Proxy Adviser Backs Chico's In Blow For Activists

ISS backs the woman's clothing retailer's candidates and notes that insurgent fund Barington has "not made a compelling case" that change is needed.
By Ronald Orol ,

A major proxy advisory firm is recommending that investors back Chico's (CHS) - Get Report  incumbent director candidates, a major blow to activist investor Barington Capital's efforts to elect two dissident candidates to the women's clothing retailer's nine-person board and a setback for the fund's campaign to drive cost-cutting and maybe even a sale of the business.

Specifically, Institutional Shareholder Services, one of two major U.S. proxy advisory firms said in a report obtained by The Deal that the dissidents led by Barington founder Jim Mitarotonda "have not made a compelling case that additional change at the board level" is warranted. In addition the proxy advisory firm said that the management-backed candidates are "likely the best candidates to continue driving the necessary change to improve the company's performance." 

Many institutional investors, particularly those that don't have the resources to research their own decisions, are heavily influenced by ISS recommendations when it comes to proxy fights. However, Glass Lewis, the other major U.S. proxy advisory firm, is expected to issue its recommendation late Monday or early Tuesday and its suggestions will carry a lot of weight with shareholders as well.

After urging changes privately for months, Barington launched a public agitation campaign at Chico's in May -- their proxy contest is set for the company's July 21 annual meeting. ISS issued its report privately to investors over the weekend, in a move that initially resulted in a drop in the retailer's share price in after hours trading from about $11 a shares to as low as $9.75, before it recovered early Monday to trade at $11.13 a share. 

The fund, which has a 1.4% stake, seeks to elect Mitarotonda and one other candidate. It has raised concerns with Chico's "substantial corporate overhead" and its advertising costs. It wants to have Chico's decentralize its corporate headquarters, giving each of its three brands, Chico's, Soma and White House Black Market, more autonomy in a move that would reduce the company's selling, general and administrative costs. The fund wants SG&A cut by $100 million.

Chico's has fervently defended itself and may spend about $6 million, according to a proxy statement, on their campaign. Costs include distribution of proxy materials to shareholders as well as a high production value video of CEO Shelley Broader. The spending which will significantly dwarf what Barington spends was criticized by the activist as a waste of shareholder money. 

At the center of the battle is Barington's assertion that one Chico's-backed nominee, Bonnie Brooks, is deeply conflicted because of her position as non-executive vice chairman at Hudson Bay Co., the operator of Saks Fifth Avenue and Lord & Taylor department stores. As a Chico's director, Barington assets, Brooks would be deeply conflicted because of her employment at a direct competitor of the women's clothing company. Both sides have issued studies to back their case, with Barington even producing images to show that Chico's, Saks and Lord & Taylor offer similar clothing at stores that often are in close geographical proximity to each other.

However, Brooks last week announced her plan to resign from Hudson Bay on December 31 and ISS suggested that her retirement "renders any potential conflict of interest moot." In addition, ISS suggests that Brooks brings "significant current retail experience - including experience in mid-and high-end apparel - as well as successful turnaround experience at three retailers" to Chico's board. Nevertheless, Brooks, if elected, would still have senior roles at both Hudson Bay and Chico's for over five months.

ISS does appear to support Barington's assertion that a recent move by Chico's to declassify its board over three years so all its directors are elected annually may be reactionary to the activist's campaign. Removal of the anti-takeover classified board structure is considered good governance for institutional investors and the major advisory firms because it makes directors more accountable to shareholders. However, ISS backed Chico's on the cost-cutting issue by asserting that the company is already taking steps to reduce spending, noting that it "announced initiatives to address escalating expenses, beginning in February 2015 with the announcement that it would close stores." 

While Barington's campaign does not raise the specter of a sale, one proxy solicitor familiar with the situation contends that the activist fund may want to see it be acquired at some point down the road. 

He noted that the activist campaign comes in the wake of reports last year that private equity firm Sycamore Partners came close to acquiring Chico's but later canceled its effort over financing and valuation concerns. In addition, Barington has a history of targeting fashion retailers for M&A campaign.

Barington has launched at least 44 campaigns at 37 different companies including 22 proxy fights since 1997, not including its Chico's campaign, according to FactSet. In addition, Barington's founder, Mitarotonda, has expertise in the fashion industry. He worked at the department store Bloomingdale's in New York City before taking a job at the retail consumer banking group at Citibank and then starting Barington in 1992.

Mitarotonda has close ties to the private equity world, often connecting executives of operating companies with buyout shops as part of an effort to make corporate operators more comfortable with take-out valuations.

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