Activist fund Barington Capital's Jim Mitarotonda stepped up his insurgency campaign and director-election proxy fight at Chico's FAS (CHS - Get Report) on Thursday by issuing a 10-page letter urging the woman's clothing retailer's board to grow its Soma brand by opening up "two to three hundred" intimate apparel stores over the next five years making the division an eventual spin-off opportunity.
The letter comes after Barington last month launched a proxy contest to elect two dissident directors onto Chico's nine-person board as part of an effort to shake things up at the retailer's July 21 annual meeting. Last month, Mitarotonda raised some general concerns with Chico's "substantial corporate overhead" and its advertising costs but didn't provide much detail about its concerns. Thursday's letter made a variety of more detailed demands, including one 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.
In addition, Barington said it wants Chico's to expand its Soma intimate apparel and sleepwear for mature women brand to compete with department stores and Victoria's Secret by opening up an additional "two to three hundred" stores over the next five years. Mitarotonda (pictured) believes that it has the potential to become a "billon dollar business" and a spin-off opportunity down the road.
A settlement appears unlikely with next month's contest fast approaching. According to people familiar with the situation, Chico's has hired Goldman Sachs' (GS - Get Report) activist defense team to assist it in responding to Barington's campaign.
And according to Factset, Barington has a long history of activist campaigns and proxy fights - launching 44 campaigns at 37 companies since 1997. Of those, 22 included proxy fights, many of which were settled or resulted in Barington candidates elected. For example, last year, The Children's Place settled a contest by installing one Barington candidate and agreeing to bring in one mutually agreed upon candidates. Also last year, Barington succeeded at electing their two-person dissident slate at The Eastern Co. in a contest that went the distance in May, 2015. However, in March, Avon Products (AVP - Get Report) settled with Barington as part of a deal that allowed the activist fund to work with the beauty products company to identify one independent director to its board, a blow to Barington's efforts to oust the company's CEO.
In addition, Chico's last month reported weaker-than-expected 2016 first quarter results, which drove the retailer's shares down. The results, discussed in Barington's letter, will likely bolster Mitarotonda's ability to convince institutional investors to back his effort to install dissident director candidates.
Chico's responded to Barington's campaign on May 24 by shuffling its board, replacing two directors, and bringing in Bonnie Brooks, a vice chairman of Hudson Bay, the operator of Saks Fifth Avenue and Lord and Taylor department stores. In addition, Chico's said it was installing former Walmart (WMT - Get Report) US CEO Bill Simon.
In addition, the retailer said the new directors were brought on in a process that also reviewed five nominees suggested by Barington in a process that began in February. And Chico's also sought to sell investors on a variety of actions it has underway to improve shareholder value, including a move to divest non-core brands. The company sold women's clothing retailer Boston Proper to Brentwood Associates last year.
On Thursday, Barington praised Chico's for removing two of its directors, including David Dyer, a former CEO of the company from its board, arguing that an ex-chief executive on a corporate board "undermines his or her successor's ability to lead and pursue a new strategy."
However, Mitarotonda also took issue with Chico's move to appoint Brooks as a director, noting that the Hudson's Bay Company owns Saks Fifth Avenue and Lord and Taylor, which both compete with Chico's. "It appears to us that her service as a director would create a conflict of interest..." said Mitarotonda in the letter.
Charles Elson, chief of the University of Delaware's Center for Corporate Governance, said in an interview Thursday that a director of a company who is an officer of a major competitor raises issues. "If you are involved with a company that competes it puts you in a bad position because you have conflicted loyalties," he said.
Barington may get some help from another activist fund, Blue Harbour Group's Clifton Robbins, which reported cutting its stake to below 5% in March. However, a May 16 securities filing reports that Blue Harbour reported still owning 4.1 million Chico's shares.