Securities Regulation Daily Victoria's Secret owner was transparent about risks to the company's dividend
Monday, October 19, 2020

Victoria's Secret owner was transparent about risks to the company's dividend

By Rodney F. Tonkovic, J.D.

A shareholder said that the company made false assurances about the safety of its dividend but later reduced it.

A district court concluded that the owner of a number of intimate apparel brands made no secret about the risks facing the company. The complaint alleged that the company's CFO falsely assured investors that its dividend was "safe" while downplaying the impact of risks to the company's financial performance. The court found that the majority of the company's statements were accurate when made or were nonactionable optimistic statements or opinions. In addition, the company extensively disclosed factors impacting its cash flow, liquidity, and debt in its SEC filings (Walker v. L Brands, Inc., October 16, 2020, Morrison, S.).

PINK in the red. L Brands is a retailer of women's intimate apparel and related products and, during the time at issue, its stable of brands included Victoria’s Secret, PINK, Bath and Body Works, La Senza, and Henri Bendel. Victoria's Secret accounted for over half of L Brands' revenue, but, in the years prior to the class period, Victoria's Secret and PINK began to decline in financial performance due to increased competition. The brands engaged in heavy promotional activities, which slowed the decline in sales at the cost of L Brand's profit margins and cash flow.

At the time, L Brands' dividend, which was set by its board, was high compared to other companies and was an important source of return for many shareholders. During the class period, which spans May 31, 2018 through November 19, 2018, the dividend, consistent with previous quarters, was $.60 per share. When the company announced its results for each of the three quarters during the class period, it reported a decline from the previous year in earnings per share, operating income, and net income but an increase in net sales. In the press release accompanying the third quarter results, however, L Brands announced that it intended to reduce its annual dividend by half starting with the quarterly dividend to be paid in March 2019. After this announcement, L Brands' stock price dropped by almost 20 percent in one day.

Dividend statements. The plaintiff shareholder took issue with a number of statements made by L Brands' executives concerning the dividend and the company's overall financial performance. For example, in May 2018, L Brands' CFO said, among other positive statements: "we’re able to, with current year cash flow, sustain our dividend... the dividend is very safe." The CFO made similar statements over the following months, and the complaint alleged that they were false because L Brands knew that Victoria's Secret and PINK were putting the company under financial strain that would affect its financial performance and lead to a reduction in the dividend. The complaint alleged further that statements in the relevant Form 10-Qs and accompanying press releases were made false and misleading statements and omissions for the same underlying reasons as the CFOs statements.

No misrepresentations. The court concluded that L Brands made no actionable misrepresentations. Regarding what the CFO said, the court found that many of the complained-of statements consisted of hard information that was not objectively false. It was true at the time the statement was made that L Brands was able to sustain its dividend. And, the statement that the dividend was "safe" was the sort of loose, non-specific prediction that courts have generally found to be not sufficiently material to sustain a claim for securities fraud. Moreover, it was well-known that the company's financial performance had steadily been waning for several years. Later statements about the company's ability to maintain the dividend were classically forward-looking, the court said, and were accompanied by two layers of cautionary language—a formal warning in the press release plus cautionary language in what the CFO stated. At no point, the court said, did the CFO minimize the risk that the dividend might have to be reduced in the future or make guarantees about its future. Allegations concerning statements in L Brands' press releases failed for the same reasons.

The court went on to similarly find no misrepresentations in L Brands' SEC filings. Again, the complaint asserted that the filings misleadingly created a false impression that L Brands' dividend was safe by failing to disclose the substantial risk that the dividend would have to be reduced so that the company could pay down debt. The court found that the relevant portions of the filings said nothing about the safety or sustainability of future dividends. In addition, the complaint failed to state an actionable violation of Items 303, 503, or 307 of Regulation S-K. Most of the alleged "known trends" related to dividends and not business operations and did not fall within the ambit of Item 303, and the remaining "known trend," concerning the impact of Victoria's Secret and PINK on L Brands' was extensively disclosed. Regarding Item 503, the court said that L Brands' filings provided robust, specific disclosures related to the direct risks the company faced.

The case Nos. are 2:19-cv-3186 and 2:19-cv-03961.

Attorneys: Krista D. Warren (Brennan Manna & Diamond LLC) for Rickey R. Walker. Richard Stuart Wayne (Strauss Troy Co., LPA) for Kurt J. Mitts. Anthony Joseph O'Malley (Vorys, Sater, Seymour and Pease LLP) for L Brands, Inc.

Companies: L Brands, Inc.

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