Project Description

VF Corp – Kontoor Brands Spin-off Quick Summary

Overview

On April 1, 2019, apparel maker VF Corporation (NYSE: VFC $94) filed its Form 10 Registration outlining its planned tax-free spin-off of its jeanswear organization into an independent, publicly traded company. The spin-off was first announced in August of 2018. The new company, to be named Kontoor Brands, Inc., will include the Wrangler®, Lee®, and Rock & Republic® brands, as well as the VF Outlet business. With estimated annual revenues of about $2.7 billion, the goal for the new company to be a global leader in the denim category is ambitious.  This low expected growth spin-off is expected to begin regular way trading on May 23. The CEO of Kontoor will be Scott Baxter, an executive who led the denim business from 2011 to 2015. Steve Rendle, will remain Chairman, President and CEO of VF after the spin-off. With about $11 billion of annual revenue, the new VF will be focused on the higher potential growth active/outdoor consumer apparel and footwear market. Their most important brands are Vans, North Face and Timberland. Others include Napapuri, Kipling, Jansport, Eastpak, Eagle Creek, Dickies, Bulwark, Red Cap, Terra, Kodiak, Walls and Horace Small.

Background

Why the spin-off? VF has, until the last few years , a fairly good record of consistent growth with an excellent average annual shareholder return of 17% since 2000. The company has been hampered, especially recently, by its slow growth jeanswear organization. In 2018, jeanswear revenue declined 4.6% whereas other VF business revenue advanced 21.4%. Jeanswear EBIT declined 14.2%, while VF’s other businesses EBIT advanced 36.7%. In 2017, VF unveiled its five-year growth priorities. These priorities included a reshaping of the brand portfolio to better position the company toward higher growth activity-based lifestyle brands. Since then, VF has acquired Williamson-Dickie, and the Icebreaker® and Altra® brands, and divested the Nautica® brand and the Licensed Sports Group, which included the Majestic® brand. Through these actions, the company has sharpened its focus on activity-based outdoor, active, and work lifestyles.  The slower growth jeans business is clearly an impediment to the new orientation; Wrangler and Lee are not premium brands and have experienced declining sales and market share over the last three years.

What to expect in the future: Nevertheless, the company believes that the jeans platform can be a successful, sustainable business with iconic global brands and a clear path to value creation as a standalone entity.  Management believes that the new VF will have a mid-teen total shareholder return target, including a strong dividend yield in-line with the S&P 500. They also believe that the company will have more flexibility to better pursue its M&A strategy and deploy more capital into its organic brand portfolio. In contrast, Kontoor, the jeans business, is expected to have a high single digit expected return with a relatively high dividend yield.

Consistent with its enhanced focus on the outdoor and active consumer, VF will move its global headquarters to the metro Denver area, which will also serve as the home for The North Face®, JanSport®, Smartwool®, Altra® and Eagle Creek® brands. Management says that uniting these brands at the base of the Rocky Mountains will “accelerate innovation, unlock collaboration across brands and functions, attract and retain talent and connect with consumers.”

Kontoor will have diversified geographic exposure and plans to further extend its geographic footprint with a sharp focus on Asia, building on its established presence in China. The company plans to expand its distribution to new customers and categories, with a focus on both their owned and wholesale digital partner channels. Kontoor expects to unlock significant scale and cost efficiencies by streamlining operations, providing flexibility to pursue strategic acquisitions over time. The company will be located in Greensboro, NC, VF’s current headquarters, and will move the Lee® brand from Kansas City to Greensboro.

Good management: Historically, VF’s success has come from acquiring small unrecognized brands with big growth potential. They invest in them and grow them. They have a sharp focus in ROIC in contrast to their WACC. Good examples are the acquisition of Van’s. This company was a small California company focused on skateboarders. VF has broadened and refocused the Vans product line to appeal to a broader hip group that includes women and the “creative” set. Van’s still has huge potential to grow. On the other hand, they regularly divest under-performing brands, notably getting rid of Vanity Fair, their namesake, in 2011.

Valuation is rich: The following table shows VF and the competitors in the apparel industry as rather richly valued.

Nike and Lulu appear to be a hottest names in this industry but then again,  the industry is notoriously fickle.

Earnings progress resumes:

VF had excellent results until 2013 when they suffered an earnings slump, but results in the last year have shown very good progress. The third quarter report ending December was excellent and guidance was up.

  • Revenue from continuing operations increased 8 percent (up 10 percent in constant dollars) to $3.9 billion; excluding acquisitions net of divestitures, revenue increased 7 percent (up 9 percent in constant dollars);
  • Active segment revenue increased 16 percent (up 18 percent in constant dollars) including a 25 percent (27 percent in constant dollars) increase in Vans® brand revenue;
  • Outdoor segment revenue increased 11 percent (up 12 percent in constant dollars) including a 14 percent (16 percent in constant dollars) increase in The North Face® brand revenue and a 4-percentage point revenue growth contribution from acquisitions;
  • International revenue increased 5 percent (up 9 percent in constant dollars) including a 1-percentage point revenue growth contribution from acquisitions net of divestitures; China revenue increased 18 percent (up 23 percent in constant dollars);
  • Direct-to-consumer revenue increased 10 percent (up 12 percent in constant dollars) including a 1-percentage point revenue growth contribution from acquisitions net of divestitures;
  • Digital revenue increased 24 percent (up 26 percent in constant dollars);
  • Gross margin from continuing operations increased 40 basis points to 51.9 percent; on an adjusted basis, gross margin increased 60 basis points to 52.2 percent;
  • Earnings per share from continuing operations was $1.16. Adjusted earnings per share from continuing operations increased 30 percent (up 31 percent in constant dollars) to $1.31, including a 1-percentage point earnings growth contribution from acquisitions net of divestitures;
  • Full year fiscal 2019 revenue is now expected to increase approximately 12 percent (up 13 percent in constant dollars) to at least $13.8 billion; and, Full year fiscal 2019 adjusted earnings per share is now expected to be $3.73, including an additional $45 million, or $0.09 per share, of incremental investment, reflecting an increase of 19 percent (up 20 percent in constant dollars).

Kontoor’s plan for the future:

Company Resources:

Form 10 Filing – April 1, 2019

Presentation on the planned separation – April 1, 2019

Additional information – April 1, 2019

Investor Relations: Joe Alkire, 336-424-7711 Vice President, Corporate Development, Investor Relations and Financial Planning & Analysis Joe_Alkire@vfc.com

Other Resources:

The Motley Fool: Why VF Corp Was Up 18% Last Month – February 11, 2019

Seeking Alpha: VFC – One of the Best Apparel Stocks to Own  – March 26, 2019