By Eric Smith
VF Corp. missed fiscal fourth-quarter earnings and revenue estimates and now faces a soft retail demand environment, but the company remains resolute about pursuing M&A amid this challenging economy.
If anything, the current climate could provide lucrative opportunities for the $10 billion-a-year, Denver, CO-based parent of Vans, The North Face, Timberland and other well-known consumer brands.
The company has two factors in its favor: financial strength and a consistent appetite for acquiring new assets. First up, a look at VF’s financial ability to add to its portfolio.
“A fortress balance sheet gives VFC dry powder to pursue M&A once the retail environment stabilizes,” Sam Poser of Susquehanna Financial Group LLLP wrote in a note to investors over the weekend. “VFC has over $5B in accessible liquidity, more than sufficient to weather the crisis. Further, the sale of the occupational work business, which is expected to be completed in the next several months, should also bolster VFC’s cash on hand. Once the retail environment stabilizes, VFC’s liquidity position provides optionality to pursue an acquisition.”
VF is in a unique position as the COVID-19 pandemic wreaks havoc across the global economy. Not only does the company have access to loads of capital, but many competitors are suffering as their retail partners remain closed—or are perhaps just starting to reopen—which could give a giant like VF an opening into expanding its empire.
The company is also selling its nine occupational work brands as a way to further reduce complexities in the business, strengthen its focus on outdoor and active brands, and open the door for another major acquisition.
Second, although the immediate focus is on stabilizing its current lineup of brands, VF leadership has retained its appetite for M&A. On Friday’s earnings call, the company addressed the likelihood of pursuing M&A, which remains high even with the coronavirus rankling businesses and markets worldwide.
“As it relates to potential acquisitions, we continue to actively assess strategic opportunities and believe the disruption caused by COVID could lead to an increase in M&A activity and the availability of attractive assets,” CFO Scott Roe said on the call. “While our first priority remains stabilizing our organic business, we are well-positioned from a liquidity standpoint to pivot to an offensive posture when prudent. M&A remains our top capital allocation and strategic priority on a medium to long-term basis.”
The market is ripe for a company like VF right now. As the economy stumbles and brands that weren’t well-positioned for the slowdown face the prospect of going under, these distressed assets could be eager to sell to a sound, strategic operator.
“We suspect the number of attractive, yet financially distressed, companies/brands will be plentiful on the other side of the crisis, particularly in the retail sector, which has been one of the hardest hit,” Poser said. “The setup for VFC to aggressively pursue an acquisition post-crisis appears ideal. M&A is the company’s No. 1 capital allocation priority and is almost always a positive catalyst for the stock.”
Roe addressed this on the call. With a portfolio that includes numerous brands selling into global markets, VF would be among the most attractive suitors for a seller.
“The disruption underway across our sector will undoubtedly provide ample opportunities for strong companies with demonstrated M&A capabilities to create significant shareholder value through inorganic growth,” Roe said. “The final element of portfolio resiliency I’d like to highlight is that of diversification. As companies across the globe report earnings, we are reminded of the advantage of running a global enterprise during this crisis.”
Is there a specific profile that VF might be targeting as it begins to consider M&A? According to Jon Komp of Baird, look for the company to go after a certain performer in the outdoor or action sports space.
“VFC has a long track record of proactively managing the brand portfolio focusing on selling underperforming businesses while acquiring high-opportunity growth brands,” Komp wrote in a note to investors.
One attribute that VF is sure to target—a brand with a strong digital presence. VF, whose own digital prowess has somewhat insulated the company during this downturn, is likely to pursue a savvy company with superior direct and digital capabilities.
“That is where all of the energy is certainly pivoting from a consumer standpoint, and we see that becoming a much more significant part of our go-to-market strategy,” said Steve Rendle, VF’s chairman, president and CEO. “As we think about acquisitions, certainly brands [that] have this capability within the addressable markets … would be at an advantage.”
While the coronavirus has stunted M&A activity in the last two months, VF is a company that many investment bankers have speculated could be ready to pounce on a distressed asset once social distancing allows for transactions to reach the finish line.
As SGB Executive wrote in our look at M&A in the time of coronavirus, now is an ideal time for both strategic and financial buyers to start shopping, something VF is clearly doing.
Joe Pellegrini, managing director for Baird’s consumer investment banking divisions, said he suspects VF—as well as other large public companies like PVH, Columbia Sportswear or LVMH—will look to pull the trigger on deals in the near term. At the very least, they will be on the hunt during this time of uncertainty.
“I think there are some good assets out there that might struggle,” he told us in March. “It wouldn’t surprise me to see some, not all, of those assets trade as we come out of this cycle. If you’re a really smart operator—and we’ve got some wicked smart people in these categories—you’re looking at this situation and licking your chops as you evaluate what those options might be.”
Nate Pund, managing director of Houlihan Lokey’s consumer, food and retail group, agreed that the current situation sets up nicely for a certain profile of large companies in this space.
“Clearly, there are going to be opportunities,” he said. “If you’re an aggregator, a strategic that owns a portfolio of brands, and you have a history of acquiring things—Columbia, Wolverine, VF—the new world order presents a unique buying opportunity to acquire businesses that may need help or at a more affordable price than before the pandemic.”
Shares of VF (NYSE: VFC) were up nearly 10 percent in Monday morning trading. But while the company withdrew guidance for fiscal 2021, M&A could be the boost the company is after as the year progresses.
“Helped by ongoing investment in the business and strength from the largest brands, we continue to see opportunity for upward revisions to guidance throughout the year; potential for accretive acquisitions is a source of upside,” wrote Jim Duffy of Stifel.
