VF Corporation saw good timing in its latest acquisition moves as the company acquires two strong brands focused on women, creates a new coalition focused on the contemporary business, welcomes back a key manager to the VF family, and strengthens its position in vertical retailing.  On the heels of a very successful first day offering in the public markets for Lululemon (see story here), VF announced on Friday they will acquire lucy activewear, inc., the vertical retail operation first launched in 1999 as a pure Internet play serving the active lifestyle market for women, and Seven For All Mankind, LLC, perhaps the strongest brand today in the premium denim market for women. 


The two companies will form the foundation of a new lifestyle brand-based coalition, VF Contemporary Brands, a profitable business with revenues in excess of $350 million.  Mike Egeck, the current CEO of Seven for all Mankind, will be president of the new coalition. 


Mr. Egeck is no stranger to the VF Corp. business.  He was president of the company’s Outdoor Coalition America after serving as president of The North Face, which was the cornerstone of the coalition’s growth over the seven years he was with VFC.  He left VF to get back into the denim business, joining Seven in 2006.


Mike Edwards, current CEO of lucy, and his team in Portland, Ore., will continue to lead that business, reporting to Egeck.  Egeck will report to Eric Wiseman, president and COO of VF Corporation. 


lucy activewear has approximately $57 million in annual revenues, sold through the lucy.com website and a base of 50 owned-retail stores. 


The average lucy store is about 2,100 square feet and generates about $650,000 in revenues when mature. The stores pay back in less than two years of opening and are generating margins approaching 20% by year three.  The stores are generating roughly 80% sales from lucy branded product and exclusive product when also including designer brands is nearing 95% of sales.


Seven for All Mankind, founded in 2000, generates approximately $300 million in annual revenues from its 7 for All Mankind brand through luxury retail stores and high-end specialty boutiques, as well as an online store.  The direct-to-consumer business is anticipated to deliver at least 30% of all Seven for All Mankind revenues in the next four years.  Growth is expected to exceed 28% this year.  First quarter revenues were up 35% and second quarter jumped 40%.  International sales, which VFC sees as a strong growth opportunity, currently account for 27% of sales, with most coming out of the EMEA region.  Sportswear only generates about 10% of revenues today, but Egeck sees that business growing at a 40% compounded annual rate going forward.


VFC has agreed to pay $775 million for Seven For All Mankind, LLC, or about 2.5X sales, a price VF said was based on its strong earnings picture.  The price is just over 9X EBITDA, well within range of many other recent deals, but below some other acquisitions of contemporary brands that went for a EBITDA multiple in the low– to mid-teens.  Seven generates operating margins of about 20%.  The company will pay $110 million for lucy activewear, inc., just under 2X sales, but lucy is expected to post a “moderate loss” for the year despite strong margins.


The acquisitions will be financed through “existing cash, borrowings under its existing credit facility and the placement of long-term debt.” 


Both brands are seen as strong owned-retail opportunities in addition to Internet sales.  Seven is opening its first location on Robertson Ave. in Los Angeles this fall and VFC sees up to 100 stores possible in the coming years.  Wiseman said he expects the two brands to add more than 300 stores between over the next ten years. 


Contemporary Brand's revenues should increase at a 15% to 20% annual rate over the next five years. In 2007, the coalition is expected to contribute approximately $125 million to total revenues, with $30 million coming in Q3 and the balance in the fourth quarter.  VFC now expects total revenues in 2007 to be up by over 14% in 2007, compared to the 12% previously anticipated, but the impact to the bottom line is expected to be neutral this year.  The deal is estimated to provide five cents to 10 cents per share accretion in 2008.


>>> Considering that the core consumer for both of these brands spends her day at work, in activewear, or in jeans, this should give VF a pretty strong foundation for growth in this market….