While VF Corp. has been more of a seller than a buyer in recent years, company officials still sees M&A as its number one priority from a capital allocation standpoint.
“History has shown and we continue to believe that M&A is our highest and best use of capital,” said Scott Roe CFO and VP, late last week at the company’s annual Investor Day. “And it remains our first priority.”
The challenge is finding available candidates that fit VF’s stringent criteria. Said Roe, “The problem is they’re really hard to time, they’re really hard to size.”
Indeed, VF in recent years has sold many businesses that haven’t met its return on capital measures.
In June 2016, the company sold its Contemporary Brands segment (7 for All Mankind, Splendid and Ella Moss) to Delta Galil Industries. On Tuesday, it sold its LSG (Licensed Sports Group) business, which included Majestic Athletic, to Fanatics.
In the fourth quarter, VF took an $80 million pre-tax impairment charge to wind down Lucy, the women’s fitness brand. Lucy is being merged into the Mountain Athletics segment of The North Face. Its most-recent acquisitions have been Timberland and Rock & Republic, both in 2011.
The company now has 20 brands: Eagle Creek, Eastpak, JanSport, Kipling, Lucy, Napapijri, Reef, Smartwool, The North Face, Timberland, Vans, Lee, Riders by Lee, Rock & Republic, Wrangler, Bulwark, Horace Small, Red Kap, Wrangler Workwear and Nautica.
The criteria for an acquisition candidate includes including brands with the capacity to deliver 15 percent return on capital within a three-year period. The company also looks for a brand that may bring capability additions and enhancements to the company and shares synergies with VF’s existing portfolio. In recent years, the criteria has been raised to seek out brands with $1 billion revenue potential.
Roe said the VF prefers larger deals versus smaller deals in part because it “takes about the same amount of time and they’re more complicated.”
But smaller brands with global growth potential will still be looked at. He noted that both The North Face and Vans were in the $200 to $300 million range at the time of their acquisitions and have become VF’s two biggest brands. Said Roe, “Rather than focus so much on the size of the business that’s acquired, our filter is really, what do we see the path of the business that we might acquire.”
Indeed, Roe stressed that the “most important filter” is the brand’s positioning. Added Roe, “Is it authentic, iconic, and in a space that we believe is strategically relevant?”
Roe noted that overall the company is targeting a return on capital of 20 percent. He added, “So that means we have some businesses that are above, some that are below.”
Addressing its acquisition strategy, Rendle likewise emphasized that from a strategic standpoint, VF looks for iconic brands with growth avenues. He added, “We also look for brands where our brand management disciplines can be utilized in a very positive and productive way. From a financial standpoint, we want to make sure that any business that we acquire is accretive to our growth and margin objectives, has the ability to generate a strong stream of free cash flow and that it can meet our minimum hurdle of greater than 15 percent on return on capital over a period of time.”
Rendle related how the company’s portfolio strategy “has grown and evolved over the years due to our ability and willingness to reshape ourselves. It’s how we position ourselves to compete in a changing apparel and footwear marketplace.”
In 1986, VF acquired Wrangler, JanSport and Red Kap with the purchase of Blue Bell brands to double the company’s size and establish itself as the world’s largest publicly-traded apparel company. The company also secured 25 percent share of the world’s denim marketplace with the acquisition.
The North Face acquisition in 2000 and Vans in 2004 and their success led VF “to begin to pivot into a portfolio of brands that have an ability to scale on a global basis and do it through a lens of activity-based lifestyle brands.” In 2007, the move to divest Vanity Fair, where the VF comes from, “absolutely put a stake in the ground that we were about driving global brands that connect with consumers through a very unique set of lifestyles, and where we’re able to leverage and scale with the expertises of our brands.”
In 2010, the acquisition of Timberland doubled the amount of its annual footwear volume and established “a much bigger stake in the outdoor lifestyle sector.”
Similar to Vanity Fair, the recent decisions to divest its Contemporary Brand and Licensed Sports Group businesses was then made to “position to continue to drive top quartile returns.”
The company is now anchored in outdoor, actions sports and jeans with five billion-plus brands: Vans, The North Face, Timberland, Wrangler and Lee.
Another area of growth is workwear (Red Kap, Bulwark, Timberland PRO, Wrangler Riggs) that will receive more attention in the years ahead. Workwear in total contributed $800 million in sales in 2016. While not central to its outdoor and action sports theme, Rendle offered workwear as an example of VF’s reach.
“I’d like to challenge you to not think of VF as an Outdoor & Action Sports company,” added Rendle. “But I’d rather ask you to think of us as a value creation company that is anchored in our powerful brands with a particular center of gravity in the Outdoor & Action Sports space. That’s a shift.”
Rendle also stressed that the company will continue to make sure each of the brands across its portfolio are measuring up
“You can absolutely expect us to be active portfolio managers. We will reshape our portfolio,” said Rendle. “We will continue to invest behind our powerful brands with a very clear intention of creating value.”
At its Investor Day, VF predicted revenue from 2016 through 2021 would grow at a five-year compounded annual growth rate (CAGR) between 4 percent and 6 percent, fueled by VF’s largest brands (Vans, The North Face and Timberland) and the company’s international and direct-to-consumer business platforms. The growth rate doesn’t assume any acquisitions.
The company expects to generate more than $9 billion of cash from operations on a cumulative basis between 2017 and 2021 and return $8 billion to shareholders through dividends and share repurchases although that cash could be tapped for acquisitions.
Photo courtesy VF Corp.