VF Corp Could Be Gearing Up for Another Huge Deal

All signs point to an expanding portfolio for the apparel and footwear giant, whose CEO said, 'Eventually, something will happen.'
By Brian Sozzi ,

VF Corp (VFC) - Get Report enjoys managing a diverse set of brands such as North Face, Timberland and Vans, but come 2017, it could easily be poised to make the largest addition ever to its already-impressive portfolio.

The apparel and footwear giant is certainly taking steps this year that suggest something huge acquisition-wise could be on the horizon within the next 12 months to 18 months.

For example, VF Corp signed a definitive agreement in June to sell its contemporary brands businesses to Delta Galil Industries (DELTY)  for $120 million. Brands included in the transaction are apparel lifestyles 7 for All Mankind, Splendid and Ella Moss, which have been challenged lately due to the sluggish demand for every day, more basic apparel. The transaction is expected to close in the third quarter.

In March, the company said it was exploring strategic alternatives for its licensed sports group businesses, which hauled in about $550 million in revenue last year. The business includes the Majestic brand (sports uniforms), as well as supplies apparel and other sports fan-friendly offerings through licensing agreements with U.S. and international professional sports leagues, colleges and universities. The group also features lifestyle brands.

With some portfolio pruning well underway, VF Corp now appears to be the most active it has been in more than a year in trying to find the right acquisition.

"We work hard on M&A. We meet on it at least once a month formally—each of us works on it individually every single week," VF Chairman and CEO Eric Wiseman explained to TheStreet in a phone interview. "We have had discussions with a lot of companies that have said 'yes, the day will come when we are ready to do a deal but today is not that day.' Some of those companies are large, some are small, but we never know when it's going to happen. Eventually something will happen."

September will mark five years from the closing of VF Corp's biggest deal ever, the $2 billion purchase of boot maker Timberland. Since then, VF Corp. hasn't been active on the acquisition front for a number of reasons, according to Wiseman.

For the first two years after landing then-struggling Timberland, for example, VF Corp was mostly focused on successfully integrating the brand. Then in 2013 and 2014, valuations in the apparel space got so "frothy," points out Wiseman, that it no longer made strategic sense to be an active shopper. The last 12 months valuations have cooled off likely as a result of soft apparel demand in the U.S. and the contraction in bricks-and-mortar retailing, which has led to the rise of more opportunities for VF Corp. to consider.

"We are just trying to find the right activation at this right time. Will [an acquisition] be something really large? Maybe, maybe not," says Wiseman.

Wall Street may be warming up to the notion of VF Corp making a headline-grabbing splash next year to position its business for the next 10 years. 

It has been five years since VF Corp. closed on its deal for Timberland.

"Clearly given their free cash flow, cash flow from operations, recent portfolio actions and ability to lever up their balance sheet, they could be looking at a sizable deal— maybe in the $3 billion to $3.5 billion in [annual] revenue range," Canaccord Genuity analyst Camilo Lyon said.

For comparison purposes, Under Armour (UA) - Get Report and Lululemon (LULU) - Get Report  -- two names long speculated as potential VF Corp acquisitions -- had about $3.9 billion and $2.1 billion in revenue last year, respectively. 

Lyon, who has a buy rating on VF Corp, believes the company could have interest in Puma in light of the recent traction it has gotten from reinventing itself into more of streetwear brand with help from popular singer Rihanna. Even Reebok, which is experiencing a revival of its own due to success with Crossfit-inspired sneaker and apparel offerings, could be of interest to VF Corp.

"They have a desire to be in athleticwear," Lyon said about VF. "They reportedly made a bid for Under Armour UA before it went public."

When asked what additional product categories it wants to be in for the long haul, VF's Wiseman declined to get into specifics. "We just shared our vision for the next 10 years with the board, but haven't shared it with associates yet," he asserted. "News [on this front] will be coming out in next six months to nine months." 

Although it's anyone's guess which company VF will gobble up next, one thing is for sure: Managing a portfolio of brands through the years has proven very effective in overcoming new retail challenges such as the shift to online shopping and changing buying patterns among consumers. Also, it has been rather lucrative to shareholders.

"If you look at our market cap today, it's $26 billion," Wiseman explained. "Eight or nine years ago, it was $7 billion. That growth has happened because we have found a way to make owning multiple brands a benefit to our shareholders."

Looked at another way, VF shares have gained an astounding 264% since Wiseman was named CEO in January 2008, a performance that easily thumps the S&P 500's 48% increase.

"Making products that can be sold in different channels to different income demographics is important in this retail environment," said Canaccord's Lyon. 

The benefits of product diversification for VF Corp was evident during the second quarter.

VF reported solid sales gains within its Americas segment for its North Face, Vans, Wrangler and Lee brands. Vans, Wrangler and Lee sales strengthened from the first quarter, a period in which consumers pulled back on their spending amid volatile stock prices and a barrage of negative election-season headlines.

The Vans sneaker brand led the way in the U.S. with a high single-digit percentage sales increase, said VF Corp., as it continued to benefit from new styles, such as sneakers with Nintendo characters. Meanwhile, the Wrangler and Lee jeans businesses notched 2% and 8% respective sales increases. North Face clocked in with a low single-digit percentage improvement in the Americas.

Vans was acquired by VF Corp back in 2004. 

The stronger pace of sales in the Americas helped counteract weaker results in Asia and some parts of Europe, as well currency volatility and softness at Timberland. Second-quarter revenue went on to rise 1% from the prior year to $2.45 billion, falling short of analyst estimates of $2.52 billion.

VF revised its full-year sales outlook to growth of 3% to 4% from mid-single-digits previously to account for the pending sale of its contemporary brands business and lowered expectations for Timberland.

Earnings are expected to be $3.20 a share versus analyst forecasts at the time of $3.23 a share, which likely still factored in 3 cents a share from the company's contemporary brands business.

"We think the model of operating multiple brands can still work, and it certainly has worked for us," Wiseman said with emphasis.

If one reads the tea leaves, VF Corp will likely soon have one more brand working for the benefit of shareholders very soon.

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