VF Corp. has announced a definitive agreement to acquire Supreme, a young and cool American streetwear brand that has become an iconic symbol of a countercultural approach to fashion. Details have yet to be finalized, but the $2.1 billion transaction is expected to close before the end of 2020.
Investors reacted positively to the move, feeling that VF will do a better job with Supreme than it did many years ago with another streetwear brand, Seven for All Mankind, in the recently divested denim sector. As we see it, Supreme will sit well inside the group alongside Vans, the skate-inspired shoe brand bought in 2004, which continues to register the highest growth rates and excellent margins for the group. Its digital direct-to-consumer (DTC) model is particularly appreciated by VF’s management.
As VF put it in a presentation to analysts, streetwear has global relevance because its creative self-expression appeals to a young, diverse and inclusive consumer segment that goes for casualization and community & social influencing. The streetwear market, it says, is estimated at $50 billion, and is growing at a double-digit rate.
Supreme has been a pioneer in introducing weekly drops of new products with a disruptive digital business model. While it has 12 mono-brand stores, mostly in the U.S. and Japa , it gets 60 percent of its turnover from the digital channel. VF says it will help accelerate the group’s “consumer-minded, retail-centric, hyper-digital transformation,” while providing access to attractive consumer segments.
While collaborating with the likes of Louis Vuitton in the fashion sector and others in the casual and athletic footwear sector, such as Clarks, Dr. Martens and Nike, Supreme has also collaborated with three VF brands: Vans, The North Face and Timberland.
The deal values this so-called “Chanel of streetwear” at $2.1 billion in terms of enterprise value, based on a multipàle of less than 15 times Ebitda. That’s up sharply from a valuation of more than $1 billion made for the brand three years ago, when Carlyle Partners bought a 50 percent interest in it. Supreme had a turnover of only $200 million at the time, and it has grown to an annual level of nearly $500 million since then. VF will buy out the shares of Carlyle as well as those of Goode Partners, which acquired a minority stake in Supreme in 2014.
Supreme has been growing at an annual rate of between 8 and 10 percent, generating a gross margin of over 60 percent and an operating margin of more than 20 percent. About 70 percent of its sales are in apparel, but there is room for more growth in other categories. We feel there is room for a diversification into sneakers, considering the kinds of collaborations that the brand has had.
VF indicated that over time it expects Supreme to generate annual sales of $1 billion under its ownership through the expansion of its international and DTC operations. More than 50 percent of the brand’s sales are currently generated in the U.S. Supreme will benefit from VF’s strong regional platforms and its supply chain, among others. It should be modestly accretive to VF’s profit during the current financial year and contribute at least $500 million in revenues and higher profits in the 2021/22 fiscal year.
James Jebbia, who founded Supreme in New York City in 1994, and his senior leadership team will remain with the company. Morgan Stanley provided a fairness opinion in connection with the transaction, and Davis Polk & Wardwell LLP served as legal advisors.
It seems obvious from Supreme’s takeover that VF will stay out of the race for the acquisition of Reebok. Out of all the candidates, Permira would seem to be a good bet, as it is considering the divestiture of Dr. Martens.
On the other hand, VF’s share price declined slightly after Moody’s and Standard & Poor’s downgraded VF’s debt, citing the high leverage it will have for several years as a result of the high price being paid for Supreme, plus an additional earnout clause. VF will be funding the transaction in part through $1.5 million cash and a new $500 million offering of commercial paper. The founder of Supreme will also receive some VF shares over time as part of the purchase price.
