VF Corporation is preparing to split into two independently traded companies through the proposed spin-off of its jeans division to its own shareholders, forming a more focused outdoor, action sports and workwear business based in Colorado.
The owner of Vans, The North Face, Timberland, Icebreaker and several other sports and outdoor brands said earlier this week that the tax-free spin-off was meant to enhance prospects for long-term value creation on both sides. It should be finalized in the first half of next year, subject to final approval from VF's board as well as customary regulatory approvals, tax and legal considerations.
VF Corporation would thus focus on its action sports, outdoor and work apparel and footwear brands, with its head office relocating to the Denver area, along with several brands in its portfolio. Another as yet unnamed company will hold the jeans and VF Outlet entities, remaining at the group's existing head office in Greensboro, North Carolina. This second entity would form a global leader in the denim category, with the Lee and Wrangler brands.
Steve Rendle, who became VF's chief executive at the start of 2017, will remain in charge of the larger group focusing on action sports, outdoor and workwear. He said in a statement that the move would support VF's efforts to turn into an increasingly consumer-centric and retail-minded organization anchored in activity-based lifestyle brands. He added that both new companies would benefit from having their own resources, management focus and financial flexibility. The transaction is widely thought to favor more acquisitions in the outdoor and sports market.
The proposed transaction is not unlike the sale of Puma to the shareholders of Kering, the French luxury group, which was finalized on May 16. Brunswick Corporation announced its intention to spin off its fitness division, led by Life Fitness, with the same purpose of having two more focused standalone entities.
The move comes after VF already reorganized its portfolio as part of a five-year plan launched in 2017. While it sold Nautica and the Licensed Sports Group, including the Majestic brand, the company bought Williamson-Dickie as well as Icebreaker and the Altra brand of footwear.
Along the way, the group said that the strategic priorities and the financial characteristics of the two parts of the business had evolved, and that synergies had become less clear.
When VF bought The North Face in 2000, the denim business made up more than half of the group's profit and cash flow, which helped to fund its growth and acquisitions. But the active, outdoor and workwear brands currently account for more than 80 percent of VF's turnover, they operate on a global scale and account for more than $1 billion of the company's free cash flow.
VF estimates that the main group will have annual sales of over $11 billion and Ebitda of more than $1.5 billion. This group would include a cluster of outdoor brands with The North Face, Timberland, Smartwool, Icebreaker and Altra, generating sales of more than $4.5 billion. A second cluster of Active brands would consist of Vans, Napapijri, Eastpak, Kipling, Jansport, Eagle Creek and Reef, generating sales of more than $4.5 billion as well. The group's workwear brands, such as Dickies, Timberland Pro, Kodiak and others, would add more than $1.7 billion in turnover. This compares with estimated sales of over $2.5 billion for the combined denim and outlet businesses, with projected Ebitda of over $450 million.
While providing sharper strategic and management focus, the spin-off should lead to less complexity, and the two companies should be able to optimize their resources to fit their own priorities. Own retailing and international sales make up a much larger share of the sales mix for the outdoor and action sports operations.
Over the next two years, the offices for The North Face, Jansport, Smartwool, Altra and Eagle Creek will relocate to the Denver area, as well as VF's Global Innovation Center for technical fabrics and its Digital Lab. About 85 VF managers, including members of its U.S. senior leadership team, will move to Colorado from spring 2019. About 800 employees in all are anticipated to settle into the new offices from the middle of next year. This includes 70 from Smartwool, which is already located in Colorado, in Steamboat Springs.
Vans, Timberland and Dickies will stay at their current locations. Timberland works out of Stratham, Massachusetts, while Vans operates out of Costa Mesa, California.
VF has its European head office in Stabio, in Switzerland, and the group's website indicates that it coordinates the European-based operations of The North Face, Timberland, Vans, Napapijri, Reef, Eastpak, Kipling, Wrangler and Lee. It could not be confirmed at the time of going to press in what way the split may alter the European operation.
The Wrangler brand will remain in Greensboro and Lee will join it in a move from Kansas City. The denim company will be led by Scott Baxter as chief executive and Rustin Welton as chief financial officer. Baxter already led the jeans business for four years until 2015.He then became VF's vice president and group president in charge of outdoor and actions sports in the Americas for nearly two years until the end of 2017, and VF's group president for Americas West earlier this year.
VF said it expected to incur one-time separation costs related to the transaction, which will be treated as adjusted items, meaning there will be no impact from the split for the full fiscal year guidance provided in July. While some joint operations will be disentangled, the company said it currently expects minimal dis-synergies on an ongoing basis as the process should be completed efficiently.
VF argued that the transaction would draw distinct types of investors. The new VF will have a return on equity target in the range of 14 percent to 16 percent, with annual revenue growth at high single-digit rate, a gross margin above 50 percent and an Ebitda margin in the mid-teen range. This compares with a shareholder return target ranging from 8 percent to 10 percent for the denim business, with a low-single digit annual sales increase, a gross margin of over 40 percent and an Ebitda margin in the high teens. Separate investor days will be held for both companies in the first half of 2019.
VF has obtained growth tax credits for the move to Colorado, and it has pledged to make a long-term commitment to the state's inhabitants in return. Rendle said that VF would match every dollar of job growth tax credit with a donation to the VF Foundation, and designate those funds to support the charitable interests of the citizens of Colorado.