“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
Clothing maker VF Corp. surprised investors in August when it announced plans to spin off its Lee jeanswear business as a separate company. That pushed the stock up to a new all-time high of $97, although it has since moved down slightly.
We feel VF has room to move higher, particularly as it focuses on its faster-growing brands. Those include Vans, which makes sports apparel for younger shoppers. The company expects Vans’ annual sales could grow from the current $3 billion to over $5 billion by 2023.
VF CORP. $92(New York symbol VF; Consumer sector; Shares outstanding: 396.5 million; Market cap: $36.5 billion; Dividend yield: 2.0%; Takeover Target Rating: Medium; www.vfc.com)is one of the world’s largest apparel suppliers, and a leader in the jeanswear, outdoor, sportswear, and workwear markets. The company has the largest share of the jeans market in the U.S. It also sells footwear. VF has over 30 brands, including Lee, Wrangler, The North Face, Dickies, JanSport, Vans, Napapijri, Smartwool, Altra, Eagle Creek, Kipling and Timberland.
Began operating in 1899 as the Reading Glove and Mitten Manufacturing Company
Renamed Vanity Fair Silk Mills, Inc. in 1919
First sold shares to the public in 1951
Acquired H.D. Lee Co. in 1969, and changed its name to VF Corp.
Specialty stores, department stores and other mass merchants account for about 70% of VF’s total sales. The remaining 30% come from its own stores and e-commerce operations. The Americas region supplies 65% of its sales, followed by Europe (24%) and Asia Pacific (11%).
The company’s sales rose 18.5%, from $10.0 billion in 2013 to $11.8 billion in 2017. That gain is partly due to acquisitions, including VF’s October 2017 purchase of Williamson-Dickie Mfg. Co. for $800.7 million. That business, which makes workwear apparel under the Dickies, Workrite, Kodiak, Terra and Walls brands, contributed $247.2 million to 2017’s overall sales.
VF’s earnings gained 14.6%, from $1.08 billion in 2013 to $1.23 billion in 2014. The company is an active buyer of its own shares, so earnings per share improved 16.2%, from $2.41 to $2.80. Its overall earnings slipped to $1.22 billion in 2015, but per-share earnings rose to $2.82.
In 2016, the company wrote down the value of its Nautica brand due to declining sales and profits. As a result, earnings for the year declined to $2.56 a share (or a total of $1.08 billion). The company has since sold that brand. Due to the costs related to the Williamson-Dickie acquisition, earnings fell again to $1.79 a share (or $721.2 million) in 2017. If you exclude all unusual items, earnings per share increased 3.5%, from $2.88 in 2016 to $2.98 in 2017.
The company recently changed its fiscal year end to March 31. In its fiscal 2019 first quarter, ended June 30, 2018, sales jumped 22.9%, to $2.79 billion from $2.27 billion a year earlier. If you exclude the contribution from acquisitions, sales gained 12%. Earnings before one-time items soared 60.7%, to $0.43 a share (or a total of $172 million) from $0.27 a share (or $107 million).
VF ended the quarter with cash of $467.9 million. Its total debt was $3.5 billion, or a low 10% of its market cap.
The company plans to spin off its denim brands into an independent company. That business, will include brands like Wrangler, Lee, Rustler and Rock & Republic. About 80 VF outlet stores will also join the new company, and its headquarters will remain in Greensboro, North Carolina.
The company has yet to announce the details of the spinoff, but will hand out the shares in the new company to its shareholders in the first half of 2019.
Following the split, VF will move its own headquarters to Denver. The company believes that moving to Colorado will help it attract and retain talent and connect with consumers. It will also get $27 million in tax incentives to relocate to Denver from Greensboro. That’s the second-largest incentive package the state has ever handed out.
The new Lee/Wrangler business will have $2.5 billion in annual revenue, $300 million in cash flow after capital expenditures, and a dividend yield of roughly 5%.
The remaining business, which will still be called VF Corporation, will have annual revenue of $11.0 billion and $1.1 billion in cash flow after capital expenditures.
The company has increased its dividend each year for the past 45 years. The current annual rate of $1.84 a share yields 2.0%. Following the spinoff, VF expects its dividend will continue to yield around 2%.
The jeanswear spinoff will let VF focus on its fast-growing outdoor and activewear business. Sales of Wrangler and Lee jeans have slowed in recent years as they have fallen out of favour with many consumers who instead wear yoga pants or premium jeans brands. As well, cost-conscious consumers have switched to cheaper private-label brands.
While the Lee/Wrangler business has slowed, it still owns the top global brands and remains the biggest jean seller in the world. As a separate company, it should be better able to focus on its own marketing and international expansion to boost sales. Scott Baxter, currently VF’s group president for its Americas West region, will serve as CEO of the new company.
VF expects to earn between $3.52 to $3.57 a share for all of fiscal 2019. The stock trades at 25.9 times the midpoint of that range.
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