In a not-terribly-surprising move, VF bought 7FAM, which has annual revenue of roughly $300 million, for $775 million. Guess?
VF also shelled out another $110 million to add activewear company Lucy, which specializes in yoga gear, to its portfolio. VF clearly aspires to be hip, but could such a strategy end up being tragically hip?
In search of cool
Though it recently sold its more stodgy Vanity Fair brand to Berkshire Hathaway's Fruit of the Loom, VF's generally been trying to go more upscale. Its recent brand acquisitions include hip, youthful names such as North Face and Vans.
At present, 7FAM jeans populate the racks at high-end department stores such as Nordstrom
VF said the 7FAM and Lucy purchases will anchor its new Contemporary Brands segment, which is expected to contribute $125 million in revenue this year. (It should have a neutral effect on earnings.) At the moment, analysts expect VF to report earnings growth of 13% in 2007. Seven may be a magic number, but so is 13 -- as in the 13% EPS growth analysts expect VF to report in 2008 and 2009, too. And of course, VF recently entered into a $400 million credit agreement, which it's using to help finance these acquisitions. That will vastly increase the company's long-term debt; last quarter's balance sheet reported $177.8 million in cash and $602.2 million in long-term debt.
Will these shrink in the dryer?
Are VF's moves really so savvy? The premium denim craze seems to be getting old, but the fashion-conscious Fools I've informally polled around Fool HQ seem to agree that 7's haven't lost their magic quite yet. Jeans like 7's might function as a "gateway" to pricier and more obscure jeans. But if everyone else is already wearing them, how much of a fashion statement are you making by sporting 7's?
Luxury brands often find themselves in this delicate balancing act. By widening their demographic reach, they often lose what made them special -- and helped them command high prices -- to begin with. Coach
Lucy's yoga apparel might be an interesting avenue to capitalize on current trends, but it's hardly alone in pedding New Age workout gear. You can already get all manner of cheap or ultra-pricey yoga outfits and gear here in the U.S. (And what was wrong with sweatpants, anyway?)
The risks are there, but the reasoning behind VF's latest purchases is undeniably sound. The company does have a history of stable growth and steady dividends -- it's a Motley Fool Income Investor pick, after all. And its ability to continue to snap up well-known brands with room for growth should give its shareholders the same comfort they'd get from a good pair of jeans or some stretchy workout clothes.
In that light, VF seems to be poised to exceed expectations. Still, buying into it now sounds a bit pricey, given its forward price-to-earnings ratio of 14 and PEG ratio of 1.57. Its increasing debt also merits some Foolish concern. I could end up kicking myself for being too conservative, should VF's aggressive brand-building yield higher growth. All the same, I'd personally prefer to wait for a better price.