One of the best qualities of apparel giant VF Corporation (NYSE:VFC) is the company's ability to grow both organically and through acquisition. Therefore, it is beneficial to consider VF's next possible acquisition. Two companies in particular appear to be likely candidates, Columbia Sportswear Company (NASDAQ:COLM) and Quiksilver (NYSE:ZQK).
For years, VF has acquired strong but undervalued competitors and built them into even stronger brands while methodically expanding their reach at the same time. The strategy has worked well for VF in the past and all indicators point to continued success in this regard, as the company's rather aggressive five-year growth plan is already well under way.
VF is outdoors
Although VF has one of the most well-rounded lineups in the industry with brands like The North Face, Timberland, Nautica, and Wrangler, the company's main focus is on the outdoors-lifestyle segment. VF's outdoor & action sports business, which now accounts for over half of its total revenue, grew 14% in the company's recently reported first quarter.
First-quarter results were driven primarily by 14% sales growth in The North Face, 12% sales growth in Timberland, and impressive 20% sales growth in Vans. The outdoor & action sports segment generated $1.57 billion in revenue for the first quarter and significantly outpaced the company's overall sales growth of 6.5%.
The impressive results from VF's largest and most important product category are the driving force behind the company's stated goal of achieving $17 billion in revenue by 2017. This means that VF has targeted a five-year revenue compound annual growth rate of 10%. For reference, VF generated $11.4 billion in sales in fiscal 2013.
Despite solid results, there is always room for improvement. Columbia and Quiksilver could both bolster VF's product lineup in the outdoors category. Columbia in particular seems like a perfect match for VF.
The company's signature hiking/climbing/travel product lines match up well with VF's offerings from brands like The North Face, Timberland, and JanSport. Acquiring Columbia now would also eliminate serious competition at the same time.
In its most-recent quarter, Columbia grew sales 22% on a year-over-year basis. This strength was derived largely from increased demand for the Columbia and Sorel brands. Management also raised guidance for fiscal 2014 and now expects revenue to grow in a range of 16%-18% for the year.
New brand opportunities
When looking at the brands in VF's outdoor & action sports segment, two gaps are apparent; the company has very little exposure to the surfing and yoga lifestyle markets.
Quiksilver's namesake brand and its Roxy brand both cater to surfing enthusiasts and would give VF a strong foothold into the niche lifestyle segment. Additionally, Roxy's snowboarding product lines would compliment The North Face brand as well.
When we consider that VF was interested in acquiring Australian company Billabong's surf brand last year, a possible bid for Quiksilver appears to make even more sense. VF dropped its pursuit of Billabong last July and cited a rich valuation.
On the other hand, as chance would have it, Columbia just entered the yoga space with its recent acquisition of Prana Living. The company acquired Prana for $190 million in cash and the brand is expected to generate over $100 million in sales in 2014 alone, which makes the deal seem like a big winner for Columbia.
Instead of acquiring some of the already well-established and popular yoga brands out there now for much more money, management at VF would likely want to acquire a smaller brand like Columbia's Prana Living and build it up methodically.
(The North Face. Source: VF Corp.)
VF is a great long-term growth prospect for many reasons, including its ability to grow in a myriad of ways. While the company continues to do well in growing its existing portfolio of brands, the time will come when VF acquires another competitor.
Quiksilver and Columbia both make sense for VF for the long run, as the companies' lineups would not only compliment VF's existing brands, they would also both expand the company's product offerings significantly.
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