Why VF Corporation Is Smart to Spin Off Its Jeans Brands

In this segment from MarketFoolery, host Chris Hill and analysts Jason Moser and Taylor Muckerman discuss the latest news in the clothing space: Global apparel and footwear giant VF Corporation (VFC 0.33%) is planning to split itself in two, putting its denim brands and outlet stores into an as-yet-unnamed company, allowing the parent to focus more on its outdoor and activewear brands like North Face and Timberland. The trio seem enthusiastic about the company's decision to pare down its portfolio.

A full transcript follows the video.

This video was recorded on Aug. 13, 2018.

Chris Hill: We have to start, it's not merger Monday, it's ...

Jason Moser: Spin-off Monday.

Hill: Spin-off Monday! VF Corp, which is the company that owns Lee and Wrangler, announced that it is spinning off the jeans brands into a separate company. There's going to be a yet-to-be-named company that will have Lee and Wrangler jeans as well as the VF Corp Outlet division. Then, VF Corp will be the remaining businesses, which includes North Face, Timberland, Vans.

Taylor Muckerman: Victoria's Secret, maybe?

Hill: No, that's L Brands.

Moser: That'd be quite the combo there, North Face and Victoria's Secret.

Hill: It would be. I should hasten to point out, Jason, that Steve Rendle, who is the CEO of VF Corp, is sticking with VF Corp.

Moser: [laughs] Wouldn't you?

Hill: He's not going with the jeans company. That seems like all the information I need as an investor about which of these two businesses has a brighter future.

Moser: Yeah, I tend to agree. I think management probably sees this as addition through subtraction. It's weird to talk about the jeans market, you always figure jeans are part of a bigger whole. But they're an actual market unto themselves. When you look at brands like Lee and Wrangler ... I'm not trying to dog those brands, they just remind me of toughskins. They seem very dated. I don't know that they're as big as they once were and carry as much sway in that market as they once did.

To put some numbers around that, you look at Levi's, which is probably the brand that most people look at when they hear jeans. They think Levi's. They brought in about $5 billion in sales last year. That's mostly jeans and jeans-related items. If you look at the VF Jeans segment, which is primarily Wrangler and Lee, they brought in about half of that.

So, you're dumping what's not ever going to be a market leader and favoring the business toward what you have in a number of market leaders, in The North Face and Vans and Timberland. Those are some very powerful brands that carry a lot of sway with a certain audience. To that point, they're moving the headquarters of VF to Denver, Colorado. It'll be, certainly, more in touch with that market, as well.

Again, I think it's just getting rid of... not dead weight, but close to dead weight. It's a company that, I think the jeans segment is responsible for about 30% of operating profit today. It's not inconsequential, but I think it's going to give the newly leaner VF Corp a better opportunity to shape the business around more of a core offering and audience.

Muckerman: So, you're selling shares, if you get them handed to you, as a VF shareholder.

Moser: I would. I mean, I would sell those shares and just go buy a few pairs of Levi's jeans. Those things will last you probably for the rest of your days, right?

Muckerman: Denim dividend.

Hill: The VF Corp executive who's been tapped to be the CEO of the new company is a guy named Scott Baxter. He's been at VF Corp for a while, he was running that division for about five years or so. So, if you're looking for silver linings, they will also have a leaner business, they will be more focused, as well. But to me, we saw this with Hewlett-Packard when Hewlett-Packard split. My only question about that was, Meg Whitman is the CEO, which one is she going with? That's the one I'm going to bet on.

Moser: Any time we talk about clothing or apparel, it's nice to put your money on a company that has a number of different brands under that umbrella. We talk a lot about Gap, and how the benefit of that model is that they aren't just Gap. It's Banana Republic, it's Old Navy, and we've seen how Old Navy has been able to pick up some of the slack in the weakness of those other brands. The leaner VF is still going to be in that model. It's not to say that the new jeans company can't do well. To be sure, they have a very big audience in the European and Asian markets.

Muckerman: That's true.

Moser: I think that's where this business will have an opportunity to really shine. It's important as investors to recognize that it's not just about this box here domestically in the United States. There's a big world out there. Those brands do carry sway out there. $2.5 billion in annual sales is not insignificant. I just think it's a tougher road ahead if you're just a jeans company, vs. something like a VF, that has a number of different offerings for a really big and growing core audience here domestically.