V.F. Corporation has a storied history of acquisition-fueled growth. Over the last 20 years, the apparel and footwear company has acquired companies like The North Face, Vans, and Timberland. That made it a little surprising when V.F. Corp. split itself into two companies. Kontoor Brands was spun off at the end of May, and now houses denim brands Wrangler, Lee, and Rock & Republic as well as the VF Outlet business.
For years, V.F. Corp. justified acquisitions as a means of becoming more profitable by achieving cost-saving through greater scale. The company is now telling investors that it sees a brighter future by creating two more focused companies. Does this shift in strategy make sense?
Details of the split
As a part of the spinoff, V.F. Corp. shareholders received one share of Kontoor Brands for every seven VF shares they owned. Wrangler and Lee have been a cornerstone of the VF portfolio for decades. Lee was acquired in 1969 and Wrangler was acquired in 1986. Last year, the brands that make up Kontoor generated $2.8 billion in revenue, which is enough to support its own company.
The table below summarizes the profile of the two newly independent companies:
|Company||Description||Key Brands||2018 Revenue||Long-Term Target Dividend Yield|
|V.F. Corp. (NYSE:VFC)||Apparel and footwear company, focused on active and outdoor brands||Vans, The North Face, Timberland, Dickies||$11.2 billion||roughly 2%|
|Kontoor Brands (NYSE:KTB)||Denim-apparel company||Wrangler, Lee||$2.8 billion||roughly 5%|
The official reason cited for the separation -- to create two more focused companies -- feels a bit disingenuous. V.F. Corp. has pursued several acquisitions over the years, arguing that the bigger the company gets, the more efficiently it can operate its apparel empire through shared sourcing and fixed costs. Denim apparel is apparel, so it's not entirely clear why it would make sense to separate the assets just because the end products use different types of fabric. The company even acknowledged that the separation will result in some "dis-synergies" -- Wall Street jargon translating to a slight hit to profit margins.
Rather, it seems the spinoff is a way for V.F. Corp. to shed its denim brands because they are slower-growing and less desirable to own in the same portfolio as its faster-growing activewear labels. This is hinted at in the way Kontoor Brands is being positioned as a dividend stock.
Kontoor Brands is profitable but doesn't have obvious avenues for growth. Therefore, instead of reinvesting in the business, Kontoor will harvest its cash flow to pay a dividend yield that management predicts will be as high as 5%. Meanwhile, legacy V.F. Corp. continues to yield around 2.4% as of this writing, but is prioritizing growth.
Kontoor Brands: primarily a dividend play
A 5% yield would be attractive, however, given the company's recent history of falling revenue and margin contraction, it won't have many other things that excite shareholders.
|Revenue||$2.93 billion||$2.83 billion||$2.76 billion|
|Operating income||$408.7 million||$357.4 million||$333.0 million|
It is not entirely clear why Kontoor has delivered poor results. Denim rival Levi Strauss has been able to show healthy top-line growth. Of course, we are talking about fashion companies, so it is entirely possible that Wrangler and Lee jeans are out of fashion while Levi's jeans are considered hip.
Perhaps as an independent company, Kontoor can better manage its branding to turn things around, and being a more focused company will create value. That being said, don't expect a turnaround to happen overnight. The spinoff could create some short-term distractions, as the newly minted leadership will need to navigate a freshly independent company. Over the medium to long term, it will be interesting to see if Kontoor can follow Levi's lead and spark organic growth.
V.F. Corp: a more nimble growth stock
In addition to spinning off Kontoor Brands, VF sold its Nautica brand in April. It's now a more nimble company focused on its fastest-growing brands.
While the brands making up Kontoor Brands saw their revenue collectively decline 2.3% last year, the remainder of V.F. Corp. had revenue grow by 23.5%. No wonder VF was eager to divest the denim assets.
VF's remaining assets, including Vans, Timberland, and The North Face, have strong brands and are benefiting from the boom in activewear, which is loosely defined as apparel geared toward activity-based outdoor and work lifestyles. The trend toward "athleisure" has made it more common for people to wear activewear while doing more than working out.
VF's legacy brands have also benefited from strong sales in direct-to-consumer channels, which include self-branded retail stores and e-commerce websites. The strength of VF's direct-to-consumer strategy is a testament to its brand power, because it shows that consumers are seeking out its labels. For example, customers choose to shop at Vans-branded stores or on Vans.com, as opposed to buying Vans at a larger retailer.
The bottom line is that V.F. Corp. has made itself a more focused growth company by divesting a number of brands that have likely been weighing it down. This could make VF a more attractive stock to own for growth-oriented investors.
Since the spinoff was completed, Kontoor Brands' stock price has declined by more than 25%. Over the same period, VF's stock price is slightly higher. This could partially be a reflection of investors' preference for faster-growing stocks over dividend-oriented stocks.
The slimmed down version of V.F. Corp. will probably be a good stock to own if it can maintain its over-20% pace of revenue growth. The odds of VF maintaining strong revenue growth have increased now that it has divested its slower-growing brands.
However, investors may not want to chuck Kontoor Brands too quickly. Although its Wrangler and Lee brands have been challenged in recent years, a company focused on denim could see its results stabilize, and perhaps grow again in the future.