A shopper walks in front of a North Face store at the Easton Town Center shopping center in Columbus, Ohio, on January 7, 2021.
Luke Sharrett | Bloomberg | Getty Images
Company: VF Corporation (VFC)
Business: VF Corp. is a consolidator of consumer footwear and apparel brands. The Company is engaged in the design, sourcing, marketing and distribution of branded lifestyle apparel, footwear and related products and operates in three segments: Outdoor, Active and Work. The Company’s brands include The North Face, Timberland, Smartwool, Icebreaker, Altra, Vans, Supreme, Kipling, Napapijri, Eastpak, JanSport, Dickies and Timberland Pro.
Market value: $6.03 billion ($15.50 per share)
Activist: Engaged Capital
Percentage ownership: n/a
Average cost: n/a
Comment from activists: Engaged Capital was founded by Glenn W. Welling, a former principal and managing director of Relational Investors. Engaged is an experienced and successful small cap investor and makes investments with an investment horizon of two to five years. His style is to hold management and boards accountable behind closed doors. As an activist, Engaged has had great success, but almost all of that success has come in small-cap companies. The company has generated consistent returns through its small-cap activity. However, of the 31 activist campaigns in its history, this is only the sixth to exceed a market cap of over $2 billion. In each of the last five years, the company has had board representation but has struggled to achieve financial success.
On October 17, Engaged announced that it had acquired a stake in VF Corp. and called on the company to implement a plan that includes cost reductions, restoring brand autonomy, improving capital structure and renewing its board of directors. Shortly thereafter, on October 24, Bloomberg reported that Legion Partners Asset Management had also acquired a stake in VF Corp. took over and asked the company to sell some of its brands.
Behind the scenes
While VF Corp. is a consolidator of consumer footwear and apparel brands, the company essentially consists of three brands that account for 79% of its revenue – Vans, The North Face and Timberland. Historically, the company has been operationally focused and has achieved relatively consistent operating margins. On January 1, 2017, Steve Rendle became CEO and shortly thereafter began a major restructuring of the company, which included centralizing several key functions previously managed at the brand level and using acquisitions for growth. Most notably, in November 2020, he purchased Supreme for over $2 billion and expected (and received) $500 million in sales in 2022 from the streetwear brand. This strategy expanded the company’s cost structure, reduced brand autonomy, and ultimately withdrew capital from its core brands to offset investments in a corporate center it was building. Under his tenure, earnings before interest, taxes, depreciation, and amortization (EBITDA) margins fell by over 300 basis points, total corporate expenses rose 34% from $631 million to $844 million, and the stock price fell 31.27% from a Up 77.11% of the S&P 500. When Engaged got involved, the company was trading at a 10-year low, more than 80% lower than its pre-Covid share price. VF Corp. desperately needed a new CEO, and they got one. Rendle left the company in December 2022. On July 17, 2023, Bracken Darrell, the former CEO of Logitech, became the new CEO at VF Corp.
Darrell spent the previous decade creating value as CEO of Logitech. During his time there, Darrell initiated a turnaround that included a major cost restructuring, reinvestments in design and innovation to return the company to growth, and a significant improvement in profitability that resulted in a stock price increase of over 900% during his decade-long tenure . So it sounds like the board has found the right person for the job. Engaged believes this turnaround should start with eliminating duplicative costs, noting that over $300 million in short-term actionable cost savings are possible. However, simply increasing the company’s EBITDA margin from 12% to 15% will not reverse the sharp decline in its share price. Engaged then proposes a restoration of brand autonomy, with a portion of cost savings reinvested to support growth and a product-led turnaround at Vans. This is much easier said than done. The Vans brand is in decline, falling from $4 billion in 2020 to $3.6 billion in 2023. Engaged calls for VF Corp. also urgently consider divestitures that are not part of the core business in order to improve the balance sheet.
At the very least, Engaged would like to forego further acquisitions and cut the dividend. The company wants management to use the additional funds from these activities to pay down debt and support the turnaround at Vans and further investments in The North Face to maintain its competitive advantage. That has a lot to do with the uncertain level of cash flow, but nearly three-quarters of VF Corp.’s revenue. are generated through wholesale and proprietary e-commerce channels, making it easier to increase sales with less additional capital. Engaged estimates that The North Face, plus the value of a stabilized van, could be worth over $30 per share without counting the value against the remaining portfolio, which includes Timberland, Supreme, Dickies and other small brands belong. Adding all the factors together, Engaged sees a path to a share price of $46 within three years.
Because it’s a moving target with important decisions having to be made every day, I’m assuming Engaged will want a seat on the board to oversee this turnaround and hold management accountable if the company doesn’t have one has success. Additionally, the majority of current board members served throughout former CEO Rendle’s tenure and allowed strategic errors to continue unchecked. Fresh blood on the board would certainly be appropriate. Engaged is likely working behind the scenes with management to discuss representation on the board. If no agreement is reached, the director nomination window will open on January 14, 2024. At that time, I expect them to nominate directors.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of 13D activist investments.