Activist Engaged Capital sees a path to lift VF Corp’s share price and slash costs
Activist Engaged Capital sees a path to lift VF Corp’s share price and slash costs

A consumer passes in entrance of a North Face retailer on the Easton Town Center mall in Columbus, Ohio, on Jan. 7, 2021.

Luke Sharrett | Bloomberg | Getty Images

Company: VF Corporation (VFC)

Business: VF Corp. is a consolidator of shopper footwear and attire manufacturers. It engages within the design, procurement, advertising and distribution of branded life-style attire, footwear and associated merchandise, and it operates by way of three segments: outside, energetic and work. The firm’s manufacturers embrace The North Face, Timberland, Smartwool, Icebreaker, Altra, Vans, Supreme, Kipling, Napapijri, Eastpak, JanSport, Dickies and Timberland Pro model names.

Stock Market Value: $6.03B ($15.50 per share)

Activist: Engaged Capital

Percentage Ownership:  n/a

Average Cost: n/a

Activist Commentary: Engaged Capital was based by Glenn W. Welling, a former principal and managing director at Relational Investors. Engaged is an skilled and profitable small-cap investor and makes investments with a two- to five-year funding horizon. Its type is holding administration and boards accountable behind closed doorways. Engaged has had nice success as an activist, however virtually all that success has come at small-cap firms. The agency has generated constant returns in its small-cap activism. However, of the 31 activist campaigns of their historical past, that is solely the sixth one above a $2 billion market cap. In the earlier 5, the agency acquired board illustration every time, however has struggled to see monetary success.

What’s occurring

On Oct. 17, Engaged introduced that it took a stake in VF Corp. and known as on the corporate to undertake a plan that features lowering costs, restoring model autonomy, enhancing the capital construction and refreshing the board. Shortly thereafter, on Oct. 24, Bloomberg reported that Legion Partners Asset Management has additionally taken a stake in VF Corp. and is looking for the corporate to divest a few of its manufacturers.

Behind the scenes

While VF Corp. is a consolidator of shopper footwear and attire manufacturers, it basically is comprised of three manufacturers that make up 79% of their income – Vans, The North Face and Timberland. Historically, the corporate was operationally targeted and had comparatively constant working margins. On Jan. 1, 2017, Steve Rendle became CEO and shortly thereafter, he commenced a vital reorganization of the enterprise which included centralizing a number of key features beforehand managed on the model stage and counting on acquisitions for progress. Most notably, in November 2020, he bought Supreme for over $2 billion anticipating (and receiving) $500 million of income in 2022 from the streetwear model. This technique expanded the company value construction, diminished autonomy of manufacturers and finally disadvantaged core manufacturers of capital to offset investments in a company middle that he had constructed. Under his tenure, earnings earlier than curiosity, taxes, depreciation and amortization (EBITDA) margins dropped over 300 foundation factors, complete company expense elevated 34% from $631 million to $844 million and the inventory price has declined 31.27% versus a rise of 77.11% for the S&P 500. By the time Engaged received concerned, the corporate was buying and selling at 10-year lows, down greater than 80% from the place shares traded prior to the Covid pandemic. VF Corp. was in determined want of a new CEO, and they received one. Rendle left the company in December 2022. On July 17, 2023, Bracken Darrell, the previous CEO of Logitech, turned the new CEO at VF Corp.

Darrell spent the prior decade creating worth as CEO of Logitech. During his time there, Darrell spearheaded a turnaround that included a main value restructuring, reinvestment in design and innovation to assist the corporate return to progress, in addition to a vital enchancment in profitability that led to a share price appreciation of over 900% throughout his decade-long tenure. So, it sounds just like the board has discovered the best particular person for the job. Engaged thinks that this turnaround ought to begin with unwinding duplicative costs, stating that there are over $300 million in value financial savings which are actionable within the brief time period. However, simply taking the corporate from 12% to 15% EBITDA margins won’t reverse the sharp decline within the inventory price. After this, Engaged suggests a restoration of name autonomy, with a portion of the price financial savings being reinvested to assist progress and a product-driven turnaround at Vans. This is far simpler stated than executed. The Vans model has been in decline, dropping to $3.6 billion of income in 2023 from $4 billion in 2020. Engaged additionally urges VF Corp. to consider non-core divestitures to repair the steadiness sheet.

At the very least, Engaged would love to see a dedication to no additional acquisitions and a discount of the dividend. The agency would love administration to use the extra money from these actions to pay down debt and assist the turnaround at Vans and continued funding in The North Face to preserve its aggressive edge. That is a lot to do with an unsure amount of money circulate, however almost three-fourths of the VF Corp.’s revenues are generated by way of wholesale and owned ecommerce channels, so it’s simpler to develop gross sales with much less incremental capital. Engaged thinks that The North Face, plus the worth of a stabilized Vans, might be value over $30 per share, with out making use of any worth to the remaining portfolio which incorporates Timberland, Supreme, Dickies and different small manufacturers. After including up all of the items, Engaged sees a path to a $46 share price inside three years.

As that is a shifting goal with vital choices to be made day-after-day, I might count on Engaged would need a board seat to assist oversee this turnaround and maintain administration accountable if the agency is unsuccessful. Moreover, a majority of the present board members served by way of former CEO Rendle’s complete tenure and allowed the strategic errors to go on unchecked. So, contemporary blood on the board will surely be warranted. Engaged is probably going working with administration behind the scenes to focus on board illustration. If no settlement is reached, the director nomination window opens on Jan. 14, 2024, at which era I might count on them to nominate administrators.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. 

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