Taking VF Corp from $2B -> $10B

(Timbs for Everyone!) The Big Daddy of Consumer Aggregators got demolished last year. Plus, why acquisitions are all about the team.

TL;DR

- Why investors fixate on the teams of brands they’re buying

- Even the best are just 1 bad year away from disaster. How we’ll fix VF Corp.

?? The Takeaways

VF Corp has hit the profitability backslide, and it’s a brutal climb back up. Let’s short them into correcting their ways.

1. 3 bizs are trapped inside 1 aggregator.
2. Cannibalize smaller brands to scale the bigger brands.
3. Reduce SG&A and get costs under control.

+ Why it’s all about the team.

LBAB Community - ?It’s all about the team

Great acquisitions are all about the team.

Something people don't understand is the person buying your biz isn't looking to spend their life operating it.

They're not buying themselves a job. They're buying an asset.

They're acquiring how well your team can perform. Seeing who they can leverage and will be successful in Your Biz 2.0. Then figuring out who needs to be added to make it successful.

Superman is not coming in to acquire your business + do the work of 10 people.

They're gonna add what’s missing to accomplish their goals with it. Marketing experts, operational experts, technical experts, legal, accounting, finance, etc.?

But for every piece your biz that’s missing, that’s a bit less $ you’re getting in the acquisition.?

For everybody who's thinking about selling their biz, spend the time to seriously document processes and operationalize as much of their biz as possible.

The team is only as good as the processes/playbooks that the biz is running. Someone who is acquiring a biz doesn’t want to be held hostage to 1 key employee who knows everything about the biz and there isn’t a clear process that someone could take over if needed.

You should do it just in case you ever actually properly wanna go on a vacation (the business will operate without you).

If you’re not reachable for 72 hours, the whole thing shouldn’t collapse.

The documentation means you can easily transfer it to the acquirer (super important for valuations), you can bring in an operator you can trust to run it, or you can run it for 20 years as a smooth oiled machine.?

The important piece is it gives you optionality. 1 of the greatest benefits of owning an asset.

They're gonna add what’s missing to accomplish their goals with it. Marketing experts, operational experts, technical experts, legal, accounting, finance, etc.?

But for every piece your biz that’s missing, that’s a bit less $ you’re getting in the acquisition.?

For everybody who's thinking about selling their biz, spend the time to seriously document processes and operationalize as much of their biz as possible.

The team is only as good as the processes/playbooks that the biz is running. Someone who is acquiring a biz doesn’t want to be held hostage to 1 key employee who knows everything about the biz and there isn’t a clear process that someone could take over if needed.

You should do it just in case you ever actually properly wanna go on a vacation (the business will operate without you).

If you’re not reachable for 72 hours, the whole thing shouldn’t collapse.

The documentation means you can easily transfer it to the acquirer (super important for valuations), you can bring in an operator you can trust to run it, or you can run it for 20 years as a smooth oiled machine.?

The important piece is it gives you optionality. 1 of the greatest benefits of owning an asset.

Let’s Examine This Biz

VF Corp, the OG Aggregator, rolls up mega-beloved consumer brands and lets them wither away managing an “asset class” vs. doubling down on them.

Trading at $12/share with a $4.8B market cap, it’s -85% L5. That’s a .46x Revenue multiple and ∞ it’s earnings considering they lost $1B last year.

VF Corp’s best known brands are North Face, Timberland, Vans, Dickies, and Supreme. Basically, if it’s a popular mall brand with owned Retail, VF Corp probably owns it.

But as you can see it isn’t all gainz and crushing it in VF land. The past 4 years have been difficult as consumer preferences have changes and VF Corp is too busy managing the vast empire to see how many fronts it’s losing ground.

Financial Summary

2023 Financial Statements (YoY Comparison)

Sales: $10.5B (-10%)? ??

COGS: $5B (-9%)? ??

Gross Margins: 52% (-1%) ?? Gross Profits: $5.4B (-11%) ??

SG&A: $5B (-1%) ?? OPEX: $5.4B (-11%)? ??

Net Income: -$968m (-917%) ??????

EPS: -$2.49 (-903%) ??????

FCF: $800m (+211%) ??

Link to VF Corp's 2023 Earnings

TLDR Analysis: Falling Sales crushes the model

1. Tight Ops (COGS, SG&A all trended with Topline), but -10% drop in sales = -917% drop in Net Income ??
2. OPEX >>> Gross Margins. ????
3. COGS and SG&A as a % of Rev are climbing. ??

We’re watching the descent of 1 of the best in the game let their Operations slip out from underneath them while sales decline.

It only took 2 years of declining revenue + rising COGS and SG&A for this biz to flip from printing $1B in profits/year to hemorrhaging $1B in losses/year.

Prompting the real existential question… Does the aggregator model work in consumer?

Let’s Strip This Biz!

Here are the 3 huge overhauls we’re going to have to put in place to get VF Corp back to a $10B biz.

1) Split VF Corp into 3 different entities

Here’s the basic structure of VF Corp’s 3 core segments:

• Outdoor: North Face, Timberland, Combo of smaller bizs
• Active: Vans, Supreme, Eastpak & Jansport
• Work: Dickies & Timberland Pro.

The lowest hanging fruit is carving out what they call the “Work category.”?

I call it a distraction. Just sell off Dickies and roll Timberland Pro under Timberland.?

Work is a 2% Net Operating Margin category (was 11% LY) vs. the 9-11% Operating Margin of Outdoor and Active.

When times get tough, you default to your core, both from a $$$ and focus perspective.

VF Corp area of excellence isn’t “Work”. We need to carve out the Work Segment to focus on the more profitable biz lines that are also VF Corp’s core strategic focus.

Then Outdoor & Active either need to be spun out into 2 separate entities or run as 2 separate biz units.

1. Outdoor (North Face & Timberland) is the crown jewel. The old reliables account for 75% of VF Corps’ Profits.
2. The Challenger Brands in Active: Vans & Supreme. (Our bid if we were going to carve anything out of the biz).

VF Corp is in a classic over-extended “Where do we prioritize our resources” paradox. The Active “Challenger” brands need more resources to grow into future mainstays, but in a tough year, the crown jewels will receive all the love & attention.

By splitting each biz unit out, each will have their own team, focus, resources to grow and scale.

Active will still get fewer resources because of how much smaller they are, which is why we should buy them, scale them and make them bigger brands.

We can roll some of VF Corp’s equity, so they can taste the upside.

Takeaway:?There are really 3 bizs trapped in 1 here.

2) ?Fold the Small Brands into the Big brands.

The problem with scooping so many smaller brands (they also own Napapijri, Altra, Smartwool, Icebreaker, Kipling, Eastpak, and Jansport) is you’re naturally gonna get distracted by the marketing, operations and attention each needs.

Let’s be honest. The team driving 3.5% of the biz’s Rev isn’t going to get the same attention as the team driving 35%.

If you look at basically everything in VF Corp’s portfolio outside of the megabrands (North Face, Timberland, Vans, and Supreme), they all look like rounding errors or product lines/vendors to the main brands.

We’ll apply a simple 2-step framework to every brand that doesn’t account for 10% of overall Revenue:

1. Does this make sense as a product line/vendor for a main brand?
2. If not, sell it off.

It’s simple math. Putting in the resources to boost one of these $10–50m/yr brands by 20–30% is 30x less valuable than increasing North Face’s $3B annual rev by 5–10%.?

Compounding that growth for North Face at over 10 years will create so much more Ent value, it would be irresponsible to not prioritize those investments.?

Whatever doesn’t support supercharging the core brands has gotta go.

Similar to an employee who isn’t working out. We need to set these smaller brands free, so they can find the right home to achieve their full potential.

Takeaway: Always prioritize making your winners bigger.

3) Free Up SG&A

This biz continually operates at the razor’s edge. This year is obviously the best ex. of what goes wrong when GM & OPEX are virtually equivalent:?

• This Year:
• Last Year:

But even in a great year like last year operating at a 3% Net Margin leaves

Here’s how these things happen:

• 3 years ago COGS were 45% of Revenue + SG&A was 41%. Leaving 14% of Profits for other expenses + Profits.
• Last year COGS was 45% of Rev + SG&A was 47%.? Leaving 8%.

These don’t seem like major differences over a 3yr period, but as these costs creep, the frog boils.?

A biz that used to operate at an 11.7% Net Income throwing off $1.4B/yr in 2 years flipped to losing ~-$1B in a year.

There’s too much overhead on this biz, especially with rising product costs. How are we going to get SG&A as a % of Rev down?

• Carving out the biz will require a lot less overhead.
• Close 5-10% of stores to start. See how much deeper this can go.
• Lay off 5-10% of the workforce.

This brand has made continued investments into growth, and they aren’t working. Their 3 year Sales CAGR is -4%.

This biz needs to tighten up and get back to disciplined operations if it wants to continue to operate some of the most well-known brands on the planet.

Takeaway: Always measure COGS & SG&A as a % of Rev.

Final Thought

Synergies are BS.

I know Warren beat me to the punch, but you should never be seeking synergies with another biz.?

VF Corp is a prime example of this. (They used to be the prime example of the Aggregetor model).?

And fundamentally why I don't believe in the Consumer aggregator model.?

Consumer is such a resource- and attention-heavy biz that you can’t just lump them together like a Real Estate portfolio with a property manager over them. For them to flourish and become massive (?? the real goal here), they need maniacal focus.

You aren't going to get that much value by combining back ends or operations, because to be super big and successful in Consumer, there's something inherently unique about your biz.?

They require anti-synergies: incredibly unique investments that only make sense for the brand, that are hard/don’t make sense to replicate in others.

The lack of focus is the biggest problem with the entire roll up/aggregator model. Other industries might have an inverse correlation with size + level of attention required.?

In Real Estate, the larger your portfolio, the less attention is required for each individual property for the overall portfolio to succeed. Consumer bizs are the exact opposite. The larger they get the more attention/resources they need.

Nothing makes that more obvious than when the going gets tough. VF Corp is a defining example of this. Operating in just a couple of different categories creates a multi-front war problem creating gnarly issues.?

Once things get tough and resources get tight, you have to pull back and prioritize what front you're not willing to lose.

Consumer is a market where you're always fighting that war, and you always need to be super diligent about what will work the best.

VF Corp is the best at what they do. These aren’t some random college grads with a spreadsheet and daddy’s money. They are the top operators running a “smart” model:

• Only focusing on Apparel & Footwear brands.
• Acquiring 20+ yr old category leading brands
• Considerably sized bizs run with tight operational discipline.

If you asked someone a decade ago to come up with the optimized Consumer PE-led model to go public, this was the top of the list idea.?

Yet the acquiring bizs in core/popular categories with huge markets and great brands still doesn't work.

This is one of those great lessons. If the best in the biz can't win, everyone else needs to rethink their strategy.