Shares of VF Corp (NYSE: VFC) have ascended 17% year to date on the strength of the company's fiscal third-quarter earnings, released on Jan. 18. The fashion and outdoor-wear conglomerate issued a vigorous report, exceeding investor expectations and raising its full-year earnings outlook. But VF Corp also whetted shareholders' appetites for future earnings after the pending spinoff of the company's denim business.
Below, let's evaluate two key comments that are relevant to this change made by management during the company's earnings conference call following the earnings release.
Image source: VF Corp.
Vans continues to defy gravity
Revenue increased 9% on an organic basis, as our growth engines continue to fuel our results. Excluding Kontoor Brands, the VF RemainCo portfolio increased 12%. Our Big 3 brands grew at a combined rate of 16%, with our Vans brand delivering another exceptional quarter of 27% growth. Importantly, growth for the Vans brand remains well balanced across channels, geographies and product categories. -- CEO Steve Rendle
VF Corp. derives the lion's share of its revenue from five major brands: the denim labels Wrangler and Lee, which will exit VF within the new company (to be named "Kontoor"), and the Vans, Timberland, and North Face brands, which will stay in VF Corp (referred to as "RemainCo" in spinoff discussions). Wrangler and Lee have seen market share declines in recent years, and management believes that placing them in their own publicly traded entity will allow a new management team to focus solely on reviving their prospects, thus unlocking shareholder value.
Of the remaining top brands, which VF Corp dubs "the Big 3," Vans continues to lead sales growth, even as management has forecasted for a few quarters that expansion of the popular sneaker line, beloved in skateboard culture, must inevitably return to normalized levels.
Vans' revenue has increased 33% in the Americas, 13% in EMEA (Europe, Middle East, and Africa), and 32% in APAC (Asia Pacific) in the first nine months of fiscal 2019 versus the prior year. Note that VF Corp doesn't release actual brand dollar volume on a quarterly basis.
This equates to total global improvement of 29% on a constant-currency basis over the last three quarters. It's clear that the label continues to resonate across a wide demographic and geographical base.
While VF Corp has signaled that Vans is too large to advance at such a pace forever, in the near term, higher digital and direct-to-consumer (DTC) sales are keeping the company's growth rate well above a long-term target of low-double-digit expansion. For comparison, Timberland and North Face expanded global sales (in constant-currency terms) by 1% and 10%, respectively, in the first three fiscal quarters of 2019.
The spinoff is on schedule for the spring, with one caveat
We remain on track for a public filing in early March. However, the government shutdown has the potential to delay the public filing. We will keep you posted as our timeline evolves. Both VF or Remainco and Kontoor Brands will host investor Road Shows in the coming months, leading up to our anticipated separation date at the end of April. -- CFO Scott Roe
During the earnings call, both CEO Steve Rendle and CFO Scott Roe assured investors that the Kontoor spinoff is slated for the latter half of April. However, as Roe states above, this depends somewhat on external factors. As of this writing, the U.S. government shutdown is ongoing, with no clear resolution in sight.
Beyond this caveat, investors should welcome the prospect of separation between Wrangler and Lee and the Big 3 brands. Shareholders will receive shares in Kontoor through a tax-free transaction, and the new denim company will have some ready money from its initial public offering to invest in marketing, research and development, and distribution to jump-start denim revenue. Kontoor will remain at VF Corp's current headquarters in Greensboro, North Carolina.
As for "RemainCo," management plans to move most of its operations to Denver, Colorado, which will place it within an appropriate geographical location for innovation and test marketing in its outdoor brands like Timberland and North Face.
More significant for investors, however, is the possibility that RemainCo will be able to exhibit much higher growth rates once free of the drag of Wrangler and Lee, which notched 1% constant-currency growth and negative 5% constant-currency growth, respectively, in the first three quarters of 2019 against the comparable period.
Thus, if VF Corp's public split strategy pans out, current shareholders will own stakes in two companies with higher potential in separation versus their current wedded state. Projected earnings numbers for both companies should be available by March, when the respective management teams pitch the deal to institutional investors.
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