What’s Next For VF Corp. After Contemporary Brands Sale?

Splendid Spring 2016 Collection
Splendid spring '16 collection.
Courtesy of brand.

VF Corp. announced Thursday its definitive plans to sell its contemporary brands — 7 for All Mankind, Splendid and Ella Moss — to Israel-based manufacturer and marketer Delta Galil Industries Ltd.

We are pleased to have reached this agreement,” said VF’s chairman and CEO Eric Wiseman in a release. “The brands included in this transaction are leaders in their sectors, and have talented, passionate people who are motivated by serving the marketplace with distinctive apparel design and exceptional service.”

Canaccord Genuity Inc. analyst Camilo Lyon called VF’s latest deal “a small but directionally right transaction.”

We welcome this transaction as the contemporary [brands] coalition has been struggling for the past two years with no clear strategy in place to re-accelerate revenue growth as evidenced by management’s mid-single-digit revenue decline guidance this year,” Lyon wrote Thursday. “The [contemporary brands] coalition has also been a drag on EBIT margins [2015 EBIT margin of 1.8 percent vs. 14.6 percent for the company].”

Further, the analyst noted, the deal represents “actions by the team to shift the portfolio to greater revenue- and profit-generating categories/coalitions.”

While market watchers have been growing anxious about VF. Corp.’s next big buy, the Greensboro, N.C.-based brand management firm has seemed more focused on rightsizing its portfolio ahead of making a purchase.

Earlier this year, we said that we are taking a focused and proactive look at the composition of our business portfolio to ensure that we are well positioned to maximize VF’s growth and return to our shareholders,” Wiseman said in Thursday’s release. “This announcement illustrates that our work as active portfolio managers is progressing.”

In March, VF Corp. suggested it was placing a “for sale” sign on its $550 million Licensed Sports Group (LSG) business, when it announced that it was exploring “strategic alternatives” for the division, part of its imagewear coalition.

That supposed sale — also applauded by market watchers — has yet to happen, but it is expected sometime this year.

Selling LSG would make strategic sense in our view as VF transitions its portfolio toward higher growth/higher margin businesses,” UBS Investment Bank analyst Michael Binetti said of the potential LSG divestiture in March. “We estimate imagewear has been a 120 basis points drag to VF’s three-year revenue compound annual growth rate and margins have a ceiling due to royalties.”

Meanwhile, analysts continue to watch a handful of brands and businesses — including Puma, Deckers Brands, Canada Goose and New Balance — that they say could make viable buys for VF Corp. in the near future.

We have been of the opinion that 2016 will be the year of the deal for VF Corp., and recent declarations by the company to actively manage its portfolio (via both additions and deletions) support our assertion,” Lyon said back in April.

The contemporary brands sale, which is expected to close in the third quarter of this year, is valued at $120 million.

In the most recent quarter (Q1), VF’s sales remained flat year over year at $2.8 billion, while net income declined 10 percent, to $260.3 million, or 61 cents per diluted share.