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

Business: VF Corp. is a consolidator of consumer footwear and apparel brands. It engages in the design, procurement, marketing and distribution of branded lifestyle apparel, footwear and related products, and it operates through 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 brand names.

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

Percentage Ownership:  n/a

Average Cost: n/a

Activist Commentary: Engaged Capital was founded by Glenn W. Welling, a former principal and managing director at Relational Investors. Engaged is an experienced and successful small-cap investor and makes investments with a two- to five-year investment horizon. Its style is holding management and boards accountable behind closed doors. Engaged has had great success as an activist, but almost all that success has come at small-cap companies. The firm has generated consistent returns in its small-cap activism. However, of the 31 activist campaigns in their history, this is only the sixth one above a $2 billion market cap. In the previous five, the firm received board representation each time, but has struggled to see financial success.

On Oct. 17, Engaged announced that it took a stake in VF Corp. and called on the company to undertake a plan that includes reducing costs, restoring brand autonomy, enhancing the capital structure and refreshing the board. Shortly thereafter, on Oct. 24, Bloomberg reported that Legion Partners Asset Management has also taken a stake in VF Corp. and is calling for the company to divest some of its brands.

While VF Corp. is a consolidator of consumer footwear and apparel brands, it essentially is comprised of three brands that make up 79% of their revenue – Vans, The North Face and Timberland. Historically, the company was operationally focused and had relatively consistent operating margins. On Jan. 1, 2017, Steve Rendle became CEO and shortly thereafter, he commenced a significant reorganization of the business which included centralizing several key functions previously managed at the brand level and relying on acquisitions for growth. Most notably, in November 2020, he purchased Supreme for over $2 billion expecting (and receiving) $500 million of revenue in 2022 from the streetwear brand. This strategy expanded the corporate cost structure, reduced autonomy of brands and ultimately deprived core brands of capital to offset investments in a corporate center that he had built. Under his tenure, earnings before interest, taxes, depreciation and amortization (EBITDA) margins dropped over 300 basis points, total corporate expense increased 34% from $631 million to $844 million and the stock price has declined 31.27% versus an increase of 77.11% for the S&P 500. By the time Engaged got involved, the company was trading at 10-year lows, down more than 80% from where shares traded prior to the Covid pandemic. VF Corp. was in desperate need of 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 prior decade creating value as CEO of Logitech. During his time there, Darrell spearheaded a turnaround that included a major cost restructuring, reinvestment in design and innovation to help the company return to growth, as well as a significant improvement in profitability that led to a share price appreciation of over 900% during his decade-long tenure. So, it sounds like the board has found the right person for the job. Engaged thinks that this turnaround should start with unwinding duplicative costs, pointing out that there are over $300 million in cost savings that are actionable in the short term. However, just taking the company from 12% to 15% EBITDA margins will not reverse the sharp decline in the stock price. After this, Engaged suggests a restoration of brand autonomy, with a portion of the cost savings being reinvested to support growth and a product-driven turnaround at Vans. This is much easier said than done. The Vans brand has been in decline, dropping to $3.6 billion of revenue in 2023 from $4 billion in 2020. Engaged also urges VF Corp. to evaluate non-core divestitures to fix the balance sheet.

At the very least, Engaged would like to see a commitment to no further acquisitions and a reduction of the dividend. The firm would like management to use the additional cash from these activities to pay down debt and support the turnaround at Vans and continued investment in The North Face to maintain its competitive edge. That is a lot to do with an uncertain amount of cash flow, but nearly three-fourths of the VF Corp.’s revenues are generated through wholesale and owned ecommerce channels, so it is easier to grow sales with less incremental capital. Engaged thinks that The North Face, plus the value of a stabilized Vans, could be worth over $30 per share, without applying any value to the remaining portfolio which includes Timberland, Supreme, Dickies and other small brands. After adding up all the pieces, Engaged sees a path to a $46 share price within three years.

As this is a moving target with important decisions to be made every day, I would expect Engaged would want a board seat to help oversee this turnaround and hold management accountable if the firm is unsuccessful. Moreover, a majority of the current board members served through former CEO Rendle’s whole tenure and allowed the strategic mistakes to go on unchecked. So, fresh blood on the board would certainly be warranted. Engaged is likely working with management behind the scenes to discuss board representation. If no agreement is reached, the director nomination window opens on Jan. 14, 2024, at which time I would 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, a mutual fund that invests in a portfolio of activist 13D investments.