VF’s Spinoff Plans Makes Good Sense

We plan to maintain our $80 fair value estimate after  VF (VFC) announced plans to spin off its jeans business (around 20% of total cash flow and a high-teen percentage of our valuation) during the first half of calendar 2019, leaving shares overvalued.

We are favorable on the separation for several reasons. First, VF's remaining company of outdoor, lifestyle, and active brands (80% of total cash flow) has matured to the point where it does not require the cash flow generated from the jeans operations to fund its growth. Second, the transaction will allow the separate companies to enhance focus and efficacy on growth opportunities with financial flexibility, which could create incremental sales and profit growth. Third, VF has a successful track record of actively managing its brand portfolio, leading to 17% average annual total shareholder return since 2000 (recent portfolio brand management includes the sale of apparel brand Nautica and acquisition of workwear brand Williamson-Dickie). As a result, we reiterate our Exemplary stewardship rating and wide moat rating (sourced by an intangible brand advantage).

Capital allocation should remain consistent with a focus on acquisitions and midteen shareholder return for the remaining company, while the new company focuses first on high-single-digit shareholder return (via dividends) and paying down debt, followed later by acquisition opportunities (likely in emerging-market regions where its Lee brand is well positioned). The remaining company will include the North Face, Vans, and Timberland brands with a growing international (around 40% of total revenue) and direct-to-consumer business (around 37%), aiding margin expansion (we calculate the remaining company EBIT margin expanding toward 18% in fiscal 2022 from just below 16% in fiscal 2017).