V.F. Corporation (VFC) Earnings Call Transcript & Summary

Greetings, and welcome to the VF Corporation Acquisition Announcement. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Joe Alkire, Vice President of Investor Relations, Corporate Development and Treasury. Thank you, sir. Please begin.

Good morning, everyone. Thank you for joining us. Welcome to VF Corporation's conference call to discuss the announcement of our agreement to acquire Supreme Holdings. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. I would also like to highlight that in addition to this morning's release, we have posted a presentation to the Investor Relations section of our website, and we'll be referring to this presentation during the call. Joining me on today's call will be VF's Chairman, President and Chief Executive Officer, Steve Rendle; and Chief Financial Officer, Scott Roe. Following our prepared remarks, we'll open the call for questions. Steve?

Thanks, Joe, and good morning, everyone. Thank you for joining us on such short notice. We're thrilled to be with you today to announce the acquisition of Supreme, an iconic global brand and a marquee streetwear property, an acquisition that further demonstrates VF's commitment to evolve our portfolio of brands to align with the market opportunities we see driving the apparel and footwear sector and a transaction that marks yet another milestone in VF's portfolio transformation and represents another catalyst in VF's evolution toward a more consumer-minded, retail-centric, hyper-digital enterprise. We are confident the Supreme transaction will serve as a spark for another layer of transformative growth and value creation for VF and our stakeholders. During our Investor Day last fall, we highlighted VF's sharp focus on total addressable markets as critical component to our portfolio management approach. VF's portfolio today is anchored in the core TAMs of active and athleisure, outdoor and work and work-inspired. However, if you recall, we highlighted several attractive overlapping market adjacencies, including streetwear. We estimate the broader streetwear market to be a roughly $50 billion global opportunity with a low double-digit growth profile driven by a number of attractive secular trends, including casualization, social influence and creative self-expression, to name a few. Supreme sits at the epicenter of this market opportunity as the original and global category leader. Streetwear is rooted in casual apparel and footwear emerging from art, music, street and action sports subcultures and is anchored in cultural legitimacy. This unique positioning drives strong engagement from a young and diverse consumer base. The category started in U.S. markets and has expanded globally through nonconventional marketing, distinctive products and a dedication to the youth self-expression. The streetwear model is unique, operating with agility across design, development, marketing and merchandising. Frequent curated drops and a constrained supply philosophy are key elements to driving continuous brand energy and strong consumer engagement. This scarcity, novelty and strong social influence model supports meaningful pricing power, resulting in best-in-class profitability. Streetwear is not a new space for VF. And the acquisition of Supreme follows a long-standing relationship between the brand and VF, with Supreme being a regular collaborator with our Vans, North Face and Timberland brands. And additionally, the street-inspired aspects of Vans, The North Face, Timberland and Dickies capture many of the core elements of streetwear and represent roughly $3 billion of our annual revenue. In fact, the street-inspired lines of our largest brands represent some of the fastest-growing segments of our portfolio today. Supreme was founded in 1994 on Lafayette Street in Downtown Manhattan. At its core was a group of neighborhood kids, New York City skaters and local artists who became a store staff, crew and customers. The brand quickly grew to embody downtown culture known for its quality, style and authenticity. Today, Supreme has grown into a $500 million-plus global cultural lifestyle brand, selling apparel, accessories and footwear through a disruptive, digitally led business model. We see a compelling path for continued growth and value creation as we bring Supreme into the VF portfolio. More specifically, we expect 8% to 10% growth for the brand over the next 5 years driven by international and D2C expansion, core pillars of VF's long-term growth strategy. Scott will cover the details of our plan, but I'd like to share a few of the key opportunities we see for both Supreme and VF resulting from this transaction. Supreme provides VF with deeper access to attractive consumer segments, which has application across many of our existing brands. There are clear opportunities for Supreme to leverage VF's strong international platforms and our existing digital and D2C capabilities. There are also significant opportunities for Supreme to leverage VF's scale and expertise to enhance its supply chain capabilities, improving operating efficiencies, explore new category adjacencies and tap into VF's existing consumer insight, data and analytics capabilities. VF is the ideal steward to honor the authentic heritage of Supreme while leveraging our scale and expertise to accelerate and enable the brand's long-term growth vision. I'm pleased with the continued advancement of our active portfolio management framework, which brought light to the attractiveness of the streetwear space and the natural fit of Supreme's business with our organization. Reshaping our portfolio to accelerate growth and our business model transformation remains our #1 strategic priority. Our thoughtful and disciplined approach to capital allocation will continue to provide VF with unique and compelling acquisition opportunities such as this. I want to close by extending a special thank you to the VF and Supreme teams for their hard work, commitment and dedication to this transaction. Talent is a foundational element of VF's strategy, our continued success and our culture. And we are thrilled to welcome Supreme to the VF family. The management team has already shown a clear desire to collaborate with VF in areas that will better enable their ability to execute a strong, long-term growth plan. We look forward to building on our long-term partnership going forward. And now I'll turn it over to Scott.

Thanks, Steve, and good morning, everyone. I am pleased to announce that we have signed a definitive merger agreement with Supreme, an iconic global leader in streetwear with a unique, digitally led, retail-centric business model. Today's announcement represents another step along our portfolio transformation journey. It's hard to believe that our Williamson-Dickie acquisition was just 3 years ago. And since that time, we have focused our portfolio management efforts on aligning our brand portfolio with our long-term strategic vision, selling Nautica and Reef, acquiring Altra and Icebreaker, spinning off Kontoor Brands and launching a process to sell the occupational work portfolio. In addition to VF's strong brand-building capabilities, active portfolio management has been and will continue to be a key component of our ongoing TSR algorithm. And we believe today's announcement is a logical step in our evolution. And we're excited for both VF and Supreme's enhanced prospects for a stronger, more sustainable growth and long-term value creation. Before we dive into Supreme's business and financial profile, I want to quickly cover the transaction details. As you saw in the news release issued this morning, under the terms of the merger agreement, we have agreed to acquire Supreme for approximately $2.1 billion subject to customary closing conditions and regulatory approval. The agreement includes the potential for a performance-based earnout tied to accretive revenue growth and gross margin performance. Under the terms of the agreement, the founder of Supreme will also defer a portion of the purchase price, which will be payable in VF equity over time. We intend to fund the acquisition with excess cash and commercial paper. We expect to close the transaction later this calendar year. Our liquidity position will remain strong following the transaction with greater than $3 billion of total available liquidity anticipated by the end of the fiscal year. While leverage metrics will remain elevated in the near term, we plan to rapidly delever the balance sheet over the next 12 to 24 months. For reference, we've posted a presentation on our website that outlines the specifics of the transaction and provides an overview of Supreme's business and financial profile in more detail. Next, I'd like to spend a few minutes and provide an overview of Supreme's fundamentals as well as a high-level summary of the growth plan we see for the brand over the next 5 years. Supreme generated more than $500 million in revenue over the past 12 months, and the brand has more than doubled over the past 4 years. During this period of explosive growth, the brand fundamentals have remained intact with exceptional full-price sell-through. And the business model operates with best-in-class profitability, with gross margins of over 60% and operating margins of over 20%, a similar profile to that of our Vans brand. Supreme is almost entirely a direct-to-consumer business with just 12 stores globally and more than 60% of the brand's revenue in digital. Supreme has a strong global presence despite its relatively immature global footprint with approximately 45% of revenue generated outside of the U.S. We see a clear path to 8% to 10% revenue growth for Supreme over the next 5 years driven by a large international and D2C expansion opportunity, core pillars of VF's 2024 strategy. There are no cost synergies baked into our acquisition model. Supreme is a unique asset led by a small but disciplined and agile management team that has presided over consistent growth during the past several years and currently operates with industry-leading margins. Therefore, our approach to integrating the business will evolve differently than prior acquisitions. We're planning a light-touch integration across most areas of the operations. However, we have identified potential opportunities associated with VF's supply chain and international and D2C platforms. The potential cost savings and synergies identified will be incremental to the returns assumed in our acquisition planning. Throughout our diligence process, we've been impressed by Supreme's business model resiliency. On a year-to-date basis, including the impact of COVID-related disruption, Supreme's revenue has increased at a mid- single-digit rate, including more accelerated growth since the launch of the brand's fall/winter season, which began in August. Importantly, profitability and cash flow generation has also remained strong during this period, a clear testament to the strength of the brand and disciplined brand management. This resiliency was a key driver behind our confidence in executing a transaction of this size in the current environment. As Steve mentioned, Supreme will be immediately accretive to EPS while enhancing VF's gross margin and cash profile starting with the fiscal year. Assuming a late calendar 2020 closing, we expect this acquisition to be modestly accretive for fiscal 2021, excluding transaction and other deal-related expenses. On a full year basis, we expect Supreme to contribute more than $500 million in revenue and at least $0.20 of adjusted EPS, providing a strong tailwind to our mid-teen organic TSR algorithm and accretive returns on capital. So in summary, we're excited about this opportunity to further our exposure to the attractive streetwear market and add another iconic brand with $1 billion potential to our portfolio. VF has a rich history of delivering superior long-term total shareholder return, and transformational portfolio actions represent critical milestones along this value creation journey. Our ability to accelerate earnings growth while advancing our digitally led, retail-centric strategy is another major step in our evolution, and it's tangible proof underscoring the optionality inherent in this business model. And now we'll open the call and take your questions.

[Operator Instructions] Our first question is coming from Omar Saad of Evercore ISI.

Congratulations, pretty exciting and interesting deal, different than a lot of the ones you've done in the past. My one question and one follow-up. I guess I'd say, Supreme is really kind of a different price point for VF, I think, relative to a lot of the brands that you guys have in the portfolio, maybe even calling it luxury-esque. Maybe your kind of high-level thoughts and kind of delving into that higher price point part of the market, more elevated price point part of the market. And then my follow-up would be, on the categories, you mentioned there could be some category adjacency opportunities. The obvious one to me or the obvious potential one to me might be footwear given the importance of sneaker culture in streetwear and your capabilities and your other brands that have huge shoe businesses, of course. Those would be my 2 questions.

Yes. Thank you. This is Steve. So I think how we look at Supreme and I think how the Supreme leadership thinks of themselves is not as a luxury brand but rather as an activity-based brand. I think this brand is anchored in East Coast skate culture and certainly taps into all of those streetwear elements of art, music that we see so prevalent in Vans. From a price point standpoint, what we've learned, as we've gotten to know James and the management team there, that the center of everything they do is their intense focus on creating authentic high-quality products that's really put to market at a fair price. Their whole point here is to provide accessibility to their young consumer and to do that with a high-quality product offer that's put to market at a fair price. That doesn't mean that this brand doesn't sell high-priced items. But the core of their offer are really those core tees, hoodies and crews that kids -- are highly sought after. The category adjacencies that we talked about here very well could be footwear. And I think the key here as we get to know one another is to really spend the time to learn what are those core categories that Supreme sees value in representing themselves and where can we provide help. But there'll be no rush to really drive to these points, and we will take our time to get to know each other, understand what their consumers' expectations are and where can VF provide value to further Supreme's success.

Our next question is coming from Michael Binetti of Crédit Suisse.

Congrats on a nice announcement today. This is great to see. How should we think about the ultimate size potential of this brand or even the headwinds to the ultimate size of this brand? Given that this is literally the best example I can think of, outside of the true luxury group, that really set the example for what a scarcity model can be and scarcity is so important to this brand, how do you think about the revenue target that you laid out, the 8% to 10%? And what the ultimate size of this business can be with how important scarcity is here?

Yes. I'll take that, Michael. A couple of things to consider. We talked about the size of the market, first of all, the total addressable market and really the adjacencies. So the opportunity from that standpoint gives us a lot of confidence. And also, I'd just ask you to remember, there's only 12 stores today, and this brand is New York-anchored and started there. The U.S. and Japanese markets are reasonably well established. But when you look at the international opportunity, really just beginning. And another interesting data point is the digital footprint is in general 2x the brick-and-mortar footprint. So as the brand decides what makes sense next, and there's a whole lot of white space out there, this formula of going into a market, developing that -- where the Supreme followers and lovers exist, developing that community and ultimately then opening up a brick-and-mortar store, which is the ultimate expression of the brand in conjunction with that strong online presence, that's a formula that's worked really well for this management team, and we would expect that, that will continue for quite a while. So we saw -- we've talked about $1 billion. I think that's pretty easy math if you think about the opportunity for geographic and international expansion.

Our next question is coming from Bob Drbul of Guggenheim.

Congratulations.

Thanks.

Thanks, Bob.

I guess just a couple of questions for me just around the discussion around no cost synergies in your assumptions. Do you see over time the opportunity to take some costs out of this and some of the synergies on sourcing or anything? Are you intending to sort of fine-tune the sourcing mechanisms in place given your scale and size? Maybe if you could just talk to that, that would be helpful.

Yes. Bob, I'll take that. This is Scott speaking. Listen, you got it right. We did not come in with a big synergy plan or that's not really part of the justification of this deal. And the first and most important reason is this management team has done a great job over a long period of time with superior fundamentals, right? I mean this is a very strong and profitable business model, really strong gross margins, really strong operating margins and in a very attractive growth profile. So we don't need to do anything. That being said, as we've spoken with James and the team, there are a lot of powerful platforms within VF that are interesting to that management team that we think may allow them to serve that consumer in a more efficient and effective way, things like our international capabilities, the platform, think about the back end of the plumbing, as I like to call it, our supply chain and just scale and efficiency, some of the things we do around real estate and direct-to-consumer. There are certainly opportunities that we think will make sense over time. But only when the brand is ready and when it makes sense for their consumer will we pull those levers. This is a really unique business model that works really well. And so we're going to be cautious and measured and work together to find where those opportunities lie. But if you ask me, Bob, 5 years from now, do we think there'll be a lot of synergies? Yes, we think there's going to be places that make sense for the brand and make sense for us together to get some of those efficiencies. I would say those would be upsides to the returns that we've outlined in the materials that we sent out this morning.

Our next question is coming from Erinn Murphy of Piper Sandler.

I guess the question is if you could share a little bit more about the due diligence process, how competitive was it? And then my follow-up is just bigger picture, how do you think about managing fashion risk with this business?

This is Steve. I'll take that. So the due diligence process, the key takeaways, we have known Supreme for many, many years. As you can see in our materials, our Vans, North Face and Timberland businesses have been doing collaborations together since the mid-'90s. So this was not a competitive process. This was really 2 business leaders, businesses coming together and talking about an opportunity and how to unlock value for both sides. And the process was methodical. And to Scott's point is we have taken our time. We're getting to know one another. But it was very clear that there was a lot of opportunities that VF could bring to help Supreme achieve its objectives. But I think also very important here, Erinn, is this is just a great affirmation of the journey we've been on as a VF, the last 4 years to evolve our portfolio to be more aligned with those parts of the market that we see scaling for apparel and footwear but also to really put a fine point on the transformation that we have been put in place to really put the consumer at the center of our business, to become a stronger operating model based around D2C skills and using digital to really enhance those capabilities. Supreme really sits at the center of that. And will be a really strong addition to how we transform and drive our shareholder value over time. And then, Erinn, I forget the second half of your question. If you could remind me.

Yes. Just bigger picture, how you think about managing fashion risk with this brand?

Right. So to the earlier question around this being a fashion brand, this is really an activity-based brand, and it is anchored in East Coast skate. And the focus that this brand -- this leadership team has on creating just good value product and the agility of their model and how they think through their seasonal weekly drop plan, the merchandising, design skills that go aligned with that, but more importantly, just the deep engagement that they have with their consumer here and across the globe, informing the agility that they have in their product creation model, I wouldn't put fashion risk as a top topic here. I think the opportunity here is to further engage, get deeper understanding and be able to position Supreme in those markets where they've got strong consumer demand and to really enable the model that this team has put together, and we've been so successful driving over the years.

Yes. Erinn, this is Scott. I would just tack on to that, too. An interesting proof point is there's the incredible sell-through that this brand has seen over a long period of time. We talked about mid- to high 90s kind of sell-through, which is just amazing, right, and really a testament to how well they've managed the merchandising of the brand.

Our next question is coming from Laurent Vasilescu of Exane BNP Paribas.

Scott, it looks like from the slides, the brand grew at a 25% CAGR since 2017. Can you parse out how large the brand was last year just in the context of a COVID world? And then can you talk about the building blocks for 8% to 10% CAGR? How do we think about e-commerce? And is there an opportunity with just 12 stores to get to, let's say, 100 to 200 stores over the next few years?

Yes. So first of all, the resiliency in the COVID environment, which I think is behind your -- the first part of your question, Laurent, has been amazing, frankly. And we've seen that high single-digit growth on a year-to-date basis. The brand is over $500 million today, growing high single digits, like 9%, I think, year-to-date. And when you look at the acceleration even of that growth in the current season that they're in today, the resiliency during a COVID environment and their ability to find their consumers wherever they're able to transact, whether when stores shut their e-commerce businesses is robust, and they have been able to adapt to that, it's just, quite honestly, pretty impressive. And it's really a testament to that team and the way in which they operate. Remember, too, that digital business is more than 60% of the total revenue today and a big part of the growth going forward. But as you think about forward growth, Laurent, I would just go back to my earlier comment, I think it was Omar's question. And with 12 brick-and-mortar stores that are very, very efficient, the opportunity to continue to add stores is absolutely there if you think about geographic expansion. That, coupled with a really strong omnichannel capability and a digital footprint that's 2x what they see in brick-and-mortar, if you think about continuing to expand, whether it be in existing markets or even new markets from a brick-and-mortar standpoint and then couple that with a really strong digital presence, that's how you get that growth algorithm on a go-forward basis.

Our next question is coming from Matthew Boss of JPMorgan.

Congrats on the acquisition. Scott, maybe how do you see -- so Supreme's operating margins greater than 20% today, do you see this as sustainable? Any planned near-term investments to scale? And how best to think about the multiyear gross margin and operating margin expansion opportunity for the brand in your opinion?

Yes. Well, we're getting -- that's a pretty detailed question given that we just announced today, and we're -- you got to give us some chance to work together on more details. But I'd say this, Matt, very consistent, this brand has had very consistent performance, really strong gross margins, very high sell-through, which means they're not having to deal with a lot of the discounting and things that many brands in our space deal with. And their model is, quite honestly, unique, fairly simple and straightforward and very consistent and has been scalable. So they've seen these margins maintained over a very long period of time. We see no reason why that won't continue. Again, this isn't really about synergies or anything we're going to do particularly different with the brand. We absolutely have strong capabilities and platforms that together, we think could be beneficial to the brand. But only when it makes sense and only when they're ready for it because frankly, it's operating. The fundamentals of the business have been so consistently strong that we see no reason why that won't continue. You think about where future expansion is likely to be a little overindexed. You think about the international markets. And historically, we've seen better margins in our international business, and there's no reason to think that wouldn't be the case here as well over time.

Great. And then maybe just to follow up. You mentioned portfolio shaping is still your #1 strategic priority. So after today's acquisition and the divestiture of occupational work, are you comfortable with the portfolio today or further changes that you're looking to make?

Yes. Matthew, this is Steve. I'll grab that. So yes, we have done a lot of work over the last 4 years to evolve the portfolio to where it is today. And I mean yes, we're comfortable. I think the point being, why we would be comfortable with the evolution into those core aspects of the total addressable market of the active, the outdoor, the work, work-inspired and being able to tap into the adjacencies like streetwear, which we were already operating in from a VF standpoint but now bringing in Supreme, just a finer point around active and how to touch those adjacencies. M&A will remain our #1 choice, and we'll continue to be very thoughtful around deploying our 3-lens approach to finding brands but also capabilities that will enhance our portfolio's ability to continue to scale and deliver against the long-term algorithms we've laid out last year in our Investor Day.

Congrats again.

Thank you.

Our next question is coming from Sam Poser of Susquehanna.

I have a handful, and I'm just going through them and then we can do it. One, the most important, I think, is sort of the collaborations. One, can you tell us what size that is? And two, is there any risk that some other brands such as -- I mean there's a lot of other apparel and footwear brands that have done collaborations over the years have continued to do so. Is there any risk that given that you guys are taking the business on that those other apparel and footwear brands may back off doing collaborations with them? And I'll just go, two, what kind of learnings do you, VFC, expect to get from Supreme? What percent of the collaborations of total revenue? And three, what's the seasonality of the business? How do we look at it by quarter, that $500 million?

Great. Well, thank you, Sam. And yes, I'll start. Scott, we can tag-team here. Yes, so the collaboration question, I think, is a really important one, and I would answer it, Sam, in this way. This is a highly well-run business, and the management team has a very clear strategy that we will support and enable. The collaborations are an important part of their model. But they have core items that they drive and a branded offer that they manage on a weekly basis that is also central to their growth. So this is their decision to drive and ours absolutely to support. I would hope, and I think this is true, that the market understands how VF works with our branded portfolio. And we do not dictate what our businesses do. We really work to support and enable the strategies that each business has in place. And I think this will be very true for Supreme going forward. Their collaborations are beyond apparel and footwear. I think you know well that they work with a broad cross-section of different sectors and different businesses to enhance their model. And we have no intention of changing that and only enabling and supporting that. And then I think that trust and understanding that the broader marketplace has for VF and how we manage, certainly we'll be supportive here. Not really able to talk to you about the size of this part of the Supreme business model. It's important, but I would tell you, it's not the primary driver, Sam. Yes. And Sam...