Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

VF Corp. is cleaning out its closet. 

The $25 billion company behind North Face jackets and Timberland boots on Thursday said it had sold a basket of fashion labels -- the "contemporary brands" Splendid, 7 For All Mankind and Ella Moss -- to Israeli apparel-maker Delta Galil. The $120 million price tag for the deal is no knockout, at about 0.3 times the revenue VF earned from the brands last year. Similar-sized apparel takeouts in the past five years have commanded a median of 1 times sales. 

But selling now helps remove what had become a profit-challenged albatross around VF's neck before its problems get any worse. Revenue for VF's contemporary brands had already fallen from a high of nearly $500 million in 2011 to $344 million in 2015, dropping 14 percent last year alone. Delta Galil expects the brands will add "over" $300 million in annual sales, signaling at best a slowing decline.

Fashion Miss
V.F. Corp's sales growth/decline from the year before, by segment
Source: Bloomberg Intelligence

Getting rid of the contemporary labels also pushes VF almost entirely out of the fast-fashion apparel business at a time when shoppers are spending less on things like expensive jeans and more on daily staples such as t-shirts and active wear. And it gives VF a clearer path -- and some more firepower -- to finally make some acquisitions. 

VF is typically a brand accumulator, but it's stuck in a four-year-plus deal drought, its longest ever, even as its results have weakened. Part of its reluctance to jump into an acquisition has stemmed from the "really frothy" valuations of potential targets, CEO Eric Wiseman told Bloomberg News in a February interview. But VF was also in need of some pruning. (It's also exploring options for its licensed athletic apparel business -- think MLB and NBA jerseys -- which produced about $550 million in revenue last year.)

Spending History
VF has built itself in large part through acquisitions over the years, with a focus on sportswear and outdoor gear.
Source: Bloomberg
HIS Sportwear valuation combines three purchases of blocks of the company from 2000 to 2003.

To be conservative, say VF gets about 0.5 times revenue for the athletic business. That's about $275 million, plus the $120 million it pockets from selling its contemporary brands and the almost $590 million in cash VF had on its balance sheet as of March. At that point, it's got a nice little cash stockpile before even having to think about raising debt. Using its own stock as currency is not typically part of VF's playbook. 

VF's narrowed focus on basic staples, outdoor gear and sportswear gives an indication of where it may focus its takeover efforts. One possible purchase could be Hanesbrands, the maker of Hanes underwear, Wonderbras, and Champion athletic gear. Its CEO Rich Noll said earlier this month that he'd resign after a decade at the helm. Operating much like VF, Noll built the company through a series of acquisitions. The company's market value and revenue grew. But sales have slowed of late, and Hanesbrands' stock is down 24 percent in the past year.

Good Fit
Hanesbrands stock had been flying high, but in the past year it's fallen 12%
Source: Bloomberg

Hanesbrands is now trading at about 13 times its projected 2016 earnings. That compares to a multiple of 19 at VF and roughly 18 and 19 times, respectively, at other apparel basics brands such as G-III Apparel Group and Gildan Activewear. The company's relative cheapness and leadership upheaval could make this an ideal time for VF to make its move.  

Both are among the few in the apparel industry that actually own many of the factories that make their clothes. And they share many of the same customers, including big retailers such as Walmart and Target. 

Other takeover options could include Lululemon -- a perennial target of takeover speculation -- Puma (majority owned by Kering) or Eddie Bauer (owned by private-equity firm Golden Gate Capital). Altamont Capital also has a portfolio of action sports and skater brands that could fit well within VF.

Here's hoping VF's next takeovers turn out better than the 7 for All Mankind deal, though. VF bought the jeans maker in 2007 from the private-equity arm of Bear Stearns for a whopping $775 million. Shareholders will lose patience if the next purchase results in such an ugly haircut -- especially after the long wait. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net