VF Corp's share price and costs could be reduced, according to Activist Engaged Capital's plan.

Company: VF Corporation (VFC)

The company consolidates consumer footwear and apparel brands by engaging in design, procurement, marketing, and distribution of branded lifestyle apparel, footwear, and related products. It operates through three segments: outdoor, active, and work. Its brands include The North Face, Timberland, Smartwool, Icebreaker, Altra, Vans, Supreme, Kipling, Napapijri, Eastpak, JanSport, Dickies, and Timberland Pro.

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

Activist: Engaged Capital

Percentage Ownership:  n/a

Average Cost: n/a

Engaged Capital, founded by Glenn W. Welling, is a successful small-cap investor with a two- to five-year investment horizon. The firm's style involves holding management and boards accountable behind closed doors. Engaged has had great success as an activist, but almost all of 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.

What’s happening

On October 17th, Engaged revealed that it had invested in VF Corp. and urged the company to implement a plan that included cost reduction, brand autonomy, capital structure improvement, and board refreshment. Following this announcement, on October 24th, Bloomberg reported that Legion Partners Asset Management had also acquired a stake in VF Corp. and was advocating for the company to divest some of its brands.

Behind the scenes

VF Corp. is a consolidator of consumer footwear and apparel brands, comprised of three brands that account for 79% of their revenue - Vans, The North Face, and Timberland. Historically, the company was operationally focused and had consistent operating margins. In 2017, Steve Rendle became CEO and initiated a significant reorganization, centralizing key functions and relying on acquisitions for growth. In 2020, he purchased Supreme for $2 billion, expecting $500 million in revenue from the streetwear brand. This strategy expanded the corporate cost structure, reduced brand autonomy, and deprived core brands of capital. Under Rendle's tenure, EBITDA margins dropped over 300 basis points, total corporate expense increased 34%, and the stock price declined 31.27%. By the time Engaged got involved, the company was trading at 10-year lows, down more than 80% from pre-pandemic shares. VF Corp. was in desperate need of a new CEO, and they got one. Rendle left the company in December 202

Darrell, as CEO of Logitech, spearheaded a turnaround that led to a significant improvement in profitability and a share price appreciation of over 900% during his decade-long tenure. However, to reverse the sharp decline in the stock price, Engaged suggests that the company should first unwind duplicative costs, with over $300 million in actionable cost savings in the short term. After this, Engaged recommends restoring brand autonomy and reinvesting a portion of the cost savings to support growth and a product-driven turnaround at Vans. This is easier said than done, as the Vans brand has been in decline, dropping to $3.6 billion of revenue in 2023 from $4 billion in 2020. Additionally, Engaged advises VF Corp. to evaluate non-core divestitures to fix the balance sheet.

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. Despite the uncertainty of cash flow, nearly three-fourths of VF Corp.’s revenues are generated through wholesale and owned ecommerce channels, making it easier to grow sales with less incremental capital. Engaged believes 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 considering all the factors, Engaged sees a path to a $46 share price within three years.

Engaged is seeking a board seat to oversee the turnaround of the company and hold management accountable if the firm fails. The majority of the current board members have been with the company throughout the tenure of former CEO Rendle, which allowed strategic mistakes to go unchecked. Therefore, fresh blood on the board is necessary. Engaged is likely working with management to discuss board representation. If an agreement is not reached, the director nomination window opens on January 14, 2024, and Engaged is expected to nominate directors.

Ken Squire is both 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.