VF Corp. earlier this week said it has begun exploring strategic alternatives for the occupational brands in its workwear business, notably Red Kap, VF Solutions, Bulwark, Workrite, Walls, Terra, Kodiak, Work Authority and Horace Small.
Those brands represented some $865 million of VF's fiscal 2019 revenue and about 50% of its work segment revenue, according to a company press release. The business is primarily based in the U.S., with customers that include U.S. government agencies and Fortune 100 companies.
The review, undertaken with the assistance of Barclays as financial adviser and Davis Polk as legal counsel, reflects the company's "continued focus on transforming VF into a more consumer-minded and retail-centric enterprise, with a portfolio of growth-oriented active, outdoor and work brands," per the release.
The announcement of these plans arrived as VF Corp. reported an uncharacteristically weak quarter that had the company downgrading its fiscal year guidance.
Third quarter revenue from continuing operations rose 5% to $3.4 billion; excluding the occupational business now under review, that revenue rose 6%, according to another company press release. Gross margin expanded 110 basis points to 55.7%, and adjusted operating income from continuing operations rose 11%. Without the occupational work business, adjusted operating income rose 14%.
The company's most recent results missed expectations for sales, especially at Timberland and The North Face, according to emailed comments from Wedbush analysts, who had noticed "early markdowns of a prominently marketed [The North Face]." The company now expects full-year revenue (excluding acquisitions or divestitures) to land at about $11.75 billion, down from its previous guidance for about $11.8 billion, Wedbush also noted.
Selling off the occupational brands could give the company an operating lift. And it could bring in about a billion dollars, according to a note from Credit Suisse analyst Michael Binetti, who has previously advocated for such action.
"[W]e've said for some time that we see a big unlock opportunity in VFC's 'other brands,'" he said in emailed comments, noting that means the brands outside of the company's major consumer labels like Vans, Timberland and The North Face, or its emerging brands. Revenues from the occupational work brands under review represent about 60% of the "other brands" revenues, by Credit Suisse's measure.
As the company itself notes, a key strategy for growth has entailed making such adjustments to its portfolio, mostly prominently with the spinoff of its heritage denim businesses, the brands Lee and Wrangler, as well as some acquisitions. It's a strategy that continues to make sense, according to Susquehanna Financial Group analyst Sam Poser.
"The pruning of the lower growth brands from the portfolio is a logical step for VFC," he said in a client note earlier this week. "The company spun-off the low-growth Jeans business in May '19 to focus the brand on higher growth areas of the apparel/footwear market, including the active and outdoor segments."
This sale would reduce VF's exposure to business-to-business sales, and allow it to focus on the consumer side, Poser also said. "Further, manufacturing complexities will also be reduced as the company continues to trim internal manufacturing capabilities and move toward an outsourced manufacturing model," he said.