(Bloomberg Gadfly)—VF Corp. finally ended its longest ever deal drought with a purchase that should please investors.
VF, which sells North Face jackets and Lee jeans among other brand-name clothing, announced Monday that it would acquire workwear maker Williamson-Dickie Manufacturing Co. for $820 million. This is the company’s first major purchase since it agreed in June 2011 to buy Timberland Co. for about $2 billion.
Such a long gap—2,254 days—was unusual for VF, No. 91 in the Internet Retailer 2017 Top 500 and the B2B E-Commerce 300. It has historically boosted its revenue growth by accumulating new labels. With the company’s sales headed for a third straight annual decline, shareholders had been getting antsy.
Williamson-Dickie is probably not the takeover they had in mind, but it gets the job done. VF has long been speculated as a potential suitor for Lululemon Athletica Inc. (No. 83), active-wear rivals such as Puma or even underwear-maker Hanesbrands Inc. (No. 226). My Gadfly colleague Shelly Banjo had also suggested Abercrombie & Fitch Co. (No. 61) might hold some appeal from a wholesale perspective. But such brands have been victims of a dour retail environment characterized by slowing mall foot traffic and heavy online competition. Not to mention they remain at the mercy of consumers’ fickle fashion tastes.
Williamson-Dickie bypasses much of the department-store drama. It gets a meaningful chunk of its sales from businesses shopping for things like chef pants or hospital scrubs. A company looking to clothe its employees in industrial coveralls isn’t going to be worried about on-point fashion trends. When it comes to potentially life-saving workwear such as visibility vests or flame-resistant clothing, there’s also less sensitivity to price and little ability for customers to wait around for things to go on sale.
It’s hardly the sexiest business, but the uniforms that Williamson-Dickie specializes in will give VF a relatively stable stream of revenue in a growing industry where competition is more fragmented. And it doesn’t have to overpay for the privilege at just under 1 times revenue and 11 times trailing-12 month adjusted Ebitda. Looking back, it makes sense that VF would go in this direction. The company last year largely backed away from fast fashion by selling a basket of labels—including Splendid, 7 for All Mankind and Ella Moss—for $120 million to Delta Galil.
I will point out that workwear isn’t completely isolated from Amazon.com Inc.’s encroachment. The e-commerce giant has been aggressively expanding into business-to-business sales as well as private-label clothing. That could jeopardize workwear margins over the long run. But in the meantime, VF has plenty of opportunity to wring more profit from Williamson-Dickie’s sales just by getting the business’s operating margin more in line with that of its own workwear division and curtailing its outsize back-office costs. VF is aiming for a 14% operating margin on more than $1 billion of Williamson-Dickie sales by 2021, up from about $875 million in revenue over the past 12 months.
VF is so optimistic about the deal’s ultimate payoff that it’s already raising its five-year EPS and revenue targets. It turns out some things are in fact worth waiting for.
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