VFC: Value Release as it Drops Kontoor Brands
As the jeans space heats up with companies rushing to the market like Levi Strauss & Co. (LEVI), Kontoor Brands, Inc. (KTB) and The Gap, Inc. (GPS), we believe longer-term, both VF Corp. (VFC) ex-Spin and KTB look interesting as an investment. As we have seen time and again with some recent Spinoffs (particularly in the US), listing a company with debt with a short-term index play due to the Spinoff’s size is a recipe for a sell-off from its first few days of normal trading.What's Happening?
The Spinoff will create a high-growth, high-margin business for VFC (Parent, ex-Spin) focused on its core segments: (i) Outdoor (brands like The North Face, Timberland, Altra, etc., FY18 revenue of $4.3bn), (ii) Active (Vans, Kipling, JanSport, etc., FY18 revenues of $4.9bn) and (iii) Work (Dickies, The Red Kap, Kodiak, etc., FY18 revenues of $1.8bn). These segments are expected to furnish a higher annual revenue growth of 7% to 8% at VFC (ex-Spin) compared to 1% to 2% revenue growth at KTB (Spinoff), with an even higher EBITDA margin profile at 16% in FY18. Moreover, the near-term $8bn ($5bn remaining) share buyback (1% return) and dividend (2% yield) payment plans leading into 2021 will be a medium-term positive for VFC (ex-Spin).
The Edge View (VFC, Parent ex-Spin)...
We see the distribution will leave VFC (ex-Spin) in an even stronger financial position with reduced leverage (at FY20E 0.6x) and high growth (at 7%) high-margin (FY20E EBITDA margin of 17.8%) focused business. Along with $8bn mid-term return program, VFC (ex-Spin) offers compelling longer-term investment opportunity. The stock is currently trading at a FY20E EBITDA multiple of 15.5x compared to its peer average of 16.9x, a discount of 8%. As VFC (ex-Spinoff) will be a higher-margin business (FY20E EBITDA Margin of 17.8% compared to its peer average of 13.3%), we expect VFC (ex-Spin) to trade at a 2.5% premium to its peers.
The Edge View (KTB, Spinoff)...
KTB (Spinoff) is expected to experience near-term index selling pressure of 2.4% (1.5m shares) and have a higher leverage position (2.6x compared to its peers’ 0.4x). However, a superior annual dividend yield of 5% at the current when-issued price of $40.50 will provide support in the short-term.
VF is an apparel and footwear company. The company designs, produces, procures, markets and distributes a variety of lifestyle products, including outerwear, footwear, occupational and performance apparel, jeanswear, backpacks and luggage for consumers of all ages. Products are marketed primarily under the company-owned brand names. The company's segment comprised of: Outdoor, which includes performance-based and outdoor apparel, footwear and equipment; Active, which includes active apparel, footwear and accessories; Work, which consists of work and work-inspired lifestyle apparel and footwear and occupational apparel; and Jeans, which markets denim and related casual apparel products.
The Edge Group - Global Fundamental Catalyst Investing. The Edge provides investors with access to hidden corporate value from Global Special Situations using a pioneering approach to investments. Founded in 2005 by fund management and investment banking professionals to provide high quality, private equity-level research on Global Corporate Divestitures for the benefit of fundamental event-driven, growth and value-oriented investors in this difficult to track, but proven investment space.
The Edge will look to screen and analyze include Spinoffs; Reverse Morris Trusts; Squeeze Outs; Privatizations; Demutualization; Deep Discounted; Rights Issues; Rights Offering; Restructuring; Insider Purchases / Buying Change of Management / CEO Change; Deteriorating fundamentals; Post-Bankruptcy; Reorganization; Tender Offer; M&A Deals; Secondary Offering; Share Swap; Thrift Conversions; Share Buybacks; Activist; Mergers. All analyzed from a fundamental point of view.
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