NEW YORK — Few expect VF Corp. to be the company to revolutionize the apparel industry. The conventional wisdom is that it's too big, too old and its management is too conservative.
Mackey McDonald is finding it difficult to shatter those perceptions, despite launching a campaign in 2004 to overhaul the company's focus and organization. But at the halfway point of his "New Deal" for VF, McDonald is confident it will lead to more than rising sales and earnings growth.
"I don't think people understand how much VF has changed," McDonald, a 22-year company veteran who is closing out his 10th year as chief executive officer, said during an interview at the company's Greensboro, N.C., headquarters. "Everyone thinks it's a conservative company with good control and good product. They don't understand how you can combine strengths of categories and come out stronger."
But it is that strategy of growing core categories that has driven VF's commitment to acquire and develop global lifestyle brands. The company went on its first spree in 2004, expending $667.5 million in cash to acquire the Vans, Kipling and Napapijri brands, as well as a majority interest in a Mexican intimate apparel marketing company. This followed its purchase of Nautica in 2003.
The impact on results was immediate. Sales shot up 16 percent to $6.05 billion in 2004 from $5.21 billion in 2003. Earnings spiked 19.3 percent to $474.7 million, or $4.21 a share, compared with earnings of $397.9 million, or $3.61, in the previous year.
Wall Street has rewarded the company in kind. The company's shares rose 32.9 percent in 2004, opening the year with a closing price of $41.11 a share on Jan. 2, 2004 and reaching $54.62 a share on Dec. 31. Shares have continued their ascent this year, reaching a record high of $61.61 in New York Stock Exchange trading. Shares closed at $57.45 on Wednesday.
"We've really tried to step on the pedal in terms of growth," said McDonald.
During the first half of 2005, the company spent another $213.5 million to acquire Holoubek Inc., which holds the apparel license for Harley-Davidson, and Reef Holdings Corp.Before setting out on the acquisition trail, McDonald and his executive team met with the heads of several companies who oversaw large brand portfolios, including A.G. Lafley, chairman, president and ceo of Procter & Gamble. The result was the adoption of a philosophy that sought to understand how a product could reach beyond its category, be it household cleaner or jeans, and impact consumers' daily lives. The discussions also drove home the notion that VF had untapped potential in existing brands such as Wrangler.
"A lot of our brands were one-category brands that had the potential to be a lifestyle brand," said McDonald.
While acquisitions and system upgrades have fueled improvements in financial performance, McDonald believes VF will have its greatest impact on changing the relationship between manufacturers and retailers.
"The biggest challenge is matching our strategies with the strategies of our retail partners," he said.
Strategic plan building with retailers meant changing the company's approach, abandoning the focus on "just how do we sell them more jeans."
VF has opted to have one retail representative for each of its five coalitions, which are broken down into jeanswear, outdoor apparel and equipment, intimate apparel, imagewear and sportswear. The goal is for VF's reps to gain a better understanding of the wants and needs of retailers. McDonald is the first to admit the simplicity of the idea, but he believes it is the first step in alleviating the tension between retailers and manufacturers over markdowns and chargebacks.
"What I've found, our biggest opportunity is not finding the innovation no one has thought of, but just coming up with solutions to problems that have been around for years," said McDonald. "Use of markdown money — it doesn't solve the problem for anybody. The bottom line is they have product sitting there on their shelves that nobody wants."
VF's ability to execute plans was one of the strengths McDonald has sought to preserve.
"A lot of companies just develop plans, but don't execute," he said.
One area that needed immediate execution was putting people in place with the necessary skills to achieve rapid growth. McDonald has moved quickly to bolster the executive ranks. Since 2004, he has brought in five executives from outside the company, including new vice presidents for mergers and acquisitions, customer management and strategies. There have been more than 15 promotions and executive reorganizations with internal candidates. Newcomers weren't dropped into large offices and handed the reins, however."We partnered new executives with people in the company to preserve the VF culture," said McDonald.
Heading into 2004, management had set its sights on adding between 15 and 20 lifestyle brands to its portfolio over five years. The process of identifying acquisition targets began with determining the product categories the company wanted to enter. Acquisition targets had to not only have a connection to the category but, more important, have the potential to move beyond it. McDonald said he is often asked why the company has not sought an outdoor equipment brand.
"Equipment is tied to just one activity," he said.
McDonald points to The North Face, which it acquired in 2000, as an example of a brand that reaches beyond its category.
"We have a North Face brand store in Malaysia," said McDonald, noting the region's tropical climate leaves little call for the brand's signature outerwear.
The bedrock to support the rapid influx of brands is technology. The company spent $137.1 million on information systems in 2004, up 9.6 percent from 2003. VF's technology has undergone 10 years of development, according to McDonald. The first issue to be tackled was the lack of a common system between business segments.
"It's like raising your children," he said. "Each system had grown up in its own business."
The company now has a firm grasp on what technological elements need to be common and which don't.
"Our IT investment means we can handle a lot of brands," said McDonald. Exactly how many he won't say, but it's clear that after the acquisitions of the last 18 months, it's much more than originally anticipated. "I don't believe there's a finite number."
ON THE ACQUISITION TRAIL A look at VF Corp.'s acquisitions over the last five years shows a company that is looking to be more than just the world's largest jeans manufacturer. By July 2005, VF had more than 40 brands in its portfolio. Here's a look at brands that have been acquired since 2000:
2005 Reef Holoubek (licensee of Harley-Davidson apparel)
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