VF Corp. has made the big-impact acquisitions that Wall Street was waiting for, laying the groundwork to flex muscle in the contemporary sportswear market.
The manufacturing giant said Thursday that it reached agreements to acquire the top premium denim brand, Seven For All Mankind, for an estimated $775 million, and women's active lifestyle company Lucy Activewear for $110 million. The two companies will be the foundation of a new division, VF Contemporary Brands, with combined annual revenues of more than $350 million.
Mike Egeck, chief executive officer of Seven For All Mankind and a VF alumnus, will be named president of VF Contemporary Brands when the deals close, which is expected at the end of next month. Peter Koral, who founded the denim label in 2000, has a contract with VF to remain with the company as an adviser through March. Mike Edwards, ceo of Lucy Activewear, will continue to run the business and will report to Egeck.
"Both of these brands are at a point where they've had significant growth, but they have huge opportunities ahead," Mackey McDonald, chairman and ceo of Greensboro, N.C.-based VF, said during a conference call with analysts.
Seven For All Mankind and Lucy have the potential to expand and develop company-owned retail operations, as well as to move into new product categories, McDonald said. Seven, for instance, has been focused on expanding beyond denim offerings to include footwear, accessories and sportswear. International expansion will be a considerable opportunity for Seven in particular.
Seven and Lucy also offered VF an entry into the women's contemporary arena, a segment that management acknowledged had been one of the weaknesses in its powerhouse portfolio.
In an interview before the conference call, Eric Wiseman, VF's president and chief operating officer, said by establishing the Contemporary Brands unit, VF hopes to replicate the success of the company's outdoor segment, which began with the acquisition of The North Face in 2000.
"A business like Seven For All Mankind, it's clearly a lifestyle brand, clearly has international potential and it has a great direct-to-consumer opportunity," Wiseman said, noting that the company already had an international business and is slated to open its first retail outlet this fall. "We weren't really in the premium jeans space and we don't have a big portfolio of contemporary brands, but we were looking for a platform to build from. We think Seven, positioned in Los Angeles, will be a great platform for us."Eric Beder, senior vice president and analyst at Brean Murray, Carret & Co., said VF made a smart move picking up the number-one player in the premium denim segment. True Religion and Citizens of Humanity are the only other brands that Beder believes present serious competition.
"With a little more professional management and some better infrastructure, this can help [Seven] out," Beder said. "The big growth for Seven is stores and international, and VF has good experience on both of those things."
This wasn't the first time VF had taken a look at Seven For All Mankind, said John Howard, ceo of Bear Stearns Merchant Banking, which acquired a 50 percent stake in the denim brand in March 2005. Howard said Koral had shopped the company to VF management several years ago.
"VF passed because they may have felt it was too fragile a business at the time," Howard said, adding that VF management may have viewed the company as one-dimensional.
Egeck, who took over as ceo in August 2006, likely made the difference, Howard said.
"He's stupendously talented," he said of Egeck. "One of the reasons this happened as quickly as it did is because they trusted him."
Egeck spent six years with VF before taking over at Seven For All Mankind. He joined VF in 2000 as president of The North Face and became president of the outdoor segment, which includes the Vans, JanSport, Eastpak, Napapijri and Reef brands. Revenues in the outdoor segment grew to $1.46 billion from $368 million during Egeck's tenure, and that segment continues to generate double-digit revenue gains. Soon after taking over at Seven, Egeck brought in 16-year VF veteran Eric Artz to take over as chief financial officer.
Wiseman also praised Egeck.
"We have a lot of respect for Mike as a manager and as a person," Wiseman said. "He left on great terms and he's returning on great terms."
During the conference call, Wiseman said Seven For All Mankind's revenues were expected to increase 28 percent compared with last year and exceed $300 million. Management expects the brand to grow 15 percent annually and plans to open 100 stores in the coming years. Denim accounts for 90 percent of the business. Although product expansion is a priority, management sees strength in the premium denim market.As the premium denim craze has waned, retailers have returned to brands that are proven performers, which has translated into bigger business for Seven. Egeck said first-quarter sales were up 35 percent and second-quarter sales were ahead about 40 percent.
"We remain the best-selling premium denim brand at retail," Egeck said during the call.
The Lucy acquisition gives VF access to another clearly defined and deeply brand-loyal consumer group. The company generates $57 million in revenues through its 50 stores and online. The firm started as an online operation in 1999, opening its first brick-and-mortar store in 2001. Edwards said revenues are growing at more than 65 percent a year and comparable-store sales are ahead 15 percent year to date.
"We're in the positive energy business and our product is about everyday performance," Edwards said.
Wiseman acknowledged that the potential for international growth for Lucy was limited. However, the company's direct-to-consumer business model made it particularly appealing. Management expects to be able to open 200 stores in the coming years.
The new contemporary brands coalition is expected to add an additional $125 million in revenues for the year. VF now expects total revenues to be up more than 14 percent in 2007, compared with earlier guidance of 12 percent.
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