By
with contributions from Amanda Kaiser
 on June 30, 2016

In buying Seven For All Mankind, Splendid and Ella Moss from VF Corp., Delta Galil Industries seeks to bolster the brands’ wholesale market share, optimize the supply chain, become more efficient and expand the product offerings.

Delta Galil, the Israeli-based apparel-maker, said Thursday it had signed a definitive agreement to acquire the contemporary brands businesses from VF Corp. for $120 million. Delta Galil, which is listed on the Tel Aviv Stock Exchange, said the acquisition will add more than $300 million to the company’s top line annual sales and will start to contribute to earnings in 2017. The deal is expected to close in the third quarter of 2016.

Isaac Dabah, chief executive officer of Delta Galil, who was catching a plane from Tel Aviv to Zurich on Thursday, told WWD that the deal “fits with most of our criteria for acquisitions.

“They are global brands, premium brands and have pricing power. It allows us to diversify and do business with many new customers, and we can grow it on the global market,” he said. Delta Galil, which had sales last year of $1.08 billion, has an existing portfolio that includes P.J. Salvage, Schiesser, KN Karen Neuburger, Nearly Nude, LittleMissMatched and FIX.

Dabah said last month the company was on the hunt for acquisitions. He noted that the three VF contemporary brands do business in more than 50 countries and have high margins. Both Splendid and Seven For All Mankind are market leaders in their respective categories. The three brands have 105 freestanding stores, which consist of about 80 full-price stores and more than 20 outlet stores.

VF’s contemporary businesses have had their share of challenges the last several years.

Dabah said the Seven For All Mankind and Splendid businesses, from a sales perspective, have been downtrending over the last few years. But the brands have stabilized and same-store sales have been even. He attributed the decreased sales to the euro effect and the downward trend in tourism in the U.S. “In general, the business is stabilizing and we hope it will grow in 2017 and beyond,” he said. NPD data showed in the first four or five months of this year, the overall jeans business increased 1 percent.

Eric Wiseman, chairman and ceo of VF Corp., said, “We are pleased to have reached this agreement. The brands included in this transaction are leaders in the sectors, and have talented, passionate people who are motivated by serving the marketplace with distinctive apparel design and exceptional service.” He said the company said earlier this year it was taking a “focused and proactive look at the composition of our business portfolio to ensure that we are well-positioned to maximize VF’s growth and return to our shareholders.

“This announcements illustrates that our work as active portfolio managers is progressing,” Wiseman said.

VF Corp. saw its first-quarter net profit decline 9.9 percent to $260.3 million, or 61 cents a diluted share. Total revenue was flat at $2.84 billion. That included net sales at $2.81 billion for the quarter, up slightly from $2.80 billion a year ago. The balance of revenues was from royalty income. In March, VF said it was “exploring strategic alternatives” for its roughly $550 million Licensed Sports Group business. That group includes the Majestic brand and supplies apparel and fanwear through licensing agreements with professional sports leagues, colleges and universities. It has licenses with such organizations as Major League Baseball, the National Football League, the National Basketball Association and the National Hockey League.

Dabah, who was previously group ceo of Jones Jeanswear, where he oversaw Polo Jeans and Gloria Vanderbilt which at the time did almost $2.5 billion in sales, is well-acquainted with the jeans business. He noted that Susan Kellogg, president of contemporary brands at VF Corp., will remain in her role, and the brands will continue to be based in Los Angeles. The European business will continue to be headquartered in Stabio, Switzerland. A new head of the European operation is being sought, since the top executive is returning to VF.

Delta Galil sees particular synergies in operations, knitwear and fabric innovation. For example, Dabah foresees the Splendid brand expanding into such categories as sleepwear, underwear and possibly yoga — important businesses for Delta Galil. Dabah said it was too early to say whether all three brands’ production will change. Right now Seven For All Mankind is manufactured in the U.S. and Mexico (and in Eastern Europe for European distribution), and Splendid and Ella Moss are manufactured in California. Dabah said he will analyze everything. “We can’t say that all the people will remain in place, but we’re looking to keep the company in tact and continue to grow sales and make it as efficient as possible,” Dabah said. With the addition of these three new brands, Delta Galil’s branded business increases from 53 percent to 65 percent.

As for seeking more acquisitions, Dabah said, “We’ll focus on making sure this acquisition is successful.” He said he had been talking with VF for at least six months about acquiring these brands. “What attracted us is the brands are premium, they have clean distribution, there are no wholesale clubs or off-price channels, and celebrities still like these brands.”

Splendid has a laid-back California feel and does well at stores such as Nordstrom, Dabah said. “We’re happy with their positioning,” he said.

Analysts called it a good deal for both companies.

Janet Kloppenburg of JJK Research Associates, said, “I knew [VF] would sell the contemporary division at a big discount. The business has really deteriorated. In the last year, they’ve had high-single to double-digit declines and it’s been dilutive to earnings,” she said. In the first quarter, VF’s contemporary brands’ revenue was down 15 percent to $74 million, including a 53 percent decline in operating income.

“It’s great for both parties,” she said. “VF’s focus has really become concentrated in the outdoor and athletic area, and that’s where the greatest growth has come.” She said she expects VF will make an acquisition in the outdoor or athletic sector.

“I think they are trying to devote their growth avenues going forward to where their core competences lie. And that’s in two main businesses, which account for 75 to 80 percent of their business — the outdoor action sport and their jeans business. That’s their two largest businesses and their two most profitable businesses,” she said.

She said the premium denim market has been under a lot of pressure and the reason for that is that a lot of the technical and quality attributes of the premium market have trickled down to the moderate market. “You can pay $59 to $89 for a pair of jeans from American Eagle and Lucky Brand that have a lot of the stretch and flex qualities that you once could get in a pair of premium jeans. Unless a new technology comes out that supports a premium price, it’s going to be difficult in that market,” she said.

“I think VF is really smart, and very innovative and put a lot of those qualities into Wrangler and Lee, and they probably did the best (with Seven For All Mankind) that anybody could, I think Delta Galil has great sourcing opportunities that will allow them to bring down the overall cost structure of the business. They have great efficiencies and sourcing advantages,” she added.

According to a research note from BB&T Capital Markets, VF’s contemporary segment has posted top-line declines since fiscal year 2011, when it delivered sales of $485 million. For fiscal year 2015, the segment posted $344 million, or 3 percent of VF’s total revenue. “The contemporary segment has also been a drag on profitability, delivering an EBIT [earnings before interest or taxes] margin of just 2 percent in fiscal year 2015, well below VFC’s company-wide EBIT margin of 17 percent,” the BB&T note said. It said that VF acquired Seven For All Mankind in August 2007 for $773 million, and acquired the Splendid and Ella Moss brands for a combined $161 million in March 2009.

“The $120 million sale price represents a significant discount to purchase price at a 0.3-times price/sales ratio. Overall, we are not surprised by the announcement given management’s commentary in recent quarters about more proactively managing its portfolio of brands. Despite recent global macro pressures, we believe the sale bodes well for VFC as it continues to explore strategic options for its Licensed Sports Group [$550 million of revenues].” The note added that the sale proceeds would likely be sued for a future acquisition, although BB&T believes it is unlikely to occur in fiscal year 2016.

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