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Fate of New Wrangler-Lee Company Hinges on Growth Potential

VF Corp.’s decision to split the company in two entities, with a new one focused on its core jeans brands Wrangler and Lee, has many potential plusses and minuses—and the outcome over time will be felt along the denim supply chain.

Analysts and industry executives, and VF Corp. itself, see many challenges and opportunities for the to-be-named jeans business. It could look to consolidate and strengthen its supplier base, while enhancing its supply chain with more strategic initiatives.

The new company could also seek to grow distribution through mergers and acquisitions, and broaden the reach of its core brands internationally, digitally and with a wider product array. One industry executive who spoke on condition of anonymity due to his closeness with the company said, “In Europe, Wrangler is considered a premium brand,” while Lee has been growing its Asian business.

Ike Boruchow, managing director of retailing/department stores and specialty softlines at Wells Fargo Securities, issued a report analyzing the development and citing key takeaways. Among them were that “the post-split jeanswear business will be a slow-growth, high-dividend business” with an implied valuation at 10 to 11 times projected earnings before interest, taxes, depreciation and amortization (EBITDA) of $450 million to $475 million,” and an estimated $5 billion to $5.1 billion in sales based on multiples of other apparel manufacturers highly exposed to the U.S. mass channel.

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“On the other hand, we believe bears are concerned that sales for jeans…are mature and have become more volatile over the past 12 to 18 months” Boruchow said, adding that “overall, management’s visibility in the business appears to be less than in years past given buying closer to need…and de-stocking trends in the Jeanswear division.”

Discussing the company’s decision in a conference call with analysts, Steven E. Rendle, VF Corp. chairman, president and CEO, said, “We believe the strategic rationale behind [the] announcement is compelling and will create two stronger companies with greater prospects for sustainable long-term growth, success and value creation. The decision to separate these businesses was part of a deliberate and extensive process with our board, as we continually analyze the strategic and financial evolution of VF that has been underway for quite some time. It’s important to note that VF is taking these actions from a position of strength, with both the Jeans and the remaining VF portfolio showing improving performance…Our jeans business and the remainder of VF have evolved differently over time, resulting in two separate and distinct businesses, with unique investment identities and operating models.”

Industry executives backed up Rendle’s praise of the appointment of Scott Baxter, currently VF’s group president, Americas West, to be CEO of NewCo., with Rendle noting his “long track record of success, which includes leading the jeans business from 2011 through 2015, a period during which the business grew at a mid-single-digit rate…I’m confident that he will do an exceptional job.”

The new company will be headquartered in Greensboro, N.C., currently home to Wrangler brand, and the Lee brand will move its headquarters from Kansas City to Greensboro.

“Greensboro is a natural home for the Jeans business, and in fact, Greensboro is often referred to as Jeansboro due to its deep denim and textile heritage,” Rendle said. “As I look ahead, I’m truly excited about the opportunity this separation presents to each company to unlock stronger and long-term growth and total shareholder return…The success that VF and the Jeans business have achieved over the years has been remarkable. To continue, it requires the ability to consider the future and make bold decisions today that will deliver superior results in the years ahead…Now is the right time to establish two great companies with powerful brand portfolios and strong management teams with the proven ability to build on our past and shape an even more successful future.”

Lee and Wrangler are two of the top five growing apparel brands on Amazon, according to Rendle, and their strong relationships in the retail channel will give them a solid foundation and offer “new growth opportunities through looking at new segments, new higher-price offers and truly looking at the marketplace through an integrated lens and opening up the availability to a multitude of different consumers, while staying intently focused on that core consumer that makes jeanswear so successful today,” he said.

Rendle admitted that the there’s a host of complexity to navigate in pulling these two business apart, noting that “The supply chain for our jeans business is very specific with a high degree of owned-manufacturer supported with contract manufacturer, but very different production resource partners.”

Scott A. Roe, chief financial officer and vice president of VF Corp., said, “The separation creates a more than $2.5 billion global leader in denim with strong iconic brands, steeped in deep heritage and authenticity. Steady growth, consistently strong profitability and robust cash flow generation will deliver high single to low double-digit total shareholder return on a sustainable basis.”

The idea, Roe said, is to unlock long-term value by creating more streamlined operations and cost efficiency, plus allow the company to prioritize growth initiatives that hadn’t yet been possible.

“The new jeans business could now be open to more acquisitions. I could see it, for instance, making a major acquisition along the lines of a Levi’s, which would create great synergies,” one industry executive who did not want to be named, suggested.

VF said in a presentation to analysts that the new jeans company will yield “robust cash flow generation” that will give it strong capital return, and it will also provide an opportunity for the company to extend its geographic footprint with a focus on Asia.