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VF Reigns With Supreme

VF Corp. has made some noise about snapping up new brands this year, and now it’s making good by acquiring streetwear sweetheart Supreme in a $2.1 billion deal.

Earlier this year, before Covid-19 struck, the Denver-based apparel giant cleared out much of its workwear portfolio—part of its consumer-oriented makeover, it said. The deal to acquire Gen Z-beloved Supreme, which is expected to close at the end of the year, would give VF another jewel in a crown that includes popular powerhouses from The North Face to Timberland to Vans—brands that have already collaborated with the hype-driven streetwear standout.

Supreme’s collection of apparel, footwear and accessories, VF says, could drive $1 billion annually once it fully fleshes out the brand’s international and direct-to-consumer presence. The deal, says VF CEO Steve Rendle, is “further validation of our vision and strategy to further evolve our portfolio of brands to align with the total addressable market opportunities we see driving the apparel and footwear sector.” Incorporating Supreme into its stable of brands will “accelerate VF’s hyper-digital business model transformation” and also drive shareholder value, he added.

The acquisition gives VF the stakes owned by private equity firms The Carlyle Group and Goode Partners, as well as by founder James Jebbia, who will remain at the New York City-based brand’s headquarters along with the rest of its senior leadership team. The new relationship with VF, Jebbia says, “will maintain our unique culture and independence, while allowing us to grow on the same path we’ve been on since 1994.”

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Since founding Supreme as a store on downtown Manhattan’s Lafayette Street rooted in skate culture, Jebbia has grown the label into a $500-million-plus global lifestyle brand. Carlyle acquired a 50 percent stake from Jebbia in 2017 for $500 million, for a valuation $1 billion though annual volume was just $200 million.

In a conference call Monday, Rendle said VF and Supreme focused on creating synergies rather than slugging it out through a competitive bidding process, noting the streetwear market’s “$50 billion global opportunity.” The “marquee property” boasts a diverse following in youth culture, he added. It also pioneered the weekly drop model that thrives on scarcity, driving full-priced product sell-throughs with “gross margins over 60 percent and operating margins over 20 percent,” noted VF chief financial officer Scott Roe—similar to the metrics at Vans.

Supreme, Rendle says, is especially relevant at a time when fashion casualization, social influence and creative self-expression are trends that continue mold the consumer landscape. VF can leverage Supreme’s strong international platforms, while Supreme will gain deeper access to the company’s consumer segments as well as VF’s supply chain and analytics’ capabilities, he added.

By the numbers

VF said the deal is expected to be moderately accretive to its revenue and adjusted earnings per share in fiscal 2021, which ends in April. Supreme is also expected to contribute at least $500 million of revenue and adjusted EPS of 20 cents in fiscal 2022.

As part of the agreement, Jebbia will defer a portion of the purchase price payable in VF equity over time, Roe said on the call. The deal includes an additional earnout potential based on revenue growth and gross margin performance, valuing the acquisition at over $2.1 billion over time.

VF will finance the deal through a combination of cash and short-term unsecured promissory notes. Roe said the company plans to rapidly deleverage its balance sheet over the next 12 to 18 months after the acquisition, and has about “$3 billion in greater liquidity” even after the deal is completed.

Supreme still has plenty of runway ahead in its global footprint, with 45 percent of revenue generated outside of the U.S., and international opportunities “just starting,” Roe said, noting plans for a “light touch” integration.

Roe also said he was “impressed by Supreme’s business model,” and that sales have increased in the mid-single-digit rate, including the impact from Covid-19. “Profitability and cash-flow generation have remained strong,” he added, noting that the management team’s discipline gave VF confidence to undertake an “acquisition of this size during this environment.”

While Rendle described Supreme as a “natural fit to our portfolio,” Roe said the apparel giant is “never actually done” with mergers and acquisitions but is much closer to a transformed VF “now than what it was before.”