VF Corp reveals strategy and outlook for Kontoor spin-off

Greensboro, North Carolina-based apparel and footwear group VF Corporation has announced the release of an investor presentation providing financial and strategic details about the impending spin-off of its denim business as Kontoor Brands, Inc.
 

VF's denim business will be spun off in May as Kontoor Brands - Instagram: @wrangler

First announced in August 2018, the split will group the Wrangler, Lee and Rock & Republic brands, as well as VF Outlet, together as a separate publicly traded company under the Kontoor umbrella, while VF Corp will continue to operate its remaining labels, which include Vans, The North Face and Timberland.
 
Kontoor will be headed up by 11-year VF veteran Scott Baxter and will continue to operate from VF’s home state of North Carolina, while VF Corp – still led by CEO Steve Rendle – will move to new headquarters in Denver.
 
VF has previously stated that the separation is intended to allow both companies to better “focus investment on strategic priorities,” principally freeing up the company’s underperforming jeans brands to take full advantage of the denim renaissance currently underway.
 
On Friday, however, VF sketched out a more detailed plan for Kontoor, listing five major areas of focus and providing financial guidance for both fiscal 2019 and a longer three-year period.
 
Chief among the new company’s strategic priorities will be scaling its advantage in its core men‘s denim business, namely by doubling down on innovation and demand creation, as well as by leveraging its existing supply chain.
 
Kontoor will also be looking to strengthen its position in high-value segments, channels and geographies, increasing investments in high ROI digital channels and expanding in select global markets.

Attracting new customers will be another major concern for the denim company, which will look to grab their attention by pushing growth in new categories and segments, while also ensuring that its operations are consumer-focused. Kontoor will also be aiming to win over hearts and minds in house, where it hopes to maintain an engaged, high-performance team driven by a TSR/ownership mindset.

In terms of financial objectives, the company will prioritize margin expansion and capital efficiency. This approach will not only involve focusing on margin accretive opportunities but also streamlining the company’s operations and implementing cost-saving initiatives.
 
As it moves forward with these strategic priorities in 2019, Kontoor is expected to report full-year revenue of over $2.5 billion, down in the mid-single-digits when compared with the $2.7 billion in revenue collectively achieved by the brands that will make up the company in 2018.
 
The new company’s annual adjusted EBITDA is predicted to be in the range of $340 million to $360 million, reflecting a mid-single-digit to low double-digit decrease compared to the previous year.
 
This anticipated decline is largely the result of an expected reduction in adjusted EBITDA for the three months ended March 30, 2019, linked to actions aiming to position Kontoor for the future, such as inventory management.
 
As previously reported, looking past the current financial year, VF currently expects Kontoor to report a low-single-digit compound annual growth rate (CAGR) in revenue from 2020 to 2021, while adjusted EBITDA is predicted to grow at a mid-single-digit CAGR.
 
Kontoor’s spin-off should be completed in late May but is still subject to final approval by VF’s board of directors, as well as customary regulatory approvals and legal restrictions.
 
Last month, fellow American fashion giant Gap Inc. announced that it would also be spinning off its consistently strong Old Navy brand as it focuses on the turnaround of its stagnant namesake brand.

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