The Mackey McDonald model is the one that’s working. Throughout the Eighties and Nineties, VF Corp. was considered a conservative, primarily domestic, producer focused on building dominant positions in such categories as denim and intimates, a strategy embodied by brands such as Lee, Wrangler and Vanity Fair. Squeezing growth out of these already huge brands was a task made more difficult by the mergers of retail giants such as Sears and Kmart and, more recently, Federated and May Department Stores. Specialty stores such as Abercrombie & Fitch and American Eagle had also lured young consumers away from the department store floors with speed and ease.
Recognizing the squeeze ahead, McDonald urged his management team to find new avenues for growth and set off on a strategy of buying and building lifestyle brands.
“We are all drinking change from the fire hose,” said Eric Wiseman, VF’s president and chief operating officer, during the WWD/DNR CEO Summit last November. “We made pro-active choices to deal with the change coming at us and transformed our brand portfolio, accelerating growth at our company by becoming relevant to new consumers.”
The seeds of the company’s new strategy were planted with the acquisition of the North Face in April 2000. At the time, the North Face was foundering under the weight of more than $100 million in debt and was on the brink of filing for Chapter 11 bankruptcy protection.
“By acquiring the North Face, VF adds a global dimension to its growing portfolio of strong outdoor lifestyle brands,” said McDonald, chief executive officer, at the time of the acquisition. McDonald also praised the brand’s “intensely loyal consumer base.”
The characteristics that made the North Face an attractive acquisition — its global appeal, ample opportunity for expansion and an established customer base — would provide the framework for future acquisitions.
In 2004, McDonald announced an overhaul of VF’s organization and, above all, a new focus on acquiring brands that existed outside the department store channel. The company went on a spending spree that year, using $667.5 million in cash to acquire the Vans, Kipling and Napapijri brands, as well as a majority interest in a Mexican intimate apparel marketing company.
Related Articles
You May Also Like
The acquisitions had an immediate impact, sending sales up 16 percent, to $6.05 billion in 2004 from $5.21 billion in 2003. Earnings rose 19.3 percent, to $474.7 million, or $4.21 a share, compared with earnings of $397.9 million, or $3.61, previous year. Last year, the company spent another $213.5 million to acquire Holubek Inc., which holds the apparel license for Harley-Davidson, and Reef Holdings Corp. There is now speculation that Eddie Bauer could be VF’s next acquisition target.
Acquiring brands such as the North Face has also shown VF the benefits of controlling its distribution channel. North Face stores have consistently delivered double-digit comparable-store sales growth over the last several years, and the majority of acquisitions since have been of brands that had their own retail component. By the end of 2005, management had announced that expanding its company-owned retail operations would be a new plank in its growth strategy, setting its sights on adding 400 company-owned stores over the next four years.
At the end of 2005, VF owned 525 stores, including 220 outlet stores. According to management, these stores accounted for 13 percent of sales in 2005. VF executives are now looking to more than double the number of standard stores to 649 and increase the number of outlets to 279 for a total of 928 stores by 2009. The increased store count is expected to account for 18 percent of sales by that date.
McDonald is quick to note the company is not turning its back on the department store channel. He did, however, recognize the need to establish a new method of interacting with all the company’s customers. It meant shifting the approach from devising ways to sell the retailers more product to working more closely with them to ensure their stores were stocked with the correct product. Rather than have a sales representative for each brand dealing with retailers separately, McDonald opted for one retail rep for each of the company’s five business segments.
The strategy has paid off, particularly with mass retailers, a channel some of VF’s competitors have been hesitant to engage. Wal-Mart is VF’s largest customer, accounting for 15.7 percent of total sales in 2005, or $1 billion, down from 16.4 percent in 2003. All of those sales come from VF’s jeanswear and intimate apparel business segments.
VF has installed research teams in Bentonville, Ark., to study Wal-Mart’s overall apparel needs and ways VF can exploit those opportunities over the long term. The team may have helped mitigate potentially significant sales losses after Wal-Mart announced during the first quarter of 2006 that it would be devoting more of its women’s apparel space to its private label brands.
Levi Strauss’ mass channel Levi Strauss Signature brand, a business that had been booming since its introduction in 2003, immediately plunged. Signature sales fell 20.2 percent to $70.2 million during the first quarter of 2006. Signature sales have continued to slide since. On Oct. 11, the company announced third-quarter results, stating that U.S. Signature sales fell 10.9 percent to $92.8 million during the quarter from the prior year. The entirety of the sales decline stemmed from a $13 million decrease in women’s sales at Wal-Mart. The company has halted sales of the line in Europe altogether.
VF, on the other hand, has not experienced the same levels of loss. During the VF’s first-quarter conference call McDonald said Wal-Mart’s efforts have centered not on getting more people into the stores, but getting more people into the apparel section.
“They have been successful,” he said, which has ultimately benefited VF. “We feel as the consumer gets more interested in apparel and as they compare pricing and compare products, they are choosing our brands, which has been beneficial to us.”
The results have spoken for themselves. Revenues are expected to hit $7 billion this year. Wall Street has rewarded the company, as well. In October 2002, shares were trading at around $29. Shares are now trading at more than double that, reaching a new 52-week high in intraday trading of $76.25 on Oct. 11.
Other major apparel manufacturers have not fared as well. Shares of Kellwood traded between $21 and $22 in January 2002 and closed at $31.12 on Monday. Its reliance on the department store channel has made achieving growth difficult. Women’s sportswear accounted for $1.25 billion in sales in 2005, representing about 60 percent of the company’s total sales. Men’s sportswear generated $498 million, or 24 percent of total sales.
Jones’ stock market performance has been more erratic over the last five years, swinging from $25 a share in December 2001 to more than $40 a share in 2002 before deflating back into the $20 range. Shares have been on the decline since the middle of 2004, closing at $33.14 on Monday.
Liz Claiborne shares have been relatively flat for the past five years. Shares traded between $24 to $25 in January 2002, and have hovered around the $40-a-share mark ever since. Claiborne shares closed on Monday at $40.96.