VF Corp acquires Supreme: $2.1bn

Introduction

The clothing conglomerate VF and Supreme have recently announced that they have signed a definitive merger agreement. The acquisition follows a long-lasting collaboration between VF and Supreme, wherein Supreme worked together with VF’s brands such as Vans, The North Face and Timberland on a number of occasions. The announced deal, which is estimated to close by late calendar 2020 has an approximate value of $2.1bn and is expected to be modestly accretive to VF’s revenues and EPS in FY 2021.  

Companies overview

Supreme 

Supreme is a 26-year old American clothing and accessories as well as a skateboard manufacturing brand. It started as a skateboarding shop in Manhattan and its popularity has grown enormously ever since. Supreme currently generates more than $500m in annual revenues and has an expected sales growth of 8% to 10%. 

It is well-known because of its drop business model in which the brand issues new pieces in a limited quantity. Demand for those items is very high; they often are sold online, where they sell-out almost instantaneously, or in stores where hundreds of people queue in the hope of being early enough to get one of these exclusive pieces.  

Supreme primarily targets the 16-35-year-old male market segment. While there is no real expansion in women’s articles, many items can be considered unisex. However, what drastically changed is that today Supreme goods are considered a luxury, and their prices are relatively high, making the purchase possible only for quite wealthy customers.  

Despite only having 12 physical stores, spread across all parts of the globe from Europe (London and Paris) to Japan and the United States of America, it has a global presence on the internet, advertised through social media campaigns focusing on the exclusivity of the goods and often partnering with other big names such as Louis Vuitton. Similar to VF, around 60% of Supreme’s revenues are allocated in the USA, and the other 40% are spread internationally.  

VF 

Founded in 1899 as a Glove and Mitten Manufacturing company, VF Corporation is nowadays one of the world’s largest apparel and footwear companies in the world, listed on the NYSE, with a market cap of more than $30 billion. It counts 48000 employees globally and has its headquarters in Denver. The USA is also the biggest market served by the company: in 2020, VF derived 59% of its $10.5 billion revenues from the Americas region, 28% from the Europe region and 13% from the Asia-Pacific region. 

VF Corporation is engaged in the design, production, marketing and distribution of branded lifestyle apparel, footwear and related products. It owns a broad portfolio of 19 brands, divided into three major segments: Active, Outdoor, Work. The most iconic ones include Vans, Eastpak, Napapijri, The North Face, Timberland and Dickies. VF’s purpose is to enable people to live sustainable and active lifestyles, with each brand achieving this in its own unique way. 

VF sells its products in international markets through licensees, distributors and independent partnership stores. It has 21 owned or leased distribution centers in the world, 3000 partnership stores and 1379 direct-to-consumer stores, of which 50% are in the U.S. In particular, the company is focused on elevating direct channels in the future (which accounted for 41% of VF’s total revenues in 2020, of which 28% were from e-commerce).  

Industry Overview

Fashion has been one of the most impacted industries by Covid-19. McKinsey & Company recently noted that, in total, global fashion revenues were 34% lower in the first 2 quarters of 2020 compared to the same period in 2019. Moreover, with many regions now facing a second wave of the pandemic, the industry is predicted to lose between $340 and $440 billion in revenues over 2021. Consumers worldwide are indeed spending less money on clothes not only due to financial concerns but also because, staying at home more than ever before, they feel less need for new clothing. However, amongst those who do spend on fashion, two recent trends have opened important windows of opportunity for companies willing to stay competitive. The first one regards the impressive flexibility of many retailers in scaling up their online channels as, according to McKinsey, in the first 8 months of 2020 “the industry registered the equivalent of 6 years’ growth in the penetration of online shopping”. Secondly, in sharp contrast with formal wear and special occasion clothing, the current social circumstances caused a marked shift towards comfortable, casualwear items. With business models based on the mostly-online sale of tracksuits, hoodies and sneakers, companies operating in the streetwear segment should benefit in both respects. 

Spurring from urban skateboard culture, the streetwear industry has been increasingly asserting itself in the world of mainstream fashion. Targeting mostly young adults, Streetwear is especially prominent in Northern America, Western Europe and Asia. Driven by leading brands such as Supreme, Bape, Nike and Adidas, it is worth approximately $185 bn in terms of sales revenue. Many brands use a simple scarcity model of keeping the supply below the demand. Often, they release new clothing lines through “drops” creating a sense of exclusivity. This approach has been adopted by many firms outside of the industry, who are trying to squeeze into this growing market. Another feature is the power of the consumer. Unlike conventional high-end fashion where experts weigh in on the product, the consumer and the community determine the value of goods. Moreover, this causes brands to have a longer than average product lifestyle since certain clothing pieces become very exclusive. Also, this market is much more accessible compared to the rest of the fashion industry as a result of low start-up costs. 

Deal Rationale

In the last year, VF has updated its five years-long – strategic growth plan. Its foundation can be summarized in four points: 

– Drive and optimize its portfolio; 

– Distort investments to Asia; 

– Elevate direct channels; 

– Accelerate consumer-minded, retail-centric, hyper-digital business model transformation. 

In order to achieve them, VF has continuously been active in the M&A market, as we can see from their activities since 2016.  

So, it is precisely in this context that the acquisition of “Supreme” perfectly fits their strategy: 

– Supreme’s brand can improve VF’s growth profitability, which shows a CAGR (on sales) over the next five years around 7-8% while Supreme is expected to achieve 8-10%. Besides, the growth of VF will be maximized by the potential synergies achievable since Supreme will be able to leverage VF’s expertise and resources such as global supply chain, international platforms, digital functions and consumer knowledge.  

– Streetwear is a large market with attractive growth characteristics, especially in China, where the revenues from this niche segment are growing exponentially. So, the already existing operations in APAC will help Supreme in expanding its business in China, gaining a large size of the current market share. Although the global expansion could be a threat to its scarcity model, the growth of the brand in the last four years with a gross margin always over 60% and operating margins of over 20% suggests that their business model is scalable.  

-Supreme is an authentic, cultural lifestyle brand with a loyal consumer base. The acquisition provides more in-depth access to the specific consumer segments, which may be interested in the other street-inspired products of VF’s brand. This aspect can be facilitated through collaborations across the VF portfolio that can raise all the brands of the company.  

-One last element that must be highlighted is the resilience of the brand. Despite Covid-19, the performances of Supreme were more than positive, especially when compared to its rivals. This is what led VF to pay over double its 2017 valuation. 

Deal Structure:  

The deal includes a clause wherein VF will make an additional payment of up to $300 million, subject to the achievement of certain post-closing milestones based on revenue growth and gross margin performance. It will be financed entirely by cash and commercial paper. The buy-side expects to add $500m in annual sales through the acquisition and $0.20 of adjusted EPS in FY 2022. VF, which had annual sales of $10.5 billion in FY2020, estimates Supreme’s valuation to be less than 15x EV/EBITDA. The brand’s annual sales have more than doubled over the past four years according to VF Corp’s chief financial officer Scott Roe, 45% of it derived from outside the U.S..  

As part of the deal, the Carlyle Group and Goode Partners will sell their stakes in Supreme. VF’s philosophy regarding acquisitions has long been to keep the management and identity of acquired brands separate from other labels in its portfolio. As a result, Mr Jebbia, Supreme’s brand founder, will receive a portion of the purchase price in VF equity and will remain with the company together with the senior leadership team while the brand will continue to be based in New York City, where it was first launched in 1994.  

The deal, which is expected to close by the end of 2020, is viewed in a positive light by VF’s investors. This is demonstrated by the 13% jump in VF’s share price and a consequent market capitalization of $31bn, which is the largest intraday gain for the company in 33 years. Morgan Stanley submitted a fairness opinion of the offer, whereas Davis Polk & Wardwell LLP provided legal advice. 


References: Supreme’s website, VF Corporation’s website, Financial Times, Bloomberg, Zephyr, Vogue Business, Strategyand.Hypebeast, CNBC


To contact the authors:

Ronak Bhatt

Valerio Hetlinger

Benedetta Magni

Rebecca Revelli

Fangyou Ye

Andrew Yerokhin

Giulia Zanetello