A few years ago, officials at Costa Mesa’s Vans optimistically thought their booming footwear and apparel brand could reach $6 billion in annual sales by 2024.
Today, sales at Orange County’s arguably best-known apparel company are slumping, with its fiscal 2024 revenue trending in the $3 billion range for the maker of shoes, shirts and other youth-oriented products.
That’s down from sales of $4.2 billion in fiscal 2022 and $3.7 billion in fiscal 2023. The company’s fiscal year begins in March.
It’s one key reason that Newport Beach activist investor Engaged Capital has aimed its sights at Vans’ parent company, Denver-based VF Corp. (NYSE: VFC).
Engaged Capital, which this month disclosed taking a significant stake in VF Corp., has proposed significant changes to the retail operator’s business model and practices, saying the company failed to invest properly in its two largest business units, Vans and The North Face.
VFC “underinvested in the company’s then largest brand, Vans, starving it of resources and disrupting the brand’s momentum,” according to Engaged Capital, which cited a lack of innovation and marketing at the Costa Mesa company.
Vans made up 32% of VFC’s revenue for its last fiscal year.
VFC bought the Costa Mesa business for $396 million in 2004.
Lukewarm Brand Heat
Vans and VFC officials have over the course of 2023 aimed to turn up the company’s “brand heat.”
Actions taken to strengthen the skateboarding-inspired shoe and apparel company’s performance have included creating more relevant products, increasing consumer interaction, and improving go-to-market strategies.
Engaged Capital, which also has a roughly 4% stake in $2.4 billion-valued Shake Shack, and earlier this year successfully pushed for board changes at the burger chain, believes there are plenty of other things to turn around.
This month, the firm released a 26-page presentation detailing actions for VFC to take to regain its value.
The investment firm laid out plans that it says could potentially triple the parent company’s share price in less than three years, including a complete refresh of the board of directors, halting any future acquisitions, and cost reductions of more than $300 million to get back on track.
According to Engaged Capital, VFC lost its momentum when the pandemic hit, and has yet to recover. Shares are down around 85% since 2019, when the company’s stock was trading around $100. Shares were trading around $15 as of Oct. 13.
The Newport Beach firm’s report was released on Oct. 17, when Engaged Capital made its stake in the company known, after which VFC shares rose 14% to $18.45. VFC currently sports a market cap of about $7 billion.
“VFC has many of the attributes that we believe will lead to a successful turnaround,” said Engaged Capital, whose specific stake in VCF hasn’t been disclosed. It’s now believed to be among VCF’s top investors, according to reports.
Lost Momentum
Engaged Capital credited a large part of the blame for VFC’s dwindling performance to previous leadership at the company. The firm pointed fingers at former Chief Executive Steve Rendle and the “strategic shift” he made during his tenure.
Rendle took the top role in January 2017 and was responsible for a business reorganization that Engaged Capital referred to as “overly complex,” and a failure. The restructuring directed resources toward VFC’s corporate center rather than to the brands under its umbrella, Engaged Capital said.
“Brands were reorganized to serve the center rather than the center serving the brands,” a VFC former executive told the firm.
This strategy accelerated corporate expenses and caused a lack of investments in the retail portfolio, which Engaged Capital tied to the struggling performance of Vans.
The presentation referred to the underinvestment as a starving of resources and disruption of momentum for the brand
Rendle left the company at the end of 2022, and was replaced by Bracken Darrell, who is credited for leading growth and reinvention at consumer brands like Whirlpool, Old Spice and Gillette.
Q1 Sales
Vans reported revenue of $737.5 million for the first fiscal quarter of 2024 ended June, off 22% from a year ago.
The company’s second-quarter results are expected on Monday, October 30.
The retailer has been focusing on eliminating unnecessary SKUs, or stock keeping units, to clear the way for newer products.
Brand President Kevin Bailey, a former Vans exec who returned to the company in March 2022, has on past earnings calls noted the over-dependence on the brand’s classic shoe lines. Vans leadership expects recovery to take some time.
“Weak financial performance in the portfolio’s formerly most profitable brand has been a key driver of margin erosion in the consolidated portfolio,” the Engaged Capital report said.
The North Face grew 12% to $538 million in the first quarter. By comparison, Vans’ compound annual growth rate has fallen 13% since 2020, according to company filings and Engaged Capital estimates.
Death Star
Former CEO Rendle’s strategy also included highly valued mergers and acquisitions and a costly headquarters move, according to the Newport Beach firm’s assessment.
A $2 billion acquisition of Supreme in 2020 was expected to generate $500 million or more in annual revenue for VFC. Last quarter, Supreme and other “active segment” units in VFC’s portfolio, Eastpak and JanSport, brought in about $330 million on a combined basis.
Rendle’s decision to relocate VFC headquarters from North Carolina to Denver in 2019 was considered a major error, according to Engaged Capital—the group referred to the new hub as his corporate “Death Star.”
It “drove massive spend and significant employee turnover,” officials said.
The company employed 70,000 people companywide at the time. VFC counted 33,000 employees, according to the company’s latest annual report.
The board’s “unwillingness to intervene” was also highlighted as a cause for the parent company’s “value destruction.”
Next Steps
VF Corp.’s new exec team has drawn more praise from Engaged Capital, which said new CEO Darrell “appears to have the transformation experience VFC urgently requires,” the presentation said.
Engaged Capital founder Glenn Welling has “had constructive discussions” with Darrell, according to a recent Wall Street Journal report.
Changes advised by Engaged Capital include immediate cost reductions worth over $300 million to drive margin recovery back to previous levels. The firm expects cuts to drive free cash flow that can then be distributed to investing again in VFC’s top brands.
An estimated $100 million of savings could be reinvested to support innovation at Vans and North Face, according to Engaged.
To reverse the restructuring by Rendle, Engaged encouraged VFC management to commit to no more acquisitions and to divesting non-core assets.
The firm is also pushing to add new board members to replace the existing members who “allowed strategic mistakes.”
Former Nike president Trevor Edwards joined the board in October.
Engaged Capital forecasts a possible share price of $46 in less than three years.
“We believe executing on these focus areas can help drive material value creation at VFC,” the firm said.
