By Jack Briody and James Muse (Columbia University), and Patrick Gorton, Shivaum Bapu, Daniel Winsor, Nicole Phung, Mohammed Safayat, Pristie Sharma and Gurneek Gill (UCL)
Overview of the deal
Acquirer: VF
Target: Supreme
Total Transaction Size: $2.1 Billion
Closed date: Expected 2020 year end
Acquirer advisor: Morgan Stanley
VF Corp (NYSE: VFC), owner of popular brands including Vans, North Face, and Timberland, announced on November 9th that it will pay $2.1 billion to purchase streetwear company Supreme. An additional payment of up to $300 million will be made subject to the satisfaction of post-closing milestones, bringing the possible total acquisition cost to $2.4 billion. Current investors Carlyle Group and Goode Partners are selling their interests in Supreme. Supreme is known for its distinct red rectangular logo with “Supreme” written in white. It has gained a substantial following among fans of streetwear. Products ranging from t-shirts and hoodies to branded fire extinguishers and bricks have sold out within seconds or minutes of launches. Perceived scarcity has led Supreme to its dominance among young people and allows it to charge significantly higher prices than other brands such as Nike or Vans. VF Corp estimates the streetwear market to be roughly $50 billion, and Supreme is at the center of this market. Management believes that Supreme will help bolster VF’s e-commerce business which is especially important as COVID-19 has altered retail shopping significantly. The deal is expected to close at the end of 2020 and contribute $500 million to VF’s revenue. VF Corp’s shares have jumped over 13% after the announcement of the deal. (Reuters)
“This scarcity, novelty and strong social influence model supports meaningful pricing power resulting best in class profitability.” - VF Corp Chief Executive Steve Rendle
Company Details: Acquirer – VF Corporation
Originally founded 121 years ago in 1899 as a glove and mitten manufacturing business in Pennsylvania, VF Corporation now owns a portfolio of 30 lifestyle apparel brands across a multitude of categories ranging from backpacks to sportswear to law-enforcement uniforms. It uses a direct-to-consumer business strategy, using a combination of brick-and-mortar and e-commerce retail stores which service customers across the globe. Some examples of its brands include: Dickies, JanSport, Vans, Timberland and The North Face.
Founded in 1899, headquartered in Denver, Colorado, USA
CEO: Steve Rendle
Number of employees: 50,000
Market Cap: $31.78b (as of 16/11/2020)
EV: $35.15b
LTM Revenue: $8.5b
LTM EBITDA: $0.93b
LTM EV/Revenue: 4.14x
LTM EV/EBITDA: 37.8x
Company Details: Target - Supreme
Supreme is an American skateboarding clothing and lifestyle brand with 11 stores spread over the US, England, France and Japan. It was originally established as a skatewear brand, then evolved into one of the world’s most popular and in-demand streetwear fashion brands. Its innovative business model involves ‘dropping’ a number of products from the current season every Thursday, in a quantity of 5-7, thereby supercharging the traditional supply-and-demand model. Once products are released online, they sell out in a matter of seconds, before quickly appearing on resale websites often marked up ten times the initial price. In 2017, Supreme sold a roughly 50% stake to The Carlyle Group, a private equity firm, for US$500 million.
Founded in April 1994, headquartered in New York, United States
Founder and CEO: James Jebbia
Number of employees: 657
EV: $2.1bn
Projections and Assumptions
Short-term consequences
Given that much of the excitement around this deal comes from the company’s expectation that VF will be able to leverage its scale and global reach for the benefit of Supreme, representatives from VF do not expect cost savings or changes to Supreme’s business model over the course of the next year. That said, the deal is expected to be accretive to VF’s adjusted EPS in fiscal year-end April 2020. Supreme founder James Jebbia will continue to run the business after the deal closes through year-end, which should satisfy any customer concerns about design changes or any compromises to the brand’s infamous scarcity, at least in the near-term. Steve Rendle, CEO of VF, explained the gradual pace that the two companies will take going forward: “We talk about a light-touch integration with this business because it’s very successful, operating at a very high level today. We’ll take our time to get to know each other. This brand will continue to operate as it always has, we do not look to come in and make any changes. We’re here to help, support and enable.”
In short, VF executives have been quite vocal about their interest in letting Supreme operate as it had been prior to the announcement of the deal, representing their faith in Supreme as a brand. Scott Roe, CFO and executive vice president of VF notes, “We’re not coming in with a new plan or approach, because frankly they’re pretty darn good at it...Supreme has done a masterful job in the COVID-19 period and maintained that flexible connection with this consumer. When stores closed, their online business was robust and through the COVID-19 period.”
Long-term Upsides
From both a strategic and financial perspective, this acquisition comes at a good time for VF, who believes that this is an opportune time for retail expansion so that they can persevere with their pre-pandemic dominance. The conglomerate has been on the search for an acquisition since the beginning of June and by acquiring Supreme, they are sending a clear message about their vision to align with lucrative clothing and footwear market trends. The addition of Supreme to VF’s portfolio will contribute hugely towards the hyper-digitalisation of VF’s business -- a key aspect of their 2024 strategy. VF firmly believes that Supreme will be instrumental in helping them fulfill their commitment to offering top quartile total shareholder return as they expect that the brand will present a $1 billion global opportunity in the next 8-10 years. Specifically, a huge feature of Supreme’s business model is their collaborations with luxurious brands, as previously mentioned. Considering the fact that Supreme has collaborated with many brands in VF’s portfolio, such as Vans and Timberland, the deal will allow Supreme to seamlessly build upon this and continue with these popular collaborations into the distant future, as it will be far easier and cheaper for them to do this now. Furthermore, VF expects Supreme’s revenues to increase 8-10% YOY by 2024. Thus, VF’s constituents and Supreme will both hope that they can capitalise on the greater profit margins that can be generated from cooperating in operations.
Additionally, VF plans to build more in-person stores for Supreme, who only has 12 worldwide locations. This will help expand Supreme’s business by increasing the accessibility customers have to their exclusive items. Though e-commerce is a growing trend, there is a lot to be said for the interest that could be generated by offering more privileged in-store experiences for consumers. Correspondingly, there is a lot of demand in new territories and with VF’s assistance, Supreme can aggressively scale their business. One area of attraction would be China, where streetwear is of profound interest. VF has established operations in China so this would help Supreme tap into this sizable market where they should start building a foundation to yield potentially huge long-term profits. Moreover, an expansion like this would assist VF in maintaining and expanding the strong presence they currently hold amongst Chinese consumers.
All things considered, this acquisition will greatly benefit both VF and Supreme in the long-term. It shows that VF clearly understands the importance of tapping into the $50 billion streetwear market and so they will hope to maximise the benefits that are to be had from fusing the streetwear business model into their own in order to develop their digital, direct-to consumer and international expansion. What’s more, Supreme will use this as a tool to consolidate their pandemic resilience as they hope to continue accentuating their longevity.
Risks and Uncertainties
The biggest risk that VF may face is driving Supreme’s growth at the expense of its exclusivity. Wells Fargo Securities expressed this aptly—Supreme “needs to be careful about driving growth without losing the brand’s ‘secret sauce’.” Now, Supreme generates more than $500m in revenue annually. This is expected to grow 8-10% in the next three years. However, VF needs to be cautious about its growth strategy for Supreme. For a brand known for its exclusivity and collectibility, it might be risky to have Supreme, a brand which Damien Hirst and Takashi Murakami would collaborate with, to be associated with the same management responsible for a durable, common-man brand such as The North Face. Nonetheless, VF seems to be aware of this risk, as its chief executive, Steve Randle, already stated that they would “not [come] in to make changes” and would instead “support and enable a high-performing business”. Despite expansion into Europe being one of the upsides for Supreme in this acquisition, it is uncertain how this would play out, considering the fact that Supreme has enjoyed most popularity in Asia Pacific and the US.
It is also unclear how a conglomerate like VF would seamlessly integrate Supreme into its brands while maintaining the latter’s hipster and “underground” integrity and character. Although VF is proud of preserving Vans’ “edginess”, in many ways, Vans is not Supreme. However, to a certain extent, these risks and uncertainties can be negated through Supreme’s reliance on online platforms. With only 12 physical stores worldwide, 60% of Supreme’s sales are generated online. As such, most of its operations are pandemic-proof.