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VF just announced it is spinning off its denim jean brands into a separate corporation, what it is initially calling NewCo to distinguish it from RemainCo. With the separation intended to be finalized in the first half of 2019, VF RemainCo, an $11 billion company, will focus on trending lifestyle brands in:
- Outdoor – Timberland, The North Face, Icebreaker, Altra, Smartwool
- Active – Vans, Eastpak, Jansport, Napapijri, Kipling, Reef, Eaglecreek
- Work – Dickies, Kodiak, Bullwark FR, Timberland Pro, Red Kap, Terra, Walls, Horace Small
NewCo will consist of Wrangler and Lee brands, as well as Rustler and Rock & Republic, and the 70-odd VF Outlet Stores. Upon launch the NewCo will be an approximately $2.5 billion company, consisting of Lee at ~$1 billion in revenues, Wrangler over $1.5 billion and outlet stores, reported by Scott Roe, CFO of VF, at a “couple hundred million” in sales.
VF veterans Robert Shearer, former VF CFO who was persuaded to return from retirement, will be chairman of the board and Scott Baxter will become its chief executive officer. Baxter most recently was Group President of Americas West, but has a long history with VF’s jeans business.
“Scott is an extremely talented leader who has a long track record of success, which includes leading the Jeans business from 2011 through 2015, a period during which the business grew at a mid-single-digit rate,” said Steve Rendle, chairman, president and chief executive officer. “There’s no one more qualified and appropriate to serve as CEO than Scott.”
Change allows Wrangler & Lee to focus
The rationale for the spinoff of its jean brands is simplicity itself. VF’s businesses have taken divergent paths, with its RemainCo entity focused on fast-growing lifestyle categories and NewCo on evergreen but slow-growing (+1-2%) denim jeans.
“The decision to separate these businesses will allow VF to sharpen its focus as a consumer-centric and retail-minded organization anchored in activity-based lifestyle brands. Our Jeans platform is a successful, sustainable business with iconic global brands and a clear path to value creation as a standalone entity,” Rendle said in a statement.
Consumers and retailers that sell the Wrangler and Lee brands will benefit most from this move. Currently wholesale accounts for the lion’s share of its business.
“Since VF acquired such a diverse range of brands, its denim brands seemed to have gotten diluted,” said Christine Rucci, founder of Godmother NYC Inc., a design and product development consultancy specializing in denim and sportswear. “This will lift Lee and Wrangler back to their rightful place in the denim trinity with Levi’s.”
Rucci has worked with Ralph Lauren, Calvin Klein, DKNY Jeans, A/X Armani, among others. Currently she is working with New York City and State to open a fully sustainable eco-friendly Denim Factory and Laundry in the heart of the garment district to preserve NYC’s long history in denim where she says, “95% of American sportswear and fashion denim was produced,” up until the 80s.
Ready to rock the jeans market
Releasing the Wrangler and Lee brands from under the shackles of VF will bring more competition in the mass-market jeans business , which has become stagnant without pressure from a battle between equals. Iron sharpens iron, as the saying goes.
If not strictly equals at the start, as NewCo will emerge at about half the size of Levi Strauss & Co, reporting $4.9 billion in revenues in 2017 with 9% growth overall, both corporations will be fully focused on their jeans brands.
More competitive pressure will benefit all and help the whole category grow, as Levi’s men’s business was flat last year and its U.S. business grew only 2%. As for VF’s jean brands, the Wall Street Journal reports sales have fallen nearly 5% since 2015.
Fashion Institute of Technology assistant professor Shelley Kohan for one believes that the rebirth of Wrangler and Lee will help Levi’s too.
“The transition of Wrangler/Lee into a new company could provide Levi’s a golden opportunity to capture more of the market share, especially if it reacts quickly. With any fundamental business change like VF is making, it causes distraction to the business,” Kohan says.
Kohan also points to other specialty retail companies, like Gap, Old Navy and American Eagle Outfitters , and private-label jean competitors, notably Walmart and Target, that could benefit from potential disruption of distribution in VF’s NewCo jeans business.
VF seems to have that contingency covered, boasting the NewCo has “best-in-class supply chain, channel and category management,” as well as “deep and long-standing relationships with leading global retailers.”
Yet people are people and this kind of dramatic reorganization and realignment could play havoc on what the company believes are its core strengths.
Innovate or die
Heightened competition brings promise for new jeans offerings at mass-market price points. While Levi’s has done a good job marketing to younger customers and Lee and Wrangler have lacked marketing support under VF’s leadership, Rucci sees enhanced product quality, fit and design as key to bringing back customer excitement for the brands, not marketing.
All three brands, she believes, have suffered from lack of quality. “Because of the lower quality and lack of advertising support, Lee and Wrangler diluted their personality. Levi’s has put a lot of effort into marketing, but really are lacking in denim quality,” Rucci says.
“I am a Levi’s fan for 45 years, and see improvements in fit, but not in fabric quality. I have vintage Levi’s that lasted 40+ years, and new jeans that last about 6-8 months. Fabric quality is key. It is the first vision and what drives the business,” she continues.
A big contributor to the quality problem, as Rucci sees it, is the reliance on overseas manufacturing. “While Levi’s has announced it will do ‘finishing’ in its Nevada development center, it is still sewing off shore,” she declares.
Wrangler, on the other hand, plans to do more production in America as part of its commitment to sustainability.
“Wrangler is starting to work with the newly-formed Vidalia Denim Mills which just opened this July in Louisiana,” Rucci says. “This is a good strategic move to bring back jeans making to the USA. Consumers are willing to pay more knowing brands are creating jobs and maintaining the history of jeans making in this country.”
On the state of the jeans market in the U.S., where jeans were born and have a proud heritage, Rucci says, “In an effort to be faster, quicker and cheaper, brands ‘threw out the baby with the bathwater’ in the 80s, going off shore for production. Only now are we seeing the importance of re-shoring back to America.”
Kohan points to the need for these jeans brands to innovate specifically in “performance fabrics, more hybrid styles (casual/athletic) and increasing sustainable, eco-friendly processing methods.”
Back to the future
Jeans are as American as apple pie. And while innovation in jeans making is key for the future, bringing back the jeans classics with modern fit is what Rucci believes will restore the faded-glory of all three heritage brands – Wrangler, Lee and Levi’s. These brands need “to look backward to look forward,” a lesson she learned from Ralph Lauren.
“The brands should go into the archives and bring back the details that made these brands great,” she says. “Lee was known for left-hand denim and Wrangler had broken twill denim. Fabric weight is value for the customers, as most vintage is 13-14 oz. and 100% cotton.”
But Wrangler, Lee and Levi’s all have a tough road ahead as they must compete with Millennials and GenZ customers’ growing demand for activewear and outdoor . Speaking to the challenge for Wrangler and Lee brands, Kohan says, “The task will not be easy to move Wrangler/Lee from where they are today to the top of the denim segment in terms of innovation and mass market share.”
Kohan further cautions that from an operational standpoint, reducing manufacturing costs – for example, VF Newco’s gross profit is in the 40% range, while RemainCo’s is over 50% – and speed to market, “may contradict the need for investments in technology and alternative methods of production.”
Note: VF did not respond to request for comment.
