With brands like Lee Jeans and Timberland, VF Corporation is one of the world’s largest apparel companies. But despite its best efforts, the company’s P/E multiple remained the lowest in its peer group. In 2005, VF Corporation turned its focus to TSR, driving a transformation that has allowed the company to grow its market capitalization more than sixfold.
Creating Value for Shareholders
An Interview with VF Corporation CFO Bob Shearer
With brands like Lee Jeans and Timberland, VF Corporation is one of the world’s largest apparel companies. Throughout the 1990s and early 2000s, the U.S.-based company worked hard to increase growth, shifting toward more lifestyle brands and making strategic acquisitions. But despite its best efforts, the company’s P/E multiple remained the lowest in its peer group.
The company turned to BCG in 2005 to find out why investors weren’t giving VF Corporation the credit in the market that it thought it deserved. After analyzing the company’s portfolio mix and business plans, and engaging with its investors, the team discovered that investors didn’t think the company’s growth strategy was credible. So they created a plan that would transform the business, thereby changing that perception and boosting shareholder value over the next decade.
The company changed its investor messaging to show that it was deeply committed to delivering strong and sustainable TSR, not just earnings growth, over the long term. To illustrate that commitment, it announced a near doubling of its dividend payout, from 23% to 45% of earnings. The increase took the company’s dividend yield from about 2% to nearly 4%. Investors found this higher yield attractive and began buying the stock and bidding up its price. Over the next six months, VF’s share price and P/E multiple increased by nearly 30% relative to the market, taking the company’s valuation multiple from the bottom to roughly the middle of its peer group.
The next step was reshaping the corporate portfolio with a focus on significantly improving gross margins. VF started by selling off one of the company’s largest legacy brands and its intimate-apparel business. It also focused more resources on its lifestyle brands and educated investors on its M&A strategy. Then, once the company persuaded the markets that it was TSR focused, it was able to make some strategic portfolio moves, such as the acquisition of bigger, faster-growing lifestyle brands.
The company trained more than 200 managers on the importance of strong TSR and how it can be used to improve decision-making. Today, VF Corporation assesses every proposed financial plan and the performance of every brand and business in terms of its TSR contribution.
People now understand that we need to be making decisions that enable their business, brand, and geography to contribute positively to TSR. It helps people understand why we are making the decisions that we make.
A TSR focus and a remixed portfolio enabled VF Corporation to grow from a market cap of $5 billion in 2005 to nearly $33 billion in 2015.
When the project started in 2005, the company’s stock sold for $15 per share on a split-adjusted basis. By early 2015, it sold for $75 per share.
The same year the company began rewarding employees for generating free cash flow, total free cash flow grew by nearly 50%.
As a result of increasing its dividend payout and yield, the company’s share price and P/E multiple increased by nearly 30% relative to the market.