VF posted a gross margin of 48% after executing a comprehensive transformation strategy.
VF Corporation focused closely on value creation to chart a course for transformation. The journey began in the early 2000s, when VF was a solid company with strong management, but experienced only limited organic growth. Its jeans wear and intimate-apparel businesses, although responsible for 80% of the company’s revenues, were mature, low-gross-margin segments. The company’s cost-cutting initiatives were delivering diminishing returns.
VF’s top line was essentially flat, at about $5 billion in annual revenues, with an unclear path to future growth. VF’s value creation had been driven by cost discipline and manufacturing efficiency, but, to the frustration of management, VF had a lower valuation multiple than most of its peers.
To address these difficulties, VF turned to BCG. Together, teams assessed VF’s options and identified key levers to drive stronger and more sustainable value creation. The result was a multiyear transformation strategy based on total shareholder return (TSR), which captures change in share price and dividends paid to the company’s shareholders. The plan had four important components:
As a sign of management’s commitment to balanced value creation, the company increased its dividend by 90%.
VF built on its long-known operational excellence to develop an operating model focused on leveraging scale and synergies across its businesses through initiatives in sourcing, supply chain processes, and offshoring.
To help fund its journey, VF divested product lines worth about $1 billion in revenues, including its namesake intimate-apparel business. It used those resources to acquire nearly $2 billion worth of higher-growth, higher-margin brands.
More than 200 managers across all businesses and regions received training in the underlying principles of value creation, and the performance of every brand and business is assessed in terms of its value contribution.
The results of VF’s TSR-led transformation are striking. The company’s revenues have grown from $7 billion in 2008 to more than $11 billion in 2013, and are projected to top $17 billion by 2017. At the same time, profitability has improved substantially, highlighted by a gross margin of 48% as of mid-2014. The company’s stock price increased fivefold from $15 per share in 2005 on a split-adjusted basis to more than $75 per share in early 2015, while paying about 2% a year in dividends. As a result, the company has ranked in the top quintile of the S&P 500 in terms of TSR over the past ten years.