CASE # 20
VF Corporation
Value creation is a
powerful lens for identifying the initiatives that will have the greatest
impact on a company’s transformation agenda and for understanding the potential
value of the overall program for shareholders. VF offers a compelling example
of a company using a sharp focus on value creation to chart its transformation
course. In the early 2000s, VF was a good company with strong management but
limited organic growth. Its “jeanswear” and intimate-apparel businesses,
although responsible for 80 percent of the company’s revenues, were mature,
low-gross-margin segments. And 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, yet,
to the frustration of management, VF had a lower valuation multiple than most
of its peers. With BCG’s help, VF assessed its options and identified key levers
to drive stronger and more-sustainable value creation. The result was a
multiyear transformation comprising four components: A Strong Commitment to Value Creation as the Company’s Focus: Initially,
VF cut back its growth guidance to signal to investors that it would not pursue
growth opportunities at the expense of profitability. And as a sign of
management’s commitment to balanced value creation, the company increased its
dividend by 90 percent. Relentless
Cost Management: 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. A Major Transformation of
the Portfolio: 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, such as Vans, Nautica, and Reef. Overall, this shifted
the balance of its portfolio from 70 percent low-growth heritage brands to 65
percent higher-growth lifestyle brands. The
Creation of a High-Performance Culture: VF has created an ownership
mind-set in its management ranks. More than 200 managers across all key
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. In addition, VF strengthened its management bench
through a dedicated talent-management program and selective high-profile hires.
The results of VF’s TSR-led transformation are apparent. The
company’s revenues have grown from $7 billion in 2008 to more than $11 billion
in 2013 (and revenues are projected to top $17 billion by 2017). At the same
time, profitability has improved substantially, highlighted by a gross margin
of 48 percent as of mid-2014. The company’s stock price quadrupled from $15 per
share in 2005 to more than $65 per share in September 2014, while paying about
2 percent 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.