VF Corp.’s Supreme Deal Dissected

Laveta Brigham

With VF Corp.’s $2.1 billion-plus deal to buy Supreme, the white-hot center of the $50 billion streetwear world is coming to Wall Street for the first time. While the ultra-passionate streetwear crowd will need some time to acclimate and get used to seeing the Supreme business framed with corporate jargon […]

With VF Corp.’s $2.1 billion-plus deal to buy Supreme, the white-hot center of the $50 billion streetwear world is coming to Wall Street for the first time.

While the ultra-passionate streetwear crowd will need some time to acclimate and get used to seeing the Supreme business framed with corporate jargon in analyst presentations, the investment set generally liked what they saw.

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Shares of VF shot up 12.5 percent to $78.75 on Monday, adding $3.5 billion to the company’s market capitalization, which ended at $30.8 billion on a strong day for the market. In the fleeting rationale of Wall Street, the deal might have essentially paid for itself — but it’s up to VF, led by chairman, president and chief executive officer Steve Rendle, to really make it worthwhile.

And streetwear experts said the deal could boost the category, but are also watching closely to see how Supreme evolves under the banner of a public company.

The brand has always been something of a mystery — beyond the $1 billion valuation it received when Carlyle bought a 50 percent stake in 2017, not much was known about its financials.

Some familiar with the business joked that it was the world’s most profitable screen-print operation, but that undersells the connection founder James Jebbia has forged with the skate crowd, fashion and popular culture in general.

Jebbia and the brand’s leadership will stay on to run the business once the deal closes this year, with VF planning on hanging back, and lots of incentive for Jebbia and team to further propel the business. Under the terms of the deal, there is a chance for the Supreme management to get a piece of an additional $300 million provided certain performance milestones are met.

“This will take time,” Rendle told WWD in an interview “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.”

Jebbia added in a statement: “We are proud to join VF, a world-class company that is home to great brands we’ve worked with for years, including The North Face, Vans and Timberland. This partnership will maintain our unique culture and independence, while allowing us to grow on the same path we’ve been on since 1994.”

The skate shop Jebbia opened on Lafayette Street has grown into a $500 million-plus business — and one that appears to support a doubling in its valuation over three years (what pandemic?).

Supreme has just 12 stores and 60 percent of its revenues come from its web site. Gross margins top 60 percent and operating margins come in at better than 20 percent. Sales are up by single digits so far this year, have accelerated recently and VF is looking at compound annual growth of 8 to 10 percent over five years, slower than the company’s 12 to 13 percent growth with Vans, but faster than the overall company.

VF said Supreme represents a “$1 billion global opportunity over time through international and direct-to-consumer expansion, core pillars of VF’s 2024 strategy,” according to VF.

The deal is expected to be completed this calendar year and will see Carlyle and Goode Partners sell their stakes.

Clearly Supreme is being bought for its brand profile and not the potential for cost savings.

“We really don’t have synergies baked into this financial model,” said Scott Roe, VF’s executive vice president and chief financial officer. “That doesn’t mean there won’t be some. I’m sure there’s going to be points where we can help them, but it’s going to have to be brand-appropriate and it’s going to have to be under the direction of the leadership and it has to make sense for the consumer and their business.

“We’re not coming in with a new plan or approach, because frankly they’re pretty darn good at it,” he said. “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.”

VF expects the business will be “accretive” to its adjusted earnings per share in the fiscal year that ends in April. Next year, Supreme is expected to add at least $500 million in revenues and 20 cents of adjusted EPS to VF’s take.

One financial source said Supreme’s “margins speak to a real underinvestment in [selling, general and administrative expenses]/corporate infrastructure. They probably either faced the choice of building all of that themselves or using VF’s. This felt like the easy path.”

But the market has in a sense come around to Supreme’s way of seeing the world. If the company operates lean, it also has a vibrant web business and very strong brand profile — essentially what many businesses are looking to transform into during the pandemic slowdown.

Just as VF can offer Supreme operational support, including in terms of data and the international business, Supreme also has some tricks to teach VF.

Rendle pointed approvingly to the brand’s “approach to consumer engagement, their thoughtful focus on delivering quality product at a really consistently high rate and their deep understanding of what their customers are expecting.”

He also noted the deal fits squarely into the evolution of VF, which jettisoned its mass denim business, moved to Denver and has been focusing on the direct-to-consumer business and working to put the consumer at the center of all it does.

Supreme stays famously close to its consumer, a devoted following happy to line up in the rain to get the latest looks.

And as different as they are, VF and Supreme play in many of the same spaces — and have collaborated extensively in the past.

“We have a good understanding of this customer,” Rendle said. “About $3 billion of our revenue is already derived from adjacencies to this marketplace, but Supreme sits at the center of this aspect of the market and we couldn’t be more excited to have them join us.”

Ike Boruchow, an analyst at Wells Fargo, said VF has “talked for years and years about wanting to focus on the athletic and active lifestyle business…they’ve talked a lot about d-to-c businesses.”

“It kind of checks all the boxes that they’ve discussed,” Boruchow said of Supreme. “It’s a category that people like, people like that there’s visibility, it’s got really good margins. It’s easily scalable globally, these guys [at VF] are good about ramping up brands outside of North America.”

Boruchow said VF would be a good steward of the brand, but noted that doubts have dogged the category, which has seen one of its patron saints — Virgil Abloh, Off-White founder and artistic director of Louis Vuitton men’s — declare that streetwear was going to wane over the next decade.

“The question remains, has streetwear peaked? There’s a possibility that maybe it’s later cycle,” said Boruchow, noting that wasn’t his position.

Valued at less than 15-times earnings before interest, taxes, depreciation and amortization, he said the price for Supreme “seems reasonable” and was “right down the middle” given the fit in the portfolio and the projected profits coming in.

“On the flip side, who knows what streetwear looks like in five years,” Boruchow said. “Are we going to say, this is a great deal?”

Together with Farfetch’s partnership with Alibaba and Compagnie Financière Richemont, this marks the second big deal in as many weeks — and if the stars align, the deals could keep coming.

With progress being made toward a vaccine for the coronavirus, the U.S. presidential election winding down and companies flush with cash to see them through the pandemic, more firms might go hunting.

“If there is an asset out there that compels you and you feel now is the time to strike, yeah, you go for it,” Boruchow said.

John Kernan, an analyst at Cowen, said the Supreme transaction was “a good deal for all parties. VF got a pretty fair price for a unique asset in the retail ecosystem.”

And Kernan argued that streetwear and Supreme still have plenty of room to run.

“It’s a fairly attractive market with a lot of growth potential,” Kernan said. “It’s a $50 billion market, Supreme is a small player overall in the market, there’s room to grow.”

But pursuing that growth while maintaining the brand’s cachet could be a tricky proposition — already Supreme has held on longer than many thought.

When Carlyle bought into Supreme there were worries the private equity firm would aggressively push for growth, but over the three years, the brand added just one store and kept its positioning.

Now streetwear observers are in wait-and-see mode again as Supreme moves on to the next step.

“It’s a great move for VF Corp,” said Tony Shellman, the cofounder of Mecca and Enyce. “They need to buy market share and a brand that brings value to the company and one you can do something with.”

Shellman is very optimistic about the acquisition because Jebbia remained with the brand, but predicts that Supreme will go mass in a few years.

“They’re going to play the game for maybe two to three years and then they’re going to open the floodgates,” Shellman said. “They don’t care about the cool kids. James has to keep up the integrity, but I believe that he can continue to do it. If James wasn’t part of the brand, this would be a totally different conversation.”

Shellman has his own personal experience with corporate companies acquiring streetwear brands for millions of dollars. He and his partners at Enyce sold the brand to Liz Claiborne for $114 million in 2004. This new acquisition could be a sign of Supreme selling out, but Shellman says the move is great for the streetwear market.

“Like anything now, streetwear is mainstream and it’s brands like Supreme that are bringing exposure to other brands,” he said. “It’s going to continue to grow the business. I think of brands like Fat Tiger, Joe Freshgoods, Leaders 1354, no one has said let’s do a billion dollars with them yet, but it’s only a matter of time. These businesses are contenders in this vast general market.

“Supreme is doing well, but imagine if they had some real gas and support?” Shellman said. “There is not one retailer or manufacturer that VF can’t call right now. They have to think of long-term opportunities and Supreme has to think about how to take the brand to the next level.”

Christopher Morency, editorial director at Highsnobiety, said: “VF Corp.’s massive acquisition of Supreme is a big deal. While it already sold 50 percent to the Carlyle Group three years ago, to a large extent [the brand] remained independent. That’s no longer going to be the case. I believe the brand has growth potential geographically, especially in Asia, while categories like footwear, toys and more homeware can authentically be expanded upon. All with the help of VF’s proven expertise in most of these categories. People say Supreme has ‘sold out’ for being commercial. [But] Supreme has been commercial for over a decade, that isn’t new. What will be interesting to see, however, is how it will balance its business model built on perceived scarcity when it’s everywhere. The curtain has dropped. VF has said it sees Supreme having the potential to become a billion-dollar business. It already has sell-through rates of more than 90 percent. Can it sustain the hype when its community of tastemakers leaves? That’s to see.”

Jeff Staple, founder of Reed Art Department who operated Lower East Side boutique Reed Space until it closed in 2016, said: “Is this good or bad for the brand? It all depends on who you ask. For the founders and the team members? I assume it’s great because they can see the fruits of their hard-earned labor. For the collectors and the community of die-hard fans — it remains to be seen.”

He said VF can help Supreme “tremendously” with logistics and retail footprint, but how would this impact the brand’s exclusivity?

“Most would agree Supreme trades on the idea of exclusivity and being antiestablishment,” Staple said. “But you speak to most business/financial-minded folks and the word ‘exclusive’ does not equate to ‘$2 billion’ —so it’ll be an interesting tightrope to walk. Let’s face it, for most Supreme fans today, if they walked into the kitchen and saw their mom, dad, grandma and auntie wearing Supreme, it would change their impression of the brand.

“I think the acquisition is incredible for both brands and the industry as a whole,” he said. “VF’s track record has shown that they don’t half-ass anything. Pretty much every brand in their portfolio is top notch. They’re now acquiring what is essentially the ‘cleanest’ brand in the world, meaning they don’t have poor distribution or brand equity issues. For all intents and purpose, this should be one-plus-one equals two (billion)!”

Izzy Ezrailson, the 40-year fashion industry veteran who founded Up Against the Wall, described the deal as a “tribute to streetwear.”

“It’s like a horse race and Supreme has the breeding and has not been overused,” he said. “The only thing to be worried about is the counterfeits, but the people that follow Supreme know the difference. The real thing shines through.”

In regard to VF, he believes the company manages “extremely well” and used Vans for reference.

“Over the course of time, this is a tremendous property that can be used in many ways that we don’t know right now. We know one thing: Supreme is valuable and irreplaceable and if they play it right, it will remain that way.”

And Dre Hayes, cofounder of The Foundation, noted the deal gives VF a boost.

“They have always been present in youth culture and lifestyle and now they will have the streetwear crown jewel in their portfolio,” Hayes said. “In regard to this purchase being good for the Supreme brand, only time will tell. Supreme is going to need to grow significantly for VF to get a return on investment. I have felt for a long time that Supreme could have more stores in some of the existing cities as well as other major markets around the world, so growth was inevitable. However, most public companies generally do not care about culture. Now that Supreme is a part of a large public company, it will ultimately be beholden to the stakeholders and there will be more pressure to grow and make the brand more accessible.”

Hayes is skeptical of VF being laissez-faire with Supreme, however.

“Maybe during the honeymoon phase, but I do not believe them long-term,” he said. “If it was LVMH or Kering that purchased Supreme and they said they were keeping the brand the same, I would be inclined to believe them, because they have a history and track record of operating brands in the luxury space, which is similar to how Supreme operates. However, I am hoping that I am wrong. VF Corp is a great company with an amazing brand portfolio, but Supreme is just a different kind of brand.”

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