Kontoor Brands Spinoff: The Company’s Performance So Far

The pandemic events of this year came as a shock to many businesses, causing their expectations for 2020 to take a different turn entirely. After a successful stock spinoff, Kontoor Brands expected to beat the Jeanswear market. The company, which initially experienced the usual post-spin dynamics and recovered from it, has been hit hard this year, especially the coronavirus pandemic continues to slow down the economy. Another possible reason that could have been responsible for the company’s business slowdown is its move to force sell its post dividend cut.

Other challenges have to do with the fact that consumers are transitioning from traditional wholesale retailers to buying from large online retailers like Amazon, eBay, AliExpress, and others. As a result of that, many consumers go for products that are readily available on those websites.

Recent reports have shown that Kontoor Brands is currently underperforming its competition, Levi Strauss (LEVI) compared to its expectations when the spinoff was finalized.

On April 1, 2019, VF Corporation (VFC), an apparel maker, filed a Form 10 registration which outlined a planned tax-free spin-off on its jeans production unit into an independent and publicly-traded company. VFC first made the announcement on August 13, 2018.

The spinoff company was to be named Kontoor Brands, Inc., which included brands like the Wrangler®, Lee®, and Rock & Republic®, and VF Outlet business. Within the first year of the spinoff, VF estimated annual revenue of almost $2.68 billion.

The idea of a VFC spinoff came after the company had seen a good record of steady growth, with a substantial annual shareholder return of 17% since 2000. While the company could boast of a fairly good performance record, it still experienced slowed growth caused by its Jeanswear unit. For example, in 2018, VF’s Jeanswear unit saw a 4.6% decline in revenue whereas the other business units saw a 21.4% increase in revenue.

As at the time of the spinoff, VF expected Kontoor Brands to have a high single-digit expected return and a relatively high dividend by the end of the first year. The VF and Kontoor management also believes that Jeanswear brands will perform better as a standalone entity. Both companies also believed that the jeans platform can grow into a successful and sustainable business with iconic global brands.

According to estimates by Zion Market Research, the denim jeans market was worth $66 billion in 2018, and there were possibilities of the market growing at a 3.6% annual rate to $85 billion by 2025. During the time of the research, Kontoor Brands controlled only about 4% of the market with $2.7 billion in revenue.