St. James Investment Company Updated: 15-December-16 V.F. C ORP ORATION (VFC) COMPANY DESCRIPTION VF Corp. operates as an apparel company which engages in the manufacture of fashion clothes, footwear, and other related products. VF’s brands include Jansport, Kipling, Lee, Lucy, Majestic, Nautica, Reef, The North Face, Timberland, Vans, Wrangler, Lee, Rock & Republic, Bulwark, Horace Small, Red Kap, and Wrangler Workwear. The company was founded in 1899 and is headquartered in Greensboro, North Carolina. INVESTMENT THESIS VF has established a broad and growing array of leading lifestyle brands, selected to enhance its presence in high-growth categories and for synergies within existing operating units. We think the company can take advantage of three market trends: 1) The outdoor and action sports market is a large and quickly growing opportunity, with active wear apparel now often worn in place of casual attire--represents a $46 billion opportunity with a focus on higher-margin performance and comfort products. The North Face line is already a leader in the $25 billion global outdoor market and provides high-performance sports apparel, an increasingly popular category thanks to the fitness craze. Management expects this category to be a key growth driver for VF and that further acquisitions will be made to increase exposure. Management states that it could grow organically to over 65% of revenue from the current 60% penetration over the next five years. 2) VF leverages its large global supply chain to support additional international sales. Management believes that international markets can grow from 30% of revenue to 45% of sales in five years. 3) Direct-to-consumer sales growing to 30% of sales from the current 27% penetration, with e-commerce being the fastest-growing, most profitable channel. We expect the company’s near-term performance to face headwinds given retailer bankruptcies and weak apparel consumer demand; however, VF maintains an attractive business model that continues to gain market share and we see it as an attractive investment. VF’s competitive advantage hinges on the company’s pricing power through its intangible brand assets. Management’s ability to cull declining brands, nurture growing brands, and acquire strong brands support an attractive portfolio. We think that the markets will eventually recognize VF’s shareholder value through a combination of a large share buyback program, a future acquisition, outsized growth of the direct-to-consumer channel, or possible further divestitures of underperforming businesses. Backed by a strong management team, solid execution and the ability to drive cost synergies, along with a vetting process to acquire strong brands with slightly broken operations, we believe that VF currently offers an attractive entry point for long-term investors. COMPANY HISTORY The began in the year 1899, when eight men formed the Reading Glove and Mitten Manufacturing Company in Reading, Pennsylvania, and began producing and selling knitted and silk gloves. Of the founders, two men had previous experience in the garment industry as hosiery manufacturing executives, while a third, John Barbey, was a brewer and banker 1 | Page St. James Investment Company Updated: 15-December-16 and controlled the company's financial operations. After twelve years of slow growth, Barbey purchased his partners' interests in the company in 1911. The following year, Barbey's son John Edward (“J.E.”) joined the company and in 1913 the company's name was changed to Schuylkill Silk Mills. In 1914 the company expanded into the manufacture of silk lingerie, and after three years of successful sales, the Barbeys decided to conduct a contest to find a brand name for their lingerie line. The winner received a $25 prize for the name "Vanity Fair." With hopes of establishing a national reputation for the company's merchandise, the Barbeys launched an extensive advertising campaign that emphasized the superior quality and style of Vanity Fair lingerie. This direct-to-the-consumer approach was considered innovative in that time period, because most other lingerie was of mediocre quality and was sold without brand names primarily through jobbers, a term used to describe a wholesaler who operates on a small scale and only sells to retailers and institutions. The Barbeys' campaign proved quite successful and the Vanity Fair brand grew in recognition. By the early 1920s, the rising success of the lingerie product line prompted Vanity Fair to discontinue its glove manufacturing operation and devote itself exclusively to the business of making lingerie. J.E. Barbey was named general manager of the company in 1931 in addition to his position as vice-president. Union organizing activities in the Reading area in the 1930s prompted Vanity Fair to open a new factory in 1937 in Monroeville, Alabama, in the union-unfriendly South. J.E. Barbey was known for his antiunion views and did not want to run a unionized factory. The Reading plant remained in operation though not unionized, but after a new wave of organizing actions arose following the end of World War II and two unsuccessful attempts were made to unionize the plant, it was closed for good in 1948. Upon his father's death in 1939, J.E. Barbey assumed the presidency of Vanity Fair, a position that he held for the next quarter century. During that time, he led the company through turbulent times, such as the economic changes that came with World War II. In 1941 the war brought about an embargo on silk, and the company began using rayon in the production of its lingerie. Throughout the rest of the 1940s, Vanity Fair perfected the use of other new types of lingerie fabrics and subsequently introduced products made from a nylon tricot material in 1948. These innovations changed the face of the lingerie industry. Nylon tricot was soon considered to be an ideal lingerie fabric because of its strength, wearing power, elasticity, and ease-of-care features. Its use also enabled the company to produce lingerie with a variety of fashionable features and in many popular colors. In 1951 Barbey, who owned nearly all of the company's common stock, decided to take the company public. About one-third of Barbey's shares were sold via an initial public offering. The stock traded over the counter until 1966, when a secondary stock offering of shares held by the J.E. Barbey Estate and Trusts was completed. The offering represented one quarter of the outstanding shares and left the Barbey trusts with a twenty-five percent stake in Vanity Fair Mills. The offering enabled the company to gain a listing on the New York Stock Exchange. BUSINESS OVERVIEW VF Corporation is one of the world's largest publicly owned fashion apparel manufacturers, designing and producing a diverse array of clothing products for both the U.S. and international markets. The company owns a portfolio of well-known brands in several categories that are sold through a variety of retail sales channels, including department, specialty, mass-merchant, and discount stores. VF is the leading maker of jeans in the United States, holding about one-quarter of the market with such brands as Wrangler, Lee, Rustler, and Riders. Approximately half of the company's revenues come from the sale of 2 | Page St. James Investment Company Updated: 15-December-16 jeanswear. Intimate apparel, which includes the Vanity Fair, Lily of France, Vassarette, and Bestform brands, generates about 16% of sales. Another 10% comes from marketing occupational apparel under the Red Kap, Penn State Textile, and Bulwark brands. VF also sells children's playwear under the Healthtex and Lee brands, North Face outdoor apparel and equipment, and JanSport and Eastpak daypacks and bookbags. The company's knitwear apparel business designs, manufactures, and markets imprinted sports clothing under licenses from Major League Baseball, the National Basketball Association, the National Football League, the National Hockey League, major universities and colleges, and top NASCAR drivers. Other operations include a chain of about fifty VF retail outlet stores located across the United States, selling a wide range of company products. More than 80% of company revenues are derived domestically; the remainder primarily originates in Europe, with South America and Asia contributing small portions of overall sales. To understand VF is to understand brand management. The purpose of building a brand is to differentiate one’s product so that one can charge a premium price. Customers will pay more because they trust a brand to deliver a quality product. For example, while a generic bottle of bleach and a bottle of Clorox are chemically identical, Clorox manages to charge about 60% more than the no-name brand. In other cases, the brand is the entire product. Customers will buy clothing solely to display the label. Every business wants to have the power of a strong brand but developing a brand is difficult and expensive. One either needs to provide a high-quality product for many years or budget millions of dollars on marketing to make any headway in a saturated market competing for consumer attention. Therefore, most attempts to build a new brand fail; however, once a company establishes a trusted brand, the company can now sell more products at higher margins than their competitors. VF Corporation owns some of the best brands in the retail sector. Although many consumers may not know the company’s name, they certainly know the company’s brands. Today, this single company combines the earnings power of JanSport backpacks, Lee jeans, Nautica clothing, Reef surf wear, North Face outdoor apparel, Timberland boots and clothing, Vans sneakers, and Wrangler jeans. VF does not create brands from scratch, an expensive and difficult process, but rather VF employs a disciplined and skillful process to buy pre-existing brands and then revitalize them.