Stitching Together an Apparel Powerhouse
Applying lessons learned from jeans and underwear, VF has assembled the world's largest, most profitable clothing conglomerate.
By Michael V. Copeland

(Business 2.0) – The North Face probably seemed like a healthy brand to shoppers back in 2000, but retailers knew differently. The outdoor apparel maker had become notorious for shipping orders late or in incorrect quantities. Its ski-related gear appeared in stores near the end of ski season, and its tents arrived after most campers were done camping. Sales were $238 million, but the company had posted a net loss of $100 million. That made it harder to pay suppliers, who in turn stopped extending credit. By April 2000, the North Face had to either pay its bills or consider bankruptcy.

That's when VF--parent of the Vanity Fair underwear brand and now the world's largest pure-play apparel company--pounced, buying the North Face for a bargain $135 million. Using its cash to keep creditors at bay, VF began revamping the North Face's sourcing, distribution, and financial operations. In the five years since, the North Face's sales have nearly doubled to an estimated $500 million, and its operating profit margin is a healthy 13 percent. (VF doesn't disclose net profit for its brands.) "The North Face is a great example of what VF brings to all its acquisitions," says David Griffith, senior retail analyst at Tradition Asiel Securities. "For VF it was easy, and it's not easy for everybody."

Time was, most "roll-ups"--acquisitions of brands by large conglomerates--were about bringing the efficiencies of mass production to staples like soup and soap. But VF has shown that it's an advantage to be huge in the trend-driven apparel business too. Thanks to a string of acquisitions that began in 1986 and has accelerated in the past four years--including purchases of Chic, Gitano, Jansport, Nautica, Vans, and Wrangler--VF last year sold $6 billion worth of clothes, more than any other clothing maker. (Nike has about twice as much revenue, but that's primarily from footwear.) Scale lets VF brands tie up the best and cheapest global suppliers and meet the ever more complex demands of powerful retailers like Wal-Mart. With $475 million in net profit last year and an industry-best 12.8 percent operating margin, VF also affords its brands the ability to take bigger risks. "VF has outperformed the competition," analyst Griffith says, "because when the performance of one brand goes a little bit south, there are others that pick up the slack."

In fact, VF has long been an acquisitive company, but the credit for its surprising recent success belongs to Mackey McDonald, VF's CEO since 1996. A soft-spoken Southerner who's a graduate of VF's own ranks, McDonald has shown that the company's operational expertise is the key to unlocking value in apparel categories from shirts to sneakers. "A lot of clothing companies lack the discipline to deliver the right products at the right time," he says. "That's an opportunity for us."

Sewing Up Bigger Deals

VF was founded in 1899 as Reading Glove & Mitten Co. in Reading, Pa., but shifted its focus to women's underwear in 1919 and renamed itself Vanity Fair Silk Mills. It made its first acquisition, a hosiery company, in 1969, and soon after purchased jeans and work-clothes maker H.D. Lee. During the next three decades, VF's acquisitions fell within the staid world of jeans and underwear, but by 2000, sales had leveled off: After all, there's only so much growth you can squeeze from dungarees and bras. It was then that McDonald decided to look for a lifestyle brand--a name that worked in multiple clothing and accessories categories. His search ended at the North Face, the model for VF's purchases ever since.

The timing of the buyout couldn't have been better. The North Face's operational problems hadn't become public enough to damage the brand, which had a strong following among not only outdoor gearhounds but also urbanites eager to appear as if they had just climbed a mountain. In short, McDonald says, by surveying consumers before the acquisition, VF discovered that the North Face was still a strong brand. But it needed a lot of back-end rebuilding.

The day the deal closed, a VF fix-it team--distribution and finance experts from the company's core underwear and jeans brands--parachuted in. One thing they found was that the North Face had outsourced distribution to a third party, resulting in insufficient information about when products would ship to stores. So the team plugged the North Face into VF's own supply-chain system, which tracks more than 500 million items made by 1,000 contract and company-owned factories worldwide. The North Face also became the beneficiary of VF's Hong Kong-based sourcing group, touted by analysts as the best in the business at doing deals with manufacturers. Now, for instance, many of its down jackets come stuffed with 900-fill down--the world's warmest and fluffiest--produced only in Hungary. (VF has cornered the market.) The transformation was rapid: The North Face turned a profit within a year and is now VF's fastest-growing brand.

Less Can Be More

While McDonald's approach has long been to supercharge growth through better operations, he has demonstrated that he also recognizes too much growth when he sees it. Take the men's sportswear brand Nautica, which VF bought in August 2003 for $631 million. As one analyst puts it, Nautica had become known for "cranking out loads of schlocky print shirts and hipster trousers that always appeared on the sales racks at department stores." According to VF CFO Bob Shearer, consumer research indicated that the brand's image had been yanked in all sorts of confusing directions: "At one point it was European contemporary," Shearer says. "Then it was rugged outdoor."

Among VF's first moves at Nautica was to buy out lead designer David Chu's licensing rights--which had favored spreading the Nautica brand as widely as possible--for $106 million. Then VF scaled back Nautica's offerings to a more basic line of sweaters, shirts, and trousers and used its manufacturing connections to reestablish the brand's quality reputation with better materials. Now, nearly two years later, Nautica clothes increasingly sell for full price: Sales are down roughly 6 percent to an estimated $650 million, but operating margins have more than doubled to an estimated 12 percent.

Of course, apparel's new economies of scale have not been lost on VF's competition: Jones Apparel Group, Liz Claiborne, and Phillips-Van Heusen have all bought other brands in the past few years. But so far VF is the master aggregator, squeezing profits from unexpected places. And McDonald doesn't appear to be closing his checkbook anytime soon. Last April, VF bought footwear company Vans for $396 million, and McDonald says he's on the hunt for a brand in women's sportswear. "We have our game plan, and we have our targets," he says. So far his aim has been dead-on.

1) Reported results in the year prior to acquisition by VF. 2) Analyst estimates for 2003 results. 3) Analyst estimates for 2004 results. 4) Analyst projections for 2005 results. Sources: VF; company reports; Morningstar; Tradition Asiel Securities