Is This Denim Spinoff a Good Idea?

VF Corp. (NYSE: VFC), the owner of brands including Timberland, The North Face, and Dickies, recently announced it would be splitting itself into two separate publicly traded companies, one focused on apparel and footwear, the other on denim and its outlet stores.

The diversified apparel company sees the split as an opportunity to increase shareholder value as it focuses on high-growth brands that work well in a branded retail store environment, but analysts are ascribing it more to the rise of athleisure wear, which has crimped denim sales.

Shareholders didn't seem to like the news, dropping VF Corp.'s stock 5% over the past week, but a denim pure play doesn't seem like a bad idea at all.

VF's denim blues

Jeans account for more than one-fifth of VF Corp.'s revenue, and it anticipates the new denim business will have some $2.5 billion in annual revenue at the start, generating high single-digit shareholder returns. That's less than the $11 billion in annual sales the new VF Corp. is expected to produce, along with midteen total returns for shareholders, but respectable for what could be seen as a rather staid business with growth potential.

Although jeans sales have fallen from $18.8 billion in 2013 to $16.2 billion last year, denim is making a strong comeback. Gap reported that denim enjoyed its biggest quarterly comparable sales growth in the brand's history in the first quarter. Abercrombie & Fitch similarly recorded record first-quarter denim sales. And Levi Strauss, a name synonymous with denim, said in July that second-quarter sales surged 17%, the third consecutive quarter of double-digit growth.

In contrast, VF Corp. was only able to see gains of 2.7% in its jeans division in the first quarter of this fiscal year.

Buying its way to growth

Separating the Wrangler, Lee, Rustler, and Rock & Republic brands from the rest of VF Corp, which has become besotted by M&A activity in lifestyle brands and plans to continue buying up other names in the space, ought to allow the denim business to flourish.

In the past year, VF Corp. has bought Altra (runner-focused), Icebreaker (merino wool-based), and Williamson-Dickie (workwear) while selling Nautica and its Majestic professional sports team licensing division. At the end of June, it said that while it is always evaluating its corporate structure, its main priority in using capital is making acquisitions while considering shareholder returns and dividends secondarily. The stock yields about 2% at the current price.

VF Corp. admits the operations it is more interested in have taken a path divergent from that of denim in recent years, and the spinoff will allow the denim business to get the focused attention it deserves and needs.

Certainly athleisure clothing, as represented by the yoga outfits of lululemon athletica but also the more sports-oriented apparel of Nike and Under Armour, has shaped how denim has been received in the market and how manufacturers have responded, such as by adding more stretchy fabric to denim's weave.

Yet the athleisure market itself has had its share of ups and downs as well, and mass merchandisers such as Walmart and Target, along with fast-fashion leaders like H&M, have entered the market and driven prices lower. Athleisure wear leaders are likely to experience more problems in the future.

Key takeaway

Wrangler and Lee have been neglected under VF Corp., and spinning them off into their own company, along with an 80-store chain of outlet stores, will set them on a path for growth as more and better marketing allows them to regain the prominence they previously enjoyed. Instead of being relegated to the ignored mom-jeans bin, Wrangler and Lee could end up being a fashion statement once more.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Under Armour (C Shares). The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.