Jeans Woes Have VF Feeling Blue

The initials of VF Corp., the nation’s largest publicly held apparel maker, reflect the century-old company’s former name of Vanity Fair Mills. But these days, they might stand for “very frustrated.”

VF is a leading maker of low- to mid-priced denim jeans under the Lee and Wrangler brands, and the company’s stock has been hammered since the spring amid ongoing publicity about a jeans glut in U.S. retailing that’s also bloodied industry giant Levi Strauss & Co. and denim manufacturer Burlington Industries Inc., among others.

But to hear VF tell it, there isn’t a glut in the $12-billion U.S. jeans market and VF’s stock is being unfairly trashed by investors. “We don’t get it,” said Cindy Knoebel, a spokeswoman at VF’s headquarters in Greensboro, N.C. “From our point of view, the jeans business is still pretty good. But the sector overall has gotten pounded.”

To be sure, VF agreed there is a glut of denim fabric to make jeans, and that VF has a few problems of its own. For instance, its Lee brand of jeans, which are mostly peddled at mid-tier department stores such as Sears, Roebuck & Co. and J.C. Penney Co., are selling below expectations. But VF blames that mostly on the well-documented slowdown in overall traffic at those retail chains.

And VF acknowledged that its European jeans business--which has historically carried fatter profit margins that its U.S. jeans lines--is shrinking. Once-rabid European demand for denim as a fashion statement is fading, and Europeans don’t wear jeans as work clothes as commonly as U.S. consumers.

“Jeans are out of favor in Europe,” Knoebel said. “That’s hit us, no doubt about that.”

Otherwise, VF contended that its business is strong. Unit sales of its lower-priced jeans such as Wrangler, which are sold through discount centers such as Wal-Mart Stores Inc. and Kmart Corp., jumped 15% in the third quarter, compared with a year earlier, VF said.

VF also sports a solid balance sheet, is generating excess cash flow of $500 million a year, is looking for more acquisitions, is working to keep its excess inventories low, and has an ongoing stock-buyback program--all of which should help support its share price.

No matter. Investors are focused on its jeans business and they’re not happy, nor have they been excited about apparel stocks generally. After reaching $51.50 a share April 30, VF’s stock has tumbled 40%, wiping out more than $2.5 billion of the company’s market value. The stock closed Friday at $30.75 a share, down 19 cents on the day, in New York Stock Exchange composite trading.

VF’s stock has been a steady gainer for most of this decade, though it slightly lagged the broader market as measured by the benchmark Standard & Poor’s 500-stock index. From 1990 through 1998, for instance, VF nearly tripled in price while the S&P; 500 shot up 248%.

But the jeans woes were enough that VF last month said its third-quarter profit fell 13% from a year earlier, to $103.9 million, on virtually flat sales of $1.46 billion. The results were well below analysts’ expectations, as VF had earlier warned they would be.

Jeans account for about 54% of VF’s $5.5 billion in annual sales, but nearly three-quarters of its profit, said analyst Jack Pickler at Prudential Securities Inc. Still, the rest of VF’s divisions--including Bestform and Vanity Fair intimate apparel, Jantzen swimwear, and lines of uniform and utility “work wear” clothing--are generally performing within expectations, he said.

“If they hadn’t had the degree of [jeans] softness at Sears and Penney, they would have come close to the [expected] numbers,” said Josephine Esquivel, an analyst at Morgan Stanley Dean Witter Inc.

Also, research shows “we’ve seen a fairly significant strengthening of the Lee brand [among consumers] and we feel pretty good about that,” said Robert Shearer, VF’s chief financial officer.

Even so, analysts and other industry trackers are divided about whether VF’s portrait of the jeans market is too rosy.

Some apparel and retail executives, who asked not to be identified, said Lee is a quality and affordable brand--but too dull and under-marketed to keep generating sizable growth in the face of dozens of rivals, many of them more trendy and fashionable.

With consumers exposed to jean styles from fashion houses such as Tommy Hilfiger Corp., Donna Karan International Inc., Liz Claiborne Inc. and Gap Inc., buyers “want more than simply a good-fitting pair of jeans,” one executive said. The market share of designer brands has nearly doubled since ’90.

Indeed, ailing Levi Strauss also has been criticized for losing touch with the influential teenage consumer and for lacking trendy designs that keep up with competitors. In turn, Levi is being squeezed from below by lower-priced jeans from VF and private-label brands sold by Penney and others.

VF and its Lee brand do get good marks for a few attempts to stay abreast of changing tastes. For instance, its Lee Pipes brand of baggy jeans for youngsters--introduced last year--generated $100 million in sales in their first 12 months on the market. Also, Lee soon hopes to be among the first to market the latest style favored by youngsters: “dirty jeans” that already look frayed and ripped.

Shearer said VF will make the same effort to bring new styles to Europe to rejuvenate its jeans business there.

That would be a switch for VF, which isn’t known as a provider of cutting-edge fashion, but rather a high-volume manufacturer of proven styles. “They’d rather have someone else identify the new fashions . . . and then follow [with their own brands] at lower prices and good quality,” Pickler said.

Regardless, some analysts said the problem with VF’s Lee brand, at least domestically, is not severe and can be improved.

“I generally subscribe to the world as VF sees it,” said Pickler. The department store weakness “has led to slower demand for the Lee brand and others.”

The fix? Keep pumping out new designs and work with Penney, Sears and the other stores to make Lee’s jeans stand out more in their stores, rather than being buried with rivals “in a sea of blue,” Shearer said.

“We’re not going to wait” for the chains’ traffic to build on their own, he said.

That’s a good strategy, said Esquivel of Morgan Stanley. “Those stores that have a good knack at merchandising do very well with the Lee brand, like, for example, Kohl’s,” a Midwest department store chain, she said.

And VF Chairman Mackey McDonald has hinted that VF also would like to bolster its growth by acquiring a “lifestyle brand” that includes not just apparel but also household items. Polo Ralph Lauren Corp. and Tommy Hilfiger are examples of lifestyle brands, but VF hasn’t identified any particular target.

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Denim’s Decline

The stock of apparel giant VF Corp. has skidded in recent months amid widespread publicity about a “jeans glut” in the U.S. market, and VF’s own disappointing results for this year’s third quarter. But VF says its business generally remains strong.

VF’s market share has grown. . .

1990

Store labels: 3.2%

VF: 17.9%

Levi Strauss: 31.0%

Others: 41.9%

Designer labels: 6.0%

1998

Others: 22.5

VF: 25.1%

Store labels: 24.5%

Designer labels: 11.6%

Levi Strauss: 16.3%

. . .but its stock remains under pressure.

Friday: $30.75

Sources: Tactical Retail Solutions Inc., Bridge News