By Uday Sampath Kumar
(Reuters) - VF Corp (N:VFC), one of the world's biggest apparel makers, will spin off Lee and Wrangler jeans into a separate public company, it said on Monday, allowing it to focus on its more profitable Vans sneakers and The North Face outerwear businesses.
Denims were responsible for more than half of VF's overall profit in 2000, but have since been outpaced by skateboarder favorite Vans, which has driven much of VF's recent growth.
The spin-off, expected to be completed in the first half of 2019, will also give VF more flexibility to pursue acquisitions and explore new business areas.
However, investors reacted coolly to the news, with VF's shares falling nearly 4 percent to $92.53 on Monday afternoon. The stock has risen roughly 20 percent year to date.
While VF's activity-based outdoor products business saw profit jump 15 percent in the year that ended in March, earnings from jeans slipped nearly 13 percent in the same period, as big outlets including Walmart Inc (N:WMT) turned to their own denim brands.
"(Jeans) has been the weak link in the portfolio," Jane Hali, head of investment research firm Jane Hali & Associates, said via email. "Now they can concentrate on the outdoor coalition and Vans, a much more unified and strong stable of brands."
The new VF, which already sold off apparel brand Nautica last year, will have annual revenue of more than $11 billion, compared to just over $2.5 billion for the jeans unit, which includes Wrangler, Lee, Rustler and Rock & Republic.
The jeans company will focus on maintaining shareholders' dividends, cutting debt and increasing sales in China and other Asian markets. Acquisitions of smaller firms are a longer-term possibility, VF said.
However, the new spun-off retailer could face headwinds related to changing tastes - with some consumers souring on jeans - and U.S. negotiations on the North American Free Trade Agreement, said Ed Gribbin, U.S.-based CEO of apparel business and product development consulting firm Alvanon.
"If NAFTA were to go away, that would be a significant challenge for them in the denim business," Gribbin said. The jeans division is heavily invested in Mexico.
VF will shift base to Denver while the still-to-be-named jeans maker will move to the company's traditional base in Greensboro, North Carolina and be led by Scott Baxter, currently president of VF's Americas West group.
Baxter led VF's jeans business from 2011 to 2015.
VF, which has a market value of about $38 billion, projected a 5-cent hit to current-quarter earnings per share due to the deal.
VF had considered "all options" for the jeans business including an outright sale, but decided that a spin-off would serve shareholders best, executives said on a conference call with analysts.