Timberland Succumbs to Realities as VF Corp Steals a Brand

Includes: TBL, VFC
by: Wall Street Strategies

By Brian Sozzi

We arrive at the office on Monday morning to learn that Timberland (NYSE:TBL) will be acquired by VF Corp. (NYSE:VFC) for $2 billion, or $43.00 p/s, implying a 43% premium to the Friday closing price (takeover price is still slightly below 52-week high). The total enterprise value of $2 billion represents a 9.3x EV/EBITDA multiple against expected FY12 Timberland EBITDA (attractive for a brand of this notoriety and balance sheet condition). To be clear, this is a fantastic deal strategically and valuation wise for VF Corp. (and follows a swift decline in Timberland shares as it missed badly on 1Q11 earnings). Let's see what VRF Corp. is obtaining:

* Sourcing opportunities as Timberland's platform is combined with North Face.
* Opportunities to better position the Timberland brand as a lifestyle brand given VF's expertise in apparel and accessories.
* A company in Timberland with hidden growth drivers that can be exploited into lifestyle platforms (Earthkeepers, Smart wool).
* Potential to drive healthier economics behind Timberland's core yellow boot line (long struggling).
* A brand that has global awareness.

Now the perspective from Timberland. Are we surprised by a transaction on Timberland finally getting done? Yes, as Chairman and CEO Jeff Schwartz (family only owns 4% or so of the company's OS) has a strong passion for Timberland's processes, heritage, and social mission. We think, however, that he realized in a world of material cost of goods inflation, ambitious growth plans in China, not to mention a poor delivery of 1Q11 earnings that hammered the stock, selling the company would be a more appropriate course of action to maximize shareholder value (stock would have likely stayed under pressure medium-term given 1Q11 performance trends).

May 12, 2011 Earnings Note (buy rating reiterated)

"Brutal, and we mean brutal, day for Timberland shareholders on earnings release day. After pitching to shareholders in the prior two quarters that Timberland was on a growth trajectory amid successful product platforms in EarthKeepers and Outdoor Adventure and controlled operating expenses, a $0.24 p/s earnings miss is served up. In our view, Timberland management has now earned itself a credibility problem that will weigh on the stock along with a soft path in the fundamental performance of the business medium-term.

The drilldown on the sources of the earnings shortfall led us to a few areas: (1) expenses to make Timberland a year round brand, in particular advertising, (2) slow movement on price increases to combat raw materials inflation and (3) a disconnect between perception and reality with regards to the economic yellow boot turnaround. All of the negatives aside, however, the stock's swift sell-off opens up a debate as to whether valuation is too compelling to overlook. Applying our new estimates, Timberland shares are trading on a P/E multiple of 13.5x our FY11 estimate of $2.50 p/s. With a sizable chunk of the negative news baked into the cake, we think signs of a fundamental improvement in the business by FY11 and into FY12 will begin to be priced in sooner rather than later."