After Its $2.1 Billion Sale, Everything That's Next for Supreme
This morning, in an industry shifting move, Supreme sold 100 percent of its business to VF Corp — the parent company of The North Face, Vans, Timberland, Eastpak, Napapijri and Dickies — for roughly $2.1 billion. The acquisition follows a long-standing relationship between Supreme and VF Corp, with Supreme being a regular collaborator with multiple of VF Corp-owned brands.
Justifying the industry-changing acquisition, VF Corp explains how Supreme offers a $1 billion global opportunity over time through international and direct-to-consumer expansion, all of which are core pillars of the conglomerate's 2024 strategy. In fiscal year 2022, VF says it expects Supreme to contribute at least $500 million of revenue.
Bigger than Supreme alone, VF's big bet on the skate brand signifies the growing business, and structurally attractive category, streetwear continues to cement itself as. According to projections by VF Corp, the global streetwear market size clocks in around $50 billion, growing double digits at CAGR (compound annual growth rate).
So what's next for streetwear's biggest player now it's no longer fully independent? What's the impact on its collaboration business? How do you scale a business built on scarcity? And will Supreme expand its retail locations and product categories? In a VF Corp earnings call following the company's acquisition of Supreme this morning, its executives Joe Alkire, Steve Rendle, and Scott Roe give us answers.
On Why It Bought Supreme
“We estimate the broader streetwear market to be a roughly $50 billion global opportunity with a low double digit growth profile, driven by a number of attractive secular trends, including casualization, social influence, and creative self-expression to name a few. Supreme sits at the epicenter of this market opportunity as the original and global category leader. The streetwear model is unique, operating with agility across design, development, marketing, and merchandising. Frequent curated drops and a constrained supply philosophy are key elements to driving continuous brand energy and strong consumer engagement. This scarcity, novelty, and strong social influence model supports meaningful pricing power resulting in best-in-class profitability.
We have known Supreme for many, many years, as you can see with our Vans, The North Face and Timberland businesses, we’ve been doing collaborations together since the mid 90s. So this was not a competitive [bidding] process. This was really two businesses coming together and talking about an opportunity and how to unlock value for both sides,” says Steve Rendle, VF Corp’s Chairman, President and CEO.
On Supreme ‘By the Numbers’
“Supreme generated more than $500 million in revenue over the past 12 months, and the brand has more than doubled over the past four years. During this period of explosive growth, the brand's fundamentals have remained intact with exceptional full price sell through. And the business model operates with best in class profitability, with gross margins of over 60 percent and operating margins of over 20 percent. Supreme is almost entirely a direct-to-consumer business with just 12 stores globally, and more than 60 percent of the brand's revenue in digital. Supreme has a strong global presence despite its relatively immature global footprint, with approximately 45 percent of revenue generated outside of the US,” says Scott Roe, VF Corp’s Chief Financial Officer.
On What There’s to Gain from Buying Supreme
“Supreme provides VF with deeper access to attractive consumer segments, which has applications across many of our existing brands. There are clear opportunities for Supreme to leverage VF's strong international platforms and our existing digital and direct-to-consumer capabilities. There are also significant opportunities for Supreme to leverage the VF's scale and expertise to enhance its supply chain capabilities, improve operating efficiencies, explore new categories, and tap into VF's existing consumer insight, data, and analytics capabilities. VF is the ideal steward to honor the authentic heritage of Supreme while leveraging our scale and expertise to accelerate and enable the brand's long-term growth vision,” says Steve Rendle, VF Corp’s Chairman, President and CEO.
On Supreme’s Five Year Growth Plan
“We see a clear path to eight to 10 percent revenue growth for Supreme over the next five years, driven by a large international and direct-to-consumer expansion opportunity. We've been impressed by Supreme's business model resiliency. On a year to date basis, including the impact of COVID related disruption, Supreme's revenue has increased in a mid single digit rate, including more accelerated growth since the launch of the brand's Fall/Winter season. On a full year basis, we expect Supreme to contribute more than $500 million in revenue,” says Scott Roe, VF Corp’s Chief Financial Officer.
On the Actual Purpose of Supreme
“How we look at Supreme and I think how the Supreme leadership thinks of themselves is not as a luxury brand, but rather as an activity-based brand. This brand is anchored in East coast skate culture and certainly taps into all of those streetwear elements of art and music that we see so prevalent in bands. From a price point standpoint, what we've learned as we've gotten to know James [Jebbia] and the management team there, that the center of everything they do is their intense focus on creating authentic, high quality products that are really put to market at a fair price. Their whole point here is to provide accessibility to their young consumers. That doesn't mean that this brand didn't sell high priced items. But the core of their offer are really those core tees, hoodies, and crews that kids are highly sought after,” says Steve Rendle, VF Corp’s Chairman, President and CEO.
On Adding New Product Categories
“The category adjacencies that we talked about here very well could be footwear. And I think the key here as we get to know one another is to really spend the time to learn what are those core categories that Supreme sees value in representing themselves and where can we provide help, but there'll be no rush to really drive to these points. We will take our time to get to know each other, understand what their consumers expectations are and where VF can provide value to further Supreme's success,” says Steve Rendle, VF Corp’s Chairman, President and CEO.
On Growing a Business Built On Scarcity
“The opportunity looking at the addressable market gives us a lot of confidence. And also I'd just ask you to remember, there's only 12 stores today, and this brand is New York anchored and started there. The U.S. and Japanese markets are reasonably well established, but when you look at the international opportunity, it's really just the beginning. And another interesting data point is, the digital footprint is in general two times the brick-and-mortar footprint. So as the brand decides what makes sense next, and there's a whole lot of white space out there, this formula of going into a market, developing where the Supreme followers and lovers exists, developing that community, and ultimately then opening up a brick and mortar store, which is the ultimate expression of the brand in conjunction with that strong online presence. So we've talked about a [growing to] a billion dollars. I think that's pretty easy math, if you think about the opportunity for geographic and international expansion,” says Scott Roe, VF Corp’s Chief Financial Officer.
On What It Means for the Supreme Shopper
“We’ve spoken with James [Jebbia] and the team, and there are a lot of powerful platforms within VF that are interesting to that management team that we think may allow them to serve that consumer in a more efficient and effective way. Things like our international capabilities. The platform, think about the backend of the plumbing as I like to call it, our supply chain and just scale and efficiency. Some of the things we do around real estate and direct-to-consumer. There are certainly opportunities that we think will make sense over time, but only when the brand is ready and when it makes sense for their consumer will we pull those levers,” says Scott Roe, VF Corp’s Chief Financial Officer.
On Supreme’s Impressive Sell-Through
“An interesting proof point is the incredible sell-through that this brand has seen over a long period of time. We talked about mid to high 90 percent kind of sell through, which is just amazing, and really a testament to how well they've managed the merchandising of the brand. You look at the overall returns of the business are pretty, we would say, best in class,” says Scott Roe, VF Corp’s Chief Financial Officer.
On Supreme’s COVID Agility
“[During COVID] We've seen high single digit growth on a year to day basis. The brand's over $500 million today, growing high single digits like 9 percent, I think year to date. And when you look at the acceleration, even of that growth in the current season that they're in today, the resiliency during a COVID environment and their ability to find their consumers, wherever they're able to transact, whether when stores shut their e-commerce business is robust and they've been able to adapt to that. It's just quite honestly pretty impressive,” says Scott Roe, VF Corp’s Chief Financial Officer.
On Supreme’s Next Stores
“[Supreme’s] digital business is more than 60 percent of the total revenue today, and a big part of the growth going forward. With 12 brick and mortar stores that are very efficient, the opportunity to continue to add stores is absolutely there, if you think about geographic expansion. That coupled with a really strong omni channel capability and a digital footprint, that's two times what they see in brick and mortar. If you think about continuing to expand, whether it be in existing markets or even new markets from a brick-and-mortar standpoint, and then couple that with a really strong digital presence, that's how you get that growth algorithm on a go-forward basis.
Then the advertising creation strategy that Supreme uses today is really anchored in just really strong, relevant content. They are experts at using the different social digital channels to push that story out on a weekly basis. But the stores are the most authentic representation of the brand and in those markets where that brick-and-mortar presence sits is a very powerful tool for really engaging and pulling that community together within their four walls. I think how we would support that going forward is if there are things that we can use or help them tap into from a consumer, data analytics capability to help gain deeper understanding, to make even richer content, those are the things that we'll spend time to learn and understand and make available,” says Scott Roe, VF Corp’s Chief Financial Officer.
On the Acquisition’s Impact on Collaborations
“The collaboration question is an important one. This is a highly well-run business. The management team has a very clear strategy that we will support and enable. The collaborations are an important part of their model, but this is their decision to drive and ours absolutely to support. I would hope, and I think this is true, that the market understands how VF works with our branded portfolio. We do not dictate what our businesses do. We really work to support and enable the strategies that each business has in place. I think this will be very true for Supreme going forward. Their collaborations are beyond apparel and footwear. I think you know well that they work with a broad cross section of different sectors and different businesses to enhance their model. We have no intention of changing that,” says Steve Rendle, VF Corp’s Chairman, President and CEO.
On Supreme Entering China
“There are things that we can do to help [Supreme] move more quickly and more efficiently in order to service that consumer. China is an important opportunity. I think Supreme, while it started in New York, had very early penetration into the Japanese market. I think we know that there's strong demand in the Asia portion of the world. Being able to work with our teams to understand that greater China marketplace, what is the best way to engage with consumers there, and being able to share those learnings back with the Supreme team, but ultimately enabling them to make the decisions that drive their day-to-day business. We are not coming in to make changes,” says Steve Rendle, VF Corp’s Chairman, President and CEO.
On Speeding Up Supreme’s Growth
“I would say ‘could we’ and ‘should we’ are different answers. Again, we're not pushing this team to go faster. I mean, could they go faster? Sure. I mean they could, but what we've been impressed with is the measured growth and I would say the long-term sustainable growth that comes with going into a region and really curating and developing the loyal followers and building upon that in a very careful way. Having said that, over time, I see no reason why it can't exceed the billion dollars, but that's in the future. Let's get the first billion first,” says Scott Roe, VF Corp’s Chief Financial Officer.
On Supreme’s Position In the Resale Market
“So the resale market is a great validation of the strength of this brand, but it is not part of the Supreme go to market strategy. It's not one that they see as relevant. And it's not something that they envision tapping into at all. But I think that the key thing here, it is a great validation to be prevalent there, to sell at such strong price points, just really it's a great validation of the strength of this business and of the brand,” says Scott Roe, VF Corp’s Chief Financial Officer.
