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V.F. Corporation Blows Up Investment Thesis. Now What?

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The North Face

AnthonyRosenberg

Introduction

For galore years nan finance thesis for V.F. Corporation (NYSE:VFC) was straightforward and simple. Based connected its 49 twelvemonth grounds of expanding dividends, income investors could count connected gradually rising dividends for a dependable income. Other investors could count connected substantial support from nan dividend to put a level nether nan banal value and hold for superior gains complete clip arsenic nan institution applied its heavy expertise to navigate nan ups and downs of nan apparel sector. Then, connected February 7, nan institution announced a 41% trim successful nan dividend from $2.04 to $1.20 per annum. This was a daze to many, including me, and requires rethinking nan finance thesis from nan crushed up. This article will measure nan finance lawsuit nether nan caller circumstances and look astatine what investors successful VFC tin expect complete nan adjacent respective years.

VFC brands

VFC Investor position 2022

A clip tested winning strategy

One of my astir successful investing strategies complete decades has been buying companies that connection a output adjacent a grounds precocious compared to their output history. The strategy starts pinch companies pinch nan pursuing characteristics:

  • A agelong history of increasing dividends

  • Substantial ongoing business pinch staying power

  • Substantial driblet successful stock value owed to macroeconomic, industry, aliases institution circumstantial conditions.

  • Record output is owed to nan stock value drop

  • Reasonable likelihood that nan institution will flooded adverse conditions, support nan dividend, and return to maturation successful revenue, earnings, and banal price.

The extremity consequence of this strategy is precocious superior gains arsenic nan banal returns to normal levels, and an unusually ample income from dividends arsenic agelong arsenic nan banal is held.

I wrote a bid of SA articles connected nan taxable successful 2017. The recommendations are now dated, of course, but nan mentation down it is arsenic valid arsenic ever and worthy a read. See, for example, Historically High Yields For The Dividend Investor.

The strategy was successful pinch companies for illustration Lowe's (LOW), Target (TGT), and Kroger (KR). Even erstwhile anticipated banal value gains didn't materialize while I was a shareholder, nan outsized yields meant an wide gain, arsenic pinch Cardinal Health (CAH), Tanger (SKT), and Exxon Mobil (XOM). In nary lawsuit did nan mediocre outlook astatine nan clip consequence successful an wide loss.

Adapting nan strategy from nan VFC experience

VFC seemed to beryllium a bully campaigner for this strategy, based connected its output and value history. The 2 times successful nan past erstwhile nan output peaked were followed by important increases successful nan banal price.

VFC value and yield

YCharts

Instead, VFC shows that this strategy doesn't activity if nan output is excessively acold supra nan erstwhile high. An utmost output is simply a awesome of utmost stress. In nan lawsuit of VFC, nan output was acold higher than its erstwhile record. This turned retired to beryllium a motion of unusually precocious stress, and a clip erstwhile nan dividend yet could nary longer beryllium supported. Therefore, nan finance lawsuit for VFC must beryllium recovered elsewhere.

February 7: A very bad quarter

There's only 1 measurement to picture nan Q3 2023 report: bad. Some lowlights:

  • Sales down from a twelvemonth ago.
  • Gross margins down
  • Net margins down
  • Adjusted rate travel of $700 million, down from an already reduced forecast of $900 cardinal 2 months ago.
  • Inventory 100% supra normal
  • Slower business complete nan adjacent mates of quarters
  • $874 cardinal costs to nan IRS from an adverse determination related to nan Timberland acquisition successful 2011.
  • Long word indebtedness double nan level of 3 years ago.
  • $442 cardinal writedown connected nan Supreme acquisition.

There were a mates of positives.

  • There has been a alteration successful leadership, arsenic described successful item below. Second, location were pockets of occurrence including a 7% summation successful North Face sales.
  • Although world income decreased 3%, they accrued 3% successful changeless dollars (before overseas income were converted to US dollars).
  • The EMEA region had a seventh consecutive 4th of accrued gross successful changeless dollars.
  • Supply chains are returning to normal, which intends much meticulous inventory buys and delivery, and not arsenic overmuch costly aerial freight.

Three Months Nine Months
Brand: 2022 2021 % Change % Change (constant currency) 2022 2021 % Change % Change (constant currency)
Vans® 926.9 1060.4 -13% -9% 2825.9 3170.7 -11% -7%
The North Face® 1321.2 1240.3 7% 13% 2753.2 2490.2 11% 17%
Timberland® 595.5 593.4 6% 1389.1 1388.2 --- 7%
Dickies® 177 211.5 -16% -13% 533.7 640.7 -17% -14%
Other Brands 510.1 518.8 -2% 5% 1371 1327.4 3% 11%
VF Revenue 3530.7 3624.4 -3% 3% 8872.9 9017.2 -2% 4%
Region:
Americas 2093.9 2132.7 -2% -1% 5233.1 5241.7
EMEA 983.3 1003.3 -2% 10% 2510.4 2515.9 14%
APAC 453.4 488.3 -7% 4% 1129.3 1259.6 -10% -2%
VF Revenue 3530.7 3624.4 -3% 3% 8872.9 9017.2 -2% 4%
International 1629.3 1676.5 -3% 8% 4132.7 4257.5 -3% 8%
Channel:
DTC 1937.4 1981.5 -2% 3% 4082.6 4247.3 -4% 1%
Wholesale (A) 1593.3 1642.9 -3% 2% 4790.3 4769.9 --- 6%
VF Revenue 3530.7 3624.4 -3% 3% 8872.9 9017.2 -2% 4%

Why was Q3 truthful bad?

The institution attributed overmuch of its difficulties to nan chaotic proviso concatenation of nan past 3 years, which wholly upended nan merchandise cycle. There was a immense mismatch betwixt erstwhile consumers wanted merchandise and erstwhile VFC could present it, and now they person a immense magnitude of inventory astatine nan incorrect portion of nan merchandise cycle. To beryllium fair, everyone successful nan apparel manufacture has reported akin problems, but VFC managed it peculiarly badly. For example, Capri (CPRI), a institution successful SA's VFC adjacent list, precocious reported excess inventory levels of 26%, compared to VFCs 100%. This is particularly galling for a institution that has a agelong grounds of excellence successful proviso concatenation management.

The timing of definite financial events has exacerbated nan situation. The Supreme acquisition whitethorn person been poorly conceived, but being finalized during nan economical disruption of nan pandemic made nan effect worse. In addition, nan $874 cardinal IRS judgement added a cardinal dollar word indebtedness added to nan already precocious debt.

In nan Q3 convention telephone nan institution besides acknowledges subpar execution successful its halfway competencies of marketing, innovation, and customer relationships. This was a “clear nan decks” 4th for VFC. They laid bare nan totality of their business and identified precisely what must beryllium done to move things around.

The financial business and response

This 4th continues trends seen passim 2022. As indicated successful nan Q3 report, nan equilibrium expanse and rate travel are astatine nan constituent of impairing nan company's expertise to run effectively. As a result, they are taking each imaginable measurement to reconstruct financial strength:

  • Cutting nan dividend 41% will prevention astir $330 cardinal annually.
  • Cost cutting passim nan institution will make $225 cardinal annually by extremity of 2024.
  • Asset sales, including sale/leaseback of nan world HQ building, will make astir $100 million
  • Selling disconnected non-core parts of nan company, including JanSport, Eastpack, and Kipling brands.
  • Suspending stock buybacks.

VFC's caller outlook

The immense inventory overhang will return a mates of quarters to resolve, and will wounded income and profits until then. Fortunately, they study that world proviso concatenation nightmare is resolving itself. Although rate effects erstwhile again wounded gross margins for nan quarter, it was reported that during nan 4th currencies yet turned from headwind to tailwind. In addition, nan China marketplace is yet reopening. China was comparatively mini for VFC but a important portion of their early maturation scheme earlier nan pandemic upended it.

The financial steps listed supra will make $200 cardinal successful caller rate and astir $900 cardinal successful savings complete 2 years. This, on pinch amended rate flows, tin beryllium utilized to onslaught nan debt, which stands astatine $4.6 billion. The institution carried $2.1 cardinal successful indebtedness successful 2019.

At nan aforesaid time, nan institution will beryllium re-allocating resources to nan areas pinch nan highest profit potential, meaning flagship brands North Face, Vans, and Timberland. For example, merchandise improvement finance arsenic a percent of gross for Vans, their biggest brand, lags good down nan institution average. This will change. VFC will besides attraction connected nan unrealized imaginable caller acquisition Supreme and different promising brands for illustration Altra.

Although immoderate of nan reasons down VFC's troubles were beyond their control, nan Q3 study acknowledges work for nan subpar capacity nether nan erstwhile management. They spot nan coming arsenic a clip for a thorough institution reset -- a clip to re-establish nan excellence that earned them prominence successful their industry. This reset originates pinch Benno Dorer, nan caller interim CEO, who is discussed successful much item below. Dorer initiated nan reset process when, arsenic lead director, he saw nan request to move beyond nan erstwhile CEO who had presided complete nan caller decline.

The finance lawsuit now

In nan Q3 report, nan institution stated nan volition of reducing nan 4.5x leverage ratio to astir 2.5x, signaling that indebtedness simplification is simply a priority. They besides said that they would see increases successful dividend erstwhile nan payout ratio reached astir 50%, down from nan existent precocious 50's, and anticipated FY2025 arsenic a imaginable clip frame. Seeking Alpha shows 2024 net estimates astatine $2.26. 50% of that is $1.13, still little than nan existent $1.20 dividend. Beyond this, nan institution gave fewer circumstantial financial forecasts, which was a responsible stance to return considering nan circumstances. Given nan galore changes successful finances, operations, and strategy, nan timeline of early financial capacity is excessively unclear. An finance lawsuit based connected financial projections is not applicable astatine this constituent successful time.

Historically, arsenic shown below, VFC's banal value has intimately reflected earnings, and though we don't person bully net estimates past Q4 we tin presume nan banal value will bespeak immoderate net improvement.

VFC value and EPS

YCharts

An appraisal of nan company's early originates pinch nan caller interim president, Benno Dorer. who was nan lead independent head until 2 months ago. Dorer, 58, had antecedently been CEO of Clorox (CLX), different global, diversified, user facing company, from 2014 to 2020. During his tenure Clorox gross roseate 22%, nan dividend roseate 49%, and net per stock roseate 68%. (Admittedly, CLX was a large beneficiary of nan pandemic.) If anyone has nan qualifications to lead VFC backmost to prominence, it's him. Lest nan “interim” title springiness anyone pause, Bob Iger gave a 2 twelvemonth committedness to Disney (DIS) erstwhile he returned location precocious to wide acclaim. Dorer will not springiness up nan reins astatine VFC until he is assured that nan guidance he imparts to nan institution is solidly grounded.

Investors are looking astatine a 2 twelvemonth clip framework earlier improvements successful VFC lead to durable improvements successful nan banal price. The task up is huge: trim monolithic debt, amended rate flow, repair customer relationships, and return to excellence successful nan apparel sector. The first issue, debt, will trim nan resources disposable to reside nan 3rd and fourth. But VFC's brands person enduring value, and VFC has nan imaginable to move their newer brands into large winners. This is not to opportunity nan banal value can't bump upwards earlier 2 years. A azygous very bully 4th connected income would beryllium capable to reverse antagonistic sentiment and nonstop nan banal up, but successful nan agelong tally fundamentals still rule.

One facet connected nan minds of each VFC guidance and observers is nan anticipation of a recession. Leading Economic Indicators, nan output curve, nan unemployment level and each different reliable parameter says we will person a recession sometime this twelvemonth aliases next. A recession would person an adverse effect connected revenues, profits, and banal price, and hold nan company's recovery.

A BUY rating

I springiness VFC a BUY standing nether circumstantial conditions. Investors must beryllium consenting to usage a 2 twelvemonth clip framework for results, and find nan 8.8% from 2 years of dividends an acceptable return successful nan interim. Concerning superior gains, nan existent guardant PE ratio is 13.27, astir half of nan agelong word PE of astir 25. The “E” has been declining, but nan “P” has been dropping faster. If/when nan business returns to erstwhile capacity levels, a return to a 25 PE would mean a summation of astir 50%.

VFC PE ratio

YCharts

Investors must besides judge successful nan company's expertise to return to its agelong word level of business performance. There is grounds that this is achievable, based connected nan company's history, continued maturation successful definite parts of nan business, and nan changes outlined successful nan Q3 convention call.

Summing up

After VF Corporation's dividend cut, nan aged finance thesis for this adjacent Dividend King had to beryllium discarded, and a caller 1 established. VFC is astatine its lowest constituent financially successful galore years, and nan banal value reflects that. A stake connected VFC is simply a stake that existent conditions are impermanent and that nan institution will return to its erstwhile success. If location is truth to nan saying, "be greedy erstwhile others are fearful," past now is nan clip to invest. The champion investing gains tin travel from buying a banal erstwhile nan marketplace is astir pessimistic and shares are beaten down.

The imaginable for a rebound successful nan institution and nan banal is there, but investors must person patience. VFC tin commencement coming returning to excellence successful marketing, innovation, and efficiency, but nan indebtedness business is terrible and will return a mates of years to repair. The institution reports that it will beryllium astatine slightest 2 years earlier nan bottommost statement improves capable to see an summation successful nan dividend. VFC is due for investors who tin hold and judge that nan institution tin return to it's agelong word grounds of success.

This article was written by

Ted Waller floor plan picture

Ted Waller is simply a backstage investor who bought his first banal astatine property 13 (GTE) and has complete 50 years of investing experience. His attraction is connected heavy worth and debased risk. Acquiring wealthiness is simply a slow incremental process that requires mounting goals, adherence to principles, patience, and flexibility.

Disclosure: I/we person a beneficial agelong position successful nan shares of VFC either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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