V.F. Corp. (VFC)

July 25, 2018

COMPANY DESCRIPTION

Headquartered in Greensboro, North Carolina, V.F. Corporation (VFC) is among the world’s largest branded apparel companies. Its best known brands include Lee, Wrangler, North Face, Timberland and Vans. V.F. Corporation sells its products through department, specialty and chain stores globally, as well as through its e-commerce site and company-owned stores.  Direct-to-consumer sales (e-commerce and company-owned stores) represent a quarter of revenue.

INVESTMENT THESIS

Our BUY-rating reflects VF’s consistently strong results, businesses that are well-managed and prospects for continued acceleration at Vans, which we think is well positioned heading into the Back-to-School season. In addition, an improving economy should benefit sales of the Company’s jeans and work apparel (Dickie’s), which appeal to low-income consumers.  In our opinion, the current valuation inadequately reflects these positive factors.

RECENT DEVELOPMENTS

On July 20, VF Corporation reported adjusted first-quarter results for fiscal year 2019. Earnings per share were $0.43, up from $0.27 a year earlier and a dime above consensus. Strong revenue and higher margins led to the earnings beat. Revenue increased 23% to $2.8 billion (21% in constant dollars), driven by improvement in the outdoor and action sports segment, which features shoes and apparel from Vans (up 32% in constant dollars) and North Face (up 5% in constant currency). Revenue was helped by strength in the company’s international and direct-to-consumer businesses (includes online sales). Digital revenue increased 54% (up 50% in constant dollars). The consensus estimate had called for revenue of $2.7 billion. SG&A grew 21% to $1.1 billion; however, management was able to leverage selling expenses and increase revenue 23% during the quarter. Gross margin rose 90 basis points, driven by direct-to-consumer sales, which sport higher margins. The adjusted operating margin increased year over year from 7.0% to 9.0%.

EARNINGS & GROWTH ANALYSIS

In the press release, V.F. Corporation increased its revenue and earnings projections. The Company now forecasts revenue of $13.6-$13.7 billion, up from $13.45-$13.55 billion previously. Earnings per share are projected to grow 12%-14% to $3.52-$3.57 per share, up from $3.48-$3.53 previously.

As for margins, the gross margin is projected to be around 51%, driven by a 70 basis-point increase in the operating margin to 13.4%, up from a prior 13.2%. Our FY19 and FY20 estimates are $3.65 and $4.01, respectively.

RISKS

Risks include warmer-than-normal winter temperatures and style changes, which could negatively impact sales of the company’ best-selling brands.

VALUATION

Our price target of $112 implies a multiple of 30.7 times our FY19 EPS estimate. At recent prices, the shares are not cheap, but we believe VFC’s strong growth prospects, positive momentum at Van’s and ability to invest in its brands warrants a premium valuation. At its current price, our target, if achieved, offers investors the prospect of a 23% return including the dividend.

V.F. Corp. (VFC)
Current Price: $92.40
Target Price: $112
Current Valuation: 25.3 times FY19 EPS
Target Valuation: 30.7 times FY19 EPS