VFC - V.F. Corp.: It's Finally Time To Load The Truck (Rating Upgrade)

2023-12-03 08:30:00 ET

Summary

• V.F. Corporation shocked investors as it withdrew its FY24 outlook while staging a business transformation under new CEO Bracken Darrell.
• Despite significant uncertainties, VFC saw a sharp capitulation selloff that likely reached peak pessimism. As a result, dip-buyers were assessed to have bought aggressively as weak holders fled.
• I assessed VFC's ability to sustain a long-term recovery, which will depend on its ability to capitalize on its superior brand moat as it engineers its transformation plans.
• VFC's attractive valuation and more robust buying sentiments suggest investors have looked past its challenges, expecting its adjusted EPS to inflect into growth in FY25.
• I argue why VFC's capitulation is constructive, suggesting investors remain early in buying into its recovery, leading to potentially substantial gains.

In my previous update in mid-October, I urged V.F. Corporation ( VFC ) investors to be wary about catching the falling knife. It proved timely, as VFC stunned its holders as it pulled its FY24 outlook while working on its Reinvent business transformation under new CEO Bracken Darrell.

Accordingly, I believe investors who needed/wanted to sell likely fled VFC post-Q3 earnings, as VFC fell toward a low of $12.85 before bottoming out. However, that was assessed to be a capitulation selloff, leading to peak pessimism in VFC. As a result, the opportunity to turn more constructive on VFC has arrived, notwithstanding the significant uncertainties, as the leading retailer executes its business transformation.

I highlighted previously that VFC's buying sentiments weren't constructive. Therefore, the recent developments have excited me, as VFC's material undervaluation could significantly boost buying sentiments as dip-buyers bought aggressively into VFC's peak pessimism in early November 2023.

VFC Bears could point out that the company has yet to engineer a successful turnaround, as the leading Vans business posted a disappointing quarter. North Face's 19% revenue growth helped to mitigate the disappointment in Vans. However, the company decided to move on with a new Vans business leader as Vans Global Brand President Kevin Beiley stepped down. As a result, Darrell has taken on a "more active role in leading the brand during this transition" as VFC undertakes an external search to fill the critical position. As a result, I believe the CEO's decision to channel his focus on Vans' transition during this period has been received favorably by investors.

Notably, the company is expected to achieve about $300M in cost savings, adding to its decision to slash its quarterly dividends by 70% to $0.09, representing a forward yield of about 2.9%. I view the company's decision to cut its dividends as constructive, allowing VFC to lighten its cost base as it moves to improve its operating margins materially with its Reinvent transformation program. In addition, management is also keen to bring its target leverage ratio to 2.5x from the estimated FY24 ratio of about 5x. As a result, I admit that V.F. Corporation remains a work in progress, suggesting investors must have conviction about the company's long-term transformation plans.

More robust buying sentiments seen since VFC bottomed out in early November align with Wall Street's estimates for FY25 and FY26. Accordingly, analysts expect V.F. Corporation's adjusted EPS to bottom out in FY24 at about $1.52 (down 28% YoY) before inflecting back into growth in FY25 at about $1.94.

However, I must highlight that the company's ability to chart a sustained recovery will depend on its ability to capitalize on its superior brand moat, engineering a recovery from VFC's multi-year low. Therefore, while investors are justified to doubt its recovery plans from the current level, I believe its valuation (assigned "B" by Seeking Alpha Quant) and more constructive price action corroborate my early recovery thesis, as the market is forward-looking.

VFC bottomed out in early November as sellers capitulated, attracting dip buyers looking for peak pessimism to return.

I noted that VFC must decisively regain the $16.7 level to sustain my early recovery thesis. That looks to be the case so far, as buyers defended that line remarkably well. As a result, VFC looks well-primed to form a further recovery from the current levels, with the $21 level the next possible consolidation zone.

With VFC about 20% from that zone, and possibly more if it consolidates constructively, I assessed buyers have moved past its significant challenges, giving space for the new CEO to work out the transition plans. Bolstered by an attractive valuation and more robust buying sentiments, it's time for investors to catch the falling knife.

Rating: Upgraded to Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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