VFC - V.F. Corporation Is A Show-Me Story

2023-12-06 02:54:31 ET

Summary

• Vans brand sales continue to decline, leading to V.F. Corporation retracting its full-year guidance.
• New CEO Bracken Darrell will look to turn the Vans and Timberland brands around, but he lacks apparel brand experience.
• VFC's struggles with Vans and Timberland, its high leverage, and its high multiple make the stock a show-me story.

Back in September , I wrote that I was neutral on V.F. Corporation ( VFC ), saying that it could be a turnaround play if new CEO Bracken Darrell could fix the Vans brand, but that the stock was carrying a high valuation compared to peers. The stock is down about -5% since then after a recent rally, while the S&P is up about 2%.

Company Profile

As a refresher, VFC is an apparel and footwear company that owns a variety of brands including Vans, The North Face, and Timberland, among others. The company's largest brand is action sports brand Vans, which accounted for approximately 32% of its FY23 sales, followed by winter apparel and footwear brand The North Face at 31%. Hiking boot and outdoor apparel brand Timberland is its third largest brand at about 15% of sales.

The company sells its products through both the DTC (direct-to-consumer) channel, as well as through the wholesale channel. Internationally it sells through licensees, agents, and distributors, as well as direct.

Fiscal Q1 Results and Vans Turnaround Plan

In my original write-up, I noted that the Vans brand had been struggling, with sales down -12%, or -8% in constant currencies, in FY23, and then plunging -22% (also -22% ex-FX), in fiscal Q1.

Things did not get any better for the brand when the company reported fiscal Q2 results at the end of October , as Vans sales sank -21%, or -23% in constant currencies, to $748.8 million. The company said slow Vans sell-through put pressure on wholesale across all regions, while traffic was poor in its DTC channels. The company said newer silhouettes are selling well, but classic styles' sales have been on the decline. The company also said that things were not getting better for Vans, and as such it retracted its previous full-year guidance. It noted the biggest issue for Vans is in the U.S. and that it is looking for a new president for the brand.

Discussing Vans on its FQ2 earnings call , CEO Bracken Darrell said:

A second step we're taking is to sharpen brand presence focused on sustainable long-term growth and brand health. A direct consequence and intent of the operating model change, which is particularly critical at this stage for all the brands, but especially Vans, is that the new structure enables brand presence to focus on what matters most, getting closer to the customer and creating consistent pipeline -- a consistent pipeline of amazing products and creating excitement around our brands. If you think about it, we really do 2 things for the world: we create products that people choose to wear, and we build brands, which operate like clubs that consumers want to be part of. Those 2 things are so critical to the success of any brand in our business, and that is where our brand presence will focus. Three, we'll be making a change in brand presence at Vans. Trends today for Vans aren't getting any better, and in fact, could even be viewed as getting worse. We will not see a turnaround this year. The good news is that the brand continues to be loved by so many consumers. There are many good steps that we've made, but we now have to make some changes and move faster."

As part of VFC's overall turnaround plan, the company will also change its corporate structure and create a global commercial organization led by recently promoted Martino Scabbia Guerrini, who will become the company's first Chief Commercial Officer. Guerrini had been running VFC's European operations. The company will also look to reduce its cost structure by $300 million and to take down debt and leverage. It also announced a dividend cut and said it would not make any acquisitions until its debt was reduced. The quarterly dividend was cut by -70% to 9 cents.

Outside of Vans' issues, the company's The North Face brand has continued to perform well, with FQ2 sales up 19%, or 17% in constant currencies, to $1.13 billion.

Timberland sales dropped -7%, or -10% ex-FX, to $488.6 million, while Dickies sales fell -8%, or -9% ex-FX, to $171.4 million. Other brands saw their revenue rise 6%, or 4% in constant currencies, to $496.6 million.

Overall revenue fell -2%, or -4% ex-FX, to $3.03 billion, just ahead of the $3.00 billion consensus. DTC revenue was down -3%, or -5% ex-FX, but up 10% excluding Vans to $1.11 billion. Wholesale revenue fell -1%, of -3% ex-FX, to $1.92 billion.

American revenue fell -11% to $1.57 billion, while International revenue rose 10%, or 5% in constant currencies, to $1.66 billion.

Adjusted gross margin was 51.3%, down -20 basis points.

Adjust EPS came in at 63 cents, missing the consensus by 2 cents.

Turning to the balance sheet, VFC ended the quarter with $6.7 billion in debt and $498.9 million in cash and equivalents. Inventories were down -10% year over year to $2.48 billion.

Looking ahead, the company removed its prior sales and profit outlook. Meanwhile, it now expects a free cash flow of $600 million for FY24, down from a prior outlook of $900 million.

VFC has a large problem with its Vans brand, which hasn't shown any signs of getting better. While new CEO Bracken Darrell has a history of helping turn companies around, that has been in the tech space with Logitech ( LOGI ). He does not have an apparel brand background, so it is still very much in the air whether he is the right person for the job. A lot of former tech execs who have moved into other consumer-facing industries have failed. It's early, but he's not off to a good start.

Meanwhile, VFC's problems are extending beyond Vans as well. Timberland is also struggling, especially in the U.S. And while The North Face has been strong, that is largely due to its international performance.

Leverage and debt are also becoming an issue, as it looks just it will end its fiscal year with leverage around 5x. That's not ideal for an apparel brand will weak sales.

On the positive front, gross margins have held up well, and its inventory looks like it is in decent shape.

Valuation

VFC currently trades around 11.7x the FY 2024 (ending January) consensus EBITDA of $1.18 billion and 10.1x the FY25 consensus of $1.37 billion. Historically, the stock has often settled into a 12-15x trailing EV/EBITDA multiple.

It trades at a forward PE of 11.0x the FY24 consensus of $1.52. and 8.6x the FY2025 consensus of $1.94.

VFC is projected to grow revenue between 4% and 5% over the next several years.

Outside of Nike ( NKE ) and Deckers ( DECK ), VFC trades at one of the higher valuations among peers.

Given its struggles and high leverage, I'd value the company between 7x and 10x FY25 EBITDA, which would place the stock between $6.50 and $16.50.

Conclusion

VFC has a lot to prove at this point in its turnaround, which will take a while if it does happen. Activists have circled the company, but this won't be a quick and easy fix and its new CEO does not have apparel brand experience. Vans is faltering and Timberland and Dickies have also struggled. It also spent $2.1 billion on its Supreme Brand a few years ago, and while that brand had a solid quarter, it greatly overpaid for the brand and helped lead to its leverage issues.

At this point, VFC is a highly leveraged show-me story trading at one of the higher multiples in the space. If Vans can regain its popularity from a few years ago and the company deleverages, it has some nice upside potential, but there is also a lot of downside given its multiple and current struggles. A potential consumer pullback next year would only add to its woes.

For further details see: