2023-07-03 01:22:18 ET
Summary
- VFC has been underperforming over the past nine months due to its inconsistent profitability, impacted revenues, and deteriorating balance sheet.
- Combined with its underperformance compared to its consumer discretionary peers, it is unsurprising that the stock has been sold off.
- Then again, VFC's dividends remain speculatively safe, thanks to the management's FY2024 FCF guidance of $900M.
- These depressed levels also offer improved forward dividend yields, though it remains to be seen if they are sufficient to cover the drastic stock losses thus far.
- While we may rate the VFC stock a buy, investors may want to "time the bottom" at $12 (its previous 2008 recession support levels) for an improved margin of safety.
The Bears Seem To Have Taken Over The VFC Investment Thesis
We previously covered V.F. Corp (VFC) with a Buy rating in September 2022. Thanks to the lowered forward guidance and resultant plunge in stock prices, VFC recorded a highly attractive dividend yield of 6.12% at that time.
VFC 9M Stock Prices
Unfortunately, VFC continued to underperform over the past nine months, a stark contrast against the notable recoveries experienced by other consumer discretionary stocks, such as NIKE ( NKE ), adidas ( OTCQX:ADDYY ), and the wider stock market, such as the SPY.
Perhaps much of the pessimism was attributed to VFC's lack of consistent profitability over the past five quarters, despite the stable operating expenses thus far.
On the one hand, the company recorded impacted revenues of $2.73B (-22.6% QoQ/ -3.8% YoY) and gross margins of 49.6% (-5.3 points QoQ/ -2.4 YoY) by the latest quarter, down from the 2019 levels of 55.5%, suggesting lower ASPs from higher promotional events.
This is on top of China's sluggish reopening demand, with the company recording -14% YoY revenue decline in the region for the latest fiscal year, compared to NKE at -4% .
On the other hand, these efforts have also cleared VFC's inventory levels, moderating to $2.29B (-11.5% QoQ/ +62.4% YoY) by the latest quarter, down -16.4% from the peak levels of $2.74B in FQ2'23, though elevated compared to $1.29B in FY2020.
Unfortunately, its balance sheet has also been impacted, with growing long-term debts of $5.69B (+23.4% QoQ/ +24.7% YoY), cash and equivalents of $0.81B (+42.1% QoQ/ -36.2% YoY), and $907M of debts due over the next twelve months.
VFC's growing reliance on debt has also expanded its annualized interest expenses to $211.92M (-2.1% QoQ/ +67.2% YoY), naturally impacting its adj EPS to $0.17 (-84.8% QoQ/ -62.2% YoY) in the latest quarter.
Then again, the management has already guided approximately $900M in FCF generation in FY2024 (+209.6% YoY). Investors must also note that its FY2023 performance was only impacted the $876M payment made to Internal Revenue Service and the $735M of non-cash impairment charge related to the Supreme ® brand.
As a result, we suppose VFC's dividends remain speculatively safe, based on its annualized dividend payout of $703M in the latest fiscal year.
In addition, these macro headwinds have impacted NKE's and ADDYY's performances over the past few quarters, with inventory levels similarly elevated and balance sheet moderately deteriorating, though not nearly as much as VFC's.
Maybe this is why the bears are winning for now.
So, Is VFC Stock A Buy , Sell, or Hold?
VFC 17Y Stock Price
As a result of its underperformance compared to its peers, the VFC has drastically plunged, thanks to the peak recessionary fears and tightened discretionary spending.
While the selloff has been overly done, with the stock now nearing its 2008 support levels, we also believe that there is still massive pessimism embedded in its stock prices, with the bulls seemingly unable to defend thus far.
VFC 10Y P/E Valuations
The same pessimism is also embedded in VFC's valuations, with NTM P/E of 9.13x, against its 1Y mean of 12.07x, 5Y mean of 23.27x, and its 3Y pre-pandemic mean of 22.13x.
With the management's FY2024 guidance still suggesting an impacted profitability at EPS of $2.15 at the midpoint (inline YoY), thanks to the elevated interest rate environment and rising inflationary pressure, it is unsurprising that we are uncertain about the stock's prospects in the near term.
Then again, VFC now offers improved forward dividend yields of 6.25%, against its 4Y average of 3.77% and sector median of 2.38%, allowing income investors to capitalize on these depressed levels.
Nonetheless, with the stock also losing -78.6% of its value since the May 2021 peak and -77.4% since the 2019 averages, it is uncertain if the decent dividends are able to cover the losses thus far.
Therefore, while we may rate VFC as a Buy for new income investors, the portfolio must also be sized appropriately, since we do not see a viable bottom yet. The correction is showing no signs of abating as well, with the stock potentially retesting the 2008 recession bottom of $12 ahead.
Long-term shareholders may also consider dollar cost averaging at $12 for an expanded upside potential to our price target of $25.83, based on its NTM P/E of 9.13x and the market analysts' FY2026 EPS projection of $2.83. It may be prudent to "time the bottom" for an improved margin of safety.
For further details see:
V.F. Corp.: No Bottom Visible, Speculative Dividend Play