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VF Corporation: Is no longer a dividend king; are the stocks now on sale?

Opdateret: 21. maj

VF Corporation had just achieved the status of a dividend king by increasing their dividends for 50 consecutive years. However, VF Corporation's status as a dividend king was short-lived, as the company found it necessary to reduce its dividends by 70%. Investors typically do not appreciate when a company reduces dividends, and this is often reflected in the share price. Does this mean that VF Corporation is now trading at a discount?

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in VF Corporation. However, I previously owned shares in the company, which I sold in the spring of 2021. I do own shares in one of the competitors, Crocs, which account for 3,68% of my portfolio. If you are interested in viewing the stocks in my portfolio or copying my portfolio, you can do so on eToro. Instructions on how to do that can be found here. If you are interested in buying shares or fractional shares of VF Corporation, you can do so through eToro. eToro is an extremely user-friendly platform that enables you to begin your investment journey with as little as $50.

VF Corporation was founded in 1899 in Denver, Colorado. It is one of the largest apparel, footwear, and accessories companies in the world. The company operates in three different segments: Outdoor (49% of revenue), Active (42% of revenue), and Work (9% of revenue). The company owns the following 13 brands: The North Face, Timberland, Icebreaker, Smartwool, and Altra in the outdoor segment; Vans, Supreme, Eastpak, JanSport, Kipling, and Napapijri in the active segment; and Timberland Pro and Dickies in the work segment. Their products are sold through wholesale (55% of revenue) and directly to consumers (45% of revenue), either through their own 1.265 stores or via e-commerce. VF Corporation sells most of its products in the Americas (60%), followed by EMEA (25%) and Asia-Pacific (15%). I believe that their well-established brands are what give the company a brand moat. Management seems to agree, as they have stated the following in an annual report: "Many of VF's brands have long histories and enjoy strong recognition within their respective consumer segments." Management believes that VF Corporation's diverse portfolio meets consumer needs across a wide range of activities and lifestyles. And their capacity to engage with consumers creates a distinctive platform for sustainable, long-term growth. It is also worth noting that VF Corporation spun off its jeans and outlet stores in 2018. This spin-off created the company Kontoor Brands, which also trades on the stock exchange.

Their CEO is Bracken Darrell. He joined VF Corporation in July 2023 as the CEO. He has extensive experience in various positions at major companies such as PepsiCo, General Electric, Procter & Gamble, Whirlpool, and Logitech. He holds a B.A. in English from Hendrix College in Arkansas and an M.B.A. from Harvard Business School. Bracken Darrell was appointed CEO because of his previous experience in turning around businesses facing declining sales, reduced profits, high costs, and ineffective innovation and marketing. He successfully led transformations at Old Spice (at Procter & Gamble) and Logitech. By the time he left, Old Spice had more than tripled its market share, and today it is a market-share leader in the category. His last turnaround, Logitech, is now worth more than 10 times what it was when he started 11 years ago. He is known for being a "people's CEO" who spends time with his employees, listens to their point of view, and has been named Swiss CEO of the year three times in the last five years. At Logitech, he achieved a high CEO score on Comparably, placing him in the top 5% compared to CEOs in similarly sized companies. After five years at Logitech, he made the decision to conduct a self-evaluation by imagining that he was firing himself and then assessing whether he would rehire himself. It wasn't a gimmick, but an exercise to determine if he was the right man for the job. While Bracken Darrell is still new as CEO at VF Corporation, he has an impressive track record, and I believe he is the right person for the job. Therefore, I am comfortable with him leading VF Corporation moving forward.

I believe that VF Corporation has a moat, and I feel confident with the management. Now, let us analyze the numbers to determine if VF Corporation meets our criteria for possessing a strong competitive advantage. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first metric we will examine is the return on invested capital, also known as ROIC. We require a 10-year history, with all figures exceeding 10% for each year. VF Corporation has historically achieved an acceptable Return on Invested Capital (ROIC), but it has been underwhelming in two out of the last three years. I would like to see some improvements in the future. Fortunately, management is prioritizing ROIC and has stated that they will make progress towards their top financial priority of reducing debt and leverage through these actions, as well as through the reduction in dividends, setting the stage for a return to growth and increased ROIC. Hopefully, we will see an increase in ROIC moving forward.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The numbers fluctuate over the ten-year period. There was a significant decrease in 2018 due to the spin-off, and another decline during the pandemic in 2020 and 2021. It is encouraging to see that VF Corporation was able to increase its equity once again in 2022. However, it is unfortunate that it dropped to its lowest level in the past ten years in fiscal year 2023, which has been a challenging year for most companies. As with ROIC, I would like to see VF Corporation increase its equity moving forward.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. First, it is worth noting that we do not have the numbers from 2018 due to the previously mentioned spinoff. VF Corporation consistently generated positive free cash flow until 2023, which appears to be a challenging year for the company. However, management has indicated that they expect free cash flow to reach $600 million in fiscal 2024, which would be the highest amount since fiscal year 2021. The free cash flow and levered free cash flow margin have been quite volatile since 2018. I would prefer to see numbers similar to those in 2019 and 2021, rather than those in 2020 and 2022, in the future. However, it is not expected that the fiscal year 2024 will be impressive.

Another important aspect to investigate is the level of debt, and we aim to determine whether a business has a manageable debt that can be repaid within 3 years. This is achieved by dividing the total long-term debt by earnings. When calculating VF Corporation's financials, it appears that the debt can be paid off in 48,16 years! Thus, it is much larger than I would like to see. However, one reason for the high numbers is that VF Corporation reported low figures in fiscal year 2023. For instance, if we based the calculations on the fiscal year 2022 numbers, the debt would be paid off in 3,31 years. Nonetheless, the debt is too high, and fortunately, management has emphasized that paying off the debt is a priority for them.

As with all other companies, there are certain risks that you need to consider if you are considering investing in VF Corporation. Economic downturn. The success of VF Corporation's business depends on consumer spending on apparel and footwear. There are several factors that influence consumer spending, including actual and perceived economic conditions, disposable consumer income, interest rates, consumer credit availability, inflationary pressures, recessions or economic slowdowns, unemployment, energy prices, and geopolitical instability. Decreased consumer spending could result in reduced demand for VF Corporation's products, leading VF Corporation to offer higher discounts that may affect profitability. Thus, if global economic and financial market conditions do not improve, it could have a significant negative impact on VF Corporation. Competition. VF Corporation operates in a highly competitive market, as both the footwear and apparel industries are highly competitive. This implies that VF Corporation will need to consistently meet consumer preferences and product trends, while also being able to adapt to constantly changing markets. In its annual report, VF Corporation acknowledges that some of its competitors are larger and have more resources. This underscores the need for VF Corporation to remain competitive in order to avoid losing market share, a challenge the company has recently faced. This is evident in the declining sales performance of Vans over the last few quarters. Margins are shrinking. In the previous fiscal year, VF Corporation reported some disappointing profit margins. The gross profit margin decreased from 54,5% in fiscal year 2022 to 52,5% in fiscal year 2023. The operating margin decreased from 14,2% in fiscal year 2022 to 9,0% in fiscal year 2023. One reason for the decrease in margins is the decline in direct-to-consumer revenue, which dropped to 45% of total revenue in fiscal year 2023 from 46% in fiscal year 2022. Direct-to-consumer sales generate higher profit margins compared to wholesale sales.

While there are risks, there are also opportunities for VF Corporation to move forward. The company has strategic areas that are expected to drive long-term growth. Optimizing their portfolio. In the past five years, VF Corporation has reduced its number of brands from 32 to 13. These brands have been selected because they are firmly established in segments experiencing significant consumer demand. With a reduced number of brands in the portfolio, VF Corporation believes that it can capitalize on brand-building and operational strengths to create synergies and operational efficiencies. If management succeeds in doing so, it should make VF Corporation more profitable moving forward. International expansion. VF Corporation has previously stated that they perceive long-term growth opportunities in the Asia Pacific region. The company aims to enhance its emerging channels, upgrade store formats, and optimize its omnichannel integration to better serve its customers in that area. Furthermore, revenue is growing in the EMEA region, where VF Corporation has just achieved its first $1 billion quarter in the company's history. The Reinvent Plan. VF Corporation has just introduced its reinvent plan, which addresses fundamental structural challenges that have impacted its performance. One part of the reinvention plan is to enhance their cost structure, with an expected $300 million in fixed cost reductions. Some of these cost savings will be reinvested in brand building and product innovations, which should enhance VF Corporation's future performance. VF Corporation will also use some of the cost savings to pay off debt. Therefore, the reinvention plan should lead to cost savings, which will enhance margins and profitability. Additionally, it should involve reinvesting in brand building and product innovation to drive higher sales, while also reducing debt.

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I have chosen to use an EPS of 1,7. The EPS was 0,63 in Q2 of fiscal year 2023, and it was -0,15 in Q1. Based on this, I expect it to be around 1,7 in fiscal year 2024. Additionally, I have selected a projected future EPS growth rate of 6,6%, which is the consensus among analysts. Additionally, I have selected a projected future P/E ratio of 13,2, which is twice the growth rate. This decision is based on VF Corporation's historically higher P/E ratio. Finally, our minimum acceptable rate of return is already established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $10,51. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy VF Corporation at a price of $5,26 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was -134, and capital expenditures were 266. I attempted to analyze their annual report in order to calculate the proportion of capital expenditures designated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 186 in our calculations. The tax provision was 697. We have 388,884 outstanding shares. Hence, the calculation will be as follows: (-134 – 186 + 697) / 388,884 x 10 = $9,69 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With VF Corporation's expected free cash flow at $600, the free cash flow per share will be around $1,54 a growth rate of 6,6%. If you aim to recoup your investment in 8 years, the Payback Time price is $16,60.

VF Corporation is an intriguing company that has been in business for 123 years, and I believe they have recently appointed the right person to be CEO. However, VF Corporation has recently encountered some challenges, leading to poor results that have necessitated a dividend cut and the loss of their status as a dividend king. If we experience a prolonged economic downturn, it will have a lasting negative impact on VF Corporation. Furthermore, when VF Corporation is operating in a highly competitive market, it is concerning that they haven't managed to innovate Vans, which has performed poorly for several quarters. It is also concerning that margins have decreased, as this negatively impacts profitability. However, I believe it is a good idea that VF Corporation has optimized its portfolio, and management has mentioned that we may see further optimization. It is also encouraging that international sales are still strong, and VF Corporation is increasing sales in both the EMEA and APAC regions. If VF Corporation succeeds with their Reinvent Plan, it could become the next turnaround story for the new CEO, Bracken Darrell. Nonetheless, I will need to see some improvement before considering investing in VF Corporation. Therefore, I will not be investing in VF Corporation at this time.

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I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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