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?
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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 $100.
The Business
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 12 brands: The North Face, Timberland, Icebreaker, Smartwool, and Altra in the outdoor segment; Vans, Eastpak, JanSport, Kipling, and Napapijri in the active segment; and Timberland Pro and Dickies in the work segment. Their products are sold through wholesale (53% of revenue) and directly to consumers (47% of revenue), either through their own 1.185 stores, their 840 concession retail stores, or via e-commerce. VF Corporation sells most of its products in the Americas (52%), followed by EMEA (33%) 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. 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.
Management
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.
The Numbers
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 three out of the last four years. The numbers were particularly bad in fiscal 2024, where the ROIC was negative. However, it is worth noting that VF Corporation is currently in a turnaround phase, which has affected the numbers in fiscal 2024. 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. VF Corporation managed to grow its equity again in 2022, but it has since decreased in fiscal 2023, dropping to its lowest level in the past ten years, a year that was challenging for most companies. Unfortunately, the equity dropped further in fiscal year 2024, marking its largest year-over-year drop in the past ten years, which is attributed to the current turnaround phase that VF Corporation is in. Hopefully, we will see equity start growing again in the upcoming years.
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 provide 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 spinoff of Kontoor Brands. VF Corporation consistently generated positive free cash flow until fiscal 2023, which was a challenging year for the company. However, management has focused on cost reductions and inventory reductions, resulting in VF Corporation delivering positive free cash flow in fiscal year 2024. The free cash flow in fiscal 2024 is also the highest the company has delivered since fiscal 2021, which is encouraging. The levered free cash flow margin in fiscal 2024 is not as high as previously but is higher than it was when VF Corporation last delivered a positive free cash flow in fiscal year 2022. The high free cash flow yield indicates that the company is trading at a reasonable valuation, but it is something that we will revisit later in the analysis.
Debt
Another important aspect to investigate is the level of debt, and we aim to determine whether a business has manageable debt that can be repaid within 3 years. This is achieved by dividing the total long-term debt by earnings. VF Corporation delivered negative earnings in fiscal 2024. However, if we use adjusted earnings ($0,74 per share), it appears that VF Corporation has 16,29 years of earnings in debt. This is much higher than the three-year threshold, and personally, I do not like to invest in companies with such high debt levels. However, it should be noted that earnings were lower than usual in fiscal year 2024, and if you make the calculations based on free cash flow instead, VF Corporation would have 5,40 years of free cash flow in debt, which looks better albeit still above the three-year threshold. However, management has mentioned that they are prioritizing paying off debt, and in the Q4 earnings call, CEO Bracken Darrell mentioned that brand sales could be used to pay off debt. Since the earnings call, VF Corporation has sold the Supreme brand to EssilorLuxottica, and I expect that VF Corporation will use some of the $1,5 billion they receive from the Supreme sale to reduce debt.
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Risks
As with all other companies, there are certain risks that you need to consider if you are considering investing in VF Corporation. One significant risk is macroeconomics. 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, reduced orders from customers for their products, order cancellations, lower revenues, higher discounts, increased inventories, and lower gross margins. The uncertain state of the global economy continues to impact businesses around the world. If global economic and financial market conditions do not improve, adverse economic trends or other factors could negatively impact the level of consumer spending, which could have a material adverse 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. Some of VF Corporation's competitors are larger and have more resources than VF Corporation, but they are also competing directly with the private label brands of some of its wholesale customers. VF Corporation's ability to compete is also dependent on its ability to reach consumers effectively and efficiently in an evolving media landscape, including digital, which is subject to evolving and increasingly restrictive privacy requirements. Furthermore, there are significant shifts underway in the wholesale and retail (e-commerce and retail store) channels, which have been accelerated because of the COVID-19 pandemic, and VF Corporation will need to adjust to these changes as well.
Reliance on third-party suppliers. VF Corporation uses third-party suppliers and manufacturing facilities, primarily in Asia, for its products, which poses risks to VF Corporation’s business operations. Although no single supplier and no one country is critical to VF Corporation’s production needs, losing a supplier could result in an interruption of finished goods shipments to VF Corporation, cancellation of orders by customers, and termination of relationships. This, along with potential damage to VF Corporation's reputation, could have a material adverse effect on VF Corporation’s revenues and, consequently, its results of operations. Additionally, most of VF Corporation's third-party suppliers are located in Asia. With the rapid development of Asian economies, the cost of labor has increased and may continue to rise in the future. This could potentially negatively impact profit margins, as the products will become more expensive for VF Corporation, and they may not be able to pass these additional costs onto its products.
Reasons to invest
While there are risks, there are also opportunities for VF Corporation to move forward. The company has strategic areas 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 12. 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. The new management has made its first large divestment by selling Supreme to EssilorLuxottica for $1,5 billion in cash. Management stated that the reason for the divestment is that given Supreme's distinct business model and VF Corporation's integrated model, the strategic portfolio review concluded there are limited synergies between Supreme and VF Corporation, making the sale a natural next step. Management also mentioned that while they will always look to adjust the VF Corporation portfolio from time to time, this transaction gives the company increased balance sheet flexibility. Management also believes that this supports their overall program to better position the company for long-term growth and more normalized debt levels. Thus, this was another step to optimize the portfolio, and we may see more steps in the future.
The Reinvent Plan: VF Corporation has introduced its Reinvent Plan, which addresses fundamental structural challenges that have impacted its performance. The management's blueprint for transforming VF Corporation from declining to growing has three key phases: reset, ignite, and accelerate. Reset focuses on resetting the U.S. business, Vans, the cost base, and the balance sheet. Ignite is about elevating how VF Corporation presents itself to customers, with a focus on product, design innovation, merchandising, commercial excellence, and brand building. The reset and ignite phases are occurring in parallel, and together they will set the stage for the third phase, which is accelerating growth once the foundation is solidified. Management is off to a good start with the Reinvent Plan as they are on track to deliver their $300 million cost savings target by the middle of the fiscal year. Some of these cost savings will be reinvested in brand building and product innovations, which are part of the ignite phase. This has allowed VF Corporation to invest in product, design, and merchandising, particularly for the Vans and The North Face brands.
Direct-to-Consumer sales grew from 45% to 47% of VF Corporation's sales from fiscal 2023 to fiscal 2024, with this channel delivering a better performance than the wholesale business. This growth is significant because VF Corporation-operated stores generally provide gross profit margins that are well above other channels such as wholesale. The increase in Direct-to-Consumer sales occurred despite a reduction in the number of stores by 80. Management mentioned that the reason for reducing store numbers is that VF Corporation has not performed as well in its own retail, especially in the Americas, as it could have. Management expects to reduce the number of stores by another 40 in fiscal 2024, which means that approximately 120 underperforming stores will have been closed by the new management in its first two years. As underperforming stores are closed, profit margins should improve in the future.
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Valuation
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 chose to use an EPS of 0,74, which is the adjusted EPS from fiscal year 2024. I have selected a projected future EPS growth rate of 7% (Finbox expects EPS to grow by 6,6%). Additionally, I have chosen a projected future P/E ratio of 14, which is twice the growth rate. This decision is based on the fact that the VF Corporation has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $5,04. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy the VF Corporation at a price of $2,52 (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 an owner of a company (or stock) receives on the purchase price of the company is essentially 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 1.015, and capital expenditures were 211. I attempted to review their annual report to calculate the proportion of capital expenditures allocated 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 148 in our calculations. The tax provision was 735. We have 388,836 outstanding shares. Hence, the calculation will be as follows: (1.015 – 148 + 735) / 388,836 x 10 = $41,20 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 the VF Corporation's free cash flow per share at $2,23 and a growth rate of 7%, if you want to recoup your investment in 8 years, the Payback Time price is $24,48.
Conclusion
VF Corporation is an intriguing company that has been in business for 125 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 necessitated a dividend cut and the loss of their status as a dividend king, as the new management has started its turnaround of the business. The turnaround also means that VF Corporation delivered a negative ROIC in fiscal 2024 but achieved a positive free cash flow. VF Corporation is facing some macroeconomic challenges, which means that sales have been down in the past few years. If these macroeconomic challenges persist for a longer period, they will hurt the business of VF Corporation. Competition is an ongoing risk for VF Corporation as they are operating in a highly competitive sector, where some competitors are larger than VF Corporation, which allows them to better withstand unfavorable economic conditions, compete more effectively on price and production, and more quickly respond to rapidly changing fashion trends and consumer preferences than VF Corporation. VF Corporation does not own its own manufacturing, making them dependent on third-party suppliers. If they lose a supplier, it could result in the interruption of finished goods shipments to VF Corporation, cancellation of orders by customers, and termination of relationships. VF Corporation is optimizing its portfolio and has decided to sell Supreme due to the lack of synergies, which not only allows them to pay off some debt but also allows the company to focus on brands that have synergies, reducing costs. VF Corporation hired a CEO known for turnarounds, and he has introduced the Reinvent Plan. VF Corporation is off to a good start, having found cost reductions that should allow them to invest in its brand and move into the next phases of the Reinvent Plan. Finally, VF Corporation is growing its share of Direct-to-Consumer sales, which have higher profit margins. These profit margins should increase as VF Corporation closes underperforming stores. Nonetheless, I have decided that I will not be investing in VF Corporation at this time, as I believe there are better opportunities elsewhere.
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