Company Reports

VF has built a portfolio of solid brands in multiple apparel categories. We view the three brands that account for about 80% its sales (Vans, Timberland, and The North Face) as supporting its narrow moat based on a brand intangible asset. VF has struggled greatly over the past few quarters, but we believe it will grow faster than most competitors in the long run and maintain its competitive edge.

Narrow-moat VF’s (December-ended) fiscal 2024 third-quarter results were woeful as its four largest brands suffered double-digit percentage sales declines. That said, we see reason for optimism as CEO Bracken Darrell, on the job for six months, is aggressively transforming every part of the business through his Reinvent plan. While we expect to reduce our $57 fair value estimate by a mid-single-digit percentage, we have confidence in Darrell’s plan and view shares, down 7% in postmarket trading on Feb. 6, as attractive. Still, we intend to adjust our Morningstar Uncertainty Rating to Very High from High based on VF’s severe downturn over the past few quarters and our quantitative model.

VF has built a portfolio of solid brands in multiple apparel categories. We view the three brands that account for about 80% its sales (Vans, Timberland, and The North Face) as supporting its narrow moat based on a brand intangible asset. VF has struggled over the past year, but we believe it will grow faster than most competitors in the long run and maintain its competitive edge.

Narrow-moat VF’s sales and adjusted earnings in its (September-ended) fiscal 2024 second quarter aligned with our forecast, but these results were overshadowed by a dim near-term outlook and the reveal of a new strategic plan from CEO Bracken Darrell (joined in July). The plan, called Reinvent, includes changes in how VF manages its operations in the Americas, more innovation and a new president at Vans, cost-cuts to bring about $300 million in annual savings, and aggressive debt reduction. Some parts of the plan line up with recent proposals from activist investors (see our Oct. 17 note), so they are likely to be supportive.

On Oct. 17, activist investor Engaged Capital appeared at a conference and released a slideshow on VF, sending its shares up 14%. VF has been an obvious candidate for activist involvement given its disappointing results, its capital allocation choices, the abysmal performance of its shares (down from $100 in 2019 to under $20 today), and its apparent undervaluation. In its presentation, Engaged offers a pathway to a share price of $46 for VF in March 2026 (the end of VF’s fiscal 2027) based on cost cuts, changes in corporate structure, and brand investments. We agree with Engaged’s overall thesis. Our $60 fair value estimate, which we are not revising on this news, is based on our 10-year discounted cash flow model that assumes VF can achieve margin improvement and revitalized sales growth.

VF has built a portfolio of solid brands in multiple apparel categories. We view the three brands that account for about 80% its sales (Vans, Timberland, and The North Face) as supporting its narrow moat based on a brand intangible asset. Despite economic concerns, we believe VF will grow faster than most competitors in the long run and maintain its competitive edge.

Led by The North Face, narrow-moat VF’s results in fiscal 2024’s first quarter were close to our forecast despite a steep 12% drop in its wholesale sales (53% of its total). The firm blamed the decline on cautious ordering amid an uncertain economy, Vans’ merchandising issues, and low demand for workwear. While wholesale orders are not expected to bounce back in the short term, VF did hold its fiscal 2024 EPS guidance range of $2.05-$2.25. As our $2.07 estimate was already near the bottom of this range, we do not expect to make any material change to our $60 per share fair value estimate. We view VF as very undervalued given its potential for sales growth and margin improvement.

VF has built a portfolio of strong brands in multiple apparel categories. We view the three brands that account for about 80% its sales (Vans, Timberland, and The North Face) as supporting its narrow moat based on a brand intangible asset. Despite economic concerns, we believe VF will grow faster than most competitors in the long run and maintain its competitive edge.

Narrow-moat VF announced that Bracken Darrell will join as CEO on July 17. The firm has been without a permanent CEO since December when Steve Rendle was dismissed and replaced on an interim basis by former wide-moat Clorox CEO Benno Dorer. Darrell comes to VF from consumer electronics and software firm Logitech, where he has served as CEO for the past 10 years. He also has management experience at wide-moat Procter & Gamble and Whirlpool. He joins VF at a crucial time after a poor (March-ended) fiscal 2023 in which it repeatedly lowered guidance, cut its dividend, recognized large write-downs related to Supreme, and paid nearly $900 million after losing a tax case (being appealed). Now, in fiscal 2024, VF faces sluggish demand for apparel and footwear while it endeavors to improve its supply chain and fix Vans and Supreme. While Darrell’s history of leading a public company for a decade provides confidence, it is perhaps surprising that VF has chosen a CEO with no experience in the apparel and footwear industry.

VF closed the books on its troubled (March-end) fiscal 2023 with results that largely met our modest expectations. While the firm appears to be making progress on its key turnaround plans, including better supply chain and inventory management, and increasing sales of Vans, the benefits of these efforts may not be apparent until fiscal 2025, especially as it still lacks a permanent CEO. Indeed, initial guidance for fiscal 2024 EPS of $2.05-$2.25 is below our $2.41 estimate. Even so, we continue to believe our medium-term estimates, including annual sales growth of about 6% and operating margins in the low teens, are reasonable, and do not expect to make any material change to our $60 per share fair value estimate. While our valuation may look aggressive with VF’s shares down more than 50% over the past year, we believe its recent problems are fixable, and that the strength of its key brands, the source of our narrow-moat rating on the firm, holds.

Through dispositions and additions, VF has built a portfolio of strong brands in multiple apparel categories. We view the three brands that account for about 80% its sales (Vans, Timberland, and The North Face) as supporting VF's narrow moat based on a brand intangible asset. Despite economic concerns, we believe VF will grow faster than most competitors in the long run and maintain its competitive edge.

VF’s results for its (December-ended) fiscal 2023 third quarter were in line with our forecast, a mildly positive development after guidance cuts and the unexpected retirement of former CEO Steve Rendle two months ago. Moreover, initial 2024 guidance, including “at least” low-single-digit percentage sales growth and higher gross and operating margins, aligns with our forecast. Thus, we do not expect to make any material change to our $61 fair value estimate and view VF’s shares as attractive. While the firm is going through a tough period, we anticipate a strong recovery in earnings over the next two or three years and believe its brand intangible asset, the source of our narrow moat rating, is intact.

VF’s shares trade at less than half our $61 fair value estimate after trading at premiums for most of the past five years. We believe investors are focused on recent problems and are overlooking its history of successful portfolio management and brand development, as well as its potential for sales growth and margin improvement in the medium term. The firm recently held an analyst event at which it outlined a strategic plan based on operating more efficiently, investing in its highest-potential opportunities, using data and analytics to meet consumer demand, and offering new products. We believe it can meet these objectives.

Through dispositions and additions, VF has built a portfolio of strong brands in multiple apparel categories. We view the three brands that account for about 80% its sales (Vans, Timberland, and The North Face) as supporting VF's narrow moat based on a brand intangible asset. Despite economic concerns, we believe VF will grow faster than most competitors in the long run and maintain its competitive edge.

Narrow-moat VF announced the unexpected and immediate retirement of long-time executive and CEO of the last five years, Steve Rendle. VF has launched a search for his successor, with Benno Dorer, a board member and former CEO of wide-moat Clorox, serving as interim CEO. Rendle, who has been instrumental in VF’s success, oversaw an upbeat analyst event just two months ago. However, the firm has repeatedly lowered guidance this year, and did so again in conjunction with the CEO announcement due, primarily, to a heavily promotional environment and canceled wholesale orders in the U.S. The firm now expects fiscal (March-ending) 2023 adjusted EPS of $2.00-$2.20 (down from $2.40-$2.50 prior) on 3%-4% constant-currency sales growth (down from 5%-6%). For comparison, VF initially guided to $3.30-$3.40 in EPS when it provided its fiscal 2023 outlook back in May. Since then, lockdowns in China have intensified, the U.S. dollar has weakened, inflation has remained high, and Vans has failed to return to growth.

VF held an analyst event in September 2022 at which it outlined its strategic plan over the next five years. This plan is based on operating more efficiently, investing in its highest-potential opportunities, using data and analytics to meet consumer demand, and offering new products. Despite the optimistic tone of the event, VF’s shares sit at roughly half our $62 fair value estimate after trading at premiums for most of the past five years as we believe investors are overly concerned about near-term issues and are overlooking its history of successful portfolio management and brand development, as well as its potential for sales growth and margin improvement in the medium term. Specifically, we believe the market is expecting five-year annual sales growth and a fiscal 2027 operating margin of 2.7% and 10.7%, respectively, while our estimates are 4.7% and 14.5%.

Through dispositions and additions, VF has built a portfolio of strong brands in multiple apparel categories. We view the three brands that account for about 80% its sales (Vans, Timberland, and The North Face) as supporting VF's narrow moat based on a brand intangible asset. Despite economic concerns, we believe VF will grow faster than most competitors in the long run and maintain its competitive edge.

There were no major surprises in VF's fiscal 2023 second-quarter results as the company had previously lowered its guidance as part of its Sept. 28 analyst event (see our note). However, VF did report that the marketplace has grown even more difficult in recent weeks as uneven consumer traffic and elevated inventories have led to widespread discounting. Moreover, it continues to face issues like sporadic store closures in China, the strong U.S. dollar, and shipping delays. Thus, while VF held to its fiscal 2023 constant-currency revenue growth range of 5%-6%, it lowered its guidance for adjusted gross margin (by 50-100 basis points), adjusted operating margin (to 11% from 12%), and adjusted EPS range (to $2.40-$2.50 from $2.60-$2.70). We expect to slightly reduce our fiscal 2023 estimates to reflect this new guidance, but these changes should not have any material effect on our per-share $63 fair value estimate. We continue to view VF as one of the most attractive opportunities in the beaten-down apparel space due to the diversity and popularity of its brands, the source of our narrow-moat rating, and potential for profit margin improvement (we forecast operating margins in the mid-teens with five years). Moreover, as part of the earnings release, VF announced a 2% increase in its dividend, providing a yield of 7%.

Through dispositions and additions, VF has built a portfolio of strong brands in multiple apparel categories. We view the three brands that account for about 80% its sales (Vans, Timberland, and The North Face) as supporting VF's narrow moat based on a brand intangible asset. Despite economic concerns, we believe VF will grow faster than most competitors in the long run and maintain its competitive edge.

At its first analyst day in three years, VF presented strategies for its key brands and fiscal 2027 financial targets. Its medium-term goals, including five-year sales and EPS percentage growth ranges of mid- to high-single-digits and high-single to low-double-digits, respectively, align with our 6% and 9% estimates. However, VF lowered its guidance for the remainder of fiscal 2023 (ending March) due to a weak back-to-school season for Vans, a slow recovery in China, and the likelihood of a promotional holiday season due to elevated inventories and soft consumer spending. Moreover, like many others, VF’s reported results are adversely affected by the appreciation of the U.S. dollar. VF’s new fiscal 2023 guidance suggests roughly flat sales, a 12% adjusted operating margin, and $2.60-$2.70 in adjusted EPS, versus our estimates of 3%, 13%, and $3.11, respectively.