Strong Brands Widen VF's Moat
We think the apparel manufacturer is an attractive investment opportunity.
We have always believed that VF's (VFC) existing brands have high demand and significant pricing power, which was the basis for our narrow Morningstar Economic Moat Rating. However, we now think that the company's capabilities in selecting acquisition targets that are slightly broken but still possess an underlying respected brand, divesting itself of brands that do not make strategic sense to the whole, and having an operating structure capable of absorbing newly acquired companies and quickly plugging them into its supply chain and back-office functions give VF a wide economic moat with sustainable brand intangible asset strength and scale cost advantages.
The company bases its acquisition strategy and brand positioning on intense consumer research and reviews its brand portfolio annually to cull any brands that do not make strategic sense for the overall portfolio. We think these two practices will ensure that the overall VF brand intangible asset will remain strong over a significant period as the brands and products it owns will be adjusted to maintain value. Furthermore, through a thorough review of the company's most recent acquisition, we think that almost all of the supply chain and back-office management of acquisitions is plugged into the VF platform, which yields very significant cost advantages. As we see acquisitions as core to VF's growth strategy, we think this will be an important contributor to long-term returns. We expect VF to achieve an average adjusted return on invested capital of 23% over the next 10 years, well above its 9.8% weighted average cost of capital.
Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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