VF Earnings: Modest Expectations Are Reached as The North Face Shines; Shares Very Undervalued

Led by The North Face, narrow-moat VF’s VFC 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.

By coalition, outdoor (40% of total sales) achieved 8% sales growth, but active (51% of sales) and work (9% of sales) missed our negative 10% estimates with declines of 15% and 20%, respectively. Given these results, it appears unlikely that Vans and Dickies will return to sales growth in calendar 2023, especially given the stressed wholesale channel. While we expect Vans will recover as the ongoing supply chain and merchandising efforts take hold, we remain uncertain that Dickies will ever be a strategic brand for VF.

Due to significant discounting, VF’s 52.8% gross margin in the quarter was 120 basis points shy of our estimate. However, its negative 0.4% operating margin was close to our negative 0.2% forecast due to cost control. Overall, its $0.15 EPS loss missed our estimate by just $0.02. Over the next two fiscal years, we forecast VF’s gross and operating margins to reach 56% and 12%, respectively, from about 53% and 10% this year as its higher-margin brands return to sales growth.

We recently lowered our Capital Allocation Rating to Standard from Exemplary due to VF’s inconsistent results, heavy debt ($6.7 billion), and recent dividend cut. VF reiterated its commitment to its dividend (6% current yield), but we think another cut is possible if our expectations are missed.