VF Earnings: New CEO’s Strategy Offers Hope, but Turnaround Will Take Time; Shares Very Undervalued

Narrow-moat VF’s VFC 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 the outlook, VF lowered its fiscal 2024 free cash flow target to $600 million from $900 million and withdrew prior sales and profit guidance. Due to its struggles and its need to improve liquidity, the firm also announced a 70% dividend cut, its second reduction in the past year. We expect to lower our $60 per share fair value estimate by a mid-single-digit percentage given the current trends. However, we view VF as very undervalued and maintain our Standard capital allocation and narrow moat ratings. We believe Darrell is taking actions that will improve profitability and results from its key brands in the medium term.

In the quarter, VF matched our estimate with a 2% sales decline. Struggling Vans (sales down 21%) led to a 14% sales drop for the active group (36% of total) versus our negative 9% estimate. Improvement in Vans’ results is no longer expected in fiscal 2024. Meanwhile, The North Face’s 19% sales growth powered outdoor sales (57% of total) to rise 9%, beating our 6% estimate.

VF’s 51.3% gross margin missed our estimate by 90 basis points due, mainly, to an inventory reserve related to Dickies. However, VF’s 12% operating margin was only 20 basis points shy of our forecast. We think the company can lift its operating margins to 15% in three years due to cost-cuts and better results from its higher-margin brands.