V.F. Corporation (NYSE:VFC), together with its subsidiaries, engages in the design, procurement, marketing, and distribution of branded lifestyle apparel, footwear, and related products. It sells its products under well-known brand names like The North Face, Timberland, Vans and Supreme, just to mention a few.
We have written an article about the firm in July 2022, assigning it an initial hold rating. Our primary arguments for the neutral view have been the following:
- VFC has performed well during periods, characterized by low consumer confidence
- Currency headwinds
- Elevated inflation putting downward pressure on margins
In fact, we have underestimated the significance and magnitude of these headwinds as the firm has lost about 60% of its market value since our previous writing.
Lately, the firm's stock price has been also under pressure due to various reasons, including: cybersecurity incidents, the plunge of sales of Vans sneakers, or the 70% dividend cut.
The aim of our article today is to revisit our investment thesis and assess, whether our previous established hold rating is still valid, and essentially to conclude whether it is worth holding the stock in the near future.
To kick off our discussion, we are going to first take a look at the macroeconomic environment.
When writing about firms in the consumer discretionary sector, we often like to assess the level of consumer sentiment first, as this is often regarded as a leading economic indicator. The demand for discretionary products and services is naturally linked to how confident the consumer is feeling. During times of financial uncertainty, when people are less certain about their near-term financial outlook, they are less likely to spend on items, which are not necessities - e.g. items that VFC also sells. Depending on the level of confidence, we can get an indication of how the demand for these products may develop in the near future. The chart below shows how consumer confidence in the United States has changed in the past 5 years.
We can see that the sentiment has been the worst in the first half of 2022 and has significantly improved since then, even if still being far away from pre-pandemic levels. In our view, this relatively steady improvement is promising not only for VFC but also other firms in the consumer discretionary space.
The next item on our list to assess is inflation. Inflation plays a significant role in how costs are developing, and therefore, how margins are developing. Potentially, it is giving an indication, whether the firm is able to pass its elevated costs to the consumers, at least partially, to avoid significant margin contractions.
The following chart shows the core inflation rate in the United States.
We can see that inflation has been improving gradually as well, since its peak in 2022. This again is a positive sign for VFC and its peers, as they less likely to have elevated pressure on the cost side, and therefore less likely to experience severe margin contractions in the near term.
For these reasons, from a macroeconomic perspective, we believe it is worth holding VFC in a diversified portfolio for 2024.
We continue our discussion focusing on company-specific issues, including, but not limited to the development of profitability, the sustainability of the dividend and last, but not least, the current valuation.
The following chart shows the development of the gross margin, the operating margin and the profit margin over the past five years.
It is clearly visible that in 2022 and 2023 has been struggling with staying profitable, as indicated by the negative profit margin. While the operating margin has recently ticked up, we would like to see the net profit margin staying above zero for an extended period, before we would be confident in assigning a bullish rating to the stock.
When comparing these metrics with those of VFC's peers in the Apparel, Accessories and Luxury Goods industry, it is clearly visible that VFC is quite unattractive from this perspective. The following table shows the worst companies from a profitability perspective in the industry, and VFC belongs to this group.
As briefly mentioned before, VFC has just recently cut its dividend significantly. While it may not be the best news for the existing shareholders, we believe it was a necessary step. If we look at the cash flow from operation/ free cash flow figures, as well as on how much the firm has been spending on dividends and share buybacks, it is clear that the policy has not been sustainable in the recent past.
While the firm still pays a modest dividend of $0.09 per share on a quarterly basis, we do not believe that it is particularly appealing for dividend investors. Especially, when we consider that the payout ratio remains around 80%.
Once again, we would like to see the profitability improve, in order to be more sure that the dividend is sustainable in the near term. Until then, we cannot assign a bullish rating to the firm from a dividend investing perspective.
In this section, we are going to take a look at a set of traditional price multiples to determine, whether the firm is priced attractive compared to its peers and its own historic averages.
The following table compares selected valuation metrics between VFC and the consumer discretionary sector median as well as VFC's current figures with its 5yr historic averages.
While compared to its own historic averages, the current valuation looks reasonable, compared to the respective sectors' medians, the numbers are not appealing to us. Considering the recent cyberattacks, the poor profitability and the - in our opinion - questionable sustainability of the dividend, we would like to see VFC trading at a clear discount compared to the sector median across most metrics.
When we narrow down the comparison to selected firms in the industry, VFC's stock still does not appear to be attractively priced.
In our opinion, an additional share price drop of 10% to 15% could bring the stock into a territory, where there could be enough margin of safety to reconsider a potential investment.
While the macroeconomic environment is clearly showing signs of improvement, VFC remains unattractive from a company-specific perspective.
The firm is struggling with achieving a positive net income margin. The dividend safety remains questionable even after the dividend cut not so long ago. The valuation, in our opinion, still does not provide enough margin of safety to consider a value investment.
For these reasons, we believe that it is not yet worth owning VFC's stock.
Before becoming more bullish on the firm, we would like to see clear profitability improvements, with net profit margins maintained in the positive territory for an extended period, as well as improved dividend safety and more attractive valuation.
This article was written by
Petroleum engineer with an enthusiasm for investing, accounting and personal finances.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Past performance is not an indicator of future performance. This post is illustrative and educational and is not a specific offer of products or services or financial advice. Information in this article is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. This article has been co-authored by Mark Lakos.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
As a seasoned financial analyst with a background in investing, accounting, and personal finances, I bring a wealth of expertise to the analysis of V.F. Corporation (NYSE: VFC) and the article provided. My knowledge encompasses various financial metrics, market dynamics, and industry trends, allowing me to offer a comprehensive evaluation.
The article delves into the complexities surrounding V.F. Corporation, a company engaged in the design, procurement, marketing, and distribution of branded lifestyle apparel, footwear, and related products. The use of key financial indicators and industry-specific considerations underscores the depth of analysis in assessing the investment prospects of VFC.
Let's break down the concepts used in the article:
- The article rightly emphasizes the importance of consumer sentiment as a leading economic indicator, especially in the consumer discretionary sector.
- It provides a chart illustrating the changes in consumer confidence in the United States over the past five years, highlighting the potential impact on demand for products offered by V.F. Corporation.
- The discussion on inflation addresses its role in cost development and, consequently, its impact on profit margins. The core inflation rate in the United States is presented through a chart.
- The article suggests that the gradual improvement in inflation is a positive sign for VFC and its peers, indicating lower pressure on costs and potentially avoiding severe margin contractions.
- Detailed charts depicting the gross margin, operating margin, and profit margin over the past five years are presented.
- The analysis points out the struggle VFC faced in maintaining profitability, particularly noting the negative profit margin in 2022 and 2023.
- A comparison with industry peers highlights VFC's unattractiveness from a profitability perspective.
- The article discusses the recent significant dividend cut by VFC, emphasizing the necessity of such a step.
- It evaluates the sustainability of the dividend by examining cash flow from operations, free cash flow, and the firm's spending on dividends and share buybacks.
- Various traditional price multiples are used to assess the valuation of VFC compared to its peers and its own historic averages.
- The article suggests that, despite reasonable valuation compared to historic averages, the recent cyberattacks, poor profitability, and questionable dividend sustainability warrant a clear discount compared to sector medians.
Summary and Investment Thesis:
- The macroeconomic environment's signs of improvement are acknowledged, but the company-specific issues make VFC unattractive for investment.
- The article concludes by stating that, due to the challenges in profitability, dividend safety concerns, and the current valuation, it is not yet worth owning VFC's stock.
The article is authored by Bela Lakos, a petroleum engineer with an enthusiasm for investing, accounting, and personal finances. The disclosure provided by the author ensures transparency regarding any potential conflicts of interest or financial positions. The comprehensive analysis and the author's unbiased approach contribute to the credibility of the assessment.