V.F. Corp.: Think Twice Before Buying The Dip (NYSE:VFC)

In today’s analysis, we discuss V.F. Corporation (VFC), a U.S. consumer firm that has shed a significant amount of its market value in the past year due to various company-specific and systematic headwinds.

Many market participants might think it’s a good time to buy V.F. Corporation, as the stock has lost nearly half its value in the past year, placing its relative strength index at a mere 34.71, suggesting a technical buying opportunity exists. However, we urge investors to be careful of merely relying on mean-reversion as various concerns regarding V.F. Corp’s fundamentals linger.

Let’s dive into a deeper discussion about our recent findings on V.F. Corporation.

A Few Macro Concerns

For those unaware, V.F. Corp.’s corporate portfolio includes some of the most solid outdoor brands on the planet, namely Vans, Timberland, The North Face, and Dickies.

Most of the firm’s brands will be discussed as a collective, with Vans partitioned into a separate section as we see its prospects as potentially cataclysmic.

Let’s look at a few macro variables to start proceedings.

Consumer Sentiment

U.S. consumer sentiment remains of significant concern as three straight months of decline paints a glum picture for retail stocks such as V.F. Corp. Although often detached from the supply-side factors in the real economy, consumer sentiment dictates the scoreboard for retail stocks.

The realized slowdown in consumer sentiment is echoed by the company’s 15% year-over-year decline in the Americas revenue, experienced during its first quarter.

Consumer sentiment may tick up once interest rates eventually decline, as reduced household liabilities might free up disposable income. However, it is critical to consider that inflation remains resilient, meaning interest rates could stay high for a prolonged period.

In addition, while interest rates do have some expansionary effects, they aren’t overly helpful in pulling an economy out of a recession. Therefore, we urge investors to consider that lower interest rates might not send consumer goods sales into the stratosphere should a recession occur.

EMEA Headwinds Vs. China Growth Consolidation

V.F. Corp experienced welcoming tailwinds from its Asia Pacific sales in Q1 amid an 18% year-on-year sales. However, the same cannot be said about EMEA, as Europe, in particular, is struggling with increased financial pressure on households, leading to a 3% decline in segmental revenue.

We believe China is well positioned to reignite demand, as illustrated by its latest PMI numbers. In fact, it is one of the few regions with low inflation, and its reopening spending spree is yet to hit full flight; as such, higher wholesale demand for V.F. Corp’s products would not be surprising to see.

On the other end of the spectrum, EMEA remains uncertain. Europe looks set to take time to recover after its energy crisis last year enforced significant pressure on households. In addition, matters in Africa and the Middle East aren’t looking much better, as many of the regions suffered dearly in the aftermath of the COVID-19 pandemic.

Vans Causing An Overhang

V.F. Corporation’s Vans brand makes up for the bulk of its revenue, with the business contributing approximately 35.35% in V.F. Corp’s second quarter. However, as illustrated by its 22% slump in year-on-year sales, V.F. Corp’s cornerstone brand is under pressure amid slow product redevelopment and concentration risk within its product line.

V.F. Corp’s Vans brand has struggled since the start of the pandemic, with the firm’s management blaming systemic features such as supply-chain issues, and lower store inventory volumes for the brand’s recent drawback. Yet, one cannot help but think there’s more to it than that.

In our opinion, an over-reliance on core products will, in most cases, eventually lead to severe cyclicality as consumer trends often fluctuate abruptly while also being difficult to predict. Moreover, recovering from a consumer shift can take and burn cash because successful research and development isn’t exactly an on-and-off switch.

Vans’ current strategy is to target younger consumers to tap into a long-term-oriented focus. In addition, it plans on luring these consumers away from big brands via a cost leadership strategy, which could work; however, nothing is certain, especially during an era where globalization and digitalization have caused affordable shoes and apparel to flood the market.

V.F. Corp’s management openly admitted that Vans is a turnaround project, stating that the segment is “not where we should be, and we remain intently focused on the actions to turn around the brand.”

Who knows, maybe new leadership under Bracken Darrell might do the trick. However, as an interested investor, I would want to see a comprehensive, actionable plan with preliminary results before buying into the turnaround idea. Until such factors are realized, we deem the Vans situation an overhang on the company’s broad-based business model.

Valuation

With a P/E ratio of merely 7.65x, one might say that V.F. Corp’s stock is undervalued. However, I extended the analysis to make sense of V.F. Corp’s forecasted variables and how they might play into the stock’s valuation.

Model Output – Residual Income Model

I decided to use the continuous residual income method to value the stock, which suggests that V.F. Corp is overvalued. Sure, the metric does not have a 100% hit rate; nevertheless, such a disparity between market and fair value is worrisome.

Sidenote: V.F. Corp is currently in its 2024 financial year, which is why the model starts in the year 2024 and not 2023.

Model Inputs

Here are the inputs used for the model.

• V.F. Corp’s stock price was divided by its forward price-to-book ratio to set a baseline book value.
• Seeking Alpha’s earnings and dividend forecasts were utilized to populate the respective line items.
• The equity charge was assumed as V.F. Corp’s CAPM.

• Lastly, due to its strong position within the retail space, a persistence factor of 1 was phased into V.F. Corp’s final year residual income to raise its terminal value – This link provides the theory behind the persistence factor.

A Few Unmentioned Positives

Our general outlook on V.F. Corp is negative. Nevertheless, a netting process suggests a few positives exist.

Firstly, the stock’s recent drawdown has opened up a lucrative dividend yield. As shown in the following diagram, V.F. Corp’s 49 consecutive years of dividend growth is now met with a stellar forward dividend yield of 7.77%, suggesting comprehensive income-based returns might be in-store for investors.

Furthermore, we think V.F. Corp is well placed to benefit from its direct-to-consumer business model, especially considering the concurrent digitalization within China that opens up an entirely new pocket of growth for the firm.

Lastly, an overlooked catalyst might be the growing popularity of North Face, which resulted in revenue growth of 50% in greater China during Q1. I highlight this as it illustrates the diversification benefits that V.F. Corp. In fact, an argument exists that the headwinds received from Vans’ recent struggles can be lessened on a firm-wide basis by brand diversification.

Final Word

Our analysis shows that V.F. Corp might be a risky bet at this time.

Although V.F. Corp’s significant year-on-year drawdown suggests that a “buy the dip” opportunity has presented itself, the company faces substantial fundamental headwinds amid a soft consumer environment and doubts about the prospects of its Vans brand.

Furthermore, our residual income model indicates that V.F. Corporation remains slightly overvalued, which phases out the benefits of its lucrative dividend profile.

Consensus: Sell Rating Assigned.