Description

VF Corporation (Ticker: VFC, “VF” or the “Company”) was historically a high valuation stock underpinned by high growth brands but following an extremely disappointing FY23 (FYE March '23) shares are trading at levels that offer little downside.  We estimate fair value at $40/share (>100% upside).

Our thesis on VFC consists of four points: 1) strong-well-known brands, 2) portfolio rationalization opportunity, 3) margin opportunity, and 4) attractive valuation.  We also view the new management team as additional positive driver for VFC shares.

Business Overview

Founded in 1899, VFC is one of the world's largest apparel, footwear, and accessories companies, owning some of the world’s most iconic brands.  They have three segments: active, outdoor, and work.  The Company estimates that their TAM is greater than $600B.  They sell their products both wholesale and direct, split ~54% / 46% respectively for each channel. It's top 5 brands include: The North Face (“TNF”), Vans, Timberland, Dickies, and Supreme.  Together these brands make up 90% of revenue.    

Brands

Sales by Brand & Segment Breakdown

The Company was built through acquisitions and divestitures – buying and selling brands has been integral to the Company. Since 2007, VFC has sold/spun-off ~20 brands, including spinning off the jeans brands that formed Kontoor (Ticker: KTB).

Brand History

The jeans divestiture that formed Kontoor was part of the prior CEO’s strategy to reposition VFC as a high-growth Company.  This meant moving away from a low growth, but highly cash-generative jeans business.  This was further pursued by acquiring the streetwear brand Supreme.  VFC substantially overpaid for Supreme, paying $2 billion in cash consideration.  Post acquisition, Supreme has not performed well and VFC has subsequently written down one-third of their initial purchase price. 

In addition to problems at Supreme, growth at Vans decelerated after several years of robust growth.  Company margins also suffered from sales deleveraging and undisciplined spending.  This led to VFC’s old management team making four cuts to FY23 earnings guidance as well as cutting the dividend.  The old CEO "retired" after the 4th earnings cut.

Thesis

1)     Strong Well-Known Brands

Despite the strategic missteps, we believe VFC is still a fundamentally solid business, supported by popular brands that resonate well with customers.  Vans is a Top 10 shoe brand, The North Face is the leading outdoor brand, Timberland is a Top 10 outdoor brand, Dickies is the leading workwear brand, and Supreme is the leading streetwear brand.

2)     Portfolio Rationalization Opportunity

We believe that the top two brands, TNF and Vans, which each represent around one-third of VFC’s revenue, are worth more than the Company’s current valuation.  We think portfolio simplification could add tremendous value.  We estimate that by keeping only TNF, Vans, and Supreme, while trimming the other 10 brands, VFC could generate over $5B of proceeds.  This could be used to reduce leverage and fund buybacks.

3)     Margin Opportunity

Over the last 10 years, VFC's EBITDA margins have fluctuated between 11-17%, with the most recent fiscal year coming in at the lower end of that range.  We think VFC can get back towards the higher end of that range through both improved gross margins and reduced SG&A.

VFC has a strong DTC mix as well as strong international penetration, both of which should help gross margins (these channels carry higher gross margins vs. domestic wholesale).  Gross margins should further be enhanced by reducing promotions.  VFC is working to address elevated fixed costs by targeting an annualized $300 million in run-rate cost savings by the middle of their FY25 (~October 2024).

Like many retailers, VFC experienced significant stress in their supply chain during the COVID-19 pandemic and its aftermath.  It left the Company with excess inventory leading to negative impacts on both margins and working capital.  If inventory turns can return to their normal cadence of ~3.5x annually (up from 2.2x) in FY23, this should unlock substantial FCF - we estimate as much as $450 million.

4)     Attractive Valuation

VFC’s current valuation is well supported by the substantial amount of FCF the Company could generate over the next few fiscal years.  We estimate they can generate $8B in unlevered FCF through FY29, which equates to ~65% of the current TEV.  This implies the cost to own all VFC's brands at just ~$4B.

Further, as mentioned above, if the Company divests any of their brands, the proceeds could be used for share buybacks - another potential upside driver for VFC shares.

New Management

In June 2023, new CEO, Bracken Darrell, was retained to lead a turnaround at VFC. He was previously the CEO of Logitech, where he oversaw a decade of impressive growth.  Under his leadership, Logitech’s revenue more than doubled, profit almost tripled, and the stock increased more than 8x.  Like VFC, Logitech owns a portfolio of fast changing products globally, and has a strong focus on younger demographics who are constantly chasing new trends.  In addition, Darrell jettisoned underperforming non-core businesses and focused on the health of the balance sheet – both likely to be critical elements of a VFC turnaround.

In October 2023, Darrell debuted his transformation plans.  These included streamlining the organization, cross-pollinating best practices across regions, turning around Vans, improving results in North America, cutting costs (projected at $300 million), and prioritizing debt reduction.

Balance Sheet

Net debt to FY23 EBITDA is ~4.2x, but given the substantial projected FCF generation, we forecast the company being able to de-lever quickly, reaching a level of ~2.5x within the next two years.  The Company paid down $900 million of long-term notes that came due in September 2023 and has $1.7B in debt due in the next 24 months, which we believe the company should be able to cover.

Valuation

We have analyzed valuation through several methodologies and arrived at a fair value estimate of $40, which implies more than 100% upside from here.  At an entry point of 6x its potential Adj. EBITDA generation for FY 2029, we believe VFC stock presents an opportunity to own a great collection of brands at an attractive price.

Catalyst

• Selling brands - backpack brands are on the block and more to follow
• Fix Vans - bring in new leader and adding footwear talent on board
• Cost cutting - $300mm in cost saves being targeted with some reinvestment