Morningstar | Fair Value Estimate on VF Reduced on Kontoor Spin and Lowered 2020 Forecast; Shares Overvalued. See Updated Analyst Note from 23 May 2019
We’re lowering our fair value estimate on VF to $64 from $74 due to the Kontoor Brands spin-off and a reduced outlook for fiscal 2020. VF released disappointing guidance for fiscal 2020 when it reported its fiscal 2019 fourth-quarter results on May 22. However, the guidance included about $75 million in unexpected costs (dis-synergies) related to the spin-off. While these costs will affect fiscal 2020, they do not change our fiscal 2021-29 forecast of average annual growth of 6% and an average operating margin of 15%. We attribute about two thirds of the reduction in our fair value estimate to the Kontoor separation and the rest to changes in our fiscal 2020 earnings per share forecast. We continue to view VF as overvalued.Our fiscal 2020 adjusted EPS forecast drops to $3.26 from $4.20, with more than 60% of the change attributable to the spin-off. We have lowered our fiscal 2020 revenue growth forecast for VF’s activewear (includes Vans) segment to 6% from 8%. We think Vans’ growth may be slowing faster than expected due to weakness in U.S. retail. We have also reduced our operating margin for the activewear segment to 23% from 26% on higher marketing expense. Our fiscal 2020 operating margin drops to 13.8% from 14.5% due to the spin-off costs and lower operating profit from activewear.
The lost cash flow from Kontoor is partially offset by the receipt of $1 billion in new cash. We anticipate VF will use some of this cash to pay down its short-term debt of $665 million due at the end of fiscal 2019. Kontoor has been declining in importance for VF. It produced about 20% and 17% of VF’s (calendar) 2018 sales and operating income, respectively. Between (calendar) 2018 and 2016, its sales fell to $2.76 billion from $2.93 billion and its adjusted EBITDA fell to $359 million from $499 million. Prior to the spin-off, we had forecast jeanswear would produce less than 14% of VF’s segment profit by fiscal 2023, down from a five-year high of 27% in fiscal 2016.
VF is an apparel and footwear company. The company designs, produces, procures, markets and distributes a variety of lifestyle products, including outerwear, footwear, occupational and performance apparel, jeanswear, backpacks and luggage for consumers of all ages. Products are marketed primarily under the company-owned brand names. The company's segment comprised of: Outdoor, which includes performance-based and outdoor apparel, footwear and equipment; Active, which includes active apparel, footwear and accessories; Work, which consists of work and work-inspired lifestyle apparel and footwear and occupational apparel; and Jeans, which markets denim and related casual apparel products.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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