EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat VF Reports Solid 4Q Ahead of Spin but 2020 Outlook Disappoints; Shares Overvalued

Narrow-moat VF closed fiscal 2019 with an extremely messy earnings report but one that met our forecast. The fourth quarter was VF’s final full quarter before the Kontoor Brands spin-off on May 23. VF’s sales of $3.21 billion in the fourth quarter slightly exceeded our forecast of $3.19 billion but adjusted gross margin of 51.0% fell short of our 51.4% forecast. The sales outperformance was due entirely to the outdoor coalition, led by strong 8% (11% constant-currency) growth for The North Face. We think the brand’s new apparel is trendy and doing well in both wholesale and direct-to-consumer channels. VF’s other coalitions matched our forecast and were led, as usual, by strong growth from Van’s (18% constant-currency). We think the gross margin miss was due to higher input costs, including cotton and labor. Adjusted EPS of $0.60 in the fourth quarter nearly matched our adjusted EPS forecast of $0.61. However, VF’s (post-spin) fiscal 2020 guidance was disappointing. We expect to lower our fair value estimate of $74 by a single-digit percentage and continue to view shares as overvalued.

VF revealed post-spin fiscal 2020 guidance that fell short of our expectations. VF guided to fiscal 2020 sales growth of 5% to 6%, but we expected growth closer to 8% (adjusted for the spin-off). Most of the difference is due to the activewear segment that includes Van’s. VF guided to 2020 growth of 6% to 7% for the segment, short of our 8.0% forecast. For Van’s specifically, VF guided to 2020 growth of 9% to 11%. While we knew Van’s extreme growth (24% in 2019) was not sustainable, it may be slowing a bit faster than we expected. We will reduce our 10-year forecast of average annual growth for activewear to 6% from 7%. We will also lower our long-term operating profit forecast for the segment to 25% from 26%. As activewear has a large impact on VF’s profits (51% of segment operating income in 2019), we expect to reduce our (pre-spin) 2020 EPS estimate of $4.20 by about 10%.

We view VF as a stronger company post-Kontoor Brands separation. By eliminating weaker brands like Wrangler and Lee, we believe VF has improved growth and profit possibilities. We think VF’s two largest brands, Van’s and The North Face, fit the athleisure trend well. We expect Van’s sales to exceed $4 billion in fiscal 2020, up from about $3 billion in fiscal 2018. We think the brand remains one of the most popular among teens and young adults. VF’s active management of its brands is a big part of our narrow moat rating. The company has done well for its shareholders with its acquisitions and divestitures in the past, and we think the Kontoor spin is another good move. We expect average annual sales growth of 5% for VF over the next decade, slightly higher than expected activewear growth. Further, we expect VF’s operating margins to improve to a stable level of about 15% in fiscal 2021 from 13.7% in fiscal 2020 as VF achieves expense leverage.

We expect no significant impact on VF from tariffs. The company reports only 7% of its cost of goods is sourced from China.