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Morningstar | Vans Stands Out for VF, but Crowded Markets Poised to Hinder Growth for the Overall Firm Long Term

VF has performed well for shareholders and built a portfolio of strong brands in multiple apparel categories. It has produced an annualized shareholder return of approximately 17% over the past 15 years, mainly due to growth in three brands that make up more than half of its sales: Vans, Timberland, and The North Face. Vans has led the way, with annual revenue growth in the midteens since 2004, averaging above 20% over the past three years. Timberland and The North Face, however, have posted uneven recent results, given significant competition, the strong U.S. dollar, and turmoil among physical retailers. Over the next 10 years, we forecast that most of VF’s revenue and operating income growth will come from Timberland, The North Face, and Vans. Conversely, VF’s jeanswear (Wrangler and Lee) business, once its main source of profit, has been plagued by declining sales and is likely to be spun off in calendar 2019.We forecast that VF’s active segment (includes Vans) will soon generate more than 35% of its sales and more than 50% of its operating income. Vans has grown from its roots as an action sports brand into a popular everyday brand. Internal research by VF suggests the typical Vans customer, once a male skateboarder, is more interested in music and fashion than action sports. In fact, 60% of Vans apparel is now purchased by females, and it is one of the most popular shoe brands for teens of both sexes. It is viewed as less of a sports brand than a brand for creative people. While Vans has been performing well, it is still relatively small ($3 billion in annual revenue) compared with its market potential. VF estimates that Vans competes in apparel and footwear markets with a combined $87 billion in annual sales, implying single-digit market share for Vans.While we believe Vans supports our narrow-moat view on VF based on an intangible brand asset, we no longer believe VF has a cost advantage over peers and have downgraded our moat rating from wide to narrow. From our vantage point, the firm’s manufacturing and distribution structure generally aligns with peers, and as such, fails to afford the firm an edge.