EUR 850.00 For Business Accounts Only

Morningstar | VF Reports Strong Third Quarter, Fair Value Estimate Unchanged; Shares Fully Valued

Narrow-moat V.F. Corporation reported strong fiscal 2019 third-quarter results, as growth in its key brands (namely Vans and The North Face, which drive its intangible asset edge), offset disappointing results from its jeans business. VF reported 8.0% revenue growth, above our estimate of 5.4% growth. Adjusted operating margin of 16.8% was an improvement of 280 basis points. However, guidance of EPS from continuing operations of $3.73 for fiscal 2019 (from $3.65 previously) nearly matches our expectation of $3.72 and we do not expect to change our fair value estimate of $74 (based on mid-single-digit revenue growth annually over the next decade and operating margins in the mid-teens). Following the 12% increase in the share price on the results, we view VF as slightly overvalued.

VF’s quarterly results support our view that its three big brands (Vans, The North Face, and Timberland) provide an economic moat. Vans, with 25% growth for the quarter, continues to grow in popularity in all regions and categories. We continue to view it as the third-most popular athletic fashion brand after Nike and Adidas. The North Face also reported a solid quarter (14% growth) as new styles appear to be connecting with consumers. VF’s work coalition had a decent quarter on revenue (5% growth) but segment profit margin of 12.5% missed our 16% expectation. We do not believe Dickie contributes to VF’s narrow moat rating.

VF continues to make progress in areas we view as important for the long term. Its direct-to-consumer business performed well in the quarter with 9% growth. We think this is an important area for the company as some physical retail remains stressed. VF expects more than 30% growth from its direct-to-consumer digital business in fiscal year 2019. The company has reported 25% annual growth rates from digital since 2012 and we believe it can maintain these growth rates. VF also showed strong progress in China (23% constant-currency growth) in the quarter.

The spin-off of VF’s jeans business, recently named Kontoor Brands, remains scheduled for April 2019. There is some chance the transaction may be delayed by the ongoing government shutdown as the SEC is understaffed. VF’s jeans coalition reported third-quarter results which missed our estimates. While revenue of $658 million was just below our expectation of $666 million, segment profit of $67.8 million missed our estimate of $89.8 million by a wide margin on discounting to reduce inventories. Both Wrangler (down 2%) and Lee (down 9%) suffered declines, partly due to the bankruptcy of Sears. VF lowered guidance for fiscal year 2019 revenue growth for the jeans coalition to minus 3% (from a previous range of minus 1% to minus 2%). We believe the proposed jeanswear spin-off is positive for VF as its other coalitions are performing much better and have greater potential (and thus warrant management attention and resources). The spin-off of the jeans coalition will not affect our narrow moat rating on VF as we do not assign a moat to the segment.

A rumor (traced to an online group called StockTradersNet) surfaced on Jan. 17, 2019, that VF is in talks to acquire Skechers for $40 per share. Skechers’ stock price rose about 6% in the report. The price, a nearly 50% premium above Skechers’ recent stock price, implies an enterprise value of about $6.5 billion for the company. Neither VF nor Skechers commented on the report. While VF actively manages its portfolio of brands and prioritizes acquisitions in its capital allocation plans, we would be surprised if it bought Skechers as it has never acquired a company of its size or maturity. VF would have to issue a significant amount of stock or take on a lot of debt to acquire Skechers. While the company has a healthy balance sheet, we do not expect it to increase debt/EBITDA (which we estimate at 1.5 at year-end) by a large amount. Moreover, we believe Skechers does not fit VF’s strategy of purchasing overlooked brands and investing in them. As for Skechers, we note it is a family-controlled company and there is no public indication that the family intends to give up control. We believe VF has been an Exemplary steward of shareholder capital in the past (having managed its portfolio of brands well by acquiring and building brands while shedding weaker brands), and we do not expect it will deviate from its strategy.