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Morningstar | VFC's Vans Has Runway to Increase Its Connection With Consumers, Supporting Its Brand Advantage

After wide-moat VF's Vans (25% of total sales) investor day, we plan to lift our total annual sales forecast toward 7% from 6.5% over the next five years to account for increased confidence in Vans' growth, given the brand's growth to date, product and geographically expansion opportunity, and enhanced connection with consumers via social engagement and data insights. As a result, we expect to lift our $80 fair value estimate by $3, leaving shares slightly overvalued.

VF has seen impressive Vans growth since its acquisition of the company in 2004, supporting our Exemplary stewardship rating. This is witnessed in Vans' sales and operating margin growing to $3 billion and over 23% last fiscal year, respectively, from $300 million and 1% operating margin in 2004 (Vans' sales growth was flat in the years prior to VF's acquisition). Also, VF expects to post over $3.4 billion in sales this fiscal year (March ending), surpassing the $3.3 billion target by calendar year 2021 given just last year.

We believe brand growth can continue to be driven by innovative product launches in a large $41 billion footwear (where Vans has only 6% market share) and $46 billion apparel (1%) Vans addressable market opportunity, respectively. Vans footwear (around 80% of total Van sales) growth will continue to be aided by innovation (improved comfort and traction for active lifestyles), while apparel (20%) is driven by ongoing extensions into head-to-toe clothing and accessories (like backpacks).

The brand will also be supported by further expansion into emerging markets. For instance, Vans sales in China are less than a tenth of its two largest competitors, while its consumer awareness is 50% versus a 75%-90% range of these bigger peers. We believe Vans can drive sales and awareness higher in emerging regions through its use of local creators, social media engagement that is 5 times above industry standard worldwide and leveraging of data/loyalty insights.

Our existing model does not forecast out specific brands but rather segments (Vans is included in the Active segment, which is one third of total revenue). That said, we now plan to provide a Vans sales forecast for the next few years, given the incremental financial information provided during the investor day presentation. We expect the Vans brand can grow a bit more than 10% annually over the next five years (versus the 10%-12% CAGR range given by VF Corporation at the investor day) and approach $5 billion in our fiscal 2022 (management's fiscal 2023) versus above $5 billion guided by the company. While our confidence in the Vans brand opportunity is enhanced, resulting in an expected lift to total annual revenue growth estimate toward 7% from 6.5% currently over the next five years, we plan to be at the lower end of company targets given that consumer trends can be fickle, particularly in younger age demographics (about 55% of Vans consumers in the U.S. are age 13-24).