EUR 850.00 For Business Accounts Only

Morningstar | Wide-Moat VF Corp. Sees Strength Across All Geographies and Channels; Shares Slightly Overvalued

VF Corp. reported a strong first quarter, shown by 10% constant-currency organic sales growth (an acceleration from last quarter's 8%) and organic gross margins of 51.3% (up 170 basis points), driven broadly across its geographies, channels, and brands. We plan to lift our $76 fair value estimate by a mid-single-digit percentage for the time value of money and slightly higher sales and margin forecasts for the current fiscal year. While we see shares as slightly overvalued, trading near 26 times fiscal 2019 (ending March) earnings, we would become more constructive on pullbacks, as VF's brand advantage, the source of its wide moat, remains one of the strongest in the apparel industry.

The company's offerings continue to resonate with global consumers, with its three major brands increasing sales 21%, an acceleration from last quarter's 18%. Vans revenue grew 35% (39% last quarter), and the company posted double-digit increases across all regions, while North Face's sales increased 8% (7%) as repositioning efforts begin to pay off, witnessed by 20% and 12% U.S. wholesale and direct-to-consumer growth, respectively.

Strength was also evident beyond VF's big three brands, with total wholesale and direct-to-consumer organic growth of 10% and 16%, respectively. It is encouraging to see wholesale growth accelerate from last quarter's 1% increase, as VF quality initiatives are driving improved order visibility (total organic inventory increased just 2%). Meanwhile, growth across regions also remained impressive, with U.S. and foreign organic sales up 11% (8% last quarter) and 14% (8%). Additionally, organic sales in the jeans segment (22% of sales) grew 3%, an acceleration from the 4% drop last quarter, driven by improving Wrangler and Lee results. As a result, we plan to lift our current fiscal-year total sales to around 11% growth from 10% prior, with operating margins near 13% (existing forecast of 12.8%) versus the 12.5% reported last year.

VF Corp. now expects fiscal-year revenue of $13.6 billion to $13.7 billion (versus our existing $13.6 billion estimate), up $15 million from prior guidance, despite $150 million in incremental currency headwind, as the company expects direct-to-consumer sales to increase 11%-13% from prior targets of 8%-10%. Further, the company increased its earnings guidance for the year to $3.52-$3.57 versus our $3.54 existing estimate, up $0.04 from prior targets, despite an incremental $0.06 currency headwind.