EUR 850.00 For Business Accounts Only

Morningstar | Wide-Moat VF Corp's Brands Continue to Resonate Across Channels and Regions; Shares Fairly Valued

We plan to lift our $83 fair value estimate by around $1 to account for the time value of money and strength in the outdoor (38% of sales) and active (33%) segments, supported by the North Face and Vans brands, respectively, leaving shares fairly valued.

In our view, VF's brand advantage (the source of its wide moat) is intact, as its Vans and North Face brands continue to resonate with consumers. VF's innovation, product and geographical expansion, and social and data analytical engagement continue to drive Vans (25% of sales), which saw revenue increase by 26%. This strength led management to increase fiscal 2019 active sales guidance to 14%-15% growth versus 13%-14% previously, and we plan to raise our 14% estimate toward the higher end of the revised target. Meanwhile, management noted that its North Face brand, which saw 5% sales growth, is benefiting from a mountain lifestyle trend that is extending from Asia-Pacific strength to other regions across the world. As a result, VF lifted its outdoor sales outlook for the year to 7%-8% growth from 6%-8% previously, tracking near our 7% growth forecast.

Demand was solid across channels with organic wholesale and brick-and-mortar up 3% and double digits, respectively, while direct-to-consumer jumped 13%, led by over 30% growth in digital. Regional results were also healthy and balanced, with both U.S. and international organic constant-currency sales growing 7%.

VF's total revenue guidance for the year was lifted to at least 11% versus 10%-11% prior (our estimate of 11%), despite disposals, a customer bankruptcy, and incremental currency headwinds that we calculate amount to around 1.5 percentage points of growth. Also, adjusted operating margins are now expected to expand 80 basis points to 13.5% versus prior guidance and our existing estimate of 70 basis points, as the company benefits from scale, resulting in an adjusted EPS target of $3.65 versus $3.52-$3.57 previously and our existing forecast of $3.61.

The company's Timberland brand saw a sales drop of 2% in the quarter, as VF is still in the process of its efforts to reinvigorate the brand through innovation, product extension, and marketing. Based on VF's stellar track record in expanding the Vans and North Face brands, as well as our view that Timberland plays into an outdoor lifestyle that appears to be resonating with consumers, we believe the brand can see a return to growth over the next few years.

Meanwhile, VF lowered its jeans segment (16% of total sales) revenue forecast to a 1%-2% drop from flat previously, which we believe is due to a customer bankruptcy that affected the Lee brand, while underlying growth for the segment is unchanged. VF reiterated plans to spin off its jean business (16% of total sales) in April 2019, a move we still view favorably, as it should allow both jeans and the remaining company (outdoor, lifestyle, and active brands) to better focus on growth opportunities.

Regarding the recent geopolitical headlines around the trade war with China, VF commented that the country's consumption remains strong, evidenced by 15% constant-currency revenue growth seen in the region. Further, VF stated that around 11% of its cost of goods sold currently comes in from China, but that its global supply chain positions it to adjust that lower if need be.