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Buy Here as Reopening Process Continues, MP Increase

Previously highlighted as a value name in our analysis released March 25, 2020, VF Corp. (VFC) has unveiled its plan for reopening stores across the Middle East, Europe and the United States as pandemic restrictions begin to ease. The earnings might have missed expectations on Friday (May 15), but digital sales and the ongoing reopening plan are clear positives moving forward, and the stock provides a value-oriented entry level at the same price as we recommended two months ago.

The Edge View...
In VF Corp.'s (VFC) earnings report on Friday (May 15), the company highlighted the ongoing pandemic has impacted its FY20 net income has dropped -46% and operating income is down -22%. However, investors were reassured by the company's phased reopening plan, which has already begun with 100% of stores open and operational in the Asia-Pacific region and the EMEA (Europe, the Middle East and Africa) region seeing partial openings already underway. The North American phase is prepared to also reopen as soon as restrictions are relaxed. These positives, alongside a sustained dividend and adequate liquidity to continue to navigate the pandemic, have strengthened the value creation prospects for VFC moving forward.

What We Said (March 25)...
VFC is an apparel and footwear company with three segments (i) Outdoor (brands like The North Face, Timberland, Altra, etc., FY18 revenue of $4.3bn) (ii) Active (brands like Vans, Kipling, JanSport, etc., FY18 revenue of $4.9bn) and (iii) Work (brands like Dickies, The Red Kap, Kodiak, etc., FY18 revenues of $1.8bn). Out of the three segments, the Outdoor and Active segments are the growth drivers, with an expected overall revenue growth of 5.1% in FY21E and 7.8% in FY22E. VFC also offers the highest EBITDA margin profile at 17% in FY21E compared to its peer average of 14.4% (Adidas: 14.7%, Nike: 15.4%, Puma: 11.4% and Columbia Sportswear: 16%). Despite having a higher growth and a higher margin profile, VFC is trading at a 10% discount at 11.5x compared to the peer average of 12.8x.

On March 16, 2020, VFC provided a COVID-19 update where the company said there was a limited impact on its supply chain. Also, the company has re-opened nearly 90% of their retail stores in Greater China as the situation steadily improves there. However, VFC’s North American and European stores have and will remain closed for now. Based on this acknowledgement and concluding that VFC’s digital sales are likely to continue its growth path, we understand the COVID-19 impact is a “one-time” issue for VFC.