V.F. Corporation Struggles For Traction

V.F. Corporation Is Down But Not Out 

We’ve like V.F. Corporation (NYSE: VFC) for a long time and not just as a reopening play. The company is a well-established, blue-chip name in consumer apparel with a nice dividend, a healthy portfolio of brands, and a growing direct-to-consumer business. While the company has been struggling with the pandemic due to widespread store closures, the combination of eCommerce and our outlook for the economic reopening have it set up for wins later in the year. The problem for the stock price right now is that the reopening is slow to get going and the FQ4 results could have been better. 

V.F. Corporation Grows But Keep It In Perspective 

V.F. Corporation had a very mixed quarter and one impacted by both divestiture and acquisitions. The company reported $2.58 in net revenue which is up 22.9% and beat the consensus by 280 basis points but there are some other factors to consider. While good at face value, the revenue gains are against a very easy comp, include an extra week, and are still well below the pre-COVID levels. On an FX-neutral basis, sales growth was closer to 19% while adjusted for acquisition closer to 16%. Within that, however, the company says it is seeing strength in all of its core brands with notable strength in the APAC region. 

Oddly enough, the company reported a decline in gross margin due to increased promotional activity. Most other retailers we favor have been reporting an increase in margin due to high demand and decreased promotional activity. Shoe Carnival, for example, posted an 1800 basis point improvement in the margin with a 1000 point impact from promotional (lack of). Regardless, V.F. Corporations promotions helped drive down inventory by 18%  but impacted gross profits by a full 100 basis points.  Looking forward, we expect to see V.F. Corporation reduce its promotional activity in an effort to capture margin gains experienced by other retailers. 

Moving down, despite the impact on margin, the company’s operating profits increased by 4.7% YOY with much better gains when adjusted for items. The adjusted operating margin increased by 260 basis points including a 100 bp impact from acquisitions that drive adjusted EPS to $0.27 or $0.02 better than the consensus estimate. Turning to the guidance, the company is expecting revenue improvement to continue in F2022 but may be underestimating how much. The $11.8 billion in net revenue forecast by the company assumes 28% YOY growth versus some very, very easy comps. 

The V.F. Corporation Dividend Is Safe But Don’t Expect Robust Increases 

V.F. Corporation pays an attractive 2.3% dividend yield and one we think safe for investors to count on but it comes with a caveat. The company went out on a limb over the past year to sustain its 47 year history of dividend increases by paying out 150% of its adjusted earnings. This cut into capital reserves and hurt key balance sheet ratios but not enough to put the company in danger. The risk is that the business will remain depressed over the next year but we don’t see that happening. What we do see happening is a 48th consecutive annual increase but at a low single-digit rate. 

The Technical Outlook: V.F. Corporation Falls To Bottom Of Range 

Shares of VFC have been trading in a range since the beginning of the year and don’t appear ready to move out, at least not to the upside. The Q4 results and guidance for 2022 have the stock down more than 8.0% in early trading and heading lower by our analysts. The price action has not only fallen beneath a potential support target but the indicators are bearish and signaling an acceleration in downside activity. We expect to see this stock fall to the $75 level if not lower before it begins to put in a bottom.