This Clothing Retailer isn’t Wowing Financial Pros

Life hasn’t been easy for apparel stocks.

YTD, the Retail ETF (XRT) is up 2%, while the broader market gained 14%.

V.F. Corp. (VFC), the top search by financial pros in the industry, epitomizes the challenges faced by the sector.

Revenues are up just 4% since 2015, while profit margins plunged from 11.2% to just 1.0%.

Although the almost 6% dividend is fairly safe, we don’t like the growth prospects for this top financial pro search.

V.F. Corp’s Business

Remember when North Face jackets were all the rage?

You can thank VFC, or VF Corporation, a global leader in lifestyle apparel and accessories that’s been around since 1899., operating in over 50 countries with over 50,000 employees.

The company holds a rich portfolio of over 30 renowned brands like The North Face, Timberland, and Vans, targeting outdoor-based lifestyles to performance-driven activewear.

VFC distributes its products through a network of specialty stores, department stores, e-commerce sites, and other digital platforms.

Its business segments into the following areas:

• Outdoor (39.7% of revenues) – Includes renowned outdoor-based lifestyle brands such as The North Face, Timberland, and Napapijri.
• Active (51.1% of revenues) – Features performance-based and youth culture-inspired brands like Vans, Supreme, and Eastpak.
• Work 9.2% of revenues) – Comprises work and work-inspired lifestyle brands like Dickies and Timberland PRO.

Other breakdowns include brand, region, and channel.

Source: VFC Q1 ‘24 Earnings Release

While Vans and the Americas are the top sellers, both saw dramatic sales declines YoY as consumer apparel spending pulled back. However, Asia Pacific provides the company with consistent growth.

Financials

Source: Stock Analysis

Although revenue stagnated and gross margins improved, operating margins compressed as SG&A costs rose as a percentage of revenue.

Our research suggests diversification of its product lines, digital transformation, and acquisitions & divestitures contributed to this problem.

However, despite a lower sales forecast for the year, management maintained its EPS and free-cash-flow targets as it optimizes supply chains and reigns in costs.

Management currently pays an almost 6% dividend yield while carrying $7.9 billion in debt with a 2.5% interest rate.

While the trailing 12-month operating cash flow is negative, VF has delivered positive free cash flow for the last three quarters.

If VF can hit its free-cash-flow targets for the year, it will cover its dividend payouts by roughly $500 million.

Valuation

Source: Stock Analysis

Apparel companies are largely valued on their growth.

VFC trades at just 10x forward earnings and ~8.3x forward free-cash-flow.

That’s cheaper than Lululemon Athletica (LULU) and Canada Goose Holdings (GOOS), though in line with Carters (CRI) and a bit cheaper than Abercrombie & Fitch (ANF).

Growth

Source: Seeking Alpha

Looking at the growth over the last year and 5-year period, it’s easy to see why each stock is valued where it is.

VFC, ANF, and CRI struggled with sales growth, while LULU and GOOS saw double-digit gains. And for the latter two companies, that also translated to free-cash-flow growth.

Profitability

Source: Seeking Alpha

All the gross margins are roughly in line. However, LULU runs a whopping 22% EBIT margin, while VFC and ANF are below 10%.

Plus, LULU is the only one with a net income margin of over 10%. VFC and ANF barely hold 1%.

Our Opinion 2/10

We simply don’t see any reason to own VFC.

While the brands are well known, the company needs to find a pathway to higher profitability and growth, something we haven’t seen yet.

We’d prefer to see management deliver more savings on the SG&A line before considering a long position.

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