VF Corporation
Ticker:
Sector:
Industry:
VFC
Apparel Makers
Consumer Goods
Recommendation:
Pricing
Closing Price
52-wk High
52-wk Low
$69.16 (10/2/2009)
$73.81 (10/3/2008)
$38.22 (11/20/2008)
Market Data
Market Cap
Total assets
$7.71 B
$6.434 M
Valuation
EPS (ttm)
P/E (ttm)
PEG Est
Quick Ratio
Current Ratio
4.74
14.6
1.26
1.29
2.34
Profitability & Effectiveness (ttm)
ROA
7.78%
ROE
14.34%
Profit Margin 7.16%
Oper Margin 11.08%
Revenue
$7.642 M
ANALYST NAME
Emily Meyers
Esm2z6@mail.mizzou.edu
Introduction & Background
VF manufactures and markets clothing, specializing in
jeans, sportswear, outdoor apparel, and footwear. Its apparel
brands include Lee, Wrangler, The North Face, Nautica, Seven For
All Mankind, lucy, Majestic Athletic, and John Varvatos. Other
brands include JanSport, Eastpak, and Eagle Creek backpacks and
Vans and Reef footwear. International sales account for roughly
30% of revenue, although I couldn’t find margin. VF’s businesses
are organized primarily into product categories called coalitions,
and then broken down by brands. They have five coalitions:
Jeanswear, Outdoor, Imagewear, Sportswear, and Contemporary
Brands. 16% of sales are sold through VF operated retail stores.
Jeanswear ($2,765M– Operating Margin 14.5%)
The Jeanswear market’s primary brands are Wrangler, established
in 1889, and Lee established in 1947, which are sold in nearly
every country. VF sells more jeans than any other company in the
world. In 2008, VF acquired the remaining 50%-owned joint
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venture that markets Lee brand jeans in Spain and Portugal. Their competitive edge in this market is
their information systems; their vendor-managed inventory and retail floor space management
programs sends point-of-sale information on a daily basis for each individual store and style-size-color
stock keeping unit (SKU). This allows them to analyze sales, demographic and geographic data, and
maximize the productivity of their Jeanswear selling space and minimize their investment in inventory.
Their Lee and Wrangler products are sold in over 500 independently operated single brand retail stores
primarily in Eastern Europe and South America. They plan on growing this business in the US through
marketing strategies and product innovations, and internationally through position and marketing in
Europe and Latin America, and expanding through new retail stores in China, Russia, and India. Margins
decreased to 14.5% from 16.6% in 2007 and 15.5% in 2006, due to cost savings and lower revenues
without comparable expense reduction.
Outdoor & Action Sports ($2,742 M – Operating 16.9%)
The Outdoor coalition consists of brands such as North Face, JanSport, Vans, and Reef, including high
performance outdoor apparel, equipment, and footwear. This is VF’s fastest growing business. The 4Q
08 saw revenues increase 13%, operating income also grew by 7%. From 05 to 07, revenues grew from
$1,455 to $2387, with a majority of it coming from organic growth. They are sold through numerous
department, specialty and VF-operated stores across the world. Margin increased to 16.6% in 08, with a
charge of .3% related to cost savings, increasing from 16.4% and 16% in 07 and 06.
Imagewear ($991M– Operating 13.5%)
The Imagewear Coalition consists of the Image division (occupational apparel and uniforms) and the
activewear division (owned and licensed high profile sports and lifestyle apparel). In fact, 150,000 FedEx
employees wear VF made uniforms. Each division represents 50% of revenues. Two-thirds of Image
division sales are to industrial laundries and resellers. Because industrial laundries maintain minimal
inventories, VF has competitive advantages in brand recognition (Red Kap has 75 years of history), and
their ability to fill customer orders within 24 hours of receipt. Margin declined to 13.5% in 08, from
14.4% in 07 and 16.2% in 06. This decline was due to .2% and .4% loss related to cost cuts and
additional investments in advertising. Over the past 7 years this business segment has grown mainly
through acquisitions.
Sportswear ($608 M - Operating 7.3%)
The Sportswear coalition was formed in 2003 with the purchase of Nautica brand. It is the principal
lifestyle brand of the Sportswear Coalition, operating 110 Nautica retail outlet stores in malls across the
US. Independent licensees operate over 200 Nautica brand retail stores across the world. The other
two are John Varvatos and Kipling brand business across North America. Since 2004, its first full year,
revenues went from $618mm in 04, to $683mm in 07, and $634mm in 08. Margins declined to 6.3% in
08 from 9.6% in 07 due to lower revenues without comparable expense reduction and a .9% charge
related to cost reduction. Margins were 13.3% in 06.
Contemporary Brands ($414M – Operating 12.7%)
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Contemporary Brands is the newest coalition formed in August 2007, currently composed of Seven For
All Mankind and Lucy brands. In May 08 VF acquired 1/3 of Mo Industries Holdings, a premium maker of
knitwear, and plans to acquire the remaining portion in the first half of 09. Seven For All Mankind is in
the premium jeans segment, with ¾ of their sales in the US through department stores and 15 retail
stores, 13 of which were opened in 08. For growth they are looking to expand the number of stores and
leverage VF’s supply chain capabilities for profitability improvement. Margins fell to 12.7% in 08 from
17.5% in 07, due to 1.7% in cost reducing markdown-related expenses.
Other ($123M)
The other business segment represents a broad selection of excess quantities of VF products and other
branded products sold at the VF Outlet retailers.
3-Year Coalition Revenues and Profits (Dollars in Millions)
Sector and Industry
VFC participates in the broad apparel market, spanning product categories from women's active
wear to denim, as well as the outdoor market for apparel and accessories via its lifestyle brands. Apparel
is a mature market, with demand mirroring population growth. Moreover, it is fragmented, with
national brands marketed by 20 companies accounting for about 30% of total apparel sales and the
remaining 70% comprised of smaller and/or private label "store" brands. Deflationary pricing pressure is
most likely a function of channel competition and production steadily moving offshore to low-cost
producers in Asia, especially India and China. S&P forecasts an 8% decrease in 2009 apparel sales,
following the 4% decline in 2008 and 4% gains in 2007 and 2006.
According to the SGMA (Sporting Goods Manufacturers Association), sports apparel equipment
and sportswear wholesale revenues were $66.3 billion in 2008, a 3.5% decline with a like decline
projected for 2009. In 2007, this broad category experienced a 3% gain; it has been growing since 2004.
Apparel represents about 44% of the mix, footwear 19%, and equipment 37%.
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Sports participation has been relatively stagnant over the past 20 years, with organized or team
sports exhibiting growth reflecting increases at high school varsity teams. These trends are slowing as
the 15-19 year old demographic (the key market) is shrinking. However, the aging of the 77 million baby
boomers bodes well for fitness-related categories over the coming decade. In the SGMA's 2009 State of
the Industry Survey, fitness walking and free weights were the top fitness activities in terms of number
of participants. Thus, VFC's lucy activewear should be a direct beneficiary.
Operations and Growth Strategies
VFC's strategy of acquiring brands that provide lifestyle authenticity and that can be extended
over multiple categories was apparent through its April 2005 acquisition of Reef Holdings, placing VFC in
the center of the surf-inspired market. Acquisitions remain vital to VFC's goal of 8% annual sales growth
and should generate about half of the increase. Over the past five years, VFC added about a dozen new
lifestyle brands, growth vehicles that allow VFC to leverage its infrastructure and reap economies of
scale with these growing brands that offer superior growth and margin prospects. Concurrently, lifestyle
businesses have risen from 10% of the sales mix to 49%, and are projected to reach 60% by 2009-2010.
A more recent strategic thrust has been to go directly to the consumer via retail locations, and VFC now
operates about 624 mono brand stores (and 74 outlets) and plans to expand this to 1,000 over the next
few years. Some 75% of the store base is in the U.S. VFC is a market leader in denim with its heritage
Wrangler's and Lee brands, which have historically generated strong cash flow, financials and
profitability. In early 2007, VFC sold its intimates business (Vanity Fair, Vassarette, Lily of France and
Bestform brands) to concentrate on its growth opportunities with its outdoor lifestyle businesses. In
August 2007, VFC added 7 For All Mankind and lucy (a premium denim brand and a specialty retailer of
women's sports apparel, respectively) and its latest acquisitions, the remaining 67% of Ella Moss and
Splendid (the first 33% was purchased in 2008), closed in March 2009.
Competitors
The athletic apparel and footwear markets are highly fragmented domestically and abroad.
Significant competitors include Timberland and WolverineWorld Wide, as well as major sports
companies such as NIKE, Inc. and Adidas-Salomon AG, and fashion-oriented competitors such as Polo
Ralph Lauren Corp (below) and GAP. VFC's heritage brands compete in the mass and moderate channel,
which is benefiting from the contraction of the traditional better department store channel.
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Financial Trends
P/E Ratio (TTM)
Beta
Dividend Yield
Dividend Yield - 5 Year Avg.
Sales - 5 Yr. Growth Rate
EPS - 5 Yr. Growth Rate
Quick Ratio
Current Ratio
LT Debt to Equity
Interest Coverage (TTM)
Gross Margin (TTM)
Gross Margin - 5 Yr. Avg.
Net Profit Margin (TTM)
Net Profit Margin - 5 Yr. Avg.
Return on Assets (TTM)
Return on Equity (TTM)
Return on Equity - 5 Yr. Avg.
Company Industry Sector S&P 500
14.61
4.43
0.4
40.59
0.92
0.66
0.8
1.41
3.41
0.01
0.01
1.52
2.7
1.68
1.37
2.81
11.61
8.23
10.26 16.03
11.89
10.91 -2.66
0.64
1.29
1.85
0.44
0.77
2.34
2.61
0.57
0.92
31.28
12.95 19.07 151.65
11.92
0.24
0.26
23.92
42.68
9.06
3.23
25.35
42.5
45.69 26.52 24.96
7.16
1.45
-0.7
5.31
8.24
6.6
5.58
13.97
7.78
2.61
-0.49
3.51
14.34
3.7
-1.61
8.4
17.62
13.69
11.6
14.76
One negative concern is apparent when comparing VF to the rest of the sector. The Debt to
Equity Ratio for VFC lies at 31.28% for the company and at 19.07% for the sector average. While this
is worrisome, it is the result of the company policy. VF expanded its operations in the last few years
through a series of acquisitions that led the company to be a market leader and allow it to maintain
a way higher profitability than its competitor. This acquisition required expenses that have been
partially covered by debt.
Quick and Current ratio are both over the sector average and well above 1. This means that the
company is not going to suffer as a consequence of lack of cash or other means to cover short term
debt. Also, the fact that the company holds more cash than necessary is good in order to maintain
that strategy of acquisitions that will help VF to grow in the long period and that has been used in
the past few years.
Dividend Yield (dividend/price ratio) and Dividend growth are also assuring us a very good profit.
The dividend’s constant increase suggests that the company will continue distributing its profits in
the near future.
Considering margins, it is also important to notice how VF performs better than its competitors
both for the gross and for the net margins. Additionally, VF posted a 7.16% net profit, while the
sector as a whole lost money at a .7% rate.
Finally, VF has a positive ROE while the sector has a negative return on equity (direct reflection
of the negative net income). I think that the company’s targeted increase in profitability will possibly
help increase this in the next future.
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Valuation
For the valuation of VF Corp, I used the Warren Buffet Owner Earnings Model. To use this
model, l looked at three important factors to determine the overall intrinsic value of VFC. The model
also allowed for the valuation to be compared to different values related to growth rates, market
returns, and discount rates.
For the Valuation, I used:
Risk Free Rate
.27%
Beta
.92
Market Return
K
12%
11.06
I used growth rates from averages of Google Finance and Yahoo. I estimated growth of -5%
for 2009 and 6% for all years following. I also used a 3% second stage growth rate. The estimates reflect
conservative assumptions and averages in order to not overvalue the long term growth. After running
the model, this gave me a valuation of $69.47
Final Recommendations
Actual Price
$
57.45
Suggested Price
$
64.05
52 Week Low
$
38.22
52 Week High
$
73.81
SUGGESTION
HOLD
Even though the future of the sector does not look too bright and its recent past performance
was poor, the company, on the contrary, is financially doing a very good job and there is no indicator
that suggests a short term fall in its profitability.
VF is differentiating its operations and targeting many different customers in different ways.
They are looking for new markets all over the world and for new opportunities. The last few years
have been successful and I anticipate that this will continue. They have been doing a very good job
in marketing their product, delivering it in the most efficient way, keeping costs low and maximizing
their revenues. I believe they have found a profitable business model to ensure the company long
term success. Further, by considering the variety of different channels that VF is using to market its
products, its apparent that the company has differentiated itself.
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The company is constantly looking for ways to increase its profitability, such as direct
distribution to the customers, licensing of operations, and outsourcing of production. This reflects
in the constant increase in dividends per share and in the high dividend yield that creates a real
advantage for our fund.
The company can someway take advantage of the recession through acquisition of distressed
companies that still have a good future market situation. Obviously that might be a risk, but it can
present obvious advantages for VF.
2009’s first two quarter data does not register any growth when projected for the entire 2009
and compared to the previous year, but they are in line with past performance. This is still a good
result as the company shows that they are able to make money even in tough economic times.
Finally, the DCF valuation above also leads me to believe that the company is fairly valued and we
should hold.
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