Friday, December 7, 2012

VF Corp Research Analysis

VF Corp (NYSE: VFC) is starting to become interesting and I think is well worth monitoring. The recent Q3 results were pretty good and full year guidance was raised, although the market sold the stock off. I suspect this is because of some weakness in The North Face brand in Europe. However, this is good news because it may allow investors an entry point into a compelling growth story. The stock is starting to move into range.

VFC’s Growth Drivers

Having raised guidance in July to $9.50 after a previous hike to $9.45 from $9.30 at the start of the year, VFC increased it again to $9.60. I like the company and think it has a number of good growth drivers. The three biggest brands are The North Face, Timberland, and Vans and all of them are benefitting from the fashion trend towards wearing rugged outdoor clothing or skateboarding fashion on a casual basis. Aside from this, VFC has a large jeanswear division that comprises iconic brands like Wrangler and Lee.

On a geographic basis, while every retailer wants to chase growth in China, VFC’s opportunity comes from the fact that it is relatively under represented there at present. So for example, while a business like Coach (NYSE: COH) is going to be volatile over demand from China that is more closely correlated to GDP growth a company like VFC can get growth through territorial expansion alone.  Coach is doing okay in that regard and the recent results were good but it is hard pushed to expand in Europe. Meanwhile VFC –despite the slowdown in Europe with the North Face and jeanswear- is on track to grow European revenues this year and has good opportunities via its e-commerce launches in Europe.

Another thing in VFC’s favor along with a company like Jones Group (NYSE: JNY) is that it has significant exposure to cotton prices and any reduction in prices will leverage its way into higher margins. Indeed, VFC is expecting further margin expansion this year. It will be interesting to see what Jones Group says in its forthcoming results on the issue.

The other thing I like about VFC is that it has a diverse set of brands while a stock like PVH is heavily dependent on Tommy Hilfiger. In other words, PVH is heavily exposed if a competitor comes along and starts grabbing market share from its core brand.

Current Trading

It is a familiar retail story with strong growth in China and weaker European growth particularly with jeanswear and The North Face. However, management is predicting a resumption of growth with the latter on the assumption that wholesalers will now start to stock up after depleting the previous over capacity created by a mild winter last year.  With jeanswear this is exactly the same pattern as was seen in Europe during the 2009 recession and it should come as no surprise, nor is the heavy exposure to Spain and Italy much of a help either.

However, VFC came out with some bullish projections for Europe by stating that it expected 10% revenue growth in Q4 which presumably implies some pretty robust assumptions for a bounce back in growth from The North Face.

Vans also has strong potential to expand in Europe and on a global constant currency basis revenues were up 26%. And it’s no surprise that VFC is planning to increase marketing investment in Vans and The North Face. They both seem capable of generating growth in a weak environment.

It is a weaker story at Timberland, but investors need to recall that excess inventory needed to be sold as a consequence of the mild winter. Throw in the brand's traditionally heavy European exposure and the result is a slight decline in constant dollar revenues.

Where Next For VF Corp?

I think this dip could be the start of a buying opportunity. I still think the stock is hardly cheap on a PE of 18.8 and an EV/EBITDA multiple of 13.3x. Investors will be getting a high quality name with good growth prospects, but there is always a price to pay for those prospects so it’s hard to argue that VFC is attractively priced yet.

That said, if it delivers on its Q4 forecast and then confirms what the analysts are hoping for in 2013, the stock is quite capable of “doing its earnings” and giving investors mid-teens returns. The problem is there are some imponderables here in relation to Timberland and The North Face recovery in Europe, and needs to be seen first rather than talked about. Moreover, no one can be confident knowing what the winter weather season will be like. There is little margin of safety priced in to this stock but the market seems to be slowly moving it into range.