Some investors may not know the name VF Corp (NYSE:VFC). But the company’s apparel brands are very familiar, including Wrangler, The North Face, Timberland and Vans. Those names are behind VFC stock impressive gains in the last 12 months.
Bulls are excited. The stock is up close to 50% over the past year as new sales initiatives are paying off. However, VF’s last quarterly report threw a bucket of cold water on VFC stock, with shares retreating sharply.
On top of that, VFC stock naysayers view the shares as expensive. VF stock is trading at 21x forward earnings, compared to cheaper ratios for peers. PVH Corp (NYSE:PVH) is at 18x, with Perry Ellis International, Inc. (NASDAQ:PERY) at just 11x. Does VF’s strengths make up for its pricier valuation?
Time to look at the pros and cons.
VFC Stock Cons
Weak Quarter: In February, VFC stock dropped 11% following a less-than-expected earnings report. To be sure, the miss wasn’t by much. The company fell short by just $10 million on revenues and a penny short of EPS expectations. However, when a company is in growth mode, the market won’t tolerate disruptions, even small ones.
VF has successfully altered its sales strategy over the past year to reinvigorate growth. This quarterly miss — though small — is the first sign that this approach is starting to run out of steam. Given VF’s higher valuation, it needs to keep its recent growth streak going.
Selling Nautica: Earlier this year, VF announced that it is selling its Nautica brand. Earlier this week, it found a buyer in Authentic Brands Group LLC but terms weren’t disclosed. VF probably didn’t receive much in return for Nautica.
It’s a sad ending for what used to be a powerful boat-themed brand in the 1990s. Many rappers and hip-hop artists embraced Nautica. Over the years, though, it slid. Prominent rapper Lil Yachty tried to reinvigorate the label last year with a new collection, but it was too little too late. VF has plenty of brands, it can do alright without this one. But it’s still a shame that a once-powerful piece of intellectual property withered away.
Maturing Brands: VF has long relied on a few of its key brands to pilot the company forward. In particular, Timberland and The North Face have done heavy lifting for the company. Outdoor apparel has been a hot segment, and VF capitalized.
But both these brands are now everywhere. While outdoor wear is still growing nicely, it’s unclear how much more of the pie the two brands can pick up. Consumers are already well aware of these brands, meaning future growth is likely to be lower. Fortunately, VF has figured out a new way to keep growth going.
VFC Stock Pros
Business Transformation Working: This time last year, VFC stock was languishing around $50 a share, way down from its 2015 peak of $80. Investors had lost faith in the company. Since then, the stock is back up 50%. What went right? Simply put, management creatively got organic sales growth moving again.
The company pulled this off by focusing on two main channels that it hadn’t fully utilized previously. The first, direct-to-consumer, is a powerful tool for a company like VF. As physical retail stores decline in importance, VF can increasingly cut out the middleman and sell straight to the consumer online. The company showed 25% growth in digital sales year-over-year this past quarter, a rather impressive figure. On top of that, the company managed 15% organic growth from its international retail channel. Asia, with China in particular, is a huge opportunity for VF going forward.
Dividend Aristocrat: The Dividend Aristocrats are an elite group. This collection of 53 S&P 500 Index stocks are notable for one thing: always boosting their dividend. Through thick and thin, this group of companies have increased their dividend payment at least 25 years in a row. No financial crisis, tech bubble, or other such event could derail this group.
VF Corp is among this impressive group of stocks. That’s quite a feat, as apparel is generally thought to be a highly cyclical sector. But VF has rode the waves and delivered shareholders consistent increased dividends.
While VFC stock currently yields just 2.3%, long-term holders get rewarded. Over the past five years, VF’s dividend has increased at a 19% annualized rate. That means folks who bought five years ago now receiving a mighty impressive 5.6% yield on their cost. These Dividend Aristocrat stocks tend to be good buy-and-hold forever-style plays, as they pay out more income with every passing year.
Breakout Coming: Three years ago this week, VFC stock closed at $75 a share. It’s still hovering near that mark today. The stock dropped into the 40s, and has just now rallied back to 2015-levels. For comparison sake, the S&P 500 was at 2,100 at the same time. It’s at 2,700 now — a nearly 30% run.
After a long period of doing little-to-nothing, a stock will often make an outsized move to the upside once it reaches new highs. While VFC stock is still relatively expensive (the bears aren’t wrong), it’s cheaper than it has been in recent years. And it’s not like the market overall is getting cheaper. Not to mention that 21x forward earnings for a high-quality Dividend Aristocrat is hardly crazy.
Another year of 10%+ EPS growth and the PE ratio moving back out to 25, and you could see the stock get to $100 surprisingly quickly. Analysts don’t think much of VFC. The average price target is just $81 a share, leaving plenty of room for upgrades as the stock gets rolling.
VFC Stock Verdict
VF is not the world’s most glamorous company. So it feels a little weird potentially chasing VFC stock after a 50% run-up. And the skeptics have a point, the shares are a bit expensive at 21x earnings.
On the whole though, there’s plenty of reason to think the company can keep powering ahead. The direct-to-consumer digital sales channel is strong and could boost margins. The stock is ready for a technical breakout. And as a longer-term investment, it’s hard to beat as a dividend growth story.
At the time of this writing, the author owned VFC stock. You can reach him on Twitter at @irbezek.