Published October 26th, 2016 by Bob Ciura
V.F. Corporation (VFC) was first organized all the way back in 1899. Over the course of the next 117 years, it has made many transformations along the way…
It was started by John Barbey and a group of investors. They formed the Reading Glove and Mitten Manufacturing Company. About 10 years later, the company was renamed Schuylkill Silk Manufacturing when it shifted into silk lingerie.
It would eventually change its name once again when silk was embargoed during World War II.
Renamed Vanity Fair Mills, it first went public in the 1950’s. The following decade, the company changed its name once again to V.F. Corporation to reflect its diversified product line.
Today, V.F. Corp. is a giant in the apparel industry. It has 64,000 employees and generates over $12 billion of annual revenue.
The company has found success by reinventing itself when necessary, and investing in iconic brands that change much slower than most other brands in the notoriously fickle fashion industry. V.F. Corp.’s dividend history is the most impressive of any clothing company.
V.F. Corp. recently raised its dividend by 14%, marking its 44th year in a row of consecutive dividend increases. The company’s long dividend streak makes it one of only 50 Dividend Aristocrats – stocks with 25+ years of rising dividend payments in the S&P 500.
Management attributes its consistent success to its product innovation and diversified brand portfolio. It keeps a close watch on changing consumer trends, and effectively responds to shifting demands.
V.F. Corp operates a diversified business model. Its revenue breakdown according to business segment is as follows:
Source: 2015 Annual Report, page 9
V.F. Corp has many strong brands, which fuel its impressive growth.
Source: 17×17 Investor Presentation, page 6
The company’s portfolio is spearheaded by the following five brands, which each collect at least $1 billion in annual sales:
- The North Face
These five brands each encompass a wide product line, ranging from shoes, jeans, and outdoor wear.
More recently, V.F. Corp. has seen its growth slow down. Last year, revenue increased just 1%, while earnings-per-share were flat from the previous year.
The reason for the slowdown is because of the heightened level of geopolitical risk and uncertainty facing the global economy. The economic slowdown in the emerging markets and the strong U.S. dollar have weighed on V.F. Corp.
V.F. Corp is a global company; 36% of the company’s sales last year came from outside the U.S.
Things have not improved much this year. Over the first three fiscal quarters of 2016, revenue was flat year over year. In the same period, diluted earnings-per-share from continuing operations rose just 2%.
The good news is that V.F. Corp can benefit from growth catalysts which will help it resume stronger growth going forward.
The first pertains to seasonal fluctuations. This year, jeans have been an under-performing category for V.F. Corp. Jeanswear sales fell 6% last quarter, due to unseasonably warm weather across many parts of the U.S.
Since winter is fast approaching, the decline in jeanswear sales in the second quarter should simply result in pent-up demand. V.F. Corp is an industry leader with its Wrangler and Lee brands, and colder weather is on the way. As a result, the jeanswear category could outperform going forward.
Another key growth catalyst for V.F. Corp would be a lower U.S. dollar and a more normalized foreign exchange market.
Investors should keep in mind V.F. Corp’s results would look a lot better if not for the strong U.S. dollar. To that end, V.F. Corp’s currency-neutral revenue increased 6% last year. Earnings-per-share would have increased 13% for the year.
V.F. Corp. has generated excellent growth rates over the long-term. For example, from 2006-2015 the company grew earnings-per-share by 10% compounded annually.
The company generates significant free cash flow, a great deal of which is returned to investors. In addition to its dividend, V.F. Corp returns cash through share repurchases. The company spent nearly $1 billion so far this year to repurchase nearly 16 million shares. It has another 15 million shares left in its current repurchase program.
Competitive Advantages & Recession Performance
One would naturally assume a clothing company would be fairly sensitive to recessions. After all, one of the easiest ways for consumers to conserve cash in a difficult economy is to cut back on buying new clothes.
But VF Corp. displayed surprising resilience during the Great Recession of 2007-2009.
- 2007 earnings-per-share of $1.35 (new high)
- 2008 earnings-per-share of $1.39 (new high)
- 2009 earnings-per-share of $1.29 (recession low)
- 2010 earnings-per-share of $1.61 (new high)
Earnings-per-share declined just 7.2% during the worst year of the recession, and the company recovered quickly. Earnings-per-share hit a new high in 2010.
VF Corp.’s impressive performance even during periods of recession is due to its strong brands – which are surprisingly long lasting. The company’s top 5 brands are shown below, along with the date the brand was created:
- Lee – founded in 1889
- Wrangler – founded in 1944
- Van’s – founded in 1966
- The North Face – founded in 1966
- Timberland – founded in 1973
All of these brands have 40+ year histories. The Lee brand is especially impressive it has been around for over 120 years. ‘Everyday’ jeans don’t change much from year-to-year (or even decade to decade). The Lee jeans you wear today are likely similar to what your grandparents wore.
This is in stark contrast to much of the clothing industry. Brands like Aeropostale (AROPQ) can attest to how quickly most of the fashion industry can change. The company’s stock price has gone from over $40 per share in October of 2009 to less than $0.04 per share now. For comparison, V.F.’s stock price has gone from under $20 per share to over $50 per share during the same time period (not including dividends).
Slow changing brands matter. V.F. Corporation has them. Aeropostale did not. Very few apparel companies possess durable brands. V.F. Corp. is the exception, not the rule.
Valuation & Expected Total Returns
VF Corp. stock trades for a price-to-earnings ratio of 19.3. It is more expensive than its own historical averages. Since 2000, VF Corp. stock has traded for a price-to-earnings ratio of 16. Moreover, the S&P 500 Index trades for a price-to-earnings ratio of 24.7.
This implies that VF Corp. stock is slightly overvalued on a historical basis, but likely undervalued relative to the S&P 500’s current elevated price-to-earnings ratio.
Future investors shouldn’t count on significant returns from valuation multiple expansion, but it is possible if interest rates remain low.
Therefore, future investor returns will likely be comprised of earnings growth and the dividend yield. The good news is that there is plenty of growth potential for the stock to continue rewarding investors.
A reasonable expectation for future earnings-per-share growth is 8%-10%, based on the company’s proven track record.
This could be accomplished through a combination of revenue growth, cost cuts, as well as share repurchases.
Including the 2.8% dividend yield, total annualized returns in the low double-digit range are possible.
V.F. Corp has a strong business model and a large number of high-quality brands. The stock has a 2.8% current dividend yield and has increased its dividend each year for more than four decades. Its dividend increases are often in the double-digit percentage range.
As a result, V.F. Corp is an attractive stock pick for both investors who desire current income, as well as dividend growth investors.
The company’s favorable metrics (listed below) help it to rank in the Top 20 using The 8 Rules of Dividend Investing.
- Above average 2.8% dividend yield
- Above average 8%-10% expected earnings-per-share-growth
- Reasonable price-to-earnings ratio under 20
- Reasonable payout ratio of 56%