Published April 15th, 2017 by Nicholas McCullum
Long-time shareholders of the V.F. Corporation (VFC) are familiar with the company’s 17×17 plan, which was unveiled in 2013 and aimed at generating $17 billion in revenues by fiscal 17. Other components of the plan included margin expansion and $18.00 in earnings-per-share (which was before a 4-for-1 stock split announced later in 2013).
Unfortunately, V.F. failed to deliver on most of the company’s stated growth targets. Performance goals compared to realized performance is displayed below.
V.F.’s performance over the long-term, however, has been very strong. The company’s 14% dividend increase last October made 2016 its 44th year of consecutive annual dividend increase. This makes V.F. a member of the Dividend Aristocrats – companies with 25+ years of consecutive annual dividend increases.
Recently, V.F. announced a new 5-year plan, complete with capital allocation priorities, merger & acquisition guidelines, and technology guidance. Investors might be wary of this plan, since the company’s recent performance fell short of its 17×17 performance plan.
This article will analyze V.F. Corporation’s new 5-year plan in detail.
The V.F. Corporation is a leader in the apparel industry with more than 60,000 associates and $12.4 billion in revenue for 2016.
V.F. is divided into four operating segments, which it calls ‘coalitions’:
- Outdoor & Action Sports
The company is well-known for its portfolio of iconic apparel brands. Particularly important is the ‘Big 3’. brands, which include Vans, The North Face, and Timberland. Each of these brands (along with Wrangler and Lee) generate at least $1 billion in annual sales.
Some of V.F.’s other brands can be seen below.
V.F. is also remarkably shareholder-friendly. The company consistently earmarks a large proportion of its earnings for dividend payments and share repurchases, including a $5 billion share repurchase authorization announced along with the 2021 plan.
The rest of this article will discuss V.F.’s 2021 plan in detail.
A Focus On Technology
Like most other apparel and retail companies, V.F’s business model is changing dramatically because of the impact of technology on consumer behavior.
V.F. reacted to this secular trend by rolling out the ‘V.F. Digital Lab’ in 2012, for which there are three locations: San Fransisco, China, and Europe.
These locations are digital incubators focused on improving V.F.’s efficiency through technology. More specifically, V.F. is aiming to improve their e-commerce offerings, make better use of data analytics, and improve their online marketing presence.
More details about the V.F. Digital Lab can be seen below.
V.F. is also beginning to implement augmented reality into its digital shopping experience.
Some of V.F.’s shopping applications allow consumers to project items (such as tents) into their surroundings. The idea is to improve customer satisfaction by reducing surprises related to the dimensions of their purchases.
This process can be seen below.
V.F.’s channel mix will change as a result of their technology investments.
The company currently sells to consumers through three channels: direct-to-consumer digital, direct-to-consumer stores, and wholesale.
Through growth in both direct-to-consumer channels, V.F. is expecting wholesale’s contributions to revenues to decrease dramatically by 2021.
V.F. hopes that their investments in technology will improve efficiency and drive margin expansions.
The company’s new 2021 plan is guiding for a 220 basis point and a 210 basis point expansion in both gross margin and operating margin, respectively. The company is also aiming for a return on invested capital exceeding 20%.
V.F.’s focus on technology will be a key contributor to shareholder returns moving forward.
Growth In Emerging Markets
V.F. currently has a healthy exposure to international markets. Only 62% of the company’s sales were generated in the United States during fiscal 2016.
The company expects that figure to shrink over time. The 2021 plan calls for 57% of revenues to be generated by the U.S.
This is not because the company’s U.S. business is shrinking. Rather, it is just growing more slowly. Growth expectations broken down by geography for V.F. can be seen at the bottom of the above diagram.
From an economic perspective, V.F.’s exposure to international markets is very attractive because even if the company’s market share in these countries remains constant, it will benefit from higher GDP growth which is driven by consumer spending.
For a quick comparison:
- China’s GDP growth has been above 6% in recent years
- The United States’ GDP growth has been just above 2.0% in recent years.
Right now, the strong U.S. dollar is presenting a headwind because V.F.’s international earnings become less valuable when swapped back to USD for reporting purposes.
However, when the U.S. dollar returns to a more normalized level, the true earnings power of V.F’s global business will be realized. V.F.’s international presence gives the company more diversification and better growth prospects.
Capital Allocation Priorities
V.F. earmarks a large amount of its capital to be returned directly to shareholders.
This has not changed with the introduction of the 2021 plan. The company expects to spend a roughly equal amount of money on dividends and share repurchases over the next five years.
Remarkably, V.F. has gained authorization for a $5 billion share repurchase program, of which it expects to complete $4 billion. The company has a current market capitalization of $22.7 billion. This $4 billion share repurchase represents just under 20% of the company’s current market cap.
For context, if these shares were repurchased immediately, the company’s earnings-per-share would jump from 2016’s $3.11 t0 ~$3.89, which would raise the stock price to $68.46 if the company’s valuation multiple remained constant. Alternatively, the company’s stock price could remain fixed and its price-to-earnings ratio would decline to 14.0 – definitely in bargain territory.
These estimates are very approximate and were aimed at illustrative the substantial size of V.F.’s recently announced buyback. No one is sure exactly how profound the buyback’s effect will be, but one thing is certain – dividends and share repurchases will be a substantial portion of V.F.’s future shareholder returns moving forward.
Financial Performance Targets and Expected Total Returns
There are only three ways for an investor to profit from owning stocks:
- Earnings-per-share growth
- Dividend payments
- Changes to valuation multiples
Fortunately, V.F.’s 5-year earnings-per-share growth is expected to be in the range of 10%-12%. This will lead to phenomenal returns for shareholders even if the company’s valuation multiple remains constant.
With that said, it is unlikely that V.F.’s valuation multiple remains constant over the next few years. The company reported adjusted earnings-per-share of $3.11 for fiscal 2016. The current stock price of $54.80 represents a 17.6x multiple of 2016’s adjusted earnings.
Most companies with expectations of 10%-12% annual earnings growth trade at a higher valuation multiple than 17.6x. If the market gains confidence in V.F.’s new growth plan, the company’s valuation has room to expand significantly.
VF is also a strong dividend stock. The company’s most recent quarterly dividend payment was in the amount of $0.42 per share, or $1.68 per year. Based on this payout, V.F. is currently priced at a dividend yield of 3.1%. The company also has a relatively safe dividend, paying out only 54% of fiscal 2016’s earnings.
The company’s 10%-12% expected earnings growth along with its ~3% dividend yield gives investors total return expectations of 13%-15% per year, broken up as follows:
These expectations are lofty, and I view V.F. as a binary play. The company will either deliver on these returns (and probably better, since their valuation will expand along the way), or they will miss on business growth and shareholders will be further impacted by a decline in valuation multiples as the markets lose confidence in this stock.
The new five-year plan for the V.F. Corporation has high potential to reward the company’s shareholders. The thought of 10%-12% earnings growth is tantilizing for fundamental investors.
However, investors should keep in mind that the company failed to deliver on some of the metrics in its 17×17 plan, and the 2021 plan has even higher growth expectations.
Thus, investors should think twice about mindlessly believing in the company’s projected growth prospects.
With that being said, V.F. looks like a solid investment right now regardless of its new growth plan. The company’s low price-to-earnings ratio, high dividend yield, and low payout ratio helped it rank as a top 10 stock according to The 8 Rules of Dividend Investing in the most recent Sure Dividend Newsletter.
This makes V.F. Corporation a buy at current prices.