VFC: Needs Another Deal

This name does not smell right to me here. This is not a story like WRC, GES, GIL or SKX where I think the margin structure is grossly overstated today, as I think that VFC is one of the better companies in this industry and it manages its margin trade-offs within reason. But there are some battles that even solid management teams can’t win. Consider the following.

Throughout 2006 and 2007, VFC posted a solid organic growth rate between 7 and 13%. This was largely driven by growth in Outdoor businesses such as The North Face, as well as scaling up its’ portfolio’s global presence. As a kicker, the impact of FX and the addition of acquisitions roughly doubled reported top line growth over that time period.

In the first two quarters of 2008, VFC still benefitted from its Lucy and Seven acquisitions (3Q07), and realized partial benefit from its purchase of Eagle Creek (1Q07) and North Face China (2Q07) business. But in stripping out these acquisitions as well as the impact of FX, organic growth was only 4% in the first half – the lowest rate in 3 years.

Now, heading into 2H, VFC has fully lapped Eagle Creek, TNF China, and is just about to lap Lucy and Seven. This is happening at the same time that the yy Euro compare goes from +20% in 1H to flat heading into 4Q, and negative in another 9 weeks assuming current FX rates prevail.

Based on consensus estimates in 2H, we need to see organic growth accelerate to 5% in 3Q, and 9% in 4Q with margins accelerating into 2009. With cost headwinds accelerating into spring '09, I have a hard time digesting these expectations.

One positive is that the company is hosting an analyst meeting (one of several it hosts throughout each year) at the end of this month to highlight its Outdoor business. Yes, there are good things to say about this division (35% of total). But those fourth quarter numbers don’t look like a slam dunk to me.

Organic growth slowing and compares getting tough, FX waning and acquisition benefit going away. Yes, VFC is a good company, but at 8.5x EBITDA and high expectations, this does not smell right.

VFC needs another deal…

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