Shorting VFC Again

Yeah...we know...VFC is one of the best managed companies in this industry. But one thing the company cannot manage is the share price. With a 10.8% move off the 1/28 near-term bottom, Keith got yet another shot at this one in the Hedgeye Portfolio,

 

 

Here’s our sense on VFC over three different durations:

 

Long-term:  It’s hard for anyone to call VFC a bad company. This is not management’s first rodeo. They are pretty darn good at making the right business decisions to manage their portfolio, and then managing expectations accordingly.

The fact of the matter is that over the course of 10 years, VFC has…

  • transformed from a vertically owned/operated capital intensive commodity-based apparel company (ie…underwear, denim) to an outsourced and offshored  portfolio of lifestyle brands that carry significant weight the consumer (ie The North Face, Vans). 
  • printed a growth algorithm of 3-5% sales, 5-6% EBIT, and 9-10% EPS. When you layer on the fact that almost all of the incremental growth came from less capital intensive businesses, we see that RNOA went from 9% to 16% over that same period. That’s not half bad. In fact, it’s clearly above average relative to peers.

 

I’d argue that we’re at the point of the ROI decision tree where the business will slow organically at the same time we’re seeing severe cost inflation -- -and that’s exactly when VFC will step on the accelerator with acquisitions. We’re already modeling stock repo in our model, so we may have to redistribute the cash to above the line if a deal happens. We also will not give the company a free pass that any deal will be a good one. The industry is at peak margins right now, and valuations do not represent that. VFC knows how to vet a deal, and even they have had their share of disasters (7 for All Mankind). Also, let's not forget that this company's long-term transformation happened when the industry had the biggest milti-year tailwind that it experienced -- ever. 

  

 

Intermediate Term

  • Ultimately, with such a diverse portfolio of brands, consumers and channels of distribution, VFC is really a double edged sword. The mix protects them from some downside, but it precludes the company from fully capturing upside in the event of a rebound.
  • In the end, it’s hard to outperform the industry meaningfully when you ARE the industry. Unfortunately, 2011 will be a dark dark year for the apparel industry in the US. VFC may well be able to steer its pricing and inventories better than most, but the biggest risk is what they can’t predict – which is the irrational behavior on the part of competitors as margin is literally sucked out of the supply chain.
  • Bottom line – numbers need to come down for 2011. The Street is at $6.80 for next year vs. $6.30 in 2010. The $6.30 is very doable this year, but this company should consider itself lucky to earn that level again in 2011. Numbers are off by $0.50.

  

 

Short Term

  • 4Q10 is the last ‘easy quarter’ revenue and margin compares – which is largely due to growth in company retail (2x the usual revenue recognition) and strength in TNF.
  • This is going to come down to earnings catalysts.
  • Will VFC ‘lower the boom’? on its conference call in a few weeks? I think that there’s a 75% chance of some official guide down, and 25% chance of a BIG one (ie calling for a flat year).
  • Is it in the stock already? With an EBITDA multiple of 8.6x, my vote is No. RL is trading at the same multiple – but the difference is that the Street is LOW by 15% on RL.

Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more