VFC: This Makes Zero Sense

If North Face, Wrangler, Napapijri or Seven were standalone businesses, every analyst would have sells on them. Yet they look through FX, spec charges, and the mother of all back-end-loaded guidance.

I’m kind of at a loss for words on this one. The company has run out of benefit from FX and acquisitions, and the ensuing transparency shows it for what it is – a portfolio of ‘slightly above average’ brands operating near peak margins and limited aggregate organic growth opportunity.

I’m not here to beat up VFC on its quarter. After all, almost everyone posted miserable results this quarter. But I am beating up VFC over its guidance and transparency (or lack thereof). This has always been one of the few ‘stand-up’ companies in the space. But now that business is tough, the company is restructuring, taking special charges, and not giving enough information for investors to accurately nail down the real earnings power this quarter.

Also, guidance next year of a low-single-digit sales decline (flattish in constant $), but with margins up 170bp excluding the impact of higher pension expenses? This means that in 2009, VFC will need to print an adjusted margin of 14% -- its highest margin in history. On a negative comp? In a recession? With The North Face slowing on the margin? And a multi-year FX tailwind going the other way? VFC needs to cut A LOT of SG&A in order to get there. I don’t know about you, but I don’t like paying for SG&A stories in most tapes – especially this one. In fact, one of the things I liked in the past about VFC is that it would consistently invest to drive growth. I understand the want/need to push out EPS hit and save costs. But this will inherently make me question what kind of growth is coming down the pike in 2010.

My 2009 number is $5.16 – well below the $5.42 (flat) guidance for the year. That’s about 10-11x pe and 6x EBITDA with the stock at $54. Expensive? Not really. But for a levered company where earnings need to come down, short interest is still low at 4% of float, 78% of ratings are Buy, and other names that are missing earnings trade at 20% lower, I wouldn’t touch this name here with a 20 foot pole.

Who is the incremental buyer here?




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