Before you read this, you gotta check out my post from Monday talking about how Levi's push into the male underwear category posed a threat to Warnaco's CK Underwear business (over 1/2 of cash flow and at peak margins). Now add another company to the list. VF Corp. Yes, VFC sold its underwear business well over a year ago, but unfortunately its Lee and Wrangler brands compete heavily with Levi's - which just printed a disastrous quarter.
- Levi Strauss & Co is not public, so naturally no one in the equity world on Wall Street cares about it. But let's not forget that Levi is 50% bigger than VFC's Jeanswear business. Levi's and the VFC brands combined account for about 50% share of denim in mass channels. This is a zero sum game, and while slight shifts in share one way or another happen all the time, any major swings in results for one usually flow through to the other. Not good then that Levi's sales in the Americas were down 20% this quarter.
- Granted, VFC just preannounced on the positive side - which suggests that its portfolio in aggregate is tracking better than Levi's (which is dependent on a narrow brand set -- Levi's and Dockers). But when such a big competitor prints the sharpest revenue slowdown in over 5 years, increased order cancellations, and gross margins rolling over on the margin, how can this NOT matter? Tack on the fact that Levi's is not public, and does not have to worry as much about external quarterly expectations and they can make the right business decision when times like this get tough. Top it all off with increased problems in implementing its new ERP system, and exposure to now-defunct Goody's, and it is not a pretty picture as it relates to control over its business.
- Increasingly desperate giants in this business are usually angry and destructive giants. Levi's is huge and its temper is flaring. With VFC, now we face promise of an EPS growth ramp in 2H that is baked into estimates (consensus calls for 14% growth), which also coincides with VFC having to anniversary recent acquisitions. At the same time, short interest remains low, and VFC has been a perennial favorite among the sell side. In fact, there are no sell ratings, and the 'buy rating ratio' of 67% is as high as it has been in over 5 years. While it may not seem expensive at 7-8x EBITDA, it's tough to ignore that it has seen 4-5x in the past. Granted, it was a more asset-based and commodity-driven model during those periods. But even high quality names like Ralph Lauren are at 8x EBITDA. Others in the space are much cheaper.