This is a simple call. It’s not easy, but it is quite simple. This is a huge below the radar retailer ($12bn in revs, 25 brands like Vans, Timberland, Wrangler and The North Face, with $30bn in cap) that is near impossible to model accurately. I think my team has, and we’re getting to numbers suggesting an upwards earnings revision. On top of the obscurity of the company and the poor disclosure practices, the following factors have put it into the ‘I don’t give a damn’ bucket for most of the investment community.
- Changed Fiscal year this year and is about to report a stub – WITHOUT providing historicals on realigned divisions.
- FX is consistently mis-modeled at this company. We think we’ve got it right (ie higher)
- And the icing on the cake is that VFC has done 4 deals over 6 months (including divesting Nautica), only adding further opacity to what this company will earn in the coming year.
All in, to get an edge on this name you have to REALLY like modeling. Fortunately, we do. If this was a company like Nike and faced the same factors, people would HAVE to spend the 20 hours realigning undisclosed financials. But this is VFC. No one cares.
I think that people will care, however, when the company reports the stub on May 4th and beats estimates by 10-15%, and either guides higher as it provides clarity on financials, or sets up for a series of sandbags and 15-20% earnings growth WITHOUT a transformational deal – which is better than 80% probability. This company buys companies religiously at 1.3x-1.7x sales, and are almost always accretive in year one despite guidance. I’m not a huge fan of deals for the sake of deals – no one is. But I think that we’re facinig the biggest wave of quality IPOs and pre-IPO M&A in retail that we’ve seen in two decades. The two biggest beneficiaries are likely to be WMT and VFC. DO NOT BE SHORT VFC when it re-enters deal mode, and it has been largely absent from that game for the better part of 10 years.
After the stub, we’re coming out at $3.75 vs. the squirrely Street number of $3.50. But REAL earnings expectations out there are a) non-existent with negative sentiment, b) more moving parts in numbers for any retailer other than Sears, and c) fear in the HF community that the brand heat at Vans (23% of sales and growing 19%) will be difficult to comp in 2H. I don’t buy that. When footwear brands catch trend, it lasts 2-3 years – not 2-3 quarters (remember Sperry? This is more defendable). Also mind you that a bigger cash cow is denim (Lee and Wrangler) and compeititor Levis (private) just killed the quarter which is a positive read through for VFC.
Is this one of those super fat calls like TPR or LULU long, or HBI, KSS, FL short? No. But as the real earnings power of the company quickly comes into reality, my bet is that we have a revaluation on higher earnings – and that’s before another deal. It might not look cheap at 22x earnings and 16x EBITDA, but on what earnings? By the end of this year, I think we’re looking 20x (slight multiple erosion – to be conservative) on $4.75 in forward earnings. There’s your $95 stock – 25% above current levels. Downside is very defendable here unless our model is flat out wrong, or if the deals are being done on peak earnings/margin streams. I could also be wrong if the deal cadence slows down meaningfully – which is unlikely given that VFC could add another $5bn in debt and remain compliant with covenants.
Ping us for our model which includes the intricate modeling assumptions as to how we’re getting to our numbers.
-- McGough
Key Assumptions:
- With the contributions we expect from the three recent acquisitions, revenue guidance implies only 3% organic, constant currency growth from the OAS coalition.
- This is too conservative given the 35% growth Vans just reported in Q4. Vans only has to grow 10% with all of the other businesses being flat in order to reach sales guidance after the contribution from the acquisitions.
- We are modeling 8% growth in Dickie’s, below the 13% the brand just reported in its first quarter as part of VF Corp.
- IceBreaker and Altra will clearly benefit from the larger distribution base and relationships of the parent company.
- Jeanswear margin recovery – Jeanswear operating margins have contracted 330bps over the past two years. With Walmart’s latest round of inventory reductions behind it margins should recover at the coalition. Levi’s has seen meaningful strength despite a shrinking department store base while VF Corp.’s Jeanswear coalition has not seen the traffic or door decline in its distribution base.
- We calculate a +1.5% tailwind from Fx in F2019 (the forward full fiscal year – not including the stub Q).
- The North Face has been challenged competitively by competitors including Canada Goose in the US, but EMEA has been growing greater than mid-teens% for the past year.
- We’re modeling further acquisitions in FY 2020 and beyond. By our math, VFC can afford nearly $5bn in new deals before becoming over levered.
