THE HEDGEYE EDGE
This is a simple call, structured around VF’s ability to drive topline and EPS growth through sales and leverage provided by its recent acquisitions. Don’t bet against VF Corp (VFC) when it’s in deal mode.
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 has only added opacity to its reporting structure given its four recent acquisitions and Nautica divestiture while subsequently consolidating its operating segments.
VF is competitively positioned to capitalize on the ever-changing consumer trends given their extensive brand collection. Most recently, we have been witnessing a shift in consumer sentiment away from basketball and into streetwear brands. VF has been reaping the benefits of its Vans brand that has been experiencing double digit growth metrics for the past three quarters coinciding with the swing in consumer preferences.
We are optimistic on management’s ability to manage wholesale exposure to drive brand relevance while simultaneously capturing a greater margin on sales derived in the company’s expanding retail store base and websites.
Given its recent appetite for acquisitions and flexible capital structure we are under the assumption that further acquisitions are an integral part of the team’s current playbook. VF has structured itself to plug in acquisitions as seamlessly as possible. The company’s experience in acquisitions enables an expedited process in integrating the new firms accounting and IT functions, real estate and supply chains into the parent.
VF is quick to leverage their extensive distribution networks, customer contracts and e-commerce channels to grow and promote the acquired brands. North Face may arguably be the best brand acquisition ever made in retail. VF Corporation purchased North Face for $25mm in 2000 which has now grown to a multi-billion-dollar operation. An impressive ROIC.
Vans is another great example, speaking to the success of VF Corp’s acquisitive abilities. Vans which was purchased in 2004 for $396mm reached $3.6B in sales in 2017.
INTERMEDIATE TERM (TREND)
The trend set-up looks favorable with strength in Outdoor revenue trends. The Van’s brand is hot, growing 39% and accelerating growth on the stub quarter earnings announcement. The results were better than expectations and given the continued hype surrounding the streetwear trend we are comfortable with Van’s propensity to grow and take share in the back half of the year.
We remain under the assumption that meaningful upside for the year is still to be realized. The most recent earnings report on May 5th, 2018 was ahead of consensus expectations, keeping in mind that this was a stub quarter. The revenue and gross margin performance in the quarter leaves management with back half levers to pull and a setup to comfortably surpass full year fiscal targets. And new acquisitions will continue to fuel growth in revenue, EBIT and Cashflow.
LONG TERM (TAIL)
We are under the assumption that the real earnings power of the company will quickly come into reality by calendar year end. Our bet is that we have a revaluation on higher earnings – and that’s before the potential for other deals. By the end of this year, we 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. We could also be wrong if the M&A cadence/commentary slows down meaningfully – which is unlikely given that VFC could add another $5bn in debt and remain compliant with covenants.
ONE-YEAR TRAILING CHART
