3 Reasons to Invest in VFC

Victor is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

V.F. Corporation (NYSE: VFC) was founded in 1899. The current chairman and chief executive is Eric Wiseman, who has been praised as one of the top CEO's in 2011 and in many other years. VFC Corporation is composed of more than 30 brands of different type of clothes, footwear and accessories for different activities and consumer targets. The main brand in this corporation is The North Face. Last year VFC had an outstanding performance:

  • Record revenues: sales rose 15% to $10.9 billion,
  • Record margins: full year gross margin rose by 75 basis point (46.5%),
  • Record cash flow from operations: CFFO rose 8.78% to $1,27 billion.

It seems that in 2013 VFC Corporation will continue performing strongly , so I will point out three good reasons to believe in this stock for the long run:


VFC has one of the more diversified product bases

It is possible to see through the results of 4Q12 the ability that the corporation had to mitigate downside risk in a hard environment. The key advantage lies in its diversified product portfolio which reduces the effect of  potential negative shocks related to a weak economical environment. This is essential because this brand diversification acts as a hedge to VFC's volatility in earnings because it can compensate a specific brand bad performance with a good one. Management expects to keep diversifying its brands with a focus on Outdoor clothing.

The revenue by coalition is expected to change as the follow graphs:

<img src="http://g.fool.com/editorial/images/32567/vfc-chart-1_large.png" />

We are going to take the most important coalition, Outdoor & Action Sports, as an example.  This coalition is expected to have 13%, 13% and 30%  of 5 year CAGR in America, Europe and Asia  respectively. In a recent 'Mad Money' show, Jim Cramer praised VFC's superb Asian growth.

This coalition is expected to reach $3 billion revenue by 2015. This growth comes from the great brands that compose this coalition. For example, TNF is expected to reach $1.5 billion in revenues (5 Yr CAGR 16%), Vans $90 million (5 Yr CAGR 13%), Napapijri (5 Yr CAGR 11%) /Kipling (5 Yr CAGR 16%) $300 million and other brands such as JanSport, Eastpak, Lucy, Eagle Creek and Reef should provide $300 million in average each.

This diversified "winter focused" product base allows VFC to adopt complementary strategies in its brands. For example, Kipling strategy is to drive DTC strategy, maximize its digital platform and to expand its market share in the travel segment. In the case of Napapijri it will also drive a DTC strategy, but its focus will be the increase share in Italy, Germany and France, as well as its growth across Europe and Asia.

I believe, there are few clothing brands that can offer the level of diversification and growth that VFC Corporation will deliver.

Sustainable growth

As VFC has a highly efficient supply chain which provides unparalleled structural advantages, it was not too hard to overcome the two external factors that threatened its growth. Both risks are connected with Europe: the first one was the warm winter of Europe that damaged TNF sales and the second one was the weak economic environment.

Nevertheless, VFC has managed to overcome this sort of external problems in order to keep its steady growth. During 2013, VFC will keep posting record growth across all coalitions. This would help to limit the impact of drawbacks suffered in some markets, such as the problems mentioned in Europe. 

As we mentioned above Outdoor & Action Sports coalition is the most important in VFC. It is important to take into consideration that sporting/outdoor clothing is one of the most promising trends in the US retail industry, and I believe this will be a driver of sustainable growth.

VFC’s improvements may continue as a result of the shift in their portfolio of higher-growth brands (will deliver 10% CAGR for the next 5 years) and higher-margin businesses (~15% CAGR). Therefore, I believe that the above-mentioned diversification and focus on Outdoor will create solid growth for the coming years.

Rewarding expansion

As Tony Robbins once said: “Identify your problems but give your power and energy to solutions.” and that was what VFC has been doing the last years.

Some VFC’s brands have increased their exposure in US department stores. That is the case of TNF in Macy’s as it has increased the number of racks that offers its clothes, as well as the wall space and signage (TNF accounts for approximately 30% of women’s active wear). Dick’s Sporting Goods underestimated the sales of TNF, so it has rolled out The North Face shop-in-shops across its portfolio as a response of the exceeding expectations. Moreover TNF has gained floor space in Nordstrom. The fact that VFC is getting more exposure in department stores will allow VFC to keep improving its quarterly results.

In addition, Asia will continue to be the strongest region for VFC (28% CAGR 2015E). VFC's management holds the 5-year-target-revenue-growth of 17% for Asia and 21% for China. In fact, international revenue will account for 45% of VFC’s total revenue in 2015. Furthermore, VFC brands are expanding and gaining share in the currently weak European market.

In 2010 70% of VFC's total revenue used to be domestic and 30% international. However, management predicts that by 2015 VFC will get 60% of its revenue from the US and 40% from both Europe and Asia. This may reflect the benefits of strategic expansions that were taking place in the last years.

<img src="http://g.fool.com/editorial/images/32567/vfc-chart-2_large.png" />

Last year VFC has opened 141 new stores, and plans to open 160 new stores so as to continue expanding the brands. In addition to traditional channels, VFC Corporation's e-commerce business is expected to grow in excess of 30% in 2013.

The goal of the company is to generate 60% of total DTC revenues with full price stores, 27% with outlet stores and 13% with e-commerce by 2015. Additionally, VFC expect to double their stores, by reaching 1500 stores by 2015E.

Valuation

Let's compare how the market prices VFC against its main peers:

<img src="http://g.fool.com/editorial/images/32567/vfc-valuation_large.png" />


VFC appears reasonably valued against its peers. For example, the company trades at 17x earnings, 3.7x book and 1.75x sales compared to Ralph Lauren's (NYSE: RL) 22.8x P/E, 4.42x P/BV and 2.30x P/S. Much higher multiples than VFC and I believe more risks than VFC. For example, Ralph Lauren appears overly exposed to Europe, it has too much dependance on its founder and its valuation appears stretched.

On the other hand, PVH Corporation (NYSE: PVH) trades at 18.7x P/E, which is higher than VFC's but both its P/S and P/BV are lower than VFC. PVH is not heavily exposed to the Outdoor Clothing trend (which I really like) and it has several risks related to the "growing by acquisitions" strategy that its management has been performing.

When it comes to valuation, VFC appears as Warren Buffett likes to say "A good business at a reasonable price".

Conclusion

This company has a top management team, a well diversified product base, a reasonable valuation, solid expected growth and leading brands. For investors who want exposure in the clothing segment, this is a top pick to analyze.

As Eric Wiseman said “We'll continue to leverage our portfolio and competitive advantages to drive revenue growth, margin expansion and earnings while mitigating risks and most importantly, creating long-term value for our shareholders.”

Thus, I will recommend buying this stock as it will keep posting outstanding performance for the coming years.




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