Stock of the week: VF Corporation

Summary:
- VF Corporation (VFC.US) split into two entities
- Low-growth jeans business separated from the company
- Long history of dividend payouts
- Share price dropped on guidance miss but decline was almost completely erased

When one is thinking about major apparel or footwear companies it is usually Nike or Adidas that come to mind first. However, another major company from the industry has just completed major corporate action and it may be wise to look at implications. In this short analysis we will take a look at VF Corporation operations, financial data and recent spin-off of the denim business.

VF Corporation managed to greatly boost sales during the past decade. Drop in earnings in 2017 was a result of the revamp of the US tax law. Keep in mind that results for calendar rather than fiscal years are depicted on the chart above. Source: Bloomberg, XTB Research

VF Corporation was founded 120 years ago and is one of the 10 biggest US apparel companies by revenue. The company’s name is not directly related to any brand, like it is the case for Nike or Adidas, therefore some may find it completely unfamiliar. However, the names of brands the company owns, like for example Vans or Timberland, should ring a bell. The company is present globally with the United States and Europe being the biggest sources of revenue. Brand portfolio of the company is quite diverse and includes outdoor products (The North Face and Timberland), footwear (Vans), jeans (Lee, Wrangler) among others. However, this breakdown is a bit outdated already as the company has recently completed a major corporate action.

VF Corporation completed spin-off of jeans operations on Wednesday, 22 May. The move was announced in August 2018. Company’s Board of Directors reasoned the decision saying that each of the two companies will enjoy less operational complexity and will have a better ability to focus on core operations. VF Corporation shareholders were granted 1 share of Kontoor Brands (new company) for every 7 shares of VF Corporation they owned. However, it should be noted that Jeans division was a drag for VF Corporation for some time. The segment saw little or no growth in the past few years. In fact, revenue of Jeans division dropped 9.8% during the past decade while total revenue of VC Corporation increased almost 92% during that period. Having said that, a spin-off can be viewed as separating low-growth segment.

VF Corporation revenue and pretax income breakdown at the end of fiscal 2019 (31 March 2019). Jeans division has been spun-off as an independent entity on 22 May 2019. Source: Bloomberg, XTB Research

The company released earnings report for the fourth quarter of fiscal 2019 on 22 May. Throughout FY 2019 (calendar Q2 2018-Q1 2019) VF Corporation managed to increase organic sales by 8% and report results better than expected. However, if we take a look at revenue figures with spin-off included we can see that VF Corporation's sales increased 11% while Kontoor Brands sales dropped by 2% in FY 2019. Differences are even more striking when we take a look at operating profit figures - VF Corporation up 18% and Kontoor Brands down 25% in FY 2019. Divisions that form now-Kontoor Brands also had a negative impact on gross and operating margin of the whole VF Corporation. Nevertheless, it should be noted that The North Face and Vans sales growth eased in the final quarter of fiscal 2019 and that could have been the cause for issuing rather conservative guidance for fiscal 2020.

VF Corporation has a solid dividend policy. Note that moderate payout margin allow the company to maintain policy even at times of deterioration in business. Source: Bloomberg, XTB Research

Like many other well-established US companies, VF Corporation is a dividend paying stock. The company has been paying out dividend for three decades now and kept rising it throughout the period. On the chart above one can find VF Corporation dividend, earnings, free cash flow as well as payout ratios for the past 11 years. During that period dividend payout seldom exceeded 60% of either earnings or free cash flow. Dividend per share in 2017 was higher than earnings per share but it was a one-off factor due to the US tax overhaul. Note that Kontoor Brands accounted for less than 15% of VF Corporation’s total operating profit therefore the company should be capable of maintaining and rising current dividend even after the spin-off.

VF Corporation (VFC.US) shares opened significantly lower yesterday as traders digested miss in company’s guidance for full fiscal 2020. Nevertheless, the drop was almost completely erased during the session. Source: xStation5

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