Like many retailers, V.F. Corporation (VFC, Financial) struggled mightily last year as the Covid-19 pandemic inflicted significant pain on the industry. Fast forward a few months and the company’s recent earnings results showed that it was closing its fiscal year in a much better position than it started the period. V.F. Corp’s most recent earnings results show that the turnaround has largely taken place and the company is in a position to once again return to growth.
Even so, V.F. Corp hasn’t participated in the market rally, posting an 11% decline year-to-date compared to a near 21% return for the S&P 500 index. The stock trades well below its intrinsic value, making it appear undervalued. Let’s examine the company’s most recent quarter and potential returns going forward to see why I think now is a good time to buy V.F. Corp.
Earnings highlights
V.F. Corp reported earnings results for its first quarter of fiscal 2022 on July 30 (the company’s fiscal year ends the Saturday nearest to March 31). Revenue grew 104% year over year to $2.2 billion, beating Wall Street analysts’ estimates by $24 million. Adjusted net income of $107 million, or 27 cents per share, compared favorably to adjusted net income loss of $221 million, or a loss of 57 cents per share, in the previous year and was 9 cents better than expected.
Excluding acquisitions and adjusting for currency exchange, revenue grew 83%. As with the fourth quarter of 2021, Vans, The North Face and Timberland all reported at least double-digit gains. Dickies also returned to growth.
The company’s big four brands grew 94% from the prior year, led by a 110% increase for Vans. Brick-and-mortar sales surged 369%. This brand benefited from increased foot traffic as people became less wary of the pandemic and saw at least 148% growth in all regions outside of Asia-Pacific. The U.S. region, which is the largest within V.F. Corp, was up 140%. Wholesale revenues grew 149% with direct-to-consumer improving 86%.
The North Face was higher by 93% with particular strength in the wholesale business. Europe/Middle East/Africa improved 142% with the U.S. up 75%. This business benefited from both on- and off-mountain product categories and a solid spring season.
Revenue for Timberland grew 70%. Gains here were powered by triple digit improvements in the Americas as this region is now back where it was before the pandemic revenue wise. The Outdoor business continues to lead the way for this brand.
Dickies grew 61% due to increased demand for the Lifestyle product category. The bulk of this brand’s business occurs in the Americas. Here, strength in the U.S. more than offset weakness in the non-U.S. portion of the region. Higher demand for work place pants also contributed to results.
V.F. Corp’s balance sheet looks to be in very good shape. The company ended the quarter with $13.6 billion of total assets, including current assets of $4.6 billion and $1.9 billion of cash, equivalents and investments. Inventories were actually down from the previous year to $1.2 billion.
Liabilities stood at $10.3 billion and current liabilities totaled $3.1 billion. V.F. Corp has $4.7 billion of long-term debt, which is down from $5.6 billion a year ago. Just over $8 million of debt matures within the next year.
V.F. Corp offered updated guidance for the year. The company raised guidance for individual brand growth, led by expected growth of 28% to 29% for Vans, 26% to 28% improvement for The North Face, 18% to 20% increase for Timberland and a mid-teen percentage gain for Dickies.
V.F. Corp now expects total revenue of at least $12 billion for fiscal 2022, up from $11.8 previously. This would be a 32% increase from the prior fiscal year and a nearly 8% improvement from fiscal year 2020. Adjusted earnings per share is expected to be at least $3.20, up from $3.05 and considerably higher than adjusted earnings per share of $1.21 from the prior year. This would be a 19.4% increase from fiscal year 2020 if achieved.
Takeaways and valuation analysis
V.F. Corp was facing its weakest comparable results from the prior year for revenue and earnings, so topping on both metrics wasn’t difficult. What is impressive is that the company is close to being back to pre-pandemic numbers. Revenue and earnings per share are both likely to beat fiscal year 2020 numbers.
All of the top four brands are expected to produce growth against their respective results in pre-pandemic times. Compared to fiscal year 2020, Dickies should be higher by the mid-20% range, The North Face should improve 15% to 17% and Vans is projected to grow 9% to 10%. Timberland should be up slightly.
One way V.F. Corp can leverage to deliver these robust numbers is through its multiple business channels. Direct-to-consumer continues to be a tailwind for V.F. Corp as this channel grew 97% companywide. In certain regions, such as the Americas, the direct-to-consumer business is already ahead of where it was prior to Covid-19. Digital also had a good showing as sales from this channel were up 25%.
These channels are relatively new for V.F. Corp and are far from mature sources of revenue. Sales for direct-to-consumer and digital are expected to improve at least 39% and 29%, respectively, this year.
V.F. Corp’s digital business is functioning well in all regions and the company says there are very few supply chain issues. In the EMEA region, Covid-19 was much more of an issue, at least at the beginning of the quarter, as vaccines for the virus are not widely available in the region. EMEA had 60% of its stores closed at the beginning of the period, but all have since reopened.
V.F. Corp trades at $76.23 today. Using the company’s guidance for the year, shares have a forward price-earnings ratio of 23.8. For context, the stock has a 10-year average price-earnings ratio just above 20. By this measure, shares are slightly overvalued.
According to the GuruFocus Value chart, which incorporates historical multiples, past returns and future estimates of business performance to estimate intrinsic value, V.F. Corp is modestly undervalued.
With a GF Value of $92.78, V.F. Corp has a price-to-GF Value ratio of 0.82. Shares would need to climb 21.7% to trade with the GF Value.
In addition, V.F. Corp pays a solid dividend yield of 2.6%. This is more than a full percentage point above the average yield of the S&P 500 index. V.F. Corp has an average yield of 2.3% over the last decade, suggesting that the higher than usual yield means shares are undervalued.
Combining potential share price appreciation and dividend yield, V.F. Corp’s total return could be above 24%.
Final thoughts
After finishing a challenging year on a high note, V.F. Corp has carried that momentum over into the new fiscal year. The top four brands had increases in revenue across the board. All are expected to improve in full fiscal 2022 compared to fiscal year 2020, with all but Timerbland projected to see gains in the double-digits.
Revenue for the year is almost back to where it was before Covid-19 and will be comfortably higher than pre-pandemic levels, showing that the company was able to foster a quick turnaround.
Shares of V.F. Corp are expensive on a historical basis, but undervalued using intrinsic value estimates. The company also has nearly five decades of dividend growth. After purchasing the stock close to the current price back at the end of May, I continue to believe that V.F. Corp is a buy today.
