VF Has Struggled to Overcome Recent Challenges, but Its Brands Provide a Competitive Edge

Senior Equity Analyst

David Swartz

Revenue segments as reported by the company.

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Active

Work

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Revenue is the money generated from normal business operations. Gross Profit is revenue minus cost of goods sold. Operating Income is revenue minus cost of goods sold and other operating expenses.

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Net Income, also called net earnings, is calculated as revenue minus cost of goods sold, operating expenses, depreciation, interest, taxes, and other expenses.

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Gross Profit, Operating Income, and Net Income as a percentage of Revenue

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An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

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Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.

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Through dispositions and additions, VF has built a portfolio of strong brands in multiple apparel categories. We view the three brands that account for about 80% its sales (Vans, Timberland, and The North Face) as supporting VF's narrow moat based on a brand intangible asset. Despite economic concerns, we believe VF will grow faster than most competitors in the long run and maintain its competitive edge.

We forecast VF’s active coalition (which includes Vans and Supreme) will generate 43% of its segment operating income in fiscal 2023. Vans has grown from its roots in action sports into an everyday brand. Internal research by VF suggests the typical Vans customer, once a male skateboarder, is more interested in music and fashion than action sports. In fact, 60% of Vans apparel is now purchased by girls and women, and it is one of the most popular shoe brands for teens. Recently, though, Vans’ momentum has slowed, and VF is implementing product and operations changes to reignite sales growth. We think the plans will work and believe Vans has strong potential as it is still relatively small ($4.2 billion in fiscal 2022 revenue) compared with global brands like wide-moat Nike and narrow-moat Adidas. 

We believe The North Face will benefit from product innovations, brand extensions, and expansions of its direct-to-consumer business. At its recent analyst event, VF outlined plans for high-single- to low-double-digit sales growth for The North Face through fiscal 2027, which appears possible after 7% compound average annual sales growth over the past five years despite the pandemic. We are less certain about VF’s long-term growth targets for Timberland and Dickies in the mid-single and high-single digits, respectively, given inconsistent historical results.

At its 2022 investor event, VF targeted an overall five-year compound average annual sales growth in the mid to high single digits and a 15% operating margin in fiscal 2027. We think these goals are in reach (we forecast 4% average sales growth over five years and a 14.3% operating margin in fiscal 2027), but VF will need to rebound from a fiscal 2023 in which both its total sales and operating margin have dropped.

Business Strategy & Outlook

We rate VF as a narrow-moat firm based on its intangible brand asset. Our moat rating is mainly based on the company's three largest brands, Vans, The North Face, and Timberland, which exhibit good growth and profitability characteristics and provide the intangible asset that supports our narrow-moat view. As evidence of the strength of its competitive position, VF’s adjusted returns on invested capital, including goodwill, have averaged 16% over the past 10 years. We are confident that the firm can generate ROICs above its weighted average cost of capital for 10 years, supporting our moat rating. We estimate VF’s WACC at 8% and expect its adjusted ROICs, including goodwill, to average approximately 20% over the next decade. 

VF actively manages its portfolio of brands through frequent acquisitions and divestitures. Historically, the company has not created its own brands. Rather, it acquires brands that it believes have significant potential and develops them. VF targets acquisitions that can generate a 15% ROIC in three years and reach at least $1 billion in annual sales over time. Its successful acquisitions include The North Face (acquired in 2000), Vans (acquired in 2004), and Timberland (acquired in 2011). Most recently, VF acquired Williamson-Dickie (parent of Dickies) for $798.4 million in 2017 and Supreme for $2.2 billion in 2020. Both Dickies and Supreme have experienced erratic results due to the pandemic and other reasons, but we believe they have growth potential. While VF has expanded through acquisitions, it has also intentionally downsized. The firm, unlike many others, is willing to drop brands that do not meet expectations. In recent years, it has spun its jeanswear and sold its smaller workwear brands, its licensing business (licensed sports and college brands), its contemporary brands segment (7 For All Mankind and other brands), and individual brands such as Nautica and Reef. The active management of its brand portfolio allows VF to replace weak, no-moat brands with others that have moat potential, allowing it to focus its marketing, distribution, and innovation efforts on its highest-return opportunities.

The strength of the Vans brand is a major part of our narrow moat rating. Before VF acquired it in 2004, Vans was a zero-growth, barely profitable, sub-$350 million brand. Under VF’s ownership, Vans has grown from its roots as a California skateboarding/action sports brand into a major lifestyle sportswear brand for the 13-35 age group. While it is primarily a footwear brand, VF has expanded it into T-shirts and other forms of apparel. Despite the pandemic and other challenges, we estimate Vans’ sales increased to $4.2 billion in fiscal 2022 from $2.3 billion in fiscal 2017. Moreover, we believe its operating margins will return to levels above 20% that were common for the brand before the pandemic. We view the expansion in sales and operating margin for Vans as evidence that VF has improved its pricing power. Vans has grown through international expansion, greater wholesale distribution, e-commerce, and an increase in the number of company-owned stores, of which there are now more than 700. 

We believe the two key brands in VF’s outdoor segment, The North Face and Timberland, join Vans in providing the brand intangible asset that underlies our narrow moat rating. Both brands have grown from their roots as niche outdoor brands to become fashion/lifestyle brands. There is significant competition in this market from Canada Goose, Columbia Sportswear, Patagonia, REI, and others. We forecast long-term sales growth rates of 6% for VF’s outdoor coalition and operating margins of 18%. Although affected by the pandemic in fiscal 2022, sales of The North Face reached $3.3 billion from an estimated $1.9 billion in 2012. We believe both Timberland and The North Face achieve premium pricing for their products. Boots of both brands typically retail for $100-$200 at stores such as no-moat Kohl’s, narrow-moat Nordstrom, and no-moat Macy’s. These retail prices are as much as double those of similar boots from Skechers, Columbia Sportswear, and private-label brands and are comparable to the retail prices of Deckers’ Ugg boots. The boots category is especially important for the Timberland brand, as we estimate that 80% of its sales come from footwear. We believe the premium pricing and distribution of The North Face and Timberland apparel supports our contention that VF’s intangible brand asset provides a narrow moat rating. 

We do not believe VF’s workwear segment warrants a narrow moat rating. We forecast long-term annual sales growth rates of 5%, below that of its other two coalitions and a few percentage points below VF’s implied targets. While VF strengthened its work coalition by acquiring Williamson-Dickie in 2017, we do not think the brand supports our narrow-moat view at this juncture. Dickies, for one thing, lacks the international appeal of some of VF’s other brands as about two thirds of its sales are produced in the crowded U.S. market. We do not think Dickies has any pricing power in the U.S. Many of its most popular pants, for example, retail at $40 or less per pair, in line with the prices of similar pants from Duluth Trading, Carhartt, Wolverine World Wide, and other competitors. We do not believe VF has a moat based on anything other than its brand intangible asset. It has no apparent cost advantage over competitors since it manufactures much of its clothing through the same independent contractors as others. Similarly, despite its size, we do not believe VF exhibits any efficient scale advantage. There is no network effect in this business and switching costs in apparel are nonexistent.

Supreme is likely too small and narrowly focused on the U.S. market to contribute to VF's narrow moat rating at present. Supreme is a near-luxury brand with high prices and operating margins around 20%. It is a popular brand and aligns well with the streetwear fashion trend. However, we estimate that, at roughly $600 million in sales, it accounts for only about 5% of VF's yearly revenue. Moreover, it was just a $200 million brand as recently as five years ago, and it still has fewer than 20 global stores. We will monitor Supreme's development and, possibly, reassess its contribution to VF's moat later.

Narrow

Economic Moat

V.F.

Dickies is an American company headquartered in Fort Worth, Texas that manufactures and sells work-related clothing and other accessories, including back packs, steel-toe boots, and belts. Its major competitors are Ben Davis, Carhartt, Red Kap and Dockers.

Dickies

Wrangler is an American manufacturer of jeans and other clothing items, particularly workwear. The brand is owned by the VF Corporation, who also own Lee, JanSport, and The North Face, among others. Its headquarters is in downtown Greensboro, North Carolina in the United States, with production plants in a variety of locations throughout the world.

Wrangler

Vans is an American manufacturer of skateboarding shoes, based in Costa Mesa, California, owned by VF Corporation. The company also produces apparel and other products such as T-shirts, hoodies, pants, socks, hats, and backpacks. The main factory are from America, Vietnam, China and now Vans tried to spread their brands worldwide. As of August 2013, the brand is also active in other actions sports industry and sponsors surf, snowboarding, BMX, and motocross teams. Since 1996, the company has also been the primary sponsor of the annual Vans Warped Tour traveling rock festival.

Vans

Nautica is a mid-range to high-end American apparel brand of the VF Corporation featuring primarily men's, women's, children's apparel and accessories, as well as home, watches, and fragrance. Nautica was founded in 1983 by clothing designer David Chu (designer) and a partner. It was purchased for cash and stock in 1984 by State-O-Maine, a New York-based apparel company. State-O-Maine changed its name to Nautica in 1994. VF Corporation purchased Nautica in 2003.

Nautica

The North Face is an American outdoor product company specializing in outerwear, fleece, coats, shirts, footwear, and equipment such as backpacks, tents, and sleeping bags. Its clothing and equipment lines are catered towards college students, climbers, mountaineers, skiers, snowboarders, hikers, and endurance athletes. The company sponsors professional athletes from the worlds of running, climbing, skiing and snowboarding.

The North Face

JanSport is an American brand of backpacks and collegiate apparel, now owned by VF Corporation, one of the world's largest apparel companies. JanSport is the world's largest backpack maker, and together, JanSport and The North Face, also owned by VF Corporation, sell nearly half of all small backpacks sold in the United States.

Jan Sport

Timberland is an American manufacturer and retailer of outdoors wear, with a focus on footwear. It is owned by VF Corporation. Timberland footwear is marketed towards people intending outdoor use. The company also sells apparel, such as clothes, watches, glasses, sunglasses and leather goods.

Timberland

Lee is an American brand of denim jeans, first produced in 1889 in Salina, Kansas. The company is owned by VF Corporation, the largest apparel company in the world. Its headquarters is currently in Merriam, Kansas, just outside Kansas City, Missouri. The company states that they are an international retailer and manufacturer of casual wear and work wear and that they have more than 400 employees in the United States. In Australasia, the brand is owned by Pacific Brands since 2007, after it was acquired from Yakka.

Reef is a brand of casual sandals, known as Thongs, created by two Argentine brothers, Fernando and Santiago Aguerre. In 1984 they moved from Argentina to the San Diego beach community of La Jolla, California, where they began Reef. Their product became popular amongst surfers and beach goers. Reef has subsequently grown into one of the world's leading active sandal manufacturers. Reef has been owned by VF Corporation since 2005.

Reef

VF Corp. designs, produces, procures, markets and distributes lifestyle apparel, footwear and related products. It operates through the following segments: Outdoor, Active, and Work. The Outdoor segment refers to authentic outdoor-based lifestyle brands including performance-based apparel, footwear, equipment, backpacks, luggage and accessories. The Active segment is a group of activity-based lifestyle brands, which offers active apparel, footwear and accessories. The Work segment consists of work and work-inspired lifestyle apparel and footwear and occupational apparel sold through direct-to-consumer, wholesale and business-to-business channels. The firm's brands include The North Face, Vans, Timberland, Icebreaker, Dickies, Napapijri, Supreme, and Kipling. The company was founded by John Barbey in October 1899 and headquartered in Denver, CO.

Earnings data Q2 2023

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At the current share price, VF Corporation's dividend yields a well-above-market 6.8%. The company cut its dividend at the start of 2023.

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