Alexa Bowen
Blake Porter
Kennedy White VFC
• Originally established in 1899 as the “Reading Glove and Mitten Manufacturing Company.” • Expanded into silk lingerie and acquired name “Vanity Fair.” • Since then has become the world’s largest apparel manufacturer with over 30 brands in the denim, outerwear, footwear, sportswear, workwear, and luggage categories. • 5 most popular brands include The North Face, Timberland, Vans, Wrangler, and Lee who account for over 70% of the company’s revenues. • The company sells its products primarily to specialty stores, department stores, national chains, and mass merchants, as well as sells through company operated stores, concession retail stores, and e-commerce sites. • The company is extremely active in managing their “company portfolio” which proves to be a major asset. Outline
Company Overview
Sector Overview
Competitive Environment
Company Strategy
Financial Analysis and Forecasting
Conclusion Revenue Segments
VFC has grown presence in Outdoor & Actions Sports segment Revenue Segments
VFC has slightly grown presence in foreign countries (Primarily Europe). Notable Acquisition Successes
• 1950’s • Lee • 1970’s • Wrangler, Jansport • 1990’s • Bulwark, The North Face • 2000’s • Eastpak, Nautica, Vans, Reef, Majestic • 2011 • Timberland Products Diversification of Products
• Over the years, VFC has become increasingly more diversified within the clothing sector. • Through 1980, VFC was primarily competing in the Jeanswear segment and have since diversified into the following segments: • Imagewear • Sportswear • Contemporary Brands • Jeanswear • Outdoor & Action Sports • Due in large part to the acquisition of The North Face Investment Thesis
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• Growth Strategy
17x17 VFC plans to gain $17 billion in revenue and increase their gross margin to 17% by 2017 PRODUCT INNOVATION PYRAMID
GLOBAL INNOVATION CENTERS
STRATEGY & INNOVATION Macro-Finance Outlook
• All-time high • more low-ticket purchases by consumers, such as retail/apparel
• Rated positively (+1) • Consumers are confident in the economy • Usually leads to consumer spending increase Portfolio Sector Weights
Purchasing VFC (Consumer Discretionary) would correct this undervaluation Consumer Discretionary
Consumer Discretionary
S&P Competitive Advantage
VFC will sustain their competitive advantage by continuing to establish a broad and growing array of leading lifestyle brands, carefully selected to enhance its presence in high- growth categories and by creating synergies within existing operating units. Competitive Analysis
VFC has shown consistent revenue growth in each of the last five years. PVH, whom we consider to be the most similar competitor, reported a decrease in revenue for 2015. Competitive Analysis
While VFC does have the highest selling, general, and administrative (SGA) costs, if we look at SGA cost as a percentage of sales, we see that VFC is the lowest of the three companies. Threat of New Competition Supplier Power • Economies of Scale • Multiple Vendors Advantages • No supplier represents >10% • Fast Changing Styles • Independent Manufacturers in • Many Established Brands Asia (77%)
Threat Level: Threat Level: Medium Low Competitive Rivalry
• Many Established Competitors • Hard to Capture Market-Share
Threat Level: High
Threat of Substitute Products Buyer Power • Many Diverse Substitutes • Discretionary Goods Available • Buyers have Countless Options • Price Sensitive Customers
Threat Level: Threat Level: Low-Medium High
Porter’s Five Forces SWOT Analysis
STRENGTHS WEAKNESSES • Strong intangible brand loyalty • 20% of sales from 10 largest • Track record with acquisitions customers • Manufacturing and supply chain ○ Largest is Wal-Mart with over ownership 10% • Decline in brand value
OPPORTUNITIES THREATS • E-commerce • Warmer weather • Strong differentiated brands to • Tighter retail inventory management outperform in current economy • Weakened apparel demand • Expansion of denim and • Raw material prices outdoor/action sports brands • Foreign exchange rates Credit Analysis Competitor Analysis Skechers (SKX)
• No Dividend • CEO Greenberg Voting Rights Scandal • Consumer Perception and Response • Competitor Pricing Nike (NKE)
• No Price Diversification • Easily Substitutable • Weak Dividend PVH Corp. (PVH)
• Similar Company, clothing conglomerate • Owns Tommy Hilfiger, Calvin Klein, and IZOD • Virtually non-existent dividend of 15 cents/year (VFC: project to exceed $2 in 2 years) • Greater volatility • 52-week range: 64.16 - 120.67 (PVH) • 52-week range: 52.21 - 77.40 (VFC) • Not as diversified • Exposed to currency risk Competitors
• Consumer Discretionary Competitors • Michael Kors • Coach • Both of these companies are considered more luxurious and thus are more likely to perform poorly during time of slower economic growth.
• North Face Competitors • Patagonia • Privately-held • Is content with their current market share. • Columbia • Typically, cheaper than North Face • North Face has set loftier revenue goals Direct-to-Consumer (DTC) Selling
Possible Adverse Effects Positives
• Reselling overseas • Control over in-store without control brand image • System failures – wholly • Close to needs and controlled preferences of consumers • Customer privacy • Gross Margins • Credit fraud • Excess, discontinued, and out-of-season sales • Inventory Issue CAGR
• EBIT is growing faster than Total Revenue • Dividend growth is at 20.6% • Free Cash Flow growth is at 16.5% Operating, Net Profit, & FCF Margins
While UA may not be the best comparison, we do see that VFC is outperforming UA in each of the three metrics. Most notably, we see that VFC has had a free cash flow margin of nearly 10% for the past two years, whereas UA has struggled to report any positive cash flows. Profitability: ROA, ROE, ROIC
We see that VFC has a massive ROIC in excess of 40%, which we would expect in more of a luxury brand company. Also, each brand within VFC now returns more than $1 in gross margin for every consumer dollar spent. Income Statement Forecasting Assumptions Income Statement Forecasting Assumptions Explained
- Revenue decreased historically due to warmer weather, increased retailer inventory, and weakened apparel demand. Increases forecasted due to higher direct-to-consumer sales, product innovation, and brand expansions.
- Net margins forecasted to increase with 17x17 plan, increased DTC sales, and increased ownership of manufacturing and supply chain branches.
- 43 consecutive years of rising dividends, no projection of this ending anytime soon but forecasted to slow down. Balance Sheet Forecasting Assumptions
Cash expected to Assets expected to grow remain high due to stock slower than sales. repurchase program. High inventory due to warmer weather. Balance Sheet Forecasting Assumptions (Cont.)
Debt expected to rise with continued share repurchase program. Equity expected to decrease as VFC repurchases shares of stock. WACC
We raised the beta from 0.69 to 0.75 to stress the model. We also changed the risk-free rate to correspond with the yield on a 10-year treasury note. After these changes, we are left with a weighted average cost of capital of 6.778%, and after seeing VFC’s return on invested captial of 40%, it is clear that VFC is creating value. Intrinsic Value FCFs
Based on our model, we find that VFC is undervalued by 20.2%. Currently, VFC’s intrinsic value far exceeds the current stock price and we expect VFC’s intrinsic value to grow steadily in the coming years. Relative Valuation
Forecasting Performance aligns with Historical Performance. Showing the forecasted numbers are realistic. Dividend Discount Model
VFC has increased their dividend for 43 consecutive years
The dividend supports over 100% of the stock price. Entry Point
Attractive low entry point Conclusion
• Fits with our macro-finance outlook • Corrects underweight sector • Consumer Discretionary Sector is outperforming • Portfolio is underweight in Consumer Discretionary • 43 consecutive years of dividend growth • Expected return of 10.4% on Dividend Discount Model • Currently undervalued by 20.2%
Recommendation: BUY