VF Corp stock. : revenue growth has been disappointing (VFC)
My thesis is that revenue growth has been disappointing at VF Corporation (NYSE: VFC) for the past decade. Looking at the 10-K from 10 years and 3 months ago, we see $9.5 billion in revenue for the period through December 2011. Looking ahead, the latest 10-K through April 2, 2022 shows revenue of only $11.8 billion.
When evaluating companies, I like to consider their revenue history of the last 10 or 11 years as one of the things to consider when determining what revenue growth might look like in the future.
Over the past 10 years, revenues have been nearly flat despite acquisitions of notable companies such as Williamson-Dickie and Supreme:
*The period until March 2019 includes 3 additional months while the period until March 2020 starts with a base of 12 months only.
Timberland was acquired in September 2011 and significantly increased its revenue for the period ending December 2012.
The Williamson-Dickie acquisition added $471.9 million in revenue for the period to March 2019.
The acquisition of Supreme increased revenue for the period to April 2022 by $438.5 million.
The North Face is one of the brands owned by VF Corporation, which shows that revenue growth has been modest for most of the past decade. Their revenue growth was impressive from 2000 to 2013, when the CAGR was 22%. However, the CAGR was only 4% from 2014 to FY17 and it was only 7% from FY18 to FY22 by slide of 2022. Investor Day:
The Billion Dollar Brand Club Lawrence Ingrassia’s book talks about the fact that incumbent brands have to fight more than ever against new brands that can grow quickly online. The book mentions that companies like Stitch Fix can create complications for existing brands:
And while the company initially sold clothing and accessories made by others, in 2017 its data scientists began designing “exclusive brand Stitch Fix” items by combining different style features of popular clothing. In-house designers create these “hybrid designs” by taking AI-generated ideas about what kinds of clothes her customers might like.
[ Billion Dollar Brand Club Kindle Location: 1,483]
Vans’ fine revenue growth over the years has eased the frustrations felt by underperforming brands. However, even Vans has recently shown signs of slowing down:
The last 10-K for VF Corporation through April 2 posted operating profit of $1.6 billion.
The FY23 adjusted outlook in the 2022 Investor Day presentation shows adjusted operating cash flow of approximately $1 billion and investments of nearly a quarter of a billion:
Management defines free cash flow (“FCF”) as cash flow from operations less capital expenditures and software purchases. Management expects to generate cumulative FCF of $5.5 billion from FY23 to FY27. Based on the guidance above, FY23 FCF is expected to be approximately $0.75 billion, leaving around $4.75 billion for FY24 to FY27, which means that the average for each of these 4 years should be around $1.2 billion:
One of the slides from Investor Day 2022 points out that Supreme is rare:
Supreme’s earnings contribution is expected to increase dramatically by FY27 and I don’t think that’s consistent with the “scarce” slide we saw about them above. If Supreme becomes ubiquitous like Vans then the brand will not be as prestigious as it is now:
P/E ratios must fall as interest rates continue to rise. Revenue growth has been extremely limited over the past decade. The plan to rely heavily on Supreme to boost its profits could diminish the brand. Putting these considerations together, I don’t think a high valuation multiple is warranted. I think it’s reasonable for enterprise value (“EV”) to be about 10 to 11 times operating income, or about $16 billion to $17.5 billion.
2nd of July 10-Q has 388,494,512 shares outstanding as of July 30. Multiplying that by the September 29 stock price of $29.91 gives us a market capitalization of $11.6 billion. Enterprise value is approximately $5.8 billion higher than market capitalization due to long-term debt of $4,468 million plus long-term leases of $1,006 plus long-term debt. short term of $828 million less cash and cash equivalents of $528 million. Today’s enterprise value is near the upper end of my valuation range and I don’t think the stock is a strong buy right now.