VF Corp (NYSE:VFC) has been in business for more than 115 years and owns some of the most famous consumer apparel brands in the world (e.g. The North Face, Vans, Wrangler, Lee, etc.).
Unseasonably warm winter weather, sluggish retail spending, unfavorable currency fluctuations, and several other transient factors have caused this dividend aristocrat to tumble nearly 30% since the end of July 2015. None of these factors seem to impact the company’s long-term earnings power, potentially setting up an attractive investment opportunity.
VFC has increased its dividend for 43 consecutive years (2.7% yield) and appears to be trading at a very reasonable price (forward P/E multiple of 16) considering the quality of the business. These are the opportunities we look for when we buy dividend growth stocks in our Top 20 Dividend Stocks portfolio.
Nevertheless, VFC registers a modest level of popularity among smart money investors. Out of some 730 funds tracked by Insider Monkey, 34 reported long positions in the company as of the end of September, down by two over the quarter. These funds held 4.10% of the company’s outstanding stock at the end of the third quarter, having amassed stakes with a total value of around $1.20 billion. Ken Griffin’s Citadel Investment Group, Cliff Asness’ AQR Capital Management, and Israel Englander’s Millennium Management ranked among VFC’s top shareholders, with stakes containing 3.28 million shares, 1.75 million shares, and 1.25 million shares, respectively.
Business Overview
VFC was founded in 1899 and is one of the largest apparel companies in the world with a strong portfolio of brands in the outerwear, footwear, denim, backpack, luggage, accessory, sportswear, occupational, and performance apparel categories. VFC annually produces over 500 million units spread across more than 30 brands including The North Face, Vans, Timberland, Wrangler, Lee, and Nautica.
Approximately 75% of the business is sold on a wholesale basis to retailers, and the remainder of the business is sold direct-to-consumer (VFC owns over 1,400 retail stores under its different brand names and maintains a significant e-commerce presence).
By geography, VFC derived 70% of its 2014 revenues from the Americas, 20% from Europe, and 10% from Asia Pacific.
Business Analysis
In business for more than 115 years, VFC clearly has some competitive advantages. Many of the company’s largest brands have carved out leading mindshare with consumers in their respective product categories because they have delivered quality for so many years – The North Face (1966), Vans (1966), Timberland (1973), Lee (1889), Wrangler (1947), Eastpak (1952), Red Kap (1923), Nautica (1983), Jansport (1967).
Strong brands help VFC charge more for its products and maintain prime shelf space with retailers (i.e. retailers need VFC’s products to draw in traffic – consumers expect them to have North Face, etc., and might shop elsewhere if they don’t carry it).
While VFC has had to evolve its products’ designs and marketing strategies over the years, its long-standing brand recognition and successful relationships with retailers (there is only so much shelf space for each product category) serve as major competitive advantages.
To stay relevant, VFC invests significantly in advertising (over $700 million in 2014, representing over 5% of sales) and consumer research. VFC realizes that developing a deep understanding of consumers’ needs must be at the core of how it designs and markets products to win customers’ loyalty. Over the past four years, VFC has conducted thousands of in-person interviews and surveyed more than 125,000 people in 15 countries to gain better consumer insights.
The best brands create strong, emotional connections with consumers, and VFC has proven time and again to excel at this objective. The company’s relationships with consumers should further strengthen as it expands its higher-margin direct-to-consumer business, which consists of more than 1,400 company-owned stores and a significant e-commerce operation.
VFC’s extensive distribution network and presence in numerous product categories have also helped the company thrive. Whenever VFC develops a new product or acquires a new brand, it can sell these products all over the world and expand them into adjacent product categories to grow sales faster. VFC’s markets are highly fragmented and extremely large in size (over $100 billion), providing no shortage of growth opportunities.
Finally, VFC’s supply chain is another advantage. The company produces more than 500 million units of apparel, footwear, and accessories every year, representing hundreds of thousands of combinations of style and color. Over 30,000 of VFC’s employees support supply chain activities, and retailers require timely fulfillment of quality products that will sell.
Unlike some of its competitors, VFC also manufactures about 25% of its own products (the other 75% are outsourced to third parties). Products manufactured in VFC’s own facilities have lower costs and shorter lead times. The company’s scale and in-house work helps it maintain very competitive production costs and supply chain reliability that smaller players would struggle to match.
Overall, VFC’s reputation for quality, strong portfolio of brands, long-standing relationships with retailers, and skill in navigating a competitive landscape marked by constantly evolving consumer preferences form the foundation of its successful business.
