VF Corp (VFC): Prospects and Challenges

VF Corp (NYSE:VFC) is one of those infuriating stocks that never seems to be cheap precisely when you want it to be. The latest set of results kept up its tradition of raising EPS guidance even if the revenue numbers were far from stellar. Indeed the key takeaway from these results was the margin improvements achieved within difficult end markets. This is one of the best run stocks in the retail sector, but it faces some headwinds in 2013. Is it good value right now?

V.F. Corp Prospects and Challenges

With its key brands of The North Face, Vans, and Timberland the company has benefited from the trend towards wearing outdoor sports clothing as a kind of fashion statement. I doubt that most people wearing mountaineering or hiking clothing have ever been on a climb or a trail. Moreover wearing Vans and listening to Sonic Youth doesn’t necessarily qualify you as bona fide skate boarder, but who cares as long as it adds to the bottom line of the company’s numbers.

In order to explain how Timberland makes money here is a breakdown of its segmental profits in Q1. The key brands are in the outdoor & action sports wear division.

Throughout 2013 the company is going to be faced with the following challenges

Timberland’s has significant exposure to Europe and markets like Italy and Spain are some of its biggest existing markets. Fortunately, Vans and The North Face were ‘built out’ of Northern Europe.

J.C. Penney Company, Inc. (NYSE:JCP) is a key retail channel and in particular with Lee jeans and Vans. The difficulties with the department store and ongoing restructuring efforts could affect sales generation.

It’s Chinese operations haven’t performing great and it is a key part of its international expansion plans

In general the mid-market consumer is challenged in the current environment. It offers neither the income secure spending of the high end or the potential to benefit from trading down by the mass market.

Of course much of this known and the plan to deal with challenging markets is to expand its direct to consumer (DtC) sales via increasing the number of stores and investing in e-commerce facilities. Indeed DtC made up 21% of revenues in 2012 and are expected to rise to 23% in 2013.

What makes VF Corp (NYSE:VFC) different is that its diverse set of brands, channels and end-markets allow it to select areas in which to focus to generate growth through the cycle. Moreover its brands benefit from some secular fashion trends (as discussed above) whereas a company like The Gap Inc. (NYSE:GPS) is more exposed to general macro trends. Indeed, The Gap has had to completely restructure its business and separate its three brands (The Gap Inc. (NYSE:GPS), Old Navy and Banana Republic) into three global entities. The idea being that this will create the ability to focus and innovate in order to drive growth. Note the difference here, The Gap Inc. (NYSE:GPS) is trying to innovate its brands to make the ‘cool’ while VF Corp (NYSE:VFC) is innovating in its sales channels. I’d argue that the latter is easier to do.