V.F. Corporation Enters Attractive Territory
V.F. Corporation (NYSE: VFC) reported a very good quarter and gave an upbeat outlook but the writing is on the wall. Not only were the results deeply impacted by systemic supply issues specifically port delays in California but the outlook is tenuous as well. The company reaffirmed its guidance citing strong demand signals through its business channels but also said the guidance assumes no disruptions.
“... continued port congestion, equipment availability and other logistics challenges have contributed to increasing product delays. VF is working with its suppliers to minimize disruption and is employing expedited freight as needed. VF's distribution centers are operational in accordance with local government guidelines while maintaining enhanced health and safety protocols.”
By all accounts, the U.S. supply chain issues are only getting worse so we can assume there will be disruptions. The salient point is that V.F. Corporation is a very strong business with a newly re-aligned portfolio, ample cash-generating power, and a safely growing and high-yielding dividend. V.F. Corporation is facing some headwinds but deteriorating business conditions. Until that happens, V.F. Corporation is a high-quality dividend grower we’d like to own and it’s trading at the lowest levels in nearly 12 months.
Supply Chain Issues Cut Deeply Into V.F. Corporation Results
V.F. Corporation has a bevy of strong brands including North Face, Timberland, and Vans so it is no surprise the company produced 22.2% in revenue growth versus last year. What is surprising is the revenue missed the consensus by 1000 basis points despite strength in all channels. Sales are up 19% organically and include double-digit gains in all sub-categories. The Outdoor segment led with growth of 31% and was followed by a 17% increase in Workwear and a 16% increase in Activewear. Sales through international channels are up 18% as well, and Direct-to-Consumer is up 32%.
As bad as the hit to revenue is, the report is still mostly good news. The adjusted gross margin came in at 53.7% or up 290 basis points and beat the consensus to drive strong earnings. The GAAP earnings of $1.18 actually beat the consensus despite the chunky revenue miss and adjusted EPS only missed the target by a nickel. More importantly, cash flow of $558 million is more than ample to sustain operations and support the dividend. Looking forward, the company reaffirmed its guidance which is in line with the broad market consensus.
The Analysts Still See Upside In V.F. Corporation Stock
The analysts still see ample upside for V.F. Corporation stock but the sentiment has been cooling off. While there have been no downgrades of sentiment since January the consensus price target is trending lower. The Pricetargets.com consensus is down about 5% over the past 30 days and may edge lower. The most recently lowered target came out in the wake of the Q3 report and puts the stock at the $76 level or about 10% above the current price action. This compares to the consensus target of $90 and the high price target of $106 which implies a little more than 50% of upside for this stock. If the company is able to overcome the supply chain disruption we think the $106 target is easily reachable.
The Technical Outlook: V.F. Corporation Is In Retreat
Shares of V.F. Corporation fell more than 5.0% in the wake of the Q3 earnings report and are moving lower now. The price action is bearish and will likely continue to fall in the near term. The next target for strong support is near $67.50 where we would expect to see price action bottom. Assuming the stock finds a bottom at or above $67.50 we would expect to see the price trend sideways until supply chain issues are obviously better or worse. If price action cannot hold support at the $67.50 level a move down to $66 is very possible. In that case, the value and yield would only become more attractive.
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