VF Corporation (VFC -1.71%) owns a collection of brands that you probably know well, including Vans, The North Face, and Timberland, among others. The company has been struggling despite this collection of iconic labels, and that's shown up in the stock price, which has fallen more than 55% over the past year.
With the stock well below its 52-week high, is VF Corp a buy, or should investors wait until there's more evidence that the business has stabilized?
There goes the dividend
Boards of directors do not take dividend cuts lightly, since investors often react negatively to such news. Investors rightly or wrongly view dividend decisions as corporate signals. Raising the dividend suggests management has a positive view of the future, and dividend cuts -- well, the exact opposite.
So the decision at VF Corp to "right size" the dividend from $0.51 per share per quarter to $0.30 was bad all around. Shareholders that were relying on VF Corp, once a longtime dividend grower, to provide a reliable income stream were hurt, and all investors now have to question the strength of the business supporting the dividend.
Image source: Getty Images.
Adding to the concern is the fact that management has highlighted the need to "reduce leverage." To put a number on how big an issue this is, the company's debt-to-equity ratio is around 1.9, which is definitely at the high end of its historical range on this leverage metric. Meanwhile, VF Corp's ability to pay its interest costs has fallen drastically over the past decade, with its times-interest-earned ratio dropping from 18 times to roughly 4 times. To be fair, a number above one means the company is covering its interest costs, so VF Corp is capable of carrying the debt it has. But its balance sheet doesn't appear to be nearly as well-positioned as it once was.
So the dividend cut was meant to free up cash for other purposes, like debt reduction. But management is also looking at selling its packs business, which includes profitable brands like Kipling, Eastpak, and JanSport. While selling these brands may help the company solidify the balance sheet, the plan here speaks to a much bigger issue for investors.
Tied to fashion
Not too long ago, VF Corp spun off Kontoor Brands (KTB 0.09%). The point of the move was to jettison less desirable brands like Wrangler and Lee. These are essentially basic attire offerings that are reliable sellers, but not likely the highest-margin products or the fastest growing. VF Corp was very specifically looking to focus more on its higher-growth fashion offerings.
Selling Kipling, Eastpak, and JanSport is basically following the same general theme. Basically, VF Corp's performance is getting more and more reliant on fashion trends.
The problem is that consumers can be very fickle, so the risk posed by a misstep is increasing as management removes more and more of the boring foundational brands it owns. And that's very different from what VF Corp was before the Kontoor Brands spin off. Long-time investors, particularly those with a dividend focus, need to recognize that this is not the same company they may have bought years ago.
There are clear signs of the risk here as well. For example, through the first nine months of fiscal 2023, VF Corp has seen sales in its Vans brand fall 11%. This brand made up nearly a third of the company's sales, so it is a very important business. Investors can point to the 11% sales growth at The North Face as an offsetting positive, given that it also makes up nearly a third of sales.
However, that information doesn't change the fact that a huge portion of VF Corp's fashion-tied operations are clearly on the outs with consumers. The remaining third of the business is more fragmented, and unfortunately performance was mixed. VF Corp's business is not particularly well positioned right now.
The dividend cut and focusing on reducing leverage are probably the right calls, but for long-term investors the risks appear to remain high here. That's not to suggest that VF Corp can't turn itself around, but it might make sense for conservative types to wait until there's clearer evidence that it has at least stabilized its most important brands.
Stay on the sidelines
Vans, one of VF Corp's largest brands, is struggling. The company has a material amount of leverage. It has cut the dividend, and is looking to sell assets to free up cash. These are not the types of things that dividend investors should be pleased to read. Meanwhile, the list of positives today is painfully small.
At this point, VF Corp seems like a turnaround stock, a high-risk investment approach that only a rare few should consider.
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February 26, 2023 at 09:53PM
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VF Corp is Down 55% From Its High. Time to Buy? - The Motley Fool
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