kennedy white blake porter alexa bowen · swot analysis weaknesses ... nike (nke) • no price...
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Alexa BowenBlake PorterKennedy White
VFC• Originally established in 1899 as the “Reading Glove and Mitten Manufacturing Company.”• Expanded into silk lingerie and acquired name “Vanity Fair.”
• Since then has become the world’s largest apparel manufacturer with over 30 brands in the denim, outerwear, footwear, sportswear, workwear, and luggage categories.• 5 most popular brands include The North Face, Timberland, Vans,
Wrangler, and Lee who account for over 70% of the company’s revenues.
• The company sells its products primarily to specialty stores, department stores, national chains, and mass merchants, as well as sells through company operated stores, concession retail stores, and e-commerce sites.
• The company is extremely active in managing their “company portfolio” which proves to be a major asset.
OutlineCompany Overview
Sector Overview
Competitive Environment
Company Strategy
Financial Analysis and Forecasting
Conclusion
Revenue Segments
VFC has grown presence in Outdoor & Actions Sports segment
Revenue Segments
VFC has slightly grown presence in foreign countries (Primarily Europe).
Notable Acquisition Successes• 1950’s
• Lee• 1970’s
• Wrangler, Jansport• 1990’s
• Bulwark, The North Face• 2000’s
• Eastpak, Nautica, Vans, Reef, Majestic• 2011
• Timberland
Products
Diversification of Products• Over the years, VFC has become increasingly more
diversified within the clothing sector.• Through 1980, VFC was primarily competing in the
Jeanswear segment and have since diversified into the following segments:
• Imagewear• Sportswear• Contemporary Brands• Jeanswear• Outdoor & Action Sports
• Due in large part to the acquisition of The North Face
Investment Thesis•
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Growth Strategy
17x17 VFC plans to gain $17 billion in revenue and increase their
gross margin to 17% by 2017
GLOBAL INNOVATION CENTERS
STRATEGY&
INNOVATION
PRODUCT INNOVATION PYRAMID
Macro-Finance Outlook
• All-time high• more low-ticket
purchases by consumers, such as retail/apparel
• Rated positively (+1)• Consumers are confident
in the economy• Usually leads to consumer
spending increase
Portfolio Sector Weights
Purchasing VFC (Consumer Discretionary) would correct this undervaluation
Consumer DiscretionaryConsumer
Discretionary
S&P
Competitive Advantage
VFC will sustain their competitive advantage by continuing to establish a broad and growing array of leading lifestyle brands, carefully selected to enhance its presence in high-
growth categories and by creating synergies within existing operating units.
Competitive Analysis
VFC has shown consistent revenue growth in each of the last five years. PVH, whom we consider to be the most similar competitor, reported a decrease in revenue for 2015.
Competitive Analysis
While VFC does have the highest selling, general, and administrative (SGA) costs, if we look at SGA cost as a percentage of sales, we see that VFC is the lowest of the three companies.
Porter’s Five Forces
Threat of New Competition• Economies of Scale
Advantages• Fast Changing Styles• Many Established Brands
Threat Level: Low
Threat of Substitute Products• Many Diverse Substitutes
Available• Price Sensitive Customers
Threat Level:Low-Medium
Buyer Power• Discretionary Goods• Buyers have Countless Options
Threat Level: High
Supplier Power• Multiple Vendors
• No supplier represents >10%• Independent Manufacturers in
Asia (77%)
Threat Level: Medium
Competitive Rivalry
• Many Established Competitors• Hard to Capture Market-Share
Threat Level: High
SWOT Analysis
WEAKNESSES• 20% of sales from 10 largest
customers○ Largest is Wal-Mart with over
10%• Decline in brand value
THREATS• Warmer weather
• Tighter retail inventory management
• Weakened apparel demand• Raw material prices• Foreign exchange rates
OPPORTUNITIES• E-commerce• Strong differentiated brands to
outperform in current economy• Expansion of denim and
outdoor/action sports brands
STRENGTHS• Strong intangible brand loyalty• Track record with acquisitions• Manufacturing and supply chain
ownership
Credit Analysis
Competitor Analysis
Skechers (SKX)
• No Dividend• CEO Greenberg Voting Rights Scandal
• Consumer Perception and Response
• Competitor Pricing
Nike (NKE)
• No Price Diversification• Easily Substitutable • Weak Dividend
PVH Corp. (PVH)• Similar Company, clothing conglomerate• Owns Tommy Hilfiger, Calvin Klein, and IZOD • Virtually non-existent dividend of 15 cents/year (VFC: project to exceed $2 in 2 years)
• Greater volatility• 52-week range: 64.16 - 120.67 (PVH)• 52-week range: 52.21 - 77.40 (VFC)
• Not as diversified• Exposed to currency risk
Competitors• Consumer Discretionary Competitors
• Michael Kors• Coach
• Both of these companies are considered more luxurious and thus are more likely to perform poorly during time of slower economic growth.
• North Face Competitors• Patagonia
• Privately-held• Is content with their current market share.
• Columbia• Typically, cheaper than North Face• North Face has set loftier revenue goals
Direct-to-Consumer (DTC) Selling
Possible Adverse Effects
• Reselling overseas without control
• System failures – wholly controlled• Customer privacy
• Credit fraud
Positives
• Control over in-store brand image
• Close to needs and preferences of consumers
• Gross Margins• Excess, discontinued, and out-of-season sales• Inventory Issue
CAGR
• EBIT is growing faster than Total Revenue• Dividend growth is at 20.6%• Free Cash Flow growth is at 16.5%
Operating, Net Profit, & FCF Margins
While UA may not be the best comparison, we do see that VFC is outperforming UA in each of the three metrics. Most notably, we see that VFC has had a free cash flow margin of nearly 10% for the past two years, whereas UA has struggled to report any positive cash flows.
Profitability: ROA, ROE, ROIC
We see that VFC has a massive ROIC in excess of 40%, which we would expect in more of a luxury brand company. Also, each brand within VFC now returns more than $1 in gross margin for every consumer dollar spent.
Income Statement Forecasting Assumptions
Income Statement Forecasting Assumptions Explained
- Revenue decreased historically due to warmer weather, increased retailer inventory, and weakened apparel demand. Increases forecasted due to higher direct-to-consumer sales, product innovation, and brand expansions.
- Net margins forecasted to increase with 17x17 plan, increased DTC sales, and increased ownership of manufacturing and supply chain branches.
- 43 consecutive years of rising dividends, no projection of this ending anytime soon but forecasted to slow down.
Balance Sheet Forecasting Assumptions
Cash expected to remain high due to stock repurchase program.
High inventory due to warmer weather.
Assets expected to grow slower than sales.
Balance Sheet Forecasting Assumptions (Cont.)
Debt expected to rise with continued share repurchase program. Equity expected to decrease
as VFC repurchases shares of stock.
WACC
We raised the beta from 0.69 to 0.75 to stress the model. We also changed the risk-free rate to correspond with the yield on a 10-year treasury note. After these changes, we are left with a weighted average cost of capital of 6.778%, and after seeing VFC’s return on invested captial of 40%, it is clear that VFC is creating value.
Intrinsic Value FCFs
Based on our model, we find that VFC is undervalued by 20.2%. Currently, VFC’s intrinsic value far exceeds the current stock price and we expect VFC’s intrinsic value to grow steadily in the coming years.
Relative Valuation
Forecasting Performance aligns with Historical Performance. Showing the forecasted numbers are
realistic.
Dividend Discount Model
The dividend supports over 100% of the stock price.
VFC has increased their dividend for 43 consecutive years
Entry Point
Attractive low entry point
Conclusion
• Fits with our macro-finance outlook• Corrects underweight sector• Consumer Discretionary Sector is outperforming
• Portfolio is underweight in Consumer Discretionary• 43 consecutive years of dividend growth• Expected return of 10.4% on Dividend Discount Model• Currently undervalued by 20.2%
Recommendation: BUY