The share price of VF Corporation (VFC 0.31%) has fallen by around 60% over the past year -- but it doesn't fully capture the pain its longer-term investors have suffered. The shares are actually down nearly 80% from the high-water mark they touched in 2020. What exactly is going on here and, just as important, had this steep fall created a good opportunity to buy into a company that's an icon in the apparel industry?
What it was and what it is
VF used to be known as Vanity Fair. At one point, a key part of the business was making basic apparel items such as blue jeans. Basics, as a broad group, are fairly stable products because they are the types of things that people need and keep buying in good periods and bad ones. They are boring, but reliable.
Image source: Getty Images.
Then, in an effort to add more growth to its portfolio, VF started a years-long strategy of layering on more fashion-oriented brands such as Vans and Timberland. Sales of fashion brands are driven more by consumer trends. When a brand is on target with its offerings, it can see exceptional demand, and that can lead to massive expansion opportunities. In that light, the logic of adding fashion brands to a strong foundation of staples-oriented brands made a fair amount of sense.
But Wall Street doesn't always favor companies that use a core-and-explore approach, usually preferring growth over stability. And in early 2019, VF Corporation spun off a large chunk of its basics business as Kontoor Brands (KTB 2.71%) as a way to unlock value for shareholders. That changed the company in a dramatic way: Now, fashion brands are the main show.
Missing the mark
The first big takeaway here is that anyone who bought VF stock prior to its Kontoor spinoff now owns a vastly different company than the one they originally invested in. If that includes you, you should do a deep dive and assess whether the new direction works for you. The second big takeaway -- particularly in light of the massive stock decline -- is that VF's brands aren't all doing very well right now. That's the downside to fashion. Fickle consumers can suddenly decide that some other brand is better.
Right now, the company's largest brand, Vans, is struggling. Its sales are down 11% through the first nine months of its fiscal 2023. The downtrend isn't expected to change anytime soon.
To be fair, its second-largest brand, The North Face, is growing fairly well, with sales up by 11%, but VF clearly isn't firing on all cylinders. Performances across the rest of its brand lineup, meanwhile, are mixed, with some up and some down. Overall, the improving sales picture for The North Face is really the best news for this company today, and it's just one brand among many.
VFC Debt to Equity Ratio data by YCharts.
There's another complicating factor here, though, and that's VF's heavily leveraged balance sheet. Its debt-to-equity ratio is currently at around 1.9, up from around 0.5 a decade ago. And the company's ratio of earnings before interest and taxes (EBIT) to interest owed has materially declined to roughly 4 after being above 10 for many years.
Given the backdrop here, it probably shouldn't be too surprising that management decided to "rightsize" the dividend in early 2023. While this was probably the correct business decision, it's a bad sign that indicates VF Corporation is on a different trajectory than it was in the past. And, given the increased importance of fashion trends, its trajectory is likely to remain much more volatile than in the past.
Wait, for now
One of the reasons management cut the dividend was to give the company more flexibility to shore up its financial position. At the very least, most investors should probably wait until it has shown material progress on that front before investing. Conservative investors, meanwhile, will probably want to consider the risks here in great detail. Even the stock's 5.6% dividend yield may not be worth it in light of the changed business model -- particularly now that you can find bank CDs with yields that are nearly as lofty.
