VF Corp. (VFC 1.25%) recently reported financial results for its fiscal 2023 (ended March 31), and the numbers were better than what analysts were looking for. Revenue of $2.7 billion and adjusted diluted earnings per share of $0.17 were both down year over year. But the stock was up slightly following the news.
Shares of VF Corp. are down 31% in 2023 and 60% over the past 12 months. They now trade at a price-to-earnings ratio of 17.7, which is a bit of a discount compared to the valuation of the overall S&P 500. Some investors might view this as an attractive buying opportunity, especially since a lot of businesses trade at premiums to the overall market.
But I think it's best to avoid VF's stock. Here's why I have this strong point of view.
VF has lots of issues
In this type of economic environment, one where interest rates are higher than they were just a couple of years ago and the possibility of a recession is on everyone's minds, it's worrying to see VF's balance sheet. As of April 1, the business had $6.6 billion of long-term debt on the books. The company's entire market cap is $7.4 billion, so this goes to show you just how precarious VF's financial position is.
The business increased its borrowings by $1.2 billion in the last 12 months. In a period of heightened uncertainty, tighter monetary conditions, and rising interest rates, this is not a good place to be. Interest expense of $165 million in fiscal 2022 was 26% higher than in the previous year.
Another alarming trend relates to VF's inventory situation. In the latest fiscal quarter, inventories were up a whopping 62% year over year, now totaling $2.3 billion. This means that VF currently has merchandise equal to about 85% of 2022 revenue. Having unusually high levels of inventory on hand can hurt brand strength because the company will be forced to institute more promotions and markdowns. This is indeed what happened, and VF's gross margin of 49.6% in Q4 shrank from 52.2% a year ago.
The debt and inventory problems are exacerbated by the fact that VF operates in one of the most competitive industries out there. VF owns some well-known brands, like Vans, The North Face, Timberland, and Dickies. But looking at things from the customer's perspective, there are so many options when it comes to buying clothes and shoes. Intense competition makes it that much harder for VF to boost sales and improve its finances.
VF has some positive attributes
Despite what I believe to be very compelling reasons for shareholders to sell VF Corp. and for prospective investors to avoid the stock altogether, it's always valuable to look at the other side of the coin. To be fair, VF does have some positive traits that are worth discussing.
For starters, the business owns some of the most popular apparel and footwear brands on the market, as I mentioned previously. Vans is a top consumer choice in the athleisure category, and it was ranked as the fourth most popular footwear brand among teenagers, according to a survey by Piper Sandler. And The North Face just posted a double-digital sales gain last quarter.
As of this writing, VF offers a beefy dividend yield of 9.5%. This is mainly due to a dividend payout that has largely stayed consistent at the same time that the stock price has come crashing down. But to its credit, this can only be possible if the organization was producing positive net income on a sustainable basis, a feat that VF has had no problems doing.
The bullish argument doesn't hold much weight. As an investor who wants to own stocks for five years or more, I just can't recommend buying VF shares with that mental framework. However, investors who care more about dividends might want to take a closer look at the stock.
