VF Corporation (VFC 1.26%) is offering dividend investors a hefty 6.8% yield, well above the 1.6% or so you could get from an S&P 500 index exchange-traded fund.
However, before jumping into this company, which owns an iconic collection of clothing brands, investors should step back and dig into the numbers just a little bit. There is one very big problem that remains a lingering headwind.
A changed business
VF, formerly known as Vanity Fair, once owned the relatively boring jeans-centric brands Lee, Wrangler, and Rock & Republic. However, it spun those businesses off as Kontoor Brands (KTB 1.91%) so that it could focus on its more fashion-oriented brands, including Vans, The North Face, Timberland, and Dickies.
Hiving off the boring staples operation from the fashion-oriented business made some sense, given that they require different skills. But in doing so, VF lost a reliable foundation on which it could rely during difficult times.
Image source: Getty Images.
The impact of that decision is showing up today. Essentially, fashion brands live and die based on often-fickle consumer taste trends. VF owns a broad portfolio of brands, so some are normally doing well while others aren't.
But just two of its brands account for a little over 60% of the apparel giant's sales. In the fourth quarter of its fiscal 2023 (which ended April 1), Vans and The North Face produced roughly the same amount in sales -- a huge 30% or so of the top line. If either of these businesses is struggling, VF will have a hard time growing.
So, when CEO Benno Dorer highlighted in the company's fiscal Q4 earnings release that the company was "able to close the fiscal year with 10 out of 12 brands flat or growing revenue, and five up double digits, despite the challenging consumer environment," that statement should be taken with a grain of salt. While technically true, two of those 12 brands matter far more than any of the others.
Divergence
And this is where the real problem for VF comes in. The North Face posted strong numbers for the just-ended fiscal quarter and year. The brand's sales rose by 12% in the quarter and 11% for the year. And that's great news.
But it has to be juxtaposed against the fact that Vans' sales declined by 14% in fiscal Q4 and 12% for the fiscal year. That's not good news, and the fourth quarter was worse than the full year, which means its performance worsened as the year progressed.
It's also worth highlighting that VF's board cut its dividend by roughly 40%, starting the new fiscal year off on what can only be described as a weak note. That move was basically a reset that spoke to the problems the company is facing. Vans is one of those problems, though so is its heavily leveraged balance sheet.
The company's debt-to-equity ratio is roughly twice what it was five years ago. One of the quickest ways for a dividend-paying company to free up cash for purposes such as debt reduction is to trim its distributions to shareholders.
VFC Debt to Equity Ratio data by YCharts.
With ongoing weakness at Vans, VF really can't claim material business success. It was the company's largest brand by sales in fiscal 2023 and has an outsize impact on financial results. Yes, the CEO has to be something of a cheerleader for the company, accentuating the positives, but investors need to make sure they are watching what's important. And right now, for this company, that's Vans.
Working on it
VF management isn't ignorant of the sales problems at Vans. It is working on a turnaround, but by its own admission, the retail environment is tough right now, so this won't be an easy fix. If you are attracted to the company's fat dividend yield, you should tread carefully and make sure to closely follow its big brands.
The North Face is doing great; Vans is not. Until both are pulling in the same direction, VF's overall results will probably be less than desirable.
