VF Corporation (VFC 0.84%) owns an impressive collection of fashion brands, including Timberland, The North Face, and Vans, among others. But having recognizable brands doesn't instantly lead to success, which has been clearly evident to investors who have pushed the stock lower by roughly 55% over the past year.
With a sizable 6.3% dividend yield, is VF Corporation worth the risk for dividend investors as it looks to make the changes necessary to improve performance?
The big number
The most important number for dividend investors will likely be 40%. That's the difference between $0.50, the quarterly dividend VF paid in the third quarter of 2022, and $0.30, the dividend it paid in the fourth quarter of that year. After the dividend took a haircut like that, potential investors would do well to exercise caution.
Adding to the worry is the fact that VF had, prior to the cut, a very long streak of annual dividend increases under its belt. The board likely didn't come to the decision to cut the dividend lightly; there had to be a material problem, or a collection of problems, that weren't going to be short term in nature.
Image source: Getty Images.
One of the issues the board had to deal with was finding a new CEO for the retailer and clothing maker. Although a new company head, Bracken Darrell, was appointed on June 20, investors shouldn't get too excited.
Just finding someone isn't enough to suggest that the leadership transition is complete. The new CEO has to dig in and learn about the company (the last job on Darrell's resume was at tech firm Logitech International), figure out how to work with other members of the leadership team, and, at the same time, provide strategic guidance.
There's probably going to be at least a three- to six-month transition period where little observable change takes place.
So while it is good news that the board found a new CEO, there is still much to be done. Investors should probably view this task as, at best, half complete at this point.
Bigger problems
This brings up some of the most notable tasks ahead of the new CEO. Picking the most pressing issue is hard, but it is probably the performance of the company's large and important Vans brand.
This fashion brand was the company's largest in fiscal 2023 by sales, but its sales declined a huge 12% year over year. By the fourth quarter, The North Face, which has been performing well, had taken over the top sales spot at the company.
Key Data Points
Here's the problem: Vans accounts for roughly 30% of VF's top line. It has a huge impact on performance. Strength at similarly large The North Face is helping to offset the hit, but the company needs to turn Vans around before it can claim to be on a sustainably positive track.
Complicating this is that many of the company's smaller brands are underperforming, too. For example, sales at Timberland and Dickies were down 2% and 13%, respectively, in fiscal 2023.
A few years ago, VF spun off its basics business so it could focus more on its fashion-driven operations. So, in some ways, what the company is dealing with today is a self-inflicted wound.
Indeed, fashion trends can and do shift, sometimes quickly, and being off-trend is a big problem for sales. Fixing this will not be easy, and it could take some time for the company to regain favor with consumers that have moved on to other brands.
VFC Debt to Equity Ratio data by YCharts
Adding to the issue is VF's weak balance sheet, which limits its ability to spend money on the turnaround effort.
One of the reasons for the dividend cut was to free up cash for debt reduction. That's a good call, given that its debt-to-equity ratio trended steadily higher over the past 10 years, hitting a high of nearly 2.3 times. Notably, that's around four times the level at which the company started the decade.
And yet, nursing struggling fashion brands back to life while also trying to reduce leverage is a tall task that will likely also require a fair amount of time to achieve. There are no easy solutions here.
Moving in the right direction
VF has made and continues to make hard choices. It is clearly taking the headwinds it faces seriously. But the new CEO still has a lot of work to do even though the company is moving in the right direction.
Given VF's reliance on fashion trends, the stock probably isn't appropriate for conservative investors despite its attractive yield. Even more aggressive investors might want to hold off until evidence of positive movement starts to show up either on the balance sheet or with brand results (or perhaps both).
