VF (VFC 0.16%), once known as Vanity Fair, has an iconic history. But that history has been tarnished of late, as the company refocused around a small list of fashion brands. There have been some very big changes already, but the new CEO has made clear that nothing is off the table as VF tries to turn its business around. Here's what that could mean.
VF's first cut wasn't the last
VF had a very long history of increasing its dividend annually -- until it didn't, thanks to a dividend cut at the start of 2023. Companies hate cutting their dividends because investors generally find such a move distasteful. Although the big issue for income investors is that they earn less dividend income after a dividend cut, such a move can also signal material business weakness.
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That's exactly what the cut implied at VF, noting that three of its four largest brands saw year-over-year sales declines in the fiscal 2024 second quarter (ended Sept. 30). Management has been working to get the brands (Vans, Timberland, and Dickies) back on track for a while, but its efforts have yet to show material sustained progress. This is why it wasn't all that surprising to see another dividend cut announced along with fiscal 2024 Q2 earnings.
If one cut is bad, two is even worse. The company basically admitted that it was in a bind and needed to take drastic action to right the ship. One key factor is leverage, which is higher than management would like. The cash saved from the dividend cut will be put to use paying down debt. But there's more to the story.
VF is in a holding pattern
In his first conference call as CEO, Bracken Darrell specifically stated that VF would not be making any acquisitions until its debt was lower. That's reasonable, but he also noted that "everything is on the table" and that there are "no sacred cows" at the company as it looks to reduce leverage and improve operating performance. That's just as big a statement as two dividend cuts in less than a year.
Clothing maker VF had already been looking to trim its brand portfolio, but now it sounds like the effort might get more support. While the company's top four nameplates get most of the attention, it owns a much larger portfolio that just gets lumped into an "other" category in earnings reports. The list includes Supreme, Eastpak, and JanSport, among others. Selling a smaller brand would be a quick way to generate cash without materially impacting the top line. And given the swift rise in interest rates, the benefit of reduced interest expense may actually offset the revenue and earnings impact of a sale.
While it is impossible to predict the future when it comes to brand sales, it seems very clear that the new CEO was alluding to such changes in his prepared comments. He added that the "board and I are fully aligned," which suggests that the board is likely to go along with big portfolio changes if they do come about. The problem is that VF is operating from a position of weakness, not strength, and that means that it may have to part with brands it would normally have preferred to keep.
VF's story is in a state of flux
VF has a broad brand portfolio but a relatively small list of brands that are particularly desirable. And some of those brands are very important to the company's top line. Most investors will probably be better off on the sidelines until the debt reduction and turnaround effort here leads to improvement in financial results. Indeed, if VF has to sell an important brand because it has nothing else that buyers are interested in, it could end up a very different company in the future than it is today. And it seems particularly unlikely that the dividend will start growing again anytime soon.
