V.F. Corporation (VFC) has been in business for more than 115 years and owns some of the most famous consumer apparel brands in the world (e.g. The North Face, Vans, Wrangler, Lee, etc.).
Unseasonably warm winter weather, sluggish retail spending, unfavorable currency fluctuations, and several other transient factors have caused this dividend aristocrat to tumble nearly 30% since the end of July 2015. None of these factors seem to impact the company's long-term earnings power, potentially setting up an attractive investment opportunity.
VFC has increased its dividend for 43 consecutive years (2.6% yield) and appears to be trading at a very reasonable price (forward P/E multiple of 16) considering the quality of the business. These are the opportunities we look for when we buy dividend growth stocks in our Top 20 Dividend Stocks portfolio.
Business Overview
VFC was founded in 1899 and is one of the largest apparel companies in the world with a strong portfolio of brands in the outerwear, footwear, denim, backpack, luggage, accessory, sportswear, occupational, and performance apparel categories. VFC annually produces over 500 million units spread across more than 30 brands including The North Face, Vans, Timberland, Wrangler, Lee, and Nautica.
Approximately 75% of the business is sold on a wholesale basis to retailers, and the remainder of the business is sold direct-to-consumer (VFC owns over 1,400 retail stores under its different brand names and maintains a significant e-commerce presence).
By geography, VFC derived 70% of its 2014 revenues from the Americas, 20% from Europe, and 10% from Asia Pacific.
Business Analysis
In business for more than 115 years, VFC clearly has some competitive advantages. Many of the company's largest brands have carved out leading mindshare with consumers in their respective product categories because they have delivered quality for so many years – The North Face (1966), Vans (1966), Timberland (1973), Lee (1889), Wrangler (1947), Eastpak (1952), Red Kap (1923), Nautica (1983), Jansport (1967).
Strong brands help VFC charge more for its products and maintain prime shelf space with retailers (i.e. retailers need VFC's products to draw in traffic – consumers expect them to have North Face, etc., and might shop elsewhere if they don't carry it).
While VFC has had to evolve its products' designs and marketing strategies over the years, its long-standing brand recognition and successful relationships with retailers (there is only so much shelf space for each product category) serve as major competitive advantages.
To stay relevant, VFC invests significantly in advertising (over $700 million in 2014, representing over 5% of sales) and consumer research. VFC realizes that developing a deep understanding of consumers' needs must be at the core of how it designs and markets products to win customers' loyalty. Over the past four years, VFC has conducted thousands of in-person interviews and surveyed more than 125,000 people in 15 countries to gain better consumer insights.
The best brands create strong, emotional connections with consumers, and VFC has proven time and again to excel at this objective. The company's relationships with consumers should further strengthen as it expands its higher-margin direct-to-consumer business, which consists of more than 1,400 company-owned stores and a significant e-commerce operation.
VFC's extensive distribution network and presence in numerous product categories have also helped the company thrive. Whenever VFC develops a new product or acquires a new brand, it can sell these products all over the world and expand them into adjacent product categories to grow sales faster. VFC's markets are highly fragmented and extremely large in size (over $100 billion), providing no shortage of growth opportunities.
