Apparel manufacturer V.F. Corporation (NYSE: VFC) may as well stand for Very Fragile Corporation.
Its stock is down more than 60% thus far in 2022 and trading at an 11-year low. Industry peers like Under Armour and HanesBrands have had similarly rough years but they at least performed well in 2021. VFC is headed for its third straight annual decline, something that has never happened before.
It’s been a stunning yet intriguing fall from grace for the company behind The North Face, Timberland, Vans, and other popular lifestyle clothing and footwear brands. Intriguing because the stock now offers a 7.3% forward dividend yield and seems to be finding support in the mid-$20’s.
But are would-be investors stepping into a value trap?
Let’s dig into why the company is getting fleeced—and whether or not the plus-sized dividend is truly a good fit for income investors.
Why is V.F. Corporation Stock Down So Much?
Two quarters into fiscal 2023, VFC has turned in some disappointing results. In Q1, earnings plunged 67% year-over-year and were well short of Wall Street’s forecast. The recently completed quarter was more of the same. Revenue decreased for the first time in two years and earnings were down sharply.
Supply chain issues have weighed heavily on the business. Distribution sites are getting backed up and operations are less than efficient. This combined with higher materials and transportation costs has hemmed margins. In the recently completed period, the gross margin was down to 51.5% from 53.9% a year ago.
At the same time, consumer demand for Vans footwear has hit the skids. The popularity of the brand has faded in 2022 amid an influx of similarly looking (and value-priced) competitors. Inflationary pressures also appear to be causing shoppers to put extra wear and tear on what they own and put off new shoe purchases. Sales of Vans products fell 8% last quarter.
Vans isn’t the only line experiencing weaker demand. Sales of Dickies clothing, popular with blue-collar workers, dropped 19% in fiscal Q2. Timberland boots sales slipped 4%. The combination of slowing sales and rising expenses hasn’t been well received by the market.
Is V.F. Corporation’s Dividend Stable?
At first glance, even though sales and profits are shrinking like no-wash cotton, VFC’s dividend appears to be in decent shape. The company is generating sufficient cash flow to meet its near-term obligations and the balance sheet contains a moderate amount of long-term debt. This comes with a caveat, though.
During its latest earnings report, VFC announced that its board of directors approved a $0.51 per share cash dividend that is payable on December 20th. This implies that $2.04 per share in dividends will need to be paid to shareholders over the next four quarters. It also means that more than 80% of VFC’s earnings are slated to be declared as dividends.
Generally speaking, payout ratios below 50% are considered healthy. In VFC’s case, the payout ratio is high and approaching unsustainable levels. It doesn’t mean that the ship can’t be righted, but profitability will need to pick up by mid-2023 as expected for dividend stability to be less dire.
The good news is, VFC has been through rough patches like this before. Recessions, financial crises, and most recently the pandemic have all caused the dividends to be stretched relative to earnings. Through it all, the company has managed to not just maintain but increase its dividend—in each of the last 49 years.
Despite the near-term headwinds, management seems hellbent on maintaining its shareholder friendly reputation even if it means fewer dollars get plowed back into the business for growth opportunities.
Will V.F. Corporation Stock Recover?
The company recently lowered its full-year EPS estimate from $2.65 to $2.45 at the midpoints. Like other clothing makers, management sees weaker economic conditions ahead that are likely to impact demand for its gear at brick-and-mortar retail outlets and e-commerce sites alike.
At 11x this year’s earnings, VFC is trading below the industry average P/E. Yet it deserves multiple given the recent performance and bleak near-term outlook. The Street is forecasting flat sales in the key holiday shopping period and year-over-year EPS declines for the next two quarters. Profit growth isn’t expected to happen until fiscal 2024.
VFC still has some supply chain kinks and macro concerns to work through. If these challenges improve, however, the stock could be attractive as a high-yielding turnaround play. A recovery will materialize but probably not for at least another couple of quarters. For now, income investors are better off window shopping until an 8% yield or sub-10 P/E arrives—and ideally both.
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