Shares of VF Corp. fell about 11 percent on Monday following the news of Steve Rendle’s retirement as CEO. His exit was a surprise but not a shock to Wall Street analysts, given VF’s underperformance, led by Vans, in recent years. More worrisome was VF’s third guidance reduction in the last three months.
Shares of VF Corp. closed Monday at $29.51, down $3.71, or 11.2 percent, on the day. The stock is down 59.7 percent from the trading price at the start of 2022 of $73.22.
Rendle joined VF Corp. as VP of sales at The North Face in 1999 and is credited with reviving the brand’s growth as president of The North Face from 2004 through 2010. The nearly-25 year VF-veteran became president of the Outdoor Americas Coalition; SVP, Americas region; and president and COO before taking over as CEO in January 2017.
Over the nearly six years as CEO, Rendle oversaw the spinoff of its Jeanswear business to refocus on outdoor and action sports brands, the elevation of the Vans brand, the acquisitions of Dickies Supreme, Altra and Icebreaker, and commitments to establish a purpose-driven culture.
Benno Dorer, VF’s lead independent director, will act as interim president and CEO immediately, while Richard Carucci, former CEO of The Clorox Corporation and Board member since 2009, will serve as interim chairman. VF hired and external search firm to find Rendel’s replacement.
VF revised its outlook for its fiscal year ended March 2023 to reflect weaker-than-anticipated consumer demand across categories, primarily in North America, which is driving an elevated promotional environment and order cancellations at the wholesale level to reduce inventories. Also impacting the outlook, to a lesser degree, are the worsening impacts of inflation on consumer discretionary spending in Europe and ongoing COVID-19-related disruptions in China.
VF now expects revenue growth in the second half of FY23 to be modestly lower than previously outlined, with revenue to increase 3 percent to 4 percent in constant dollars (previous guidance up 5 percent to 6 percent in constant dollars.) Adjusted EPS for the fiscal is now expected in the range of $2.00 to $2.20 (previously, $2.40 to $2.50), versus $3.18 in the prior year. The promotional environment, primarily in North America, and SG&A deleverage from lower volumes are expected to impact profitability in the near term.
On October 27, while reporting second-quarter results, VF reduced its EPS guidance to $2.40 to $2.50 (previously, $2.60 to $2.70.) During its Investor Day meeting in late September, VF reduced its EPS outlook to $2.60 to $2.70 (previously, $3.05 to $3.15.)
Analysts said the new CEO could change VF’s strategy outlined at its Investor Day and rethink capital allocation priorities, including the company’s dividend.
Credit Suisse reduced its rating on VF to “Neutral” from “Outperform” on the news and reduced its price target to $28 from $36.
Analyst Michael Binetti wrote in a note, “We still think this is a very solid collection of brands, and we think the stock could stabilize once the market gets comfort that EPS revisions have stopped. But the abrupt CEO transition and lack of clarity on which brand is seeing incremental pressure add too much near-term uncertainty and reduces our conviction calling for a rotation into the stock on a view that EPS is truly bottoming. On fundamentals…even if VFC can clear Vans inventory soon, we don’t see VFC in a reasonable position to start guiding to positive YOY Vans order books until at least Fall ‘23/Spring ’24. And any near-term fluctuations in TNF trends will likely see outsized downward stock corrections. Finally, while we think the open CEO role will attract strong talent, and we think this portfolio of brands can be very powerful when operating well, we see too much uncertainty today (with no all-clear to further negative revisions) to remain Outperform.”
Wells Fargo kept its “Equal Weight” rating and reduced its price target to $32 from $35.
Analyst Kate Fitzsimons wrote in a note, “Following management’s recent meetings, an announcement of this magnitude certainly came as a negative surprise given Rendle’s tenure at the organization and among our softlines CEOs (joined VFC in 1999), his board Chairman position, yet another guidance cut (4th so far this FY), and the timing of this announcement still early on in the holiday season. Net/net, with visibility now even lower on VFC into FY24, including the timing of clean inventories, Vans stabilization (we already expect a sub-algo year next year), and with a CEO transition underway, we see the VFC equity as stuck in the penalty box at least until a CEO announcement can lend some sort of credibility to LT VFC strategies and targets.”
Stifel maintained its “Hold” rating but adjusted its price target to $30 from $33. Jim Duffy wrote, “We admire Mr. Rendle for his contributions to VFC, thoughtful leadership and passionate oversight of VFC’s transition to a purpose-led organization. Unfortunately, a period of significant share price underperformance added pressure to perform, which did not materialize against a tightening consumer spending backdrop. The role will likely garner significant interest from outside global leaders of active lifestyle brands.”
The analyst said succession planning offered an opportunity to permanently split the CEO and Chairman roles to improve corporate governance.
The downward revision, according to Duffy, showed VF’s brand portfolio as “clearly challenged,” indicating a soft back-to-school period and discouraging Black Friday weekend. He wrote, “We believe wayward trends in domestic Vans sales and, to a lesser extent, Timberland, are challenging progress.”
Duffy noted that the Vans brand had the largest revenue and operating income based on its portfolio and was primarily to blame for share underperformance in recent years.
Duffy concluded, “We continue to admire and respect the brand portfolio though understand painful transitions around trend shifts can challenge productive growth. With a net debt to EBITDA at approximately 3.6x entering CY23 and the portfolio seeking a credible case for stronger growth, we believe it is prudent to remain valuation sensitive.”
JP Morgan maintained its “Underweight” rating and reduced its price target to $23 from $27. Analyst Matt Boss noted that management turnover had become an issue for the company with Rendle’s exit marking the fourth major senior management change across the organization in 2022. Other changes included Kevin Bailey (previously VF’s president of APAC & Emerging Brands) becoming global brand president of Vans in March; Nicole Otto (former VP of Nike Direct North America) becoming global brand president of The North Face in June; and Marissa Pardini (previous VP & GM of The North Face Americas) becoming chief product & merchandising officer for Vans in December.
However, Boss said the guidance revision showed that VF faces “multiple company-specific concerns exiting this year,” including challenges reviving “brand heat” for Vans, its exposure to weaker trends in Europe and pandemic-related disruption in China, and exposure to wholesale, notably with the Timberland brand.
Specifically, he wrote that coming out of meetings with VF management in mid-November at the JP Morgan Global Luxury & Brands Conference in Paris, its updated guidance indicated that promotional headwinds had become “greater than plan” tied to weaker demand in North America that challenged efforts to clear inventories, particularly at Vans and Dickies. Boss wrote that the wholesale order cancellations, stemming from efforts to rebalance inventories across the marketplace, were driving heavier promotional actions than initially hoped. Finally, the updated outlook showed that the weakness in Europe and China had worsened.
Baird kept its “Outperform” rating on VF while lowering its price target to $37 from $42. The investment boutique also removed VF’s stock from its “Fresh Pick” list. Jonathan Komp wrote, “We are surprised the Board is moving in another direction, though we expect brand-level leadership, growth strategies and capital allocation plans to remain intact.”
The analyst noted that VFC’s stock outperformed the market through late 2019 but had “fallen sharply” over the pandemic, with a disappointing recovery for Vans overshadowing positive developments at other brands. With VF’s stock down 58 percent year-to-date, “we suspect the Board felt urgency to initiate change, even though we expect brand-level leadership and F2027 growth strategies and capital allocation plans to remain intact,” wrote Komp.
Komp added that he suspected VF would not have reduced guidance without the CEO change announcement, and the move could represent an attempt at “lowering the bar” as a precaution against further challenges. Still, Komp further axed his fiscal 2024 EPS estimate for VF to $2.10 from $2.70 previously as he sees “greater potential” for additional revisions by Dorer or the new CEO.
Williams Trading kept its “Hold” rating but trimmed its price target from $27 to $26. Sam Poser believes the retirement of Rendle and the high rate of order cancellations showed that VF Corp. was more focused on short-term sales growth than the long-term health of its brands. The analyst wrote, “It’s clear to us that VFC, except for the three emerging brands, Altra, Smart Wool and Icebreaker, management leaves alone, and are growing at over 30 percent a year, has focused too much on short term growth and risks damaging the brands. The plan to fairly rapidly increase its global footprint of Supreme risks hurting what made it special.”
He further said that market conversations indicate HeyDude is taking share from Vans. Power also believes the Timberland brand was hurt by a recent move to increase prices on its iconic wheat boot to offset inflationary costs and then significantly discounted the product over the last few weeks, repeating a pricing mistake made in the earlier part of the prior decade.
Poser wrote, “We are hopeful that VFC’s new CEO will have operational intelligence and, more importantly, have branding skills, and puts the health and sanctity of VFC’s brands ahead of potential growth. If a brand is healthy, compelling and managed well, profitable sales come. Focus on short-term gains cause long-term pains.”
Cowen reiterated its “Market Perform” rating and lowered its price target to $27 from $29.
John Kernan wrote the lower sales and EPS guidance marked the fourth time overall in fiscal 2023 that VF’s outlook was downwardly readjusted. He said the reduction “now raises questions on the durability of the dividend into next year in the face of $1.8B debt refinancing.”
Kernan added that the current dividend yield of 7 percent could prove unsustainable and Cowen’s modeling a dividend cut in FY24 to $1.70 relative to the $2.05 dividend expected in FY23, given VFC’s reduced earnings power and rising leverage ratios. VF’s senior unsecured bonds due 9/20/22 and senior unsecured loans due 12/30/24 will need to be refinanced at higher rates as VF’s leverage has increased, and Cowen estimates the increased interest expense will cost VF between 15 to 20 cents a share in annual EPS.
Cowen is now modeling for the second half of fiscal 2023, VF’s Outdoor segment’s sales to climb 11 percent on a currency-neutral basis, Active segment sales to be down 3 percent on a currency-neutral basis, and Work segment sales to be down 5 percent on a currency-neutral basis. Kernan said, “Our checks indicate slowing momentum for Vans, Timberland and Dickies.”
Guggenheim kept its “Buy” rating while trimming its price target to $40 from $48.
Robert Drbul wrote in a note, “In our view, VFC operates a strong brand portfolio, headlined by The North Face, Vans, Supreme, Dickies, and Timberland, each of which possesses attractive global growth opportunities in categories of strength both during and following the pandemic period (Active, Outdoor, and casual Streetwear). We believe a turnaround for Vans is critical to the shares recovering and look forward to an update on the Vans business and any progress the business is making. We are encouraged by the performance of the other Big 3 brands in the portfolio, including The North Face, Dickies, and Timberland. We also remain optimistic about prospects of the Supreme brand. We believe that cost structure realignments through the strategy will likely generate leverage over time even as the company begins to reinvest and increase its marketing and demand creation spend.”
Photo courtesy VF Corp./Getty