Shares of VF Corp. slid 6.5 percent on Friday after the company reported better-than-expected third-quarter results but lowered its sales outlook due to a deteriorating performance by Vans and weakness in China. 

Several analysts lowered their price targets and downwardly adjusted estimates on VF while indicating the stock’s improvement is primarily tied to Vans regaining top-line momentum.

Shares of VF fell $4.39 on Friday to $62.96.

Highlights of the fiscal third quarter ended December 31 include:

  • Revenue increased 22 percent year-over-year to $3.62 billion, slightly exceeding Wall Street’s consensus estimate of $3.6 billion;
  • On an adjusted basis, EPS increased 45 percent to $1.35, topping Wall Street’s consensus target of $1.21 due to leaner expenses and lower taxes;
  • Gross margin increased 140 basis points to 56.1 percent, missing guidance of 57.0 percent due to incremental freight costs and currency headwinds;
  • By region in the quarter, U.S. sales grew 24 percent year-over-year, and EMEA was up 28 percent on a currency-neutral basis. APAC was up 3 percent on a currency-neutral basis, pressured by Greater China’s 9 percent decline;
  • By major brand, sales on a currency-neutral basis were led by The North Face, up 27 percent, followed by Timberland, 11 percent; Vans, 8 percent; and Dickie’s, ahead 4 percent;
  • For the fiscal year ended March 31, VF lowered its revenue target to $11.85 billion from $12.0 billion due to softening trends in China and some brand-specific pressures for Vans. The growth is now expected to be 28 percent versus 30 percent previously;
  • By brand for the fiscal year, growth is expected to be 21 percent to 22 percent for Vans (down from previous guidance of 26 percent to 28 percent); 29 percent to 30 percent for The North Face (up from 27 percent to 29 percent previously); 18 percent to 20 percent at Timberland (unchanged), and over 20 percent at Dickie’s (unchanged); and
  • FY22 EPS was maintained at $3.20. The quarter’s beat implies Q422 guidance of 48 cents, down from Wall Street’s consensus of 57 cents.

The following is a summary of analyst views on the quarter:

•J.P. Morgan downgraded VF to “Neutral” from “Outperform” and lowered its price target to $64 from $80.

“Compounding larger picture macro headwinds impacting our coverage broadly for the next 12 months (rising wages, elevated supply chain/freight costs, higher costs of digital customer acquisition) are multiple company-specific concerns exiting this year (namely Vans “brand heat,” China regional exposure, GPM category/geo mix pressure),” wrote Matt Boss. 

“Said differently, incorporating the macro/micro moving pieces into the multi-year P/L, we see VFC’s risk/reward more balanced taking into account the company’s top-/bottom-line profile relative to the valuation on a ‘relative’ basis across our Global Brands coverage universe,” continued Boss.

The analyst noted that VF missed expectations for gross margins for the third consecutive quarter, and the outlook for improvement has become more “clouded,” with a lower contribution now expected from the higher-margin Vans and overall China businesses.

Boss feels Vans has “no overnight fix” with China not expected to return to pre-pandemic 20 percent growth rates anytime soon and recovery in demand for Classics critical to bringing Vans back to double-digit growth. Classics make up about 60 percent of Vans’ mix. He said Vans’ underperformance places “increased pressure on TNF, Dickie’s, and TBL to pick up the slack.”

•BTIG maintained its “Buy” rating but lowered its price target to $90 from $101.

Camilo Lyon wrote that VF posted a “generally good FQ3” with adjusted EPS beating estimates, solid sales and expense leverage offsetting less gross margin expansion than anticipated. Lyon also called out “standout” performances by The North Face and Timberland. The analyst said The North Face’s 30 percent constant-currency growth in China “offers a playbook for how Vans can return to growth in that market (e.g., getting closer to the consumer with local-for-local marketing and product assortments).”

Lyon said the implied Q4-profit and sales guidance reduction was primarily driven by weakness by Vans in China for the second quarter in a row. However, Lyon said VF’s guidance for fiscal 2023 could prove conservative if supply chain costs come down, inventory levels improve, merchandise margins remain healthy, and the promotional environment remains rational.

“We fully appreciate (and also feel) the Vans China disappointment but take some measure of solace in the company’s acknowledgment that the brand heat has faded because now they can work to reignite that lost momentum. That all said, we point out that the other key brands in the portfolio (TNF, Dickies, Timberland, and Supreme) are healthy, particularly in NA and EMEA. Overall, while the stock could tread water for the next 1-2 quarters until China stabilizes, with the stock trading at 17x F23E EPS, we see little downside from here.,” Lyon continued.

•Piper Sandler reiterated its “Overweight” rating while lowering its price target from $89 to $80.

Erinn Murphy wrote that VF’s management indicated it could take two to three quarters for inventory in China to improve. Officials also expect global supply chain/logistics challenges could continue throughout the industry for the balance of 2022, although VF believes “it is in a better position than most” to offset these pressure due in part to efforts to secure extra capacity. Another concern is Omicron, which impacted store traffic in the latter part of December in the U.S. while traffic was down, running 40 percent versus pre-pandemic levels in the final weeks of the quarter.

On the brighter side, Murphy called out the momentum at The North Face, VF’s commitment to fixing Vans, and management’s positive outlook for the overall EMEA region. She also noted that VF officials are confident a mid-single-digit planned increase in pricing will offset a similar increase in inflation. Murphy wrote in a note, “While VFC shares are in a show-me situation and have remained a consensus short, we believe the portfolio should emerge stronger post-pandemic.”

•Baird maintained its “Outperform” rating while lowering its price target to $80 from $95.

Analyst Jonathan Komp wrote the beyond the quarter results topping estimates, positives included TNF’s 28 percent growth on a two-year basis amid strength for on- and off-mountain categories and higher quality of sales, Dickies revenue of 14 percent on a two-year stack, and Timberland returning to a pull-demand market.

Komp added, “Management also expressed high confidence in delivering its long-term algorithm given lean inventories (ex-China), TNF/Dickies strength, and secular tailwinds. All told, we are trimming F2023E EPS (+14 percent) and acknowledge patience for Vans still is needed, yet see a compelling risk/reward with the market underwriting structurally lower growth.”

•Citi Research kept its “Neutral” rating on VF and trimmed its price target to $68 from $71.

Analyst Paul Lejuez wrote in a note, “Good results for The North Face, Timberland and Dickies were once again not enough to offset the weakness at Vans. It’s not that Vans results were awful (in fact business trends in the Americas have sequentially improved and reached pre-pandemic levels). But the stock isn’t ‘cheap’, so the market needs more from the brand to support the valuation (after years of getting used to strong double-digit growth at Vans). It is unclear when or if Vans will return to its historical levels of growth, yet even with the stock price declines over the past week, VFC still trades at nearly 14x our F23E EBITDA, above DECK at 10x and LEVI at 9x.”

•Williams Trading maintained its “Hold” rating and trimmed its price target to $70 from $75. The firm on January 20 downgraded the stock from “Buy” and from an $85 price target due to expectations that supply chain issues and some challenges in China would result in a revenue shortfall.

Williams Trading analyst Sam Poser in a note Monday stated, “Wait and See. Visibility remains clouded as the timing of resolution of demand in China and supply chain constraints remain uncertain, and shipping costs are likely to remain elevated. At the same time, outside of China, demand for all brands remains healthy, especially The North Face (TNF), and Timberland. Vans sales are not living up to its long term growth plan, but the brand remains healthy. VFC, from a brand management perspective, remains one of the best companies in our coverage.”

•Stifel kept its “Hold” rating on VF and lowered its price target from $85 to $74.

Jim Duffy described the quarter as “again a mixed bag” with The North Face performing better-than-expected to help make up for below-plan results at Vans. The analyst said investors are “appropriately focused” on the challenges at Vans given that it’s VF’s largest and most profitable brand, making up an estimate 35 percent of FY22E revenue and 45-to-50 percent of pre-tax income.

Duffy wrote, “We see a number of factors validating Vans brand health but dependence on the Classics franchise (we estimate ~50 percent of revenue) looks to be an ongoing source of pressure. A return to sustainable double-digit growth is not credible near-term. Given Vans challenges headwinds in China, we are trimming FY22 and FY23 estimates. With lower estimates and multiple compression in the market, we are taking a more conservative stance on valuation.”

•Cowen maintained its “Outperform” rating on VF while adjusting its target price to $72 from $77.

John Kernan wrote in a note improving investment sentiment will be highly correlated to a rebound in Vans brand momentum and inbound data. The next earnings catalyst is not until May and the anayst said “uncertainty on supply chain and China and demand weakness is increasing across the sector.”

Kernan said the broad-based strength at The North Face “helped mask what continues to be a difficult environment in China (8 percent of sales), and an increasingly elongated recovery for Vans. Questions remain around the consensus expectations into next year. Shares have now declined ten consecutive earnings releases.”

Photo courtesy VF Corp./Vans