VF Corporation (VFC) is a self-described "$9 billion apparel powerhouse, with an incredibly diverse, international portfolio of brands and products that reach consumers wherever they choose to shop." While you may not have heard of VF Corporation as a consumer, its brands are widely popular—Timberland, Jansport, Lee, Majestic, Nautica, Wrangler, and The North Face. This portfolio of proven brands makes VF Corporation the largest apparel company in the world.
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(Source: Yahoo Finance)
VF Corporation has declined nearly 10 percent in the last three months and has significantly underperformed the S&P 500 over the same time period. Recently, the shares dipped below the 200 day moving average and are now solidly in the oversold territory. As I have written in the past, VF Corporation is one of my favorite picks that I have been recommending since 2010 and highlighted in my Great Recession II portfolio.
VF Corporation specializes in a diverse group of products. For example, Wrangler jeans can be purchased for under $10 and Lee/Nautica also have price points in the $20 to $30 range. In addition to being well positioned to weather the tumultuous economy, its higher-end brands such as North Face and Timberland will supercharge its profitability when the economy eventually recovers.
It has been reported that VF Corporation is interested in acquiring J Brand, a luxury woman's apparel maker. For reference, J Brand's products are sold at upscale department stores, including Barney's, Saks, and Bloomingdale. The purchase price for J Brand would be in the neighborhood of $1.2B based on comparable transactions. VF Corporation has had great success with its $2.0B Timberland acquisition which was another popular lifestyle brand and this does look like another strategic fit for the company.
Management has proven its ability to build a world class product portfolio, and I am confident that the acquisition will only be pursued if it is a strategic fit. The P/E of 16.8 is higher than typically for my investments but the forward P/E of 12.4 is attractive, given the company's rate of growth. If the company makes any further acquisitions, I would only expect to see the multiple expand further. VF Corporation appreciated significantly in the Timberland acquisition period and something similar might occur for it.
I want to focus briefly on Vans as an example of how potent VF Corporation is as a company. Vans was acquired by VF Corporation in 2004 and has tripled its revenues in eight short years. Within the next four years, Vans is aiming to double its revenue again with an increased focus on footwear and further spreading the company's lifestyle brands across the United States and other regions. VF Corporation's management team continues to do an excellent job at bringing the best out of its brands and linking the lifestyle aspects together in harmony.
Strategies To Play Earnings
The company reports earnings preopen on July 19 and I recommend going long before that date. There is always the risk of downside, but I believe it is limited after the recent selloff.
Strategy 1 (Strong Bull): Long VF Corporation
Strategy 2 (Moderate Bull): Long VF Corporation; Short August 2012 Call @ $1.00
Strategy 3 (Slight Bull): Long VF Corporation; Short July 2012 Call @ $3.00
Alternatively, selling the 135 July 2012 Put @ $5.20 might be the optimal strategy of all as you can potentially generate a 3.85% return if VF Corporation does not decline further in the next two weeks. Earning season is always unpredictable but VFC has surprised to the upside recently. Regardless of near-term price movements, VF Corporation has a strong portfolio and leadership that understands how to grow in this economic climate. Take advantage of the reason sell-off to add this company to your portfolio.
Disclosure: I am long VFC.