V.F. Corporation's (NYSE:VFC) stock had a bad 2016; having started the year at $58.22, the stock fell roughly 10% to close at $53.35, after hitting a 52-week high of $67.10. However, with the stock now at ~$53, the 52-week low of $48.05 seems distant in the rear view mirror, so after the recent Q4 earnings report, is the tide finally turning for VFC?
Well, in a word; no. VFC has struggled with its wholesale business for some time now, as bankruptcies and inventory tightening outside of the company's control has occurred, drastically reducing demand in the short term. The North Face saw a 20% decline in wholesale volume last quarter based on the same period just a year ago, and it was a similar story across the board. CEO Steve Rendle said on the company's latest earnings call that they 'expect continued disruption and repositioning in the near-term', and to 'expect more moderate growth during the course of 2017'. Not exactly music to an investor's ears.
It's not all bad news though, 2016 revenue was actually up 1% Y/Y on a currency neutral basis, and the all-important gross margin rose 40 basis points to 48.6%, and that includes an 80bps foreign exchange headwind. EPS of $3.11 was up 7% currency-neutral, and a dividend of $1.68 gives a payout ratio of only 54%, despite the yield being north of 3.1% at the time of writing.
The good news however comes when we dig a little deeper into the numbers, and break down where the sales grew and fell. Vans became VFC's biggest brand during the year, with sales in 2016 up 7%, including a huge 15% increase in Q4. What's more impressive is that D2C or Direct to Customer sales for Vans grew an incredible 40% Y/Y in Q4, and it was a similar story with the company's other brands. Jeanswear revenue actually fell 4% in Q4, but D2C sales were up low double digits, and Timberland also grew D2C sales at twice the rate of the overall business.
As we know, selling direct to the customer cuts out the middle man, which means that VFC are in control of everything from design to final sale, which should improve customer service, and will definitely benefit gross profit margin, and we have seen evidence of this in the most recent earnings report.
V.F. Corp. has struggled recently. Wholesale was once the largest single source of revenue for the firm, but we have seen a decline that has hurt top-line growth in the last few years. However, we have also seen a drop in share price, and I believe that now is a good time to start acquiring some shares on a pullback. The stock currently trades at about 18x earnings and yields 3.17%, which is a fair price for a company that has 5 individual $1 billion annual revenue brands and a payout ratio that allows for continued dividend growth and share buybacks, as well as investment in technology, innovation and sensible acquisitions. The shift from wholesale to D2C is a short term headwind, but when coupled with high single digit growth in Europe and Asia for 2017 and beyond, the results could be very profitable in the long run.
VFC is a dividend aristocrat that has had to downshift to take a tight corner, but 2017 could prove to be the year to start buying this great company.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VFC over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.