Activist Jumps on the VF Bandwagon: Time to Buy?

Shares of VF Corp. (VFC) jumped by more than 14% in Tuesday trading. As of late morning, it was the top performer in the S&P 500. If the gains hold, it would be VF’s best single-day performance since October 2008.

The apparel and footwear conglomerate, whose brands include Vans, The North Face, and Timberland, will soon face the wrath of activist investor Engaged Capital, who is said to have built a significant stake in the company.

The Wall Street Journal reported that Engaged would like to see the company implement a $300-million cost-cutting plan and several other ideas to get it back on top in the apparel industry, including a strategic review of its non-core assets and real estate.

The past five years have not been good for loyal VFC shareholders. Its shares are down over 76% over this period. 

This could be the push VF needed to make the necessary changes to its business. It is also time to consider buying its shares. Here’s why.

The Activist Won’t Be Asking for CEO to Exit

Activists like Engaged, ask for a lot when they butt heads with the management and board of companies they own shares in. That’s especially true when these positions are bought as value plays. The activist comes in, makes a few recommendations, ensures they’re implemented, and then sits back to wait for good things to happen to its share price.

The one thing you won’t see in this situation is the replacement of the CEO. In June, VF hired Bracken Darrell as its new chief executive to replace the former CEO, Steve Rendle, who unexpectedly stepped down last December. 

Darrell came over from Logitech (LOGI), where he delivered a 681% cumulative return for shareholders in the 10.5 years he was CEO. I’m sure VF board members are looking for him to provide a repeat performance with one of America’s most iconic apparel companies. 

Darrell’s hiring is similar to Best Buy's (BBY) recruiting of Hubert Joly in 2012. Joly knew very little about the apparel business. However, he’d been in hospitality for a long time and understood people. Joly’s bold moves saved Best Buy from the scrap heap of retail history.

The former Logitech CEO has an opportunity to do the same with VF. Engaged would be crazy to push for change at the top. They’ve got the right person. They must convince VF and the board that their ideas aren’t merely the usual cut, cut, cut emphasized by activist investors.

A $46 Share Price in 3 Years

According to comments by Engaged’s Director of Research Chris Hetrick, VF’s shares could trade near $50 in three years with aggressive execution of its plan. 

Hetrick believes the only two brands the company shouldn’t be willing to part with are The North Face and Vans. He also thinks the dividend should be cut. Its annual rate is currently $1.20.   

Engaged said Rendle made some bad moves in his five years as CEO. They included underinvesting in Vans, which led to a slowdown in its cool factor, and buying Supreme for $2.1 billion, substantially weakening the company’s balance sheet. 

“We believe VFC’s value destruction is directly attributable to Mr. Rendle’s failed strategy and the Board’s seeming unwillingness to intervene,” CNBC reported Engaged Capital’s comments. 

Currently trading around $18, if it were to hit $46 within 36 months, it would be a compound annual growth rate of 36.7%, returning its shares to where they traded in June 2022. 

VFC stock under Darrell could return to its level before Covid-19 when it hit $100.    

Consider the Current State of Its Business

Of the 24 analysts currently covering VFC stock, just 10 rate it Overweight or an outright Buy with a target price of $21. Half of the analysts are sitting on the fence with a Hold rating. 

Darrell delivered his first quarterly report in early August. 

“[W]e have all the necessary ingredients to unlock the company's significant potential and return to delivering strong, sustainable and profitable growth, which will translate to elevated shareholder returns,” Darrell stated. 

While revenue was 8% lower in Q1 2024, The North Face delivered its 10th consecutive quarter of double-digit revenue growth, up 12% excluding currency. That’s the foundation for rebuilding the company’s overall business. 

Another positive in the first quarter was its  31% increase in revenue in China, leading the way in the Asia/Pacific region. Of its three operating areas, only Asia/Pacific had positive growth in the quarter.

For 2024, it expects sales to be flat year-over-year to moderately lower, with earnings per share of $2.15 at the midpoint of its guidance. Based on its current share price, that’s a price-to-earnings ratio of 8.4x, its lowest valuation multiple in the past decade. 

It’s got a lot of work to do to return its business to the highs it experienced before the pandemic. Having an activist watching your every move could be good or bad. 

I guess we’ll find out. 

In the meantime, consider selling the Nov. 17 $20 put. Its bid price as I write this is $2.30, an annualized yield of 147.2%. 

If the share price stays around $18.45, and the shares are put to you in 31 days, your net price of $17.70 would be a slightly better entry point than where it’s currently trading. If it expires above $20, you’ll pocket the $230. 

Either way, the $20s are just around the corner for VFC stock. If you’re aggressive, the news should be precisely what you need to hear to make a move. 

 

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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.