Brean Capital Downgrades V.F. Corporation, Awaits Pullbacks Or Buybacks

Brean Capital’s Eric Tracy believes that while the current premium valuation for VF Corp VFC reflects the “positives to the story,” it does not discount for some of the incremental fundamental risks.

Tracy downgraded the rating on the company from Buy to Hold.

Key Risks

The analyst mentioned the risks facing V.F. Corp include guidance for acceleration in the second half, despite the increasingly uncertain macro environment, the exposure to post-Brexit Europe and FX, and ongoing liquidation pressures in domestic athletic retail, among other concerns.

“While EUR/USD has been relatively stable in the wake of last month's Brexit vote, we believe uncertainty around the form/ fate of the EU layers in incremental macro risk across the continent, particularly as countries including Sweden, France re-evaluate their continued participation,” Tracy stated.

Related Link: V.F. Corp's Contemporary Division Sale Welcomed By Canaccord Analysts

Re-Acceleration Unlikely

The analyst also noted that Van’s European growth had slowed in recent quarters, impacted by the ongoing reset in wholesale. Although management expects the reset to be completed in 2H, the analyst does not expect a re-acceleration, given the macro uncertainty.

“We continue to believe sporting goods rationalization and cross channel inventory liquidation will remain a headwind,” Tracy said, while adding that checks indicate “both VFC AND retail buyers are taking a cautious stance around open-to-buy/inventory builds, likely constraining ability to chase in season/upside even if seasonality comes in favorable on potential La Nina climate pattern.”

In addition, Tracy believes that the aging athleisure “supercycle” and oversaturated distributed are likely to limited visibility into a re-acceleration in 2H.

However, the analyst did acknowledge the key positives to the story, such as V.F. Corp’s best-in-class management and execution, accretive mix shifts that are expected to drive continued gross margin expansion, skillful portfolio management and free cash flow optionality.

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