Cowen: Vans Will Boost VF Corp's Overall Operating Margins

Apparel and footwear company VF Corp VFC is emerging as a margin expansion story, according to Cowen.

The Analyst

Analyst John Kernan upgraded shares of VF Corp. from Market Perform to Outperform and increased the price target from $96 to $106.

The Thesis

VF Corp's 2023 guidance that calls for $5 billion in revenues for its Vans brand — representing a CAGR of 10-12 percent — is an improvement from its previous outlook of 8-10-percent CAGR between 2016-2021, aKernan said in a Friday note. (See the analyst's track record here.) 

The anticipated growth stems from a 30-35-percent CAGR in the direct-to-consumer digital channel, 13-15-percent CAGR in the apparel and accessories categories and 14-16-percent CAGR in progression footwear, the analyst said.

Vans has a market share of 6 percent and 1 percent, respectively, in footwear and apparel, out of a total addressable market opportunity of $41 billion for footwear and $46 billion for apparel, Kernan said. 

Even with the 23-percent operating margin the company currently envisions for Vans, the analyst said the mix benefit of Vans growth could present VF Corp. with 150-200-basis point expansion over the next five years.

The retailer said the channel mix toward DTC provides incremental margin expansion opportunity, Kernan said. 

With the planned divestment of the denim business, Cowen forecast for the operating margin of the Remainco business to exceed 17 percent, helped by a 200-250-basis point expansion facilitated by the Vans business over the next five years.

"Any expansion in the other outdoor and active businesses margin profile (The North Face, Timberland or Williamson Dickie) would provide additional margin expansion above this analysis," Kernan said. 

Cowen estimates FY19 EPS of $3.63, ahead of the high end of the company's guidance, and FY20 EPS of $4.23, above the consensus estimate of $4.12.

The Price Action

VF Corp. shares were trading down 0.26 percent at $90.96 at the time of publication Friday. 

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