Alexa BowenBlake PorterKennedy White

VFC• Originally established in 1899 as the “Reading Glove and Mitten Manufacturing Company.”• Expanded into silk lingerie and acquired name “Vanity Fair.”

• Since then has become the world’s largest apparel manufacturer with over 30 brands in the denim, outerwear, footwear, sportswear, workwear, and luggage categories.• 5 most popular brands include The North Face, Timberland, Vans,

Wrangler, and Lee who account for over 70% of the company’s revenues.

• The company sells its products primarily to specialty stores, department stores, national chains, and mass merchants, as well as sells through company operated stores, concession retail stores, and e-commerce sites.

• The company is extremely active in managing their “company portfolio” which proves to be a major asset.

OutlineCompany Overview

Sector Overview

Competitive Environment

Company Strategy

Financial Analysis and Forecasting

Conclusion

Revenue Segments

VFC has grown presence in Outdoor & Actions Sports segment

Revenue Segments

VFC has slightly grown presence in foreign countries (Primarily Europe).

Notable Acquisition Successes• 1950’s

• Lee• 1970’s

• Wrangler, Jansport• 1990’s

• Bulwark, The North Face• 2000’s

• Eastpak, Nautica, Vans, Reef, Majestic• 2011

• Timberland

Products

Diversification of Products• Over the years, VFC has become increasingly more

diversified within the clothing sector.• Through 1980, VFC was primarily competing in the

Jeanswear segment and have since diversified into the following segments:

• Imagewear• Sportswear• Contemporary Brands• Jeanswear• Outdoor & Action Sports

• Due in large part to the acquisition of The North Face

Investment Thesis•

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Growth Strategy

17x17 VFC plans to gain $17 billion in revenue and increase their

gross margin to 17% by 2017

GLOBAL INNOVATION CENTERS

STRATEGY&

INNOVATION

PRODUCT INNOVATION PYRAMID

Macro-Finance Outlook

• All-time high• more low-ticket

purchases by consumers, such as retail/apparel

• Rated positively (+1)• Consumers are confident

in the economy• Usually leads to consumer

spending increase

Portfolio Sector Weights

Purchasing VFC (Consumer Discretionary) would correct this undervaluation

Consumer DiscretionaryConsumer

Discretionary

S&P

Competitive Advantage

VFC will sustain their competitive advantage by continuing to establish a broad and growing array of leading lifestyle brands, carefully selected to enhance its presence in high-

growth categories and by creating synergies within existing operating units.

Competitive Analysis

VFC has shown consistent revenue growth in each of the last five years. PVH, whom we consider to be the most similar competitor, reported a decrease in revenue for 2015.

Competitive Analysis

While VFC does have the highest selling, general, and administrative (SGA) costs, if we look at SGA cost as a percentage of sales, we see that VFC is the lowest of the three companies.

Porter’s Five Forces

Threat of New Competition• Economies of Scale

Advantages• Fast Changing Styles• Many Established Brands

Threat Level: Low

Threat of Substitute Products• Many Diverse Substitutes

Available• Price Sensitive Customers

Threat Level:Low-Medium

Buyer Power• Discretionary Goods• Buyers have Countless Options

Threat Level: High

Supplier Power• Multiple Vendors

• No supplier represents >10%• Independent Manufacturers in

Asia (77%)

Threat Level: Medium

Competitive Rivalry

• Many Established Competitors• Hard to Capture Market-Share

Threat Level: High

SWOT Analysis

WEAKNESSES• 20% of sales from 10 largest

customers○ Largest is Wal-Mart with over

10%• Decline in brand value

THREATS• Warmer weather

• Tighter retail inventory management

• Weakened apparel demand• Raw material prices• Foreign exchange rates

OPPORTUNITIES• E-commerce• Strong differentiated brands to

outperform in current economy• Expansion of denim and

outdoor/action sports brands

STRENGTHS• Strong intangible brand loyalty• Track record with acquisitions• Manufacturing and supply chain

ownership

Credit Analysis

Competitor Analysis

Skechers (SKX)

• No Dividend• CEO Greenberg Voting Rights Scandal

• Consumer Perception and Response

• Competitor Pricing

Nike (NKE)

• No Price Diversification• Easily Substitutable • Weak Dividend

PVH Corp. (PVH)• Similar Company, clothing conglomerate• Owns Tommy Hilfiger, Calvin Klein, and IZOD • Virtually non-existent dividend of 15 cents/year (VFC: project to exceed $2 in 2 years)

• Greater volatility• 52-week range: 64.16 - 120.67 (PVH)• 52-week range: 52.21 - 77.40 (VFC)

• Not as diversified• Exposed to currency risk

Competitors• Consumer Discretionary Competitors

• Michael Kors• Coach

• Both of these companies are considered more luxurious and thus are more likely to perform poorly during time of slower economic growth.

• North Face Competitors• Patagonia

• Privately-held• Is content with their current market share.

• Columbia• Typically, cheaper than North Face• North Face has set loftier revenue goals

Direct-to-Consumer (DTC) Selling

Possible Adverse Effects

• Reselling overseas without control

• System failures – wholly controlled• Customer privacy

• Credit fraud

Positives

• Control over in-store brand image

• Close to needs and preferences of consumers

• Gross Margins• Excess, discontinued, and out-of-season sales• Inventory Issue

CAGR

• EBIT is growing faster than Total Revenue• Dividend growth is at 20.6%• Free Cash Flow growth is at 16.5%

Operating, Net Profit, & FCF Margins

While UA may not be the best comparison, we do see that VFC is outperforming UA in each of the three metrics. Most notably, we see that VFC has had a free cash flow margin of nearly 10% for the past two years, whereas UA has struggled to report any positive cash flows.

Profitability: ROA, ROE, ROIC

We see that VFC has a massive ROIC in excess of 40%, which we would expect in more of a luxury brand company. Also, each brand within VFC now returns more than $1 in gross margin for every consumer dollar spent.

Income Statement Forecasting Assumptions

Income Statement Forecasting Assumptions Explained

- Revenue decreased historically due to warmer weather, increased retailer inventory, and weakened apparel demand. Increases forecasted due to higher direct-to-consumer sales, product innovation, and brand expansions.

- Net margins forecasted to increase with 17x17 plan, increased DTC sales, and increased ownership of manufacturing and supply chain branches.

- 43 consecutive years of rising dividends, no projection of this ending anytime soon but forecasted to slow down.

Balance Sheet Forecasting Assumptions

Cash expected to remain high due to stock repurchase program.

High inventory due to warmer weather.

Assets expected to grow slower than sales.

Balance Sheet Forecasting Assumptions (Cont.)

Debt expected to rise with continued share repurchase program. Equity expected to decrease

as VFC repurchases shares of stock.

WACC

We raised the beta from 0.69 to 0.75 to stress the model. We also changed the risk-free rate to correspond with the yield on a 10-year treasury note. After these changes, we are left with a weighted average cost of capital of 6.778%, and after seeing VFC’s return on invested captial of 40%, it is clear that VFC is creating value.

Intrinsic Value FCFs

Based on our model, we find that VFC is undervalued by 20.2%. Currently, VFC’s intrinsic value far exceeds the current stock price and we expect VFC’s intrinsic value to grow steadily in the coming years.

Relative Valuation

Forecasting Performance aligns with Historical Performance. Showing the forecasted numbers are

realistic.

Dividend Discount Model

The dividend supports over 100% of the stock price.

VFC has increased their dividend for 43 consecutive years

Entry Point

Attractive low entry point

Conclusion

• Fits with our macro-finance outlook• Corrects underweight sector• Consumer Discretionary Sector is outperforming

• Portfolio is underweight in Consumer Discretionary• 43 consecutive years of dividend growth• Expected return of 10.4% on Dividend Discount Model• Currently undervalued by 20.2%

Recommendation: BUY