If you’ve been a shareholder of Colorado-based VF Corp (VFC) for the past five years, you might want to take a deep breath before selling your shares.
Sure, the past five days have been brutal, with VFC stock losing 22% of its value on horrid earnings news. And, yes, I realize past management has destroyed more than 83% of your share value over the past five years, but yesterday’s unusual options activity should give you some hope.
I’ve got 41,000 reasons to believe that the future of one of America’s most storied apparel companies will get better. You have to stick around to see it.
Vans Is a Disaster
I’ve worn Vans for years, so it pains me to see the brand floundering like a fish out of water. New CEO Bracken Darrell -- he’s been the head honcho for a little more than four months -- is determined to return the brand to its skater roots.
“Inside all of us there’s a little bit of an underdog, a little bit of an outsider. Not everybody but almost everybody. And Vans really catered to that through the skater community,” Darrell told CNBC’s Jim Cramer on Monday.
“I think we got so big that we, we ended up kind of catering to other people that were just purely into fashion — which was not bad — but we kind of lost our way on really making sure, always appealing to that slightly mischievous, fun side that we all have inside.”
If you’ve been inside a Vans store recently, it’s not hard to see that the brand has lost its way. To deliver a turnaround at Vans -- which saw its quarterly sales fall 23%, excluding currency -- the CEO is personally taking charge of the brand. Keven Bailey, who’d been running Vans, is out.
VF will find a replacement from outside the company. However, Bailey will remain with VF to help Darrell with its Reinvent transformation program. It’s always good when CEOs don’t throw the baby out with the bathwater. This move should encourage employees that the new CEO isn’t impulsive, which is never a quality you want from a turnaround CEO.
How bad is the Vans business?
The company’s direct-to-consumer (DTC) segment, which includes company stores and e-commerce, was down 5% in Q2 2024. Excluding Vans, it was up 9%. So, that part of the business is doing relatively well outside the Vans concerns. That’s a positive. In Q1 2024, DTC accounted for 47% of its overall revenue.
“Trends today for Vans aren't getting any better, and in fact, could even be viewed as getting worse. We will not see a turnaround this year. The good news is that the brand continues to be loved by so many consumers. There are many good steps that we've made, but we now have to make some changes and move faster,” Darrell stated in the Q2 2024 conference call.
Activist investors want VF to divest brands and pay down debt. It would be a mistake to sell Vans or Timberland, for that matter. The trio can deliver for the company in the future.
Its Finances Continue to Suffer
As a result of the second-quarter numbers, the company lowered its free cash flow projection in 2024 by $300 million to $600 million. VF’s cash from operations in the 12 months ended Sept. 30 were just $239 million. As recently as fiscal 2020, it was $1.66 billion.
There’s no question that the company’s cash flow and profitability have seen better days. However, as CFO Matthew Puckett said in the conference call, VF still has approximately $2.2 billion of liquidity on the balance sheet. It will get through the transformation in a stronger position than where it is today.
The CEO has prioritized four areas that he attends to focus on in the immediate future: 1) Fix the U.S. business, 2) turn around Vans, 3) lower its cost structure, and 4) strengthen the balance sheet.
If you think about it, these all go hand in hand.
Sure, you can divest brands for cash to pay down debt, but buyers smell blood right now. VF won’t get top dollar for any divestitures at this point, including the often-mentioned sale of Timberland.
So, to help fix North America, it has promoted Martino Scabbia Guerrini, the head of its EMEA (Europe, Middle East, and Africa) region, to be the company’s first Chief Commercial Officer. The CCO will run a unified global commercial organization to deliver on all aspects of its business, from supply chain to customer service.
As Darrell stated in the conference call, two out of three of its regions are performing more efficiently. With the company veteran in charge, it won’t be long before North America is also humming.
By implementing this global commercial organization, it intends to get closer to the customer, delivering innovative new products at an accelerated pace. That should help Vans get out of the funk it’s in. An externally-hired brand President will also help things along.
As for cost savings, it plans to reinvest a portion of its projected $300 million annual savings into brand-building and product innovation. In addition to finding operating efficiencies, it announced a 70% cut to its quarterly dividend. That will save it $325 million annually.
Lastly, it won’t make any further acquisitions until it’s lowered its debt. At the moment, its gross leverage ratio is 4.8x. It wants to be down to 2.5x within the next couple of years.
So, if you read between the lines, investors shouldn’t expect any acquisitions until sometime in 2026 or later. That doesn’t mean it won’t sell brands between now and then. It's just that it won’t add to its woes anytime soon.
The Option Play for the Risk Taker
In mid-October, I suggested that it might be time to buy VFC stock because activist investors were pushing the company for accelerated change. I was ahead of myself, given the state of the Vans business.
However, the future is bright with Darrell in the CEO role. He did a fantastic job with Logitech (LOGI), and shareholders reaped the rewards -- LOGI shares gained 681% during his tenure.
Activist Engaged Capital believes the shares could be trading near $50 in 36 months, depending on the execution. Doesn’t everything?
So, in mid-October, I was looking at selling the Nov. 17 $20 put. At the time, its bid price was $2.30. Today, the bid is $5.40. Unless things giddy-up in the next two weeks, my recommendation is underwater by about $300.
Changing gears slightly, the Jan. 1/2025 $10 put had a volume of 40,983 on Wednesday, 158.85x the open interest. It was the second-highest Vol/OI ratio yesterday of unusually active options.
So, the bid price yesterday was $1.30 for an annualized yield of 8.3% if you were selling the put. Today, it’s $1.05, or 6.0%. If you’re an income investor, that’s not terrible. However, the object of the exercise is to buy some shares at a reasonable price.
In today’s unusual options activity, the Dec. 15 $12.50 put has a bid price of $0.30 for an annualized yield of 17.8%. It’s currently out of the money by a couple of dollars. It won’t report another quarter until after expiry, so the volatility should be slightly lower through the end of the year.
If you’re risk-averse -- you probably shouldn’t be playing options if that’s the case -- a call might be more appropriate.
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.
