Jensen Investment


Investment Blog Post
03/21/2019 - Investment Blog Post

Holdings Update: Buy VFC

In March 2019, Jensen’s Quality Growth Investment Team added VF Corporation (VFC) to the Jensen Quality Growth portfolio.  VFC is one of the world’s largest apparel and footwear companies, with over 25 brands organized into four categories: Outdoor, Active, Work, and Jeans.

The company was founded in 1899 as Reading Glove and Mitten Manufacturing Company by John Barbey and a group of investors.  In 1919, the company began making underwear, and changed its name to Vanity Fair Mills.  VFC went public in 1951, and in 1986, the company acquired the Wrangler and JanSport brands, doubling the company’s size.  In the 2000s, VFC acquired numerous brands, with the standouts being The North Face and Vans, and in 2011 it added Timberland to its portfolio.  Last year the company acquired Williamson-Dickie, a maker of workwear, and announced plans to spin off its denim brands.

Key to the investment case for VFC is the strength of its brand portfolio, which covers the spectrum of outerwear, performance apparel, casualwear, footwear, and occupational categories, including The North Face, Vans, Timberland, Dickies, Icebreaker, Smartwool, Altra, and others.  VFC also has a strong position in the U.S. backpack and luggage market, with the JanSport, Eastpak, and Eagle Creek brands.  The promotion of Steve Rendle to CEO in early 2017 has reinvigorated the company’s long track record of cultivating its brand portfolio, which we view as a positive catalyst for growth.  In addition to strong brands, strategy, and management, the company has proven economies of scale in design, manufacturing, marketing, and distribution.

Another positive for VFC is its growing diversity of revenue sources.  Approximately two-thirds of the company’s sales are to resellers, including a rapidly-growing online channel, as well as department stores and specialty stores.  The remaining third of sales represent VFC’s direct-to-consumer business, including retail stores, outlet stores, and e-commerce sites.  The direct business has grown faster than wholesale, increasing from about one-quarter of sales three years ago.  VFC’s sales are primarily in the U.S. (57% of revenues), with the rest mostly in Europe (24%) and Asia-Pacific (11%).

VFC joins two other apparel companies in the Jensen Quality Growth portfolio: Nike, the global sports company, and TJX Companies, owner of T.J. Maxx, Marshalls, and HomeGoods.  We feel comfortable owning all three for several reasons.  First, while there is some overlap in products between Nike and VFC, the strategies are different: VFC is cultivating a brand portfolio across many types of apparel, while Nike is focused on a single sports-centric brand.  On the other hand, TJX purchases apparel and home furnishings in bulk lots and sells them throughout its chains of discount stores.  Second, from a risk management standpoint, we have reduced the size of our portfolio positions in both Nike and TJX in recent years, which allows for additional consumer discretionary investment.  Further, the three stocks are not heavily cross-correlated, as shown in the accompanying table.

That said, we are aware of the risks that VFC faces.  The industry is competitive and exposed to cyclical factors including consumer spending and consumer tastes, although VFC has mitigated this concern with a track record of continual innovation.  Additionally, the company is exposed to fashion and weather risks—if the company has the wrong product on the shelves, sales can suffer.  VFC addresses these risks with the increased use of data mining and analytics, such as point-of-sale data, social media trends, and weather data.  Finally, while the company has had several success stories with its acquisitions, not all have worked out flawlessly.  However, the company’s acquisitions in recent years appear considerably more promising than some of those made in the 2000s.

Over time, VFC has made a concerted effort to establish sustainable sourcing, reduce the use of fossil fuels, promote inclusion and diversity, and improve governance. We believe these strategies reduce business and reputational risk for its brands, while benefiting the bottom line through automating the manufacturing process, reducing waste, and limiting employee turnover.  In 2019, VFC was named one of the world’s most ethical companies by the Ethisphere Institute for a third consecutive year.

Overall, we believe VFC possesses many of the characteristics we look for in a quality company, including solid competitive advantages, strong free cash flow, good growth drivers, a stable balance sheet, and consistently high returns on shareholder capital.  For example, VFC has been a member of the Jensen Quality Universe for over thirty years due to its consistent and high Return on Equity.  In our opinion, the uncertainty associated with the upcoming spin-off of the denim business has created a modest disconnect in valuation, providing us an opportunity to establish a new position.

Fund holdings are subject to change and should not be considered recommendations to buy or sell any security. For a listing of the funds current holdings, please click here.