Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

When will V.F. Corp. learn that actions speak louder than words?

The apparel and footwear conglomerate has built its identity around using acquisitions to shore up growth, so much so that it's a lot better known as the owner of brands like North Face and Timberland than as VF Corp. But at its investor day Thursday, the company had little to show for its purportedly "active" takeover search, other than professing repeatedly over seven hours of presentations that M&A was still its top priority. Instead, VF's big news came in the form of a $5 billion buyback authorization, part of a plan to return $8 billion to shareholders over the next five years. Talk about a letdown. 

Missing Piece
The absence of a deal has been weighing on VF's stock price
Source: Bloomberg
Deal drought is longest since Bloomberg began tracking the company in the 90s.

The decision to funnel cash toward buybacks reads like an attempt to placate impatient shareholders. It's also an admission that the company's more than five-year deal drought -- its longest since at least the 1990s -- won't be ending anytime soon. Investors, who typically are thrilled by large share buybacks, were anything but. Shares fell 3.7 percent on Thursday. 

For context, VF spent about $3 billion on share repurchases from 2012 to 2016, according to its annual filings. An upsized $5 billion outlay represents more than a fifth of VF's current market value. It would also be enough to cover the bulk of a Puma SE takeover at a 30 percent premium and almost half of the equity cost of an oft-speculated Lululemon Athletica Inc. purchase. (The yoga-pant maker had some issues of its own on Thursday, but shareholders are overreacting.)

Give management some credit for not overpaying for a deal that could wind up being a disaster. But the longer VF takes to fill this deal vacuum, the more it weighs on results. And that's what makes the rosy outlook the company also delivered at its investor day all the more suspect.

VF said it expects its compound annual growth rate through 2021 to range from 4 percent to 6 percent. This is coming from a company that's missed analysts' revenue estimates in its last three quarters, posted back-to-back annual sales declines and is currently projected to boost sales by less than 1 percent in 2017. Given the underwhelming outlook in the near term, Piper Jaffray Cos. analyst Erinn Murphy estimates VF will need to come up with a 7 percent CAGR for fiscal 2019 through fiscal 2021 to meet those targets.

VF characterized its growth targets as organic, saying that any deal it did would be additive. But it's not clear where the company is going to find that kind of sales boost on its own. 

Steep Mountain
VF's revenue growth targets look ambitious compared to analysts' estimates
Source: Bloomberg
There was only one estimate for 2020 sales available as of publication.

For one, apparel and shoe sales are in decline industry-wide as shoppers spend their hard-earned dollars elsewhere. The athletic and action-wear market is suffering particularly hard as chains like Sports Authority go bankrupt. It also seems dubious that the retro trends currently boosting VF's Vans shoe business will last long enough to deliver that 8 percent to 10 percent CAGR management is targeting for that line through 2021. Fickle consumers are bound to move on to the next hot thing sooner rather than later.

Growth isn't going to come from sales to department stores and mass merchants like Macy's Inc. and Wal-Mart Stores Inc., which are struggling in their own right. Nor will it come from store expansion -- VF already operates more than 1,500 stores and said it will scale back new openings. And as for VF's bet on digital sales, retail realists know that e-commerce doesn't gin up new revenue but rather shifts sales away from other channels.

Sure, VF can squeeze some growth out of new international markets, particularly through its focus on China. But there are very few examples of American retailers actually making it there, and when they do, it's typically a process that takes decades rather than years.

Underwhelmed
Relative to Piper Jaffray analyst Erinn Murphy's estimates, all of VF's main business segments will fall short of the goals implied by the company's previous long-term plan
Source: Piper Jaffray estimates, VF filings

The company acknowledged Thursday that it fell short of some of its 2017 revenue targets set during the last time it came up with long-term targets. Of note, the lack of an acquisition accounted for roughly $1.3 Billion, or 30 percent, of the sales shortfall relative to VF's 2017 target, according to Telsey Advisory Group. 

Things likely won't be all that different this go around without some real action on the M&A front. VF's investor presentation was long on promises, but talk is cheap.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Including dividends VF paid out more than $5 billion to shareholders over that stretch.

To contact the authors of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net