6
North America
Equity Research
28 October 2019
Matthew R. Boss, CPA
(1-212) 622-2630
matthew.boss@jpmorgan.com
3Q – mgmt’s guidance embeds TNF up high-single-digits and Vans up low-double-
digits by our work. (3) Work Wear Break Down: Mgmt lowered FY19 Work
category guidance by 50bps for the year at the mid-point (+4-5% vs. +4-6% prior) or
by $9M on a $1.8B base driven by “acknowledgement” of moderation in
industrial/manufacturing sector growth noting ~30% of VFC’s work portfolio (in
particular RedKap, Bulwark) is tied to cyclical factors clarifying that trends to
date are not fundamentally in a different place. On Dickies specifically, growth
slowed to -3% in 2Q (vs. 1Q +2%) including a 900bps negative shift impact owing to
the YOY timing of shipments to a mass retailer YOY w/ mgmt's guidance (+5-6% vs.
+6-7% prior) embedding 2H trends up low-double-digits supported by lifestyle
and international shipments. (4) 2H Margin Outlook: Mgmt’s unchanged gross-
margin outlook of +80bps to 54.1% implies +50bps 2H expansion moderating vs. 1H
due to worsening FX w/ 3Q expected to be a "little stronger" than 4Q. On SG&A –
mgmt expects SG&A leverage to be heavily weighted to 4Q w/ 3Q expected to see
~60bps of deleverage. (5) Balance Sheet for a “Big Deal”: CFO Roe spoke to the
ability to do a “really big deal” on the call w/ TSR accretive acquisitions remaining
mgmt’s #1 capital allocation priority w/ mgmt comfortable w/ both issuing equity as
well as increasing leverage (to the extent of one-step downgrade to credit rating to
BBB+) for the right deal. On potential categories – recall mgmt’s identified $500B
addressable market notably identifying categories such as Streetwear, Health &
Wellness, Experiences, Performance Footwear, and Work Inspired — outside of VFC’s
current Outdoor/Active/Work segment. On Model Implications: We model 3Q20 EPS
of $1.20 and 4Q EPS of $0.62 equating to FY20 EPS of $3.38 (vs. $3.32-$3.37 guide)
based on +6% revenue growth, 84bps gross margin expansion and 10bps SG&A
leverage. On risk/reward – a 1.5x PEG on the mid-point of management’s 12-14% EPS
growth profile points to $85 versus $108 applying a 1.5x PEG to our mid-teens
modeled profile the next 3 years.
LEVI (Overweight): Mgmt Access & Model Dive = Lower PT to $20. We lower
4Q19 revenues to a -1.6% decline (below the Street at -0.6% / guidance -3%) modeling
EPS of $0.22 (vs. Street at $0.21). 3 Builds We Are Monitoring Near-Term: (1) US
Wholesale: Modeling a 7% YOY decline in 4Q US wholesale (vs. 3Q -10%)
comprised of a 200bps “underlying core” wholesale decline (vs. -4% in 3Q & YTD
approx. flat) and ~500bps headwind from reduced off-price shipments YOY (~300bps
headwind) and lapping the Dockers’ floor reset (~200bps headwind). (2) Europe:
Modeling +10% 4Q c/c growth or +13% c/c excluding the unfavorable Black Friday
shift (into 1Q20) representing a 300bps deceleration versus +15% year-to-date with
“macro volatility” built into our estimate (i.e. 2-year stack = mid-teens growth). (3)
Asia: we model 4Q Asia +7% c/c (vs. +13% YTD) driven by weakness in HK and
unfavorable timing of India shipments (shifted into 3Q - out of 4Q). On the margin
front - we model +85bps 4Q gross margin expansion bridging to mgmt's Flat FY19
guide at 53.8% supported by (i) reduced off-price sales, (ii) cleaner inventories (exiting
3Q Flat or 380bps below sales growth), (iii) price increases (implemented during 3Q)
and (iv) moderation in FX headwinds modeling 4Q20 SG&A deleverage of 136bps
driven by the flow through of the unfavorable Black Friday shift. Looking ahead, we
lower FY20 EPS to $1.17 (in-line w Consensus) equating to +7.9% EPS growth or
high-single-digit adjusted organic net income growth (excl. tax headwind) in line
w/ mgmt’s long-term algorithm based on +7.6% revenues growth (more/less
matching the Street at +7.7%) or +4.7% organic constant-currency growth
(excluding 340bps from Black Friday shifts/Extra Week/Acquisition). On the top-
line, our FY20 model embeds a ~2% decline in US wholesale comprised of
“underlying” US wholesale -0.8% (sequentially improving through the year on easier
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