V.F. Corp’s Impressive Digital Growth Returns Confidence in Dividend

Last spring, we downgraded V.F. Corp’s Dividend Safety Score from Safe to Borderline Safe.

 

Mandated store closures and anxious shoppers led to a sharp decline in revenues across the industry.  The revival for retailers was uncertain as the severity and length of the pandemic was not clear.  

V.F. Corp's cash flow no longer covered its dividend, leading us to wonder if management would follow many of its peers and consider temporarily suspending the payout to preserve capital out of an abundance of caution.

 

However, amidst the uncertainty, V.F. Corp elected to use its strong balance sheet and access to liquidity to maintain its dividend.  

 

Now nine months into the crisis, V.F. Corp is demonstrating progress in its recovery.

 

Although revenues were down 18% last quarter, that is much improved from the previous quarter's 48% drop.  

 

The recovery is being led by growing exposure to digital channels (25% of sales, up from 10% last year) and China, both of which were pre-pandemic strategies that have accelerated in the current environment.  

 

Pandemic-related headwinds will likely persist in the near term, but it seems likely the worst is over for V.F. Corp as there does not seem to be much appetite for lockdowns like last spring.

 

Going forward, management expects free cash flow to cover the dividend. 

V.F. Corp even had the confidence this month to announce a $2.1 billion acquisition of leading streetwear brand Supreme.

 

This is a modest acquisition relative to the size of V.F. Corp, whose market cap exceeds $30 billion, but it will cause leverage to tick up. 

 

Rating agencies have warned of possible downgrades as a result.  But given V.F. Corp's current rating sits several notches above junk status, a downgrade is unlikely to trigger a change in the company’s dividend policy.

Overall, the long-term outlook for V.F. Corp remains positive and the risks created by the pandemic appear manageable and temporary. We expect V.F. Corp's strong portfolio of brands to remain well aligned with today's consumer trends.

 

With improving cash flows and management continuing to prioritize the payout, including announcing the firm's 48th consecutive annual increase in October, we are upgrading our Dividend Safety Score back to Safe.