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Lowering VF's Fair Value Estimate

Bridget Weishaar

Wide moat-rated VF’s (VFC) investor day yielded few surprises as growth initiatives for the next five years were consistent with the past five, focusing on outdoor and action sports brands, direct-to-consumer channels, and international markets to drive both top-line increases and margin expansion. One notable change from the last strategic plan was the lack of focus on acquisitions and its exclusion from five-year goal metrics. Despite this, we think management remains committed to this growth strategy and comments that acquisitions were still believed to yield the best return for investors and were the preferred bucket for capital allocation, supports this. That said, we think the company is having a difficult time finding acquisitions that meet its criteria of 15% return on capital in three years and good fit for brand portfolio, and now plan to remove our $1.5 billion acquisition assumption for 2018 from our estimates.

From a core growth standpoint, plans to grow revenue at a mid-single-digit compound annual growth rate over the next five years, operating income at a high-single-digit growth rate, and EPS at a low-double-digit rate align with our estimates. Overall, the consistency in strategic plan is exactly what we would expect from a wide-moat company. We see little change to our organic growth estimates calling for mid-single-digit revenue growth and high-single-digit operating income growth over the next five years, but expect that the removal of our acquisition assumption will drop our $70 fair value estimate to $64. We continue to view shares as undervalued and an attractive opportunity to own a wide-moat company in the branded apparel space.

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