VF Corp (VFC -1.58%) has a storied history, but it has lost its way in recent years. The clearest indication of that was the early 2023 dividend cut it was forced to make. But that wasn't the end of the bad news, as the board just enacted another dividend cut when it announced fiscal second quarter 2024 financial results. There's a lot to unpack here, but the story is pretty simple.
How far has VF's dividend fallen?
Along with weak fiscal second quarter 2024 earnings (sales down 2% and a GAAP loss of $1.02 per share), VF Corp announced a dividend cut of 70%. But there's more to this retailer's story because the new dividend rate of $0.09 per share per quarter is just over 80% below the $0.51 per share dividend that was in place at the end of 2022. This has been a multi-step decline, with a brief stop at $0.30 per share in the middle. Investors who believed that first cut, roughly 40% or so, was enough got burned when the company brought in a new CEO and reduced the payment even further.
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To be fair, the two dividend cuts make complete sense. The company has more leverage than it would like and wants to prioritize debt reduction during a time of rising interest rates. The quickest way to free up cash for debt reduction is usually to cut the dividend. And it is much easier for a new CEO to cut a dividend than it would be for a leader that's been in place for a while. Essentially, the new guy can blame the old guy (without actually saying it). It also resets the dividend bar to a lower level from which future growth will, hopefully, be easier to achieve.
Don't get too excited about VF Corp's future
The problem here is that VF Corp is basically suffering from self-inflicted wounds. The performance downturn started when the apparel retailer spun off its basics brands into a company called Kontoor (KTB -1.42%). Those brands, while boring and slow growing, provided a reliable foundation on which VF Corp was building a faster growing collection of fashion brands. Fashion brands are fine, but consumers can be mercurial when it comes to fashion trends so there's more risk.
That showed up pretty quickly, as VF Corp's Vans brand struggled. This brand is the company's second largest at roughly 25% of sales. But it was the largest brand not too long ago, with sales declines and the strength of The North Face leading to a change in position between these two nameplates. So far the company has shown little success in its effort to turn Vans around.
But that's not the only headwind. Timberland and Dickies, the company's third and fourth largest brands, have also been performing poorly. That suggests that the execution problem extends well beyond Vans. And while there are some smaller brands that are doing better, they simply aren't as meaningful to the top and bottom lines. In fact, they are so small they all get lumped together into an "other" category when the company reports earnings.
With three of the company's four largest fashion brands not resonating with customers, it is hard to suggest that this stock is a buy. Now add in a new CEO, who just announced an updated turnaround plan, and there's even more risk. Until the latest plan shows at least some early success, it seems like a poor risk/reward tradeoff to assume that performance at this struggling company will suddenly rebound.
The plans make sense, but it's time for a show me attitude
There's nothing shocking in the new turnaround plan. Cut debt (as noted above), bring in new leaders, cut costs, and reorganize the business are all the types of things you hear when companies attempt to come back from a rough patch. The issue is execution, which so far has been pretty poor. Until the new leadership team can prove it has what it takes to execute on its plan, all but the most aggressive investors should probably watch this story from the sidelines to give management some time to prove itself.
