Staking Ground in Value Territory
Here's how I'm making a move in a beaten-down sector by adding a new name to my portfolio.
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My regular readers know that I have been very underweight in the retail sector for many, many quarters, and that continues to remain the case. Between consumers gaining little buying power over the past half decade due to inflation and Covid pandemic federal largess being spent a long time ago, there has been little to be positive about around on the overall sector. Tariffs and student loan payments restarting after a five-year hiatus are just two more recent headwinds for the industry.
However, this week I took an initial stake, via covered call orders, in apparel and footwear name V.F. Corp. VFC, the maker of well-known brands such as Vans, Timberland, JanSport and North Face. The stock has been hit hard by increasing worries around tariffs as well as consistent sales declines in brands like Vans and Dickies. The shares are down some 45% so far in 2025. Even for a retail-related name, that is quite abysmal performance this year.
The company brought in an executive from Lululemon LULU last year to turn around Vans, but there is still a lot of work to do on this front. However, backing out the negative sales performance from Vans in the most recent quarter, revenues did rise 4% year-over-year on a constant currency basis.
V.F. Corp. also has a large turnaround effort underway to reduce operational costs and balance sheet leverage over time. This initiative included cutting its dividend and divesting a non-core business. This helped reduce leverage by a full turn and debt by $1.75 billion over the past 12 months.
Tariffs are a legitimate concern as they are for most apparel makers. V.F. Corp. and most of the industry rely on manufacturing overseas, mainly in Asia. However, its manufacturing model is quite flexible and only 2% of its sourced goods come from China. Any further progress on the trade front should help investor sentiment around apparel retail concerns and the company.
Company management seem to believe in the longer-term turnaround of the enterprise given several insiders collectively added approximately $2.2 million to their V.F. Corp. stakes in May.
VFC shares currently trade at under 14 times forward earnings and even with the reduced dividend payouts, still yield just over 3%. Not too expensive given it is hard to see how the environment gets much worse for retail-related concerns.
The stock would be a significant value if V.F. Corp can achieve a turnaround in the fortunes of Vans in the quarters ahead. I can also make valuations even cheaper using the covered call strategy highlighted below.
Option Strategy
Here is how one can initiate a position in VFC utilizing a covered call strategy. As a reminder, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the January $11 call strikes, fashion a covered call order with a net debit in the $9.00 to $9.10 a share range (net stock price - option premium). Liquidity is more than solid with the options against this equity.
This strategy provides downside protection of nearly 25% over the trade’s duration, which includes three quarterly dividend payouts of 9 cents a share. This strategy also provides return potential of 22% including dividends, even if the stock trades slightly down over its option duration.
At the time of publication, Jensen was long VFC.
