BofA Highlights Valuation Concerns In VF Corp Downgrade

Apparel and footwear VF Corp (NYSE: VFC) reported a 10% decrease in Vans brand revenue and this should prompt investors to turn bearish on the stock, according to BofA Research.

The VF Analyst: Robert Ohmes downgraded VF's stock from Neutral to Underperform with an unchanged $65 price target.

The VF Thesis: Van's revenue in the Americas region was down 17% in the reported quarter and there is reason to believe the brand's recovery is lagging peers, Ohmes wrote in the note. Most notably, Nike Inc (NYSE: NKE) reported a North America FX neutral revenue decline of just 1% in its most reported quarter.

Related Link: VF: Q2 Earnings Insights

Van's appear to be losing market share to Nike amid a "reemergence as the dominant brand" in the casual lifestyle category, the analyst wrote. This might explain why recent data points including Google Trends and Web traffic show Van's is underperforming in the important holiday trends and back-to-school categories.

While Van's weak momentum versus its peers warrants a bearish stance on the stock, investors should be aware of the main risk to the thesis. Specifically, M&A remains a top capital allocation priority for VF as the company should end fiscal 2021 with $5 billion of total liquidity.

Management could allocate some of its cash to pursue an acquisition of a "large active lifestyle" brand that would be accretive to margins.

VFC Price Action: Shares of VF were trading lower by 4.7% Monday at $72.26.