Home Optimal energy VF Corp: Potential Business Opportunity in Apparel Manufacturers (NYSE: VFC)

VF Corp: Potential Business Opportunity in Apparel Manufacturers (NYSE: VFC)


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Drilling from top to bottom

In the process of generating a trade idea, one should refrain from looking at charts until all fundamental data has been analyzed and digested to “explore” specific sectors and complete equity. the universe was derived from such an analysis.

Starting (in our opinion) with the main driver of directional equity investing and trading, the manufacturing PMI, we can arrive at the following view:

There has been a steady decline for over 6 months now, signaling a sharp slowdown in the economic drivers of the stock markets and a subsequent decline in the S&P500. Thus, our authoritarian view of actions is Bearish.

Creating a world view:



Even though the above conclusion is drawn from a sample of a population of indicators, we can align this view and substantiate it with other benchmarks stated in previous reports published in our various media avenues. social; further confirming that our medium-term view for equities is bearish.

Identify industry disruptions:

Now that we have established a bearish view for stocks for a trading period, further analysis is needed to identify industries on which to create a sub-universe of stocks to trade.


Over the past 6 months, the apparel industry has benefited from the high level expansion in the business PMI report with overall positive feedback from the respondents section. However, for the month of June, we see a different story of respondents and commodities.

Quote from the ISM June manufacturing report

ISM manufacturing report for June

This response clearly signals overall expectations of lower sales and orders as well as overstocked inventory across the industry, the first sign of a contraction over the past 6 months highlighting an opportunity to make our point. bearish view on this sector.

Ability to use:

A capacity utilization reading between 78% and 80% is at the higher end and calls for either higher production to increase capacity or a forced slowdown in demand to let the industry catch its breath.

In the case of clothing, we see a reading of 80.2% in June using one of the two simplified solutions provided above. Judging by the slowdown in the consumer sector and all the negative leading indicators for the US economy as well as respondents’ expectations for a slowdown in sales; we conclude that the sector will experience a a slowdown in demand rather than an expansion in capacity.

Raw material pilots:

In the apparel industry, cotton prices are a clear and comprehensive driver of margins and business and consumer demand. Noting a (30%) decline in MoM cotton prices from June to July, we have a new data point to look at to generate a trade idea and then refine our universe of stocks within the sector:

Falling cotton prices can lead to a series of advantages and disadvantages for operators in the industry, we have endeavored to research:

Detriment businesses with slower inventory turns, holding overvalued inventory, and not being fast enough to take advantage of lower prices/higher margins.

Benefit from to higher gross margin companies with faster inventory turnover who can benefit from this decline in raw materials.

US cotton prices


Universe of clothing stocks:

Have a bearish setting on the Equity asset class and a bearish setting on the apparel industry, along with fundamentals for fast/slow inventory turnover ratios and high/low gross margins to drive the detriment /benefit from the contraction in cotton prices; we are ready to select a comprehensive portfolio of long and short clothing stocks.

Based on fundamental screening, it is intuitive that larger capitalization stocks will benefit from faster inventory turnover and higher margins due to economies of scale, while smaller capitalization stocks will see the antithesis of these advantages.

Additionally, an optimistic/pessimistic P/E multiple can be a clear indication of what participants are willing to pay for the quality of the underlying future earnings as a result of this environment and developing thesis.

By following these parameters and filters, it is complete to focus on the following two activities:

V.F. Corporation (NYSE: VFC) Long bias

A large capitalization of $17 billion can provide guidance on which settings above are desired.


PER 14.5x which is above the industry average of 8x. This perceived higher multiple of earnings quality may be a view in support of cotton price dynamics and participants relying on the quality of large caps to benefit from such price changes.

DEER 37% again above the industry average of 6%. This better quality of company fundamentals can provide an additional “base” to attract investors looking to gain exposure to the sector.

Gross margins 54.50% above the industry average of 32.3%. This confirms our metric to take advantage of sustained margins throughout the decline in cotton prices, also increasing the bottom line.

Net margins 10.30% above the industry average of 3.1%. With the above gross margins maintained and improved through lower cotton prices, we can expect this higher net margin to increase EPS at the end of the quarter. Maintaining an industry-leading P/E multiple can be a primary driver and catalyst for taking advantage of the long position.

Stock rotation 3.8-4.2x above the industry average of 2.4x. This again confirms our metric of being able to retain the benefits of lower cotton prices in new inventory and not holding overvalued inventory from previous months, a factor in higher margins and profits.

Delta Apparel Short Bias (DLA)

A small capitalization of $175 million can provide guidance on which settings above are desired.


PER 6.3x below the industry average of 8x. This supports a pessimistic view of underlying earnings that can be derived from the above thesis for margins and inventory.

DEER 17.5% above the industry average of 6%. A positive against the industry, but still lower than our long counterpart in $VFC.

Gross margins 23.9% below the industry average of 32.3%. A lower than average gross margin will likely be sustained in lower cotton prices, subsequently diminishing the bottom line.

Net margins 6.11% above an industry average of 3.1%. A positive against the industry, but still lower than our long counterpart in $VFC.

Stock rotation 1.8-2.2x below the industry average of 2.4x. This confirms our parameters of not being able to change inventories quickly enough to take advantage of lower cotton prices and retain overvalued inventories from previous months. This, coupled with lower gross and net margins, will significantly reduce EPS, with the stock already carrying a compressed P/E multiple, this can be a catalyst to profit from a short sale.

Structuring the trade

After defining a universe for long and short stocks within our desired industry, a quantitative structure of the subsequent trade is needed to “synchronize” our entries and exits in the spread trade.

The graph above represents the spread (VFC price minus DLA $ price) for the last 5 years. The median value in Black of $46.50 is our mean reversion price target for this time series. First standard deviations in Green and second standard deviations in Red. A second negative standard deviation opens the question to mean the reversion to “long this deviation” or in other words Long $VFC and Short $DLA.

A P value of 93% provides a high confidence interval for regression to the mean within the deviation. This behavior of cointegration or inversion allows us to hope for a profit by “aspiring” to this gap.

A coverage ratio of 0.27 represents the optimal positioning in order to remain as neutral as possible. This ratio specifically recommends shorting ~$3 DLA for every 1 long in $VFC.

Average reversion and coverage ratio:


Assuming a position totaling $2,000 budget, a trader would be allowed to buy $14 VFC and short $52 DLA for a total position of $2,077.

This spread holds a “target profit” at the midpoint of $46.50 of 157% from a theoretical current entry at $17.20. A “Max Profit” is derived from the possibility of exiting at the level of +1 standard deviation of $57.25finally our “Max Risk” is a function of the annualized standard deviation of the series of spreads as well as the internal risk tolerance.

It would make a theoretical profit of $3,266 and a theoretical risk of loss of ($409.88) from this point of view.

Is the position hedged against cotton prices?

Given the delayed equity price reaction to the 30% decline in cotton prices, traders would benefit from understanding the historical behavior of our equity spread position to cotton price action:

The above study demonstrates a negative correlation over 5 years of (60%) between stock spread values ​​and cotton prices. It would therefore make sense that the decline – and continued decline – in cotton prices would statistically represent another driver for profiting from the “desire” for the stock spread and hedging the business risk of such a decline. prices.