Arista works closely with its core customers to optimize their networking ecosystems, which we believe can strengthen its customer switching costs. To expand its customer base beyond the data centers of hyperscale cloud providers, enterprises, service providers, and financial institutions, Arista announced its intention to expand into the campus market. The adjacent move is due to requests from existing customers desiring one software platform across networking locations, and Arista has bolstered its clout with wireless capabilities. Even with current customer concentration risk, Arista is growing alongside key customers and that new ventures have expanded from core competencies.
Financial Strength
Arista is considered to be in a financially healthy position; its zero debt balance and $2.9 billion in cash, cash equivalents, and marketable securities as of the end of 2020 provide flexibility for the future. With no stated plans to return capital to shareholders, the company’s investment plan is fixated on developing products and expanding sales. It is believed that the company’s financial health will remain stable and cash could be deployed for growth via bolt-on products or technologies.
Bulls Say
- Demand for EOS continuity across networks should proliferate Arista’s installation base. Installation base growth causes new customers to consider Arista during upgrades.
- Arista has been a first mover on its path to rapid profitable growth. Upcoming industry disruptions that Arista may lead include 400 Gb Ethernet switching and campus market splines.
- Instead of relying on partnerships to plug portfolio gaps, Arista might be able to make accretive acquisitions in adjacent markets that could catalyze growth in areas such as analytics, access points, and security.
Company Profile
Arista Networks is a software and hardware provider for the networking solutions sector. Operating as one business unit, software, switching, and router products are targeted for high-performance networking applications, while service revenue comes from technical support. Customer markets include data centers, enterprises, service providers, and campuses. The company is headquartered in Santa Clara, California, and generates most of its revenue in the Americas. It also sells into Europe, the Middle East, Africa, and Asia-Pacific.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Vans has grown from its roots as an action sports brand into an everyday brand. Around 60% of Vans apparel is now purchased by females, and it is one of the most popular shoe brands for teens of both sexes. It is viewed as less of a sports brand than a brand for creative people. Vans, like wide-moat Nike and others, offer customization options that are very popular among consumers aged 13-24. Vans has strong potential as it is still relatively small (approximately $3.5 billion in fiscal 2021 revenue) compared with global brands like Nike (about 10 times larger).
It is expected that the North Face will benefit from its new FutureLight waterproof fabric, brand extensions, and expansions of its direct-to-consumer business. VF plans 8%-9% annual growth for The North Face, which may be possible after the coronavirus crisis has passed.
Future Outlook
VF laid out fiscal 2024 goals of a gross margin above 55.5%, an operating margin above 15%, and an ROIC above 20% at its 2019 investor event. These targets are aggressive, but achievable. Indeed, the analyst of Morningstar forecast an operating margin of 15% in fiscal 2024, up from an estimated 13% in fiscal 2022. To achieve this, VF will need continuing strong growth from high-margin brands Vans and Supreme as the virus fades.
Narrow-Moat VF Dealing With Supply Chain Woes and Weakness in China, but Brands Remain Healthy
Vans’ sales increased just 8% in the quarter due to a 10% decline in wholesale sales related to the supply problems and soft demand in China. Attributing the same to the latter COVID-19-related closures and weakness in China’s economy and do not think the long-term prospects for Vans in the region have been affected. The activewear and casualization trends are positive for Vans. Other key brands The North Face and Timberland were affected by supply problems, leading to outdoor coalition growth of 31%, short of the 40% forecast. Dickies was a standout, as workwear sales jumped 18%.
Apart from these issues, apparel and footwear manufacturers are dealing with higher labor, energy, and raw material costs, especially for cotton. In VF’s case, cotton represents only about 10% of its product costs, lower than for some competing firms that are heavier in apparel. Thus far, VF and others in the industry have been able to overcome inflation with strong pricing as discounting in the clothing space remains relatively low. Moreover, as product shortages are likely to persist and underlying demand is healthy, as a result pricing will remain strong through the holiday period.
Bulls Say
- Vans, expected to generate over $4 billion in sales in fiscal 2022, is developing into a fashion brand. It still has growth potential, given its small share in the roughly $120 billion (Euromonitor) sports-inspired apparel and footwear markets.
- VF has disposed of its weaker jeans (in 2019) and work (in 2021) brands, helping to pull its gross margins up to the mid-50s from the high-40s.
- As an upscale brand with high price points, Supreme brings higher margins than any of VF’s individual brands except Vans. There is potential for VF to generate significant sales of Supreme gear in China.
Company Profile
VF designs, produces, and distributes branded apparel and accessories. Its largest apparel categories include action sports, outdoor, and workwear. Its portfolio of about 15 brands includes Vans, The North Face, Timberland, Supreme, and Dickies. VF markets its products in the Americas, Europe, and Asia-Pacific through wholesale sales to retailers, e-commerce, and branded stores owned by the company and partners. The company has grown through multiple acquisitions and traces its roots to 1899.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
