V.F. Corporation
(VFC) reported second-quarter 2012 adjusted earnings of $1.11 per
share, speeding ahead of the Zacks Consensus Estimate of 94 cents.
However, the result dipped 5% from adjusted earnings of $1.17 per
share earned in the prior-year quarter. The year-over-year decline
was mainly due to a loss of 12 cents at the Timberland operations
as well as a combined 11 cents per share impact from foreign
currency translation and higher pension expense.
Quarter in
Detail
V.F. Corp.'s second-quarter revenue
of $2,141.8 million fell short of the Zacks Consensus Estimate of
$2,173 million. Revenues grew 16% compared with the year-ago
period, on the back of robust growth in Outdoor & Action Sports
and international revenues. However, poor weather and the sale of
John Varvatos in April 2012 had a modest negative impact on
revenues.
Costs and operating expenses on a
year-over-year basis increased 19.8% in the quarter. Gross margin
in the quarter spiked 20 basis points to 46.1% from 45.9% in the
year-ago quarter, resulting from easing of pressures from higher
product costs in the Jeanswear segment. Adjusted operating margin,
on the other hand, contracted 240 basis points to 7.9%, reflecting
losses in Timberland as well as higher pension expenses.
Segment
Details
Revenue at Outdoor &
Action Sports jumped nearly 45% from the year-ago quarter
to $1,040.0 million, of which Timberland and Smartwool brands
contributed $239 million. Business operations from Americas, Europe
and Asia contributed to the revenue increase. Segment operating
income (excluding Timberland) increased 22% year over year, while
operating margin contracted 110 basis points to 13.6%.
Jeanswear revenue
declined 3% to $594.0 million, driven by double-digit growth at the
Western Specialty and Asian businesses and strong sales of Rock
& Republic jeans products. These were more than offset by a
decline in Mass channel revenues, lower revenues of the Lee brand
in the U.S. and soft conditions in Europe. However, the company
witnessed higher-than-expected growth in the segment’s operating
income and margin, mainly on improved gross margin that came from
lower manufacturing costs in owned plants and tight inventory
controls.
Imagewear revenue
increased 3% in the quarter to $251.5 million, driven by increases
in both Image and Licensed Sports businesses. Moreover, operating
income and margin at the segment slumped due to high product
costs.
Revenue at
Sportswear inched down 2% to $117.5 million driven
by diminished Nautica brand revenue, offset in part by robust
revenue growth in its Kipling brand. Segment operating income
was flat, while operating margin expanded 10 basis points to
9.8%.
Contemporary
Brands’ revenue slumped 9% to $107.9 million due to the
sale of John Varvatos. Operating income rose 12% during the
quarter, registering a substantial improvement in gross margins,
which expanded 200 basis points to 11.1%.
The company’s
international revenues increased 42%, contributing
about 33% to total revenue. The growth was largely driven by
strength across the biggest brands in Asia and Europe.
Additionally, Timberland contributed 26 percentage points to this
growth.
Direct-to-consumer
revenue increased 37%, driven by the addition of 34 new stores and
a 29 percentage points growth contribution from Timberland. The
company’s total owned retail stores were 1,071 at the end of
second-quarter 2012. Direct-to-consumer revenues reached 21% of
VF’s total revenues.
Balance Sheet
V.F. Corp. ended the second quarter
with cash and cash equivalents of $330.5 million and long-term debt
of $1,830.5 million. The company’s shareholder equity came in at
$4,524.1 million at the end of the second quarter of 2012.
Dividend
The board of directors of V.F.
Corp. declared a quarterly cash dividend of 72 cents per share. The
dividend will be paid on September 20, 2012 to shareholders of
record as of September 10, 2012.
Looking into
2012
Given the solid second-quarter
results, the company raised its earnings forecast for fiscal 2012
by 5 cents per share to $9.50 per share, while it had earlier
forecasted earnings of $9.45 per share. However, the company
retained the expected earnings contribution from Timberland at
$1.10 per share.
The company maintains its revenue
projection of an increase of approximately 15% year over year to
$10.9 billion in fiscal 2012. Timberland is expected to contribute
about $1 billion to fiscal 2012 revenue.
The company also raised its cash
flow projection to a record $1.2 billion in fiscal 2012, mainly
driven by strong working capital management.
Our Take
We expect V.F. Corp. to continue
delivering on its potential, given the proven performance across
its segments, its focus to build brand image via incremental
marketing spending and its committed returns to shareholders by
virtue of share buybacks and dividend payouts.
Moreover, we believe that V.F.
Corp.’s policy to acquire businesses providing strategic
opportunities and exiting businesses having lower potential have
helped the company to drive growth while improving
profitability.
Based in Greensboro, North
Carolina, V.F. Corp. is one of the world's largest apparel
companies. The company, together with its subsidiaries, engages in
the design, manufacture, and marketing of branded apparel and
related products in the United States and internationally. Major
competitors of the company are Gap Inc. (GPS) and
Sears Holdings Corporation (SHLD).
V.F. Corp. currently retains a
Zacks #3 Rank, which translates to a short-term Hold rating. We
maintain a long-term Neutral recommendation on the stock.
GAP INC (GPS): Free Stock Analysis Report
SEARS HLDG CP (SHLD): Free Stock Analysis Report
V F CORP (VFC): Free Stock Analysis Report
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