Neutral on V.F. Corporation

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We maintain our long-term ‘Neutral ‘recommendation on V.F. Corporation (VFC). V.F. Corp.'s diversified brand portfolio positions the company well above its peers to generate above average industry growth and sustain itself in the current challenging environment. The company’s approach to brand management allows each brand to develop further, through rigorous marketing strategies, financial control, and operating leverage. Further, given the strength of most of its brands and opportunities with regard to distribution, the company is set for significant long-term growth.

Moreover, V.F. Corp. operates 25 manufacturing facilities, where the company benefits from a decades-long history of manufacturing and engineering expertise including cost and service benefits. Apart from this, V.F. Corp.benefited  from an extremely diversified and balanced base of over 1,500 contractors across 60 countries controlled from one of the biggest sourcing offices in Hong Kong, which provide tremendous scale and expertise. Given the strength of V.F. Corp.’s global supply chain, the company can rapidly adjust its sourcing strategies.

 Moreover, V.F Corp.’s policy to acquire businesses providing strategic opportunities and exiting businesses having lower potential has helped the company to drive growth and improve profitability. The acquisition of Rock and Republic Enterprises Inc. in the first quarter of fiscal 2011 will enable V.F. Corp. to compete in the premium-denim space dominated by Los Angeles designers.

Additionally, the recent merger of Timberland in the V.F. Corporation portfolio of brands of outdoor and action sports business comprising Vans, Jansport, Eastpak and other brands, will make 50% of the company's total revenue, which is expected to rise to 60% by 2015. The deal will increase V.F. Corporation’s profit by $0.25 a share and revenues by $700 million in fiscal 2011. In fiscal 2012, the deal is expected to add $0.75 to the earnings and $1.6 billion to the revenue of the company.

On the flip side, V.F. Corp.’s international business accounts for approximately 30.0% of sales, with products distributed globally through local retailers, wholesalers, and independent distributors. The international business exposes the company to risks such as foreign laws and regulations that could negatively affect operations, foreign consumer preferences, disruptions or delays in shipments, and currency fluctuations.

V.F. Corp. faces intense competition from other well-established players in the apparel industry, such as Gap Inc. (NYSE:GPS - News) and Sears Holdings Corporation (NasdaqGS:SHLD - News). To retain the existing market share, the company may have to reduce its sales prices, which could affect its margins.

The company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively affect their discretionary spending, and in turn, the company’s growth and profitability.

V.F. Corporation holds a Zacks#2 Rank, which translates into a short-term Buy recommendation.

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