V.F. Corp. Still Neutral


We retain our long-term Neutral recommendation on one of the world’s largest apparel companies, V.F. Corporation (VFC).

Our recommendation is supported by the company’s robust fourth-quarter earnings beat, its Timberland performance, encouraging management guidance and the company’s policy of streamlining assets through acquisitions and divestitures, offset by concerns regarding stiff competition from private label brands and currency fluctuations.

In the fourth quarter, V.F. Corp.’s adjusted earnings of $2.32 per share surpassed the Zacks Consensus Estimate of $2.30 and the prior-year quarter earnings of $1.78 per share, driven by a strong top-line growth and a contribution of 34 cents per share from the Timberland acquisition. For full fiscal 2011, adjusted earnings surged 27% to $8.20 per share, beating the Zacks Consensus Estimate of $8.18.

V.F. Corp.'s fourth quarter revenue of $2,879.4 million exceeded the Zacks Consensus Estimate of $2,821 million and surged 36.8% from the year-ago revenue. Double-digit revenue growth at all V.F. Corp.'s coalitions led to the overall climb in the quarter. The company’s full fiscal 2011 revenue also exceeded the Zacks Consensus Estimate of $9,337 million and climbed 22.8% year over year to $9,365.5 million.

Buoyed by better-than-expected results, the company initiated fiscal 2012 earnings guidance of approximately $9.30 per share with about 15% to 17% growth expected in its top line. Further, the company expects gross and operating margins to expand by 70 and 20 basis points, respectively. The company now anticipates gross margin to reach 45.8% and operating margin to touch 11% in fiscal 2012.

Going forward, 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 its profitability. As evident from the recent quarter earnings, which were considerably boosted by the recently acquired Timberland performance, we believe the company’s acquisition policy will benefit its revenue and earnings in the long run.

Further, the addition of Timberland in V.F. Corporation portfolio of brands of outdoor and action sports business comprising Vans, Jansport, Eastpak and other brands, is expected to make for 50% of the company's total revenue in fiscal 2012, which in turn, is anticipated to rise to 60% by 2015. Additionally, we believe the recent acquisition of Rock and Republic brand will allow V.F. Corp. to compete in the premium-denim space, which is dominated by Los Angeles designers.

Moreover, 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.

However, offsetting these positives, V.F. Corp. is prone to risks of foreign laws and regulations in its international business, which may negatively affect operations, foreign consumer preferences, and disruptions or delays in shipments. Further, the company’s international business also exposes it to currency translation risks.

V.F. Corp. also faces intense competition from other well-established players in the apparel industry, such as Polo Ralph Lauren Corp. (RL), Sears Holdings Corp. (SHLD), The Gap Inc. (GPS) and others. To retain the existing market share, the company may have to reduce its sales prices, which could affect its margins.

Given the pros and cons embedded in the stock, V.F. Corp. retains a Zacks #3 Rank, which translates into a short-term Hold rating and also coincides with our long-term recommendation on the stock.

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Read the Full Research Report on GPS

Read the Full Research Report on RL

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