V.F. Corp's 2Q Beats, Rev Misses

Zacks

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.

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