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Timberland Drives V.F. Corp's 4Q

Zacks Equity Research

V.F. Corporation (VFC) reported fourth-quarter 2011 adjusted earnings of $2.32 per share, striding ahead of the Zacks Consensus Estimate of $2.30. The result also surpassed earnings of $1.78 per share in the prior-year quarter. The robust increase in earnings per share was primarily driven by strong top-line growth and a contribution of 34 cents per share from the Timberland acquisition.

On a reported basis, the company’s earnings came in at $2.28 per share compared with 49 cents registered in the prior-year quarter. The reported figure includes the costs associated with Timberland acquisition and impairment charges in fourth quarter 2010.

For full fiscal 2011, adjusted earnings surged 27% to $8.20 per share, beating the Zacks Consensus Estimate of $8.18. On a reported basis, earnings were $7.98 per share compared with $5.18 per share registered in fiscal 2010.

Fiscal 2011 was a great year for V.F. Corp. as the company achieved record revenues, record earnings per share and record cash flow. Moreover, Timberland’s contribution toward earnings was more-than-expectation. The acquisition was expected to increase V.F. Corp.'s profit by 25 cents a share, but it surpassed the estimate.

Operational Performance

V.F. Corp.'s revenue of $2,879.4 million in the fourth quarter exceeded the Zacks Consensus Estimate of $2,821 million. Revenues eclipsed the year-ago figure by 36.8%. Besides, double-digit revenue growth at all V.F. Corp.'s coalitions led to the overall climb.

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.

Costs and operating expenses on a year-over-year basis increased 23.5% in the fourth quarter. Gross margin in the reported quarter declined 140 basis points to 45.2% from its previous high of 46.6% in the year-ago quarter, resulting from higher product costs. Adjusted operating margin for the reported quarter contracted 60 basis points to 12.3%, primarily due to a year over year 34.6% increase in operating expenses.

Segment Performance

Revenue at Outdoor & Action Sports jumped 81% from the year-ago quarter to $1,619 million, of which Timberland and Smartwool brands contributed $549 million. Business from both the Americas and beyond contributed to the revenue increase. America's revenue grew robustly by 19% while International revenue spiked 20%. Moreover, a growth of 20% was registered in the segment’s direct-to-consumer business.

Fourth-quarter operating income (including Timberland) increased 52% from the year-ago quarter to $274 million while operating margin contracted 320 basis points year over year to 16.9%. However, excluding Timberland, operating margin expanded 390 basis points to 24%.

Jeanswear revenue increased 3% to $711.6 million driven by a domestic growth of 1% and international growth of 9%. The company is registering market share gain in all of the three businesses under this segment driven by new product innovations in all categories. However, the segment’s operating margin in the quarter declined due to higher product costs.

Imagewear revenue increased 10% in the quarter to $256.8 million, driven by a 14% revenue growth in Image and 5% revenue growth in Licensed Sports. However, higher product costs dragged down the segment’s operating margin.

Revenue at Sportswear inched up 1% in the quarter to $159.5 million primarily driven by a 49% revenue growth in Kipling brand, fully offset by decline in the U.S. Nautica brand.  However, operating margin declined year over year due to higher product cost.

Contemporary Brands experienced a revenue increase of 12% to $128.9 million, as benefited from new store openings and e-commerce coalition. Operating margin was 6% compared with a loss in the year-ago quarter.

During the quarter under review, international revenues increased 68%, largely driven by solid growth in the Outdoor & Action Sports and Jeanswear businesses, along with strength across the biggest brands in Asia and Europe. Timberland contributed 51% to this growth.

Direct-to-consumer revenue increased 53% in the quarter, driven by new store openings and Timberland acquisition. The company opened 46 stores across diverse brands in the quarter, bringing the total number of owned retail stores to 1,068 at the end of fourth-quarter 2011. Timberland contributed 37% to this growth.

Balance Sheet

V.F. Corp. ended fiscal 2011 with cash and cash equivalents of $341.2 million and long-term debt of $1,831.9 million. The company’s shareholder’s equity was $4,525.2 million at the end of fiscal 2011. During fiscal 2011, the company recorded all-time-high operating cash flow of $1,081.4 million.


The board of directors of V.F. Corp. declared a quarterly cash dividend of 72 cents per share. The dividend will be paid on March 19, 2012 to shareholders of record as of March 9, 2012.

Looking Into 2012

Bolstered by better-than-expected quarterly results, the company expects total revenue in fiscal 2012 to grow approximately 15% year over year. Moreover, the company is expecting earnings of approximately $9.30 per share in fiscal 2012 with an expansion of 70 and 20 basis points in gross and operating margins, respectively. V.F. Corp. now anticipates gross margin to reach 45.8% and operating margin to touch 11% in fiscal 2012.

The company also expects operating cash flow to exceed $1.1 billion. Apart from this, it plans to make a capital expenditure of approximately $375 million in fiscal 2012 toward new store opening, new distribution centers in U.S, Europe and Asia and new headquarters for the company’s Outdoor & Action Sports businesses in the U.S and Europe.

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 and improve profitability. 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 in fiscal 2012, which is expected to rise to 60% by 2015.

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. However, we maintain a long-term Neutral recommendation on the stock.

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