V.F. Corp. Beats Yet Again
V.F. Corporation (VFC) reported first-quarter 2012 adjusted earnings of $1.94 per share, striding ahead of the Zacks Consensus Estimate of $1.88. The result also surpassed adjusted earnings of $1.82 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 12 cents per share from the Timberland acquisition. On a reported basis, the company’s earnings came in at $1.91 per share.
Operational Performance
V.F. Corp.'s first-quarter revenue of $2,556 million exceeded the Zacks Consensus Estimate of $2,448 million. Revenues eclipsed the year-ago figure by 31%, with Timberland contributing significantly to quarterly revenue.
Substantial revenue growth at all V.F. Corp.'s coalitions led to the overall climb. During the quarter, Outdoor & Action Sports segment was the strongest, recording a 60% rise in revenue.
Costs and operating expenses on a year-over-year basis increased 33.1% in the reported quarter. Gross margin in the quarter declined 150 basis points to 45.7% from its previous high of 47.2% in the year-ago quarter, resulting from higher product costs in the Jeanswear segment. Adjusted operating margin, excluding Timberland, contracted 50 basis points to 13.5%.
Segment Performance
Revenue at Outdoor & Action Sports jumped 60% from the year-ago quarter to $1,264 million, of which Timberland and Smartwool brands contributed $356 million. Business from both the Americas and international operations contributed to the revenue increase.
First-quarter operating income (including Timberland) increased 40% from the year-ago quarter to $202 million, while operating margin contracted 230 basis points year over year to 16.0%. However, excluding Timberland, operating margin expanded 200 basis points to 20.3%.
Jeanswear revenue increased 9% to $741.7 million, driven by double-digit growth at the domestic brands, while international jeans revenue declined marginally. However, the segment’s operating income and margin in the quarter dropped due to higher product costs.
Imagewear revenue increased 12% in the quarter to $277.5 million, driven by a 21% and 3% revenue growth in Image business and Licensed Sports, respectively. Moreover, operating income at the segment jumped 16% in the quarter, with margin expanding 50 basis points to 15.5%.
Revenue at Sportswear increased 10% to $122.9 million driven by revenue growth in its U.S. brands, namely Nautica and Kipling. Operating income in the quarter climbed 44% while operating margin expanded 210 basis points to 8.7%.
Contemporary Brands experienced a revenue increase of 13% to $126.9 million with growth across all its brands. Operating income rose 53% during the quarter, registering a substantial improvement in gross margins, which expanded 300 basis points to 11.7%.
The company’s international revenues increased 48%, contributing about 40% to total revenue. The growth was largely driven by strength across the biggest brands in Asia and Europe. Additionally, Timberland contributed 33 percentage points to this growth.
Direct-to-consumer revenue increased 49% in the quarter, driven by new store openings and the Timberland acquisition. The company opened 24 stores across diverse brands in the quarter, bringing the total number of owned retail stores to 1,059 at the end of first-quarter 2012. Timberland contributed 32 percentage points to this growth.
Balance Sheet
V.F. Corp. ended the first quarter with cash and cash equivalents of $325.6 million and long-term debt of $1,831.1 million. The company’s shareholder equity came in at $4,451.7 million at the end of the first 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 June 18, 2012 to shareholders of record as of June 8, 2012.
Looking into 2012
Bolstered by better-than-expected quarterly results, the company now expects earnings of approximately $9.45 per share in fiscal 2012, up 15 cents from $9.30 per share guided earlier. 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.
However, the company expects earnings per share comparisons for the second quarter of 2012 to be challenging, due to the seasonal nature of Timberland business (which has historically posted losses in the second quarter), a negative impact from foreign currency translation and higher pension expense, partly offset by gains from facility closures.
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.
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 account for 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 #2 Rank, which translates to a short-term Buy rating. However, we maintain a long-term Neutral recommendation on the stock.
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