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V.F. Corp (VFC) Beats on Q1 Earnings & Sales, Lifts EPS View

Zacks Equity Research

V.F. Corporation VFC has posted strong first-quarter fiscal 2020 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate and improved year over year. With this, the company delivered its eighth earnings beat in the last nine quarters, with a fifth straight positive sales surprise. Further, management raised earnings outlook for the fiscal year.

Following the robust quarterly results and upbeat outlook, shares of the company gained 3.8% during pre-market trading. In the past six months, the stock has gained 5.7%, while the industry rallied 7.6%.



Q1 Highlights

V.F. Corp, which completed the spin-off of its Jeans business into Kontoor Brands, Inc., delivered adjusted earnings of 30 cents per share. The bottom line also improved 61% year over year and surpassed the Zacks Consensus Estimate of 28 cents. On a constant-dollar basis, adjusted earnings rose 67%.

V.F. Corp generated net revenues of $2,271.5 million, which increased about 6% year over year and outpaced the Zacks Consensus Estimate of $2,239 million. Constant-dollar revenues improved 9%. Moreover, adjusted revenues grew 6%, and 8% in constant dollars. Excluding acquisitions and divestitures, the metric rose 9%, and 11% in constant currency. Revenue growth can be attributed to strength in the company’s largest brands, and international and direct-to-customer businesses along with robust Active and Outdoor segments.

Excluding acquisitions and divestitures, adjusted international revenues edged up 4%, and 10% at constant dollars. Further, revenues in China improved 21%, and 29% in constant dollars.

Moreover, V.F. Corp’s direct-to-consumer revenues grew 14%, and 17% in constant dollars. Digital revenues were up 24%, and 28% in constant dollars.

V.F. Corporation Price, Consensus and EPS Surprise

V.F. Corporation Price, Consensus and EPS Surprise

V.F. Corporation price-consensus-eps-surprise-chart | V.F. Corporation Quote

Adjusted gross margin expanded 120 basis points (bps) year over year to 54.4%. Furthermore, adjusted operating income surged 23% to $163 million. Adjusted operating margin grew 100 bps to 7.2%.

Segmental Details

Revenues at the Active segment grew 8% to $1,232.1 million (up 11% on a constant-dollar basis). This includes revenue growth of 20% (23% in constant dollars) at Vans brand.
 
The Outdoor segment reported revenues of $610.6 million, which improved 7% year over year (up 11% in constant dollars). This includes revenue growth of 9% (12% in constant dollars) at The North Face brand. Also, the contribution from acquisitions of about 2 percentage points aided revenues.
 
Revenues at the Work segment were flat but inched up 1% at constant currency to roughly $422.5 million.

Other revenues declined 24.1% to $6.3 million.

Financial Details
 
V.F. Corp ended first-quarter fiscal 2020 with cash and cash equivalents of $606.1 million, long-term debt of $2,126.8 million, and shareholders’ equity of $4,150.7 million. At the end of the fiscal first quarter, the company used cash from operating activities of $69.9 million.

During the reported quarter, this Zacks Rank #3 (Hold) company repaid nearly $585 million of short-term borrowings and paid about $200 million of dividends. It did not buyback any shares in the quarter and therefore had an outstanding balance of $3.8 billion under its existing share repurchase authorization.

Further, management announced a quarterly dividend of 43 cents per share, which is payable Sep 20, 2019, to its shareholders of record as of Sep 10.

Outlook
 
V.F. Corp updated its view for fiscal 2020. The company now expects revenues to be about $11.8 billion, which represents growth of about 6%, and 8% in constant dollars, excluding the impact of acquisitions and divestitures. Earlier, management projected revenues of $11.7-$11.8 billion, which represented 5-6% growth.

On a segmental basis, the company expects revenue growth of 5% for Outdoor (6% in constant dollars), 7-8% for Active (10-11% in constant dollars) and 3-5% for Work (4-6% in constant dollars) segments. This apart, V.F. Corp consistently expects International revenues to grow 4-6% (7-9% at constant currency). Revenues for the direct-to-consumer business are anticipated to increase 10-12% (11-13% at a constant-dollar basis). The company estimates digital revenue growth of nearly 25%.

Adjusted gross and operating margins are anticipated to increase nearly 80 and 90 bps, respectively, to 54.1% and 13.8% in fiscal 2020. Earlier, it expected adjusted gross and operating margins to increase nearly 60 bps each to 54% and 13.7%, respectively.

Management now envisions adjusted earnings per share of $3.32-$3.37, indicating 16-18% growth from the year-ago period (18-20% at constant currency). This guidance includes an additional $20 million or 4 cents per share with respect to incremental investment. It is also higher than the prior expectation of $3.30-$3.35, mirroring 15-17% improvement from the year-ago period (17-19% at constant currency). The Zacks Consensus Estimate for earnings is currently pegged at $3.34.

Further, V.F. Corp expects adjusted cash flow from operations to be at least $1.3 billion in fiscal 2020. The effective tax rate is expected to be 15-15.5%. Moreover, capital expenditure is estimated to be roughly $400 million for the fiscal year.

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