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Why Is V.F. (VFC) Down 9.3% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for V.F. (VFC). Shares have lost about 9.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is V.F. due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

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

V.F. Corp 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.

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.

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, the 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).

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.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

At this time, V.F. has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise V.F. has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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