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My VF Corp. report - VF Corporation Report


									                                     VF Corporation (VFC)

                                          June 25, 2009

Price:         $56.36                                               Div. Yield:   4.1%
FY 09 EPS:     $4.78                                                CIC Rank:     6.94
NTM P/E        11.5                                                 Rating:       1-2-1

The Story

VF Corp is an industry leader in apparel/ footwear design and manufacturing with yearly
dividend growth and a current yield of 4.1% vs. a 3.32% Dividend Growth Fund yield. It boasts
a diversified portfolio consisting of various product lines and multiple distribution channels, with
solid growth potential in each. The company reported record numbers through 3Q08 until it
took a hit in 4Q due to the economic meltdown, but still posted a 6% growth in revenues y/y.
The Company

VF was founded in 1899 as the Reading Glove and Mitten Manufacturing Co. and later became
Vanity Fair Mills. Following the acquisition of the H.D. Lee Company (jeans) in 1969 the name
was changed to VF Corporation. VF has grown organically and through acquisitions to
approximately 30 brand name products divided into five operating segments called “coalitions”:
Outdoor and Action Sports, Contemporary Brands, Sportswear, Jeanswear, and Imagewear.

      Outdoor and Action Sports (36% of revenue, 16.9% OPM) (“lifestyle”)

       This is VF’s fastest growing business, producing lifestyle products including outerwear,
       sportswear, backpacks, and luggage. Its largest brand, The North Face, was acquired in
       2000 and offers, for the most part, outerwear, snow sports gear, and backpacks. The
       North Face products are primarily sold through premium sporting good stores in the U.S.,
       Canada, Europe, and Asia and through roughly 40 VF-owned retail stores. Other
       recognizable brands include JanSport, Eastpak, and Reef.

      Contemporary Brands(5% of revenue, 13.2% OPM) (“lifestyle”)

       Created in 2007, this is VF’s newest coalition that was formed after the acquisition of 7
       For All Mankind and Lucy brands and covers trendy, fashionable products. 7 For All
       Mankind products include premium denim for both men and women, where jeans retail at
       prices between $155-$199. The Lucy brand includes women’s activewear such as yoga
       and gym apparel. VF recently expanded this coalition with acquisition of the remaining
       2/3 of Mo Industries Holdings, Inc. (1/3 acquired in 2008) to include premium sportswear
       brands Splendid and Ella Moss.

      Sportswear(8% of revenue, 7.1% OPM) (“lifestyle”)

       The Sportswear coalition has been struggling as of late as its main lifestyle brand Nautica
       has seen many store closings. Sales were down 9% last year. An attempt was made to
       market jeans under the brand but was unsuccessful.

      Jeanswear(36% of revenue, 14.5% OPM) (“heritage”)

       VF’s Jeanswear coalition heads the company’s “heritage” segments with leading market
       share and 36% of company revenue. The largest brands are the iconic Lee and Wrangler
       jeans which are sold in nearly every developed country. Jeanswear revenues have been
       stable in recent years despite pressure from high competition, and the company believes
       their inventory logistics gives them a leg up on competition. VF receives point-of-sale
       information from retailers every day and ships products based on that information so that
       stores meet appropriate shopper’s demands.

      Imagewear(13% of revenue, 13.5% OPM) (“heritage”)
       VF breaks down the Imagewear coalition into two sections: Image Division and
       Activewear Division. The Image Division specializes in occupational apparel such as
       police uniforms under the brand The Force and food service apparel Chef Designs. In
       early 2009 VF launched a line of high quality tailored services apparel under the brand
       Joseph Abboud.

       The Activewear Division consists primarily of apparel licensed by major sports leagues
       such as the MLB, NFL, NBA, and also Harley-Davidson. Products are marketed to fans
       through sporting goods stores, and VF’s brand Majestic provides the jerseys worn by all
       30 teams in the MLB.

The Outdoor and Action, Contemporary, and Sportswear coalitions are considered the
company’s “lifestyle” lines where they see high growth potential as they try to capture consumer
trends and specific interests/activities. The Jeanswear and Imagewear coalitions are VF’s
“heritage” segments acting as sort of cash cows and the focus is on strong profitability. As a %
of revenues the lifestyle and heritage segments were split 50/50 in 2008 and a key concern for
VF is whether they can tap deeper into that lifestyle area of high growth. VF has history of large
acquisitions on which they have spent an average of $418 million/yr over the last 5 years. They
purchased the remaining 2/3rds of Mo Industries in 1Q09 for $161 million. Mo Industries is a
manufacturer of premium men’s and women’s sportswear and had $100 million revenues in
2008. VF Corp’s customer base consists of specialty and department stores, national chains, and
mass merchants, and a growing number of product lines are sold through VF-owned retail stores
and websites.

VF is a multinational corporation with operations in Europe, Asia, Canada, and Latin America
and see 30% of their revenues come from outside the U.S. VF is also completely outsourced: ¾
of their products are produced or purchased in Asia with the remaining coming from Eastern
Europe, Mexico, and Central America. Their sourcing diversity is particularly attractive as VF
continues to invest in low-cost manufacturing locations.

Recent Results

VF reported a 6% growth in revenues for 2008 despite a tough fourth quarter where earnings
were down 28% vs. 4Q07. Part of the earnings shrinkage was due to, in addition to a weaker
economy, a $41 million cost-reduction charge that is expected to save $100 million a year
($0.91/share) starting in 2009. VF maintained strong cash flow and spent $217 million on
capital expenditures & acquisitions, distributed $255 million in dividends, and repurchased $150
million of common stock. Highlights for the year were the Outdoor & Action Sports coalition
(lifestyle) and international sales, in which revenues increased 15% and 21%, respectively.
VF posted its numbers for 1Q09 and revenues dropped 6.5% vs. the year ago quarter, with 5%
coming from foreign currency conversion into stronger US dollars resulting in an $80 million
loss. Quarterly operating margin declined to 9.4% from 13.2% a year ago, but the company still
holds their target OPM at 15%. EPS was down to $0.91 compared to $0.94E, representing the
first time since 2000 that they didn’t beat expectations, but probably resulting from and increased
pension expense. Despite, VF raised its quarterly dividend from $0.58 to $0.59 a share, marking
the 36th straight year of dividend growth. Revenues in Asia were up 24% and VF’s direct-to-
consumer business revenues were up 4% to 16% of total sales. The direct-to-consumer business
consists of VF-owned retail & outlet stores and online merchandise sales, providing higher
margins than the VF average due in part to selling at retail prices instead of wholesale.


For the short term the obvious concern is the economy and how long it will take for recovery to
begin. As is VF’s case in most years, the second quarter of 2009 is projected to be the worst of
the year. With VF being somewhat seasonal, the second quarters are typically periods of
inventory buildup in preparation for 3Q and 4Q sales booms. 2Q09 EPS is projected at $0.42,
with a turnaround in 4Q09 when EPS is projected to be up 31% to $1.38. Overall for the year is
an expected EPS of $4.78 and a decline in revenues of 5-7%, with over half caused by foreign
exchange movements.

VF continues to expand its direct-to-consumer (DTC) business, which consists of 698 VF-owned
retail stores and seven brand-specific websites representing 16% of revenues. Internet sales are
small but quickly growing as apparel and footwear have become the second largest e-commerce
sales category in the world (behind travel). After opening 89 new stores in 2008, VF looks to
grow DTC by investing $30 million in retail store openings and new brand-specific websites for


VF management has set out its long-term expansion objectives. Having the highest growth
potential, the primary focus is building more lifestyle brands with an emphasis on youth and
female consumers. Expanding in fast growing economies like China, India, and Russia is a top
concern. International business delivers higher operating margins than the overall company, so
increased investment into those locations will be beneficial for VF to meet its OPM target of
15% and international sales of 33% of total revenues.

VF has been selective when it comes to acquisitions, which have paid off. They only acquire
companies where they see high growth potential, and the five company purchases between 2000
and 2005 have provided and average CAGR of 21.6%. This weakened economy provides an
opportunity for VF to acquire smaller, quality brands at reasonable prices, and with management
expecting acquisitions to represent 25-30% of long-term revenue growth I see them taking

Though management admits that it probably won’t be reached in 2009, L-T revenue growth is
targeted at 8-10% and EPS at 10-11%, driven by DTC growth of 18% to 22% of revenues,
international sales increasing 13%, and lifestyle apparel lines growing by 20%.

Financial Analysis

VF’s LTM operating margin leads all top competitors at 12% and is well above the 7% average.
Though the company maintains its long-term target of 15%, it has fluctuated between 10-13%
the past five years and may have peaked at 13.3% in ’06 and ’07. VF has an attractive quick
ratio of 1.4 compared to competitors’ average of 1.2. The company has a strong balance sheet
with good cash flow which they used to buy back $149 million worth of stock in 2008 and
distributed $255 million in dividends (a 42.2% payout ratio). Total debt is 21.8% of assets and
debt to EBITDA is 1.37, with $200 million in long term debt due in October 2010. VF ended
2008 with $1.3 billion in available credit, which is a relatively good situation to be in during a
time when credit lines are tight.

The DCF looks very attractive, having the stock at 54% of intrinsic value after debt (counting a
2010 maturity of $200 million). VF is also sporting an above market yield (4.1% vs. 2.5%) and a
P/E ratio of 11.5 that is nearly half the industry average of 20.6. The high yield is definitely
attributed to the depressed stock price, but I think it shows how they were actually in a good
enough condition to keep their dividend while others around them were slashing. The stock still
yields about 1% higher than the market average for the last five years. The company has raised
their dividend for 36 straight years and it has increased 180% over the past 10. VFC delivers a
comfortable yield and continuous dividend growth complemented by a well-below industry P/E.


An obvious risk for VF is the current state of the economy, which has indeed hampered sales and
bottom line growth. The company tends to be fairly seasonal as second quarters have historically
produced relatively low numbers, coupled with the tough competition VF faces allows little
room for error during these periods. Close management of inventory is required here especially
during the current recession. Another risk is that 26% of revenues come from only 10 customers,
with 11% (of total revenues) coming from Wal-Mart, needless-to-say, the largest customer.
Though the stores VF sells to are typically strong retailers, a collapse of one, say Wal-Mart, or
even a change in its desire for VF products would substantially damage company revenues and
growth. Retailers that hold a significant portion of VF’s revenues also have the ability to put
pressure on the prices of its products, which Wal-Mart is notorious for doing.

Foreign exchange exposure is another risk that caught my attention as VF posted an $80 million
loss, or $0.73/share, in 1Q09 from translation into stronger US dollars (fewer dollars per foreign
currency). The company indicates that they enter into some hedging contracts, but more may be
necessary. Over half of the 2009 revenue decline is already projected to be from FX losses, and
as shaky as the global economy has been, a potential run on foreign currencies would further
strengthen the dollar and really damage the area of business where VF sees 30% of its revenues.


VF Corporation has a very broad revenue base that I think will get them through this recession
and beyond. Past acquisition success is very promising and there are good growth prospects as
they expand direct-to-consumer business and lifestyle product lines. I like the valuation of this
stock and I think it has a lot of potential with low P/E and the DCF value nearly twice the market
cap. Company fundamentals are also solid with good cash flow and debt at a fifth of assets, but
their foreign exchange problem worries me. With a 4.1% yield and consistent dividend growth
policy I am going to rate VF a 1-2-1.

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