VIEWS: 75 PAGES: 7 POSTED ON: 1/9/2011
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. Short-Term 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 2009. Long-Term 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 advantage. 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. Valuation 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. Risks 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. Recommendation 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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