V.F. Corporation (VFC, Financial) operates in different segments like Jeanswear, Imagewear, Sportswear, Contemporary Brands and Direct-To-Consumer, or DTC, across the world. The apparel and accessories retailer posted first-quarter fiscal 2015 results earlier this month, where earnings came in line but missed to beat consensus estimate on revenue.
First-quarter numbers
Consolidated sales grew 2% (8% on currency neutral basis) year-over-year to $ 2,837.3 million, but failed to beat the number which analysts were expecting. The growth in revenue was on the back of good performance across all segments except contemporary brand sales. The segmentwise revenue growth on currency neutral as well as reported basis is summarized below:
| Ă‚ | Revenue Growth (year over year) | |
| Ă‚ | Currency Neutral | Reported |
| Jeanswear | 6% | 1% |
| Imagewear | 8% | 7% |
| Sportswear | 3% | 3% |
| Outdoor & Action Sports | 10% | 2% |
| Contemporary | -7% | -11% |
| Direct To Consumer | 11% | 5% |
| International | 9% | -5% |
Overall, the DTC channel contributed 24% to sales during the first quarter.
On the back of top-line growth, earnings per share remained flat versus the year-ago quarter and came in at $0.67, which was what analysts were expecting. On a currency neutral basis, earnings per share grew 13% year over year.
VFC’s gross margin witnessed 40 basis points, or bps, contraction to 49%. The retailer’s move to shift to higher-margin mix was more than offset by currency headwinds. Also, the operating income declined 1% year over year to $398 million and operating margin contracted by 50 bps to 14%.
VCF exited the quarter with cash and equivalents of $655.5 million, long-term debt of $1,422.8 million and shareholders’ equity of $4,904.3 million.
Growth drivers
The revenue momentum should get a lift from ongoing product introductions at both The North Face and Timberland, later this year along with macroeconomic recovery in Europe. This should drive growth in the long run.
To bolster the ecommerce channel, the company is re-launching new websites for North Face and JanSport this month to bring them to same platform as Vans and Timberland as part of one VF approach.
The turnaround of Jeanswear is remarkable as it accelerated for the second consecutive quarter. This will also drive growth as the company is launching new products, including the advanced comfort line which will see greater mid-tier expansion in the second quarter.
In addition the new Wrangler Riggs campaign has been a big success with both retailers and in consumer tests, so it will be a growth driver as the company rolls this out nationally.
In addition, the company is investing in demand creation to inform and amplify connections with consumers. For example, VFC is increasing demand creation investments for the North Faces Mountain Athletic training collection, including the first-ever spring TV commercial.
During the quarter VFC added 23 new stores to take the company-owned retail store count to 1,395. In the current fiscal, the company is on track to open 125 stores. Also, year-to-date ecommerce business is just 18% of DTC channel so this has a huge potential for growth, going forward. The company is bolstering its ecommerce presence brand by brand and country by country.
Acquisitions in the cards?
Historically, VFC has grown by way of acquisitions and its last major acquisition was of Timberland in 2011 for $2 billion. Management’s tone during the earnings call was very clear – Merger & Acquisitions remains the first priority in capital allocation. Management said:
“As it relates to capital allocation really no change in the way we've talked about that, acquisitions remain our first priority, followed by dividends and we said consistently and we demonstrated we won't accumulate cash.”
Wrapping up
VFC has upped its outlook for fiscal 2015. The company now expects earnings per share growth of 14% on local currency basis versus 12% projected earlier. On reported basis, it reiterated its earlier projection of 4% growth.
For the next five years, analysts expect compound annual growth rate of 11.51%. The company is expanding its ecommerce presence globally in a phased manger. Also, it is looking for possible acquisition targets as M&A is in its DNA.
Also, the diversity of brands and product mix makes it less risky.
Hence, VFC is a good buy.
