February 13, 2015 V.F. Corporation Current Recommendation Earnings Update: V.F. Corp Misses on Q4 Earnings, Up Y/Y, Guides 2015 SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 08/01/2011 Current Price (02/13/15) $75.26 Target Price $79.00 SUMMARY (VFC-NYSE) V.F. Corporation ended 2014 with mixed results as top and bottom lines for both fourth-quarter and full-year 2014 came in below expectations, but improved year over year. The improvement was driven by the solid performance of its Vans, Timberland, The North Face and Wrangler brands across all regions worldwide. In particular, its Vans brand crossed the $2 billion mark in 2014. Management also provided a favorable guidance for 2015 and believes that the company is well placed to achieve its goals set for 2017. We believe V.F. Corp s growth prospects look promising, given its sustained focus on opportunistic acquisitions and expansion of its global operations, which will boost its top and bottom lines. However, the prevalent soft macroeconomic environment, stiff competition and volatile raw material prices remain concerns. Therefore, we maintain our long-term Neutral recommendation on the stock. 52-Week High $75.46 52-Week Low $56.46 One-Year Return (%) 34.08 Beta 0.98 Average Daily Volume (sh) 3,454,040 Shares Outstanding (mil) 432 Market Capitalization ($mil) $32,503 Short Interest Ratio (days) 2.47 Institutional Ownership (%) 83 Insider Ownership (%) 2 Risk Level * Low, Type of Stock Large-Growth Industry Textile-Apparel Zacks Industry Rank * 101 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) Annual Cash Dividend $1.28 Dividend Yield (%) 1.70 5-Yr. Historical Growth Rates Sales (%) 12.9 Earnings Per Share (%) 18.1 Dividend (%) 16.7 using TTM EPS 24.4 using 2015 Estimate 23.2 using 2016 Estimate 19.7 2013 2,612 A 2,220 A 3,297 A 3,290 A 11,420 A 2014 2,781 A 2,402 A 3,487 A 3,579 A 12,282 A 2015 2,940 E 2,530 E 3,732 E 3,826 E 13,056 E 2016 14,195 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.61 A $0.32 A $0.98 A $0.82 A $2.73 A 2014 $0.67 A $0.36 A $1.08 A $0.98 A $3.08 A 2015 $0.72 E $0.39 E $1.18 E $0.96 E $3.25 E 2016 $3.82 E Zacks Rank *: Short Term 1 3 months outlook 3 - Hold Projected EPS Growth - Next 5 Years % 12 * Definition / Disclosure on last page (Note: Qtly. fig. may not add up to annual fig. due to rounding off.) 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
RECENT NEWS V.F. Corp Misses on Q4 Earnings, Up Y/Y, Guides 2015 Feb 13, 2015 V.F. Corporation ended 2014 with mixed results as top and bottom line for both fourth-quarter and fullyear 2014 came in below expectations, but improved year over year. The year-over-year improvement was driven by the solid performance of its Vans, Timberland, The North Face and Wrangler brands across all regions worldwide. V.F. Corp.'s fourth-quarter 2014 adjusted earnings of $0.98 a share were up 19.5% year over year but fell short of the Zacks Consensus Estimate by a penny. Total revenue of $3,578.9 million grew 9% year over year but missed the Zacks Consensus Estimate of $3,591 million. On a currency neutral basis, revenues were up 11% year over year. The year-over-year increase in revenues was attributable to strength witnessed in the company s Outdoor & Action Sports brand, along with the international and direct-to-consumer businesses. On a reported basis, quarterly earnings slumped 66% year over year to $0.28 a share. Looking at full-year 2014, the company s earnings came in at $3.08 per share, which rose 13.7% from 2013, missing the Zacks Consensus Estimate of $3.09 per share. Further, total revenue for the year advanced 8% from the year-ago level to $12,282.2 million, coming below the Zacks Consensus Estimate of $12,294 million. Quarter in Detail The company s gross margin in the reported quarter expanded 80 basis points (bps) to 49%, marking a record high. Gross margin gained from the ongoing mix shift to higher-margin businesses. Selling, general and administrative expenses, as a percentage of sales, shot up 20 bps to 32.9%. However, the impact of gross margin was stronger, leading the adjusted operating income to soar 14% to $578 million, on a year-over-year basis. Moreover, adjusted operating margin expanded 70 bps to 16.2% during the quarter. Segment Details Revenues at Outdoor & Action Sports rose 13% from the year-ago quarter to $2,164.3 million, driven by solid growth witnessed in the Americas and Asia-Pacific regions. The increased revenues are attributable to a respective 12%, 17% and 11% rise in sales in The North Face, Vans and Timberland brands. Segment operating income increased 21% year over year to $432 million, while operating margin expanded 130 bps to 20%. Jeanswear revenues of $755.1 million were up 3% from $734 million in the prior-year quarter. During the quarter, the segment s performance benefited from low single-digit percentage growth in both the American and European regions, coupled with mid single-digit growth in the Asia-Pacific region. Global Jeanswear revenues were in line with the year-ago level. Moreover, segment revenues gained from respective increases of 3% and 5% in the company s Wrangler and Lee brand revenues. Segment operating income ascended 5% to $142 million, while operating margin contracted 40 bps to 18.7% in the quarter. Equity Research VFC Page 2
Imagewear revenues increased 4% year over year to $298.3 million on the back of strong Licensed Sports Group revenues. Operating income jumped 8% to $48 million, while operating margin at the segment expanded 60 bps to 16.2%. Revenues at Sportswear rose 4% to $215 million, owing to strong performance at the Kipling brand that delivered a 25% increase in the U.S. On the other hand, revenues of the Nautica brand remained flat in the quarter. However, segment operating income fell 10% year over year to $32 million. Operating margin came in at 15%, contracting 220 bps year over year, adversely affected by the headwinds in the country s departmental stores network. Contemporary Brands revenues slipped 1% to $107.7 million due to the challenges faced by the women s contemporary apparel and premium denim categories. Operating income in the quarter slumped 80% to $1.8 million, while operating margin contracted 20 bps to 0.3%. The company s International revenues advanced 5% year over year. The improvement was largely driven by strong performances at almost all brands in the Asia-Pacific (up 17%) and Americas (Non-U.S.) (up 9%), partly offset by Europe (down 1%). Notably, within the Asia-Pacific region, the company witnessed strong growth in China, where revenues were up 20%. International revenues represented 33% of V.F. Corp. s total revenue in the fourth quarter, compared with 34% in the year-ago quarter. Direct-to-Consumer revenues surged 22% year over year, primarily driven by robust double-digit revenue growth in every region across the globe and upside in almost every brand. During the quarter, the company added 75 new stores, including various brands, bringing the store count to 1,401. Overall, direct-to-consumer revenues contributed 32% to V.F. Corp. s fourth-quarter revenues, higher than the 29% contribution in the year-ago quarter. Financial Details V.F. Corp. ended the year with cash and cash equivalents of $971.9 million and long-term debt of $1,423.6million. The company s shareholders equity came in at $5,630.9 million as of the end of Dec 2014. Inventories improved nearly 6% year over year, indicating the company s emphasis on operational efficacy. Moreover, during 2014, the company generated cash flow from operations of about $1,697.6 million and returned more than $1.2 billion to stockholders through share buybacks and dividends. In fact, even for 2015, management expects to return over $1.2 billion to its shareholders, which is anticipated to include $700 million allocated towards the company s share buyback plan. Along with its results, the company announced a quarterly dividend of $0.32 per share, payable on Mar 20, 2015 to stockholders of record as of Mar 10. Outlook Management remains pleased with its 2014 results which were backed by V.F. Corp s solid brand portfolio, teamed up with the company s constant focus on achieving operational efficacy. The company ended the year on a solid note with its Vans brand crossing the $2 billion mark. With this, management believes it is well placed to achieve its goals set for 2017. Equity Research VFC Page 3
For 2015, management anticipates an 8% increase in revenues, on a currency neutral basis. On a reported basis, revenues are expected to climb 3%. Brand wise, on a currency neutral basis, Outdoor & Action Sports revenues are expected to increase by 8%, Imagewear and Sportswear brands are anticipated to generate mid single-digit growth, Jeanswear is expected to grow at a low single-digit rate in 2015, while revenues from Contemporary Brands are expected to remain flat year over year. Additionally, the company envisions International and Direct-to-Consumer revenues to improve at a low double-digit and a mid-teen percentage rate, respectively. Further, the company expects its gross margin and operating margin for 2015 at 49.2% and 15%, respectively. The company projects adjusted earnings for 2015 to rise 12% year over year, on a currency neutral basis, compared with $3.08 per share reported in 2014. On a reported basis, earnings per share are expected to jump 4%. Equity Research VFC Page 4
VALUATION V.F. Corporation s current trailing 12-month earnings multiple is 24.4x, compared with 23.9x for the industry average and 19.2x for the S&P 500. Over the last 5 years, the company s shares have traded in the range of 11.8x to 25.7x trailing 12-month earnings. The stock is trading at a premium to the industry average, based on forward earnings estimates. Our target price of $79.00, 24.3x 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low V.F. Corp. (VFC) 23.2 19.7 12.2 21.2 24.4 25.7 11.8 Industry Average 20.7 19.2 15.2 15.5 23.9 86.3 13.7 S&P 500 16.6 15.5 10.7 15.1 19.2 19.4 12.0 PVH Corp (PVH) 13.4 11.8 13.4 9.6 15.1 20.3 12.2 Teijin Ltd. (TINLY) N/A 18.9 N/A 5.5 20.8 94.8 8.1 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B P/B ROE D/E Div Yield 5-Yr High 5-Yr Low Last Qtr. Last Qtr. V.F. Corp. (VFC) 5.1 5.5 2.1 22.2 0.2 1.9 16.6 EV/EBITDA Industry Average 3.4 3.4 3.4 11.5 0.2 0.6-0.9 S&P 500 5.3 9.8 3.2 25.5 N/A 2.1 N/A Equity Research VFC Page 5
Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research VFC Page 6
OVERVIEW Based in Greensboro, NC, V.F. Corporation also known as V.F. Corp. is one of the world s largest apparel companies. The company, together with its subsidiaries, designs, manufactures and markets branded apparel and related products in the United States as well as internationally. V.F. Corporation s product line consists of denim and casual tops, bottoms, backpacks, book bags, luggage, outdoor gear, skateboard-inspired footwear and apparel, surf-inspired footwear and apparel, women s lingerie, occupational apparel, licensed sports apparel, athletic apparel and fashion sportswear. The company sells these products through specialty stores, department stores, national chains, and mass merchants, along with licensees and distributors. Moreover, the company operates through V.F. Outlets, which sell a range of V.F.-branded products comprising apparels and accessories. V.F. Corporation primarily posts its financial report under the following 6 core business segments, which are termed coalitions. Outdoor and Action Sports Coalition: This is the company s fastest growing business segment, which markets outdoor and activity-based products of authentic lifestyle brands. The key brands sold under this segment are Vans, The North Face, Timberland, JanSport, Kipling, Reef, Napapijri, Eagle Creek, Eastpak, and Lucy brands. Jeanswear Coalition: Through this segment, the company offers jeanswear and related products under brands like Lee, Wrangler, Rustler, Riders, and Timber Creek by Wrangler in the United States and many other countries. Imagewear Coalition: Under this segment, the company sells occupational attire and uniforms as well as licensed sports products. The premium brands under this segment include Red Kap, Bulwark, Majestic, MLB and NFL. Sportswear Coalition: The segment markets 2 primary lifestyle brands for men, women, boys, girls and infants Nautica and Kipling. Contemporary Brands Coalition: Under the segment, the company offers premium lifestyle brands such as 7 For All Mankind, Splendid and Ella Moss. Other: Under this segment, the company record revenues from royalties and other related items. Equity Research VFC Page 7
REASONS TO BUY Efficient Brand Management Approach: V.F. Corporation s diversified brand portfolio positions the company in a higher stratum than its peers to generate above-average industry growth and sustain itself in the current challenging environment. The company s approach toward brand management allows each of its brands to develop further through rigorous marketing strategies, financial control and operating leverage. We believe that given the strength of many of its brands and opportunities with regard to distribution, the company is poised for long-term growth. Stock Appears Promising in the Near Future: With promising top-line growth as well as margin expansion, V.F. Corporation appears to be an attractive option for investors in the near future. The company has recorded improved year-over-year financial results for the last several quarters and is expected to continue with its upbeat performance, going forward. Management s impressive guidance for 2014 also enhances the company s growth prospects. For the year, V.F. Corporation envisions delivering an 8% increase in revenues, considering a 13% revenue growth in its Outdoor & Action Sports coalition. This is in line with the company s previously announced revenue growth target for 2017. It projects adjusted earnings for 2014 to be at $3.08 per share, rising 14% year over year. International Expansion Strategy Bodes Well for Future Growth: V.F. Corporation is aggressively looking for opportunities to expand its international operations, particularly in the Asia Pacific, which is one of the fastest growing regions. In China, the company plans to increase its store count to 6,000 by 2017 from approximately 2,300 stores in 2013. Moreover, V.F. Corporation successfully achieved its target of a 38% contribution from international operations to revenue in 2013 and now expects to increase it to 43% by 2017. We believe that the company s sustained focus on expanding its international operations will boost its top line in the long run, while reducing the risk of operating in a single market. Huge Manufacturing and Distribution Facilities Provides Economies of Scale: V.F. Corporation operates 29 manufacturing facilities, where the company benefits from a decade-long history of manufacturing and engineering expertise as well as many cost and service benefits. Apart from this, V.F. Corporation has an extremely diversified and balanced base of over 1,900 contractors across 60 countries controlled from one of the biggest sourcing offices in Hong Kong, which provides a wide scale and expertise. Given the strength of V.F. Corporation s global supply chain, the company can rapidly adjust its sourcing strategies. Timberland s Long-term Growth Targets Bode Well for the Company: Recently, the company s wholly owned subsidiary, Timberland, at an analyst meet outlined its revenue growth targets through 2019. Overall, the brand expects to reach revenue of $3.1 billion by 2019, representing about 13% 5- year compounded annual growth rate. The brand hopes to achieve this target on significant growth across all geographies and channels along with the expansion of its global store count to nearly 360 in the next five years. With these targets, the company should successfully deliver consistent value for both consumers and shareholders, presently and going forward. Equity Research VFC Page 8
REASONS TO SELL Macroeconomic Challenges: The apparel retail industry is a consumer-driven industry, and hence very sensitive to the economy s health. Spending on such items is heavily dependent on the personal disposable income of consumers. The current macroeconomic challenges such as high household debt and unemployment levels may restrain consumers from spending on apparel and accessories. Seasonal Risk: V.F. Corporation s business typically generates stronger sales during the winter season as the company s Timberland, The North Face and SmartWool brands mainly manufacture winter-related items, which comprise the major portion of its Outdoor & Active Sports coalition. Consequently, the company is vulnerable to risks if the particular season fails to meet expectations. Competitive Pressure: V.F. Corporation faces intense competition from other well-established players in the apparel industry such as Polo Ralph Lauren Corp., Levi Strauss & Co., Sears Holdings Corp., The Gap Inc., on the basis of brand recognition, fashion, price, service, store location, and quality. Failure to offer high-quality products at a competitive price may hamper V.F. Corporation s market share, and consequently dent top and bottom-line growth. DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of VFC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1127 companies covered: Outperform - 15.8%, Neutral - 78.2%, Underperform 5.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research VFC Page 9