Business context and reporting period
V.F. Corporation (VF) designs, sources, markets and distributes branded apparel, footwear and related products across more than 30 brands. This Form 10-K covers the 52-week fiscal year ended January 2, 2016; 2014 was a 53-week year, limiting direct comparability. VF reports five coalitions: Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands. Direct-to-consumer represented 27% of 2015 revenue; international markets represented 36%.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $12.377 billion | $12.282 billion |
| Operating income | $1.661 billion | $1.438 billion |
| Operating margin | 13.4% | 11.7% |
| Net income | $1.232 billion | $1.048 billion |
| Diluted EPS | $2.85 | $2.38 |
| Cash from operations | $1.147 billion | $1.698 billion |
| Cash and equivalents at year-end | $946 million | $972 million |
| Working capital / current ratio | $2.221 billion / 2.1 | $2.418 billion / 2.5 |
| Debt to total capital | 25.7% | 20.4% |
Gross margin was 48.3%, down 50 basis points; foreign currency reduced it by 80 basis points, partly offset by lower product costs and favorable business mix. Operating cash flow fell $551 million, reflecting a $250 million discretionary pension contribution, higher inventory and working-capital use, the prior-year extra week and currency effects. Capital expenditures were $255 million; software purchases were $63 million. VF returned nearly $1.3 billion through $733 million of share repurchases and $565 million in dividends.
Year-end short-term borrowings were $450 million and long-term debt, including current maturities, was about $1.415 billion. VF had $945.6 million of cash and $1.310 billion of remaining availability under its $1.75 billion revolving facility and commercial-paper program, after outstanding borrowings and letters of credit. Inventory rose to $1.612 billion from $1.483 billion, attributed mainly to weak cold-weather demand.
Material changes versus the prior period
- Revenue increased 1%, despite an estimated 5% adverse currency impact and the prior-year extra week; VF cited operational growth, led by Outdoor & Action Sports.
- Reported operating margin and EPS improved substantially in part because the noncash impairment charge declined to $143.6 million from $396.4 million. Excluding impairment charges, operating margin was 14.6% in 2015 versus 14.9% in 2014.
- Outdoor & Action Sports revenue rose 2.8% to $7.400 billion, but coalition profit declined 3.5% and margin fell to 17.1%. Jeanswear revenue was nearly flat, with profit up 1.4%. Imagewear revenue declined 1.9%; lower oil and gas exploration weighed on occupational apparel. Sportswear revenue fell 2.3%, while profit increased 1.2%. Contemporary Brands revenue fell 14.1%, profit dropped 75% to $5.8 million and margin declined to 1.7%.
- Contemporary Brands impairment charges reduced reported results by $143.6 million pretax in 2015, principally for 7 For All Mankind, Splendid and Ella Moss. The 2014 charge was $396.4 million, including goodwill impairment.
- International revenue declined 4%, including a 13% adverse currency impact. Direct-to-consumer revenue grew 3%, after currency and the extra-week comparison.
Outlook, management commentary, risks and contingencies
- Management expected the 2016 annual tax rate to be approximately 23% and capital spending to be approximately $300 million, funded from operating cash flow. It reported no current plan for a 2016 contribution to the U.S. qualified pension plan and expected about $15.3 million of contributions to other defined-benefit plans.
- Management described long-term growth priorities as product innovation, consumer connection, direct-to-consumer expansion and geographic growth. It expected direct-to-consumer to continue growing faster than VF overall; no specific consolidated revenue or EPS forecast is provided in the supplied filing text.
- Key risks include consumer-spending and fashion-trend volatility, warm or otherwise unfavorable weather, intense competition and margin pressure, demand forecasting and inventory exposure, foreign exchange, reliance on contractors and global supply chains, customer concentration, cybersecurity/privacy, and execution risks in retail expansion and acquisitions.
- VF recorded a $250 million discretionary U.S. pension contribution; pension plans remained underfunded by $156.6 million at year-end. Management estimated 2016 pension expense of $61.8 million.
- The EU ruled in January 2016 that Belgium’s excess-profit tax rulings were illegal and ordered recovery of benefits, potentially affecting VF’s 2010–2014 taxes. VF was assessing its options and said it did not expect a material impact. VF also disputed proposed IRS adjustments to Timberland’s 2011 tax return and filed a Tax Court petition; management said resolution of any one examination was not expected to materially affect consolidated results.
- VF reported no pending material legal proceedings beyond routine litigation. Management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether inventory elevated by warm-weather-related demand weakness is cleared without heavier discounting or further margin damage.
- Whether growth in core Outdoor & Action Sports brands and direct-to-consumer can offset currency headwinds and softness in Contemporary Brands, Jeanswear and certain retail channels.
- The extent to which reported earnings improvement reflects lower impairment charges rather than continuing operating improvement; assess the sensitivity of remaining Contemporary Brands and Rock & Republic intangible values to forecasts.
- Cash generation and leverage following the pension contribution, increased short-term borrowing, share repurchases and dividends; confirm ongoing facility availability and covenant compliance.
- Developments in the Belgium tax matter and Timberland IRS dispute, as well as currency, pension funding and major-customer risks.