VF Corporation — Q1 2011 Form 10-Q
Business context and reporting period. VF Corporation reported unaudited results for the three months ended April 2, 2011 (presented in the filing as March 2011), compared with the three months ended April 3, 2010. The company operates across Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenues | $1.959 billion | $1.750 billion | +12% |
| Operating income | $274.6 million | $223.3 million | +23% |
| Net income attributable to VF | $200.7 million | $163.5 million | +23% |
| Diluted EPS | $1.82 | $1.46 | +25% |
| Gross margin | 47.2% | 46.7% | +0.5 percentage points |
| Operating margin | 14.0% | 12.8% | +1.2 percentage points |
| Cash from operations | $(32.9) million | $184.2 million | Declined $217.0 million |
Revenue growth was broad-based: Outdoor & Action Sports rose 16%, Jeanswear 9%, Imagewear 12%, Sportswear 10% and Contemporary Brands 8%. International revenue increased 20% and represented 36% of total revenue; Asia revenue increased 52%. Direct-to-consumer revenue grew 10%, including 31% growth in e-commerce.
Balance sheet and liquidity
- At April 2, 2011, cash and equivalents were $673.0 million; total debt was approximately $978.0 million, including short-term borrowings and current maturities. Net debt to total capital was 6.9%; debt to total capital was 19.2%.
- Working capital was $1.913 billion and the current ratio was 2.8 to 1. VF reported approximately $1.34 billion available under committed domestic and international credit facilities.
- Operating cash outflow reflected seasonal working-capital investment, including cash outflows from accounts receivable of $101.6 million and inventories of $101.5 million. Inventory was up 24% year over year; accounts receivable was up 13%.
- Investing cash outflow was $96.3 million, including $33.6 million of capital expenditures and $55.5 million for Rock and Republic trademarks. Financing cash outflow was $13.6 million; dividends paid were $68.5 million.
Material changes and unusual items
- VF changed inventory accounting from LIFO to FIFO for affected inventory beginning January 2, 2011. The change increased Q1 pretax income by $8.0 million, net income by $4.9 million and diluted EPS by $0.04; management said the prior-period retrospective effect was not material.
- Q1 2011 gross margin benefited by 0.6 percentage points from nonrecurrence of prior-year restructuring costs and 0.4 points from the inventory accounting change. Higher product costs not fully recovered through pricing actions partly offset these benefits.
- Q1 earnings benefited by approximately $0.10 per share from tax items, $0.04 from the inventory accounting change and $0.02 from currency translation. The 2010 quarter included a $0.11-per-share tax benefit, substantially offset by $0.09 per share of restructuring costs.
- VF paid $55.5 million for Rock and Republic trademarks and related intellectual property, recorded as an indefinite-lived intangible asset. Total purchase price was expected to be about $57 million plus expenses; final price remained subject to contingencies expected to be resolved by year-end.
Outlook, management commentary and risks
- Management expected a full-year 2011 effective tax rate of approximately 25% and capital spending that could reach $225 million, funded by operating cash flows. The filing did not provide a specific full-year revenue or EPS forecast.
- Management stated that cash, operating cash generation, unused credit lines and borrowing capacity were adequate to meet obligations, capital needs and the dividend policy. It noted that cash from operations is typically lower in the first half because of seasonal working-capital needs.
- VF declared a quarterly dividend of $0.63 per share, payable June 20, 2011 to shareholders of record June 10, 2011.
- Key stated risks include consumer spending and confidence, input-cost inflation and margin pressure, dependence on major customers, demand forecasting, fashion trends, foreign exchange, international-market risks, suppliers and manufacturing continuity, and execution of international, direct-to-consumer and acquisition strategies. No material changes to previously disclosed risk factors or market-risk exposures were reported.
- VF reported no material change in internal control over financial reporting and concluded disclosure controls were effective. IRS examinations of 2007–2009 and other tax examinations remained ongoing; management did not expect any individual examination outcome to materially affect the consolidated statements.
Important facts for investors to verify
- Whether revenue and margin growth persisted after accounting for the $0.04-per-share FIFO benefit, prior-year restructuring comparison and tax benefits.
- Whether inventory and receivables growth converted into cash in subsequent quarters, given Q1 operating cash outflow and the company’s seasonal cash-flow pattern.
- Whether higher product costs were recovered through pricing, and how marketing investment affected margins, particularly in Outdoor & Action Sports.
- The final Rock and Republic purchase price and the commercial performance of the related Kohl’s licensing and distribution arrangement.
- Execution of the planned capital spending, store expansion and growth strategy, alongside the stated risks and any developments in tax audits or other contingencies.