V.F. Corporation (VF) — 2009 Form 10-K
Business context and reporting period. VF is a global branded apparel and footwear company, organized into Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands. Fiscal 2009 was the 52 weeks ended January 2, 2010; fiscal 2008 had 53 weeks, which affects year-over-year comparisons. VF reported continuing operations after its 2007 sale of the intimate apparel business.
Financial performance
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Total revenues | $7.220 billion | $7.643 billion |
| Operating income | $736.8 million | $939.0 million |
| Operating margin | 10.2% reported; 11.9% excluding impairment | 12.3% |
| Gross margin | 44.3% | 43.9% |
| Net income attributable to VF | $461.3 million | $602.7 million |
| Diluted EPS | $4.13 reported; $5.16 excluding impairment | $5.42 |
| Cash from operations | $973.5 million | $679.5 million |
| Cash and equivalents at year-end | $731.5 million | $381.8 million |
| Working capital / current ratio | $1.537 billion / 2.4 | $1.641 billion / 2.6 |
| Debt to total capital | 23.7%; net debt to capital 10.7% | 25.2% |
Capital expenditures were $85.9 million, dividends paid were $261.7 million, and VF repurchased $112.0 million of stock. Year-end long-term debt, including its current portion, was approximately $1.142 billion; short-term borrowings were $45.5 million. VF reported $1.3 billion of committed revolving credit facilities, with no borrowings under those facilities at year-end.
Material changes and segment results
- Revenue declined about 6% year over year, including a $156 million adverse currency translation impact and a $344 million organic decline. The prior-year comparison included an extra fiscal week.
- The $122.0 million noncash goodwill and trademark impairment charge reduced diluted EPS by $1.03. It related to Reef ($36.7 million), Nautica ($58.5 million) and lucy ($26.8 million).
- Outdoor & Action Sports was the strongest coalition: revenue rose 0.4% to $2.752 billion and coalition profit increased 11.9% to $508.3 million. Jeanswear revenue fell 8.8% to $2.523 billion; Imagewear fell 12.7% to $865.5 million; Sportswear fell 12.7% to $498.3 million. Contemporary Brands revenue rose 4.6% to $471.9 million, but coalition profit declined 28.2% to $37.2 million.
- Gross margin improved to a record 44.3%, supported by direct-to-consumer mix and lower inventory-disposal costs. Marketing, administrative and general expenses rose as a share of revenue, driven partly by pension expense and retail operations.
- VF completed its acquisition of Mo Industries, owner of Splendid and Ella Moss, in March 2009. The acquired business contributed $61.2 million of revenue and $12.0 million of operating earnings for the year.
Outlook, risks and unusual items
- Management said economic conditions and consumer spending were expected to remain difficult through 2010, and did not expect to achieve its long-term revenue or earnings growth targets in 2010. It forecast 9%–11% diluted EPS growth for 2010.
- Long-term targets remain revenue growth of 8%–10%, operating income of 15% of revenue, ROIC of 17%, and debt below 40% of total capital. Management plans $50 million of targeted investment in advertising, product development and retail expansion; approximately $110 million of capital spending; and about 80–90 new retail locations. It intended to repurchase at least 3 million shares in 2010.
- Key exposures include weak consumer demand, fashion and inventory forecasting, customer concentration (top ten customers were 27% of revenue; Wal-Mart alone 11%), international sourcing and currency risk, and pressure on margins. Approximately 84% of products sold were sourced from independent contractors, primarily in Asia.
- Defined-benefit pension plans were underfunded by $250.9 million at year-end, after more than $200 million of 2009 contributions. Pension expense rose to $98.0 million from $10.8 million; management estimated approximately $66 million for 2010 and did not then intend a 2010 contribution to the domestic qualified plan. Funding needs remain sensitive to investment returns and discount rates.
- Goodwill and intangible assets were 45% of total assets. Management cautioned that further impairment could arise if economic or business assumptions weaken, particularly for premium brands and channels.
- A receivables-sale program provided up to $105 million of nonrecourse capacity; $74.2 million of receivables sold remained excluded from year-end receivables. The reported operating cash flow also reflected inventory reductions and receivables sales.
- An EPA lawsuit concerning alleged sale of unregistered pesticides in shoes was settled in the first quarter of 2010. VF reported no other pending material legal proceedings.
Important facts for investors to verify
- Reconcile reported and impairment-adjusted earnings, and assess the assumptions supporting the Reef, Nautica and lucy valuations.
- Confirm the durability of operating cash flow and the contribution from inventory reductions and receivables sales.
- Track pension-plan funding, expense and actuarial assumptions, including whether additional contributions are needed.
- Assess the 2010 EPS growth forecast against the stated weak demand outlook, planned investments and segment trends.
- Monitor major-customer exposure, retailer health, and sourcing, foreign-exchange and licensing risks.