Business Context and Reporting Period
Company: V.F. Corporation (V.F. Corp)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended April 4, 2009 (Fiscal Q1 2009)
Business Overview: V.F. Corp is a global apparel and footwear company operating through five reportable segments (coalitions): Outdoor and Action Sports, Jeanswear, Imagewear, Sportswear, and Contemporary Brands. The company operates in a 52/53-week fiscal year.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $1,725,474 | $1,846,341 |
| Net Sales | $1,707,301 | $1,825,277 |
| Operating Income | $161,448 | $244,125 |
| Net Income Attributable to VF Corp | $100,939 | $149,032 |
| Diluted EPS | $0.91 | $1.33 |
| Cash and Equivalents (End of Period) | $276,428 | $259,855 |
| Short-term Borrowings | $287,873 | $303,181 |
| Long-term Debt | $1,140,414 | $1,143,620 |
| Working Capital | $1,523,055 | $1,539,950 |
| Cash Used by Operating Activities | $(35,363) | $(50,955) |
Margins:
- Gross Margin: 42.2% (Q1 2009) vs. 45.1% (Q1 2008)
- Operating Margin: 9.4% (Q1 2009) vs. 13.2% (Q1 2008)
- Effective Tax Rate: 29.0% (Q1 2009) vs. 33.3% (Q1 2008)
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 7% year-over-year. Approximately 5% of the decline was attributed to foreign currency translation effects (stronger U.S. dollar), with the remainder due to organic declines driven by the global economic downturn.
- Profitability Pressure: Net income decreased 32% to $100.9 million. Operating income dropped 34% to $161.4 million. Gross margin contracted by 2.9 percentage points due to currency transaction effects and margin pressure from discounting in a challenging retail environment.
- Segment Performance:
- Jeanswear: Revenues declined 6% (reported) and 1% (constant currency). Profit dropped 27% due to international market contractions (Eastern Europe/Scandinavia) and currency impacts.
- Imagewear: Revenues fell 8% due to reduced demand in industrial and protective apparel sectors driven by rising unemployment.
- Outdoor and Action Sports: Revenues declined 5% reported, but grew 2% on a constant currency basis. The North Face and Vans brands gained market share.
- Sportswear: Revenues declined 14%, but coalition profit more than doubled due to a one-time charge in the prior year for discontinuing the Nautica wholesale women's business.
- Acquisition: Completed the acquisition of Mo Industries Holdings, Inc. (owner of Splendid and Ella Moss brands) on March 11, 2009, for a total purchase price of $213.2 million (including fair value of prior investment). This added $5.6 million in revenue and $1.4 million in earnings for the quarter.
- Pension Costs: Defined benefit pension costs increased significantly, adding $20.8 million to Corporate and Other Expenses, impacting earnings by approximately $0.13 per share.
Guidance, Outlook, and Risks
- Economic Outlook: Management expects difficult economic conditions to continue through 2009, impacting consumer spending. The company anticipates lower revenues in the remaining quarters of 2009 compared to 2008.
- Liquidity: The balance sheet remains strong with a debt-to-total-capital ratio of 28.6%. The company has $1.1 billion in available liquidity under committed bank credit lines and no long-term debt payments due until late 2010.
- Capital Allocation: No share repurchases were made in Q1 2009; the company does not currently intend to repurchase shares in 2009. Capital expenditures are expected to reach $110 million for the full year, funded by operating cash flows.
- Dividends: A quarterly cash dividend of $0.59 per share was declared, payable June 9, 2009.
- Risks: Key risks include volatility in global capital markets, foreign currency fluctuations, rising unemployment affecting demand for industrial apparel, and the ability to successfully integrate acquisitions.
Investor Verification Checklist
- Currency Impact: Verify the extent to which reported declines are driven by the strong U.S. dollar versus organic sales volume, particularly in the Jeanswear and Outdoor segments.
- Pension Obligations: Review the sustainability of the increased pension expense ($20.8 million in Q1) and future funding requirements for defined benefit plans.
- Inventory Levels: Confirm that inventory reductions (down 4% vs. prior year) are sufficient to meet demand without excessive discounting in the second half of the year.
- Acquisition Integration: Monitor the performance of the newly acquired Mo Industries brands (Splendid and Ella Moss) and their contribution to the Contemporary Brands coalition.
- International Exposure: Assess the specific impact of economic contractions in Eastern Europe and Scandinavia on the Jeanswear segment's long-term recovery.