VFC

Business Context and Reporting Period

Company: V.F. Corporation (VFC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 29, 2007
Business Overview: VF is a global marketer of branded lifestyle apparel and related products, organized into five coalitions: Jeanswear, Outdoor, Imagewear, Sportswear, and Contemporary Brands. The company is executing a strategic transformation to shift its portfolio toward higher-growth, higher-margin lifestyle brands (e.g., The North Face, Vans, 7 For All Mankind) and away from lower-growth heritage businesses.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16% to $7.22 billion, driven by 10% organic growth and 6% from acquisitions. The Outdoor Coalition was the primary growth engine, with revenues up 28%.
• Acquisitions: VF completed five major acquisitions in 2007 (collectively costing ~$1.07 billion), including Seven For All Mankind, lucy activewear, Majestic Athletic, Eagle Creek, and The North Face China rights. These formed the new "Contemporary Brands" coalition.
• Divestiture: VF sold its women's intimate apparel business in April 2007 for $348.7 million in cash. This business is reported as discontinued operations, resulting in a $24.6 million loss on disposal in 2007.
• Profitability: Income from continuing operations rose 15% to $613.2 million. Operating margins improved slightly to 13.4%, aided by the mix shift toward higher-margin lifestyle brands, though partially offset by higher distressed sales and integration costs.
• Debt Levels: Long-term debt increased significantly due to the issuance of $600 million in senior notes in October 2007 to fund acquisitions and refinance commercial paper.

Guidance, Outlook, and Risks

Long-Term Financial Targets (Revised Jan 2008)

• Revenue Growth: 8% to 10% annually (increased from 6% to 8%).
• Operating Margin: Target of 15% (increased from 14%).
• EPS Growth: 10% to 11% annually.
• Return on Invested Capital: 17%.
• Debt to Capital: Less than 40%.
• Dividend Payout: Approximately 40% of earnings.

Management Commentary

Management expects continued growth in international markets (targeting 13% annual growth) and direct-to-consumer channels (targeting 18% annual growth). The company plans to invest approximately $60 million in 2008 for new retail locations.

Risks and Contingencies

• Customer Concentration: The top 10 customers accounted for 27% of revenues; Wal-Mart alone represented 12%.
• Intangible Assets: Goodwill and indefinite-lived intangibles totaled $2.3 billion (42% of total assets), creating exposure to impairment charges if fair values decline.
• Supply Chain: 74% of products are sourced from independent contractors, primarily in Asia, exposing the company to labor, political, and trade regulation risks.
• Foreign Currency: 28% of revenues are international; a weaker U.S. dollar benefited 2007 results by $130 million.

Investor Verification Checklist

• Acquisition Integration: Verify the profitability timeline for the newly acquired Contemporary Brands (specifically lucy activewear, which is currently unprofitable due to start-up costs).
• Intangible Asset Valuation: Monitor the annual impairment testing of the $2.3 billion in goodwill and indefinite-lived intangibles, particularly given the high valuation relative to equity.
• Customer Concentration: Assess the impact of potential volume reductions from top retailers, specifically Wal-Mart (12% of revenue).
• Debt Servicing: Review the impact of increased interest expense following the $600 million bond issuance and the ability to maintain the <40% debt-to-capital target.
• Discontinued Operations: Confirm the final resolution of tax and liability matters related to the sale of the intimate apparel business.