VF Corporation 10-Q Summary
Business context and reporting period. VF Corporation’s quarter ended October 2, 2010; comparisons are with the quarter ended October 3, 2009. The filing also reports the first nine months of fiscal 2010. VF’s apparel and footwear businesses are reported in coalitions including Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands. Unless stated otherwise, financial amounts below are in millions.
Financial performance
| Metric | Third quarter 2010 | Third quarter 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $2,232.4 | $2,093.8 | $5,576.4 | $5,304.9 |
| Operating income | $354.5 | $317.9 | $747.3 | $599.1 |
| Net income attributable to VF | $242.8 | $217.9 | $517.1 | $394.4 |
| Diluted EPS | $2.22 | $1.94 | $4.68 | $3.54 |
| Operating margin | 15.9% | 15.2% | 13.4% | 11.3% |
| Gross margin | 46.5% | 44.3% | 46.7% | 43.5% |
- Revenue grew 7% in the quarter and 5% year to date. Management attributed growth primarily to higher unit volumes; organic growth contributed $162 million in the quarter and $243 million year to date, partly offset by currency translation.
- Quarterly sales growth was led by The North Face (17%) and Vans (19%). Asia revenue increased 37%, and direct-to-consumer revenue rose 10%.
- For the first nine months, cash from operations was $448.6 million, versus $263.9 million a year earlier. Capital expenditures were $73.6 million; cash used for investing was $124.7 million and cash used for financing was $634.8 million. Financing outflows included $322.2 million of share repurchases, $196.0 million of dividends and $202.4 million of long-term debt payments.
- Cash and equivalents were $402.9 million at quarter-end. Total debt was approximately $988.3 million, down from $1,141.7 million at December 2009; VF repaid $200 million of 8.5% notes at maturity. Debt to total capital was 20.1%, and net debt to total capital was 12.9%.
- Working capital was $1,727.4 million and the current ratio was 2.5-to-1. VF reported $983.3 million available under its domestic credit facility and $343.6 million under its international facility, with no borrowings under either facility in 2010.
- Cash dividends were $0.60 per share for the quarter. The board subsequently declared a quarterly dividend of $0.63 per share, a 5% increase.
Changes and segment performance
- Gross margin improved 2.2 percentage points in the quarter and 3.2 points year to date. Management cited lower product costs, favorable business mix, improved direct-to-consumer profitability, fewer and less costly distressed-inventory disposals, and favorable currency transaction effects.
- Marketing, administrative and general expense rose to 30.6% of revenue in the quarter from 29.1%, reflecting increased marketing investment and direct-to-consumer mix. Marketing spending increased 35% in the quarter.
- Outdoor & Action Sports was the main growth engine: quarterly revenue increased 14% and coalition profit 21%; nine-month revenue rose 12% and profit 31%. Jeanswear quarterly revenue was nearly flat, while nine-month revenue declined 2%; profit improved in both periods. Imagewear revenue and profit increased in both periods.
- Sportswear quarterly revenue declined 13% and profit 42%, primarily due to timing of Nautica special-program shipments and increased marketing. Contemporary Brands’ quarterly profit fell 58%, reflecting retail investments, store-fixture write-offs and higher marketing; 7 For All Mankind revenue declined 4% in the quarter.
- Shares outstanding declined year over year. VF repurchased 4.1 million shares for $322.2 million in the first nine months, at an average $79.36 per share; 7.6 million shares remained authorized for repurchase at quarter-end.
Outlook, commentary and risks
- Management expected a 2010 full-year effective tax rate of approximately 25% and capital spending of approximately $120 million, primarily for new retail stores, funded by operating cash flow.
- Management said available cash, operating cash flow, borrowing capacity and credit lines should provide adequate liquidity for obligations, capital spending, dividends and investment opportunities. It noted that operating cash flow is typically strongest in the fourth quarter.
- At September exchange rates, management expected foreign currency translation to reduce fourth-quarter reported revenue versus the prior-year quarter. Management also cited expected fourth-quarter revenue growth as a reason for higher seasonal inventory.
- VF acquired the remaining 50% of its Vans Mexico joint venture in March 2010 for $31.0 million and recognized a $5.7 million gain on remeasurement of its original investment. The acquired business contributed $9.8 million of third-quarter revenue and $2.1 million of pretax earnings.
- First-nine-month results included a $13.0 million foreign tax refund benefit and $0.09 per share of restructuring expense, primarily related to reducing product costs. Management said lower pension expense benefited EPS by $0.05 in the quarter and $0.15 year to date. It was evaluating up to $100 million of additional domestic pension contributions for the remainder of 2010, although these were not required.
- Tax authorities were examining multiple years and jurisdictions. Management considered it reasonably possible that unrecognized tax benefits could decline by approximately $29.1 million in the next 12 months, including $28.1 million that would reduce tax expense.
- Key stated risks include consumer spending and economic conditions, raw-material costs and availability, customer concentration and credit, fashion and demand changes, margin pressure, execution of growth and acquisition plans, foreign exchange, suppliers and manufacturing continuity, and international legal and political risks. VF reported no material changes to previously disclosed risk factors or market-risk exposures.
Important facts for investors to verify
- Whether fourth-quarter seasonal sales and collections convert the reported operating cash flow into sustained cash generation, given receivables and inventory growth.
- How much reported cash flow depends on the receivables-sale program: $118.5 million of receivables were sold and outstanding at quarter-end, and management attributed $44.3 million of nine-month operating cash flow to the program.
- Whether segment trends persist, particularly Sportswear’s shipment timing and Contemporary Brands’ weaker profitability, alongside continued growth in Outdoor & Action Sports.
- Whether the stated 25% annual tax-rate expectation and potential tax-benefit reductions are realized, and whether VF makes the discretionary pension contribution of up to $100 million.
- Whether currency movements, marketing investment, inventory levels and share repurchases affect margins, liquidity or the expected fourth-quarter results.