V.F. Corporation — Q1 2015 Form 10-Q
Reporting period: Fiscal quarter ended April 4, 2015; comparative quarter ended March 29, 2014. Financial statements are unaudited. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenues | $2.837 billion | $2.781 billion | +2% |
| Operating income | $397.8 million | $403.2 million | -1% |
| Net income | $288.7 million | $297.2 million | -3% |
| Diluted EPS | $0.67 | $0.67 | Flat |
| Gross margin | 49.0% | 49.4% | -40 bps |
| Operating margin | 14.0% | 14.5% | -50 bps |
| Operating cash flow | -$430.6 million | $13.7 million | Down $444.3 million |
| Capital expenditures and software purchases | $69.7 million | $94.0 million | Down $24.2 million |
Revenue growth reflected an 8% operational increase, partly offset by a $166.9 million, or 6%, unfavorable foreign-currency effect. Direct-to-consumer revenue increased 5% and represented 24% of sales; international revenue declined 5% and was 40% of sales. The filing attributes the weaker operating cash flow primarily to a $250 million discretionary domestic pension contribution and lower collections associated with the prior-year 53rd-week calendar.
Balance sheet and liquidity
- At April 4, cash and equivalents were $655.5 million; total assets were $9.733 billion; and stockholders’ equity was $4.904 billion.
- Short-term borrowings were $1.068 billion and long-term debt was $1.423 billion, for total borrowings of approximately $2.491 billion. Short-term borrowing rose from $21.8 million at year-end 2014, primarily to support seasonal working capital, share repurchases, and the pension contribution.
- Working capital was $1.803 billion and the current ratio was 1.8:1, down from 2.6:1 at December 2014. Debt to total capital was 33.7%, versus 20.5% at year-end; net debt to total net capital was 27.3%, versus 7.8%.
- Cash used in financing was $205.1 million net, including $1.048 billion of net short-term borrowing, $730.8 million of treasury-stock purchases, and $135.9 million of dividends paid. Cash declined $316.4 million to $655.5 million during the quarter.
Material changes and operating trends
- Outdoor & Action Sports revenue increased 2%, but coalition profit fell 5% to $260.8 million; foreign exchange, investment in direct-to-consumer and marketing, and the calendar shift pressured results.
- Jeanswear revenue rose 1% and profit rose 2%. Imagewear revenue and profit increased 7% and 9%, respectively. Sportswear revenue increased 3%, with profit up 2%.
- Contemporary Brands revenue fell 11% and profit declined 55%, reflecting weak demand in women’s contemporary apparel and premium denim, discounting, and reduced expense leverage.
- Other coalition profit included a $16.6 million gain from the sale of a VF Outlet location. Corporate and other expenses increased 14.8%, primarily due to IT system costs, innovation-center investment, and higher compensation.
- Foreign-currency translation contributed to a $200.1 million other comprehensive loss for the quarter; accumulated other comprehensive loss reached $902.4 million.
Outlook, risks, and unusual items
- The filing provides no quantified full-year revenue or earnings guidance. Management said inventory growth reflected anticipated 2015 sales growth and stated that liquidity was adequate to meet obligations, fund capital expenditures, and maintain the dividend at current and expected rates.
- In April 2015, VF replaced its $1.25 billion revolving facility with a $1.75 billion unsecured facility maturing in April 2020; its U.S. commercial-paper program was also increased to $1.75 billion. At quarter-end, $197.5 million remained available under the prior facility after commercial paper and letters of credit.
- The Board declared a $0.32-per-share quarterly dividend payable June 19, 2015. VF repurchased 10.0 million shares during the quarter for approximately $730.8 million; 30.7 million shares remained authorized for repurchase.
- VF contributed $254.9 million to defined-benefit plans, including the $250 million discretionary contribution, and expected approximately $18.5 million of further contributions during the remainder of 2015.
- Q1 included a $6.3 million net discrete tax benefit. The effective tax rate was 23.8%, compared with 22.2% a year earlier. The IRS examination of Timberland’s 2011 return included proposed material adjustments that VF disputed; management considered the tax provision adequate.
- Principal stated risks include consumer demand and fashion trends, foreign-currency movements, margin pressure, supply and distribution disruption, customer concentration and financial health, information-security risks, weather, and international political, regulatory, and economic conditions. VF reported no material changes to previously disclosed legal proceedings or risk factors, and no significant change in market-risk exposures.
Important facts for investors to verify
- Whether operating and cash-flow trends normalize after the pension contribution and the prior-year calendar effect, and how seasonal working-capital needs develop.
- How much reported revenue and profit growth remains after currency effects, particularly in Outdoor & Action Sports and international markets.
- Whether Contemporary Brands’ demand and margin declines persist, and whether the one-time outlet-sale gain affects comparisons.
- Short-term borrowing, cash balances, facility availability, and the pace of share repurchases relative to cash generation.
- Outcomes of the disputed Timberland tax adjustment and other tax examinations, as well as currency and derivative impacts.