VF Corporation — Q1 2010 Form 10-Q
Business context and period. VF Corporation reported unaudited consolidated results for the three months ended April 3, 2010, presented in the filing as the period ended March 2010; comparison is with the three months ended April 4, 2009. VF operates apparel and footwear businesses across Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total revenue | $1,749.9 million | $1,725.5 million |
| Operating income | $223.3 million | $161.4 million |
| Net income attributable to VF | $163.5 million | $100.9 million |
| Diluted EPS | $1.46 | $0.91 |
| Gross margin | 46.7% | 42.2% |
| Operating margin | 12.8% | 9.4% |
| Cash from (used in) operations | $184.2 million | ($35.4 million) |
- Revenue increased about 1%; management attributed $38 million of the year-over-year increase to currency translation, while organic revenue declined $29 million, principally due to lower wholesale unit sales, especially in Jeanswear.
- Cash and equivalents were $718.6 million at quarter-end. Working capital was $1.59 billion and the current ratio was 2.5 to 1. Debt to total capital was 23.7%; net debt to total capital was 11.0%.
- Debt comprised $48.5 million of short-term borrowings, $202.7 million of current long-term debt and $937.8 million of long-term debt. The $200 million notes due October 2010 were classified as current; management said no other debt payments were due until 2017.
- Inventories were down 15% from March 2009. Cash flow benefited from higher earnings, timing of receivable collections and increased receivables sales; these factors affect comparability with the prior-year cash outflow.
Material changes and operating performance
- Outdoor & Action Sports revenue rose to $678.6 million from $618.3 million, and coalition profit increased to $132.7 million from $88.6 million. North Face and Vans revenues grew 9% and 20%, respectively; direct-to-consumer revenue in the coalition rose 28%.
- Jeanswear revenue declined to $622.1 million from $667.4 million, while coalition profit improved to $106.8 million from $89.6 million. Imagewear and Sportswear revenues were also lower; Sportswear profit improved. Contemporary Brands revenue rose to $104.1 million from $89.6 million, but coalition profit fell to $8.5 million from $15.4 million.
- Gross margin improved 4.5 percentage points, driven by lower product costs, nonrecurrence of prior-year unfavorable currency transaction effects, business mix and improved profitability on distressed inventory sales. Marketing, administrative and general expenses increased to 34.0% of revenue from 32.9%.
- Q1 included a $5.7 million gain from remeasuring VF’s former 50% Vans Mexico joint-venture interest upon acquiring the remaining interest. The acquisition price was $31 million.
Outlook, commentary and risks
- Management expected a 2010 full-year effective tax rate of approximately 26%, excluding the Q1 tax benefit. Q1’s lower tax rate reflected a $13 million benefit related to foreign tax refund claims; management also said it intended to file additional claims.
- Management expected 2010 capital spending could reach $115 million, funded from operating cash flow. It intended to repurchase at least 3 million shares during 2010; 1.5 million shares were repurchased in Q1 for $118.0 million.
- Management expected Contemporary Brands to deliver double-digit revenue growth beginning in Q2 and operating margin in the mid-teens in the second half of 2010.
- VF had more than $1.3 billion of available committed credit capacity at quarter-end. Management stated that cash, operating cash flow and available borrowing capacity were adequate for obligations, capital spending and dividends.
- Key stated risks include consumer demand and economic conditions, dependence on major customers, margin pressure, fashion and demand forecasting, international and currency exposure, suppliers and manufacturing continuity, brand protection, and the ability to execute growth plans and integrate acquisitions. Management reported no material changes to previously disclosed risk factors or market-risk exposures.
- Tax authorities were examining multiple tax years and jurisdictions. VF said unrecognized tax benefits increased $8.3 million in Q1 and could decrease by about $32 million over the next 12 months; about $29.8 million of that decrease would reduce income tax expense. The filing also identifies commitments and contingencies but does not provide a clear quantified total for them.
Important facts for investors to verify
- Whether revenue growth and improved margins persist, particularly given declining organic revenue and weakness in Jeanswear.
- How much of Q1 earnings growth reflects operating improvement versus the $13 million tax benefit, currency effects, lower pension expense and the $5.7 million acquisition remeasurement gain; Q1 also included restructuring costs of $0.09 per diluted share.
- Whether operating cash flow remains strong after considering receivables sales: the program allowed up to $192.5 million outstanding, and $116 million of receivables had been sold at quarter-end.
- The company’s ability to meet the $200 million October 2010 debt maturity while funding planned capital spending, dividends and share repurchases.
- Progress and final purchase accounting for Vans Mexico, and the outcome and timing of pending tax audits and refund claims.