Business context and reporting period
V.F. Corporation (VF) designs, manufactures and distributes branded apparel, footwear and related products. This 10-K covers the 52-week fiscal year ended December 28, 2013; the filing also reports fourth-quarter results. Its five reporting coalitions are Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands. All share and per-share figures reflect the December 2013 four-for-one stock split.
Financial performance and liquidity
Fiscal-year results (dollars in millions, except per-share data):
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $11,419.6 | $10,879.9 |
| Operating income | $1,647.1 | $1,465.3 |
| Net income attributable to VF | $1,210.1 | $1,086.0 |
| Diluted EPS | $2.71 | $2.43 |
| Gross margin | 48.1% | 46.5% |
| Operating margin | 14.4% | 13.5% |
| Cash from operations | $1,506.0 | $1,275.0 |
Fourth-quarter revenue was $3,290.1 million versus $3,033.3 million in 2012; operating income was $508.4 million versus $450.3 million; net income attributable to VF was $367.7 million versus $334.2 million; and diluted EPS was $0.82 versus $0.75.
Cash and equivalents were $776.4 million at year-end, working capital was $2,315.0 million and the current ratio was 2.5, up from 2.0. Long-term debt was $1,426.8 million; short-term borrowings were $18.8 million. Debt to total capital declined to 19.3% from 26.5%, and net debt to total net capital was 10.0% versus 19.6%. VF repaid $400 million of floating-rate notes during 2013. Investing activities used $350.3 million, including $271.2 million of capital expenditures and $54.0 million of software purchases; financing activities used $983.8 million, including dividends and debt repayment.
Material changes versus prior year
- Revenue rose 5%, with $517.6 million of growth from operations and a positive $45.8 million foreign-currency translation impact. International revenue increased 8% and represented 38% of sales; direct-to-consumer revenue increased 13% and represented 22%.
- Gross margin expanded 160 basis points, attributed to lower product costs and a favorable mix shift toward higher-margin brands, international markets and direct-to-consumer channels. Operating margin rose 90 basis points despite increased marketing and direct-to-consumer investment.
- Outdoor & Action Sports revenue grew 8.7% to $6,379 million; Jeanswear grew 0.8% to $2,811 million; Sportswear grew 8.2% to $625 million. Imagewear revenue declined 0.9% to $1,066 million and Contemporary Brands declined 6.9% to $415 million. Contemporary Brands profit fell 21.1%.
- Operating cash flow increased by $231 million. VF ended the year with $178.9 million more cash than at the prior year-end.
Outlook, commentary, risks and unusual items
- VF forecast 2014 capital spending of approximately $270 million, expected to be funded from operating cash flow; it planned about 150 additional store openings, focused on Vans, The North Face, Timberland and Splendid. Management expected direct-to-consumer growth to outpace overall company growth.
- Management expected a 2014 effective tax rate of approximately 23.5%–24% and pension expense of approximately $58 million. The indicated annual dividend rate for 2014 was $1.05 per share. The filing provides no quantified 2014 revenue or EPS guidance.
- Key risks include consumer-spending weakness, weather sensitivity, fashion and demand-forecasting risk, pricing and cost pressure, reliance on major retail customers, international sourcing and currency exposure, and execution risks in store expansion and acquisitions. Ten largest customers represented 21% of 2013 revenue; the largest customer represented 8%.
- The defined-benefit pension plans remained underfunded by $221.2 million, improved from $482.9 million in 2012 after higher discount rates and a $100 million discretionary contribution. VF does not plan an additional contribution to its domestic qualified plan in 2014, but expects approximately $16.7 million of contributions to other plans.
- Unusual items include a $42 million gain on the 2012 sale of John Varvatos, which did not recur, and $10.7 million of Timberland acquisition-related costs in 2013. No goodwill or indefinite-lived intangible impairment charges were recorded in 2013. VF reported no pending material legal proceedings beyond routine litigation.
- Contractual obligations totaled $6.174 billion, including $1.370 billion of operating leases, $1.335 billion of inventory commitments and $1.135 billion of interest obligations. A $1.25 billion revolving credit facility was available through December 2016, subject to $17.4 million of standby letters of credit.
Important facts for investors to verify
- Whether growth and margin gains in Outdoor & Action Sports and Sportswear can offset soft performance in Contemporary Brands and modest Jeanswear growth.
- Whether new stores and e-commerce produce returns sufficient to justify continued direct-to-consumer investment and fixed lease commitments.
- Whether lower product costs and favorable mix persist, and how currency movements and sourcing costs affect margins.
- Whether the pension funding improvement and lower projected pension expense are sustained; review the sensitivity of obligations to discount-rate and investment-return assumptions.
- Review tax exposure, including the $109.6 million of net unrecognized tax benefits and the permanently reinvested $2.533 billion of foreign earnings.
- Confirm the timing and scale of inventory, lease and debt-related cash commitments, and monitor customer concentration and the performance of the weaker Contemporary Brands business.