VFC

Business Context and Reporting Period

Company: V.F. Corporation (VFC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 30, 2006
Business Overview: VF Corporation is a global leader in branded lifestyle apparel and related products. The company operates through four primary "coalitions" (reportable segments): Jeanswear, Outdoor, Imagewear, and Sportswear. Key brands include Wrangler, Lee, The North Face, Vans, JanSport, Nautica, and Red Kap. In late 2006, management decided to exit the women's intimate apparel business (brands including Vanity Fair and Lily of France), which is reported as discontinued operations.

Key Financial Metrics (Fiscal Year 2006)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 10% to $6.2 billion, driven primarily by organic growth across all businesses, particularly the Outdoor and Jeanswear coalitions. The Outdoor coalition saw a 28% revenue increase, led by The North Face and Vans.
• Profitability: Income from continuing operations rose 11% to $535.1 million. Operating margin decreased slightly to 13.3% from 13.6% due to special items (restructuring charges in 2006 vs. benefit from postemployment benefit reductions in 2005) and increased advertising spend.
• Discontinued Operations: The intimate apparel business, previously a significant contributor, is now classified as discontinued. In 2006, it contributed $35.3 million to net income before a $36.8 million charge for the estimated loss on disposal, resulting in a net loss of $1.5 million for the segment.
• Dividend Increase: The quarterly dividend was increased by 90% in the second quarter of 2006, from $0.29 to $0.55 per share, raising the annual payout ratio to 41.1%.
• Acquisitions: VF acquired a 60% interest in a joint venture in India ($33 million) and announced the acquisition of Eagle Creek (post-period). The 2005 acquisitions (Reef, Vans, Kipling, Napapijri) continued to drive growth.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Strategic Focus: Management is shifting the portfolio toward higher growth, higher margin lifestyle brands. The company targets 8% annual revenue growth (5% organic, 3% acquisitions) and an operating margin of 14%.
• Capital Allocation: VF plans to use the estimated $350 million proceeds from the sale of the intimate apparel business to repurchase shares in 2007. Capital expenditures are expected to reach $145 million in 2007, focused on retail store expansion and distribution projects.
• Dividend Policy: The target dividend payout ratio has been raised to approximately 40% of earnings.

Risks and Contingencies

• Customer Concentration: The ten largest customers accounted for 30% of total revenues in 2006, with Wal-Mart alone representing 13.2%. Loss of a major customer could materially impact results.
• Supply Chain and Sourcing: Over 65% of products are sourced from independent manufacturers, primarily in Asia. Risks include labor instability, trade restrictions (safeguard quotas on China), and currency fluctuations.
• Foreign Currency: Approximately 26% of revenues are derived from international markets. A weaker U.S. dollar benefited 2006 results, but future fluctuations could adversely affect financial condition.
• Inventory Management: The apparel industry is sensitive to fashion trends. Misjudging demand could lead to excess inventory and markdowns.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the final sale price and closing date of the intimate apparel business (agreed at $350 million) and confirm the final loss on disposal.
• Outdoor Coalition Performance: Assess the sustainability of the 28% revenue growth in the Outdoor segment, specifically the performance of The North Face and Vans.
• Customer Concentration: Monitor sales trends with Wal-Mart and other top retailers to gauge exposure to retail consolidation or order reductions.
• Share Repurchase Execution: Track the actual volume of shares repurchased in 2007 using the proceeds from the intimate apparel sale.
• Foreign Currency Exposure: Review hedging strategies and the impact of exchange rate fluctuations on the 26% of revenue generated outside the U.S.
• Inventory Levels: Analyze days' sales in inventory to ensure the company is not overstocked relative to demand, particularly in the Jeanswear segment.