V.F. Corporation — FY 2014 Form 10-K Summary
Reporting period: Fiscal year ended January 3, 2015, a 53-week year; the prior fiscal year was 52 weeks. VF designs, sources, markets and distributes branded apparel, footwear and accessories across five coalitions. References below to 2014 and 2013 mean the fiscal years ended January 3, 2015 and December 28, 2013, respectively.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenues | $12.28 billion | $11.42 billion |
| Operating income | $1.44 billion | $1.65 billion |
| Net income attributable to VF | $1.05 billion | $1.21 billion |
| Diluted EPS | $2.38 | $2.71 |
| Gross margin | 48.8% | 48.1% |
| Operating margin | 11.7% | 14.4% |
| Cash from operations | $1.70 billion | $1.51 billion |
- Revenue rose 8% as reported. Growth reflected strong Outdoor & Action Sports results and higher international and direct-to-consumer sales. The extra fiscal week contributed approximately $100 million of revenue and 1 percentage point of growth; currency translation reduced revenue by $90.6 million.
- Gross margin expanded 70 basis points, primarily from a richer mix of higher-margin businesses. Operating income and EPS fell mainly because of a $396.4 million pretax, noncash impairment charge recorded in Q4. The charge reduced net income by $306.8 million and diluted EPS by $0.70; excluding it, reported operating margin was 14.9%.
- Segment revenue and coalition profit: Outdoor & Action Sports, $7.20 billion and $1.31 billion; Jeanswear, $2.80 billion and $528 million; Imagewear, $1.10 billion and $164 million; Sportswear, $650 million and $78 million; Contemporary Brands, $400 million and $23 million. Outdoor & Action Sports revenue grew 13%; Contemporary Brands revenue fell 4% and profit fell 40%.
- Cash from operations increased despite lower net income, supported by operating performance, collections during the extra week and noncash adjustments; higher inventory partly offset these effects. Investing used $329 million, including $234 million of capital expenditures and $68 million of software purchases. Financing used $1.11 billion, including $728 million of open-market share repurchases and $479 million of dividends.
- Cash and equivalents were $972 million. Working capital was $2.57 billion and the current ratio was 2.6. Total debt, including short-term borrowings and current maturities, was approximately $1.45 billion; debt-to-total-capital was 20.5% and net-debt-to-total-net-capital was 7.8%. The $1.25 billion revolving facility was available apart from $16.5 million of standby letters of credit; no commercial paper was outstanding.
- Dividends declared totaled $1.1075 per share, up from $0.9150. VF repurchased 12.0 million shares for $727.8 million during 2014 and reported an indicated 2015 annual dividend rate of $1.28 per share.
Material changes and unusual items
- The $396.4 million impairment related to goodwill and intangible assets of 7 For All Mankind, Splendid and Ella Moss: $142.4 million of goodwill, $133.3 million of trademarks and $120.7 million of customer relationships. Management cited weak contemporary-apparel and premium-denim conditions, reduced traffic and increased promotions. The charge was noncash.
- Effective in 2014, VF classified concession-store revenue as direct-to-consumer revenue and concession fees as selling, general and administrative expense rather than as an offset to revenue. The change did not affect operating income; prior periods were not restated. Reported direct-to-consumer revenue was 26% of total, compared with 24% in 2013 (22% before the classification change); comparable growth was 19%.
- Outdoor & Action Sports was the principal growth driver, with revenue up 13% and coalition profit up 19%. Jeanswear revenue was nearly flat and profit declined 3%, amid weakness in Lee and North American denim. Sportswear revenue rose 4%, but profit fell 12% as promotional activity and investment weighed on margins. Imagewear revenue rose 4% and profit 8%.
- International revenue grew 9% and represented 38% of total revenue. Foreign-currency translation was a headwind to revenue and comprehensive income; the company does not hedge translation exposure.
Outlook, risks and contingencies
- Management expected 2015 capital spending of approximately $225 million, to be funded from operating cash flow, and forecast a 2015 annual effective tax rate of approximately 24%–24.5%. No consolidated revenue or EPS guidance is stated in the supplied filing text. Management expected direct-to-consumer growth to continue outpacing company-wide growth.
- VF made a $250 million discretionary contribution to its domestic qualified pension plan in January 2015, after reporting a $372 million aggregate pension underfunding at year-end 2014. Management expected 2015 pension expense of approximately $61.6 million and intended no further 2015 contribution to the domestic plan at that time, subject to ongoing review.
- Key risks include consumer-spending and fashion volatility; seasonality and weather; competitive and pricing pressure; demand-forecasting and inventory risk; dependence on major retail customers; foreign exchange; reliance on global contractors and supply chains; cyber, privacy and technology risks; store leases and direct-to-consumer execution; raw-material and labor costs; pension volatility; and potential goodwill or trademark impairments.
- VF disclosed $6.39 billion of contractual obligations and commitments, including $1.48 billion of operating lease payments, $1.45 billion of inventory obligations and $1.02 billion of interest-payment obligations. The filing reports no pending material legal proceedings other than ordinary routine litigation and states that management does not expect outstanding matters to have a material adverse effect. Tax audits include proposed adjustments to Timberland’s 2011 return; management considered its tax provision adequate.
- Approximately $527 million of cash and short-term investments was held by international subsidiaries whose earnings were considered permanently reinvested. The company had not determined the related deferred U.S. tax liability; repatriation could result in additional taxes.
Important facts for investors to verify
- Whether the Contemporary Brands impairment assumptions and subsequent brand performance support the remaining asset values and avoid further impairment.
- Whether reported revenue and margin trends persist after accounting for the extra fiscal week, currency movements and concession reclassification.
- Whether Outdoor & Action Sports growth can offset continued pressure in Jeanswear and Contemporary Brands, and whether Sportswear margins recover.
- How the January 2015 pension contribution, discount rates, investment returns and mortality assumptions affect future funding needs and expense.
- Whether the planned capital spending, ongoing repurchases and dividend commitments remain supported by operating cash flow and liquidity.
- Potential exposure from foreign-currency movements, retail-customer concentration, supply-chain disruption, tax audits and contractual commitments.