Business Context and Reporting Period
Company: V.F. Corporation (VF)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 29, 2007.
Overview: VF operates lifestyle apparel brands organized into coalitions (Jeanswear, Outdoor, Imagewear, Sportswear, and Contemporary Brands). The period was marked by significant strategic activity, including the acquisition of Seven For All Mankind and lucy activewear (forming the Contemporary Brands coalition) and the divestiture of the Intimate Apparel business, which is reported as discontinued operations.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Sep 2007 | 3 Months Ended Sep 2006 | 9 Months Ended Sep 2007 | 9 Months Ended Sep 2006 |
|---|---|---|---|---|
| Total Revenues | $2,073.2 | $1,810.1 | $5,264.2 | $4,617.0 |
| Operating Income | $331.0 | $287.8 | $714.8 | $620.9 |
| Income from Continuing Ops | $209.3 | $186.0 | $449.2 | $393.7 |
| Net Income | $207.2 | $197.7 | $427.2 | $424.9 |
| Diluted EPS (Continuing Ops) | $1.86 | $1.64 | $3.96 | $3.49 |
| Cash from Operating Activities | N/A | N/A | $165.8 | ($0.2) |
| Working Capital | $1,431.7 | $1,519.7 | N/A | N/A |
| Debt to Total Capital Ratio | 33.7% | 24.3% | N/A | N/A |
Note: Cash flow figures provided are for the nine-month period only. Working capital and debt ratios are as of September 29, 2007, compared to September 30, 2006.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 15% in the quarter and 14% year-to-date. Growth was driven by organic increases (9% in the quarter) and acquisitions (6% in the quarter), particularly in the Outdoor and Jeanswear coalitions.
- Profitability: Income from continuing operations rose 13% in the quarter and 14% year-to-date. Operating margins improved slightly to 16.0% in the quarter (from 15.9%) and 13.6% year-to-date (from 13.4%).
- Acquisitions: The company completed four major acquisitions in 2007 (Eagle Creek, Majestic, lucy activewear, and Seven For All Mankind) with a total cost of $1,074.7 million. These added $92 million in revenue for the quarter.
- Discontinued Operations: The Intimate Apparel business was sold in April 2007. The sale resulted in a loss on disposal of $24.6 million in the nine-month period, primarily due to the write-off of unrealized gains on marketable securities held by the divested unit.
- Balance Sheet: Short-term borrowings increased significantly to $461.0 million (from $302.6 million) to fund acquisitions, though $592 million of this was reclassified to long-term debt following a subsequent bond issuance in October 2007.
Guidance, Outlook, and Risks
- Dividend Increase: In October 2007, the Board declared a quarterly dividend of $0.58 per share, an increase of $0.03 from the previous quarter.
- Capital Structure: In October 2007, VF issued $600 million in senior unsecured notes (due 2017 and 2037) to repay bridge loans and commercial paper used for acquisitions. The company also entered into new $1.0 billion and €250 million revolving credit facilities.
- Outlook: Management expects capital spending to reach approximately $140 million for the full year 2007. They anticipate favorable comparisons in the fourth quarter for the Sportswear coalition.
- Risks: Key risks include reliance on a small number of large customers, changing fashion trends, foreign currency fluctuations (a weaker dollar positively impacted revenue by $36 million in the quarter), and the ability to successfully integrate recent acquisitions.
- Unusual Items: The sale of the H.I.S. brand trademarks resulted in an $8.0 million gain for the nine-month period. The adoption of new accounting standards (FAS 158 and FIN 48) resulted in adjustments to Retained Earnings and Goodwill.
Investor Verification Checklist
- Acquisition Integration: Verify the performance of the newly formed Contemporary Brands coalition (Seven For All Mankind and lucy activewear) in subsequent quarters to ensure projected synergies are realized.
- Discontinued Operations: Confirm the final settlement of liabilities and the sale of remaining marketable securities from the Intimate Apparel divestiture to ensure no further adjustments to the loss on disposal.
- Debt Servicing: Monitor the impact of the new $600 million long-term debt issuance on future interest expenses and cash flow coverage.
- Inventory Levels: Review inventory turnover ratios, as inventory levels increased 25% year-over-year due to seasonal buildup and acquisitions, which could impact future working capital.
- Currency Exposure: Assess the sustainability of revenue growth given the significant positive impact ($36 million in the quarter) from the weakening U.S. dollar.