VF Corporation — Q1 2013 Form 10-Q
Business context and period. VF Corporation reported unaudited results for the three months ended March 30, 2013, compared with the three months ended March 31, 2012. VF sells apparel, footwear and related products through its Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands coalitions. Results are not necessarily indicative of the full year.
Financial performance
- Revenue: Total revenue was $2.612 billion, up 2% year over year. International revenue grew 6% and was 42% of the total; direct-to-consumer revenue rose 12% and represented 20%.
- Profit and margins: Operating income increased to $357.7 million from $314.1 million; operating margin rose to 13.7% from 12.3%. Gross margin reached a record 48.1%, up 240 basis points. Net income attributable to VF was $270.4 million versus $215.2 million; diluted EPS was $2.41 versus $1.91.
- Tax and unusual items: The effective tax rate fell to 20.1% from 26.7%, including $13.5 million of net discrete tax benefits that added approximately $0.12 to diluted EPS. Timberland acquisition-related costs reduced EPS by $0.02, compared with $0.03 in the prior-year quarter.
- Cash flow: Operating cash flow was $11.7 million, compared with cash use of $112.1 million. Investing activities used $115.0 million, including $102.2 million of capital expenditures, versus $25.1 million of capital expenditures a year earlier. Financing activities used $192.0 million, principally reflecting share repurchases and dividends.
- Liquidity and debt: Cash and equivalents were $300.4 million at quarter-end, down from $597.5 million at year-end 2012. Working capital was $1.554 billion; the current ratio was 1.9:1. Debt totaled approximately $2.014 billion, and debt to total capital was 28.4% (net debt to total net capital, 25.2%). A $400 million two-year note due in Q3 2013 was classified as current debt. The $1.25 billion revolving credit facility had $1.064 billion available after commercial paper and letters of credit.
- Shareholder returns: VF repurchased 1.7 million shares for approximately $280.7 million and paid $96.3 million in dividends. The quarterly dividend was $0.87 per share, compared with $0.72 a year earlier; the board declared another $0.87 dividend for June 2013.
Changes versus the prior-year quarter
- Outdoor & Action Sports led growth: revenue rose 9.5% to $1.384 billion and coalition profit increased 12.3% to $226.5 million. Vans global revenue rose 25%; The North Face rose 6%.
- Jeanswear revenue declined 3.2% to $717.9 million, but coalition profit rose 29.3% to $143.3 million as lower product costs and improved efficiencies lifted its operating margin to 20.0% from 14.9%.
- Imagewear revenue fell 8.9% and coalition profit fell 26.3%, mainly due to shipment timing and the absence of prior-year oil-and-gas-related shipments.
- Sportswear revenue increased 4.3% and coalition profit rose 14.0%, supported by direct-to-consumer growth. Contemporary Brands revenue declined 18.3%, substantially reflecting the prior-year sale of John Varvatos; coalition profit decreased 15.4%.
- Management attributed gross-margin improvement to lower product costs and a mix shift toward higher-margin businesses. Marketing, administrative and general expenses increased to 34.4% of revenue from 33.4%, reflecting greater direct-to-consumer and marketing investment.
Outlook, risks and other notable matters
- The filing provides no specific numerical full-year revenue or earnings guidance. Management cited continued expectations for high revenue growth and said capital spending supports that outlook; it expects capital expenditures to be funded by operating cash flow.
- Management said cash, operating cash generation, credit facilities and capital-market access should provide adequate liquidity for obligations, investment, and maintaining the dividend at current and expected rates. Inventory purchase obligations increased approximately $345.4 million from year-end, primarily due to seasonality.
- Moody’s had a negative outlook on VF’s ratings, citing increased debt associated with the Timberland acquisition. Management identified consumer demand, margin pressure, fashion trends, raw-material availability and costs, foreign exchange, weather, customer and supplier conditions, international markets, and the integration and growth of acquisitions among risks.
- VF contributed $109.8 million to defined-benefit plans in the quarter, including a $100 million discretionary domestic-plan contribution, and expected approximately $11 million of additional contributions for the rest of 2013. The company also had ongoing tax examinations; management did not expect any one examination to materially affect the consolidated financial statements.
- VF reported no material changes to previously disclosed legal proceedings or risk factors, no significant change in market-risk exposures, and effective disclosure controls at quarter-end.
Important facts for investors to verify
- Whether operating cash flow improves after the quarter’s pension contribution and seasonal working-capital outflows, while capital spending remains elevated.
- Repayment or refinancing plans for the $400 million note due in Q3 2013 and the effect of debt levels on credit ratings and financing costs.
- Whether Outdoor & Action Sports and direct-to-consumer growth continue, and whether weakness in Imagewear, Jeanswear and Contemporary Brands persists.
- The sustainability of reported earnings growth after the $13.5 million discrete tax benefit and the effect of future tax-audit outcomes.
- Inventory levels, seasonal purchase obligations, and the returns from ongoing distribution, headquarters, retail and technology investments.