VF Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014. Comparatives are for the three months ended March 30, 2013, unless stated otherwise. Dollar amounts are in U.S. dollars.
Financial performance
- Revenue: $2.781 billion, up 6.5% year over year; reported growth included $161.3 million from operations and $7.6 million from currency translation.
- Profit and margins: Operating income was $403.2 million, up 12.7%; operating margin was 14.5%, versus 13.7%. Net income was $297.2 million, up 9.9%. Diluted EPS increased to $0.67 from $0.60. Gross margin improved 130 basis points to 49.4%.
- Cash flow: Operating cash flow was $13.7 million, compared with $11.7 million. Investing cash outflow was $99.1 million, including $49.3 million of capital expenditures and $44.7 million of software purchases. Financing cash outflow was $366.3 million, primarily reflecting share repurchases and dividends.
- Liquidity and debt: Cash and equivalents were $321.7 million at quarter-end, down from $776.4 million at December 2013. Short- and long-term borrowings totaled approximately $1.692 billion, versus $1.451 billion at year-end. Working capital was $1.993 billion; the current ratio was 2.3-to-1. The reported debt-to-total-capital ratio was 22.7%, and net-debt-to-total-net-capital was 19.2%.
- Shareholder returns: The quarterly dividend was $0.2625 per share, compared with $0.2175 a year earlier. VF repurchased 9.2 million shares in Q1 for a total cost of $554.6 million; an additional 2.9 million shares were repurchased through April 16 for $172.8 million.
Business trends and changes versus prior year
- Outdoor & Action Sports: Revenue rose 13.7% to $1.575 billion; coalition profit increased 21.2% to $274.5 million, and margin improved to 17.4%. Vans, The North Face and Timberland grew 20%, 14% and 12%, respectively.
- Jeanswear: Revenue declined 3.8% to $690.3 million and profit fell 9.8% to $129.3 million. Management cited pressure in the Americas mid-tier channel, women’s denim trends and the exit of less profitable sales programs; Europe and Asia Pacific grew.
- Imagewear: Revenue rose 4.1% and profit 19.6%; margin improved to 14.4%. Licensed Sports growth and lower product costs contributed.
- Sportswear: Revenue rose 2.6% to $131.5 million; profit rose 3.3%. Nautica wholesale shipments were affected by timing and shifted into Q2.
- Contemporary Brands: Revenue declined 5.3% and profit 37.3%, amid U.S. premium-denim weakness, lower wholesale sales and higher relative SG&A.
- International revenue increased 11% and represented 43% of sales, versus 42%. Direct-to-consumer revenue increased 16% and represented 23% of sales; VF opened 23 stores, bringing its owned-store total to 1,263.
- Gross-margin gains reflected a mix shift toward Outdoor & Action Sports, international and direct-to-consumer businesses. SG&A rose to 34.9% of revenue from 34.4%, reflecting marketing and DTC investment and a concession-fee classification change.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said cash, operating cash generation, credit facilities and capital-market access were expected to provide adequate liquidity for obligations, investment needs and the dividend.
- Management attributed the increase in short-term borrowings to seasonal working-capital needs and share repurchases. Inventory rose from December with seasonality and anticipated sales growth; Q1 operating cash flow also reflected working-capital uses.
- VF’s $1.25 billion revolving credit facility supported its commercial-paper program; $1.0 billion remained available at March 2014. In April, S&P raised VF’s corporate credit rating from A-minus to A, with a stable outlook.
- The effective tax rate was 22.2%, versus 20.1%, including an $8.4 million discrete tax benefit in 2014; the comparable 2013 quarter included a $13.5 million benefit. Tax examinations and settlements remain ongoing; management said no single examination was expected to have a material impact.
- VF changed the income-statement classification of concession fees beginning in 2014, moving them from an offset to revenue to SG&A. The change did not affect operating income; prior-period figures were not restated because the impact was considered immaterial.
- Management identified risks including consumer demand, raw-material costs and availability, fashion trends, margin pressure, customer concentration and credit, distribution or supplier disruption, foreign exchange, cybersecurity, weather, and international political, legal and economic conditions. The filing reported no material changes to previously disclosed risk factors or legal proceedings.
- No goodwill impairment was recorded in Q1. The company sold selected receivables on a recurring, nonrecourse basis; $167.7 million had been removed from receivables at quarter-end.
Important facts for investors to verify
- Whether growth and margin gains in Outdoor & Action Sports and DTC can continue, and whether investment spending remains manageable.
- Whether weakness in Jeanswear and Contemporary Brands stabilizes, particularly in the Americas and U.S. premium-denim market.
- How seasonal working-capital needs, inventory levels and continued repurchases affect cash, short-term borrowings and net debt.
- Whether Q2 shipment timing, concession-fee presentation and discrete tax benefits affect comparisons of subsequent results.
- Progress and outcomes of tax examinations, currency exposures and other risks described in the filing.