VF Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 28, 2013. Amounts are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $3,297.3 | $3,148.4 | $8,129.5 | $7,846.6 |
| Operating income | $579.7 | $536.9 | $1,138.8 | $1,015.0 |
| Net income attributable to VF | $433.8 | $381.3 | $842.5 | $751.8 |
| Diluted EPS | $3.89 | $3.42 | $7.55 | $6.72 |
| Gross margin | 47.6% | 46.7% | 48.0% | 46.2% |
| Operating margin | 17.6% | 17.1% | 14.0% | 12.9% |
- Q3 revenue rose 5%, operating income 8%, net income 14%, and diluted EPS 14% year over year. For the first nine months, revenue rose about 4%, operating income 12%, net income 12%, and diluted EPS 12%.
- Operating cash flow was $418.1 million for the nine months, versus $102.6 million a year earlier. Investing activities used $255.3 million, including $203.5 million of capital expenditures and $41.9 million of software purchases. Financing activities used $441.7 million.
- At September 28, cash and equivalents were $315.7 million; total debt was approximately $1.90 billion, implying net debt of about $1.58 billion. Working capital was $2.04 billion and the current ratio was 2.0. Debt to total capital was 25.2%, down from 34.3% at September 2012.
- VF paid $286.8 million in dividends and repurchased $283.4 million of common stock during the nine months. Cash dividends per share were $2.61 for the period, before the subsequently announced stock split.
Business context and material changes
VF reported across Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear, Contemporary Brands and Other. Growth was led by Outdoor & Action Sports and direct-to-consumer and international sales. Q3 international revenue increased 7% and direct-to-consumer revenue increased 14%; each was a larger part of VF’s sales mix than in the prior-year quarter.
- Outdoor & Action Sports: Q3 revenue increased 6.5%; nine-month revenue increased 7.3%. The North Face, Vans and Timberland posted global Q3 growth of 3%, 16% and 2%, respectively. Q3 coalition profit grew 2%, while operating margin declined to 21.4% from 22.3%.
- Jeanswear: Q3 revenue grew 4% and coalition profit 20.5%; lower product costs and improved international performance lifted Q3 operating margin to 21.2% from 18.3%. Asia Pacific revenue was weak, including ongoing inventory pressure in China.
- Imagewear: Q3 revenue was flat; nine-month revenue declined 4.2%, reflecting shipment timing for a customer and broader softness.
- Sportswear: Q3 revenue increased 0.6% and coalition profit 29.7%; higher direct-to-consumer mix and improved profitability supported margins.
- Contemporary Brands: Q3 revenue was nearly flat, but coalition profit fell 29.1%. Nine-month revenue declined 9.4%, partly reflecting the absence of John Varvatos, sold in 2012, and weakness in premium denim.
Management commentary, outlook and risks
- Management attributed improved gross margin to lower product costs and a greater revenue mix from higher-margin businesses. SG&A as a share of revenue increased, reflecting greater marketing and direct-to-consumer investment.
- Q3 Outdoor & Action Sports results faced retailer caution and a calendar shift that moved approximately $40 million of shipments into Q4. Nautica shipments were also affected by a retailer calendar shift. VF did not provide a clear full-year earnings or revenue guidance figure in the supplied filing.
- VF expected to repay all commercial paper by year-end 2013. It reported a $1.25 billion revolving credit facility, with $781.6 million available at quarter-end after commercial paper and standby letters of credit.
- In October, the board declared a quarterly dividend of $1.05 per share, a 21% increase, and approved a four-for-one stock split payable December 20, 2013. The filing’s reported per-share figures had not yet been adjusted; it also provided pro forma split-adjusted figures.
- Unusual comparability items include the $42.0 million John Varvatos sale gain in 2012, which benefited prior-year nine-month results, and 2013 discrete tax benefits of $19.0 million. The nine-month effective tax rate was 21.7%, compared with 24.2% in 2012.
- VF contributed $113.3 million to defined benefit plans in the first nine months, including a $100 million discretionary contribution, and expected to contribute about $6.5 million more during the remainder of 2013. It reported $120.3 million of unrecognized tax benefits and associated interest; management said about $49.1 million could decrease within 12 months, including $38.8 million that would reduce tax expense.
- Risks identified include consumer demand and fashion trends, raw-material availability and cost, large-customer exposure, distribution or supplier disruptions, margin pressure, international and currency risks, weather, information-system security, and the ability to integrate and grow acquisitions. Management reported no material changes to previously disclosed legal proceedings or risk factors, and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the shipment timing shifts cited for Outdoor & Action Sports and Nautica reversed in Q4, and whether underlying demand supported the expected growth.
- How much of earnings growth and the lower tax rate depended on discrete tax benefits and currency movements, rather than recurring operations.
- Whether Contemporary Brands’ sales and margins stabilized, and whether Imagewear’s customer shipment timing normalized.
- Seasonal working-capital needs, inventory levels, commercial-paper repayment, and the availability and terms of VF’s credit facilities.
- The execution and financial effects of the announced dividend increase and four-for-one stock split; reported share and per-share figures in this filing are pre-split unless identified as pro forma.