Business Context and Reporting Period
Company: V.F. Corporation (V.F. Corp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 28, 2008
Business Overview: V.F. Corp operates lifestyle apparel and footwear businesses organized into "coalitions" including Jeanswear, Outdoor, Imagewear, Sportswear, and Contemporary Brands. The company reported record revenues and earnings per share for the second quarter of 2008.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 28, 2008 |
3 Months Ended June 30, 2007 |
6 Months Ended June 28, 2008 |
6 Months Ended June 30, 2007 |
|---|---|---|---|---|
| Total Revenues | $1,677,482 | $1,517,393 | $3,523,823 | $3,191,012 |
| Operating Income | $163,856 | $168,462 | $407,981 | $383,787 |
| Net Income | $103,978 | $81,662 | $253,010 | $220,006 |
| Diluted EPS (Continuing Ops) | $0.94 | $0.93 | $2.27 | $2.10 |
| Gross Margin % | 43.8% | 42.9% | 44.5% | 43.2% |
| Cash from Operating Activities | N/A | N/A | $62,329 | $81,450 |
| Short-term Borrowings | $396,932 | $107,586 | $396,932 | $107,586 |
| Long-term Debt | $1,142,889 | $602,229 | $1,142,889 | $602,229 |
| Cash and Equivalents | $276,009 | $177,849 | $276,009 | $177,849 |
Note: Net Income for 2007 includes discontinued operations losses. Cash flow figures are for the six-month period.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11% in the quarter and 10% year-to-date. Growth was driven by organic expansion in the Outdoor and Imagewear coalitions and the full-year impact of 2007 acquisitions (Seven For All Mankind and lucy).
- Segment Performance:
- Outdoor: Revenues up 17% (quarter) and 18% (YTD) due to strong volume in The North Face, Vans, and Kipling.
- Jeanswear: Revenues declined 1% (quarter) and 4% (YTD) due to a challenging retail environment and inventory reductions by retailers.
- Sportswear: Revenues declined 4% (quarter) and 7% (YTD), primarily due to a reduction in Nautica assortment and the exit of the women's wholesale business.
- Profitability: Operating income decreased slightly in the quarter ($163.9M vs $168.5M) but increased year-to-date ($408.0M vs $383.8M). Gross margin improved to 43.8% in the quarter due to a favorable product mix.
- Debt Levels: Short-term borrowings increased significantly to $396.9M (from $107.6M) to fund working capital needs. Long-term debt increased due to the issuance of $600M in senior notes in October 2007.
- Acquisitions: In June 2008, VF acquired a one-third interest in Mo Industries (owner of Splendid and Ella Moss) for $77.0 million.
Guidance, Outlook, and Risks
- Outlook: Management expects capital spending to reach approximately $145 million for the full year 2008. The company anticipates continued growth in international and direct-to-consumer channels.
- Currency Impact: A weaker U.S. dollar benefited revenue comparisons by $42 million in the quarter and $98 million year-to-date. Management expects this to continue positively impacting reported revenues if rates remain stable.
- Tax Matters: The effective tax rate was 28.5% for the quarter and 31.4% year-to-date, lower than the prior year due to favorable audit settlements and a higher mix of income in lower-tax jurisdictions. Management expects unrecognized tax benefits to decrease by approximately $15 million over the next 12 months.
- Risks: Key risks include reliance on a small number of large customers, changing fashion trends, foreign currency fluctuations, and the ability to successfully integrate acquisitions. The company also faces potential margin pressure from raw material costs.
- Dividends: A quarterly cash dividend of $0.58 per share was declared, payable September 19, 2008.
Investor Verification Checklist
- Inventory Levels: Verify the 10% increase in inventory against the forecasted 9% revenue growth for Q3 to assess potential overstock risks.
- Jeanswear Decline: Monitor the continued performance of the Jeanswear coalition, which faced a 7% domestic revenue decline due to retailer inventory cuts.
- Mo Industries Option: Track the option to acquire the remaining two-thirds of Mo Industries in 2009, with a maximum purchase price of $225 million.
- Working Capital: Review the significant increase in short-term borrowings ($397M) and its impact on interest expense and liquidity.
- Tax Rate Sustainability: Assess whether the lower effective tax rate (31.4% YTD) is sustainable or if it was driven by one-time audit settlements.