Business Context and Reporting Period
Company: V.F. Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and six months ended July 3, 1999
Business Overview: V.F. Corporation operates in apparel and related businesses, categorized into "growth" segments (jeanswear, intimate apparel, workwear, daypacks) and "maintenance" segments (knitwear, international intimates, playwear, swimwear).
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended July 3, 1999 |
3 Months Ended July 4, 1998 |
6 Months Ended July 3, 1999 |
6 Months Ended July 4, 1998 |
|---|---|---|---|---|
| Net Sales | $1,364,830 | $1,350,319 | $2,723,074 | $2,676,524 |
| Operating Income | $144,710 | $156,068 | $298,662 | $298,982 |
| Net Income | $79,582 | $86,781 | $165,148 | $164,887 |
| Diluted EPS | $0.64 | $0.69 | $1.33 | $1.31 |
| Cash Flow from Operations | N/A | N/A | $4,268 | $(44,706) |
| Short-term Borrowings | $562,040 | $419,166 | $562,040 | $419,166 |
| Long-term Debt | $520,220 | $517,682 | $520,220 | $517,682 |
| Cash and Equivalents | $83,465 | $70,211 | $83,465 | $70,211 |
Margins: Gross margin was 33.8% for the quarter and 34.1% for the six months ended July 3, 1999, compared to 33.8% and 34.0% in the prior year periods. Marketing, administrative, and general expenses were 23.0% of sales for the quarter and 22.9% for the six months.
Material Changes vs. Prior Period
- Revenue: Consolidated sales increased 1% for the quarter and 2% for the six months compared to 1998.
- Profitability: Net income decreased 8% for the quarter ($79.6M vs $86.8M) but increased slightly for the six months ($165.1M vs $164.9M). Operating income declined 7% for the quarter.
- Segment Performance: "Growth" category sales advanced 5% for the quarter and six months. "Maintenance" category sales declined 14% for the quarter and 11% for the six months due to knitwear declines and elimination of unprofitable playwear lines.
- Acquisitions: The company acquired four businesses in Q1 1999 (including Wrangler/JanSport in Chile, Peru, Bolivia; Fibrotek; Todd Uniform; Horace Small) for an aggregate cost of $117.1 million. These contributed to sales growth and increased intangible assets.
- Discontinuation: The Jantzen women's sportswear business was discontinued, resulting in approximately $12 million in provisions for inventory losses and other costs.
- Liquidity: Short-term borrowings increased significantly to $562 million (from $419 million in Q2 1998) to fund seasonal working capital and acquisitions. Cash flow from operations improved significantly to $4.3 million for the six months, compared to a negative $44.7 million in the prior year.
Guidance, Outlook, and Risks
- Management Commentary: Gross margins remained flat due to Jantzen closure costs, despite improvements from lower sourcing costs. Domestic jeanswear sales declined due to shipment timing shifts and consolidation efforts, which were resolved by quarter-end.
- Capital Actions: The company repurchased 1 million shares of common stock for $45.6 million in the first six months. Subsequent to the period end, the Board authorized an additional 10 million share repurchase. A new $750 million revolving credit agreement was entered into to replace the expiring facility.
- Year 2000 Readiness: The company estimates total Y2K resolution costs at $27 million, with $25 million spent through July 3, 1999. Approximately 96% of applications software is compliant. The company anticipates potential disruptions from third-party suppliers but believes significant interruptions are unlikely.
- Risks: Key risks include consumer spending levels, retail industry strength, competitor actions, currency exchange rate fluctuations, and the ability of the company and its supply chain to resolve Year 2000 issues.
Investor Verification Checklist
- Verify the impact of the Jantzen discontinuation on future inventory levels and operating expenses.
- Confirm the integration progress and financial performance of the four Q1 1999 acquisitions.
- Monitor the resolution of domestic jeanswear shipment timing issues and consolidation efforts.
- Assess the status of Year 2000 compliance for critical third-party vendors and suppliers.
- Review the utilization of the new $750 million revolving credit facility and future debt levels.