VF Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 27, 2014. Figures are unaudited; dollar amounts below are in millions unless stated otherwise. VF operates apparel, footwear and accessories businesses reported through product-category coalitions.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenues | $3,520.4 | $3,297.3 | $8,703.3 | $8,129.5 |
| Operating income | $633.1 | $579.7 | $1,256.1 | $1,138.8 |
| Net income | $470.5 | $433.8 | $925.4 | $842.5 |
| Diluted EPS | $1.08 | $0.97 | $2.10 | $1.89 |
| Operating margin | 18.0% | 17.6% | 14.4% | 14.0% |
| Gross margin | 48.3% | 47.6% | 48.7% | 48.0% |
Revenue increased 7% in both comparison periods; operating income rose about 9% in Q3 and 10% year to date, while diluted EPS increased 11% in each period. Management attributed earnings growth mainly to operating performance. Gross-margin improvement reflected a richer mix, including Outdoor & Action Sports, international and direct-to-consumer businesses. Concession-fee classification changes also lifted reported gross margin by about 20 basis points without affecting operating income.
Segments and operating trends
- Outdoor & Action Sports: Q3 revenue +11%, profit +13%; nine-month revenue +13%, profit +18%. The North Face, Vans and Timberland grew across regions; direct-to-consumer sales rose 20% in Q3.
- Jeanswear: Q3 revenue roughly flat and profit down 1%; nine-month revenue down 1.5% and profit down 5.9%. U.S. mid-tier and department-store pressure and weak women’s denim weighed on results; inventory liquidation hurt margins.
- Imagewear: Q3 revenue +3%, profit +5%; nine-month revenue +3%, profit +8%. Occupational apparel and uniforms were a strength.
- Sportswear: Q3 revenue +5% but profit down 4%; nine-month revenue +4% and profit down 13%. Promotional activity and investment in infrastructure and direct-to-consumer operations pressured margins.
- Contemporary Brands: Q3 revenue down 5% and profit down 49%; nine-month revenue down 4% and profit down 28%, reflecting weak consumer trends and store-opening and selling costs.
International revenue grew 9% in Q3 and 11% year to date. Direct-to-consumer revenue grew 16% and 17%, respectively, and represented 22% of Q3 revenue; VF operated 1,333 stores at quarter-end.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $366.8, down from $418.1. Higher working-capital cash use more than offset increased net income; 2013 also included a $100 million discretionary pension contribution that did not recur.
- Investing cash outflow was $255.0, including capital expenditures of $171.6 and software purchases of $66.8. Financing cash outflow was $376.8.
- Cash and equivalents were $496.5 at September 27, versus $776.4 at year-end 2013. Current assets were $4,524.2 and current liabilities $2,266.5; working capital was $2,257.7 and the current ratio 2.0:1.
- Short-term borrowings were $654.8 and long-term debt $1,424.3, for total reported debt of approximately $2,079.2. Debt-to-total-capital was 26.2%, versus 19.3% at year-end. Management attributed increased short-term borrowing to seasonal working capital and share repurchases.
- VF repurchased 12.0 million shares for $727.5 during the first nine months and paid $340.7 in dividends. The quarterly dividend declared after quarter-end was $0.32 per share. The company reported $618.4 of remaining availability under its $1.25 billion revolving credit facility.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the filing. Management expected seasonal inventory buildup to support anticipated Q4 sales growth and said cash, operating cash flow, credit facilities and capital-market access were adequate to meet obligations, fund investment and maintain the dividend.
- Foreign-currency translation produced a nine-month other comprehensive loss of $206.5, principally reflecting currency translation losses; it reduced reported comprehensive income despite higher net income. VF’s disclosed foreign-exchange derivative contracts had $1.8 billion notional value.
- The effective tax rate was 22.4% versus 21.7%. The 2014 nine-month period included $17.7 of net discrete tax benefits. Tax examinations were ongoing; management considered the tax provision adequate and said no single examination outcome was expected to have a material impact. Unrecognized tax benefits and related interest were $107.7; approximately $31.7 could decrease over the next 12 months, including $26.5 that would reduce tax expense.
- VF guaranteed up to $10 million of loans to suppliers in Bangladesh for factory building, fire and safety improvements; no related borrowings were outstanding at quarter-end. Inventory purchase obligations increased about $114.4 from year-end due to seasonality.
- Principal stated risks include consumer demand and fashion shifts, margin pressure, raw-material and supplier availability, distribution or IT disruptions, reliance on large customers, international-market and currency risks, and execution of international and direct-to-consumer growth. Management reported no material changes to previously disclosed legal proceedings or risk factors and no significant change in market-risk exposures.
- A change in concession accounting classification moved fees from a revenue offset to SG&A and included concession revenue in direct-to-consumer results; operating income was unchanged and prior-period income-statement amounts were not restated.
Important facts for investors to verify
- Whether strong Outdoor & Action Sports and direct-to-consumer growth can offset continuing weakness in Jeanswear and Contemporary Brands and margin pressure in Sportswear.
- Whether elevated receivables, inventories and short-term borrowing unwind as expected after the seasonal selling period.
- How share repurchases, dividends and investment spending affect liquidity, debt and per-share results.
- The effect of currency movements on comprehensive income and the operating results of international businesses.
- Potential developments in tax examinations and the Bangladesh supplier-loan guarantee; the filing does not quantify a material expected loss for either.