VF Corporation — Q2 2014 Form 10-Q
Business context and reporting period
VF Corporation reported its unaudited second quarter and first six months of fiscal 2014, ended June 28, 2014, compared with the corresponding 2013 periods. Its businesses are reported in coalitions including Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenues | $2,402.1 million | $2,220.4 million | $5,182.9 million | $4,832.3 million |
| Operating income | $219.8 million | $201.3 million | $623.0 million | $559.1 million |
| Net income | $157.7 million | $138.3 million | $454.9 million | $408.7 million |
| Diluted EPS | $0.36 | $0.31 | $1.03 | $0.91 |
| Operating margin | 9.2% | 9.1% | 12.0% | 11.6% |
| Gross margin | 48.4% | 48.5% | 48.9% | 48.3% |
| Operating cash flow | — | $219.6 million | $291.4 million |
- Q2 revenue rose 8%; first-half revenue rose 7%. International revenue grew 14% in Q2 and 12% in the first half. Direct-to-consumer revenue grew 18% and 17%, respectively.
- Outdoor & Action Sports led growth: revenue increased 16% in Q2 and 15% in the first half; coalition profit rose 30% and 24%. Jeanswear revenue declined 1% and 3%, while coalition profit fell 8% and 9%. Sportswear revenue grew, but coalition profit fell 37% in Q2 and 20% in the first half.
- Q2 gross margin slipped 10 basis points, principally from currency effects and Jeanswear inventory-management actions; first-half gross margin improved 60 basis points. Operating margin expanded 10 basis points in Q2 and 40 basis points for the first half.
- Cash and equivalents were $475.9 million at June 28, versus $776.4 million at year-end 2013 and $320.1 million a year earlier. Working capital was $1.91 billion and the current ratio was 2.0.
- Short-term borrowings were $581.1 million; long-term debt was $1.43 billion. Debt to total capital was 26.2%, versus 19.3% at year-end 2013. The $1.25 billion revolving credit facility had $683.3 million available after commercial paper and standby letters of credit.
- First-half investing cash outflow was $163.6 million, including $95.8 million of capital expenditures and $56.0 million of software purchases. Financing cash outflow was $352.0 million.
Material changes and management commentary
- Operating cash flow fell $71.8 million year over year, reflecting greater working-capital cash use; the comparison also included a $100 million discretionary pension contribution in 2013 that did not recur in 2014.
- Inventory was $1.62 billion, up from $1.40 billion at December 2013. Management attributed the increase to seasonality and anticipated second-half sales growth.
- VF repurchased 12.0 million shares for $727.5 million in the first half, compared with 6.8 million shares for $281.0 million in the prior-year period. Cash dividends paid were $227.6 million. The quarterly dividend of $0.2625 per share was declared again for payment in September 2014.
- Management said it expected cash generation, cash balances and available financing to provide adequate liquidity for obligations, capital spending, dividends and investment opportunities. The filing provides no quantified full-year earnings or revenue guidance.
- Concession fees were reclassified from an offset to revenue to selling, general and administrative expense, and concession sales were included in direct-to-consumer. This changed reported revenue and margin presentation but did not affect operating income; prior periods were not restated.
Risks, contingencies and unusual items
- First-half 2014 included a $15.5 million net discrete tax benefit; the effective tax rate was 21.7%, versus 21.0% a year earlier. Management said the underlying rate increased, primarily due to U.S. tax-law changes.
- IRS examinations and appeals remain ongoing. Net unrecognized tax benefits and related interest were $107.1 million; management said approximately $35 million could decrease over the next 12 months, including $28.1 million that would reduce tax expense. Management did not expect any one examination to have a material financial-statement impact.
- Foreign-exchange exposure, consumer demand, fashion trends, margin pressure, raw-material availability and costs, customer concentration and financial health, supply-chain disruption, weather, and international-market risks are among the stated risk factors. No material changes to previously disclosed legal proceedings or risk factors were reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether inventory growth converts to expected second-half sales without further discounting or margin pressure, particularly in Jeanswear.
- Whether operating cash flow improves as seasonal working-capital needs unwind, given lower first-half cash generation and increased short-term borrowing.
- The sustainability of Outdoor & Action Sports growth and the recovery prospects for weaker Jeanswear, Sportswear and Contemporary Brands results.
- The effects of substantial share repurchases and dividend payments on leverage, liquidity and future capital allocation.
- The outcome and timing of tax examinations and settlements, including the potential realization of the disclosed tax benefits.