V.F. Corporation (VFC) posted first-quarter 2014 adjusted earnings of 67 cents a share, up 12% year-over-year and ahead of the Zacks Consensus Estimate of 64 cents. Results mainly benefited from the sustained positive results at the company’s Outdoor & Action Sports business on the back of strong performance of the North Face, Vans and Timberland brands. Additionally, earnings were aided by gross margin improvement in every segment.
Quarter in Detail
V.F. Corp.'s total revenue of $2,780.8 million grew nearly 6.5% year over year on the back of double digit revenue growth at its Outdoor & Action Sports, international as well as direct-to-consumer businesses. Moreover, reported sales surpassed the Zacks Consensus Estimate of $2,765 million.
The company posted record gross margin in the quarter, registering a 130 basis points (bps) improvement to 49.4%. The improvement was mainly attributed to higher margins in all coalitions, driven by a mix shift to higher margin businesses coupled with a reclassification of retail concession fees as announced earlier.
Adjusted operating income rose 13% to $403.2 million, on a year-over-year basis. Moreover, adjusted operating margin expanded 80 bps to 14.5% during the quarter.
Segment Details
Revenue at Outdoor & Action Sports rose 14% from the year-ago quarter to $1,574.6 million, driven by double-digit growth witnessed in international and U.S. markets as well as direct-to-consumer and wholesale networks.
The increased revenues could be attributed to a respective 14%, 20% and 12% increase in sales in North Face, Vans and Timberland brands. Segment operating income increased 21% year over year to $274.5 million, while operating margin expanded 100 bps to 17.4%.
Jeanswear revenues declined 4% year over year to $690.3 million. The dismal performance at the segment was due to a high single-digit percentage decline in the Americas region, partly offset by a high single-digit percentage increase in Europe and 10% rise in Asia Pacific.
Moreover, segment revenue suffered due to a 2% decline at the Wrangler brand and a 1% decline at the Lee brand. Segment operating income dipped 10% to $129.3 million while operating margin contracted 130 bps to 18.7% in the quarter.
Imagewear revenues increased 4% year over year to $263.2 million on the back of strong Licensed Sports Group revenues. Operating income increased 20% to $37.8 million and operating margin at the segment enhanced 190 bps to 14.4%.
Revenues at Sportswear increased 3% to $131.5 million owing to strong performance at the Kipling brand that delivered high-teens percentage increase in the U.S. and 23% growth worldwide. On the other hand, revenue growth for the Nautica brand remained flat in the quarter. Segment operating income increased 3% year over year to $12.6 million. Operating margin came in at 9.6%, contracting 10 bps year over year.
Contemporary Brands’ revenues rose 5% to $98.2 million, depicting the challenges faced by the premium denim business environment. Operating income in the quarter declined 37% to $7.9 million, while operating margin contracted 420 bps to 8.0%.
The company’s International revenues escalated 11% year over year. The growth was largely driven by strong performances at almost all brands in Europe (up 12%) and Asia Pacific (up 16%) regions, while revenue for Americas remained flat. Notably, within the Asia Pacific region the company witnessed strong growth in China, where revenues were up 27%. International revenues represented 43% of V.F.Corp.’s total revenue in the first quarter.
Direct-to-Consumer revenues advanced 16% year over year, primarily driven by a double-digit revenue growth in every region across the globe and upside in almost every brand. During the quarter, the company added 23 new stores to its portfolio, including various brands, bringing the store count to 1,263.
Overall, direct-to-consumer revenues contributed 23% of V.F. Corp.’s first quarter revenues, higher than 20% in the year-ago quarter. Including the newly included revenue from concession locations, the company estimates the direct-to-consumer business would make for 22% of the total revenue.
Financial Details
V.F. Corp. ended the quarter with cash and cash equivalents of $321.7 million and long-term debt of $1,425.8 million. The company’s shareholders equity came in at $5,754.8 million as of Mar 29, 2014.
Moreover, during the quarter, the company generated cash flow from operations worth $13.7 million and spent about $49.3 million towards capital expenditure. Inventories improved 7.3% year over year, indicating the company’s emphasis on its operational efficacy.
Dividend
On Apr 22, 2014, management announced a quarterly dividend to be paid to stockholders of record as of Jun 10, 2014, on Jun 20, 2014.
Share Repurchases
During the quarter, the company bought back nearly 9.1 million shares for an aggregate value of $553 million, under the share repurchase authorization approved in Dec 2013. Further, in the second quarter, the company repurchased another 2.9 million shares for about $173 million. Going forward, the company expects no further share repurchases throughout 2014.
Looking Ahead
The company seems confident about 2014, mainly on the back of its strong brand portfolio. For 2014, it envisions to deliver at the high end of its previously stated guidance of a 7%-8% increase in revenues, considering favorable growth in all its coalitions. For the second quarter, the company expects revenue growth similar to the first-quarter level, driven by continued strength at the Outdoor & Action Sports coalition.
Full-year revenue growth at the Outdoor & Action Sports coalition is anticipated in the 12% – 13% range. Further, the company retains its gross margin and operating margin forecasts for 2014 at 49% and 15%, respectively.
Based on the marginally higher-than-expected earnings results for the first quarter, the company now projects adjusted earnings for 2014 to rise 13% year over year to $3.06 per share. Previously, the company had forecasted earnings in the band of $3.00–$3.05 per share, representing an 11%–13% growth.
Other Stocks to Consider
This NC-based retailer currently holds a Zacks Rank #3 (Hold). However, other better-ranked stocks in the apparel and related industries include Hanesbrands Inc. (HBI), Foot Locker Inc. (FL) and American Apparel Inc. (APP), all of which carry a Zacks Rank #2 (Buy).
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