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V.F. Corp
is one of those infuriating stocks that never seems to be cheap
precisely when you want it to be. The latest set of results kept up its
tradition of raising EPS guidance even if the revenue numbers were far
from stellar. Indeed the key takeaway from these results was the margin
improvements achieved within difficult end markets. This is one of the
best run stocks in the retail sector, but it faces some headwinds in
2013. Is it good value right now?
V.F. Corp Prospects and Challenges
With its key brands of The North Face, Vans, and Timberland the
company has benefited from the trend towards wearing outdoor sports
clothing as a kind of fashion statement. I doubt that most people
wearing mountaineering or hiking clothing have ever been on a climb or a
trail. Moreover wearing Vans and listening to Sonic Youth doesn’t
necessarily qualify you as bona fide skate boarder, but who cares as
long as it adds to the bottom line of the company’s numbers.
In order to explain how Timberland makes money here is a breakdown of
its segmental profits in Q1. The key brands are in the outdoor &
action sports wear division.
Throughout 2013 the company is going to be faced with the following challenges
Timberland’s has significant exposure to Europe and markets like
Italy and Spain are some of its biggest existing markets. Fortunately,
Vans and The North Face were ‘built out’ of Northern Europe.
J.C. Penney is a key retail channel and in
particular with Lee jeans and Vans. The difficulties with the department
store and ongoing restructuring efforts could affect sales generation.
It’s Chinese operations haven’t performing great and it is a key part of its international expansion plans
In general the mid-market consumer is challenged in the current
environment. It offers neither the income secure spending of the high
end or the potential to benefit from trading down by the mass market.
Of course much of this known and the plan to deal with challenging
markets is to expand its direct to consumer (DtC) sales via increasing
the number of stores and investing in e-commerce facilities. Indeed DtC
made up 21% of revenues in 2012 and are expected to rise to 23% in 2013.
What makes V.F. Corp different is that its diverse set of brands,
channels and end-markets allow it to select areas in which to focus to
generate growth through the cycle. Moreover its brands benefit from some
secular fashion trends (as discussed above) whereas a company like The Gap $GPS
is more exposed to general macro trends. Indeed, The Gap has had to
completely restructure its business and separate its three brands (The
Gap, Old Navy and Banana Republic) into three global entities. The idea
being that this will create the ability to focus and innovate in order
to drive growth. Note the difference here, The Gap is trying to innovate
its brands to make the ‘cool’ while V.F. Corp is innovating in its
sales channels. I’d argue that the latter is easier to do.
The J.C. Penney question is an uncertain one. The store has been hit
hard by consumer spending changes and a misguided strategy of promising
lower prices in general instead of the kind of discounting and
promotional activity that the rest of the sector has been using. Whether
the restructuring will work is open to question and it’s something to
consider for V.F. Corp shareholders.
Q1 Performance
We can see how well V.F. Corp is run by looking at the profit margin movements in the quarter.
Margins were the real story this quarter because overall revenue
growth was only up a paltry 2.2% and significantly below the 6% target
for the full year. EPS was ahead of expectations and full year guidance
was raised to $10.75 from $10.70 previously.
The standout performers in the quarter were the North Face and Vans
which increased revenues 6% and 25% respectively. Moreover they achieved
growth in the DtC channels of 25% and 20% respectively. As for the
troubled region of Europe, The North Face recorded ‘modest’ growth while
Vans rose an incredible 30%.
As discussed earlier the problematic brands in 2013 are likely to be
Timberland and Jeanswear. Timberland revenues were up only 2% and flat
in the Americas. Fortunately mid-teens increases in Asia managed to
offset mid-single digit declines in Europe.
Where Next For V.F. Corp?
As I write the stock trades on 16.3x forward earnings. It is
certainly not the cheapest stock out there and it has some headwinds to
meet in 2013. With that said some of its brands are recording very
strong growth and the DtC expansion is very impressive.
The problem with buying the stock up here is that I get the sense
that all the positives are priced into it already and as good as the
management are, the target of 6% growth for 2013 when only 2.2% was
achieved for Q1, raises more questions than answers. Cautious investors
will want to monitor events here and wait for a more favorable
risk/return proposition.
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