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Outdoor clothing company VF (NYSE: VFC) is one of
the most compelling growth stories in the retail sector. Its mix of
brands gives it the diversity to deal with a slowdown in any one
segment, and many of its brands are under-penetrated within key growth
markets. Here's why it deserves to trade at a premium to the rest of the retail sector.
VF raises guidance, again
In its latest second-quarter results, the company kept up its
tradition of raising guidance, hiking its full-year EPS expectations by
$0.10 to $10.85. Moreover, it declared itself on track to hit its
targets for the full year. The company’s aiming for 6% revenue growth,
13% in EPS growth, and marked improvements in margins and cash flow.
While all of this is good news, it's already priced into the stock.
The real question: In a weak retail environment, how is VF reporting
such good numbers? And can it continue?
Diversity helps VF to outperform
The first factor that distinguishes VF is that it has a range of
brands in its portfolio. This gives it significant flexibility to deal
with changing retail conditions.
A good comparison would be something like Nike(NYSE: NKE). Michael
Jordan’s favorite sportswear company is doing well at the moment, but
this is largely due to outperformance in North America. Moreover, much
of its growth is focused on footwear. However, the other parts of its
empire are not performing particularly well, and the pressure is building up on Nike to continue to execute.
Nike just doesn’t have the same kind of diversity that VF's mix of
outdoor wear, sports clothing, footwear, and jeanswear generates.
You can see how well VF imanages investments in its various segments by looking at margin growth in the last quarter.
Source: company accounts.
Five out of its six segments saw margin increases, and a look at its
profits for the first six months illustrates their relative importance.
Source: company accounts.
Within its Outdoor & Action Sports division lie three diverse
brands. The North Face gives it exposure to the rugged outdoor hiking
and mountaineering market, and equally importantly, people who want to
be associated with this lifestyle. Vans generates a similar appeal to
people attracted by skating, surfboarding and snowboarding, while
Timberland has long been a leading outdoor wear brand. All three are
placed in distinct fashion niches.
The big three brands
It isn't all plain sailing for VF. For example, Timberland has had
problems due to its heavy exposure to Europe. Timberland’s European
revenues were down in double-digits,but it managed to record only a 3%
overall decline in revenues. On a more positive note, Timberland’s Asian
revenues were up 10% and, it generated low-single-digit-growth in the
Americas.
VF reacted to weak conditions in Europe for Timberland, by
investing in direct-to-consumer (DtC) initiatives such as e-commerce
enabled websites. These actions led to positive DtC comparables in
Europe, and high-single-digit growth in the Americas.
Furthermore, its other two key brands (Vans and The North Face) have
great potential to grow via international expansion. Both brands tap
into the growing trend for consumers to wear outdoor activity clothing
as a fashion statement. Indeed, Vans generated 15% growth in the
quarter, with international sales up 20%; incredibly, Europe rose 20%.
As for the The North Face, it generated 5% growth overall. The North
Face’s international sales were up 20% with European sales increasing an
impressive 10%.
VF has a good mix of growth opportunities from regional expansion,
growing its DtC business, and favorable lifestyle trends .It can
selectively invest across its brands and regions in order to counteract
any weakness elsewhere.
How VF compares across its industry
Here's a brief look at how the company matches up versus its industry peers.
Frankly, VF doesn't merit its discount to Nike, because of the
advantages (as discussed above) that VF holds over its footwear-focused
rival. On the other hand, its premium to Columbia Sportswear(NASDAQ: COLM) is well-deserved.
Columbia is forecasting full-year sales to decline by up to 2.5%. Its
brands do not have the kind of lifestyle appeal that VF has managed to
generate with Vans or The North Face. Columbia's core clothing tends to
be for activities like skiing and fishing. Arguably, these are not
hobbies whose clothing has the kind of crossover appeal that VF's brands
generates. .
The bottom line
In conclusion, VF’s diversity gives it good growth prospects for the
next few years. Its valuation of over 18 times forward EPS estimates may
look expensive, but the company has low-teens-growth forecasted for the
next couple of years. In addition, it is expecting to generate around
$1.4 billion in cash flow for 2013.
Arguably, the stock is fairly valued right now, but if it hits its
low-teens EPS growth targets, then it’s reasonable to expect the stock
to return at least low-teens returns for investors over the next few
years.
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