V.F. Corp (VFC) Up On Q2 Earnings & Sales Beat, View Raised

V.F. Corporation (NYSE:VFC) released second-quarter 2017 results, wherein both top and bottom lines exceeded our estimates and sales also grew year over year. Notably, sales marked its first positive surprise after posting four straight misses. The solid first-half results also encouraged management to raise its outlook for full-year 2017.

The splendid quarter was well-received by investors, as shares of this branded apparel retailer jumped 2.3% in the pre-market trading session. Further, V.F. Corp.’s shares have jumped 9.9% year to date, outperforming the industry’s marginal rise of 0.3%.



Q2 Numbers

The company’s quarterly earnings from continuing operations came in at 29 cents a share, which beat the Zacks Consensus Estimate by a penny. However, the bottom line plunged 11% year over year. On a currency neutral basis, earnings remained flat year over year.

V.F. Corp. generated total revenue, including royalty income, of $2,359.6 million that increased about 2% year over year and surpassed the Zacks Consensus Estimate of $2,289.6 million. Net sales of $2,333.3 million also advanced 2% from the prior-year quarter. On a currency neutral basis, revenues jumped 3%. Revenues in the quarter gained from strength in international and direct-to-customer platforms, the Outdoor & Action Sports coalition and the company’s workwear business.

The company’s reported gross margin increased 80 basis points (bps) to 49.7%, thanks to gains from better pricing, reduced product costs and mix shift toward high margin businesses, which were partly negated by foreign currency headwinds. Foreign currency hurt gross margin by 80 bps.

Reported operating income declined 14% to $168 million, while operating margin contracted 130 bps to 7.1%. Currency headwinds affected operating margin by 70 bps.

Segment Details

Revenues at Outdoor & Action Sports grew 4% to $1,466.2 million (up 5% on a currency neutral basis).

Jeanswear revenues of $600.8 million declined 5% year over year (down 4% on a currency neutral basis).

Imagewear revenues surged 11% (12% on a currency neutral basis) to roughly $150 million.

Revenues at Sportswear dipped 1% on both reported and currency neutral basis to $114.3 million.

Financial Details

V.F. Corp. ended the quarter with cash and equivalents of $672.5 million, long-term debt of $2,111.6 million and shareholders’ equity of $3,644.3 million. In the first half of 2017, the company used $4.5 million cash in operating activities.

During the quarter, the company bought back 14 million shares for nearly $760 million, under the share repurchase program authorized in Mar 2017. So far in 2017, the company has repurchased 22 million shares for $1.2 billion.

The company also declared a quarterly dividend of 42 cents per share, payable on Sep 18 to shareholders with record as on Sep 8.

Divestitures

On Apr 28, V.F. Corp. divested its Licensed Sports Group (LSG) business to Fanatics Inc., which included the sale of its Majestic brand. Also, management implemented its plan of discontinuing with its licensing unit, which led the company to bring assets of its JanSport brand under the “held for sale” category. In Aug 2016, the company completed the sale of its Contemporary Brands businesses, including the 7 For All Mankind, Splendid and Ella Moss brands.

All these businesses are classified as discontinued operations in the company’s financial statements.

Outlook

Management remains impressed with the company’s quarterly performance, which met its expectations. Results were backed by solid results by its major global brands, direct to consumer operations, international operations and strength at its workwear business. The company remains optimistic of its second half, which also encouraged it to raise its 2017 outlook. Given this strength, the company remains focused on making investments in its big brands, which is aimed to augment shareholder-value in future.

For 2017, management now anticipates revenues to grow 2% to $11.65 billion. Currency neutral revenues are expected to rise 3%. Earlier, management projected 2017 revenues to grow at a low-single digit percentage rate. Direct-to-consumer revenues are now anticipated to rise in a range of 10–11%, as compared with a high single-digit percentage rate growth forecasted earlier. The company expects digital revenues to surge over 25% year over year now.

V.F. Corp. now anticipates gross margin to increase 40 bps from 2016 levels to 49.8% as compared with a 20 bps growth to 49.6% expected earlier. Currency is still expected to impact gross margin by roughly 70 bps. Operating margin is still expected at about 14%, including 60 bps impacts from currency headwinds.

Finally, the company now envisions earnings per share to be $2.94, reflecting a 1% dip from the year-ago period figure of $2.98. Earlier management expected EPS to decline at a low-single digit percentage rate to a band of $2.89–$2.94. On a currency neutral basis, earnings per share is still expected to rise in the mid-single digit percentage range.

The company expects cash flow from operations of approximately $1.45 billion for 2017, wherein effective tax rate is projected to be in the low 20% range.

Zacks Rank & Key Picks

V.F. Corp. currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks are G-III Apparel Group, LTD (NASDAQ:GIII) , Guess?, Inc. (NYSE:GES) and PVH Corp. (NYSE:PVH) .

G-III Apparel, with a long-term EPS growth rate of 15%, sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Guess, with a long-term EPS growth rate of 17.5%, flaunts a Zacks Rank #1.

PVH Corp. has a spectacular earnings surprise history. The stock, with a long-term EPS growth rate of 11.2%, holds a Zacks Rank #2 (Buy).

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