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A Retailer Fit For Any Portfolio
These days, investors can't exactly judge retailers and consumer goods companies based on sales growth. Consumers still aren't ready to spend, and won't be for some time. As a result, it's becoming more important to analyze companies based on their ability to uphold margins, preserve lean inventory levels without heavy discounting, maintain manageable debt levels and continually find ways to make operations more efficient. It's for these exact reasons that I am bullish on VF Corp. (NYSE:VFC).
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The Good and the Bad
For the third quarter, VFC's revenue fell 5% and earnings dropped at a more accelerated rate of 6.8% to $1.94 per share due to higher pension expenses. Despite traders' negative reaction, which sent the stock down nearly 7% on Tuesday, that's where the bad news ends. (For more on pension expenses, read the Pension Plan section in our Financial Statements Tutorial.)
VFC cleared through merchandise and reduced inventory 13% from last year. While many retailers, such as Abercrombie & Fitch (NYSE:ANF), have experienced damaged margins from heavy promotional activity, VFC was able to work through its excess inventory while sustaining its gross margin - an impressive and rare feat.
This freed up working capital and resulted in $205 million in free cash flow. Cash on the balance sheet rose to $379 million and management expects it to reach over $600 million by the end of next year. Management put that cash to work quickly by repurchasing shares and increasing the dividend for the 37th consecutive quarter.
Department stores like Macy's (NYSE:M), Nordstrom (NYSE:JWN) and Saks (NYSE:SKS), which carry VFC's brands, are cutting back on inventory levels after overstocking shelves last year. They will likely be reluctant to increases merchandise purchases from VFC anytime soon, meaning VFC's top line can be expected to remain sluggish for some time.
Strong Portfolio
That said, VFC sports a very strong portfolio of brands popular enough among consumers that they can still be sold without dramatic markdowns, as evidenced by this quarter's performance. In the past several years, shoppers have traded in theirColumbia
My only concern for VFC is that it relies heavily on four brands: Wrangler, Lee, The North Face and Vans represent 60% of its revenue. Sure, all of these brands are still gaining market share and remain popular among consumers, but shoppers are fickle and there is certainly risk that they could lose interest in any of these brands in an instant.
Bottom Line
Year to date, VFC has risen by more than 30%. Based on management's earnings estimates of $4.85 to $5 per share, the company sells at roughly 15 times expected earnings. For a company that yields more than 3% while sustaining margins in such a tough environment and owning well-known brands, I think this is a very reasonable P/E multiple. Investors looking for a retail play in advance of the holiday season may find that VFC is a great fit. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks)
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IN PICTURES: How To Make Your First $1 Million
The Good and the Bad
For the third quarter, VFC's revenue fell 5% and earnings dropped at a more accelerated rate of 6.8% to $1.94 per share due to higher pension expenses. Despite traders' negative reaction, which sent the stock down nearly 7% on Tuesday, that's where the bad news ends. (For more on pension expenses, read the Pension Plan section in our Financial Statements Tutorial.)
VFC cleared through merchandise and reduced inventory 13% from last year. While many retailers, such as Abercrombie & Fitch (NYSE:ANF), have experienced damaged margins from heavy promotional activity, VFC was able to work through its excess inventory while sustaining its gross margin - an impressive and rare feat.
This freed up working capital and resulted in $205 million in free cash flow. Cash on the balance sheet rose to $379 million and management expects it to reach over $600 million by the end of next year. Management put that cash to work quickly by repurchasing shares and increasing the dividend for the 37th consecutive quarter.
Strong Portfolio
That said, VFC sports a very strong portfolio of brands popular enough among consumers that they can still be sold without dramatic markdowns, as evidenced by this quarter's performance. In the past several years, shoppers have traded in their
My only concern for VFC is that it relies heavily on four brands: Wrangler, Lee, The North Face and Vans represent 60% of its revenue. Sure, all of these brands are still gaining market share and remain popular among consumers, but shoppers are fickle and there is certainly risk that they could lose interest in any of these brands in an instant.
Bottom Line
Year to date, VFC has risen by more than 30%. Based on management's earnings estimates of $4.85 to $5 per share, the company sells at roughly 15 times expected earnings. For a company that yields more than 3% while sustaining margins in such a tough environment and owning well-known brands, I think this is a very reasonable P/E multiple. Investors looking for a retail play in advance of the holiday season may find that VFC is a great fit. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Kristin Graham
Kristin Graham is an equity analyst with experience in covering retail and consumer stocks. She obtained a unique global perspective by sailing around the world on the Semester at Sea study abroad program. She also specializes in global equities and international investing. Graham is a Level III CFA candidate.
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