Overall stock market weakness and an analyst downgrade have sent shares of diversified apparel maker VF Corp. (NYSE: VFC) toward their lows over the past year. An undervalued share price hurts the ability to use equity for acquisitions, but strong cash flow generation leaves plenty of dry powder to buy market share and supplement very respectable organic growth.
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Recent Quarter Sales Review

Second-quarter sales increased 7% to $1.6 billion, as every major division reported an improvement in its top line. Outwear and Action Sports accounted for about one-third of sales and reported a strong 12% sales increase on double-digit growth in the North Face and Vans brands. Jeanswear is the next-largest segment at just under one-third of total sales, and it saw a more modest 2% sales increase for its flagship Lee and Wrangler jeans.

The sportswear and imagewear units reported mid-single-digit growth on decent trends at Nautica, a successful brand launch with Macy's (NYSE: M) and sports licensing businesses. Contemporary brands is the smallest segment, but it witnessed very strong 18% growth as 7 For All Mankind and other brands in the division continued to be popular among consumers.

Profit Recap

Operating profit also improved in every division on 35% and 40% growth in the two largest segments and more than respectable results in the other segments. Total operating profit reached $151.4 million as gross margins reached record highs. Net income jumped 47% to $1 per diluted share.

Outlook

Management boosted its full-year sales outlook and now expects an increase between 4% and 5%. It also increased its earnings expectations to $6.10 per share, representing year-over-year growth of 18%.

Price Momentum Has Been Weak

Given the current guidance, VF Corp. shares are trading at a forward P/E of 11.6. Price momentum has been weak, as overall stock market sentiment has been negative and investors worry that consumers have tired of paying for higher-priced jeans, which has adversely affected retailer Buckle (NYSE: BKE) and True Religion Apparel (Nasdaq: TRLG).

A Well-Diversified Company

However, the company is very well diversified, both geographically and across a dizzying array of apparel brands. Near-term business trends are also very robust and suggest consumer spending is increasing after an extended weak period. Management has been using excess capital generation to repurchase shares and support a decent dividend yield of 3.2% But it could likely pick up the pace on acquisitions, such as for True Religion or Joe's Jeans (Nasdaq: JOEZ), to further augment organic growth. (To learn more, see Analyzing Retail Stocks.)

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