VF Corp.'s (NYSE:VFC) Q4 miss is unlikely in our view to deter investors from keeping their long positions. The shortfall is not material and comes after three earnings beats in Q1, Q2 and Q3. And more importantly, the group's revenue and margin outlook remains highly supportive, as several short- and mid-term drivers are well identified.
The pullback following the release is an opportunity to increase exposure to the stock.
Disappointing Q4 figures
VFC delivered weak Q4 EPS of $0.82 vs. the Street at $0.84, driven by poor revenue growth for the second quarter in a row (+8% below +10% guidance). Cold weather was a positive for several of the group's brands and products (notably The North Face and Timberland) and enabled the core Outdoor/Action division to grow 12%. But conversely, cold weather was a drag on store traffic and, as such, affected the group's other brands and categories.
The guidance for 2014 is mixed: +7-8% revenue growth (below +8-10% long-term guide), strong gross margin expansion (+90bps) and EPS growth of 11-12% (slightly below consensus and long-term guide). And Q1 is unlikely to be a positive catalyst given continued tough weather conditions.
Well-identified drivers give confidence in revenue growth pick-up
In our view, there is no debate about VFC's margin story as the company continues to deliver and benefits from secular drivers:
- Expected margin improvement at Timberland now that the integration process is over.
- Revenue mix enhancement and the rising weight of more profitable Outdoor and International segments.
- Distribution mix improvement and the rising weight of the direct distribution channel.
But investors are likely to debate the group's revenue outlook as VFC has been struggling recently with its growth targets (even if this did not prevent the company from beating consensus EPS expectations in the previous three quarters). In our view, growth will finally pick up thanks to several short-term and mid-term drivers.
First, there are signs of improving apparel sales in Europe (22% of group revenues), such as accelerating top-line at H&M (OTCPK:HNNMY). The trend is likely to keep going as recent consumer confidence data have been positive in the region.
Second, it looks like Timberland has reached an inflection point in terms of revenue growth and earnings contributions following several tough years: VFC targets +10% revenue growth in 2014 vs. +5% in 2013 and flat growth in 2012.
On a longer term view, we are confident in the group's ability to gain share in developed economies (through notably store openings) and to exploit the huge market opportunity in Asia and Latin America (only 8% and 7% of group revenues respectively).
A large acquisition could be an additional catalyst. As VFC has completed the integration and restructuring of Timberland and is back to a comfortable net debt / EBITDA of 0.4x, management could unveil new M&A ambitions.
Disclosure: I am long VFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.