V.F. Corporation: Friday's Drop Provides A Good Investment Opportunity

| About: V.F. Corporation (VFC)


V.F. Corporation announced its second quarter results on Friday.

Outdoor & Action Sports segment's momentum fueled revenue growth of 16%.

Outdoor & Action Sports segment's revenue represented more than 50% of total revenue.

The company is becoming more and more a sport apparel company.

It trades at a lower PE ratio than other sports apparel companies.

V.F. Corporation (NYSE: VFC), one of the leading apparel companies in the United States, announced its second quarter results before Friday's opening. Although V.F. Corporation announced very solid numbers, the company's shares dropped about a percent and closed at $60.95 a share, a decline of 2.3% year to date. I strongly believe that Friday's drop provides investors a good investment opportunity. V.F. Corporation represents very strong brands and, therefore, should be able to benefit from increasing momentum in its Outdoor & Action Sports segment in the second half of this year.

Second quarter earnings

According to V.F. Corporation's press release and earnings call, the company managed to increase revenue by 8% in the second quarter, in line with the company's own guidance. Especially the increase in Outdoor & Action Sports segment's revenue (16%) contributed to the overall revenue increase. The Outdoor & Action Sports segment consists of well-known brands like The North Face, Vans and Timberland. As a result of recent momentum, the Outdoor & Action Sports segment represented over 50% of V.F. Corporation's total revenue and profit in the first six months of this year.

The increase in Outdoor & Action Sports revenue was enough to compensate for the disappointing results in other sectors like jeanswear (-1%), imagewear (+3%) and other sportswear (+5%). Bottom line, V.F. Corporation earned $0.37 per basic share in the traditionally softest second quarter of the year. Earnings per share increased 16% compared to last year's second quarter, representing a solid gross margin and conservative spending in SG&A expenses. Finally, V.F. Corporation declared a $0.2625 dividend, a healthy 1.70% yield based on Friday's close.

Full year guidance

As I mentioned above, V.F. Corporation's shares dropped 1% on Friday and 2.3% for the year. For a stable growth company with a trailing P/E ratio just below 20, a disappointing result. According to Reuters, analysts and investors were disappointed in V.F.'s full year guidance. However, the guidance was right in line with the guidance in the first quarter, as the company expects to increase revenue by 8% and to earn $3.06 a share in 2014.

Given the momentum in the Outdoor & Action Sports segment and the impact of this segment on the company's total results (over 50% of revenue and profit), I believe that V.F. Corporation should be able to achieve at least an 8% revenue increase in the second half of 2014. Therefore, I believe the company's guidance is conservative and there is a good chance that the upcoming earnings reports will be more positive.

Investment opportunity

V.F. Corporation is more and more focusing on outdoor and (active) sports. For example, the company earns over 50% of its revenue and profit from its Outdoor & Action Sports segment. This segment is a fast growing niche market in sports apparel and I believe that V.F. Corporation should be compared to athletic and sports apparel companies like Nike (NYSE:NKE), Lululemon (NASDAQ:LULU) and Under Armour (NYSE:UA), rather than the traditional apparel companies. Nike (22.8), Lululemon (21.9) and Under Armour (63.7) all trade at a trailing P/E ratio above 20. Based on this comparison, V.F. Corporation has some short-term upside potential and I am positive that its shares will recover in the second half of this year.

Disclosure: The author is long NKE, VFC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long NKE and VFC. Currently I have no long position in LULU. However, I actively trade LULU on a day-to-day basis. Therefore, I might initiate a long position in LULU in the next 72 hours.