V.F. Corporation Is Back On Track

| About: V.F. Corporation (VFC)


VFC reassured on its top line outlook as the company reported a revenue beat in Q1 for the first time since Q4 ’12.

Timberland and Europe are accelerating, giving confidence in VFC’s ability to reach or even exceed its FY14 revenue growth target.

Margin expansion continues at a high pace and offers high visibility going forward.

A large acquisition could be an additional catalyst, as VFC is back to a comfortable net debt/EBITDA of 0.4x.

In-line with our scenario, Timberland and Europe accelerate

In our February 18 article, we remained constructive on V.F. Corporation (NYSE:VFC) despite an unimpressive set of Q4 figures and notably poor top line momentum. We argued at the time that revenue growth would pick up soon, thanks to an improving apparel sales environment in Europe (22% of VFC's revenues) and the expected growth inflection at Timberland following several tough years.

Our confidence paid off sooner than we expected, as VFC delivered strong Q1 EPS of $0.67 vs. the street's estimate of $0.63. The beat was mainly driven by an impressive gross margin improvement (+130bps to 49.4% vs. consensus around 48.8%) with the gross margin reaching an all-time high thanks to the rising weight of high-margin brands in the mix (The North Face, Timberland, Vans).

Importantly, the beat was also driven by some revenue upside (+6.5% growth vs. +5% expected), something that had not happened since Q4 2012. Investors were starting to debate the group's revenue outlook, and we believe that this Q1 release provided the much-expected relief. In-line with our scenario, Timberland accelerated to +12% revenue growth in the quarter, comparing well to the +10% growth guidance for 2014 and the +5% and flat growth reported respectively in 2013 and 2012. Europe showed signs of improvement, specifically in the jeanswear category.

Pretty high level of confidence heading into next quarters

Following this strong Q1 performance, VFC adjusted its FY14 revenue guidance to the high end of the previous +7-8% guidance and its EPS guidance to $3.06 from $3.00-$3.05. As VFC expects Q2 growth to be similar to that of Q1 (+6.5%), this suggests that the year will be back-end loaded. But this suggests as well that the group has probably a pretty strong Q3 and Q4 backlog in cold weather categories.

This, combined with a continuation of the improving retail environment in Europe (recent consumer confidence data in the region have been positive), gives high confidence in VFC's ability to reach or even exceed its revenue growth target.

At the same time, the margin story is likely to keep going, as VFC benefits from secular drivers: margin improvement at Timberland, revenue mix enhancement towards Outdoor and International segments, distribution mix improvement towards direct distribution channel.

On a longer term view, we remain confident in the group's brands' ability to gain share in developed economies (through notably store openings) and to exploit the huge market opportunity in Asia and LatAm (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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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