V.F. Corp (NYSE:VFC) posted first quarter FY15 operating results. Prima facie, reported performance was weak, but it is not what it seems. 1Q revenues rose to $2.83b (+2% Y/Y) from $2.78b in the prior period. Diluted GAAP EPS remained flat at $0.67. In terms of analyst estimates, the company met diluted GAAP EPS expectations of $0.67, after barely missing prior quarter estimates.
Weak performance is not what it seems
The company's reported results appear weak, but they are not what they seem, as mentioned earlier. Fluctuations in the foreign currency market played a highly negative role in the company's performance, resulting in significant drags on revenues and margins. Excluding currency fluctuations, top-line revenues would have grown 8% Y/Y, while the bottom-line would have jumped 13% over the same period. Instead of declining 5% Y/Y, international revenues would have been up 9%. Clearly, the FX environment was a challenging one for VFC during the quarter. However, currency-neutral performance remains impressive.
Outlook remains positive overall, continued strong demand despite sluggish retail sales
On a segment basis, four out of five segments experienced strong growth, with Outdoor & Action Sports (+10% Y/Y, constant-currency basis) - VFC's largest segment (almost 60% of sales, per Q1 FY15 data) - leading the charge. Other segments such as Jeanswear, Imagewear and Sportswear managed positive single-digit growth, also on a constant-currency basis. Margins for all segments expanded, with Imagewear (<10% total profit) expanding the most (+13% Y/Y, constant-currency basis). The company managed to achieve this strong performance in an environment where retail sales were lagging, which is impressive as this further emphasizes the resilient demand for the company's offerings.
Furthermore, some may have concerns that the strengthening dollar would affect international demand, but this is clearly not the case. Demand for the company's footwear and apparel, inter alia, remain strong. As VFC continues to increase its top-line, its brands continue to strengthen, further augmenting the company's competitive advantage. In addition, management reported excellent sell-through during the quarter. Therefore, I expect VFC to continue to grow at a decent clip (mid to high single-digit constant currency top-line growth) in the near future.
Currency headwinds will continue
FX headwinds were a huge drag on VFC's performance during the first quarter, and this should continue. As a quick reminder, the primary reason for the strengthening of the dollar can be attributed to the diverging monetary policy stance adopted by the Fed compared to its central banking peers. Market participants, in anticipation of rising rates, have shifted capital into the U.S., betting on the eventual rise of rates bringing higher yields. Though forex headwinds should continue, I expect its impact to be slightly smaller in Q2 as the dollar currency index has fallen slightly (probably due to weak trade data) from its March high of 100, according to CNBC data. Regardless, the index continues to trade at elevated levels, hence investors should expect currency headwinds to continue into the following quarters.
DTC continues to grow
In a prior article on VFC, I detailed the company's e-commerce potential and initiatives. DTC has continued to grow in the first quarter, achieving 11% growth Y/Y on a constant-currency basis. Considering the company's offline sales remain strong, I expect DTC to continue experiencing strong growth going forward. The convenience of online shopping remains undeniable, hence expect VFC to face little headwind (apart from FX) in this aspect of its business.
As seen above, I have updated my model from my prior article. Revenue and margin assumptions have be altered downwards to reflect the difficult FX environment the company will continue to experience. Full-year FY15 revenues are expected to grow 3% to $12.6b, down from 8%. FY16 revenues are expected to experience growth of 5%, down from 8%. Beyond FY16, I expect the currency market to stabilize, allowing VFC to return to mid single-digit top-line growth. As for EBITDA margins, I have adjusted FY15 margins to 16%, down from my initial 17% estimate. Margin expansion throughout the five-year projection also is expected to expand slower than my initial forecast. One can see that my model continues to imply a price target of $84 (down from $96 in my prior article), or 18% upside (down from 35%) from current levels. Therefore, I reiterate my bullish outlook on VFC.
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