Diversified branded-apparel provider VF Corp (NYSE:VFC) has seen its share price jump 30% so far in 2009, besting the market's return (as measured by the S&P 500) of approximately 15%. The stock may stop to catch its breath, but it still has considerable upside as industry conditions improve and because of the low-growth expectations embedded in VFC's current price.
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Falling Sales
VF released second-quarter earnings in late July that saw reported sales decline 11% to $1.5 billion; negative currency fluctuations accounted for 3% of that decline. Management boasted that its flagship brands, including Wrangler, Lee, the North Face and Vans, gained market share, with the latter two brands posting global organic growth of 4% and 14%, respectively. However, jean sales declined 12% worldwide, though China's sales were up 10%. This mirrored top-line struggles at apparel wholesale and retail rivals such as Ralph Lauren (NYSE:RL), as it reported an 8% net sales decline in its most recent quarter. Phillips-Van Heusen (NYSE:PVH) reported a more moderate 6% sales decline on relative strength in wholesale trends and retail sportswear.
Controlled Expenses Not Enough
Expense controls helped reduce the hit to the bottom line, but hefty pension expenses and negative currency translation took their toll and contributed more than half of the quarterly earnings decline of 26 cents, or 27.6%, to 68 cents per diluted share. Management expects full-year sales to fall between 5% and 7% and earnings between $4.70 and $5 per share. It also expects operating cash flow of $750 million. When subtracting out capital expenditure, which has averaged $121 million over the past three years, free cash flow should come in at approximately $5.65 per diluted share.
A Good Outlook
At projected free cash flow levels for the coming year, the stock price is discounting modest levels of free cash flow growth (less than 5%) over the next decade. This should be a low enough bar for VF Corp to exceed, and over the past five years it has managed to grow average annual sales 5.5%, earnings 10%, and cash flow 7.5%. A good chunk of this growth has come via acquisitions, but current indications are that the company is still able to grow organically in what is proving to be a very challenging period for global retail firms.
Bottom Line
Management has so far proven adept in the current environment and remains focused on boosting profitability along with top-line expansion. A couple of years ago it sold its lower-margin intimate apparel business to Fruit of the Loom, which competes with Hanesbrands (NYSE:HBI) and Maidenform Brands (NYSE:MFB) in the more commoditized space in the retail industry. Shareholders can reasonably expect more of the same from VF Corp in the coming years. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
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