Gear Up With VF Corporation

 | May 01, 2012 | 1:30 PM EDT
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First-quarter retail earnings from retailers have been ugly so far, and there are a couple of key elements to be aware of prior to earnings intensifying for the sector this month.

Deckers Outdoor (DECK), Crocs (CROX), Jones Group (JNY) and Columbia Sportswear's (COLM) major department store accounts are placing lower amounts of new orders for fall 2012, following a warmer-than-average winter 2011 after which excess inventory had to be cleared through profit-busting markdowns in January, February and March or sold off to the likes of TJX Companies (TJX) and Ross Stores (ROST). In this instance, blaming Mother Nature is fair, and wholesalers, specifically those that sell cold-weather gear, are paying the price in the form of limited forward order visibility.

Furthermore, the wholesalers have not been optimistic on the prospect for replenishment orders if consumer demand surprises to the upside this holiday season; department stores may just opt to maximize gross-margin dollars after being forced to cut their losses on old inventory in 2011.

The wholesale and specialty apparel sectors of retail have to be separated if one is inclined to gain equities exposure to consumer discretionary names. Specialty apparel retailers continue to operate on lean inventories, and there is a tangible benefit in the second half of 2012 from lower year-over-year cotton costs.

A cautious ordering environment on the part of department stores means that brands historically able to command full price, or near full price, will be allocated the large majority of merchandise buying dollars. Not all wholesale stocks should be ignored -- for instance, investors might want to direct their attention toward VF Corporation (VFC).

The company's first-quarter results were far from perfect. Its Timberland brand is a notoriously volatile business, but VF Corporation moved aggressively to liquidate unsold inventory. The continued clearing of these goods will weigh on second-quarter gross margins, so the inventory outlook does not improve meaningfully until the back half of year.

Excluding Timberland (and more broadly, Europe), however, the numbers and commentary by VF Corporation warrant a valuation in the range of $175 to $185 per share.

Here is some added support for the call:

  • North Face has sidestepped cautious department store order taking, with its fall backlog up by a double-digit percentage (exact figure not provided).
  • The Vans business has surprising momentum (and in Europe, no less).
  • The Wrangler and Lee denim businesses experienced sluggish sales in the first quarter overseas but boasted improved gross and operating margins.

Long-term considerations:

  • VF Corporation aims to reduce its product SKUs by 15% before fall 2013, thereby speeding up inventory turns (best sellers will be moving quicker), improving the cash conversion cycle and setting the stage for future strong dividend hikes.
  • Timberland will see a relaunch in 2012, and it sounds as though VF Corporation is finally bringing technological innovation (no doubt from the North Face team) to the brand. I hear this, and I think greater share of the department store floor and interest by curious consumers.


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