In Retail, VF Can Keep Thriving

 | Oct 25, 2011 | 9:00 AM EDT
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Following the gotcha moment conducted on a grand stage by Crocs (CROX) last week, the market was certainly on notice for potential disasters from U.S.-based apparel and accessories manufacturers.

It looks as if strong brands received love from their mall partners in the third quarter, with reorders and forward bookings, while less-than-soughtafter brands received the cold shoulder. I think the retail price increase bonanza of 2011 has caused department stores to be very careful with their open-to-buy, or future budgeted, dollars. If too much inventory is ordered from so-so brands that are asking the consumer to pay a higher prices vs. 2012, the department store runs the risk of greater-than-expected markdowns as consumers say "no thanks."

Commodity items, or basics, continue to be a challenging area in retail. VF Corp. (VFC) saw it in its jeans business in the third quarter, Wal-Mart (WMT) still has softness in its apparel offerings, teen apparel retailers are conducting a jeans and t-shirts pricing death match and JC Penney (JCP) opted to become more competitive on price.

Normally I don't advise chasing a stock after the earnings report, given the propensity for profit taking. But there is still an opportunity in VF, a name that I have been bullish on all year long due to its competitive strengths in the marketplace that has afforded it the luxury of pricing power across multiple brands.

That call to action in the stock stems from the nearing holidays and the market in active pursuit of retail winners. Considering commentary by management teams has been scarce since the second-quarter releases back in August, my view is that the market is eager to latch onto names that more than just navigated the third-quarter economic blip, but thrived and stole share.

VF thrived while others lagged, and the company looks prepared to continue consolidating its stronghold of department store floors in the U.S. into 2012.

The stock is at all-time high and trades on a premium P/E multiple relative to the five-year mean and peer comparables, so this is a story that has been pulled from the bag by and large.

The opportunity for another leg up in the stock though is rooted in the strong probability for a further markup in consensus forecasts for 2012 due to declining costs to produce product are on a collision course with jacked up prices, a winning outcome as far as margins go; the fact that Timberland EPS accretion is running ahead of plan, no shocker there as growth brands did exist in the portfolio at the time of the acquisition; and that the market is still bracing for the worst regarding Europe. But VF is simply defying the doom-and-gloom forecasts and importantly, there is visibility into this continuing into first quarter as seen in bookings.

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