VF’s Quarter and Results for the Year: One Sentence Caught my Attention

Okay, strong balance sheet, revenue growth, profitable, blah, blah, blah. I’ll get to all that. But on page 22 of the conference call an analyst asked about their interest in potential acquisitions. The answer from CFO Bob Shearer, in part, was “…how we think about acquisition targets, and we think about it a lot, and yes, we have a list. But we think about brands that are complementary to our brand portfolio that help us reach customers/consumers.” 

I added the italics and bold type. You wouldn’t think that their having a list would get me quite this interested, but it does. Consider what it means. They have a list of companies they might want to buy. I assume they didn’t create this list by throwing darts or rolling die. Maybe there’s a drinking game! Probably not. They had a process whereby they looked at the brands they own, with whom and how they compete, and their customer segmentation. Then they surveyed the universe of competitors and analyzed and selected the ones they thought might be good fits.
Okay, I don’t want to make VF sound too omnipotent here. Maybe they aren’t as rigorous as I’m suggesting. Acquisitions in this industry, in my experience, have a large element of serendipity to them. Still, such a process would be consistent with the management rigor I think I hear in their public information. And it would be important managing their portfolio of brands.
Just so you see how important, here’s a list of the brands they own and the markets those brands are in.
That’s a lot of brands, a lot of markets, and quite a bit of market overlap. Randomly buying brands because they were “a good deal” and increased revenue would result in an unmanageable behemoth pretty quickly. That, I assume, is where the rigor of developing the list comes in. Deals they make will be supportive of markets where they already participate and have expertise.
Their management rigor also shows up in their operations. VF makes around 500 million units of product a year for 35 brands. They own 28 of their own factories and work with 1,800 contract manufacturers in 60 countries. They’ve got 29 distribution centers and 1,246 retail stores under various brands.
In what is probably an understatement, they say in the 10K (you can see it here), “Managing this complexity is made possible by the use of a network of information systems for product development, forecasting, order management and warehouse management, attached to our core enterprise resource management platforms.”
Why is this a good thing? Here’s another quote from the 10K.
“We believe that we will be able to remain cost competitive in 2014 due to our scale and significance to our suppliers. Absent any material changes, VF believes it would be able to largely offset any increases in product costs through: (i) the continuing shift in the mix of its business to higher margin brands, geographies and channels of distribution; (ii) increases in the prices of its products; and (iii) cost reduction opportunities. The loss of any one supplier or contractor would not have a significant adverse effect on our business.”
Not sexy maybe, but I’d characterize all this boring operations stuff as a critical competitive advantage. It’s particularly important for integrating and realizing value from an acquisition. Anybody can buy a company. It takes good management and hard work to integrate it effectively into an existing organization. And careful selection of the acquisition target, which brings us back to their list of company’s they watch. Having tied that together, we can now move on to the numbers.
Fourth quarter revenues were $3.29 billion, with a net profit of $368 million, or 11.2%. Outdoor & Action Sports revenues were up 12% for the quarter. The North Face rose by 12% and Vans by 14%. “Vans was up at a low-double-digit rate in the Americas, up 20% in Europe and up at nearly the same rate in Asia.”
For the year, VF’s revenues rose 5% from $10.77 to $11.3 billion. The growth was all organic. That is, there were no acquisitions in 2013.
38% of revenue was from outside the U.S. Direct to consumer, which includes retail stores, outlet stores and online represented 22% of revenue compared to 21% a year ago. Ecommerce by itself was $327 million, or 2.9% of total revenue. Of their 1,246 retail stores, 1,166 carry only a single VF brand. The other 80 are VF outlet stores. The plan is to open another 150 stores in 2014 focused mostly on Vans, The North Face, Timberland and Splendid.
They also note, “In addition to our direct-to-consumer operations, our licensees, distributors and other independent parties own and operate over 3,000 partnership stores…”
The Outdoor & Action Sports segment grew from $5.866 to $6.379 billion and represents almost 56% of total revenue for the year. It generated an operating profit of $1.106 billion, representing 57.3% of VF’s total operating profit for the year of $1.93 billion.
“The Outdoor & Action Sports Coalition revenues increased 9% in 2013 over 2012 primarily due to an increase in unit volume. The North Face, Vans, and Timberland brands achieved global revenue growth of 7%, 17% and 5%, respectively. U.S. revenues increased 7% in 2013 and international revenues increased 10% with balanced growth in Europe and Asia Pacific. Direct-to-consumer revenues rose 15% in 2013 driven by increases of 28% and 15% for The North Face and Vans brands, respectively. New store openings, comp store growth and an expanding e-commerce business all contributed to the direct-to-consumer revenue growth.”
The North Face grew its revenues by 20% in Asia and at a “mid-single digit” rate in Europe. They don’t tell us what happened in the U.S. but given those numbers it seems to imply that things weren’t that good.
One analyst, referring to The North Face, asked if they’d seen any changes in the competitive environment. Steve Rendle, Group President of Outdoor and Action Sports Americas answered, “The competitive set in the outdoor industry remains the same. As North Face transcends that outdoor space it takes on a whole lot of new competitors.”
Those new competitors a brand encounters as it extends its reach is something I’ve talked about often. It’s a whole new competitive environment and we can all think of brands that haven’t done well trying to extend themselves. But they weren’t VF’s size with its management processes and balance sheet. Part of how they expect to succeed, Steve Rendle says in response to another question, is because The North Face “…is very much a pre-booked business model…we will buy to that order book and that order book is about 90% to 95% of our total revenue.”
They don’t, in other words, risk making too much product and over distributing. As you know, I like that a lot. It’s important to building a brand.    
Vans, we learn, passed $1 billion in the Americas in 2013. They highlight that Vans is no longer just a footwear brand and is having success moving into apparel. They note that, “According to data from more than 160 US board shops, Vans is a top 10 brand in almost all of our men’s apparel and accessory categories.”
Okay, that has to be data from Action Watch. I’m wondering just what it means to be in the top 10. How many brands of men’s apparel or accessories does a specialty shop carry? Wish some analyst had asked for a more detailed explanation.
Van’s international business was up 23% for the year. There was a mid-20% increase in Europe and a “high-teen” increase in Asia. I’d like a bit more specific information. Given the overall increase of 17% and the increases they mention for Europe and Asia, what should I assume for the U.S? It’s interesting that they provide percentage growth numbers for the other areas, but not the U.S. or at least the Americas.
Gross margin rose from 46.5% to 48.1%. “The increase in gross margin reflects lower product costs and the continued shift in the revenue mix towards higher margin businesses, including Outdoor & Action Sports, international and direct-to-consumer,” management said.
Selling, general and administrative expenses rose from $3.597 to $3.841 billion. As a percentage of total revenues it rose from 33.1% to 33.6%. This was partly because they choose to make some additional marketing expenditures “…to support future growth for our largest and fastest growing businesses.” Kind of nice to have a balance sheet that supports that kind of decision making. It was also higher because Timberland was included for a whole year for the first time. Advertising and promotion expense alone was $671.3 million, or 5.9% of revenue.
Interest expense was $80.6 million for the year. The weighted average interest rate was 4.5%. I just mention that because I wonder about the impact on VF, and lots of other companies, when interest rates rise substantially. That is going to happen, and if I knew when I’d get very, very rich.
Net income was $1.21 billion, up from $1.09 billion last year.
The balance sheet is strong, with a current ratio of 2.5 and a debt to total capital ratio of only 19.3%. Inventory was up a bit, but less than you’d expect given the revenue growth. Receivables were up 11.3%- more than twice the revenue growth.
If I could ask a couple of balance sheet related questions just because I have an inquiring mind, the first would be about the accrued liabilities. They total $905 million, and are mostly broken down in Note J. But the biggest single entry, for $209 million, is “other.” It’s not that it’s a big number for VF, but I’m curious what’s in it. Oh well, guess we’ll never know.
The second would focus on Note M on their retirement and savings benefit plans. Not much a question as a comment. I note that their expected rate of return on plans assets in 2013 was 5.7%. Obviously, the higher your expected return, the less you have to put into the plans each year to meet the obligations. VF’s 5.7% may still, in my opinion, turn out to be a bit high, but it’s certainly reasonable. Good for them for being realistic. When you see a company (or a municipality, or a state) claim their pension plan is “fully funded,” that’s based on certain assumptions about how long people are going to live and how much the plan assets are going to earn. If those assumptions aren’t reasonable, then the plan is probably not fully funded. Ask the pension holders in Detroit.
Okay, I know nobody wants to hear any more about that, so I’ll move on.
VF’s four growth drivers are leading in innovation, connecting with consumers, serving consumers directly wherever and however they want to engage the company’s brands, and continuing to expand geographically from the Americas to Europe and Asia in mature and emerging markets. Those might sound a bit like platitudes taken in isolation. But in conjunction with the strategies and management processes we’ve highlighted here, they seem credible.