V.F. (VFC)

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With total revenues of over $6B in 2006^[1],V.F. Corporation (NYSE: VFC) is a leading clothing manufacturer. The company owns a broad range of major brands in denim, sportswear, and outdoor apparel. Some of its better known brands include Lee, The North Face and Vans. Although V.F. has its own retail stores, it primarily sells its clothing through department stores and other national mass-market chains; its five largest customers, including Wal-Mart, Target, and Sears, accounted for over a quarter of total revenue from 2004 to 2006.^[2]

In recent years, the company has shifted its business strategy from maintaining its mass-market holdings to acquiring "lifestyle brands"—clothing that resonate with consumers and generally come with higher margins. The company has focused on using its supply chain expertise to improve these brands' business operations, while leaving the creative decisions to the brands themselves. To meet this goal, V.F. has spent over $2B in the past few years acquiring more upscale brands like Nautica, John Varvatos, and most recently, Seven For All Mankind.^[3].

[edit] Company Overview

[edit] Breakdown of Holdings

Historically, V.F.'s revenue has largely come from its holdings in mass market jeanswear (e.g. Lee, Wrangler, and Rustler jeanswear), as well as intimate apparel. But as the company seeks out brands with higher growth prospects, it sold its intimate apparel unit and acquired several luxury demin and sportswear lines. In addition to these higher-end brands, a significant portion of the revenue is derived from the company's outdoor apparel holdings, which includes brands such as Reef, Vans, and the North Face.

^[4]

[edit] Revenue and Income

V.F.'s revenue and income have steadily increased over the past few years largely as a result of strong sales in the higher margin demin and sportswear brands the company has acquired. V.F.'s outdoor brands have also driven profits, as the company's 2007 3rd quarter earnings in that division were up 23% from a year ago.^[5] In addition, net revenue for V.F. was up 10% in 2006, largely due to organic growth (i.e. growth excluding mergers and acquisitions).^[6]

^[7]

[edit] Trends and Forces

[edit] Volatility of Fashion Trends

The world of luxury consumption is quite often a fickle one. Less well-established brands that were popular one season can lose much of their luster in the next one. As V.F. seeks to expand its presence in the higher end of the apparel market, it must contend with the potential for rapid change in consumer tastes. These fluctuations may lead to increased volatility in V.F.'s revenues in the years to come.

[edit] U.S. Economic Conditions

Almost 75% of V.F.'s business is conducted domestically, rendering it particularly susceptible to shifts in the U.S. economy. Recent trouble in the credit markets, coupled with high gasoline prices, have the potential to depress domestic consumer spending, thereby impacting V.F.'s bottom line. However, V.F.'s mass market jeanswear, which accounts for almost half of the company's, serves as a significant hedge against decreases in consumer discretionary spending. Although V.F.'s brands attract a wide range of customers, most consumers are more likely to spend on low-cost wardrobe basics than designer apparel in an economic downturn. But as V.F. continues to expand its near luxury holdings, it will become more vulnerable to changes in the U.S. economy.

[edit] Dependency on Department Stores

Department stores in the United States have undergone significant changes in recent years. In response to declining margins, stores have implemented tighter inventory controls and have scaled back the quantities of merchandise that they purchase from wholesalers like V.F.. As a means of increasing market share, companies have also sought to differentiate themselves from the competition by demanding exclusive contracts and store-specific private labels (e.g. Ralph Lauren's "American Living" line for J.C. Penney).^[8] In addition, a series of mergers and acquisitions in the industry (e.g. Federated Department Stores' 2005 takeover of Marshall Field's) give the businesses that remain potentially greater power to negotiate lower prices with V.F., thereby lowering profit margins.

[edit] Competition

V.F. faces a broad range of competitors across its various holdings. Its Seven for All Mankind demin brand competes with labels like True Religion, Diesel, and Citizens for Humanity. It's Nautica brand competes against Polo Ralph Lauren, Van Heusen, and IZOD. The company's North Face brand competes with other outdoorswear brands like Timberland and Columbia Sportswear.

[edit] Notes

1. ↑ from V.F.'s 2006 10-K, Part II, Item 6, p. 12 (filed Feb. 27, 2007)
2. ↑ from V.F.'s 2006 10-K, Part II, Item 6, p. 24 (filed Feb. 27, 2007)
3. ↑ from V.F.'s 2006 10-K (filed Feb. 27, 2007)
4. ↑ from V.F.'s 2006 10-K, Part II, Item 7, p. 34 (filed Feb. 27, 2007)
5. ↑ from V.F.'s 2007 3rd Quarter 10-Q (filed Nov. 6, 2007)
6. ↑ from V.F.'s 2006 10-K (released Feb. 27, 2007)
7. ↑ from V.F.'s 2006 10-K, Part II, Item 6, p. 24 (released Feb. 27, 2007)
8. ↑ "Top fashion designers go down-market", USA Today (published September 25, 2007)
9. ↑ These figures were taken from Yahoo! Finance