This Growth Company Continues to Execute its Game Plan

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V.F. Corporation (NYSE: VFC) and its iconic North Face brand have yielded a stock price that brings to mind a mountain climber reaching ever thinning air in quest for the summit.  With a market capitalization of $16 billion and sales north of $10 billion, have this company’s best growth days come and gone?  Would investing in this company after a decade of outperformance leave investors in the wake of an avalanche as lofty expectations fall short?  Or can V.F. Corp. continue to execute its plan of acquiring and growing brands, capitalize on international growth opportunities, and ultimately continue to earn excess returns on invested capital that lead to consistently higher market valuations?

V.F Corp. traces its roots back to 1899 and today is a leading global apparel company.  They own more than 25 brands, many of which have been acquired since 2000.  The most recent acquisition is that of Timberland for $2 billion, which now joins other iconic brands such as The North Face, Vans, Nautica, Lee, and Wrangler.  Today, about 80% of sales are attributed to the outdoor/action and jeanswear divisions.  Normally a serial acquirer wouldn’t be associated with consistent, market-beating performance, but this is exactly what V.F. Corp. has been able to achieve.  They have been able to buy brands with single-digit margins and then both grow the top-line and increase margins into the mid-teens.  Shareholders have been rewarded to the tune of 18% annualized returns in the last decade versus just 7% for the S&P 500.  Much of this upside has been realized in the last four years, when V.F. Corp. has been able to outperform during both the bear market and ensuing cyclical bull market. 


Window Shopping

Let’s first look at peer comparisons to see how V.F. Corp. stacks up.  Anything at the extreme ends of the spectrum could give off warning flags or support a bullish thesis.  Starting with size, Nike (NYSE: NKE) is the clear global leader.  Nike is a bit opposite of V.F. Corp. in that they started with footwear and moved into apparel whereas V.F. Corp. started with apparel and is expanding into footwear (Timberland acquisition).

V.F. Corp. is able to achieve robust 15% EBITDA margins, which are only topped by Ralph Lauren (NYSE: RL).  V.F. Corp. transforms acquired companies by moving previously weak margins toward the company’s target of 15% not just by cutting costs, but by setting a strong foundation for long-term growth.  They bought The North Face in 2000 when it was a $200 million business, and now the brand produces just under $2 billion in annual sales.  This is why their acquisition model has yielded substantial returns for shareholders: They don’t just spend capital, but actually achieve excess returns on invested capital.

And lastly, V.F. Corp.’s valuation remains attractively positioned from an earnings, sales, and cash flow standpoint.  This is despite growth that surpasses everyone but PVH Corp. (NYSE: PVH).  Growth is measured as 5-year geometric growth in EBITDA.  PVH has made some big acquisitions in recent years.  They spent roughly $3 billion for Tommy Hilfiger in 2010 and spent roughly the same amount early this year to acquire Warnaco Group.

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Still a Growth Story

First off, management is targeting 8% constant currency organic growth for 2012.  This is a sizable number, and compounded on this is consistent margin improvement as higher margin businesses grow faster than lower margin businesses.  The result is an estimated increase in earnings-per-share of 17% for 2012.  This growth is fueled by innovation and is the central theme to the strong performance generated over the last 10-12 years.  There is no reason to doubt that management’s strong business prowess will materially change in the coming years.

V.F. Corp. is still primarily a North American company, although they have a footprint across the globe.  The company has enormous international opportunities, especially with The North Face brand.  Management cites South America as a huge opportunity, and Asia only did $160 million for the division but is growing more than 20% a year.  China?  Well it is only 4% of sales, but growing more than 20% annually as well.  One potential risk is that Europe accounts for more than 25% of sales and the continent remains a black hole for economic growth.  This could either continue to negatively weigh on results or be the impetus for surprise earnings beats and near-term outperformance if the region shows any signs of life.

And the last opportunity is e-commerce and retail outlets.  The company only has 100 retail stores whereas Ralph Lauren has almost 400.  Combine store expansion with Internet retailing trends and you get further support for continued top-line performance.

Bottom Line

V.F. Corp.’s performance measures are top-notch and shareholders have been well rewarded.  The stock continues to have all the attributes for sustained long-term gains.  Whether the company can finish this year ahead of the S&P 500 (currently +4% advantage) for the fourth consecutive year and do it again in 2013 is a more difficult conclusion to reach.  V.F. Corp. recently raised their dividend 21%, and shares now have a decent 2.3% indicated yield.  The company has high investment grade credit ratings and a solid balance sheet.  Patient, long-term investors seeking a relatively safe growth stock that also pays some dividends may be well served to consider V.F. Corp.

market8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Nike. Motley Fool newsletter services recommend Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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