A Dividend Aristocrat with Some Kick
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've known about V.F. Corp. (NYSE: VFC) as a dividend aristocrat for a while now. When the company acquired Timberland I wasn't tremendously surprised, as this brand seemed to fit with the existing portfolio. What I didn't realize at the time was the difference that Timberland could make to the company's future growth rate. With V.F. Corp. reporting earnings, investors got a chance to see what a difference this footwear brand can make.
I've been impressed already by V.F. Corp's ability to grow its dividend at a respectable rate over many years. With top brands such as Timberland, Vans, Nautica, The North Face, and others, the company has different styles to appeal to a large cross section of consumers. In the retail industry, mass appeal is extremely important and something that individual retailers don't seem to be able to consistently get right. For instance, The Gap (NYSE: GPS) has a brand portfolio of its own, yet has struggled to consistently produce the kind of results investors expect. While the company appears to be turning itself around, having beaten earnings in four of the last four quarters, The Gap's cash flow tells a different story. In the last three years, the company's cash flow has decreased by a total of over 29%. During the same time frame, V.F. Corp. has seen its overall cash flow grow by more than 45%. In another comparison, V.F. Corp. competes directly with Sears Holdings (NASDAQ: SHLD) and its Lands End product line. One company has grown its earnings, cash flow, and dividend (V.F. Corp.). The other company has seen earnings disintegrate, has had negative cash flow, and has no yield (Sears). You can see in the apparel industry there are clear winners and losers, and the stock market is not kind to those that come in on the short end of the stick. Luckily for V.F. Corp. investors, the company has beaten estimates in each of the last four quarters and just turned in a very impressive earnings report.
The company's earnings have to be looked at from the perspective of organic growth versus reported growth because of the Timberland acquisition. For instance, total revenues including Timberland increased 16%, but organic constant dollar growth was up 6%. In the same way, adjusted EPS came in at $1.11, which was down 5%; however, $.12 was related to losses from Timberland and $.11 was from the negative impact from foreign exchange and higher pension expense. There are a lot of moving parts to V.F. Corp. so it makes sense to look at each division's results individually.
The division most affected by the acquisition of Timberland was the company's Outdoor and Action Sports unit. Revenue increased an impressive 44.86%, primarily due to Timberland, but because of integration costs, profit was actually down 7.83%. In the Jeanswear division, revenue was down about 1% in constant dollars. However, the company expects mid-single-digit revenue growth for the year, as margins improve with a hopefully more normal fall and winter season. The Imagewear division showed revenues up just 3%, but this was considered a good achievement versus the exceptionally strong growth this unit saw last year. In the Sportwear division revenues were down 2%, but the company still projected mid-single-digit revenue growth for the year. In the Contemporary Brands division, revenues were reported down 6% in constant dollars. This was due primarily to the sale of the John Varvatos line; excluding the sale, revenues were actually up 7% in constant dollars. This unit is expected to see high single-digit growth, but it will appear the unit experienced a mid-single-digit decline because of this previously mentioned sale. While these are the more traditional divisions of V.F. Corp., the two stars of this earnings report were the company's International and Direct to Consumer divisions.
Internationally, the company's revenues increased 42%, with Timberland representing 26% of this increase. Even worries in international economies were not enough to slow down the company's growth. Sales in Europe were up 16%, Asian sales increased 20%, Chinese sales were up 30%, and now this division represents 33% of total revenue. In the Direct to Consumer division, revenues increased 37% again primarily due to Timberland. The company opened 34 new stores, bringing the total to 1,071, and this division now represents 21% of total revenues. When you realize that these two highest growth divisions now account for more than 50% of total revenues, these higher growth rates should begin to increase V.F. Corp.'s overall earnings growth. You can see from the company's financials and outlook that they certainly expect good things in the future.
The company's gross margin increased slightly to 46.1%, and net income plus depreciation increased 13.66%. On an adjusted basis, the company's free cash flow payout ratio came in at 49.25%. This bodes well for the company to continue its impressive streak of dividend increases. For the year, the company expects revenue growth of 17% in constant dollars, and earnings per share of about $9.50. With this EPS projection, shares sell for about 15.74 times 2012 projections. Analysts are calling for EPS growth of 13.46%, add in the company's almost 2% yield, and the stock looks attractively priced. This company was already a dividend aristocrat, but with Timberland their growth rate should have more kick than before.
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