Why This Apparel Company is a Good Buy

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

V.F. Corp’s (NYSE: VFC) stock price has seen an impressive 24% run up year to date, significantly outperforming the S&P 500. However the company’s stock price has underperformed the S&P 500 since its earnings, despite posting better than expected EPS. This is in contrast with its peer PVH Corp's (NYSE: PVH) over 20% post earnings gain. I believe VFC is a good buy at current levels. In this article, I am taking a look at the company’s prospects.

The company reported 3Q12 EPS of $3.52, beating the consensus estimate of $3.49. Taking Timberland’s coalition into consideration, it posted revenue growth of ~14.5% Y/Y. Outdoor & Action Sports sales were up by 29% from last year and international sales rose by 28% (Y/Y). Also, revenues from the direct-to-consumer segment increased 28%. VFC also added 42 new stores in 3Q12. This brings the company owned store count to 1,101 (against 1, 047 last year), a ~5% growth rate. Although, 3Q12 revenues stood at $3.15 billion, a bit lower than the consensus estimate of $3.17 billion with European macroeconomic factors playing the role. I expect 4Q12 sales to accelerate considering the shift of shipments of 3Q to 4Q.

Comparing VF with its peers, it has the highest ROE of 21.52%. Its dividend yield is also better than its peers. Let’s have a quick look at the comparative analysis of its ROE/Forward Dividend Yield against Nike, Jones Group, PVH Corp. 

<table> <tbody> <tr> <td> <p><strong>Company Name</strong></p> </td> <td> <p><strong>ROE</strong></p> </td> <td> <p><strong>Forward Dividend Yield (E)</strong></p> </td> </tr> <tr> <td> <p><strong>VF Corporation</strong></p> </td> <td> <p>21.52%</p> </td> <td> <p>2.30%</p> </td> </tr> <tr> <td> <p><strong>Nike</strong> <strong>Inc.</strong> <span class="ticker" data-id="204702">(NYSE: <a href="http://caps.fool.com/Ticker/NKE.aspx">NKE</a>)</span></p> </td> <td> <p>21.51%</p> </td> <td> <p>1.60%</p> </td> </tr> <tr> <td> <p><strong>The Jones Group Inc.</strong> <span class="ticker" data-id="204145">(NYSE: <a href="http://caps.fool.com/Ticker/JNY.aspx">JNY</a>)</span></p> </td> <td> <p>3.09%</p> </td> <td> <p>1.70%</p> </td> </tr> <tr> <td> <p><strong>PVH Corp.</strong></p> </td> <td> <p>3.63%</p> </td> <td> <p>0.20%</p> </td> </tr> </tbody> </table>

The company has good long term fundamentals with return improvement and quality of revenue streams being the focal points. Considering the margin expansion coming from higher selling prices, sales mix improvements and low inventory I see further upside in the share price.

Some of the long term growth drivers of the company include:

1) International Expansion:

VFC with its two biggest international platforms in Europe and China is shifting its focus towards opportunities in India, Brazil, Eastern and Central Europe. With these expansions, international revenue is expected to reach ~$4.3 billion by 2015. Additionally, the company's strong sales growth in Asia for 3Q12 (~25% y/y), signifies incremental revenues coming from these new markets in the future.

2) The Outdoor and Action Sports:

With the robust performance in 3Q 2012, the outdoor and Action Sports segment is likely to remain the biggest growth opportunity in the long term. With the North Face and Vans, its outdoor and action sports brands remain the leader in their respective categories. Vans is estimated to achieve 25% Y/Y growth for 2012. Besides the company is increasing its global marketing investments in 4Q12 for TNF and Vans which will help them expand in overseas markets

3) Direct to Consumer:

VFC’s future growth plans include its expansion of the direct-to-consumer business segment by focusing on retail and e-commerce. Direct-to-consumer revenues reached 18 percent of VF’s total revenues in the Q3 compared with 16 percent in the 2011 period. The company's investments in retail and e-commerce appear to be gaining traction. As part of the expansion plan the company will be increasing its store count to 6,000 by 2017.

To sum up, I believe the company will continue to deliver strong performance through international and Direct to Consumer expansions. Its series of acquisitions which include The North Face, Timberland, and VAN's have positioned themselves as strong players in the Outdoor category. The acquisitions are expected to comprise ~52% of the business in 2012 and growing up to ~58% by 2015. Further its marketing investment in TNF and VAN will result in increased market share. With an impressive balance sheet of $305 million cash in hand, a debt to equity ratio of 34.3% and management payout target of 40%, I recommend this stock as a buy.

ShwetaDubey 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.If you have questions about this post or the Fool’s blog network, click here for information.

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