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Growth & Income

V. F. Corporation has put together 12 straight quarters with positive earnings surprises and 40 consecutive years with an annual dividend increase. In late October, this Zacks #2 Rank (Buy) apparel and footwear company raised its earnings outlook for the full year after a strong third-quarter performance. Given all these factors, VFC seems to be an attractive pick for investors seeking growth and income.

Third Quarter Beat

On October 22, V.F. Corp. reported third-quarter earnings of $3.52 per share, inching past the Zacks Consensus Estimate of $3.49 and handily beating the year-ago performance by nearly 23%. The year-over-year increase was primarily driven by strong top-line growth along with improved margins.

Revenue of $3,119.6 million fell short of the Zacks Consensus Estimate at $3,172 million, but gained 14% year-over-year. VFC experienced robust revenue growth in Outdoor & Action Sports, international and direct-to-consumer revenues, but the sale of John Varvatos in April 2012 had a slightly negative impact.

Segment-wise, revenue at the company’s Outdoor & Action Sports jumped 29%, Imagewear climbed 3%, Sportswear was up 2%, International grew 28% and Direct-to-consumer increased 28%. Revenue at Jeanswear fell 1% and Contemporary Brands slumped 17%.

Gross margin in the quarter spiked 140 basis points to 46.7% from 45.3% in the year-ago quarter, due to improvement in higher margin businesses. Moreover, adjusted operating margin rose 90 basis points to 17.5%, reflecting higher gross margin.

Given the solid third-quarter results, the company raised its earnings forecast for fiscal 2012 by 10 cents per share to $9.60 per share. The company maintained its revenue projection for an increase of approximately 15% year over year to $10.9 billion.

The company also provided its outlook for the fourth quarter, forecasting revenue growth of 7% year over year on a constant currency basis. Adjusted earnings are anticipated to be up more than 30% from the year-ago quarter.

Earnings Forecast on the Rise

In the last 60 days, the Zacks Consensus Estimate for 2012 moved up 0.7% to $9.60, as 17 of 18 estimates were revised upward. The Zacks Consensus Estimate for 2013 is currently $10.97. These estimates represent year-over-year growth of 19.4% for 2012 and 14.2% for 2013.

Strong Dividend

V. F. Corp. has been consistently raising its dividend every year for the past 40 years. In October, the company announced a 21% increase in its quarterly dividend, which now stands at 87 cents per share. This brings the company’s annualized dividend to $3.48 per share.

This dividend, which will be paid on December 20, currently yields about 2.3%. The company has a payout ratio of 32%, while its 5-year annual dividend growth rate stands at 3.2%.

Valuation

Valuation looks reasonable for this apparel retailer with shares trading at 15.7x 12-month forward earnings, on par with its peer group average. However, on a price-to-book basis, shares are currently trading at 3.4x, a 9.7% premium to the peer group average of 3.1x.

Nevertheless, the stock looks attractive, given a trailing 12-month ROE of 21.6%, which is higher than the peer group average of 18.2%. The company’s long-term estimated earnings per share growth rate also remains strong at 12.0%.

The stock price is now mirroring the increasing trend of consensus estimates. The year-to-date return for the stock is 16.5%. Volume is averaging roughly 655K daily.

We remain impressed with V.F. Corp’s consistent positive earnings surprise trend, strong organic revenue growth and the raised management guidance. Furthermore, the company’s sustained focus on strategic acquisitions along with expanding global operations provide ample opportunity to boost the top and bottom lines. The company’s focus on broadening its business globally is evident from its recently announced expansion plans for Asia Pacific, one of the fastest growing regions in the world. The company targets Asia-Pacific sales at $2 billion by 2017.

Founded in 1899 and based in Greensboro, North Carolina, V.F. Corporation is one of the world’s largest apparel companies with more than 30 brands. The company primarily generates its revenue from jeanswear, outdoor, imagewear, contemporary brand and sportswear divisions. The company sells its products through specialty stores, department stores, national chains, and mass merchants, along with licensees and distributors. It has a market cap of $16.7 billion.



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