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V.F. Corporation (VFC - Analyst Report) reported third-quarter 2012 adjusted earnings of $3.52 per share, speeding ahead of the prior-year period earnings of $2.87 and Zacks Consensus Estimate of $3.49. The year-over-year increase was primarily driven a strong top-line growth along with improved margins.

Quarter in Detail

V.F. Corp.'s third-quarter revenue of $3,119.6 million fell short of the Zacks Consensus Estimate of $3,172 million. Revenues grew 14% compared with the year-ago period, on the back of robust growth in Outdoor & Action Sports, international and direct-to-consumer revenues. However, the sale of John Varvatos in April 2012 had a slightly negative impact on revenues.

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

Segment Details

Revenue at Outdoor & Action Sports jumped nearly 29% from the year-ago quarter to $1,852.3 million, of which Timberland and Smartwool brands contributed $499.0 million. Business operations from Americas and Asia contributed to the revenue increases, which were partially offset by a decline in European operations. Segment operating income (excluding Timberland) increased 16% year over year, while operating margin expanded 220 basis points to 25.7%.

Jeanswear revenue inched down 1% to $718.8 million. The year-over-year double-digit growth at the U.S., Latin and Central America and Asian businesses were more than offset by a decline in revenues in Europe. However, the company witnessed significant growth in the segment’s operating income and margin, mainly on improved gross margin that came from lower product costs and better profitability in European Jeanswear.

Imagewear revenue climbed 3% in the quarter to $284.5 million. However, operating income and margin at the segment slumped due to high product costs.

Revenue at Sportswear edged up 2% to $154.2 million driven by increased Nautica and Kipling brands revenues. Segment operating income was slightly up, while operating margin remained flat year over year.

Contemporary Brands’ revenue slumped 17% to $104.2 million due to the sale of John Varvatos. However, operating income surged 66% during the quarter, while adjusted operating margin expanded 540 basis points to 12.9%.

The company’s international revenues increased 28%, contributing about 40% to total revenue. The growth was largely driven by strength across the biggest brands in Asia and Europe. Additionally, Timberland contributed 20 percentage points to this growth.

Direct-to-consumer revenue increased 28%, driven by the addition of 42 new stores and a 19 percentage points growth contribution from Timberland. The company’s total owned retail stores were 1,101 at the end of third-quarter 2012. Direct-to-consumer revenues reached 18% of VF’s total revenues.

Balance Sheet

V.F. Corp. ended the third quarter with cash and cash equivalents of $304.6 million and long-term debt of $1,429.8 million. The company’s shareholder equity came in at $4,926.8 million at the end of the third quarter of 2012.

Dividend

The board of directors of V.F. Corp. declared a quarterly cash dividend of 87 cents per share reflecting an increase of 15 cents from the previous quarter. This marks the company’s 40th consecutive year of dividend hike and will be paid on December 20, 2012 to shareholders of record as of December 10, 2012.

Looking into 2012

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, while it had earlier forecasted earnings of $9.50 per share.  However, the company retained the expected earnings contribution from Timberland at $1.10 per share.

The company maintains its revenue projection of an increase of approximately 15% year over year to $10.9 billion in fiscal 2012. Timberland is expected to contribute about $1 billion to fiscal 2012 revenue.

The company maintains its cash flow projection of a record $1.2 billion in fiscal 2012, mainly driven by strong working capital management.

In addition, the company provided its outlook for the fourth quarter. V.F. Corp. expects its revenue to increase by 7% year over year on a constant currency basis. Moreover, adjusted earnings are anticipated to be more than 30% from the year-ago quarter.

Our Take

We remain impressed with the company’s consistent positive earnings surprise trend, strong organic revenue growth, as well as the raised management guidance. However, stiff competition from private label brands and currency fluctuation still remain causes of concern, thus keeping us on the sidelines.

As one of the world’s largest apparel companies with over 30 brands, V. F. Corp is well positioned to generate above-average industry growth and sustain itself in the current challenging environment.

However, skepticism remains since the company derives about 40% of its sales from international business, which exposes it to risks of foreign laws and regulations that could negatively affect operations; foreign consumer preferences, disruptions or delays in shipments and currency fluctuations.

V. F. Corp, which faces stiff competition from well established apparel industry players like Polo Ralph Lauren Corp. (RL - Analyst Report), Sears Holdings Corp. (SHLD - Analyst Report) and The Gap Inc. (GPS - Analyst Report), carries a Zacks #2 Rank, implying a short-term Buy rating. However, we retain our long-term ‘Neutral’ recommendation on the stock.

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