MARKET WATCH: A Few Interesting Points on VF’s Latest Quarter

Jeff Harbaugh

• November 07 2008
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VF owns Vans, Reef, Nautica, Wrangler, Jans Sport, Eagle Creek, Lee, Majestic, Red Cap, Lucy, Rustler and other brands as well. They organize their business and report in six segments, which they call Coalitions; Jeanswear, Outdoor, Imagewear, Sportswear, Contemporary Brands, and Other. So if you’re waiting for me to tell you how Reef of Vans did on their own I’m going to have to disappoint you. I’d like to know myself, but that data is not provided.

Click HERE for the link to the filing.

Revenue for the quarter rose 6.4% to $2.207 billion compared to the same quarter last year. Gross margin rose to 44.4% from 43.9%. Operating income rose 6% and net income was up 12.9%. That translates into earnings per diluted share of $2.14 compared to $1.89 in the same quarter the prior year.

The balance sheet continues to be strong and has strengthened some from a year ago. Current ratio is up from 1.9 to 2.2 and the debt to total capital ratio fell from 33.7% to 28.8%. It’s a good time to be strengthening your balance sheet. VF includes in the filing their balance sheet from a year ago as well as from the end of their last year. Not all companies include that year ago balance sheet, but you really need it, since seasonality can make quarter to quarter balance sheet comparison somewhat problematic. Total current assets are $3.1 billion and total assets $6.98 billion. VF has equity of $3.86 billion.

Hey, here’s a fascinating footnote we should talk about; Note G- Pension Plans. I should point out that I’m choosing to talk about this just because it’s something I think you should be aware of and I happened to think of it as I read through this filing- not because this is an issue specific to VF or because they have an issue with their pension plan different from other companies.

VF has a defined benefit plan.  That is, the payments you get in retirement are based on some formula that usually includes how long you worked and what your compensation was. VF has a responsibility to fund that plan so that it can meet its obligation to its retirees. Money they put into it is an expense on their income statement. How much they contribute depends on various actuarial assumptions they make about how many retirees they will have, how long they will live, and what the rate of return on the pension plan assets are. If, for example, a company assumes that their portfolio of stocks and bonds is going to earn 10% a year, they have to put less into the plan than if they assume that it’s going to earn 5%. Here’s what VF said about their plan.

“During the first nine months and extending into the fourth quarter of 2008, the fair value of investments in our qualified defined benefit pension plan declined due to disruption in the global capital and credit markets…. If our plan’s investment portfolio does not recover its losses before our next plan measurement date at the end of 2008 and if the extent of the effects of any decline in asset values are not offset by the effects of a possible increase in the discount rate used to value the plan’s obligations to participants, it is likely that (i) the reduction in the plans’ funded status will result in charges to Other Comprehensive Income at December 2008, (ii) our pension expense in 2009 will increase, and (iii) VF will be required to make funding contributions to the plan in 2009.”

I’ve seen one writer suggest that General Motor’s retirees may end up owning the company because of that company’s unfunded pension liabilities. Let’s say you’re the pension committee and all through the 1990s you happily assumed, and earned a 12% or better return on your pension plan assets. Since 2000, it hasn’t quite worked like that. But maybe because you believe the good old days will return, or because you really need the cash for operations, you didn’t cut that assumed rate of return or make the payments to the pension fund a lower rate would require. Now you have to face the need to make catch up payments as well as replacing the declining value of existing assets. Should be interesting to watch this play out.

Meanwhile, VF does supply really good information on its Coalition results. Here are the revenues and costs for them for the quarter compared to the same quarter last year.

They note that “Our direct-to-consumer and international businesses continue to be key drivers of growth, with these revenues in the quarter rising 12% and 22%, respectively.  International revenues represented 34% of total revenues.” In regards to their international business they note that “a weaker U.S. dollar in relation to the functional currencies where VF conducts the majority of its international business (primarily the European euro countries) benefited revenue comparisons by $50 million in the third quarter of 2008 and $148 million in the first nine months of 2008, compared with the 2007 periods.”

In discussing their Coalitions, it’s instructive to look at what they say about their Jeanswear and Outdoor segments during the quarter. They point to a 3% decline in domestic jeanwear revenue as resulting from the challenging retail environment, with “retailers lowering their inventory levels and consumers moving to lower price points, including private label products.” They note that international jean revenues were flat, but that a $20 million benefit from foreign currency translation is included in that result.

Outdoor, which includes Vans and North Face among others, had revenue growth of 12% during the quarter.  Let’s hope the action sports industry is somehow more about outdoor than it is about denim.

Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.