MARKET WATCH: VF Industries Conference Presentation
Jeff Harbaugh
- January 14 2009
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VF’s January 14th press release already had my attention before the web cast of their investors presentation was released.
I strongly recommend you take the time to watch the whole web cast and look at the slides. You’ll see how a well managed company is going to survive and even set themselves up to prosper during our little ongoing economic inconvenience. What are they doing?
• Reacting quickly and decisively
• Not jumping into a hole and hiding
• Being realistic
• Taking advantage of opportunities the recession may create
• Continuing to be financially conservative- strong balance sheet
• Following the basic strategy they have been following for some years.
They are able to accomplish the first five largely because of the sixth. If they hadn’t been following the financial, branding, and diversification strategy they had been following, it would be too late to start now as a response to the recession. The thing that positions any business for a recession is good management before the recession starts. Just because you have cash flow and lots of customers when times are good doesn’t mean you’re a god of management. It may just mean that a rising tide lifts all boats.
Go look particularly at their slides four and five for their take on the business environment and how they see things changing. I’ve been writing that the environment we’re going into may not resemble the one we’ve just left for a long time and it looks like VF has some of the same beliefs.
They’ve taken cost reduction actions that will save $100 million in 2009. That required a fourth quarter 2008 charge to income of $42 million, or $0.30 a share. Revenues for that quarter will be down about 2%, but that includes a negative 2% impact from foreign currency translation. Excluding the $42 million charge, earnings per share will be down seven to eleven percent from the $1.46 of the fourth quarter in 2007. For all of 2008 revenues are expected to be up around 6%. Earnings for the year will be flat for the year even including the 4th quarter charge at about $5.41 per share.
Early guidance for 2009 is that revenues will be down slightly to $7.6 billion and that earnings per share will be flat. Without a $0.50 charge for pensions and a $0.20 charge for foreign exchange, they expect their 2009 earnings would be up more than 10%.
They won’t be the only corporations with charges for those items. I’ve written before about the pension issue. Basically, VF has a defined benefit plan. That is, they have to pay a retiree a specific amount usually based on their salary and how long they worked for VF. They have to pay into a fund based on actuarial calculations so that they have enough to pay these liabilities. When the stock market drops, the value of these investments drops and they have to put more into the fund. If it rises, they have to put in less or maybe nothing. That payment into the fund will reduce their earnings per share in 2009 by a currently estimated $0.50.
One other comment on their presentation; they say they have “total liquidity” of $1.6 billion. Of that amount, $350 million is cash in the bank. The rest is available lines of credit.
One thing I’ve been wondering about (not just with regards to VF) is the roll and value of brands in our new economic environment. Their fifth slide lists some changes in consumer attitudes and behaviors. These included:
• Widespread trading down
• Shift more to “need” from “want”
• Decline in shopping as entertainment
• Thrift reacquires virtue
• Conspicuous consumption and flash out of style
• Greater consideration for value
• Greater promotional sensitivity
• Shift from credit to cash
Now, you can’t expect a brand based company to say this, but what do those things mean for the role of brands? To what extent will consumers care about, and be able to afford to buy, a product that makes them feel better or like they belong to something when the product itself is, except for the differences created by advertising and promotion, often no different from much cheaper products? Especially when those advertising and promotional efforts are being cut back.
I suppose the answer is, “They won’t.” At least not to the same degree they did before. So brands and companies that aren’t well positioned are going to have a hard time, and some are going to go away and companies like VF are going to weather the storm and eventually prosper as a result- as long as the change isn’t too great.
Just to give us all some perspective, I am inconveniently forced to recall that some years ago I wrote a glowing review of PacSun which at the time was killing it. And continued to kill it for a while after I wrote the review. I am not comparing VF to PacSun, but things change. And these days, they change more quickly than we ever imagined they could. VF has been acting decisive and flexible. I hope they, and all of us, can be flexible enough.
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.
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