V.F. Corporation (VFC)

VFC 
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V.F. (VFC)

Q4 2012 Earnings Call

February 15, 2013 8:30 am ET

Executives

Lance Allega

Eric C. Wiseman - Chairman, Chief Executive Officer, President and Member of Finance Committee

Robert K. Shearer - Chief Financial Officer and Senior Vice President

Steven E. Rendle - Group President of Outdoor & Action Sports Americas and Vice President

Scott H. Baxter - Group President of Jeanswear Americas & Imagewear and Vice President

Karen Murray - President of Sportswear Coalition

Susan Kellogg - President of Contemporary Brands Coalition

Cindy Knoebel - Vice President of Corporate Relations

Analysts

Robert S. Drbul - Barclays Capital, Research Division

Kate McShane - Citigroup Inc, Research Division

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Michael Binetti - UBS Investment Bank, Research Division

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Omar Saad - ISI Group Inc., Research Division

Presentation

Operator

Good day, and welcome to the VF Corporation Fourth Quarter Fiscal 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lance Allega, Director, Investor Relations. You may begin, sir.

Lance Allega

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss VF's fiscal 2012 fourth quarter and full year results. Before we begin, I'd like to remind participants that certain commentary included in today's prepared remarks and the Q&A session may constitute forward-looking statements in the definition of the federal securities law. Forward-looking statements include management's current expectations, estimates and other projections about our business, results of operations and the industries in which VF operates. Actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those projected in the forward-looking statements are discussed in the documents filed with the SEC.

Additionally, participants on today's call may discuss non-GAAP financial measures. You'll find the appropriate reconciliations in our press release, which was issued about an hour ago, and on our website at vfc.com.

Joining us on today's call will be VF Chairman and Chief Executive Officer, Eric Wiseman; Bob Shearer, our Chief Financial Officer; 2 of our Group Presidents, Scott Baxter and Steve Rendle; and Karen Murray, President of VF Sportswear; and Susan Kellogg, President of VF Contemporary Brands. Karl Heinz Salzburger made the flight and is here in North Carolina today, however, he is sick and unable to join us on today's call. So Steve, Scott and Karen will be filling in appropriately for his parts.

Following our prepared remarks, we will take your questions. [Operator Instructions] I'll now turn the call over to VF Chairman and CEO, Eric Wiseman. Eric?

Eric C. Wiseman

Thanks, Lance. Good morning, everyone, and thank you for joining us. To set a little context for today's call, we thought it was important to spend a bit more time on our expectations for 2013 and specifically, the strategic initiatives we're concentrating on to drive continued growth across our portfolio. So as a heads-up, today's call will run a bit longer than normal, and as Lance said, we'll allow ample time for questions at the end. Let's get started.

2012 was another year of records for VF: record revenues, record margins, record earnings and record cash flow from operations. It was a year that revealed many strengths of our company and many advantages to our strategy and our business model. In fact, VF has unique strengths in our industry, including a diverse portfolio of more than 30 brands, with innovative and relevant products capable of reaching the broadest array of consumers in every market; deep strategic insights, validated by comprehensive research that yields increasingly greater returns on our marketing investment and ability to attract -- to connect with consumers; an obsessive focus on continuously improving our operational capabilities to drive growth and strong consistent returns to our shareholders; and finally, a highly efficient supply chain that includes owned and sourced manufacturing, which gives us unparalleled structural advantages, including product innovation, speed to market, low cost and outstanding quality. Individually, any one of these strengths would be an enviable asset for any company to have. Yet together, in concert, they're at the center VF's DNA and what allows us to be so successful.

Now let's take a look at how some of these strengths played out for the year just ended. Total revenues grew 15% to $10.9 billion or 17% on a constant dollar basis, including organic growth in every coalition, every geographic region and in both our wholesale and direct-to-consumer businesses. In constant dollars, our Outdoor & Action Sports coalition grew revenues by 31% or 13% on an organic basis. Internationally, constant dollar revenues for the year were up 29% or 11% if you exclude Timberland. And our direct-to-consumer business grew 25%, an increase that now takes our DTC business to 21% of total VF revenues.

Full year gross margin rose by 75 basis points to a record 46.5%, with improvements in nearly every business. And very important to this story is the fact that it's about much more than product cost. Our improvements continue to be impacted most greatly by the shift in our portfolio mix towards higher-growth, higher-margin businesses and geographies.

Our profitability also got stronger this year. In fact, all 5 coalitions ended the year with double-digit operating margins for a combined 13.5%. Excluding Timberland, our operating margin would've reached 14.4%, once again reinforcing our confidence and our ability to reach our 15% goal by 2015.

And finally, our adjusted earnings per share increased 17% to $9.63, well above our long-term expectation for 12% annual EPS growth. And included in that result is $1.12 in earnings per share from Timberland.

Turning to 2013, I'd like to underscore the confidence I have in VF's ability to deliver sustainable profitable growth. All global companies operate in a constantly fluctuating environment, and we have validated time and again our ability to effectively manage our business under a variety of conditions. 2013 is no different. We'll continue to leverage our portfolio and competitive advantages to drive revenue growth, margin expansion and earnings while mitigating risks and most importantly, creating long-term value for our shareholders.

Taking a brief look at a few of our 2013 highlights. First, we expect revenues to increase approximately 6%, which will take us to the $11.5 billion mark. But let me make one thing clear, VF is not a 6% growth company, it's a 10% growth company. In 2013, there were 2 external factors weighing on our growth, both of which are well known to you: First, a second unseasonably warm winter, which is affecting our largest brand, The North Face; and second, weak economic conditions in Europe, which accounts for 22% of VF's revenues. In addition, we have no acquisitions baked into our plan this year. Beyond 2013, our confidence in the power of VF's portfolio to deliver 10% revenue growth remains high.

Below the revenue line, we're expecting substantial margin expansion over the results we just posted in 2012. Gross margins should expand by 100 basis points to 47.5%, and adjusted operating margin is expected to grow by nearly 100 basis points, which puts us very close to our 2015 goal 2 years ahead of schedule. And we expect adjusted earnings per share to grow 11% to $10.70. All of this is expected to yield another record year of cash flow from operations, which should approach $1.4 billion. Clearly, a great year ahead of us, with balanced growth, strong profitability and the leadership you've come to expect from VF.

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