VFC reported 1Q16 EPS of $0.61 versus GS $0.60 and consensus $0.58. The beat was largely tax driven, but we note that the Outdoor & Action Coalition (O&A) beat our EBIT forecast by $0.03 and Jeanswear was in-line. Sportswear, Other, and Corporate all missed, driving an overall -$0.02 miss versus our number. VFC reiterated its FY16 guide with modest tweaks in timing, 2H FX-neutral EPS growth is now expected to be up high-teens from up mid-to-high teens before.
We were overall encouraged by O&A top-line trends relative to a very weak fundamental backdrop, including the aftermath of an extremely warm winter and excess inventory levels of both cold weather product and casual footwear styles in the trade. Specifically:
* The North Face (TNF) accelerated in all regions, up low-single digits in N Am following a down low-single digit 4Q; high-teens in EU following a down mid-single digit in 4Q, and up high-single digits in Asia following a down low-single digit.
* Vans is in correction in EU, down mid-teens EU (vs up high-single digits in 4Q). We were encouraged to see mid-single digit momentum hold in N Am, but wouldn't be surprised if this rate slowed balance of year.
* Timberland's strong 2014/15 momentum has faded, up low-single digits FX-neutral with Asia especially weak down low-single digits. We were encouraged to see Americas up mid-single digits despite weather issues.
* Company-wide inventory increased 9%, of which half is singled out as cold weather. These figures, coupled with COLM's comments last night that the "value channel" is still very full on 2015 cold weather inventory, suggest cold weather sales and margins are likely to weigh on VFC's P&L for the balance of the year. We believe this is already reflected in company guidance.
Outside of O&A, we were encouraged to see the Jeanswear Coalition report sales up 4% FX-neutral and operating margins +40 bps, likely benefiting in part from cotton deflation.
Contemporary Brands and Sportswear continue to be very weak, with sales down mid-teens for both and EBIT cut in half.
Lastly, we note that VFC share buybacks of $713mn fell well short of our $1B and were lower than 1Q15 $730mn. The less active buyback activity could signal VFC feels more confident in needing to use that cash for a potential acquisition, consistent with language in 4Q15 that suggested a more aggressive approach for 2016.
Our 12-month PT of $73 is based on 20X 12-24-mo forward EPS. Key risks include deteriorating O&A sales trends and a sharply strengthening USD.
Rating and pricing information: VF Corp. (B/N, $62.66)
We, Lindsay Drucker Mann, CFA, Bill Schultz and Edward McLaughlin, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
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