In the first quarter, VF Corp (NYSE:VFC)’s revenue rose 2% $2.6 billion compared with the same period of 2012, driven by strength in the outdoor and action-sports segment. Gross margins expanded by 240 basis points year-over-year, to an all-time high 48.1% in the quarter, thanks to lower product costs compared to a year ago and a more favorable mix shift to higher-margin products. Adjusted operating margins expanded by 130 basis points year-over-year to 13.8%. Adjusted first-quarter EPS came in at $2.43, exceeding my own internal and consensus estimates, and up 26% year-over-year.
But growth by acquisition is a risky strategy for any company. VF risks overestimating the value of a business, accounting inconsistencies, integration problems, and any other issue that pulls management’s attention away from its core operations. Each of VF’s product categories is highly competitive, with several mass, specialty, and web-based retailers pursuing market share gains.
Bottom line
Nike’s bullish supportive points:
As one of the world’s most widely recognized brands, Nike wields significant pricing power. The company gets higher gross margins in footwear than competitors.
Nike’s footwear and apparel assortment spans several geographies and categories, mitigating exposure to any particular product or market.
Nike has significant power over its retail customers. Nike represents more than half of the purchases by Foot Locker and Finish Line, collectively, and 13% of purchases by Dick’s Sporting Goods.
Despite its growth aspirations, it is also encouraging that Nike remains committed to returning cash to shareholders, including $5 billion in planned share repurchases during the next five years and continued dividend growth.
Emerging markets should present ample growth opportunities. The firm has established a solid foundation in key markets across Eastern Europe, the Middle East, Africa, China, and Latin America.
Conclusion
Even the best-run footwear and apparel companies are susceptible to industry dynamics, however, including slowing consumer spending and volatile fashion preferences. From time to time, these pressures can create temporary situations of excess inventory, which can lead to markdown pressure. These risks are largely unavoidable, and NIKE, Inc. (NYSE:NKE) has demonstrated that its diverse product portfolio and global reach provide an effective mitigating buffer. Given the firm’s significant product development, marketing, and supply-chain capabilities, I expect meaningful growth from a number of its more nascent brands in the coming years.
The article Nike Remains a Solid Way to Play Emerging Markets originally appeared on Fool.com and is written by Ahsan Aslam Khan.
Ahsan Aslam Khan has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of NIKE, Inc. (NYSE:NKE). Ahsan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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