V.F. Corporation (NYSE:VFC) provided new five-year growth and earnings targets for 2013-17 at its analyst day presentation which reinforce the view that the firm is well placed to capture growth opportunities globally and deliver impressive investment return for investors in the coming years, enabled by a diverse portfolio of top brands, analytics-driven consumer insights, and a relentless focus on innovation and efficiency.
While tepid demand in Europe remains a near-term concern, I think V.F. Corporation (NYSE:VFC) is likely to weather challenging conditions in the region better than its rivals like PVH Corp (NYSE:PVH) and Ralph Lauren Corp (NYSE:RL), while finding plenty of room to grow in other international markets (Asia in particular) as well as in retail and e-commerce.
V.F. Corporation (NYSE:VFC)’s 2017 revenue target of $17.3 billion implies a five-year compound annual growth rate of 10% (8% organic, 2% from acquisition), which strikes as ambitious but not unrealistic, especially given management’s record in meeting and exceeding its goals set previously. The outdoor and action sports cohort, Asia Pacific markets, expanded retail presence (more than 600 owned retail stores to be opened globally over the next five years) and e-commerce are expected to be key drivers for organic growth, and the management reiterated that future acquisitions will probably remain concentrated in the outdoor and action sports area, which offers the most appealing growth and margin profile.
Strong first quarter report by PVH
On one hand, V.F. Corporation (NYSE:VFC)’s competitor PVH reported first-quarter earnings that exceeded its guidance by a sizable margin, as solid performance in the United States and newer markets like Brazil and China more than offset softness in Europe and negative currency impact in Japan. Revenue grew 34% to $1.91 billion, mainly driven by the Warnaco acquisition and sales increases at Tommy Hilfiger, partially offset by sales loss from the Izod women’s and Timberland wholesale sportswear businesses, which PVH exited in 2012.
Besides integration risk related to the Warnaco acquisition and potential overextension of the Calvin Klein brand, a crowded retail environment can be seen as the key external challenge. Each of PVH Corp (NYSE:PVH)’s segments is highly competitive, with mass merchants, department stores, specialty retailers, and online retailers all vying for market share. From an operational standpoint, even though the combined firm is much larger, it is still subject to the same input cost fluctuations (labor, cotton, transportation), which can create variability in quarterly profitability.
Single brand dependency of Ralph Lauren
Ralph Lauren Corp (NYSE:RL) continues to demonstrate both depth and range of supply and brand competitive advantages, as it gains share in what is still a difficult global macro environment. The March-ending fiscal fourth quarter and full year showed slow top-line growth, but excellent operating efficiency gains and sourcing advantages driving profitability. I believe that global mega brands are benefiting from both the ubiquity and universal distribution of popular culture, and that increasing international travel will continue to be important in the luxury sector.
Ralph Lauren, for the most part, depends on a single brand. While diversified across regions and demographics, the business carries some fashion risk and could limit the company’s ability to scale like its competitors V.F. Corporation (NYSE:VFC), PVH , Liz Claiborne and Jones Group which have built diverse portfolios of brands. Macy’s accounted for about 10% of total sales last fiscal year (20% of wholesale sales), which is a sizable dependence on one customer. Should the department store decide to drastically cut its orders, Ralph Lauren’s top line could take a hit. Also, retailers continue to manage inventories more tightly, which could take a toll on the apparel manufacturer’s near-term sales.
