In short, outdoor and action sports are going to need to gear it up. The plan is to have this business segment turning in 14% annual compound growth for the next five years, with 11 percentage points attributable to organic growth, while the final three come from acquisitions. While the other areas of the business are going to need to hold up their respective ends, it’s really all down to action.
A mountain to climb
VF Corp (NYSE:VFC) went all out on its release to investors, going so far as to set up a website dedicate to the idea of $17 billion by 2017. The action-outdoor portfolio holds some of VF Corp (NYSE:VFC)’s most well-known brands. In addition to The North Face and Timberland, the lineup includes Vans, Reef, and Jansport. That set needs to be producing $11.1 billion in revenue in 2017 for VF Corp (NYSE:VFC) to hit its lofty goal — last year it managed just under $6 billion. If it does manage that growth, the action-outdoor business will be generating more revenue than the entire company currently pulls in.
To get to that goal, VF Corp (NYSE:VFC) is relying heavily on its Asian operations, which it forecasts will grow at an annual compound rate of 24% over the next five years. The North Face is the main driver of that growth, with its high-margin, high-end outdoor product line. VF is looking for 26% annual growth in Asia from the brand, and the increase in sales is going to help pull up the company’s margins, as well.
Last quarter, the action-outdoor business managed a 16% pre-tax profit margin, second only to the jeans business. As a result, VF had a 48% gross margin and a 14% operating margin. The 2017 goal is for annual gross margin to reach 49.5%, while operating margin should come in at 16%.
Can VF scale the peak?
The bar is high, and VF is now committed to hitting its impressive goal. Competitors are certainly not going to back down, and VF is going to be under pressure for the next five years. On its main front, expect VF to see a siege from rival brand Columbia Sportswear Company (NASDAQ:COLM) and sporting champion Under Armour Inc (NYSE:UA).
Columbia Sportswear Company (NASDAQ:COLM) is another outdoor-gear maker, though it manages a much smaller margin on its products. The company’s sales rose a mere 5% last quarter, with operating margin hitting just 6%. While the growth prospects aren’t great — management expects a drop in annual sales this year — Columbia Sportswear Company (NASDAQ:COLM) still takes a chunk of the market, with total sales of $1.7 billion last year.
Under Armour Inc (NYSE:UA) is the bigger competitor, though its product overlap is smaller than Columbia Sportswear Company (NASDAQ:COLM)’s. Still, if I were a VF investor, I’d be more concerned about the impact of Under Armour Inc (NYSE:UA). The company continues to expand its lineup, recently adding more womenswear and footwear. That’s helped the company get to the $1.8 billion in annual revenue that it earned last year. That was a 25% increase from the year before, and with a 23% increase already in the first quarter this year, Under Armour Inc (NYSE:UA) could quickly move in on VF’s territory.
While I like the portfolio that VF has assembled, I’m worried that the five-year pace is going to be unsustainable. I like the company’s long-term prospects, but with so much competition, especially in the outdoor space, I’d be worried about too much being hung on the 2017 goal. For now, I’m going to be cautiously optimistic, but not completely swayed.
The article Finding Disappointment in the Great Outdoors originally appeared on Fool.com is written by Andrew Marder.
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Under Armour. The Motley Fool owns shares of Under Armour.
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