1. VF Corporation - Fundamental Analysis
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Company Profile
VFCorporation,headquarteredinGreensboro,NC,isadiversifiedapparelcompany. Itsproductsinclude
outdoorapparel, jeanswear,andimageswearacross36 brands,suchas The NorthFace,Vans,
Timberland,7for all Mankind,etc.Currently,79% of the revenue isfromwholesale,21% isfrom Direct
to consumer(DTC),whichincludesVF-operatedstoresande-commerce. The companyoperates29
distributioncentersand1,129 VF-operatedstores. VFbrandsare soldinternationally(37% of salesfrom
outside US) throughindependentlicensees,distributorsandpartnershipstores.
Recommendation
VFCorporationisa multi-year(longterm) investmentgiven the followingreasons.
(1) VFCorp keptsolidtopand bottomline growthwith improvingoperatingmarginandhealthy
financial position;(2) The companyfocuseson three keydrivesforgrowth: weightingon
outdoor/Sportssegment;penetratingInternational marketandexpandingDTCbusiness.(3) Ithas
beenconsistentlystronginacquiringandsuccessfullycultivatingprofitable brands. (4) A steadycash
flowallowsVFCtoreact quicklyoninvestmentopportunities,repaydebt,andpaydividends.
Analysis
(1) The company kept solid top and bottom line growth with improving operating margin and healthy financial
position;
a).The companykepthighrevenue growthaswell asimprovingoperatingmargin. Duringthe past
several years,there isnorevenue dropof anysingle quarter,while operatingmargin gradually
improved.
b). Duringthe pastseveral years,the companykeptgoodcurrentand leverage ratio.Netincome,
operatingcashflow,workingcapital andfree cashflow (withoutacquisitions cost) wereall positive and
graduallyincreasing. Operatingcashflow isconsistentlyhigherthannetincome.

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c).Ina retail business,we wanttomake sure thatinventoryandreceivableswon’tgrow mustfasterthan
revenue.Increasingfinishedgoodsisaredflagin retail,especially apparel/footwearindustry.If the
company can’t sell all the products,theyhave tomark downto muchlowerprices onnextseason,
hence the lowersalesandmargins.Also,itmightbe a signthatmanagementteamdoesn’thave the
abilitytoaccuratelyestimate the sales. Duringthe pastseveral years, VFCorp’sInventoryand
receivableswere quiteconsistentrelativetototal revenue,witharelativelystable finished
goods/revenue ratio,around10.5%.Eventhough,afteracquisitionof Timberlandon2011, the ratio
increasedto12.7% due to Timberland’sproblematicinventory.But on2012, Timberland’sinventorywas
undercontrol, andfinishedgoodsonlyaccountedfor10.1% of total revenue.
d).Positive retainedearningisone of the mostimportantindicatorsof competitive advantage.Net
earningscanbe paidout as dividends,usedtobuybackshares,or retainedforgrowth.Exceptin 2011,
whenVFCorp acquiredTimberland, itsretainedearnings growthkeptapositive number,future
evidence thatthe companyisbenefitingfromapersistentcompetitive advantage.

3. VF Corporation - Fundamental Analysis
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e).However,there are some yellowflagswe have topayattentionto.The companyis highlydependent
on acquisition; goodwill accountforaround20% of total asset. If the acquisitioncouldn’tbringthe
expectedbenefitstocompany,impairmentwill be chargedandhence muchlowerthe assetvalues.
AlsoVFCorp ishighly dependentonseverallarge consumerssuchas Wal-Mart,JC Penny, Macys,
Nordstrom,etc.…Eventhoughinrecentyears,the sales percentage fromthe 10 largestconsumerswas
gettinglower,from26%on 2010 to 21% on 2012.
(2). Management focuses on Outdoor/Sports Action segment; International market, and DTC while balancing
the whole diversified portfolio.
What separates VFCfromitscompetitors is,where mostof themhighlydependonone ortwobrands,
VFChas a balancedportfoliocombing high-growthbrandssuchasNorth Face,Timberlandin
Outdoor/SportsAction,balancedwithconsistentmoderate growthbrandsinjeansandcontemporary
businesses.The managementteamset2017 revenue targetof 17.3 billion,from10.8 B in 2012,
representingafive-yearcompoundedannual growthrate (CAGR) of 10%,with8% organicgrowthand
2% from acquisition. Targetoperatingmarginof 2017 was setto 16%, comparedfrom 13.5% on 2012.
Duringthe past years,the companyhas graduallyshiftedtooutdoor/SportsAction segmentwithhigher
top-line growthoperatingmargin.The segmentaccountsfor41.6% revenue in2010, 53.9% in2012, and
an estimated 64.2%by 2017. Outdoor/Sports,comparedtoothersegmentsuchaswomen’sclothes, are
relativelylesscompetitive.Managementexpects2012-2017 TargetCAGR as 14%, 11% from organic
growth, and 3% fromacquisition.
Withinthiscategory,NorthFace,Vansand Timberlandare the three profitable brandswith$1.9B,
$1.5B, $1.5B salesrespectively.Northface isthe mostsuccessful brandthatVFcultivated after2000
acquisition;Vans, wholly-ownedskateboardingfootwearbrand, isthe fastestgrowthbrandinVF
portfolio.Recently,Vansannouncedthatitplanstoenterthe athleticfootwearsegment,whichmight

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challenge NIKE’sthe dominantposition. Timberland,acquiredin2010, can utilize the management
expertiseandthe marketingplatformof NorthFace,hence lowerthe cost.Overall, the three have good
brand recognition butstill possessgreatexpansionpotential,comparingtoNIKEandRalphLauren with
$7B sales.Managementset2017 revenue targetof $3.3B for North Face (CAGR 12%), Vans$2.9B (CAGR
15%), Timberland2.3B(CAGR10%). In this segment,managementisfocusedonexpandingbrand
recognition,adding more stylesand colors, whileapplyingnew technology toimprove the functional
performance of the products.
(DTC) business –consistingof itsownretail storesand e-commerce businesses –will be asignificant
contributorto VFCorporation’sgrowthoverthe nextfive years. Comprising21percent (19% in owned
retail stores;and2% in e-commence) of total revenuesin2012, DTC sales isanticipatedtogrow to 25%
of total revenuesby2017. New stores opening, comparablestore salesgrowth,andhighere-commerce
salesare the keydriversof DTC business. VF-operatedstores,withsuperiorgrossmargin(10% above
average),providesuniqueshoppingenvironment tocustomersand helpsVFtobuild brandrecognition
amongcustomers. Doingsowill improve wholesale growthinturn.Currently,there are 1,129 VF-
operatedstores, 141 new stores (40 NorthFace;75 Vansstores) were addedon2012.
VFCorporationremainslargelyunderpenetratedoverseaswith20% salesinEurope and15% salesin
Asiathroughindependentlicensees,distributors,andpartnershipstores.Asia,withonly15%
penetration,hasthe greatestgrowthopportunities.ChinaandIndiaare the top marketsof expansion
duringthe followingyears;whilenewstoresopeningsare the keygrowthstrategy.From2007 to 2012,
VFCorp grewits Asianbusinessfrom$20M to $1B, representing30% CAGR. Managementestimatedthe
2012-2017 CAGR of 25%.
(3). Management team has good records of acquiring and cultivating brands.
VFCorp has one of the bestmanagementteamsinapparel/footwearindustry.Theyhave strongtrack
record of acquiringandcultivatingbrands.VFhas experience inbuyingbrandsandgrowingthe business
by cuttingexpenses, utilizingexistence platforms, andexpandingdistributionchannelsthroughoutmany
countries.Theyalso divestiture somebrandsastheyrepositiontheirportfoliotowardsthe more
profitable outdoorbusiness.

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Since 2000, VF Corpacquired12 brands,whichadded $7B to VFCorp revenue;while the company
divestedbusinessthattotaled$1.3B inrevenue.The mostsuccessful brandsacquisitionsare NorthFace
and Vans. In 2000, VF Corpspent$150 millionbuyingNorthface withnegative10% operatingmargin.
Duringthe past 12 years,revenue increasedfrom $240 millionon2000 to$1.9 billionon2012,
representing19%CGAR; operating marginimprovedto +18%. In 2004, VF CorpboughtVans,with$392
millionindebt.VansCGARafteracquisitionwas25% andoperatingmarginimprovedfrom negative 8%
on 2004 to 17% in 2012. InJune 2011, VFCorp paid$2.3B to buy Timberland,withrevenue $1.4B,and
an operatingmargin of 9%. Before the acquisitionon2010, Timberlandhadstruggledwithrising
productioncosts and excessinventory. After18 monthssince acquisition,inventoryis now under
control and operatingmarginwasimproving.Giventhe managementteamsuperiorbusinesssenseand
operatingexperiences,we believe theycan improve the operatingmarginof Timberlandandkeepmore
than 10% salesgrowth.
(4) Strong annual operating cash flow (>$1.0B), free cash flow, around $600 million cash position allows VFC to
react quickly on investment opportunities, repay debt, and pay dividends.
From a cash flowperspective,bykeepingdebttocapital ratiobelow 30% duringthe lastfew years,the
company’sfree cashflowpayoutratiohas beenaround30%, while addingpositive cashtocurrent
assets.(2009 has -450 netcash change because of $2.3B Timberlandacquisition).The management
teamtargeted2017 operatingcashflowto$2.4B, whichrepresentsCGAR14% operatingcashflow.
Managementexpects10%5 yearCGAR revenue growth,withoperatingmarginincreased2.5% to16%.
So we wouldexpect12-13%earningsgrowth. However,tokeepthe estimateconservative,we assume
10% earninggrowth,aswell as operatingcashflow growth,capital expenditure increaseandfree cash
flow.The free cashflowbefore acquisitionisestimatedas$1,125; $1,238, $1,362 forthe year 2013,
2014 and 2015. Inthe followingthree years,the companywill focusonrestructuringTimberland,
insteadof acquiringnewbrands.So we expectanacquisitionexpense lessthan$100 million,thenthe
free cash flow withacquisitioncostsis$1,025; $1,138, $1,262 millionrespectively.
Witha $600 millioncashpositionof 2012, we assume +$100 millionnetcashchange annuallyisenough
to supportthe short terminvestmentandfinancial activities.Debtrepaymentsare estimatedas$300
each year;newstocksissuesare estimatedas$60 eachyear.
Consideringthatdividendpayoutratioisonly30%, while company’s2017 targetratio is40%, it seems
reasonable thatthispayoutpercentage couldincreaseslightlywithout impactingthe company'sday-to-
day operations (cashflowpaysoutlessthan30%).

6. VF Corporation - Fundamental Analysis
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The company mightallocate varyingpercentagesof cashto dividendpayoutandstockrepurchase based
on the tax policy,stockprice andmarkettrends,sowe expectdividendgrowth inthe range of 10% -
15% forthe followingthree years.
We estimatedtwoscenarios,one withlowerenddividendgrowthrate 10%, andanotherwithhigher
end15%. Under the firstscenario, assumingdividendgrowthrate of 10% with paymentof $367, $403,
$444 in2013, 2014 and 2015, VFCorp can still repurchase $199, $275, $358 millionstockstoreward
shareholders. Underthe secondscenario, assumingdividendgrowthrate of 15%, withpaymentof $383,
$441, $503 in2013, 2014 and 2015, VF Corp can still repurchase $182, $237, $295 millionstocksto
rewardshareholders.
So we can conclude thatVF Corpstrong earningsandcash flow givesthe managementgreatflexibilityto
allocate excesscash between dividendand share buybackplanstorewardshareholders.

7. VF Corporation - Fundamental Analysis
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Conclusion
Overall, VFCorp hasa topmanagement team, toptierbrands,a well diversifiedportfolio,andsolid
expectedgrowth.Thisisone of the bestpicks inapparel/footwear.
Appendix
Back to 2011, we drewthe graph of P/E(pinkline),P/S(reddottedline),Revenue andOperatingincome
(greydashline) growthfrom2000 to 2011. Overthe past 11 years,P/E wasin the reasonable range of
10-20, and it wasgrowinggraduallywithrevenue andincome. The nextstepistoevaluate the company,
setup target price.