VF Corp (VFC), Nike Inc (NKE): This Retailer Deserves to Trade at a Premium

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VF CorpOutdoor clothing company VF Corp (NYSE:VFC) is one of the most compelling growth stories in the retail sector. Its mix of brands gives it the diversity to deal with a slowdown in any one segment, and many of its brands are under-penetrated within key growth markets. Here’s why it deserves to trade at a premium to the rest of the retail sector.

VF raises guidance, again

In its latest second-quarter results, the company kept up its tradition of raising guidance, hiking its full-year EPS expectations by $0.10 to $10.85.  Moreover, it declared itself on track to hit its targets for the full year. The company’s aiming for 6% revenue growth, 13% in EPS growth, and marked improvements in margins and cash flow.

While all of this is good news, it’s already priced into the stock. The real question: In a weak retail environment, how is VF Corp (NYSE:VFC) reporting such good numbers? And can it continue?

Diversity helps VF to outperform

The first factor that distinguishes VF Corp (NYSE:VFC) is that it has a range of brands in its portfolio. This gives it significant flexibility to deal with changing retail conditions.

A good comparison would be something like Nike Inc (NYSE:NKE). Michael Jordan’s favorite sportswear company is doing well at the moment, but this is largely due to outperformance in North America. Moreover, much of its growth is focused on footwear.  However, the other parts of its empire are not performing particularly well, and the pressure is building up on Nike to continue to execute. Nike Inc (NYSE:NKE) just doesn’t have the same kind of diversity that VF Corp (NYSE:VFC)’s mix of outdoor wear, sports clothing, footwear, and jeanswear generates.

You can see how well VF imanages investments in its various segments by looking at margin growth in the last quarter.

Source: company accounts.

Five out of its six segments saw margin increases, and a look at its profits for the first six months illustrates their relative importance.

Source: company accounts.

Within its Outdoor & Action Sports division lie three diverse brands. The North Face gives it exposure to the rugged outdoor hiking and mountaineering market, and equally importantly, people who want to be associated with this lifestyle. Vans generates a similar appeal to people attracted by skating, surfboarding and snowboarding, while Timberland has long been a leading outdoor wear brand. All three are placed in distinct fashion niches.

The big three brands

It isn’t all plain sailing for VF Corp (NYSE:VFC). For example, Timberland has had problems due to its heavy exposure to Europe. Timberland’s European revenues were down in double-digits,but it managed to record only a 3% overall decline in revenues. On a more positive note, Timberland’s Asian revenues were up 10% and, it generated low-single-digit-growth in the Americas.

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