If you want a lesson in how to run a great products-based business, look no further than VF Corp (NYSE: VFC). Yesterday's report was the final chapter of the great story that was 2004. The stock continued its run on the news by closing up 7.5% to an all-time high of $59.09 per share. Management should be very proud of the way it executed in 2004. In today's world of Johnny-come-lately fashions, it has done an excellent job of maintaining the company's brands and adding new ones to the mix.
I liked the fact that even though marketing, administrative, and general expenses as a percentage of sales rose 2.1 percentage points, the cost of goods sold fell 2.4 percentage points. For a company that sells products, like Motley FoolHidden Gems recommendation Deckers Outdoor (Nasdaq: DECK), having higher gross margins gives management additional flexibility to promote the brand. More advertising means better product and brand awareness. More marketing dollars means better promotions and, yes, brand awareness. We could do without more general and administrative costs, but someone has to process the orders.
VF has a nice stable of brands such as Wrangler and Lee jeans, Nautica sportswear, The North Face outerwear, and Vassarette intimate apparel, which prompted a "stop looking at that website" look from my wife. None of them is fancy, and they certainly wouldn't be regarded as high-end. But VF had sales of over $6 billion because its brands reach such a wide audience.
The company has also been adding new brands to try to continue to grow revenue at a rate of 6% to 8%. Looking at the cash flows, which I was very happy to see attached to the press release, VF has spent $1 billion over the last two years to pick up names like Nautica, Vans, Kipling, and Napapirji. OK, I admit that I've never heard of the last two, but Nautica and Vans are good, solid brands. It also completed its acquisition of Holoubek, a licensee of Harley-Davidson (NYSE: HDI). In South Carolina, where I'm from, there are lots of people wearing Harley apparel. (If only they would wear helmets.) Time will tell, but it appears to be money well-spent.
Speaking of money well-spent, does VF represent a good buy for your investment dollars? I calculate its enterprise value (market cap plus long-term debt minus cash) to be about $7 billion. VF generated $537 million in free cash flow (net income plus depreciation and amortization minus capital expenditures). That gives it an EV/FCF ratio of 13, which is well below the market average of around 22. In addition, the current dividend yield is about 2%. With an earnings yield (earnings per share/price per share) of 7% and a dividend yield of 2%, I would say investors are still being compensated well for the risks.
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Fool contributor David Meier does not own shares in any of the companies mentioned. The Motley Fool has a disclosure policy.
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