Apparel, footwear, and workwear conglomerate V.F. Corporation (VFC 3.46%) reported its final quarter of 2019 on Wednesday, while opening a new chapter in its business operations. The company announced that it's completed the spinoff of its jeans business into Kontoor Brands, which is expected to begin trading as a stand-alone company on Thursday.
Below, we'll review details from the quarter and look ahead to management's financial expectations for the new fiscal year.
V.F. Corp: The raw numbers
| Metric | Q4 2019 | Q4 2018 | Growth (YOY) |
|---|---|---|---|
| Revenue | $3.21 billion | $3.05 billion | 5.2% |
| Net income | $128.8 million | $252.8 million | (49.1%) |
| Diluted EPS | $0.32 | $0.63 | (49.2%) |
Data source: V.F. Corporation. EPS = earnings per share. YOY = year over year.
What happened with V.F. Corp. this quarter?
- Management attributed the company's revenue improvement to strength in its largest brands, higher direct-to-consumer (DTC) sales, and contributions from its active, outdoor, and work segments.
- The company confirmed that it has completed the separation of its jeans business, which includes the Wrangler and Lee jeans labels, via a distribution of shares. Kontoor Brands was scheduled to begin trading on the New York Stock Exchange on Wednesday, May 23 under the ticker symbol "KTB."
- Shareholders of V.F. Corp. will receive one share of Kontoor Brands for every seven shares of V.F. Corp. stock owned on the date of record: May 10, 2019. V.F. Corp. will retain zero share interest in Kontoor Brands.
- The company completed the sale of its Nautica brand to Authentic Brands Group, LLC, on April 30. Terms of the deal have not yet been disclosed.
- With the dispositions of Kontoor Brands and Nautica, V.F. Corp will focus on a slimmer portfolio that will center around its three primary brands: Vans, Timberland, and The North Face. During the quarter, these businesses posted year-over-year revenue growth rates of 14%, 1%, and 8%, respectively. Notably, Vans' expansion slowed a bit versus previous quarters due to sluggish growth in the EMEA (Europe, Middle East, and Africa) region.
- Operating margin declined by 400 basis points, to 6%. The company listed several adjusting items to operating income, including transaction and integration expenses from recent acquisitions such as Williamson-Dickie, Reef, Icebreaker, and Altra, expenses from the Kontoor spinoff, and relocation costs in moving V.F. Corp.'s headquarters from Greensboro, North Carolina to Denver, Colorado. After accounting for these adjustments, operating margin decreased 110 basis points.
Image source: Getty Images.
Management's perspective
V.F. Corp. enters its new fiscal year having alleviated management's responsibility of turning around its struggling jeans business -- Kontoor Brands' own management team will now undertake the revival of the jeans labels. CEO Steve Rendle shared his thoughts on the separation in V.F. Corp.'s earnings press release:
Fiscal 2019 marked one of the most significant periods of transformation in VF's 120-year history, highlighted by our announcement to spin off our Jeans business as an independent, publicly traded company. Despite the tremendous workload, we remained sharply focused and delivered another year of strong financial results and top quartile returns to our shareholders.
As we enter fiscal 2020, our portfolio is well positioned, and our growth and momentum are strong, fueled by the investments we are making in support of our long-term strategy. The bold decisions we continue to make to evolve our company underpin the transformational journey we're on to deliver on our commitment to be a purpose-led, performance-driven and value-creating enterprise capable of delivering sustainable long-term shareholder value.
Looking forward
V.F. Corp. issued full-year fiscal 2020 guidance alongside earnings on Wednesday. Net of the Kontoor and Nautica divestitures and excluding the impact of acquisitions, revenue is expected to fall between $11.7 billion and $11.8 billion, reflecting growth of 5%-6%. DTC revenue is expected to improve 9%-11%, propelled by an anticipated 25% increase in digital sales.
V.F. Corp. projects adjusted operating margin of 13.7% in fiscal 2020, which will represent an improvement of 60 basis points over 2019's adjusted operating margin. Excluding the impact of acquisitions and divestitures, the company is aiming for adjusted EPS of $3.30-$3.35, which will equal 16% year-over-year growth at the midpoint of the range.
It's notable that V.F. Corp's revenue is slated for fairly mild expansion in the current fiscal year. After all, freeing up faster-growing brands from the drag of the mature jeans business was a primary rationale presented to investors for the Kontoor divestiture.
Now that management can attend to the sales velocities of Vans, Timberland, and The North Face without distraction, investors will likely expect a positive revision to the revenue outlook in the coming quarters, or at the very least, indications of a more vigorous growth story in 2021.
