I guess VF Corp. (NYSE:VFC) missed the meeting where it would have been told that apparel makers are supposed to produce fairly meager margins and seldom, if ever, produce a return on capital in excess of the cost of that capital. After all, with fickle mall rats making today's True Religion (NASDAQ:TRLG) tomorrow's Members Only, and plenty of Indians and Bangladeshis willing to work for peanuts, how is an American apparel company supposed to compete?
Well, compete it does. Growth was not torrid this quarter -- sales were up 8% and adjusted earnings were up 11% -- but VF Corp. is a company that nevertheless produces double-digit returns on capital and has done so rather consistently for quite some time. And though I'm a little concerned with overall operating margins and the performance in the intimates business, some of the margin issues seem tied to building the brands and the business. Given the historical returns here, I'm willing to give management the benefit of the doubt when making those types of investments.
I suppose every industry or sector is perpetually beset by worries; such is the nature of Wall Street. But it seems to me that retail stands out as a bit above-average in that regard. Still, I think VF's strategy is a good one for navigating the ups and downs of consumer taste.
While it has attractive brands like Vans and North Face, it also has a sizable mass-market business (Wal-Mart (NYSE:WMT) was about 16% of sales in 2005), and though companies like Guess? (NYSE:GES), Pacific Sunwear (NASDAQ:PSUN), and Aeropostale (NYSE:ARO) may have their ups and downs, it seems like people are always buying clothing from Wal-Mart and Target (NYSE:TGT). It also doesn't hurt that VF currently produces only about 1% of its clothing in the U.S. -- that certainly helps keep costs down and profits up.
I appreciate that VF is a quality company, but I'm still a little concerned about the goodwill on the balance sheet and the recent pace of inventory and accounts receivable movements relative to sales. That said, that's not my biggest issue right now. This stock has had a heckuva run since the spring, and while I don't think it's undervalued, I don't put new money to work in a name unless I'm getting a discount to fair value.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
