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VF Corp.

Garrett E. Isbell
Analyst June 22, 2010


Diversified Brand Portfolio
Global Presence
Dividends and share repurchase plan
Exposure to emerging markets
Proven Acquisition Model
Ticker VFC
Exchange NYSE
Uncertain Economic Outlook
Textiles, Apparel, and Luxury
Industry Goods Highly Competitive Environment
Sector Consumer Discretionary Risk Associated Acquisition Plans

Capital Appreciation & Porters Five Forces:
Threat of Competition: High
Market Cap. $8.72B
Threat of New Entrants: Moderate
52 Week Price Range $53.53-$89.23 Threat of Substitutes: Low
Power of Suppliers: Low
Current Price (6/18/10) $79.17 Power of Buyers: High
Current P/E ttm 16.89x ttm Brief Overview
Projected 2012 P/E 12.50x VF Corporation is an international apparel
company. The Company has a portfolio that
2009 EPS 4.18 contains a broad list of brands in the
outdoor, jeanswear, imagewear, footwear,
Projected 2012 EPS 7.29
sportswear, and contemporary clothing
Dividend Yield 3.1% categories. VFCs products are marketed to
consumers shopping in specialty stores,
Debt Rating A department stores, national chains, mass
merchants, and online retailers.
Beta 0.93
Portfolio Consideration

S&P classifies VFC as a consumer discretionary stock, and the EIF is currently overweight the
consumer discretionary sector by 349 bps. The EIF currently holds two other consumer
discretionary stocks Gamestop and McDonalds. VFC holds 25.6% of the consumer
discretionary portfolio and has produced roughly a 6.38% gain since its purchase.

Target %
Current Gain / Loss
Value @ Dividend Equity for S&P %
Name Ticker Shares Market Loss Since Beta Class %
(12/31/09) Yield % % Summer (5/21/10)
Value YTD % Purchase
COM* GME 970 $21,281.80 $22,106.30 3.87% -6.29% 0.00% 1.05 31.40% 3.09%
MCDONALD'S CORP COM * MCD 365 $22,790.60 $24,407.55 7.09% 23.89% 3.30% 0.63 34.60% 3.41%
V F CORP COM VFC 310 $22,704.40 $23,978.50 5.61% 1.60% 3.10% 0.92 34.00% 3.35%
1,645 $66,776.80 $70,492.35 5.56% 5.38% 2.20% 0.86 100% 9.84% 7.00% 10.49%

Within the consumer discretionary sector, VFC is classified in the Textiles, Apparel, and Luxury
Goods industry. VF provides the EIF exposure to apparel and footwear retail and was originally
purchased in fall of 2009. The rationale was to gain exposure to the apparel and footwear retail
industry, and to put the EIF in a position to profit from the eventual pickup in consumer spending
as a result of the global recession subsiding.

VF is also classified as an income and capital appreciation stock within the EIF portfolio due to
its 3.1% dividend yield. VF has 13.31% of the income & capital appreciation strategy within the
fund. In total, VF holds 3.54% of the EIFs equity position.

Holding Approx. Target%

Holding Holding Period Gain Period Annual Class Equity for
Name Ticker Shares Market Dividend
Cost Basis / Loss Gain/ Dividend % % Spring
Loss % Yield 2010

Income & Capital Appreciation (2% >

ABBOTT LABORATORIES COM* ABT 610 $32,685.00 $29,011.60 ($3,673.40) -11.24% $1.76 3.7% 15.94% 4.05%
CATERPILLAR INC COM * CAT 400 $27,510.00 $24,304.00 ($3,206.00) -11.65% $1.70 2.8% 13.35% 3.39%
MCDONALD'S CORP COM * MCD 365 $19,701.29 $24,407.55 $4,706.26 23.89% $2.21 3.3% 13.41% 3.41%
PEPSICO INC COM** PEP 386 $22,293.96 $24,275.54 $1,981.58 8.89% $1.95 3.1% 13.34% 3.39%
PROCTER & GAMBLE CO COM * PG 460 $26,365.96 $28,101.40 $1,735.44 6.58% $1.95 3.2% 15.44% 3.92%
UNITED PARCEL SERVICE CLASS B* UPS 445 $28,521.77 $27,928.20 ($593.57) -2.08% $1.88 3.0% 15.34% 3.90%
V F CORP COM VFC 310 $23,601.94 $23,978.50 $376.56 1.60% $2.40 3.1% 13.17% 3.35%
2,976 $180,679.92 $182,006.79 $1,326.87 0.73% 100% % 30.00%
Industry Overview
According to IBIS World, VF Corporation is classified as a Cut & Sew Apparel contractor.
While the industry is fairly large, revenue concentration is not. The top 6 firms account for
~ 30% of total revenues, with about 6000 firms competing for market share within the industry.
While the industry saw a large expansion from 2002-2006, revenues declined from 2008-2009
because of the global recession.

Revenue Growth

Charts: IBIS World

The industry can be broken into several sub-divisions, as shown by IBIS world. These divisions
include, wholesale apparel companies, retail apparel companies and stores, mens and
boys cut and sew, and women and girls cut and sew which accounts for the largest revenue
segment of the industry. VF, because of its large and diversified portfolio, has exposure to all of
these revenue segments within the cut and sew apparel industry. The total value of the industry is
rough $6.5 billion.
One of the main headwinds to the industry has been the increase it imports and competition
outside of the US. However, VF has a large portion of its supply chain outside of the US, and
uses its size to take advantage of outsourcing labor. The global reach has also positioned VF to
take advantage of the
Personal Spending growth that will come out
of emerging markets,
especially Asia.
2 The retail sales industry as
1.5 well as the consumer
1 discretionary sector is
0.5 widely dependent on a
0 strong economy. A good
macroeconomic indicator
is personal, or consumer
spending. While 2008 saw
some of the lowest
personal spending numbers in almost 30 years, 2009 provided a strong resurgence in the
American consumer. However, there are still questions that remain about the staying power of
the nascent, but robust recovery. Continued outperformance by the sector and industry will be
determined by the strength of the continuing recovery both domestically and abroad.
Company Overview
VF Corporation is an international apparel company and maintains a broad brand portfolio. Some
of its most recognizable include The North Face, Wrangler, Vans, Lee, Reef, and Seven for all
Mankind. In all, VFC has 25 brands. VFCs clothing brands are broken up into different groups
or coalitions (referred to now as coalitions). The five coalitions are outdoor, jeanswear,
imagewear, sportswear, and contemporary.

Not only does VFC have a wide range of brands, but also a wide range of customers with 30% of
its revenues coming from non-domestic sales, with exposure in European, Asian, and Latin
American markets.

Distribution Channels

VFC reaches its consumers through a variety of different channels which include wholesale
distribution, e-commerce, and mono-brand retail stores. VFC currently operates 757 brand
stores that are located in shopping centers and malls. Along with the 757 retail stores owned
directly, VFC also licenses its products out to over 1,300 retail stores dedicated to VFC brands.
Most of these stores are located in Eastern Europe and Asia and focus on The North Face,
Kipling, Nautica, Lee, and Wrangler. Along with retail stores, a growing number of sales are
beginning to come from online sales. Total retail store and e-commerce sales were up from 16%,
to 17% of total revenues.

As mentioned earlier, VFC also looks to penetrate markets by licensing its apparel lines in
identified geographic regions. VFC profits off of the licensing agreements by receiving royalty
payments. Gross Royalty income for 2009 was $77.2 million. VFC has also entered licensing
agreements to market apparel under other trademarks. Some of these agreements include, Major
League Baseball, the National Football League, the National Basketball Association, Harley-
Davidson, and NASCAR, which helps to maintain VFCs already strong brand recognition.

The biggest customers for VFC come from independent sales agents and distributors. The bulk
of the customers include specialty stores, department stores, national chains and mass merchants
which made up 27% of total revenues in 2009. The five largest customers (listed in alphabetical
order) include Kohls, Macys, JC Penney, Sears, Target, and Wal-Mart. These six customers
account for nearly 21% of total revenues.


Outdoor & Action Sports

The Outdoor & Actions Sports coalition is VFs fastest growing apparel coalition. It produces
and markets products with an emphasis on outdoor lifestyles and includes outerwear, footwear,
equipment, and backpacks. The flagship of outdoor & action sports is The North Face which is
sold throughout North and South America, Europe and Asia. The North Face is sold in over 250
independently licensed retailers and 50 VF operated retailers.

Vans is a performance and casual footwear and apparel line, which focuses primarily on the
extreme sports enthusiast. It should be noted that VF holds 50% of Vans in a marketing joint
venture in Mexico. Other brands in the coalition include JanSport, Eastpack, Napapijri, Kipling,
and Reef.


The jeanswear coalition is the most developed collation in the VF portfolio. Its top brands
include Lee and Wrangler which have a long standing tradition in American culture, having been
founded in 1889 and 1947 respectively. This has led to VF acquiring a strong market share in the
denim market in the US.

However, jeanswear overseas is marketed much different than it is in the US. For instance, jeans
are much more of a fashion trend, and have a higher selling price. Most of the growth from the
jeanswear coalition will come from expansion of its current business model in Asia which has
averaged over 25% growth each year for the past 3 years.


The imagewear coalition consist of the Image division, which focuses on creating and marketing
uniforms and apparel to companies, and the Licensed Sports division, which creates uniforms for
professional sports teams.

In the image division, VF creates and markets work apparel to companies domestically and
internationally (mostly Europe) under the Red Kap, Bulwark, The Force, and Chef Designs
brands. Each brand offers unique characteristics, including foodservice specialization and fire
retardant uniforms. Some of the largest customers for the division include the FedEx
Corporation, AT&T, American Airlines, and the New York City Fire Department.

The Licenses Sports Division is involved in the creation and marketing of sports apparel and
footwear under the brand name Majestic. VF has license agreements which include agreements
with the National Football League, National Hockey League, NASCAR, and Major League
Baseball, which includes the sole right to produce and market MLB uniforms to all 30 teams.
Along with professional sports associations, Majestic also has contracts with Harley-Davidson to
produce and market all Harley-Davidson apparel. Each division makes up approximately 50%
of the collations revenue.

The sportswear coalition is mostly made up of the Nautica brand which markets fashionable
jeanswear and related tops to young adult males. While in the past, Nautica has produced and
marketed similar lines for women, the brand has been in a consolidation phase for many years
now, which has negatively affected sales of the sportswear coalition. VF sees room for
improvement for the Nautica brand by introducing the clothing line at competitive price points,
especially in Asia.

The coalition also includes Kipling which produces luxury totes, handbags, and luggage. Kipling
has an agreement with Macys that all of its products in the US be sold exclusively in its stores
(except for those stores operated by VF). Sales of Kipling is mostly confined in the US (about
75%) with the balance being picked up in Canada and Europe


The contemporary coalition produces and markets premium priced luxury brands. The coalition
was recently formed in December 2007, and originally included the brands lucy and 7 for all

7 for all Mankind is the strongest company in the coalition. Based in Los Angeles, 7 for all
Mankind produces and markets contemporary jeans and related products, which include tops,
sweaters, and accessories. 7 for all Mankind is the leading retailer of high-end contemporary
jeans. In December 2009, it received an award from Advertising Age as one of the top ten new
products of the decade. The brands clothing is sold at high end retailers such as Saks, Macys,
Neiman Marcus, and Nordstroms.

The coalition looks to be the second largest growth driver for VF. With expansion of the
relatively new 7 for all Mankind brand, as well as the recent acquisitions of Splendid and Ella
Moss, there is significant upside associated with the development of well identified luxury
Revenue Growth by Componet





2007 2008 2009 2010E 2011E 2012E

Outdoor Jeanswear Imagewear Sportswear Contemporary Other

Supply Chain Dominance

VF Corporations supply chain is charged with sourcing its product, and ultimately delivering it
to the customer. With results that include the selling of over 400 million products spread over 25
brands, a strong grasp of the supply chain is required. VF owns and operates over 30
manufacturing centers and has entered into long term contracts with over 1,600 manufacturing
facilities. Currently, VF produces 16% of its own product, while 84% of its products are obtained
from contractors, mostly in Asia. The diversification gives VF the advantage of flexibility, as
well as lowers its risk associated with its supply chain. While 84% of its product comes from
over 1,600 manufacturing contractors, no single contract represents anything greater than 3% of
its cost of goods sold. This means that the loss of one contract would have no real material effect
on the company.

VF also shows dedication to human rights. In 1997, it drafted and adopted VF Global
Compliance Principles. The program lists a set of standards that is consistent with international
labor standards and addresses topics such as ethical business practices, ages, wages, work hours
and health and safety standards. To gain a VF contract, all of its 1,600 manufactures must
undergo a factory inspection, and sign a strict agreement with VF that maintains that it follows
the VF Global Compliance Principles.

It was also noted in VFs most recent annual report that it experienced no difficulties in obtaining
the necessary raw materials required for production, and that they see no difficulty in achieving
their raw material needs going into 2010 and beyond. They base this on contracts set up with its
1,600 contracted manufactures (most of which stipulate that the factory attain the necessary raw
materials), as well as contracts for its over 30 owned factories with local producers. The primary
raw materials are cotton based material.

Porters 5
Threat of Competition: High

While competition challenging VFs broad portfolio may be slight, the competition that each of
its individual brands face is fierce. The industry lends itself to many competitive factors, which
include price, quality, and brand recognition. Continued success of its brands hinges on price
cutting measures, finding ways to improve quality, and most importantly, marketing the brands
in such a way that provides strong brand recognition and favor among the consumers. VFs
proven understanding of the apparel industry, as well as a diverse portfolio and strong financials,
puts VF in a good position to both maintain market share for its more familiar brands, as well as
to grow those that are just starting out.

Threat of New Entrants: Moderate

For VF, the threat of new entrants varies from brand to brand. While it may be easy for a new,
small luxury apparel group to take market share away from the smaller contemporary brands, it
would seemingly be difficult for a new jeanswear company to take on Wrangler or Lee whose
names are synonymous with jeans in America.

Threat of Substitutes: Low

If VF were just in the high end apparel market segment, the threat of substitutes may be higher.
However, VFs diversified portfolio allows for exposure to all price ranges of apparel. A perfect
example would be jeans. If someone did not want to pay the $150-$200 price for 7 for all
Mankind jeans, they could easily go to Wal-Mart and buy a pair of Wranglers for $25.

Power of Supplies: Low

The power of suppliers for VF is low. This is due in part, to two reasons. First is VFs diversified
and strong supply chain. With over 1,600 contracted manufactures and over 30 owned factories,
VFs success is not contingent on one single supplier. This gives VF significant negotiating
strength over its contracted manufactures. The other factor is the raw material associated with the
production of its products; cotton. Since cotton is a traded commodity, its price is based more on
supply and demand economics, rather than individual contract negotiations.

Power of Buyers: High

Ultimately, the success of VFs brands hinges upon its apparel products finding good favor with
consumers. Be it based on price, quality, or brand recognition, the customer is left with the final
say. Because of this, VF as well as other companies in the industry, are constantly having to try
and predict and react to customer demands, and trends within the fashion industry.

Outlook and Company Strategy


Being a part of the consumer discretionary sector, VF Corporations success depends on

continued economic growth, especially consumer spending and payrolls. In 2008, VF took a hit
to its top line, hampered mainly by its contemporary coalition. A significant portion of its
continued growth will need to come from the expansion of its contemporary coalition, which is
comprised mostly of high end products. In recent months, there have been worries that the
nascent recovery could falter, which would further harm the revenue growth potential for VF.

While there is risk to some of the brands in VFs portfolio, VFs diversification is key to their
ability to perform in weaker economic conditions. This support comes from cheaper; more
widely produced and sold brands such as Wrangler or Lee. Wrangler is currently sold through
Wal-Mart retail stores.

VFs current plan for growth includes positioning itself to gain market share in the emerging
markets such as Asia by opening direct product retail stores, and taking advantage of e-
commerce. Most of the future capex will be placed into the expansion of its growing brands,
especially in the contemporary coalition. VF will look to us capex to help continue its expansion
into emerging markets, especially in Asia. One of VFs greatest success stories is the growth of
its jeanswear coalition in Asia, supported by strong sales of VFs Lee brand. The expansion of
jeanswear coalition in Asian markets help fuel the 15% growth it saw in international sales in
2009. Many are still predicting an expansion of the global economy. Either way, VF is
positioned well to take advantage of a full economic recovery, as well as strong enough to with
stand further unfavorable economic conditions.

Another move that can be viewed as a bullish sign is VFs current inventory reduction. From
2008 to 2009 they reduced inventory to $1,151.90 mm to $958.64 mm, which helped lead to a
significant increase it its cash position.

Invetory Levels
600.00 Invetory Levels
2007 2008 2009 2010E 2011E 2012E

Acquisition Outlook

For VF, there are two growth drivers. The first is the growth and expansion of the brands it
already has, and introducing them into new markets. The second driver of growth is the
acquisition of new brands. Currently, management has given no guidance as far as potential
acquisitions through the remainder of 2010 and into 2011. However, VF is a very opportunistic
company, and will look to expand where it makes sense to both their portfolio strategy, as well
as potential return on investment. With the cutting of inventory, VF has increased its cash
position significantly. If an opportunity comes along that makes sense to VF, dont be surprised
to see them try and take advantage of it.

Acquisition History

2000: The North Face, Eastpak

2003: Nautica, John Varvatos

2004: Vans, Kipling, Napajijri

2005: Reef

2007: Majestic Athletic, Eagle Creek, 7 for all Mankind

2009: Splendid, Ella Mos

Financial Strength and Business Model

VFs current business model includes financing a lot of its annual period and product costs with
short term financing. They are able to achieve this buy having strong inventory turnover, and
managing their current assets well. Both its current and quick ratio are above 1. VF has also
managed its long term debt well, with only one of its bonds maturing in the next 4 years.

Payment Schedule
Total 2010 2011 2012 2013 2014 Thereafter
In millions

Recorded liabilities:
Long-term debt(1) 1,149 203 3 3 3 3 934
Other(2) 383 68 45 42 33 34 161
Unrecorded commitments:
Interest payment obligations(3) 1,203 71 58 58 58 57 901
Operating leases(4) 898 180 159 131 107 95 226
Minimum royalty payments(5) 318 59 78 79 50 52 -
Inventory obligations(6) 742 690 15 15 15 7 -
Other obligations(7) 72 43 14 9 5 1 -

Total 4,765 1,314 372 337 271 249 2,222

VFs current cash balance of over $700 mm, puts it in a position to be able to pay off the $203
mm due when one of its bonds mature at the end of this year.

Critical Issues

Continued Asian Expansion

There is some worry that the Asian markets, especially China, could be in the midst of a credit
bubble. If the current expansion the Chinese economy is experiencing were to stall or decline,
VFs performance could be adversely affected.
Risks Associated with Acquisition Based Business Model

While VF is not solely dependent on acquisitions for growth, it is one of their two main growth
drivers. In order to experience continued success, VF needs to continue to make strong
acquisition decisions. This does not mean they need to continually acquire new brands. However,
this does mean the brands they do acquire need to perform well. Any time VF makes an
acquisition, there are risks associated with the success of that brand. This risk is magnified by the
characteristics of the retail apparel industry. The demand by the consumers is always changing,
fashions go in and out of style very quickly, making brand acquisition a very risky endeavor.

Supply Chain Risk

What makes the supply chain for VF so strong can also be viewed as a double edged sword.
Their international supply chain, with factories in several different counties in Europe, Asia, and
Latin America create risk associated with foreign governments and labor laws. With the supply
chain almost wholly outside the US, VF is also exposed to changes in currency prices, tariffs,
and international trade laws in the countries in which it operates.

Analyst Recommendations

Upgrades & Downgrades History

Date Research Firm Action From To
9-Feb-10 Sterne Agee Initiated Neutral
13-Oct-09 UBS Initiated Buy

29-Apr-09 Susquehanna Financial Downgrade Positive Neutral

14-Apr-09 Wedbush Morgan Initiated Hold
22-Sep-08 Lazard Capital Downgrade Buy Hold
3-Sep-08 Credit Suisse Upgrade Neutral Outperform
4-Jun-08 Robert W. Baird Initiated Outperform

9-Apr-08 Susquehanna Financial Initiated Positive

9-Jan-08 Lazard Capital Upgrade Hold Buy
6-Dec-06 Citigroup Initiated Buy
Ratio Analysis

Ratio Analysis
VFC 2007 2008 2009 Current Industry SHLD GPS

Net Profit
Margin 7.89% 6.35% 7.80% 7.23% 7.90% 0.50% 7.80%
Gross Margin 43.48% 43.95% 44.25% 44.73% 25.50% 25.60% 40.20%
Return on
Assets 9.18% 9.37% 7.09% 8.01% 4.57% 1.62% 14.79%
Return on
Equity 15.92% 13.64% 14.78% 13.56% 1% 2.55% 23.33%

Liquidity Ratios
Quick Ratio 1.33 1.48 1.53 1.6 -- 0.27 1.22
Current Ratio 2.33 2.62 2.41 2.51 2.62 1.3 2.19

LT Debt: Equity 0.32 0.32 0.25 0.25 0.55 0.19 0.32
Leverage 1.8 1.81 1.7 1.69 0.12 2.87 1.62

Asset Turnover 1.12 1.19 1.12 1.11 1.06 1.78 1.85
Turnover 3.58 3.72 4.2 3.66 2.47 3.64 5.25

Price: Earnings 12.76 9.58 14.19 16.89 23.11 39.71 12.28
Price: Book 2.11 1.69 2.12 2.26 3.92 0.96 2.8
Price: Sales 1.05 0.78 1.12 1.19 0.35 0.32 1.15
Price: Cash
Flow 2.41 3.43 6.59 6.1 13.89 8.36 8.09

Net Profit
Margin 7.89% 6.35% 7.80% 7.23% 7.90% 0.50% 7.80%
Asset Turnover 1.12 1.19 1.12 1.11 1.06 1.78 1.85
Leverage 1.8 1.81 1.7 1.69 0.12 2.87 1.62
Return on
Equity 15.92% 13.64% 14.78% 13.56% 1.00% 2.55% 23.33%
Recommendation to the EIF

I recommend that we hold the full VF position for the remainder of the summer based on both
growth opportunities, as well as a strong dividend yield.

Proforma Assumptions
Revenue: I grew total revenue by 3.64%, 4.61% and 10.07% for 2010, 2011, and 2012
respectively. This growth is based on company guidance, and is broken down by each of VFs
five coalitions. The growth is based on economic outlook, as well as expansion of the companys
brands according to guidance given by VF.

Cost of Revenues: I used historical common size analysis to come up with my COGS for VF. I
grew COGS by 2.26%, 4.48%, and 8.02% respectively. The slow growth in COGS is due in part
to VFs current slashing of inventory. However, the growth in to 2011 and 2012 picks up as VF
looks to being expanding their inventory.

Income Taxes: The historic income tax has been 32%, 29%, and 30% for 2007, 2008, and 2009.
For 2010, 2011, and 2012, I used 30% based on the average of the past three years.

Working Capital: My proforma working capital assumptions were based off of common size
relative to income statement line items.

Valuation Assumptions

Risk Free Rate: I used the EIF standard of 4.5%.

MRP: I used the EIF standard of 5.7%

Beta: I used a beta of 0.93. It was based off of averages of analyst, and my regression model. I
used the S&P as my benchmark index.
P/E: My P/E multiples for 2010, 2011, and 2012 were 13.50 x, 13x, and 12.50x. This is based on
both guidance from analyst through Reuters, as well as current P/E trends. VFs current P/E is
16.29x ttm as of market close on June 18, 2010. Trading at a higher than normal multiple, I am
forecasting the P/E will fall going into 2011 and 2012 because most of the future growth
expected has already been priced into the current market value of VF. This assumption is based
on semi-strong growth opportunities, but also strong EPS forecasts, which will cause the stock to
trade at a lower P/E multiple.

Share Outstanding: I decreased shares outstanding for 2010, 2011, and 2012 based on company
guidance. My current forecasts are 108 mm, 107mm, and 106mm. This is based off of company
guidance. VF is currently implanting a plan of repurchasing 3 million shares of common stock.
At the end of 2009, VF had just over 10.5 mm shares of common stock outstanding.

1. YahooFiance
2. Reuters
4. Fidelity Investments
5. Jefferies
6. Bloomberg
7. IBIS World
8. Hoovers Online
9. Morning Star
10. Valueline
11. Standard and Poors
12. VF Corporations Annual Report
13. VF Corporations Q1 Filing (10-Q)
Current Events

Underappreciated Global Retail Growth


o V.F. Corporation
o Investing Ideas & Strategies

Peter Wahlstrom, CFA, On Wednesday June 16, 2010, 7:00 am EDT

We believe that VF Corporation (NYSE:VFC - News) has established a successful multichannel

distribution strategy and leading brand portfolio in the fragmented and competitive retail
marketplace. Through its decade-long metamorphosis, which has included the acquisition and
divestiture of several brands, the company has transformed into a diversified global apparel
marketer. VF manufactures and markets clothing--specializing in jeans, sportswear, outdoor
apparel, and footwear. Its main brands include Lee, Wrangler, The North Face, Nautica, Seven
For All Mankind, JanSport, and Vans. The firm is well-positioned to leverage its brand strength
and distribution network, in our view, and we see long-term top-line and margin growth
stemming from retail expansion, further penetration in China, and bolt-on acquisitions.

Retail push should drive top-line growth and higher margins.

VF currently operates more than 750 retail locations, and is slated to add another 80-90 new
stores in 2010 alone. Since 2004, VF's direct-to-consumer sales have increased 12% annually,
and the company has opened more than 250 stores. Although retail is a notoriously difficult
business, VF has performed well, and in 2009 the returns on its direct-to-consumer business were
above 20%. Company revenues are spread across five segments (coalitions), and 17% of sales
were generated from the retail channel in 2009, up from just 10% in 2004 (a 15% compound
annual growth rate). We highlight the company's 2009 revenue breakout by coalition and
distribution channel below:

To see images associated with this article click:

Increasing penetration in China should contribute to near-term growth.

Like several retailers and apparel manufacturers, VF sees China as an avenue to spur
international revenue growth. Unlike many of its competitors, however, VF has been in Hong
Kong since 1994, and its Asian market operating margins are among the highest across the
company. The firm's local infrastructure is well-established, with more than 1,200 employees
spanning management, human resources, information technology, and finance functions.
Penetration of higher-margin Vans and North Face brands in the Chinese market will be critical
components to reaching management's stated goal of generating 33% of sales from international
markets by 2012 (up from 27% in 2009). For example, management sees long-term revenue
potential of $1 billion for the North Face brand in China, and is increasing its store count by 40%
to reach a total of 1,400 doors in China by year-end. The firm recently raised its 2010 revenue
growth target for Asia and now expects 25% growth this year.

Management has earned a reputation as solid brand integrators, and future acquisitions
are likely.
Over the last decade, VF Corp has expanded to become a global player in a competitive,
commodity market. Management takes a strategic approach toward acquisitions by targeting
desirable brands with global expansion potential. Since 2003, VF Corp has closed 14
acquisitions while generating an average return on invested capital of 17.4%. VF's leadership
team has established a solid track record of integrating brands in a unique operating structure,
which leverages centralized procurement, information technology, and logistics services, while
providing flexibility in implementing brand-specific growth strategies.

To see images associated with this article click:

To see images associated with this article click:

While we remain cognizant of acquisition-related integration risks, we believe the firm has
navigated its growth course well. The company has talked recently about adding to its Outdoor
and Action Sports coalition via acquisition, yet we don't expect anything transformational for the
organization, given management's historically-low debt levels and commentary surrounding
potential acquisition price tags. On the first-quarter 2010 conference call, management stated,
"Our sweet spot's in the $300 million to $400 million range, but we can (go) up from there and
down from there."

We believe VF has plenty of financial flexibility to pursue acquisitions in management's target

range. Morningstar recently initiated credit coverage of VF Corporation with an issuer rating of
'A' which reflects the company's solid financial health, minimum near-term debt maturities, and
narrow economic moat.

VF is in fine financial health, even after spending about $3 billion on acquisitions since 2003.
The company had more than $700 million in cash on its balance sheet as of Dec. 31, 2009 and
generated about $650 million in free cash flow last fiscal year. The company's debt/capital and
lease-adjusted debt/EBITDA ratios were 0.24 and 2.0, respectively, at the end of the last fiscal
year. Although the firm is actively pursuing acquisitions as part of its long-term growth strategy,
we project comparable levels of debt going forward. The firm generated average annual cash
flow from operations of $700 million during the last seven years ($4.8 billion cumulatively) and
has funded nearly $3 billion of acquisitions during the same period. We forecast that EBIT will
cover interest expense more than 13 times in 2010. Debt maturities are not a concern, as they are
well-spread and manageable in each of the next five years and could be paid off through a
combination of cash on hand and free cash flow.

We believe VF shares are currently undervalued.

Our fair value estimate of $95 per share implies forward price/earnings of 16 times, an
EV/EBITDA multiple of 9.5 times, and a free cash flow yield of 4%. The company entered 2010
in relatively good shape, and reported solid first-quarter results that exceeded our expectations.
Looking over the next several years, our estimates would prove conservative if management
achieves its long-term targets of double-digit revenue growth and a 15% operating margin. VF
Corp generates solid free cash flow, which fully funds organic growth, a stable dividend, and
share repurchases. We believe the company's growth profile will strengthen as the economic
recovery continues and the direct-to-consumer and international strategies gain traction.

June 10, 2010, 9:17 a.m. EDT

With a caveat, retailers sound positive tone

By Andria Cheng , MarketWatch

NEW YORK (MarketWatch) -- Despite the volatility in the stock market, still
persistently high unemployment and European debt crisis, retailers are
feeling better these days.

Acknowledging rising wages in China, increasing freight costs and inflationary

pressures in cotton and other raw materials, executives who presented at the two-
day Piper Jaffray consumer conference that ended Wednesday in New York said
business trends remained encouraging.

Adidas Tones Up Reebok

Four years after its $3.8 billion purchase of former U.S. rival Reebok, Adidas is expecting growth of the
brand this year for the first time since its purchase. MarketWatch's Andria Cheng speaks with Adidas
CEO Herbert Hainer and Reebok chief Uli Becker to see how they got the brand back on the map.

"It's a consistently positive tone, both domestically and internationally," said Piper
Jaffray analyst Jeff Klinefelter in an interview. "Trends didn't suggest consumers
are retrenching. The punch line is the gradual consumer spending recovery

Still, Klinefelter cautioned traffic will continue to be uneven with consumers

driven to shop by events such as Memorial Day sales.

"Retailers are generally very positive even as they get one eye glancing at the
macroeconomic issues," said Blake Krueger, chief executive of Hush Puppies and
Merrell shoe labels' parent Wolverine World Wide Inc. (NYSE:WWW) , in an
interview. "The order has been higher this year than what we thought is going to

Against investor worries about European markets, executives at Tommy Hilfiger

owner Phillips-Van Heusen Corp. (NYSE:PVH) and Guess? Inc. (NYSE:GES)
said their European same-store sales are still positive without signs of business
slowing down.

Both companies' shares have been pummeled on concerns about their European
exposure. For instance, the region is Guess's No. 2 sales market after North
America but its biggest profit contributor.

"The fundamentals of the business are in place," said Guess (NYSE:GES) Chief
Financial Officer Dennis Secor. "We are still seeing strong business in Europe."

However, he said a stronger dollar will dent sales after they are translated to the
U.S. dollars

"I say with a caveat 'we need to stay very close to those markets,'" said Cindy
Knoebel, a VF Corp. (NYSE:VFC) vice president, in an interview. "There's a lot of
nervousness about what's going on in Europe. We are still seeing our business
holding up very well."

VF, which sells to retailers from Wal-Mart Stores Inc. (NYSE:WMT) to Saks Inc.
(NYSE:SKS) and owns brands from North Face to Vans, said the upbeat sentiment
in the U.S. also comes with its own caveat.
"We are all feeling better, but it's not translating to (retailers) making big bets on
inventory," she told MarketWatch. "There's a lot still to come in the year. We'll
chase inventory when we can."

'Bifurcated' recovery?

Matt Rubel, chief executive of Collective Brands Inc. (NYSE:PSS) , which owns
Payless ShoeSource stores as well as footwear brands including Saucony and
Sperry Top-Sider, said the recovery is "bifurcated."

"The premium end is very healthy," he said. "That consumer is out there shopping.
But I don't believe you'll see a strong performance at the mass level until job
picture corrects itself. The unemployment rate in Hispanic and African market
place is still in the mid-to-high teens."

Discounter Wal-Mart has said that higher gasoline prices and unemployment rate
are pressuring its low-income shoppers.

On the other end of the price spectrum, upscale handbag designer Coach Inc.
(NYSE:COH) said it's seen "healthy growth" continuing into the first two months
of the quarter, Chief Executive Lew Frankfort said, adding his own note of caution.

"Although [the consumer is] back, she's cautious," he said. "She's not spending at
the level as 2006 and 2007."

Meanwhile, fragile housing market is keeping No. 2 home-improvement retailer

Lowe's Cos. (NYSE:LOW) in check.

"We are optimistic about 2010," said executive vice president of store operations
Mike Brown. "But we sees this year as a transitional year. There's still a lot of
angst on when the housing market will bottom."

Retailers said they will continue to plan conservatively, echoing moderated

guidance they gave after reporting better-than-expected first quarter results. See
full story on retailers bracing for slower profit growth.

Michael O'Sullivan, president and chief operating officer at off-price retailer Ross
Stores Inc. (NASDAQ:ROST) , said the company's core business is strong and
consumers are still buying, but also said Ross will plan conservatively and would
rather chase products instead of overstocking.
"The question mark is whether there's a lasting economic recovery," O'Sullivan
said in an interview. "People are still concerned. There's uncertainty."

To mitigate anticipated cost pressures, retailers said they are consolidating their
vendor base and increasingly moving production out of China to lower cost
countries from Vietnam to India. They said prices also may go up.

"There's going to be pricing pressures," said Skechers USA Inc. (NYSE:SKX)

operating and finance chief David Weinberg, in an interview. "Wages are going up.
We'll pass along some of those increases."

Weinberg also said business trends are still strong and the company hasn't needed
to discount much since the end of last year, delivering record level margin.

Perhaps one of the most telling signs about a recovered consumer came in a panel
featuring 11 high-school seniors. When asked whether they are spending more this
year, more than half raised their hands.

"Retail consumers are not dead," said Urban Outfitters Inc.'s (NASDAQ:URBN)
John Kyees. "We are very positive about retail consumers."