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Geographical Diversity Is A Double-edged Sword For VF Corp.

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VFC’s revenue segmentation

VF Corporation (VFC) is one of the largest apparel companies in the world. It’s expected to report revenues of $12.3 billion for 2014. As we saw earlier in this series, VFC reports its segments based on product coalitions. Outdoor & Action Sports is the company’s largest segment. It accounted for ~55.9% of total revenues or $6.4 billion in 2013.

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Geographical classification

The company derives most of its revenues from the United States. The US market accounted for ~62.4% of revenues or $7.4 billion in 2013. The percentage is similar to firms such as Lululemon Athletica (LULU) with 66.1% of sales coming from the United States. Under Armour (UA), another major competitor, derived almost 90% of its revenues from the United States.

In contrast, international revenues made up a much larger component for rivals Columbia Sportswear (COLM), PVH Corp. (PVH), and Fossil (FOSL), which derived 42.4%, 45.8%, and 53.2% of revenues from overseas markets in their last fiscal years, respectively. The Gap (GPS) derived almost 85% of its revenues from the North American market. GPS is part of the SPDR S&P Retail ETF (XRT). GPS makes up 1.01% of XRT’s portfolio holdings.

Most of VFC’s international revenues originate in Europe. While the larger US segment grew at a CAGR (compounded annual growth rate) of 8.8% over the period 2009–2013, the international segment grew at a CAGR of 19%. The international segment, particularly Asian countries like China, Japan, and India, are key growth drivers for VFC.

This implies that the US macroeconomic environment is likely to exert a relatively greater influence on VFC’s and GPS’s revenues compared to their peers. Currently, the US economy and labor market is chugging along nicely. This, along with lower gas (OIL) (USO) prices, should benefit well managed companies in the consumer discretionary sector (XLY) such as VFC, UA, LULU, and GPS.

On the other hand, while international diversity in revenues can benefit companies, the current macro environment for much of the world outside of the United States remains challenging in the near to medium term. VFC is likely to face both challenging and opportunistic environments in certain geographies. We’ll have more on the key headwinds and tailwinds facing VFC and other apparel retailers (XRT) in Part 20 of this series.

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