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VF Corporation’s 1Q15 Margins Are Expected to Improve

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Result headwinds for VF Corporation

Last quarter, VF Corporation’s (VFC) 4Q14 adjusted EPS (earnings per share) rose by 17% to $0.98, while sales grew 7% to $3.6 billion. The company expects currency headwinds from its international operations due to the appreciation of the US dollar. European revenue, which represents 20%–23% of total sales, is expected to grow at a high single-digit pace on a constant-currency basis. However, after factoring the adverse impact of US dollar appreciation versus the euro, sales are expected to decline at a mid-single-digit pace.

Over the past year, the US dollar (UUP) has appreciated over most major currencies. The average US dollar trade-weighted index in 1Q15 is up by more than 11% compared to 1Q14. This year, through April 17, the index has appreciated by 3.4% at near six-year highs.

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Peer group comparisons

Currency factors have also affected revenue for VFC peers Nike (NKE), Under Armour (UA), and Lululemon Athletica (LULU) in their latest reported quarters. While results from the United States for these companies have been strong, currency factors have been a drag on financial results. This is more so for Nike (NKE) and Columbia Sportswear (COLM) than for Under Armour (UA) and Lululemon Athletica (LULU). NKE derives ~56% of sales from outside North America, compared to ~12% for UA and ~10% for LULU. COLM derived 43% of its revenue from outside the United States in fiscal 2014 and is due to declare 1Q15 results on April 30.

VFC, NKE, and UA together constitute 0.4% of the portfolio holdings in the iShares Russell 1000 ETF (IWB) and 0.6% in the SPDR S&P 500 ETF (SPY).

Cost projections

VF Corporation (VFC) expects margins to improve in 2015, coming in at 49.3% compared to 48.8% in 2014. Margins have been expanding over the past few quarters, mostly as a result of the company increasing its complement of full-price stores.

Adverse forex movements are expected to impact margins by 0.3% in 2015. In 2H15, margins are expected to improve compared to 1H15 as the company realizes the benefits of lower cotton, leather, and energy costs.

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