VF Corp. (VFC) is trading pretty sharply lower today (-7%) after reporting Q2 (Sep) earnings this morning. You may not have heard about VF Corp, but you are surely familiar with its brands. VFC is one of the world's largest apparel, footwear and accessories companies. Its brands include Vans, The North Face, Timberland, Wrangler and Lee. It also had owned the Nautica brand but sold that to Authentic Brands Group in April 2018.
VFC announced a major transformation in August 2018 when it said it will separate the company into two independent, publicly traded companies: VF Corp., an apparel and footwear powerhouse, and a yet-to-be named company (NewCo), which will hold VF's Jeans and VF Outlet businesses and will be a leader in the denim category. VFC expects there will be a tax-free spin-off of NewCo to VFC shareholders. The separation is targeted to be completed in the first half of calendar 2019.
VFC says the strategic priorities and financial characteristics of VF and NewCo have evolved over time and the synergies across these businesses have become less clear. Enabling the Jeans business to operate independently from VF will allow it to focus on its own long-term strategic priorities as a separate company with a separate management team. It will also allow VF to sharpen its focus as a global apparel and footwear powerhouse with a portfolio of iconic brands in attractive and growing consumer categories.
Turning to the SepQ results, adjusted EPS rose 19% YoY to $1.43 while revenue rose 15.2% YoY to $3.91 bln. Both result were better than expected. VFC also raised full year guidance: now expects adjusted EPS of $3.65 vs prior guidance of $3.52-3.57. Revenue guidance was bumped up to $13.7 bln from $13.6-13.7 bln.
On the call, VFC discussed the current trade climate between the US and China. About 11% of total cost of goods sold come directly to the US from China. VFC says it has the ability to reposition its global sourcing footprint in the near to mid-term to mitigate the potential negative impact of additional tariffs should they materialize. With regard to the recent trade agreement between the US, Mexico and Canada, VFC says it's pleased with the outcome. The impact to the business is expected to be minimal.
In sum, despite the overall upside in terms of EPS and revenue and despite an 11% increase in the dividend to $0.51/share, investors were disappointed in the SepQ results. It seems that VFC's jeans business had a difficult quarter, which was compounded by the impact of a customer bankruptcy (presumably Sears) contributing to a decline of 7%.