VF Corporation has said that reducing costs in its global supply chain has given it a competitive advantage

VF Corporation has said that reducing costs in its global supply chain has given it a competitive advantage

Apparel and footwear giant VF Corporation has said that reducing costs in its global supply chain has given it a competitive advantage as it continues to look for gross margin expansion in 2015.

While VF Corp last week booked fourth-quarter earnings that missed analyst expectations, sales rose 9% and gross margin improved by 80 basis points to a record 49% - driven primarily by the continuing shift of its revenue mix toward higher margin businesses.

Speaking on the firm's earnings call, CFO Bob Shearer pointed to a number of gross margin components related to product costs, the first of which, he said, was the cost of cotton coming down.

“We buy finished fabrics like denim. We don't buy cotton. However, the cost of cotton will ultimately impact our cost of cotton-based fabrics because of the lag time of cotton flowing through our production cycle. It will be the second half of the year when we see a benefit of the cotton cost reduction, primarily in our jeans business.”

The other component is leather buys, for which Shearer said VF finds it more advantageous to lock-in prices over a longer-term. At present, the company is locked down to the third quarter. “Because of this timing, the locked in cost for leather in 2015 is higher than our cost in 2014 even though today's costs have declined somewhat from those higher levels.”

From a materials cost standpoint, he added, costs will be relatively flat in 2015 versus 2014.

Shearer also confirmed that labour costs are on the rise. “We estimate in our own plans by as much as 3% to 5% and on source products by an average of 10% to 15%. Generally we're able to mitigate much of the higher labour costs in our plants, but not so with external costs. The increase in labour cost is generally the reason for [our] limited overall product cost increase.”

He added: “There are a lot of puts and takes on product cost for us this year. Our input costs are diverse like our business. Our supply-chain folks do a great job of finding the lowest cost with high quality around the globe. That's a competitive advantage for us for sure as we continue to look for gross margin expansion and 2015 will be no exception.”

Barclays analyst Matthew McClintock described VF Corp's results as “solid”, with its three major brands – The North Face, Vans and Timberland - driving double-digit growth for the fifth consecutive quarter.

He noted: “Despite muted trends in the mass channel, jeanswear posted solid improvement, with sales up 3%. The realignment strategy and innovation platforms continue to track well, which we expect to help maintain a similar run-rate into 2015.”

Acquisition frustration
Separately, management noted its frustration in failing to identify and add to the VF portfolio.

“We are an acquisition minded company and we are probably as frustrated as those of you who want us to make acquisitions,” said CEO Eric Wiseman. “We're probably as frustrated as you are about our lack of getting anything done recently. However, we remain very disciplined, and when we find the right opportunity to make strategic and value creation sense for us we are in a great position to pull the trigger and go. We have a lot of capacity to acquire.”

Asked whether the strong dollar makes European acquisitions look more attractive, Wiseman said: “Of course, yes it does.”

He added: “We know where we are hunting. We've talked externally, primarily in the Outdoor and Action Sports base. I said primarily, not exclusively. International is looking more and more attractive to us because of the strength of the US dollar and we're continuing to have discussions with people. We just don't have anything we can talk about today.”

Wiseman also touched on the delays occurring at US West Coast ports, which the company has been “navigating through...incredibly effectively”, incurring no missed deliveries or incremental costs.

“We have diverted stuff to other ports. We've moved part of our truck fleet out there to get our [product] through the docks and off the platforms. There's a lot of things we've done that just haven’t been material enough to talk about. But it is a complicated situation. If it does go to a full on strike and shutdown it will be material to everybody. Now the question is how material, and the answer to that is, you tell me how long the strike will be and I’ll tell you how material.”

For the full year, VF is forecasting revenue to increase by 8% on a currency neutral basis, and an improvement in gross margin of 40 basis points to 49.2%. Earnings per share, on a currency neutral basis, is expected to increase 12%, compared to an adjusted EPS of $3.08 in 2014.

Wiseman said: “Looking forward to 2015, foreign currency, currency adjusted, currency neutral, these are terms you are going to hear us and many US companies with sizeable international businesses talk about likely for many quarters to come.

“While the rapid strengthening of the US dollar may continue to cause reported results to shift depending on how the euro, the pound, the peso and yen, move throughout the year, the important news is, our fundamental business is incredibly strong and the momentum we've established will continue.”