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In line with the positive preannouncement earlier this month, VFC beat its previous guidance of $0.80 and printed $0.94. That’s nice at face value, but consider the following…
1. The company guided for EPS -10%, and then came in +5.5%. Big delta from guidance, But this proved to be VFC’s lowest quarterly EPS growth in 2 years. This INCLUDED a $0.07 tax benefit, excluding which earnings would have been -2% -- a rate not seen since early 2004. The icing on the cake is that this excludes FX benefit – which can’t be ignored either given that Int’l is nearing a third of sales and the delta on the dollar gets tougher in 2H.

2. Operating profit was up only 1.8%, which included an 8.5% boost from the addition of its Contemporary businesses at this time last year (Lucy and Seven). Compares start getting tougher in 2H.

3. Jeanswear EBIT was down 22.8% -- supporting my concerns in watching Levis in recent weeks. Jeanswear accounts for a disproportionate amount of VFC cash flow (about 45-50%). This is the biggest decline in this business I have seen at VFC in years.

4. The Outdoor segment (about 1/3 of cash flow) posted a respectable 17% top line and 11% EBIT growth, both represent a very material deceleration in 2-year run rates. Keep in mind that this group (The North Face, Vans, etc..) has fueled virtually every part of the company’s global growth in recent years. This is a troubling statistic.

5. Amazingly, Nautica’s numbers fall into the ‘less toxic’ group. EBIT decline of 25% is hardly anything to write home about. But one could make the argument that Sportswear has hit bottom.

6. 3Q guidance is 9% EPS vs the Street at 15%. VFC kept the year’s guidance even, and geared it towards 4Q. Regardless of numbers relative to expectations, we need to bank on a meaningful ramp in EPS in 2H vs 1H, which is the same time VFC anniversaries recent acquisitions and faces tougher dollar compares.

7. Cash from ops guidance for 2008 came in at $700mm, versus $821 in 2007. Down 15% year/year.

8. I keep coming back to the top line and slowing after we roll past recently-acquired brands, FX benefit easing, and the company reverting to a low-mid single digit organic top line growth rate vs the 10%(ish) numbers we’ve seen over 2 years. Gross margins are at peak and are likely to head lower as industry headwinds play out throughout 2009, and both cash from operations and free cash flow slow on the margin. Yes, VFC is one of the better-run apparel companies out there. But sentiment remains net positive, and I have no clue as to who the incremental buyer is if my model is correct.