VF Corporation's third quarter net income increased 17% to $181.9 million from $155.4 million, with earnings per share rising 15% to $1.59 from $1.38. Last year's third quarter earnings included an $.08 per share impact from the recognition of certain costs related to the disposition of its Playwear business. Sales were $1,803.1 million in the quarter versus $1,792.6 million reported in last year's third quarter. The Reef® and Holoubek businesses, which were acquired during 2005, added $29 million to sales and were neutral to earnings.
For the first nine months of 2005, net income rose 16% to $404.7 million from $349.4 million, with earnings per share rising 14% to $3.55 from $3.11. Sales increased 7% to $4,802.5 million from $4,494.8 million.
“The transformation of our company, with the addition of higher growth, higher margin lifestyle brands, is paying off,” said Mackey J. McDonald, chairman and chief executive officer. “Our growth engines – including our Outdoor and Sportswear coalitions – are providing us with a platform that will ensure healthy top and bottom line performance.”
He continued, “We're very pleased with the outstanding strength in earnings and margins we achieved this quarter, with higher operating margins in nearly all our business coalitions. Strong volume gains in our higher margin Outdoor business, combined with excellent operational efficiencies, enabled us to deliver stronger than expected bottom line performance despite a variety of factors pressuring retail sales and consumer spending. These factors notwithstanding, we are disappointed with the sales performance in our Jeanswear and Intimates businesses and are working aggressively to reverse these trends.”
Total Jeanswear sales, which include the Wrangler®, Lee®, Riders®, Rustler®, Wrangler Hero® and H.I.S® brands, declined 4% in the quarter, to $689 million versus $714 million in last year's third quarter. Domestic jeanswear sales declined 7% in the quarter. This was primarily due to a significant decrease in our Lee® brand business reflecting the impact of recent retail consolidations as well as weakness in industry jeans sales across the mid-tier channel. International sales rose 4%, with strength in Canada, Mexico, Latin America and Asia. Profitability of our Jeanswear business continues to be very strong, with a 5% rise in operating income and an increase in operating margins of more than one full percentage point. We remain encouraged by the initial results of newer initiatives such as our Wrangler Jeans Co.(TM) shirt program, our Riders® Coppercollection(TM) and Aura from the Women at Wrangler(TM) lines for women, and premium Wrangler® brand products in specialty stores. We also recently launched a new campaign to drive awareness of the fit attributes of our Lee® brand women's jeans lines.
Our Outdoor business had another outstanding quarter in both sales and profitability, and we are excited about the growth prospects for all our Outdoor brands. Sales rose 14% in the quarter to $521 million from $457 million, with our newly acquired Reef® brand contributing $18 million of the increase. Outdoor operating income rose 28%, with operating margins expanding to 21.5% from 19.1%, resulting from the strong volume gains and a sharp improvement in the profitability of our Vans® business during the quarter.
The North Face brand continued its momentum, with sales up 23% in the quarter and increases across all product categories. Our owned retail stores are also performing very well, with comparable store sales in the U.S. running 17% above prior year levels. Spring 2006 bookings for the brand are extremely strong, up 30%.
Our Kipling® and Napapijri® brands also experienced solid sales growth in the quarter, with stable results across our Vans®, JanSport® and Eastpak® brands.
We remain excited about the prospects for our Kipling® and Napapijri® brands. In September we opened a new Kipling® brand flagship store in London and have opened 16 stores internationally through our distributors in 2005. Year to date, we have experienced double-digit growth for our Kipling® brand in Spain, the UK and Germany. Spring bookings for our Napapijri® brand are up 18%, with particularly strong growth in Germany and France. Our newest store opened recently in Munich and we're looking forward to the opening of our first store in the U.S., in New York City, next spring.
Our Vans® brand continues to perform very well. Our new retail prototype store continues to show great promise, with comparable store sales up 22% year-to-date in these remodeled stores. We're committed to expanding our Vans® branded apparel business, and have launched the Vans® Core and Vault collections for spring of 2006.
The integration of our most recent acquisition, the Reef® brand, is on plan. Business trends for the brand are quite positive, with double-digit growth across all channels.
We continued to experience difficult comparisons in our Intimate Apparel business, which includes our Vanity Fair®, Vassarette®, Lily of France®, Bestform® and Curvation® brands. Sales declined 9% in the quarter, to $213 million from $235 million. As has been the case throughout 2005, the majority of the decline was in our private brands business. Operating income fell 35%, with operating margins dropping to 10.1% from 14.1%, as we continue to take actions to align costs and capacity. Sales comparisons are expected to improve in the fourth quarter, although margins will remain under pressure. Key organizational changes, a focus on driving new product success and actions taken to reduce product costs are expected to result in improved sales and profits in 2006.
Our Imagewear coalition reported a 5% sales increase in the quarter, to $203 million from $193 million. The increase in sales was a result of the January 2005 acquisition of the assets of Holoubek, a licensee of the Harley-Davidson Motor Company, Inc., which drove a double-digit sales gain in our licensed sports apparel business. Imagewear operating income rose 25%, with operating margins exceeding 18% in the current quarter.
Sales of our Sportswear businesses, which include the Nautica® and John Varvatos® brands, as well as Kipling® brand sales in North America, increased 2% in the quarter, to $166 million from $163 million. Sales comparisons reflect lower sales of distressed Nautica® brand products, which also contributed to improved operating margins. Sportswear operating income increased 32%, while operating margins reached nearly 18%.
We continue to gain market share in men's sportswear in department stores with our Nautica® brand. The productivity of our men's sportswear business at retail is improving, with sales per square foot expected to be up 10% in 2005. Spring 2006 bookings for our men's sportswear business are healthy, up 7%.
The John Varvatos® men's luxury business continued its strong sales growth in the quarter and we are looking forward to the opening of our new flagship store in New York City in November.
We are moving ahead aggressively with our expansion plans for our Kipling® brand in the U.S. and in September opened three new retail stores.
Overall gross margins for VF increased by more than one full percentage point in the quarter, to 41.5% from 40.2%, with improvements across most of our businesses. Operating margins also rose sharply in the quarter, to 16.2% from 14.0%. Operating margins in 2004 were impacted by a $15 million loss on the disposal of our Playwear business. The income tax rate for the 2005 quarter rose to 33.9% from 33.4% due to expected settlements of prior year taxes.
Our balance sheet remains in excellent shape, and we ended the quarter with over $200 million in cash. Inventories were up 11% over September 2004 levels, with $21 million of the total increase of $117 million due to the 2005 acquisitions. Debt as a percent of total capital was 27.5% at the end of the quarter, or 23.2% net of cash. We recently repaid $300 million of long-term debt that came due at the beginning of the fourth quarter. During the quarter we repurchased one million shares of common stock, bringing the total shares repurchased year-to-date to three million. We expect to repurchase an additional one million shares by year-end.
We are maintaining our expectation for an increase in earnings of about 10% for the full year to approximately $4.65 per share. Sales for 2005 should rise 5 to 6%, excluding any additional acquisitions. Anticipating a continuation of difficult retail conditions, we expect sales in the fourth quarter to rise about 2%, while earnings per share should be flat to up slightly over the same period a year ago.
“We're looking forward to wrapping up another record year in both sales and earnings, and to continuing the momentum into next year,” said Mr. McDonald. “At the present time, we are optimistic that we can deliver another record year in 2006, with strong top and bottom line growth. However, we believe it prudent to continue to monitor retail conditions prior to providing specific sales and earnings guidance.” The Company plans to provide an update on its Growth Plan and more specific financial guidance for 2006 in mid-December.
VF CORPORATION
Consolidated Statements of Income
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September September
--------------------------------------------
2005 2004 2005 2004
-------- ----------- ----------- -----------
Net Sales $1,803,064 $1,792,569 $4,802,538 $4,494,775
Costs and Operating
Expenses
Cost of goods sold 1,055,064 1,072,741 2,810,709 2,720,842
Marketing, administrative
and general expenses 470,753 466,197 1,380,238 1,229,993
Royalty income and
other (15,218) (12,751) (38,440) (37,359)
Loss on disposal of VF
Playwear - 14,978 - 7,561
----------- ----------- ----------- -----------
1,510,599 1,541,165 4,152,507 3,921,037
----------- ----------- ----------- -----------
Operating Income 292,465 251,404 650,031 573,738
Other Income (Expense)
Interest, net (17,955) (18,735) (50,062) (52,172)
Miscellaneous, net 819 838 801 1,956
----------- ----------- ----------- -----------
(17,136) (17,897) (49,261) (50,216)
----------- ----------- ----------- -----------
Income Before Income
Taxes 275,329 233,507 600,770 523,522
Income Taxes 93,464 78,070 196,050 174,123
----------- ----------- ----------- -----------
Net Income $181,865 $155,437 $404,720 $349,399
=========== =========== =========== ===========
Earnings Per Common Share
Basic $1.63 $1.41 $3.63 $3.18
Diluted 1.59 1.38 3.55 3.11
Weighted Average Shares Outstanding
Basic 111,114 110,149 111,043 109,511
Diluted 114,099 113,034 114,099 112,232
Cash Dividends Per
Common Share $0.27 $0.26 $0.81 $0.78
