VF Corporation saw income rise 12% to a record $128.2 million from $114.7 million before the cumulative effect of a change in accounting policy for stock compensation expense, with earnings per share rising 14% to $1.14 from $1.00. Reflecting the cumulative effect adjustment recorded in the first quarter of 2005, net income in the 2005 period was $102.9 million, equal to 89 cents per share. Total revenues increased 5% in the current quarter, to $1.67 billion from $1.58 billion in the year-ago quarter. Foreign currency translation negatively impacted revenues by approximately $30 million, or 2%, and earnings per share by 2 cents in the 2006 quarter.
“We are delighted to start the year off on such a positive note, with earnings well in excess of the initial guidance we gave in February,” said Mackey J. McDonald, chairman and chief executive officer. “Our growth strategy clearly has momentum, which should continue to build as the year progresses. Importantly, our performance this year is being driven by strong organic growth. Our results this quarter have given us increased confidence in our ability to deliver even stronger revenues and earnings this year than previously anticipated, while at the same time giving us the opportunity to significantly step up the investments behind our most important growth initiatives.”
First Quarter Business Review
Outdoor
Outdoor division total revenues increased 35% in the quarter, driven by particularly strong global growth in The North Face, Vans and Napapijri brands and by the addition of the Reef brand, acquired in April 2005, which contributed $42 million to revenues in the quarter. Revenues of The North Face brand grew approximately 40%, while revenues of the Vans and Napapijri brands both achieved mid-teen percentage growth rates. The packs business also grew modestly in the quarter, driven by higher Eastpak brand sales in Europe. The strong volume gains achieved by The North Face and Vans brands were the primary drivers behind a 59% increase in operating income in the quarter, with total Outdoor operating margins rising two full percentage points to 13.1%.
Sportswear
Each of the Sportswear businesses, which include the Nautica and John Varvatos brands, as well as Kipling brand sales in North America, achieved higher revenues in the quarter. The Nautica branded wholesale business, including men's sportswear, increased revenues in the quarter at a low single digit rate, with strong sales of our spring product offerings partially offset by slightly lower revenues in Nautica brand retail stores. As anticipated, operating income and operating margins declined in the quarter, due primarily to investments to support the upcoming launch of Nautica brand women's sportswear and the Nautica, Kipling and John Varvatos brands' retail store strategies. In addition, margins reflected increased promotional activity in the Nautica brand retail stores during the quarter.
Jeanswear
The company was very pleased with the overall performance of the Jeanswear coalition, which includes the Wrangler, Lee, Riders, Rustler and Wrangler Hero brands. Domestic jeans revenues rose slightly in the quarter, as the company continued to experience solid gains in its domestic Mass Market and Western Specialty businesses. While down from prior year levels, Lee brand domestic revenues were better than anticipated and the company expects improved top line comparisons beginning in the second quarter. Total Jeanswear revenues were down slightly from prior levels reflecting currency translation effects that negatively impacted revenues by approximately $15 million. Total Jeanswear operating income rose 5% in the quarter reflecting higher sales of full priced products, with operating margins rising to 17.5% from 16.4%.
Intimate Apparel
The Intimate Apparel business posted difficult revenues and profit comparisons as expected, with the Private Brands business continuing to be the primary driver behind the revenue decline. The company continues to anticipate more stable performance for the remainder of the year. The management team is highly focused on returning this business to traditional levels of profitability and renewing growth in its brands, including Vanity Fair, Lily of France, Vassarette, Bestform and Curvation.
Imagewear
The Imagewear coalition delivered another excellent quarter. Revenues rose 4%, with the gain due to a strong increase in sales of Image apparel, which includes uniforms for the industrial, public safety and service markets. Operating margins remained strong, at 15.5% in the quarter, with operating income about flat with prior year levels.
Gross margins were 42.1% in both the 2006 and 2005 periods. Operating income rose 9% in the quarter, with operating margins increasing to 12.2% from 11.8%. Income rose 12% before the cumulative effect of the change in accounting policy for stock compensation expense in 2005, reflecting lower net interest expense in the current period.
Inventories rose 6% versus the comparable quarter in 2005, 2% of which was due to the acquisition of the Reef brand. Debt as a percent of total capital was 24.7% at the end of the quarter.
Outlook
Based on its strong performance this quarter, the company raised its full year guidance for both revenues and earnings, expecting revenues to expand 6 to 7%, driven primarily by the Outdoor coalition and stronger than anticipated revenues in the domestic Jeanswear business. The company also continues to expect its Imagewear and Sportswear businesses will achieve revenue gains over 2005 levels.
“We are committed to maintaining the positive momentum behind our growth strategy and believe the best means of doing so is to continue to invest behind our brands. Accordingly, we plan to invest an additional $20 million this year in increased advertising behind our Jeanswear brands as well as to support a variety of growth initiatives in our Outdoor business,” said Mr. McDonald.
Previously, the company had anticipated an increase in 2006 earnings per share of approximately 6% over the $4.54 reported in 2005 before the cumulative effect adjustment. The company now expecting a 9% increase to approximately $4.95 per share.
The company expects a 7 to 8% percent increase in revenues and approximately 10% increase in earnings per share in the second half. The fourth quarter is expected to be particularly strong.
Earnings comparisons for the second quarter of 2006 will reflect the impact of special items that benefited net income by $7.7 million, or 7 cents per share, in the prior year's quarter. Considering those special items, the company currently expect second quarter earnings per share to be about flat with the 85 cents per share reported in the second quarter of 2005. Revenues should rise by 6 to 7%.
VF CORPORATION
Consolidated Statements of Income
(In thousands, except per share amounts)
Three Months Ended
March
-----------------------
(Revised,
see Note B)
2006 2005
---------- -----------
Net Sales $1,646,405 $1,563,643
Royalty Income 19,328 18,542
---------- ----------
Total Revenues 1,665,733 1,582,185
---------- ----------
Costs and Operating Expenses
Cost of goods sold 964,558 915,564
Marketing, administrative and general
expenses 498,228 480,115
---------- ----------
1,462,786 1,395,679
---------- ----------
Operating Income 202,947 186,506
Other Income (Expense)
Interest income 1,418 3,016
Interest expense (12,690) (18,674)
Miscellaneous, net 882 119
---------- ----------
(10,390) (15,539)
---------- ----------
Income before Income Taxes and Cumulative
Effect of a Change in Accounting Policy 192,557 170,967
Income Taxes 64,372 56,281
---------- ----------
Income before Cumulative Effect of a Change
in Accounting Policy 128,185 114,686
Cumulative Effect of a Change in
Accounting Policy - (11,833)
---------- ----------
Net Income $ 128,185 $ 102,853
========== ==========
Earnings Per Common Share - Basic
Income before cumulative effect of a
change in accounting policy $ 1.16 $ 1.02
Cumulative effect of a change in
accounting policy - (0.11)
Net income 1.16 0.92
Earnings Per Common Share - Diluted
Income before cumulative effect of a
change in accounting policy $ 1.14 $ 1.00
Cumulative effect of a change in
accounting policy - (0.10)
Net income 1.14 0.89
Weighted Average Shares Outstanding
Basic 109,854 111,761
Diluted 112,339 114,993
Cash Dividends Per Common Share $ 0.29 $ 0.27
