VF Corporation reported solid organic sales growth during the fourth quarter, but write-downs relating to the company’s Jeanswear business and the recently announced sale of their Intimates business caused net income and diluted EPS to miss guidance issued at the end of Q3. Sales for the fourth quarter increased 9% to $1.60 billion, compared with $1.46 billion in the fourth quarter of 2005.

Gross margins during the fourth quarter increased 70 basis points to 42.4% compared to 41.7% last year. SG&A expenses as a percentage of sales increased 150 basis points to 30.8% compared to 29.3% last year. This expense increase brought fourth quarter operating margins down to 13.0% of sales compared to 13.6% of sales last year. Net income decreased 14.9% to $108.6 million compared to $127.5 million. Diluted EPS was 95 cents per share compared to $1.13 last year.

Outdoor Coalition total revenues were up 32% to $453 million during the fourth quarter. Domestic revenues in the ODC grew 34% in the quarter, while international revenues rose 28%. Operating income increased 36% in the quarter, and operating margins rose in spite of additional investments into infrastructure.

The North Face saw double-digit revenue increases during the quarter with “solid sell-through” in spite of the unseasonably warm weather. TNF backlogs for both spring and fall are up over 20% and in line with VF’s expectations. TNF Americas revenues increased “more than” 35%. The brand opened four new full-price retail stores during the quarter and retail sales were said to be “as strong as the wholesale business.”

During a conference call with analysts, Dave Gato, VF’s president of Outdoor Coalition Americas, said, “I think that our retail strategy is an important one for the long-term growth – a complementary way to the wholesale strategy. We really are looking for a few select key locations that highlight and showcase the brand and drive the wholesale sales around it.”

Vans also reported double-digit revenue gains in Q4 with wholesale and retail businesses both up more than 20%. Management said that a strong backlog for Vans in the first half of 2007 points to continue growth ahead for the brand. They also stated that they don’t expect the Vans brand to slow down and that the footwear business “will remain strong throughout 2007.”

Kipling and JanSport both posted double-digit revenue gains in the quarter with JanSport in particular accelerating its growth rate. This growth was accomplished while the brand was implementing infrastructure improvements both in systems and distribution facilities.

VF’s expansion into Europe, the Middle East, Africa, and Asia continues to progress as planned. Total revenues in these regions across all brands increased 24% with “nearly all” of this growth organic. TNF is the largest brand in these regions in terms of revenues and it reported growth of over 20%. International TNF Spring ‘07 bookings are up 20%, plus, according to management, early feedback on Fall ‘07 bookings indicates that this growth rate will continue. Internationally, Vans was said to be “mirroring its success story in the U.S.,” with revenues up more than 20% over last year and particularly strong momentum in footwear and apparel programs both at wholesale and retail.

Seven out of VF’s eight brands have grown at the double-digit rate internationally. In order to continue this top-line growth, the company has outlined three major initiatives for '07 – geographic expansion, category extensions, and retail initiatives. Geographic expansion into emerging markets will focus on Eastern Europe, China, Japan, and Korea. Category expansions will include footwear from Napapijri and development of European-specific apparel lines for Reef. VFC has store openings planned in major European and Asian cities, including Barcelona, Milan, Sidney, Beijing, and Shanghai. VFC had 33 owned stores and more than 150 partnership stores at year-end and plans to increase this number to a total of 50 owned stores and 200 partnerships by the end of 2007.

VF’s Sportswear Coalition achieved 8% overall fourth quarter revenue growth with profit up 7% and increases in all brands. For the year, Nautica grew 4%, John Varvatos grew 26%, and Kipling grew 40%. VF’s Imagewear business experienced a slight fourth quarter sales decline of 2%, due entirely to the company’s planned exit from the commodity fleece and t-shirt business. The licensed sports business saw an 11% revenue gain for the period.

Mackey MacDonald, VFC’s chairman and CEO, said that acquisitions continue to be the company’s number one priority. “We've got tremendous cash flow and that is the number one priority we have,” said Mackey. “I would expect to see some small tuck-in acquisitions as we go forward, but we are continuing to look at larger, more transformational types of acquisitions… Fortunately, we have such strong organic growth that we're not required to go find acquisitions. We can find the right kind and the right ones and we will do that.”

Looking forward, VFC is expecting 8% growth in revenues and a 10% increase in earnings per share from continuing operations with continued margin expansion. Operating margins will approach 14% despite continued investments in growth. Revenues in the first quarter should increase 10%, but earnings per share are likely to grow at a lower rate.


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