VF Corp. had a solid third quarter, driven by continued momentum in its outdoor coalition, a strong contribution from its new contemporary brands coalition, and the continued expansion of its own retail network. But the brand consolidator sharply cut its Q4 guidance due to a “significant deepening of the global financial crisis” and its impact on consumers worldwide.


VF now anticipates a 3% to 4% rise in revenues and a 1% to 5% increase in fourth quarter earnings per share.  Previous guidance called for revenue and EPS increases of 8% and 20%, respectively.


On a conference call with analysts, Eric Wiseman, CEO of VF Corp., said the retail slowdown began to accelerate in September, and market conditions have “become much more difficult than we could have possibly foreseen” since its last quarterly report. The weakness was impacting all business segments “pretty proportionately” and “was pretty evenly distributed across the board.”


VF still sees higher revenues in its outdoor and contemporary brands coalitions in Q4 but its Jeanswear and Imagewear coalitions are expected to show slight declines. Operating margins are expected to be flat to up slightly with continued expansion in gross margin as its retail revenue growth continues.


Wiseman stressed that the lower guidance “is entirely related to recent external market conditions, both here and abroad, and not to brand-specific issues.”  He added, “As you know, weve met or exceeded our plan in each of the first three quarters. However, we now believe that consumers will be much more selective in their spending, and we believe VF is well positioned to get our fair share of that spending on apparel, given our strong brands and our global reach.”


As for third quarter, the 6% overall revenue gain to $2.21 billion was less than the 9% previously forecast due to deteriorating market conditions, as well as the impact of the strengthening dollar on international revenues, according to Wiseman. Ten percent earnings per share growth exceeded internal guidance with the help of additional tax credits, but were in line when excluding unusual items. 


The overall bottom line was hurt by profit declines in its Jeanswear (down 9% to $122.9 million) and its Sportswear (off 3.5% to $16.5 million) coalitions.  Revenues for the Contemporary Brands coalition, which consists of lucy and 7 For All Mankind, more than tripled to $100.5 million, reflecting the acquisitions of both brands in August 2007. On a comparable basis, revenues rose 12%. 


In the Outdoor Coalition, revenues climbed 12.5% to $906.6 million, paced by strong growth in both the U.S. and International. On a global basis, revenues for The North Face, Vans, Kipling, Reef, Eastpak and Napapijri brands each grew at double-digit rates. The two largest brands, TNF and Vans, saw revenues grow 15% and 11%, respectively.  Coalition operating income jumped 16.9% to $188.6 million and operating margins expanded 80 basis points to 20.8% of sales, benefiting from continued strong volume growth as well as the expansion of its “very profitable” international businesses. 

 

The expansion of the owned-retail business was also called out as a driver for expanding margins. A total of 14 stores were opened during the quarter, including Vans, The North Face, Napapijri and Kipling.
Wiseman said the Outdoor Coalition “continues to anticipate a strong, mid-teen revenue gain in the fourth quarter and healthy increases in operating income and margins.”  

 

Imagewear coalition revenues slid 2.8% $260.1 million. Both its Image workwear business and Activewear sports licensing unit saw low-single-digit declines. Imagewear’s operating margins rose while operating income dipped 1.9% to $40.8 million from $41.6 million. Wiseman said that Imagewear “is also not immune to current economic pressures; accordingly, fourth quarter revenues and operating income are both expected to post slight declines from prior year levels.”


International revenues increased 22% in the quarter and represented 34% of total revenues. The gains were driven by a 22% increase in the international outdoor business, led by strength in Western Europe. Nonetheless, VF management noted that its European business slowed similar to the U.S. in the last few weeks.


Retail revenues increased 12% in the quarter and represented 14% of total revenues.  Retail revenues of Vans, TNF, Kipling, John Varvatos, Napapijri, lucy and Lee each grew at double-digit rates. Comps grew in the upper-single-digits at full-price stores, but were weaker at outlets.  At the end of the quarter, VFC had 662 owned-retail stores, with plans to open 90 this year on track.


Looking ahead, Wiseman expects market conditions “will remain challenging throughout 2009,” noting that VFC is “planning accordingly” in regards to cost and inventory controls. The company also expects a net increase in costs of about 3% for the first half of 2009, but expects to offset most or all of this increase through selective price increases.


While noting that much of VFC’s business comes from replenishment, Wiseman noted that VFC has not seen “material” order cancellations.

 

Said Wiseman, “The discussions were having about forward business with our customers are thoughtful and cautious. And we think that’s a smart way for everybody to approach planning right now, and that’s what our customers are doing and how were approaching it as well.”
Wiseman added that VFC’s strong financial position enables it to continue to invest in brands, which includes higher spending in advertising and product development in Q408 “to keep our brands front and center with consumers.” He expects the difficult climate will enable VFC to gain market share and explore acquisitions.