VF Corp. said fourth quarter revenues inched up 0.2% to $1.92 billion from $1.9 billion a year ago. Net income fell 42.2% to $66.9 million, or 60 per share, from $115.9 million, or $1.05, a year ago after a charge to reduce the carrying value of the goodwill and intangible assets related to its Nautica, Reef and lucy brands.
Excluding a $114.4 million after-tax, non-cash charge related to the impairment of goodwill and intangible assets, fourth quarter net income increased to $181.3 million and earnings per share increased to $1.62. The current quarter also included a 12 cents per share impact from higher pension expense and a 1 cent per share benefit from foreign currency translation.
In 2008, fourth quarter earnings included a 30 cents per share charge related to cost reduction actions. Excluding the 2008 charge and adjusting 2009 earnings for the higher pension, foreign currency and impairment impacts, earnings per share in 2009 would have increased by 28%.
“Today’s results speak to the strength and resiliency of VF’s business model and diversified brand portfolio,” said Eric C. Wiseman, chairman and chief executive officer. “Our focus on prudent brand investment, disciplined cost control, and inventory management has enabled us to deliver exceptionally strong performance in an exceptionally difficult environment. We look forward to resuming growth this year, fueled by investments to accelerate growth in our fastest growing brands.”
For the full year 2009, revenues were $7,220.3 million, down 6% from $7.64 billion in 2008. Foreign currency translation accounted for two percentage points of the decline. Net income was $461.3 million or $4.13 per share, compared with $602.7 million or $5.42 per share in 2008. Excluding the fourth quarter impairment charge, net income in 2009 declined to $575.7 million and earnings per share were $5.16.
Higher pension expense and foreign currency impacted earnings per share in 2009 by 48 cents and 18 cents, respectively. Excluding the 30 cents per share charge in the fourth quarter of 2008 and adjusting 2009 earnings for the higher pension, foreign currency and impairment impacts noted above, earnings per share in 2009 would have increased by 2%.
Noncash Impairment Charge
As a result of a review of goodwill and intangible assets that VF conducts during the fourth quarter of each year in connection with its strategic planning process and preparation of its annual financial statements, a $122.0 million pre-tax noncash impairment charge was recorded to reduce the carrying value of the goodwill and intangible assets related to its Nautica, Reef and lucy brands, acquired in 2003, 2005 and 2007, respectively. On an after-tax basis, the charge totaled $114.4 million, which decreased fourth quarter earnings per share by $1.02 and full year earnings per share by $1.03.
“While we continue to believe that each brand has opportunities for improved performance, we concluded that the fair value of our investments in these businesses has declined as we have not achieved the forecasted growth and cash flows originally projected at the dates of acquisition,” said Wiseman.
Fourth Quarter Business Review
Outdoor & Action Sports: Fourth quarter revenues in its Outdoor & Action Sports coalition grew 8%, with operating income and margins each reaching record levels for the period. Global revenues of The North Face and Vans brands grew 7% and 14%, respectively. Total coalition revenues in its Americas businesses rose 4%, while international revenues were up 9% in constant dollars, led by exceptionally strong growth in Asia. Total direct-to-consumer revenues for its Outdoor & Action Sports coalition rose 21% in the quarter.
Operating margins were 20% in the quarter. Prior year results included $8.2 million in expenses related to cost reduction actions.
Jeanswear: Jeanswear revenues declined 3% in the fourth quarter, a marked improvement from the 11% decline experienced through the first nine months of the year. A key highlight of the quarter was the 3% increase in revenues of our Mass Market business in the U.S. Total domestic revenues were down slightly from those in the prior year’s quarter. International revenues were down 11% in constant dollars, with 15% growth in our Asia business offset by continued difficult jeanswear market conditions across Europe.
Fourth quarter operating margins rose to 16% reflecting strong gross margin expansion both domestically and internationally. Prior year results included $22.6 million in expenses to reduce costs.
Sportswear: Revenues of its Sportswear coalition, which includes the Nautica brand and the Kipling brand in North America, declined 18% in the quarter, in line with expectations, based on a shift in Nautica brand wholesale shipments to the third from the fourth quarter.
Operating margins exceeded 12% in the quarter, a significant improvement over those in the prior year period. Operating income in the 2008 quarter included $3.2 million in cost reduction expenses.
Contemporary Brands: Revenues of its Contemporary Brands coalition, which consists of the 7 For All Mankind, lucy, John Varvatos, Splendid and Ella Moss brands increased 18%, with the acquisition of the Splendid and Ella Moss brands contributing $20 million to revenues in the quarter. Its 7 For All Mankind brand resumed growth in the quarter, with an increase in global revenues of 5%.
Operating income rose 12% in the quarter, with operating margins improving from those reported in the first nine months of 2009. Operating margins of its 7 For All Mankind, Splendid and Ella Moss brands were at strong, mid-teen levels in the quarter.
Imagewear: As anticipated, the rate of revenue decline in its Imagewear business slowed in the fourth quarter, led by a resumption of growth in its Licensed Sports business, where revenues grew 7%. Total coalition revenues fell 8% in the quarter, reflecting continued high levels of unemployment in key sectors that have impacted our industrial and protective apparel businesses.
Profitability improved with an increase in operating margins to 11.7% in the quarter. Operating income in the 2008 quarter included $2.0 million in cost reduction expenses.
International and Direct-to-Consumer
VF said continued growth in its international and direct-to-consumer businesses remain key long-term drivers of both organic growth and margin expansion. During the quarter, international revenues increased slightly on a constant currency basis, with growth in its Outdoor & Action Sports and Contemporary Brands businesses largely offset by the impact of weak market conditions that continued to affect its European jeanswear business. Its Asian business continued to grow strongly, with revenues up 40% in the quarter. For the full year in 2009, international revenues declined 1% on a constant currency basis as a result of “very challenging jeanswear market conditions” across Europe, while Asia revenues rose 28%. International revenues as a percent of VF’s total revenues were 30% in 2009 and 2008. On a constant currency basis, international revenues would have risen to 31% of total revenues in 2009.
Direct-to-consumer business increased 7% in the quarter, driven by strong increases in our Vans, The North Face, 7 For All Mankind and Napapijri brands. VF opened a total of 31 stores across our brands in the quarter and 90 stores during the year, bringing the number of owned retail stores to 757 at year-end. Its direct-to-consumer revenues as a percent of total revenues increased by one and a half percentage points to over 17% in 2009. This business has consistently delivered strong returns on investment, which in 2009 remained over 20%.
Gross Margins Reach Record Levels for Fourth Quarter and Full Year
VF’s gross margins expanded by 380 basis points to a record 46.3% in the quarter; for the full year 2009, gross margins reached a record 44.3% compared with 43.9% in 2008. The fourth quarter increase was fueled by gross margin expansion in each of our coalitions, driven in part by growth in its direct-to-consumer business. Significant reductions in inventories across our coalitions in 2009 also contributed to the improvements in both the quarter and full year. Operating margins excluding the impairment charge rebounded to 13.6% in the fourth quarter and were 11.9% for the full year. Higher pension expense reduced operating margins by 110 basis points for both the quarter and the year. Operating results for the fourth quarter and full year in 2008 included expenses related to cost reduction initiatives that reduced operating income by $41 million.
Strong Balance Sheet and Record Cash Flow
VF’s balance sheet strengthened further in 2009. It ended the year with cash and equivalents of $732 million, nearly double the 2008 levels. VF exceeded its inventory reduction plans, with inventories down 17% or $193 million from 2008 year-end levels. Cash flow from operations exceeded our prior target of $800 million, reaching a record $973 million. During the year VF contributed $200 million to its pension plan, spent $108 million to repurchase 1.5 million shares and increased our dividend payments to $262 million.
2010 Outlook
“We expect to deliver higher revenues and earnings per share in 2010,” said Wiseman. “Were looking forward to continued momentum in our strongest businesses, but our overall outlook is tempered by ongoing concerns over weak global market conditions.”
He continued, “Our confidence in the global growth potential of our brands has led to a planned increase of approximately $50 million in investment spending. Our approach to investing is disciplined and concentrated on our fastest growing and most profitable opportunities. In addition to continuing to fuel the growth of our Outdoor & Action Sports businesses, which have delivered consistently superior performance, we will invest in our Contemporary Brands business and in high-growth, high-profit international markets such as Asia.”
2010 revenues are expected to increase by 2 to 3%. Excluding the 2009 impairment charges, earnings per share are expected to increase by 9 to 11% to approximately $5.60 to $5.70. On a GAAP basis, earnings per share are expected to increase approximately 35% from the $4.13 reported in 2009. Lower pension expense in 2010 compared with 2009 should benefit earnings per share by $.20. Based on recent foreign currency exchange rates, foreign currency translation is planned to be neutral to both revenues and earnings this year.
Key points related to its 2010 outlook include the following:
Continued momentum in its Outdoor & Action Sports businesses and strong growth in its Contemporary Brands coalition. Outdoor & Action Sports revenues should grow at a high single digit rate in 2010, driven by strong growth in our The North Face and Vans brands; Contemporary Brands revenues are expected to increase by 10% to 15%, with solid growth in its 7 For All Mankind, Splendid and Ella Moss brands. Jeanswear, Sportswear and Imagewear coalition revenues should remain relatively stable in 2010, while operating margins should improve for each.
Gross margin expansion of more than 100 basis points, driven by the continued change in its mix toward higher growth lifestyle brands and a growing direct-to-consumer business.
Investments totaling $50 million to support future growth, driven primarily by a substantial increase in marketing spending behind those businesses with the strongest opportunities for growth, including The North Face, Vans and 7 For All Mankind brands, and our business in Asia. Investments are also planned to further strengthen our innovation and sustainability platforms.
Higher operating margins, despite heavy brand investments, driven by significantly higher gross margins.
Continued growth internationally. International revenues are expected to grow in line with total revenues, with strong results in Asia where revenue growth should exceed 20% in 2010. Over the coming years, we expect our international revenues to approach 40% of total revenues.
Additional expansion in our highly profitable direct-to-consumer business, where revenues are expected to rise by over 10% in 2010. Growth will be driven by 80 to 90 new store openings and low-single digit comp store growth. This expansion should drive direct-to-consumer revenues up to 19% of total revenues in 2010. Within the next several years, our direct-to-consumer revenues are expected to exceed 20% of total revenues.
Strong cash flow from operations, which should approximate $800 million in 2010 and support share repurchases totaling at least 3.0 million shares, continuing the repurchases of the past two quarters and above the level of the past several years.
Industry-leading dividend payout, which is expected to exceed 40% of earnings this year.
Concluded Wiseman, “2010 will be a pivotal year for VF Corporation, as we resume healthy top and bottom line growth, expand margins and invest in our future. Our strong cash flow will enable us to repurchase additional shares this year, continue our industry-leading dividend payout and repay $200 million in long-term debt �â¬ï¿½â¬ï¿½ all without compromising our ability to add more financially and strategically attractive brands to our portfolio.”
Share Repurchase
The Board of Directors has approved an authorization for the company to repurchase 10 million shares, as the prior authorization initiated in 2006 is nearly completed.
Dividend Declared
The Board of Directors also declared a quarterly cash dividend of 60 cents per share, payable on March 19, 2010 to shareholders of record as of the close of business on March 9, 2010.
