VF Raises Full-Year Guidance on Strong Q3

The Outdoor & Action Sports, Jeanswear, Sportswear and Imagewear coalitions all achieved growth on a constant dollar basis. The sale of John Varvatos impacted VF’s organic revenue growth by 1 percentage point in the third quarter.

“Having achieved yet another quarter of record revenue, gross margin and earnings per share performance, we remain on track to deliver a year of outstanding results to our shareholders,” said Eric Wiseman, VF Chairman and Chief Executive Officer. “Our third quarter results clearly demonstrate VF’s unique competitive advantages – diversity across brands, geographic regions and channels; powerful brands that resonate with consumers; and business disciplines that enable the consistent, successful execution of our growth strategies.”

Wiseman concluded, “We are confident in our ability to deliver a very strong fourth quarter across our businesses, supported by higher levels of strategic investments in key brands and markets that are proven drivers of both top and bottom line growth.”

Third Quarter 2012 Review

Gross margin rose by 140 basis points to a record 46.7 percent, compared with 45.3 percent in the same period of 2011 with improvements in nearly every business. The higher gross margin also reflects the continued shift in our revenue mix towards higher margin businesses.

Operating income was $551 million on an adjusted basis in the third quarter of 2012 and included adjusted operating income from Timberland of $77 million. On a GAAP basis, third quarter operating income was $537 million compared with $430 million in the same period of the prior year. Acquisition-related expenses for Timberland in the third quarter of 2012 and 2011 were $14 million and $27 million, respectively. Adjusted operating margin was 17.5 percent compared to 16.6 percent in the third quarter of 2011. The current quarter’s operating margin was negatively impacted by 80 basis points by Timberland. On a GAAP basis, operating margin was a record 17.1 percent.

Net income on an adjusted basis was $393 million compared to $321 million in the same period last year. Adjusted earnings per share increased 23 percent to $3.52 per share from $2.87 during last year’s same period. This increase includes the negative impacts from foreign currency translation ($0.18 per share) and higher pension expense ($0.05 per share). Timberland was accretive to third quarter adjusted earnings per share in 2012 and 2011 by $0.54 and $0.25, respectively.

Adjusted earnings per share for the quarter exclude Timberland acquisition-related expenses of $0.10 in 2012 and $0.18 in 2011. On a GAAP basis, third quarter net income was $381 million while earnings grew 27 percent to $3.42 per share.

Nine Months 2012 Review

Revenues increased 20 percent to $7.8 billion from $6.5 billion in the first nine months of 2011. The Timberland acquisition accounted for 14 percentage points, or $931 million, of the revenue growth in the period. Organic revenue growth during the first nine months of 2012 was 6 percent; in constant dollars, organic revenue growth in the first nine months was 8 percent. All revenue comparisons include a negative impact of about 1 percentage point from the sale of John Varvatos during the period.

Net income on an adjusted basis increased 13 percent to $734 million in the first nine months of 2012, up from $651 million reported in the same 2011 period. Adjusted earnings per share rose 12 percent during the first nine months to $6.56 from $5.87 in the same period last year. Through the first nine months of 2012, Timberland contributed $0.53 to adjusted earnings per share. Additionally, foreign currency translation and higher pension expense combined have negatively impacted earnings by $0.43 per share. Adjusted earnings per share in the first nine months of 2012 exclude the $0.32 per share gain from the sale of John Varvatos and $0.16 per share in Timberland acquisition-related expenses. On a GAAP basis, net income in the first nine months of 2012 was $752 million while earnings increased 18 percent to $6.72 per share.

Coalition Review

Outdoor & Action Sports delivered another quarter of record performance with revenues up 29 percent and organic revenue growth of 6 percent, or 11 percent in constant dollars. The addition of the Timberland and Smartwool brands contributed $499 million to revenues in the quarter.
As anticipated, global revenue growth in the current quarter for The North Face brand moderated from prior periods, increasing 5 percent, or 8 percent in constant dollars. High single-digit growth in the Americas region and exceptionally strong growth in Asia were offset by a mid-single digit constant dollar decline in Europe. The North Face brand remains on track for mid-teen constant dollar revenue growth both in the fourth quarter and for the full year. The Vans brand achieved a 21 percent (26 percent in constant dollars) increase in global revenues in the quarter, with double-digit revenue growth in the Americas, Europe and Asia regions. Based on the Vans brand’s exceptional performance year to date, full year constant dollar revenue growth should approximate 25 percent. On a full quarter basis, Timberland constant dollar revenues declined slightly in the third quarter. On a full year basis, Timberland should achieve a modest increase in revenues on a constant dollar basis.

Excluding Timberland, Outdoor & Action Sports operating income rose 16 percent and operating margin increased 220 basis points to an all-time high of 25.7 percent compared with 23.5 percent in the 2011 period. On a GAAP basis, operating income for the coalition increased 29 percent with a flat year-over-year operating margin, reflecting the impact of Timberland.

Double-digit constant dollar revenue growth in Outdoor & Action Sports should continue in the fourth quarter, driven by strong performance by The North Face and Vans brands. Both brands should benefit from new store openings, and comp store and e-commerce growth, supported by higher levels of marketing spending in key regions. For the full year, Outdoor & Action Sports revenues are expected to grow at the higher end of the 25-30 percent range provided in February 2012, with constant dollar organic revenues growing at a mid-teen percentage rate.

Jeanswear revenues were down 1 percent (up 1 percent in constant
dollars) in the quarter, reflecting a 3 percent increase in U.S. sales, a high single-digit increase in its Asia business and a double-digit (constant currency) increase in the Latin/Central American region. These increases were offset by the continuation of challenging economic conditions in Europe.

Jeanswear operating margin improved significantly, up 320 basis points to 18.3 percent with operating income up 19.8 percent over the prior year period. The improvement was driven by lower product costs and a significant improvement in European Jeanswear profitability. Jeanswear continues to anticipate mid single-digit constant dollar revenue growth for the full year and operating margin expansion of more than 100 basis points.

Imagewear revenues grew 3 percent in the third quarter. As expected, the revenue comparison was impacted by the exceptionally strong growth achieved in the prior year’s third quarter, which included expanded distribution in the protective apparel business. As anticipated, operating income and margin both declined in the quarter, as higher product costs continued to negatively impact the business. As these cost impacts subside, operating margin in the fourth quarter should increase over that of the prior year’s same period.

With strong first half growth from its Image business and strong second half growth from its Licensed Sports Group, Imagewear coalition revenues are on track for mid single-digit growth for the full year, consistent with guidance given in February. Operating margin should remain strong, approximating that of the prior year.

Sportswear revenues increased 2 percent in the third quarter, tempered by a shift in the timing of special programs into the fourth quarter as well as lower distressed sales. Both the Nautica and Kipling (U.S.) brands achieved double-digit direct-to-consumer growth in the quarter. Sportswear operating income was up slightly in the quarter, with operating margin about flat with the prior year period.

Both the Nautica and Kipling (U.S.) brands expect to deliver strong double-digit revenue growth in the fourth quarter, with total Sportswear revenues for the full year expected to increase at a high single-digit rate.

Contemporary Brands revenues were down 17 percent in the quarter (down 15 percent in constant dollars), with the decline primarily due to the sale of John Varvatos, which occurred in April 2012. Excluding John Varvatos in both the 2011 and 2012 periods, revenues decreased 1 percent (increased 2 percent in constant dollars). The revenue comparisons were negatively impacted by a reduction in sales of excess inventories for the 7 For All Mankind brand, which benefited the coalition’s profitability in the quarter. The Splendid and Ella Moss brands, on a combined basis, achieved a high teen rate of revenue growth in the quarter.

Contemporary Brands achieved a significant improvement in profits and profitability in the third quarter, with operating income increasing 66 percent and operating margin expanding by 650 basis points to 12.9 percent. Excluding John Varvatos from the third quarters of 2011 and 2012, operating margin improved 540 basis points, to 12.9 percent in the 2012 period from 7.5 percent in the prior year.

Due to the John Varvatos sale, total Contemporary Brands coalition revenues are expected to decline at a high single-digit rate in 2012. Excluding John Varvatos, Contemporary Brands coalition revenues should increase at a high single-digit rate in 2012.

International Review (In Constant Dollars)

International revenues increased 28 percent in the third quarter, with 20 percentage points of the growth attributable to Timberland. As anticipated, organic revenue growth in Europe decelerated in the quarter, rising by 3 percent. The Vans brand continued its exceptional growth in Europe with revenues up 47 percent in constant dollars in the quarter. Higher revenues were also achieved in Europe by the Kipling and Napapijri brands. In Asia, organic revenues increased 25 percent. Strong growth in The North Face, Kipling and Lee brands continued in China, where organic revenues grew 23 percent in the quarter. International revenues reached 40 percent of total revenues in the quarter compared with 38 percent in the third quarter of 2011.

Direct-to-Consumer Review

Direct-to-consumer revenues increased 28 percent in the third quarter, with 19 percentage points of the growth attributable to Timberland. The North Face brand’s direct-to-consumer business continued to post strong growth, up 10 percent in the quarter. The Vans brand’s direct-to-consumer business also demonstrated solid results, with revenues rising by 18 percent. Direct-to-consumer revenues for the Nautica, 7 For All Mankind and Kipling brands each achieved healthy growth during the quarter. A total of 42 stores were opened across our brands in the quarter, bringing the total number of owned retail stores to 1,101. Direct-to-consumer revenues reached 18 percent of VF’s total revenues in the quarter compared with 16 percent in the 2011 period.

Balance Sheet Review

Inventories remain tightly controlled and were down 1 percent from September 2011 levels. Given anticipated strong cash generation, the company expects to pay off all commercial paper by the end of the year.
2012 Earnings Per Share Guidance Raised

Based on strong results achieved in the first nine months of 2012, full year adjusted earnings per share are now expected to be approximately $9.60 per share, up $0.10 from the $9.50 per share guidance provided on July 19. The company also indicated plans to increase its fourth quarter global marketing investment over previously expected levels, particularly in The North Face and Vans brands, to capitalize on current momentum, support growth in key strategic regions and connect even more deeply with consumers. In addition, given a revised assumed euro to U.S. dollar conversion rate of 1.25 for the fourth quarter, the full year negative impact of foreign currency translation is now estimated at $0.35 per share compared to prior guidance of $0.42 per share.

The expected adjusted earnings contribution from Timberland in 2012 remains at $1.10 per share, as compared with $0.60 in 2011, and is approximately $0.57 in the fourth quarter versus $0.34 in the same period of 2011. The impact on earnings from higher pension expense in 2012 remains at $0.19 per share. Guidance for adjusted earnings per share continues to exclude two items: 1) Timberland acquisition-related expenses of $0.24 per share, and 2) the $0.32 per share gain from the sale of John Varvatos. Inclusive of these two items, 2012 earnings per share on a GAAP basis is now expected to reach $9.68.

Top line guidance for 2012 remains at $10.9 billion, an increase of approximately 15 percent, or 17 percent in constant dollars, with Timberland accounting for just under $1 billion of the growth. Excluding Timberland, revenues are expected to rise by approximately 6 percent, or 8 percent in constant dollars. Each of the above comparisons includes about a one percentage point negative impact from the sale of John Varvatos.

Reflecting gross margin improvement across nearly all coalitions and an increasingly higher percentage of revenues coming from higher margin businesses, full year gross margin is expected to improve by approximately 80 basis points in 2012, driven by a substantial year-over-year improvement in the fourth quarter. The company continues to expect cash flow from operations to reach a record $1.2 billion in 2012.

In the fourth quarter, which marks the first fully comparable period with Timberland under VF’s ownership, constant dollar revenue growth is expected to increase by about 7 percent over the same period last year. This also includes a one-percentage point negative impact from the sale of John Varvatos. Given expectations for stronger revenue growth comparisons across all coalitions, a greater contribution to earnings from its highly profitable and growing direct-to-consumer business, and more normalized product costs, adjusted earnings per share for the fourth quarter should post the strongest comparison of the year, increasing by just over 30 percent.

Adjusted Amounts

This release refers to adjusted amounts that exclude restructuring and other costs related to the acquisition of Timberland, which approximated $14 million pretax ($0.10 per share) in the third quarter and $24 million pre-tax ($0.16 per share) in the first nine months of 2012, and are currently estimated at $35 million pre-tax ($0.24 per share) for the full year. Additionally, adjusted amounts in 2012 exclude the gain on the sale of John Varvatos of approximately $42 million pre-tax ($0.32 per share inclusive of a $0.10 per share tax benefit triggered by the sale). Adjusted amounts in 2011 exclude Timberland acquisition-related expenses of $26.6 million ($0.18 per share) in the third quarter and first nine months of the year. Reconciliations of GAAP measures to adjusted amounts are presented in the supplemental financial information included with this release, which identify and quantify all excluded items.

Dividend Increased

VF’s Board of Directors declared a quarterly dividend of $0.87 per share, reflecting a $0.15 or 21 percent increase over the previous quarter’s dividend. The dividend is payable December 20, 2012 to shareholders of record on December 10, 2012. This marks the 40th consecutive year of higher dividend payments to shareholders.