VF Corp.'s revenues rose 5 percent in its third quarter ended Sept. 28 to $3.3 billion, led by Outdoor & Action Sports, Jeanswear, and its International and Direct-to-Consumer businesses. Global sales rose 16 percent at Vans, 3 percent at The North Face and 2 percent at Timberland. Net income on an adjusted basis grew 11 percent.
Other highlights of the quarter:
- Outdoor & Action Sports up 6 percent, International up 7 percent and Direct-to-Consumer up 14 percent.
- Gross margin improved by 90 basis points to 47.6 percent.
- Quarterly dividend increased by 21 percent to $1.05 per share.
- Four-for-one stock split announced.
- Full-year adjusted earnings guidance unchanged after incremental investments of $0.25 per share to drive future growth.
“Our solid year-to-date results allow us to make significant, incremental brand investments while still delivering on our long-term earnings growth target,” continued Wiseman. “The announced 21 percent increase in our dividend and stock split demonstrate the confidence we have in our ability to consistently generate strong returns for VF shareholders.”
Third Quarter 2013 Review
Revenues rose 5 percent to $3.3 billion, compared with the same period of 2012, led by Outdoor & Action Sports, Jeanswear, and our International and Direct-to-Consumer businesses. Changes in foreign currency exchange rates positively impacted total reported revenue growth by approximately one percentage point during the quarter.
Gross margin improved 90 basis points to 47.6 percent, compared with 46.7 percent in the same period of 2012. With improvements in nearly every coalition, the higher gross margin reflects the continuing shift in our revenue mix toward higher margin businesses and moderately lower year-over-year product costs.
SG&A as a percent of revenues rose 40 basis points to 30 percent in the third quarter. This increase includes an 80 basis point impact from higher marketing investments to support our largest and fastest growing businesses.
Operating income on an adjusted basis grew 6 percent to $582 million in the third quarter, compared with $551 million in the same period of 2012. On a GAAP basis, third quarter operating income increased 8 percent to $580 million, compared with $537 million in last year’s same period. Adjusted operating margin was 17.7 percent, compared with 17.5 percent in the third quarter of 2012. On a GAAP basis, operating margin rose to 17.6 percent from 17.1 percent in last year’s period.
Net income on an adjusted basis grew 11 percent to $436 million in the third quarter, compared with $393 million in the same period of 2012. Adjusted earnings per share which excludes items related to the acquisition of The Timberland Company (“Timberland”) of $0.02 per share in the third quarter increased 11 percent to $3.91 per share from $3.52 per share during the same period last year. Last year’s third quarter adjusted earnings per share of $3.52 excluded $0.10 per share in Timberland acquisition-related expenses. On a GAAP basis, third quarter net income was
up 14 percent to $434 million or $3.89 per share.
Coalition Review
Revenues for Outdoor & Action Sports increased 6 percent in the quarter to $2 billion with balanced growth across the U.S. and international markets as well as its wholesale and direct-to-consumer channels. The revenue impact of shipments that moved from September into October due to a retailer calendar shift that was discussed during the company’s second quarter earnings call negatively impacted third quarter coalition revenue growth by about 2 percentage points.
Consistent with expectations, revenues for The North Face brand rose 3 percent globally. Third quarter results were driven by more than 25 percent growth in Direct-to-Consumer sales and flat revenues in the brand’s wholesale business due to the retailer calendar shift and later-in-the-year shipments resulting from retailer caution. When normalized for the retailer calendar shift, The North Face brand’s global revenues would have been up at a high single-digit rate. By region, The North Face brand’s revenues were up at a low single-digit percentage rate in the Americas (impacted by the calendar shift) and a low double-digit percentage rate in Asia Pacific, offset by a low single-digit percentage rate decrease in Europe.
The Vans brand continued its strong performance on all fronts: wholesale, direct-to-consumer and in all regions of the world. Third quarter Vans brand global revenues were up 16 percent driven by a low-teen percentage growth rate in the Americas, with 25 percent growth in Europe and a high single-digit growth rate in its Asia Pacific business. Globally, the Vans brand posted strong mid-teen percentage revenue increases in both its wholesale and direct-to-consumer channels.
Third quarter revenues for the Timberland brand were up 2 percent. In the Americas region, revenues increased at a mid single-digit percentage rate driven by balanced direct-to-consumer and wholesale growth rates. In Asia Pacific, third quarter revenues increased at a low single-digit percentage rate, up at a high single-digit rate on a constant-dollar basis. And, consistent with expectations, conditions in Europe remain challenging with Timberland brand revenues up modestly, down at a mid single-digit percentage rate on a constant currency basis. Globally, the Timberland brand’s growth was balanced between its direct-to-consumer and wholesale businesses.
Third quarter operating income for Outdoor & Action Sports rose 2 percent to $421 million and operating margin decreased 90 basis points to 21.4 percent, compared with 22.3 percent in the 2012 period. This result was negatively impacted by the retailer shift in revenues from the third to fourth quarter and incremental marketing investments to position the coalition’s three largest brands The North Face, Vans and Timberland for greater growth in 2014.
Jeanswear third quarter revenues were up 4 percent to $747 million, driven by a mid single-digit percent increase in the Americas region, which included a high single-digit increase in its Mass business. European revenues were up at a low double-digit rate and in the Asia Pacific region, revenues declined at a high single-digit rate as the Lee brand continues to work through an industry-wide build-up in inventories in China that began during the latter part of 2012.
Global revenues for the Wrangler brand were up 8 percent driven by strength in the Americas region, with strong results in its Mass channel and continued strength in its Western specialty and Latin American businesses. Wrangler brand revenues in Europe were up 10 percent on a constant dollar basis. Third quarter revenues for the Lee brand were up 3 percent globally driven by a mid single-digit percentage increase in the Americas region reflecting balanced results across all channels. Third quarter revenues for the Lee brand in Europe were up at a high single-digit rate with particular strength in Northern Europe, and as previously noted, the Lee brand’s sales in Asia Pacific were lower.
Strong international performance along with moderating product costs led to a 20 percent increase in Jeanswear operating income to $158 million. Operating margin reached 21.2 percent in the quarter with improvements in the Wrangler and Lee brands across every region of the world including a significant contribution from the very strong performance in Europe.
Imagewear revenues were flat in the third quarter at $284 million. Despite the absence of growth, operating income for the coalition was up 9 percent to $41 million with a 110 basis point improvement in operating margin to 14.3 percent, reflecting gross margin expansion. Imagewear revenues are expected to increase at a low double-digit rate in the fourth quarter.
In line with expectations, Sportswear revenues grew 1 percent to $155 million in the quarter, driven by more than 25 percent growth in direct-to-consumer sales offset by a mid-teen rate decline in its wholesale business. The retailer calendar shift also affected Sportswear’s wholesale results. When normalized for this shift, global revenues in the third quarter for the coalition would have been up at a high single-digit rate. Nautica brand revenues were down at a mid single-digit rate due to the calendar shift. The Kipling brand’s U.S. business achieved a 39 percent increase in revenues over the same period last year. Globally, the Kipling brand grew 22 percent. The coalition posted strong gross margin expansion and a significant improvement in profitability with a 30 percent increase in operating income to $24 million, representing a 350 basis point improvement in operating margin to 15.5 percent.
In a challenging business environment, third quarter revenues for the Contemporary Brands coalition were up 1 percent to $105 million. Better revenue comparisons are expected in the fourth quarter. Contemporary Brands’ operating income fell 30 percent to $9 million in the third quarter. Operating margin fell 390 basis points to 9.0 percent.
International Review
International revenues in the third quarter increased 7 percent, up 4 percent on a constant currency basis. Americas (non-U.S.) revenues increased 13 percent (up 17 in percent constant currency) with strong performances from the Vans, JanSport and Reef brands. Revenues in Europe rose 7 percent (up 2 percent in constant currency) with positive results by the Vans, Wrangler, 7 For All Mankind, Eastpak, Lee, Kipling, Napapijri, and SmartWool brands. In Asia Pacific, revenues were up 2 percent (up 3 percent in constant currency) driven by 10 percent growth in China which included strong results by the Vans, The North Face, and Timberland brands offset by continued weakness from the Lee brand as previously discussed. The North Face and Vans brands saw strong increases in international Direct-to-Consumer revenue in the quarter, up 19 percent and 44 percent, respectively. International revenues were 40 percent of total VF revenues in the third quarter; consistent with the level reached in the same period of 2012.
Direct-to-Consumer Review
Direct-to-Consumer revenues increased 14 percent in the third quarter including a 28 percent increase in The North Face brand, an 18 percent increase in the Vans brand, a 16 percent increase in the Nautica brand and a 50 percent increase in the Kipling brand. A total of 55 stores were opened across our brands in the quarter bringing the total number of owned retail stores to 1,202. Direct-to-Consumer revenues reached 19 percent of total revenues in the third quarter compared with 18 percent in the 2012 period.
Balance Sheet Review
Inventories were flat compared with Sept. 2012 levels despite higher revenues reflecting VF’s continued focus on operational excellence. Additionally, the company paid off $400 million in debt associated with the Timberland acquisition. For the full year, VF’s cash generation from operations is expected to exceed $1.4 billion.
2013 Guidance
Revenues are still expected to approximate $11.5 billion in 2013. Full-year gross margin is now expected to approach 48 percent, up approximately 150 basis points over 2012’s results. As predicted during our second quarter call, VF’s very strong earnings performance is allowing us to make significant, incremental marketing investments to support long-term growth for our top brands. These incremental investments total $40 million, or about $0.25 in earnings per share, with $10 million recognized in the third quarter and $30 million expected to be recognized in the fourth quarter. Even with these incremental investments, full year adjusted earnings per share guidance remains at $10.85 (or $10.78 on a GAAP basis), which represents a 13 percent increase (or 11 percent increase on a GAAP basis) over 2012’s results and is directly in line with the company’s stated long-term financial objectives.
Adjusted Amounts
This release refers to adjusted amounts that exclude restructuring and other items related to the acquisition of The Timberland Company, which approximated $3 million ($0.02 per share) in the third quarter of 2013, compared with $14 million ($0.10 per share) in the third quarter of 2012. Adjusted amounts for the full year 2013 exclude Timberland acquisition-related expenses of $10 million ($0.07 per share), compared with $31 million ($0.25 per share) for the full year 2012. Reconciliations of certain GAAP measures to adjusted amounts are presented in the supplemental financial information included with this release, which identify and quantify all excluded items.
Four-for-One Stock Split and Increase in Dividend Approved
In a separate news release issued today, VF Corporation announced that its Board of Directors approved a four-for-one split of the company’s shares of common stock to be payable in the form of a stock dividend. Shareholders of record as of the close of business on Dec. 10, 2013 will receive three additional shares of common stock for each share of common stock they own, payable on Dec. 20, 2013. The New York Stock Exchange is expected to begin reporting the adjusted number of shares outstanding and adjusted per-share stock price on Dec. 23, 2013.
Additionally, on a pre-split basis, VF’s Board of Directors declared a quarterly dividend of $1.05 per share, reflecting an $0.18 or 21 percent increase over the previous quarter’s dividend. This marks VF’s 41st consecutive year of higher dividend payments to shareholders. This dividend will be payable on Dec. 20, 2013 to shareholders of record at the close of business on Dec. 10, 2013. For more information, please visit the investor relations page at www.vfc.com.
