VF Corporation announced better than anticipated sales and earnings for the third quarter of 2003, reflecting stronger than expected sales in the Company's core businesses and a higher than expected profit contribution from Nautica Enterprises, Inc. The Company also increased its guidance for full year earnings and raised its quarterly dividend.
Third quarter earnings from continuing operations were $1.14 per share, compared with $1.15 per share in 2002. Income from continuing operations was $125.3 million versus $128.6 million in the 2002 period. All per share amounts are presented on a diluted basis. Sales in the quarter rose 3% to $1,435.4 million versus $1,400.4 million in the prior year's quarter.
The addition of Nautica contributed approximately $72 million in sales and $.05 per share to third quarter results.
As anticipated, 2003 third quarter earnings reflect expenses related to the Company's actions to manage inventories and capacity. However, these expenses were less than anticipated. In addition, the Company had expected third quarter earnings to reflect the estimated loss that the Company would have incurred upon the sale of its Playwear business. The Company did not reach an agreement on the sale of its Playwear operation and is currently evaluating all alternatives for this business. Previously, the Company had anticipated expenses related to these actions would approximate $25 million, or $.15 per share. The actual expenses in the quarter were $12 million, or $.07 per share.
Foreign currency translation favorably impacted both sales and earnings in the quarter. Excluding foreign currency effects, sales were about flat. The benefit to earnings in the quarter was $.04 per share.
For the first nine months of 2003, earnings from continuing operations rose to $2.65 per share from $2.60 in the same period in 2002. Current year sales rose slightly to $3,820.2 million compared with the $3,772.9 million reported in the 2002 period. Income from continuing operations was $292.3 million versus $294.1 million reported a year ago.
Commented Mackey J. McDonald, chairman and chief executive officer, “We were pleased to see a pickup in sales toward the end of the quarter, in line with generally stronger sales at retail, particularly in September. We also are pleased with the contribution made by Nautica in the quarter and are looking forward to building Nautica as the foundation for our new Sportswear coalition.”
Sales in the Company's Outdoor coalition, which includes The North Face(R), JanSport(R) and Eastpak(R) brands, rose 15% in the quarter, or 11% adjusted for currency effects, driven by double-digit sales increases of The North Face(R) brand globally and strong growth in our international businesses across each brand. International jeans sales were about flat with prior year levels, and were down 9% excluding currency effects. Domestic jeans sales and Imagewear sales each declined 6%, while global intimate apparel sales were down 3%.
Mr. McDonald noted sales of the Company's mass market jeans brands were better than anticipated in the quarter, with the impact from the entry of a new competitor in discount stores less than expected. However, the Company has seen a higher than expected impact from the number of store closings by a large customer. The Company is very pleased with the strengthening of its mass jeans brands through the back to school period, and noted particular strength in its Wrangler(R) Five Star Premium Denim and fashion programs.
Gross and operating margins declined in the quarter, due to the impact of the actions related to capacity alignment and inventory management.
VF's balance sheet remains strong, and the Company made excellent progress during the quarter toward reaching its year-end inventory goal. Excluding Nautica, inventories were up 7% over prior year levels, or 5% excluding currency effects. The Company continues to expect that, excluding Nautica, inventories at year-end will be slightly above the prior year level.
Debt as a percent of total capital was 38% at the end of the quarter. On October 14, 2003 the Company refinanced part of the debt incurred to acquire Nautica by issuing $300 million principal amount of 6.00% unsecured notes due in 2033. The net cash proceeds of $292.4 million were used to repay commercial paper borrowings related to the Nautica acquisition. During the fourth quarter, the Company expects to repay the remaining amount of commercial paper associated with the Nautica acquisition from cash flow provided by operations. Accordingly, the ratio of debt to total capital is expected to range between 30% and 35% at the end of 2003.
“Our balance sheet remains in great shape, despite having made such a significant acquisition, providing us with the flexibility to invest in additional new growth opportunities,” Mr. McDonald said.
Encouraged by our most recent results, we are increasing our full year earnings per share guidance. We now expect that earnings could reach $3.50 to $3.55 per share, an increase of 8% to 10% from the $3.24 per share from continuing operations reported in 2002. This excludes any impact from exiting the Playwear business, which could result in a loss somewhat higher than the $7 million previously indicated. Sales are expected to increase approximately 3%. The acquisition of Nautica is expected to contribute approximately $240 million in sales and $.08 to $.10 to earnings per share in 2003. The Company has indicated that Nautica could add at least $.10 to earnings per share in 2004.
We continue to anticipate that gross margins could rise by approximately 100 basis points from the 36.0% level reported in 2002 and that operating margins will be about flat. Cash flow from operations is expected to approximate $350 million.
The Company's expectations regarding sales and earnings in the fourth quarter remain intact, excluding any impact from the possible exit of Playwear. Sales could increase approximately 8%, while earnings are expected to range between $.85 and $.90 per share.
The Company also announced the retirement of Dr. Robert Buzzell, 70, from the Board of Directors after 20 years of service.
The Board of Directors declared an increase in the quarterly cash dividend rate of $.01 to $.26 per share. This marks the 13th consecutive year that the Company has increased its quarterly dividend rate. “We're proud that we can offer our shareholders a yield that outpaces not only our competitors, but the overall market as well,” said Mr. McDonald. The cash dividend is payable on December 19, 2003 to shareholders of record as of the close of business on December 9, 2003.
VF CORPORATION
Consolidated Statements of Income
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
--------------------- ---------------------
Oct. 4 Sept. 28 Oct. 4 Sept. 28
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Sales $1,435,403 $1,400,389 $3,820,200 $3,772,907
Costs and Operating
Expenses
Cost of products sold 898,325 871,117 2,393,628 2,380,561
Marketing, administrative
and general expenses 341,861 321,027 965,352 904,722
Other operating income (9,359) (8,070) (21,728) (17,891)
--------------------------------------------
1,230,827 1,184,074 3,337,252 3,267,392
--------------------------------------------
Operating Income 204,576 216,315 482,948 505,515
Other Income (Expense)
Interest, net (13,632) (19,980) (38,790) (52,094)
Miscellaneous, net (154) 696 2,784 2,222
--------------------------------------------
(13,786) (19,284) (36,006) (49,872)
--------------------------------------------
Income from Continuing
Operations
Before Income Taxes 190,790 197,031 446,942 455,643
Income Taxes 65,501 68,467 154,642 161,552
--------------------------------------------
Income from Continuing
Operations 125,289 128,564 292,300 294,091
Discontinued Operations - (315) - 2,020
Cumulative Effect of
Change in Accounting
Policy for Goodwill - - - (527,254)
--------------------------------------------
Net Income (Loss) $125,289 $128,249 $292,300 $(231,143)
============================================
Earnings (Loss) Per Common Share -
Basic
Income from continuing
operations $1.16 $1.16 $2.70 $2.61
Discontinued operations - - - 0.02
Cumulative effect of
change in accounting policy - - - (4.82)
Net income (loss) 1.16 1.16 2.70 (2.19)
Earnings (Loss) Per
Common Share -
Diluted
Income from continuing
operations $1.14 $1.15 $2.65 $2.60
Discontinued operations - - - 0.02
Cumulative effect of
change in accounting policy - - - (4.68)
Net income (loss) 1.14 1.15 2.65 (2.05)
