VF Corporation reported that second quarter sales rose 11.9% to $1.27 billion from $1.13 billion in the prior year's second quarter, with growth in most of the company's core businesses. Net income increased 20.3% to $90.1 million, or 80 cents per share, from $74.9 million, or 68 cents per share, in the year-ago period. Earnings include a benefit of $10.4 million (six cents per share) related to disposition of the Company's Playwear business.
The acquisition of Nautica contributed $115 million to sales and as expected was dilutive to earnings per share by four cents. The acquisitions of the Vans(R), Napapijri(R) and Kipling(R) brands added $11 million to sales in the quarter and a penny to earnings per share.
For the first six months of 2004, sales increased 13% to $2,702.2 million from $2,384.8 million. Net income rose 16% to $194.0 million from $167.0 million, with earnings per share rising 15% to $1.73 from $1.51.
Sales in the Company's Outdoor businesses, which include The North Face(R), Vans(R), JanSport(R), Eastpak(R), Napapijri(R) and Kipling(R) brands, jumped 20.6% in the quarter to $146 million from $121 million. The North Face(R) brand continued its strong growth in the quarter, with sales up 52%. Two new stores, in Amsterdam and Hong Kong, were added during the quarter. Additional stores in Boston, Milan and Helsinki are on plan to open in the third quarter. Fall bookings for the brand remain robust, up 47% in the U.S. and 28% internationally. Sales in the Company's Packs business declined slightly in the quarter but are expected to increase for the year, with growth driven by travel and apparel products.
Total Jeanswear sales declined 6% to $579 million in the second quarter, reflecting challenges faced by several key customers in the U.S. International jeans sales rose 6% from the prior year level due to favorable currency translations. The Company noted that its Jeanswear sales rose 2% in the first quarter and are expected to increase in both the third and fourth quarters. The anticipated increase in total Jeanswear sales in the second half of the year is based on the strong response to new programs including the Wrangler Jeans Co.(TM), Riders(R) Copper Collection(TM), “Buddy Lee Registered(TM)”, “One True Fit(TM)” and “Ultimate 5” lines in the U.S. and a new line under the Lee(R) trademark in Europe.
Global intimate apparel sales saw a strong increase in the quarter, up 12% to $235 million from $210 million in the prior year's second quarter. The Company's department store, mass channel, private label and international businesses all reported higher sales in the period.
Sales in the Imagewear coalition showed a strong turnaround, rising 11% in the quarter to $173 million from $156 million last year. Licensed sports apparel business continued its strong growth, with sales up 19% in the period. Occupational apparel rose 10% to $114 million from $104 million in 2003, marking an improvement in the sales trend for the first time in several years.
Sportswear sales were $112 million in the quarter. The Nautica men's sportswear business continues to perform slightly better than anticipated, with a healthy gain in retail sales per square foot despite a significant reduction in retail floor space for the brand. Our fall bookings remain on plan.
Profitability was strong in the quarter, with improvements in operating margins across most of our core businesses. Gross margins in the quarter improved by more than 200 basis points, rising to 39.4% from 37.1%. Royalty and other income increased 88%, primarily due to the contribution of licensing income from Nautica. Operating margins increased to 11.8% in the quarter from 11.1% in the prior year's period.
VF's balance sheet, liquidity and cash flow remain very strong. Inventories rose only 6%, despite the addition of $153 million of inventories from Nautica and the acquisitions of Vans, Napapijri and Kipling. Inventories in the Company's core businesses declined 9% in the quarter.
The Company generated strong cash flow from continuing operations of $133 million in the first half of 2004. Based on the strength of its businesses, the Company now anticipates that cash flow from continuing operations will increase to a range of $500 to $550 million in 2004. Debt as a percent of total capital was 35.7% at the end of the quarter.
Outlook
We continue to expect another strong year in sales and earnings in 2004. Sales are expected to increase by 12 to 15%, and could hit $6 billion for the year – a significant new milestone for us. Earnings per share are expected to increase approximately 8%. The acquisitions of the Vans(R), Napapijri(R) and Kipling(R) brands are expected to contribute approximately $275 million to sales and $.05 to earnings per share.
We are committed to investing in our Company's future growth and are planning to make investments in a number of targeted areas during the remainder of 2004 to support this growth. Our core businesses are performing very well in both sales and earnings, and we continue to believe they have great promise. To sustain our performance, unlock the potential of our core brands and capitalize on our newly acquired brands, we plan to invest an additional $45 million in our brands, our people and our organization this year. These expenditures totaled nearly $8 million in the second quarter and are expected to approximate $15 million and $22 million in the third and fourth quarters, respectively.
In terms of the third quarter, we currently expect a sales increase of 20% to 25% and an increase in earnings per share of approximately 10%. Included in this guidance is the negative impact from the Company's Playwear business of $.06 per share, primarily driven by the recognition of certain costs related to the disposition of the business. Fourth quarter sales should rise 5 to 8% and earnings per share should be about flat with prior year results. The Company noted that results in the fourth quarter of 2003 included a favorable tax settlement, which benefited earnings by $.07 per share.
“We have tremendous momentum, which is giving us the opportunity to make investments that will fuel our future growth while still enabling us to deliver strong bottom line results to our shareholders,” said Mr. McDonald. He indicated that the Company is boosting its marketing spending, investing in new resources in such areas as strategic planning and leadership development, and establishing a new customer team organization. VF is also exploring new ways to maximize the efficiency of its supply chain to more fully leverage its global capabilities across all business units and improve profitability. “This is an exciting time for our company – not only are we exceeding our growth targets, we are putting in place the foundation for consistent, sustainable growth in coming years,” he said.
VF CORPORATION
Consolidated Statements of Income
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
----------------------- -----------------------
July 3 July 5 July 3 July 5
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net Sales $1,269,537 $1,134,742 $2,702,206 $2,384,797
Costs and Operating
Expenses
Cost of goods sold 769,708 714,011 1,648,101 1,495,303
Marketing,
administrative
and general expenses 371,785 301,157 763,796 623,491
Royalty income and
other (11,368) (6,039) (24,608) (12,369)
Gain on disposition
of Playwear business (10,363) - (7,417) -
----------- ----------- ----------- -----------
1,119,762 1,009,129 2,379,872 2,106,425
----------- ----------- ----------- -----------
Operating Income 149,775 125,613 322,334 278,372
Other Income (Expense)
Interest, net (16,656) (13,090) (33,437) (25,158)
Miscellaneous, net (489) 2,207 1,118 2,938
----------- ----------- ----------- -----------
(17,145) (10,883) (32,319) (22,220)
----------- ----------- ----------- -----------
Income Before Income
Taxes 132,630 114,730 290,015 256,152
Income Taxes 42,542 39,785 96,053 89,141
----------- ----------- ----------- -----------
Net Income $90,088 $74,945 $193,962 $167,011
=========== =========== =========== ===========
Earnings Per Common Share
Basic $0.82 $0.69 $1.77 $1.54
Diluted 0.80 0.68 1.73 1.51
Sales by Product Category
(In thousands)
Three Months Ended Six Months Ended
----------------------- -----------------------
July 3 July 5 July 3 July 5
2004 2003 2004 2003
----------- ----------- ----------- -----------
Jeans and related
apparel $579,060 $614,301 $1,282,844 $1,303,234
Intimate apparel 234,807 210,446 484,227 442,235
Sportswear 111,712 - 257,860 -
Outdoor products 145,736 120,681 270,315 221,066
Occupational apparel 114,392 103,716 225,902 226,571
Other apparel 83,830 85,598 181,058 191,691
----------- ----------- ----------- -----------
Total $1,269,537 $1,134,742 $2,702,206 $2,384,797
=========== =========== =========== ===========
