VF Corp. reported fourth-quarter earnings were down but in line with guidance. Among its major brands in the quarter, North Face was down 8 percent, Vans grew 14 percent, and Timberland gained 4 percent. The company provided a weak outlook for 2017.
Among the highlights of the report:
- 2016 revenue from continuing operations in line with 2015 at $12 billion (up 1 percent currency neutral);
- 2016 international revenue increased 4 percent (up 6 percent currency neutral);
2016 EPS from continuing operations down 9 percent to $2.78, adjusted EPS up 2 percent to $3.11 (up 7 percent currency neutral); - 2016 cash flow from operations reached almost $1.5 billion and the company returned more than $1.6 billion to shareholders through dividends and share repurchases;
- 2017 revenue expected to increase at a low single-digit percentage rate including a 2 percentage point negative impact from changes in foreign currency;
- 2017 gross margin expected to be 48.6 percent, which includes a 70 basis point negative impact from changes in foreign currency;
- 2017 EPS expected to be down at a low single-digit percentage rate compared to 2016 adjusted EPS of $3.11 (up at a mid-single-digit percentage rate on a currency neutral basis); and,
- Expect to return more than $1.6 billion to shareholders in 2017 through share repurchases and dividends.
“VF’s global business model, diverse brand portfolio and focused operational discipline helped the company deliver solid results in 2016 despite an inconsistent U.S. marketplace,” said Eric Wiseman, executive chairman of the Board. “We’re pleased with the improved quality of our revenue, which reflects continued growth in our international and direct-to-consumer platforms, and our strong gross margin and cash generation performance that enabled us to return a record $1.6 billion to our shareholders. Looking forward, I expect the strategic and operational actions we are taking to generate even stronger long-term value for our shareholders.”
Adjusted Amounts – Excluding Goodwill and Intangible Asset Impairment, Restructuring, and Pension Settlement Charges
This release refers to adjusted amounts that exclude 1) noncash goodwill and intangible asset impairment charges related to its Lucy brand of $80 million pre-tax (15 cents per share after-tax for full year 2016), 2) restructuring charges related to cost alignment initiatives of $58 million pre-tax (10 cents per share after-tax for full year 2016), and 3) a noncash pension settlement charge of $51 million pre-tax (7 cents per share after-tax for full year 2016). The pension settlement charge was a result of actions taken to reduce risk, volatility, and the liability associated with VF’s U.S. pension plan. The above charges were incurred during the fourth quarter of 2016. 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, and provide management’s view of why this information is useful to investors.
Discontinued Operations – Contemporary Brands
On August 26, 2016, the company completed the sale of its Contemporary Brands businesses, which included the 7 For All Mankind, Splendid and Ella Moss brands. Accordingly, the company removed the assets and liabilities of the Contemporary Brands businesses as of that date and included the results of those businesses in discontinued operations for all periods presented.
The company’s net loss from discontinued operations was $98 million in 2016, which includes the loss on the sale of the Contemporary Brands businesses and the operating results of the businesses, net of tax.
Fourth Quarter 2016 Income Statement Review
- Revenue was in line with last year’s fourth quarter at $3.3 billion (up 1 percent currency neutral) driven by strength in its international and direct-to-consumer platforms, and its Vans business.
- Gross margin improved 90 basis points to a record 49.1 percent on a reported basis, as benefits from pricing, lower product costs and a mix-shift toward higher margin businesses were partially offset by changes in foreign currency and the impact of restructuring charges. On an adjusted basis, gross margin increased 160 basis points to 49.8 percent. Changes in foreign currency negatively affected both reported and adjusted gross margin by 90 basis points during the quarter.
- Operating income on a reported basis was down 41 percent to $320 million compared to the same period of 2015. On an adjusted basis, operating income decreased 5 percent to $509 million. Operating margin on a reported basis decreased 660 basis points to 9.6 percent. Adjusted operating margin decreased 90 basis points to 15.3 percent. Changes in foreign currency negatively impacted both reported and adjusted operating margin by about 60 basis points in the quarter.
- Earnings per share on a reported basis was down 33 percent to 63 cents compared to 94 cents during the same period last year. Adjusted earnings per share for the fourth quarter increased 3 percent to 97 cents a share. Excluding the impact of changes in foreign currency, adjusted fourth quarter earnings per share was up 8 percent. Wall Street’s consensus estimate had been 97 cents.
Fiscal Year 2016 Income Statement Review
- Revenue was in line with last year at $12.0 billion (up 1 percent currency neutral) driven by continued momentum in its international and direct-to-consumer platforms, and its Vans business.
- Gross margin improved 20 basis points to 48.4 percent on a reported basis as benefits from pricing, lower product costs, and a mix-shift toward higher margin businesses were partially offset by changes in foreign currency and the impact of restructuring charges. On an adjusted basis, gross margin increased 40 basis points to 48.6 percent. Changes in foreign currency negatively affected both reported and adjusted gross margin by almost 80 basis points in 2016.
- Operating income on a reported basis was down 16 percent to $1.5 billion compared to the same period in 2015. Adjusted operating income was down 6 percent to $1.7 billion. Operating margin on a reported basis decreased 240 basis points to 12.5 percent. Adjusted operating margin decreased 90 basis points to 14.0 percent. Changes in foreign currency negatively impacted both reported and adjusted operating margin by 50 basis points in 2016.
- Earnings per share on a reported basis was down 9 percent to $2.78 compared to $3.04 in 2015. Adjusted earnings per share for 2016 increased 2 percent to $3.11. Excluding the impact of changes in foreign currency, adjusted 2016 earnings per share was up 7 percent.
Coalition Review
Fourth quarter revenue for Outdoor & Action Sports was up 2 percent to $2.1 billion. Full year Outdoor & Action Sports revenue also increased 2 percent in 2016 to $7.5 billion.
- Vans brand revenue for the fourth quarter was up 14 percent (up 15 percent currency neutral) driven by a mid-teen increase in the Americas business (up high-teens currency neutral); and in Europe a return to growth with a mid-single-digit rate increase (up low single-digits currency neutral); and more than 20 percent (up more than 25 percent currency neutral) growth in Asia Pacific. Revenue for the Vans® brand for the full year was up 6 percent (up 7 percent currency neutral) and reached $2.3 billion.
- Fourth quarter revenue for The North Face brand was down 8 percent (down 7 percent currency neutral) driven by the strategic decision to reduce sales to the off-price channel and the impact of bankruptcies in North America. Excluding these factors, The North Face brand would have increased at a low single-digit rate. On a regional basis, the Americas declined at a low double-digit rate; Europe increased at a mid-teen rate (up high-teens currency neutral); and, Asia Pacific declined at a low double-digit percentage rate (down mid-single-digit currency neutral). For the full year, revenue for The North Face brand declined 2 percent (down 1 percent currency neutral) to $2.3 billion.
- Timberland brand revenue was up 4 percent in the fourth quarter (up 5 percent currency neutral) including a low single-digit rate increase in the Americas region; a high single-digit rate increase in Europe (up low double-digits currency neutral); and, a mid-single-digit rate increase in Asia Pacific. Full year Timberland® brand revenue was up 1 percent to $1.8 billion.
Fourth quarter operating income on a reported basis for Outdoor & Action Sports was consistent with 2015 at $385 million. On an adjusted basis, operating income increased 4 percent to $402 million. Changes in foreign currency negatively impacted both reported and adjusted operating profit growth by approximately 8 percentage points. Operating margin on a reported basis was 18.0 percent, down 40 basis points compared to the same period last year. Adjusted operating margin increased 50 basis points to 18.9 percent. Full year reported operating income decreased 3 percent to approximately $1.2 billion. Full year adjusted operating income decreased 2 percent. Changes in foreign currency negatively affected full year profit growth on both a reported and an adjusted basis by approximately 7 percentage points. Full year reported operating margin was 16.3 percent, compared to 17.1 percent in 2015. Full year adjusted operating margin was 16.5 percent in 2016.
Jeanswear fourth quarter revenue declined 5 percent (down 4 percent currency neutral) to $697 million. For the full year, global Jeanswear revenue was down 2 percent to $2.7 billion (flat currency neutral).
• Wrangler brand revenue was down 1 percent (up 1 percent currency neutral) in the fourth quarter with revenue in line with last year in the Americas business (up low single-digit currency neutral); a high single-digit rate decrease in Europe (down mid-single digits currency neutral); and, a 20 percent decline in the Asia Pacific region (down high-teens currency neutral). Full year revenue for the Wrangler® brand was down 1 percent (up 1 percent currency neutral) to $1.7 billion.
• Fourth quarter revenue for the Lee brand was down 13 percent (down 11 percent currency neutral) including a high-teens rate decline in the Americas region; a high single-digit rate increase in Europe (up low double-digits currency neutral); and, a mid-single digit rate decline in the Asia Pacific region (down low single-digit currency neutral). For the full year, revenue for the Lee® brand was down 3 percent (down 1 percent currency neutral) to $1.0 billion.
Fourth quarter operating income on a reported basis for Jeanswear decreased 27 percent to $103 million. On an adjusted basis operating income decreased 12 percent to $124 million. Changes in foreign currency offset the decline in both reported and adjusted operating profit by 2 percentage points. Operating margin on a reported basis was 14.8 percent, down 430 basis points compared to the same period last year. Adjusted operating margin decreased 130 basis points to 17.8 percent. Full year reported operating income decreased 8 percent to $492 million. Operating income on an adjusted basis decreased 4 percent to $512 million. Full year reported operating margin was 18.0 percent, compared to 19.2 percent in 2015. Full year adjusted operating margin was 18.7 percent in 2016.
Imagewear fourth quarter revenue increased 15 percent to $298 million with a more than 20 percent increase in the Licensed Sports Group (LSG) business and a mid-single-digit increase in the workwear business. For the full year, revenue for Imagewear was up 2 percent to $1.1 billion.
Fourth quarter operating income on a reported basis for Imagewear was up 40 percent to $55 million and reported operating margin increased 330 basis points to 18.5 percent. Adjusted operating income in the fourth quarter increased more than 40 percent to $57 million and adjusted operating margin increased 380 basis points to 19.0 percent. Changes in foreign currency positively affected both reported and adjusted operating profit growth by approximately 5 percentage points. For the full year, Imagewear operating income on a reported basis increased 14 percent to $180 million, and operating margin was 16.3 percent, a 170 basis point increase over 2015. Operating income on an adjusted basis increased 15 percent and adjusted operating margin increased 180 basis points to 16.4 percent. Changes in foreign currency positively affected both reported and adjusted operating profit growth by approximately 4 percentage points.
Sportswear fourth quarter revenue declined 17 percent to $162 million including a 20 percent decrease in Nautica® brand revenue and a 2 percent decline in the Kipling® brand’s North American business compared to the same period last year. For the full year, Sportswear coalition revenue was down 16 percent to $536 million.
Fourth quarter operating income for Sportswear decreased 63 percent to $10 million with operating margin at 6.5 percent, compared to 14.5 percent in the same period last year. Adjusted operating income in the fourth quarter decreased 53 percent, with adjusted operating margin of 8.3 percent. Full year 2016 reported operating income decreased 54 percent with operating margin of 6.8 percent, compared to 12.4 percent in 2015. Full year adjusted operating income decreased 50 percent with operating margin of 7.4 percent.
International Review
International revenue in the fourth quarter was up 5 percent (up 7 percent currency neutral). Revenue was up 6 percent (up 7 percent currency neutral) in Europe and up 6 percent (up 8 percent currency neutral) in the Asia Pacific region, including a 6 percent increase (up 14 percent currency neutral) in China. Revenue in the Americas (non-U.S.) region was down 1 percent (up 6 percent currency neutral). The international business represented 34 percent of total VF fourth quarter sales, compared to 33 percent in last year’s same period. For the full year, international revenue was up 4 percent (up 6 percent currency neutral). Revenue was up 5 percent (up 4 percent currency neutral) in Europe and up 3 percent (up 6 percent currency neutral) in the Asia Pacific region, including a 4 percent increase (up 10 percent currency neutral) in China. Revenue in the Americas (non-U.S.) region was up 2 percent (up 11 percent currency neutral). The international business represented 38 percent of total VF sales in 2016, compared to 37 percent in 2015.
Direct-to-Consumer Review
Direct-to-consumer revenue was up 11 percent (up 12 percent currency neutral) in the fourth quarter driven by a mid-teen increase in the Outdoor & Action Sports business and a mid-teen increase in the international business. The company’s e-commerce business continued its strong momentum with 21 percent revenue growth during the quarter. There were 1,507 VF-owned retail stores at the end of the quarter compared with 1,405 at the end of the fourth quarter of 2015. Direct-to-consumer revenue reached 37 percent of total fourth quarter revenue compared with 33 percent in last year’s same period. For the year, direct-to-consumer revenue was up 8 percent (up 9 percent currency neutral) driven by a low-teen increase in the Outdoor & Action Sports business and a low double-digit (mid-teen currency neutral) increase in the international business. Direct-to-consumer revenue was 28 percent of total VF revenue in 2016 compared to 26 percent in 2015.
Balance Sheet and Cash Flow Highlights
Inventories were up less than 1 percent compared to 2015 levels. In 2016, VF’s cash flow from operations reached almost $1.5 billion. The company also returned more than $1.6 billion to shareholders through dividends and share repurchases.
2017 Outlook
“The pace of change in both our industry and the broader consumer landscape is happening at an accelerated rate,” said Steve Rendle, President and Chief Executive Officer. “The proliferation of technology and innovation across all aspects of our lives has shifted consumers’ shopping behaviors and elevated their expectations when engaging with our brands. We are pivoting to become more agile and consumer centric to compete and win in this changing global marketplace.”
Key points related to VF’s full year 2017 outlook include:
• Revenue is expected to increase at a low single-digit percentage rate including about a two percentage point negative impact from changes in foreign currency. By coalition, revenue for Outdoor & Action Sports is expected to increase at a low single-digit percentage rate (up at a mid-single-digit rate currency neutral); revenue for Jeanswear is expected to approximate 2016 levels; Imagewear revenue is expected to increase at a low single-digit percentage rate; and Sportswear is expected to decline at a high single-digit percentage rate.
• International revenue is expected to grow at a low single-digit percentage rate (accelerating to a high single-digit percentage rate on a currency neutral basis). By geographic region, European revenue is expected to increase at a low single-digit percentage rate (up at a high single-digit rate on a currency neutral basis). In the Asia Pacific region, revenue is expected to increase at a mid-single-digit percentage rate (up at a high single-digit rate on a currency neutral basis). And, in the Americas (non-U.S.) region, revenue is expected to increase at a high single-digit percentage rate (up at a low-teen rate currency neutral).
• Direct-to-consumer revenue is expected to grow at a high single-digit percentage rate. Direct-to-consumer growth in 2017 includes the addition of about 50 stores and mid-single-digit comparable sales growth, including an expected increase of approximately 25 percent in e-commerce revenue.
• Gross margin is expected to be about 48.6 percent, consistent with 2016 gross margin on an adjusted basis, and includes about a 70 basis point negative impact from changes in foreign currency.
• Operating margin is expected to approximate 14 percent, including about a 70 basis point negative impact from changes in foreign currency.
• Earnings per share is expected to be down at a low single-digit percentage rate compared to 2016 adjusted EPS of $3.11 (up at a mid-single-digit percentage rate on a currency neutral basis).
• Cash flow from operations is expected to reach $1.5 billion.
• VF expects to return more than $1.6 billion to shareholders through share repurchases and dividends.
• Other full year assumptions include an effective tax rate in the low 20 percent range and capital expenditures of approximately $225 million.
In the first half of 2017, VF expects revenue on a reported basis to decline at a low single-digit percentage rate (about flat on a currency neutral basis). We expect earnings per share to decline at a mid-single-digit percentage rate on a reported basis (up at a low single-digit rate on a currency neutral basis).
In the second half of 2017, VF expects revenue on a reported basis to increase at a low single-digit percentage rate (up at a mid-single-digit rate on a currency neutral basis). Earnings per share is expected to increase at a low single-digit percentage rate on a reported basis (up at a high single-digit rate on a currency neutral basis).
Dividend Declared
VF’s Board of Directors declared a quarterly dividend of 42 cents per share, payable on March 20, 2017 to shareholders of record on March 10, 2017.