If you pulled a Rip Van Winkle and went to sleep ten years ago and awoke just this last week, you would probably think that you had done so in some sort of bizarre world where VF Corporation, which relied on selling jeans to the value market and intimate apparel to women, had seen a vast majority of its most recent quarters sales come from a combination of The North Face, Vans, Jansport, Kipling, and a Italian fashion outdoor label.
But that is exactly what is now happening as VFC relied on the companys Outdoor Coalition, which includes the above brands, to deliver roughly 69% of the companys nearly 25% sales increase for the third quarter.
Total VF Corp. sales rose 24.9% to $1.79 billion from $1.44 billion in the third quarter last year. Net income increased 24.0% to $155.4 million, $1.38 per diluted share, from $125.3 million, or $1.14 per diluted per share, in the year-ago period. Acquisitions were the key driver here as the Vans, Napapijri, and Kipling deals this year added $183.6 million in sales and 12 cents per share in earnings to the quarter. Without the acquisitions, Q3 sales for the corporation would have increased about 10% and diluted EPS would have risen 10.5% versus last year.
“We are aggressively driving integration and growth plans for all of our acquired businesses, both in Outdoor and Sportswear, and are very pleased by the benefits we've seen to date,” commented VFC chairman and CEO Mackey McDonald. “We are on or ahead of schedule in meeting our sales and operating margin goals, and remain extremely excited at the future growth prospects for all these brands.”
Mike Egeck, president of the VF Outdoor Coalition Americas, told BOSS in an excusive interview that the Core businesses are growing and the recent acquisitions are “performing better-than-expected.” He said sales were 11% higher than the internal plan in place for the acquired companies and operating profit exceeded expectations by 69%.
While Egeck said that there were no real surprises in the new businesses, he did express some surprise at how well the classic footwear business was performing at Vans. He said Vans beat the internal plan by double-digits and the operating plan by more than 60%. The upside for Vans is really seen in Apparel, which is currently 10% of sales, as well as Equipment and Accessories, which is just 3% of sales. Owned-Retail is another key growth target area. A new retail store format is showing double-digit gains since it opened.
Vans has already started to bring in some of the apparel expertise from VF Corp., enrolling a new head of product development for Apparel as well as sourcing and planning/forecasting help. The company will reportedly be making some new appointments later this week as they add a VP of Apparel and someone to head up the Vans Snowboard business.
Combined sales of the Outdoor businesses, which include The North Face, Vans, JanSport, Eastpak, Napapijri and Kipling brands, jumped 116% in the quarter to $457.1 million from $211.6 million in Q3 last year.
The North Face brand posted a 44% sales increase, while the total Coalition would have grown just 29.3% without the acquisitions, revealing a less robust business elsewhere in the ODC.
The North Face reportedly saw growth across all product categories, but Egeck said that Footwear still leads all categories in year-to-date growth, with an increase in excess of 70% for the YTD period. Outerwear increased 50% YTD, and Sportswear grew 36% over the same period. Egeck said he sees Footwear and Sportswear leading growth going forward.
He said the company is surprised at the continued high rate of growth in the Sportswear category, but he was really amazed at the early sell-through they got in Fleece in the Outerwear category. They started shipping Fleece in June and it has done “very well”. He also pointed to the Gore WindStopper product and also said Down goods were selling well.
All-in-all, the addition of a back-to-school delivery window for TNF has paid big dividends as they hit the market earlier than the competition. Egeck said the key for them this fall has been an expanded product offering and a higher turn rate at retail.
VFC said that The North Face still relies heavily on Specialty Outdoor shops for the business, with 48% of sales coming out of that segment this year. Sporting Goods is the second largest component with 27% of the business, Specialty/Lifestyle accounts making up 9% of the business and Department Stores contributing another 6% of the total. TNF Owned-Retail is 10% of the business, a number Egeck said he expects to stay fairly even going forward. He said they saw growing their business in the U.S. through deeper penetration in existing accounts rather than broadening the distribution base.
Sales in Spring bookings for TNF are up 22% in the U.S. and 23% in Europe.
The brand added a TNF retail store in Boston during the quarter. The other key objective is the continued expansion of the shop-in-shop concepts with retail customers. Egeck said they will have 600 shops by the end of the year and will have a team of merchandisers to service the shops by H2 2005.
The Packs business also rose strongly in the quarter, with growth said to be driven by travel and apparel products. Egeck said the Packs business, which has included the Jansport and Eastpak brands, saw YTD growth in the mid-single-digit neighborhood. Including Jansport Apparel, the Packs business was up in the low-teens. The brands will be reported separately next year.
As BOSS reported last week, Eastpak will move be run out of Vans headquarters in Southern California and will be positioned as a more action sports brand. The company said that Eastpak is much stronger in Europe where it is seen as the number one pack brand in the market. VFC said that Eastpak has a 55% market share in Germany, 38% in Benelux, and 22% in Italy, with distribution primarily in the mid- to high-end department store channel. The first Eastpak retail store will open in Milan early next year.
VFC sees the global Outdoor market as a $33 billion opportunity at retail, with 36% of the business in Apparel, 20% in Footwear, and 44% in Equipment. When you look at TNFs current category breakdown, which has Outerwear at 55% of the business, Sportswear with 25%, and Footwear and Equipment each with 10% of the total, it is easy to picture where the company may look for the next round of acquisitions.
Egeck said he saw more opportunities in the Action Sports arena as well as the Fishing and Hunting categories. Hardlines purchases would certainly make more sense in these markets as they build to the share that Equipment holds in the market. BOSS wonders if any of the Huffy board or skate brands would make any sense for these guys, or will they focus on more companies that can benefit from VFs expertise in the apparel business?
