VF Corporation reported their 11th consecutive quarter of record sales and earnings results. Revenues rose 8% in the second quarter to $1.57 billion, compared with $1.45 billion in 2005. This increase was fueled by organic growth across VFs different coalitions, but was clearly led by strength in Outdoor, which posted a 24% increase in sales to $371.0 million.
Profitability in the Outdoor Coalition did not quite keep up with sales increases, with only a 1.5% increase to $42.4 million. As a percentage of sales, operating earnings were 11.4%, down 240 basis points compared to 13.8% last year. During a conference call with analysts and the media, VFC management said that Outdoor margins were down in the quarter due to the investments the company is making to support future growth. Also, since the second quarter is a low-volume quarter for Outdoor, the investments had a disproportional impact on margins. The company said it expects to return to more normal margins in the second half of the year.
One of these investments is the new one million square foot distribution facility recently opened in California. According to management, this will not only support domestic growth of the outdoor brands, but also yield cost savings for these brands. In addition, VFC is investing in similar projects to ramp-up its European infrastructure.
VFC Chairman & CEO Mackey MacDonald said that the company is also “aggressively pursuing” acquisition opportunities, but he also made one caveat – today’s environment is very competitive and he said that VFC will not compromise financial and strategic criteria for any acquisition.
The companys owned-retail strategy also seems to be paying off. VFC emphasized that they are not interested in becoming a multi-brand retailer; rather they want to focus on communicating their individual brands messages in a controlled environment. Owned-retail now represents about 13% of VFs total revenue. On a comparable store basis, Vans stores were up over 50%, the North Face was up 20%, and Nautica was up 8% versus last year.
Eric Wiseman, VFs COO and president, said that they have been analyzing the profitability of their owned-retail stores very carefully over the past few years and they are convinced that they can make them almost as profitable as their wholesale business. VF will continue to work towards its 400 new stores target, but Wiseman said that this is a global number and does not include acquisitions. Over the past twelve months, VF has added a total of 47 stores, including full-price and outlet stores, and expects to add between 45 and 50 additional stores by year-end. The brand with the most upside in owned-retail was said to be Vans, and VF will be aggressively opening new locations to take advantage of the 50% comps the current retail base is generating.
The North Face brand revenues were up 16%. Management conceded that this growth rate is “a bit less” than what TNF has generated in prior quarters, but this is the brands lowest volume quarter and not at all indicative of what TNF management expects in the coming quarter and for the year in total. Growth is expected both domestically and internationally, and from across all categories – especially footwear.
Vans, was said to “far outperform” VFs “most optimistic assumptions.” Global revenues were up 24%, with double-digit growth in both wholesale and retail businesses. The brand is moving forward with its apparel initiative, both in its owned retail stores and with tests scheduled with several key retailers this fall. JanSport had a particularly strong quarter, with revenues up over 30%, driven in part by strength in the day-pack business and in part by early shipments of back-to-school merchandise. Kipling International also had a strong quarter, with revenue growth in excess of 20%, and strong growth in the UK, Spain, and Belgium. The brand is continuing its retail expansion in Europe, with new stores in Amsterdam, Paris, and Brussels.
Napapijri continues to be very strong in Europe, and the brand just opened its first store in New York City this week.
The Imagewear team not only grew the top line at a healthy rate, but also achieved solid profit and margin performance. Imagewear sales increased 4.3% to $188.5 million compared to $180.8 million last year. Operating earnings increased 20.5% to $29.1 million compared to $24.1 million last year.
VFCs gross margins slipped 20 basis points to 41.8% of sales compared to 42.0% last year. Marketing and G&A expenses increased 10 basis points to 31.5% of sales. The balance sheet remains strong. Inventories increased at half the rate of revenues, rising 4% versus the comparable quarter in 2005. Net income in the current quarter increased to $99.0 million compared with $96.7 million in the prior year’s quarter, with whole earnings per share increased 4% to 88 cents. On an “apples to apples” basis, excluding the effect of the special items in 2005, second quarter earnings per share increased 13%.
Due to the strong results, VF increased its guidance for the remainder of the year. Third quarter revenues are anticipated to be up about 8% with earnings per share in the quarter up about 6%, which will point to a slight decline in operating margins in the quarter due to previously mentioned investments. Q4 will be particularly strong, with an expected EPS increase of approximately 17% and investment spending levels that are more comparable to last year’s Q4.
For the year, VF is expecting earnings to hit $5.00 per share compared to the previously expected $4.95. The new target represents a 10% increase over the $4.54 reported in 2005 before the cumulative effect adjustment. Revenues are now expected to rise approximately 7% for the year, to nearly $7 billion.
