VF Corporation reported second quarter earnings from continuing operations were $.68 per share, compared with $.79 per share in the second quarter of 2002. Prior year earnings per share included a net benefit of $.03 per share from unusual items.
Income from continuing operations was $74.9 million versus $88.5 million in the 2002 period. Excluding unusual items in the second quarter of 2002, income from continuing operations declined 13% in 2003 from $86.6 million in the prior year period. All per share amounts are presented on a diluted basis.
Sales in the quarter fell 2% to $1,134.7 million versus $1,160.3 million in the prior year’s quarter.
For the first six months of 2003, earnings from continuing operations rose 4% to $1.51 per share from $1.45 per share. Prior year earnings per share included a net benefit of $.02 per share from unusual items. Sales rose slightly to $2,384.8 million compared with the $2,372.5 million reported in the 2002 period. Income from continuing operations was $167.0 million versus $165.5 million reported a year ago.
Foreign currency translation favorably impacted both sales and earnings in the quarter. Excluding foreign currency effects, sales were down 5% from the prior year period. The benefit to earnings in the quarter was $.02 per share.
Commented Mackey J. McDonald, chairman and chief executive officer, “Our sales and earnings performance in the quarter was better than we had anticipated, due in part to earlier than planned load-ins of new programs. We remain confident in the strength of our brands and businesses, despite a retail environment that continues to be less than robust.”
“We are very excited about our recently announced plans to acquire Nautica,” continued Mr. McDonald. On July 7, the Company announced that it had signed a definitive merger agreement to acquire Nautica Enterprises, Inc. for a total consideration of approximately $585.6 million. “The transaction will add a solid lifestyle brand to our growing portfolio, give us new capabilities in sportswear and boost our presence in the jeanswear category. We also see opportunities to improve profitability and to capture additional growth.”
International jeans sales rose 5% reflecting the positive effects of foreign currency translation. Sales in the Company’s Outdoor coalition, which includes The North Face, JanSport and Eastpak brands, rose 12% in the quarter, driven by double-digit sales increases of The North Face brand products. Domestic jeans sales and global intimate apparel sales declined by 4% and 3%, respectively, reflecting continued efforts by retailers to reduce inventories and a number of store closings by customers. Imagewear sales declined 8%, reflecting continued weakness in the manufacturing and transportation sectors and reduced discretionary spending by corporations. Our licensed sports business, however, continued its positive momentum. The Company is continuing to review alternatives for its Playwear business.
Gross margins were 37.1% compared with 37.5% reported in the second quarter of 2002; excluding the impact of unusual items in 2002, gross margins in the prior year period were 37.2%. As anticipated, operating expenses as a percent of sales increased to 26.5% in the quarter versus 24.9% in the prior year period. Accordingly, operating margins declined to 11.1% in the quarter from 13.1% in the same quarter a year ago; excluding the impact of unusual items, operating margins in the 2002 period were 12.8%.
Inventories rose in the quarter as anticipated. The Company continues to expect that inventories at year-end will be flat to up slightly over prior year levels. The Company’s balance sheet remains exceptionally strong. Debt as a percent of total capital was 27.5%; net of cash, the ratio was 20.8%.
With regard to the full year, we expect that earnings per share could increase by 3-5% from the $3.24 per share from continuing operations reported in 2002. Compared with 2002 earnings per share of $3.38 from continuing operations (which excludes net restructuring charges of $.14 per share), earnings per share in 2003 are expected to be about flat. Sales are expected to decline slightly. Gross margins could rise by approximately 100 basis points from the 36.0% level reported in 2002, with operating margins flat with those reported in the prior year. Cash flow from operations is expected to range between $350-$400 million.
In terms of the third quarter, we expect sales to be down approximately 2%. Earnings per share in the third quarter could be down 15-20%, primarily due to 1) expenses related to the Company’s proactive stance toward managing inventories, capacity and costs and 2) the estimated loss that the Company may incur if the Playwear business is sold. These expenses could total approximately $25 million, or $.15 per share.
“This year may fall short of our original expectations, but we are pleased that we will maintain our earnings at prior year levels, demonstrating our ability to successfully manage our way through these extraordinary times,” said Mr. McDonald.
The Company is on plan to complete its merger agreement to acquire Nautica Enterprises, Inc. early in the fourth quarter of 2003. The Company expects that even with additional borrowings its debt to total capital ratio at year-end will range between 30-35%, remaining well below the Company’s long-term target of 40%.
VF CORPORATION
Consolidated Statements of Income
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
-------------------------- -----------------------
July 5 June 29 July 5 June 29
2003 2002/a 2003 2002/a
-------------- ----------- ----------- -----------
Net Sales $1,134,742 $1,160,256 $2,384,797 $2,372,518
Costs and Operating
Expenses
Cost of products
sold 714,011 725,076 1,495,303 1,509,444
Marketing,
administrative
and general
expenses 301,157 288,578 623,491 583,695
Other operating
income (6,039) (5,324) (12,369) (9,821)
-------------- ----------- ----------- -----------
1,009,129 1,008,330 2,106,425 2,083,318
-------------- ----------- ----------- -----------
Operating Income 125,613 151,926 278,372 289,200
Other Income
(Expense)
Interest, net (13,090) (14,727) (25,158) (32,114)
Miscellaneous, net 2,207 392 2,938 1,526
-------------- ----------- ----------- -----------
(10,883) (14,335) (22,220) (30,588)
-------------- ----------- ----------- -----------
Income from
Continuing
Operations
Before Income
Taxes 114,730 137,591 256,152 258,612
Income Taxes 39,785 49,111 89,141 93,085
-------------- ----------- ----------- -----------
Income from
Continuing
Operations 74,945 88,480 167,011 165,527
Discontinued
Operations - 386 - 2,335
Cumulative Effect of
Change in
Accounting Policy
for Goodwill - - - (527,254)
-------------- ----------- ----------- -----------
Net Income (Loss) $74,945 $88,866 $167,011 $(359,392)
============== =========== =========== ===========
Earnings (Loss) Per Common Share -
Basic
Income from continuing
operations $0.69 $0.79 $1.54 $1.45
Discontinued operations - - - 0.02
Cumulative effect of change
in accounting policy - - - (4.80)
Net income (loss) 0.69 0.79 1.54 (3.33)
Earnings (Loss) Per Common
Share - Diluted
Income from continuing
operations $0.68 $0.79 $1.51 $1.45
Discontinued operations - - - 0.02
Cumulative effect of change
in accounting policy - - - (4.66)
Net income (loss) 0.68 0.79 1.51 (3.18)
