With continued explosive growth from Vans as well as improved gross margins, VF Corp. reported a better-than-expected quarterly profit. Its earnings guidance was maintained for the year due to incremental marketing costs being added to the second half to support 2014 growth.
Highlights in the quarter included a revenue growth of 6.5 percent for its Outdoor & Action Sports coalition, 7 percent internationally, and 14 percent in its Direct-to-Consumer business. Among its major brands, Vans’ global sales jumped 16 percent while North Face advanced 3 percent and Timberland increased 2 percent.
Revenues for its outdoor brands, as expected, were hurt by a retailer calendar shift that moved many shipments from September into October due to caution by retailers.
On a conference call with analysts, Eric Wiseman, VF’s chairman, president and CEO, specifically noted how the outdoor industry “has approached this season very cautiously and that means that they have bought conservatively because the last two winters have been so difficult.”
On the positive side, he said except for jeans, which is being impacted by overstocks in China, inventories across retail “are in pretty good shape,” and VF is set to respond to by any increase in demand across its coalitions.
“Our inventories are really clean,” said Wiseman. “We ended the quarter with inventories flat on last year and the math would suggest we're going to grow around 10 percent in the fourth quarter and we are starting with flat inventory. So our inventories are clean and we think the retailers are pretty clean as well in general.”
VF also increased its quarterly dividend by 21 percent to $1.05 per share, and declared a four-for-one stock split announced.
Companywide, net income on an adjusted basis grew 10.9 percent to $436 million, or $3.91 a share, compared with $393 million, or $3.52, in the same period of 2012. Results were easily ahead of Wall Street’s consensus estimate of $3.77. Adjusted earnings exclude charges related to last year’s Timberland acquisition of 2 cents per share in the latest quarter and 10 cents per share a year ago.
Revenues increased 4.7 percent to $3.27 billion, led by Outdoor & Action Sports, Jeanswear, and its International and Direct-to-Consumer businesses. Changes in foreign currency exchange rates positively impacted reported revenue growth by approximately one percentage point during the quarter.
Gross margin improved 90 basis points to 47.6 percent, reflecting the continuing shift in its revenue mix toward higher margin businesses, particularly its Outdoor & Action Sports brands, and moderately lower year-over-year product costs.
SG&A as a percent of revenues rose 40 basis points to 30.3 percent, including an 80 basis point impact from higher marketing investments to support its major Outdoor & Action Sports brands. Operating income on an adjusted basis grew 5.6 percent to $582 million.
In the Outdoor & Action Sports coalition, revenues improved 6.5 percent to $1.97 billion with balanced growth across the U.S. and international markets as well as its wholesale and direct-to-consumer channels. The revenue impact of shipments that moved from September into October due to a retailer calendar shift, already forewarned during the company’s second quarter earnings call, negatively impacted third quarter coalition revenue growth by about 2 percentage points.
Third quarter operating income inched up 2.0 percent to $421.2 million while operating margin decreased 90 basis points to 21.4 percent. Besides the calendar shift, earnings were held back by incremental marketing investments to position the coalition’s three largest brands The North Face, Vans and Timberland for stronger growth in 2014.
Among the coalition’s brands, revenues for The North Face brand rose 3 percent globally, consistent with expectations. More than 25 percent growth in Direct-to-Consumer (DTC) sales helped made up for flat revenues in the brand’s wholesale business, due to the retailer calendar shift and later-in-the-year shipments resulting from retailer caution.
On the call, Steve Rendle, VF’s Group President of the Outdoor & Action Sports Americas coaltion, noted that absent the calendar shift, which totaled about $40 million in revenues for North Face, third-quarter revenues for North Face would have been up at a high single-digit rate. The shift is expected to benefit fourth-quarter results, when North Face revenues should approximate a low double-digit growth rate.
Revenues in the Americas region were up 3 percent in the quarter, with flat wholesale results that were held back by the calendar shift. DTC performance delivered 30 percent growth. Added Rendle, “In both channels we are really encouraged with the trends are seeing in apparel, footwear and equipment demand as we head into the cooler months ahead.”
Indeed, Rendle said he remained “incredibly confident” about North Face’s future with its scheduled product launches, marketing initiatives, retail partnerships, and DTC momentum, “especially in the context following two challenging winters here in the US.”
Early reads on its Thermoball insulated product have exceeded internal expectations. In addition to “very strong sell-through” at its DTC network, North Face is rolling out an exclusive in-store concept at 300 Dick's Sporting Goods locations playing up Thermoball. Incremental investments are also being made to support a new Never Stop Exploring ad campaign with the reach across TV, print, digital and in-store.
Added Rendle, “So all factors considered we are right where we expected to be. And there is significant momentum in the Americas business moving into the fourth quarter, lining us up for a strong finish to the year.”
In Europe, North Face saw a low single-digit percentage rate decrease, impacted by the opening of a new distribution center for the region. Fourth-quarter revenue is expected to grow at the mid-teen rate with Thermoball also seeing early strength among wholesale partners. In the third quarter, its DTC business in Europe was up nearly 20 percent, including more than 60 percent growth in its e-com business.
The North Face’s sales were up 11 percent in the Asia Pacific region, driven by mid-teen percentage growth in China. For the fourth quarter, The North Face is doubling its marketing investment in China, including launching its first major national TV campaign, Explorer for The North Face.
Vans’ 16 percent gain in the quarter was driven by high teen DTC growth and a mid-teen percentage increase in its wholesale business.
In the Americas, Vans revenues were up at a low teens rate during the quarter with both the DTC and wholesale channel showing strong double-digit momentum. Footwear saw double-digit growth across core board shop, boutique, lifestyle and family footwear channels.
Two new pro skater shoes using performance characteristics including WAFFLECUP, duracup and Ultracush received strong adoption in core board shops. The 66 launch at Foot Locker celebrated its one-year anniversary with a revised in-store branding execution and expanded product categories to include the OTW and Classics collections.
Vans apparel also continues to gain a greater foothold, cracking the top 10 men's brands in eight of 11 categories in Q313 as measured by Action Watch. As recently as 2011, Vans didn’t make these apparel rankings.
Overseas, Vans sales were up 25 percent in Europe and expanded at a high single-digit rate in the Asia-Pacific region.
Timberland’s 2 percent increase was supported positive growth in its DTC and wholesale businesses. Said Rendle, “The work we have done during the past two years at Timberland is really paying off.”
In the Americas, Timberland’s revenues were up in the mid single-digit range, in line with expectations. Results in this region were driven by sales of boots in DTC and wholesale as somewhat more seasonal weather began slightly earlier than last year.
Core styles in the premium boots and hiking categories “performed really well” at both wholesale accounts and its own DTC locations. Early sell-throughs on its relaunched apparel collection in North America, available at select Nordstrom locations and key independent retailers, “have been very encouraging,” particularly outerwear, said Rendle.
The Timberland brand is also being supported by the launch of a Best Then, Better Now advertising campaign that coincided with Timberland's 40th anniversary of the yellow boot, as well as a specific campaign for Timberland Pro. A newly designed homepage for Timberland has already nearly doubled the average time consumers spend on the brand’s website. Timberland’s DTC growth benefited from operational initiatives designed to drive conversion.
“We continue to make significant progress with Timberland and remain confident that we have set the right path for stronger long-term growth,” said Rendle. ”We couldn't be more confident in our ability to grow this brand. The product is stellar, our distribution is well-positioned and we're telling our amazing stories.”
Timberand’s Europe revenues were flat, as expected, reflecting a slight increase in its wholesale business, offset by weaker DTC sales as key locations across the continent are continuing to be reset. In Asia, revenues were up 9 percent C-N, led by strong growth across the region in both women's and men's footwear and a 40th anniversary marketing campaign supporting boot sales.
The coalition also includes JanSport, Kipling, SmartWool, Napapijri, Eastpak, Eagle Creek, Lucy, Reef and part of the Kipling business.
Among its other coalitions, Jeanswear revenues – including Lee and Wrangler – rose 4.0 percent to $747.2 million; operating earnings improved 20.4 percent to $158.3 million.
In its Imagewear coalition, which includes its work apparel brands as well as Majestic Athletic, sales were flat at $284.5 million. Operating profits improved 8.6 percent to $40.7 million, due to gross margin expansion. Imagewear revenues are expected to increase at a low double-digit rate in the fourth quarter.
Sportswear coalition revenues (Kipling, Nautica) inched up 0.7 percent to $155.2 million with operating earnings jumping 29.7 percent to $24.0 million. In its Contemporary Brands coalition (7 For All Mankind, Splendid, Ella Moss), sales inched up 0.8 percent to $105.0 million; operating earnings fell 29.6 percent to $9.4 million.
International revenues in the third quarter increased 7 percent, up 4 percent on a C-N basis. Americas (non-U.S.) revenues increased 13 percent (up 17 percent on a C-N basis) with strong performances from Vans, JanSport and Reef. Revenues in Europe rose 7 percent (up 2 percent on a C-N basis) with positive results by Vans, Wrangler, 7 For All Mankind, Eastpak, Lee, Kipling, Napapijri and SmartWool.
In Asia Pacific, revenues were up 2 percent (up 3 percent on a C-N basis) driven by 10 percent growth in China, which included strong results by the Vans, The North Face, and Timberland that offset continued weakness from Lee. North Face and Vans saw strong increases in international DTC revenue in the quarter, up 19 percent and 44 percent, respectively. International revenues were 40 percent of total VF revenues in the quarter, the same level as last year.
DTC global revenues increased 14 percent in the quarter including a 28 percent increase for the North Face, an 18 percent increase in the Vans, a 16 percent increase in Nautica and a 50 percent increase in Kipling. DTC revenues reached 19 percent of total revenues compared with 18 percent in the 2012 period.
Regarding its outlook, revenues are still expected to approximate $11.5 billion in 2013. Full-year gross margin is now expected to approach 48 percent, up approximately 150 basis points over 2012’s results. Incremental marketing investments to support long-term growth for North Face, Vans and Timberland will total $40 million, or about 25 cents a share, in the second half. Incremental marketing investments of $10 million were recognized in the third quarter with $30 million expected to be recognized in the fourth. With the extra marketing spend, full year adjusted EPS guidance remains at $10.85, which represents a 13 percent increase over 2012’s results and in line with the company’s stated long-term financial objectives.
