VF Corp. Beats Street with Strong Second Quarter

On a conference call with analysts, VF Corp. Chairman, President and CEO Eric Wiseman, said increasing levels of investment spending for its key brands, particularly The North Face and Vans, are paying off. 
This marks VF’s third consecutive quarter of double-digit top line growth in an economic environment marked by rampant product cost inflation, weak consumer spending, and fiscal uncertainty around the world, said Wiseman.

Earnings reached $129.4 million, or $1.17 a share, easily topping Wall Streets consensus estimate of $1.02 per share.

The star again was the companys Outdoor & Action Sports coalition, where revenues increased 23 percent to $717.9 million, with Americas revenues rising 14 percent and International revenues up 42 percent (29 percent on a constant-currency basis). Nearly all Outdoor & Action Sports brands achieved double-digit growth in the quarter, with the two largest brands – The North Face and Vans – achieving global revenue growth of 21 percent and 22 percent, respectively. Sales jumped 37 percent for Kipling and 46 percent for Napapijri.

Total direct-to-consumer revenues for the Outdoor & Action Sports coalition rose 22 percent in the quarter, with a 34 percent increase in TNF direct revenues and a 19 percent increase in Vans direct revenues.
Operating income for the Outdoor & Action Sports Coalition rose 9.7 percent to $89.5 million, reflecting a higher percentage of advertising expense to revenues versus the 2010 period, and investments to support the coalition’s seasonally higher second half business.

Steve Rendle, group president of the Outdoor & Action Sports coalition, said the investments in merchandising, upstream innovation, direct-to-consumer and operations weighed on margins during the coalitions seasonally smallest quarter. Operating margin in the quarter was 12.5 percent of sales versus last year’s 13.9 percent although full-year coalition margin is still expected to approximate 20 percent.

Touching on brand performance, Rendle said The North Face saw very positive results across its outdoor, performance, action sports and youth segments.

Were seeing particular strength in outerwear, running, training and yoga apparel, as well as specialty mountain biking apparel, said Rendle. And our e-commerce business continues on a roll with revenues up a remarkable 54 percent. With fall bookings up 16 percent, were looking for another spectacular year of growth for The North Face brand in North America.

Vans is outpacing its 2010 growth rate, fueled by increases across retail, e-commerce and wholesale. E-commerce for Vans was up over 30 percent in the quarter. Vans is also witnessing significant growth in Mexico since it acquired the business from its distributor last year. Regarding retail, Vans is on schedule for an expansion in the New York City metro area with all nine stores in its plan now open.  A first stand-alone Vans partner store in New York City is slated to open in the current quarter. Said Rendle of Vans, With the momentum weve seen in the first half, we are on track to deliver another year of double-digit revenue growth in North America.

Lucy revenues were up 10 percent, supported by e-commerce growth of more 30 percent. Said Rendle, Lucy is making good strides in building brand recognition supported by their title sponsorship of the Solstice Yoga event in Times Square last month which attracted about 6,000 participants.

Other brands in the Outdoor & Action Sports coalition are Reef, Jansport, Eastpak and Eagle Creek.

The Imagewear coalition, which includes the company’s workwear brands as well as the Majestic and Lee sports licensing businesses, saw revenues rise 16 percent to $244.1 million, driven by a 32 percent hike in the Image (work uniform) business, with a strong performance in Protective Apparel. The Licensed Sports group saw a modest sales decline reflecting the fact that VF has NHL locker room rights only every other year.

Said Scott Baxter, president of VF Imagewear, on the call, We expect to see a return to more normal growth for our Licensed Sports business in the third quarter, although like everyone else, we are concerned about the unresolved labor issues in the NFL and NBA. And we expect momentum in our Image business to continue through the remainder of the year.

Imagewears operating income soared 54.8 percent to $40.3 million with operating margin strengthening to 16.5 percent of sales from 12.3 percent in last year’s second quarter.

Looking at the other coalitions for Q2, sales in Jeanswear (Lee, Wrangler, Rider) rose 10 percent to $613.4 million. Operating income declined only slightly in the quarter, to $94.4 million, helped by the gain from a jeanswear facility closure. Contemporary Brands (7 for All Mankind, John Varvatos, Ella  Moss, Splendid) saw sales grow 11 percent to $118.1 million; earnings jumped 30 percent 10.7 million. In its Sportswear coalition (Nautica and some Kipling product), revenues grew 10 percent to $120.3 million; operating earnings rose 20 percent to $11.7 million.

Company-wide International revenues increased 30 percent (20 percent on a constant-currency basis) in the quarter, driven by the 42 percent increase in Outdoor & Action Sports and a 20 percent increase in Jeanswear. Operating income grew over 30 percent. Europe and Asia revenues were up 30 percent, Latin America was up 40 percent and Mexico was up 26 percent.

In Asia, The North Face and Vans delivered revenue gains in excess of 25 percent in constant dollars. India, although relatively small, grew over 50 percent across brands. Europe was led by 34 percent growth from Outdoor & Action Sports. Fall bookings in Europe are up over 25 percent for TNF and up over 50 percent for Vans. Management said International revenues could grow from 30 percent to nearly 33 percent of total revenues this year.

Direct-to-consumer revenues grew 17 percent in the quarter driven by new store openings, a 40 percent-plus increase in e-commerce, and exceptionally strong comp growth. Direct growth in each of the Outdoor & Action Sports, Jeanswear and Contemporary coalitions exceeded 20 percent in the quarter. The direct businesses for TNF, Vans, 7 For All Mankind, Napapijri and Kipling brands each achieved solid revenue gains in the period. A total of 29 stores were opened across brands in the quarter, bringing the total of owned-retail stores to 808. Operating margin for direct-to-consumer for the quarter improved by almost 300 basis points.

Overall company gross margin declined, as anticipated, to 45.9 percent of sales from 47.1 percent in the 2010 comparable period, reflecting the impact of higher product costs. Excluding a 65 basis point benefit from the gain on the closure of a European jeanswear facility, gross margins were down 180 basis points and in line with expectations. VFC had warned that margin pressures would be particularly felt in the second and third quarter because product cost increases are running ahead of pricing adjustments. Higher price increases are expected to help offset the impact of product cost increases to help gross margin comparisons improve in the fourth quarter. Overall, VFs expecting about 100 basis points of gross margin decline for the year. 

SG&A was down 80 basis points to 35.7 percent of revenues in the quarter with the help of leverage and despite a higher marketing spend. Inventories were up 16.7 percent-down from the 24 percent increase seen at the close of the first quarter-and reflected a 9 percent increase in product costs.

Looking ahead, full-year estimates were raised for the second time this year, to $7.50 a share, on revenue growth of 12 percent to 13 percent. VFs April forecast was $7.25 a share on 10 percent revenue growth. Growth in the high-teens is expected in Outdoor & Action Sports, low-teens in Imagewear, and high-single-digit rates in Jeanswear, Sportswear, and Contemporary Brands. International revenues could increase by more than 20 percent, up from previous guidance for 15 percent, with revenue growth in Asia now expected to exceed 30 percent. The direct-to-consumer business is projected to rise about 15 percent, better than the 10 to 15 percent growth previously forecast.
Wiseman noted that revenue and earnings guidance does not include any accretion expected with its acquisition of Timberland, which is expected to close in the third quarter. When the deal was announced in June, VF indicated that Timberland could add $700 million revenues and 25 cents to earnings per share this year. 

Wiseman indicated the company remains bullish on the TBL acquisition. Over the past five weeks, weve spent a lot of time getting to know the Timberland and SmartWool teams better. Our meetings have confirmed what we saw from the beginning, said Wiseman. These are highly talented, very passionate teams whose values and business priorities are very much aligned with ours.

Regarding margin pressures, CFO Bob Shearer noted that cotton prices have come down dramatically with current crops down to just over $1.00 from $3.00 levels earlier this year. But he indicated its too soon to predict the impact on 2012. Wiseman also noted that VFs price increases taken to-date have shown little impact on its unit volumes although he admitted the company is still uncertain how consumers will respond to even higher prices in H2.