VF Corporation announced record results for the fourth quarter and full year 2004 that were well ahead of its previous guidance provided in October 2004. All per share amounts are presented on a diluted basis.
Commented Mackey J. McDonald, chairman and chief executive officer, “This was a banner year for VF, capped by another great quarter. Were delighted that VFC achieved growth across all businesses – jeanswear, outdoor, intimates, imagewear and sportswear – in the quarter. Were benefiting from a powerful combination of very strong category-driven businesses that are highly profitable and generate healthy cash flow, plus the addition of new lifestyle brands with great growth potential.”
Fourth quarter sales rose 12% to $1.56 billion from $1.39 billion in the prior year’s fourth quarter. Net income increased 19% to $125.3 million from $105.6 million, with earnings per share rising 15% to $1.10 from 96 cents. Results in the 2003 period included a favorable tax settlement, which benefited earnings by 7 cents per share.
Nearly all the earnings gain in the quarter was generated by the Company’s core businesses, with acquisitions made in 2004 contributing a penny to earnings per share, reflecting the seasonal nature of these businesses. The Company saw solid sales growth in its core businesses, while the acquisitions of the Vans®, Napapijri® and Kipling® brands added $100 million to sales in the quarter. Jeanswear sales increased 3%, Outdoor sales including acquisitions expanded 87%, Intimate Apparel sales rose 4%, Imagewear sales grew 16% and Sportswear sales were up 2%.
Full year sales for 2004 increased 16% to $6,054.5 million from $5,207.5 million. Net income rose 19% to $474.7 million from $397.9 million, with earnings per share rising 17% to $4.21 from $3.61. These results include $9.5 million ($.05 per share) of net charges related to the disposition of the Playwear business. Acquisitions made during 2004 benefited sales and earnings per share by $296 million and $.14, respectively. Full year Jeanswear sales were about flat with 2003 levels. Driven by strong increases in its core businesses as well as by acquisitions, Outdoor achieved a 73% sales increase, with increases of 9% and 6% achieved in Intimate Apparel and Imagewear, respectively. Sportswear sales were $605 million in 2004, reflecting a full year of sales compared with a partial year in 2003.
Jeanswear
Total Jeanswear sales, which include the Lee®, Wrangler®, Riders®, Rustler®, H.I.S®, Maverick® and Old Axe® brands, were $669 million, up 3% from $648 million in last year’s fourth quarter.
Domestic jeans sales were approximately even with prior year levels. The Mass Market business was flat in the quarter, while the Western Specialty business was up. VFC continued to see excellent response to the new lines, including Wrangler Jeans Co.(TM), Riders® Coppercollection(TM) and Aura from the Women at Wrangler(TM). Lee® brand sales were down in the quarter, but the decline was due to lower sales of distressed products.
International jeans sales rose 17% in the quarter, with the favorable effects of foreign currency translation accounting for 6% of the improvement. Despite challenging market conditions across Europe, the business there has stabilized and spring/summer bookings are running ahead of last year’s levels. Momentum is being provided by the Lee® X-line and Wrangler® W Rivet lines in department and specialty stores, and by the Hero by Wrangler® Easifit(TM) program in mass market stores. VFC also achieved double-digit sales increases in other international markets including Canada, Mexico, Turkey and Asia.
Outdoor
The Outdoor businesses continued to show excellent momentum in the quarter. Combined sales of the Outdoor businesses, which include The North Face®, Vans®, JanSport®, Eastpak®, Napapijri® and Kipling® brands, jumped 87% in the quarter to $276 million from $148 million.
Sales of The North Face® brand grew by 26% in the U.S. and 48% internationally, with growth across most product categories. Spring bookings for the brand are up 25% in the U.S. and 22% in Europe.
The Vans®, Napapijri® and Kipling® brands all performed above the expectations and contributed $100 million to Outdoor sales in the quarter.
Intimate Apparel
The Intimate Apparel business grew sales by 4% in the quarter, to $185 million from $178 million, with growth across the private brands, mass channel and international businesses.
The private brands business enjoyed double-digit sales growth, as VFC continued to reap the benefits of partnering with one of the major customers on a significant product launch.
The mass channel business also remains healthy, due to new product successes and strong marketing programs across the Vassarette®, Bestform® and Curvation(TM) brands.
The chain and department store business was mixed as this channel remains promotionally driven and some of the customers turned more cautious toward the end of the year.
Imagewear
The Imagewear coalition reported a strong 16% sales increase in the quarter, to $231 million from $199 million, with increases in both the occupational and licensed sports apparel businesses. In addition, Imagewear recently completed the acquisition of the net assets of Holoubek, Inc., an apparel licensee of Harley-Davidson Motor Company, which is expected to contribute approximately $40 million to 2005 sales.
Improving employment trends and the aggressive pursuit of new businesses are contributing to sales gains in the occupational apparel business.
Strength in the licensed sports apparel business was fueled by strong baseball playoff and World Series business, and continued strength in sales of the National Football League and licensed Harley-Davidson products.
Sportswear
The sales performance in Sportswear reflects the focus on increasing sales of first quality products and improving profitability. Sales of the Sportswear businesses, which include the Nautica®, Earl Jean® and John Varvatos® brands rose 2% in the quarter, to $180 million from $177 million.
The Nautica® brand continued to improve its performance at retail, with an increase in sales of full priced products.
Actions taken during the year have resulted in a substantial improvement in profitability, and the Sportswear business is now generating operating margins comparable to other VF businesses.
Sales of the John Varvatos® men’s collection business grew strongly in the quarter.
As VFC experienced throughout the year, overall profitability was strong in the fourth quarter, with improvements in operating margins across most of the businesses, despite continued heavy investments to support the future growth plans. During the quarter, growth plan spending on a variety of brand marketing programs, customer team initiatives and supply chain projects totaled approximately $17 million. For the full year, the growth plan spending totaled $40 million.
Gross margins increased by more than three full percentage points in the fourth quarter, to 40.8% from 37.4%, with the improvement coming from the acquisition of higher margin businesses, lower overall sourcing costs and improved sales of full priced products. Operating margins reached 13.1% in the quarter, up from 11.7% in the prior year period.
During the year VFC invested $655 million in acquisitions, yet total debt at year-end was only slightly above prior year levels, a testament to the ability to generate strong cash flow. Cash flow from operations reached $723 million in 2004, up from $544 million in 2003. VF ended the year with $485 million in cash on its balance sheet. Inventories were up approximately 4% at year-end, with all of the increase due to the addition of $65 million of inventories from the 2004 acquisitions. Inventories in the core businesses actually declined from the fourth quarter of 2003. Debt as a percent of total capital was 28.4% at the end of the year, or 17.0% net of cash.
Outlook
In October VFC announced a new long-term annual sales growth target of 8%. Currently, VFC are planning for 6-8% sales growth in 2005, excluding any additional acquisitions. Specifically, VFC expect low to mid single digit growth in each business except Outdoor, where sales growth could exceed 25%. VFCre also anticipating another record year in earnings per share. EPS are expected to rise at least 8%, excluding the impact from expensing stock options as required under new accounting rules, which VFC will implement at the beginning of the third quarter of 2005.
VFC anticipate another strong year of cash flow from operations of approximately $550 million in 2005. VFC plan to repurchase approximately two million shares of common stock this year to offset the dilution resulting from the exercise of stock options.
In terms of the first quarter, VFC currently expect sales to rise approximately 6-8%, with earnings up approximately 8%.
VF CORPORATION
Consolidated Statements of Income
(In thousands, except per share amounts)
Three Months Ended Year Ended
---------------------------------------------
January 1 January 3 January 1 January 3
2005 2004 2005 2004
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Net Sales $1,559,761 $1,387,259 $6,054,536 $5,207,459
Costs and Operating
Expenses
Cost of goods sold 923,413 868,747 3,644,255 3,262,375
Marketing, administrative
and general expenses 446,776 366,462 1,676,769 1,331,814
Royalty income
and other (14,478) (9,891) (44,276) (31,619)
---------- ---------- ---------- ----------
1,355,711 1,225,318 5,276,748 4,562,570
---------- ---------- ---------- ----------
Operating Income 204,050 161,941 777,788 644,889
Other Income (Expense)
Interest income 2,303 6,844 7,151 11,456
Interest expense (19,067) (17,966) (76,087) (61,368)
Miscellaneous, net 1,312 745 3,268 3,529
---------- ---------- ---------- ----------
(15,452) (10,377) (65,668) (46,383)
---------- ---------- ---------- ----------
Income Before Income
Taxes 188,598 151,564 712,120 598,506
Income Taxes 63,295 45,931 237,418 200,573
---------- ---------- ---------- ----------
Net Income $ 125,303 $ 105,633 $ 474,702 $ 397,933
Earnings Per Common Share
Basic $ 1.13 $ 0.97 $ 4.30 $ 3.67
Diluted 1.10 0.96 4.21 3.61
