VF Corporation raised its guidance for the year after reporting earnings in its third quarter ended December 29 came in well above Wall Street’s consensus estimates.

Third-quarter highlights:

  • Revenue from continuing operations increased 8 percent (up 10 percent in constant dollars) to $3.9 billion; excluding acquisitions net of divestitures, revenue increased 7 percent (up 9 percent in constant dollars);
  • Active segment revenue increased 16 percent (up 18 percent in constant dollars) including a 25 percent (27 percent in constant dollars) increase in Vans® brand revenue; Outdoor segment revenue increased 11 percent (up 12 percent in constant dollars) including a 14 percent (16 percent in constant dollars) increase in The North Face® brand revenue and a 4-percentage point revenue growth contribution from acquisitions;
  • International revenue increased 5 percent (up 9 percent in constant dollars) including a 1-percentage point revenue growth contribution from acquisitions net of divestitures; China revenue increased 18 percent (up 23 percent in constant dollars);
    Direct-to-consumer revenue increased 10 percent (up 12 percent in constant dollars) including a 1-percentage point revenue growth contribution from acquisitions net of divestitures; Digital revenue increased 24 percent (up 26 percent in constant dollars);
  • Gross margin from continuing operations increased 40 basis points to 51.9 percent; on an adjusted basis, gross margin increased 60 basis points to 52.2 percent;
  • Earnings per share from continuing operations was $1.16. Adjusted earnings per share from continuing operations increased 30 percent (up 31 percent in constant dollars) to $1.31, including a 1-percentage point earnings growth contribution from acquisitions net of divestitures;
  • Full year fiscal 2019 revenue is now expected to increase approximately 12 percent (up 13 percent in constant dollars) to at least $13.8 billion; and,
  • Full year fiscal 2019 adjusted earnings per share is now expected to be $3.73, including an additional $45 million, or $0.09 per share, of incremental investment, reflecting an increase of 19 percent (up 20 percent in constant dollars).

Revenues of $3.94 billion exceeded analysts’ average estimate of $3.87 billion. Excluding non-recurring items, adjusted earnings of $1.31 were well above the consensus estimate of $1.10.

“VF’s third quarter results were fueled by strong growth in our largest brands and balanced growth across the core dimensions of our portfolio,” said Steve Rendle, chairman, president and chief executive officer. “Based on the strength of our third quarter performance and the growth trajectory we see for the remainder of fiscal 2019, we are again increasing our full year outlook, including an additional $45 million of growth-focused investments aimed at accelerating growth and value creation into fiscal year 2020. We remain sharply focused on executing our integrated growth strategy and transforming VF into a purpose-led, performance-driven enterprise committed to delivering superior returns to shareholders.”

Constant Currency – Excluding the Impact of Foreign Currency

This release refers to “reported” amounts in accordance with U.S. generally accepted accounting principles (“GAAP”), which include translation impacts from foreign currency exchange rates. This release also refers to “constant dollar” amounts, which exclude the impact of translating foreign currencies into U.S. dollars.

Discontinued Operations – Nautica Brand Business and Licensing Business

On April 30, 2018, the company completed the sale of its Nautica brand business. On April 28, 2017, the company completed the sale of its Licensed Sports Group (“LSG”) business, including the Majestic® brand. In conjunction with the LSG divestiture, VF executed its plan to entirely exit the licensing business and completed the sale of the assets of the JanSport® brand collegiate business in the fourth quarter of 2017. Accordingly, the company has included the operating results of these businesses in discontinued operations through their respective dates of sale.

Adjusted Amounts – Excluding Williamson-Dickie, Icebreaker®, Altra®, Reef®, and Jeans Spin-Off Transaction and Deal Related Expenses, Costs Related to Office Relocations and the Provisional Impact of U.S. Tax Legislation

This release refers to adjusted amounts that exclude transaction and deal related expenses associated with the acquisitions and integration of Williamson-Dickie, Icebreaker® and Altra®, and expenses and losses on sale related to the divestitures of the Reef® brand and the Van Moer business, which was acquired in connection with the Williamson-Dickie acquisition. The release also refers to transaction expenses associated with the planned spin-off of the Jeans business. Total transaction and deal related expenses, including the losses on sale, were approximately $63 million in the third quarter of fiscal 2019 and $135 million in the first nine months of fiscal 2019.

This release also refers to adjusted amounts that exclude costs primarily associated with the previously announced relocations of VF’s global headquarters and certain brands to Denver, Colorado. Total costs were approximately $6 million in the third quarter of fiscal 2019 and $17 million in the first nine months of fiscal 2019.

Adjusted amounts in this release also exclude the provisional amounts recorded due to recent U.S. tax legislation. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. Measurement period adjustments related to the provisional net charge resulted in a net expense of approximately $10 million in the third quarter of fiscal 2019 and $23 million in the first nine months of fiscal 2019.

Combined, the above net charges negatively impacted earnings per share by $0.16 during the third quarter of fiscal 2019 and $0.36 during the first nine months of fiscal 2019. All adjusted amounts referenced herein exclude the effects of these amounts.

Third Quarter Fiscal 2019 Income Statement Review

  • Revenue increased 8 percent (up 10 percent in constant dollars) to $3.9 billion. Excluding acquisitions net of divestitures, revenue increased 7 percent (up 9 percent in constant dollars), driven by VF’s largest brands, international and direct-to-consumer platforms, as well as strength from the Active, Outdoor and Work segments.
  • Gross margin increased 40 basis points to 51.9 percent, driven by a mix-shift toward higher margin businesses. On an adjusted basis, gross margin increased 60 basis points to 52.2 percent.
  • Operating income on a reported basis was $592 million. On an adjusted basis, operating income increased 30 percent to $656 million, including a $7 million contribution from acquisitions net of divestitures. Operating margin on a reported basis increased 170 basis points to 15.0 percent. Adjusted operating margin increased 270 basis points to 16.6 percent.
  • Adjusted operating margin, excluding acquisitions net of divestitures, increased 280 basis points to 16.8 percent.
  • Earnings per share was $1.16 on a reported basis. On an adjusted basis, earnings per share increased 30 percent (up 31 percent in constant dollars) to $1.31, including a 1-percentage point growth contribution from acquisitions net of divestitures.

Balance Sheet Highlights

Inventories were up 9 percent compared with the same period last year. Excluding the impact of acquisitions net of divestitures, inventories increased 7 percent. The company also returned approximately $700 million to shareholders through dividends and share repurchases. The company has $3.8 billion remaining under its current share repurchase authorization.

Adjusted Full Year Fiscal 2019 Outlook

The following outlook for fiscal year 2019 is on an adjusted basis and has been updated to include the following:

  • Revenue is now expected to be at least $13.8 billion, reflecting an increase of approximately 12 percent (up 13 percent in constant dollars). This compares to the previous expectation of at least $13.7 billion, which reflected an 11 percent increase.
  • By segment, revenue for Outdoor is now expected to increase 8 percent versus the previous expectation of a 7 percent to 8 percent increase; revenue for Active is now expected to increase 16 percent versus the previous expectation of a 14 percent to 15 percent increase; revenue for Work is now expected to increase 39 percent versus the previous expectation of a more than 35 percent increase; and, revenue for Jeans is now expected to decline 3 percent versus the previous expectation of a 1 percent to 2 percent decline.
  • International revenue is now expected to increase 10 percent to 11 percent (up about 13 percent in constant dollars) versus the previous expectation of a 12 percent to 13 percent increase.
  • Direct-to-consumer revenue is now expected to increase 13 percent (up 14 percent in constant dollars) versus the previous expectation of a 12 percent to 14 percent increase. Digital revenue is still expected to increase more than 30 percent.
  • Adjusted gross margin is expected to be at least 51 percent.
  • Adjusted operating margin is expected to increase 90 basis points to 13.6 percent.
  • Adjusted earnings per share is now expected to be $3.73, including an additional $45 million, or $0.09 per share, of incremental investment, reflecting an increase of 19 percent (up 20 percent in constant dollars). This compares to the previous expectation of $3.65.Cash flow from operations is still expected to approximate $1.8 billion.
  • Other full year assumptions include an effective tax rate of about 16 percent and capital expenditures of approximately $275 million.

Image courtesy Vans