VF Corp. reported third-quarter earnings topped Wall Street expectations, but it lowered guidance for the full year in part due to inventory reductions by both The North Face and Timberland brands related to fourth-quarter wholesale orders.

“We continue to operate in an uneven, global economic environment including especially sluggish retail conditions in the Americas, our largest market,” said Eric Wiseman, VF chairman and chief executive officer, in a statement. “With a strong balance sheet, powerful brands and a growing global presence, we have great confidence in our ability to maintain near-term profitability, yet we’re not satisfied with our third quarter results. We remain sharply focused on operational improvements and taking advantage of this environment to accelerate strategies to create sustainable, long-term growth opportunities for our brands.”

Discontinued Operations – Contemporary Brands
On August 26, 2016, the company completed the sale of its Contemporary Brands businesses, which included the 7 For All Mankind, Splendid and Ella Moss brands, to Delta Galil Industries Ltd. Accordingly, the company removed the assets and liabilities of the Contemporary Brands businesses as of that date and included the results of those businesses in discontinued operations for all periods presented.

The company’s net loss from discontinued operations was about $5 million in the third quarter of 2016, which includes both the final adjustment to the loss on the sale of the Contemporary Brands businesses and the operating results for the businesses during the quarter, net of tax.

Income Statement Review

  • Revenue was down 1 percent to $3.5 billion.
  • Gross margin was up 70 basis points to 48.4 percent on a reported basis, as benefits from pricing, mix and lower product costs were partially offset by changes in foreign currency and inventory management efforts. Changes in foreign currency negatively impacted reported gross margin by 60 basis points in the quarter.
  • Operating income on a reported basis was down 1 percent to $635 million compared with the same period of 2015.
  • Operating margin on a reported basis increased 10 basis points to 18.2 percent. Changes in foreign currency negatively impacted reported operating margin by 40 basis points in the quarter.
  • Earnings per share (EPS) was up 13 percent to $1.20 compared with $1.06 during the same period last year. Excluding the impact of foreign currency, third-quarter EPS was up 16 percent. Excluding discontinued operations, earnings were $1.19, which compares to Wall Street’s consensus estimate of $1.15 a share. The quarter benefitted from a lower tax rate due to a higher mix of international sales and about 6 cents per share due to net tax discrete items relative to 2015.

Coalition Review
Third-quarter revenue for Outdoor & Action Sports was up 2 percent to $2.3 billion.

  • Revenue for The North Face brand was down 1 percent (flat currency neutral) in the quarter, including a mid-single-digit rate decline in the Americas, a more than 20 percent increase in Europe and a mid-single-digit percentage rate decline in Asia-Pacific (down low single digit currency neutral).
  • Vans brand revenue was up 7 percent (up 8 percent currency neutral), driven by a high-single-digit percentage rate increase in the Americas business (up 10 percent currency neutral), a low-single-digit rate decline in Europe and more than 20 percent growth in Asia-Pacific.
  • Timberland brand revenue was in line with last year’s third quarter (down 1 percent currency neutral), including a mid-single-digit percentage rate decrease in the Americas region, a mid-single-digit percentage rate increase in Europe (up low single digit currency neutral) and a low single-digit rate decline in Asia-Pacific.
  • Third-quarter operating income for Outdoor & Action Sports was up 1 percent to $490 million (up 3 percent currency neutral). Operating margin was 21.0 percent, compared to 21.2 percent in the same period last year.

Jeanswear third-quarter revenue declined 6 percent (down 4 percent currency neutral) to $701 million due to unseasonably warm weather in September, softer consumer demand and shifts in the delivery of orders.

Wrangler brand revenue was down 6 percent (down 4 percent currency neutral) with a high-single-digit percentage rate decline in the Americas business (down mid single digit currency neutral), a mid-single-digit percentage rate increase in Europe and a high-single-digit increase in the Asia-Pacific region (up low double digits currency neutral). Revenue for the Lee brand was down 6 percent (down 4 percent currency neutral), including a high-single-digit percentage rate decline in the Americas region, a mid-single-digit percentage rate increase in Europe and a high-single-digit percentage rate decline in the Asia-Pacific region (down low single digit currency neutral).

Operating income for Jeanswear in the third quarter declined 10 percent to $142 million and operating margin was 20.3 percent, compared to 21.2 percent in the same period last year.

Imagewear third-quarter revenue declined 3 percent to $282 million (down 4 percent currency neutral), with a low-single-digit percentage rate increase in the Licensed Sports Group business and a high-single-digit decline in the workwear business, which continues to be impacted by challenges in the oil and gas exploration sector and employment trends in industrial manufacturing. Third-quarter operating income for Imagewear was up 11 percent (up 8 percent currency neutral) to $47 million and operating margin increased 230 basis points to 16.6 percent.

Sportswear third-quarter revenue declined 13 percent to $141 million, including a 15-percent decrease in Nautica brand revenue and a 6-percent decline in the Kipling brand’s North American business compared with the same period last year. These results reflect ongoing challenges in the U.S. department store and outlet channels, as well as general category demand. Additionally, the strategic decision to license the women’s sleepwear and men’s underwear businesses negatively impacted Nautica brand revenue by about 8 percentage points in the quarter. Operating income for Sportswear decreased 35 percent to $15 million with operating margin at 10.7 percent, compared to 14.3 percent in the same period last year.

International Review
International revenue in the third quarter was up 5 percent (up 6 percent currency neutral). Revenue in Europe was up 7 percent (up 6 percent currency neutral) and up 2 percent (up 4 percent currency neutral) in the Asia-Pacific region. Revenue in the Americas (non-U.S.) region was up 3 percent (up 9 percent currency neutral). The international business represented 41 percent of total VF third-quarter sales, compared with 38 percent in last year’s same period.

Direct-To-Consumer Review
Direct-to-consumer revenue was up 6 percent in the third quarter, driven by a low-double-digit percentage rate increase in the Outdoor & Action Sports business, offset by a low-teen decline in Sportswear. The company’s e-commerce business continued its strong momentum with 18 percent revenue growth. There were 1,475 VF-owned retail stores at the end of the quarter compared with 1,363 for last year’s same period. Direct-to-consumer revenue reached 23 percent of total third-quarter revenue compared with 21 percent in last year’s same period.

Balance Sheet Highlights
On September 20, 2016, the company issued €850 million of senior notes to be used for working capital and general corporate purposes, including repayment of outstanding indebtedness under its existing commercial paper program. As expected, inventories were up 1 percent compared with the same period of 2015.

Share Repurchases
During the third quarter, the company purchased 2.7 million shares of its own stock for $166 million under a program authorized by its Board of Directors. In 2016, the company has purchased nearly 16 million shares for $1 billion. There are approximately 15 million remaining shares authorized for purchase.

2016 Outlook
Following is the adjusted outlook for 2016:

  • Revenue, on a currency neutral basis, is expected to increase 2 percent to about $12.2 billion compared to the previous estimate of 3 to 4 percent growth. Revenue for the Outdoor & Action Sports coalition is now expected to increase at a low-single-digit percentage rate compared with previous expectations of mid-single-digit growth, due primarily to proactive inventory reductions by both The North Face and Timberland brands related to fourth-quarter wholesale orders. Revenue for the Jeanswear coalition is now expected to increase at a low-single-digit percentage rate compared with previous expectations of mid-single-digit growth. Direct-to-Consumer revenue is now expected to increase at a high-single-digit percentage rate compared with previous expectations of low-double-digit growth.
  • Gross margin is expected to reach 48.6 percent, which includes about 70 basis points of headwind from changes in foreign currency.
  • Operating margin is now expected to reach 14.3 percent, including about 60 basis points of negative impact from changes in foreign currency. This is 20 basis points lower than the previous 14.5 percent estimate.
  • Reported earnings per share is expected to increase 3 percent to $3.13 (up 7 percent currency neutral), compared with previous expectations of a 5 percent increase to $3.20 (up 11 percent currency neutral). This is compared to EPS from continuing operations of $3.04 in 2015.
  • Other full-year assumptions include an approximate 20 percent effective tax rate. The expectation of $1.3 billion of cash flow from operations remains unchanged.