VF Corporation saw a tough trading environment in the first quarter of 2009, as revenues declined 2% on a constant currency basis and fell 7% on a GAAP basis to $1.73 billion compared to $1.85 billion in Q1 last year. Most of the revenue decline originated in the companys Sportswear, Contemporary Brands and Imagewear coalitions. VFs Outdoor and Action Coalition, which includes The North Face, Jansport, Vans and Reef, among other brands, reported a revenue increase on a currency-neutral basis.
International revenues declined 5% on a constant currency basis. Revenue in VFs Asian business was up 24% in the quarter, with solid growth in Lee, The North Face, Vans, Napapijri and Kipling brands.
Gross margins were down 290 basis points to 42.2% of net sales due to negative impacts from currency movements and heavier discounts from the challenging retail environment. SG&A as a percent of revenue was up a full point to 32.9% of net sales due to higher pension expense and owned-retail store growth. These factors combined resulted in operating margins of 9.4% of sales, 380 basis points below last years first quarter when operating margins were 13.2%.
VFC opened 19 new retail stores during the quarter, including new stores for Vans, The North Face and 7 For All Mankind, bringing the total number of owned-retail stores to 705 at the end of the quarter.
The company is still placing a priority on maintaining a stronger balance sheet. Cash and equivalents of $276 million were above March 2008 levels despite acquisition spending, and should exceed $600 million at year-end unless there are additional acquisitions this year. VFC also has $1.1 billion available in lines of credit and no long-term debt payments due until October 2010.
Management stated that they have seen a few areas where conditions have “significantly and unexpectedly deteriorated” and as a result VFC has revised revenue and earnings guidance to “more appropriately reflect the scale and scope of this recession.” Revenues are now expected to decline by 5% to 7%, with more than half, or 4%, of the decline due to foreign currency translation. Earnings per share for 2009 are now expected to be in the range of $4.70 to $5.00 versus $5.42 in 2008.
Management said that the first half of 2009 will be significantly more difficult than the second half, with the second quarter likely to mark the low point of the year.
VF Outdoor and Action Sports Coalition Gets its Energy from Direct-to-Consumer
The Outdoor and Action Sports Coalition was the most successful group of brands in VFs portfolio during the first quarter with a currency-neutral sales increase of 2% for the period. As reported, sales declined 4.8% to $605.9 million compared to $636.2 million last year. Total direct-to-consumer revenues for the Outdoor and Action Sports coalition rose 16% on strength from TNF and Vans U.S. retail sales.
Regionally, the Americas business was up 4% and the international business was down 1% for the Outdoor and Action Coalition.
In Asia, Coalition revenues grew at “a strong double-digit rate” in the quarter.
The North Face global revenues increased 14% on a currency adjusted basis with an increase of 35% in direct-to-consumer retail sales. The international opportunity for TNF was highlighted heavily during a conference call with analysts. TNF opened two new owned-retail stores in Glasgow and Bristol during the quarter, and the next TNF store will open in Copenhagen in the fourth quarter. TNF continued to open new partnership stores and shop-in-shops with over 70 new international shop-in-shops planned for The North Face this year, bringing the total in Europe to over 220. Management said that The North Face brand currently has a double-digit increase in fall bookings internationally.
Vans, the second biggest brand in the coalition, had global revenues that were about flat on a currency adjusted basis and were up 3% domestically. Direct-to-consumer sales were up 16% for the quarter.
VFC plans to open two new Vans stores internationally this year – both in France. They expect the Vans brand to grow at a mid single-digit rate for the year.
The other businesses in the Outdoor and Action Coalition were said to be “doing okay” in this environment with two notable exceptions. Management said that Reefs business is “struggling” currently and Eagle Creek, which has a big travel luggage component is seeing revenues slow down because travel spending is down.
Coalition operating income declined 12.8% to $92.0 million in the first quarter compared to $105.5 million in Q1 last year due primarily to transactional currency impacts, but management said that overall margins “remain very strong.” Operating margins were 15.2% of sales, down 140 basis points from 16.6% last year. Management commented that this current economic environment is particularly difficult for smaller specialty businesses and have seen a number of “smaller accounts” close their doors recently.
Total revenues in the Imagewear coalition, which includes the Majestic Athletic business, were down 8.3% to 226.7 million in the first quarter compared to $247.0 million for the same quarter last year. The declines were driven primarily by a slow industrial and protective apparel businesses. Operating income dropped 31.2% to $22.9 million compared to $33.3 million last year, also due to declines in the industrial and protective apparel businesses. The slow sales brought operating margins down 340 basis points to 10.1% of sales compared to 13.5% last year.
