VF Corporation said on a constant currency basis, first quarter revenues were down 2%, net income decreased 25%, and earnings per share declined 24% to $1.01. Total revenues in the company's Sportswear coalition, which includes the Nautica brand and the Kipling brand in North America, decreased 14% in the quarter, while Outdoor and Action Sports brands' revenues increased 2% on a constant currency basis. The company stated that due to the uncertain economy, it has chosen to cease providing guidance for future quarters.
Revenues on a reported basis decreased 7% to $1.73 billion, compared with $1.85 billion in the first quarter of 2008. Foreign currency translation accounted for five percentage points of the decline, which was more than the four percentage points assumed in prior guidance. Net income in the current quarter was $100.9 million compared with $149.0 million in the prior years quarter. Earnings per share declined to 91 cents from $1.33, with most of the decline due to the aforementioned higher pension expense and transactional currency impacts, in addition to foreign currency translation that reduced earnings by 10 cents per share.
Global volatility and challenging economic conditions affected the businesses in the first quarter, said the company. VF Corp.'s four largest and most powerful brands, which represent over 60% of VFs total revenues Wrangler, The North Face, Lee and Vans continued to perform well in this environment, with global sales for Wrangler and The North Face up on a constant currency basis during the quarter, and Lee and Vans brand revenues up domestically. These brands continue to gain or hold share in most markets, said the company.
“We are pleased that we met our first quarter targets,” said Eric C. Wiseman, Chairman, President and CEO. “Our balance sheet, liquidity and cash flow remain very strong, inventories are down and were on track with our cost reduction initiatives. However, changes in several key markets have led us to reduce our top and bottom line assumptions for the balance of the year.
First Quarter Business Review
Outdoor and Action Sports
Outdoor and Action Sports brands continued to perform well despite challenging global conditions. On a constant currency basis, total revenues increased 2%, with revenues in the company's Americas businesses rising 4% and international revenues down 1%. In Asia, revenues grew at a strong double-digit rate in the quarter as the company continued to aggressively expand its business there. Global revenues of The North Face brand VFs second largest brand grew 14% in the quarter on a constant currency basis, with healthy growth in the brands direct-to-consumer business. Global revenues of the Vans brand were about flat on a constant currency basis and were up 3% domestically. Total direct-to-consumer revenues for Outdoor and Action Sports coalition rose 16%, as the company continued to open new stores and expand our e-commerce business. On a reported basis, total revenues of Outdoor and Action Sports coalition declined 5%.
Operating margins remained strong in the quarter, although down slightly due to the transactional impacts of foreign currency exchange rate fluctuations.
Domestic jeanswear revenues rose 4% in the first quarter, with a 3% increase in Wrangler brand revenues and a 7% increase in Lee brand revenues and both brands continuing to gain share in their respective channels of distribution.
International jeanswear revenues dropped 8% on a constant currency basis, as sharper than anticipated economic declines impacted Eastern European and Scandinavian businesses, which account for nearly 40% of our total annual jeans business in Europe. Asia revenues rose 15% in the quarter.
On a global, constant currency basis, Wrangler brand revenues grew 1% while Lee brand revenues declined 4%. Total revenues of the company's Jeanswear coalition on a constant currency basis were down 1%, while on a reported basis total revenues were down 6%.
Operating income declined 25% on a constant currency basis, due to higher distressed inventory levels, lower absorption of fixed overhead expenses and transactional impacts of foreign currency exchange rate fluctuations primarily in the European jeans business.
Total revenues of the company's Sportswear coalition, which includes the Nautica brand and the Kipling brand in North America, decreased 14% in the quarter, reflecting the continuation of weak department and outlet store trends that impacted both brands, as well as the exit of the womens sportswear wholesale business in mid-2008.
Operating income more than doubled during the quarter; margins in the quarter reflect the seasonality of the business, and VF Corp. said it remains on track to deliver significantly improved operating income and margins for the full year.
Revenues of VF Corp.'s Contemporary Brands coalition, which consists of the 7 For All Mankind, lucy, John Varvatos, Ella Moss and Splendid brands, decreased 4% on a constant currency basis and were down 6% as reported. Lower 7 For All Mankind brand revenues reflect substantially weaker than expected conditions in upper tier and specialty store channels. Declines in the 7 For All Mankind and lucy brand revenues were partially offset by double-digit growth in the John Varvatos brand and by the recent acquisition of the Ella Moss and Splendid brands, which contributed $6 million to revenues in the quarter.
Operating income and margins increased slightly on a constant currency basis in the quarter.
Total revenues of the Imagewear coalition were 8% lower in the quarter, driven primarily by declines in our industrial and protective apparel businesses; these businesses have been impacted by a higher than anticipated rise in unemployment levels to over 12% in the manufacturing and the petrochemical sectors, which led to reduced uniform sales.
Operating income dropped 31%, due primarily to declines in the industrial and protective apparel businesses where profitability levels are typically higher than the coalition average, as well as the impact of lower volume on expense absorption.
International revenues declined 5% on a constant currency basis due to the aforementioned challenges in our European jeans business. Revenues of our Asian businesses continued to grow strongly, up 24% in the quarter, with solid growth in Lee, The North Face, Vans, Napapijri and Kipling brands.
VF Corp.'s direct-to-consumer business grew 4% in the quarter, driven by strong increases in Vans and The North Face brands direct-to-consumer sales. Nineteen stores were opened, including new stores for our Vans, The North Face and 7 For All Mankind brands, bringing the total number of owned retail stores to 705 at the end of the quarter.
Maintaining a strong balance sheet and aggressively managing inventories continue to be high priorities, stated the company. Cash and equivalents of $276 million were above March 2008 levels despite acquisition spending, and should exceed $600 million at year-end, barring additional acquisitions this year. Liquidity remains strong, with $1.1 billion available in lines of credit through a diversified group of domestic and international lenders and no long-term debt payments due until October 2010. Inventories declined 4%, and by year-end are expected to be more than 10% below year-end 2008 levels. The company said it continues to expect another year of strong cash flow from operations in 2009. Based on its continued efforts to aggressively manage inventories in this environment, VFC is raising its cash flow projections to $750 million from its previous guidance of $700 million.
While VF Corp. said it achieved its guidance in the first quarter, changing market conditions in several key areas have led the company to reassess its revenue and earnings assumptions for the remainder of the year. Due to increased volatility in global market conditions, VF Corp. stated it has decided to discontinue its practice of providing specific quarterly guidance.
Regarding its annual guidance, revenues are now expected to decline by 5 to 7%, with more than half, or 4%, of the decline due to foreign currency translation. This revision is due to three primary factors:
– The severe contraction in the economies of Eastern Europe and Scandinavia that is impacting the international jeanswear business in particular, as these geographies combined account for nearly 40% of the company's total annual European jeans revenues.
– A rapid rise in unemployment levels in the manufacturing and petrochemical sectors that are resulting in lower than anticipated sales of uniforms in our Imagewear coalition.
– Weakening conditions across most upper tier department and specialty stores that are affecting the 7 For All Mankind premium denim business in particular.
The company is also establishing a new range for 2009 earnings per share of $4.70 to $5.00 versus $5.42 in 2008. This includes the previously disclosed impacts of higher pension expense and foreign currency translation, which combined should lower earnings by 80 cents per share. In addition, transactional foreign currency impacts are negatively affecting earnings this year. Absent these impacts, earnings would be well above prior year levels.
Most of the reduction in 2009 earnings guidance relates to the previously mentioned challenges faced by our European jeans business. In addition, given the strong operating margins of the Imagewear and Contemporary Brands businesses, modest reductions in the company's' revenue expectations for these coalitions have a disproportionate impact on earnings.
Actions taken in the fourth quarter of 2008 to reduce costs by $100 million beginning this year are on track, and VFC stated it will continue to be vigilant about controlling costs across all businesses.
“Naturally, as we consider the challenges to our earnings this year, we considered taking further expense reductions in areas such as advertising and product development to help protect our profitability. History has shown that investing in strong brands and new products during recessionary times significantly improves a companys prospects for growth when conditions improve, which is why we will continue investing behind our strongest brands,” said Wiseman.
As indicated in prior guidance, first half comparisons will be significantly more difficult than those of the second half, with the second quarter marking the low point of the year in our revenue and earnings comparisons, given seasonal factors and the cadence of profits from our lifestyle and retail businesses.
“We are disappointed that we will not meet our original projections for the year,” continued Wiseman. “However, given the strong performance of our largest brands, we remain confident about our long-term potential and believe we have the right plans, strategies and skills in place to realize that potential. Considering our strong profitability, healthy cash flow and solid balance sheet, we believe we have a once-in-a-generation opportunity to create tremendous value for our shareholders as we focus and execute against a well-defined and proven set of growth strategies.”
|Consolidated Statements of Income|
|(In thousands, except per share amounts)|
|Three Months Ended March|
|Costs and Operating Expenses|
|Cost of goods sold||996,640||1,014,130|
|Marketing, administrative and general expenses||567,386||588,086|
|Other Income (Expense)|
|Income Before Income Taxes||141,447||223,324|