While VF Corporation saw strong top-line growth in the Outdoor and Sportswear Coalitions as well as some acquisition-aided growth in Imagewear, the gains did not translate into bottom-line growth for the second quarter due to the divestiture of the Intimates division and a decline in operating income in the Imagewear division.
Total revenues grew 12.3% to $1.52 billion and income from continuing operations increased 18.1% to $105.8 million, or 93 cents per share, compared with $89.6 million, or 80 cents per share, in the prior year's quarter. Earnings per share saw a 4 cents per share gain from the sale of the H.I.S trademarks and related intellectual property in Europe. Reported net income was $81.7 million, or 72 cents per share, compared with $99.0 million, or 88 cents per share in the prior year quarter, reflecting the sale of the Intimates business, which closed in the second quarter.
Outdoor Coalition revenues increased 20.4% during the quarter to $446.7 million, compared to $371.0 million for the same quarter last year. Operating income increased 25.1% in the Outdoor Coalition to $53.0 million. As a percentage of sales, operating margins increased 40 basis points to 11.8%.
Excluding the acquisition of Eagle Creek, which added $10 million to revenues in the quarter, Outdoor Coalition sales would have increased 17.7%. JanSport brand revenues declined in the quarter, due primarily to a shift in the timing of product shipments. TNF, Vans and Reef all posted double-digit revenue gains during the quarter.
International revenues within the coalition rose 48%, with The North Face, Vans, Kipling, Napapijri, Eastpak and Reef brands each growing in excess of 35%.
Vans is growing its core footwear business through wholesale, retail store expansion and e-Commerce. Management said that they are “encouraged” by the performance of Vans apparel and that the category is a key growth driver for the brand.
On the retail expansion front, VFC will be opening 19 new Vans doors this year and will open an additional six North Face doors, bringing that total count to 24. For the full year, the company will grow its owned-retail base to roughly 600 doors.
VFC has been investing most of its retail growth into Jeanswear expansion in the EU and Asia, as well as into Vans stores and TNF stores. Management said that these stores have been able to get up to solid operating margins quickly and are seeing low double-digit comp-sales results.
Imagewear revenues grew 22% in the quarter to $229.9 million. The increase was due entirely to the acquisition of Majestic Athletic. Excluding Majestic, Imagewear revenues were “down slightly” in the quarter. In addition, the Imagewear division was the only piece of VFCs portfolio to show declining operating profits, which slipped 10.5% to $26.1 million.
As a percentage of sales, operating margins in the division declined sharply, dropping 410 basis points to 11.3%. Part of the decline was due to VFs strategic decision to exit the commodity fleece business. Management said that the Majestic integration is proceeding ahead of schedule and they expect organic revenue growth to resume in Q3. Operating margins are expected to show substantial improvement in the second half of the year.
Total revenues in the Sportswear Coalition rose 8.8% to $153.7 million in the quarter while operating income rose 5.3% to $18.8 million. Revenues in the Jeanswear coalition rose 3% to $655.4 million, while operating income increased 14% to $101.4 million.
Overall gross margins were down slightly to 42.9% versus 43.3% partly due to the sale of the H.I.S. brand in the Jeanswear division. Also, Imagewear gross margins were lower than those of its unusually strong prior-year second-quarter. Operating margins were up 30 basis points to 11.1%.
On the balance sheet, VF inventories were up slightly due to a designed ramp-up in reaction to heavier than normal shipments later in the year.
“Last year we could have used a bit more [inventory] frankly,” said Eric Wiseman VFs COO. “So to assure service, more of that is in outdoor as well since it's a bigger piece. So we're very comfortable that there's no issue relative to the inventories. They remain very, very clean.”
During the companys quarterly conference call one analyst asked if the sale of the H.I.S. brand was a sign of more sell-offs from under the VF umbrella in the future and management said that they will continue to look at smaller pieces of the business that aren't performing and if the return on investment required to get them up to VFC performance levels is not worthwhile, the company will continue to have some divestitures.
At the same time, VF continues to look for acquisitions that will complement its portfolio. While no specific brands were mentioned, management said that focus continues to be lifestyle brands, particularly in the outdoor or sportswear area. The company is also looking for global brands that have growth potential. VFC Chairman & CEO Mackey MacDonald said that acquisitions are still their best use of capital and they will continue to look for the right brands.
Looking ahead, for the third quarter, revenues are expected to rise approximately 12%, while earnings per share from continuing operations should increase 10%. Operating margins should be strong and stable in the quarter. VFC expects a fifth consecutive year of record results, with healthy organic growth. VFC is taking a cautious outlook regarding retail and consumer trends for the second half of the year by maintaining guidance for a 12% increase in revenues and EPS.
