VF Corp. saw an 11.8% gain in third quarter earnings on a 6% revenue gain. However, due to a “significant deepening of the global financial crisis and worsening economic conditions taking a heavy toll on consumer confidence and spending in many markets around the world,” the company cut its fourth quarter guidance. It now anticipates a 3% to 4% rise in revenues and a 1% to 5% increase in earnings per share. Previously, VF’s guidance was for revenue and earnings per share increases of 8% and 20%, respectively.
VF reported third quarter revenues rose over 6% to a record $2.21 billion $2.07 billion a year ago. Due primarily to the continued deterioration in market conditions, as well as the impact of the strengthening dollar on foreign currency translations, this increase was below its prior expectation for 9% growth in revenues. Income from continuing operations advanced 11.8% to $233.9 million, or $2.10 a share, from $209.3 million, or $1.86, in the prior years quarter.
Current period results included a net benefit of 7 cents per share from unusual items. Net favorable income tax adjustments benefited earnings by 14 cents per share, while charges for cost reduction initiatives and for costs for a duty and tax issue related to a recent acquisition negatively impacted earnings by 7 cents per share.
For the first nine months of 2008, revenues were up 9% to a record $5.7 billion from $5.26 billion. Income from continuing operations increased 8% to $486.9 million, compared with $449.2 million in the prior year period. Earnings per share from continuing operations were up 10% to $4.37.
“The achievement of another quarter of record revenues and earnings is a tremendous accomplishment by our brands and businesses given the challenging market conditions,” said Eric Wiseman, chairman and CEO.
He continued, “However, global market conditions have continued to deteriorate beyond what we could have anticipated, with a marked change particularly during the last several weeks. While our brand portfolio is healthy, general economic conditions are not, necessitating that we take a much more conservative stance toward our fourth quarter guidance. Despite this additional caution, we continue to look forward to record revenues and earnings in the fourth quarter, and to delivering our sixth consecutive year of record performance in 2008.”
Third Quarter Coalition Performance
Outdoor
Wiseman said its Outdoor coalition “continued its positive momentum, with revenues up 12% in the quarter and strong growth in both our domestic and international businesses. On a global basis, revenues of The North Face, Vans, Kipling, Reef, Eastpak and Napapijri brands each grew at double-digit rates. Our two largest Outdoor brands, The North Face and Vans, grew revenues 15% and 11% in the quarter, respectively. We opened a total of 14 stores during the quarter, with new stores added for our Vans, The North Face, Napapijri and Kipling brands.”
Outdoor operating income rose 17% while operating margins expanded by nearly a full percentage point to 20.8%.
Wiseman said it “continues to anticipate a strong, mid-teen revenue gain in the fourth quarter and healthy increases in operating income and margins for our Outdoor coalition.”
Jeanswear
Total Jeanswear revenues declined 2% in the current quarter, with a slight gain in international business offset by lower revenues in its domestic jeans business.
“New programs in our Wrangler, Lee and Riders brands in the U.S. in the fourth quarter have shown positive early results and were continuing our focus on driving product innovation across all brands and channels of distribution; however, given current economic conditions, we expect that our global Jeanswear revenues will show a low single digit percentage decline in the fourth quarter,” he continued. “We also expect a decline in operating margins due to investments in advertising, a fashion-forward new product mix and heightened promotional activity designed to support retail sales.”
Sportswear
Revenues in its Sportswear coalition dipped 5% in the quarter. Nautica brand revenues declined in the quarter reflecting in part the exit of its womens wholesale sportswear business, in addition to challenging overall conditions in department stores. The momentum in its Kipling U.S. and John Varvatos businesses continued in the quarter, with both achieving double-digit revenue gains.
Sportswear operating margins improved in the quarter, reaching double-digit levels despite the inclusion of $1.5 million in expenses related to recent cost reduction actions.
Looking forward, Sportswear revenues should be flat to up slightly in the fourth quarter, with continued improvement in operating margins over both prior year levels and those achieved in the third quarter.
Contemporary Brands
Revenues of its Contemporary Brands coalition, which consists of the 7 For All Mankind and lucy brands acquired in August 2007, exceeded $100 million in the quarter. On a comparable basis reflecting a full quarter, revenues rose 12%, driven by continued growth in both the 7 For All Mankind and lucy brands.
Operating income in the quarter included a $6 million charge related to the aforementioned tax and duty matters, which arose prior to its acquisition of the 7 For All Mankind brand.
Wiseman said, “For the fourth quarter, we expect mid-single digit revenue growth, with comparisons impacted by the exit of a low margin, customer-specific program that had been included in our Seven For All Mankind business. Operating income and margins are both expected to be above prior year levels. Full year revenues should approximate $400 million in 2008.”
Imagewear
Imagewear revenues declined 3%, with low single digit declines in both its Image and Activewear businesses. Imagewear operating margins rose in the quarter with operating income essentially flat with the 2007 period.
Wiseman said, “Our Imagewear business is also not immune to current economic pressures; accordingly, fourth quarter revenues and operating income are both expected to post slight declines from prior year levels.”
International/Direct-to-Consumer
Regarding overall operations, Wiseman said, “Our focus on controlling costs and inventories clearly benefited our results this quarter. Gross margins rose 50 basis points, reflecting healthy growth in many of our lifestyle brands and continued expansion in our retail and international businesses. Operating margins were 15.9% and were relatively flat with those in the prior years quarter; however, margins in the current period included a 50 basis point impact from the aforementioned cost reduction initiatives and charge for taxes and duties.”
“Our financial liquidity remains solid. Cash and equivalents were $226 million at the end of the quarter and we expect solid cash flow from operations of $650 to $700 million in 2008. Considering the strong seasonal cash flow of our fourth quarter, we anticipate that all of our outstanding commercial paper, which represents most of our short-term borrowing obligations, will be repaid by year-end. In addition, we have $1.3 billion available in domestic and international lines of credit through a strong, diversified group of domestic and international lenders. Our balance sheet is in excellent condition and we have no long-term debt repayments due until October 2010. Our debt to total capital ratio was 28.8% at the end of September and should approximate 23% by year-end. Reflecting our focus on tight inventory control, inventories were up only 4% from the prior years third quarter.”
Outlook
Wiseman said, “We continue to anticipate record fourth quarter revenues and earnings per share. However, the month of September – particularly the second half – marked a turning point in market conditions, with a significant deepening of the global financial crisis and worsening economic conditions taking a heavy toll on consumer confidence and spending in many markets around the world. Accordingly, we have reduced our expectations for the quarter and now anticipate a 3 to 4% rise in revenues and a 1% to 5% increase in earnings per share. Our previous guidance was for revenue and earnings per share increases of 8% and 20%, respectively.”
“While admittedly difficult, todays environment is creating opportunities for strong companies with strong brands,” said Wiseman. “In fact, were planning higher spending in both advertising and product development in the fourth quarter, as we believe this is the right time to invest behind our brands to support their continued long-term growth.”
Wiseman concluded, “We are pleased by the fact that we continue to expect record revenues and earnings this year, considering all the challenges of 2008 and our more conservative outlook for the fourth quarter. Full year revenues are now expected to rise 7% to 8% while earnings per share should rise approximately 8% to 9%. Clearly, there remains a great deal of uncertainty about where markets are headed, in both the short and long-term,” said Wiseman. “We will continue to plan our business cautiously, manage both costs and inventories aggressively, and focus our efforts on superior short-term execution while we invest and build for the future.”
Dividend Increased
The Board of Directors declared a quarterly cash dividend of 59 cents per share, an increase of 1 cent. The dividend is payable on Dec. 19, 2008 to shareholders of record as of the close of business on Dec. 9, 2008. This will mark the 36th consecutive year of higher dividend payments to shareholders.
