VF Corp. Q3 Revenues Decline, but TNF and Vans Grow

VF Corp. reported third quarter revenues declined 5% to $2.09 billion from $2.20 billion, with foreign currency translation accounting for two percentage points of the decline. Net income declined to $217.9 million, or $1.94 a share, from $233.9 million, or $2.10, in the prior year’s quarter.

The current year included a 17 cents per share combined impact from higher pension expense and foreign currency translation of 11 cents and 6 cents per share, respectively. Also impacting the comparison was a 7 cents per share benefit from unusual items in last year’s third quarter.

For the first nine months of 2009, revenues were $5.30 billion, down 7% from $5.73 billion in the prior year period. Foreign currency translation accounted for three percentage points of the decline. Net income and earnings per share both declined 19% to $394.4 million and $3.54 respectively. A majority of the earnings per share decline was due to higher pension expense and foreign currency translation impacts of 36 cents and 19 cents per share, respectively, which together accounted for 55 cents of the 83 cents per share reduction.

“We achieved an important improvement in our third quarter performance relative to the first half of the year as conditions have stabilized, giving us the confidence to move our earnings guidance toward the higher end of our prior range,” said Eric C. Wiseman, chairman, president and chief executive officer. “Our relentless drive to control costs, reduce inventories and focus investments on our highest return opportunities has served us very well during these difficult and volatile times. We will continue this disciplined approach through the balance of this year and into 2010 to maximize opportunities for both top and bottom line growth.”

He continued, “Our four largest brands – Wrangler®, Lee®, The North Face® and Vans®, representing approximately 60% of our total revenues – are strong and healthy, and continue to gain share in most markets. And, we were pleased that our fifth largest brand, Nautica®, grew revenues and achieved a significant improvement in profitability in the quarter with a return to double-digit margins.”

He added, “We are also pleased to announce a 2% increase in our quarterly dividend, to $.60 per share, which will mark 2009 as the 37th consecutive year of higher dividend payments to shareholders. Strong cash generation has enabled us to continue to build on our long-established track record of increasing our dividend and returning superior value to our shareholders.”

Third Quarter Business Review

Outdoor and Action Sports

Third quarter revenues in the Outdoor and Action Sports coalition were about even with the prior year, with operating income and margins each reaching record levels in the period. On a constant currency basis, revenues rose 3%. Global revenues of The North Face and Vans brands grew 10% and 4%, respectively, in the quarter on a constant currency basis. Total coalition revenues in the Americas businesses rose 1%, while international revenues were up 4% in constant dollars, led by exceptionally strong growth in Asia. Total direct-to-consumer revenues for the Outdoor and Action Sports coalition rose 17% in the quarter, with double-digit growth in the Vans, The North Face and Napapijri brands.

Operating income rose with margins reaching a record 23.1% in the quarter, with continued expansion in gross margins.

Revenue growth should accelerate in the fourth quarter primarily due to an increase in the owned-retail store business, as well as more favorable foreign currency translation rates. In addition, operating margins should continue to expand in the quarter compared with the prior year period.

Jeanswear

As anticipated, revenue comparisons in the global Jeanswear business improved in the third quarter versus the second. On a constant currency basis, revenues were down 7% in the third quarter compared with a 12% decline in the second quarter. The improvement was said to be especially evident in the domestic business, which was down 6% in the third quarter compared with a decline of 12% in the second quarter. VF said it continued to grow market share in its Wrangler® men’s and Lee® men’s and women’s jeans and casuals businesses in the U.S. Total coalition revenues declined 11% on a reported basis in the quarter.

International jeanswear revenues were down 10% on a constant currency basis in the quarter, reflecting continued difficult economic conditions across Europe. Strong growth continued in Asia, where jeanswear revenues rose 17%.

Operating income declined in the quarter on lower revenues, while operating margins improved to 16.7%.

Fourth quarter revenue comparisons are expected to improve over those of the third quarter. Operating margins should be nearly double those of the prior year’s quarter, reflecting strong gross margin expansion both domestically as well as internationally. In addition, operating margins last year were impacted by actions taken in that period to reduce costs.

Sportswear

Revenues of our Sportswear coalition, which includes the Nautica® brand and the Kipling® brand in North America, grew 4% in the quarter – a significant improvement compared with first half results. While the third quarter benefited from a slight shift in Nautica® brand wholesale shipments from the fourth quarter to the third, VFC continues to expect better comparisons in the second half versus the first, with a mid single-digit decline in total coalition revenues in the period.

Operating margins rebounded strongly in the quarter to 15.8%, reflecting improved margins in the Nautica® brand wholesale business and aggressive cost and inventory reduction actions. Management continues to expect double-digit operating margins for both the fourth quarter and the year.

Contemporary Brands

Revenues of the Contemporary Brands coalition, which consists of the 7 For All Mankind®, lucy®, John Varvatos®, Splendid® and Ella Moss® brands increased 3% (or 4% on a constant currency basis), with the acquisition of the Splendid® and Ella Moss® brands contributing $20 million to revenues in the quarter. Weak conditions in upper tier department and specialty stores continued in the U.S., resulting in a decline in 7 For All Mankind® global brand revenues in the quarter. Despite the revenue challenge, the operating margin for the 7 For All Mankind® brand for the year should be well above VF’s overall long-term target of 15%.

VF expects much stronger revenue and operating income comparisons in the fourth quarter, with better top line performance in the 7 For All Mankind® brand resulting from new store openings and continued growth in our international business. The addition of the Splendid® and Ella Moss® brands will also continue to benefit both revenues and operating margins. We remain confident coalition operating margins will return to strong double-digit levels in the fourth quarter.

Imagewear

Imagewear coalition revenues fell 15% in the quarter, with comparable declines in both the Image and Licensed Sports businesses. The Image business has been impacted this year by high levels of unemployment in key sectors affecting our industrial and protective apparel businesses. Licensed Sports revenues have been impacted by lower attendance at sporting events as well as the overall economic environment which has led to reduced sales of highly discretionary products such as team sports apparel.

Operating income and margins declined reflecting the lower volumes, particularly those in the industrial and protective apparel businesses where profitability levels are higher than the coalition average.

While high unemployment levels will continue to impact Image revenues in the fourth quarter, VFC said customer relationships remain strong and they feel that are well positioned to capitalize on new business opportunities when economic conditions improve. They also expect easier comparisons in the Licensed Sports business in the fourth quarter. The coalition’s operating margin is expected to be relatively stable in the quarter compared with the prior year period.

VF’s gross margins remained near record levels for the period, and were 44.3% compared with 44.4% in last year’s third quarter. Despite a 100 basis point impact from higher pension expense, operating margins declined only slightly, to 15.2% in the quarter from 15.9% in the prior year period.

International and Direct-to-Consumer

VFC said continued growth in theinternational and direct-to-consumer businesses remain key long-term drivers of both organic growth and margin expansion. During the quarter, international revenues declined 2% on a constant currency basis due to weak market conditions affecting their European jeanswear business in particular. However, on a constant currency basis, international revenues of the Vans® and The North Face® brands rose in the quarter. The highly profitable Asian business continued to grow strongly, with revenues up 32% in the quarter.

VFC's direct-to-consumer business increased 6% in the quarter, driven by strong increases in the Vans®, The North Face®, 7 For All Mankind® and Napapijri® brands. The direct-to-consumer business represented 15% of VF’s total revenues in the quarter, up nearly 2 percentage points from the prior year’s quarter. Operating margins of this business also expanded during the quarter, driven primarily by the successful full-price retail formats.