VF Corporation fourth quarter Revenues rose 9% to a record $1,598.8 million, compared with $1,462.4 million in the fourth quarter of 2005, driven by higher revenues across the Outdoor, Jeanswear and Sportswear businesses. Income from continuing operations in the current quarter increased 12% to a record $141.4 million, compared with $125.7 million in the prior year's quarter.
The Outdoor coalition total revenues were up 32% to $453 million and strong gains across nearly every brand. Domestic revenues grew 34% in the quarter while international revenues rose 28%. The North Face, Vans, Kipling and JanSport brands each posted double-digit revenue gains in the quarter. Recently, VFC announced the acquisition of the Eagle Creek brand of adventure travel gear, which is expected to add approximately $30 million to revenues in 2007.
Income in the quarter reflects two unusual items: a $16.9 million ($.15 per share) benefit from a favorable tax resolution, substantially offset by $14.7 million ($.12 per share) in expenses related to actions to reduce product costs and enhance our product development processes primarily in our international Jeanswear business. Earnings per share from continuing operations also rose 12%, to a record $1.24 from $1.11 last year. Earnings per share were approximately $.03 higher than the guidance we provided on January 23, due to the net benefit of the above unusual items, which, due to their nature, were not included in our prior guidance. Reflecting discontinued operations and the $36.8 million ($.32 per share) estimated loss on the sale of the intimates business, net income was $108.6 million, or $.95 per share.
For the full year 2006, revenues increased 10% to $6,215.8 million from $5,654.2 million in 2005, with strong growth across all our businesses. Income from continuing operations rose 11%, to $535.1 million from $482.6 million, while earnings per share from continuing operations increased 12% to $4.73 from $4.23. Reflecting the net effect of discontinued operations, net income was $533.5 million, equal to $4.72 per share.
“This marks another record year of healthy organic growth across all our businesses,” said Mackey J. McDonald, Chairman and Chief Executive Officer. “The investments we've made in our brands and businesses continue to pay off in the form of strong top-line growth, providing us with confidence in our ability to sustain momentum and deliver attractive returns to our shareholders throughout 2007.”
“Operating income increased 36% in the quarter, and operating margins rose while we continued investing to support the future growth we expect from our Outdoor brands.”
“Our Jeanswear coalition, which includes our Wrangler®, Lee® and Riders® brands, posted a 2% gain in revenues during the quarter. International revenues grew 7% in the quarter, with particularly strong growth in our Wrangler® brand. Domestic revenues were about flat; however, we were especially pleased with the continued momentum in our domestic Lee® brand business, which enjoyed a 16% revenue increase in the quarter.”
“Jeanswear operating income declined in the quarter, reflecting a more difficult mass channel retail environment in North America, as mentioned in our January release. In addition, operating results include the unusual charge related to the aforementioned $14 million from actions to reduce product costs and enhance our product development processes primarily in our international Jeanswear business.”
“Total revenues of our Sportswear coalition, which includes our Nautica® and John Varvatos® brands as well as the Kipling® brand in North America, increased 8% in the quarter. Each brand achieved higher revenues in the quarter. Our Nautica® branded business enjoyed a revenue gain of 4%. Double-digit revenue gains were achieved in our Kipling® and John Varvatos® brands, as we continue to expand these businesses in the U.S.”
“Operating income rose 7% in the quarter, with margins down slightly reflecting ongoing investments to support our new Nautica® women's sportswear initiative.”
“Total revenues of our Imagewear coalition declined 2% in the quarter. Our licensed apparel business grew 11% in the quarter, with this gain offset by our exit of an underperforming line of commodity fleece business in our Image apparel segment and more difficult comparisons in our industrial segment.”
“Imagewear operating income rose strongly in the quarter, due mostly to a favorable product mix and more tightly controlled inventories, with operating margins reaching 18%.”
“We opened 24 retail stores in the quarter and a total of 62 stores during the year across a variety of brands including Vans®, The North Face®, Kipling® and Napapijri ®, bringing our total number of owned retail stores to 538 at year-end. Total retail revenues grew 19% in the quarter and 17% for the year.”
“Our overall gross margins continue to benefit from the continuing transformation in our business mix and the strong growth in our lifestyle businesses, where gross margins are generally higher. Fourth quarter gross margins rose to 43.2% from 42.4% in the prior year's quarter. Operating margins declined in the period, reflecting the expenses taken to support our Jeanswear business described above.”
“We ended the year with a very strong balance sheet. Inventories increased at a lower rate than sales, with a 6% increase versus 2005. Debt as a percent of total capital was slightly below 20% at the end of the year, compared with 23% at the end of 2005. Accounts receivable remain above prior year levels, due primarily to strong sales in the quarter in our international businesses, where payment terms are longer than those of our U.S. businesses, as well as the impact of a weaker dollar in translating foreign currencies at the balance sheet date. As a result, cash flow from operations was below prior year levels. As our accounts receivable stabilize during 2007, we expect a very strong year of cash flow from operations of approximately $625 million.”
“We have built a powerful portfolio of higher margin, higher growth lifestyle brands that provides us with a strong, stable platform for future growth. As previously announced on January 23, we are looking forward to another record year in 2007. Revenues are expected to rise 8%, with healthy organic growth in all our coalitions. Outdoor revenues should increase 15-20%, with mid-single digit revenue growth in Sportswear. The improved growth trend in our Jeanswear business should continue this year, with revenues expected to grow at a slightly higher rate than the 3% achieved in 2006. We also expect another year of growth for our Imagewear business, where we are planning for a low single-digit revenue increase.”
“Earnings per share from continuing operations should increase 10%, with nearly all the increase driven by top line growth and margin expansion. As previously indicated, we plan to use the $350 million in proceeds from the sale of our intimate apparel business to repurchase shares during 2007. This investment in our own shares will substantially replace the Intimates' contribution to earnings per share by 2008, when the benefit from the share buyback is fully realized. While the repurchase will provide a significant benefit in 2007, the overall average annual shares in 2007 will remain relatively constant compared with 2006 average shares. This is due to the higher number of shares outstanding at the end of 2006 versus the 2006 average, as well as the impact of ongoing stock option exercises that typically occur throughout the year.”
“We also are looking forward to record performance in the first quarter. Revenues should be up 10% while earnings per share from continuing operations should increase 4 to 6%, reflecting a slightly higher tax rate and higher average shares outstanding. Earnings growth should accelerate as we progress through the year, with second half results expected to be particularly strong.”
“Providing above average returns to our shareholders through the efficient use of our strong cash flow continues to be a focal point for VF. The combination of 10% earnings growth and our current dividend yield should generate a very healthy return for our shareholders in 2007,” McDonald concluded.
