VF Corporation third quarter evenues rose 12% to a record $2.034 billion, compared with $1.822 billion in the third quarter of 2005, driven by higher revenues across all our businesses. Net income in the current quarter increased 10% to a $197.7 million, compared with $179.6 million in the prior year. Earnings per share rose 11% to a $1.75 from $1.57. Foreign currency translation benefited revenues and earnings per share by $24 million and $.03, respectively, in the quarter.
For the first nine months of 2006, revenues were up 8% to $5,266.3 million from $4,856.4 million in the 2005 period. Income rose 9%, to $424.9 million from $391.1 million, while earnings per share increased 10% to $3.77 from $3.43, before a $.10 per share cumulative effect of a change in accounting policy for stock compensation expense in the first quarter of 2005.
“We are very pleased with our brands' strong performance this quarter. We have stepped up our investments in a number of areas, including product development, marketing and geographic expansion, and it's paying off in strong organic growth,” said Mackey J. McDonald, chairman and chief executive officer. “We are committed to keeping our brands healthy and growing through such investments, while at the same time delivering strong earnings growth.”
Outdoor
Our Outdoor coalition continues to have tremendous momentum, with total revenues up 25% to $659 million and strong gains across nearly every brand. Domestic revenues grew 20% in the quarter while international revenues rose 37%. The North Face®, Vans®, Napapijri® and Eastpak® brands each posted revenue gains in excess of 20%, while our Reef® and Kipling® brands also posted solid growth in the quarter.
Operating income rose 25% in the quarter, while operating margins remained strong and stable, despite continued investments to support the future growth we expect from all our Outdoor brands.
Jeanswear
Our Jeanswear coalition, which includes our Wrangler®, Lee® and Riders® brands, posted another quarter of healthy growth, with revenues up 6% and growth in both our domestic and international businesses. Domestic jeanswear revenues grew 5% with our Lee, Mass Market and Specialty businesses all growing at comparable rates. International revenues increased 8%, due primarily to the launch of our new majority-owned joint venture in India and foreign currency benefits. We continue to see strong growth in such markets as Mexico, China and Russia, where revenues are growing at double-digit rates.
Jeanswear operating income declined slightly in the quarter, due primarily to marketing investments to support growth in our brands, particularly our Lee® and Wrangler® brands in the U.S. In addition, capacity actions to reduce future product costs resulted in higher expenses in the period.
Sportswear
Total revenues of our Sportswear coalition, which includes our Nautica® and John Varvatos® brands as well as the Kipling® brand in North America, increased 6% 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.
As anticipated, reflecting ongoing investments to support our new Nautica® women's sportswear initiative, operating income and margins declined during the quarter. Otherwise, operating margins would have been comparable to those in the prior year period.
Imagewear
Our Imagewear coalition continued its solid growth trend with a 6% revenue increase in the quarter, with gains in both our Image business, which includes uniforms for the industrial, public safety and service markets, and in our licensed apparel business. During the quarter, we announced a new agreement with ESPN to manufacture and market a line of College GameDay apparel, including tees, fleece crews and hoods. The line launched in September at leading sports specialty and sporting goods stores, in addition to better department stores, college campus retailers and online at ESPNShop.com.
Imagewear operating income declined slightly. Operating margins dropped in the quarter due to investments and actions taken to support future top and bottom line growth, but remain at very healthy levels. Full year margins are expected to be up over prior year levels.
Intimates
Reversing the trend of the past several quarters, we are pleased that our Intimates coalition achieved a 5% increase in revenues in the period. Our department store and Private Brands businesses drove most of the increase, with success in new product introductions in both our Vanity Fair® and Lily of France® brands. We also experienced growth internationally in our Mexican and European boutique businesses.
Intimates' operating income and margins were down from prior year levels, and are being impacted by provisions for higher than required inventory levels.
During the quarter VF opened 21 retail stores across a variety of brands including Vans®, Kipling® and Napapijri®, bringing our total number of owned retail stores to 560 at the end of the quarter. Total retail revenues grew 17% in the quarter.
Overall gross margins expanded slightly in the quarter, to 42.3%. Operating margins remain strong at 15.1% but are down modestly from prior year levels, reflecting the higher costs associated with brand investments and other actions supporting future revenue and earnings growth.
VF's balance sheet remains in excellent shape. Very strong revenues in the month of September resulted in a sharp increase in accounts receivable, and also accounted for the lower than normal cash flow from operations for the nine month period. We continue to expect cash generated from operations to approximate $600 million for the year. Inventories increased at a lower rate than revenues, rising 2% versus the comparable quarter in 2005. Debt as a percent of total capital was 24.3% at the end of the quarter versus 27.3% at the end of the 2005 period.
“We continue to look forward to a very strong fourth quarter and our fourth consecutive year of record revenues and earnings.
“We now expect full year revenues to be up approximately 8% in 2006 – surpassing the $7 billion mark for the first time in our company's history – with nearly all of the increase coming from organic growth. Earnings per share are now expected to rise 11% to approximately $5.05 over the $4.54 reported in 2005 before the cumulative effect adjustment.”
Fourth quarter revenues should increase by about 6%, with earnings per share rising approximately 13%, indicating additional expansion in operating margins during the period.
“We are confident that we have the pieces in place to continue to achieve our long-term growth and margin targets,” said Mr. McDonald. “Most of our brands are strong and growing, and we have a robust pipeline of initiatives in place to support their continued growth. We continue to target a 14% operating margin and expect to make continued progress towards that goal in the coming months and years. We have the balance sheet and cash flow to fund additional acquisitions. And we are committed to returning cash to shareholders via our very strong dividend.”
VF CORPORATION
Consolidated Statements of Income
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September September
-----------------------------------------------
2006 2005 2006 2005
----------------------- -----------------------
Net Sales $2,015,213 $1,803,064 $5,209,673 $4,802,538
Royalty Income 18,576 19,022 56,677 53,840
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Total Revenues 2,033,789 1,822,086 5,266,350 4,856,378
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Costs and Operating
Expenses
Cost of goods sold 1,173,149 1,055,613 3,049,549 2,812,989
Marketing,
administrative and
general expenses 553,871 478,471 1,545,878 1,415,097
----------------------- -----------------------
1,727,020 1,534,084 4,595,427 4,228,086
----------------------- -----------------------
Operating Income 306,769 288,002 670,923 628,292
Other Income (Expense)
Interest income 1,439 1,402 4,149 6,459
Interest expense (15,842) (19,357) (42,394) (56,521)
Miscellaneous, net 1,272 819 2,070 801
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(13,131) (17,136) (36,175) (49,261)
----------------------- -----------------------
Income before Income
Taxes and Cumulative
Effect of a Change in
Accounting Policy 293,638 270,866 634,748 579,031
Income Taxes 95,931 91,236 209,824 187,966
----------------------- -----------------------
Income before
Cumulative Effect of a
Change in Accounting
Policy 197,707 179,630 424,924 391,065
Cumulative Effect of a
Change in Accounting
Policy - - - (11,833)
----------------------- -----------------------
Net Income $ 197,707 $ 179,630 $ 424,924 $ 379,232
======================= =======================
Earnings Per Common
Share - Basic
Income before
cumulative effect of a
change in accounting
policy $ 1.78 $ 1.61 $ 3.85 $ 3.51
Cumulative effect of a
change in accounting
policy - - - (0.11)
Net income 1.78 1.61 3.85 3.40
Earnings Per Common
Share - Diluted
Income before
cumulative effect of
a change in
accounting policy 1.75 1.57 3.77 3.43
Cumulative effect of a
change in accounting
policy - - - (0.10)
Net income 1.75 1.57 3.77 3.32
Weighted Average Shares
Outstanding
Basic 110,802 111,114 110,179 111,043
Diluted 113,062 114,146 112,649 114,139
Cash Dividends Per
Common Share $ 0.55 $ 0.27 $ 1.39 $ 0.81
