VF Corp. said it was sticking with its guidance for 2008 after an “exceptionally strong performance” by its outdoor coalition of brands and solid growth of its international and retail business in the first quarter.
“We continue to anticipate another record year in 2008 and are maintaining our guidance for a revenue increase of 9% and an EPS increase of 10%,” said Eric Wiseman, president and CEO. “Our strong revenue growth should continue in the second quarter, with an anticipated increase of 10%, half of which should be organic growth.”
Wiseman said the guidance is “not contingent upon any meaningful recovery in the economy or consumer spending” and does anticipate a modest slowdown in western Europe.
Still, Wiseman said the U.S. environment remains tough, particularly in its sportswear and jeans coalitions, with no relief in sight.
“We're still seeing lots of promotional activity out there exacerbated by cooler than normal weather in much of the country, which means that seasonal goods are moving slowly,” Wiseman said. “We're not seeing a material change in order cancellations and delayed shipments, but retailers are tightening up the pipeline and becoming even more conservative in their inventory planning and orders.”
Company-wide, VFCs first-quarter revenues rose 10.8% to $1.85 billion in the first quarter from $1.67 billion in the year-earlier period. Income from continuing operations climbed 11.1% to a record $149 million, compared with $134.1 million in the prior year's quarter. Gross margins rose 160 basis points to more than 45%, while SG&A as a percentage of sales rose 130 basis points.
Earnings per share from continuing operations rose 13.6% in the first quarter, to a record $1.33 from $1.17 last year. Acquisitions Majestic, 7 For All Mankind, lucy and Eagle Creek generated $141 million in revenue. Favorable foreign currency exchange rates boosted revenues by $56 million and earnings per share by 9 cents, or 6.8%.
Inventories rose 13% during Q1, reflecting the absorption of acquisitions.
At the Outdoor Coalition, revenues rose 18% in the first quarter on the strength of double-digit growth both at home and abroad. The North Face, Vans, Kipling and Napapijri – posted double-digit revenue gains in the quarter. The coalitions remaining brands are America Eagle, Eastpak, JanSport and Reef. Wiseman said the coalition had bookings in hand to sustain a growth rate in the high teens for the entire year.
The groups operating income rose 26%, with operating margins rising a full 100 basis points to 16.6%.
By comparison, revenues grew 16% at VFCs Imagewear Coalition and 21% at its International division, while declining 6% and 11%, respectively, at its Jeanswear Coalition and Sportswear Coalition. International growth was particularly strong in China, Russia and Latin America. Wiseman said the international and retail businesses were “acting as a buffer against the difficulties in todays environment, particularly on the domestic side.”
VFCs retail revenues grew 24% during the quarter on the strength of double-digit gains at its Vans, The North Face, Kipling, Napapijri, Wrangler and Lee stores. VFC owned 641 stores at the end of the quarter, including 15 opened during the quarter. The company expects to open 100 stores this year, including a “significant number” in the second quarter. The operation is becoming more profitable as it gains scale and raises the ratio of full-price to outlet stores, which CFO Bob Shearer said was in the 50/50 to 60/40 range. This year, the company will open three full-price stores for every outlet, Shearer said.
The company expects “exceptionally strong” double-digit growth at its outdoor coalition in the second quarter, but said earnings would fall to 80 cents from 93 cents from the year earlier as VFC boosts spending to open more Outdoor Coalition stores. Gross margins are expected to grow 100-basis points during the quarter, but operating margins will decline 200 basis points to 9.1%. The bulk of the decline, or 150 basis points, will be driven by increased spending to support growth of Outdoor Coalition stores, including the Aug. 1 launch of The North Face e-commerce site.
“For example, we expect to open 15 to 20 new stores in our Outdoor coalition in the quarter,” Wiseman said. “In addition, distribution expenses will increase to support the higher shipping levels we expect in the second half of the year, and advertising will be up as a percent of revenues to support future growth.”
Costs will also rise as the company boosts employment at its distribution centers to ensure it can ship all the product ordered and made for delivery in Q3.
Wiseman said the Jeanswear business was hurt by cool weather and consumers shifting to lower price points. “There are people from mid-tier moving to mass, and people within mass going to the very lowest price point,” said Wiseman. “As that happens and people go to the very lowest price point in the mass channel, that's not where our strong brands exist nor where we want them to exist, so that's affected us as well.”
