VF Corporation reported fourth quarter revenues decreased 2% to $1.91 billion, compared with $1.96 billion in the fourth quarter of 2007, with nearly all the decline attributed to the effects of foreign currency translation.
Income from continuing operations in the current quarter was $115.9 million, compared with $164.4 million in the prior years quarter. Included in the most recent quarter was a previously announced charge of $41 million related to cost reduction actions. Earnings per share from continuing operations was $1.05 in the fourth quarter, compared with $1.46 last year and, as expected, included a negative 30 cents per share impact from the charge. Foreign currency translation also impacted earnings by 2 cents per share.
For the full year 2008, revenues increased 6% to a record $7.64 billion from $7.22.billion in 2007, driven by strong performance in the outdoor coalition and a full year of revenues from the Contemporary Brands coalition.
Including the aforementioned charge, income from continuing operations declined to $602.7 million from $613.2 million. Earnings per share from continuing operations reached a record $5.42, and includes the 30 cents per share impact from the cost reduction initiatives, compared with $5.41 in 2007. The full year benefit from foreign currency translation to revenues and earnings per share was $109 million and 15 cents per share, respectively.
Fourth Quarter Business Review
During the quarter, the company said it took aggressive actions to reduce costs across its business, which they expect to result in savings of $100 million annually beginning in 2009.
Operating income in the 2008 quarter was $179.8 million compared with $250.6 million in the prior years quarter, with $41 million of the decline attributable to the cost reduction initiatives. The company said the balance of the decline was due to exceptionally difficult retail conditions in the fourth quarter that resulted in unprecedented levels of promotional activity across many of our businesses.
Operating margins were 9.4% in the quarter compared with 12.8% in the 2007 period, with over 200 basis points of the decline due to the cost reduction initiatives.
Outdoor
The company said it Outdoor coalition had another “outstanding” quarter, with total revenues up 13% and 17% in constant dollars. Domestic revenues grew 17% in the quarter while international revenues rose 6% (17% in constant dollars). The North Face, Vans and Napapijri brands each posted double-digit revenue gains in the quarter.
Globally, revenues of The North Face grew 20% in the quarter while global revenues of Vans increased 18%.
Operating income rose by 7% and included $8.2 million in expenses related to cost reduction actions. The decline in operating margins in the quarter was due to cost reduction actions as well as a similar amount resulting from transaction-related currency fluctuations.
Sportswear
Total revenues of the Sportswear coalition, which includes Nautica and John Varvatos as well as the Kipling brand in North America, decreased 9% in the quarter. Nautica revenues declined 12% in the quarter, reflecting difficult conditions in department stores and weaker than expected performance in its retail outlet stores. The company said its Kipling and John Varvatos brands each continued to grow strongly, posting double-digit revenue growth in the quarter.
Cost reduction expenses of $3.2 million contributed to a drop in fourth quarter operating income. Increased markdown activity and negative comparable store sales in Nautica retail outlets significantly impacted the profitability of the Nautica® brand.
Outlook
For 2009, representatives said they anticipate a low to mid single digit decline in revenues, with a 3% to 4% negative impact from foreign currency translation. Earnings per share should approximate the $5.42 reported for 2008.
Current guidance includes significantly higher pension expense levels as well as the effects of foreign currency translation, which are expected to negatively impact 2009 earnings per share by approximately 50 cents and 30 cents, respectively.
Going forward, representatives noted the company will continue to report the results of these businesses as Outdoor and Action Sports. We look forward to another year of record revenue in our Outdoor and Action Sports business, given the continued momentum of our brands. Revenues of our Contemporary Brands business are also expected to grow significantly.
Reflecting the actions taken in 2008 to reduce costs and align inventories, most of our coalitions are expected to post significant improvements in profitability in 2009. The $90 million increase in pension expense anticipated in 2009 will be reported as a corporate expense and will, accordingly, impact consolidated operating margins only.
Citing the “worsening of economic conditions that occurred in latter part of 2008,” as well as the trend of foreign currency translation rates during the year, the company predicts first half comparisons are expected to be substantially more difficult than those of the second half.
The first quarter is expected to be especially challenging, with revenues expected to be down by 5 to 7%, with a 4% impact from foreign currency translation.
The pension and change in foreign currency translation rates will have a significant impact on the comparability of the company's earnings on a quarterly basis. The pension expense impact to earnings per share will approximate 11 cents to 12 cents each quarter, while the change in foreign currency translation rates will have the greatest earnings impact on the first and third quarters.
Accordingly, earnings per share in the first quarter will decline significantly, reflecting an estimated combined impact of 20 cents per share from higher pension expense and foreign currency rate changes. The compant expects that earnings per share for the quarter will approximate 90 cents to 95 cents compared with $1.33 per share reported in the first quarter of 2008.
