VF Corporation announced second quarter revenues were $1.49 billion, a decline of 11% compared with $1.68 billion in the second quarter of 2008, with foreign currency translation accounting for 3 percentage points of the decline.
For the first half of 2009, revenues were $3.21 billion, down 9% from the $3.52 billion in the first half of 2008. Foreign currency translation accounted for 4 percentage points of the decline.
“Business remains undeniably tough across most categories, channels and geographies, but I am pleased that our largest brands – Wrangler, Lee, The North Face and Vans – continue to gain share in most markets,” said Eric C. Wiseman, Chairman, President and CEO. “While we see some signs of stabilization occurring, we remain very cautious about the outlook for consumer spending for the balance of the year. We will continue to plan our business conservatively while investing in our brands and maximizing every effort to gain market share.”
He continued, “Both revenues and earnings in the second half of the year should show a marked improvement from those reported in the first half, reflecting easier comparisons, initiatives to control our expenses and steps taken to capture new revenue opportunities. We are confident that VFs business model, built on a foundation of powerful brands, great diversity, a proven set of growth strategies and financial strength, is the right one for these difficult times, and one that will allow us to continue to build our competitive advantage in the months and years to come.”
Second Quarter Business Review
Outdoor and Action Sports
Our Outdoor and Action Sports coalition reported another quarter of strong results, with revenues up 2% on a constant currency basis and down 2% on a reported basis. Global revenues of The North Face and Vans brands grew 4% and 14%, respectively, in the quarter on a constant currency basis. Revenues in the Americas businesses rose 3% while international revenues were up 2% in constant dollars, with a 32% increase in revenues in Asia.
Operating margins rose by more than one full percentage point in the quarter, despite our continued investments in retail, due to an increase in gross margins that reflect the strength of our brands.
Looking toward the second half of 2009, the company expects higher total revenues on both a reported and constant currency basis and further expansion in operating margins.
Total Jeanswear revenues declined 16% in the second quarter, or 12% on a constant currency basis, with declines in both domestic and international businesses. Domestic revenues of our large core Wrangler and Lee businesses declined at a mid single digit rate in the quarter, with total domestic revenues down 12%.
International jeanswear revenues were down 12% on a constant currency basis in the quarter, reflecting deep recessionary conditions across Europe. In China, jeanswear revenues rose 10%.
Operating income declined in the quarter, but operating margins rose slightly, reflecting cost reduction actions.
The company expects comparisons in the second half of 2009 for the global jeanswear business to improve over those in the first half, which were impacted by the factors previously mentioned that were specific to the second quarter.
Internationally, the company said second half revenue comparisons will continue to be difficult, with gains in the Asia business and improved comparisons in the Latin America and Mexico businesses being offset by declines in Europe, where they expect market conditions to remain weak.
On a reported basis, global revenues for the jeanswear business are expected to decline at a high-single-digit rate in the second half, while operating margins should remain strong, in the mid-teens.
Revenues of the Sportswear coalition, which includes our Nautica brand and the Kipling brand in North America, decreased 23% in the quarter, reflecting the continuation of very challenging department and outlet store trends affecting Nautica brand revenues.
Customer bookings support better revenue comparisons in the second half of the year, with a mid single digit decline anticipated. The company also continues to expect that operating margins will improve to double-digit levels in the second half of 2009, a result of cost reduction actions taken in 2008 and significantly lower inventory levels that should result in lower markdown activity.
Revenues of the contemporary brands coalition, which consists of the 7 For All Mankind, lucy, John Varvatos, Ella Moss and Splendid brands rose 2% (or 4% on a constant currency basis) due to the acquisition of the Ella Moss and Splendid brands, which contributed $16 million to revenues in the quarter.
Lower operating income and margins reflected the difficult retail environment in the upper tier department and specialty store channels.
The company expects strong revenue growth in the second half of the year driven primarily by the addition of the Ella Moss and Splendid brands, as well as improved comparisons in the 7 For All Mankind brand as it benefits from new store openings and continued growth in the international business. Operating margins are expected to return to double-digit levels.
Total revenues of the imagewear coalition were 19% lower in the quarter, with comparable declines in both the image and licensed sports businesses. The image business has been impacted this year by sharp increases in unemployment in key sectors affecting our industrial and protective apparel businesses. Lower revenues in the licensed sports business reflected the difficult retail environment.
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.
Second half revenue and operating income results are expected to show improvement over those reported in the second quarter due primarily to easier comparisons in our Licensed Sports business versus the prior year period. While the company does not anticipate any near term improvement in employment levels in our key industry sectors, the rate of decline in our image business should moderate in the second half versus the first half. Total imagewear revenues in the second half are expected to decline at a high single digit rate, and operating margins should return to double-digit percentage levels.
VFs gross margins increased slightly to 43.9% from 43.8% in the quarter. Operating margins declined to 8.1% from 9.8%, reflecting a 140 basis point impact from the higher pension expense as well as the impact of investments to grow the retail business in this seasonally low period.
International revenues declined 4% on a constant currency basis due to weak market conditions in Europe. However, on a constant dollar basis, international revenues of our Vans, The North Face, 7 For All Mankind and Kipling brands rose in the quarter. Our Asian business continued to grow strongly, with revenues up 13% in the quarter.
Our direct-to-consumer business increased 4% in the quarter, driven by strong increases in Vans, The North Face and 7 For All Mankind brands. Seventeen stores were opened in the quarter, including new stores for our Vans, The North Face and 7 For All Mankind brands, bringing the total number of owned retail stores to 717 at the end of the quarter.
Our balance sheet remains very strong; cash and equivalents were $385 million and should exceed $600 million at year-end assuming no additional acquisitions this year. Inventories declined 9% from June 2008 and by year-end are expected to be more than 10%, or $100 million, below year-end 2008 levels. We continue to expect another year of strong cash flow from operations in 2009, which should exceed $750 million.
The company said it continues to anticipate that 2009 revenues will be down 5% to 7%, with about half, or 3%, of the decline due to foreign currency translation. Earnings per share should approximate $4.70 to $5.00 versus $5.42 in 2008, including a negative impact of approximately 70 cents per share from higher pension expense and currency translation. Despite slightly better than anticipated earnings in the second quarter and some upside from currency translation, given the uncertain environment, the company is maintaining guidance at this time.
Second half revenue and earnings comparisons should improve relative to those of the first half, due to easier comparisons. Fourth quarter earnings comparisons should be the strongest, given the absence of restructuring actions that reduced fourth quarter earnings by 30 cents per share, the seasonality of the growing retail business and a lower impact from currency effects. However, currency effects will remain a significant impact in the third quarter, which is the largest quarter in both revenues and profits in the international business. In addition, last years third quarter benefited from 7 cents per share in favorable tax settlements.
The Board of Directors declared a cash dividend of 59 cents per share, payable on September 18, 2009 to shareholders of record as of the close of business on September 8, 2009.
|Consolidated Statements of Income|
|(In thousands, except per share amounts)|
|Three Months Ended June||Six Months Ended June|
|Costs and Operating Expenses|
|Cost of goods sold||833,693||942,763||1,830,333||1,956,893|
|Marketing, administrative and general expenses||532,206||570,863||1,099,592||1,158,949|
|Other Income (Expense)|