VF Corporation announced record results for the fourth quarter and full year 2005. Net income in the fourth quarter rose to a record $127.5 million from $125.3 million, with earnings per share rising to $1.13 from $1.10. Total revenues increased 4% to a record $1.65 billion from $1,58 billion.
As previously announced, during the fourth quarter the Company early adopted Financial Accounting Standards Board Statement No. 123 (Revised 2004), Share-Based Payment (“Statement 123®”), which requires the expensing of stock options. The impact on net income and earnings per share in the quarter resulting from this requirement was $3.2 million and $.03, respectively. Earnings per share before the change in accounting were $1.16 in the quarter, an increase of 5% over 2004 levels. Total revenues increased 4% to a record $1,646.0 million from $1,579.2 million. Beginning in the fourth quarter of 2005, the Company has decided to report gross royalty income as a component of total revenues. Revenues in all prior periods have been restated to reflect this change.
For the full year 2005, income increased 9% to $518.5 million from $474.7 million, before a one-time after-tax cumulative effect adjustment related to the early adoption of Statement 123® of $11.8 million, or $.10 per share, recognized in the first quarter of 2005. Income in 2005 included $16.9 million related to stock option expense, equal to $.15 per share. Accordingly, earnings per share before the change in accounting were $4.69 in 2005, an increase of 11% over the $4.21 per share in 2004. Including the cumulative effect adjustment, net income in 2005 was $506.7 million or $4.44 per share. Total revenues in 2005 rose 6% to $6,502.4 million from $6,124.6 million in 2004. Revenues in 2004 included $87 million in sales from the Company's Playwear unit, which was sold in 2004.
“We are delighted to deliver another record quarter and year to our shareholders,” said Mackey J. McDonald, chairman and chief executive officer. “We have strong momentum behind our plans to transform VF into a company driven by dynamic, growing lifestyle brands. Our lifestyle businesses – Outdoor and Sportswear – continue to have excellent growth prospects and over the coming years will comprise a much bigger part of our overall sales mix. At the same time, our heritage businesses – Jeanswear, Intimate Apparel and Imagewear – all have strong market positions and leading brands, and the ability to continue to be important contributors to VF's profits and cash flow.”
Our Outdoor coalition had another excellent quarter and continues to be the primary driver of our Company's top line growth. Total revenues increased 23% to $343.9 million in the quarter from $279.9 million in last year's period, driven by growth across nearly all our Outdoor brands. The North Face® brand continued to grow revenues in excess of 20% both in the U.S. and internationally. Revenues of our Vans® brand also rose, with continued momentum in its Classics line and double-digit growth in comparable store sales within Vans® brand retail stores. Our Kipling® brand continued to grow in Europe, while total revenues of our packs business rose 13%, driven by higher JanSport® brand sales in the U.S. The strong volume gains achieved by The North Face® brand and profit improvements in our Vans® brand contributed to a 45% increase in operating income in the quarter, with an increase in total Outdoor operating margins to 14.2% from 12.0%.
Revenues of our sportswear businesses, which include our Nautica® and John Varvatos® brands, as well as Kipling® brand sales in North America, were $182.9 million in the quarter compared with $183.6 million in the prior year period. Our Nautica® brand men's sportswear business continues to perform well, with a 7% increase in revenues in the quarter. Offsetting this increase was a decline in sales of off-price goods. Our John Varvatos® brand men's luxury business had another double-digit increase in revenues in the quarter, and we are continuing to make good progress in our launch of the Kipling® brand in the U.S. Operating margins were 14.4% in the quarter, a decline from prior year levels, due in part to investments to support the upcoming launch of Nautica® brand women's sportswear, higher spending behind the brand's Navigate Life(TM) marketing platform and a decline in profits in our young men's denim business.
Overall, our jeanswear business continues to be healthy. Total Jeanswear revenues, which include the Wrangler®, Lee®, Riders®, Rustler® and Wrangler Hero® brands, rose slightly in the quarter, to $686.8 million from $679.8 million. Revenues in both our domestic and international businesses increased during the quarter, with particular strength in our Mass Market, Western Specialty, Mexican and Latin American businesses. Our Lee® brand business continues to be challenged, with aggressive efforts underway to stabilize performance. Total Jeanswear operating income rose 3% in the quarter, with an increase in operating margins during the period to 17.8%.
Revenues in our Intimate Apparel coalition were more stable than in the last several quarters. Total revenues decreased slightly to $183.6 million in the 2005 quarter from $185.9 million in the 2004 quarter. Our Mass Brands business had an excellent quarter, with revenues up 13%. As has been the case all during 2005, revenue comparisons in our Private Brands business were negatively impacted by the absence of a large program with a private label customer, which boosted revenues and manufacturing efficiencies in the prior year. Operating income declined sharply to $3.2 million from $14.3 million, a result of lower manufacturing capacity utilization and costs associated with improving our product assortments in department and mid-tier stores.
Our Imagewear coalition reported higher revenues in the quarter, up 2% to $234.6 million from $230.9 million, with the increase due to the acquisition of a licensee of the Harley-Davidson Motor Company, Inc. in early 2005. Operating margins remained strong, at 15.2% in the quarter. The decrease in operating income was due in part to difficult comparisons related to a more profitable mix of sales of World Series apparel products in 2004 versus 2005.
Operating margins declined in the quarter due in part to the impact of adopting Statement 123®. Operating margins in the 2005 quarter were 12.1% compared to 12.9% in the 2004 quarter, with 30 basis points of the decline due to the effects of Statement 123®. Operating income was $199.9 million in the quarter, including a $5.0 million impact from Statement 123®, compared with $204.0 million in the year-ago period.
Our balance sheet continues to be very strong, giving us ample flexibility to support future growth. We ended the year with nearly $300 million in cash. Inventories at year-end were 11% above 2004 year-end, with the majority of the increase in our growing lifestyle businesses. Debt as a percent of total capital was 22.6% at the end of the year, or 15.7% net of cash. During the quarter we repurchased one million shares of common stock, bringing the total shares repurchased during the year to four million.
We're looking forward to another record year in both revenues and earnings in 2006. We continue to anticipate solid organic growth in revenues of approximately 4 to 5% in 2006, driven by double-digit growth in our Outdoor coalition and mid-single digit growth in our Sportswear and Imagewear coalitions. We expect stable revenues in our Jeanswear and Intimates coalitions. Identifying and adding strong new brands to our portfolio remains a priority, but we will maintain a disciplined approach and only pursue those that have the potential to make a positive long-term contribution to total shareholder returns.
Earnings per share are expected to grow more than revenues in 2006. Based on the $4.44 per share reported in 2005, which includes the $.10 per share cumulative effect adjustment from adopting Statement 123®, earnings per share are expected to rise approximately 8%. Based on 2005 earnings per share of $4.54 before the cumulative effect adjustment, we expect an increase in earnings per share of approximately 6%, in line with our previous guidance. Also as previously disclosed, the impact on 2006 earnings per share from expensing stock options is expected to be $.17 per share.
Based on the changing mix of our business and the seasonality experienced by our growing Outdoor business, as well as improvements we expect in our Lee brand and Intimates businesses, we expect stronger earnings comparisons in the second half of the year compared to the first half. For the first quarter, we expect earnings per share to be up slightly over prior year levels, with revenues increasing by approximately 5%.
We also anticipate another strong year of cash flow from operations, which could reach $600 million in 2006.
VF also announced that its Board of Directors has approved an authorization for the Company to repurchase 10 million shares. We are nearing the completion of our current 10 million share repurchase program, which was initiated in 2001. We plan to repurchase approximately two million shares of common stock this year to offset the dilution resulting from the exercise of stock options.
The Board of Directors declared a regular quarterly cash dividend of $.29 per share, payable on March 20, 2006 to shareholders of record as of the close of business on March 10, 2006.
VF CORPORATION
Consolidated Statements of Income
(In thousands, except per share amounts)
Three Months Ended
December Year Ended December
----------------------- -----------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net Sales $1,626,110 $1,559,761 $6,428,648 $6,054,536
Royalty Income 19,889 19,397 73,729 70,052
----------- ----------- ----------- -----------
Total Revenues 1,645,999 1,579,158 6,502,377 6,124,588
----------- ----------- ----------- -----------
Costs and Operating
Expenses
Cost of goods sold 972,254 923,413 3,785,243 3,644,255
Marketing,
administrative and
general expenses 473,860 451,695 1,888,957 1,702,545
----------- ----------- ----------- -----------
1,446,114 1,375,108 5,674,200 5,346,800
----------- ----------- ----------- -----------
Operating Income 199,885 204,050 828,177 777,788
Other Income (Expense)
Interest income 1,580 2,303 8,039 7,151
Interest expense (13,942) (19,067) (70,463) (76,087)
Miscellaneous, net 4,259 1,312 5,060 3,268
----------- ----------- ----------- -----------
(8,103) (15,452) (57,364) (65,668)
----------- ----------- ----------- -----------
Income before Income
Taxes and Cumulative
Effect of a Change in
Accounting Policy 191,782 188,598 770,813 712,120
Income Taxes 64,312 63,295 252,278 237,418
----------- ----------- ----------- -----------
Income before Cumulative
Effect of a Change in
Accounting Policy 127,470 125,303 518,535 474,702
Cumulative Effect of a
Change in Accounting
Policy - - (11,833) -
----------- ----------- ----------- -----------
Net Income $ 127,470 $ 125,303 $ 506,702 $ 474,702
=========== =========== =========== ===========
Earnings Per Common
Share - Basic
Income before
cumulative effect
of a change in
accounting policy $ 1.15 $ 1.13 $ 4.65 $ 4.30
Cumulative effect
of a change in
accounting policy - - (0.11) -
Net income 1.15 1.13 4.54 4.30
Earnings Per Common
Share - Diluted
Income before
cumulative effect
of a change in
accounting policy $ 1.13 $ 1.10 $ 4.54 $ 4.21
Cumulative effect
of a change in
accounting policy - - (0.10) -
Net income 1.13 1.10 4.44 4.21
Weighted Average Shares
Outstanding
Basic 110,407 110,956 111,192 109,872
Diluted 113,122 114,153 114,192 112,730
Cash Dividends Per
Common Share $ 0.29 $ 0.27 $ 1.10 $ 1.05
