VF Corp reported first-quarter revenues increased 1.4% to $1.75 billion from $1.73 billion a year ago. Earnings soared 62% to a record $163.5 million, or $1.46 per share, from $100.9 million, or 91 cents, a year earlier. Results benefited from strong sales in its Outdoor & Action Sports coalition as well as efforts to reduce costs and inventories.

As anticipated, earnings per share benefited from lower pension expense and foreign currency translation rates, by 5 cents and 6 cents a share, respectively, compared with the 2009 quarter. Also included in the current quarter was an 11 cents per share tax credit as well as $.09 in restructuring expenses related primarily to actions to reduce product costs.

“Were off to a strong start to the year,” said Eric C. Wiseman, chairman and chief executive officer. “Our first quarter results were stronger than anticipated, marked by improving revenue trends and gross margins that were even stronger than our expectations. Actions taken in 2009 to lower our costs and reduce inventories are clearly contributing to our stronger results. Were looking forward to accelerating top line growth in the second quarter and delivering a record year in earnings per share. Our confidence in the momentum of such key growth engines as our Outdoor & Action Sports businesses and our brands in China is evidenced by our plans to further increase investments this year behind very targeted marketing and brand-building initiatives in these businesses.”

First Quarter Business Review

Outdoor & Action Sports: Our Outdoor & Action Sports businesses achieved outstanding results in the quarter. First quarter revenues grew 10% with operating income and margins each reaching record levels for the period. Global revenues of The North Face® and Vans® brands grew 9% and 20%, respectively. Total revenues in our Americas businesses rose 11%, while international revenues were up 8%. Total direct-to-consumer revenues for our Outdoor & Action Sports businesses rose 28% in the quarter, with double-digit growth in The North Face®, Vans®, Kipling®, Napapijri® and lucy® brands.

Operating income rose by 50%, with margins increasing to nearly 20% in the quarter, despite significant increases in marketing and other brand-building investments.

Jeanswear: Our core Wrangler® and Riders® businesses continue to perform strongly and gained share in U.S. mass market stores. In addition, revenues of our Lee brand in the U.S. rose 3% in the quarter, Asia jeanswear revenues grew by 40% and our European jeans business has stabilized. However, as anticipated, global Jeanswear revenues declined 7% in the quarter. A decline in our U.S. mass market business was due primarily to non-core programs that were discontinued in the second quarter of 2009; accordingly, revenue comparisons are expected to improve beginning in the second quarter of 2010. The exit of our mass market business in Europe contributed to lower revenues in our European jeans business but also was a factor behind the improved profitability of this business in the quarter. In addition to the strong growth in Asia, we also achieved double-digit growth in other international markets including Mexico, South America and Canada.

Operating income increased 19%, with a significant increase in margins to over 17% in the quarter.

Sportswear: Despite a slight decline in revenues, Sportswear operating income and margins each showed substantial improvement over those of the prior year’s quarter. The performance of our Nautica® brand continues to improve in both our wholesale and retail businesses. Kipling® brand revenues in the U.S. increased 33% in the quarter, reflecting the successful launch of a new, exclusive program with Macy’s.

Contemporary Brands: Revenues of our Contemporary Brands coalition, which consists of the 7 For All Mankind®, John Varvatos®, Splendid® and Ella Moss® brands rose 16%, with last year’s acquisition of the Splendid® and Ella Moss® brands contributing an incremental $14 million to revenues in the quarter compared with the 2009 period. 7 For All Mankind® brand revenues rose in the quarter, with direct-to-consumer revenues more than doubling in the period.

Operating income and margins declined from those of the prior year’s quarter due to two factors. First, last year’s first quarter included a $3.9 million favorable resolution of a 2008 tax and duty matter. In addition, investments in new 7 For All Mankind® retail stores reduced margins in this seasonally low period for revenues; these new stores are expected to contribute to significantly stronger margins in upcoming quarters.

Imagewear: Trends in our Imagewear coalition continue to improve as economic conditions have gradually improved. As anticipated, revenues were down 2% in the first quarter, but we expect a return to growth beginning in the second quarter in this coalition. Operating income and margins remained stable in the quarter.

Expansion in International and Direct-to-Consumer Businesses

Continued growth in our international and direct-to-consumer businesses remain key long-term drivers of both organic growth and margin expansion. During the quarter, international revenues increased 2%, but declined 5% on a constant currency basis. Strong growth internationally in our Outdoor & Action Sports businesses and in our Jeanswear businesses in Asia, Mexico, South America and Canada was offset by continued difficult market conditions affecting our European jeanswear business and the exit of our mass market business in Europe. Our momentum in Asia continued in the first quarter, with revenues rising 31% in the quarter and double-digit growth in The North Face®, Vans® and Lee® brands.

Our direct-to-consumer revenues increased 23%, driven by both new store openings and strong comp store performance in the quarter. The direct-to-consumer businesses of The North Face®, Vans®, 7 For All Mankind®, Kipling®, Nautica®, lucy® and Napapijri® brands each achieved strong revenue results in the period. We opened a total of 16 stores across our brands bringing the number of owned retail stores to 766 at the end of the quarter.

Gross Margins Reach Record Level in Quarter

Gross margins expanded by 450 basis points to a record 46.7% in the quarter. This substantial improvement was driven by three primary factors: 1) lower product costs; 2) continued expansion and improved gross margins in our retail stores; and 3) generally clean inventories across our businesses. Operating margins rose to 12.8% from 9.4%, with the aforementioned restructuring costs impacting operating margins by 60 basis points in the current quarter. As planned, we significantly increased our brand investments, with a 12% increase in marketing spending in the quarter.

Strong Balance Sheet

Our financial condition remains strong. Cash and equivalents were $719 million at the end of the quarter. Inventories declined 15%. We generated cash flow from operations of $184 million in the quarter, and we now expect cash flow could exceed $800 million in 2010. During the quarter we spent $118 million to repurchase 1.5 million shares and are on track to complete the repurchase of 3 million shares in the first half of 2010.

Increasing 2010 Brand Investment

Given much stronger than anticipated first quarter results, we are committing an additional $35 million in investment spending behind our strongest brands and biggest opportunities for profitable growth, bringing the total increase in investment spending this year to approximately $85 million. These growth investments are targeted toward specific opportunities, including the following:

    * The North Face® brand:
          o launch the first-ever television advertising campaign in the U.S.
          o enhance thenorthface.com consumer experience
          o drive market share gains in Europe
          o leverage the brand’s “activity-based model” to reach new consumer segments
          o boost our global product development and innovation platforms
    * Vans® brand:
          o initiate a multi-faceted, high-impact media campaign in key locations across Europe
          o launch new in-store events and enhanced visual merchandising in Vans® European stores
          o accelerate new digital innovations to expand Vans® leadership in interactive marketing globally
          o implement new initiatives around the Vans® brand as the original customizable action sports and lifestyle product provider
          o drive awareness and affinity for Vans® apparel and accessories, from boardshorts to dresses

    * China:
          o expand the Lee® brand’s multi-media campaign in key regions
          o extend The North Face® award-winning Red Flag interactive consumer campaign
          o broaden the reach of Vans® digital and event marketing programs
    * Innovation: build new capabilities to drive product innovation across our businesses

2010 Outlook

Based on strengthening trends across our businesses – and in particular in those areas where we have increased our marketing spending
we are raising our 2010 revenue guidance to an increase of 3 to 4%, up from our prior guidance of an increase of 2 to 3%. We now expect revenues in our Outdoor & Action Sports coalition to rise by more than 10% this year, versus our previous expectation for a high single-digit percent increase. Our outlook for Asia has also strengthened, and we currently anticipate revenue growth could exceed 25% this year.

Based on the exceptionally strong gross margins achieved in the first quarter, we now expect gross margins could reach 46% for the year, an increase of 170 basis points over 2009 levels.

The increase in our revenue guidance, combined with the strong trend in gross margins, supports an increase in our earnings per share guidance to approximately $5.90 versus our previous guidance of $5.60 to $5.70. The new guidance represents an increase of about 14% over 2009 earnings per share of $5.16 (before impairment charge). It also encompasses the $35 million in additional marketing spending referenced above, equaling $.20 per share. On a GAAP basis, earnings per share are now expected to increase more than 40% from the $4.13 reported in 2009.

In conclusion, Wiseman noted, “Our brand portfolio is as strong as it has ever been
and the opportunities for future growth are compelling. Our investments are concentrated behind very targeted, high-impact initiatives that will build even greater connectivity between our brands and the consumers who wear them, ultimately resulting in continued strong, profitable growth.”

Consolidated Statements of Income
(In thousands, except per share amounts)



Three Months Ended March



Net Sales

$ 1,730,086

$ 1,707,301
Royalty Income


Total Revenues


Costs and Operating Expenses

Cost of goods sold



Marketing, administrative and general expenses



Operating Income



Other Income (Expense)

Interest income



Interest expense

(20,499 )

(22,015 )

Miscellaneous, net


  (13,582 )

About The Author

Thomas J. Ryan

Thomas J. Ryan Senior Business Editor | SGB Media tryan@sgbonline.com | 917.375.4699



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