VF Corp. reported first-quarter earnings were down slightly due to a sales dip and currency headwinds but VF said results were in line with expectations and its growth platforms performed well. On  currency-neutral basis, The North Face’s sales grew 8 percent in the quarter while Vans rose 6 percent.

First-Quarter Highlights

  • First quarter revenue from continuing operations decreased 2 percent to $2.6 billion (down 1 percent currency neutral);
  • Gross margin from continuing operations improved 150 basis points (up 190 basis points currency neutral) to 50.2 percent;
  • Outdoor & Action Sports revenue increased 2 percent (up 4 percent currency neutral); The North Face brand revenue increased 6 percent (up 8 percent currency neutral) and Vans brand revenue increased 5 percent (up 7 percent currency neutral);
  • International revenue increased 2 percent (up 5 percent currency neutral), including 5 percent growth (10 percent currency neutral) in China;
  • Direct-to-consumer revenue increased 6 percent (up 7 percent currency neutral) with digital revenue up 25 percent (up 26 percent currency neutral); and,
  • EPS from continuing operations decreased 8 percent (down 3 percent currency neutral) to 52 cents; EPS growth was negatively impacted by 8 percentage points due to lower discrete tax benefits in the first quarter of 2017, compared with 2016.

“VF’s first quarter results were right in line with our expectations. The company’s largest brands and international and direct-to-consumer platforms performed well, delivering solid results against a retail backdrop that continues to experience significant dislocation,” said Steve Rendle, president and chief executive officer. “Our diversified value-creation model and our focus on becoming a more agile and consumer-centric organization position us to accelerate growth through 2017 and execute against our recently announced 2021 strategic growth plan.”s.

Discontinued Operations – Licensing Business And Contemporary Brands

On April 4, 2017, the company announced it had reached an agreement to sell its Licensed Sports Group (LSG) business, including the Majestic brand, to Fanatics, Inc., subject to customary closing conditions. The company expects to complete the sale of its LSG business in the second quarter of 2017. In conjunction with the LSG divestiture, VF executed its plan to entirely exit the licensing business, which comprises the LSG and JanSport brand collegiate businesses (together, the “Licensing Business”). Accordingly, the company classified the assets and liabilities of these businesses as held for sale and included the results of these businesses in discontinued operations for all periods presented.

On August 26, 2016, the company completed the sale of its Contemporary Brands businesses, which included the 7 For All Mankind, Splendid and Ella Moss brands. Accordingly, the company has classified the assets and liabilities of the Contemporary Brands businesses as held for sale as of March 2016 and included the results of those businesses in discontinued operations for all periods presented.

The company’s net loss from discontinued operations was $5.5 million in the first quarter of 2017, which includes the estimated loss on the sale of the Licensing Business, net of the associated tax impact triggered by the disposition, and the after-tax operating results of the Licensing Business during the quarter, including restructuring and other charges related to the decision to discontinue the business.

Income Statement Review

  • Revenue declined 2 percent to $2.6 billion (down 1 percent currency neutral), however, our key growth drivers, including our international and direct-to-consumer platforms, and our Outdoor & Action Sports coalition delivered stronger results during the quarter.
  • Gross margin improved 150 basis points to 50.2 percent on a reported basis, as benefits from pricing, lower product costs and a mix-shift toward higher margin businesses were partially offset by changes in foreign currency. Changes in foreign currency negatively affected reported gross margin by 40 basis points during the quarter.
  • Operating income on a reported basis was down 7 percent to $291 million compared to the same period of 2016. Changes in foreign currency negatively affected operating profit growth by 5 percentage points during the quarter. Operating margin on a reported basis decreased 50 basis points to 11.3 percent. Changes in foreign currency negatively affected reported operating margin by about 40 basis points in the quarter.
  • Earnings per share on a reported basis from continuing operations was down 8 percent to 52 cents compared to 56 cents during the same period last year. Excluding the impact of changes in foreign currency, first quarter earnings per share was down 3 percent. 

Balance Sheet And Cash Flow Highlights

Inventories were up 2 percent compared with the same period of 2016. During the first quarter, the company purchased 8.2 million of its shares for $438 million at an average price of approximately $53 per share under the company’s share repurchase program authorized by VF’s Board of Directors in 2013. In March 2017, VF’s Board of Directors approved a program that authorizes up to $5 billion of share repurchases.

2017 Outlook

The following outlook is presented on a continuing operations basis and has been updated to exclude the Licensing Business, which has been presented as discontinued operations for fiscal years 2016 and 2017.

  • Revenue is expected to increase at a low single-digit percentage rate including about a 2 percentage point negative impact from changes in foreign currency.
  • Gross margin is expected to reach 49.6 percent, a 20 basis point increase over 2016 gross margin, and includes about a 70 basis point negative impact from changes in foreign currency.
  • Operating margin is expected to approximate 14 percent, consistent with the 2016 adjusted operating margin, including about a 60 basis point negative impact from changes in foreign currency.
  • Earnings per share is expected to be down at a low single-digit percentage rate compared to 2016 adjusted EPS of $2.98 (up at a mid-single-digit percentage rate on a currency neutral basis).
  • Other full year assumptions include an effective tax rate in the low 20 percent range and cash flow from operations of about $1.45 billion.

Dividend Declared

VF’s Board of Directors declared a quarterly dividend of $0.42 per share, payable on June 19, 2017 to shareholders of record on June 9, 2017.

Photo courtesy The North Face