While VF Corp.s Outdoor Coalition is still clearly the primary driving force behind the companys revenue and earnings growth, the company is beginning to see success in several other segments as well, including Jeanswear, Sportswear, and Imagewear.
For the third quarter, VFC managed to push beyond the $2 billion revenue mark for the first time with $2.03 billion in sales, compared with $1.82 billion in the third quarter of 2005. This 12% increase was driven by double-digit growth in the Outdoor Coalition and mid- to high-single-digit revenue growth in every other reporting segment.
“Were very pleased to see growth coming from across all of our coalitions, and its all organic,” said Mackey Macdonald, chairman and CEO of VF Corp., during a conference call with analysts. “Our outdoor coalition clearly has the strongest momentum, but a third of the revenue growth achieved during the quarter was generated from our other coalitions.”
Outdoor Coalition revenues increased 25.4% to $659.0 million during the quarter compared to $525.2 million last year. This was fueled by 30% growth at TNF with “solid double-digit” increases in both wholesale and retail sales. TNFs spring bookings are apparently up 20% compared to the same time last year. In addition, TNF retail comps were said to be up “more than 20%” for the year.
Vans is also one of the key growth stories at VF with revenues jumping 20% and spring bookings up 47% in North America and up 20% in Europe. Vans retail comp sales were also up in the 20% range with strong profitability. In fact, the retail segment of Vans is so profitable, Eric Wiseman, VP & chairman of the Outdoor Coalition, said that his team is opening retail locations as fast as they can find appropriate real estate.
VFs other outdoor brands — Reef, Kipling, Napapijri, and Eastpak — “demonstrated solid growth” and the company said they all have “excellent prospects for continued growth.”
During the quarter, VF opened 21 retail stores across several brands including Vans, Kipling, and Napapijri, bringing the total number of owned-retail stores to 560. Total retail revenues grew 17% in Q3.
Overall, VFs push into retail has been quite successful with Vans leading the way in terms of profitability. Operating margins for the retail stores are comparable to VFs wholesale business, and in some cases they are actually higher. In addition, VFC feels the brand-building impact form the retail locations carries through to VFs wholesale customers and enhances their business.
Outdoor Coalition operating earnings kept pace with sales, increasing 25.4% for the quarter. Operating margins were flat at 21.2% in spite of increased costs related to the development and implementation of new systems in the Outdoor Coalitions new distribution center. This new DC, coupled with an exceptionally strong September, caused a shift in sales from Q4 into Q3, inflating the Outdoor Coalitions top-line numbers slightly and negatively impacting the next quarter.
The strong September also spiked VFs accounts receivable, which should in-turn generate higher rates of free cash flow in Q4. Inventories increased at a lower rate than revenues, rising 2% versus the comparable quarter in 2005. Debt as a percent of total capital declined to 24.3% at the end of the quarter versus 27.3% at the end of the 2005 period.
VFs Imagewear Coalition continues to make solid improvements with licensed apparel. Revenues for the division increased 6.3% to $215.7 million compared to $203.0 million last year, thanks to the roll-out of the ESPN Game Day apparel line and strong sales in licensed professional football and baseball team apparel.
On the operations side of the business, the company has been working towards $100 million in cost savings, which will then be re-invested into brand building. So far the company has realized $20 million to $30 million in cost savings under this plan.
Overall gross margins expanded slightly in the quarter, to 42.3%. Operating margins were down 70 basis points to 15.1%, due to these brand-building investments and other actions supporting future revenue and earnings growth.
The company has several initiatives under way to optimize its global supply chain, especially within the Outdoor Coalition where the company is working on making “selective moves” to increase capacities in lower cost geographies.
Net income for the third quarter increased 10% to $197.7 million, compared with $179.6 million last year. Earnings per share rose 11% to $1.75 from $1.57, beating internal guidance by nine cents and surpassing analysts expectations. Foreign currency translation benefited revenues by $24 million and EPS by three cents in the quarter.
Fourth quarter revenues are expected to increase by about 6%, with earnings per share rising approximately 13%, indicating additional expansion in operating margins during the period.
Due to the strong third quarter, VF management now expects full year revenues to be up approximately 8% in 2006 – surpassing the $7 billion mark for the first time – with nearly all of the increase coming from organic growth. Earnings per share are now expected to rise 11% to approximately $5.05 over the $4.54 reported in 2005.
>>> TNF isnt showing any signs of slowing down, but youve gotta wonder how many quarters of 20% growth they can sustain