VF Corp. reported first quarter revenues rose 10% to $185 billion from $1.67 billion a year ago. Income from continuing operations climbed 11% to a record $149 million, compared with $134.1 million in the prior year's quarter. Earnings per share from continuing operations rose 14% in the first quarter, to a record $1.33 from $1.17 last year. The benefit from foreign currency translation was 9 cents per share in the current quarter.
“Our record results for the first quarter demonstrate the strength and diversity of the business platform we have built ' in brands, geographies, product categories and channels of distribution,” said Eric Wiseman, president and CEO. “Our international and retail businesses, both of which grew by over 20% in the quarter, are proving to be very beneficial to us as we navigate through what are clearly challenging economic conditions in the U.S. Based on this strong performance and our confidence that we have the right strategic initiatives in place to achieve our goals, we are maintaining our guidance for 2008.”
Outdoor
VF said the its Outdoor segment achieved an “exceptionally strong performance. The performance of our Outdoor coalition has exceeded our expectations, and we remain confident that our business has excellent prospects for future growth.”
Total revenues rose 18% with double-digit growth in both domestic and international businesses. The North Face, Vans, Kipling and Napapijri brands each posted double-digit revenue gains in the quarter. Operating income rose 26%, with operating margins rising a full percentage point to 16.6%.
VF said of the segment, “We look forward to double-digit top line growth and higher operating margins in 2008 as we continue to benefit from our investments in brand building and infrastructure.”
Imagewear
Total revenues of its Imagewear coalition rose 16% in the quarter, with growth in both its Image and Activewear businesses. The acquisition of Majestic Athletic added $35 million to revenues. Imagewear operating income rose in the quarter, and margins declined due to the timing of the Majestic acquisition during the 2007 first quarter.
Contemporary Brands
VF's Contemporary Brands coalition, which consists of the 7 For All Mankind and lucy brands acquired in 2007, added $96 million to first quarter revenues and $15 million to operating income. The company said, “We are particularly pleased with the performance of the 7 For All Mankind brand, which continues to exhibit strong year over year revenue growth. We are also making solid progress in strengthening the product assortment and store concept for our lucy brand as we continue our retail expansion strategy.”
Jeanswear
Revenues of its global Jeanswear coalition, which includes our Wrangler, Lee and Riders brands, declined 6% during the quarter.
VF said, “Our international jeans revenues rose 6% reflecting the benefit of foreign currency translation. We achieved strong growth in Asia,
Sportswear
Total revenues of its Sportswear coalition, which includes Nautica and John Varvatos brands as well as the Kipling brand in
“Our Kipling and John Varvatos businesses achieved higher revenues in the quarter. As anticipated, Nautica brand revenues declined, primarily due to a customer's decision last year to reduce their assortment of Nautica products, as well as lower sales in off-price channels. Recently, we decided to discontinue our Nautica women's wholesale sportswear business to focus our resources on building our core men's sportswear, licensed and direct-to-consumer businesses. This decision resulted in expenses of $3 million ($0.02 per share) in the quarter and should result in savings of approximately $3 million in the second half of 2008. The decline in operating income and margins reflects these expenses as well as the revenue decline in the quarter.”
International/direct-to-consumer
VF's international and direct-to-consumer businesses continue to be key drivers of growth.
VF said, “Our international business continued to experience solid growth, with revenues increasing 21% in the quarter and representing 36% of total revenues. We also continue to experience healthy gains in our retail revenues, which increased 24% in the quarter. Retail revenues of our Vans, The North Face, Kipling, Napapijri, Wrangler and Lee brands each grew at double-digit rates. At the end of the quarter, we had 641 owned retail stores.”
Overall operating margins rose to 13.2% in the quarter, up from 12.9% in the first quarter of 2007, helped in part by strong profitability in its international businesses. Gross margins increased to 45.1% from 43.5%, reflecting efficiency gains in its global jeanswear business and healthy growth in our lifestyle brands. Marketing, administrative and general expenses increased as a percent of revenues in the quarter due in large part to the seasonality of its expanding retail business.
Our balance sheet continues to be strong and our inventories are in good shape. Inventories were up 13% from the prior year's first quarter, with 7% of the increase due to the 2007 acquisitions. Cash and equivalents were $258 million at the end of the quarter, and we continue to expect cash flow from operations of approximately $700 million in 2008. During the quarter we repurchased 1.7 million shares.
Outlook
Looking ahead, Wiseman said, “We continue to anticipate another record year in 2008 and are maintaining our guidance for a revenue increase of 9% and an EPS increase of 10%. Our strong revenue growth should continue in the second quarter, with an anticipated increase of 10%, half of which should be organic growth. The fact that our business is changing and will continue to change ' as we expand our retail business, grow our lifestyle brands and acquire new ones ' is resulting in more seasonality in our business and will affect the cadence of our earnings during the year, particularly in the second quarter.”
We continue to look forward to higher gross margins in the second quarter, which should increase by 100 basis points. However, operating margins in the quarter could decline by 200 basis points from the 11.1% reported in the 2007 second quarter, reflecting two primary factors. The first is the absence of the gain from the sale of the H.I.S trademarks in last year's second quarter, which added $7.5 million to operating income (and $.04 to EPS) in the 2007 period. This factor will account for approximately 50 basis points of the expected decline in operating margins. The second primary factor relates to our Outdoor coalition, where seasonality plays a role. We expect continued strong top line growth in our Outdoor coalition in the second quarter, but higher spending in retail, distribution and advertising will disproportionately impact profitability in the second quarter, our seasonally lowest period of revenues. For example, we expect to open 15 to 20 new stores in our Outdoor coalition in the quarter. In addition, distribution expenses will increase to support the higher shipping levels we expect in the second half of the year, and advertising will be up as a percent of revenues to support future growth.
As a result of our commitment to continue investing in the growth of our Outdoor business, Outdoor operating income and margins are expected to be below last year's second quarter, which will account for most of the remaining 150 basis point expected reduction in our second quarter operating margins. On a full year basis, we continue to expect that operating margins in our Outdoor coalition in 2008 will be above prior year levels.
Two other items will impact second quarter margins, but to a much lesser degree. In Sportswear, while revenue comparisons should improve in the second quarter, operating income and margins are also expected to decline, due to similar issues that impacted first quarter profitability. Looking forward to the second half of 2008, we anticipate Sportswear operating margins returning to double-digit levels, due in part to improved performance in our retail stores and easier comparisons. In addition, the second quarter is a low period of revenues and profitability for our Contemporary Brands coalition. While it will be clearly profitable in the second quarter, considering the acquisition interest expense along with the seasonality of our Seven For All Mankind and lucy activewear businesses, we expect a slightly dilutive impact from these acquisitions of $.02 per share in the quarter.
Taking into account the above factors, we expect second quarter earnings per share will approximate $.80 per share compared with $.93 in the 2007 quarter.
“We expect strong revenue comparisons and a resumption of double-digit earnings per share growth in the second half of 2008, driven by the exceptional profitability in our growing international businesses, continued growth in our retail revenues and profits, the seasonal benefit to revenues from our fast-growing Outdoor business and improved results across our coalitions. 'While we expect economic and retail conditions to remain very challenging, we believe we have the right business model supported by the solid execution plans needed to achieve our 2008 growth targets.”
Dividend Declared
The Board of Directors declared a cash dividend of $.58 per share, payable on June 20, 2008 to shareholders of record as of the close of business on June 10, 2008.
