With another stellar performance from its triumvirate of outdoor brands The North Face, Vans and Timberland, VF Corp. reported earnings and revenues that expanded at a double-digit rate on a currency-neutral basis in the second quarter while lifting its EPS guidance for the year.
In the Outdoor & Action Sports coalition, sales jumped 16 percent on a currency-neutral basis to $1.4 billion and grew 9.2 percent on a reported basis. Operating income rose 17 percent on a currency-neutral basis to $134.9 million in the segment and gained 3.2 percent on a reported basis. Operating margin declined 50 basis points to 9.7 percent (as reported), due to changes in foreign currency rates.
The sales performance by the Outdoor & Action Sports coalition came on top of a 10 percent gain seen in the first quarter.
“We are really pleased with the momentum this business continues to create and sustain,” said Steve Rendle, president and COO, on a conference call with analysts. “This quarter's growth was balanced with mid- to high teen increases in both our wholesale and D2C businesses. With double-digit growth in almost all 10 brands in this portfolio, we are firmly on track to achieve our 2015 currency-neutral growth target.”
The coalition includes The North Face, Vans, Timberland, JanSport, SmartWool, Napapijri, Eagle Creek, Kipling Europe, Lucy and Reef.
At The North Face, sales on a currency-neutral basis rose 10 percent (up 6 percent reported), including a 20 percent increase (up 15 percent reported) in its direct-to-consumer (D2C) business.
By region, The North Face brand’s revenue was up at a low double-digit percentage rate in the Americas. The wholesale business grew at a high single digit rate and D2C was up at a mid-teen rate, including continued strength in e-commerce.
“With the successful move of The North Face website to VF's new e-commerce platform, we are really pleased to see increased traffic and conversion particularly in mobile,” said Rendle.
Mountain Athletics saw strong growth, including “great initial results” from its newly launched women's product. An ITrainFor campaign featuring a 30 second TV spot as well as digital and display ads supported the growth. The brand is also holding twice a week free outdoor workouts in five major cities across the nation reaching consumers training for ski adventures and cross-country treks goals or just seeking to improve their daily workout.
Said Rendle, “Athletes everywhere have responded well to these sessions led by expert trainers. Still in its early days, the Mountain Athletics business is picking up momentum and is clearly helping The North Face move to a year-round brand.”
During the quarter, The North Face successfully relaunched its iconic Hedgehog hiking footwear collection to a “very strong” response. Thermoball is also seeing an “incredibly strong comp and balanced men's and women's growth.”
Internationally, sales for TNF were up at a mid single-digit rate (down low-teen percentage reported) in Europe, driven by D2C. Mountain Athletics, Hedgehog and Thermoball collections were also strong in Europe. Sales were up at a low-teen percentage rate in the Asia Pacific region, again led by D2C. For the full year, The North Face is expected to continue to see low double-digit currency-neutral revenue growth.
At Vans, sales grew 23 percent on a currency-neutral basis (up 17 percent reported), including a 25 percent increase (up 21 percent reported) in D2C sales and 22 percent growth (up 15 percent reported) in wholesale sales. The performance marked Vans’ 23rd consecutive quarter of double-digit growth.
Revenue in the Americas region was up greater than 20 percent with similar growth rates in the retail and wholesale channel. Scott Baxter, group president, attributed Vans ongoing success to “the strong connectivity the brand has with their consumers who are often more loyal fans than consumers.”
Standout product included its Disney collaboration, which saw “really strong sell-through” at D2C and wholesale. Vans collaboration with Takashi Murakami, the Japanese pop art icon, resulted in long lines outside stores. Outreach events such as The Vans Warped Tour and the Vans U.S. Open of Surfing is also helping Vans resonate with its customer base.
In other regions, Vans sales were up more than 30 percent in Asia Pacific, and up at a mid-teen percentage rate (down mid single-digit reported) in Europe. Overall internationally, Vans saw 35 percent growth in D2C and a mid-teens increase in wholesale. In 2015, VF continues to expect a mid-teen currency-neutral percentage rate increase in revenue for Vans.
Timberland’s sales advanced 10 percent on a currency-neutral basis (up 2 percent reported), including a 17 percent increase (up 9 percent reported) in its wholesale business. Said Baxter, “Timberland continues to build its relevance as the year-round outdoor lifestyle brand with its adaptive style that is made for the modern trail.”
In the Americas region, Timberland’s revenue was up at a mid single-digit percentage rate (up low single-digit reported), with a low-teen increase in the wholesale space on a currency-neutral basis. Baxter noted that the quarter is Timberland’s smallest quarter, typically representing less than 15 percent of Timberland's annual revenue.
“Boots and hikers in both men's and women's led the way,” said Baxter. “In men's, it was exciting to see the success of the casual growth in Collection. We are really starting to break through with true spring product. In women's, casual and plastic boots as well as new spring sandals helped that business more than double in the quarter. “
During the quarter, the relaunch of timberland.com with an updated look and interface that marries content and commerce drew accolades. On the Timberland Pro side, the When Your Feet Hurt Your Work Suffers campaign helped drive particular strength in its Pro Boondocks and Pro Powertrain collections.
“It is clear that this consumer continues to turn to Timberland to provide great innovative products for their on-the-job needs,” said Baxter. “So double-digit growth in the first half and now onto the fun part of the year – definitely a lot of great things ahead for Timberland in 2015.”
In Asia Pacific, Timberland’s revenue in the quarter was up at a high single-digit percentage rate (up low single-digit reported) and in Europe, up at a high-teen percentage rate (down slightly reported). VF expects Timberland’s revenue to continue to increase at a low-teen percentage rate on a currency-neutral basis in 2015.
The fastest-growing brand of the quarter across VF’s entire portfolio was Eagle Creek with 28 percent growth. VF’s officials noted that Eagle Creek was just named as Consumer Reports top luggage brand for 2015. Kipling, Napapijri and JanSport were also called out for “particularly strong results.”
In other coalitions, Jeanswear (Wrangler, Lee) increased 4 percent on a currency-neutral basis to $608.2 million and was flat on a reported basis. Operating earnings on a reported basis gained 4.4 percent to $104.6 million.
In the Imagewear segment (Red Kap, Majestic Athletic) sales were flat on both a currency-neutral and reported basis at $248.8 million. A mid single-digit increase in the Licensed Sports Group business was offset by a low single-digit percentage rate decline (down mid-single reported) in workwear due to slower oil production demand. Operating income was flat on a reported basis at $35.4 million.
In the Sportswear segment (Nautica, Kipling U.S.) sales were up 1 percent on a reported and currency-neutral basis, to $142.2 million. Operating income on a reported basis grew 40.6 percent to $14.4 million.
In its Contemporary Brands coalition (7-for-all-Mankind, Ella Moss, Splendid), sales slid 5 percent on currency-neutral basis while giving back 9.7 percent on a reported basis to $86.9 million. Operating income on a reported basis tumbled 87.1 percent to $1.14 million.
Companywide, sales rose 10 percent on a currency-neutral basis to $2.51 billion while gaining 4.7 percent on a reported basis. The gains were driven by growth in its Outdoor & Action Sports and Jeanswear coalitions, and its international and direct-to-consumer (D2C) businesses.
Net earnings increased 8.3 percent to $170.8 million. On a per share basis, earnings grew 11 percent to 40 cents and were up 22 percent on a currency-neutral basis. Wall Street’s consensus estimate had been 36 cents a share.
Gross margin was 48.3 percent on a reported basis, down 10 basis points compared with the same quarter last year, but in line with expectations. Continued benefit from the shift of it revenue mix toward higher margin businesses was more than offset by the impact of foreign currency.
Operating income on a reported basis was up 1 percent to $223 million compared with the same period in 2014. Operating margin on a reported basis declined 30 basis points to 8.9 percent due to the negative impact from changes in foreign currency rates.
International revenue, on a currency neutral basis, was up 13 percent (down 1 percent reported) in the second quarter. Revenue in Europe was up 11 percent (down 8 percent reported) and up 17 percent (up 14 percent reported) in the Asia Pacific region. Revenue in the Americas (non-U.S.) region was up 11 percent (down 1 percent reported). On a reported basis, the international business was 34 percent of total second-quarter revenue compared with 36 percent in the same period of 2014.
D2C revenue, on a currency neutral basis, grew 13 percent (up 7 percent reported) in the quarter with positive comparable sales growth in all regions and particular strength in Asia Pacific. Forty-nine stores were opened during the quarter bringing the total number of VF-owned retail stores around the world to 1,438. On a reported basis, D2C revenue reached 26 percent of total revenue in the quarter, the same percentage as last year’s second quarter.
Full year revenue expectations for 2015 were unchanged, with an 8 percent increase on a currency-neutral basis (up 3 percent reported). Revenue for the Outdoor & Action Sports coalition is expected to increase at a low double-digit currency-neutral percentage rate (up mid single-digit reported).
Currency-neutral gross margin is still expected to improve 70 basis points to reach about 49.5 percent for the full year. Based on expected changes in foreign currency for the balance of the year, however, reported gross margin is now expected to be closer to 49 percent compared with the previous expectation of 49.2 percent.
EPS, on a currency neutral basis, is now expected to increase 15 percent compared to an adjusted EPS of $3.08 in 2014. This is an increase from the previous expectation of 14 percent per share growth provided in early May.
Scott Roe, CFO, said the performance will put VF further ahead of 2017 five-year EPS target. He added, “In fact is a nice stairstep acceleration in the first three years of our plan – plus 13 percent in year one, 14 percent in year two and now plus 15 percent in year three.”
EPS, on a reported basis, is now anticipated to increase 5 percent to $3.22 compared to adjusted earnings per share of $3.08 in 2014.
Third quarter currency-neutral and reported revenues are expected to increase at nearly the same rates as those of the second quarter driven by strength from the Outdoor & Action Sports and Jeanswear coalitions, its international operations and continued strength in its D2C businesses. Fourth quarter currency-neutral revenue should increase at a rate slightly lower than third quarter results due to the tougher comparison against the same period of 2014 which included a 53rd week. The strongest margin and profit comparisons of the year are expected in the fourth quarter, when D2C business makes the most significant contribution of the year, the negative impact of currency lessens and lower product costs are realized.
