Helped by meatier margins, VF Corp. on Tuesday reported
earnings rose sharply in the third quarter, prompting the company to lift its
guidance for the year. But shares of VF still slipped 7.31 to 159.46 on the day
as overall sales slightly missed Wall Street expectations, reportedly due to a
shortfall at The North Face brand


On a conference call with analysts, Eric Wiseman, VF’s
chairman, president and CEO, said that through the first nine months of the
year, “the economic news is mixed,” with “some slowing” in the US economy,
increasingly challenging conditions in Europe and slowing growth in China.


“Against this backdrop VF delivered another quarter of
record revenues, margins and earnings, we raised our earnings guidance,
increased our dividend payments for the 40th consecutive year and confirmed our
expectation for all-time highs in revenues, earnings and cash flow,” said


The company now expects full year adjusted earnings per
share to be approximately $9.60 per share, up 10 cents from the $9.50 guidance
provided on July 19. For the fourth quarter, sales are expected to increase in
constant dollars by 7 percent in the first fully comparable quarter with
Timberland under VF's ownership with adjusted EPS increasing just over 30


Earnings in the third quarter rose 26.8 percent to $381.3
million, or $3.42 a share. The results include expenses from the September 2011
Timberland acquisition and a gain on the sale of John Varvatos. Excluding those
items, the profit came in at $3.52 a share, ahead of Wall Street’s consensus
estimate of $3.49 a share.


The bottom line was aided by gross margin improvement of 140
basis points to a record 46.7 percent, with improvements in nearly every
business. The higher gross margin also reflects the continued shift in its
revenue mix towards higher margin businesses.


VF’s revenues rose 14.4 percent to $3.15 billion, reflecting
the Timberland acquisition. Organic revenue growth in the quarter was 2 percent
(6 percent in constant dollars) driven by continued strength in the Outdoor
& Action Sports, international and direct-to-consumer businesses.


Sales were just short of Wall Street’s expectations of $3.17
billion. Analysts attributed the miss to The North Face, which saw sales grow 5
percent in the quarter, or 8 percent in constant dollars. TNF’s
direct-to-consumer business was ahead 10 percent.


On the call, Steve Rendle, VF’s VP, group president-Outdoor
& Action Sports Americas, noted that the brand faced difficult comparisons
against a 22 growth rate in the year-ago quarter. Results also reflect some
movement in its order book from the third into the fourth quarter as wholesale
orders moved closer to need based on last year's warm winter.


“Coupled with challenging conditions in Europe we're
actually quite pleased with our results,” said Rendle. “As we noted last
quarter, the fall order book is up low double-digits on a global basis and is
driven primarily by North America and Asia. We have great confidence that the business
will accelerate in the fourth quarter to a mid-teen constant dollar revenue
growth rate positioning us to end the year strongly.”


Wiseman also noted that despite the challenging spending
climate, the company has made the decision to increase its fourth-quarter
marketing investments over levels previously planned to further support growth
momentum for TNF as well as Vans in 2013.


“Uncertainty around world economic conditions will persist,
but we've demonstrated that the VF model built around diversity and brands,
products, channels and geographies is ideally suited to succeed regardless of
the environment,” said Wiseman.


By segment, the Outdoor & Action Sports Coalition’s
sales rose 28.9 percent to $1.85 billion with organic revenue growth of 6 percent,
or 11 percent in constant dollars. The addition of the Timberland and SmartWool
brands contributed $499 million to revenues in the quarter.


Operating profits jumped 28.7 percent to $413.0 million,
reflecting the impact of Timberland. Excluding Timberland, Outdoor & Action
Sports operating income rose 16 percent and operating margin increased 220
basis points to an all-time high of 25.7 percent compared with 23.5 percent in
the 2011 period.


In the Americas, TNF’s third-quarter revenues rose at a high
single-digit rate, driven by a solid sell-through in both wholesale and D2C
with particular strength in sales of lightweight outerwear, sportswear and
equipment product categories.


Rendle says TNF has seen a strong consumer response to its
key fall product initiatives including FlashDry apparel, which has been
launched in more than 3,700 wholesale doors as well as its D2C channel, “where
early reads are quite positive,” said Rendle. Its Powder Guide ABS vest,
avalanche airbag apparel system has also garnered numerous awards and praise from
the likes of Outside Magazine and Popular Science.


“The North Face brand continues to build relevance in new
product categories as well with our technical running, training and yoga lines
gaining momentum as we increase penetration in existing doors and expand into
relevant new specialty doors,” said Rendle. “Our new product pipeline is robust
and we continue to raise the bar on product innovation for the entire outdoor


For TNF, the increase in incremental spend in marketing in
the fourth quarter will support the launch of the brand’s biggest technology
focused media campaign ever centered around FlashDry, the ABS vest and key
Summit Series products in four key US markets. The mix will include TV, radio and


“We are also investing at retail both in our own stores and
in those of key partners to drive traffic and improve conversion rates in the
seasonally important period for the brand,” said Rendle.


In Europe, TNF saw a mid-single digit decline in revenues as

“macro conditions have continued to soften,” said Karl Heinz
Salzburger, VP, Group President-International. The decline was driven by
weakness in the wholesale channel as retailers remain cautious and committed to
orders later than usual.


Salzburger said TNF continues to capture market share, and
“we are confident that we are extremely well positioned to compete successfully
even in today's difficult environment.”


E-commerce in Europe grew 33 percent. New websites were
opened in Germany, the Netherlands, Ireland and Austria to bring its total
e-commerce presence to 12 countries.


Like the U.S, the coalition is increasing its fourth-quarter
marketing investment internationally over previously planned levels to support
continued momentum for TNF and Vans. Efforts will be increased for Vans in the
UK and Benelux, TNF in Germany and in China for both brands.


In Asia, TNF’s revenues jumped more than 60 percent in
constant dollars, “driven primarily by outstanding growth in China where
outdoor category growth remains very strong,” said Salzburger. TNF also doubled
its distributor business in the quarter driven by growth in Taiwan, Australia
and Singapore.


Overall, The North Face brand remains on track for mid-teen
constant dollar revenue growth both in the fourth quarter and for the full


At Vans, global revenues in the third quarter were up 21
percent, or 26 percent excluding the impact of foreign currency. The Americas
grew at mid-teens rate, driven by balanced wholesale and D2C growth.  The 18th Vans Warp Tour saw “tremendous
success” in helping the brand connect to consumers while its Vans House Parties
concert series held in Brooklyn is particularly helping “put the brand on the
map in the greater New York Metro region, the epi-center of our strategy to
grow the brand in the Northeast,” said Rendle.


Its Van Doren and Slim classics lines are resonating with
men and women with Vans overall “seeing renewed strength” in Classics across
the board. The Vans LXVI action sports lifestyle collection, launched in late
June, is “gaining traction” across key wholesale partners and its own stores.
The increased marketing spend at Vans will focus at building awareness for the
Vans LXVI collection.


Internationally, Vans sales in Europe grew 45 percent with “exceptional
strength” in Northern and Central Europe. Vans' Asian business also posted
strong results in the third quarter growing more than 40 percent in constant


Vans full year constant dollar revenue growth on a global
basis should approximate 25 percent.


Timberland’s global revenues declined slightly in the
quarter. In the Americas, sales declined moderately as the overall industry
“continues to grapple with excess inventories” after last year’s warm winter.
Said Rendle, “It is important to note that we are well positioned from an
inventory standpoint with inventories running down on a year-over-year comp


The absence of Timberland apparel in the Americas, which was
formally licensed, also impacted revenues. Rendle said efforts to “right size”
Timberland’s distribution hurt sales but improved profitability.


On the product side, Timberland’s Hookset handcrafted
collection has been “very well received” while its rugged Helcore boot
collection launched with an campaign that included street team product demos
and webisodes shows promise. A Timberland store in Chicago opened in August.


For the full year, Timberland’s global revenues are expected
to show a slight increase on a constant dollar basis. Added Rendle, “As we move
through the year we have continued to realize significant integration synergies
driven by supply chain leverage, inventory discipline and organizational
initiatives designed to bring Timberland's cost structure into better alignment
with that of the overall outdoor and action sports portfolio.”


In Europe, Timberland’s revenues were flat in constant
dollars but strength was seen with its Hookset collection as well as its
outerwear collection. In-store retail initiatives has resulted in improved comp
store performance toward the end of the quarter.


Timberland’s Asia business continues to see strong growth
with positive results across all product categories, “very good” retail comp
performance and particular strength in the key Japanese market.


For the full year, Timberland expects to see a slight
increase in sales. Rendle also said VF has continued to realize “significant
integration synergies driven by supply chain leverage, inventory discipline and
organizational initiatives designed to bring Timberland's cost structure into
better alignment with that of the overall outdoor and action sports portfolio.”


Double-digit constant dollar revenue growth in Outdoor &
Action Sports should continue in the fourth quarter, driven by strong
performance by The North Face and Vans brands. For the full year, Outdoor &
Action Sports revenues are expected to grow at the higher end of the 25-30
percent range provided in February 2012, with constant dollar organic revenues
growing at a mid-teen percentage rate.


Among its other coalitions, Jeanswear sales in the quarter dipped
1.2 percent to $718.8 million; operating earnings rose 19.8 percent to $131.4
million. Imagewear sales inched up 2.5 percent to $284.5 million while
operating profits dipped 5.7 percent to $37.5 million.


Sportswear revenues increased 1.6 percent to $154.2 million;
operating income grew slightly, to $18.5 million from $18.3 million.
Contemporary Brands’ sales were down 17.4 percent to $104.2 million but
earnings rebounded to $13.4 million from $8.1 million.