VF Corporation revenues rose 8% in the quarter to a record $1.566 billion compared with $1.452 billion in the second quarter of 2005, fueled by healthy organic growth across the Outdoor, Jeanswear, Imagewear and Sportswear coalitions. Net income in the current quarter increased to a record $99.0 million compared with $96.7 million in the prior year’s quarter, which benefited from $7.7 million, equal to 7 cents per share, in special items. Accordingly, reported earnings per share increased 4% to 88 cents. Excluding the effect of the special items in 2005, second quarter earnings per share increased 13%.
For the first six months of 2006, revenues were up 7% to $3,232.6 million from $3,034.3 million in the 2005 period. Income rose 7% to $227.2 million from $211.4 million, while earnings per share increased 9% to $2.02 per share from $1.85 per share, before a $.10 per share cumulative effect of a change in accounting policy for stock compensation expense in the first quarter of 2005. Excluding the special items in last year’s second quarter and the effect of the accounting change for the first half of 2005, income in the first half of 2006 increased 12% and earnings per share rose 13%.
“This quarter is further evidence of the power of our brands, which are benefiting from continued investments in marketing, new talent and infrastructure designed to keep them strong and growing,” said Mackey J. McDonald, chairman and chief executive officer. “We are gratified by the strong organic growth our brands are currently generating, which we expect will continue. We are also continuing to aggressively pursue acquisitions, which remain an important component of our future growth.”
The Outdoor coalition enjoyed another quarter of robust double-digit growth, with total revenues up 24% to $371.0 million, with strong gains both domestically and internationally. The North Face® brand continued its momentum in the quarter with a revenue increase of 16%, while Vans®, JanSport®, Reef® and Kipling® brands each grew revenues in excess of 20% in the quarter.
Operating income rose slightly in the quarter, while operating margins declined to 11.4% from 13.9%. VF is continuing to make significant investments in the Outdoor brands to support strong future growth. These investments impacted margins particularly heavily in the second quarter, given the seasonal nature of our Outdoor businesses.
The Jeanswear coalition posted excellent results in the quarter, with growth across most of the brands and geographic markets. Total revenues were up 6% in both domestic and international jeans businesses. The Lee® brand in the U.S. revenues grew 11% in the quarter. Reflecting continued strength in Wrangler Hero® and Riders® brands, the Mass Market business also experienced solid gains, with revenues up 8%. Growth in international markets such as Latin America, Mexico and China continued, with double-digit revenue increases in each. Revenues in Europe and Canada also grew in the quarter.
Jeanswear operating margins were a healthy 13.9% in the quarter compared with 15.3% in the prior year’s quarter. Jeanswear operating margin comparisons reflect the impact of the special items that boosted margins by 2.2% in the 2005 quarter. Excluding the special items, Jeanswear operating margins improved by nearly one percentage point in the 2006 quarter.
Total revenues of the Sportswear coalition, which includes Nautica®, John Varvatos®, and Kipling® in North America, increased 5% in the quarter. Each brand achieved higher revenues in the quarter. Nautica® brand men’s sportswear business continues to perform very well despite recent department store consolidation, and the company is looking forward to the initial test of its new women’s sportswear line this fall.
Operating income and margins continue to reflect investments to support the women’s sportswear initiative. Sportswear operating margins were 12.7% in the current quarter compared to 13.8% in the prior year’s quarter, with these investments accounting for nearly all of the decline.
The Imagewear team delivered another outstanding quarter, with revenues up 4%. The gain was due to higher sales of Image apparel, which includes uniforms for the industrial, public safety and service markets, while our Licensed Apparel business was about flat with prior year levels.
Operating margins jumped two full percentage points in the quarter, to 15.4% from 13.4%.
The Intimate Apparel coalition experienced a revenue decline of 3% in the quarter. The revenue decline in the Department Store and Mass Market businesses was partially offset by a strong increase in Private Brands business and higher international revenues. Operating income and margins improved in the quarter, but the comparisons reflect special items that negatively impacted margins in the prior year’s quarter. Operating margins declined to 6.9% in 2006 from 10.3%, excluding the special items in 2005.
VF continues to grow its base of owned retail stores. Over the past twelve months, it has added a total of 47 stores, including full price and outlet stores, and expects to add between 45 and 50 additional stores by year-end. The biggest expansion is in our base of Vans® stores, with several stores also being added in our Kipling®, Napapijri® and The North Face® brands, as well as in our Lee® and Wrangler® brands internationally.
The tax rate rose to 33.3% in the quarter from 29.5% in the prior year’s second quarter, due primarily to the impact of the aforementioned special items in the 2005 period.
The balance sheet remains strong. Inventories increased at a lower rate than revenues, rising 4% versus the comparable quarter in 2005. Debt as a percent of total capital was 24.7% at the end of the quarter versus 29.7% at the end of the 2005 period.
“Our strong performance to date gives us increased confidence in our outlook for the remainder of 2006. Accordingly, we are raising our full year earnings guidance to $5.00 per share from $4.95 previously, which represents a 10% increase over the $4.54 reported in 2005 before the cumulative effect adjustment. Revenues are now expected to rise approximately 7% for the year, to nearly $7 billion.
Strong organic growth should continue in the third quarter, with revenues expected to rise approximately 8%. Earnings per share are anticipated to increase by about 6%, reflecting heavier spending in such areas as marketing, new product launches, technology and distribution to support growth. The fourth quarter should be particularly strong, with earnings per share rising about 17%.
“Our growth plan is working,” said Mr. McDonald. “Were headed for another record year, with strong momentum across most of our brands and businesses. Were excited about the wide range of growth opportunities that lie before us, many of which are still in their early stages. We are fortunate to have built strong operating platforms and leading-edge supply chain processes and technologies that provide us with ample fuel to invest behind these opportunities and still maintain industry-leading profit margins.”
“We continue to anticipate another solid year of cash flow from operations, which should approximate $600 million in 2006.”
The Board of Directors declared a cash dividend of $.55 per share, payable on September 18, 2006 to shareholders of record as of the close of business on September 8, 2006, consistent with the 90% increase in the indicated dividend rate announced in May.
VF CORPORATION
Consolidated Statements of Income
(In thousands, except per share amounts)
Three Months Six Months
Ended June Ended June
----------------------- -----------------------
2005 2005
2006 (see Note B) 2006 (see Note B)
----------- ----------- ----------- -----------
Net Sales $1,548,055 $1,435,831 $3,194,460 $2,999,474
Royalty Income 18,773 16,276 38,101 34,818
----------- ----------- ----------- -----------
Total Revenues 1,566,828 1,452,107 3,232,561 3,034,292
----------- ----------- ----------- -----------
Costs and Operating
Expenses
Cost of goods sold 911,842 841,812 1,876,400 1,757,376
Marketing,
administrative and
general expenses 493,779 456,511 992,007 936,626
----------- ----------- ----------- -----------
1,405,621 1,298,323 2,868,407 2,694,002
----------- ----------- ----------- -----------
Operating Income 161,207 153,784 364,154 340,290
Other Income (Expense)
Interest income 1,292 2,041 2,710 5,057
Interest expense (13,862) (18,490) (26,552) (37,164)
Miscellaneous, net (84) (137) 798 (18)
----------- ----------- ----------- -----------
(12,654) (16,586) (23,044) (32,125)
----------- ----------- ----------- -----------
Income before Income
Taxes and Cumulative
Effect of a Change in
Accounting Policy 148,553 137,198 341,110 308,165
Income Taxes 49,521 40,449 113,893 96,730
----------- ----------- ----------- -----------
Income before Cumulative
Effect of a Change in
Accounting Policy 99,032 96,749 227,217 211,435
Cumulative Effect of a
Change in Accounting
Policy - - - (11,833)
----------- ----------- ----------- -----------
Net Income $ 99,032 $ 96,749 $ 227,217 $ 199,602
=========== =========== =========== ===========
Earnings Per Common
Share - Basic
Income before
cumulative effect of a
change in accounting
policy $ 0.90 $ 0.87 $ 2.06 $ 1.90
Cumulative effect of
a change in
accounting policy - - - (0.11)
Net income 0.90 0.87 2.06 1.79
Earnings Per Common
Share - Diluted
Income before
cumulative effect of
a change in accounting
policy 0.88 0.85 2.02 1.85
Cumulative effect of
a change in
accounting policy - - - (0.10)
Net income 0.88 0.85 2.02 1.75
Weighted Average Shares
Outstanding
Basic 109,879 110,254 109,867 111,008
Diluted 112,539 113,283 112,440 114,138
Cash Dividends Per
Common Share $ 0.55 $ 0.27 $ 0.84 $ 0.54
