VF Corp. reported earnings declined in the second quarter but exceeded expectations, prompting the parent of The North Face, Timberland and Vans to raise its guidance for the year.
Highlights of the quarter include:
• Second-quarter revenue from continuing operations increased 2 percent to $2.4 billion (up 3 percent currency neutral).
• Gross margin from continuing operations improved 80 basis points (up 160 basis points currency neutral) to 49.7 percent.
• Outdoor & Action Sports revenue increased 4 percent (up 5 percent currency neutral); Vans brand revenue increased 8 percent (up 9 percent currency neutral). The North Face brand revenue increased 5 percent (up 6 percent currency neutral).
• International revenue increased 4 percent (up 6 percent currency neutral), including 13 percent growth (18 percent currency neutral) in China.
• Direct-to-consumer revenue increased 13 percent (up 14 percent currency neutral) with digital revenue up 34 percent (up 36 percent currency neutral).
• Earnings per share from continuing operations decreased 11 percent (flat currency neutral) to 29 cents.
• 2017 earnings per share now expected to be $2.94, including a $40 million, or 8 cents per share, impact from additional investments to fuel accelerated growth.
• VF expects to return more than $1.8 billion to shareholders in 2017 through share repurchases and dividends, up from the prior outlook of $1.6 billion.
Wall Street had expected earnings of 28 cents on average on sales of 28 cents per share on sales of $2.29 billion.
“VF’s second quarter results were solid and consistent with our expectations, driven by strong results from our largest global brands, the company’s international and direct-to-consumer platforms, and our growing workwear businesses,” said Steve Rendle, president and chief executive officer. “We have really good momentum as we move into the second half of 2017 and are confident in our growth engines, as evidenced by an increase in our full year outlook and our plan to increase our cash returns to shareholders. Based on the strength of the first half of 2017 and our expectations for the second half of the year, we are making growth-focused investments in our largest brands and platforms to generate additional value for our shareholders both in the near and long term.”
Discontinued Operations – Licensing Business And Contemporary Brands
On April 28, 2017, the company completed the sale of its Licensed Sports Group (LSG) business, including the Majestic brand. Accordingly, the company removed the assets and liabilities of LSG at that date and included the operating results of LSG in discontinued operations for all periods presented. In conjunction with the LSG divestiture, VF executed its plan to entirely exit the licensing business and has classified the assets of the JanSport brand collegiate business as held for sale and included the operating results in discontinued operations for all periods presented.
On August 26, 2016, the company completed the sale of its Contemporary Brands businesses, which included the 7 For All Mankind, Splendid and Ella Moss brands. Accordingly, the company has classified the assets and liabilities of the Contemporary Brands businesses as held for sale as of June 2016 and included the operating results of those businesses in discontinued operations for all periods presented.
The company’s net loss from discontinued operations was $5 million in the second quarter of 2017, which includes an adjustment to the estimated loss on the sale of LSG recorded in the first quarter of 2017, and the after-tax operating results of the LSG and the JanSport brand collegiate business during the quarter.
Income Statement Review
- Revenue increased 2 percent to $2.4 billion (up 3 percent currency neutral), driven by broad-based strength across its international and direct-to-consumer platforms, our Outdoor & Action Sports coalition, and its workwear businesses.
- Gross margin improved 80 basis points to 49.7 percent on a reported basis, as benefits from pricing, lower product costs and a mix shift toward higher margin businesses were partially offset by changes in foreign currency. Changes in foreign currency negatively affected reported gross margin by 80 basis points during the quarter.
- Operating income on a reported basis was down 14 percent to $168 million compared to the same period of 2016. Changes in foreign currency negatively affected the operating profit decline by 8 percentage points during the quarter. Operating margin on a reported basis decreased 130 basis points to 7.1 percent. Changes in foreign currency negatively affected reported operating margin by about 70 basis points in the quarter.
- Earnings per share on a reported basis was down 11 percent to 29 cents compared to 32 cents during the same period last year. Excluding the impact of changes in foreign currency, second quarter earnings per share was in line with last year’s second quarter.
Balance Sheet And Cash Flow Highlights
Inventories were up 3 percent compared with the same period of 2016. During the second quarter, the company purchased 14 million of its shares for approximately $760 million at an average price of $54 per share under the company’s share repurchase program authorized by VF’s Board of Directors in 2017. The company has purchased 22 million of its shares for approximately $1.2 billion thus far in 2017.
2017 Outlook Raised
The following outlook for 2017 has been updated and includes the following:
- Revenue is now expected to approximate $11.65 billion, up 2 percent on a reported basis (up 3 percent currency neutral). By coalition, revenue for Outdoor & Action Sports is now expected to increase approximately 5 percent (up 6 to 7 percent currency neutral) versus the previous expectation of a mid-single-digit percentage rate increase; revenue for Jeanswear is still expected to approximate 2016 revenue. Imagewear revenue is now expected to increase at a mid-single-digit percentage rate versus the prior expectation of a low-single-digit percentage rate increase. Sportswear is still expected to decline at a high-single-digit percentage rate.
- Direct-to-consumer revenue is now expected to increase between 10 percent and 11 percent versus the previous expectation of a high-single-digit percentage rate increase. Digital revenue is now expected to increase more than 25 percent.
- Gross margin is now expected to reach 49.8 percent, versus the previous expectation of 49.6 percent, a 40 basis point increase over 2016 gross margin, and includes about a 70 basis point negative impact from changes in foreign currency.
- Operating margin is still expected to approximate 14 percent, consistent with the 2016 adjusted operating margin, including about a 60 basis point negative impact from changes in foreign currency.
- Earnings per share is now expected to be $2.94, down approximately 1 percent on a reported basis (up at a mid-single-digit percentage rate currency neutral) compared to 2016 adjusted EPS of $2.98. This compares to the company’s prior outlook range of $2.89 to $2.94. Relative to its prior outlook, the company’s updated 2017 earnings per share outlook includes about a 8 cents per share ($40 million pre-tax) impact from additional investments to drive accelerated growth into 2018 and beyond.
- Other full-year assumptions include an effective tax rate in the low 20 percent range and cash flow from operations of about $1.45 billion.
VF’s Board of Directors declared a quarterly dividend of 42 cents per share, payable on September 18, 2017 to shareholders of record on September 8, 2017.
Photo courtesy The North Face