Carried by double-digit gains at The North Face, Vans and Timberland coupled with gross margin expansion in every coalition, VF Corp. reported net income rose 9.9 percent in its first quarter and hiked it outlook for the year.
Earnings reached $297.2 million, or 67 cents a share, exceeding Wall Street's consensus estimate by 4 cents a share. Companywide revenues rose 6.5 percent to $2.75 billion. Net income rose 9.9 percent to $297.2 million, or 67 cents a share, exceeding Wall Street's consensus estimate by 4 cents a share.
On a conference call with analysts, Eric Wiseman, VF’s chairman, president and CEO, remarked that the Outdoor & Action Sports coalition grew at a faster rate in the first quarter than the fourth quarter of last year, with revenues up 14 percent versus 12 percent in Q4. He said the coalition “had balanced growth across all channels and geographies.”
VF now expects the Outdoor & Action Sports coalition sales to grow 12 percent to 13 percent higher this year after projecting low double-digit revenue growth in February, lifted by raised expectations for Timberland.
Other highlights companywide in the quarter include an 11 percent gain internationally, including double-digit growth in both Europe and Asia-Pacific. Direct-to-consumer grew 16 percent, with double-digit growth in both its US and its international business.
Gross margin improved 130 basis points to 49.4 percent, an all-time high for any quarter in VF’s history, with improvements in every coalition. The improved margin was driven by the continuing shift of its revenue mix toward higher margin businesses – including direct-to-consumer (DTC), international and its Outdoor and Action Sports coalition – and includes 30 basis points related to previously-disclosed change in classification of retail concession fees.
SG&A as a percent of revenues rose 50 basis points to 34.9 percent in the first quarter, primarily driven by the reclassification of retail concession fees. Excluding that, SG&A was relatively flat year-over-year in spite of investments in its D2C business and marketing.
Operating income increased 13 percent to $403 million, or 14.5 percent of sales.
In the Outdoor & Action Sports coalition, revenues grew 13.8 percent to $1.57 billion with double-digit growth across the U.S. and international markets as well as in wholesale and DTC channels. Operating profits advanced 21.2 percent to $274.5 million with an improvement in operating margin of 100 basis points to 17.4 percent.
First quarter revenues for The North Face brand rose 14 percent globally, accelerating from the 12 percent gain seen in Q4. The increase was driven by nearly 30 percent growth in DTC sales and a high single-digit increase in the brand’s wholesale business. By region, The North Face brand’s revenues were up at a high-teen percentage rate in the Americas region, up at a mid-teen percentage rate in Asia Pacific and up at a low single-digit percentage in Europe.
In the Americas, Steve Rendle, VP & group president, Outdoor & Action Sports Americas, said the gains were led by successes in both winter and spring products.
“Product highlights like Thermoball and our premium Steep Series line saw consistent strength over the winter season, and as we made the transition to spring, Thermoball, which is engineered as a transitional-weight product, remains quite strong, along with a spring 2014 launch of our ultra performance footwear collection, and the Mountain Athletics earning line, which are driving continued momentum, and further validating our expansion into a four-season brand,” he said.
With Fall 2014 marking significant expansions in Thermoball styles in the Mountain Athletics collection, the launch of its new Quantum outdoor training collection, and the debut of FuseForm in its Steep Series line, Rendle said, “2014 will be one of the strongest product offerings in TNF's history.”
Campaigns like Mountains are Calling and The Explorer are establishing significant social media momentum for the brand, helping drive the highest TNF brand equity scores ever posted.
In Europe, TNF delivered a low-single digit increase, which Karl Heinz Salzburger, VP & group president, International, rated as “solid results” given the “much warmer than normal winter.” D2C revenues in Europe were up at the mid-teen rate, including more than 30 percent growth in online sales. TNF is “make significant progress on transitioning our apparel to the European fit,” and also expanding its snow sports and activity-inspired categories to better meet local demand, he added.
Asia’s mid-teen increase was led by “significant D2C strength.” In China, sales grew at the mid-teen rate.
Concluded Rendle, “Inventories in both the D2C and wholesale channels are in great shape, and with amazing product on deck and solid bookings in hand for this coming fall, we have great confidence in our ability to deliver 12 percent global growth for The North Face in 2014. Now here is Karl Heinz to run through Europe and Asia.”
Vans revenues, which represented the highest of any VF brand in the first quarter, were up 20 percent in the quarter with strong, double-digit growth across all geographies, as well as in the brand’s wholesale and DTC channels. The skate brand marked its 18th consecutive quarter of double-digit revenue growth. Revenues in the Americas region were up at a low-teen percentage rate in the quarter, up more than 20 percent in Europe and more than 40 percent in the Asia Pacific region. Global DTC revenues for the Vans brand were up 19 percent in the quarter.
The gains in the Americas were driven by balanced strength in both its D2C and wholesale channels, said Rendle. In the Americas, Vans on the footwear side is seeing a “great response” in its women's business, particularly in slip-ons, in both sell-in and sell through. In Classics, its Beatles collaboration, coinciding with the 50th anniversary of the band’s appearance on Ed Sullivan, has seen “great success,” added Rendle.
On the technical skate front, the Gilbert Crockett Pro model is helping elevate Vans into higher price points. In apparel, women’s is relauching this spring and 2014 marks the first year for Vans moving into a four-season apparel model with a “true summer collection.”
A new digital platform was launched in late March at vans.com that merges content and commerce. Said Rendle, “Early reads on the new format and both sales and sentiment have been nothing but positive.”
The 20 percent gain in Europe for Vans reflected D2C growth of more than 40 percent, said Salzburger. The House of Vans in London, which opened in August, has been a hit. Vans Europe website is likewise being redesigned. Van’s 40 percent growth in Asia included a more than doubling of growth in China. Vans also opened the first skate park in Korea this year.
Revenues for the Timberland brand were up 12 percent in the quarter. In the Americas region, revenues increased at a high-teen percentage rate, including greater than 20 percent growth in its wholesale business and solid DTC results driven by double-digit comparable store growth rates. Timberland grew at a high single-digit percentage rate in Europe and at a low double-digit percentage rate in Asia Pacific. Globally, Timberland’s growth was balanced between its DTC and wholesale businesses in the quarter.
VF now expects Timberland to grow 12 percent in 2014, versus the 10 percent projected in February.
In the Americas, sales of core Timberland men's and kids boot styles, as well as its hiking boots, almost doubled versus last year, and its PRO line “continues to be a game changer in the marketplace, led by the Direct Attach collection. Four of our top six Timberland product families are now built on the anti-fatigue platform,’ said Rendle.
Timberland also rolled out its spring collection of apparel during the first quarter, “and it's off to a very good start.” The Bradstreet footwear collection, with SensorFlex technology originally inspired for trail running, was launched with plans calling for expansion across many of its casual products. Backed by TV ads and store merchandising displays, “our efforts are definitely paying off, as customers are responding really well to this new product. Overall, we are feeling great about the Timberland business,” said Rendle.
Europe’s high-single digit gain was also supported by a strong launch for the Bradstreet collection, as well as stronger results from its classic footwear for women, where Timberland introduced a line of casual transitional products. Building on its U.K. success, Timberland added e-commerce in France, Germany and Italy.
In Asia, the low double-digit gain was driven by strength in Timberland’s classic boot in both men's and women's. Mens' apparel also “performed well,” driven by outerwear. Women's apparel also saw an increase driven by outerwear, in particular, lifestyle waterproof jackets.
The Outdoor & Action Sports coalition also includes JanSport, Kipling, SmartWool, Napapijri, Eastpak, Eagle Creek, Lucy, Reef and part of the Kipling business.
Among its other coalitions, Jeanswear revenues – including Lee and Wrangler declined 3.8 percent to $690.3 million. The drop reflected ongoing challenges in the U.S. mid-tier/department store channel and to a lesser extent, consumer trends in women’s denim. Operating profits were down 9.8 percent to $129.3 million.
In its Imagewear coalition, which includes its work apparel brands as well as Majestic Athletic, revenues were ahead 4.1 percent to $263.2 million. The gains were supported by particular strength in its Licensed Sports Group business, which particularly benefited from strong NFL postseason sales. Operating earnings rose 19.6 percent to $37.8 million. Operating margin was up 180 basis points, reaching 14.3 percent, driven by gross margin improvement and SG&A leverage. During the quarter, the Imagewear division decided to exit the youth business for Major League Baseball, which impacted its top line by 4 percentage points, but is expected to boost profitability in the future.
In its Sportswear coalition (Kipling, Nautica), sales inched up 2.6 percent to $131.5 million. Operating profits grew 2.8 percent to $12.6 million. Nautica was flat, impacted by the timing of special programs and is expected to grow at a low double-digit rate in Q2. Kipling's North American revenue was up at a high teen percentage rate, with greater than 20 percent D2C growth. Globally, the Kipling brand grew 23 percent.
In its Contemporary Brands segment (7 For All Mankind, Splendid, Ella Moss), sales gave back 5.4 percent to $98.2 million amid a challenging denim market. Operating income slumped 37.2 percent to $7.9 million.
International revenues in the quarter grew 11 percent (up 10 percent on a currency-neutral basis). Revenues in Europe rose 12 percent (up 8 percent C-N) with positive results from nearly every brand in VF’s portfolio. In the Asia Pacific region, revenues were up 16 percent (up 17 percent C-N) driven by 27 percent growth in China (up 25 percent C-N), which included strong results from every brand. Reported revenues were flat in the Americas (non-U.S.) region (up 8 percent C-N). International revenues were 43 percent of total sales compared with 42 percent in the same period of 2013.
Direct-to-consumer revenues grew 16 percent in the quarter with double-digit increases in all regions of the world and growth in nearly every VF brand. Twenty-three stores were opened across its brands during the quarter bringing the total number of VF owned retail stores to 1,263. Direct-to-consumer revenues reached 23 percent of total revenues compared with 20 percent in the 2013 period.
Revenues for 2014 are now expected to increase at the high end of the 7 to 8 percent range previously provided in February. Second quarter revenues are expected to increase at a similar level to that of the first quarter, and again be driven primarily by strength from its Outdoor & Action Sports coalition.
Full year gross margin and operating margin expectations of 49 percent and 15 percent, respectively, remain unchanged. Based on slightly stronger than expected first quarter results, EPS in 2014 is now expected to increase to approximately $3.06 per share, representing 13 percent growth over 2013. Previously, it projected earnings in the range of $3.00 to $3.05.
