VF Corporation (NYSE:VFC), a global leader in branded lifestyle apparel, today announced record results for the first quarter of 2008. All per share amounts are presented on a diluted basis and, unless otherwise noted, reflect continuing operations.
First quarter revenues rose 10% to a record $1,846.3 million, compared with $1,673.6 million in the first quarter of 2007. Income from continuing operations in the current quarter increased 11% to a record $149.0 million, compared with $134.1 million in the prior year’s quarter. Earnings per share from continuing operations rose 14% in the first quarter, to a record $1.33 from $1.17 last year. The benefit from foreign currency translation was $.09 per share in the current quarter.
“Our record results for the first quarter demonstrate the strength and diversity of the business platform we have built – in brands, geographies, product categories and channels of distribution,” said Eric Wiseman, President and Chief Executive Officer. “Our international and retail businesses, both of which grew by over 20% in the quarter, are proving to be very beneficial to us as we navigate through what are clearly challenging economic conditions in the U.S. Based on this strong performance and our confidence that we have the right strategic initiatives in place to achieve our goals, we are maintaining our guidance for 2008.”
First Quarter Business Review
The strength of our Outdoor brands around the world contributed to another quarter of exceptionally strong performance. The performance of our Outdoor coalition has exceeded our expectations, and we remain confident that our business has excellent prospects for future growth. Total revenues rose 18% with double-digit growth in both our domestic and international businesses. The North Face®, Vans®, Kipling® and Napapijri® brands each posted double-digit revenue gains in the quarter. Operating income rose 26%, with operating margins rising a full percentage point to 16.6%.
We look forward to double-digit top line growth and higher operating margins in 2008 as we continue to benefit from our investments in brand building and infrastructure.
Revenues of our global Jeanswear coalition, which includes our Wrangler®, Lee® and Riders® brands, declined 6% during the quarter. Our international jeans revenues rose 6% reflecting the benefit of foreign currency translation. We achieved strong growth in Asia, Mexico and Latin America, with double-digit revenue increases on a constant-currency basis in each market. Domestic jeanswear revenues declined 13% due to a very challenging retail environment that impacted our business in both the mass market and mid-tier channels of distribution and the shift in timing of certain product programs in this year’s quarter versus the 2007 period. Jeanswear operating margins rose in the quarter, despite a slight decline in operating income.
Top line comparisons should begin to improve in the second quarter and continue through the balance of the year due to newly added programs in both our international and domestic businesses and continued strength in Asia, Mexico and Latin America.
Total revenues of our Sportswear coalition, which includes our Nautica® and John Varvatos® brands as well as the Kipling® brand in North America, declined 11% in the quarter. Our Kipling® and John Varvatos® businesses achieved higher revenues in the quarter. As anticipated, Nautica® brand revenues declined, primarily due to a customer’s decision last year to reduce their assortment of Nautica® products, as well as lower sales in off-price channels. Recently, we decided to discontinue our Nautica® women’s wholesale sportswear business to focus our resources on building our core men’s sportswear, licensed and direct-to-consumer businesses. This decision resulted in expenses of $3 million ($0.02 per share) in the quarter and should result in savings of approximately $3 million in the second half of 2008. The decline in operating income and margins reflects these expenses as well as the revenue decline in the quarter.
Our Contemporary Brands coalition, which consists of the 7 For All Mankind®and lucy® brands acquired in 2007, added $96 million to first quarter revenues and $15 million to operating income. We are particularly pleased with the performance of the 7 For All Mankind®brand, which continues to exhibit strong year over year revenue growth. We are also making solid progress in strengthening the product assortment and store concept for our lucy® brand as we continue our retail expansion strategy.
Total revenues of our Imagewear coalition rose 16% in the quarter, with growth in both our Image and Activewear businesses. The acquisition of Majestic Athletic added $35 million to revenues. Imagewear operating income rose in the quarter, and margins declined due to the timing of the Majestic acquisition during the 2007 first quarter.
Our international and direct-to-consumer businesses continue to be key drivers of growth. Our international business continued to experience solid growth, with revenues increasing 21% in the quarter and representing 36% of total revenues. We also continue to experience healthy gains in our retail revenues, which increased 24% in the quarter. Retail revenues of our Vans®, The North Face®, Kipling®, Napapijri®, Wrangler® and Lee® brands each grew at double-digit rates. At the end of the quarter, we had 641 owned retail stores.
Operating margins rose to 13.2% in the quarter, up from 12.9% in the first quarter of 2007, helped in part by strong profitability in our international businesses. Gross margins increased to 45.1% from 43.5%, reflecting efficiency gains in our global jeanswear business and healthy growth in our lifestyle brands. Marketing, administrative and general expenses increased as a percent of revenues in the quarter due in large part to the seasonality of our expanding retail business.
Our balance sheet continues to be strong and our inventories are in good shape. Inventories were up 13% from the prior year’s first quarter, with 7% of the increase due to the 2007 acquisitions. Cash and equivalents were $258 million at the end of the quarter, and we continue to expect cash flow from operations of approximately $700 million in 2008. During the quarter we repurchased 1.7 million shares.
We continue to anticipate another record year in 2008 and are maintaining our guidance for a revenue increase of 9% and an EPS increase of 10%.
Our strong revenue growth should continue in the second quarter, with an anticipated increase of 10%, half of which should be organic growth. The fact that our business is changing and will continue to change – as we expand our retail business, grow our lifestyle brands and acquire new ones – is resulting in more seasonality in our business and will affect the cadence of our earnings during the year, particularly in the second quarter.
We continue to look forward to higher gross margins in the second quarter, which should increase by 100 basis points. However, operating margins in the quarter could decline by 200 basis points from the 11.1% reported in the 2007 second quarter, reflecting two primary factors. The first is the absence of the gain from the sale of the H.I.S trademarks in last year’s second quarter, which added $7.5 million to operating income (and $.04 to EPS) in the 2007 period. This factor will account for approximately 50 basis points of the expected decline in operating margins. The second primary factor relates to our Outdoor coalition, where seasonality plays a role. We expect continued strong top line growth in our Outdoor coalition in the second quarter, but higher spending in retail, distribution and advertising will disproportionately impact profitability in the second quarter, our seasonally lowest period of revenues. For example, we expect to open 15 to 20 new stores in our Outdoor coalition in the quarter. In addition, distribution expenses will increase to support the higher shipping levels we expect in the second half of the year, and advertising will be up as a percent of revenues to support future growth.
As a result of our commitment to continue investing in the growth of our Outdoor business, Outdoor operating income and margins are expected to be below last year’s second quarter, which will account for most of the remaining 150 basis point expected reduction in our second quarter operating margins. On a full year basis, we continue to expect that operating margins in our Outdoor coalition in 2008 will be above prior year levels.
Two other items will impact second quarter margins, but to a much lesser degree. In Sportswear, while revenue comparisons should improve in the second quarter, operating income and margins are also expected to decline, due to similar issues that impacted first quarter profitability. Looking forward to the second half of 2008, we anticipate Sportswear operating margins returning to double-digit levels, due in part to improved performance in our retail stores and easier comparisons. In addition, the second quarter is a low period of revenues and profitability for our Contemporary Brands coalition. While it will be clearly profitable in the second quarter, considering the acquisition interest expense along with the seasonality of our Seven For All Mankind and lucy activewear businesses, we expect a slightly dilutive impact from these acquisitions of $.02 per share in the quarter.
Taking into account the above factors, we expect second quarter earnings per share will approximate $.80 per share compared with $.93 in the 2007 quarter.
We expect strong revenue comparisons and a resumption of double-digit earnings per share growth in the second half of 2008, driven by the exceptional profitability in our growing international businesses, continued growth in our retail revenues and profits, the seasonal benefit to revenues from our fast-growing Outdoor business and improved results across our coalitions. “While we expect economic and retail conditions to remain very challenging, we believe we have the right business model supported by the solid execution plans needed to achieve our 2008 growth targets,” concluded Mr. Wiseman.
The Board of Directors declared a cash dividend of $.58 per share, payable on June 20, 2008 to shareholders of record as of the close of business on June 10, 2008.
VF will hold its first quarter conference call and webcast today at 4:30 p.m. ET. Interested parties should call 1-888-287-5420 domestic, or 1-719-785-1756 international, to access the call. You may also access this call via the Internet at www.vfc.com.A replay will be available through April 29th and can be accessed by dialing 1-888-203-1112 domestic, and 1-719-457-0820 international.The pass code is 9493633. A replay also can be accessed at the Company’s web site at www.vfc.com.
Cautionary Statement on Forward-looking Statements
Certain statements included in this release are "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting VF and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Potential risks and uncertainties that could cause the actual results of operations or financial condition of VF to differ materially from those expressed or implied by forward-looking statements in this release include VF's reliance on a small number of large customers; the financial strength of VF's customers; changing fashion trends and consumer demand; increasing pressure on margins; VF's ability to implement its growth strategy; VF's ability to grow its international and direct-to-consumer businesses; VF's ability to successfully integrate and grow acquisitions; VF's ability to maintain the strength and security of its information technology systems; stability of VF's manufacturing facilities and foreign suppliers; continued use by VF's suppliers of ethical business practices; VF's ability to accurately forecast demand for products; continuity of members of VF's management; VF's ability to protect trademarks and other intellectual property rights; maintenance by VF's licensees and distributors of the value of VF's brands; the overall level of consumer spending; general economic conditions and other factors affecting consumer confidence; fluctuations in the price, availability and quality of raw materials and contracted products; foreign currency fluctuations; and legal, regulatory, political and economic risks in international markets. More information on potential factors that could affect VF's financial results is included from time to time in VF's public reports filed with the Securities and Exchange Commission, including VF's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.
VF Corporation is a global leader in lifestyle apparel with a diverse portfolio of jeanswear, outdoor, imagewear, sportswear and contemporary apparel brands. Its principal brands include Wrangler®, Lee®, Riders®, The North Face®, Vans®, Reef®, Eagle Creek®, Eastpak®, JanSport®, Napapijri®, Nautica®, Kipling®, John Varvatos®, 7 For All Mankind®, lucy®, Majestic® and Red Kap®.
VF Corporation's press releases, annual report and other information can be accessed through the Company's home page, www.vfc.com.
Consolidated Statements of Income
(In thousands, except per share amounts)
Three Months Ended March
|Costs and Operating Expenses|
|Cost of goods sold||1,014,130||945,883|
|Marketing, administrative and general expenses||588,086||512,411|
|Other Income (Expense)|
|Income from Continuing Operations Before Income Taxes||223,472||204,112|
|Income from Continuing Operations||149,032||134,078|
|Earnings Per Common Share - Basic|
|Income from continuing operations||$||1.36||$||1.20|
|Earnings Per Common Share - Diluted|
|Income from continuing operations||$||1.33||$||1.17|
|Weighted Average Shares Outstanding|
|Cash Dividends Per Common Share||$||0.58||$||0.55|
|Fiscal Periods: VF operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. Similarly, the fiscal first quarter ends on the Saturday closest to March 31. For presentation purposes herein, all references to periods ended March 2008, December 2007 and March 2007 relate to the fiscal periods ended as of March 29, 2008, December 29, 2007 and March 31, 2007, respectively.|
Consolidated Balance Sheets
|Cash and equivalents||$||257,856||$||321,863||$||174,155|
|Accounts receivable, net||1,111,460||970,951||1,002,563|
|Other current assets||223,541||213,563||209,102|
|Current assets of discontinued operations||-||-||276,202|
|Total current assets||2,758,288||2,645,129||2,689,095|
|Property, Plant and Equipment||1,548,280||1,529,015||1,471,535|
|Less accumulated depreciation||892,709||877,157||879,595|
|Noncurrent Assets of Discontinued Operations||-||-||155,965|
|LIABILITIES AND SHAREHOLDERS' EQUITY|
|Current portion of long-term debt||3,661||3,803||69,683|
|Current liabilities of discontinued operations||408||1,071||73,726|
|Total current liabilities||1,231,379||1,134,387||1,246,683|
|Noncurrent Liabilities of Discontinued Operations||-||-||10,535|
|Commitments and Contingencies|
|Common Stockholders' Equity|
|Additional paid-in capital||1,664,314||1,619,320||1,526,913|
|Accumulated other comprehensive income (loss)||101,633||61,495||(97,277||)|
|Total common stockholders' equity||3,614,085||3,576,829||3,248,030|
Consolidated Statements of Cash Flows
|Three Months Ended March|
|Adjustments to reconcile net income to cash used by operating activities of continuing operations:|
|Income from discontinued operations||-||(4,266||)|
|Amortization of intangible assets||9,895||4,639|
|Changes in operating assets and liabilities, net of acquisitions:|
|Accrued income taxes||67,210||55,850|
|Other assets and liabilities||(17,503||)||(11,510||)|
|Cash used by operating activities of continuing operations||(50,292||)||(8,769||)|
|Income from discontinued operations||-||4,266|
|Adjustments to reconcile income from discontinued operations to cash used by discontinued operations|
|Cash used by discontinued operations||(663||)||(11,156||)|
|Cash used by operating activities||(50,955||)||(19,925||)|
|Sale of property, plant and equipment||2,444||1,504|
|Business acquisitions, net of cash acquired||-||(157,111||)|
|Cash used by investing activities of continuing operations||(20,368||)||(179,446||)|
|Discontinued operations, net||-||(371||)|
|Cash used by investing activities||(20,368||)||(179,817||)|
|Increase in short-term borrowings||171,251||228,728|
|Payments on long-term debt||(1,315||)||(1,174||)|
|Purchase of Common Stock||(123,676||)||(159,341||)|
|Cash dividends paid||(63,528||)||(61,530||)|
|Stock-based compensation, net||11,059||18,662|
|Tax benefits of stock-based compensation||8,397||5,072|
|Cash provided by financing activities||2,188||30,417|
|Effect of Foreign Currency Rate Changes on Cash||5,128||256|
|Net Change in Cash and Equivalents||(64,007||)||(169,069||)|
|Cash and Equivalents - Beginning of Year||321,863||343,224|
|Cash and Equivalents - End of Period||$||257,856||$||174,155|
Supplemental Financial Information
Business Segment Information
|Three Months Ended March|
|Total coalition revenues||$||1,846,341||$||1,673,619|
|Total coalition profit||273,806||252,414|
|Corporate and Other Expenses||(29,831||)||(36,823||)|
Income from Continuing Operations Before Income Taxes
Cindy Knoebel, CFA VP, Financial &
Corporate Communications, 212-841-7141 or 336-424-6189