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VF Earnings Grow 20% As Jeans Sales Decline And Firm Seeks Brands

Strong growth across most of core businesses — except jeans — allowed VF Corp. to post a 20.2 percent earnings gain in its second quarter.

NEW YORK — VF Corp. on Wednesday reported a 20.2 percent rise in second-quarter earnings, driven by recently acquired brands and strong sales across most of its core businesses, with the notable exception of jeans.

The company remains on the acquisition trail, but chairman and chief executive Mackey McDonald said that Dockers isn’t “at the top” of the firm’s shopping list.

There has been extensive market speculation that VF was a leading contender to buy that business, which Levi Strauss & Co. has been shopping since May.

“We’re primarily looking not for category brands, but for lifestyle brands,” McDonald said on a conference call with Wall Street analysts.

Acquisitions — including Nautica, Vans, Kipling and Napapijri — have helped to drive much of Greensboro, N.C.-based VF’s recent growth, adding $1 billion in new sales over the past 12 months.

For the three months ended July 3, VF posted net income of $90.1 million, or 80 cents a diluted share, up from $74.9 million, or 68 cents a share, a year earlier. Sales increased 11.9 percent to $1.27 billion.

Executives said they foresee a strong pace through the third and fourth quarters, projecting that VF will record an 8 percent increase in earnings per share and a 12 to 15 percent rise in sales for the year. Last year, VF earned $397.9 million on sales of $5.21 billion. The projected 15 percent rise would bring its sales to $5.99 billion, which could make it the largest publicly traded apparel manufacturer in the world.

By way of comparison, Hong Kong-based sourcing powerhouse Li & Fung Ltd. last year posted revenues of $5.47 billion, and this year has been aggressively signing licensing deals that may bring in additional sales. Beaverton, Ore.-based Nike Inc., in its most recent fiscal year, ended in May, posted sales of $12.25 billion, but apparel represented only $3.55 billion of its business.

Sales at VF’s core jeans unit, including the Wrangler and Lee brands, were off 5.7 percent in the quarter.

“We definitely saw a weakening overall in denim,” said Terry Lay, corporate vice president and chairman of the jeanswear coalition. “The market was definitely down.”

This story first appeared in the July 22, 2004 issue of WWD.  Subscribe Today.

In the mass channel, he said, sales declines were related to the woes of Kmart Corp., which is a key customer. Excluding that chain, mass market sales were up.

On the Lee brand, sold to national chains, he said part of the decline was because of fewer orders of shorts, capris and other seasonal styles, which sold poorly last year and resulted in significant markdowns.

“We went into the second quarter more conservative around those items,” Lay said. “Our inventory is in very good shape, and overall, across channels, we feel good not only about our internal inventories, but about inventories at retail.”

Inventory control and margin improvement — two issues that relate closely, since excessive inventories of seasonal goods can lead to margin-eroding markdowns — were a key theme of the conference call. The firm noted that inventories at the end of the quarter were only 6.1 percent higher than they had been at the same time last year, an increase that significantly trailed the 11.9 percent sales growth. Likewise, gross margins — the raw profit on the sale of merchandise, before accounting for sales and administrative costs, as well as taxes — had risen to 39.4 percent of sales, from 37.1 percent.

The declines in the jeans business — still VF’s largest segment, representing 45.6 percent of total revenue — were more than offset by growth at its other divisions. Sales of intimate apparel were up 11.6 percent, outdoor goods rose 20.8 percent and occupational apparel and uniforms grew 10.3 percent.

Eric Wiseman, a corporate vice president who serves as chairman of the company’s outdoor and sportswear coalitions, said VF has been exerting a lot of effort to improve the performance of the Nautica brand. The company is refining the brand image and plans to boost Nautica’s ad budget by 60 percent this year to drive sales, he said.

Nautica’s sales are “running flat to up slightly,” Wiseman said, a performance he described as heartening, given that the line has lost about 25 percent of the retail floor space allocated to it by its two top department store customers.

As the Nautica brand turns the corner, he said, growth options include reintroducing women’s sportswear and launching the brand in Europe.

For the first six months of the year, VF posted income of $194 million, or $1.73 a diluted share, a 19.4 percent increase from the comparable period last year. Sales were $2.7 billion, a 13.3 percent rise.

VF Corp. Second-Quarter Sales
Change from Prior Year
Jeanswear
$579.1 million
-5.7 percent
Intimate apparel
$234.8 million
+11.6 percent
Outdoor products
$145.7 million
+20.8 percent
Occupational apparel
$114.4 million
+10.3 percent
Sportswear
$111.7 million
n/a*
Other
$83.8 million
-2.1 percent
Total
$1.27 billion
+11.9 percent
* VF CREATED ITS SPORTSWEAR COALITION UNIT IN AUGUST 2003, AFTER ACQUIRING NAUTICA.
SOURCE: COMPANY REPORTS
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