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VF Strong in Quarter, With Eye on Levi’s

While a difficult 2002 for VF Corp. culminated with strong fourth-quarter results, the firm is bracing for big changes in the mass jeans landscape.

NEW YORK — Coming off strong fourth-quarter results, VF Corp. said Tuesday it won’t take Levi Strauss & Co.’s entry to the mass market jeans business sitting down.

While acknowledging that the introduction of Levi’s Signature brand in Wal-Mart Stores for the back-to-school season would hurt its mass market sales, the firm promised a series of initiatives to combat its rival’s penetration of the discount channel and expand its business through new acquisitions, product introductions or both.

Luckily for VF, it entered the year with some momentum, posting net income of $76.6 million, or 69 cents a diluted share, for the quarter ended Jan. 4. This compared with year-ago losses of $112.6 million, or $1.03.

Exclusive of restructuring charges in both quarters and, in the most recent period, reversal of previous charges and a $2.3 million pretax gain on the sale of a closed facility, profits fattened 50.7 percent to $84.4 million, or 76 cents a share, from $56 million, or 49 cents a year ago. Results for the fourth quarter of 2001 were also reclassified to present the private label knitwear and the Jantzen swimwear businesses as discontinued operations.

The adjusted bottom line came in a penny ahead of Wall Street’s expectations and the firm’s previous guidance of 75 cents a share. Investors were pleased, trading up shares of the firm $1.78 or, 5.3 percent, to close at $35.48 Tuesday on the New York Stock Exchange.

Sales for the three months ascended 6.2 percent to $1.31 billion from $1.23 billion a year ago.

Most of VF’s businesses improved their bottom lines last year, enjoying benefits from the company’s strategic positioning program, now ostensibly concluded. The domestic jeanswear business posted a 4 percent rise in fourth-quarter sales, but a 4 percent drop for the year overall.

In total, the U.S. market in jeans came up about flat last year with growth in juniors offset by softness in men’s and women’s, said chairman and chief executive officer Mackey McDonald, on a conference call. VF’s total share of the jeans market rose last year to 20.8 percent from 20.2 percent a year earlier.

The competitive landscape for jeans in the mass channel, however, will shift when Levi’s launches its new Signature lines in about 3,000 U.S. Wal-Mart stores for the b-t-s season.

VF is expecting this change, as well as Kmart Corp.’s contraction, to pull its jeans sales in the mass channel down 9 percent this year. Domestic jeanswear sales overall should decline by about 3 percent this year.

McDonald said of the launch of Levi’s Signature: “We do see an impact at least for the short term, but we have many new growth initiatives we’ll be launching in the coming weeks and months across our jeans brands.”

He added that VF’s Wrangler, Riders and Rustler brands in the mass channel and Lee in the department store tier “are as strong as they have ever been.” Wrangler, he noted, its the top jeans brand for men aged 25 and up, while Riders is the number-one name in women’s jeans at the mass channel.

“We have a long history of profitably managing multiple brands in the mass channel and working in close partnership with our customers to maximize the productivity of their floor space,” said McDonald. “Our state-of-the-art floor space management capabilities have been honed over many years of use and we believe that they give us a real competitive advantage.”

The company said the drop in jeans sales in the mass market would come from a fall in units and not from reduced prices. VF also acknowledged it would have to give up shelf space for its jeans in Wal-Mart this year.

Hopes offsetting the negative impact of Signature are, in part, pinned on what the firm described as “a price advantage to the consumer and, we think, a big value advantage.”

The mass market represents about one-third of the overall jeans market domestically.

If the new year poses daunting challenges, 2002 was adequate preparation for them. In a statement, McDonald conceded that “2002 was by no means an easy year.” Still, he said, the firm managed to pick up market share in key categories and come out of the year with sales momentum. VF beefed up investment behind its core brands with an 11 percent increase in advertising spending. The firm also has cut many of its costs. By the end of this year, VF will have reduced its domestic manufacturing to 5 to 10 percent of its total, down from 10 to 15 percent at the end of 2002.

Additionally, the firm has cash of nearly $500 million and the flexibility to pursue new avenues of growth, said the ceo. A lifestyle brand that would cover multiple categories would be an excellent fit, he added on the call.

European jeanswear sales were up 5 percent for the quarter and 8 percent for the year. Adjusting for foreign currency fluctuation, sales of VF’s jeans business in Europe dropped 3 percent in the quarter, but grew 4 percent for the year.

The domestic intimates business saw apparel experience flat sales in the fourth quarter and a decline of 4 percent in the year. Sales in the outdoor division were up 17 percent for the quarter and 3 percent for the year. Imagewear sales increased 10 percent in the quarter, but were down 3 percent for the year overall.

For the 12 months, VF registered a net loss of $154.5 million, or $1.38 a diluted share. This reversed year-ago earnings of $137.8 million, or $1.19. Without restructuring charges in both periods, income advanced 24.5 percent to $380.9 million, or $3.38 a share, from $306 million, or $2.66, during the proceeding year.

Sales in 2002 dipped 2.6 percent to $5.08 billion from $5.22 billion in 2001.

This year, VF said it is looking to grow earnings per share by 5 to 10 percent, despite significant upticks in pension, health care and other costs.