NEW YORK — Booming sales in outdoor apparel spurred VF Corp. to double-digit earnings gains for the third-quarter and nine-month periods.
The strong results were achieved despite sales declines in the company's jeanswear segment, its oldest and largest business, which includes denim stalwarts Lee and Wrangler. Mackey McDonald, president and chief executive officer of the Greensboro, N.C., apparel giant, said during a conference call with analysts that the earnings gains proved the company's commitment to building a portfolio of lifestyle brands was effective.
"I think you can certainly see the story of VF now has become a transformation to higher-growth lifestyle brands, which is allowing us to maintain solid performance even when our higher-margin core businesses are going through some of the fluctuations that are common to the apparel business," said McDonald.
For the three months ended Oct. 1, earnings rose 17 percent to $181.9 million, or $1.59 a diluted share, outpacing Wall Street analysts' estimates of $1.56 a share. Earnings for the corresponding period last year came in at $155.4 million, or $1.38 a share, weighed down by a $15 million charge related to the sale of VF's playwear segment.
Sales for the quarter were essentially flat, inching up 0.6 percent to $1.8 billion.
"While sales hit a record in the quarter, we are not satisfied with the current rate of sales growth and we do not think that it is indicative of the growth potential of this portfolio," said McDonald.
Declining jeanswear sales were attributed to a weak domestic market and the effects of retail consolidation. Jeanswear sales slid 3.5 percent to $688.5 million from $713.9 million in the year-ago period.
"It should be no surprise to anyone that our jeanswear was not exempt from the challenging external environment during the important back-to-school season," said Eric Wiseman, executive vice president of global brands, during the call.
The Lee brand in particular underperformed during the quarter and contributed to a 7 percent decline in domestic sales.
"We've taken our eye off our women's business," said Wiseman, a problem the company is attempting to solve with a new print advertising campaign touting the Lee brand's fit.Wiseman also cited the results of a study by The NPD Group examining jeanswear sales between June and August that showed a 11 percent decline at midtier department stores. "Lee sales were down a bit more [than that]," said Wiseman.
Retailers are also anticipating the effects of mounting macroeconomic pressures on their customers. Without naming Kmart or Sears specifically, McDonald said some key retail customers had shifted their focus to hard goods in an effort to avoid a potential slide in apparel purchasing. Rising energy prices and early warnings regarding high home heating bills this winter are expected to affect buying habits.
"It's more of a strategic change from some of our retailers," said McDonald. "I think we're seeing more substantial moves from one category to another."
As a result, retailers have lowered their inventory levels. McDonald said VF has moved quickly to reduce production to avoid creating a situation in which heavy markdowns would be necessary to clear excess goods. The company intends to end the year with inventory levels about even with last year's. McDonald believes retailers will eventually bring their apparel inventories back up. However, momentum will likely take a hit.
"We're not sure the energy costs are going to allow the consumer to come back in very strong," said McDonald.
Wrangler has buoyed the company's jeanswear segment, said Wiseman, adding, "Our Wrangler brand remains a powerhouse, the number-one national brand by far in discount stores, both in units and dollar sales."
The North Face brand continued to be the sales driver in outdoor apparel and equipment, the company's second-largest segment, where sales rose 13.9 percent to $520.8 million from $457.1 million. North Face sales were up 23 percent for the quarter, with comparable-store sales up 17 percent. That momentum is expected to continue, as the company indicated orders for spring are already up 30 percent.
The company's intimate apparel segment, which includes Vanity Fair, Vassarette and Bestform, continued to struggle as sales fell 9.1 percent to $213.3 million from $234.6 million. Wiseman admitted the segment's product launches at department and chain stores had "missed the mark." However, management is expecting comps to rise for the fourth quarter and believes the business will regain ground in 2006.Imagewear sales rose 5.3 percent to $202.8 million from $192.5 million, driven by the January acquisition of Holoubek, which holds the license for Harley-Davidson apparel. Sportswear sales gained 1.8 percent to $166.3 million from $163.3 million.
Earnings for the nine months were up 15.8 percent to $404.7 million, or $3.55 a share, from $349.4 million, or $3.11 a share, driven by outdoor apparel and equipment sales, which jumped the $1 billion hurdle.
Overall sales rose 6.8 percent to $4.8 billion from $4.49 billion, again fueled by booming sales in the outdoor apparel segment, which ballooned 51.2 percent to $1.1 billion. Jeanswear sales fell 0.8 percent to $1.99 billion, while intimate apparel sales were down 7.7 percent to $663.6 million. Imagewear sales rose 5.9 percent to $445.4 million, while sportswear sales posted a gain of 8.7 percent to $445.4 million.
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