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VF Net Leaps Despite Top-line Pressure

Jeanswear, contemporary units see profits grow despite sales declines.

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A revenue number that disappointed Wall Street did nothing to limit Eric Wiseman’s enthusiasm about VF Corp.’s profit prospects for the fourth quarter and beyond.

Wiseman, chairman, president and chief executive officer of VF, told WWD, “The Street was positioned a little above our revenue number, but we weren’t. This year is coming out amazingly close to the plans we laid out at the start.”

The revenue gains so far this year — nearly 20 percent for the nine months — have come despite what he described to analysts on a morning conference call as “decidedly mixed” economic news marked by “some slowing in the U.S. economy, increasingly challenging conditions in Europe and slowing growth in China.”

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VF eclipsed analysts’ earnings expectations for the quarter, reporting adjusted earnings per share of $3.52 versus estimates that averaged $3.49, while revenues, at $3.15 billion, came up shy of Wall Street’s view of $3.17 billion. The Greensboro, N.C.-based apparel giant stuck with its year-end estimate for revenues of $10.9 billion, implying fourth-quarter revenues of $3.05 billion, below the consensus estimate of $3.09 billion. Combined with acknowledgement of some slowing in The North Face business as stores work through the remnants of outerwear inventories from a warm 2011, the revenue results and forecast pressured VF’s stock down $7.31, or 4.4 percent, to $159.46 in New York Stock Exchange trading Monday.

In February, when it reported year-end results, VF projected 2012 revenue growth of 15 percent, or to $10.88 billion. Since then, the group has made no acquisitions but off-loaded John Varvatos.

However, Wiseman’s focus was on another section of the income statement. For the three months ended Sept. 29, the company generated net income of $381.3 million, or $3.42 a diluted share, a 26.8 percent increase over the $300.7 million, or $2.60, reported for the 2011 quarter. Additionally, with cotton prices down and other factors working in the firm’s favor, gross margin expanded 140 basis points to 46.7 percent of revenues, the highest third-quarter figure in the company’s history, from 45.3 percent a year ago.

“This says a lot about the evolving business mix of VF,” Wiseman said. “As we get more international, our profit grows. As we do more in the direct-to-consumer area, our profit grows. As we invest more in our higher-margin Outdoor & Action Sports coalition businesses, our profit grows.”

The $3.15 billion in revenues represented a 14.5 percent increase over the $2.75 billion reported in the third quarter of 2011. Excluding the contributions from Timberland, acquired on Sept. 13, 2011, organic growth was 2 percent and came to 6 percent at constant currency.

DTC rose to 18 percent of sales from 16 percent a year ago. International, including DTC, grew to 40 percent, a 2-point year-on-year spurt.

With a full quarter of Timberland volume, the O&AS group saw sales rise 28.9 percent to $1.85 billion, representing 58.8 percent of revenues. Excluding Timberland in both periods, sales rose 6.3 percent and advanced 11 percent at constant currency. Operating profit for the group was up 28.7 percent, to $413 million, and picked up 16 percent without Timberland’s contributions in both years. International revenues grew 28 percent overall, with 20 points attributable to the addition of Timberland. Even as corporate growth in Europe decelerated to 3 percent, Vans was up 47 percent in constant dollars on the continent.

Wiseman noted that VF saw profitability improve even in areas under top-line pressure. Although up 1 percent in constant currency, jeanswear sales dropped 1.2 percent to $718.8 million while the unit’s operating income grew 19.8 percent to $131.4 million. Contemporary brand revenues finished the quarter down 17.4 percent to $104.2 million and were off 1 percent excluding the effect of the Varvatos sale. However, income rose 66.4 percent to $13.4 million.

“That reflects better inventory management and less dependence on sales of distressed goods [at Seven For All Mankind],” the ceo said. “The contemporary group saw a tremendous improvement in profitability and Seven is enjoying growth in its full-price business, even though the changes have affected the top line.”

Inventories ended at $1.76 billion, down 1.1 percent from a year ago.

For the nine months, net income grew 19.2 percent to $751.8 million, or $6.72 a diluted share, as revenues rose 19.7 percent to $7.76 billion.

Wiseman said that, to alleviate some of the pressure on Lee from its presence in the midtier channel, VF has begun investigating selective placement of the brand’s products with a number of department store accounts. “We’re testing the concept and should know more about its prospects early next year,” he said. VF also is in talks with J.C. Penney Co. Inc. about the status of the Lee and Vans brands in renovated stores, he added.

In addition to elevating the quarterly dividend 20.8 percent to 87 cents from 72, effective Dec. 20 to shareholders of record Dec. 10, the company raised its year-end earnings per share guidance to $9.60 from the $9.50 provided in July.

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