Despite posting impressive revenue and earnings gains in the first quarter, VF Corp. wasn't immune to the difficulties of the U.S. retail environment and will be pulling the plug on the Nautica women's sportswear business as a result.
"Given the consolidation in the department store channel and the challenging environment in the women's better sportswear category, we were not able to gain critical mass in the category," Bob Shearer, chief financial officer of VF, said of the Nautica women's business during a conference call with analysts.
VF acquired Nautica in 2003 and spearheaded the label's third run at the women's sportswear market for the fall 2006 season. Eric Wiseman, VF's president and chief executive officer, said during the call that it "couldn't have been a worse time" to attempt to move into the segment. The decision of a major customer to reduce its women's Nautica assortment last year, coupled with retail consolidation and weakening overall market conditions, made gaining traction nearly impossible.
"I think the traditional department store better sportswear lines are really struggling," said Wiseman. "We really struggled to get a foothold in that space."
Ultimately, the Nautica women's business represented a drag on earnings per share of about 5 cents annually, according to the company.
Evidence of the weakening spending power of U.S. consumers showed itself in other areas of VF's business, and management was clear that it expected economic difficulties to continue throughout 2008. Despite this, executives were equally confident the company's diversified portfolio of lifestyle brands would allow it to continue to generate earnings and revenue gains for the year and hit earlier guidance of a 9 percent revenue improvement and a 10 percent rise in earnings.
For the three months ended March 31, earnings rose 7.7 percent to $149 million, or $1.33 a share, besting Wall Street analysts' consensus estimate of $1.29 a share. Comparatively, the company reported earnings of $138.3 million, or $1.20 a share, during the same period a year ago.
Revenues, including royalty income, rose 10.3 percent to $1.85 billion from $1.67 billion. Sales increased 10.4 percent to $1.83 billion from $1.65 billion.
The outdoor segment, home to the Vans, Kipling, Napapijri and The North Face brands, buoyed results for the quarter. Double-digit growth in domestic and international businesses fueled an 18.1 percent increase in revenues to $636.2 million from $538.8 million. Wiseman said he expects the outdoor business to grow in the midteens for the remainder of the year.Imagewear revenues were aided by a $35 million boost stemming from the acquisition of Majestic Athletic. Imagewear revenues rose 15.6 percent to $247 million from $213.7 million.
VF's newest coalition, contemporary brands, posted volume of $96 million, driven primarily by the Seven For All Mankind premium denim label.
Jeanswear, the company's largest and oldest segment, along with the sportswear segment, took the biggest hit from the weak domestic retail environment. Jeanswear revenues fell 6.4 percent to $712.2 million from $760.8 million.
"The first quarter is not representative of what we expect from our jeanswear business for the rest of the year," said Wiseman.
During the quarter, Wiseman said consumers in the mass and midtier levels had migrated to lower-priced products.
"In times like this, some consumers flock to more value price points. That happens in every channel of distribution," he said. "That's not where our strong brands exist, nor is it where we want them to exist."
Retailers also tightened up inventory levels and were more conservative with their orders.
Sportswear volume fell 10.9 percent to $132.2 million from $148.4 million, again due in large part to the Nautica business. Kipling and John Varvatos saw higher revenues during the quarter.
Management anticipates that the outdoor and contemporary brands segments, along with strength in international markets such as China and India, will still allow VF to meet its goals for the year with more consistent performance in the second half. As Wiseman noted, a difficult year in the domestic market had been anticipated.
"The bad news is that we were right," he said. "The good news is that we were right and we planned accordingly."
He added that, while he expected conditions to remain difficult, management isn't expecting things to get worse.