VF Corp. started the second-quarter earnings season for U.S.-based apparel firms with a flourish, exceeding profit expectations and raising its full-year earnings guidance.
Setting a high standard for companies like PVH Corp. and Ralph Lauren Corp., scheduled to report next month, VF overcame softness in Europe and in the midtier channel of the U.S. to post a 20 percent increase in net income.
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“The challenge out there is the trajectory of the global economy,” Eric Wiseman, chairman, president and chief executive officer of the Greensboro, N.C.-based apparel giant, told WWD Thursday. “That will be the headwind for us, but you can make progress in a headwind.”
And progress was certainly made in the second quarter. In the three months ended June 30, net income rose to $155.3 million, or $1.40 a diluted share, from $129.4 million, or $1.17 a share. Adjusted earnings per share, excluding a gain from the sale earlier this year of John Varvatos and expenses related to the acquisition of Timberland, was $1.11, 17 cents above the analysts’ consensus estimate of 94 cents.
Revenues came up slightly short of estimates, rising 16.4 percent to $2.14 billion versus $1.84 billion in last year’s quarter and the $2.18 billion median analyst estimate. Excluding Timberland’s $239 million contribution, organic revenues rose 3 percent and were up 6 percent at constant currency.
Gross margin, under pressure from higher input costs, improved to 46.1 percent of sales over the year-ago quarter’s level of 45.9 percent, which was enhanced by a facility closure. Robert Shearer, chief financial officer, said the improvements came principally from U.S. jeanswear, which he described as VF’s “most challenged” business, and the outdoor and action sports group, which includes The North Face, Vans and Timberland.
Investors indicated their approval of the numbers by sending shares of VF up $10.61, or 7.5 percent, to $152.42 in New York Stock Exchange trading Thursday.
Wiseman said that Timberland’s 2011 performance exceeded expectations and that it’s currently ahead of plans for 2012.
“Overall, Timberland is a little ahead of schedule, but the truth will be told about that acquisition and whether it delivered what we paid for it probably in 2015,” he said. “We have a lot of work to do on our apparel launch for fall 2013. Sixty percent of its business is outside the U.S. and it’s got a very successful apparel business in Asia, where footwear and apparel are about even.”
On track to generate about $1.5 billion in sales this year, Wiseman believes Timberland apparel could grow “another $300 million.”
He remains bullish about the potential for VF’s direct-to-consumer business, which, helped by Timberland’s contribution, expanded to 21 percent of revenues, or about $450 million, from 18 percent a year ago. VF plans to add about 130 stores to its 1,050-unit footprint at the end of 2011. “That’s still a big opportunity for us,” he said.
Similarly, he noted that VF brands are generally underpenetrated in China, where sales rose 34 percent in the second quarter, led by a 50 percent increase in jeans.
“We’ve got about 2,200 points of sales in China across four brands, and some of the big footwear players there have 10,000,” he noted. “A lot of runway? Yes. We have plenty.”
While Lee remains VF’s biggest brand in China, it’s struggled against weakness in the midtier channel in the U.S., where its revenues fell during the quarter.
Without direct reference to J.C. Penney Co. Inc. or Kohl’s Corp., Wiseman commented, “The midtier in general is having a difficult time right now and one of the issues is foot traffic. What we look at is whether we’re a headwind or a tailwind for [those stores]. With Lee, we’re outperforming total store numbers and those for the denim category. The answer is that you have to take share.”