NEW YORK — Finding that its move to buy more goods from foreign contractors is paying off quicker than expected, VF Corp. on Wednesday reported a 28.1 percent jump in second-quarter net income, handily beating Wall Street’s expectations.
This story first appeared in the July 18, 2002 issue of WWD. Subscribe Today.
Company executives said the improvement in margins, coupled with an anticipated improvement in sales, will bring a 12 percent increase in net income for the full fiscal year, factoring out one-time expenses.
One-time items have played an important role in the company’s recent financial results, with VF reporting net losses in the first quarter of 2002 and fourth quarter of 2001 resulting from a $527.3 million goodwill write-off and $236.8 million in restructuring charges, respectively.
“Our conservatism, our approach to today’s difficult market and our brand-management skills are paying dividends this year,” said chairman and chief executive officer Mackey McDonald in a conference call with stock analysts. “Our cost structure is in excellent shape.”
The Greensboro, N.C.-based company said net income for the quarter ended June 29 came in at $88.9 million, or 79 cents a diluted share. That compares with $69.4 million, or 60 cents a share, last year. Excluding one-time items, which Wall Street analysts leave out in making their profit forecasts, VF’s income would have been 77 cents a share, well ahead of the 63-cent Thomson Financial First Call consensus.
The rise in income came despite a 9.8 percent drop in sales to $1.19 billion. The sales decrease was more than offset by a rise in operating margins to 37.3 percent of sales from 33.8 percent.
“They realized a greater part of the cost savings from the restructuring than they had thought,” said Dennis Rosenberg, analyst at CS First Boston. “It’s paying off faster.”
Robert Shearer, vice president and chief financial officer, said the move to close domestic production facilities and move to offshore contractors and foreign VF-owned plants was improving margins.
“Clearly, we’re seeing fundamental improvement in the underlying profitability of our core businesses,” Shearer said.
Robert Drbul, analyst with Lehman Bros., noted that VF also had a lower level of “distressed sales” — goods that must be sold for a steep markdown — during the quarter. That’s because the company has cut its inventory levels dramatically over the past year in response to the slowdown in retail demand.
At the end of the quarter, VF had $894.1 million in inventory on hand, 26.3 percent less than a year earlier.
McDonald said the company has found some bright spots in a shaky retail environment.
“Although June same-store sales comparisons were slightly better than expected, we’re still seeing mixed results overall,” he said. “Our brands are continuing to gain share. The mass channel continues to be stronger than department or specialty stores as consumers search for value.”
He said the company’s research showed that Wrangler’s U.S. market share for the first five months of the year had risen to 10.3 percent, from 10 percent a year earlier. Lee’s was up to 4.4 percent from 4.2 percent.
“Domestic jeans sales were down in the first half, but expected to be up in the second half,” he said, explaining that the decline in revenue in that business was partly due to first-half price cuts.
He also pointed out that VF had landed the uniform contract for the 55,000 airport security workers to be hired by the newly created Transportation Security Administration.
McDonald said he expects sales in VF’s continuing businesses — late last year it said it was pulling out of the swimwear and private label knitted apparel business — to be up 4 percent in the second half of the year.
But he acknowledged that overall demand for apparel is likely to remain less than robust. He suggested the relatively strong recent sales performance of discounter mass merchants, in comparison to apparel specialty retailers and department stores, reflects the fact that the mass chains are less dependent on apparel revenues.
Consumers have many other spending options, he noted.
“There are other priorities for their disposable income, which relates to home, travel, services, electronics,” he said. “The challenge we have in the apparel industry is presenting new innovative product. I don’t think that advertising brands gets you there today. I think you have to have better products for consumers and you have to tell them about it.”
He noted that the company boosted its marketing spending by 16 percent so far this year, placing a strong emphasis on product-specific advertising, such as the current TV campaign for Lee Performance Khakis showing a woman pouring red wine on her stain-resistant pants.
After making a number of acquisitions in 2000, including The North Face, Eastpak and HIS jeans, VF took a breather from its buying spree last year. McDonald said the company is now back in the hunt.
Without naming specific brands of interest, he said, “We’re looking, obviously, to strengthen those areas that we currently don’t have the strength in. The ideal acquisition for us would be a lifestyle brand that would cover multiple product categories.”
In particular, the company is looking at junior and young men’s brands distributed in department stores, he added. VF has cash on hand if the right deal comes along —?its balance sheet showed $272.2 million in cash at the end of the quarter, up from $100.4 million a year ago.
Analysts on the call asked McDonald about the Securities and Exchange Commission’s new requirement that ceo’s sign sworn statements attesting to the validity of all the information in their financial reports. The policy is intended to make it easier to hold corporate executives legally responsible for financial shenanigans and outright fraud, such as has been uncovered at several major companies over the past few months.
“What we have in place at VF is a culture of financial controls that have been there for many, many years. We have some terrific people who stick behind those controls and live by them,” McDonald said. “I feel fully confident signing any statement anyone wants me to sign about our finances and accounting.”
VF shares rose 13 cents, to $35.58 in Wednesday’s trading on the Big Board.
For the six months, VF recorded a $359.4 million net loss, including the goodwill write-off. That compares with $146.9 million in earnings a year earlier. Sales slipped 10.2 percent to $2.47 billion.