VF’s North Face Stays Hot in Warm Winter

Outerwear brand's sales helped lift parent company's fourth-quarter profits above expectations despite heightened margin pressure.

The North Face’s sales proved as resilient in fighting warm winter weather as its jackets have been battling the cold, helping to lift parent company VF Corp.’s fourth-quarter profits above expectations despite heightened margin pressure.

This story first appeared in the February 17, 2012 issue of WWD.  Subscribe Today.

Eric Wiseman, chairman, president and chief executive officer of VF, told WWD Thursday that, despite unseasonably warm weather, the outerwear-focused North Face achieved a 22 percent increase in global revenues in the fourth quarter, divided among 24 percent growth in the U.S. and volume increases of 12 percent and 41 percent in constant dollars in Europe and Asia, respectively. He reaffirmed the company’s goal of lifting The North Face to a $3 billion business in 2015.

The brand’s strength was a highlight of the pacesetting performance by the firm’s Outdoor and Action Sports Coalition, which saw sales soar 80.6 percent, to $1.62 billion, and rise nearly 20 percent excluding results for Timberland, acquired in September. Including Timberland, the coalition, the largest of the five operated by VF, registered operating profits of $274 million, 51.9 percent higher than in the final quarter of 2010.

The durability of North Face, coupled with Timberland’s $713 million contribution to revenues, helped offset weakness in the company’s jeanswear business, where segment profit dropped 23.1 percent on a 3.4 percent sales gain, to $711.6 million, and gross margin declined more than expected.

“We talk a lot about the diversity of our business model,” Wiseman told WWD. “In 2008, when the luxury sector was struggling, midtier and mass propped us up. Now, Europe is under pressure but Asia is strong. There’s no disproportionate concentration in any segment or market.”

Similarly, Wiseman noted, the Lee and Wrangler Western jeanswear businesses performed well, “and then there’s the mass jeanswear business where revenues were flat and profit was down substantially. When we saw cost increases coming at us [for 2011], we had to make a decision about how much to pass along to the mass customer who sits at the epicenter of the issue of disposable income. We took our prices up about 15 percent, but that wasn’t close to covering the cost of denim.”

As a result, gross margins declined about 400 basis points in the U.S. mass jeanswear business, dominated by Wrangler’s presence in Wal-Mart, “but we gained share and floor space.”

He expects the pressure on jeanswear margins to ease in the second half of 2012 and the company’s gross margin to rise about 70 basis points for the full year. 

In the three months ended Dec. 31, net income expanded to $258 million, or $2.28 a diluted share, against year-ago profits of $55.3 million, or 49 cents. Excluding extraordinary items, such as costs related to the Timberland acquisition in last year’s quarter and impairment charges related to its Contemporary coalition in 2010, adjusted EPS was $2.32, 1 cent higher than analysts projected, versus $1.78 in the earlier quarter. Revenues rose 36.8 percent to $2.91 billion from $2.13 billion, and were up 11 percent on an organic basis. Gross margin fell below estimates, dropping 140 basis points to 45.2 percent of revenues.

Based on the assumption of an average exchange rate of $1.25 per euro, VF projected 2012 EPS of $9.30, below the $9.53 consensus estimate. Wiseman said the company shifted its guidance downward when the euro dropped against the dollar early in January. Earlier guidance had assumed a $1.30 rate and been pegged at $9.48.

Investors took the conservative guidance in stride, lifting shares of the Greensboro, N.C.-based company $4.67, or 3.3 percent, to $147.92 after they hit a 52-week high of $148.84 in morning trading.

For the full year, net income rose 55.4 percent to $888.1 million, or $7.98 a diluted share, as revenues advanced 22.8 percent, to $9.37 billion.