Lower cotton prices helped VF Corp. deliver higher-than-expected first-quarter profits and the best gross margin result in its history.
This story first appeared in the April 29, 2013 issue of WWD. Subscribe Today.
Cotton’s reversal significantly helped the profitability of VF’s jeanswear coalition, which saw operating income spike 29.4 percent to $143.3 million, even as the unit’s sales declined 3.2 percent to $717.9 million on weakness among midtier retailers in the U.S., as well as in its wholesale businesses in China and southern Europe.
“We knew going into this quarter there would be a substantial difference in jeanswear gross margin,” Eric Wiseman, chairman, president and chief executive officer of the Greensboro, N.C.-based apparel giant, told WWD. “Denim we bought in the final quarter of 2011 and sewed in 2012 was made with very expensive cotton. We were up against the highest product costs we faced all year. Then again, the gap that helped us so much in the first quarter will diminish as the year goes on.”
In the three months ended March 30, net income shot up 25.6 percent to $270.4 million, or $2.41 a share, from $215.2 million, or $1.91, in the prior-year period. Adjusted EPS was $2.43, 25 cents above the $2.18 Wall Street had expected.
Gross margin jumped 240 basis points to 48.1 percent of sales from 45.7 percent a year ago. While the full-year improvement in gross margin is expected to be a more modest 100 basis points as the “cotton gap” closes throughout the year, Wiseman asserted that VF’s emphasis on branded lifestyle businesses, direct-to-consumer initiatives and international markets will continue to pay dividends.
“Five years ago, our lifestyle brands provided higher gross margins than our non-lifestyle brands; our DTC higher than wholesale, and international better than domestic,” he said. “But those were small businesses five years ago. This year, 60 percent of our business will be lifestyle brands; DTC will be 23 percent, and 38 percent will be international.”
The strength of the profits and margins reported Friday was generally lost on investors, who traded shares of the stock down $3.93, or 2.2 percent, to $174.82, as revenues, up 2.2 percent to $2.61 billion, missed analysts’ consensus estimate of $2.64 billion. The drop followed a 2.6 percent pickup on Thursday, to $178.75, when VF hit a 52-week high of $178.91 in intraday trading.
The decline in jeanswear sales was consistent with company expectations for the quarter as it battled weak demand in southern Europe, oversupply in China and turbulence in the middle tier of the U.S. retailing galaxy.
Wiseman pointed out that the uncertainty at J.C. Penney Co. Inc. might come back to benefit VF as the retailer works to restore equilibrium under returning ceo Myron “Mike” Ullman.
“Penney’s embarked on a bold strategy where they looked for new customers to come into their store,” Wiseman said. “In the process, they alienated some traditional customers, and our Lee customers have been that traditional customer. We’ll have the right products in the stores, and there’s an opportunity there for a lift if they can get their customers back. It doesn’t take anything magical for that to happen.”
Lee’s first-quarter revenues were down 6 percent, the company said. Wrangler’s were down 2 percent, with strength in the U.S. Western wear and Latin America business offset by weakness in the U.S. mass market.
VF’s largest business unit, outdoor and active sports, saw operating income grow 12.3 percent, to $226.5 million, on 9.5 percent sales growth, to $1.38 billion. As with the company overall, profit growth outpaced sales growth in sportswear, home of the Nautica brand, with operating income ahead 13.9 percent, to $12.2 million, on a 4.3 percent sales increase to $128.2 million.
Wiseman said he and the team at VF are continuing to study recent weakness in the company’s contemporary group — which consists of Seven For All Mankind, Ella Moss and Splendid — and in the U.S. contemporary market as a whole. Profits at the contemporary group fell 15.4 percent, to $12.6 million, as sales tracked down 18.3 percent to $103.7 million, with all but about 4 percent of the decline attributable to the sale last April of the John Varvatos business.
“We were down 4 percent worldwide without Varvatos, but within that, our DTC business was up 9 percent and our European wholesale business moved ahead,” Wiseman noted. “That means the problem was in U.S. wholesale, and this has all happened within the past 75 to 90 days, too recently for us to have reached a conclusion about it.”
However, he noted that within VF’s contemporary stores traffic is down but conversion is up, and average unit retails have been “OK. That tells me that it’s not our product. Fewer people are walking in the door, but once they’re inside they like what they see and they’re buying more of it.”