NEW YORK — VF Corp. kept the momentum going in the second quarter with a rebound in its Lee jeans business and double-digit gains from the Vans and The North Face brands.
VF Corp. on Wednesday reported its 11th consecutive quarter of record sales and earnings.
“[Our transformation] is playing out just as we outlined it two years ago,” Mackey McDonald, chairman and chief executive officer, said during a conference call with analysts. “The even better news is we’re achieving growth across most of our businesses.”
For the three months ending in June, earnings for the Greensboro, N.C.-based apparel giant rose 2.4 percent to $99 million, or 88 cents a diluted share, compared with earnings of $96.7 million, or 85 cents a share, in the same period a year ago. Revenues for the quarter rose 7.9 percent to $1.57 billion from $1.45 billion. Sales rose 7.8 percent to $1.55 billion from $1.44 billion.
A turnaround in the struggling Lee business was a standout in the company’s jeanswear division. Jeanswear revenues increased 6 percent to $638.2 million, spurred by strong domestic sales and double-digit gains in Latin America, Mexico and China.
“This was a great quarter for our jeanswear team,” Eric Wiseman, president and chief operating officer, said during the call. “Our work to turn around the Lee brand in the U.S. is beginning to take hold, with revenues up 11 percent in the quarter, and we expect Lee to end the year up slightly versus 2005.”
Wiseman said the boost was attributable to retailers stocking up on inventory based on the strength of new Lee products. While management expects Lee to continue growing through the rest of the year, Wiseman said it was unlikely that the brand would maintain a double-digit growth rate.
The outdoor segment, which includes the Vans, Reef and North Face brands, continues to propel sales, with revenues shooting up 23.5 percent to $371 million from $300.4 million a year ago. The Vans, JanSport, Reef and Kipling brands reported revenue increases in excess of 20 percent, while North Face revenues increased 16 percent in what is typically the brand’s slowest time of the year. Vans, in particular, stole some of the limelight during the quarter, posting a 50 percent rise in comparable-store sales.
Wiseman said Vans “far outperformed our most optimistic assumptions,” and that the brand would be key in the company’s plans to expand its company-owned retail operations. “If you’ve got a format and a brand that is delivering comps of 50 percent, you’d be wise to get on that,” he said.
The intimate apparel division continued to struggle, with revenues declining 3.4 percent to $215.5 million from $223.2 million. However, McDonald said the rate of decline has “slowed significantly.” Management forecasts revenues to be flat for the second half.
Imagewear revenues rose 4.3 percent to $188.5 million, driven by higher sales of industrial uniforms. The sportswear segment, which includes Nautica and John Varvatos, reported revenues up 5.1 percent to $141.2 million from $134.4 million.
VF’s growth strategy has hinged on moving away from its roots as a large manufacturer of category apparel goods to developing and acquiring a portfolio of flashier lifestyle brands. The strategy has paid off with booming sales and earnings. Wall Street has responded, sending shares up more than 87 percent since the beginning of 2003. Shares reached a new 52-week high of $68.58 in intraday trading on the New York Stock Exchange on Wednesday.
Despite the success and ample cash on its balance sheet, the pace of acquisitions has trailed off. The most recent acquisition came in March 2005, when the company acquired Reef Holdings. Ever since, analysts have tried to gain insight into the next potential acquisition target and have come up empty. McDonald headed off the obligatory acquisition question in his remarks.
“As you know, today’s environment is very competitive, and we will not compromise our financial and strategic criteria,” he said. “It does mean that we need to look at a lot more opportunities, which is exactly what we’re doing.”
McDonald also used the call to address concerns that have been raised regarding how an economic downturn could negatively impact the spending habits of a large portion of the company’s consumer base. Lazard Capital Markets analyst Todd Slater downgraded VF to a “hold” rating in a research report released on Tuesday, based largely on the company’s exposure in the mass channel.
“While VF continues to exhibit best-of-class execution and strong inventory disciplines, it is not immune to softening consumer trends, especially in the lower-end mass channel impacted by high energy prices,” Slater said in the report. The downgrade, said the report, was not related to the company’s performance during the quarter, “but rather a function of deteriorating consumer fundamentals and slowing retail dynamics.”
McDonald acknowledged that the company would naturally be affected by a sustained economic downturn, but he pointed out that the mass channel accounts for 33 percent of revenues and that sales have consistently risen through several economic cycles. He also touted the strength of the VF brands as a point of differentiation.
“Sometimes, when a consumer gets more selective, if you have the best fashion and innovation and great prices, you reap the reward of that,” McDonald said. “What we’re seeing at this time gives us encouragement … we feel comfortable with where we are.”
For the first half of the year, earnings climbed 13.8 percent to $227.2 million, or $2.02 a share, from $199.6 million, or $1.75 a share. Revenues rose 6.5 percent to $3.23 billion from $3.03 billion. Sales also rose 6.5 percent, to $3.19 billion.
The outdoor segment led revenue growth, with a 29.2 percent gain to $756.7 million. Jeanswear revenue rose 2 percent to $1.34 billion, Intimates fell 5.6 percent to $425.6 million, Imagewear grew 3.9 percent to $382.5 million and sportswear rose 3.5 percent to $304.2 million.
The strong results prompted management to up its earnings guidance for the year. Earnings per share are expected to be $5, up from a previous estimate of $4.95. Revenues are expected to rise about 7 percent to approach $7 billion.