AS MARGINS CLIMB, VF NET RISE 19.4%

Byline: Thomas J. Ryan

WYOMISSING, Pa. — Boosted by fatter margins, earnings at VF Corp. climbed 19.4 percent in the third quarter, crushing Wall Street estimates.
The apparel giant also announced a two-for-one stock split and increased its dividend by 5 percent.
In the quarter ended Oct. 4, VF earned $108.7 million, or $1.72 a share, compared with $91 million, or $1.42 a share, in the 1996 quarter. Wall Street expected $1.53 a share. On the New York Stock Exchange Wednesday, VF stock rose 1 5/8 to close at 91 3/4.
The earnings gain came despite a weakening of foreign currencies against the dollar, which VF said dragged down results by 6 cents a share.
Sales in the quarter inched up 2.6 percent to $1.42 billion from $1.38 billion.
“Results for the most recent period surpassed our expectations, particularly given the good third quarter we had last year,” said Mackey J. McDonald, chief executive officer, in a statement.
Despite the strong results, a cautionary note was sounded by Gerard G. Johnson, VF’s chief financial officer, as he looked ahead.
In a telephone interview, Johnson said recent poor reports of general activity at retail have “got us very cautious,” and VF is taking its production schedules “down a little bit” to make sure inventories are in line with demand.
“We’d rather be a little bit conservative and protect the profit. In this goosey retail environment, I think it’s a good move,” Johnson said.
As of Oct. 4, inventories were $767.2 million against $750.8 million a year ago, an increase of 2.2 percent.
Meanwhile, gross margins in the most recent quarter climbed to 34.4 percent from 32.3 percent as a result of declines in raw material costs and increased offshore manufacturing. Margins expanded “sharply” in all domestic and international coalitions except knitwear, which was hurt by competitive pricing conditions, VF said.
Operating margins improved — to 12.8 percent of sales from 11.1 percent — despite increased advertising costs. The company spent $226 million in brand marketing in the nine months, a 19 percent increase over the prior year. Interest costs were cut 19 percent.
Domestic sales rose 6 percent, with gains “well balanced” across jeans, intimate apparel, knitwear and playwear divisions.
International sales, which account for 18 percent of sales, declined 11 percent, with the bulk of the decline due to the strengthening of the U.S. dollar against foreign currencies.
McDonald said sales were “especially robust” for Vassarette, its intimate apparel brand for the discount channel; Red Kap workwear, and Healthtex, its children’s line.
“Sales of the company’s domestic jeans brands grew at a 4 percent rate in the quarter, due primarily to an upturn in Wrangler Westernwear and continued growth at Lee. While retail conditions remain poor in several key Western European markets, jeans sales in Mexico, Canada and Eastern Europe are growing strongly,” McDonald said.
Johnson added that the bounce back in western jeans was “particularly encouraging,” considering the area was a “little flat” at the beginning of this year.
He said the Riders line was doing “very, very well,” benefiting from increased coordination with Wrangler.
The Lee Riveted line is “doing wonderfully well” and is currently sold out, while Lee’s overall market share has “expanded somewhat” in the last eight months after some erosion last year, according to Johnson. Including international, jeans sales were up 6 percent in the quarter.
Intimate apparel sales were up 9 percent in the quarter, driven by double-digit gains in Vassarette. Vanity Fair’s sales increased modestly because of a planned reduction in the number of offerings, but profits were up “substantially,” Johnson said.
Sales of knitwear were up about 7 percent, though Johnson indicated that it’s a “tough market” for fleeces and T-shirts, with “lousy” pricing in the sports licensed apparel segment.
In the view of analyst Jack Pickler at Prudential Securities, it was “another outstanding quarter for VF.” He said, “The revenues were pretty much on our projection, but the gross margin was much stronger than we’d thought, overhead was somewhat lower and interest expense was lower than I estimated.”
Pickler said he expects the top line to pick up as foreign currency fluctuations ease and new marketing initiatives begin to kick in, particularly for the Vanity Fair, Vassarette and jeans brands and the launch of Brittania in fall 1998.
He also said Brittania, which was recently acquired from Levi Strauss, will be relaunched in the mass market in fall 1998, targeting a younger customer than previously.
Pickler expects VF will earn $5.40 a share this year against $4.64 last year and forecasts $5.75 in 1998.
In the nine months, earnings advanced 18.9 percent to $257.8 million, or $4.01, from $216.9 million, or $3.36. Currency fluctuations hurt results in the latest nine months by 12 cents a share. Sales gained 4.7 percent to $3.94 billion from $3.76 billion.
McDonald called the two-for-one stock split and the increased dividend “a mark of our confidence in our long-term growth plans.”
The two-for-one stock split is payable Nov. 24 to stock of record Nov. 4. The quarterly stock dividend was increased 1 cent to 20 cents a share and is payable Dec. 19.

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