VF POSTS SOLID RESULTS, BUT CAUTIOUS AMID ECONOMIC UNCERTAINTY
Byline: Scott Malone
GREENSBORO, N.C. — VF Corp. will trim inventories and limit fiscal expectations in response to the uncertain economy, but it will not close the door on possible acquisitions.
The apparel giant, based here, was among the most acquisitive U.S. apparel companies in 2000, making five major purchases that are starting to bear fruit this year, and it continues to be frequently mentioned as a possible suitor for Warnaco Group’s intimate apparel or or jeanswear operations — particularly its Calvin Klein labels.
At the annual meeting at the O. Henry Hotel here, VF officials reported first-quarter earnings a penny ahead of Wall Street’s expectations on solid earnings growth.
VF’s stock closed at $38.89, down 29 cents, in New York Stock Exchange trading, close to its 52-week high of $40.40. Meanwhile, Warnaco shares continued their recent slide, establishing a new 52-week low of 52 cents a share before closing at 60 cents, its previous low for the last year.
Net income for the quarter ended March 31 came in at $77.5 million, or 67 cents a diluted share, up 9.2 percent from $71.1 million, or 60 cents, a year earlier. Sales were $1.43 billion, up 5 percent from $1.36 billion.
However, chairman and chief executive officer Mackey McDonald warned shareholders about bumpy times ahead.
“What’s happening at retail now is causing many apparel companies and retailers to have very difficult results,” he said. He warned that VF expects to report flat second-quarter sales and a drop in earnings per share of about 15 percent, as the company works to lower its inventories.
However, for the overall year, the company expects a rise of 8 to 10 percent in earnings per share as the five companies acquired last year start to contribute to the bottom line.
Last year those brands — Chic, Gitano, HIS, The North Face and Eastpak — sapped about 6 cents a share from VF’s $2.21 a diluted share bottom line, which came out to $260.3 million on a net basis. This year, McDonald said he expects them to boost earnings by 4 cents a share. Officials said the bulk of the first-quarter sales growth came from these new businesses.
McDonald said he believes the outlook for retailing for the rest of the year is “sluggish, but not deteriorating.”
With consumer confidence levels down from a year ago and energy prices up, he sees little reason to expect a pickup in spending, but he isn’t predicting a collapse in the apparel market, either. “I think we will see some stabilization as we go into the second half of the year, but I don’t expect much recovery.”
Concerns about a stagnating economy have VF focusing on cutting inventories, up 14.5 percent from prior-year levels and 1.2 percent from the start of the fiscal year. Excluding acquisitions, the year-to-year inventory growth would have been 4 percent, company officials said.
Much of the increase was in jeans, McDonald said, where a shift toward more basic styles caused plants to speed up production. “We do have more inventory than we expected to in jeans,” he acknowledged. “We want to be very conservative because of the uncertainties” about the current apparel environment, he said. “We want to be very lean.”
McDonald said VF expects to have inventories back in line by the end of the second quarter. The company said it will be taking down time at jeans plants in the second quarter as part of its overall effort to cut inventories $100 million this year from the $1.12 billion at the end of 2000.
Despite concerns about the overall market, VF officials said they weren’t ruling out further acquisitions this year. With The Warnaco Group Inc.,which produces the Calvin Klein jeanswear and innerwear lines, among other brands, facing troubles, some industry sources have speculated that VF would be interested in some Warnaco assets.
VF executives declined to directly address the rumors, though in an interview after the annual meeting, John Schamberger, chairman of the company’s North and South American jeanswear and playwear coalitions, suggested, “If you look at our jeans portfolio, an upstairs brand that is strong in department stores would be nice to add,” he said. While the company’s Lee brand has been making inroads in the department-store sector, it’s also a mainstay of mass and moderate merchandisers, he said.
McDonald told shareholders VF is always interested in possible deals, adding, “There are a lot of companies in our industry that are struggling financially.” Later in his office, he said the company might consider a more upmarket brand if the right opportunity came along. “We basically look for areas to fill out our portfolio, to fill out our distribution to new retail channels or customers that we aren’t serving,” he said.
However, he declined to comment on Warnaco or the Calvin Klein lines, saying only, “I wouldn’t want to comment on any specific brands.”
VF officials also said they were considering new options for The North Face brand, including rolling out retail stores and stepping up shoe offerings.
Robert Shearer, vice president and chief financial officer, who also oversees the company’s outdoor brands, said VF is planning to open at least one new North Face store this year; eight currently operate.
The acquisition of The North Face and Eastpak drove up sales in the company’s outdoor segments by five times for the first quarter, making it the firm’s fastest-growing classification.
Domestic jeanswear sales rose 2 percent, with international jeanswear sales rising 6 percent in the quarter. Domestic innerwear sales were up 5 percent.
Schamberger said the growth in the jeans business was driven by the Lee brand, as well as the company’s new brands. The imagewear business, which includes workwear and knits, saw sales slide 4 percent. Playwear sales were off 7 percent.