ACQUISITIONS, WEAK PERFORMERS DRAG VF NET DOWN IN QUARTER

Byline: Thomas J. Ryan

NEW YORK — VF Corp.’s cash cow — jeans — supplied what its less-developed calves could not, but results still fell short of last year’s performance.
Strength in jeanswear was offset by subpar performances from recent acquisitions, workwear and intimate apparel as VF’s third-quarter profits slid 3.4 percent. Results were in line with Wall Street expectations as VF in August said that the integration of four acquisitions — North Face, Eastpak, Chic and Gitano — this year could cost between $11 million and $17 million in the second half rather than the neutral effect projected.
Earnings for the Greensboro, N.C.-based firm reached $100.4 million in the three months ended Sept. 30, down from $103.9 million. Earnings per share were 86 cents, up from 85 cents, reflecting fewer shares due to a stock buyback program. EPS was in line with Wall Street estimates that ranged between 84 cents and 87 cents. VF said excluding the impact of the stronger dollar against the euro and other foreign currencies, EPS would have been 88 cents.
Sales climbed 8.4 percent to $1.59 billion from $1.46 billion.
The report, with its comments on softness in workwear and intimate apparel, follows reorganization moves by the company this past Monday in which those units had been reassigned within VF’s coalition management structure.
“This was a solid quarter for VF, with sales reflecting particularly strong performance across our jeanswear brands as well as contributions from recent acquisitions,” said Mackey McDonald, chairman and chief executive officer, in a statement.
On Wednesday, VF shares fell 31 cents to $22.75, a 1.4 percent decline. Earnings were released following the close of the market.
Domestic jeanswear sales rose 9 percent, with gains across the mass market, Lee and Western businesses. Brands include Wrangler, Riders and Rustler. European jeans sales fell, but were up excluding currency fluctuations. Jeanswear makes up about 50 percent of VF’s sales.
Intimate apparel sales dropped 7 percent as declines in private label due to the loss of a program with Victoria’s Secret were not offset by gains in lines sold at department stores. Brands include Vanity Fair, Vassarette, Bestform, Lily of France, and the recently introduced Tommy Hilfiger and Nike licensed ones.
Workwear sales and profitability were below prior year levels, reflecting difficulties integrating acquisitions made in 1999.
On the positive side, knitwear sales rose 7 percent, with strength in printwear and private label. Backpack sales, which include JanSport, rose 42 percent, reflecting the May acquisition of Eastpak.
Sales of Playwear — which includes Healthtex, Lee and the licensed Nike line — were flat.
Gross margins eroded to 33.9 percent from 34.3 percent due primarily to the acquisitions, which carry profit margins below VF’s core businesses. Margins “remain healthy” in core businesses, except for workwear.
“We’re pleased to see momentum improving in our top line and look forward to translating these sales into higher earnings,” said McDonald. “We are confident that our working capital management and operations skills will benefit The North Face, Eastpak, CHIC and Gitano, resulting in healthy, long-term profitability for these brands.”
VF said it told analysts it expects annual sales from its 2000 acquisitions to reach $640 million by 2003, with a combined operating margin of about 11 percent. Current sales are about $480 million, and analysts estimated that the combined businesses were generating about a break-even operating margin now.
At a Sept. 15 analyst meeting, VF said its goal was to bring North Face, the largest of the recent acquisitions, to an 11 percent margin from its current negative footing. It aims to increase Eastpak to 14 percent from 4 now; and wants to bring the combined Chic, Gitano and H.I.S. jeans lines to 10 percent from 4.
VF’s overall operating margin in the latest quarter was 11.6 percent, down from 12.7 percent a year ago. Marketing, administrative and general expenses grew to 22 percent of sales from 21.4 percent, reflecting the acquisitions.
“We will continue the ongoing analysis of our portfolio of brands and businesses to identify new sources of future growth and address profitability issues within underperforming units,” McDonald said. He indicated that the company still expects essentially flat EPS in 2000, which reflects the dilution from recent acquisitions which will primarily affect the fourth quarter.
“I consider these very satisfactory numbers,” said Jack Pickler, at Prudential Securities. “Given all the concerns about retail, particularly with some of the other apparel companies that I communicate with, and concerns about some of the mass merchants and discounters, given that that’s a key channel for VF’s jeans business, I consider this a real accomplishment to do as well as they did in this quarter.”
Several apparel firms, including Warnaco Group, Guess and Russell, have recently issued profit warnings as a result of weak retail trends.
J.P. Morgan’s Noelle Granger said margins were “a touch weaker than we expected” because of dilution from the integration of recent acquisitions. “But the top line of 8 percent was a nice acceleration,” she said. Top-line growth also was attributed to the acquisitions.
“The real challenge is to translate that top line growth to bottom line through improving the profitability at those acquisitions, which is probably a couple of quarters away,” said Granger.
Granger also said VF should benefit from moves seemingly designed to turn around the flagging intimate apparel and workwear businesses.
On Monday, VF announced that Dan McFarlan would step down as vice president and chairman of its intimate apparel and playwear coalitions after 22 years of service with the company.
Most of McFarlan’s duties will be filled by Eric Wiseman, currently president of VF’s Bestform unit, who becomes vice president and chairman of Global Intimate Apparel. He will be responsible for domestic and international intimate apparel, as well as swimwear, which includes Jantzen. John Schamberger, chairman of the company’s North and South American jeanswear coalition, will add responsibilities for playwear.
VF also said its knitwear and workwear businesses have been merged into a new coalition, VF Imagewear, with $1.1 billion in revenues. George Derhofer, who recently assumed responsibility for VF’s Workwear and Knitwear businesses, will become vice president and chairman of VF Imagewear.
Granger said the change in innerwear management seemed designed “to get a fresh perspective” to revive the business, while the creation in the Imagewear should enable VF to better capture the corporate clientele.
“The concept is to provide full apparel offerings to corporations whether line workers wearing uniforms up through corporate casual with company-logoed golf shirts,” said Granger. Granger said in the near term, the workwear business has to deal with problematic integration issues.
Also on Monday, VF said its JanSport, Eastpak and North Face operations — units that had reported to MacFarlan — would report to chief financial officer Bob Shearer on an interim basis. Shearer will also oversee outlet operations.
Finally, Terry Lay, vice president and chairman of VF’s International Jeanswear Coalition, assumed additional responsibilities as vice president of global processes. Tim Lambeth, the current global processes vice president, will retire at yearend after 32 years of service.
McDonald said the changes were made “to better align our organization with the dynamics of our marketplace and establish a growth model for our company’s future.”
VF also said it increased its quarterly dividend by a penny to 23 cents a share, marking the 10th consecutive year it increased its quarterly rate. The cash dividend is payable Dec. 18 to holders of record on Dec. 8.
In the nine months, earnings slid 2.7 percent to $261.7 million from $269 million, while stock buybacks increased earnings per share to $2.22 from $2.19. VF said the negative impact of the stronger dollar versus foreign currencies pulled down earnings by four cents a share. Sales advanced 2.8 percent to $4.31 billion from $4.19 billion.

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