03 May VF Corp.’s Q1 Tops Estimates
VF Corp’ earnings slid 9.9 percent in the first quarter to $260.3 million, or 61 cents a share, but exceeded Wall Street’s consensus target of 59 cents. The company retained its guidance for the year. Among its major brands on a currency-neutral basis, The North Face grew 8 percent while Vans gained 2 percent and Timberland increased 3 percent.
First-quarter highlights:
- First quarter revenue in line with last year at $2.8 billion (up 2 percent currency neutral).
- Top five brands’ revenue up 2 percent (up 4 percent currency neutral).
- Outdoor & Action Sports and Jeanswear revenue both up 2 percent (up 4 percent currency neutral).
- Direct-to-consumer revenue up 7 percent (up 8 percent currency neutral).
- International revenue up 1 percent (up 4 percent currency neutral).
“Our first quarter results demonstrate the ability of our diversified business model to perform as expected in an inconsistent environment,” said Eric Wiseman, VF Chairman and Chief Executive Officer. “By leveraging our strengths – driving innovation into the marketplace, connecting with consumers and operating with financial discipline – we are on track to deliver results consistent with our 2016 outlook, while also delivering on our commitment to shareholders.”
Income Statement Review
- Revenue was in line with last year at $2.8 billion (up 2 percent currency neutral) driven by strength in our Outdoor & Action Sports and Jeanswear coalitions and our direct-to-consumer and international businesses.
- Gross margin was 48.2 percent on a reported basis, down 80 basis points compared with the same quarter last year as benefits from lower product costs, pricing and the continued mix shift to higher margin businesses were offset by 100 basis points from changes in foreign currency and proactive inventory management efforts.
- Operating income on a reported basis was down 15 percent to $336 million compared with the same period of 2015. Operating margin on a reported basis declined 220 basis points to 11.8 percent. As a reminder, in the first quarter of 2015, we recognized a one-time gain on the sale of a VF Outlet® location. Excluding this transaction and a 90 basis point headwind from changes in foreign currency rates, operating margin declined 70 basis points.
- Earnings per share was $0.61 per share compared with $0.67 per share during the same period last year. Excluding the negative impact of foreign currency, first quarter earnings per share was flat.
Coalition Review
First quarter revenue for Outdoor & Action Sports was up 2 percent (up 4 percent currency neutral) to $1.6 billion.
- Revenue for The North Face® brand was up 6 percent (up 8 percent currency neutral) driven by a low single-digit percentage rate increase in the Americas; a high-teen percentage rate increase in Europe; and, a mid-single-digit percentage rate increase in Asia-Pacific (up high single-digit currency neutral).
- In line with expectations, Vans® brand revenue was down 1 percent (up 2 percent currency neutral) including a mid-single-digit increase in the Americas business (up high single-digit currency neutral); a high single-digit increase in Asia-Pacific (up low double-digit currency neutral); and a mid-teen percentage rate decrease in Europe where the brand continues to manage through elevated inventories related to its Classics collection.
- Timberland® brand revenue was up 2 percent (up 3 percent currency neutral) in the first quarter including a low single-digit increase (up mid-single-digit currency neutral) in the Americas region; a mid-single-digit increase in Europe; and a mid-single-digit decline in Asia-Pacific (down low single-digit currency neutral).
- First quarter operating income for Outdoor & Action Sports declined 13 percent to $228 million (flat currency neutral). Operating margin was 13.9 percent compared to 16.2 percent in the same period last year. More than half of this decrease was due to foreign currency fluctuations.
Jeanswear first quarter revenue was up 2 percent (up 4 percent currency neutral) to $711 million.
- First quarter revenue for the Wrangler® brand was up 2 percent (up 4 percent currency neutral) with low single-digit growth in the Americas business (up mid-single-digit currency neutral); a mid-single-digit decline in Europe (down low single-digit currency neutral); and a low single-digit decline (up mid-single-digit currency neutral) in the Asia-Pacific region.
- Revenue for the Lee® brand was up 1 percent (up 4 percent currency neutral) including low single-digit growth in the Americas region (up mid-single-digit currency neutral); mid-single-digit growth in Europe (up high single-digit currency neutral); and a low single-digit decline (up mid-single-digit currency neutral) in the Asia-Pacific region.
- Operating income for Jeanswear in the first quarter was up 4 percent to $137 million, with a 40 basis point increase in operating margin to 19.3 percent.
Imagewear first quarter revenue was down 5 percent to $269 million (down 4 percent currency neutral) with the Licensed Sports Group business remaining flat and a high single-digit decline in the workwear business, which continues to be impacted by considerably less oil and gas exploration. First quarter operating income for Imagewear was flat at $42 million, with an 80 basis point increase in operating margin to 15.4 percent, driven by pricing and changes in foreign currency rates related to our manufacturing operations.
Sportswear first quarter revenue declined 13 percent to $118 million including a 14 percent decrease in Nautica® brand revenues and an 8 percent decrease in the Kipling® brand’s North American business compared with the same period last year, reflecting ongoing challenges in demand for the sector. Additionally, the strategic decision to license the women’s sleepwear and men’s underwear businesses negatively impacted Nautica® brand revenue by about 6 percentage points in the quarter. Operating income for Sportswear decreased 63 percent to $5 million with a 550 basis point decrease in operating margin to 4.0 percent.
Contemporary Brands’ first quarter revenue was down 15 percent to $74 million, including a 53 percent decline in operating income.
International Review
International revenue in the first quarter was up 1 percent (up 4 percent currency neutral). Revenue in Europe was up 1 percent (up 2 percent currency neutral) and in the Asia-Pacific region was up 2 percent (up 6 percent currency neutral). Revenue in the Americas (non-U.S.) region was down 1 percent (up 12 percent currency neutral). The international business represented 41 percent of total VF first quarter sales, compared with 40 percent in last year’s same period.
Direct-to-Consumer Review
Direct-to-consumer revenue was up 7 percent (up 8 percent currency neutral) in the first quarter driven by low double-digit growth in the Outdoor & Action Sports business, which was offset by a mid-teen percentage rate decline in Sportswear and a high single-digit decline in the Contemporary Brands coalition. There were 1,541 VF-owned retail stores at the end of the quarter. Direct-to-consumer revenue reached 26 percent of total revenue in the first quarter compared with 24 percent in the 2015 period.
Balance Sheet Review
- Inventories were up 9 percent compared with the same period of 2015. As noted in February, about half of this amount is related specifically to core styles of cold-weather product positioned to fill demand in the second half of 2016.
- During the first quarter, the company purchased 11.3 million of its shares for $714 million at an average price of $63.13 under a program authorized by its Board of Directors. There are approximately 19 million remaining shares authorized for purchase.
2016 Outlook Highlights
There are no changes to management’s full-year outlook given on February 19, 2016:
- Revenue is expected to increase at a mid-single-digit percentage rate, including about one percentage point of negative impact from changes in foreign currency.
- Gross margin is expected to improve by about 50 basis points to 48.8 percent, which includes about 70 basis points of headwind from changes in foreign currency.
- Operating margin is expected to reach 14.4 percent, including about 70 basis points from the anticipated negative impact of changes in foreign currency.
- Earnings per share, on a currency neutral basis, is expected to increase 11 percent (up 5 percent reported) compared to an adjusted EPS of $3.08 in 2015. As a reminder, 2015 adjusted earnings per share excluded the negative impact of a $0.23 per share noncash impairment charge recorded in the fourth quarter of 2015 to reduce the carrying value of intangible assets related to our 7 For All Mankind®, Ella Moss® and Splendid® brands. On a reported basis, 2015 earnings per share was $2.85.
- Cash flow from operations is expected to reach $1.3 billion.
- Revenue in the first half is expected to be flat on a reported basis, up at a low single-digit percentage rate currency neutral. First half earnings per share should be down at a low double-digit percentage rate on a reported basis, down low single-digit currency neutral. As a reminder, the second quarter of 2015 benefitted by $0.02 in earnings per share from a lower tax rate primarily due to the settlement of prior years’ tax audits. We continue to expect currency neutral revenue growth in the second half of 2016 to increase at a high single-digit percentage rate, with the strongest performance coming in the fourth quarter. We expect second half reported earnings per share to increase at a mid-teen percentage rate, or up at a high-teen percentage rate currency neutral.
Dividend Declared
VF’s Board of Directors declared a quarterly dividend of $0.37 per share, payable on June 20, 2016, to shareholders of record on June 10, 2016.