24 Oct VF Corp.’s Tops Q3 Targets, Lifts Outlook
VF Corp. again raised its outlook for the year after reporting third-quarter earnings that came in well above Wall Street’s targets.
- Third quarter revenue from continuing operations increased 5 percent to $3.5 billion (up 4 percent currency neutral);
- Gross margin from continuing operations improved 100 basis points (up 180 basis points currency neutral) to 50.1 percent;
- Outdoor & Action Sports revenue increased 8 percent (up 6 percent currency neutral); Vans brand revenue increased 28 percent (up 26 percent currency neutral);
- International revenue increased 13 percent (up 10 percent currency neutral), including 18 percent growth in Europe (up 14 percent currency neutral) and 9 percent growth in China;
Direct-to-consumer revenue increased 18 percent (up 17 percent currency neutral) with digital revenue up 38 percent (up 37 percent currency neutral); - Reported earnings per share from continuing operations decreased 16 percent (down 12 percent currency neutral) to 97 cents due to a noncash goodwill impairment charge; adjusted earnings per share from continuing operations increased 6 percent (up 10 percent currency neutral) to $1.23;
2017 revenue now expected to increase about 6 percent on a reported basis (up 5.5 percent on a currency neutral basis) to approximately $12.1 billion; - 2017 reported earnings per share is now expected to be $2.73; adjusted earnings per share from continuing operations is now expected to be $3.01, including an additional $25 million, or 5 cents per share, of incremental investment, up 1 percent on an adjusted basis (up 6 percent currency neutral) compared to 2016 adjusted earnings per share of $2.98; and,
- Quarterly dividend rate increased by 10 percent to 46 cents per share.
VF Corporation reported financial results for its third quarter ended September 30, 2017. All per share amounts are presented on a diluted basis.
“VF’s third quarter results were strong, fueled by accelerated momentum across the company’s international and direct-to-consumer platforms and our Outdoor and Action Sports and Workwear businesses,” said Steve Rendle, president and chief executive officer. “Based on the strength of our third quarter performance and the stronger growth trajectory we see for the remainder of 2017, we are again increasing our full year outlook and making additional growth-focused investments aimed at accelerating growth and value creation into 2018 and beyond. VF remains committed to returning cash to shareholders as evidenced by the increase in our dividend, which is supported by the strength of our balance sheet and the confidence we have in our strategic growth plan.”
Discontinued Operations – Licensing Business And Contemporary Brands
On April 28, 2017, the company completed the sale of its Licensed Sports Group (LSG) business, including the Majestic brand. Accordingly, the company has removed the assets and liabilities of LSG at that date and included the operating results of LSG in discontinued operations for all periods presented. In conjunction with the LSG divestiture, VF executed its plan to entirely exit the licensing business and has classified the assets of the JanSport brand collegiate business as held for sale and included the operating results in discontinued operations for all periods presented.
On August 26, 2016, the company completed the sale of its Contemporary Brands businesses, which included the 7 For All Mankind, Splendid and Ella Moss brands. Accordingly, the company has included the operating results of those businesses in discontinued operations for all periods presented.
The company’s net loss from discontinued operations was less than $1 million in the third quarter of 2017, which includes an adjustment to the estimated loss on the sale of LSG recorded in the first quarter of 2017, and the after-tax operating results of the JanSport brand collegiate business during the quarter.
Adjusted Amounts – Excluding Noncash Impairment Charges And Williamson-Dickie Transaction And Deal Related Expenses
The release refers to adjusted amounts that exclude a pretax noncash goodwill impairment charge related to the Nautica brand of $105 million and $5 million of transaction and deal related expenses associated with the acquisition of Williamson-Dickie. Combined, the above charges impacted earnings per share by 26 cents. All adjusted amounts referenced herein exclude the effects of these amounts.
Reconciliations of measures calculated in accordance with GAAP to adjusted amounts are presented in the supplemental financial information included with this release, which identifies and quantifies all excluded items.
Income Statement Review
Revenue increased 5 percent to $3.5 billion (up 4 percent currency neutral), driven by broad-based strength across VF’s international and direct-to-consumer platforms, Outdoor & Action Sports coalition, most notably our Vans brand and Workwear businesses. Wall Street’s consensus consensus had been $3.41 billion.
By coalition, Outdoor & Action Sports’ revenues rose 7.6 percent to $2.5 billion and was up 6 percent on a currency-neutral basis. Operating earnings in the coalition rose 6.8 percent to $524.5 million and gained 11 percent currency-neutral.
Among other coalitions, Jeanswear’s revenues inched up 0.5 percent to $697.7 million while currency-neutral sales were down 1 percent. Jeanswear’s operating profits declined 14.9 percent to $121.2 million and was off 16 percent on a currency-neutral basis.
In the Imagewear segment, sales grew 8.5 percent to $138.9 million and gained 8 percent on a currency-neutral basis. Imagewear’s operating income was down 6.7 percent to $22.4 million and lost 10 percent at constant currencies.
Sportswear’s sales inched up 0.3 percent to $140.3 million and were flat on a currency-neutral basis. Operating profits grew 16 percent to $17.5 million and also increased 16 percent currency-neutral.
By region companywide, U.S. sales were flat in the quarter.
International sales grew 13 percent and gained 10 percent on a currency-neutral basis. EMEA jumped 18 percent on a reported basis and 14 percent currency-neutral. In the APAC region, sales rose 5 percent on a reported basis and 4 percent on a currency-neutral basis. China’s sales grew 8 percent on both a reported and currency-neutral basis.
In the Americas (non-U.S.), sales rose 8 percent and gained 5 percent on a currency-neutral basis.
Wholesale revenues grew 1 percent on a reported basis and was flat on a currency-neutral basis. In the direct-to-consumer channel, sales jumped 18 percent on a reported basis and gained 17 percent on a currency-neutral basis.
Companywide gross margin improved 100 basis points to 50.1 percent, as benefits from pricing and a mix shift toward higher margin businesses were partially offset by changes in foreign currency and an increase in product costs. Changes in foreign currency negatively affected reported gross margin by 80 basis points during the quarter.
Operating income on a reported basis was down 20 percent to $484 million compared to the same period of 2016. On an adjusted basis, operating income was down 2 percent to $593 million. Changes in foreign currency negatively affected the reported and adjusted operating profit decline by 3 percentage points during the quarter. Operating margin on a reported basis decreased 450 basis points to 13.8 percent. On an adjusted basis, third quarter operating margin declined 140 basis points to 16.9 percent. Changes in foreign currency negatively affected reported and adjusted operating margin by 80 basis points during the quarter.
Earnings per share on a reported basis decreased 16 percent to 97 cents compared to $1.16 during the same period last year. On an adjusted basis, earnings per share increased 6 percent to $1.23, well above Wall Street’s consensus estimate of $1.12. Excluding the impact of changes in foreign currency, third quarter reported and adjusted earnings per share decreased 12 percent and increased 10 percent, respectively.
Balance Sheet Highlights
Inventories were up 1 percent compared with the same period of 2016. As of the end of the third quarter, the company has $4.2 billion remaining under its current share repurchase authorization. In anticipation of the closing of the Williamson-Dickie transaction on October 2, 2017, VF prefunded the purchase price resulting in a significant increase in both cash and short-term borrowings at the end of the third quarter. The company expects to end 2017 with less than $1 billion of short-term borrowings.
2017 Outlook Raised
The following outlook for 2017 has been updated and includes the following:
- Revenue is now expected to increase about 6 percent on a reported basis (up 5.5 percent currency neutral) to approximately $12.1 billion. This compares to the previous expectation of $11.85 billion, a 3.5 percent increase on a reported basis (up 4.5 percent currency neutral). Both estimates include about a $200 million contribution from the previously announced Williamson-Dickie acquisition. By coalition, revenue for Outdoor & Action Sports is now expected to increase approximately 7 percent versus the previous expectation of an approximate 5 percent increase (up 6 percent to 7 percent currency neutral); revenue for Jeanswear is now expected to decline slightly versus the previous expectation of revenue that approximated that of 2016; Imagewear revenue is still expected to increase at a mid-single-digit percentage rate; and, Sportswear is still expected to decline at a high single-digit percentage rate.
- International revenue is now expected to increase approximately 10 percent versus the previous expectation of a low single-digit increase (up high single-digit currency neutral).
- Direct-to-consumer revenue is now expected to increase approximately 13 percent versus the previous expectation of a 10 percent to 11 percent increase. Digital revenue is now expected to increase approximately 30 percent versus the previous estimate of a more than 25 percent increase.
- Gross margin is now expected to approximate 50 percent, versus the previous expectation of 49.5 percent, and includes about a 50 basis point negative impact from changes in foreign currency. The Williamson-Dickie acquisition is expected to negatively impact gross margin by about 20 basis points.
- Operating margin on a reported basis is expected to be 12.3 percent; adjusted operating margin is expected to approximate 13.4 percent, versus the previous expectation of 13.7 percent, including about a 50 basis point negative impact from changes in foreign currency. The Williamson-Dickie acquisition is expected to negatively impact adjusted operating margin by about 20 basis points.
- Earnings per share on a reported basis is expected to be $2.73; adjusted earnings per share is now expected to be $3.01 compared to the previous expectation of $2.96. Accordingly, adjusted earnings per share is expected to increase 1 percent (up 6 percent currency neutral), compared to 2016 adjusted earnings per share of $2.98. Relative to the prior outlook, the company’s updated 2017 adjusted earnings per share outlook includes an additional 5 cents per share ($25 million pretax) impact from additional investments to drive accelerated growth into 2018 and beyond. This is in addition to the 8 cents per share ($40 million pre-tax) impact from additional investments announced on July 24, 2017.
- Other full year assumptions include an effective tax rate of approximately 20 percent (down from a tax rate in the low 20 percent range previously) and cash flow from operations is expected to reach approximately $1.5 billion (up from $1.45 billion previously).