“Our strong second quarter results demonstrate that VF’s diverse portfolio of brands supported by powerful platforms is a potent engine for growth,” said Eric Wiseman, VF Chairman and Chief Executive Officer. “By staying sharply focused on our strategies – leading in innovation, expanding geographically and connecting more deeply with our consumers – we are winning in the global marketplace and are on track to deliver another record year for VF.”
Second Quarter 2013 Review
Revenues rose 4 percent to $2.2 billion compared with the same period of 2012, driven by strength in Outdoor & Action Sports, international and direct-to-consumer businesses.
Gross margin improved 240 basis points to 48.5 percent, an all-time high for any quarter in VF’s history. This performance, which includes improvements in nearly every coalition, compares with 46.1 percent in the same period of 2012. The higher gross margin reflects lower year-over-year product costs and the continued shift in our revenue mix toward higher margin businesses.
Operating income on an adjusted basis grew 22 percent to $206 million in the second quarter, compared with $169 million in the same period of 2012. On a GAAP basis, second quarter operating income increased 23 percent to $201 million, compared with $164 million in last year’s same period. Adjusted operating margin was 9.3 percent, compared with 7.9 percent in the second quarter of 2012. On a GAAP basis, operating margin rose to 9.1 percent from 7.7 percent in last year’s period.
Net income on an adjusted basis grew by 16 percent to $142 million from $123 million in the second quarter of 2012. Adjusted earnings per share – which excludes Timberland acquisition-related items of $0.03 per share in the second quarter – increased 14 percent to $1.27 per share from $1.11 per share during the same period last year. Last year’s second quarter adjusted earnings per share of $1.11 excluded a $0.32 per share gain from the sale of John Varvatos and $0.03 per share in acquisition-related expenses. Additionally, last year’s second quarter earnings per share included a non-recurring $0.10 per share discrete tax benefit primarily related to the settlement of prior years’ tax audits. On a GAAP basis, second quarter net income was down 11 percent to $138 million or $1.24 per share.
Second Quarter Coalition Review
Outdoor & Action Sports revenues rose 6 percent in the quarter to $1.1 billion with balanced growth across both the U.S. and international markets, and its wholesale and direct-to-consumer channels.
The North Face® brand revenues rose 5 percent globally driven by a mid-teen percentage rate increase in its direct-to-consumer sales and more than 20 percent growth in its international business. Revenues for The North Face® brand’s Americas region were down slightly, with a modest decline in its wholesale business that was not fully offset by its strong direct-to-consumer business, which grew at a mid-teen percentage growth rate. Second quarter revenues for the brand grew by 10 percent in Europe and by more than 40 percent in Asia Pacific demonstrating that The North Face® brand’s international strategy continues to deliver outstanding results.
Vans®, one of VF’s fastest growing and most profitable brands, continues to perform well on all fronts: wholesale, direct-to-consumer and in all regions of the world. In the second quarter, Vans® brand global revenues were up 15 percent including low-teen percentage growth in the Americas, 20 percent growth in its European business and more than 20 percent growth in the Asia Pacific region. The Vans® brand posted strong mid-teen percentage revenue increases in both its wholesale and direct-to-consumer channels globally.
Second quarter revenues for the Timberland® brand were down 3 percent. In the Americas region, revenues increased at a low single-digit percentage rate driven by a high single-digit increase in direct-to-consumer sales, offset by a modest decline in its wholesale business. In Asia Pacific, where Japan remains the brand’s largest market, second quarter revenues increased at a low single-digit percentage rate (low double-digit rate on a constant-dollar basis). With continued challenging conditions in Europe, the Timberland® brand’s revenues declined at a low double-digit percentage. Globally, on a constant-dollar basis, the Timberland® brand’s direct-to-consumer business was up by a mid single-digit percentage rate in the quarter.
Second quarter Outdoor & Action Sports operating income rose 22 percent to $100 million and operating margin increased 120 basis points to 9.1 percent, compared with 7.9 percent in the 2012 period.
For the first half of 2013, Outdoor & Action Sports revenues grew 8 percent. For the full year, VF continues to anticipate that coalition revenues will increase by about 10 percent, driven by particular strength in both the Vans® and The North Face® brands.
Jeanswear second quarter revenues were up 3 percent to $612 million, driven by a mid single-digit percent increase in the Americas region, which benefitted in part by the normalization of seasonal product orders from the first quarter into the second quarter. Jeanswear revenues for the European business were up 1 percent. In the Asia Pacific region, second quarter revenues declined at a mid single-digit rate – a sequential improvement from the first quarter – as the Lee® brand continues to work through an industry-wide build-up in inventories in China that began during the latter part of 2012.
Revenues for the Wrangler® brand were down 1 percent with about flat results in the Americas business, which saw continued strength in its Western specialty, Canadian and Latin American businesses, offset by a modest decline in its Mass business. Wrangler® brand revenues in Europe increased slightly and sales in the Asia Pacific region declined slightly in the quarter. The Lee® brand’s second quarter revenues were up 10 percent globally driven by a mid-teen percentage increase in Americas revenues where the business saw strong results from its seasonal and core jeans business. Second quarter revenues for the Lee® brand in Europe were up slightly and, as previously noted, the Lee® brand’s sales in Asia Pacific were lower.
Favorable year-over-year product costs and continued improvements in operating efficiencies led to a 17 percent increase in Jeanswear operating income to $109 million. Operating margin reached 17.8 percent in the quarter with improvements in the Wrangler® and Lee® brands across every region of the world
For the full year, U.S. Jeanswear revenues are expected to increase at a mid single-digit rate. On a global basis, Jeanswear should grow at a low single-digit rate, up from its previous expectation of modest growth.
Imagewear revenues declined 4 percent in the second quarter to $242 million, reflecting the continued delay of a contract renewal. Excluding this program, Imagewear achieved modest growth in the quarter. Operating income for the coalition was up 15 percent to $35 million with a 240 basis point improvement in operating margin to 14.5 percent, reflecting lower year-over-year product costs
Imagewear revenues are now expected to grow at a low single-digit percentage rate in 2013 compared with the previously anticipated mid single-digit growth rate.
Sportswear revenues grew 14 percent to $133 million driven by a low double-digit percentage increase in the Nautica® brand and nearly 30 percent growth in the Kipling® (U.S.) brand. Globally, the Kipling® brand grew 18 percent. The 14% growth for the coalition in the quarter benefitted from a 3 percentage point shift in timing of shipments for the Nautica® brand from the previous quarter. Improved profitability in the coalition’s wholesale and direct-to-consumer businesses drove a 42 percent increase in operating income to $16 million, representing a 240 basis point improvement in operating margin to 12.2 percent
First half revenues for Sportswear were up 9 percent. Based on first half results and anticipated second half strength, Sportswear revenues are now expected to be up about 10 percent from its previous expectation of high single-digit growth.
Second quarter revenues for the Contemporary Brands coalition were down 9 percent in the quarter to $99 million. Four percentage points of the decline were due to the absence of the John Varvatos® brand, which was sold in April 2012. Contemporary Brands’ operating income fell 34 percent to $8 million in the second quarter. Operating margin fell 310 basis points to 8.0 percent.
Excluding the impact of the sale of the John Varvatos® brand, full-year Contemporary Brands revenues are now expected to grow at a low single-digit percentage rate in 2013 versus the previously stated high single-digit growth rate.
International Review
Second quarter international revenues increased 6 percent. In Asia Pacific, revenues were up 10 percent in the quarter, driven by 17 percent growth in China and strong results by nearly all Outdoor & Action Sports brands. Americas (non-U.S.) revenues increased 10 percent with strong performances from the Vans®, The North Face®, Timberland® and Wrangler® brands. Revenues in Europe rose 2 percent held back by the Timberland® brand, which continues to be impacted by difficult economic conditions. The North Face® and Vans® brands saw strong direct-to-consumer revenue increases in the quarter, rising 13 percent and 44 percent, respectively. International revenues reached 34 percent of total VF revenues in the second quarter compared with 33 percent in the same period of 2012.
Direct-to-Consumer Review
Direct-to-consumer revenues increased 8 percent in the second quarter including a 15 percent increase in The North Face® brand, a 16 percent increase in the Vans® brand and a 39 percent increase in the Kipling® brand. A total of 35 stores were opened across our brands in the quarter bringing the total number of owned retail stores to 1,157. Direct-to-consumer revenues reached 22 percent of total revenues in the second quarter compared with 21 percent in the 2012 period.
Balance Sheet Review
Inventories were down $47 million, or 3 percent, from June 2012 levels reflecting VF’s consistent focus on the efficient execution of our business. VF continues to anticipate another year of exceptional cash generation from operations, which is expected to exceed $1.4 billion in 2013
2013 Earnings Per Share Guidance Raised
Revenue guidance for 2013 remains unchanged, with revenues expected to increase by 6 percent to $11.5 billion. Given the strong results achieved in the first half of 2013, full-year gross margin expansion is now expected to slightly exceed the previously anticipated 100 basis point improvement over 2012. Based on stronger gross margin improvement, adjusted earnings per share in 2013 are now expected to increase to $10.85 per share, up $0.10 from the $10.75 per share guidance provided on April 26. On a GAAP basis, which includes an estimated $0.07 per share in Timberland acquisition-related expenses, earnings per share in 2013 are now expected to rise to $10.78 per share, up $0.13 from the prior guidance of $10.65 per share.
Adjusted Amounts
This release refers to adjusted amounts that exclude restructuring and other items related to the acquisition of The Timberland Company, which approximated $5 million ($0.03 per share) in the second quarter of 2013, the same amount reported in the second quarter of 2012. Adjusted amounts for the full year exclude anticipated Timberland acquisition-related expenses of $9 million ($0.07 per share) in 2013, compared with $31 million ($0.25 per share) in 2012. Additionally, adjusted amounts in the second quarter of 2012 exclude the gain on the sale of John Varvatos Enterprises, Inc. of approximately $42 million ($0.32 per share inclusive of a $0.10 per share tax benefit triggered by the sale). Reconciliations of certain GAAP measures to adjusted amounts are presented in the supplemental financial information included with this release, which identify and quantify all excluded items.
Dividend Declared
VF’s Board of Directors declared a quarterly dividend of $0.87 per share, payable on September 20, 2013 to shareholders of record on September 10, 2013.
Webcast Information
VF will hold its second quarter conference call and webcast today at 8:30 a.m. Eastern Time. Interested parties should call 888-855-5837 (domestic) or 719-325-2278 (international) to access the call. The conference call will be broadcast live and accessible at www.vfc.com. A replay of the conference call will be available from July 19 through July 26, 2013, via telephone at 877-870-5176 (access code: 5989331) or at www.vfc.com.
About VF
VF Corporation is a global leader in branded lifestyle apparel and footwear with more than 30 brands. The company’s largest five brands are The North Face®, Wrangler®, Timberland®, Vans®, and Lee®. Other brands include 7 For All Mankind®, Bulwark®, Eagle Creek®, Eastpak®, Ella Moss®, JanSport®, Kipling®, lucy®, Majestic®, Napapijri®, Nautica®, Red Kap®, Reef®, Riders®, Splendid® and SmartWool®.
For more information, please visit www.vfc.com.
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