VF Corp. released their Q1 financials today with two main areas on the rise: Outdoor & Action Sports segments up 10% and direct-to-consumer revenues up 12% including double-digit growth in the U.S. and International. Interestingly, The North Face was up 6% and Vans was up 25% with more than 30% growth in Europe.
Here’s the release:
“VF’s first quarter performance is a great example of our strong business model, disciplined execution and our ability to leverage all aspects of our portfolio,” said Eric Wiseman, VF Chairman and Chief Executive Officer. “The combination of powerful brands and strong operating platforms creates a unique engine capable of delivering consistent, long-term shareholder value. With a strong start to the year, we’re well positioned to achieve our full year goals.”
First Quarter 2013 Review Revenues rose 2 percent, as anticipated, to $2.6 billion compared with the same period of 2012, driven by strength in the Outdoor & Action Sports, international and direct-to-consumer businesses. The sale of John Varvatos in April 2012 negatively impacted VF’s revenue growth comparison by 1 percentage point in the first quarter. Gross margin improved 240 basis points to 48.1 percent, an all-time high for any quarter in VF’s history. This performance, which includes improvements in nearly every coalition, compares with 45.7 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 towards higher margin businesses.
Operating income on an adjusted basis grew 13 percent to $360 million in the first quarter compared with $319 million in the same period of 2012. On a GAAP basis, first quarter operating income increased 14 percent to $358 million, compared with $314 million in last year’s same period. Adjusted operating margin was 13.8 percent compared with 12.5 percent in the first quarter of 2012. On a GAAP basis, operating margin rose to 13.7 percent from 12.3 percent in the first quarter of 2012.
Net income on an adjusted basis grew by 25 percent to $273 million from $219 million in the first quarter of 2012. Adjusted earnings per share – which excludes Timberland acquisition-related items of $0.02 per share in the first quarter – increased 25 percent, to $2.43 from $1.94 during the same period last year. This increase includes a $0.12 per share discrete tax benefit primarily related to the impact of U.S. tax law changes enacted in 2013, which are retroactive to 2012. On a GAAP basis, first quarter net income was $270 million, with a 26 percent increase in earnings per share to $2.41, including the $0.12 per share discrete tax benefit noted above.
First Quarter Coalition Review
Outdoor & Action Sports revenues were up 10 percent in the quarter to $1.4 billion with balanced growth across both the U.S. and international markets.
Revenues for The North Face® brand rose 6 percent with low single-digit growth in both the Americas and Europe regions, and continued strong double-digit growth in Asia. Helped by colder, more seasonable weather, the brand’s direct-to-consumer business posted a strong double-digit revenue increase in the quarter.
The Vans® brand momentum continued in the first quarter with a 25 percent increase in revenues including over 20 percent growth in the Americas and Asia regions, and more than a 30 percent increase in Europe. The Vans® brand posted strong double-digit revenue increases in both its wholesale and direct-to-consumer channels.
Timberland® brand revenues were in line with expectations; up 2 percent in the first quarter with mid-teen growth in Asia and a mid single-digit increase in the Americas region. In Europe, where challenging macro-economic conditions continue to impact the business, the brand experienced a mid single-digit decline in revenues. The Timberland® brand’s direct-to-consumer business, which continues to show good progress, grew at a high-teens rate in the quarter.
First quarter Outdoor & Action Sports operating income rose 12 percent to $227 million and operating margin increased 40 basis points to 16.4 percent compared with 16 percent in the 2012 period.
Jeanswear revenues, as expected, decreased 3 percent to $718 million, including slightly lower sales in the Americas region, which faced difficult comparisons due to earlier shipments of spring seasonal products in the prior year’s quarter. Additionally, the first quarter of 2013 was impacted by difficult conditions in the mid-tier channel. Jeanswear revenues in Europe declined at a mid single-digit rate. In Asia, as anticipated, Jeanswear revenues declined by a low double-digit rate, as the Lee® brand navigates an industry-wide build up in inventories that began during the latter part of 2012.
Revenues for the Wrangler® brand were down 2 percent with strength in its U.S. Western and Latin American businesses offset by a slight decline in its U.S. Mass business due to the previously mentioned seasonal product pull-forwards in the prior year period. The Lee® brand’s first quarter revenues were down 6 percent due to continued challenging dynamics in the mid-tier channel in the U.S. and difficult macroeconomic conditions in Europe. And as noted above, the Lee® brand experienced lower sales in Asia as retailers work through elevated inventory levels.
Favorable year-over-year product costs and continued improvements in operating efficiencies led to a 29 percent increase in Jeanswear operating income to $143 million. Operating margin reached 20 percent in the quarter with improvements in both the Wrangler® and Lee® brands across every region of the world.
Imagewear revenues declined 9 percent in the first quarter to $253 million against exceptionally strong growth in the first quarter of 2012. The first quarter comparison was impacted by a program that was shipped in the first quarter of 2012 that is not expected to ship until the second half of 2013. Related to the lower volume, first quarter Imagewear operating margin decreased to 12.5 percent.
Sportswear posted revenue growth of 4 percent to $128 million driven by a low single-digit increase in the Nautica® brand and mid-teen growth in the Kipling® (U.S.) brand. The Nautica® brand revenues in the first quarter were impacted by a shift in timing of shipments that should drive a mid-teen revenue increase in the second quarter. Direct-to-consumer revenues for the Sportswear businesses increased more than 20 percent in the quarter contributing to an 80 basis point improvement in operating margin over the prior year period.
Contemporary Brands revenues were down 18 percent in the quarter to $104 million, with 14 percentage points of the decline due to the absence of John Varvatos, which was sold in April 2012. Excluding John Varvatos from the first quarter of 2012, revenues were down 4 percent. Direct-to-consumer revenues, excluding John Varvatos, increased 9 percent.
Contemporary Brands’ operating income in the first quarter decreased 15 percent to $13 million. Operating margin expanded by 40 basis points to 12.1 percent, driven by improved direct-to-consumer performance.
International Review
First quarter international revenues increased 6 percent. Revenues in the Americas (non-U.S.) region increased 10 percent with strong performances from the Vans®, Timberland® and Wrangler® brands. In Asia, revenues were up 9 percent, reflecting strong results by all Outdoor & Action Sports brands. Revenues in Europe rose 4 percent driven by double-digit growth in the direct-to-consumer businesses of the Vans®, The North Face®, Timberland® and Napapijri® brands. International revenues reached 42 percent of total VF revenues in the first quarter compared with 40 percent in the same period of 2012.
Direct-to-Consumer Review
Direct-to-consumer revenues increased 12 percent in the first quarter including a 25 percent increase in The North Face® brand, an 18 percent increase in the Timberland® brand and a 15 percent increase in the Vans® brand. Direct-to-consumer revenues for the Nautica®, Kipling®, Napapijri®, Splendid® and Ella Moss® brands also each achieved double-digit growth during the quarter. A total of 20 stores were opened across our brands in the quarter bringing the total number of owned retail stores to 1,132. Direct-to-consumer revenues reached 20 percent of total revenues in the first quarter compared with 19 percent in the 2012 period.
Balance Sheet Review Inventories were down $107 million, or 7 percent, from March 2012 levels reflecting VF’s highly disciplined approach to inventory control. During the first quarter, VF repurchased a total of 1.7 million shares for approximately $280 million and made a discretionary contribution of $100 million to its pension plan.
2013 Earnings Guidance Raised Revenue guidance for 2013 remains unchanged, with revenues expected to rise by 6 percent to $11.5 billion. Also unchanged is an expected improvement of 100 basis points in gross margin and nearly a 100 basis point increase in operating margin for the year. Based on slightly stronger than expected first quarter results, adjusted earnings per share in 2013 are now expected to rise to $10.75 per share, up $0.05 from the $10.70 per share guidance provided on February 15. On a GAAP basis, which includes an estimated $0.10 per share in Timberland acquisition-related expenses, earnings per share in 2013 are now expected to rise to $10.65 per share, up $0.05 from the prior guidance of $10.60 per share.
Looking forward to the second quarter, last year’s adjusted earnings per share of $1.11 included a non-recurring $0.10 per share discrete tax benefit primarily related to the settlement of prior years’ audits. On a reported (GAAP) basis, last year’s second quarter earnings per share of $1.40 included three non-recurring items: a $0.32 per share benefit related to the sale of John Varvatos, the previously described $0.10 per share discrete tax benefit, and a $0.03 negative impact resulting from Timberland acquisition-related expenses.
