VF reported their fourth quarter results for 2014, and outlook for 2015 today, February 13, 2015. Revenues were up 8% to $12.3 billion. The leaders for the corporation were once again The North Face and Vans. The big news however is that Vans passed the $2 billion dollar mark in 2014 to become VF’s second $2 billion brand along with The North Face.
Here’s more:
“Our powerful brands and the competitive advantage of our business platforms combined with our relentless focus on operational excellence delivered another year of strong returns for our shareholders,” said Eric Wiseman, VF Chairman, President and Chief Executive Officer. “Our four largest brands: The North Face®, Vans®, Timberland®, and Wrangler®, along with many of our other brands, were strong performers as we grew our business in every region and channel around the world.
“We are very pleased to report that Vans® passed the $2 billion dollar mark in 2014 to become VF’s second $2 billion brand along with The North Face®,” Wiseman continued. “As we end the second year of our five-year plan we’re on track with our 2017 targets.”
Fourth Quarter 2014 Review
Revenues rose 9 percent to $3.6 billion driven by strong growth in our Outdoor & Action Sports coalition and our international and direct-to-consumer businesses. On a currency neutral basis, revenues increased 11 percent over the 2013 quarter. VF uses a 52/53 week fiscal year and the fourth quarter of 2014 included a 53rd week, which added approximately $100 million in revenue, representing about 3 percentage points of growth.
Gross margin improved 80 basis points to a record 49 percent driven primarily by the continuing shift of our revenue mix toward higher margin businesses. A $396 million pre-tax, noncash impairment charge ($0.70 per share) was recorded to reduce the carrying value of the goodwill and intangible assets related to our 7 For All Mankind®, Ella Moss® and Splendid® brands.
SG&A as a percent of revenues was up 20 basis points to 32.9 percent. Operating income on an adjusted basis grew 14 percent to $578 million in the fourth quarter, compared with $508 million in the same period of 2013. On a GAAP basis, fourth quarter operating income was $182 million. Adjusted operating margin improved to 16.2 percent, compared with 15.5 percent in the fourth quarter of 2013. On a GAAP basis, operating margin was 5.1 percent in 2014.
Adjusted earnings per share increased 20 percent to $0.98 per share compared with $0.82 per share during the same period last year. On a GAAP basis, earnings per share were $0.28.
Full Year 2014 Review
Revenues increased 8 percent to a record $12.3 billion, compared with $11.4 billion in 2013, driven by continued strength in our Outdoor & Action Sports coalition, and our international and direct-to-consumer businesses. On a currency neutral basis, revenue increased 8 percent for the year. Inclusion of the 53rd week, as previously noted, added approximately 1 percentage point of growth in 2014.
Gross margin improved 70 basis points to a record 48.8 percent, compared with 48.1 percent in 2013. For the full year, the improvement in gross margin reflects the continued shift in our revenue mix toward higher margin businesses as well as our previously disclosed change in classification of retail concession fees.
SG&A as a percent of full year revenues was up 30 basis points to 33.9 percent. This increase was primarily due to the change in classification of retail concession fees.
Operating income on an adjusted basis grew 11 percent to $1.8 billion, compared with $1.6 billion in 2013. On a GAAP basis, full year operating income was $1.4 billion in 2014. Adjusted operating margin was 14.9 percent in 2014, compared with 14.4 percent in 2013. On a GAAP basis, operating margin was 11.7 percent in 2014.
Adjusted earnings per share increased 14 percent to $3.08 per share compared with $2.71 per share in 2013. On a GAAP basis, full year earnings per share were $2.38.
Coalition Review
Fourth quarter revenues for the Outdoor & Action Sports coalition increased 13 percent (up 16 percent currency neutral) to $2.2 billion. Full year Outdoor & Action Sports revenues increased 13 percent in 2014 (up 14 percent currency neutral).
Fourth quarter revenues for The North Face® brand rose 12 percent (up 14 percent currency neutral) including a 30 percent increase in direct-to-consumer sales. By region, The North Face® brand’s revenues were up at a mid-teen percentage rate in the Americas, up more than 25 percent in Asia Pacific and down at a mid single-digit rate in Europe (up at a low single-digit rate currency neutral). For the full year, revenues for The North Face® brand grew 11 percent (up 12 percent currency neutral) to reach $2.3 billion.
Revenues for the Vans® brand in the fourth quarter were up 17 percent (up 20 percent currency neutral) with 30 percent growth in its direct-to-consumer channel and strong wholesale growth. Revenues in the Americas region were up 20 percent in the quarter, up more than 50 percent in the Asia Pacific region and down slightly in Europe due to the changes in foreign currency. On a currency neutral basis, Vans® brand revenues in Europe were up at a high single-digit rate in the quarter. Revenues for the Vans® brand for the full year were up 17 percent, firmly establishing its place as VF’s second $2 billion brand.
Revenues for the Timberland® brand were up 11 percent (up 15 percent currency neutral) in the fourth quarter driven by balanced wholesale and direct-to-consumer gains. In the Americas region, revenues were up nearly 25 percent driven by significant wholesale growth and strong direct-to-consumer sales. In Asia Pacific, fourth quarter revenues were up at a mid single-digit percentage rate (up at a low double-digit rate currency neutral). And in Europe, the Timberland® brand was down at a low single-digit rate (up at a mid single-digit rate currency neutral). Full year Timberland® brand revenues were up 13 percent to $1.8 billion, or an increase of 15 percent on a currency neutral basis.
Fourth quarter operating income for Outdoor & Action Sports rose 21 percent to $432 million. Operating margin increased 130 basis points to 20 percent in the quarter and improved for the full year by 90 basis points to 18.2 percent.
Jeanswear fourth quarter revenues were up 3 percent (up 5 percent currency neutral) to $755 million. As anticipated, revenue comparisons for the Americas region improved with sales up at a low single-digit rate (up mid single-digit currency neutral). In Europe, revenues were up at a low single-digit rate (up 10 percent currency neutral) and in Asia, revenues were up at a mid single-digit rate. In 2014, global Jeanswear revenues were flat at $2.8 billion (up 1 percent currency neutral).
Fourth quarter global revenues for the Wrangler® brand were up 3 percent (up 6 percent currency neutral) driven by strength in the Americas region, including a low-teen increase in its western specialty business and low single-digit growth in the U.S. mass channel. Wrangler® brand revenues in Europe were down 4 percent (up 5 percent currency neutral) and down slightly in Asia Pacific. Full year revenues for the Wrangler® brand increased 2 percent (up 4 percent currency neutral) to reach $1.7 billion.
Global revenues for the Lee® brand in the fourth quarter were up 2 percent (up 5 percent currency neutral) driven by a high single-digit percentage increase in Asia Pacific and a high single-digit percentage increase in Europe (up at a high teen rate currency neutral). This was offset by flat results in the Americas region where the business continues to work through ongoing challenges in the U.S. mid-tier channel. For the full year, global Lee® brand revenues were down 2 percent (down 1 percent currency neutral) at $1.0 billion.
Operating income for Jeanswear in the fourth quarter rose 5 percent to $142 million. Operating margin increased 40 basis points to 18.7 percent in the quarter, and was down 60 basis points for the full year to 18.8 percent due to challenges primarily related to the U.S. business.
Imagewear revenues were up 4 percent (up 5 percent currency neutral) in the fourth quarter to $298 million driven by particular strength in the Licensed Sports Group (LSG) business. For the full year, revenues for the Imagewear coalition were up 4 percent to $1.1 billion including growth in both the Image business driven by new product introductions in our Red Kap® and Bulwark® brands and the LSG business, which had strong demand for National Football League® and Major League Baseball® products.
Fourth quarter operating income for Imagewear was up 8 percent to $48 million, with a 60 basis point improvement in operating margin to 16.2 percent. For the full year, Imagewear operating margin improved 60 basis points to 14.9 percent.
Sportswear fourth quarter revenues increased 4 percent to $215 million. Nautica® brand revenues were flat with a low-teen percentage rate increase in the direct-to-consumer business being offset by a high single-digit decline in wholesale sales. The Kipling® brand’s U.S. business achieved a 25 percent increase in revenues compared with the same period last year. For the year, Sportswear coalition revenues were up 4 percent. Globally, the Kipling® brand grew 13 percent in the fourth quarter, up 18 percent currency neutral.
In the fourth quarter, operating income decreased 10 percent to $32 million with a 220 basis point decline in operating margin to 15 percent. 2014 operating margin for the Sportswear coalition declined by 210 basis points to 12 percent, impacted by a challenging environment in the U.S. department store channel.
Contemporary Brands coalition fourth quarter revenues were down 1 percent (up 1 percent currency neutral), to $107 million, reflecting continuing challenging consumer trends in women’s contemporary apparel and premium denim.
International Review
International revenues in the fourth quarter grew 5 percent, or 13 percent on a currency neutral basis. Revenues in Europe were down 1 percent (up 8 percent currency neutral) and in the Asia Pacific region were up 17 percent (up 20 percent currency neutral), including 20 percent growth in China. Revenues in the Americas (non-U.S.) region were up 9 percent (up 19 percent currency neutral). International revenues were 33 percent of total VF fourth quarter sales compared with 34 percent in the same period of 2013. For the full year, international revenues represented 38 percent of total VF sales, the same as in fiscal 2013.
Direct-to-Consumer Review
Direct-to-consumer revenues grew 22 percent (up 25 percent currency neutral) in the fourth quarter with strong double-digit increases in all regions of the world and growth in every VF brand with a retail format. Seventy-five stores were opened during the fourth quarter bringing the total number of VF owned retail stores to 1,401. As previously discussed, effective in 2014, VF now includes revenues from its concession locations in its direct-to-consumer business. Direct-to-consumer revenues reached 32 percent of total revenues in the fourth quarter compared with 29 percent in the 2013 period (27 percent prior to the concession classification change). Direct-to-consumer revenues were 26 percent of total VF revenues in 2014 compared with 24 percent in 2013 (22 percent prior to the concession classification change). References to direct-to-consumer and wholesale revenue growth rates reflect the change in reporting of concessions in all periods.
Balance Sheet Review
Inventories were up 6 percent compared with December 2013 levels. In 2014, VF’s cash generation from operations reached nearly $1.7 billion and the company returned over $1.2 billion to shareholders through dividends and share repurchases.
Adjusted Amounts – Excluding Noncash Impairment Charge
As a result of our annual review of goodwill and intangible assets, we recorded a $396 million pre-tax, noncash impairment charge in the fourth quarter of 2014 to reduce the carrying value of the goodwill and intangible assets related to our 7 For All Mankind®, Ella Moss® and Splendid® brands. On an after-tax basis, the charge totaled $307 million, which decreased fourth quarter and full year 2014 earnings per share by $0.70. While management continues to view these brands as compelling and complementary within the context of VF’s portfolio, it concluded that an impairment charge was required because the fair values of these brands were below their respective carrying values. All “adjusted amounts” referenced herein exclude the effects of this noncash impairment charge. Reconciliations of GAAP measures to adjusted amounts for 2014 are presented in the supplemental financial information included with this release, which identify and quantify all excluded items.
Currency Neutral – Excluding the Impact of Foreign Currency
This release refers to “currency neutral”’ amounts. In 2014, currency neutral amounts only exclude the impact of translating foreign currencies into U.S. dollars. The net impact of foreign currency fluctuations on non-U.S. dollar denominated transactions in 2014 was not material compared to 2013. Reconciliations of GAAP measures to currency neutral amounts for 2014 are presented in the supplemental financial information included with this release, which identify and quantify all excluded items.
Currency neutral amounts for 2015 exclude both the expected impact of translating foreign currencies into U.S. dollars and the expected impact of foreign currency rate changes on non-U.S. dollar denominated transactions. The “transactional” impact from foreign currency fluctuations is considered in 2015 currency neutral amounts due to the recent and rapid strengthening of the U.S. dollar. This release also refers to “reported” amounts in 2015, which include translation and transactional impacts from foreign currency based on current estimates of foreign currency exchange rates.
2015 Outlook
“2015 will be another great year for VF. Our fundamentals have never been stronger and despite the strength of the U.S. dollar, which will continue to pressure our reported results, we expect meaningful growth in every region around the world,” Wiseman continued. “Our consistent and proven, powerful-brand, powerful-platform approach to business gives me tremendous confidence in our ability to further increase competitive separation for our brands and provide sustainable, long-term returns for our shareholders.”
Key points related to VF’s full year 2015 outlook include:
Revenue is expected to increase by 8 percent on a currency neutral basis (up 3 percent reported). Revenues for the Outdoor & Action Sports coalition, including The North Face®, Vans® and Timberland® brands, are expected to increase at a low double-digit percentage rate currency neutral (up mid single-digit reported). Imagewear and Sportswear coalition revenues are expected to grow at a mid single-digit rate. Jeanswear is expected to grow at a low single-digit rate and Contemporary Brands revenues are expected to be nearly flat on a currency neutral basis (down at a mid single-digit reported rate).
International revenues are expected to increase at a low double-digit rate on a currency neutral basis (up low single-digit reported). Revenues for Europe, which represents less than a quarter of VF’s total sales, are expected to be up at a high single-digit rate currency neutral (down at a mid single-digit rate reported). In the Asia Pacific region, which is about 10 percent of VF’s total sales, full year revenues are expected to increase at a mid to high-teen percentage rate. And in the Americas (non-U.S.) region, which is a little more than 5 percent of VF’s total sales, revenues are expected to be up at a mid-teen percentage rate currency neutral (up mid single-digit reported). International revenues should approximate 37 percent of total revenues in 2015.
Direct-to-consumer revenues are expected to grow at a mid-teen percentage rate currency neutral (up at a low double-digit percentage rate reported) in 2015 and should represent about 28 percent of total VF revenues. Direct-to-consumer growth in 2015 will be driven by approximately 150 store openings, comp store growth and an expected increase of more than 30 percent in e-commerce revenues.
Gross margin is expected to improve by 40 basis points to reach 49.2 percent, which includes a 30 basis point headwind from changes in foreign currency.
Operating margin is expected to reach 15.0 percent, including the negative impact of changes in foreign currency.
Earnings per share, on a currency neutral basis, is expected to increase 12 percent (up 4% reported) compared to an adjusted EPS of $3.08 in 2014.
Cash flow from operations should reach $1.3 billion. The year over year comparison is impacted by a $250 million contribution to fully fund the company’s U.S. pension plan made in the first quarter of 2015, the significant cash received in the 53rd week of 2014 and the negative impact of changes in foreign currency.
VF expects to spend approximately $700 million under the company’s share repurchase program; when combined with the annual dividend, this will return more than $1.2 billion to shareholders in 2015.
Other full year assumptions include a 24 percent effective tax rate and capital expenditures of approximately $225 million.
In terms of revenue comparisons in 2015, on a currency neutral basis, we expect relatively consistent growth comparisons quarter-by-quarter throughout the year. Due to the rapid strengthening of the U.S. dollar in the second half of 2014, reported revenue comparisons in the second half of 2015 will be slightly stronger than in the first half.
In terms of earnings cadence in 2015, the negative impact of currency movements is more pronounced in the first half of the year, especially in the first quarter when foreign currencies in 2014 were at their strongest level against the U.S. dollar and our international business mix is particularly high.
