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VF Corp Q1 Results Depressed by Strong Dollar, Challenging Denim Market

Late last week apparel and footwear giant VF Corporation (VFC) reported fiscal first-quarter earnings that were in line with Wall Street expectations despite the impact of currency fluctuations that devalued income.

Total revenues rose 8 percent on a currency neutral basis to $2.8 billion, reflecting healthy growth in the Outdoor & Action Sports, Imagewear, International and Direct-to-Consumer businesses. Growth rates in Jeanswear and Sportswear were slower, reflecting difficultly in the U.S. denim and non-active apparel markets, while the Contemporary brands business turned in a disappointing quarter due to the ongoing challenges in the premium denim and women’s contemporary apparel sector. On a reported basis, total revenue increased 2 percent over the prior year period and narrowly missed analyst estimates.

VF reported that Eastpak was its fastest-growing brand in the quarter, and that the direct-to-consumer business grew 11 percent and included mid-single-digit comps, while the international business grew 9 percent with Europe up 4 percent, Asia up 17 percent and a 16 percent increase from the Americas’ non-U.S. region.

Gross margin was 49 percent on a reported basis, down 40 basis points compared with the same quarter last year and in line with the company’s expectations. Continued benefit from the shift toward higher margin businesses was more than offset by the impact of foreign currency. The company continues to expect a 70 basis point improvement for the full year to reach 49.5% on a currency neutral basis (49.2% on a reported basis).

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Operating income on a reported basis was down 1 percent to $398 million from the same period of 2014. Operating margin on a reported basis declined 50 basis points to 14 percent, which includes a 70 basis point headwind from changes in foreign currency rates.

Net income in the quarter fell 3 percent to $288 million, or $0.67 per diluted share, flat with last year’s first quarter on a reported basis and up 13 percent on a currency neutral basis.

First quarter sales and operating income by coalition and division are broken out in the chart below.

Direct-to-consumer revenues grew nicely, with positive comparable sales growth in all regions and particular strength in Europe. Twenty-three stores were opened during the first quarter bringing the total number of VF-owned retail stores to 1,395. On a reported basis, direct-to-consumer revenues reached 24 percent of total revenues in the first quarter compared with 23 percent in the same period of 2014.

“We remain confident in the year ahead, the fundamental strength of our business, and the significant momentum we see across our diverse portfolio of brands,” chairman, CEO and president Eric Wiseman said in a statement. “The proven strength of VF’s growth strategy, driven by consistent execution and solid operational discipline, has led us to increase our expectations for full-year currency neutral earnings per share growth putting us on track to deliver another record year to shareholders.”

For the current fiscal year, earnings per share on a currency neutral basis are now expected to increase by 14 percent compared to adjusted earnings per share of $3.08 in 2014. This is an increase from the previous expectation of a 12 percent per share increase.

Earnings per share on a reported basis are still expected to increase by 4 percent to $3.20. Prior year adjusted earnings per share excluded the negative impact of a $0.70 non-cash impairment charge recorded in the fourth quarter of 2014 to reduce the carrying value of the goodwill and intangible assets related to the 7 For All Mankind, Ella Moss and Splendid brands.

The company’s stock is down about 5 percent year-to-date.