Halloween came early for apparel stock investors last Friday when VF Corporation (VFC) reported third-quarter financial results that missed Wall Street estimates.
What seemed to spook investors the most, however, was chairman and CEO Eric Wiseman’s comments on the quarterly earnings call about “softer,” “cautious” and “choppy” market conditions which, along with the company’s lowered fourth quarter guidance, sent the stock down almost 13 percent on the day, and took many other apparel stocks along with it.
For the three months ended Oct. 3, total revenue increased 3 percent (8 percent on a currency neutral basis) to $3.6 billion, driven primarily by growth in the company’s Outdoor & Action Sports, Jeanswear, International and Direct-to-Consumer (DTC) businesses.
The company reported that its five largest brands (Lee, Wrangler, The North Face, Vans and Timberland) collectively grew by 11 percent on a currency neutral basis, and that there was growth in all channels in every region of the world.
Performance highlights in the quarter include Outdoor & Action Sports, which was up 5 percent on a reported basis and 13 percent on a currency neutral basis, with nearly the same growth rate in both DTC and wholesale, and Jeanswear which posted its fourth consecutive quarter of at least mid-single-digit growth, including higher results for both Wrangler and Lee in all channels in nearly every region around the world. Jeanswear revenue was flat on a reported basis but rose 4 percent corrected for currency fluctuations.
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The company’s fastest-growing brand in the quarter was SmartWool with 33 percent currency neutral growth. Wiseman called SmartWool “one of the unsung jewels in our portfolio.” He also said that Lucy, Eastpak and Napipiri did very well.
Timberland had the best quarter, however, up 11 percent reported and 21 percent currency neutral.
The Contemporary business, which includes Seven For All Mankind , Ella Moss and Splendid, fell by 16 percent on a reported and 13 percent on a currency neutral basis.
VF international business was down 5 percent (up 9 percent currency neutral), with most of the currency fluctuation affecting Europe. International comprised 38 percent of total company sales in the quarter, down from 41 percent in the same period last year.
The DTC business, which represents 22 percent of total revenue, was up by 3 percent, (8 percent currency neutral), with strength in the Outdoor & Action Sports and Jeanswear business tempered by weakness in Sportswear and Contemporary. VF Corporation added 60 new stores in the quarter, bringing the total of company-owned stores around the world to 1,480.
Gross margin was 47.9% of revenue, down 40 basis points from the same period last year. On a currency neutral basis, gross margin improved by 60 basis points to 48.9%, due to more favorable product costs and continued mix shift to higher margin businesses, benefits that were more than offset by unfavorable foreign currency fluctuations in the quarter.
Operating margin declined 20 basis points to 17.8%, also due to the negative impact from foreign currency. Currency neutral operating margin was 19 percent, a 100-basis-point improvement over the year-ago period.
Earnings per share rose 14 percent on a currency neutral basis compared with last year’s same period. On a reported basis, earnings per share were down one percent to $1.07.
Inventories were up a surprising 12 percent compared to the 2014 quarter.
“On a currency neutral basis, our year-to-date revenue is up 9 percent and our earnings per share are up 15 percent–a performance that affirms our ability to leverage our diverse, competitive assets to fuel consistent, long-term growth,” said chairman and CEO Eric Wiseman. “Today’s results speak to the power of VF’s brands and platforms to perform well in what is proving to be a mixed retail environment. We delivered excellent operating results by staying focused on what we do best–bringing relevant, innovative product to the marketplace, amplifying our relationships with consumers and driving operational excellence into every area of our business.”
The company revised downward its full-year revenue growth forecast from 8 percent to 7.5%, and its earnings per share guidance down four cents to $3.18.
VF Corporation stock wasn’t the only one impacted by Wiseman’s comments. Shares in Phillips-Van Heusen (PVH) fell by 8 percent to $88.17, G-III Apparel Group (GIII) stock was down by 11 percent to $56.77, and Columbia Sportswear (COLM) shares dropped by 9.5% to $50.39, casting a pall over the outlook for Holiday 2015.