VF’s June 30 Quarter; Net Income Down, But Kind of Not Really.

VF’s net income fell 11% from $155.4 million in the quarter to $138.3 million in the same quarter last year. But last year’s quarter included a gain of $41.7 million from the sale of the John Varvatos brand that was booked under Other Income (Expense). In this year’s quarter, instead of a gain of $41.6 million, that line showed an expense of $1.5 million. Without that gain from the sale, net income would be up over last year’s quarter. 

Which is what you might expect with total revenues up 3.7% to $2.19 billion and the gross margin rising from 46.1% to 48.5%. As we’ve gotten used to, VF’s Outdoor & Action Sports segment (that includes Reef, Vans, The North Face and Timberland) led the way. Below is a table from the 10Q with the revenues and operating profit for each segment. And, while we’re at it, here’s the link to the 10Q for anybody who wants it. I always wonder if anybody but me ever looks at them.
 
 
As you can see, Outdoor & Action Sports (OAS) represented 49.7% of revenue and 37.3% of operating profit. The result in Jeanswear is impressive, delivering a bit more operating profit than OAS on only $612 million in revenue.
 
North Face revenue rose 5% in total. There was “…moderate growth in the wholesale sales, a 15% increase in the brand’s D2C [direct to consumer] business and a more than 20% increase in international sales.” In the Americas, wholesale revenue declined in the mid-single digit range. D2C there rose in the mid-teens.
 
Vans revenues grew 15%, with growth balanced between wholesale and D2C. Outside of the Americas, Van’s growth was over 20%. D2C growth was over 40%. They don’t tell us what Van’s growth was in the Americas, but obviously it was below 15% since outside of the Americas, it was 20%. I thought their take on Van’s apparel was interesting. “By taking classic action sports products the consumers are already connected to and adding performance benefits to them, such as weatherization, we’re equipping the Vans consumer with a whole new level of quality and technology in both warm and cold weather. This allows us to have more relevant, year-round offerings as we extend our reach into cold-weather months and cold-weather markets.”
 
We hear that Reef’s results were “solid,” but aren’t given any details. Timberland’s global revenues fell 3%. They were up low single digits in the Americas and down high single digits in the rest of the world. They expect revenue to be up for the year. We’re into VF’s second year of ownership of Timberland and to some extent it’s still a work in progress.
 
The 3.7% total revenue growth included 3% in the U.S. and 6% internationally including 10% in the Americas not counting the U.S. and 2% in Europe.
 
The gross margin improvement of 2.4% resulted from “…lower product costs and a favorable mix shift towards higher margin businesses.” Partly that’s due to growing D2C business. They don’t tell us anything about exactly how the lower product costs came to be. I wonder if there isn’t some benefit from the fall in cotton prices included there. I’d just like to know what part of it reflects good management and what reflects factors over which they have no control.
 
Inventory fell 3% even with the sales growth and certainly reflects good management. Inventory management is something they noted several times as an area of focus. They characterize their supply chain as a competitive weapon. “And as others are feeling the pinch of higher costs, we’re in many, many cases able to offset those costs through efficiencies in our own plants.”
 
They specifically connect inventory and supply chain management to marketing when they note that they are very satisfied with their retail inventories because it gives them “…the opportunity to really get our new product well positioned and upfront for the consumer as it starts to ship into our dealers…” That’s an important idea.
 
Marketing, administrative and general expenses rose 1% as a percentage of revenues. Half was for their D2C business and half for “…increased marketing investment in our brands.”
 
If VF has issues, and isn’t growing as fast as it used to, those issues are pretty much the same ones all retailers and brands in our industry have. Europe is weak, and VF especially calls out problems in Southern Europe. Hardly a surprise with unemployment rates north of 25%. The U.S. is recovering slowly, but consumers are cautious in their spending. “Retailers,” they note, “Are buying much closer to demand.”
 
But VF points out that their pension plans are almost fully funded (that’s a big deal, though you don’t hear about it much), they are paying down $400 million in Timberland related acquisition debt in the third quarter, and they will be out of the commercial paper market by year end. Their long term debt is down $400 million from a year ago. That leaves them with a balance sheet with which they can consistently pursue their strategy. Not everybody enjoys that.