In the money: VF reports mixed jeanswear performance
While VF Corp has increased its full-year forecasts on the back of strong second-quarter results revealed yesterday (19 July), it has also reported a mixed performance in jeanswear.
Jeanswear sales fell 3% over the quarter, with double-digit revenue rises in the company's western speciality and Asian businesses offset by a "modest decline" in the mass channel. This was combined with falling revenue at its Lee brand due to challenges in the mid-tier channel and "soft conditions" in Europe.
But despite the decline in mid-tier sales, VF is "taking share" in the channel according to chairman, chief executive officer and president Eric Wiseman.
"We've got great new products in there under the Lee brand that consumers are resonating with," he told analysts during an earnings call. "We just need more customers in that channel right now. But that will happen eventually. That will get sorted out."
Also speaking to analysts was VF Corp group president of jeanswear Americas and imagewear vice president Scott Baxter, who said the Lee brand had had an "unusually challenging" quarter with total global revenue down 11%.
"In the US, following several quarters of strong growth, the brand is navigating through near-term difficulties created by changing dynamics in the mid-tier channel. In addition, Lee revenue reflects the shift of some seasonal products into the first quarter from the second," he said.
However, news was not all bad for the brand, with group president of international and vice president Karl Heinz Salzburger adding that Lee recorded 15% overseas growth, driven by strong momentum in Asia, where revenues increased more than 50%.
Salzburger said the growth in Asia was due to investments in increasing brand visibility, with new marketing campaigns in both China and India, as well as through improving distribution by optimising store locations.
In Europe however, the news wasn't as good, with soft conditions contributing to lower revenues in the quarter.
Salzburger admitted that beyond the challenging economic situation in Europe, the jeans market is "not in the best health", emphasising that the denim group is having a similar experience to its competitors.
"We expect our revenues to be down in the high-single digit for the year. What we are doing, we are improving our gross margin and working on the SG&A side so that profitability continues to improve," said Salzburger of its operations in Europe.
Speaking about jeanswear's varied performance across Europe, he added: "Weakness is concentrated in western and southern European markets, but bright spots include Russia, France and Scandinavia, where revenues are showing strong growth year-to-date."
Despite jeans sales declining over the quarter, the division recorded a "stronger than anticipated" operating margin, which it attributed to lower manufacturing costs in its owned plants and tight inventory controls. Operating margin rose 30 basis points over the quarter to 15.7%, while operating income was "essentially flat" with the second quarter of last year.
The company increased its denim prices during 2011 in response to higher cotton costs, but with the fibre price now declining, it expects operating margin to continue to improve for the rest of the year.
Yet these jeanswear issues may only be a temporary blip. The company booked a 3% increase in revenue over the half, which instils confidence in its earlier forecasts for mid single-digit constant dollar revenue growth in the division for the full year.
The company also lifted its full-year guidance by $0.05 per share to $9.50 after consolidated profit, which includes the North Face and Nautica brands, climbed 19.9% to US$155.4m in the three months ended 30 June. Excluding the impact of the sale of the John Varvatos brand, net income declined to $123m from $129m in the same period of the prior year.
Revenue rose 16% to $2.1bn. On an organic basis, revenue increased 3%, driven by strong growth in its outdoor and action sports, and international businesses.
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