Conclusion: Overall, good numbers out of VFC. The company had a headline beat that will get people jazzed, but underlying results are even better. In fact, when you strip out all of the one-times between this year and last, you’re looking at closer to +18% EPS growth vs +7% reported. As it relates to the Timberland acquisition, which appears to be going well, our sense is that it was a penny dilutive ($0.11 in EBIT less $0.12 in interest expense), suggesting that organic earnings were +19% vs last year. In light of Q1 results, the company is taking up full-year expectations by $0.15 to $9.45 ahead of the Street at $9.40, which is sure to promote the first of what we expect to be multiple upward earnings revisions over the course of 2012.
What Drove The Beat: Gross Margins were light and investment spending was higher, but the top line trends are encouraging and all non-outdoor businesses picked up on the margin driving a better than expected bottom-line. Jeanswear accounted for 3pts of growth while Contemporary, Imagewear, and Sportswear combined contributed another 3pts to the top-line.
Deltas in Forward Looking Commentary (updated view in red):
2012 outlook includes:
2012 revenues should increase by approximately +15% (17% in constant dollars) > no change (now excludes $70mm related to sale of John Varvatos = 1% better)
Excluding Timberland, revenues should rise by approximately 6% (8% in constant dollars). > no change
“We're still cautious about the macro environment both here and abroad given the mixed economic data that we're seeing, so we think it's prudent to wait and get another quarter or two under our belts before we consider taking a stronger stand on revenues.”
GM: Gross margin in 2012 should expand by approximately 70 basis points> no change
EBIT%: should expand by approximately 20 basis points (net of a 30 basis point negative impact from higher pension expense)
Timberland’s operating margin should exceed 11% in 2012. Excluding Timberland in both 2011 and 2012, the operating margin in 2012 is expected to improve 40 basis points from 13.6% to 14.0%, including a 40 basis point negative impact from higher pension expense.
EPS: Adjusted earnings per share is expected to rise to approximately $9.30. (raised to $9.45) Included in this guidance is the anticipated negative impact from 1) foreign currency translation, which is expected to reduce earnings by $0.41 per share (now $0.35), and 2) higher pension expense, which will negatively impact earnings by $0.19 per share. Timberland should earn approximately $1.10 per share in 2012 (no Chg) (excluding acquisition-related expenses estimated at $0.20 per share (now $0.23)). On a GAAP basis, earnings per share are expected to increase to approximately $9.10.
Solid revenue growth across all coalitions, highlighted by 25-to-30% growth in Outdoor & Action Sports
By Segment:
Outdoor & Action Sports:
- 25-to-30% growth in Outdoor & Action Sports (incl. a full year of revs from Timberland) > no change
- The North Face & Vans +mid-teen rev growth each in constant dollars
- Timberland: expected to add +$1Bn > no change
Jeanswear: planning for mid-single-digit revenue growth in 2012.
Imagewear: planning for mid-single-digit revenue growth in 2012.
Sportswear: planning for mid-single-digit revenue growth in 2012.
Contemporary Brands: planning for mid-single-digit revenue growth in 2012.
Other:
FCF: which could exceed $1.1 billion. > no change
CapEx: of approximately $375 million. > no change
Highlights from the Call:
- Mgmt increasingly confident in ability to deliver on updated 2012 guidance (now $9.45 in EPS vs. $9.30 prior; $0.06 from less severe Fx impact)
- In light of concerns re China, still in its infancy re VFC investment - only four platforms there currently (Jeanswear - Lee, North Face, Vans, and Kipling)
- DTC - expect to open 110 new stores across all brands (primarily Vans, TBL, North Face) driving +15% growth yy to 20% of total revs by F12
- $375mm in CapEx to grow the business in F12, nearly 2x historical rate of sales (and VFC still expected to generate $1Bn+ in FCF in F12 as well)
- Outdoor & Action Sports:
- Still seeing solid sell-through despite seasonal abnormalities
- Fall order book is up low-double-digit
- North Face up 14% in Q1; DTC up +20%; on track to hit $2Bn in revs this yr
- Up HSD in Europe; 'tremendous growth' in Asia
- Global rationalization plan to reduce SKUs by 15% by fall 2013
- e-com now in 5 countries (Italy, Spain, UK, Sweden and France) - Germany Austria, and Netherlands in 2H F12
- Vans up +25% in Q1; DTC up +18%
- Up 50%+ in Europe and high-teen in Asia
- Launched 3 new stores in Q1; and e-com in 7 new countries in May (UK, Germany, Netherlands, France, Ireland, Austria and Sweden)
- Timberland revs down slightly in NA (seasonal impact); Europe up +LSD and Asia up strong double-digit
- Focused on growing wholesale and DTC distribution
- Launching apparel next fall 2013 for spring 2014
- Earthkeepers still running strong
- Jeanswear:
-
- Up HSD in Asia (higher than recent trends due to timing of shipments)
- Lee Brand up +6%; Europe lower Asia up +HSD
- Share gains in jeans and total bottom at mid-tier dept stores
- Riders by Lee launch in dept stores later this year
- Wrangler: Int'l up +8% (Asia up mid-teen, Europe softened Northern & Eastern Eur offset by Southern Europe)
- Americas up low- double-digit strong at mass market and Western Business
- Launching new fleece and easy care shirts later this year
- Expanding into five-star premium line and footwear as well
Revs: +31%
- Organic up 12% (+14% cc)
- Warm weather drove stronger sales and early shipments
- Imagewear - 20% growth in both Bulwark and RedKap uniform brands
- Licensed MLB and NFL apparel business up as well
- Sportwear - Nautica up both at retail and wholesale; Kipling up over 50%+
- Contemporary Brands - "feel we are turning the corner here"
- even posted +18% revenue growth
- Splendid and Ella Moss both up over 20%
GM: -150bps (vs discussion of -100bps)
- Core on plan down ~100bps due to higher jeans product costs, gross margin for TBL was lower than expected
- Taking aggressive actions to move cold weather product - expect to be clean by 2H
SG&A: up +30.5%
- TBL drove SG&A rate by ~100bps
EBIT: +12.5% vs. 14% last yr
- TBL impacted EBIT% by 100bps; pension another 30bps
- Accounting chg boosted last yr by 40bps so on apples to apples OM would have been similar yy
Adjusted EPS
- TBL contributed $0.12 in EPS excl $0.03 in acquisition costs
- Other items….Fx and pension = $0.09 hit; last years $1.82 included +$0.11 from a tax settlement and LIFO acctg chg
- So, underlying core earnings growth was actually up +$0.32, or 19%
BS:
- Cash = $326mm
- Expect to generate FCF higher than $1.1Bn
Outlook:
- No change to TBL, or higher pension expectations
- Fx impact expectations now $0.06 less
- Fx = ~$0.10 EPS benefit for every $0.05 move in Fx (upside if rates stay constant)
- GM = comfortable with guidance
- Revs = keeping view despite taking out $70mm related to John Varvatos
Q2:
- Most challenging due to seasonality re TBL - likely to impact EPS by ~-$30mm, or -$0.20 in EPS
- Combined impact of TBL, Fx, and pension should impact EPS by -$0.29
- As such expect a decrease in Q1 EPS growth yy
Q&A:
Open-to-Buy Positioning in Europe:
- Expected a bit softer fall bookings, which materialized, but still expect North Face to grow for the full year
- Don't yet have full visibility on fall bookings yet - expecting very strong year for Vans
TNF fall bookings
- Global Bookings up LDD
- Asia very strong up DD, Europe a bit softer (UK customers had bankruptcies)
- Neutralizing the bankruptcies is Europe, expect to see a few percent growth in Europe
- In U.S. seeing fall bookings in-line with prior year
Inventories - Seasonal Impact:
- TNF really strong growth and sell-through in seasonal categories similar to 2011
- TNF Inventories at retail in a good position
- Some retailers sitting on higher inventory, but fall bookings and sell-through give mgmt confidence in FY outlook
- TBL, impact of weather tougher than expected, working through this
- Working on diversifying brand so not so seasonal going forward
- A few domestic TNF retailers did give back some inventory which is reflecting in current backlog as they have committed to new orders
Vans E-Commerce:
- Launching Van’s e-commerce in Europe next month
- Leveraging TNF E-commerce “back half” which includes systems and fulfillment as well as deliveries to supply chain
- Maintain focus on the brand dynamic so that the sites speaks its relevant parts to the target consumer
Trip to China:
- Timberland is the inflection point resulting in the trip to China
- Making a great deal of progress with the Asia Pacific Business
- Approaching $1bn mark in that business
TBL:
- Don't have full visibility into what fall looks like
- Expect the $1Bn incremental contribution from TBL on track
- 10% annual growth still the target still applies - adjusted to single-digits in 2012 due to Fx
Pricing:
- Have taken pricing up only 1/2 re to cost increases
- Current goal is to hold pricing where it is today
- 15% SKU rationalization reflecting the rightsizing of the collections to really maximize the overall output and creativity with improved margins as a result
Outlook EPS Upside:
- $0.15 higher despite revenues the same
- Varvatos losing $75mm in sales, but profitability across brands higher than expected
- Pretty well locked in right now (most of 3Q and half of 4Q) for denim
- Intent is to hold pricing in jeanswear (recall VF only raised prices 1/2 of cost increases)
Jeanswear:
- Replenishment was a bit softer than expected while booking coming in as expected
- Int'l have to look at China and India (Jeans is biggest business in both), China is most profitable jeans business in their portfolio in any region
Contemporary Brands:
- Splendid and Ella Moss up +20% mostly an Int'l opportunity
- Has been running at a DD rate for a while now
- Sevens has been the bigger drag here, both wholesale and retail grew in Q1 up +18%
- Premium denim has been strong last 6-9 months
Seasonality:
- TBL opportunity to strengthen core FW collection as well as Spring apparel assortment (coming online Fall 2013)
- Expectation for 10% growth in 2013 driven by addition of apparel, expanded assortment and channel penetration - also to leverage DTC platform & in Int'l there is still oppy
Change in Confidence in Europe:
- Have seen some stabilization recently in weaker markets, haven't seen a deterioration
- Last year grew +16% in Int'l markets despite turmoil last year
- Still expect DD growth across Western Europe
TNF International Drivers of Growth:
- e-commerce, rolling out into new markets
- DTC opening stores in TNF (40 stores total today)
- Geographic opportunity in a Pan European market, not just a couple markets
- Most underpenetrated in Russia, Poland, Czech Rep, also Scandinavia, Germany (only 10 doors vs. competitor that has ~150), and France
TBL Fundamentals:
- GM right in-line with core average - expected it to be higher
View of VFC Portfolio Strategy:
- Seasonality is not a primary factor when evaluating deals
- Mgmt does look at how they can strengthen a brand to drive upside - had this oppy in TBL
Inflation Outlook:
- Expect a few percentage points in inflation on an annual basis moving forward (From wage and cotton)
- Investing heavily in brands to offset bottom line pressures
- Feel the company is well positions from a brand and innovations perspective for the long haul
