V.F. Corporation (VFC)

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VF Corp (VFC)

Q2 2013 Earnings Call

July 19, 2013 8:30 am ET

Executives

Lance Allega - Director of Investor Relations

Eric C. Wiseman - Chairman, Chief Executive Officer, President and Ex Officio Member of Finance Committee

Steven E. Rendle - Group President of Outdoor & Action Sports Americas and Vice President

Karl Heinz Salzburger - Group President of International and Vice President

Scott H. Baxter - Group President of Jeanswear Americas & Imagewear and Vice President

Robert K. Shearer - Chief Financial Officer and Senior Vice President

Analysts

Michael Binetti - UBS Investment Bank, Research Division

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Omar Saad - ISI Group Inc., Research Division

Robert S. Drbul - Barclays Capital, Research Division

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Kate McShane - Citigroup Inc, Research Division

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

David J. Glick - The Buckingham Research Group Incorporated

David Weiner - Deutsche Bank AG, Research Division

Christian Buss - Crédit Suisse AG, Research Division

Presentation

Operator

Good day, and welcome to VF Corporation's Second Quarter 2013 Earnings Conference Call. Today's conference is being recorded. And at this time, I would now like to turn the conference over to Mr. Lance Allega, Director of IR. You may begin.

Lance Allega

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss VF's second quarter 2013 results.

Before we begin today, I'd like to remind participants that certain commentary included in today's prepared remarks and the Q&A session may constitute forward-looking statements under the definition of federal securities law. Forward-looking statements include management's current expectations, estimates and other projections about our business, results of operations and the industries in which VF operates. Actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from these projected in the forward-looking statements are discussed in the documents filed with the SEC.

Additionally, participants on today's call may discuss non-GAAP financial measures. You will find the appropriate reconciliations in our press release, which was issued about an hour ago, and at our website at vfc.com.

Joining us on today's call will be VF's Chairman and Chief Executive Officer, Eric Wiseman; Bob Shearer, our Chief Financial Officer; and our Group Presidents, Scott Baxter, Steve Rendle and Karl Heinz Salzburger.

Following our prepared remarks, we'll take your questions. [Operator Instructions] And now I'll turn the call over to VF's Chairman and CEO, Eric Wiseman. Eric?

Eric C. Wiseman

Thanks, Lance. Good morning, everyone. Thank you for joining us. At our Investor Day last month, where we outlined our new 5-year growth plan, I made the comment that we believe we're really just beginning to achieve the potential that we have to grow and deliver shareholder value. Based on today's strong results, I can say with great confidence that our ability to drive growth and long-term sustainable profit is right on track. And at the halfway mark of 2013, we're also right on track with our expectations for the first year of that 5-year plan. We are on track for 6% revenue growth to $11.5 billion; on track to deliver a significant improvement in full year gross and operating margin; on track to deliver 13% earnings per share growth, consistent with our long-term target; and on track to deliver very solid cash flow generation, with more than $1.4 billion expected this year.

In the second quarter, we grew revenues by 4% to $2.2 billion, and we remain very comfortable holding to our full year guidance. With positive results across both our wholesale and direct-to-consumer channels and low single-digit increases in our U.S. and European businesses, coupled with greater than 10% growth in both our Asia Pacific and our non-U.S. Americas region, we're pleased with our balanced performance. Gross margin for the quarter hit 48.5%, an all-time VF record for any quarter, driven by lower product costs and mix. That's an improvement of 240 basis points over last year's second quarter, a result we're truly proud of, and certainly, a higher bar is now set for the future. With improvements in nearly every coalition, our adjusted operating margin also showed significant improvement, up 140 basis points despite a heavier investment in advertising and our direct-to-consumer business on a year-over-year basis. And finally, all of this translates to second quarter adjusted earnings per share being up 14% to $1.27.

Looking at the balance of the year, while the economic environment remains a bit uncertain and a bit of a headwind, we're confident that our powerful brands and powerful platforms are among the best positioned in the industry to deliver fantastic products to consumers and strong profits to our shareholders. In fact, based on strong first half results, with margins and EPS exceeding our original plan, we're raising our full year adjusted earnings per share guidance by $0.10 per share to $10.85. This is a 13% increase over 2012, which is directly in line with the 5-year plan we just announced last month. And we now expect our gross margin to improve slightly more than 100 basis points for the full year.

The consistent improvement in our gross margin over the past few years has allowed us to make meaningful investments in our brands, products and our innovation strategy that have proven very effective in building our business around the world. This year, we've taken our full year guidance from $10.70 to $10.85, demonstrating, once again, strong improvement in gross margin.

If we were to see further gross margin expansion in the second half of the year, we would likely invest those dollars against new marketing and product initiatives to support our 5-year growth commitment to our shareholders. This is a strategic balance that you come to know and expect from us and one that's proven effective many times in the past.

So a great first half. We're on track across nearly all key measures. We're improving profitability and, by all accounts, well on our way to another record year.

And with that, I'll turn the call over to Steve, Karl Heinz and Scott, who'll take us through VF's top 5 brands. And then Bob will close out with a deeper look at our financials. Steve?

Steven E. Rendle

Thank you, Eric. Second quarter global revenues for The North Face were up 5%, fueled by moderate growth in the wholesale sales, a 15% increase in the brand's D2C business and a more than 20% increase in international sales.

In the Americas region, revenues were down slightly, with a mid-single-digit decline in wholesale business, which was expected given seasonal lower demand and coupled with retailer caution. Our D2C performance in the quarter was ahead of expectations, growing at a mid-teen rate, a result that creates great momentum that we expect to carry into the balance of the year. Recent investments in our frequent shopper and loyalty program are really paying off. And overall, we were encouraged by the strong sell-through of fleece, rainwear and other spring items, including color updates on key styles.

Now let's review our progress against the key growth drivers for The North Face brand in 2013: product innovation, marketing and D2C. First, product. This fall, The North Face is bringing consumers breakthrough innovations, including Thermoball, a proprietary, athlete-tested, synthetic insulation technology that is lightweight and compressible like down but continues to insulate even when wet. Equivalent to 600 fill down, Thermoball was reviewed last week by Climbing Magazine, who dubbed it handmade down, noting that testers immediately thought it was down. Thermoball will be featured in over 5,000 stores in North America this fall.

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