As predicted in February, VF Corporation's revenues went up by only 2 percent in the first quarter ended March 31, hitting $2,582 million, due to delayed shipments of spring/summer merchandise and to a tough comparison with the strong first quarter of 2002. Sales growth would have been one percentage point higher without the recent sale of John Varvatos. However, the group's gross margin rose by 2.4 percentage points to 48.1 percent, setting a new all-time record for any quarter in the company's history. Thus the adjusted operating margin grew to 13.8 percent from 12.5 percent a year ago, and net earnings jumped by 26 percent to $270.4 million.
The company reported high operating margins of 16.4 percent for its Outdoor & Action Sports Coalition, 0.4 percentage points better than a year ago, although they were lower than the 20 percent ratio achieved by its jeanswear business, thanks especially to the recent decline in cotton prices and other input costs. The unexpectedly good profitability has led the management to raise its guidance for this year's net income, predicting that it will improve by 12 percent, twice as fast as revenues. A better product mix and a higher proportion of sales through company-owned stores should help make the difference.
Direct-to-consumer (DTC) revenues are slated to represent 23 percent of the total turnover by the end of this year, compared with 21 percent at the end of 2012, and the management indicated in a conference call that it will lay out more aggressive plans for its DTC business when it meets analysts again on June 11 for an update of its five-year development plan.
The group opened 20 new stores across its brands in the first quarter, taking the total door count up to 1,132 units as of March 31. VF is accelerating the opening of new company-owned stores planned for this year, with 160 new units led by Vans. The higher anticipated revenues in the second half of the year should benefit from a planned increase in advertising expenditures of $60 million this year. This will be focusing mainly on The North Face (TNF), Vans and Timberland and on certain markets.
In the first quarter, the Outdoor & Action Sports Coalition continued to be the star at VF in terms of sales, which rose by 10 percent to $1,384 million including gains of 25 percent for Vans, 6 percent for TNF and 2 percent for Timberland. Consumer-direct revenues rose for the three brands by 15, 25 and 18 percent, respectively. The protracted cold weather spell in the U.S. and Europe contributed to TNF's strong performance in its own stores and online.
TNF's sales grew by 11 percent outside the Americas, driven by an increase of nearly 40 percent in Asia. In Europe, the brand's revenues rose by nearly 30 percent thanks to the strong development of its own retail stores and online, with low double-digit increases on a comparable store basis, but its wholesale revenues were down. Aided by the introduction of specific fits and colors for different markets, TNF is apparently gaining market shares in Europe, said Karlheinz Salzburger, who is in charge of the group's international operations.
Timberland performed less well than Vans or TNF in the quarter, but VF indicated that its results were in line with expectations. The brand's sales declined by a single digit in Europe, but increased by a mid-single digit in the Americas and by around 15 percent in Asia. Timberland's problems in Europe were largely attributed to its strong exposure in Italy and other parts of Southern Europe where the macroeconomic situation is far from brilliant. However, Timberland's European stores recorded an increase on a same-store basis, and orders for the next autumn/winter season are positive. The brand is going to celebrate its 40th anniversary this year with a “Best Then, Better Now” campaign (more already published in SGI Europe).
Other smaller VF brands such as Eastpak, Kipling and Napapijri are also expected to grow in Europe this year. Overall, the group posted a 4 percent sales increase in its Sportswear Coalition, but suffered declines of 3 percent in Jeanswear and 9 percent in Contemporary Brands, excluding John Varvatos.