The North Face increased its global revenues by 12 percent in dollar terms in the second quarter ended June 30, and its orders were up by about 20 percent overall. The weakend euro affected the score, and in fact, while TNF’s sales were up in single digits outside the U.S. in terms of dollars, they were up in double digits in terms of local currencies in Europe, the Middle East and Africa, with orders up by about 25 percent.
Comparable store sales in the EMEA region also increased by a double-digit figure for the full first half of 2010. While TNF opened a few more stores, the increases were mostly recorded at the wholesale level on a global basis during the latest quarter. Together with Vans and Lucy, they helped VF Corporation’s Outdoor and Action Sports Coalition post a 12 percent rise in total quarterly sales to $584.4 million. Sales rose also in the Americas, and they went up by 28 percent in Asia, with Vans rising by more than 20 percent in the U.S. and doubling in China and other parts of Asia.
Thanks in part to higher marketing and brand-building investments, which will grow even more in the second part of this year, the operating margin of the coalition increased to 13.9 percent in the second quarter from 11.5 percent in the same period a year ago.
Adding the jeanswear business and its other operations, VF improved operating margins from 8.1 percent to 10.6 percent in the quarter, largely due to a surprising increase of 3.2 percentage points in gross margins to a record of 47.1 percent. Two percentage points were obtained through lower product costs, and the balance was due to clean inventories and continued progress in the group’s expanding retail operations.
The group’s total direct-to-consumer revenues rose by 7 percent in dollars during the quarter, with double-digit increases for TNF, Vans, Lucy and 7 for All Mankind, but they were more or less flat on a comparable basis. The group opened 25 new stores across all brands in the quarter and is on track for 80 to 90 openings for the full year.
Company officials told financial analysts that they were hoping to be able to raise gross margins a little more in the second half, but were not sure to be able to do so next year, due to the higher price of cotton and higher labor and freight costs for items sourced in the Far East. They indicated that some price increases were inevitable.
In the second half of 2010, profits were be affected by the weakening euro and by a previously planned boost in advertising expenditures, which may end up taking 1.5 percentage points off from the operating margin. Assuming an exchange rate of $1.23 for the euro in the second half, the group’s operating margin could end up just below 13 percent for the full year, compared with 13.1 percent in 2008 and 11.9 percent in 2009.
VF upgraded its profit projections for 2010 yesterday, predicting earnings per share of $6.10, better than the previous guidance of $5.90. This means that VF would stand to book net profit of $683 million in 2010, compared with $603 million in 2008 and $574 million in 2009.
Group sales are expected to increase by 4 to 5 percent in dollars for the full year, and by 5 to 6 percent in local currencies – 1 percentage point higher than previously anticipated. This would imply getting close to the record level of $7.63 billion achieved in 2008, after a sales increase of about 7 percent in constant currencies in the second half of 2010.
The improved forecast is due to the fact that the group’s consolidated results for the second quarter were better than expected. Total revenues grew by 7 percent in the quarter to $1.59 billion, with increases in each segment, and net income went up by 47 percent to $110.8 million. Sales outside the U.S. rose by 3 percent in dollars and by 6 percent in constant currencies. For the full first half of the year, VF had a 55 percent increase in net income to $274.4 million on 4 percent higher sales of $3.34 billion.
The group continued to generate strong cash flow and used part of it to repurchase some of its own shares. The management indicated that it would rather use it for new major acquisitions, particularly in the outdoor and action sports sector, but it has been unable to find the right opportunity at an acceptable price. The management reiterated that VF would have no problem financing an acquisition of up to $1 billion.
Meanwhile, TNF is conducting consumer surveys to guide it in the development of new and innovative products that will help to keep the momentum, and possibly to justify higher prices.
TNF has won 25 product awards in the recent past. Included are three of the 47 awards assigned by a European jury at the OutDoor show in Friedrichshafen last week. They went to TNF’s super-compressible “Verto” jacket, its “Triumph” anorak and its “Hydroshock SE” travel shoe.