VF Corporation, the owner of The North Face and many other outdoor, sports and fashion brands, has upgraded its guidance for sales and profits for the full year, after all of its units continued to blaze ahead in the second quarter and it managed to limit the impact of rising input costs.
Fueled by its outdoor and action sports coalition, VF saw its sales jump by 15 percent to $1,840 million for the quarter. Its gross margin did decline, as it had warned, by about 1.2 percentage points to 45.9 percent, due to higher product costs. The decrease would in fact have been steeper without the closure of a European jeans plant, which added 65 basis points to the group's gross margin. Its operating margin was down by 0.3 percentage points to 10.3 percent for the quarter.
The outdoor and action sports coalition of VF Corp., which last month agreed to take over Timberland, enjoyed a sales rise of 23 percent for the quarter. The North Face alone achieved a sales jump of 21 percent for the quarter. It was slightly outgrown by Vans, which saw its sales rise by 22 percent for the quarter. Kipling did even better, with sales up by 37 percent, and Napapijri managed a sales hike of 46 percent.
The performance of the outdoor and action sports coalition includes a quarterly European sales hike of 34 percent in constant currencies, driven by The North Face and Vans. There is little respite in sight for these two brands in Europe, since their forward orders in the region at the end of June increased by more than 25 percent for The North Face and by more than 50 percent for Vans.
The outdoor and action sports unit's sales in all its international markets climbed by 42 percent for the quarter, up by 29 percent in constant currencies. The unit did well in Asia, where sales of The North Face, Vans and Kipling all jumped by more than 25 percent for the quarter. Meanwhile, its sales increased by 14 percent in the Americas, with double-digit growth from nearly all brands.
The expansion of the outdoor and action sports unit was partly driven by the steep rise in its direct-to-consumer sales, up by 22 percent for the quarter. The North Face lifted its direct-to-consumer sales by 34 percent for the quarter, compared with 19 percent for Vans. In Europe alone, The North Face opened five own stores in the first half and scheduled seven in the second half. For Vans, the score stands at five store openings in the first half and 12 scheduled openings in the second half.
The operating margin for the outdoor and action sports coalition slid by 1.4 percentage points to 12.5 percent, which was mostly attributed to higher marketing expenses. Yet the coalition's operating income still increased by 10 percent and its operating margin for the full year is expected to reach about 20 percent.
The other parts of VF, from jeans to sportswear and other fashion brands, all saw their sales inflate at double-digit rates for the quarter, albeit not as fast as the outdoor and action sports brands. As anticipated, the jeans unit was affected by higher input costs, but its operating margin contracted by just 1.6 percentage points to 15.4 percent, as it pushed through some price increases and benefited from the closure of the European jeans plant.
The group's international sales as a whole improved by 30 percent in the quarter, equivalent to a rise of 20 percent in constant currencies. Asian revenues were up by 30 percent, including a jump of 34 percent in China and 52 percent in India. VF's entire Asian sales rise amounted to 25 percent in constant currencies. European sales were up by 30 percent in reported terms and by 16 percent in constant currencies. Meanwhile, VF's sales were up by 40 percent in Latin America and by 26 percent in Mexico. Furthermore, the group's international business achieved an increase of more than 30 percent in its operating income, with a higher operating margin.
VF's net income jumped by 16.8 percent to $129.4 million, which was better than expected. For the first half of the year, VF Corp.'s revenues expanded by 14 percent to nearly $3,799 million, again with strong growth in all brand units. The group's net income for the six months jumped by 20 percent to $330.1 million. Inventories were up by 17 percent at the end of the period, but this was still better than the increase of 24 percent reported at the end of the first quarter.
The group's management judged that the measures it took in the last months to deal with higher costs and price increases had paid off. However, managers admitted that they were still uncertain about the reaction of consumers to more price hikes in the second half of the year. They point out that the volumes of sales in its U.S. jeans business did increase a little, which would appear to indicate that the impact of price increases could be smaller than anticipated.
For the time being, VF predicts that its gross margin for the third quarter will decline along the same lines as in the second quarter, without the benefits of the plant closure. For both the second and third quarters, increases in products costs came ahead of price hikes, but the impact of cost increases should be offset to a larger extent by price hikes in the last quarter. For the full year, VF still expects its gross margin to shrink by about 1.0 percentage points, mostly due to its U.S. jeans business.
While VF had predicted that its sales for the full year would expand by about 10 percent, it now anticipates that the rise will reach 12 to 13 percent. This would include an increase of the outdoor and action sports unit's sales in the high-teens range. While the group's entire international business was expected to expand by 15 percent, the guidance now calls for a rise of more than 20 percent. This should be driven by Asia, where sales are expected to grow by more than 30 percent for the full year.
As for direct-to-consumer sales, which were meant to increase by 10 to 15 percent, they are now firmly expected to rise by about 15 percent. Furthermore, earnings per share are anticipated to rise by about $7.50, compared with earlier guidance of $7.25 per share. None of these forecasts include benefits from the acquisition of Timberland, which is still expected to close in the third quarter.