Outdoor financials: Record 3Q sales for VF thanks to Outdoor Coalition, plus Deckers, K2, Kellwood, Rocky, Timberland, economic indicators drop

Record 3Q sales for VF thanks to a very strong Outdoor Coalition performance
VF Corp. (NYSE: VFC) reported record results for its third quarter during an Oct. 21 conference call, and followed that with an Oct. 22 conference call to announce the details of a growth plan designed to increase sales 8 percent annually.

For Q3, company sales rose 25 percent to $1,792.6 million from $1,435.4 million in 2003. Net income increased 24 percent to $155.4 million from $125.3 million, with earnings per share rising 21 percent to $1.38 from $1.14. All per share amounts are presented on a diluted basis. TNF reported strong growth in most of its core businesses, while the recent acquisitions of the Vans, Napapijri and Kipling brands added $183.6 million to sales in the quarter and $0.12 to earnings per share.

For the first nine months of 2004, sales increased 18 percent to $4,494.8 million from $3,820.2 million. Net income rose 20 percent to $349.4 million from $292.3 million, with earnings per share rising 17 percent to $3.11 from $2.65. The results for the nine months include a net $7.6 million ($.04 per share) charge related to disposition of the Playwear business.

The Outdoor Coalition businesses led the way for VF in the quarter with combined sales of The North Face, Vans, JanSport, Eastpak, Napapijri and Kipling brands skyrocketing 116 percent in Q3 to $457 million from $212 million in 2003. TNF reported sales up 44 percent. The brand experienced growth across all product categories — outerwear, sportswear, footwear and equipment. During the quarter a new store was added in Boston, with stores in Paris, Munich, Copenhagen, Innsbruck, Antwerp and Turin opened in conjunction with retail partners. Spring bookings for TNF were reported as up 22 percent in the United States and 23 percent in Europe. Sales in its packs business also rose strongly in the quarter, with growth driven by travel and apparel products. VF’s Vans business is performing above the compnay’s expectations, with double-digit sales growth in its core footwear business in the quarter. The Vans, Napapijri and Kipling brand acquisitions contributed $184 million to Outdoor Coalition sales in the quarter.

Overall profitability was strong in the quarter, with improvements in operating margins across most of VF’s core businesses. According to the company, gross margins benefited from the acquisitions of strong lifestyle brands, where gross margins tend to be higher than in some of our category-driven businesses. Gross margins in Q3 rose to 40.2 percent in 2004 from 37.4 percent in Q3 2003. Royalty income increased, primarily due to the full quarter contribution of licensing income from Nautica.

Inventories declined 1 percent, despite the addition of $58 million of inventories from the acquisitions of Vans, Napapijri and Kipling. Inventories in VF core businesses declined 6 percent in the quarter from the Q3 2003.

VF reported strong cash flow from continuing operations of $298 million in the first three quarters of 2004. The company anticipates that cash flow from continuing operations could approximate $550 million in 2004. Debt as a percent of total capital was 31.9 percent at the end of the quarter.

Looking ahead, VF projects full year sales to increase 15 percent, approaching the $6 billion mark for the year. Earnings per share are expected to rise approximately 12 percent over prior year levels. The acquisitions of the Vans, Napapijri and Kipling brands are expected to contribute approximately $285 million to sales and $0.14 to earnings per share this year, above VF’s previous expectations.

For Q4, the company expects a sales increase of approximately 8 percent, with earnings per share about flat with last year’s fourth quarter. Growth plan spending could approximate $20 million in the quarter. Areas of continued investment include brand marketing, new customer team initiatives and supply chain projects. In addition, results in the fourth quarter of 2003 included a favorable tax settlement, which benefited earnings by $0.07 per share.

VF believes that as a result of current momentum within the core and acquired businesses and with the variety of initiatives underway within the growth plan, sales and earnings could increase at high single-digit rates in 2005. Margins should benefit as the profitability of the recent acquisitions continues to improve and the supply chain initiatives take hold.

Following the Oct. 21 call, VF offered up a very long, but interesting conference call to detail the company’s five-year plan growth initiative, an initiative that has been one year in the making.

We’ll focus only on the Outdoor Coalition (OC) report. The company reports that the outdoor market (and they include action sports and snowsports in this category) is $33 billion in size, primarily split between footwear and apparel.

Little doubt the OC will be on an acquisition bent since the company highlighted the fact that it saw a fragmented distribution channel as something that “can be leveraged to make acquisitions and put them into our organization.” VF views the TNF acquisition as the perfect model that the company will seek to mirror — acquire a global lifestyle brand that is authentic and deeply rooted in its market and then use VF’s sourcing and operational strengths to unlock the company’s money-making potential.

Snapshots of the brands in the OC:
>> JanSport — No. 1 daypack brand in the world with studies showing one in every three teens will only consider buying a JanSport-branded backpack. Experiment with “by JanSport” branded equipment in Target went well and will be continued. The Modus luggage line targeted at college graduates has also been showing nice growth and VF expects that opportunity to expand significantly.
>> Eastpak — No. 1 daypack brand in Europe. In Germany, the brand has a 55 percent market share. In Benelux (Belgium, Luxembourg, Netherlands), it has a market share in the high 20’s. In Italy, the market share has grown to 22 percent. Some of the success in Europe has come from limited edition concept bags with street artists providing original artwork that then gets offered on a limited number of bags. The company reports that it allows them to sell a bag normally retailing for 45 Euro for 100 Euro just by adding the artwork and they like that. Eastpak will be moving inside Vans’ facility for U.S. distribution as the company tries to capture the youth market and reenergize Eastpak sales in the United States. Expect to see some of the successful practices from Europe be translated here.
>> TNF — 10 percent of the company’s business is generated by equipment sales. 10 percent of the business is generated by footwear. Footwear and Tekware sales growth continues to please with footwear showing the strongest percentage increases. 55 percent of the business is made up in apparel sales. The remaining 25 percent goes to sportwear. In Europe, Asia and the Middle East, TNF is looking to expand retail doors from 3,600 now to 5,000. It will also be opening either alone or with partners more company stores, including two upcoming ones in St. Petersburg and Moscow. 10 percent of the TNF sales come from TNF branded stores — a number that is not likely to shift much according to VF. Specialty shops account for 48 percent of the brand’s sales. 27 percent of the business is done in sporting goods stores, with the remaining 15 percent divided among specialty accounts and department stores. The company is also looking at expanding the brand into more product categories, but declined to specify at this time.
>> Vans — Since less than 10 percent of the company’s business is in apparel, VF views that as a huge growth opportunity.

Deckers sales leap up 177 percent for Ugg and 165 percent for Simple
Oct. 21 was a good day for Deckers Outdoor Corp. (Nasdaq: DECK) as Chairman and CEO Doug Otto told analysts that the company’s third-quarter net sales increased 124 percent to a record $55.8 million compared to $24.9 million the year before. Net earnings for the quarter ending Sept. 30, 2004, increased to $5.8 million or $0.46 per diluted share, compared to net earnings of $481,000, or $0.04 per diluted share for the third quarter of last year. That was the first of many percentage leaps discussed in the company’s earnings call.

Including sales from both the wholesale divisions and the Internet and catalog retailing business, Teva sales for the third quarter increased 32 percent to $11.9 million from 2003’s $9.0 million, while Ugg sales were up 177 percent to $39.2 million versus $14.1 million last year. And, the Simple brand wasn’t lagging this quarter as its sales jumped 165 percent to $4.6 million from last year’s $1.8 million. Sales for the Internet and catalog retailing business, which were included in the brand sales numbers, aggregated about $5.4 million for the third quarter of 2004, up 241 percent from $1.6 million for the third quarter of 2003.

“After a record spring season, Teva’s robust performance continued into the fall, primarily driven by strong demand for our core sandal category as well as our expanded closed-toe offering,” Otto said during the call. “Our UGG business remains very strong as sales of all styles, including our classic boots, slippers and fall collection, continue to perform well. We are also encouraged by the results of Simple, in particular the strong retail performance of our new clog and Sugar sneaker, as well as the positive reaction to the brand’s spring 2005 sneaker collection.”

Deckers updated its guidance for the fourth quarter, expecting net sales to range between $55 million and $60 million and diluted earnings per share to range from $0.47 to $0.51. Also, the company raised its guidance for FY2004 net sales to range between $196 million and $201 million, up from the previous guidance of $182 million to $190 million, and diluted earnings per share to range from $1.84 to $1.88.

With everything on the uptick, Otto said Deckers is pursuing its five strategic initiatives: 1. new innovative styles in its brands; 2. grow domestic distribution; 3. expand international distribution; 4. selectively license brands in non-footwear categories; and 5. build new brands.

Otto noted that with its debt repaid, the company is “keeping an eye for the next Teva or Ugg.”

K2’s winter brands drive 3Q sales growth
Like many winter-sport enthusiasts, K2 Inc.’s Chairman and CEO Richard Heckmann is “hoping for snow,” as he discussed third-quarter earnings with analysts on Oct. 20. K2’s (NYSE: KTO) third-quarter sales exceeded estimates hitting $333.5 million (instead of $320 million) with diluted earning per share of $0.26 — an increase of 99 percent from $168.0 million in the prior year, and diluted earnings per share were $0.26. Its third-quarter operating income was $27.6 million, a 256 percent increase from the 2003 comparable period, and net income of $13.2 million, a 293 percent increase from last year.

With one out of every three skis sold in the United States a K2 brand, according to Heckmann, it’s no wonder that the quarter’s growth was driven by the winter products brands.

“We generated organic sales growth net of acquisitions of nearly 12 percent in the quarter, driven principally by growth in our winter products brand,” Heckmann said. “Additionally, our trend of improved profitability continued as reflected in higher margins and net income. We are moving swiftly to integrate recent acquisitions, and the combination of our scalable infrastructure, leading brands and strong balance sheet position us well for future growth.”

This quarter’s results show that K2 is moving beyond its self-described status as a “first- and fourth-quarter company.” The only real negative point is the sale of in-line skates. Also, K2’s net debt (debt minus cash) has also grown to $346 million as a result of acquisitions, even as cash reserves have risen 150 percent to $37 million.

In the Action Sports segment, sales of skis, snowboards, in-line skates, bikes and paintball products totaled $180.1 million in the third quarter of 2004, an increase of 152.6 percent over the 2003 period. Growth was driven by double-digit increases in skis and snowboards, and by acquisitions made in the fourth quarter of 2003 consisting of Atlas and Tubbs snowshoes, and Brass Eagle paintball products and the acquisitions of Volkl and Marker at the beginning of the third quarter of 2004.

Earlier this year, K2 realigned its product offerings into three broad categories. Now, with the recent acquisitions of Ex Officio and Marmot, K2 created a new segment this quarter, Apparel and Footwear, for them as well as Earth Products. Sales for the new division were $45.1 million, an increase of 317.6 percent over the 2003 period. The increase was due to 37.0 percent growth in technical skate footwear and apparel and the acquisitions of Ex Officio and Marmot in the second and third quarters, respectively, of 2004.

Kellwood anticipates lower than expected earnings for 3Q
Announcing that its net earnings will be lower than anticipated for the third quarter, shares of Kellwood Company (NYSE: KWD), parent of Kelty, Sierra Designs, Slumberjack, and Wenzel, were down 8 percent on Oct. 22 –hitting their lowest price since August 2003. The company blamed the slippage in earnings to weak consumer demand for apparel, caused partially by high gas prices, abnormal weather and some of its brands not being on target in terms of fashion look and appeal. As a result, weak sales forced both retailers and wholesalers to make bigger-than-anticipated markdowns on items, Kellwood said.

Kellwood expects net earnings in the third quarter ending on Oct. 30 to be in the range of $28.5 million, or approximately $1.00 per diluted share, which is below the guidance provided in August of $32.5 million, or $1.15 per share, according to Hal Upbin, chairman and CEO. Last year the company reported net earnings of $30.9 million and earnings per share of $1.13 in the third quarter.

And it won’t get much better in the fourth quarter despite new marketing initiatives. Based on orders booked to date, it appears that sales in the fourth quarter from these higher margin initiatives will be less than anticipated in August. As a result, Kellwood now expects sales for the year to be approximately $2.57 billion, versus its earlier forecast of $2.6 billion. Last year, Kellwood reported sales of $2.35 billion.

One analyst noted that margin expansion was one of the key reasons for investing in the company, adding, “We aren’t seeing that this year. We also aren’t seeing growth, with new guidance only 2.5 percent bottom line growth over last year. It looks like operating margin will be down significantly for the back half and down slightly for the full year. “

The company has also completed a $400 million five-year unsecured credit facility, which, along with $263 million of cash, will offer liquidity and financial flexibility to meet operating, strategic and corporate development needs, and fund acquisitions.

Timberland Q3 revenue driven by U.S. and international markets
The Timberland Company (NYSE: TBL) reported record third-quarter net income of $68.6 million and diluted earnings per share of $1.92, which the company attributed to strong global revenue gains and continued benefits from gross margin expansion. Last year’s net income was $53.3 million with diluted earnings per share of $1.47.

Third-quarter revenue increased 11.3 percent to $493.9 million, driven by gains in both U.S. and international markets. U.S. revenues grew 6.0 percent, reflecting balanced growth from footwear and apparel offerings, and across wholesale (+6.0 percent) and retail channels (+6.0 percent on a 1.3 percent comparable store sales gain). International results (+19.3 percent or +10.6 percent in constant dollars) reflected double-digit constant dollar sales growth in Asia and strong constant dollar gains in Europe. Overall revenue growth benefited from favorable foreign exchange rate changes, which added $15.3 million (or 3.4 percent) to third-quarter revenue.

Third-quarter results were supported by strong global footwear sales. Global footwear revenues expanded 13.6 percent to $388.2 million, driven by strong growth in men’s and women’s casual and kids’ categories. Global apparel and accessories revenue grew 3.1 percent to $101.4 million, as gains in Timberland brand apparel in the United States and Asia offset constant dollar declines in Europe.

“We are targeting mid single-digit revenue growth for the balance of this year and believe that we are on track toward delivering strong revenue growth and double-digit profit gains in 2004,” Jeffrey Swartz, president and CEO of Timberland, said. “Looking ahead to 2005, we intend to drive solid revenue gains and continued strong earnings growth, leveraging strategies focused on capturing the great potential we see for the Timberland brand.”

Rocky net sales reach record $50.1 million
For the ninth consecutive quarter Rocky Shoes & Boots’ (Nasdaq: RCKY) earnings per diluted share increased compared to the prior year’s. Net income increased 41 percent to $4.9 million for the third quarter ended Sept. 30, 2004, compared to 2003’s $3.5 million. Net income per diluted share increased 27 percent to $0.98 for the third quarter of 2004 from $0.77 a year ago.

Net sales rose 21 percent to a record $50.1 million for the quarter from last year’s $41.4 million. This increase included $5.1 million of boots produced for the U.S. military, as well as increases in branded sales of rugged outdoor and occupational footwear and Rocky apparel.

Gross profit increased 22 percent to $16.0 million for the third quarter compared to 2003’s $13.1 million. Gross profit margin rose to 32.0 percent of net sales for the third quarter from 31.6 percent of net sales a year ago. Rocky said the improvement was due to higher gross profit margin for branded products, which offset lower gross profit margin on boots produced for delivery to the U.S. military.

Fourth consecutive month that the leading economic indicators drop
The U.S. index of leading economic indicators fell 0.1 percent in September, the Conference Board reported Oct. 21. This is the fourth straight monthly decline, the longest consecutive month decline since mid-2002. The dip was less than the consensus forecast of Wall Street economists, who had predicted a 0.2 percent fall. Economists believe that this trend of consecutive declines indicates that the U.S. economy is losing steam as it heads into 2005.

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