UPDATE 4-VF Corp Q2 profit zips past estimates, ups FY view

Thu Jul 22, 2010 2:26pm EDT

* Q2 EPS $1.00 vs est $0.77

* Sees FY EPS $6.10 vs est $5.97

* Sees 5 pct rise in H2 revenue

* Apparel prices to go up in 2011, says CFO

* Shares rise 7 pct (Recasts; adds executive comments, updates share move)

By Nivedita Bhattacharjee

BANGALORE, July 22 (Reuters) - VF Corp's (VFC.N) quarterly profit beat Wall Street estimates on swelling margins and better sales across segments, and despite some costing pressures going forward, the world's largest apparel company said it's margins will still grow.

Shares of the company were up 6 percent at $78.68 Thursday afternoon on the New York Stock Exchange. They touched a high of $79.42 in intra-day trade.

VF Corp said lower product costs and clean inventories, which reduce the need for discounting, helped it rake up a 320 basis points jump in gross margins for the quarter.

Greensboro, North Carolina-based VF Corp owns more than 30 brands including Jansport, Vans, Wrangler and Lee.

Product costs will be down this year but could rise after that, Chief Executive Eric Wiseman said on a conference call with analysts.

"They (product costs) were down in the first half of the year and they will be down in the second half ... as well, but by a lesser amount," Wiseman said, adding that costs will be more of a concern in 2011.

Apparel prices across the board are expected to rise as prices of cotton, copper and labor in China go up, Chief Financial Officer Bob Shearer told Reuters.

"Costs in apparel are going up and it's an overall trend to be sure. Cotton-based products might be pressured more than the other types," Shearer said.

The company's jeanswear segment would bear most of the brunt, he said.

Rising cotton prices and labor costs in China have raised questions on whether and how apparel makers can sustain margins, and if the companies could look to raise prices as they transfer the pressure to consumers.

"Clearly price increases will be part of the formula for protecting our gross margins in 2011," CEO Wiseman said.

IN-HOUSE ADVANTAGE

The company did not quantify the price rise, but CFO Shearer said the hikes will come into effect in 2011.

VF Corp manufacturers about two-thirds of its jeans at its own plants, and sources comparatively lesser amount of goods from China, mitigating risks from higher product costs to some extent.

"Less than 25 percent of our total goods come from China. It's a good thing because many of our competitors have a good 40 to 50 percent of their product needs sourced from China," Shearer said.

For the full year, VF Corp, whose peers include Nike Inc (NKE.N) and Levi Strauss & Co among others, expects gross margins to reach record levels of slightly above 46 percent.

"Margins will improve still because we also have other factors to help us," the CFO said, adding that an expansion of its high-margin retail business was an advantage.

"The same is true with our lifestyle businesses, like action sports -- that's where the improvement is coming from in the second half."

OUTDOOR ACTION

While global jeanswear sales saw a lukewarm rise of 2 percent, the outdoors and action sports segment rose 12 percent with the Vans brand rising 24 percent. Global revenues of The North Face and Vans brands -- which fall under it's outdoors and action sports umbrella-- grew 12 percent and 24 percent respectively.

Shearer said jeans sales in the U.S. markets grew by 5 percent, but were offset by a 10 percent fall in its European markets.

"We expect stronger increases as we go through the rest of the year," he said.

For the second quarter, profit rose 47 percent to $110.8 million, or $1 a share, and topped estimates of 77 cents a share. Revenue rose 7 percent to $1.59 billion.

Strong trends, boosted by better marketing spend, spurred the company to forecast earnings of $6.10 a share for the full year, above the $5.90 a share it expected before.

Revenue for the second half is expected to grow 5 percent compared with a 4 percent rise in the first half.

Analysts on average were expecting a profit of $5.97 a share for the year, according to Thomson Reuters I/B/E/S. (Reporting by Nivedita Bhattacharjee; Editing by Anne Pallivathuckal, Gopakumar Warrier)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.