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VF on Acquisitions Hunt, and Tommy Could Be in Its Sights

As it posted first-quarter results, VF Corp. said it expects acquisitions to supply most of its top-line annual growth of 6 percent in coming years.

Mackey McDonald VF Corp

Mackey McDonald, VF Corp.

Photo By WWD Staff

NEW YORK — Its inability to corral Calvin Klein Industries last year hasn’t soured VF Corp. on acquisitions one iota.

In fact, the company said Tuesday as it announced first-quarter results, it expects future acquisitions to supply the majority of top line annual growth of 6 percent in the years ahead. And it didn’t close the door on the possibility that such an acquisition or expansion move could involve Calvin Klein or another high-profile American designer, Tommy Hilfiger.

Mackey McDonald, chairman and chief executive officer, told attendees at the company’s annual meeting Tuesday in Greensboro, N.C., that the company’s priority is "growth," with a long-term target of 6 percent. That 6 percent, according to the company, will come from internal growth of between 2 percent to 3 percent, and from new acquisitions contributing between 3 percent and 4 percent.

Building on speculation already rampant in the marketplace about Warnaco Group and Tommy Hilfiger, a VF spokeswoman told WWD, "We are actively looking. The company is concentrating on [acquisitions with] high returns in our profitable areas, which are jeanswear, intimate apparel and our outdoor businesses."

She added, "We remain interested in a lifestyle sportswear brand that could cover multiple areas."

As reported, the company had been interested in acquiring Calvin Klein Inc., but lost that opportunity when the designer firm was snapped up last year by Phillips-Van Heusen. Warnaco Group holds the rights, as licensee, to Calvin Klein jeans and owns the label for underwear outright.

One lifestyle brand with offerings in jeanswear and intimate apparel, and understood to be investigating strategic alternatives, is Tommy Hilfiger Corp. VF manufactures Tommy Hilfiger intimates under license. The VF spokeswoman declined comment on the company’s interest in Tommy.

The company on Tuesday posted first-quarter results that bested Wall Street’s median expectations by 9 cents, coming in at 83 cents a diluted share, and reiterated its expectations that 2003 earnings per share would be between 5 percent and 10 percent higher than in 2002, where EPS from continuing operations were $3.38, excluding restructuring charges of 14 cents per share.

As for timing, she said, "We are hopeful to have something that we can do this year, but it will have to be the right opportunity, the right price and the right time."
For the three months ended April 5, the company posted net income of $92.1 million, or 83 cents a diluted share, against a $448.3 million loss, or $3.96, a year ago. Last year’s results included a $527.3 million charge for a change in accounting for goodwill. Last year, the company exited the Jantzen and private label knitwear businesses. Excluding the discontinued businesses, income from operations rose 19.5 percent to $92.1 million, or 83 cents, from $77 million, or 67 cents, last year.

Buoyed by improved cost management and double-digit sales increases by most of its branded product categories, the company bested Wall Street’s mean consensus of 74 cents in earnings per share. Analysts had been expecting between 72 cents and 77 cents per share, according to a poll by Thomson First Call.

McDonald said in a statement, "This was a great quarter. Our focus on managing costs is serving us well in this environment. As important, our brands and financial position remain strong, providing us with excellent leverage when conditions improve."

Wall Street apparently agreed, sending shares of the company up $1.43, or 3.7 percent, to close at $39.98 in trading Tuesday on the Big Board.

Sales in the quarter gained 3.1 percent to $1.25 billion from $1.21 billion. International jeans sales were up 15 percent, reflecting the positive effects of foreign currency translation. Domestic jeans sales, however, fell by 7 percent due to customers’ efforts to control stocks and in some cases close stores.

McDonald expressed concern that retailers had driven inventories too low in some cases: "We think there are some stock-outs in some [of our] major accounts," he told analysts. "Some inventory is at an all-time low in denim."

Global intimate apparel sales increased by 9 percent, with increases across the company’s department store, mass market and international businesses. Sales in VF’s outdoor coalition — The North Face, JanSport and Eastpak brands — gained 15 percent in the quarter, driven by double-digit sales increases of the The North Face brand products in the U.S. and internationally.

Imagewear sales — including Chase Authentics, CSA, NFL White, NFL Red and Harley Davidson — increased by 10 percent, while the licensed sports apparel brands in the category posted a double-digit increase. Playwear sales, however, declined by 15 percent. The company said previously it was exploring strategic options for the business.
Robert Drbul, analyst for Lehman Brothers, wrote in a research note on Monday, "Despite the challenging top-line growth environment, VF Corp.’s portfolio of mature and recognized brands generates strong cash flow and its sound balance sheet provides a solid platform for growth. Cash flow from operations in 2002 totaled $645.6 million."

He cautioned, however, that, "while we believe VF’s jeanswear business remains healthy, it will face two significant challenges in 2003." Levi’s entrance into Wal-Mart and more than 300 Kmart store closings "are driving VF’s expected 9 percent jeanswear sales decline in the mass channel for 2003."

McDonald told the annual meeting that the continuation of momentum for its Lee jeans brand, with new fashion styles and a new Lee concept store in London, is a high priority for the firm. Lee Dungarees continues to be a fast-growing men’s brand. The company this year will launch a new missy program and logo under the "lee" jeans brand, which includes a new contour jean, as well as a continued rollout of its new juniors brand called "Wish," which was launched last year.

The company is also launching a new intimates brand, Curvation, at Wal-Mart this year. It also plans to freshen the look of its Vassarette assortment, McDonald said.

A big growth driver in the outdoor business was the cold and wet weather in the quarter, which contributed to strong sales of fleece products. VF plans to re-launch the Riders line for men, featuring a new look and logo, at Kmart sometime toward the second half of the year. In addition, Blu Jeans — a new men’s, women’s and kids’ brand for Target — is scheduled to start shipping in June. The launch could pave the way for other categories at Target, McDonald said, although he noted that the option was really up to Target.

McDonald was particularly pleased with the increased presence overseas of Wrangler, which is now in Russia and China.

VF currently operates seven full-price stores under the nameplate The North Face, and will open its first European store in London this year. It expects distribution at European retail accounts to reach 2,800 doors in 2003, growing to 5,000 doors in 2008.
The ceo said that the company views "retail stores as a part of [The North Face’s] growth within the brand and as a tool in learning consumer feedback from products."

In the quarter, gross margins rose almost 2 full percentage points to 37.5 percent of sales while operating margins improved to 12.2 percent from 11.3 percent last year. Last year’s results included the impact of restructuring charges. Excluding the charges, operating margins in the 2002 quarter were 11.8 percent.

The company also issued second-quarter guidance of earnings per share that will be flat to down 5 percent, excluding restructuring charges, from last year’s 77 cent performance. Wall Street’s expectations were 85 cents. Because of its dependence on the back-to-school season and other seasonal factors, VF typically posts stronger results in the second half of the year than in the first half.

In spite of Wall Street’s second-quarter expectations, McDonald said during the call, "Our second quarter is on plan."
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