Executives at VF Corp. and Levi Strauss & Co. anticipate a steep uphill battle to grow their businesses this year because of the sharp decline in consumer spending.
As the two apparel giants reported fourth-quarter and year-end results on Tuesday, both companies acknowledged that the advantages of size and diversified brand portfolios were tempered by withering economies around the world.
“We expect 2009 to be a very difficult year,” said Eric Wiseman, VF’s chairman and chief executive officer. “We don’t expect any improvement from the conditions we saw on the fourth quarter.”
John Anderson, president and ceo of Levi’s, said, “The outlook remains uncertain and we face stiff headwinds.”
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Despite the difficulties, both firms managed to grow annual revenues and are focusing on investing in proven strategies while reducing costs.
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However, VF’s broad portfolio wasn’t enough to save it from a 29.5 percent drop in fourth-quarter earnings and a flat outlook for 2009. Net income for the quarter ended Jan. 3 slid to $115.9 million, or $1.05 a diluted share, as consumers refused to buy at full price. Year-ago profits weighed in at $164.4 million, or $1.46. Revenues dipped 2.2 percent to $1.91 billion from $1.96 billion.
VF, based in Greensboro, N.C., wielded the cost-cutting scalpel and trimmed $100 million in annual expenses beginning this year. Along with the lowered costs came $41 million in charges during the quarter.
Wiseman trumpeted VF’s business model and results on a conference call with Wall Street analysts, describing the company’s balance sheet and liquidity as being in “excellent shape.” He also isn’t ruling out using VF’s financial clout to do a bit of wheeling and dealing in the downturn.
“I remain very encouraged by our long-term opportunities for growth,” Wiseman said. “We remain interested in acquisitions. However, we will remain very disciplined. No one can predict what the coming months will bring, but I’m confident in our continued ability to navigate through the challenges inherent in such uncertain times.”
In a report previewing VF’s earnings, Todd Slater, an analyst at Lazard Capital Markets, said, “An acquisition of a youthful, authentic brand with a similar culture to Vans and Reef would fit well into VF’s recently created Action Sports America coalition.”
Profits and revenues were strongest at VF’s outdoor and action sports division, where operating income rose 7.2 percent to $101.4 million during the quarter on a 13.5 percent increase in revenues to $675.7 million.
Profits in the jeanswear business fell 50.9 percent to $55.4 million as sales dipped 8.1 percent to $663.2 million. Results in the division were hurt by promotions to clear inventory, as well as provisions for bad debt expense related to recent retail bankruptcies. Quarterly sales and revenues also slid in the firm’s imagewear, sportswear and contemporary brands divisions.
For the full year, VF’s earnings inched up 1.9 percent to $602.7 million, or $5.42 a diluted share, compared with $591.6 million, or $5.22 a share in 2007. Revenues rose 5.9 percent to $7.64 billion from $7.22 billion.
This year, revenues are expected to post a low- to midsingle-digit decline and earnings are targeted at $5.42 a share.
A $215 million tax benefit incurred in 2007 made for difficult comparisons for Levi Strauss & Co. For the three months ended Nov. 30, earnings fell 76.7 percent to $62.3 million from $267.1 million.
Like VF, Levi’s was able to post revenue gains thanks to growing sales in key markets and a beneficial exchange rate. Revenues increased 1.2 percent to $1.27 billion from $1.26 billion during the quarter. Sales rose 1.5 percent to $1.24 billion from $1.22 billion, while licensing revenues slid 8.5 percent to $32.2 million from $35.2 million.
Throwing the bulk of its marketing might behind a global campaign for the iconic 501 jeans proved a winning strategy for Levi’s, and Anderson indicated that the 501 push likely would continue to help reclaim market share in the company’s largest and most mature markets. The program launched during the second half of the year and increased sales of the style significantly, Anderson said.
The core Levi’s brand accounted for about 76 percent of sales last year, or roughly $3.27 billion, an increase from the 73 percent of sales the brand accounted for in 2007 and the 70 percent of sales in 2006.
The onetime tax-related benefit from 2007 affected full-year results as well, as earnings slid 50.2 percent to $229.3 million from $460.4 million.
Revenues inched up 0.9 percent to $4.4 billion from $4.36 billion. Sales also rose by almost 1 percent to $4.3 billion from $4.27 billion. Licensing revenue gained 3.2 percent to $97.8 million from $94.8 million.
The company’s business in the Americas was particularly hard hit by the weak economy and the bankruptcy filings of two key customers, Goody’s and Mervyns. Revenues in the Americas fell 4.1 percent to $2.48 billion from $2.58 billion. Any gains made by Levi’s were wiped out by continued problems at the Dockers brand. Management said the U.S. Dockers brand had seen demand fall, prompting higher sales allowances and discounts. Dockers accounted for 18 percent of sales, or $774.6 million, last year compared with 21 percent of sales in 2007. Sales of the Signature by Levi Strauss & Co. label also fell in the U.S.
Advantageous currency exchange rates helped inflate results in the company’s overseas markets. European revenues spiked 8.7 percent to $1.2 billion from $1.1 billion. The favorable currency rate improved revenues by approximately $85 million.
The Asia-Pacific region saw revenues rise 7 percent to $728.9 million from $681.2 million, aided by a $14 million boost due to currency exchange. While significant gains were achieved in emerging markets such as China and India, management said those gains were offset by a weak performance in mature markets like Japan.
“We recognize how tough 2009 will be,” Anderson said. “We will tightly manage expenses and inventories while we continue to invest in our brands and retail network.”