With another blockbuster performance for Vans and an acceleration of growth at The North Face, VF Corp scored its best quarter in two years in its third quarter ended December 31 and again raised its full-year guidance. Shares of VF rose $9.08, or 12.4 percent, to $82.34 Friday on the New York Stock Exchange.
On a conference call with analysts, VF officials said results are tracking ahead of the financial targets established at the beginning of the year as well as long-term targets set at its Analyst Day in Boston nearly two years ago.
Both top-line and earnings growth projections for the year were raised. On the sales side, expectations were raised of its Outdoor, Active and Work segments as well as D2C while slightly lowered for its Jeans segment and international overall.
In the quarter, the top-line gains were again led by 27 percent growth on a currency-neutral basis by Vans that followed on the same 27 percent gain seen in its second quarter.
“Vans has delivered another exceptional quarter of growth, further cementing their rightful place as the number three global sport lifestyle brand,” said CEO Steven Rendle on the call. “While obviously a brand this size won’t grow at these exceptional rates forever, we have great confidence in their ability to sustain double-digit growth by relying on Not Just One Thing to drive this business to $5 billion by 2023.”
The North Face also stepped up to help Vans drive overall growth. The brand’s currency-neutral growth reached 16 percent, improving on the 7 percent growth seen in the second quarter and helped in part by fourth-quarter orders being pulled up to the third.
Said Rendle, “The North Face made significant progress in their journey to return to their rightful leadership position as the largest most influential global outdoor brand. The brand’s focus on purpose-led brand and product innovation is starting to gain attention and traction. My congratulations to the team. This has been an intense two plus year journey. And while it’s not complete, we’re starting to see their hard work payoff.”
Other highlights included “resilient” international growth in the high-single digits, led by over 20 percent growth in China; as well as strong double-digit growth in D2C, led by digital.
Rendle said that with the spinoff of Kontoor Brands, its jeans business, set for this April, “I am confident in our accelerated growth trajectory and the strategic positioning of our portfolio as we head into next year.”
Rendle also indicated that VF isn’t being overly impacted by the uncertain geopolitical and macroeconomic conditions.
He said, “While these events have the potential to disrupt our business and our consumers around the globe, to-date the impact to our business has been minimal. While we are more closely monitoring conditions in certain markets such as China and the UK, for our businesses, the overall consumer backdrop remains quite solid.
“As it relates to trade, the impact to-date has been de minimis. We continue to monitor this situation closely and are developing continuity plans for potential outcomes.”
Double-Digit D2C Growth Drives Top-Line Growth
In the quarter, companywide sales grew 8.0 percent to $3.94 billion and increased 10 percent on a currency-neutral basis. Analysts’ average estimate of $3.87 billion.
Excluding acquisitions net of divestitures, revenue increased 7 percent and were up 9 percent in constant dollars. The gains were driven by VF’s largest brands, international and direct-to-consumer platforms, as well as strength from the Active, Outdoor and Work segments.
Excluding Kontoor Brands, the VF RemainCo portfolio increased 12 percent.
Overall D2C revenue increased 11 percent with 23 percent growth in digital and a 12 percent increase in total comp sales. Wholesale business increased 7 percent organically led by 35 percent growth in China and a high-single-digit growth in the U.S. Excluding Kontoor Brands, wholesale increased at a low-double-digit rate as strong sell-through was seen across key channels and accounts during the holiday season.
Geographically, the U.S. grew 9 percent and international posted 8 percent growth led by 23 percent growth in China. Excluding the impact of acquisitions, total Asia increased 16 percent. Europe increased 4 percent and its non-US Americas business increased 7 percent. VF still expects high single-digit international growth in the second half, in line with the results of the first half.
Scott Roe, CFO, said European growth remains broad-based with strength across most brands and countries but has “moderated somewhat” given the “exceptional performance” in the region last year, led by The North Face and Vans. He said VF remains on track to deliver mid single-digit revenue growth for Europe and high single-digit growth excluding Kontoor Brands for fiscal 2019.
VF’s big three brands, Vans, The North Face and Timberland, grew at a combined rate of 16 percent in the quarter.
Vans Not Seeing Slowdown
Vans’ 27 percent growth was well-diversified across channels, geographies and product categories. Said Rendle, “The brand continues to focus on icon management and driving the head-to-toe approach with footwear and apparel up 25 percent and 23 percent respectively. The Slip-on surpassed the Old Skool this quarter as the fastest growing icon, as the brand relentlessly pursues it’s Not Just One Thing mentality.”
Vans D2C business generated total comps of more than 20 percent, led by the digital business, which accelerated to 53 percent growth. VF again increased its full year outlook for Vans and now expects about 23 percent growth or 25 percent growth on a constant dollar basis for fiscal 2019. Said Roe, “We are confident that the Vans brand can sustain low double-digit growth, in line with their five-year commitment in fiscal 2020.”
VF officials cautioned that Vans’ growth would ease from its hectic growth rate with the full-year update indicating that the brand should see about 15 percent growth in fourth quarter. But VF officials remain confident that Vans would continue to expand at its long-term projection in low double-digit growth with the help of some diversification but also overall brand heat.
Said Roe, “We really haven’t seen the brand slow down materially. Again, at some point the laws of gravity do establish themselves. I think the most important thing to you remember is, we have confidence in the long range plan. And so far, we really haven’t seen that slowdown. We’re really encouraged.”
The North Face Sees Americas Return To Double-Digit Growth
At The North Face, the 16 percent increase driven by double-digit growth in all channels and geographic regions but led the Americas return to double-digit growth. The Americas business increased 15 percent, driven by 9 percent growth in D2C and a 25 percent increase in wholesale.
“The actions we’ve taken to reposition the brand in the marketplace continue to yield results, and we are confident in the growth trajectory of this brand heading into next year,” said Rendle.
The North Face’s D2C business increased 11 percent, led by 20 percent growth in digital. Strong sell-through drove an overall 21 percent increase in the brand’s wholesale business as shipments were accelerated to meet increase consumer demand.
Looking at product, The North Face saw strength from Mountain Sports, Mountain Lifestyle and Urban Exploration product territories, with particular strength in outerwear, fleece and sportswear. Earlier this month, at the Consumer Electronics Show (CES), FUTURELIGHT, a new breathable, waterproof material, was awarded the top honor in the Best Emerging Tech category in Digital Trends’ Top Tech of the CES Awards. Said Rendle, “Initial indications in the marketplace are promising that FUTURELIGHT will be one of the most dynamic textile innovations the outdoor industry has seen in years.”
Roe added that sell-through across all channels was strong for The North Face during the holiday season and inventory at retail “is in great shape.” Roe added, “Given our recent performance, 2019 product pipeline and initial order book visibility, we are confident that The North Face can sustain high single-digit growth as we head into fiscal 2020.”
In the VF officials implied that The North Face’s growth may moderate to that high single-digit rate in the fourth quarter with the the quarter benefiting from delivery shifts of product delayed from the second quarter and pulled-forward orders from the fourth but also said the brand has regained some heat.
Said Rendle, “What you’re seeing really is the result of two, three years of really intense work of cleaning up the marketplace, segmenting the customer base and now placing the appropriate products in each of their key retail partners, be it specialty to some of the large nationals. You’re seeing improvement in quality of products. So that is resulting in the velocity of sell-through that prompted that pull forward of the Q4 into Q3 giving you that distortion in the wholesale number. But we continue to be very confident in our D2C numbers. The results that we delivered this quarter are right in line with our expectations. We do see opportunities to improve and ideas there would be strengthening the retail environment, stronger merchandising, more focused big seasonal stories as the product offers continue to improve in the coming seasons.”
Timberland’s Diversification Strategy Supports Growth In North America
The Timberland brand grew 3 percent in the quarter, driven by high single-digit growth in North America and 17 percent growth from digital. In North America, Timberland’s diversification strategy helped deliver balanced growth across both classics and non-classics.
Timberland PRO also remained strong with 10 percent growth. The international business for Timberland was softer than expected, driven mainly by Europe due in part to unfavorable weather trends primarily impacting the Classics business.
In Asia, Timberland’s China business remained strong with more than 30 percent growth offset by weakness elsewhere in the region. Looking at fiscal 2020, VF expects low single-digit growth for Timberland.
Rendle admitted that VF is a “little bit behind” its goal to position Timberland to achieve mid single-digit growth that was projected at its Analyst Day. But he’s still confident that efforts to diversify the line to complement the Classics business and bring in more lifestyle, women’s and outerwear will pay off.
Rendle said, “We committed to North Face accelerating and following North Face acceleration would come Timberland. And we’re really seeing that work nicely. And with the Work vector that we’ve committed to delivering on its portion of our long-term growth, we really feel confident about the plan we’ve put forward and our ability to execute that.”
Active Leads Segment Gains
By segment, Outdoor revenues rose 10.7 percent to $1.61 billion and 12 percent on a currency-neutral basis. The division includes Altra, Icebreaker, Smartwool, The North Face and Timberland. Excluding the impact of the acquisition of Icebreaker and Altra, and the divestiture of Reef, sales grew 7 percent on a reported basis and 8 percent currency-neutral.
Operating profits in the Outdoor segment advanced 22.7 percent to $338.0 million and gained 24 percent on a currency-neutral basis.
In the Active segment, sales jumped 16.1 percent to $1.143 billion and gained 18 percent on a currency-neutral basis. The division includes Eagle Creek, Eastpak, JanSport, Kipling, Napapijri and Vans. Excluding the impact of divestiture of JanSport collegiate business in the fourth quarter of fiscal 2017, sales were up 18 percent on a reported basis and 20 percent on a currency-neutral basis.
Operating earnings in the Active segment climbed 37.2 percent to $272.9 million and vaulted 39 percent on a currency-neutral basis.
In the Work segment, sales increased 2.2 percent to $493.6 million and 3 percent on a currency-neutral basis. Brands in the division include Bulwark, Dickies, Horace Small, Kodiak, Red Kap, Terra, Walls, Workrite and VF Solutions. Excluding the divestiture of Van Moer, sales were up 5 percent on both a reported basis and currency-neutral basis.
Operating earnings in the Work segment improved 8.7 percent to $62.5 million and gained 9 percent on a currency-neutral basis.
In the Jeans segment, sales were up 5.0 percent to $657.9 million and sunk 3 percent on a currency neutral basis. Brands include Lee, Riders, Rock & Republic and Wrangler. Operating earnings declined 27.2 percent to $67.8 million and were down 29 percent on a currency-neutral basis.
Improving Gross Margins Boost Profit Gains
Companywide, net income reached $463.5 million, or $1.16 a share, against a loss of $90.3 million, or 23 cents, in the same period a year ago.
On an adjusted basis, EPS climbed 30 percent on a reported basis (up 31 percent in constant dollars) to $1.31, well above the consensus estimate of $1.10.
The adjusted results exclude transaction and deal related expenses associated with the acquisitions and integration of Williamson-Dickie, Icebreaker and Altra, and expenses and losses on sale related to the divestitures of Reef and the Van Moer business, which was acquired in connection with the Williamson-Dickie acquisition. Adjusted amounts also exclude costs associated with the relocations of VF’s global headquarters and certain brands to Denver that amounted to approximately $6 million in the third quarter and $17 million in the first nine months. Finally, adjusted earnings exclude provisional amounts recorded due to U.S. tax reform.
Gross margin in the quarter increased 40 basis points to 51.9 percent, driven by a mix-shift toward higher margin businesses. On an adjusted basis, gross margin increased 60 basis points to 52.2 percent.
Operating income on a reported basis was $592 million. On an adjusted basis, operating income increased 30 percent to $656 million, including a $7 million contribution from acquisitions net of divestitures. Operating margin on a reported basis increased 170 basis points to 15.0 percent. Adjusted operating margin increased 270 basis points to 16.6 percent. Adjusted operating margin, excluding acquisitions net of divestitures, increased 280 basis points to 16.8 percent.
Inventories were up 9 percent compared with the same period last year. Excluding the impact of acquisitions net of divestitures, inventories increased 7 percent.
According to the updated outlook:
- For the full year ended March 31, revenue is now expected to increase approximately 12 percent, or up 13 percent in constant dollars, to at least $13.8 billion. This compares to the previous expectation of at least $13.7 billion, which reflected an 11 percent increase.
- Revenue for Outdoor is now expected to increase 8 percent versus the previous expectation of a 7 percent to 8 percent increase; revenue for Active is now expected to increase 16 percent versus the previous expectation of a 14 percent to 15 percent increase; revenue for Work is now expected to increase 39 percent versus the previous expectation of a more than 35 percent increase; and, revenue for Jeans is now expected to decline 3 percent versus the previous expectation of a 1 percent to 2 percent decline.
- International revenue is now expected to increase 10 percent to 11 percent (up about 13 percent in constant dollars) versus the previous expectation of a 12 percent to 13 percent increase.
- D2C revenue is now expected to increase 13 percent (up 14 percent in constant dollars) versus the previous expectation of a 12 percent to 14 percent increase. Digital revenue is still expected to increase more than 30 percent.
- Adjusted gross margin is expected to be at least 51 percent, the same as before.
- Adjusted operating margin is expected to increase 90 basis points to 13.6 percent, up from , versus the previous expectation of 13.4 percent.
- Adjusted earnings per share is now expected to be $3.73, including an additional $45 million, or 9 cents per share, of incremental investment, reflecting an increase of 19 percent (up 20 percent in constant dollars). This compares to the previous expectation of $3.65.
- Cash flow from operations is still expected to approximate $1.8 billion.
In other matters, Roe said the government shutdown could delay its spinoff of Kontoor Brands, which was first announced last August. VF Corp was hoping to complete the spinoff in March, and it filed the paperwork with the Securities and Exchange Commission to do so in mid-December.
Rendle said the relocation of its Outdoor brands and corporate leadership teams to Denver will commence in June and should be completed by the end of the year
Rendle added, ”While it’s still early, approximately 90 percent of the brand and corporate leadership teams have committed to make the move so far. We’ll have a line of sight to the total employed population acceptance rate by the end of the quarter. The upfront planning, coupled with our early acceptance results gives us increasing confidence that this move will put us in a stronger position for the future.”
Rendle also discounted a rumor Thursday by an investor site that VF was in talks about acquiring Skechers. Said Rendle, “Obviously, M&A continues to be our number one choice of our capital allocation. And I think you all know us well and you’ve seen how we have been reshaping our portfolio to align with where we see our strengths in the larger consumer marketplace across Active, Outdoor and Work. I would encourage you to remember those facts. And when you read things in the news like that, you don’t necessarily always have to believe rumors.”
Image courtesy The North Face