VF Corp’s profits and sales for the fiscal first quarter ended July 2 were largely in line with plan amid weakness in China and foreign currency headwinds. Highlights included double-digit gains for The North Face and Timberland. Steve Rendle, chairman, president and CEO, said VF’s premium brands have not yet felt the impact of macroeconomic pressures.
“Excluding China, consumer health is generally good across our markets,” said Rendle. “Although I won’t be the first person to point out that sentiment has softened, leading to changing behavior among consumers forced to be more choiceful and cautious in their spending in the near term, from our point of view, we see this being largely confined to the value end of the marketplace where VF has very little exposure. To date, we have seen a limited impact on the mid-to-higher end consumer where the majority of our brands are positioned in terms of demographic and distribution.”
He added that VF has “a greater number of high performing brands today than ever before” that are well-positioned in their segments and have untapped growth opportunities.
Rendle said, “We are working closely with our retail partners to drive sell-through and ensure our family of brands remains at the forefront of consumers’ minds. To our well-established strategic platforms and capabilities, we are mitigating headwinds faced across the marketplace and the persistent impact of COVID in China while reinforcing our competitive advantages.”
VF has maintained its currency-adjusted fiscal 2023 outlook while revising its earnings outlook on a reported dollar basis to reflect ongoing negative impacts from foreign currency fluctuations.
In the first quarter, revenue reached $2.3 billion, up 3.1 percent and just below Wall Street’s consensus estimate of $2.4 billion. On a currency-neutral basis, sales were up 7 percent and up low-double-digits, excluding China. Including the negative FX translational impact of nearly $100 million, sales were up 3 percent on a reported basis.
VF’s big four brands—Vans, The North Face, Timberland, and Dickies—grew 2 percent, up 6 percent in constant dollars, while the portfolio’s balance climbed 9 percent, up 16 percent in constant dollars.
VF reported a loss of $57 million, or 14 cents a share, in the period against a profit of $324.2 million, or 83 cents, a year ago.
Excluding charges related to a pension settlement, the Supreme acquisition and integration efforts, other restructuring activities, and the impact of the divestiture of its workwear business, adjusted EPS was 9 cents a share, down 68 percent from adjusted EPS of 27 cents a year ago and off 58 percent in constant dollars. VF incurred about 5 cents a share in non-controllable impacts relative to its plans, primarily driven by FX.
EPS at 9 cents on an adjusted basis was lower than Wall Street’s consensus estimate of 14 cents a share.
Gross margin reached 53.9 percent, down 260 basis points. On an adjusted basis, the gross margin was down 260 basis points to 54.1 percent. The decline, largely in line with plan, was driven primarily by mix, reflecting the evolution of channels and brands, which impacted margins by 160 basis points, and higher freight costs were only partially offset by price increases. Promotional activity remains low and in line with last year.
Operating margin was 2.8 percent, down 640 basis points on a reported basis, and 3.4 percent, down 340 basis points on an adjusted basis.
Vans Revenues Decline 4 Percent
Vans’ Q1 sales declined by 4 percent on a currency-neutral basis to $946.8 million. Excluding China, Vans sales were up 4 percent.
With the return of Kevin Bailey as president, Vans is making progress with its reset, said Rendle. In China, Vans opened its first owned store in Taiwan with successful collaborations. The brand sees “early signs of positive response” from ongoing efforts to rebuild its core classics. Vans’ Stranger Things collaboration was the second largest customized launch since its Harry Potter collaboration, and in-line product will launch in early September.
Finally, in the Americas DTC business, front-of-store merchandising updates and quick floor set changes optimize traffic and drive higher conversion.
“While our financial performance is not yet where we would like it to be, we are encouraged by the work underway to reignite momentum,” said Rendle. “The brand is healthy, which is evident when we launched innovative product, indicated with the recent global collaborations, all of which resonated with our consumers and generated high rates of sell-through. We continue to see strong growth in our Vans Family membership, where members have higher frequency and rates of spend. Overall, we are encouraged with the early progress made with actions underway and confident in long brands and long-term prospects to reignite growth.”
The North Face’s Sales Jump 37 Percent
The North Face continued its recent momentum with currency-neutral sales climbing 37 percent to $481.1 million, representing broad-based growth across regions and channels.
“Growth during the quarter was fueled by our 365 product initiatives, with warm weather apparel and accessories, as well as rainwear generating strong performances,” said Rendle. “Collaborations continue to drive brand heat, including the Members Only to Earth Day inspired collaboration which drove high digital sell-throughs in the U.S. and the EMEA. Our Return to Travel lines also performed well, including bags and luggage, and we saw early positive performance for our packs business for back-to-school.”
Rendle said The North Face’s marketing campaigns are “clearly resonating,” starting with its Full Circle Everest expedition that drew over five billion impressions. The North Face ranked number one in pre-sale revenue for the outdoor category during the 6.18 China shopping holiday. The brand’s Explore Past loyalty program that celebrated its first anniversary saw over 900,000 sign-ups, translating to 50 percent growth year-over-year.
Rendle also noted that Nicole Otto, formerly VP of Nike Direct North America, took over as the brand’s president at the start of June. He said, “She brings a deep understanding of the consumer engagement strategies in a wealth of industry experience. With a proven innovator and future-focused leader, she steps in at an opportune time with strong product pipelines positioning the team to drive our strategies further.”
Timberland Sales Climb 14 Percent
Timberland sales delivered another quarter of double-digit sales growth, up 14 percent on a currency-neutral basis to $269.5 million. Strong performances in the EMEA and the Asia-Pacific drove the gains.
Said Rendle, “We are sharpening our consumer focus and accelerating a launch culture to attract new consumers to the Timberland brand, and it’s paying off as we see success stories from the elevation of our iconic boat shoes globally with generation both to the creation of a footwear design and innovation experience inside Fortnight.”
Timberland’s growth was driven by men’s footwear, led by outdoor across lifestyle, hike, trekkers, and seasonal executions, including trail-ready sandals. Apparel was also strong, especially lightweight outerwear and logo keys, with apparel as a whole accounting for 20 percent of quarterly sales.
On Earth Day, Timberland introduced the Timberloop Trekker, its first footwear product that can be disassembled and recycled at the end of its life cycle. The Timberland Pro limited edition work boots, its first collaboration with Samuel Adams, sold out in one week.
Said Rendle, “Initiatives like these are key to connecting new and existing consumers from work to weekend. Across the board, we are excited about the trajectory of the Timberland brand and its opportunities for future growth.”
Dickie’s Sales Slide 13 Percent
Dickies sales were down 13 percent to $170.4 million on a currency-neutral basis, reflecting softer trends in the Americas value-end consumer in a more conservative inventory posture of the brand’s largest customer in the U.S. Excluding sales from the unnamed customer, revenue in the Americas and globally were up mid-single-digits in Q1.
In APAC, the lockdowns in China due to COVID impacted its Dickies business but saw positive growth across other regional markets. Dickies’ reset European business continued its strong performance with regional sales up 30 percent, driven by work lifestyle products.
“We are generating solid growth globally across icons, women’s and work lifestyle, while work wear has been soft reflecting a larger exposure to the value end,” said Rendle. “Exciting collaborations, such as with Supreme and New York Sunshine, are generating momentum and energy while enabling Dickies to broaden its distribution into Tier Zero accounts. The underlying performance of Dickies remains positive.”
Other Brands Climb 16 Percent
Other Brands’ sales rose 16 percent in the quarter on a currency-neutral basis to $393.9 million. The brands include Altra, Eastpak, Icebreaker, JanSport, Kipling, Napapijri, Smartwool, and Supreme.
Supreme was broadly flat and primarily in line with plans. Supreme’s European stores performed well and benefited from the openings in Berlin and Milan in the prior year, “where there continues to be a high level of energy and excitement for the brand,” said Rendle. The return of in-person consumer events at stores in Milan, New York and Paris have seen a positive response.
The outdoor emerging brands collectively grew 15 percent, driven by a 34 percent gain for Altra. Rendle said Altra continues to maintain its leading position in trail running shoes and is gaining traction in road shoes, including recently launching the Vanish Carbon speed model.
VF sees improving performance in its pack business with greater demand across the bag and travel category and with brands in the Americas and the EMEA during the first quarter. Rendle said, “Revenue was up more than 30 percent versus last year, a little ahead of schedule, driven by healthy order books, higher reorder rates and anticipation of back-to-school shipments where the season is off to a good start.”
Regional Performances Led By EMEA
By region, the EMEA was the strongest performer, with revenue up 24 percent on a currency-neutral basis to $594.6 million. All markets were up, driven by Italy and France, Matt Puckett, EVP and CFO, told analysts.
The North Face, Timberland, Smartwool, and Dickies had strong performances. Both DTC and wholesale grew double-digits.
Revenue in the Americas was up 7 percent on a currency-neutral basis to $1.39 billion. Puckett said the Americas’ performance “has overall been resilient considering the softer macro backdrop and subdued traffic levels in our DTC network.”
While the outdoor segment has been the key driver, Vans also generated growth, with regional revenue up 3 percent for the brand.
Puckett added, “The consumer remains solid at the higher end, but the value end has been more impacted, and we have seen certain retailers begin to take a more cautious approach to open to buy. However, we continue to see the strength of our brand’s position to take advantage of opportunities in the marketplace as they arise.”
The APAC region was down 15 percent on a currency-neutral basis to $281.9 million. Overall sales were down 37 percent in Mainland China due to the COVID lockdowns. Consumer spending post-lockdown has been soft to date, as expected. The outdoor segment continues to grow strong in China, with The North Face generating double-digit growth during Q1. Said Puckett of China, “Overall, the business has seen a progressive improvement throughout each month of the quarter.”
In the rest of Asia, VF’s business is recovering, with high-teens growth across markets.
By channel, wholesale grew 18 percent on a currency-neutral basis, while DTC was down 3 percent and digital declined 14 percent.
Inventories were up 92 percent compared with the same period last year, driven by an increase of in-transit inventory of approximately $550 million as VF modified terms with the majority of its suppliers to take ownership of inventory near the point of shipment rather than the destination.
On-hand inventory, excluding in-transit, was up about 50 percent, as planned. On a two-year organic basis, excluding in-transit, inventories were up 26 percent, partly reflecting last year’s unusually low levels.
Said Puckett, “We feel good about our inventory levels, although we are closely monitoring our own and channel inventories in light of the softer consumer environment, ensuring we maintain a controlled promotional strategy.”
The updated FY23 outlook calls for:
- Revenue to increase at least 7 percent in constant dollars, unchanged from the previous outlook;
- Adjusted gross margin to be up slightly versus the previous outlook of up approximately 50 basis points;
- Adjusted operating margin is approximately 13.2 percent versus the previous outlook of approximately 13.6 percent; and
- Adjusted EPS of $3.05 to $3.15, implying 4 percent to 7 percent growth versus the prior year on a constant dollar basis. Previous guidance called for EPS in the range of $3.30 to $3.40.
