In the Q&A portion of VF Corp.’s fourth-quarter conference call on Friday, analysts questioned management about the distribution challenges facing The North Face in the U.S., whether the profitability in its Outdoor & Action Sports Coalition was sustainable, and open-to-buy rates by retailers.
Regarding The North Face’s distribution in the U.S., Steven Rendle, VF Corp.’s CEO, stressed the company has no plans to expand to new retail partners to offset a number of bankruptcies over the last year, including Sports Authority.
“I think we’re well positioned today with where our brand is positioned, and yes, we’ve absorbed some pretty significant bankruptcies this last year,” said Rendle.
Overall, The North Face’s wholesale sales in the Americas region tumbled 30 percent in the fourth quarter due to the bankruptcies as well as a decision to keep the brand out of off-price channels. Officials had noted that warm weather in October and November caused a “slow start” to the holiday season and led to some inventory overhang and promotions.
Rendle did admit that some of The North Face’s weakness in the last year “is our own doing.” He added, “We, as we’ve looked ourselves in the mirror, do not think we’ve put the strongest product offer into the United States marketplace.”
The brand has refocused over the last six to eight months on four user occasions: Mountain Sports, its most technical gear; Mountain Culture, more of an outdoor lifestyle approach; Mountain Athletics, its training category; and Urban Exploration, which aims at the outdoorsy city resident.
The four classifications guide design as well as distribution strategies. Said Rendle, “These new specific business units that we have in place are adding greater clarity of focus and helping our design teams really bring the right product to life in each of those brand territories.”
Rendle added that across key brands, “probably more attention is being put into the right assortment, the right levels at the right times of the year, so really leveraging that retail discipline and becoming more retail centric looking at the quality of flow and the frequency of new delivery.”
But Rendle also indicated The North Face overall last year was also hurt early on by the significant amount of excess inventories coming out of the 2015 holiday season that was compounded by the liquidations. He said the heightened inventory levels “had a really big impact on the marketplace and the ability to represent new goods with so much last year’s product in the marketplace.”
He added, “That is exactly why we made the decision to pull back on the move of excess inventory at the expense of revenue and earnings, because we think it’s very important that as a leader we do our part to have a clean marketplace for ourselves.”
Encouragingly, Rendle added that while retailers are continuing to order conservatively, the overall industry is seeing “a much cleaner marketplace in that outdoor segment” that should support higher-margin sales and open-to-buy opportunities in 2017.
“We have a history of really understanding how to supply the market at a proper level,” said Rendle. “Those disciplines are back in a very strong and important way. And I think as we manage our own house effectively, we think that will really help us access that open-to-buy that we’re deserving of and working with our partners, driving our sell-through and gross margin contribution to their business.”
Overall, he said, The North Face plans to use a strategy similar to the one its European business tapped to drive a U.S. rebound after that region incurred some slower growth. With a focus on market segmentation, product quality, new product and “really strong go-to-market disciplines,” Europe is now seeing a high-teen growth rate with The North Face.
Added Rendle, “That template is being picked up and brought to our U.S. business, and I think this is where our strength’s really come to bear. We’ll be able to move quickly to get these changes in place and get that elevated level of product that certainly we’ve been used to and the marketplace expects back here in the U.S. market.”
Asked about profitability in the Outdoor & Action Sports coalition, Rendle added the profitability rate at Outdoor & Action Sports is “absolutely sustainable” despite the challenges at The North Face in the U.S. and disruption at retail.
“That starts, first and foremost, with the quality of the products and the gross margin that we’re able to obtain through just a year-over-year improvement of the products we offer and the pricing that we look to, to drive that gross margin,” said Rendle. The coalition will continue to invest in key areas, including product, design, marketing and digital, to support growth while leveraging back-end functions across the VF platform.
He added, “And when you think about the power of a Vans business with its D2C footprint, The North Face with its D2C and digital platform, and Timberland really emerging and seeing better and better D2C improvement, that also gives us great confidence that that operating margin, profitability model is sustainable.”
Overall, revenue in 2017 for the Outdoor & Action Sports coalition is expected to increase at a low-single-digit percentage rate (up at a mid-single-digit rate currency neutral). For The North Face, revenue is expected to expand in the mid-single-digit range, up mid-teens in Europe, and a mid-single-digit increase in the Americas and Asia.
Vans, which surpassed The North Face to become VF’s largest brand in 2016, is expected to increase sales in 2017 at a low-double-digit rate, driven by a high-single-digit increase in both the Americas and Europe, and up high teens in Asia.
For 2017, Timberland is expected to grow in the low-single-digit range, with mid-single-digit growth in Europe and Asia and modest growth in the Americas.
Companywide revenue is expected to increase at a low-single-digit percentage rate, including about a two percentage point negative impact from changes in foreign currency. Growth is expected to be stronger on a currency-neutral basis in the second half of the year, in part due to easier comparisons but also the benefit of repositioning efforts.
Photo courtesy The North Face
