Newly minted VF Corp. President and CEO Bracken Darrell marked his first 100 days in the role by hosting his first quarterly conference call with analysts to discuss the company’s fiscal second-quarter results, the issues surrounding the business, the plan to address those issues, the future of the brands under the VF umbrella and the people that the company needs to drive change. When Darrell finished the call, the second quarter seemed like a distant memory.

“There is a universal desire for VF to be successful again,” Darrell said in his opening prepared comments on the call. “It’s been exciting to hear the power of our brands and appreciate the consistent performances of our international business as well as The North Face, and it was also important for me to hear firsthand where the biggest issues are, including in the U.S. and Vans.

“I’ve come to many conclusions about the organization, business and opportunities we have,” he continued. “Most importantly, I’ve gained conviction about what we need to do next and have begun to see how we could evolve the company longer-term into a new brand builder and innovator. I’ll save that last part for another day.

“Before I go into our plans, I want to mention that I’m struck by the parallels between VF and my former company when I started there 11 years ago,” he explained. “It, too, required a turnaround. Turnarounds have many consistent features and similar themes that are always key focus areas at the beginning that evolve over time. The seriousness of the situation gives you a sense of urgency and a desire to move quickly on key steps.

“Our biggest business is declining,” he said. “The U.S. isn’t working well. The innovation engine has historically been strong but has drifted downward over the past few years. Employees still love the brands and business. But the morale has been hurt by the poor performance and costs are too high. All of those were features of my last turnaround.

“My first turnaround long ago was the Old Spice brand at P&G,” Darrell shared. “Similarly, sales were falling, profit was down, costs were too high for the business, and the innovation engine and marketing weren’t working. By the time I left Old Spice, we had more than tripled our market share, and today, it’s a market-share leader in the category. 

“My last turnaround Logitech is now worth more than ten times what it was when I started there 11 years ago. While no two turnarounds are the same. I’ve been here before, and I feel quite at home. I’ve not encountered any big surprises.

“These are the four key areas we’re prioritizing aggressively,” he outlined. “I will go into some of the specific actions we’re taking to address them next. The four key areas are fix the U.S., deliver the Vans’ turnaround, lower our cost base, and strengthen our balance sheet.”

Darrell went on to summarize the four key areas of focus. First, and perhaps the most critical, based on the recent numbers, is to fix the U.S. business.

“First, we’re establishing a global commercial organization, inclusive of an Americas region,” the CEO shared.

From an execution standpoint, he said having an engine with a fast transfer of best practices and ensuring that as things work, they get transferred throughout the company and the different parts of the world were absolutely critical in his view.

“We don’t have that in North America, and our results show it. However, we do have an aim here, and we recently successfully transferred that model to APAC, which is also operating well,” Darrell said. “To ensure we’re executing consistently across the globe in terms of supply-chain management, relationships with wholesale customers, customer service, and more, we are changing our operating model and creating a global commercial organization led by our Chief Commercial Officer (CCO), who will lead the day-to-day execution of the business around the world and bring execution excellence back to North America.”

Darrell shared that Martino Scabbia Guerrini was appointed CCO to lead the combined platform across North America, the EMEA and APAC and reports directly to him. He said Martino has been highly effective in building a platform for the EMEA that has “delivered sustained growth in revenue and operating income for many years,” a platform that Darrell said has delivered superior growth in all the VF brands and a winning spirit that’s palpable when you meet the people in the EMEA.

“A second step we’re taking is to sharpen brand presence focused on sustainable long-term growth and brand health,” Darrell continued.

He said a direct consequence and intent of the operating model change, which is critical at this stage for all the brands, but especially Vans, is the new structure that enables brand presence to focus on what matters most.

“Getting closer to the customer and creating a consistent pipeline of amazing products and creating excitement around our brands,” Darrell explained. “If you think about it, we do two things for the world. We create products that people choose to wear, and we build brands that operate like clubs that consumers want to be part of. Those two things are critical to the success of any brand in our business. And that’s where our brand presence will focus.”

The CEO went deeper into the issues with Vans, putting the focus on the leadership of the brand and announced that the company is making a change in the brand president position.

“Trends today for Vans aren’t getting any better. And could even be viewed as getting worse,” Darrell said. “We will not see a turnaround this year. The good news is that the brand continues to be loved by so many consumers. There are many good steps that we’ve made, but we now have to make some changes and move faster.”

With that introduction, he said Kevin Bailey is stepping down as global brand president at Vans but will remain on the executive leadership team, reporting to Darrell, and will have a leadership role in the announced Reinvent initiative.

“His long history at VF as brand president and regional president helping build the APAC platform will be valuable as we build a more effective and efficient organization in the months ahead,” he said, providing a soft landing for the Vans brand leader who came back to the brand in March of last year to attempt a turnaround similar to what Steve Murray had achieved with The North Face. There was much hope and energy around Bailey’s appointment to lead the Vans brand again in 2022 after the brand grew from $800 million to $2.3 billion during his previous stint as brand president from 2009 to 2016 (read SGB Media‘s coverage here).

“I’d like to thank Kevin for stepping back into this role about 18 months ago,” Darrell offered. “He’s been a loyal and wise leader for this company for many years.”

Darrell said an external search is underway for a new brand president of Vans, and said he would take an active role in delivering the turnaround strategies at the brand in the interim.

Lastly, Darrell said the company would optimize cost structure to improve operating efficiency, profitability and effectiveness.

“I’ve never seen a turnaround situation that didn’t need addressing cost structure,” he said. “We’re committing to $300 million of cost reductions across the business.

“This program is comprehensive and will touch almost everything. But importantly, we will invest back a portion of our savings in brand-building and product innovation as we organize to return to growth and, at the same time, improve profitability.”

He continued to say that addressing the cost base is an important factor in making progress on the critical financial priority of deleveraging the balance sheet, bringing down the debt and reducing leverage.

“This is our top financial priority, to strengthen the balance sheet,” Darrell committed to the analysts. “Bringing down debt levels and deleveraging are important for shareholders. And today as a consequence, the dividend reduction we have announced is one step towards achieving this objective, but there will be more.”

The company announced a 7 percent decrease in the quarterly dividend to 9 cents a share.

Darrell also said the company would not engage in any acquisitions until it brought its debt level down.

“I want to underscore our full commitment to creating and maximizing value for all our shareholders,” he said to his audience. “To bring down our debt levels and improve our operations, the board and I are fully aligned, and everything is on the table and there are no sacred cows.”

The new CEO then delivered what may be one of the more honest moments for any corporate CEO, admitting to Wall Street that things will not get better anytime soon, and then played his honeymoon phase card.

“The headline here is that we’re not guiding revenue and profit for the remainder of the year,” Darrel shared. “We are providing an update on free cash flow and projected liquidity levels at year-end, which remain more than ample under a wide range of scenarios.” So why remove guidance? he asked.

“As a new CEO, I want to hit our numbers,” he explained. “At the end of the day, the first numbers I’m going to give you, we will hit. There are a lot of moving pieces in our business and in the market and we’re moving even more as a function of our Reinvent program.”

He added, “To conclude, this is a turnaround. I’ve been here before, so I know what it takes. We have a strong foundation, world-class brands and great people, and we’re taking aggressive action as we started to announce today; this will lead the way to a new future for VF and one in which the company will be leaner, faster and stronger. While it will take time for the initiatives we’re implementing to take full effect, we expect to make progress quickly, and we will build on that in the quarters to come.”

Turning to the numbers from the fiscal second quarter ended September 30, company CFO Matt Puckett ran through the details and outlined brand and regional highlights. Puckett said the second quarter remained weak overall as bright spots in The North Face and International markets continue to be outweighed by declines in Vans and in the company’s Americas business.

“That said, we delivered on our commitment to reduce inventory versus last year and paid down $850 million term debt in September, ending the quarter with liquidity of $1.7 billion and net leverage of 4.5 times, slightly ahead of our plans mid-year,” Puckett explained.

Consolidated revenue was $3.03 billion in the fiscal second quarter, down 2 percent, or down 4 percent in constant-currency (cc) terms, with the big four brands (TNF, Vans, Timberland, and Dickies) down 3 percent (-5 percent cc) and the balance of the portfolio up 6 percent (+4 percent cc).

“As indicated last quarter, Q2 revenue benefited from a change in shipment timing, particularly at The North Face and, importantly, we have delivered more consistently on time this year and are lapping late deliveries from last year that fell into Q3,” the CFO explained. “Normalizing for this change in shipment timing which benefited the quarter by a couple of points, overall, Q2 momentum had a relatively similar trajectory to Q1.”

Consolidated wholesale revenues were down 1 percent (-3 percent cc), primarily driven by the Americas, which was down 11 percent in the quarter.

Consolidated direct-to-consumer (DTC) revenues were down 3 percent (-5 percent in constant dollars) but grew 10 percent (+9 percent cc) when excluding the Vans DTC business.

Regional Highlights
The Americas region was down 11 percent in the quarter to $1.57 billion, and down 3 percent when excluding Vans. Puckett said results in the region continued to be pressured by wholesale, as expected. DTC reportedly saw an outsized impact from the Vans underperformance in the quarter. Excluding Vans, the Americas DTC business was reportedly up 5 percent in the quarter, with all brands except Vans and Timberland recording positive performances.

The International business was up 10 percent (+5 percent cc) to $1.66 billion.

The EMEA business was up 14 percent (+6 percent cc) to $1.06 billion in Q2, reflecting growth across all channels and delivering the first $1 billion quarter in the company’s history, perhaps a reflection of the work done by Martino Scabbia Guerrini that promoted Darrell to promote him to CCO.

EMEA wholesale was up 7 percent in Q2, also reflecting some of the delivery timing benefits highlighted, while DTC was up 3 percent led by The North Face, which the company reported to be up in the low teens.

Greater China was up 8 percent (+14 percent cc), driving the APAC region up 2 percent (+6 percent cc). Brick-and-mortar stores rose double-digits, driven by increasing traffic and average unit retail. While the consumer continues to be impacted by the economic environment in China, Puckett said The North Face had another outstanding quarter of nearly 50 percent growth in Greater China across channels.

Brand Highlights
The North Face revenue was $1.13 billion for the period, up 19 percent (+17 percent cc), benefiting from on-time deliveries, which negatively impacted the prior year period due to the supply chain disruption. Puckett said the brand was up high-single-digits on a normalized basis excluding the change in shipment timing.

Puckett said The North Face DTC business was also strong, up 12 percent in the quarter.

“This compares to a run rate of a little over 20 percent for the first five months of the fiscal year,” he said. “However, a later than typical start to the fall season, particularly in insulated outerwear, weighed on September results, which were plus 2 percent. Globally and across channels, we saw strong performances in bags and packs supporting a robust back-to-school season.”

Vans, on the other hand, saw revenue fall 21 percent (-23 percent cc) to $748.1 million. Puckett said slow sell-through rates continued to pressure wholesale across all regions, while traffic remained challenged and weighed on DTC.

“Newness and innovation continued to outperform in silhouettes, like the Knu Skool, Lowland, UltraRange and MTE, which all saw strong growth during the quarter though the volumes in these stalls continued to have limited impact in offsetting the declines in classic products,” the CFO shared.

Timberland revenues declined 7 percent in reported terms (-10 percent cc) to $488.6 million as growth in both EMEA and APAC was more than offset by softness in the Americas wholesale business.

“Results were affected by demand softness for six-inch boots, which negatively impacted both the wholesale order book conversion and DTC,” Puckett detailed. “Outdoor and women’s continued to perform well as the Motion 6 trail and hiking collection became the brand’s No.2 collection globally, and success in women’s sandals from spring paved the way for new fall boots.”

Dickies sales decreased 8 percent (-9 percent cc) to $171.4 million in the quarter. The CFO said the brand continued to feel pressure from the value and consumers in the core work business.

“Increased caution from key partners has continued to weigh on results,” Puckett said.

The Other Brands business grew 6 percent (+4 percent cc) to $496.6 million.

Puckett called out the Supreme business, the streetwear brand VF acquired in December 2020 (read SGB Media’s coverage here). Some analysts have called out the acquisition as a source of much of the pain currently the company is experiencing, due to the steep $2.1 billion price tag and the debt the company took on to fund the transaction using some proceeds from senior notes it issued in April of 2020, along with commercial paper borrowings.

S&P noted at the time (read SGB Media’s coverage here) when it downgraded the company’s issue-level ratings on VF’s unsecured debt that its leverage was elevated because of the EBITDA decline related to the COVID-19 pandemic fallout. S&P expected the acquisition to increase VF’s leverage and extend the timeline to reduce back to pre-pandemic leverage.

Puckett said Supreme had its strongest start to a season in Q2 in a couple of years with double-digit revenue growth in the quarter. 

The August opening of Supreme’s new store in Seoul was said to be off to “a terrific start and has delivered impressive results across a number of metrics,” which Puckett said was a strong proof point on the road map of the brand’s growth strategy, aimed at expanding access to the brand to more consumers globally.

Income Statement
Gross margin was 51.3 percent of sales in Q2, down 10 basis points from the year-ago period. Adjusted gross margin 51.3 percent for the period, down 20 basis points due primarily to headwinds of 50 basis points of unfavorable rate impact, as margin expansion from price and lower promotions, which has improved versus last year, but remains higher than fiscal 2022, was more than offset by increased product cost and negative transactional currency impacts. This negative impact was said to be partially offset by tailwinds of 20 basis points from a favorable mix and 10 basis points of foreign currency exchange rate benefits.

Still, excluding the impact of additional inventory reserves in Dickies, it would have been up 30 basis points. Tailwinds from mix, price and lower promotions were more than offset by product cost and FX headwinds.

The positive favorable mix of up 20 basis points in the quarter was said to be driven primarily by international growth but was a lower-than-anticipated benefit as DTC slowed due to the challenges at Vans.

Puckett said the company booked an unplanned $15 million distressed inventory reserve during the quarter associated with Dickies, which flows through the cost line and negatively impacted gross margin by about 0.5 points.

SG&A spend in the quarter was down 1 percent year-over-year as the company maintained tight cost discipline and began to generate modest benefits associated with Reinvent but saw some deleverage in digital and technology and distribution expenses.

Operating margin was 12.0 percent in Q2, up 1,490 basis points, and adjusted operating margin of 12.0 percent was down 30 basis points for the period. Adjusted operating margin contraction was driven by 30 basis points of unfavorable constant currency gross margin impact and 30 basis points of deleverage, partially offset by 30 basis points of foreign currency exchange rate benefits.

The company posted a $1.16 loss per share in Q2 versus a 31 cents loss per share in Q2 last year, impacted by the additional tax expense booked due to the Timberland tax case ruling. Adjusted earnings per share were 63 cents versus adjusted EPS of 73 cents in the year-ago period.

Puckett explained the reported tax expense in Q2. On September 8, he said the Appeals Court ruled in favor of the IRS in a Timberland tax case regarding the timing of income inclusion from the Timberland acquisition in 2011.

“We’re disappointed with the outcome and still believe in the technical merits of our case. This decision has no impact on our cash debt outlook for fiscal 2024 as the payment was made last year. But we recognized a noncash $690 million net increase to our reported tax expense in Q2 which includes anticipated refunds of some tax payments from prior years,” he said. “The process of filing amended returns for each tax year across both federal and multiple state jurisdictions will take time and we’re not assuming any benefits to cash over the next 18 months from these refunds.”

Balance Sheet
Consolidated inventories were down 10 percent, or down $269 million, during the quarter compared to quarter-end last year.

“This [inventory] result, despite ongoing revenue challenges speaks to the improved performance of our supply chain and the important results our teams are accomplishing to improve operational metrics and benefit cash flow,” Puckett said. “Our inventory composition remains healthy overall and is concentrated in core and carryover product.”

Puckett said the use of cash during the first half was slightly better than planned, driven by lower working capital, with $19 million used by operations and a negative free cash flow of $158 million.

“As a result, liquidity sits at $1.7 billion, which is again better than our plans at this point in the year,” the CFO said. “As it relates to debt, we paid down $850 million term debt in September and ended the quarter with a commercial paper balance of $1 billion. Midway through the fiscal year and at our seasonal peak levels of working capital, total debt is up modestly versus the beginning of the year.”

Project Reinvent
Reinvent, the newly announced transformation program is expected to address fundamental structural challenges that have impacted the company’s performance and tackle cost structure head-on. The company expects to generate $300 million in fixed cost reductions.

“We’ll streamline operations in line with the changes to the operating model that Bracken discussed to generate efficiencies and create a faster and leaner organization company-wide,” Puckett said.

He continued to say that the company would further reduce costs in non-strategic areas, ensuring the overall cost structure is balanced to the business and he pointed toward the biggest opportunities, including reinvesting a portion of the savings directly toward brand building and product innovation, first and foremost, against the company’s largest brand assets.

“We expect to achieve the vast majority of the $300 million target on a forward run rate basis by the middle of the next fiscal year,” Puckett shared. “We’d anticipate about half on a run rate perspective will be in place by the beginning of fiscal 2025 as a portion will, in fact, be achieved in fiscal 2024.”

Puckett said the decision to retract revenue and profit guidance centers mainly on four key changes to the company’s assumptions.

“First, the timing of the Vans’ turnaround is taking longer than we thought,” he began. “And specifically, we are now no longer expecting any discernible improvement in half two results relative to half one. Through today’s announced actions, we are addressing with urgency, the work needed to stabilize the business. Bracken and I plan to share our expectations with the market on the timing of the turnaround when we see a tangible impact from the initiatives underway.

“Second, the North America business, primarily U.S. wholesale is now anticipated to be modestly weaker versus our prior expectations as we look to the back half of the year. And although much less impactful, we now see a choppier macro environment in Europe.

“Lastly, there will be cross currents from Reinvent as we remove costs, change the organization structure and re-engineer the Americas for growth; this will create noise in the P&L in the short term,” he said.

Puckett continued to say that in addition to the changes he highlighted, most notably Vans, which will directly impact Q3, it’s worth reminding everyone of the importance of looking at Q2 and Q3 combined to get a more comparable reading of the seasons.

“This is particularly true for The North Face, which is comping bigger distortion from last year’s late shipment timing and subsequent benefit in Q3 last year and will, therefore, be negatively impacted in Q3 this year,” he said. Puckett went further and suggested the third quarter’s wholesale result for the TNF brand will also be impacted by the lower overall order book for the season, as planned, reflecting greater retailer caution, the retailers focused efforts to reduce inventories and VF’s poor service to customers last year, which he said they have been working hard to correct.

“While we expect the DTC business to continue to deliver healthy growth in Q3, taking it all together, we anticipate global North Face revenue to decline in the third quarter,” he forecasted. “Stepping back from the near-term impacts and optics I’ve just explained, we continue to feel very good about the underlying consumer demand for the brand to broad-based performance across product categories and geographies and the significant growth opportunity that lies ahead for the brand.”

Puckett said they also continue to focus on reducing inventory and now expect to end the year down mid- to high-single-digits compared to previous guidance of at least down 10 percent, “reflecting the more challenged Vans and U.S. wholesale outlook.”

Fiscal 2024 free cash flow is now expected to be approximately $600 million, a decrease from previous guidance of approximately $900 million, “flowing through the more muted operating results.”

“We now anticipate liquidity of about $2.2 billion by the end of the fiscal year,” Puckett added. “Deleveraging the balance sheet remains our top financial priority. We plan to end the year with leverage slightly higher than last year, given the anticipated impacts to half two revenue and profit.”

He said the company continues to be laser-focused on addressing both the numerator and the denominator moving forward and is taking the necessary steps to impact both, including the $300 million in annualized cost reduction through Reinvent and the reduction to the dividend, which on an annualized basis is approximately $325 million in cash savings.

The CFO also offered an update on the divesture of the company’s Packs business, which includes Jansport, Eastpak and Kipling (read SGB Media’s coverage here). He said all three brands continue to perform strongly, and they believe it positions VF well as they progress the sales process.

“In summary, we’re taking the necessary actions to reset the business and strengthen the balance sheet. Our transformation plan Reinvent directly addresses our biggest performance issues, Vans in the U.S. and importantly, commits to lowering our cost structure by $300 million. We will make progress toward our number one financial priority of lowering our debt and leverage from these actions, along with the reduction in the dividend as we set the stage for a return to growth and increased ROIC. We look forward to updating you in coming quarters on our ongoing progress,” Puckett concluded.

Photo courtesy of Vans