VF Corporation President and CEO Bracken Darrell opened the company’s fiscal third quarter conference call with analysts with news that company CFO Matt Puckett would be stepping down later this year as soon as his replacement can be hired. Both execs said the change was a mutual conversation about the right time to move on.
From there, the call moved into even more sobering topics, including a strategic review of the company’s brands, the company’s four near-term priories in the “Reinvent” transformation project, the recent cyber attack that could have affected over 35 million consumers, and the troubling trends seen in the fiscal third quarter ended December 31.
The CEO referenced the Reinvent transformation project, which prioritizes aggressively four key areas that were introduced on the company’s fiscal Q2 call, including:
- Fix the Americas
- Deliver the Vans Turnaround
- Lower the Company’s Cost Base
- Strengthen the Balance Sheet
“As part of the recently established Global Commercial Structure led by Martino [Scabbia Guerrini], the America’s regional platform is taking shape,” Darrell noted. “Every day this platform improves and changes have already resulted in giving management greater transparency on the business. They will take time to bring it up to the standard we have around the world.
Darrell said Q3 was a particularly disappointing quarter as total revenue fell 16 percent, or down 17 percent in constant-currency (CC) terms, to $3.0 billion, compared to down just 2 percent (-4 percent CC) in the fiscal 2024 second quarter. Still, a shift in deliveries from Q2 into Q3 in the prior year did benefit the second-quarter comps while dampening the upside for the third quarter. Results were said to be challenged across the brand portfolio, including The North Face and “the rest of the outdoor brands.”
Fix the Americas
The overall VF Corporation business was down 24 percent (-25 percent CC) in the Americas region in the third quarter.
“The big delta came down to five things,” explained Darrell. “Number one, unseasonably warm weather most of the quarter. The average temperature was 3 to 4 degrees higher than average in the northern hemisphere. Number two, a difficult comparison given the operational challenges we faced last year. As a reminder, last year we were late with deliveries leading to revenues that would have been recorded in the second quarter coming in the third quarter. We corrected these operational issues this year, which led to a tougher comparison. Number three, continued Americas underperformance. This was the last quarter operating without an Americas regional platform and we expect these changes to result in improved Americas results over time. Number four, we also made our results this quarter a little worse by cleaning up Vans as we reset our channels. And finally number five, there was some impact in the cyber incident as we closed the quarter.”
“We now have our new commercial organization in [the] Americas platform in place and are confident this will translate to improved results for the [Vans] brand and across the rest of our brands,” Darrel emphasized on the call.
He said that EMEA and APAC regions have consistently outperformed the U.S. business and Guerrini has imported the same key processes to the U.S. platform, including the areas of key account management, go-to-market execution, merchandise planning and forecasting.
“The overall discipline of one approach has been sorely missed in the U.S., Darrel said,.”The Americas team is expected to be fully in place and operational as we begin the next fiscal year.”
Deliver the Vans Turnaround
For the second focus item, Vans, Darrell and Puckett both spent a great deal of time outlining the key issues, discussing near-term solutions and long-term expectations.
“At Vans, the decline looked like it did last quarter by the numbers, but underneath there’s a lot changing,” said Darrell. “I’ve been spending more than half of my time with our team reviewing strategies, new products and marketing plans. Product and marketing are obviously every brand’s foundation.”
Vans was down 28 percent (-29 percent CC) to $668.2 million in the third quarter, inclusive of deliberate actions taken to right-size inventories in the Wholesale channel. The business was down in all three regions. The CEO said the trend was broadly in line with the first half when accounting for the intentional reset actions taken in the third quarter to clean up the marketplace and reposition the wholesale channel.
“These [actions] negatively impacted global revenue by about 5 points in Q3 and may have a further impact in Q4 as we complete the work,” Puckett added.
Darrell suggested that all brand turnarounds have certain features, including a clear brand purpose and a product plan that will eventually result in growth and marketing that weaves them together. He went on to talk about his take on what went wrong and a few steps that could start to make a difference.
“During the period from 2015 to 2020, the brand really took off,” he continued. “It got energized and accepted by new groups thanks to cultural trendmakers. More celebrities started to wear them. Moms bought them for their kids, and we actually took our eye off the core youth audience that had been the lifeblood of Vans. The brand had to evolve. But rather than continue to respect and serve the youth audience that had built the brand, we only fed the trend that grew it rapidly.
He said Vans largely withdrew marketing to the core youth and instead focused on everyone else when looking for one key point that has driven the brand down.
“We extended our line-up to lower price points and value stores, and we offered more and more color waves of the same old things to pour more fuel into a fire built on a trend. The trend fuel burned out 18 months ago. The trend moved on. When a brand loses its way, the answer starts at its foundation, its purpose and target audience,” he stressed.
Darrell said the company continues to see a strong performance from newer things in the Vans product portfolio, like the Knu Skool product, which is becoming a larger share of the business.
Darrell said they are resetting the marketplace in Q3 and Q4, changing the marketing and beginning to launch relevant new products in the coming seasons.
“Along with the work we are doing on brand purpose, product innovation and marketing, we’re resetting the marketplace to accelerate our progress now,” he explained.“This marketplace clean-up will integrate with products and marketing spun from the same storylines and that is a new approach relative to the past few years. I’m excited about what’s ahead.”
Matt Puckett said the turnaround work remains in progress at Vans. “During the quarter we took actions to reset the wholesale channel to ensure the brand’s market positioning and product assortments are aligned with the brand direction. The impact on revenue in the quarter was approximately $50 million,” he said.
In the conference call’s Q&A segment of the call, the execs talked about freshening the brand product at retail and suggested that they were removing slow-moving inventory from retailers to create open-to-buy for stronger product that were moving in the market.
“So we’re pulling that back out or they’re returning it, and then we’re opening up basically an open to buy for the product that is selling. So it’s really just cleaning out the channel,” Darrell responded when asked about the mechanics of refreshing the Vans brand at retail.
For more details on the Vans brand discussions on the conference call, go here or check out the article links at the end.
Lower the Company’s Cost Base
Darrell said the company is on track to deliver the $300 million fixed cost savings target which is entirely within their control.
“This quarter we began to simplify and right-size the company’s structure, real estate and other nonstrategic areas.”
Puckett said the company made progress in executing its cost savings program as they worked towards the gross target of $300 million and despite the difficult operating performance, made progress on the number one financial priority to reduce debt and leverage.
Puckett said the actions taken on Reinvent around streamlining the organization and optimizing cost structure have begun to bear fruit.
“In fiscal Q3, we booked approximately $50 million in charges, of which about $20 million were non-cash. These charges are included in our reported results, but excluded from adjusted operating earnings and earnings per share that I just reviewed,” he concluded.
Strengthen the Balance Sheet
Reducing debt and strengthening the balance sheet remains a top priority in the Reinvent program and Darrell said the company benefited during the quarter from the reduction of inventories and the recent reduction in the dividend.
“We’re already reducing the net debt substantially this quarter versus last year and that’s before we sell any assets, he said. “We’ve also identified non-core physical assets which will be monetized in the coming quarters and we’re activating a plan to pay down our next two rounds of debt without refinancing.”
As the next phase of the Reinvent transformation plan, the CEO talked briefly about the strategic review of the brand portfolio announced with the Q3 results, and in alignment with the Board of Directors. There was not much news in this area, but Darrell’s point was they have already started the process of reviewing how brands in the portfolio fit.
“This is the next natural step in our turnaround plan as we continue to execute on Reinvent. VF has a long history of growth and value creation through the evolution of our portfolio. We are objectively assessing what fits and what doesn’t as we look to reshape our business toward the greatest opportunities for near and long-term profitable growth and value creation,” he said.
“Looking ahead to the rest of the fiscal year, as we continue to implement actions and make instrumental changes across our business, we remain focused and committed to achieving our cash flow objective for fiscal 2024. VF eliminated revenue and profit guidance at the second quarter call, but Darrell said that are committed to cash flow and said they were on track to deliver,” Darrell said.
Pucket also said the company delivered an approximate $640 million reduction in net debt relative to the prior year.
“This better-than-planned result was largely attributable to lower working capital and strong execution by our teams to maximize free cash flow,” he explained. “As a result, we achieved a larger than anticipated reduction in inventories, sequentially down over $330 million relative to Q2 and down over $440 million or 17 percent at the end of the quarter, relevant to the prior year.”
He also said that as part of their priority to reduce debt and leverage, they continued to work hard to right-size inventories.
Puckett said that the Vans position at the end of the quarter was down almost 30 percent year-over-year compared to the overall VF Corporation decline of 17 percent year-over-year. He said they expect a further reduction in inventories in Q4 across the broader portfolio.
“Our ability to meet near-term inventory objectives reflects the agility in the supply chain, a return to more effective sales and operations planning, and improved collaboration across the business,” Puckett said.
Liquidity at the end of the quarter stood at $2.8 billion and net debt was $5.2 billion, down from $5.9 billion in the prior year.
“In addition to the cash generated from lower inventories and the previous reduction in the dividend, we have also continued an effort we began last year to monetize noncore physical assets across several areas,” the CFO continued. Notably, he said the work now includes the closure of the corporate aviation program.
“We’ve begun the marketing process and expect to dispose of these assets over the next few quarters,” he outlined. “To the extent the strategic review process results in the divestment of any brands, this would also support this objective. In summary, we’re encouraged by the progress we’re making on Reinvent. We have a lot more to accomplish, the impact of which will be increasingly visible in the coming quarters.”
Puckett said the non-core physical assets are largely related to the elimination of a corporate aviation program, but there are also a couple of buildings that are involved as well.
“It’s a meaningful number,” said the CFO. “I wouldn’t give you the exact number, but kind of north of $50 million and maybe pretty close to $100 million in the end, but so that’s kind of what you’re looking at. And that’ll likely play out over the next two to three quarters. I think we’ll be able to get most of that done.”
He said that a chunk of money would be helpful as it relates to the debt pay down and the objective is to not refinance two tranches of debt that are due this December and next April, but instead pay those off.
“To do that, we obviously need to sell the Packs business, and we’re continuing to work toward that,” he offered. The Packs business includes Jansport, Eastpak and Kipling. The company has been marketing the business for a year.
“We expanded or opened up the aperture from a marketing standpoint last quarter, and that’s been really good,” Puckett continued. “We’ve got a number of parties who are highly interested and engaging through kind of a round of bids and in the middle of pretty substantive due diligence as we speak, so good progress there as it relates to the underlying business.”
He said they are going to generate a reasonable amount of cash flow this year and they have confirmed the $600 million number.
“I’d suggest that next year will be a bit stronger than that as we kind of normalize and continue to drive down inventories,” he said.”
Cyber Incident
The CEO also briefly addressed the cyber incident the company experienced in December that is rumored to have affected over 35 million consumers.
“It obviously impacted us, but it could have been much worse,” was Darrell’s start of an explanation and resolution plan. “I’m super impressed by the quality of work done by our teams across the company. Rarely have I seen a company rally so quickly and so effectively to a cause. Great preparation beforehand, leadership and teamwork during and meticulous follow-through mitigated the impact. I don’t think it could have been handled much better and I’m really proud of the team. We’ve instituted a range of additional controls to de-risk the potential for any future incidents.”
Third Quarter
Taking a look at the fiscal third quarter in more detail, Puckett said they remained highly focused throughout the quarter on strengthening both their business fundamentals and the balance sheet. “At the same time, we are advancing our transformation program Reinvent with a sense of urgency and resolve to execute against and identify new and additional opportunities to reshape and improve VF,” he shared.
The CFO noted that while total third-quarter revenue was down 17 percent on a constant-currency basis, the majority of the decline came out of the wholesale side of the business. DTC was down 8 percent (-9 percent CC) to $1.79 billion in fiscal Q3, while wholesale fell 26 percent (-28 percent CC) to $1.17 billion for the period. Excluding Vans, the DTC business would only have declined 3 percent on a constant-currency basis.
DTC represented 60.3 percent of total global sales in the quarter, compared to 54.9 percent of total revenues in the prior year’s corresponding quarter.
Puckett said the quarter was impacted by the expected timing-related shifts in wholesale, where on-time deliveries this year benefited Q2 while impacting Q3 relative to the prior-year period. This reportedly had an overall impact of about 2.5 points on total revenue in the quarter and 5.5 percent variance across the global wholesale revenue.
“As Bracken mentioned earlier, we took proactive measures to accelerate the Vans turnaround by introducing several reset actions at the brand in Q3, which impacted total VF revenue about 1.5 percent in the quarter and may have a further impact into Q4,” Puckett explained. “These actions are largely focused on ensuring we have a clean marketplace with the right level of healthy inventory into which we can more effectively introduce upcoming newness while positioning our partners and Vans for overall better sell-through and profitability, as well as delivering a more compelling brand presentation to consumers.”
Puckett also said results were impacted by the cyber security incident in December, which briefly disrupted the company’s ability to fulfill orders over the pre-holiday period.
“We estimate the overall impact to Q3 revenue was less than 2 percent,” Puckett surmised. “From an EPS standpoint, the estimated impact was approximately 4 cents to 5 cents on the quarter.” He said it does not include any potential recovery from cyber insurance.
Regional Review
As reported above, the Americas region was down 25 percent on a constant-currency (CC) basis in the quarter. Puckett said they saw the most pressure in wholesale, which was down 35 percent CC for the quarter. DTC, which was down 16 percent CC, was said to reflect softer sell-through throughout the holidays, “particularly outside of promotional windows in addition to weaker sell-through in cold weather and seasonal products, particularly in the outdoor segment.”
EMEA was reportedly down 7 percent (-12 percent CC) to $912.3 million in the quarter. Excluding impact from the wholesale shipment timing, the decline would have been about 7 percent, Puckett estimated.”
“We are seeing slowing consumer confidence and greater caution continuing in the wholesale channel,” Puckett added. “DTC was down 1 percent but up slightly excluding Vans, with The North Face up mid-single-digits. Like the Americas, we also experienced a more challenged sell-through on cold weather seasonal products across Europe.”
The APAC region continues its growth path and was up 2 percent (+3 percent CC) to $461.6 million in the reported period.
“Aside from Vans and Dickies, all of our brands that operate in the [APAC] region were growing, led again by strength in The North Face. Also to note, VF revenue was up 7 percent in Greater China,” Puckett detailed.
Brand Review
Global revenue for The North Face revenue was down 10 percent (-11 percent CC) to $1.19 billion in the quarter and up 4 percent (+3 percent CC) to $2.86 million in the nine-month year-to-date period. Excluding the wholesale shipment timing shift, The North Face revenue would have reportedly been down in mid-single-digits. Darrell said management expected a weaker fiscal Q3 quarter for The North Face, but results were said to be “worse than expectations,” impacted largely by the Americas region.
“After a slow start to the fall/winter season, momentum remained subdued and performance was choppy throughout the quarter,” added Puckett. “While core bestselling lines continued to deliver strong sell-through, we saw softness in cold weather items and some seasonal product offerings.”
Darrell said the weather was a factor as temperatures were substantially warmer than normal throughout the quarter.
“Of note, in January, the weather got cold and The North Face returned to growth across all three regions. We believe our performance is strongly held back by the operating model that we’re now transitioning away from,” he noted.
Puckett said TNF remained “relatively stronger” in international markets. In the APAC region, momentum continued in the quarter, with the brand growing 26 percent (+28 percent CC) in the region and up 31 percent (+32 percent CC) in Greater China. In the EMEA region, revenue was down 5 percent CC in the quarter. However, Puckett also said DTC growth continued in the region and was up 6 percent CC for the quarter. Overall in EMEA, when looking across Q two and Q three combined to neutralize the impact of shipment timing across the quarters, the brand was up high single digits within the region.
Timberland was reportedly down 21 percent (-22 percent CC) to $473.0 million in Q3. Puckett said this was driven largely by the Americas region where “channel inventory and retailer caution remained a headwind and specific to the brand’s assortment, boots and other seasonal product have been challenged this season.” Internationally, the Timberland business reportedly “performed relatively better,” highlighted by low-single-digit growth in the APAC region.
Dickies results reportedly continued to be pressured with revenue down 16 percent (-17 percent CC) to $147.9 million in the quarter.
“The Americas region again experienced declines with softer sell-out trends in a core work business and specifically in the value-oriented distribution,” Puckett shared. “International markets were impacted by the results in Europe which were down as a result of wholesale timing shifts into Q2. However, the underlying business continues to be good, and the APAC market continued its reset.”
Supreme reportedly saw its positive momentum from the prior quarter continue with broad-based growth across regions and benefited from entry into Korea with the ongoing strong performance in the new store in this market that opened in August. Overall, strong sell-through across product categories led to improving profitability. It is the only brand mentioned with inventory growth as the company works to support the growth.
“Now I want to summarize what I see VF becoming over the next several years. We’re leveraging our strengths, world-class brands and great people while taking action to make VF leaner, faster and stronger through proactive measures. As I outlined last quarter, this will take time, but we’re making progress quickly and building on what we laid out just a few months ago,” Bracken Darrell said, wrapping up his comments.
“The ultimate outcome will be a leaner, more cohesive set of brands relentlessly focused on the consumer and will deliver industry-leading innovation in products and marketing, enabled by much more efficient operations. Design or perhaps a better word for it in this industry, for now, innovation will be at the center of our transformation agenda. Our commercial operations will run efficiently and effectively across all three regions. Each brand will have powerful capabilities to build innovative products consumers are hungry for with powerful marketing to tell their story.”
Income Statement
Gross margin was 55.1 percent of sales in Q3, up 20 basis points year-over-year; Adjusted gross margin was 55.3 percent, up 40 basis points YoY. Adjusted gross margin tailwinds of approximately 175 basis points from a favorable mix were partially offset by headwinds of approximately 135 basis points of unfavorable FX rate impact, largely driven by transactional foreign exchange rates.
Overall promotions were said to be “about flat” versus the prior-year quarter, reflecting the “continued elevated levels of promotional activity across our markets, our ongoing efforts to reduce inventory, in particular leveraging our own outlets, as well as the impact of the Vans marketplace reset actions,” Puckett shared.
Operating margin was negative 1.1 percent for the period, down 1,570 basis points YoY; Adjusted operating margin was 9.3 percent, down 560 basis points YoY for the quarter. Adjusted operating margin contraction was said to be driven by 610 basis points of deleverage, partially offset by 40 basis points of favorable constant-currency gross margin impact and 10 basis points of translational FX rate benefits.
Loss per share was 11 cents in Q3, compared to earnings per share $1.31 in the corresponding quarter in the prior year. Adjusted earnings per share were 57 cents in Q3 versus adjusted earnings per share $1.12 in the prior-year corresponding quarter.
Adjusted earnings per share were significantly lower than the expected 77 cents for the period. Revenue was also a miss, coming up short of the expected $3.24 billion for the period. VF did not offer guidance for the third quarter when the company reported the fiscal second quarter. Darrell appeared to have little faith in the company’s ability at the time to forecast achievable numbers.
Puckett said the company’s outlook on free cash flow for fiscal 2024 is unchanged and they expect to deliver about $600 million for the year.
“This is supported by the work we continue to do to reduce inventories, which we now expect to be down at least 10 percent at year-end. Reflecting the additional progress we’ve made and compared to previous guidance of down mid-to-high single digits. We anticipate liquidity to be approximately $2.3 billion at [fiscal] year-end and we continue to expect the second half gross margin for fiscal 2024 to be up relative to last year.”
While VF did not provide any additional guidance on the call for fiscal 2024 or fiscal 2025, Puckett did share that they expect impact from the following areas for the next several quarters:
- Vans turnaround actions as VF takes the steps necessary to reposition and reset the brand;
- Continued caution from wholesalers in key markets, translated to softer future order books globally, but with the greatest impact in the Americas; and
- The North Face wholesale channel, particularly in the U.S., is expected to remain challenged and finally a choppier Americas and European macro environment.
With respect to Reinvent and the actions underway, Pucket said they expect actual gross savings within fiscal 2024 to be at least $60 million, the majority of which is within SG&A and they continue to be on track to deliver the $300 million in annualized gross savings, with the vast majority of the savings in place on a forward run rate basis by the middle of next fiscal year.
“But keep in mind, in fiscal 2025, while we will benefit from the incremental impact from reinvent actions year-over-year, we will face headwinds from an expected increase in incentive compensation and a more normalized amount of inflation,” Puckett cautioned.
“Looking at all this from a cash perspective, we continue to anticipate the cash costs associated with Reinvent actions to be largely offset by net proceeds from the sale of non-core physical assets that I referenced earlier in my comments. This will play out over the next several quarters,” he offered.
“Finally, in closing, while our financial results in Q3 were challenged, I am pleased that we were able to expand gross margin, reduce inventories and generate strong cash flow. And importantly, we are reiterating our fiscal 2024 cash flow guidance despite the continued challenged earnings results. The actions we are implementing as part of Reinvent are substantial. We have moved from planning to execution across many initiatives, including our cost savings program, restructuring actions and operational improvements,” Puckett said.
“In addition, we’ve initiated a strategic review of the portfolio designed to ensure the brands within VF are aligned to both our strategic and financial objectives,” he concluded. “While the impacts are not visible in our financial results yet, I’m confident these actions reset the business and enable us to stabilize and then grow revenue, improve profitability and reduce debt and leverage, positioning VF to deliver shareholder value creation.”
Image courtesy VF Corp.
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For more details on Vans and The North Face, go here for more SGB Media coverage.
EXEC: VF Sees The North Face Fiscal Q3 Results “Worse than Expectations”
EXEC: Vans Falls 29 Percent in Q3; Inventory Down as Brand Helps Create OTB
