VF Corp. reported second-quarter results generally in line with Wall Street targets but reduced its full-year outlook for the second time in a month.
The North Face’s momentum has been offset by the underperformance at Vans and consumer pullback during heightened promotional activity in North America.
“While consumer health remains relatively intact across most of our markets, we continue to see global trends result in more choiceful and cautious spending behavior,” said Steve Rendle, chairman, president and CEO, on a call with analysts. “In North America, we saw a mixed back-to-school result across product categories and, today, are seeing variable traffic patterns across channels and an elevating promotional environment in most markets.”
In China, progress has been slowed by rolling lockdowns, although TNF continues to outperform, noted Rendle. Outside of China, it has made further improvement in Asia, led by Japan and Korea, which remain highly influential in China, Rendle said.
In Europe, VF had “another quarter of strong growth across our portfolio of brands in Europe, despite a backdrop of deteriorating consumer confidence,” said Rendle.
VF reduced its EPS forecast for fiscal year ended March 31, 2023. It is expecting EPS in the range of $2.40 to $2.50, down from a previous outlook of $2.60 to $2.70 and against $3.18 in the prior year.
During its September 28 Investor Day meeting, VF reduced its EPS outlook to $2.60 to $2.70, down from $3.05 to $3.15. VF attributed the latest adjustment to the adverse impact of foreign currency fluctuations, heightened inventory levels and increased promotional activity in the marketplace.
“Despite this mixed macroeconomic picture, our portfolio of brands continues to deliver a broad-based performance, as consumers continue to prioritize their active lifestyles and lean on our brands to fulfill those needs, and the investments we’re driving into our key strategic growth capabilities and platforms continue to support the growth of our brands,” said Rendle.
In the second quarter ending October 1, sales grew 2 percent on a currency-neutral basis, down 3.7 percent on a reported basis, to $3.1 billion, in line with Wall Street’s estimate.
Net earnings showed a loss of $118.4 million, or 31 cents, against earnings of $464.1 million, or $1.18, a year ago. The latest period included charges tied to restructuring efforts, impairment at Supreme and a pension settlement.
On an adjusted basis, EPS was down 34 percent, down 27 percent in constant dollars, to 73 cents a share short of analysts’ consensus target of 74 cents.
Vans’ Currency-Neutral Revenues Decline 8 Percent
Vans’ revenue in the second quarter reached $952 million, down 13 percent on a reported basis and off 8 percent in constant dollars. Rendle said that the brand’s efforts to accelerate momentum “are still early,” and the lower sales were primarily a result of a disappointing back-to-school season in the Americas.
For the six months, Vans’ sales are now negative 6 percent in constant dollars and down 1 percent, excluding China.
Rendle said Vans recently created a new position, chief product and merchandising officer, and added a key leader from TNF to lead digital to help top-line growth regain traction.
Vans’ Progression footwear line, which currently represents 25 percent of brand sales, continues to see an uptick in demand with the UltraRange EXO, MTE Hi, showing strong initial sell-through.
VF brought back Kevin Bailey to lead Vans, overseeing a product revamp. Rendle said, “It will take some time for the product-facing initiatives to be introduced, and when they come, we are confident that they will have a positive impact on the brand’s results.
Traffic to Vans’ stores and digital platforms continues to be below historic levels, although conversion in-store remains in line with historical levels, and tests and learning in-store merchandising have shown improvement in stores and online. Rendle said on Vans, “Our focus in the second half is to prioritize initiatives that drive traffic into our direct channels where we have the opportunity to benefit from our strong conversion rates. I remain confident that we have the right people and the right strategy, and we’ll execute to deliver results at Vans.”
The North Face’s Currency-Neutral Revenues Jump 14 Percent
The North Face’s revenues reached $951 million in the second quarter, up 8 percent on a reported basis and ahead 14 percent in constant dollars. The gains reflect double-digit growth across all regions and channels, leading to the brand’s largest second quarter. Year-to-date growth on a currency-neutral basis is 21 percent.
“Product innovation remains at the forefront of the brand’s continued momentum with a good start to the season in outerwear, which showed strength in soft shelves, fleece and lightweight insulated jackets as consumers prepare for the coming fall/winter conditions,” said Rendle. “In addition to the good performance of outerwear, the continued focus on 365-day apparel in the Americas led to a double-digit growth in DTC for this region.”
In the quarter, bags and luggage saw strength globally with a recovery in summer travel and a strong back-to-school season. On the marketing front, XPLR Pass membership added more than 800,000 new members in Q2, surpassing 15 million members in total.
Rendle said of TNF, “Overall, the brand has strong and balanced momentum and is well-positioned to continue to generate long-term sustainable growth.”
Timberland’s Currency-Neutral Revenues Gain 3 Percent
Timberland’s revenues were $524 million, down 4 percent on a reported basis but ahead 3 percent in constant dollars. Rendle said Timberland’s quarter performance was impacted slightly by shipment timing. Sales for the first half were up 7 percent versus last year, running slightly ahead of its long-term plans.
Rendle said Timberland continues to benefit from a “sharpened focus,” including an integrated brand and product campaign, “Built for the Bold.” The GreenStride Turbo Hiker ranked as the number one fall 2022 style across all regions and channels, while a recent campaign to launch the Trailquest hiker in New York City and London drove 1 billion impressions.
Timberland has had success in the EMEA region, with sales up nearly 20 percent in the quarter and growth of over 50 percent in community membership.
The Timberland Pro workwear business returned to growth in the quarter. Said Rendle, “All and all, a solid quarter for Timberland with momentum as we head into Q3.”
Dickie’s Currency-Neutral Sales Drop 15 Percent
In its last “Big Four” brand, Dickie’s revenues were $186 million, down 19 percent on a reported basis and 15 percent on a currency-neutral basis. The decline was due to continued efforts to tightly manage inventory levels by Walmart, the brand’s largest wholesale customer, which impacted results by about 10 percent in the quarter. Rendle said, “Outside the value consumer, the brand is healthy.”
Strong growth continued in the EMEA region, driven by work lifestyle. The Icons business was up mid-single-digits in the Americas, with women’s a significant contributor. It has seen growth with partners in Japan, and Dickie’s is seeing a successful expansion in South Korea. Said Rendle, “Dickies continues to expand its appeal with new consumers in all regions while maintaining strong brand momentum, giving us confidence in our long-range plans for the brand.”
Outdoor Emerging Brands Expand 14 Percent In Constant Dollars
VF’s outdoor emerging brands—Altra, Smartwool, Icebreaker—in aggregate grew by 14 percent in the quarter, driven by continued “outstanding growth” at Altra, which achieved a double-digit growth rate in road and trail running and was up mid-teens in the Americas and triple-digits in the EMEA. Rendle said the brand’s performance had been fueled by continued success of the Loan Peak and launches of key styles, including Torin 6, Olympus 5, Outroad, and the Mont Blanc BOA.
Smartwool revenue in Q2 grew low double-digits, driven by apparel, up in the mid-20 percent range. Rendle said, “We saw continued momentum in base layers and the launch of intranet mid-layer collection.”
Icebreaker was up mid-single-digits, led by brick-and-mortar performance and the launch of Shell Plus, a 100 percent natural outer layer that’s earned multiple innovation awards.
Supreme’s revenues climbed 7 percent, with stores continuing to see robust foot traffic in all regions, especially in Japan. Said Rendle of Supreme, “The F/W season has had a good opening. We’ve dropped the new Yoji Yamamoda collection, Nike ACG release and launched the Andre 3000 Poster campaign.”
Momentum in its packs business—Jansport, Eastpak, Kipling—continued in Q2, with high-teens growth for the quarter, driven by strength in back-to-school and continued recovery in global travel trends.
Americas Region Sales Down 3 Percent
Revenue in the Americas was down 3 percent on a currency-neutral basis but up 3 percent, excluding Vans.
Matt Puckett, EVP and CFO, said the gains came against a difficult macro backdrop characterized by softer traffic in parts of its DTC network, higher inventory levels across the marketplace and an increasingly promotional environment. Its outdoor businesses continued to perform strong, led by TNF, growing low double-digits in the quarter and generating strong sell-outs across channels.
Vans’ was down 11 percent, impacted by lower back-to-school sales and increasingly cautious ordering by wholesale partners, leading to higher cancellations and lower traffic affecting direct channels.
Dickie’s was down 17 percent in the Americas, impacted by Walmart’s inventory focus.
EMEA Region Delivers 12 Percent Currency-Neutral Growth
In the EMEA region, sales were up 12 percent in the quarter and up 16 percent year-to-date, driven by broad-based growth across all brands and ten brands growing double-digits in the quarter.
Four of the five largest markets—France, Italy, Spain, and Germany—generated double-digit growth. Puckett said, “Both DTC and wholesale are up double-digits again, signaling the broad-based strength our brands are enjoying in the region. Within wholesale, the third-party digital business was softer, reflecting a more conservative approach to inventory and some cancellations amidst lower traffic.”
APAC Returns To Growth
In the APAC region, sales returned to growth, with revenue up 2 percent in constant dollars in Q2, in line with plans.
Greater China improved to down 10 percent in the quarter, in contrast to down 30 percent in Q1, but continues to be impacted by widespread rolling COVID lockdowns and restrictions and lower consumer spending.
The rest of Asia improved, growing 30 percent during the quarter.
Puckett said, “The outdoor segment continues to experience favorable tailwinds, and The North Face delivered yet another quarter of strong double-digit growth across the region highlighted by revenue growth of nearly 30 percent in the first half in Greater China.”
Gross Margins Decline
The earnings decline of 27 percent in constant dollars reflects an erosion in gross margins on an adjusted basis by 240 basis points to 51.5 percent. The decrease primarily reflects higher discounts, increased promotional activity and elevated inventory levels. Planned price increases offset higher product costs.
Adjusted operating margin reached 12.3 percent, down 440 basis points, reflecting lower gross margins and ongoing targeted investments.
Investments supported initiatives in the digital and technology space and marketing spend. SG&A was up 7 percent on a constant dollar basis in the quarter, still above but in line with the company’s 2023 full-year revenue growth outlook of 5 percent to 6 percent. Said Puckett, “We are continuing to maintain strict cost management against all controllable spend.”
Supply Chain Disruption
Puckett said investments in diversification, scale and agility have enabled VF to minimize disruption. He said, “We are still feeling the effects from the eight weeks of large-scale lockdowns in China during Q1, as the impacts work through the system. And, while much more stable, we continue to deal with ongoing micro lockdowns and the impact to operations in China during Q2.”
Transit times across the ocean and dwell times import are improving,
although still elevated versus pre-pandemic levels. VF anticipates it will move closer to normal lead times by fall 2023.
Inventory Levels Surge
Inventory levels are up 88 percent versus last year, including an increase of about $510 million in in-transit inventories related to a new supply chain financing program. The program results in VF taking inventory ownership at the point of shipping rather than at the destination. Excluding this factor, inventories are up 58 percent versus last year.
On an organic basis, excluding in-transit inventories and compared to the second quarter of fiscal 2020, which is a pre-pandemic comparison, gross inventories are up about 35 percent.
Puckett said roughly 75 percent of the increase versus last year was to right-size the inventory levels from unusually low levels and to support this year’s growth plans. The balance of the increase largely represents higher-than-planned levels of inventory at Vans and Dickies, primarily in core products.
Puckett said, “Actions are underway to mitigate this and ensure we are well-positioned at our fiscal year-end and, importantly, as we manage the overall health and inventory levels towards spring and summer of 2023. These include adjustments to forward purchases where possible, controlled sell-down of excess and distressed inventory and, in some cases, where the stock is largely replenishment plans to carry a higher level of inventory in the near term, such as in the case of core Dickies workwear product.”
Photo courtesy The North Face
