By Eric Smith
VF Corp.’s quarterly report had the familiar refrains of other public companies amid the coronavirus pandemic—declining revenue, net income and EPS, plus a clouded vision of what the coming months will bring as the economy slowly reopens.
But for all the similarities that VF shares with other players in the active-lifestyle space as COVID-19 decimates brands and retailers alike, the $10 billion parent of Vans, The North Face, Timberland, Dickies and others clearly has some built-in advantages when it comes to handling this crisis.
From a diverse portfolio to ample liquidity to respected leadership, VF is sitting about as pretty as anyone in this mess.
“VF, with the strong, strong history that we have, is absolutely built for and prepared to navigate the times that we are in today,” Steve Rendle, VF’s chairman, president and CEO, told analysts on Friday morning’s earnings call. “The strengths that we have both in operation and financial discipline that have guided us in our over-120 year history have put us in a very strong position to manage the foundational elements of our business.”
That strong position, though forged over its 121-year history, can be traced more recently to the company’s last two Investor Days—the 2017 event in Boston, MA, and the September 2019 event in Beaver Creek, CO.
At each Investor Day, VF outlined the roadmap it would use to navigate today’s ever-changing landscape. And while things have changed even more dramatically in the last two months, the moves that VF has undertaken—including a rightsizing of its portfolio, a clear emphasis on consumer demands and a shift toward digital—more than prepared the company for the new normal now being formed.
“Our iconic brands and the reshaping of our portfolio that we’ve taken over the last three years put us in a very strong position to connect with consumers in these evolving consumer and market trends,” Rendle said. “Our investments over the past two years to transform to be a more consumer-minded, retail-centric, hyper-digital enterprise, and our deep, deep commitment to elevating our DTC digital and consumer engagement through our data platforms, are all proof points that the strategy we’ve been working on and the actions we’ve been taking position us extremely well to navigate and accelerate on the other side of this crisis.”
As Rendle outlined last September in Beaver Creek, VF has committed to the lofty ambitions of its then-new tagline: “purpose-led and performance-driven.”
VF’s purpose involves increasing equity and diversity in the VF workforce, building more sustainable supply chains and fighting to protect public lands. And the performance is centered on such goals as continually innovating design while also enhancing analytics capabilities to meet consumers’ evolving demands—not only for what products they want but also where and when they purchase, which will include a heightened focus on digital.
“We look at our business through the lens of the consumer,” Rendle said last year. “We’re unlocking the creative potential of our brand. We’re elevating our ability to design merchandise with highly compelling product assortments and unlocking our ability to create powerful brand experiences that draw consumers in. We’re evolving our ability to place the right product in front of the right person at the right time.”
While that evolution has boded well for VF amid the coronavirus, it doesn’t mean the company is entirely evading pain along the way. And its fiscal fourth quarter ended March 31 showed some of the chinks in its armor, which VF’s CFO Scott Roe outlined on Friday’s call.
VF went into Q4 on a roll, having achieved 9 percent organic revenue growth and 19 percent organic earnings growth during the first three quarters of fiscal 2020. Then came fallout in February and March—during VF’s Q4—that brought a significant shift for the company.
“The fourth quarter, however, marked a profound change in conditions,” Roe said. “Our Asia business was essentially shut down for two weeks, our European business was closed anywhere from two to three weeks, and our North American business was closed the final two weeks of the quarter. Unsurprisingly, our results for the fourth quarter reflect the operational impacts of the disruption.”
In Q4, revenue decreased 11 percent (down 10 percent in constant dollars) to $2.1 billion, driven by lower consumer demand as a result of the COVID-19 outbreak and related government actions and regulations. Sales came in below Wall Street’s consensus target of $2.36 billion.
Earnings loss per share was $1.22 on a reported basis. On an adjusted basis, earnings per share decreased 70 percent (down 69 percent in constant dollars) to 10 cents a share, below Wall Street’s consensus estimates of 18 cents.
In the outdoor segment, sales were down 15 percent on a reported basis to $848.3 million and were down 14 percent on a currency-neutral basis. The segment showed a loss of $9 million against operating earnings of $31.8 million a year ago. VF’s outdoor brands include The North Face, Timberland, Altra, Icebreaker and Smartwool.
In the active segment, sales were down 9 percent, and they fell 8 percent on a currency-neutral basis. Operating earnings fell 33.5 percent to $154.6 million from $232.6 million a year ago. Active brands include Vans, Eagle Creek, Eastpak, JanSport, Kipling and Napapijri.
And in the work segment, sales were down 1 percent to $211.6 million and were flat on a currency-neutral basis. The work segment showed an operating loss of $1.75 million against earnings of $12.6 million a year ago. Work brands include Dickies, Bulwark Protection, Horace Small, Kodiak, Red Kap, Terra, VF Solutions and Walls.
Among VF’s four major brands—”The Big Four,” as the company calls them—sales of The North Face were down 14 percent on a reported basis and 13 percent on a currency-neutral basis. On a currency-neutral basis, sales were down 21 percent in the Americas, rose 4 percent in EMEA, and were down 26 percent in APAC.
Sales of Vans were down 7 percent on a reported basis and 6 percent on a currency-neutral basis. On a currency-neutral basis, sales were down 7 percent in the Americas, down 2 percent in EMEA, and off 5 percent in APAC.
Sales of Timberland were down 19 percent on a reported basis and 18 percent on a currency-neutral basis. On a currency-neutral basis, sales were down 10 percent in the Americas, down 18 percent in EMEA, and off 34 percent in APAC.
And sales of Dickies were down 3 percent on a reported basis and 2 percent on a currency-neutral basis. On a currency-neutral basis, sales were up 7 percent in the Americas, up 2 percent in EMEA, and were down 35 percent in APAC.
By geographic area, sales in the Americas were down 10 percent on both a currency-neutral and reported basis. EMEA’s sales were down 7 percent on a reported basis and 5 percent on a currency-neutral basis.
APAC’s sales were down 23 percent on a reported basis and fell 22 percent on a currency-neutral basis. In China, sales were down 33 on a reported basis and fell 31 percent on a currency-neutral basis. In the America (non-U.S.) region, sales were down 11 on a reported basis and fell 10 percent on a currency-neutral basis.
Rougher days are coming for VF in the near term. Roe said the company expects revenue in the first quarter of fiscal 2021 to be down slightly more than 50 percent. But while elaborating on the expected recovery path, he said the company is expecting North America and EMEA to begin to reopen during the first quarter while “continued steady improvement” is expected in the APAC region.
For its second quarter ending in September, sequential improvement is expected in North America and the EMEA region, but sales in both regions are expected to decline significantly on a year over year basis. APAC’s growth is expected to continue to accelerate. Promotional activity will likely remain elevated and disruption across the distribution landscape is expected to continue.
For its third quarter ended December, the APAC business is expected to begin to return to a more normalized growth alongside a stabilizing North America and European marketplace. Continued promotional activity is likely during the fall/holiday season.
And by its fiscal fourth quarter ending in March 2021, VF expects North America and EMEA to return to modest growth with APAC returning to more normalized growth. The promotional environment is expected to begin to moderate as the impacts of excess inventory and retail consolidation begin to stabilize.
VF expects to deliver at least $600 million of free cash flow through a combination of operating earnings, working capital management and lower capital expenditures. VF expects this supports a year-end liquidity position of at least $5 billion, with over $3 billion of cash on hand, and a net leverage ratio below three times. These numbers exclude the potential proceeds from its occupational work divestiture.
Roe echoed Rendle’s comments that the current crisis is expected to accelerate VF’s hyper-digital transformation. He noted that 80 percent of all planned strategic investments for the current fiscal year will be focused on digital. Said Roe “As we look ahead, digital will become even more central to the VF’s growth and success.”
Roe concluded in his formal comments, “VF has navigated many crises over our 121-year history and have demonstrated a willingness and ability to evolve our portfolio and strategy to stay relevant as consumer behaviors and the marketplace evolves. There is no question that the COVID-19 disruption will have lasting impacts on our sector. There will be retail casualties. This will accelerate industry consolidation. This will likely accelerate category trends, which we believe will benefit from activity-based lifestyle brands. We are witnessing the acceleration of digital commerce, and the critical importance of direct consumer engagement. We also believe this environment will shine an even brighter light on corporate values and highlight the importance of purpose-led enterprises.”
Rendle, meanwhile, likened the current situation to the foul weather that might stymie an adventure. And, befitting the CEO of a company like VF, he found inspiration from one of its brand’s most famous ambassadors—the renowned climber and photographer Jimmy Chin.
“As my good friend, North Face athlete Jimmy Chin, told me, all storms pass,” Rendle said. “It’s how you weather them that matters. We have a bias for action and decisiveness to effectively manage this crisis. And I’m proud of the actions we’ve taken guided by our values.”
Photo courtesy VF Corp.