Vans And North Face Both Clicking for VF Corp

By Thomas J. Ryan

VF Corp raised its outlook for the year on accelerated momentum at Vans and renewed momentum at The North Face in the first quarter.

In the quarter ended June 29, revenue from continuing operations increased 6 percent, or 9 percent on a currency-neutral basis, to $2.3 billion. Excluding acquisitions and divestitures, adjusted revenue increased 9 percent, or 11 percent on a currency-neutral basis.

The quarter marked its first report since the company completed the spin-off of its Jeans business under the name, Kontoor Brands.

Earnings from continuing operations surged 58.5 percent to $97.2 million, or 24 cents a share. Continuing earnings on an adjusted basis ran ahead 67 percent in constant dollars, to $120.5 million, or 30 cents, exceeding Wall Street’s consensus estimate of 29 cents.

Shares of VF closed Wednesday at $89.33, up $1.06, or 1.2 percent, on the New York Stock Exchange.

Adjusted earnings exclude transaction and deal-related costs include acquisition and integration costs related to the acquisitions of the Icebreaker and Altra, separation and related expenses associated with the spin-off of the jeans business and costs involved with the relocation of VF’s global headquarters and certain brands to Denver.

As a result of the strong first-quarter results and increased confidence in the full year, Steve Rendle, chairman, president and CEO, VF, said the company is raising its outlook, including an additional $20 million of incremental investments primarily focused on North Face’s Futurelight launch

“With the separation of Kontoor Brands now complete and our relocation into Denver well underway, we can now focus on driving our powerful brands to become even more consumer-minded and retail-centric,” said Rendle, on a conference call with analysts. “Our first-quarter results stand as a powerful proof point that our transformation to be a more purpose-led, performance-driven, the value-creating enterprise is yielding tangible results for our consumers, associates and shareholders. It’s an exciting time at VF.”

Vans Delivers 23 Percent Currency-Neutral Growth

Active segment revenue increased 8 percent or 11 percent in constant dollars, to $1.23 billion. Operating income in the segment increased 14.3 percent to $307.6 million, or 17 percent on a currency-neutral basis.

The gains in the Active segment were driven by a hike of 20 percent, or 23 percent on a currency-neutral basis at Vans. The growth rate accelerates from the 18 percent currency-neutral growth seen in Q4.

“Our Vans business continues to perform well above its long-term growth target,” said Rendle. “More importantly, the quality of the growth is strong and diverse as we are seeing the rapid acceleration of the Slip-On franchise complement the continued strength of the Old Skool. The Vans team remains intensely focused and disciplined as they continue to deliver consistent performance that is driven by not just one thing.”

By region, Vans sales jumped 22 percent in the Americas on both a reported and currency-neutral basis. In EMEA, Vans revenues increased 8 percent on a reported basis and 15 percent on a currency-neutral basis. Vans’ APAC sales saw the strongest growth, up 26 percent on a reported basis and 33 percent on a currency-neutral basis.

With ongoing investments expected to help continue its momentum, Rendle said VF remains “confident in Vans’ ability to sustain its trajectory above our long-term target.” VF raised its target for Vans for the current year to now expect 11 percent to 13 percent growth, up from guidance of low double-digit growth previously. Added Rendle, “The brand is well on its way to achieving its $5 billion target by 2023.”

The Active segment also includes Eagle Creek, Eastpak, JanSport, Kipling, and Napapijri.

North Face Tops Expectations

In the Outdoor segment, revenue increased 7 percent, or 11 percent on a currency-neutral basis, to $610.6 million. In its smallest quarter of the year due to North Face’s emphasis on cold-weather merchandise, the segment showed a loss of $80.3 million, slightly down from a loss of $83.5 million a year ago.

The top-line gain in the Outdoor segment was led by a gain of 9 percent, or 12 percent on a currency-neutral basis by North Face.

“The North Face continues to exceed expectations with double-digit growth across all regions and strength in all channels and product territories,” said Rendle. “In light of the brand’s strong first-quarter performance, increased visibility to the full year and renewed energy in the brand’s product pipeline and innovation engine, we’re increasing our fiscal 2020 growth outlook for The North Face to 8 percent to 9 percent.”

Previously, VF had guided North Face’s growth in the high-single digits range.

By region, North Face’s sales climbed 10 percent in the Americas on both a reported and currency-neutral basis. In EMEA, North Face revenues increased 4 percent on a reported basis and 11 percent on a currency-neutral basis. North Face’s APAC sales delivered the strongest growth, up 14 percent on a reported basis and 20 percent on a currency-neutral basis.

Rendle highlighted the upcoming launch of Futurelight, a breathable, waterproof material that was introduced at CES 2019 in January and will be introduced to the North Face brand in “a few months.”

Said Rendle, “The response from the marketplace has been very strong. Given the opportunity Futurelight has to significantly disrupt the outdoor industry, we’ve decided to invest even more aggressively behind the breakthrough technology.”

In the Q&A session, Rendle said North Face’s backlog orders “are good” and in line with its outlook for the year, although he noted that retailers over the last two to three years are ordering closer to market.

In the first quarter, North Face saw broad-based growth across regions and categories.

“We had really solid rainwear sales, strong Sportswear and Logowear, which is real validation of the work that the brand has been doing, taking the learnings from Europe and being able to apply that more holistically here and in Asia. And the results had been really good,” said Rendle. “In fact the Logowear aspect is just great, validation that people are looking to the brand as a brand that they want to be part of in purchasing those Logowear products. But the core of the brand is the equipment category, and we saw really strong double-digit growth in our equipment. And that was certainly in the packs – daypacks, as we
come into this important back-to-school, but we also saw it in the bags and tents, which is proof points that people are using our products to get outdoors and really following what the brand’s driving from a marketing standpoint.”

Asked about the incremental spend supporting Futurelight, Rendle said the investment includes “quite an expanded media investment” from a print and online social component as well as in-store tools to help consumers understand the new technology. The CEO added, “It feels different. It performs differently. And our team has done a tremendous job in being able to articulate that story in a very experiential way. And we’ll bring that to life both in print, online and in the in-store component.”

The Outdoor segment also benefited from a 2-percentage point revenue growth contribution from acquisitions. Icebreaker was acquired in April 2018 and Altra was bought on June 2018. The Outdoor segment also includes Smartwool and Timberland.

Timberland Regaining Momentum In U.S.

Timberland’s sales slipped 1 percent on a reported basis in the quarter while adding 2 percent on a currency-neutral basis. The brand was dragged down by a poor performance in the EMEA region, down 9 percent on a reported basis and 4 percent on a currency-neutral basis. Timberland’s sales climbed 6 percent in the Americas on a reported basis and 7 percent on a currency-neutral basis. APAC sales were up 1 percent on a reported basis and gained 5 percent on a currency-neutral basis.

Rendle said Timberland’s efforts to elevate the brand’s merchandising, design and marketing and “really raising the experiential aspects of this brand” is on plan although he added, “We’re a little bit behind where we would like to be from a results standpoint.”

In the U.S., Timberland’s improving performance reflects efforts to realign go-to-market disciplines and improve segmentation. Rendle added, we’re seeing improved sell-through on our Classics products. But at the same time we’re seeing really good sell-through on our non-Classics and that’s the part of the diversification strategy that we’ve been working very, very hard on. And you’ve seen that start to pay off here in the U.S. marketplace.”

In Asia, Timberland is seeing “strong sell-through on the Classics and good sell-throughs on the non-Classics” due to efforts to right-size assortments and bring relevant assortments for local consumers. In Europe, the warm winter impacted the Classics business and that impacted the spring business.  Non-classics are performing well in the EMEA region.

Rendle concluded on Timberland overall, “We remain very confident in our ability to manage this reset and drive ourselves to that mid-single-digit commitment. We’re a little bit behind where we’d like to be. That doesn’t exactly make us happy, but the good news is we have the playbook. We understand how to execute it as we continue to add to that leadership team on a global basis, the skill sets, the capabilities required to drive these actions are in place. And now it’s just in our court to get the work done, to get the results to where we’ve committed to be.”

Work Segment’s Results On Plan

In the Work segment, sales were flat on a reported basis, inched up 1 percent on a currency-neutral basis, and advanced 4 percent on a currency-neutral basis and adjusted for the acquisition of Dickies. Operating profit in the Work segment came to $47.0 million, down 4 percent on a reported basis and 3 percent on a currency-neutral basis.

Rendle said the Work segment saw a “consistent performance across our brand portfolio.”  Beyond Dickies, Work brands include Bulwark, Horace Small, Kodiak, Red Kap. Terra. Walls and Workrite.

Scott Roe, CFO and EVP, said the Work segment’s performance was in line with expectations. He said the segment “remains solid despite a somewhat more tempered economic environment in the more cyclical parts of the brand portfolio.”

Dickies’ revenue increased 2 percent in the quarter, which was impacted by a strategic repositioning of the brand in Japan, and timing of shipments which will impact growth during the first half of the year. VF remains confident in the full-year outlook of 5 percent to 7 percent growth for Dickies.

By region companywide, U.S revenues grew 9 percent and 12 percent excluding acquisitions and divestitures.

International revenue increased 2 percent, or 8 percent on a currency-neutral basis. Excluding acquisitions and divestitures and on an adjusted basis, international revenue increased 4 percent or 10 percent on a currency-neutral basis.

In the APAC region, sales grew 13 on a reported basis and 19 percent on an adjusted, constant-dollar basis. China revenue increased 21 percent or 29 percent on a currency-neutral basis.

In the EMEA region, sales were down 5 percent on a reported basis but grew 5 percent on an adjusted, constant-dollar basis. In the Americas (non-U.S.), sales advanced 5 percent on a reported basis and 6 percent on an adjusted, constant-dollar basis.

By channel, direct-to-consumer (DTC) revenue increased 16 percent on an adjusted, constant-dollar basis, highlighted by a 14 percent total comp and 29 percent growth in digital. Wholesale revenues on the same basis increased 8 percent, driven by 17 percent growth with digital wholesale partners and strong sell through across key accounts.

Gross margin from continuing operations increased 140 basis points to 54.4 percent; on an adjusted basis, gross margin increased 120 basis points to 54.4 percent.

SG&A grew slightly faster than revenue, as strong operating leverage was offset by 11 percent growth in the investments tied to growth opportunities. Operating margin expanded 100 basis points to 7.2 percent, representing 37 percent organic growth in operating profit compared to the prior year.

Roe noted that the first quarter is the company’s smallest quarter of the year. He added, “With that said, we are executing exceptionally well. The fundamentals of our business are strong and the demand signals we are seeing from both consumers and retail partners give us confidence in our full-year outlook. We’re tracking ahead of plan and are pleased with the quality and balance of the growth across the portfolio.”

Inventory increased 9 percent relatively in line with the company’s full-year revenue growth outlook

Earnings And Sales Outlook Raised

Looking ahead, changes to the guidance include:

• Revenue is now expected to approximate $11.8 billion, reflecting an increase of approximately 6 percent or 8 percent on a constant-dollar basis excluding the impact of acquisitions and divestitures. This compares to the previous expectation of revenue between $11.7 billion and $11.8 billion.
• Revenue for Outdoor is now expected to increase approximately 5 percent, or 6 percent on a constant-dollar basis, excluding the impact of acquisitions. This compares to the previous expectation of an increase in revenue of approximately 4 percent to 5 percent, or 5 percent to 6 percent on a constant-dollar basis, excluding the impact of acquisitions.
• Revenue for Active is now expected to increase approximately 7 percent to 8 percent, or 10 percent to 11 percent on a constant-dollar basis, excluding the impact of divestitures (Reef). This compares to the previous expectation of an increase in revenue of approximately 6 percent to 7 percent or 9 percent to 10 percent on a constant-dollar basis excluding divestitures.
• Revenue for Work is still expected to increase approximately 3 percent to 5 percent or 4 percent to 6 percent on a constant-dollar basis, excluding the impact of divestitures.
• International revenue is still expected to increase approximately 4 percent to 6 percent, or approximately 7 percent to 9 percent on a constant-dollar basis, excluding the impact of acquisitions and divestitures.
• DTC revenue is now expected to increase approximately 10 percent to 12 percent, or 11 percent to 13 percent on a constant-dollar basis, including 25 percent growth in digital. This compares to the previous expectation of an increase in revenue of approximately 9 percent to 11 percent, or 10 percent to 12 percent on a constant dollar basis.
• Adjusted gross margin is now expected to be 54.1 percent, which represents an estimated increase of 80 basis points. This compares to the previous expectation of about 54.0 percent.
• Adjusted operating margin is now expected to be 13.8 percent, which represents an estimated increase of approximately 90 basis points. This compares to the previous expectation of an adjusted operating margin of 13.7 percent.
• Adjusted EPS is now expected to be in the range of $3.32 to $3.37, including an additional $20 million, or 4 cents per share, of incremental investment, reflecting growth of approximately 16 percent to 18 percent, or 18 percent to 20 percent on a constant dollar basis, excluding acquisitions and divestitures. This compares to the previous expectation of $3.30 to $3.35, reflecting the growth of 15 percent to 17 percent, or 17 percent to 19 percent on an adjusted, constant-dollar basis.

Photo courtesy The North Face