On his first conference call since becoming VF’s new CEO, Steve Rendle delivered a bullish assessment of VF’s prospects, predicting the company’s primary brands – Vans, The North Face and Timberland – would collectively grow at a high single-digit rate in 2017, with a “special focus on reigniting growth in our North Face and Timberland brands in the Americas.”
International growth rates in Europe and Asia are projected to nearly double, driven by China. The strengthening of the industrial sector is expected to accelerate workwear sales. Building on a 21 percent gain in e-commerce globally in the fourth quarter, VF will “meaningfully invest in digital as part of our global focus on direct-to-consumer (DTC), and we will amplify our investments in the design of products to enrich the consumer brand experience,” Rendle stated.
Having slowed down its acquisition pace in recent years and even exited some past ones, Rendle stressed that the company remains “committed to being an active brand portfolio manager, and we will continue to focus on M&A to create value.”
“That being said,” he added, “we will be disciplined and we will not take action simply for the sake of taking action. And, of course, the quality of our talent matters. We will leverage VF’s deep bench of global talent by placing proven leaders in the right jobs, at the right time, in the right place.”
Rendle takes over from Eric Wiseman after VF comes off a particularly challenging year, marked by pronounced weakness in its wholesale segment in its U.S. due to a number of bankruptcies. Compounded by warm weather in October and November, The North Face suffered a 30 percent decline in wholesale sales in the fourth quarter in the Americas region although the extent of the decline was partly due to a decision to keep the brand out of off-price channels. Vans also took North Face’s spot as the company’s largest brand.
A casualty of the tough year is Lucy. VF took an $80 million pre-tax impairment charge to wind down the women’s fitness brand in 2017. With international making up 38 percent of total VF sales, VF also continues to have its comparisons impacted by foreign currency headwinds.
VF closed the year by reporting fourth-quarter revenues were fell just short of plan. While in line Wall Street targets, earnings were down.
With sales expected to many challenged and ongoing investments in strategic growth priorities, including digital and stores, demand and product creation, and innovation, VF officials also delivered a conservative outlook for the current year.
Still, shares of VF rose $2.31, or 4.6 percent, to $52.68 on Friday as investors apparently welcomed Rendle’s message.
“It’s clear that the pace of change in both our industry and the broader consumer landscape is happening at an accelerated rate,” said Rendle. “As we look ahead to 2017 and beyond, we will be an agile and consumer-centric organization. We will embed more of our value creating capabilities directly adjacent to our brands, while supporting cross-enterprise efforts with the right balance of brand-based and centralized teams and resources.”
Fourth-quarter Profits Impacted By Special Charges
In the fourth quarter, net earnings from continuing operations slid 35.0 percent to
264.3 million, or 64 cents a share. The year-ago period excluded loses of $94.3 million, or 22 cents a share, the its Contemporary Brands (7 For All Mankind, Splendid, Ella Moss), which was sold in August 2016.
Beyond the charge to write-down Lucy, the quarter was impacted by $58 million of pre-tax restructuring charges as it realigns its cost structure to achieve efficiency, speed and agility, as well as a $51 million pre-tax pension settlement that reduced its pension liability. Adjusted to exclude non-recurring items, earnings per share for the quarter increased 3 percent to 97 cents a share, matching Wall Street’s consensus estimate of 97 cents. Excluding the impact of changes in foreign currency, adjusted ESP would have been up 8 percent.
Revenues slipped 0.2 percent to $3.32 billion while gaining 1 percent on a currency-neutral basis, driven by strength in its international and DTC platforms, and Vans. Wall Street on average was expecting $3.44 billion.
Gross margin in the quarter improved 90 basis points to a record 49.1 percent on a reported basis, as benefits from pricing, lower product costs and a mix-shift toward higher margin businesses were partially offset by changes in foreign currency and the impact of restructuring charges. On an adjusted basis, gross margin climbed 160 basis points to 49.8 percent. Changes in foreign currency pulled down both reported and adjusted gross margin by 90 basis points during the quarter.
Operating income on a reported basis was down 40.5 percent to $320 million. On an adjusted basis, operating income decreased 5 percent to $509 million.
For the full year, net earnings from continuing operations were down 10.8 percent to $1.17 billion, or $2.82 a share. With losses from discounting operations in both periods, net earnings were down 12.8 percent to $1.07 billion, or 2.58. Revenues were flat with year-ago levels at $12.0 billion.
In the Outdoor & Action Sports coalition, sales increased 1.6 percent to $2.13 billion and gained 2 percent on a currency-neutral basis.
Operating profits were down 0.2 percent to $384.8 million but would have increased 8 percent on a currency-neutral basis. Restructuring activities in the latest period included to reposition the Lucy brand were $17.4 million in the period. On an adjusted basis, operating income increased 4 percent to $402 million. Changes in foreign currency negatively impacted both reported and adjusted operating profit growth by approximately 8 percentage points.
For the full year, revenues in the Outdoor & Action Sports coalition improved 1.8 percent to $7.53 billion and gained 2 percent on a currency-neutral basis. Operating income was down 3.2 percent to $1.23 billion but improved 3 percent on a currency-neutral basis. Full year adjusted operating income decreased 2 percent. Changes in foreign currency negatively affected full year profit growth on both a reported and an adjusted basis by approximately 7 percentage points.
Vans Boosted By DTC Growth
The highlight among VF’S brands was Vans, which saw revenue for the quarter jump 14 percent (up 15 percent currency neutral).
In the Americas, Vans grew 17 percent, including more than 20 percent growth in D2C and low single-digit growth in wholesale. D2C comps were up at a high-teen rate, including 40 percent growth in e-commerce.
“Looking at product, our All Weather MTE collection, which is designed for the elements and leverages Vans as a four-season brand, doubled its revenue compared with last year,” said Rendle. “And Vans upgraded custom footwear platform, which allows consumers to create their own unique Vans shoes through patterns, colors and the ability to upload their own art, is off to a strong start.”
In Europe, Vans returned to growth during the quarter following inventory challenges earlier in the year with low single-digit growth. DTC saw 20 percent revenue growth while wholesale declined at a mid single-digit rate. A strong increase was seen in its iconic silhouettes, and a Toy Story collaboration sold well. Asia grew more than 25 percent, also finding success with the Toy Story collaboration as well as strong e-commerce sales in China.
In 2016, Vans revenues were up 6 percent (up 7 percent currency neutral) to reach $2.3 billion. In 2017, Vans is expected to increase sales at a low double-digit rate, driven by a high single-digit increase in both the Americas and Europe, and up high teens in Asia.
The North Face Sees Low-Double Declines In Americas
Fourth quarter revenue for The North Face brand was down 8 percent (down 7 percent currency neutral) driven by the strategic decision to reduce sales to the off-price channel and the impact of bankruptcies in North America. A mid-teen increase in D2C, offset by more than a 20 percent decline in wholesale. Excluding the inventory clean-ups and bankruptcies, North Face would have increased at a low single-digit rate and overall achieved “a significant improvement in the quality of sales,” said Rendle.
In the Americas, revenue was down at a low double-digit rate during the quarter, with a low double-digit D2C growth, offset by a 30 percent decline in wholesale in the Americas region, mostly due to the inventory actions and the impact of bankruptcies. Rendle noted that like some other brands, the fall/winter season got off to a slow start in October and November for The North Face with performance improving in December “and that trend has continued into January.”
Addressing the Lucy charge, Rendle said Lucy will wind down operations over the course of 2017 and be positioned in The North Face brand as part of the Mountain Athletics collection.
“Lucy has developed tremendous customer loyalty by delivering exceptional product in a very attractive consumer segment,” said Rendle. “However, brand awareness is low, the trademark is limited to North America, and the performance has been uneven over the last few years. We believe the combination of Lucy’s strong product portfolio with The North Face’s brand awareness and distribution network is just the right catalyst to accelerate our TNF Mountain Athletics growth rate over the next several years. It’s a great example of our One VF approach to active portfolio management.”
In Europe, The North Face grew at a high-teen rate, driven by an almost 30 percent increase in DTC and a low double-digit increase in its wholesale business. The brand has benefited from a reset initiated in 2015 and those learnings will be applied to accelerate growth in the Americas.
In Asia, North Face was down at a mid single-digit rate, impacted by a “highly promotional” climate in China, said Karl Heinz Salzburger, VF’s group president, international. He added, “We are consolidating our retail partners, more aggressively managing inventory in the marketplace, and elevating our distribution in the region. While this shift will cause early 2017 performance to be relatively flat, we expect strong momentum to return in the second half of 2017.”
For the full year, revenue for The North Face brand declined 2 percent (down 1 percent currency neutral) to $2.3 billion. Excluding the inventory actions and the impact of bankruptcies, North Face was up at a low single-digit rate. For 2017, revenue is expected to expand in the mid single-digit range, up mid-teens in Europe, and a mid single-digit increase in the Americas and Asia.
Timberland Slowed By Mild Fall
Timberland brand revenue was up 4 percent in the quarter (up 5 percent currency neutral). Revenue in the Americas increased at a low single-digit rate, including a low double-digit increase in its D2C business, which was partially offset by a low single-digit decline in wholesale.
“Similar to The North Face, our core brand business was impacted by a slow start to the season, excess inventory in the marketplace, bankruptcies and overall retailer caution,” said Rendle. “We were pleased to see momentum in our D2C business in Q4, our biggest quarter of the year, highlighted by continued traction with our new SensorFlex platform and limited release programs. Timberland PRO increased at a high single-digit rate, as we saw improvement in the industrial sector.”
Overseas, Timberland revenue in Europe grew at a low double-digit rate, with high-teen growth in DTC and mid single-digit growth in wholesale. Asia Pacific delivered mid single-digit growth.
Full year Timberland brand revenue was up 1 percent to $1.8 billion. For 2017, Timberland is expected to grow in the low single-digit range, with mid single-digit growth in Europe and Asia and modest growth in the Americas. Given the improvement in the U.S. industrial sector, Timberland PRO is projected to expand at a mid single-digit rate.
Among its other coalitions, Jeanswear (Lee, Wrangler) saw fourth quarter revenue decline 5 percent (down 4 percent currency neutral) to $697 million. Fourth quarter operating income on a reported basis decreased 27 percent to $103 million and was down 12 percent on an adjusted basis. For the full year, Jeanswear revenue was down 2 percent to $2.7 billion and was flat currency neutral. Full year reported operating income decreased 8 percent to $492 million and was off 4 percent on an adjusted basis.
Imagewear Boosted By Chicago Cubs Win
In its Imagewear coalition, which includes its work brands and Majestic Athletic, fourth quarter revenue increased 15 percent to $298 million. The Licensed Sports Group (LSG) more than 20 percent increase with the help of the Chicago Cubs World Series win while a mid single-digit increase was seen in the workwear business. For the full year, revenue for Imagewear was up 2 percent to $1.1 billion.
Fourth quarter operating income on a reported basis for Imagewear was up 40 percent to $55 million with adjusted operating income increased more than 40 percent. For the full year, Imagewear operating income on a reported basis increased 14 percent to $180 million while expanding 15 percent on an adjusted basis.
Sportswear fourth quarter revenue declined 17 percent to $162 million including a 20 percent decrease in Nautica brand revenue and a 2 percent decline in the Kipling brand’s North American business. For the full year, Sportswear coalition revenue was down 16 percent to $536 million.
Fourth quarter operating income for Sportswear tumbled 63 percent to $10 million and was off 53 percent on an adjusted basis. Full year operating income fell 54 percent to $36.6 million and was off 50 percent on an adjusted basis.
International revenue in the quarter was up 5 percent (up 7 percent currency neutral). Revenue was up 6 percent (up 7 percent currency neutral) in Europe and up 6 percent (up 8 percent currency neutral) in the Asia Pacific region, including a 6 percent increase (up 14 percent currency neutral) in China. Revenue in the Americas (non-U.S.) region was down 1 percent (up 6 percent currency neutral). For the full year, international revenue was up 4 percent (up 6 percent currency neutral) and represented 38 percent of total VF sales.
E-commerce Jumps 21 Percent
DTC revenue was up 11 percent (up 12 percent currency neutral) in the quarter driven by a mid-teen increase in the Outdoor & Action Sports business and a mid-teen increase in the international business. E –commerce jumped 21 percent during the quarter. For the full year, DTC revenue was up 8 percent (up 9 percent currency neutral) to make up 28 percent of total VF revenue.
For 2017, EPS is expected to be down at a low single-digit percentage rate compared to 2016 adjusted EPS of $3.11, but expand by a mid single-digit percentage rate on a currency neutral basis.
Revenue is expected to increase at a low single-digit percentage rate including about a two percentage point negative impact from changes in foreign currency. By coalition, revenue for Outdoor & Action Sports is expected to increase at a low single-digit percentage rate (up at a mid single-digit rate currency neutral); revenue for Jeanswear is expected to approximate 2016 levels; Imagewear revenue is expected to increase at a low single-digit percentage rate; and Sportswear is expected to decline at a high single-digit percentage rate.
In the first half, revenue on a reported basis to decline at a low single-digit percentage rate (about flat on a currency neutral basis). EPS is projected to decline at a mid single-digit percentage rate on a reported basis (up at a low single-digit rate on a currency neutral basis). In the second half of 2017, revenue on a reported basis is expected to increase at a low single-digit percentage rate (up at a mid single-digit rate on a currency neutral basis). EPS in the second half is expected to increase at a low single-digit percentage rate on a reported basis (up at a high single-digit rate on a currency neutral basis).
Image courtesy The North Face