VF Corp. raised its guidance for the year due to stronger-than-expected growth in the second quarter in its Outdoor & Action sports coalition, driven by its Vans and The North Face; as well as above-plan sales in its D2C channel and workwear business.
“Six months into the first year of our 2021 strategy, our results are right in line with our expectations, and in fact, we’re doing so much better than we anticipated,” said Steve Rendle, its newly-minted president and CEO, on a conference call with analysts. “Our improved performance in the face of an unpredictable retail environment around the world demonstrates the strength of our brand portfolio and diversified value creation model. We’re in the early phases of our journey to become a more agile and consumer centric organization and we are encouraged by our strong start to 2017.”
During the second quarter, companywide sales improved 1.7 percent to $2.33 billion and were ahead 3 percent on a currency-neutral basis. Sales were slightly ahead of internal expectations and exceeded Wall Street’s average target of $2.29 billion. VF’s big three brands – Vans, The North Face and Timberland – grew at a combined rate of 7 percent. International grew 6 percent, including 18 percent growth in China. Direct-to-consumer (D2C) climbed 14 percent, with digital up more than 35 percent. Growth accelerated to 8 percent in workwear.
Gross margin improved 160 basis points to 49.7 percent, again exceeding expectations. Net earnings declined 15.8 percent to $114.9 million, or 29 cents a share, due to accelerated growth investments but came in at the high-end of guidance provided in April and ahead of Wall Street’s consensus estimate of 28 cents. Excluding the impact of changes in foreign currency, EPS was in line with last year’s second quarter.
Among the different coalitions, sales in the Outdoor & Action Sports, which includes The North Face, Vans and Timberland, were up 3.8 percent to $1.47 billion and advanced 5 percent on a currency-neutral basis. Operating profits were down 1.2 percent to $121.8 million but grew 12 percent on a currency-neutral basis.
The North Face Offsets U.S. Bankruptcies
At The North Face, currency-neutral sales rose 6 percent, led by a 26 percent hike in the Europe. Sales rose 1 percent in both the Americas and APAC region.
The gains for The North Face were driven by D2C, increasing at a mid-teen rate. Wholesale was relatively flat but ahead at a high-single rate on a global basis excluding the impact of bankruptcies in the Americas region. Rendle noted that the bankruptcies “didn’t really start to impact us into the second half of 2016.”
For the first half of 2017, global revenue for The North Face increased 7 percent or 9 percent excluding the impact of the Americas bankruptcies.
By region, revenue growth in the Americas for The North Face was driven by mid-teen growth in D2C with strong results from digital, which grew more than 40 percent in the quarter. This was partially offset by a high single-digit decrease in wholesale due in large part to the impact of the bankruptcies.
Among products, a highlight in the Americas region was the Apex Flex jacket, which Outside Magazine named one of the best summer jackets of 2017. Rendle also called out Alex Honnold, who became the first climber to complete a free-solo ascent of El Capitan in Yosemite. He said the feat marked “the perfect embodiment of The North Face spirit of exploration.”
In Europe, consumer demand for The North Face “remains very strong across the region,” said Rendle. Wholesale grew nearly 40 percent while D2C expanded at a high single-digit rate. Based on bookings and ongoing strength across key product categories in markets, The North Face is expected to increase more than 15 percent in Europe for the balance of 2017.
In Asia, high teen growth in D2C for The North Face was partially offset by an expected high teen decline in wholesale. A highlight in Asia was Outdoor Training, which launched on April 1 and saw more than 40 percent sell-through. The launch was helped by an I Train For marketing campaign and the opening of the first global outdoor training station in Shanghai. The Urban Exploration territory also continues to perform “very well” in Asia.
Added Rendle, “While the outdoor environment remains highly promotional in China, and we continue to consolidate our retail partners and aggressively manage inventory in the marketplace, we expect accelerated growth in the second half of 2017, including mid-single-digit growth in the third quarter.”
Overall, based on strong first half performance, current order visibility, and increased confidence for the balance of the year, The North Face is now expected to grow at the higher end of its initial mid-single-digit range prediction. Fewer off-price sales and a significant shift in the timing of the order books from September to October will likely result in a mid-single-digit decline in revenue for the third quarter. Normalizing for the timing shift, revenue growth for the third quarter is expected to be in the low-to mid-single digit range.
Vans Remains VF’s Fastest-Growing Brand
Vans’ revenues grew 9 percent on a currency-neutral basis globally in the second quarter. Sales rose 7 percent in the Americas region, climbed 5 percent in EMEA and jumped 29 percent in the APAC region.
D2C increased more than 25 percent with 45 percent growth in Vans’ digital business. As expected, wholesale declined at a low single-digit rate.
In the Americas, D2C continued its momentum for Vans with more than 20 percent growth in the quarter, including over 25 percent growth in digital and high-teen comp growth. Wholesale declined at a mid-single-digit rate “pressured primarily by conditions in the family channel where we are in the midst of a product transition and up against strong distribution gains a year-ago,” said Rendle.
Based on current visibility as well as a significant momentum, Vans is now expected to show low double-digit growth in the Americas in 2017.
Rendle said Vans’ growth in the Americas extends across multiple product categories and families.
“While the Old Skool has recently become the number one classic style, the iconic slip on and checkerboard styles and designs are seeing tremendous growth, up more than 65 percent in the quarter,” said Rendle. “Targeting the core skate community, the new athlete inspired UltraRange Pro was recently launched and at a $90 price point, saw real strength in the market with more than 70 percent sell-through in skate and board sport accounts.”
Collaborations also continue to perform well for Vans in the Americas while its customs program is expanding at a triple-digit rate.
In Europe, Vans “is performing better than expected, as demand continues to accelerate,” said Rendle. D2C increased more than 20 percent, driven by a more than 40 percent jump in digital and 20 percent comp growth. In line with the expectations, wholesale declined at a low single-digit rate due to the timing of shipments.
Based on stronger-than-expected second half orders, Vans Europe is now expected to increase at a low double-digit rate for 2017, including strong high-teen growth in the second half.
In Asia, Vans “is firing on all cylinders” with almost 30 percent growth. D2C expanded 45 percent with strength across all markets, including almost 80 percent growth in digital in China.
Vans is now expected to grow globally at the high-end of its low double-digit growth range for 2017.
Timberland Returns To Growth
As expected, Timberland returned to growth in the second quarter with global revenue expanding 3 percent on a currency-neutral basis, in line with its low single-digit growth outlook for the year. A mid-single-digit increase in D2C was supported by a low single-digit increase in wholesale.
The Americas grew 4 percent with high single-digit growth in D2C, including 25 percent growth in digital and low single-digit growth in wholesale. Timberland’s non-classics business increased at a low double-digit rate during the quarter with more than 100 percent growth in its new platforms, including SensorFlex and AeroCore.
Timberland PRO remained “very strong” with more than 20 percent growth.
“Our growth strategy is gaining traction as we work to diversify in North America business toward a more balanced assortment,” said Rendle. “The strong sell-through we are seeing with our non-classics products gives us confidence, we can drive accelerated growth in the second half of 2017 and into next year.”
In Europe, Timberland’s revenue was up 4 percent in the quarter driven by low double-digit growth in D2C, partially offset by a modest decline in wholesale. With more than 35 percent growth in its new platforms such as SensorFlex and AeroCore and high single-digit growth in apparel in the quarter, Timberland is expected to deliver high single-digit growth in the second half of 2017.
Timberland’s Asia business improved sequentially, but was down 1 percent in the quarter as D2C declined at a low single-digit rate and wholesale was in line with last year. High single-digit comp growth, including more than 50 percent growth in digital revenue, was offset by a strategic decision to close underperforming doors in some of its more mature markets. Revenue in China jumped 60 percent.
Similar to The North Face, a significant shift in the timing of its order books will likely result in a low single-digit decline in revenue for Timberland for the third quarter. When normalizing for the timing shift, revenue growth for the third quarter will likely be in the low single-digit range. Timberland is still expected to show low single-digit growth outlook for 2017.
The Outdoor & Action Sports segment also includes Eagle Creek, Eastpak, JanSport, Kipling, Lucy, Napapijri, Reef and Smartwool.
Across its other coalitions, sales in Jeanswear (Wrangler, Lee) were down 4.5 percent to $600.8 million and off 4 percent currency-neutral. Operating profits were down 22.1 percent to $84.8 million while declining 20 percent currency-neutral.
In the Imagewear coalition (Bulwark, Horace Small. Red Kap, Timberland PRO, Bulwark, Wrangler RIGGS), sales increased 11.3 percent to $150.0 million and grew 12 percent currency-neutral. Operating earnings were up 4.9 percent to $25.6 million and inched up 1 percent currency-neutral.
The gain largely reflected sales of its Licensed Sports Group (LSG), which includes Majestic Athletic and was sold earlier this year to Fanatics. As part of the transition agreement with Fanatics, VF will supply jerseys for one-year following the transaction.
Excluding the impact of LSG jersey revenue, its Image business was up 2 percent and consistent with plan, consistent with its plan. Revenue growth accelerated to 8 percent in the quarter with at least 20 percent growth in three of its largest work brands, Timberland PRO, Bulwark, and Wrangler RIGGS workwear.
In the Sportswear segment (Nautica), sales dipped 0.5 percent to $114.3 million and eased 1 percent currency-neutral. Operating income was ahead 80.1 percent to $11.3 million and up 80 percent currency-neutral.
Ramped Up Investments Impact Bottom Line
The companywide earnings decline reflected accelerated investments in the business to support growth plans. SG&A as a percentage of revenue was up 210 basis points to 42.6 percent in the quarter.
At its Investor Day earlier in the year, VF said it had committed an additional $40 million, or 8 cents a share, of investments in demand creation and strategic priorities this year. Said Scott Roe, VP and CFO, on the call, “Our brands are strong and in a marketplace that continues to experience significant disruption, we believe we have a unique investment and growth opportunity when many of our competitors are on their heels.”
Investments in its strategic priorities, including D2C and in particular digital, product innovation, demand creation and technology, accounted for more than all of the SG&A increase versus last year “as our focus on agility and cost optimization allowed us to reduce cost elsewhere” said Roe.
He also said that because the second quarter is VF’s lowest quarter, “SG&A ratios are always a little distorted” with any cost increases.
Roe said SG&A will deleverage through the first three quarters of this year significant leverage is expected in SG&A in the fourth quarter and into 2018 as growth is expected to accelerate.
The 80 basis point improvement in margins on a reported basis in the second quarter was due to pricing, lower product costs and a mix shift toward higher margin businesses that offset an 80-basis point negative impact from changes in foreign currency.
Operating income on a reported basis was down 13.6 percent to $168.0 million. Changes in foreign currency negatively affected the operating profit decline by 8 percentage points during the quarter. Operating margin on a reported basis decreased 130 basis points to 7.1 percent with 70 basis points of the decline traced to foreign exchange.
The year-ago period included results from a number of businesses that have been sold, including as well as 7 For All Mankind, Splendid and Ella Moss in its former Contemporary Brands division. On a net basis, including losses from these discontinued operations, net earnings in the latest period was $110 million, or 28 cents a share, against earnings of $51.0 million, or 12 cents, in the same period a year ago.
D2C Sees Double-Digit Growth, Led By Digital
Companywide by channel, D2C revenue increased 13 percent and ran up 14 percent currency neutral. Of the D2C gain, digital ran up 34 percent and jumped up 36 percent currency neutral. Wholesale revenues were down 3 percent globally and were off 2 percent on a currency-neutral basis.
By region, sales in the U.S. were up 1 percent in the quarter. International revenue increased 4 percent and grew 6 percent currency neutral.
The international gains were led by the APAC region, which was up 7 percent on a reported basis and ahead 9 percent on a currency-neutral basis. The gains were driven by China, up 13 percent on a reported basis and 18 percent on a currency-neutral basis.
In other regions, EMEA saw 1 percent growth on a reported basis and 4 percent on a currency-neutral basis. In the Americas region (non-U.S.), sales were ahead 4 percent on a reported basis and 6 percent on a currency-neutral basis.
Regarding the third-quarter shift, Roe that while the quarter historically represented the peak for fall shipments, a significant shift in order book timing from the end of September to early October is occurring due to consumers making purchases closer to need. Said the CFO, “Our key retail partners are setting their floors later which pushes our shipments from what has traditionally been Q3 to Q4.”
Roe estimates the shift has pushed almost $100 million of wholesale revenue into Q4 compared to a year-ago. As a result, revenue growth in the third quarter to be in the low single-digit range and EPS to be in the range of $1.09 to $1.12, down from $1.20 last year. Normalizing for the wholesale timing shift, VF’s revenue and EPS growth rate for Q3 would be in the mid-single-digit range.
VF officials fully expect the Q3 shortfall to be more than made up in Q4. Added Roe, “We are confident in our increased growth outlook and have good momentum as we move into the second half of the year. Our core growth engines are delivering high single-digit growth, our gross margin is strong, our fundamentals are intact, and we are investing in our future growth drivers.”
Guidance Raised For 2017
Looking ahead, revenue is now expected to approximate $11.65 billion, up 2 percent on a reported basis (up 3 percent currency neutral). Previously, VF has projected revenue to increase at a low single-digit percentage rate including about a 2 percentage point negative impact from changes in foreign currency.
By coalition, revenue for Outdoor & Action Sports is now expected to increase approximately 5 percent (up 6 to 7 percent currency neutral) versus the previous expectation of a mid-single-digit percentage rate increase; revenue for Jeanswear is still expected to approximate 2016 revenue; Imagewear revenue is now expected to increase at a mid-single-digit percentage rate versus the prior expectation of a low single-digit percentage rate increase; and Sportswear is still expected to decline at a high single-digit percentage rate.
Direct-to-consumer revenue is now expected to increase between 10 percent and 11 percent versus the previous expectation of a high single-digit percentage rate increase. Digital revenue is now expected to increase more than 25 percent.
Gross margin is now expected to reach 49.8 percent, versus the previous expectation of 49.6 percent, a 40 basis point increase over 2016 gross margin, and includes about a 70 basis point negative impact from changes in foreign currency. The increase marked the second consecutive quarter it raised its margin guidance.
Operating margin is still expected to approximate 14 percent, consistent with the 2016 adjusted operating margin, including about a 60 basis point negative impact from changes in foreign currency.
EPS is now expected to be $2.94, down approximately 1 percent on a reported basis (up at a mid-single-digit percentage rate currency neutral) compared to 2016 adjusted EPS of $2.98. This compares to the company’s prior outlook range of $2.89 to $2.94. Relative to its prior outlook, the company’s updated 2017 earnings per share outlook includes about a 8 cents per share ($40 million pre-tax) impact from the additional growth investments.
M&A Chatter Picks Up
Touching on M&A, Roe indicated that acquisition talks have increased in recent months. Said Roe, “We have a robust pipeline of opportunities and the activity has increased over the past few months, and we continue to evaluate the shape of our existing portfolio. We look forward to keeping you updated our progress.”
Asked if its priority around acquisition targets has changed, Rendle said that while VF would certainly continue to look at brands in the Outdoor & Action Sports space, it’s “less about really the sector and it’s more about the consumer usage occasions and where can we find a way to bring our skills and capabilities and the benefits of our platforms to bear it to unlock these new pools of value. The number one choice in our integrated strategy is reshaping our portfolio and we are extremely committed to doing just that in aligning our portfolio to be consistent with our financial aspirations.”
Photo courtesy The North Face
