Powered by explosive growth at Vans, a pick-up in sales at The North Face and Timberland, and enhanced margins, VF Corp. reported better-than-expected earnings in its fourth quarter.
The net loss in the quarter came to $90.3 million, or 23 cents a share, after a charge of $1.16 a share from recent U.S. tax legislation as well as a 4-cents-share charge from discontinued operations.
On adjusted basis, EPS increased 13 percent to $1.01, including a 4-cent-a-share contribution from the Williamson-Dickie acquisition. Relative to the company’s outlook provided on October 23, the latest quarter included an incremental charge of $35 million pre-tax, or 6 cents a share, from additional investments to drive accelerated growth in 2018 and beyond.
VF’s officials said including the incremental charge, EPS would have been 6 cents above its outlook provided last October, but the consensus estimate–which excluded the incremental spend–was $1.02, and the miss seemed to have hurt VF’s stock.
Shares of VF fell $9.30, or 11.1 percent, to $74.64 on Friday.
Revenue increased 20.0 percent to $3.6 billion, up 18 percent on a currency-neutral basis, including a $247 million contribution from the Williamson-Dickie acquisition, which closed on October 2, 2017. Excluding the Williamson-Dickie acquisition, revenue increased 12 percent (up 10 percent currency neutral), driven by broad-based strength across VF’s international and D2C (direct-to-consumer) platforms, Outdoor & Action Sports coalition and Workwear businesses.
Sales likewise missed Wall Street’s consensus target of $3.67 billion, and that may have also pressured the stock.
On the call, VF officials announced that they had decided to sell Nautica and those results were not listed as discontinued operations. Including Nautica, sales would have exceeded VF’s October guidance by $138 million.
Gross margin in the quarter improved 130 basis points to a quarterly record high of 51.5 percent, as benefits from pricing, lower restructuring costs and a mix-shift toward higher margin businesses were partially offset by the Williamson-Dickie acquisition and changes in foreign currency. On an adjusted basis, gross margin increased 60 basis points to 51.6 percent. Excluding the Williamson-Dickie acquisition, adjusted gross margin increased 140 basis points to 52.4 percent. Changes in foreign currency negatively impacted gross margin by 10 basis points.
Operating income on a reported basis was $481 million. On an adjusted basis, operating income increased 6 percent to $497 million, including a $19 million contribution from the Williamson-Dickie acquisition. Operating margin on a reported basis increased 390 basis points to 13.2 percent. Adjusted operating margin declined 180 basis points to 13.6 percent. Adjusted operating margin, excluding the Williamson-Dickie acquisition, declined 130 basis points to 14.1 percent. Changes in foreign currency negatively impacted operating margin by 30 basis points.
In the Outdoor & Action Sports segment, sales rose 16 percent in the quarter to $2.5 billion and grew 13 percent on a currency-neutral basis. Operating profits rose 24 percent to $486.3 million and climbed 25 percent on a currency-neutral basis.
North Face Benefits From Timing Shift
At North Face, global revenue increased 6 percent on a currency-neutral basis in the quarter, including a 3 percentage point benefit from the order book timing shift. VF officials have already noted that stores are ordering later in the season, pushing orders into the fourth from the third quarter.
Wholesale revenue increased 4 percent and its D2C business increased 8 percent, including 14 percent growth in digital.
“While the growth in The North Face was below our outlook, we accelerated the timing of several initiatives to improve the quality of sales and reposition the brand back to its rightful place as the premium global outdoor lifestyle brand,” VF’s chairman and CEO, Steve Rendle, said on a conference call with analysts. ”During the quarter, less promotional activity, foundational investments in China to improve the marketplace and position ourselves for accelerated growth, as well as aggressive efforts to clear Amazon of unauthorized dealers, impacted results. These actions continued to improve the positioning of the brand in the marketplace and are showing up in stronger margins for both us and our partners.”
Rendle added, “In 2017, The North Face team made significant progress against our strategic growth plan, and reported numbers clearly don’t tell the whole story. To put context around the underlying performance of the brand and the progress being made, excluding lower off-price sales, the impact of cleaning up the Amazon environment and the investments made in China, fourth quarter revenue growth was 8 percent when normalized for the order book timing shift.”
By region, revenue in the Americas declined 1 percent, as growth in D2C, and particularly digital, was offset by the decline in wholesale.
Among fall 2017 launches, a highlight for The North Face was the L5 Proprius Jacket and the L2 Proprius Fleece Hoodie as part of the Summit Series with a focus on “fast, light, essential” that inspired the world’s leading alpinist, David Lama, to join the brand.
Said Rendle, “The attention to this category will create a positive halo for the brand and influence design for the broader North Face assortment. The brand also saw Urban Exploration business expand nicely, with collaborations with Pendleton, Timberland, Vans, and Supreme, coupled with strong sell-through from its new Cryos Collection and the addition of the Asia designed Black Series Collection, which helped advance this important strategic brand extension.”
In Europe, North Face’s strong momentum continued with revenue growth of 32 percent, marking the eighth consecutive quarter of double-digit growth in the region. Wholesale revenue increased over 40 percent, led by deepening strategic partnerships in the region. D2C increased a mid-teen rate, including almost 30 percent growth in digital.
The Nuptse Jacket celebrated its 25th anniversary, supported by a Nuptse Forever campaign, which drove excitement in the Urban Exploration territory and buzz across Europe with 75 percent growth.
Asia increased 8 percent in the quarter, including the negative impact of the foundational investments in China. D2C revenue increased 30 percent, driven by digital, which offset a decline in wholesale, as the brand aggressively managed inventory in the marketplace.
For the full year, The North Face’s sales were up 3 percent on a currency-neutral basis. Sales were down 3 percent in the Americas, expanded 23 percent in the EMEA region and gained 3 percent in APAC.
“2018 is off to a strong start for The North Face and we’re pleased with the progress being made to elevate the brand,” said Rendle. “It is early, but we are executing our strategy and even more confident in our 2021 growth targets. As we look to fiscal 2019, we expect growth for The North Face to be in line with the 6 percent to 8 percent range we laid out at our Investor Day.”
Asked about the shortfall in the North Face, Amazon and the outlook in the Q&A session, Rendle noted VF had noted earlier last year indicated the brand needed a reset, “specifically around product creation, demand creation, evolving our D2C and digital platforms.” The brand also needed to work on distribution issues at Amazon and off-price channels, as well as challenges in Asia.
Regarding Amazon, Rendle said The North Face has been testing selling directly to Amazon for five months and now has a dedicated key account leader and team working with the website in the U.S., similar to the European platform.
The partnership has involved “really investing the time and resources to understand Amazon better, help them understand us as a provider and a brand, and then collaboratively going out to clean up the unauthorized dealers, which a tremendous amount of work went into that this fall. I would like to tell you we’re done. I don’t think you’re ever done, as you’re constantly policing that environment, but I would tell you, we have a good partner that’s very committed to working with us in a collaborative way to bring our brand to life in this aspect of our distribution.”
As far as the robust 6 to 8 percent outlook, Rendle said it generally reflects confidence in reception to the Summit Series. He said the launch led to “a complete re-ignition of energy in the specialty channel, in our own D2C. We’ve seen it across the globe, and the impact that the focus on Summit Series and very specific ideas around design, innovation specific to performance, but really unlocking design that people are attracted to, color stories, and performance features that we see having a direct impact on the balance of the line as we’ve really shored up the pinnacle.”
Rendle also said North Face’s Urban Exploration is also seeing momentum overseas, particularly the Black Series, and “our early reads here in the United States are equally strong.”
Rendle added, “The interest in collaborations with the brand is another proof point. But just as we go out and launch marketing campaigns, the online digital piece and the connections that we’re getting with consumers, all of that kind of adds up to us confidently stating 6 percent to 8 percent growth rate for next year.”
Vans’ Q4 Revenues Soar 35 Percent
At Vans, revenue for the fourth quarter increased 35 percent, with strength across all regions, channels, and product franchises. Revenue in the Americas increased 38 percent, Europe increased 31 percent, and Asia Pacific grew 21 percent. Wholesale and D2C businesses, both increased more than 30 percent, including more than 50 percent growth in digital.
Said Rendle, “The brand has become the global icon of creative expression for youth culture.”
The Vans North America D2C team, which became VF’s first $1 billion regional D2C platform. The region saw nearly 30 percent D2C growth and a total comp above 20 percent.
“Looking at product, the diversity of Vans’ growth and the teams’ Not Just One Thing mentality will sustain our strong momentum as we move into fiscal 2019,” said Rendle. “For the quarter, Classic footwear increased more than 25 percent, with continued strength in Old Skool and Slip-On styles. Progression footwear increased more than 20 percent, as the new UltraRange, All Weather MTE, and Pro franchises continued to perform well. The brand also delivered double-digit growth across apparel, and accessories. And our customs platform, a great example of creative expression, increased almost 200 percent in the quarter.”
For the year, Vans sales were up 19 percent on a global basis. Sales were up 19 percent in both the Americas and EMEA and ahead 24 percent in APAC.
Rendle added, “The Vans brand is stronger than it has ever been. Retail inventory levels are in great shape and we remain disciplined with respect to inventory management, merchandising, and assortment planning. We’re investing heavily to continue to fuel Vans’ explosive growth. While the comps next year will be difficult, disciplined execution and a long track record of consistent performance give us confidence the Vans brand will deliver double-digit growth in fiscal 2019.”
Timberland’s Sales Gain Momentum In Q4
At Timberland, global revenue increased 8 percent, including a 5 percentage point benefit from the same order book timing shift that impacted The North Face brand. Wholesale increased 6 percent and D2C increased 10 percent, including more than 30 percent growth in digital.
In line with expectations, Timberland brand revenue in the Americas increased 5 percent. However, revenue declined 1 percent when normalized for the order book timing shift.
“Our diversification strategy continues to evolve, as strength from non-classic footwear and apparel, both of which increased at a mid-single-digit rate, offset by softness in our core Classic business,” Rendle said. “The performance of our SensorFlex and Aerocore platforms was particularly strong, increasing almost 50 percent in the quarter, and our Timberland PRO business continued to generate double-digit growth, with strength from our Powertrain Sport franchise.”
In Europe, Timberland revenue increased 14 percent, including a 2 percentage point benefit from the order book timing shift. Wholesale and D2C businesses both increased at double-digit rate, including more than 30 percent growth in digital. Said Rendle, “Our locally designed product continues to drive demand, highlighted by our new women’s collection, Courmayeur Valley, and Venice Park, which increased at double-digit rates. In men’s, we had strong success with our Radford campaign and our Goose Eye Waterproof Parka collection.”
Timberland’s Asia business increased 3 percent, with more than 50 percent growth in China, which was partially offset by softness in Japan. High-teen growth in its D2C business, driven by almost 80 percent growth in digital, was offset by a decline in wholesale. The Ultimate Winter Boot with a SensorFlex outsole performed well in the region.
For 2017, Timberland’s sales were up 1 percent on a global basis, including a dip of 1 percent in the Americas, a gain of 6 percent in EMEA and a lift of 1 percent in APAC.
“Timberland’s performance in 2017, while not at the level we’ve come to expect from this powerful lifestyle brand, was in line with our expectations,” said Rendle. “We are thoughtfully executing against the strategy we laid out at our Investor Day. And as we move into fiscal 2019, we will begin to step our way into more sustainable and diversified growth. Over the past year, we’ve made significant investments and announced several organizational changes within the global Timberland brand, designed to foster more global connectivity and speed to market, drafting off the strong momentum we have in Europe and China.”
For the year, VF’s revenues increased 7 percent to $11.8 billion, or 4 percent on an organic basis. The big three brands grew at a combined rate of 8 percent. On an organic basis, international increased 9 percent, led by strength in Europe and China, D2C increased 15 percent, with 30 percent growth in digital and its Workwear business increased 7 percent.
Gross margin improved 160 basis points to 50.5 percent, a record for VF. Adjusted EPS increased 7 percent to $2.98, including about $100 million of incremental investment to drive our strategy and accelerate growth.
Rendle, marking his first year as CEO, noted that VF at the start of the year made a commitment to digital and the company saw owned and wholesale digital growth of more than 25 percent, accounting for 55 percent of its total growth.
International, also cited as a growth priority, adding 9 percent in revenues in the year and accounted for more than 40 percent of total revenue in 2017. Workwear was also marked as a focus and the brands were consolidated into a single global platform and Williamson-Dickie was acquired.
Rendle also noted as part of an its commitment to be “active brand portfolio managers,” VF sold LSG, its licensed apparel business that includes Majestic Athletic, and decided to sell Nautica while also acquiring Williamson-Dickie and reaching an agreement to buy Icebreaker.
Finally, Rendle said the company “committed to being a more consumer and retail-centric organization” and was able to grow D2C 15 percent, including 12 percent comp growth. D2C represents more than 30 percent of total revenue. The majority of its $100 million incremental investment at capabilities is focused on its consumer-centric strategy.
Priorities for 2018, according to Rendle, include “protecting and enabling the explosive growth in Vans, while reenergizing growth in our Timberland and North Face brands specifically here in North America; successfully integrating Williamson-Dickie and Icebreaker into VF; accelerate our consumer-centric transformation work, with a particular focus on increasing speed-to-market; and we’ll drive operational efficiency and create capacity for growth to fund our strategic growth initiatives.”
To better support the growth of its larger brands, Rendle said the company has realigned the roles of its Group Presidents and redirected its leadership talents to its most important objectives. Going forward, each Group President will be responsible for a single geographic region and have one global brand reporting to them.
Rendle also said reshaping the portfolio will remain a top priority in 2018. He added, “Our commitment to active portfolio management is how we position ourselves to deliver top quartile returns, with an evolving portfolio of powerful brands that are strategically advantaged to win. The decisions we are making cement VF’s position as a value creation company. Reshaping the portfolio will remain a top priority in 2018.”
As previously mentioned, VF is changing its fiscal year to the Saturday closest to March 31 from the Saturday closest to December 31.
Revenue is expected to approximate $2.9 billion in the transition quarter ended March 31, up 16 percent, including about a $200 million contribution from the Williamson-Dickie acquisition. Excluding the Williamson-Dickie acquisition, revenue is expected to increase at a high single-digit rate due in part to changes in foreign currency.
Adjusted EPS is expected to approximate 65 cents a share, up 27 percent, including about a 2-cents-a-share contribution from the Williamson-Dickie acquisition. Excluding the Williamson-Dickie acquisition, adjusted EPS is expected to increase more than 20 percent, due in part to changes in foreign currency.
For fiscal 2019, revenue is expected to be up more than $13.2 billion, representing high-single-digit growth. This includes the expected contributions from Icebreaker and Williamson-Dickie. Adjusted EPS is expected to be approximately $3.45, representing low double-digit growth.
“Our growth is accelerating and our core growth engines are delivering double-digit growth,” said Rendell. “Our fundamentals are strong, and we are aggressively investing in our largest and most profitable growth opportunities. We will use our early success to build on our momentum and continue to transform VF. We will continue to reshape and evolve our portfolio to deliver top quartile returns to shareholders. We look forward to updating you on our progress and on the next chapter of VF’s value-creation journey.”
Photo courtesy The North Face