VF Corp. reported first-quarter earnings were down slightly due to a sales dip and currency headwinds, but VF said results were in line with expectations and its growth platforms performed well.
Particularly encouraging was The North Face, which saw sales climb 8 percent in the quarter on a currency-neutral basis. Vans rose 6 percent on the same basis.
Net revenues in the quarter were down 2 percent to $2.56 billion and off 1 percent on a currency-neutral basis. Stronger results were seen from its key growth drivers, including its international and direct-to-consumer (DTC) platforms, and its Outdoor & Action Sports coalition.
“The momentum we see building in our largest brands and in our international and direct-to-consumer platforms is strong,” said Steven Rendle, VF’s CEO, on a conference call with analysts. “And our first-quarter results give me confidence in our expectation for accelerated growth as we move through 2017.”
He noted that for the quarter Vans, The North Face and Timberland grew at a combined rate of 4 percent, with strength in The North Face and Vans offsetting a decline at Timberland. International grew 5 percent, and its China business delivered a 10 percent growth rate. DTC grew 7 percent, including a mid-single-digit comp. Digital was up more than 25 percent.
Supporting its bottom line, gross margin from continuing operations in the quarter improved 150 basis points to 50.2 percent and gained 190 basis points on a currency-neutral basis. Benefits from pricing, lower product costs and a mix shift toward higher-margin businesses were partially offset by changes in foreign currency. Changes in foreign currency negatively affected reported gross margin by 40 basis points during the quarter.
“Our gross margin drivers remain intact,” said Rendle. “And our strong margin expansion will fuel investment in our strategic priorities and provide flexibility as we execute against our 2021 plan. It’s an important and sustainable part of our model.”
EPS from continuing operations decreased 8 percent (down 3 percent currency neutral) to 52 cents. Excluding the negative impact of 8 percentage points due to lower discrete tax benefits, EPS would have grown 5 percent on a currency-neutral basis.
Shares of VF closed Friday at $54.63, down $3.22, or 5.6 percent, Friday on the New York Stock Exchange.
The quarter also included transition and restructuring costs related to the sale of its licensing business, including Majestic Athletic, to Fanatics as well as the related exit from its JanSport collegiate licensing business. Excluding these items, earnings would have been 55 cents a share, in line with Wall Street’s expectations. VF noted that it sold the sports licensing business for $225 million, with the transaction expected to close shortly.
Operating income on a reported basis in the quarter was down 7 percent to $291 million compared to the same period of 2016. Changes in foreign currency negatively affected operating profit growth by 5 percentage points during the quarter.
Among its key brands, The North Face’s revenues grew 8 percent on a global basis, as strength in the Americas and Europe was offset by a slight decline in Asia-Pacific. Excluding the impact of bankruptcies in the Americas business, which didn’t really impact the brand until the second half of 2016, global revenue for The North Face was up at a low-double-digit rate. Low-double-digit growth was seen in D2C, and mid-single-digit growth in wholesale.
In the Americas, sales increased 4 percent, driven by low-teen growth in D2C with strong results from e-commerce, which grew nearly 20 percent. This was offset by a low-single-digit decrease in wholesale due to the impact of the bankruptcies. From a product standpoint, rainwear performed well in the quarter, driven by the launch of its new Apex Flex Gore-Tex jacket.
In Europe, The North Face was up 19 percent as its strong momentum continued. The wholesale business climbed nearly 30 percent. Strong results were seen across all product categories and channels, and the momentum is expected to continue for the balance of the year.
In Asia, as expected, first-quarter revenue was down 1 percent, as low-double-digit growth in D2C was offset by a high-single-digit decline in wholesale. With the outdoor environment remaining highly promotional in China, efforts are being made to consolidate retail partners and aggressively manage inventory in the marketplace. High-single-digit growth continues to be expected in Asia in 2017, primarily weighted toward the second half.
“While revenue growth at The North Face was slightly above our expectations for the first quarter, there’s no change to our outlook for mid-single digit revenue growth for the brand in 2017,” said Rendle.
At Vans, global revenue was up 7 percent with broad based growth across all regions of the world and all product franchises. From a channel perspective, D2C increased at a high-teen rate, while wholesale was flat, as growth in the Americas and Asia was offset by an expected decline in Europe.
Vans Americas business was up 6 percent, driven by low-double-digit D2C growth, including more than 20 percent growth in e-commerce. The wholesale business increased at a low-single digit rate. Classics and particularly the Old Skool fueled success in D2C and wholesale. Vans opened a permanent House of Vans in Chicago, a pop-up House of Vans in Toronto and three pop-up House of Vans locations in Mexico.
In Europe, Vans delivered 1 percent growth during the quarter, marking a turnaround. Said Rendle, “Our D2C business remains strong, with 20 percent growth driven by a 30 percent increase in e-commerce and a high-teen comp growth. As expected, wholesale declined at a low-single-digit rate.”
With inventory levels for Vans in Europe in the wholesale channel now normalizing and double-digit growth in its fall order book, Vans is on track to deliver high-single digit growth in Europe in 2017.
In Asia, for the third consecutive quarter Vans delivered more than 20 percent growth. The gain was fueled by more than 50 percent growth in D2C, with strength across all markets driven by “exceptional growth” in the digital space in China. Wholesale increased at a mid-single-digit rate with strength in China and Korea.
Looking to 2017, Vans remains on track to deliver low-double-digit growth outlook overall.
In line with expectations, Timberland’s global revenue decreased 4 percent with low-single-digit growth in D2C and high-single-digit decline in wholesale. Revenues in the Americas decreased 7 percent, as mid-single-digit growth in its D2C business, including almost 30 percent growth in e-commerce, was offset by a low-double-digit decline in wholesale.
“We continue to work on diversifying our business toward a more balanced assortment, which will reduce our reliance on Classic boots in the Americas region,” said Rendle. “This is the strategy we outlined at the Investor Day, and it’s the same successful strategy that has led to more consistent balanced growth in our international business.”
While not yet to scale in the Americas, Timberland is seeing ”tremendous success” in its men’s casual platforms, such as SensorFlex and AeroCore.
“Our D2C business has the right assortment. And the growth we are seeing gives us confidence that we have the right strategy,” said Rendle. “However, the product transition in the wholesale channel will take a little longer to play out. As we diversify the assortment, and our retail partners work through inventory in the boot category, we expect the Americas business to return to growth in the second half of 2017.”
Timberland revenue in Europe was in line with 2016 levels, as low-single-digit growth in D2C was offset by flat revenue in wholesale. As expected, wholesale revenue in the quarter was impacted by timing of shipments in the brand’s distributor business. Timberland Europe is projected to return to growth in the second quarter and accelerate into the high-single-digit range in the second half of 2017.
Revenue in Timberland’s Asia business was down 5 percent. D2C declined at a mid-single-digit rate, as strong e-commerce growth in China and low-single-digit comp growth was offset by a decision to reduce underperforming doors in some of its mature markets. Wholesale was down at a high-single digit rate.
“For 2017 we continue to expect Timberland to grow in the low-single digit range,” said Rendle. “We expect the brand to return to growth in the second quarter and for growth to accelerate in the second half of the year, as our international business gains momentum, and we continue to evolve our product segmentation and assortment in the Americas.”
Overall sales in the Outdoor & Action Sports coalition increased 2.4 percent to $1.68 billion and grew 4 percent on a currency-neutral basis. Operating income in the segment inched up 1.2 percent to $230.9 million and advanced 7 percent in local currencies.
The coalition also includes Eagle Creek, Eastpak, JanSport, Kipling, Lucy, Napapijri, Reef and Smartwool.
The company also owns a number of jeans brands (Lee, Rider by Lee, Rock & Republic and Wrangler), work brands (Bulwark, Horace Small, Red Kap and Wrangler Workwear) and the Nautica sportswear brand.
VF’s outlook was adjusted for the sale of its licensing business, but remained essentially the same.
Revenue is expected to increase at a low-single-digit percentage rate, including about a 2 percentage point negative impact from changes in foreign currency. Previously, the forecast called for low-single-digit growth.
Gross margin is expected to reach 49.6 percent, a 20 basis point increase over 2016 gross margin, and includes about a 70 basis point negative impact from changes in foreign currency. Previously, gross margin was expected to be about 48.6 percent, also including about a 70 basis point negative impact from changes in foreign currency.
Operating margin is 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. Operating margin was also pegged at 14 percent under the old forecast.
EPS is expected to be down at a low-single-digit percentage rate compared to 2016 adjusted EPS of $2.98 (up at a mid-single-digit percentage rate on a currency neutral basis). Earnings per share were also expected to be down at a low-single-digit percentage rate under the previous forecast.
Photo courtesy The North Face
