Wall Street generally remained upbeat about VF Corp.’s prospects despite the company’s reported earnings and sales in its second quarter ended October 2 coming in slightly below consensus targets. Concerns include reigniting growth in China and Vans’ overall momentum.

The report came out Friday morning and shares closed down $3.33, or 4.5 percent, to $70.74 in trading Friday on the New York Stock Exchange.

Highlights of the quarter ended May 31 include:

  • Revenue increased 23 percent (up 21 percent in constant dollars) to $3.2 billion, just short of Wall Street’s consensus estimate of $3.5 billion.
  • Excluding the contribution from Supreme acquisition, sales grew 19 percent on a reported basis (17 percent in constant currency), driven by EMEA and North American regions. The shortfall was attributed to transit delays that pushed shipments into the second quarter into the third quarter and near-term challenges for Vans, mainly in China.
  • Gross margin increased 290 basis points to 53.7 percent, primarily driven by reduced promotional activity. On an adjusted basis, gross margin increased 300 basis points, including a 20 basis point favorable impact from acquisitions, to 53.9 percent.
  • On an adjusted basis, EPS increased 66 percent, up 63 percent in constant dollars, to $1.11, just below Wall Street’s consensus target of $1.16.
  • In APAC, headwinds were a result of COVID disruptions and a more challenging near-term consumer environment in China. Vans now expect to show growth for the full year in the range of 26 percent and 28 percent against year-ago levels against the guidance of 28 percent to 29 percent previously.
  • Vans’ sales grew 7 percent on a currency-neutral basis. Vans’ EMEA business “accelerated meaningfully” in the quarter, but the Americas’ Q2 recovery did not meet expectations, and headwinds were faced in the Asia Pacific, with virus disruption across the region and a more challenging near-term consumer environment in China. Vans now expects to show growth for the full year in the range of 26 percent and 28 percent against year-ago levels against the guidance of 28 percent to 29 percent previously.
  • The North Face’s 2Q revenue grew 29 percent in constant currency, despite “significant” wholesale shipment shifts into the third quarter. The international business was seen gaining share while growth in the underlying U.S. business accelerated meaningfully on tight inventories, driving high-quality sales. The North Face is now expected to grow for the full year in the range of 27 percent to 29 percent, up from 26 percent to 28 percent guidance previously.
  • Timberland’s Q2 revenue grew 25 percent in constant currency, also despite a meaningful wholesale shipment timing shift from 2Q to 3Q. Despite historically low inventory levels, core boots and outdoor footwear continue to show strength heading into Holiday, each growing more than 40 percent in Q2.
  • Dickies’ 2Q revenue grew 19 percent in constant currency and is now projected to increase over 20 percent in the full year versus previous guidance for mid-teen growth.
  • VF reaffirmed its full-year F22 guidance for revenue and EPS, including $12 billion in revenue and $3.20 in adjusted EPS, while it revised its margin guidance slightly to 56 percent gross margin (versus over 56 percent previously), including an additional 40 basis points of incremental freight costs and 13 percent operating margin (versus over 13 percent previously).

The following is a summary of analyst views on the quarter:

»BTIG maintained its “Buy” rating and revised its price target on VF to $101 from $104.

“Given the noise during the quarter, the company’s tone and confidence about its ability to hit its guidance were encouraging,” wrote Camilo Lyon. He estimated that $200 million of wholesale shipments shifted from the second into the third quarter across VF’s brand portfolio due to the supply chain challenges and said Vans was particularly hurt by Chinese consumers shifting spend to domestic brands.

On the positive side, he said the vast majority of VF’s supply chain challenges have been transit rather than production-related. He also feels The North Face could present upside with its lean inventory position, healthy U.S. momentum and technology stories such as Futurelight and Vectiv as it enters the cold-weather season. Wrote Lyon, “Ultimately, we believe VFC’s F22 guidance could prove conservative as it recaptures the $200M wholesale revenue in 2H, partially offset by softness in China and as freight costs are partially offset by a disciplined promotional strategy during the holiday. In total, we see the VFC portfolio displaying its strength as its key brands are showing positive momentum, thus helping to offset a temporary slowdown in Vans.”

»BMO Capital lowered its price target on VF Corp. to $73.00 from $75.00 and maintained its “Market Perform” rating.

Simeon Siegel wrote, “Bottom Line: Weaker domestic Vans results coupled with a challenging (near-term) China outlook and ongoing, industry-wide supply chain/logistics challenges, weighed on VFC results. Although management noted incremental sales and GM headwinds, they held the FY2022 EPS guide at $3.20, as the team works to control the controllable and focus on spend reductions without impacting strategic investments and Demand Creation. Although we see value in the brands, we continue to believe that current valuation appears stretched.”

»Baird maintained its “Outperform” rating and kept its $95 price target.

Wrote Jonathan Komp, “We see prospects for a sharp fundamental into 2H and F2023E including for Vans as well as more diversified growth across the portfolio. More broadly, we remain confident in VFC’s ability to deliver attractive long-term growth targets, or above (>mid-teens EPS growth) given expected SG&A leverage supported by leverage of strategic investments, less transitory cost pressure (i.e., from freight), and the full return of retail store volume (not assumed until F20203 which may prove conservative). We think sentiment can improve as VFC demonstrates its ability to deliver a strong earnings recovery particularly given higher embedded growth needed to reach 2H estimates.”

»Stifel kept its “Hold” rating and price target of $85.

Jim Duffy wrote, “FY2Q results included a mix of good news (The North Face, Dickies, wholesale, full-priced selling) and uninspiring indicators (Vans and China). We are encouraged that FY guidance remains largely intact considering supply chain disruptions and emergent macro headwinds in China. Revenue composition shift to wholesale from DTC; however, is not confidence-inspiring. From current levels, all paths to equity value creation depend on factors for which visibility is challenged including a return to HSD+ growth from Vans and +DD growth from China.”

»Cowen kept its “Outperform” rating but reduced its price target to $80 from $83.

John Kernan said in a note, “Q2 results were below consensus and fairly in line with our model. Management talked optimistically regarding 2H FY22 guidance along with North Face trends and gross margin into 2023. Our biggest concern is the implied acceleration in the Active segment that is embedded in management’s Q4 guidance and consensus estimates into next year.”

»Citi maintained its “Neutral” rating and lowered its price target to $76 from $85.

In a note, Paul Lejuez wrote that although the stock was initially down significantly in trading Friday due to the sales and earnings miss in the quarter, VF’s comments on the quarterly call helped reduce market fears to some degree.

“Managementexplained that much of the sales miss was due to supply chain delays that resulted in shipments shifting from 2Q into 3Q (excl the shift, sales would have been close to consensus) and they had confidence that most of the missed sales in 2Q would be booked in 3Q. In addition, management noted that the reduction in Vans’ guidance for the year was related to China (about 10 percent of sales). While Vans missed its sales plan in the Americas in 2Q, management said it was largely related to the COVID resurgence in August, which hurt sales in the key back-to-school period. Overall, it still wasn’t a great quarter, and with the stock trading at 15x our F23E EBITDA, the valuation is not yet compelling in our view.”

Photo courtesy Vans