Shares of VF Corp. fell $5.98, or 7 percent, to $85.13 on Wednesday after the company reported third-quarter results, apparently due to growth concerns at Vans; however, analysts were generally upbeat on the report, given that VF was able to raise guidance for the full fiscal year despite the impact of the return of store closures that significantly impacted Vans.

It was also seen as encouraging its continued strength in China and digital business, improving momentum at The North Face and strong confidence from VF’s management in an overall sales recovery in the current quarter and into fiscal year 2022. VF officials also predicted not only revenues but margins could return to pre-COVID-19 quarterly peak levels in FY22.

Highlights of the third quarter ended December 26 included:

  • Sales fell 6.0 percent to $2.97 billion, just short of Wall Street’s consensus estimate of $3 billion;
  • By segment on a currency-neutral basis, Outdoor sales were down 7 percent, Active was off 11 percent, and Work grew 8 percent.
  • Vans’ sales were down 8 percent on a currency-neutral basis after sliding 11 percent in Q2. The results were below expectations as a result of store closures in the EMEA region and California. Vans’ sales are expected to accelerate to positive low-double-digit growth in Q4.
  • The North Face outperformed expectations with sales on a currency-neutral basis down 2 percent on a currency-neutral basis versus a decline of 26 percent in Q2. For Q4, sales are expected to accelerate to growth of more than 20 percent.
  • Timberland’s sales were down 17 percent on a currency-neutral basis in Q3 versus a decline of 26 percent in Q2. Q4 revenue is expected to increase mid-single digits.
  • Dickies’ sales were up 7 percent on a currency-neutral basis after climbing 18 percent in the second quarter. Q4 revenue is expected to increase mid-teens.
  • By region on a currency-neutral basis, sales were down 11 percent in U.S., 4 percent in EMEA, and down 17 percent in non-U.S. Americas. Currency-neutral comps were up 6 percent in APAC with Mainland China ahead 15 percent.
  • By channel on a currency-neutral basis, DTC was down 2 percent despite digital expanding 49 percent. Wholesale sales on a currency-neutral basis were down 12 percent.
  • Gross margin decreased 250 basis points to 54.7 percent, primarily driven by elevated promotional activity to clear excess inventory and the timing of net foreign currency transaction activity. On an adjusted basis, its gross margin decreased 150 basis points to 55.7 percent.
  • EPS reached 93 cents a share on an adjusted basis, down 19.1 percent from $1.15 a year ago. Adjusted results topped Wall Street’s consensus estimate of 90 cents;
  • For fiscal 2021, revenue is expected to decline in the range of 12 percent to 13 percent on an adjusted basis than a previous projection of a decrease of roughly 14 percent;
  • Fiscal 2021 adjusted EPS is expected to be approximately $1.30, reflecting a decrease of roughly 51 percent. Previous guidance called for EPS of at least $1.20, reflecting a decrease of roughly 55 percent. The updated outlook reflects around 5 cents of adjusted EPS from the December acquisition of Supreme, the Q3 EPS beat, and better underlying Q4 in part tied to foreign exchange.
  • Inventories in the quarter fell 14 percent.
  • Order books are reportedly conservative vs. historical levels, but cancellations are low.

The following is a synopsis of analyst views on the quarter and VF’s leadership transition.

›Piper Sandler, which has an “Overweight” on VF, increased its price target from $106 to $107.

Wrote Erinn Murphy, Piper Sandler’s lead analyst, in a note, “In addition to accelerating trends planned for Q4, most notably for TNF, Dickies and Vans, we are encouraged by management’s comments around FY22 on the earnings call, which included: 1) gross margin at least back to peak levels organically – this was one of the most notable comments on the call from our perspective; 2) FY22 quarterly sales back to prior peak mid-way through next FY; 3) no notable cancelations on orders as inventory in the channel is lean, and demand of outdoor is improving.”

She also noted VF’s officials reiterated that Supreme is expected to deliver at least $500 million in sales over FY22 and gross margins stand to benefit from the integration of higher-margins for Supreme.

For the third quarter, Murphy highlighted the success of innovation by the company, including The North Face’s VECTIV footwear, Gucci collaboration, Futurelight, Vans finding momentum in Progression footwear, and work-inspired product gaining traction at Dickies. She was also encouraged that its digital growth on a currency-neutral basis improved to 49 percent from 42 percent in Q2. She noted that while VF officials indicated that a channel mix would continue to pressure gross margins in Q4, “that GM roadmap into FY22 should accelerate.”

›Deutsche Bank, which has a “Buy” rating on VF, lowered its price target to $99 from $103.

“VFC continued its unfortunate streak of trading down on earnings days (today is its 6th straight quarter) on a mixed 3Q print in which revenues missed while margins/EPS slightly beat,” said Paul Trussell, lead analyst in the space at Deutsche Bank, in a note. “Given store closures in California and EMEA, and overall weak Holiday/seasonal apparel results in NA, we viewed top-line expectations relatively muted and see little surprise in today’s results.”

Trussell said the quarter gave his team “more confidence” in several aspects of VF’s business strategy, including momentum at The North Face, given the brand’s outperformance in the quarter in part due to strong reception to new launches. He also cited VF official’s confidence about returning to a peak gross margin rate in FY22. Trussell was also encouraged that VF was able to raise EPS guidance despite the impact of ongoing store closures with an emphasis on growth in Asia, its digital transformation and Project Enable initiatives currently underway. Trussell added, “Our outer year estimates come down slightly though to reflect store productivity challenges (due to ongoing closures in some regions), but we reiterate our Buy rating driven by an attractive margin outlook and its compelling, and recently enhanced, top-line growth profile as a result of VF’s multi-year portfolio transition, the Supreme acquisition and ongoing momentum in outdoor and active categories.”

>BTIG reiterated its “Buy” rating at a price target of $102.

Camilo Lyon, the lead analyst at BTIG, believes that Vans, with its currency-neutral decline of 8 percent, appears to be facing the most questions. However, he noted that one-third of Vans’ North American revenues are in California and one-third of European revenue is direct-to-consumer stores. He wrote, “So closures continue to have a disproportionate albeit likely short-lived impact on the brand. We expect this trend to snap back next quarter (guiding FQ4 Vans +LDD) and progressively get stronger into the summer months as restrictions ease.”

On a positive note, he pointed to The North Face’s strong growth in Europe, up 17 percent on a currency-neutral basis, and an improving trend in North America, down 12 percent in the third quarter after declining 32 percent the second quarter. Lyon wrote, “We believe TNF is in a solid position heading into F22, largely due to benefits from ramped up innovation and expansion of its lifestyle offering that Gen Z/Millennials have responded to particularly well.”

Overall, Lyon described VF’s quarter as “solid” given the lockdown headwinds in California and Europe. He wrote, “Our view on VFC has not changed and, in fact, it continues to be that of a strong recovery play that is on track to return to pre-pandemic F20 sales levels while recovering lost gross margin.”

›Stifel maintained its “Hold” rating at an $82 price target.

Jim Duffy, the lead analyst at Stifel, said the earnings upside, despite a softer than modeled top line, reflects expense discipline offsetting pressure from retail closures in California and Europe (primarily impacting Vans). The increased FY21 guidance reflects a “slightly stronger organic business,” coupled with the Supreme addition. Duffy wrote, “We look for sequential improvement across FY22 and expect organic revenue surpasses prior peaks sometime in FY1H.”

However, Duffy said, “Vans remains the linchpin to profitability,” with VF’s guidance for Vans calling for low-double-digit Q4 growth suggesting improving underlying trends. Duffy added, “Near-term pressures from retail closures, however, weigh on Van’s outsized profitability. With Van’s margin under pressure and pro forma net leverage [approximately] 3.0X forward EBITDA, we don’t see sufficient risk-adjusted upside to turn more constructive. We reaffirm our Hold rating and $82 12-month target price.”

›J.P. Morgan, which has an “Overweight” rating on VF, maintained its price target at $100.

Matt Boss, the lead analyst, wrote, “We see VFC’s EPS growth profile accelerating to mid-teens beginning 2H20 (versus flattish the past three years) with management’s Big 3 brands (TNF, Vans, TBL) and pruned portfolio driving mid- to high-single-digit annual revenue growth, consistent gross margin expansion (International/DTC/OAS mix = 50bps annually) and inflection to SG&A leverage (post-front-end loaded investments) driving +13 percent EBIT dollar expansion the next three years.”

›Baird reiterated its “Outperform” rating and lifted its price target to $95 from $92.

Jonathan Komp, Baird’s lead analyst in the space, noted that Q3 results were close to expectations with upside for The North Face and strong digital growth offsetting incremental pressure from COVID-related store closures which are continuing in the current quarter.

The analyst noted that Vans, with overall sales down 6 percent and DTC sliding 30 percent, was impacted by store closures in California and Europe which are two-thirds of the brand’s retail base and implied about a quarter of total revenue. Komp also suspects Vans is being impacted by shifts toward athletic/athleisure/comfort, which may prove temporary. However, Komp said Vans still saw strength in digital, up 48 percent; in China, ahead 21 percent; and also pointed to VF’s projection that Vans would return to low-double-digit growth in the current quarter.

Other favorable developments in the quarter included sequential improvement at The North Face and Timberland. Komp also said the ongoing momentum in Dickies underscores the benefits Supreme may derive under VF’s ownership.

Komp added, “More importantly, VFC outlined a framework for a healthy F2022E revenue/ EPS recovery that we believe supports our prior estimates (or perhaps upside) with building momentum for the Outdoor brands and Supreme offsetting limited short-term visibility for Vans. We are buyers of the pullback, seeing opportunity for 40-50 percent upside on a two-year basis.”

›Cowen, which has an “Outperform” rating on VF, slightly lowered its price target to $97 from $99.

John Kernan, lead analyst at Cowen, “Outperform,” wrote in a note, “Q3 results were fairly in line with consensus, though below our elevated expectations and investor positioning into the release. The tone of the call was optimistic on returning to peak gross margin in FY22 and improved top-line momentum at Vans and North Face into Q4 (March end) and Spring/Summer. We tweak our price target lower to $97 on slightly lower EPS for FY22 than previously modeled.”

›Banc of America reiterated its “Underperform” rating at a $65 price target.

Banc of America lowered its FY22 EPS estimate by 20 cents despite VF’s outlook for improving gross margins and revenues. Robby Ohmes, lead analyst at Banc of America, wrote in a note, “We believe VFC’s operating margin recovery will lag given elevated SG&A expense related to: (1) productivity challenges in Brick & Mortar as store traffic remains below pre-COVID levels; (2) VFC cost savings initiatives thru Project Enable will largely be offset by business transformation investments to optimize the seamless integration of environments (virtual & physical); and (3) resumption of marketing spending, which we believe had a large bias toward existing customers during COVID-19, as [approximately] 50 percent of Vans’ U.S. D-T-C (direct to consumer) sales in F2Q-F3Q were driven by loyalty members.”

But the analyst’s “Underperform” rating is largely tied to expected slowing momentum for Vans. Citing in part Banc of America aggregated credit & debit card data, Ohmes said he believes Vans is losing share in the U.S. following a period of significant outperformance that lasted from June 2017 to December 2019. He wrote, “We believe Vans share loss in the U.S. is primarily driven by Nike’s reemergence as the dominant brand in casual lifestyle, led by strong momentum in Air Force 1, Nike Blazer, & Converse.”

›Wells Fargo reiterated its “Overweight” rating with a $100 price target.

Ike Boruchow, lead analyst on the stock at Wells Fargo, wrote in a note, “While the quarter was noisy, at a high level, we see momentum building in the portfolio: TNF Is accelerating impressively, Vans should recover nicely when the lockdowns in California/Europe end and Dickies is an underappreciated growth driver. We also see that inventory dynamics are holding back growth today, which should improve as we move further into 2021 (a TNF/TBL issue). Furthermore, we see upside potential at Supreme (most notably, an expansion into China, where the brand does virtually no revenue today). All in, we continue to see a lot to like here long-term.”