All About Outdoor & Action Sports: VF’s Quarter

But revenue from VF’s other segments- coalitions as they call them- grew by just one half of one percent from $1.116 to $1.123 billion. These other segments are jeanswear, imagewear, sportswear, contemporary brands, and other.

The same trend can be seen in VF’s operating profit. Total operating profit rose 6% from $269 to $285 million. OAS operating profit was up 16% from $100 to $131 million. Ignoring OAS, total operating profit for the other segments fell 8.4% from $168.6 top $154.5 million.

The North Face, Vans and Timberland brands are the major brands in OAS. Their revenue grew, respectively, by 11%, 21%, and 19% during the quarter. OAS revenues were up 13% in the U.S. and 19% internationally. Direct to consumer in OAS rose 24% during the quarter. Wholesale was up 13%.

It’s instructive to note that direct to consumer revenues for the whole company grew 18% for the quarter and international 14%, both lower than in the OAS segment alone.  VF ended the quarter with 1,299 owned retail stores and they are on track to open a total of 150 new ones this year.

In addition to The North Face, Vans and Timberland, OAS includes other brands. One of them is Reef. I’ve always been fond of that brand and hope for some piece of information on how it’s doing. We don’t get it. But CFO Bob Shearer does tell us that Napapijri, Kipling, EASTPAK and SmartWool (also in OAS) each grew by over 20% in the quarter.

Like I said in the title, for VF, it’s all about OAS. Bob Shearer talks about OAS, international, and direct to consumer being VF’s key growth drivers. We’ve already seen that international and direct to consumer growth was higher in percentage terms for OAS than for the rest of the business. As Bob puts it, “These have been our core growth drivers over the past few years. They will be for the remainder of 2014 and will be for years to come. In so many ways, we’re just scratching the surface related to these powerful growth engines.”

I have always admired VF’s management discipline and that the management discipline has never paralyzed them when it was time to do something new or better. Still, their financial results, and reliance on OAS for growth (not just for this quarter), make it pretty clear that they aren’t immune to market pressures no matter how well they manage. If they were, all their segments would be performing as well as OAS.

Their answer, I imagine, would be that they own a portfolio of brands exactly because not all market segments are going to perform well at the same time. I agree with them.

What, then, is the secret sauce that is allowing The North Face, Vans, and Timberline to perform so well right now? Let’s start by talking about VF’s overall management strategy a bit. As CFO Shearer puts it, “We make investments to drive topline. We find leverage elsewhere in our expense structure and improve our profitability.”

What do you need to do that? Well, for one thing you need the management team that can spot the investment opportunities. Then you need the balance sheet that allows you to make those investments.

Here’s Steve Rendle, SVP for the Americas, talking about why Vans is doing so well when asked “What’s the strategy to keep the Vans brand from overheating and perhaps being a transient fashion phenomenon?”

“…the Vans team is the primary driver of that sustainable growth pack. They’re very, very mindful about their product segmentations, the partners that they work with and how they sell in seasonal initiatives. Here in the US, which I can speak to directly, through their go-to-market process, looking at these really creative collaborations coupled with just normal seasonal product releases, they stay very on top of who they partner with, what they’re selling in and really managing that growth on a long-term view.”

There’s that management discipline I talked about earlier. There’s also thoughtfulness in distribution, something I believe in critical. Vans is accomplishing what I’ve said is a critical challenge for brands that have been around a long time- appealing to new customers without losing the old ones.

I’m guessing VF tries to drive the same kind of management process with all its brands. With The North Face, I’d highlight their efforts to make it a four season brand and the growth opportunities that represents. I also want to point you to a comment by International Group President Karl Salzburger. He says that The North Face sales in Asia “…were down at the mid single-digit rate in the quarter as we held back shipments to proactively manage channel inventory.”

That’s good for the brand and good for the margins even at the cost of some short term sales.

Timberland is coming into its own after being acquired by VF almost three years ago. Here’s how SVP for the Americas Rendle puts it: “Our Best Then Better Now brand campaign has been successful in helping us to reposition Timberland with consumers as a lifestyle brand. And we’re starting to see very positive data that indicates consumers in the Americas are starting to recognize the brand as much more than a boot company.”

VF bought these three brands, in my opinion, because they saw solid brands that could, with VF’s financial and logistically support and management processes, appeal to a much broader group of customers and market other products consistent with the brand positioning. They assert that they can continue the growth.

If they do, and if brands in other segments don’t perform better, I wonder if we won’t see additional acquisitions in this space, not to mention some divestitures of brands that don’t have the same potential.