VF’s Quarter: It’s Not Easy for Anybody Out There

VF filed its 10-Q for the quarter ended April 2^nd on May 10^th.  The results, while in line with expectations, showed VF under the same kind of pressure other public companies are dealing with.  Even their action sports segment, where most of their growth has been coming from, experienced very modest sales growth and reduced operating income.

Total revenue for the quarter was basically unchanged, rising from $2.837 to $2.839 billion.  They describe it as being up 2% but then losing 2% to foreign exchange.  The gross margin fell from 49% to 48.2%.  SG&A expense rose from $0.993 to $1.031 billion.  As a percentage of revenues it was up from 35% to 36.3%.  $16.5 million of the increase was due to a gain of that amount (which reduced expense I guess) from the sale of a VF outlet store in the first quarter of 2015.

Operating income fell 15.6% from $398 to $336 million.  As a percentage of revenue it fell from 14% to 11.8%.  Net income was down 9.9% from $288.7 to $260.3 million.

The Outdoor & Action Sports segment is what we’re always most interested in because it includes Vans, The North Face, Timberland and Reef, though of course we never hear anything about Reef- too small.

The segment’s revenues rose 2.4% during the quarter compared to last year’s quarter from $1.607 to $1.644 billion.  The segment accounted for 57.9% of the quarter’s revenues.  The Jeanswear segment was up a bit from $700 to $711 million.  Revenues in VF’s other four segments declined.

Operating profit in Outdoor & Action Sports fell 12.7% from $261 to $228 million.  Foreign currency impact drove a bit more than a third of the revenue decline and almost all of the operating income decline.

The North Face grew 6% in the quarter and was up 20% in Europe.  That Europe number is before the currency impact.  In Asia, it was up “high single digits,” also before currency impact.

One of the analysts highlighted, and CEO Eric Wiseman confirmed, that VF is going to hold onto some of its unsold cold weather inventory and sell it next season.  They expect to end up with more operating income from that inventory than if they’d marked it down this season.  I’m hearing about more of that from other brands as well.  Every piece doesn’t have to be “new and improved” every year.  The economy and retail environment seem to make that approach more attractive.

Vans was down 1%.  Vans had growth in the direct to consumer channel, but “…a decline in wholesale revenues in the Americas region and Europe, as retailers manage through their excess inventory.”  They talk in the conference call about “…our choice to strategically reduce wholesale shipments on certain classic styles…” given retailer conditions.  President of International Business Karl Salzburger characterizes this as a “short term work-through.”

I’m happy to hear about any brand that reduces shipments in acknowledgment of market conditions rather than force product on the market and then figure out how to deal with and overstock situation.

Timberland’s revenues rose by 2%.  It rose “in the mid-single digits” in the Americas before currency impact.  The same was true for the brand in Europe.  Asian revenue was “down slightly.”

CEO Wiseman talked about consumers wanting “…strong authentic brands that offer a decent price value equation.”  Creating those brands and keeping them strong is expensive and takes time.  Providing them at a good price is to some extent in conflict with that, and is part of the reason I believe larger brands/companies have an advantage right now.  He goes on to say:

“The interesting thing going on right now is around the retailers that we sell to who are demonstrating very conservative behavior around buying. And that’s why you see this big disconnect right now between our direct-to-consumer numbers, which are, quite frankly, very strong, and are wholesale numbers, which are, quite frankly, weak. And it’s part an inventory build, and part with consumers moving to a buy-now, wear-now. The consumers are buying closer to their need as are retailers. So that’s changing the cadence of our bookings.”

And at the end of the conference call he notes:

“I think to really win with the consumer who I believe, call me the eternal optimist, is very incented to purchase, but you have to put very interesting offers in front of them. New products with very compelling stories and if we do that on a more frequent basis, like a real retailer would, thinking through a monthly flow lens, our brands with the strength of their connections with that consumer and our ability to drive these new innovative products…”

Nobody uses the term “fast fashion” anymore, but Eric certainly makes it sound like it’s here to stay.  He specifically notes that with owned factories and sophisticated supply system they can adjust inventory very quickly.

VF is optimistic while acknowledging the bumps in the road.  They make it sound a bit like they think it’s a one-time bump.   Maybe for a company with VF’s brands, history, and management processes it is.  Maybe.