After posting a loss for the first quarter of its financial year, ended June 30, VF Corp. bounced back in the second quarter, and the third fiscal quarter ended Dec. 31 confirmed this recovery, driven by Europe and China. The good progress, which was attributed to in part to investments made in previous years on digital marketing and sales led the group to raise its full-year guidance.
While they were still affected by the Covid-19 pandemic, the company’s sales and profits declined at a slower pace than in the previous two quarters. The management said that year-to-date results surpassed its expectations. It believes that its brand portfolio remains on track to return to growth in the fiscal fourth quarter.
Hampered by store closures and other Covid-related restrictions, VF’s revenues for the three months ended Dec. 31, 2020 fell by 6 percent from the year-ago quarter to $2,971 million, with a decline of 8 percent in constant currencies, which was much better than the 18 percent drop recorded in the second quarter. The quarterly net income reached $347.2 million, down 25 percent from $421.6 million last year. It was off by 23 percent to $327.7 million on an adjusted basis, excluding discontinued operations.
The gross margin dipped by 2.5 percentage points to 54.7 percent, mainly due to higher promotional activity to clear excess inventory, with currency headwinds shaving 0.9 percentage points. On an adjusted basis, the gross margin decreased by 1.5 percentage points to 55.7 percent.
Overall, VF’s wholesale revenues declined by 10 percent in the quarter. Total direct-to-consumer sales fell by 2 percent, but online sales jumped by 53 percent, nearly offsetting the loss of sales at brick-and-mortar stores due to retail lockdowns, which also had a major impact on profits.
In North America, over 95 percent of VF’s owned retail stores were open at the beginning of the third quarter, with all VF-owned retail stores re-opened by mid-October. Since that time, additional stores were closed again, and around 15 percent of the store fleet was shut down by the end of the quarter. In the EMEA region, nearly all of VF’s owned retail stores were open at the beginning of the third quarter. Since that time additional stores were locked up again, ending up with 50 percent of them being closed by the end of the quarter. On the other hand, nearly all of VF’s owned retail stores in the Asia-Pacific region were open during the quarter and are still open now.
By geography, the Americas, excluding the U.S., was the hardest-hit region across the group, with sales falling by 16 percent in constant currencies. The U.S. was down by 11 percent, due to restrictions caused by the pandemic. The Outdoor and Active categories continued to outpace the group’s overall performance in the apparel segment.
Sales in the EMEA region only declined by 4 percent in constant currencies, and they even gained 1 percent in reported terms, despite the broader European economy being among the hardest hit by the pandemic during the quarter. VF’s digital business grew by more than 80 percent in the region. Indicating an uninterrupted momentum, judging from the order books for the spring/summer 2021 season, the management explained this in part with VF’s long-standing good relations with major European e-tailers such as Zalando and Asos.
Sales rose by 6 percent in the Asia-Pacific region, boosted by an 11 percent gain in China on a constant-currency basis. The D2C business in Mainland China grew by 20 percent, led by e-commerce.
Revenues in the Outdoor segment, which is led by The North Face, dropped by 7 percent in terms of local currencies. The usually more dynamic Active segment, which includes Vans, fell at a higher rate of 11 percent. With many new products and a growing international distribution, the Work segment improved by 8 percent, led by Dickies.
In reported terms, sales declined in the Outdoor segment by 5.3 percent to $1,571 million in the quarter, leading to a drop of 11 percent to $311.8 million in its operating profit. Sales were flat at TNF, but they fell by 14 percent at Timberland. Smaller brands like Altra, Icebreaker and Smartwool enjoyed a good momentum. TNF had a serious drop of 13 percent in the U.S., but this was offset by increases of 22 percent in EMEA, 16 percent in APAC and 4 percent in the rest of the Americas region. TNF’s total digital sales went up by 64 percent.
In constant currencies, TNF saw revenues decline by 2 percent, with continued sequential improvement in the Americas. Europe remained a bright spot for the brand, with a growth of 17 percent there, including a gain of 112 percent in online sales, offsetting the impact of significant store closures in the region.
The TNF Gucci collaboration generated over 15 billion media impressions since its December launch. Mountain products also performed well, highlighted by Futurelight’s expansion deeper into the product assortment, leading to triple-digit growth versus the prior year.
Timberland declined in every region, aside from the digital sales channel. In reported dollars, its sales fell by 19 percent in the Americas, by 11 percent in EMEA and by 6 percent in APAC. In terms of local currencies, Timberland’s sales fell by 17 percent, while Dickies rose by 7 percent, with strong demand across all regions and growth across all channels.
In reported terms, the revenues of the Active segment dipped by 9.1 percent to $1,127.1 million, generating 30 percent lower operating earnings of $201.4 million. Vans declined by 6 percent in dollars, with sales falling by 7 percent at wholesale and by 29 percent at the brand’s numerous brick-and-mortar stores, partly offset by a 52 percent improvement in the digital channel.
In constant currencies, Vans’ revenues fell by 8 percent worldwide as growth in digital was more than offset by brick-and-mortar store re-closures in the Americas and EMEA markets. The brand accelerated to 9 percent growth in APAC, led by digital and China. In the brand’s more buoyant Progression line, its all-weather MTE styles increased at a double-digit rate. The UltraRange grew by high single digits as Vans consumers turned to more outdoor and active-oriented franchises.
For the full financial year ending on March 31, VF raised its guidance and now expects its total revenues to reach a level of $9.1 billion to $9.2 billion, up from a previous forecast of $9.0 billion, reflecting a decrease of around 12 to 13 percent on an adjusted basis from the prior year. Vans is expected to go down by less than 15 percent for the year, TNF by less than 10 percent and Timberland by less than 19 percent. The total turnover will include a small contribution of about $125 million in revenues from the Supreme brand, whose takeover was closed on Dec. 28.
VF’s management believes that the acquisition of this premium streetwear brand will serve as a spark for “another layer of transformative growth” and value creation for the group. It still expects Supreme to contribute at least $500 million in revenues in fiscal 2022 by opening new stores and through more frequent collaborations. The management said, however, that it still has to determine the level of investments on the brand in an effort to reach the right balance between Supreme’s growth and its profit margins, which have been very high lately.
Meanwhile, a year ago, VF announced its decision to explore the divestiture of its Occupational Workwear business, which includes Red Kap, VF Solutions, Bulwark, Workrite, Walls, Terra, Kodiak, Work Authority and Horace Small. The business also includes certain occupational workwear products by Dickies that have historically been sold through the business-to-business channel.