In releasing its results for its third quarter ended on Dec. 28 on Thursday, VF Corporation said its business so far this year has performed at the high end of its group’s long-term growth objectives, but the management admitted that it will not be able to meet the targets it had previously set for the current financial year. Consequently, VF’s share price dropped by more than 9 percent.
In particular, the management is now projecting a currency-neutral increase of only 4 percent in the full financial year for VF’s Outdoor segment, or a rise of about 5 percent excluding the impact of acquisitions. The company’s previous guide was toward a growth of 6 to 7 percent in Outdoor, excluding acquisitions, but Timberland didn’t perform as expected in the latest quarter, recording a drop of 4 percent in sales, and the management is now predicting that the brand will show a decline of between one and two percent for the year.
The management is raising the outlook for Vans, forecasting growth of about 15 percent for the brand, and tightening the outlook for The North Face to an increase of around 9 percent. Overall, the updated forecast for the full year calls for an organic sales increase across the group of 7 percent in constant dollars to about $11.75 billion, slightly below the previous target of $11.8 billion.
The company is also now projecting a currency-neutral increase of only 10 to 11 percent in its total direct-to-consumer revenues for the full year, including growth of around 20 percent in the digital channel. That’s down from earlier expectations of an increase of 12 to 13 percent. The management indicated that, in contrast to Vans, Timberland and The North Face were relatively weak in e-commerce, and pointed out that TNF’s digital team has been reorganized.
As before, the management expects that the gross margin will go up by 0.8 percentage points to 54.1 percent and the operating margin up by 0.9 percentage points to 13.8 percent. However, earnings per share are predicted to show an increase of about 18 percent, below the previously forecast range of 19 to 21 percent.
Led by The North Face, sales and profits both rose during the third quarter in the Outdoor segment by 3 percent in dollars and by 4 percent in constant currencies, building up to a profit of $348.9 million on sales of $1,659 million.
TNF recorded a sales increase of 8 percent in the quarter, led by its business outside the U.S., with a solid performance in the urban exploration and mountain lifestyle ranges and a high single-digit increase for footwear. The brand’s performance was more mixed in the U.S. While it’s still a minor contributor to TNF’s revenues, its Futurelight technology has triggered a fourfold increase in the number of units sold in the product series that feature it since it became available to consumers four months ago.
The 4 percent quarterly sales decline at Timberland, which is being placed under new management as reported, was attributed to challenging conditions for its men’s footwear range in the Americas and Europe, particularly in classics, which was only partly offset by a solid momentum in apparel, outdoor footwear and the brand’s operations in China.
Led by Vans, whose revenues jumped by 13 percent, the Active segment booked a 5 percent increase in profit to $286.5 million on sales of $1,239 million in the quarter. In constant currencies, Vans’ sales and profits went up by 9 percent and 6 percent, respectively. The highest growth was recorded in the Progression segment, up by 30 percent, followed by apparel at 14 percent and heritage footwear at 8 percent.
In the latest quarter, the group’s net income was nearly flat at $452.7 million, but 11 percent higher than a year ago excluding discontinued operations. The group’s total revenues grew by 5 percent to $3.38 billion, with an increase of 6 percent in constant currencies.
Channel and regional performance
Across the group, while wholesale revenues increased by 4 percent, DTC revenues increased by 7 percent with growth of 17 percent online and 6 percent on a comparable store basis.
While the U.S. market was affected by a more promotional environment, leading to a sales increase of only 3 percent, VF continued to perform well in China and its business in the EMEA accelerated in the quarter. VF grew by 30 percent in China, with five percentage points attributed to earlier shipments ahead of the Chinese New Year. It recorded organic growth of 7 percent in EMEA, with DTC growth of 13 percent – up by 30 percent in digital and 11 percent in same-store sales.
Excluding the company’s occupational Work business, whose revenues increased by 2 percent to $480.1 million, the group’s total sales were up by 6 percent in dollars and 7 percent in local currencies.
Just before releasing its quarterly results, VF said that it was examining strategic options for the divestiture of some of the brands in this segment. It plans to keep Timberland Pro and Dickies, whose sales grew by 13 percent in the latest quarter, driven by growth of 68 percent in China and 16 percent in online sales. Excluding those divestitures, the segment should book a sales increase of 2 to 3 percent in constant dollars for the year.
On an adjusted basis, excluding exceptional items and the jeans business spun off last year, the gross margin and the operating margin both went up by one percentage point in the quarter, reaching 55.7 percent and 17.6 percent, respectively, partly aided by a favorable currency effect. VF’s forecast for this year’s profits has remained unchanged.