VF Corp going strong despite slowdown in Q4 sales due to China lockdowns

VF Corp reported a revenue increase of 9 percent to $2.8 billion (€2.65bn) in the fourth quarter of 2022, driven by The North Face (TNF), although sales at Vans were flat during the period. Sales were boosted by a 15 percent increase in the EMEA region and 12 percent in North America, partially offset by an 11 percent decline in the APAC region primarily due to Covid lockdowns in China. TNF reported a 24 percent increase in revenues for the three months to April 2 to a record $770 million (€729m) - 59 percent ahead of pre-pandemic 2019. Timberland rose 9 percent to $435 million (€412m), and Dickies 7 percent to $197 million (€186.5m), while Vans was flat with revenues of $991 million (€938m).

On a full-year basis, revenue increased 28 percent to $11.8 billion (€11.2bn). The North Face was up 33 percent to $2.46 billion (€2.33bn). Vans and Timberland both gained 20 percent to $3.47 billion (€3.3bn) and $1.51 billion (€1.43bn), respectively. Dickies increased 19 percent to $702 million (€664.6m). Net income for the fourth quarter fell to $80.8 million (€76.5m) from $89.5 million a year ago, while full-year net income rose to $1.39 billion (€1.32bn) from $407.9 million in 2021.

CEO Steve Rendle said that despite Vans achieving double-digit growth in EMEA, it was not enough to offset Covid lockdowns in China and lower performance in its classics range, “which had sequentially improved” but remained negative as a category.

At TNF, VF Corp said it continued to see strong growth across channels and categories, with momentum in both on-mountain and off-mountain products, leading to healthy inventory levels and robust order books. Timberland sales were driven by strong double-digit growth in both the Americas and Europe, partially offset by an annual decline of 13 percent in Asia-Pacific. Dickies performance was boosted by the Americas, driven by double-digit growth across both work and lifestyle products, and strong wholesale demand, all of which drove record regional profit.

Group fourth-quarter gross margin declined 20 basis points to 51.9 percent. The operating margin was up 210 basis points to 6.8 percent. Annual gross margin increased 180 basis points to 54.5 percent, driven by a higher proportion of full-price sales, offsetting freight costs. The operating margin of 13.8 percent jumped 720 basis points.

VF Corp said China’s zero-tolerance policy to Covid-19 impacted some specific raw material suppliers within the country but added that the majority of its supply chain was now operational and back to normal operating levels. Logistics challenges due to port congestion had contributed to ongoing product delays, but the company was working with suppliers to “minimize disruption.” “While we continue to see higher than normal levels of congestion and disruption from labor shortages and equipment constraints across the logistics network, the overall picture has improved in the last few months,” Rendle said. “We continue to proactively address these challenges (and) we’ve taken pricing action across our brands to offset the inflationary pressures.”

The company also said it was preparing for a tax bill over its 2011 takeover of Timberland. It has been in dispute with the US Internal Revenue Service about the timing of “income inclusion” and is appealing a court ruling in favor of the IRS. “While we intend to appeal, we anticipate that we will pay the 2011 taxes being disputed, which are estimated at approximately $845 million (€800m) for gross tax and interest. We’re confident in our timing and treatment of income inclusion and will continue to defend our position,” the company said.

The company forecast first-quarter growth in both the Americas and EMEA but expected further declines in APAC as the environment in China continued to be “challenging,” with around 20 percent of stores currently closed and no sign of them reopening before early June. “As a result, we expect our business in China to be down approximately 35 percent in the first quarter, with continued growth at The North Face not enough to offset declines anticipated across most of our portfolio.” It forecasts a gradual recovery in China as the consumer market improved along with easier financial comparisons in the second half and the market “expected to generate growth for the year as a whole.”

VF Corp said it expected total revenue to rise at least 7 percent on a constant currency basis for the full year, with TNF forecasted to report a low double-digit sales rise and Vans up in mid-single digits. It also guided a gross margin rise of around 50 basis points and an operating margin of approximately 13.6 percent. CFO Matt Puckett said the group revenue forecast incorporated a cautious view on the macroeconomic environment, “given recent developments affecting some of our markets and consumer sentiment more broadly.”