VF Corp. lost more than 5 percent of its value on the stock market after it published its results for its second quarter ended Sept. 30 on Oct. 22, but it has regained some ground since. The management improved its guidance for this year’s revenues to $12.0 billion from $11.8 billion, but kept its forecast for the bottom line, despite an operating environment that was described as being more challenging than expected in the second quarter.
VF’s CEO, Steve Rendle, subsequently said some interesting things in an exclusive interview with Footwear News. Commenting on its supply chain problems, he indicated that the group is considering shifting some production for the U.S. market to Central America and doing the same for Europe by producing some footwear in Portugal and some clothing in Eastern Europe. He also praised the agility of the business model used by the recently acquired Supreme brand of streetwear, indicating that its 52-week product drop schedule may also be applied to Vans.
The overall quarterly revenues of the group - which owns brands such as Vans, The North Face, Timberland, Icebreaker, Smartwool and Altra - increased by a reported 23 percent to $3,198 million in the three months ended Sept. 30, falling short of analysts’ expectations for a top line of $3.3 to $3.5 billion, as a “significant” amount of orders were shifted into the third quarter due to supply chain bottlenecks. At constant currency rates, revenues were up by 21 percent.
VF’s sales growth in the quarter got a slight boost of $99.6 million from the acquisition of Supreme, which it purchased in December 2020 for $2.1 billion. Excluding Supreme, which actually suffered a 30 percent gap in inventories, sales were up by a reported 19 percent, or 17 percent in constant currency terms, led by EMEA and North America, which had been hit by Covid-19 a year earlier.
The group mentioned difficulties in the Asia-Pacific region, where some 5 percent of stores were closed at the beginning of the quarter due to a resurgence of Covid-19. While virtually all stores have since been reopened, the consumer environment in China remains “challenging” amid a continuing backlash against Western brands like Vans that was particularly reflected in lower digital sales.
About 85 percent of the group’s production capacity is now operational, but VF noted that the resurgence of Covid-19 lockdowns in sourcing countries like Vietnam added to capacity constraints during the second quarter, on top of supply chain woes tied to port congestion and increasing ocean lead times, leading to delivery delays of up to ten weeks. The group experienced severe problems in South Vietnam, which accounts for about 10 percent of overall sourcing. VF attributed about half of the overall shift in revenues from the second to the third quarter to Vietnam.
While tight inventories have led to fewer order cancellations, supply chain strains have forced VF to use expedited freight when necessary, bumping up costs. Matt Puckett, CFO of the group, said some of the pressures on freight are expected to extend into the calendar year 2022.
VF’s net income for the second quarter was lower than expected, but it nevertheless jumped by 81 percent to $464.1 million as compared to the year-ago period. The gross margin widened by 2.9 percentage points to 53.7 percent, largely on the back of reduced promotional activities. The adjusted gross margin increased by 3.0 percentage points to 53.9 percent, due to higher full-price realization, lower markdowns, a favorable mix and a positive impact of about 0.2 points from Supreme. When compared to its prior peak gross margins in fiscal 2020, VF said its current gross margin was impacted by a headwind of about 1.8 percentage points from incremental expedited freight and foreign exchange. The adjusted operating margin in the second quarter widened by 3.6 percentage points to 16.7 percent.
VF’s direct-to-consumer (DTC) sales were up by a reported 32 percent, or 31 percent higher at constant currencies, reflecting organic growth of 21 percent in dollars and 20 percent in local currencies.
By segment, the revenues of the Active segment grew by 16 percent to $1,392 million and its profit inched up to $284.3 million from $259.1 million. The segment’s growth included an 8 percent gain in sales at Vans, and an 8 percent contribution from acquisitions. While Vans “accelerated meaningfully” in EMEA during the quarter, the brand faced headwinds in the Asia-Pacific region and in the U.S., where a surge in the Delta coronavirus variant led to lower-than-expected back-to-school sales. Segment revenues went up by 7 percent in EMEA, partly driven by a 17 percent surge in DTC digital sales.
The Outdoor segment saw a 31 percent increase in revenues to $1,507 million, with the profit more than doubling to $284.1 million from $132.5 million. Sales increased at The North Face by a reported 31 percent, while those of Timberland jumped by 26 percent, both thriving despite also suffering from delayed deliveries. TNF grew by 40 percent in constant currencies in EMEA, while Timberland’s recovery took place almost entirely in the U.S.
The group’s three smaller brands - SmartWool, Icebreaker and Altra - have been growing at a mid-to-high-teens pace, contributing annual revenues of nearly $550 million.
In the Work segment, revenues climbed by 18 percent to $299.2 million in the quarter, and profits soared to $62.0 million from $8.2 million.
On a geographical basis, international revenues went up by 18 percent in the quarter, with 15 percent growth in constant currencies. European sales rose by 19 percent, or 17 percent at constant currencies. Sales for Greater China grew by 9 percent, or by just 3 percent in constant currencies, with Mainland China growing by a reported 9 percent and 2 percent at constant currencies.
For the third quarter, VF expects to post revenues of about $3,600 million, reflecting high single-digit organic growth versus the same period of 2020.
For the full year ending in March 2022, or fiscal 2022, VF still anticipates revenues of $12.0 billion, up about 30 percent on the year, including about $600 million from Supreme, although its Active segment is seen doing slightly worse than previously anticipated. Instead, the guidance for Outdoor and Work has been raised slightly.
By segment, revenues for Outdoor are now expected to increase by between 25 and 27 percent versus previous expectations of 24 to 26 percent. Revenues for Active are forecast to rise between 35 and 37 percent versus previous expectations of a 37 to 39 percent increase, while Work’s revenues are now seen rising between 19 and 21 percent, up from previous expectations of a 16 to 18 percent gain.
Direct-to-consumer revenues are anticipated to grow by between 34 and 36 percent versus previous expectations of 39 to 41 percent growth, including Digital revenue growth of about 20 percent versus previous expectations of an increase of between 29 and 31 percent.
International revenues are seen increasing by between 24 and 26 percent against 25 to 27 percent growth previously. The group expects sales to rise by 30 to 32 percent in both EMEA and the non-U.S. Americas, up slightly from previous expectations. In Asia-Pacific, on the other hand, sales are seen increasing by 12 to 14 percent, well below a previous 18 to 20 percent growth forecast.
The gross margin for the year is now projected at about 56 percent, compared with previous estimates for a gross margin of more than 56 percent, with the new forecast including 0.4 percentage points of incremental freight costs on top of what the group had anticipated in July.
