The North Face has been thriving in Europe, the Middle East and Africa (EMEA) in the first quarter, leading to sales growth of 19 percent in constant currencies. But its owner, VF Corporation, was impacted by sluggish sales for Timberland and its jeans brands in a weak U.S. market.
The North Face (TNF) managed a global sales increase of 6 percent for the quarter, up by 8 percent in constant currencies. While demand was strong in Europe, sales increased by 4 percent in the Americas and they dwindled by 1 percent in constant currencies in Asia Pacific.
The results appeared to back up the group's strategy to try and replicate some of the moves that worked in Europe, in order to adjust its approach in other markets. This particularly applies to segmentation for The North Face and Timberland. As previously reported, Arne Arens, who previously headed up TNF in Europe, has moved to the U.S. to take up the same function in that market.
The uptick in TNF's European sales includes a rise of nearly 30 percent in its wholesale turnover, with strong demand across all categories and channels, which the group expects to continue for the remainder of the year. The sales rise of 4 percent in the Americas came from a low teens rise in own retail sales, with strong demand for its rainwear, while U.S. retail bankruptcies contributed to a low single-digit slump in the outdoor brand's wholesale turnover.
The brand's wholesale turnover was down at a high single-digit rate in Asia, where own retail sales moved up at a low double-digit rate. VF said the Chinese market remained strongly promotional, which prompted TNF to consolidate its retail partners and to aggressively manage its inventories. VF continues to project high single-digit sales growth in Asia for TNF in the full year, weighted toward the second half. The outdoor brand is anticipating a global sales rise at a mid-single digit rate for the full year.
The VF group's Outdoor & Action Sports division raised its turnover by 2 percent to $1,678.8 million for the quarter, up by 4 percent in constant currencies, with a mixed regional performance that resulted in a 7 percent sales rise for Vans and a 4 percent decline for Timberland, both in constant currencies.
The Vans brand, which was the group's largest last year, raised its turnover by 6 percent in the Americas and by 21 percent in Asia Pacific, excluding exchange rate changes. The American increase included a low double-digit sales growth in own retail sales, with more than 20 percent of incremental turnover in online sales, while wholesale turnover was up at a low single digit. The action sports brand's retail sales surged in Asia and its wholesale turnover was up at mid-single digit rate in the region, with increases in China and South Korea.
Vans' turnover moved up by just 1 percent in constant currencies in EMEA, which was described as the continuation of the brand's regional turnaround. Its own retail sales in EMEA were up by about 20 percent, including a rise of 30 percent for online sales and a high-teens comparable store sales increase. As predicted, its wholesale turnover in EMEA dipped at a low single-digit rate, but inventories are normalizing and the fall order book is up at double-digit rate. The group is thus projecting a high single-digit growth rate for Vans in EMEA for the full year.
Adding the weak performance of the jeans business, the VF Group saw its sales from continuing operations dip by 2 percent to $2,581.7 million for the quarter, down by 1 percent in constant currencies. This excludes sales of divisions that have been divested or put for sale, namely the Licensing Business and the Contemporary Brands unit.
The group's underlying sales contracted by 5 percent in the U.S. market, while they moved up by 5 percent in EMEA and by 4 percent in Asia Pacific, including a 10 percent rise in China. The Americas outside of the U.S. delivered a sales increase of 8 percent for the quarter.
The dip in global sales was occuured excmusively at the wholesale level, were revenues were down by 4 percent, while direct-to-consumer sales advanced by 7 percent in constant currencies. This includes a comparable store sales rise in the mid-single digits and digital sales up by 26 percent in constant currencies. The group ended the quarter with 1,511 stores, as compared with 1,431 in March 2016.
VF's gross margin from continuing operations improved by 1.5 percentage points to 50.2 percent. Exchange rate changes had a negative impact of 0.4 percentage points, but this was more than compensated by lower product costs and an improved mix. The group's operating income was down by 7 percent to $291 million, with exchange rate changes accounting for 5 percentage points of the decline. VF ended the quarter with a 20 percent decline in net profit to $209.2 million.
VF outlined a detailed five-year plan for its various brands and the entire company at its investor day, as previously reported. This projects sales of $3.0 billion for TNF by 2021, with compound annual growth rates of 6 to 8 percent, while the implied target for Vans stands at $3.5 billion, with annual growth of 8 to 10 percent. The group's strategy generally calls for the VF to become more agile and consumer-centric.
The VF group's guidance for the full year is that sales will increase at a low single-digit percentage rage, including a negative impact of about 2 percentage points from exchange rate changes. The gross margin is projected to increase by 0.2 percentage points to 49.6 percent, while the operating margin should reach about 14 percent, consistent with last year's adjusted operating margin. Earnings per share are projected to contract at a low single-digit percentage rate.
