Buoyant demand for the Vans brand, robust own retail sales and international markets just about made up for sluggishness in the U.S. market for VF Corporation in the fourth quarter.
The group reported flat sales of about $3.3 billion for the quarter, an increase of 1 percent in constant currencies. VF's turnover was affected by U.S. retail bankruptcies as well as strategic decisions to help clean up American inventories. Steve Rendle, who took over from Eric Wiseman as VF's chief executive at the start of the year, thus insisted in a conference call with analysts that the quality of sales had improved significantly.
The sales increase of 2 percent to $2,133.2 million reported for the outdoor and action sports division was slightly below the guidance provided in October. The shortfall was due in part to VF's decision to ship fewer The North Face products to off-price channels in the Americas. TNF's sales were down by 7 percent for the quarter, as its turnover was down at a low double-digit rate in the Americas and off at a mid-single-digit rate in Asia-Pacific, but up at a high-teen rate in Europe.
The Vans brand was a standout for the quarter with a sales rise of 14 percent and an increase in turnover in all regional markets, including a return to growth in Europe with a low single-digit increase rate in constant currencies. This was driven entirely by own retail sales, while inventories in the wholesale channel continued to normalize. The group thus predicts that the Vans brand's currency-neutral sales will expand at high single-digit rate in Europe in 2017.
With that, Vans' turnover reached about $2.3 billion for the full year, making it the largest in the VF group. Sales increased by 6 percent in dollars and by 7 percent in constant currencies for the year. Vans is expected to raise its sales at a low double-digit rate in constant currencies in 2017, due to its growth in Europe as well as a high-single-digit rate increase in the Americas, and a high-teens rise in Asia.
Vans thus moved slightly ahead of The North Face last year, although the outdoor brand's sales were also rounded off to $2.3 billion for the year, down by 2 percent in dollars and by 1 percent in constant currencies. The group is forecasting sales expansion at a mid-single-digit rate in constant currencies for TNF this year, up at a mid-teen rate in Europe and at a mid-single-digit rate in the Americas and Asia.
The Timberland brand raised its turnover by 4 percent in the quarter, with increases in all three regional markets. The footwear brand reached sales of $1.8 billion for the year, up by 1 percent. Timberland's sales are projected to expand at a low single-digit rate in 2017.
The operating income of the outdoor and action sports division was flat for the $384.8 million for the quarter and it contracted by 3 percent to $1,226.2 million for the full year.
The entire VF group's gross margin improved by 0.9 percentage points to 49.1 percent for the quarter but the adjusted operating margin was down by 0.9 percentage points to 15.3 percent, mostly due to exchange rate changes.
The adjustments relate to several one-off charges, starting with an impairment charge of $80 million pre-tax relating to the Lucy brand, which focuses on fitness and fashion apparel for women. The group has decided to wind down the operations of the Lucy business in 2017 and to merge it with TNF, as part of the outdoor brand's Mountain Athletics range. Rendle said that Lucy had built up customer loyalty but that brand awareness remained low, the trademark was limited to North America and its performance had been uneven over the years. VF could thus leverage TNF's brand appeal and distribution to cover the same category more efficiently.
Other one-off charges detailed by VF include pre-tax restructuring charges of $58 million to align costs, after the divestment of the group's contemporary brands business, which was among changes that are reducing the group's scope. Yet another item consists of a non-cash pension settlement charge of $51 million pre-tax. The entire group's net income was down by 15 percent to $264.3 million.
For the full year, VF's gross margin improved by 0.2 percentage points to 48.4 percent. Average prices were on the rise while product costs were lower and the mix shifted toward higher-margin products, but these benefits were mitigated by currency exchange rates and the impact of restructuring charges. On an adjusted basis, the gross margin was up by 0.4 percentage points and the operating margin decreased by 0.9 percentage points to 14.0 percent. Net income was down by 13 percent to $1,074.1 million for the year.
VF's guidance for 2017 calls for sales to increase at a low single-digit percentage rate, including about two points of negative impact from exchange rate changes. The turnover of the outdoor and action sports division is projected to rise at a low single-digit percentage rate. Own retail sales should advance at a high single-digit percentage rate, with the addition of about 50 stores and mid-single-digit comparable sales growth, including a projected rise of about 25 percent in online sales.
The U.S. group's gross profit margin is forecast to reach about 48.6 percent for 2017, consistent with last year's margin on an adjusted basis, while the operating profit margin is predicted to land at about 14.0 percent. Earnings per share are projected to decline at a low single-digit rate compared to the adjusted earnings of $3.11 per share in 2016, which equates with a mid-single-digit percentage rise in constant currencies.
VF's focus for this year is squarely on Vans, TNF and Timberland, which VF expects to jointly grow at a high-single digit rate. It will put much effort into re-igniting growth of the TNF and Timberland brands in the Americas. Rendle further predicted that international growth rates in Europe and Asia should nearly double in 2017, due to more investment toward the group's largest and most profitable activities, particularly in China. Another focus that was recurrently mentioned is workwear, for which VF predicts increased demand on the back of extra spending in infrastructure. Further details are to be unveiled at the group's investor day in March.
