The North Face's turnover soared by 20 percent in constant currencies for the third quarter in Europe, the Middle East and Africa (EMEA), but this ample rise could not make up for weakness in the North American wholesale market. This has more broadly affected sales at VF Corporation, the owner of the outdoor brand along with Vans, Timberland and several others, leading to a small downgrade in the group's sales guidance for the full year.
VF pointed to unstable market conditions in the U.S., due to retail bankruptcies as well as cautious retail orders of warm-weather products caused by the absence of winter weather last year, and residual inventories in the off-price channel. Other items discussed in a conference call with analysts included uncertainties around the political situation and weak consumer spending, and the structural shift toward late and more frequent deliveries to retailers. Eric Wiseman, VF's outgoing chief executive, explained that the concept of pre-orders and re-orders was starting to give way to monthly and bi-monthly drops of meaningful ranges.
Many of the VF group's brands thus reported continued increases in retail sales, while their wholesale was off in the U.S. market. Instead of speculatively building inventory, VF decided to reduce its inventory buys to protect its brands and to avoid clogging up the market.
The North Face's sales were off by 1 percent in reported terms and flat in constant currencies, but the group pointed out that the outdoor brand's turnover had gone up by 11 percent for the same quarter last year. TNF's retail sales were up at a mid-teen rate, against a mid-single-digit decline in wholesale turnover.
TNF's sales dropped at a mid-single-digit rate in the Americas, which was entirely due to a low double-digit decline in wholesale turnover. Without the retail bankruptcies, the outdoor brand's sales would have been flat in the Americas. VF has revised the guidance for TNF's sales from mid-single-digit growth down to low single-digit expansion for the full year.
TNF's growth in EMEA included a jump of more than 20 percent in wholesaling, with strong demand across most markets and product categories. Sales from the Mountain Athletics range were up by more than 70 percent in Europe. The quarter saw the opening of TNF's first Urban Exploration store in London, targeted at city adventurers. The brand's sales were off slightly in Asia for the quarter, due to a dip in wholesale turnover that was blamed on discounting across the outdoor category in China, but the group expects TNF to return to growth in Asia in the fourth quarter.
Due to inflated sales for Vans and a flat turnover for Timberland, sales of VF's outdoor and action sports division were up by 2 percent to $2,336.0 million. Own retail sales in this business were up at low double-digit rate, but wholesale turnover slipped at a low single-digit rate, affected by the bankruptcies and calendar shifts.
Wiseman paraphrased Mark Twain to emphasize that reports about troubles at Vans have been exaggerated. The action sports brand's sales advanced by 7 percent for the quarter, with a rise of 8 percent in constant currencies, although its sales already jumped by 10 percent for the same quarter in 2015.
Vans' turnover declined at a low single-digit rate in EMEA, which accounts for about 25 percent of the brand's sales, but managers said this was aligned with its projections as it continued to clean inventories, and the brand should return to expansion in EMEA in the fourth quarter. The European decline came from the wholesale channel, while Vans' retail sales advanced by 20 percent in the region, with a comparable sales rise at a mid-teens rate and a jump of more than 40 percent in online sales.
The Vans brand's sales were up more than 20 percent in Asia-Pacific, with retail sales moving up by nearly 40 percent. The action sports brand's turnover moved up by 10 percent in the Americas in constant currencies, marking the strongest quarter this year after increases of 8 percent in the first quarter and 9 percent in the second. This rise in the Americas was driven by own retail sales.
The Timberland brand's sales were flat for the quarter, with a decline of 1 percent in constant currencies. That combined a mid-single-digit decline in the Americas, a low single-digit drop in Asia-Pacific and a mid-single-digit increase in Europe, which amounted to an increase in the low single-digit rate in constant currencies. The drop in Asia-Pacific was caused by weaker retail sales, due to lower customer traffic in Singapore and Japan. Timberland launched its first online sales platform in Southeast Asia by opening a site in Singapore. The projection for Timberland is unchanged, with an estimate of low single-digit sales growth for the full year.
Operating income for the outdoor and action sports division was up by 1 percent to $490.5 million, which would have been up by 3 percent without currency exchange rate changes. The operating margin dipped by 0.2 percentage points to 21.0 percent.
Adding weaker sales from jeans and other divisions, the VF group's turnover was down by 1 percent to $3,488.2 million for the quarter. This included a drop of 13 percent to $141 million for the sportswear division, with a decline of 15 percent for the Nautica brand and 6 percent for the Kipling brand in North America. Then again, Napapijri was VF's fastest-growing brand in the quarter.
The entire group's retail sales moved up by 6 percent to $800 million, amounting to 23 percent of the group's turnover for the three months. Online sales continued to expand, with a rise of 18 percent in the quarter. VF's gross margin was up by 0.7 percentage points to 48.4 percent, and it would have been 0.6 percentage points higher in constant currencies. Operating income for the entire group was down by 1 percent to $635 million but it ended the quarter with net income from continuing operations up by 10 percent to $503.0 million.
The comparison should be easier in the fourth quarter, given that VF's turnover dipped by 1 percent for the last three months of 2015. The group's guidance calls for sales to increase by 2 percent to $12.2 billion for the full year in constant currencies, down from a previous estimate of 3 to 4 percent growth. Sales from the outdoor and action sports division are now expected to expand at a low single-digit rate, down from the earlier forecast of a mid-single-digit rate increase. This is due primarily to pro-active inventory reductions by The North Face and Timberland, related to fourth quarter orders. While own retail sales were projected to increase at a low double-digit rate, the current forecast is that they will rise at a high single-digit rate.
The group's forecast is that the gross margin will reach 48.6 percent, including about 0.7 percentage points of headwind from changes in foreign currency. The estimate of 14.5 percent for operating margin has been reduced to 14.3 percent, with a negative impact of 0.6 percentage points from currencies. Reported earnings per share should increase by 3 percent to $3.13, up by 7 percent in constant currencies, compared with a previous forecast of $3.20 per share.
VF managers are preparing to organize an Investor Day around the end of the first quarter, to explain its strategy with regard to market changes and brand management. They pointed to the fact that about 30 percent of VF's products sold in the U.S. market are made in the same hemisphere, in factories owned and operated by the group, which is regarded as a strong asset at a time when retailers want more reactive suppliers to satisfy what was described as a “buy-now wear-now” approach by retailers and consumers.
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