Ho Hum. Another Solid Quarter: VF Corporation

You know, this is getting boring.  So boring, though in a good way, that I think I’ve just used the same title for two quarterly reviews.

For the quarter that ended December 31, VF revenues were up 8% to $3.9 billion compared to the same quarter the previous year.  They got to that amount from $3.649 billion in last year’s quarter with $313.7 million in growth of already owned brands, $57.6 million in acquisitions, and a decline of $23 million from sales of brands and $57.4 million from foreign currency.

The two charts below show the breakdown for this and last year’s quarters by market segment.  Here are things to think about as you review them.

Remember that the jeans segment, where revenues declined quarter over quarter, is disappearing from VF via being spun off as a separate public company.  VF doesn’t think jeans is a category which fits the positioning of its typical brand or has the growth potential it expects.  I think they’re right if only based on the segment’s performance.

You may also recall that they changed the segment some of their brands are in.  The most notable was moving Vans from outdoor to active.

Outdoor is described as including “Outdoor apparel, footwear and equipment.” Active is “Active apparel, footwear and accessories.” The work segment is “Work and work-inspired lifestyle apparel, footwear and occupational apparel.”

All three, you already know, include footwear and apparel.  Consider the supply chain and inventory management flexibility this gives VF (or any other company) that has a large number of contract and owned manufacturing plants. To take the simplest example, a Vans t-shirt may be exactly the same as a Dickies t-shirt as a North Face t-shirt except for the graphics.

I’m curious to know how much of the work segment is actually for work as opposed to “work-inspired” and where VF sees the growth opportunity.  I’m guessing in work-inspired but wonder if that’s a long-term trend VF can count on.

The chart below shows total segment revenue and operating profit for each of the two quarters.Note that operating profit is rising in all the segments except jeans, which is being spun off.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active revenues were up 16%, with Vans up 25%.  Management acknowledges in the conference call that a brand the size of Vans can’t grow this fast forever.  But they believe it can sustain low double-digit growth “…in line with their five-year commitment in fiscal 2020.”

Outdoor rose 11%, with The North Face up 14% for the quarter and Timberland flat.  Work was up just 2.24%.

The gross margin, at 51.9% rose by 0.4% “…driven by a mix-shift to higher margin businesses and increased pricing partially offset by costs related to the acquisition, integration and separation of businesses and certain increases in product costs.”  My belief is that jeans is not a higher margin business where you can increase prices.

“Selling, general and administrative expenses as a percentage of total revenues decreased 140 basis points…during the three…months ended December 2018…compared to the 2017 periods. The decrease…was due to leverage of operating expenses on higher revenues and was partially offset by expenses related to the acquisition, integration and separation of businesses.”

You will perhaps note that I’m not discussing which business were sold or bought and with what impact on financial results.  Nor am I talking specifically about the restructuring expenses they mention.  These comings and going and associated impacts are at a higher than normal level right now, but generally I see them as part of VF’s ongoing strategy, so I’m not trying to separate them from operating results.

Net income rose from a loss of $90 million in last year’s quarter to a profit of $464 million in this year’s.  However, the tax provision fell from $533 to $103 million (from a rate of 55.7% to 16.4%) as a result of the tax reform (if you insist on calling it that) bill.  Pretax income rose from $460.2 to $566.3 million.

Other interesting points:

Store count was unchanged from a year ago excluding the impact of acquisitions.

Wholesale business was up 7% organically including 35% in China and “high single digit growth” in the U.S.  However, taking out the Kontoors (the jeans spinoff) business that growth was “…at a low double-digit rate…” organically.

Dickies grew 6% with 20% growth in China.

VF has some projects going on (they especially mention The North Face) to refurbish and resell product.  We’ll see more of that from many brands.

What is it that VF is doing right?  First, it doesn’t hurt to be big.  Size gives you, these days, access to cheap capital.  It also means that you get, in the words of CFO Scott Roe, “…to maintain our level of investment as our revenue increases and we will start to leverage that inflection point hit this year.”  They can, that is, make their sales and marketing budget decline as a percent of revenues.

Second, they’ve managed to stay flexible even with their growth.  Third, their management processes and discipline seem rock solid.  If you’ve never seen it, go to this page then click on “Presentation” to download the PDF on their plans for Vans.  At least page through it.

Here’s what CEO Steve Rendle says in the conference call.  “What’s you’re seeing really is the result of two, three years of really intense work of cleaning up the marketplace, segmenting the customer base and now placing the appropriate products in each of their key retail partners, be it specialty to some of the large nationals. You’re seeing improvement in quality of products. So that is resulting in the velocity of sell-through that prompted that pull forward of the Q4 into Q3…”

VF sees their competitive advantage as their ability run their business better than the competition- partly because of their size.

What could go wrong?

Well, Timberland isn’t working out yet.  Vans, as they’ve acknowledged, can’t continue to grow 25% a quarter, their expectations for China may not pan out, the jeans business isn’t working out, it will be interesting to see if work continues as a fashion trend, and (a problem everybody has) we’ll see how well positioned their brands are when the inevitable recession hits.

For now, though, you just have to be mostly impressed with what they are accomplishing.

 

It Probably Wasn’t the Plan; Abercrombie & Fitch’s November 3rd Quarter.

Back in 2012 A&F had 946 U.S. stores.  They ended the most recent quarter with 684 (plus 195 international stores).  In the immortal words of Gary Schoenfeld in his first earnings conference call as CEO of Pac Sun however many years ago it was, “Nobody needs 900 Pac Sun stores.”

Nobody needed 946 A&F stores either.  Given how the retail market is changing, the 28% reduction was probably a great thing, if not part of the plan.  It’s even more interesting to note that 400 of the U.S. stores are Hollister and only 284 are A&F branded.  Those of you who have been around a while may remember, when Hollister opened (the first store was in 2000), that as an industry we were pretty dismissive of the concept.  Don’t know if that’s because we didn’t think it would work, were afraid of it, or wished we’d thought of it first.

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Popups, Extra Week, Higher Costs; Tilly’s Quarter

Tilly’s sales for the quarter ended October 28th were down 3.9%, or $6 million, to $146.8 million from last year’s quarter.  However, the decline was due to “…the calendar shift impact of the 53rd week in fiscal 2017’s retail calendar, which caused a portion of the high sales volume back-to-school season to shift into the second quarter this year versus the third quarter last year, reducing last year’s comparable net sales base for the third quarter by approximately $14 million. This calendar shift impact was partially offset by higher comparable store sales and net sales from seven net new stores totaling approximately $8 million.”

Keep that $14 million in mind as you think about the quarter over quarter comparison.  That decline for the quarter was partly offset by seven new stores and higher comparable store sales (4.3%-  includes e-commerce) totaling $8 million.

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Attacking the Retail Challenge: Zumiez’s Quarterly Results

I’ve decided that my best recent article was “How Brick and Mortar Retail Has to Change,” written last June.  I was surprised it got so little feedback.  Probably because the list of what customers don’t need us to do anymore is a little intimidating, and we aren’t sure how to respond.

Even if, like Zumiez, your plans are responsive (as I see it) to the changing conditions, there’s still going to be a recession (not just in the U.S.), there’s too much product and manufacturing capacity, too many brands, too much retail space, too little product differentiation, and many customers have too little income.  And they have to spend more of that income on necessities.  I guess a cell phone is a necessity.  Certainly housing, food and health care are.

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Looks Like Amer Sports is Going Private

Back in October, there was some speculation that somebody wanted to buy Amer Sports and Amer said, “Yup, it’s true.  We’re talking.”  I wrote a short article about it at the time.

On December 7th, they confirmed that there is, in fact, a cooperative tender offer coming beginning around December 20thHere’s the link to the press release on the subject.  At that time, a tender offer document with full information will be available.

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Emerald Expositions Cancels Interbike for 2019

Emerald issued a press release today announcing that the Interbike show scheduled for September 2019 was a no go.  Here’s the press release. I excluded the part at the end describing who Interbike and Emerald Expositions are.

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Emerald Expositions’ Quarter and the Trade Show Environment

It’s a hell of a time to be in the business of putting on trade shows in the active outdoor business.  Reed Exhibitions has “postponed” the January Agenda show in Long Beach and is planning to evolve it towards a consumer-oriented show.  After last January’s show, I wrote that I didn’t think I’d be back to Agenda next January.  Apparently, I was right.

Meanwhile, the word from Emerald’s first November Outdoor Retailer winter market show in Denver is not too positive.  People I spoke with as well as this article from SGB Media made clear there are some concerns.

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Nobody Wants to Talk About Sanuk, But Deckers Has an Outstanding Quarter

That’s not quite true.  I want to talk about Sanuk, though probably for the last time.  There’s not a mention of the once high-flying brand in the conference call, and it only comes up in the 10-Q because, inconveniently I imagine, they have to acknowledge its existence.

For the quarter ended September Sanuk revenue was down 9.4% ($1.43 million) from $15.22 million in last year’s quarter to $13.80 in this year’s.  The Sanuk wholesale business had an operating profit of $291,000 down from $1.23 million in last year’s quarter, a drop of 76.3%.  Add any reasonable allocation of overhead, taxes, interest and the brand lost money during the quarter.

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Ho Hum- Another Strong Quarter for VF. And a Few Thing to Make You Think

It’s not my purpose to simply report earnings.  That’s why you don’t see an article every time an industry public company reports.  By waiting for the actual publicly filed document, I hope to glean a few pieces of information that might make you think-bring you up short even- and perhaps help you run your business better.

VF has had a string of glowingly good reports and the one for the quarter ended September 30 is no exception.  I’ll get to summarizing the numbers, but first here are some other things for you to consider.

Back in September, VF held a Vans investor day where they announced they were planning to take Van’s revenues from $3 to $5 billion in five years.  I wrote this article looking at why they might, or might not, pull it off.  I said, “Vans is well into an experiment to see if a truly “omnichannel” approach to branding and customer engagement change some of the rules for growing a brand.”  They are betting they can outperform by doing the things all brands/retailers need to do but doing them better than their competitors.

What ever happened to “features and benefits” as the preferred way to differentiate products?

A year ago, a friend recommended Retail’s Seismic Shift, by Michael Dart, to me.  It finally got to the top of my reading stack.  Should have gotten there sooner.  In the last chapter is an interview with former VF CEO Eric Wiseman.  Good read.

Brand Extension Versus Distribution Management

One of the things we do in the new retail environment, and that VF thinks it can do better than most, is to be insightful about where we get sales growth.  Too much growth in the wrong places, as it always has, equals brand damage.  I’ve been making that speech for at least a decade, but it’s become more important as the consumer has become more knowledgeable, perhaps less brand loyal, able to find information easily and buy in multiple places.

In talking about Vans in Europe, CFO Scott Roe says, “It’s really about making sure that we don’t get over torqued in any one particular part of our business.  And what we’re seeing there is some rationing, frankly, of some of the product as we ensure that not one style or not one category gets too much out of balance.”

And then, addressing The North Face, CEO Steve Rendle makes the comment, “I think the brand is absolutely anchored in that core Mountain Sports… Where we’ve seen really nice growth…is more of that Mountain Lifestyle component, the more contemporary logo-ed sportswear pieces that are taking their influence from the Mountain Sports category, the influence that, that’s having on Urban Exploration component of the line.”

“And what we’ve seen in Europe is a brand that’s moved beyond just an outerwear and equipment resource, but truly a brand that can deliver lifestyle apparel while being very anchored in that outdoor Mountain Sports category. And that’s exactly what you see taking place in Asia. More importantly, what we just saw this quarter here in the United States marketplace, where we saw a strong sell-through of daypacks, really good lifestyle sportswear logo.”

Talking about the Williamson-Dickie acquisition he notes, “We knew that it was a strong consumer-focused brand…But what we’re finding is that it’s anchored so well in the Work category, specifically here in the U.S., but as we’ve worked with management and begun to understand the consumer response to this brand, we’re seeing a much stronger work lifestyle component anchored in Asia and Europe that we see being able to bring back across the globe.”

CFO Rendle suggests in the conference call that they feel Timberland has the same potential as Vans, The North Face and Williamson-Dickie to maintain its core business but expand outside it.

Controlled distribution in a brand’s existing franchise to protect the brand’s credibility but look for growth in tangential areas for growth where it’s already accepted but the opportunity hasn’t really been exploited.  This, I’m pretty sure, is a key criterion for VF’s evaluation of brands- both those that they buy and those that they sell.

Speaking of Buy and Selling

It’s not exactly a sale, but VF is spinning off their jeans business as a separate public company.  Here’s what I wrote about the August announcement.

On October 2, 2017 VF acquired Williamson-Dickie for $800.7 million.  It generated $252.8 million of revenue and $18.5 million of new income in the September 30 quarter.

On April 3, 2018, VF acquired Icebreaker for $198.5 million. It contributed $53.7 million in revenue and $7.0 million in net income during the quarter.

June 1, 2018 brought the acquisition of athletic and performance-based lifestyle footwear brand Icon-Altra for $131.7 million.  During the recent quarter its revenue and net income contributions were $17.0 and $1.9 million respectively.

On April 30, 2018, VF sold the Nautica brand for $289.1 million and recorded a loss of $38.6 million.

VF sold its License Sports Group and the JanSport brand collegiate businesses on April 28, 2017, receiving net proceeds of $213.5 million and reporting a loss of $4.1 million.

And in October 2018 VF sold Reef.  Finally, after all my years bemoaning that we got no indication of how Reef was doing, we get a few numbers as a going away present.  Subject to some adjustments, the proceeds from the sale were $139.4 million.  The expected loss $9.9 million.  Reef’s revenues, we’re told in the conference call were around $150 million annually.

They’ve also sold the Van Moer business they got with Williamson-Dickie, but the numbers are very small.

VF has always characterized itself as a portfolio manager.   I hypothesize that VF has stood up, sniffed and wind, and taken notice of the massive changes happening in brand and retail management.  No kidding, right?  Haven’t we all.  Many retailers and brands, however, seem flummoxed bordering on paralyzed by the change.  Or it’s just too late for them.

VF, on the contrary has looked at it’s size, it’s diversified portfolio, management discipline and processes, manufacturing and supply chain flexibility, solid financial condition and strength as a portfolio manager and seen an opportunity rather than a problem.

Over the years, we’ve watched lots of brand try and fail at extending their brand franchise into other distribution and new customer groups.  This has been especially prevalent in public companies because of the pressure to increase revenues.

VF is very specifically restructuring its portfolio of brands to take advantage of the new competitive conditions in ways it believes many of its competitors can’t or won’t.  Brands they acquire (and keep) will have the virtues they describe in talking about Vans, The North Face and Williamson-Dickie in the quotes above and will be positioned to benefit from the resources VF brings to the table.  The jeans business they are spinning off is an excellent example of a business that doesn’t fit VF’s criteria.

Think about that while we move on to the numbers for the quarter.

Financial Results

Revenues as reported rose 15.2% from $3.39 billion in last year’s quarter to $3.91 billion in this year’s.  The breakdown by channel and segment is shows below for this year’s and last year’s quarter.

 

Outdoor includes The North Face, Timberland, Smartwool, Icebreaker and Altra.  The big dog in the Active segment is Vans.  It also includes six smaller brands.  Of those six, JanSport and Reef are now sold.  Remember that Jeans is being spun off.  The next chart shows revenue and operating profit by revenue by segment for the two quarters.  It’s a little easier to compare the change in revenues than in the chart above.

 

 

 

 

 

 

 

 

 

 

 

 

 

Of the revenue growth of $515 million quarter over quarter $230.9 million was from organic growth and $323.5 million from acquisitions.  Vans revenues rose 26% and The North Face 5%.  Timberland revenue fell by 2%.  Wrangler and Lee were down 5% and 9% respectively, in case anybody was wondering why they are being spun off.

The gross margin declined very slightly from 50.2% to 50.1%.  “Gross margin in the three months ended September 2018 was negatively impacted by lower margins attributable to acquired businesses, acquisition and integration costs and certain increases in product costs, partially offset by a mix-shift to higher margin businesses and increases in pricing.”

SG&A expense was up 15.1% from $1.13 to $1.30 billion.  As a percent of total revenue they declined from 33.3% to 33.2%.  “The decrease…was due to leverage of operating expenses on higher revenues and was partially offset by expenses related to the acquisition, integration and separation of businesses and continued investments in strategic priorities.”

Net interest expense rose $3.0 million in the quarter “…due to higher levels of short-term borrowings at higher interest rates and lower interest income as compared to 2017, which was partially offset by lower interest on long-term debt due to the payoff of the $250.0 million of 5.95% fixed-rate notes on November 1, 2017.”

Operating income grew 14.4% from $575.5 to 658.7 million.  Net income rose 31.4% from $386.1 to $507.1 million.

The balance sheet remains strong with no significant changes not explained by acquisitions and divestitures.  Cash provided by operating activities fell from $217 to $103 million.

We went through a phase years (decades?) ago where I pronounced, correctly I think, that operating well was a competitive advantage because so few were doing it.  As industry management sophistication increased (more or less) I decided that operating well had become just a requirement of getting a chance to compete offering no competitive advantage- companies that had survived were mostly operating well.  Now VF, as well as a few other companies, believes they can make operating well- keeping up with a relentless pace of change- a competitive advantage again.

In Touch with Reality? Big 5 Sporting Goods Quarter

For its September 30 quarter, 436 store Big 5 reported a small decline in revenue and a larger decline in net income.  More significant to me are comments in the conference call that suggest a very traditional retail focus, rather than one acknowledging the massive changes required to succeed at retail.

Revenue in the quarter fell 1.5% from $270.5 million in last year’s quarter to $266.4 million in this year’s.  54.8% of the quarter’s revenue was from hard goods.  Apparel was 16.9% and footwear 27.8%.  A 2% decline in comparable store sales was the major reason for the revenue decline.  I want to highlight the following comment from the 10-Q as part of the revenue discussion:

“Sales from e-commerce in the third quarter of fiscal 2018 and 2017 were not material and had an insignificant effect on the percentage change in same store sales for the periods reported.”  You might also want to look at their web site.

It’s 2018 and a 436-store retailer has e-commerce revenues that are “not material?”  Hmmmm.  Wonder how much e-commerce related expense it takes to produce “not material” revenues.

The gross margin fell from 32.4% to $31.0%.  Revenue reduction was the biggest cause of the decline.  Second was higher distribution expense of 0.73% including increases freight costs.  Lot of that going on.  Store occupancy costs accounted for 0.42% “…due primarily to lease renewals for existing stores.”

Finally, there was 0.10 decline in merchandise margins.

SG&A expense rose a couple of hundred thousand to $77.7 million.  As a percent of revenue, they rose from 28.6% in last year’s quarter to 29.2% in this year’s.  Minimum wage increases, especially in California where more than half of their stores are located, caused a $400,000 increase with more coming.

Operating income was down 52.7% from $10.2 to $4.8 million.

Interest expense rose from $447,000 to $860,000 reflecting both higher debt levels and an interest rate that rose 1%.  That’s happening to many companies.

Income taxes fell from $3.79 million to $844,000 “…primarily reflecting a reduction in the federal corporate income tax rate…”  The decline in net income was 47.7% from $5.95 million in last year’s quarter to $3.12 million in this year.  Consider how much more net income would have fallen if not for the reduced income taxes.

Net cash used in operations for the six months ended September 30 was $8.06 million, up from $5.55 million in the same six months last year.  You’d rather see cash generated by operations rather than used.

On the balance sheet cash, at $5 million is down about $300,000 from a year ago.  Inventory has risen from $309.3 to $314.8 million.  They note they are carrying over some inventory to next year- a common practice these days (but also indicative of a lack of product differentiation in the industry).  The current ratio has improved from 2.07 to 2.36 times.  Long term debt is up from $46.4 million a year ago to $83.5 million at the end of this year’s quarter.  Equity has fallen by 11.3% from $203 to $181 million.

The quarterly dividend has been reduced from $0.15 to $0.05, reflecting the weaker financial position and operating results.

Let’s move to the conference call.  On the positive side, Chairman, President and CEO Steve Miller says, “With our new POS system now in place, we are expanding our customer relationship management capabilities, which should provide enhanced customer analytics and improve the effectiveness of our marketing efforts.”

Collecting, slicing and dicing, and making better use of customer data is something every retailer has to be figuring out how to do better.  They also are increasing their digital advertising spend at the expense of newspaper advertising.

But other comments seem traditional.  There’s a generic statement about the change happening in retail, but what I hear in their comments is a tactical urgency to deal with the current financial situation (not inappropriate) rather than a strategic acknowledgement that a lot has to change- quickly.

“We are testing pricing strategies to be more responsive to an increasingly promotional competitive retail environment.” He mentions that again in part of his response to an analyst’s question.

Well, okay, but if you’re planning to compete on price with brands lots of others carry with your current real estate model in an environment of over supply and limited product differentiation, you might have a hard time.  No brick and mortar pricing strategy is likely to win in an online world unless the product offerings are distinctive in ways that probably have to go beyond the actual product attributes.

“From a product standpoint, we are accelerating the pace of change within our assortment. This includes downsizing certain product categories to position us to be more aggressive in pursuing product opportunities that we believe have higher growth potential.”

Again, fine, but tactical.  Have you acknowledged the fact that brands are going to turn over faster?  How are you identifying and bringing in new brands and what’s the process for getting them in the right stores?  How’s the micro sorting going?

There are a couple of mentions of finding new ways to reduce expenses.  That’s great, but of course there’s a limit to it and as they describe it, it sounds tactical.  Successful retailers won’t be the ones that reduce expenses; they will be the ones that increase expenses in a way that improves margins, provides a better customer experience, and ties brick and mortar and online together in a way that ultimately reduces costs.

It’s hard to know too much about what’s going on from what they say in a conference call, but I work with what they give me.  I suggest you visit a Big 5 store then perhaps a Dicks and see what you think.  I’d like to see more sense of urgency from Big 5.  An acknowledgement of the interdependence of brick and mortar and online as a means of providing customers with the flexibility and connection they require would make me feel a whole lot better too.