Strategy, Housekeeping and the Numbers: VF’s June 30 quarter.

It’s interesting to review this recently released 10-Q, as it discusses VF before the recent announcement that they will spin off the jeans business as a separate public company.  With hindsight, you can see how their strategy would lead to that decision.  I’ll also outline the company’s change in their business segments and, of course, review the numbers.  Let’s get started.

Strategy

Here’s what CEO Steve Rendle says in the conference call.

“…we all see that the U.S consumer continues to be open to and motivated to interact with powerful brands, brands that they connect with, brands that provide products and experiences that are relevant to who they are. I don’t think we’re sitting here saying that this is easy…but we — what we’re seeing is that we have a clarity of focus on what our brands stand for, that we’re bringing the best product. And more importantly, big learnings over the last couple of years is really elevating the brand experience in connecting more emotionally with our consumers. We are able to stay at the forefront of the decisions that they have and where they choose to spend their time and money. We see the same to be true in Europe, and we see the same being very true in Asia and I think as we really focus our attention against those key drivers and platforms within our portfolio, we will continue to see our opportunity to connect and maintain those long-term loyal relationships.”

I’d say that’s not the jeans business he’s describing.  Like I said, hind sight is wonderful.

Steve is the second industry CEO I know of who’s trying to help the analysts focus on asking the important questions.  I was hoping for follow up questions about systems and the different quality of information, changes in how and how fast they make decisions, their view of risk taking and how better/different customer information is leading to changes in logistics and inventory management.  Oh well.

Later, talking specifically about Vans, CEO Rendle makes some related comments.

“The strength and understanding of the consumer, that the team has gained through our consumer insights and brand building focus, they just have gotten stronger and stronger, more focused on who they are and more importantly who they are not. We are in exceptional moment where we’re seeing distorted growth. Some of that could very much be some trend, level of trend. But honestly, the way we look at it, we are resetting the rightful level of penetration that this brand has with the consumer and within the wholesale channel and as you — as we do our channel checks, you can see the brand has just taken a larger footprint both on the footwear wall, the tables in the footwear section, but we’re also now starting to place really relevant assortments of apparel. So that the better this brand begins to understand…its consumer, the more thoughtful we can be on placing the right products at the right time. The disciplined franchise management, channel management segmentation just gets stronger and stronger and it really is disciplined of how that team operates… This isn’t an exceptional moment of time that likely has a downward cycle in the back and this is just a reset of its rightful position as one of the top footwear brands in that active lifestyle component of the consumer’s choice.”

You can see Steve alluding to using the same tools/approach for Vans he discussed in the first quote.  No surprise there.  He also talks about Van’s current growth as “exceptional” and “distorted.”  They’re using that as an opportunity for “resetting” the brands penetration and positioning.  They are being thoughtful and purposeful in how they distribute the brand.  Good.

They see a particular opportunity in Vans’ apparel.  It sounds like some cautious management of the brand even as it grows is creating, as they see it, the opportunity for apparel.  What I think I hear, and what I imagine they’d like Wall Street to pick up on, is that even if (when?) revenue growth does slow, they could continue to grow the bottom line.

But he doesn’t see that this time of “exceptional” growth as one that will have a “downward cycle in the back.”

Well, that’s walking a fine line.  I have endless respect for what VF has accomplished with Vans.  If he means the brand isn’t in danger of the kind of blowup we’ve seen in other industry brands, I can buy that giving their management process for the brand as they describe it.  But there’s an implication that any kind of turn down isn’t going to happen.  That would be somewhere between unusual and unprecedented.  Even Nike had its hard times.  I continue to believe there’s a limit to one brand’s market share.

If they are saying that by careful distribution, positioning of the brand, and paying attention to the consumer, they can manage and minimize a downturn when it comes, I’d think that right.  They may be well positioned to benefit from the inevitable recession.

Vans is taking advantage of its exceptional revenue growth to position the brand for success even when that revenue growth is not quite so exceptional.  Good plan.

Housekeeping

VF has changed its reportable segments, joining other companies who have stopped referring specifically to action sports.  The new segments are:

  • Outdoor, which includes The North Face, Timberland, Smartwool, Icebreaker and Altra.
  • Active, which includes Vans, Kipling, Napapijri, JanSport, Reef, Eastpak and Eagle Creek.
  • Work, which includes Dickies, Bulwark, Red Kap, Timberland PRO, Wrangler RIGGS, Walls, Terra, Kodiak and Horace Small.
  • Jeans, which includes Wrangler, Lee and Rock and Republic.

As we know, those four segments will become three after the spinoff of the jeans business.

CFO Scott Roe tells us why they made the change.  “Our Outdoor Action Sports business has become so large that we felt it was good for you the readers to have one click down one more level of visibility rather than having one giant segment, especially given some of the different financial characteristics of the two as you can see, right. And really that’s the driver in the guidance is companies with like characteristics are grouped together and it’s really no more or less than that.”

Makes sense to me.

The Numbers

Net revenues rose 22.9% from $2.269 billion in last year’s June 30 quarter to $2.278 billion in this year’s.  The table below shows revenue and operating profit by segment.  You can see that the active segment, where Vans lives, is still the largest segment, though not as large as before the change described above.  Vans was up 35% for the quarter, speaking of unsustainable trends.  The big jump in work came from the Dickie’s acquisition.  The North Face revenues rose by 8% and Timberland was down 1% despite a 4% boost from foreign currency.

 

 

 

 

 

 

 

 

 

11% of the 22.9% revenue growth came from acquisitions, and 3% from favorable foreign exchange trends.  Direct to consumer revenues rose 22% and were 31% of total revenues.  Acquisitions accounted for 6% of that growth and foreign exchange 2%.  Ecommerce rose 54% including 4% from foreign currency and 21% from acquisitions.

International revenues represented 38% of quarterly revenues and rose 27%.  5% of the increase was from foreign currency and 13% from acquisitions.

56.6% of revenue growth in the quarter came from acquisitions and foreign currency.  The table below shows the sources of revenue and operating for both quarters by segment.  This is worth spending a minute on.

 

 

 

 

 

 

 

 

The gross margin rose from 49.6% in last year’s quarter to 50.3% in this year’s.  “Gross margin was favorably impacted by a mix shift to higher margin businesses, increases in pricing and foreign currency changes, partially offset by lower margins attributable to acquired businesses, acquisition and integration costs and certain increases in product costs.”

SG&A expenses as a percentage of revenue declined from 42.6% to 42% due to spreading these expenses over a bigger revenue base.

Net income rose 45.6% from $109.9 to $160.4 million.

One other financial comment that may be of interest to some of you.  VF has a defined benefit pension plan, which is becoming something of a rarity in this country.  Looking at Note 10 in the 10-Q on that plan, I saw that the discount rate they are using to determine pension obligations was about 4.25%.  “So What?  How else are you going to bore us today, Jeff?”

I just wanted to congratulate VF on having a reasonable discount rate.  The lower the rate, the more it costs them to fund the plan.  In the public sector, discount rates of 7 or 7.5% are more common, because, I guess, the politicians know they won’t be around to deal with the blow back when the impact of the underfunding hits (as is starting to happen now).  Unless “This time is different,” the business cycle suggests that the markets are not going to support those higher returns over the next decade or so.  Honestly, I’m afraid 4.5% may prove to be too high.

Anyway, it’s good to see VF in touch with reality on this one.

CEO Rendle had this comment about how VF was becoming more “retail centric.”

“…you’re seeing greater attention to thinking and acting like a retailer, focusing on sell-through and getting our very best products on the floor at the beginning of the season, working dynamically to make sure those products are selling through and just keep the offer fresh, balanced with better and better marketing.”

I circled the term when I read the conference call and wrote “inevitable!” above it.  It struck me that the need to become retail centric had started to appear perhaps 20 years ago, even if we didn’t identify it as such then.  Basically, the requirement to address a customer who shopped a new way and had different priorities and sources of information made it necessary for brands to move in that direction and, finally, to become retailers.  The ones who manage that well will be successful.

VF to Spin Off Denim Business as Separate Public Company

Yesterday, VF Corporation, owner of Vans, Reef, The North Face and a lot of other brands announced that it was spinning off its jean business (it owns Lee and Wranglers) into a separate public company with 100% of shares to be distributed to existing VF shareholders.  It also announced that VF would be moving its headquarters to Denver.

The stock market, which never likes surprises it doesn’t understand, took the stock down 3.3%.  It’s back up 1.55% so far this morning (Tuesday).

To give you perspective, VF’s total revenues for the year ended December 31, 2017 were $11.8 billion.  Of that total, the jeans wear segment contributed $2.65 billion, or 14.0% of the total.  The company’s total operating profit during the year was $1.91 billion and jeans contributed $421.9 million, down from $491.1 million the previous year and $535.4 million the year before that.  Revenues in jeans have been down as well.

Why Are They Doing This?

If I were to sum up the press release, presentation and conference call, I’d say that the jeans business is great at generating cash flow, but not so great at generating growth.  So, it holds back the overall results of VF.  They didn’t exactly put it that way.  They said that:

  • Jean and the rest of VF now have “diverging path to long term value creation.”
  • “The separation will provide greater strategic focus, operating model alignment, and greater management capacity to invest in new growth vectors and capabilities to accelerate growth.”
  • “The separation creates an opportunity to unlock long term value creation through streamlined operations, scale and cost efficiencies and the flexibility to pursue and invest in strategic priorities and growth initiatives not easily accessible inside the VF portfolio today.”
  • They will be separate companies with “…a separate management team focused actively on its own unique opportunities.”

VF, as you know, has always trumpeted the synergies and efficiencies between its businesses, but we learn in the conference call that the synergies between jeans and the other business are less clear than they used to be and that the jeans business is more independent than the rest of the portfolio.

This, then, as they describe it is good for shareholders, good for the jeans business and good for VF.  Everybody should be happy.

Why Not Just Sell the Jeans Business?

Good question.  They’ve sold, as well as bought, businesses before after all.  It’s kind of what they do.  The answer they gave is that they’ve held the jeans business so long that it’s fully depreciated.  A sale would result in a big reported profit and tax hit.

Fair enough, but the devil is in the details and it’s a long-term capital gain (I assume- I’m not a tax guy).  Whatever the tax hit would be, let’s phrase the decision to spin it off, instead of selling it, differently.  Would it be unreasonable to say, ‘It’s a declining business and we didn’t think we could sell it for enough to justify the tax hit.’

From the language they used in the conference call, it sounds like they didn’t shop it before deciding to spin it off.  That suggests that they were quite certain that it couldn’t possibly be worth the price they needed to get.  They did acknowledge that if a potential buyer came along they were obligated to consider an offer.

A Complicated Deal

This deal is going to take one to two years to get completely done.  There are a lot of moving parts.  Assets to be allocated between VF and the new company (which doesn’t have a name yet), people to be moved, supply contracts to be managed, debtholders to be satisfied, real estate to be bought and sold or leased.  If the presentation and conference call were a little short on specifics, I’m giving VF a break on that one.  They have a responsibility to announce the deal, but the early stage, given the scale and timeline, makes it reasonable that specifics were largely unavailable.

There’s not yet a proforma balance sheet for either company after the transaction is done.  We did learn that, “There’s no change to VF’s capital structure or capital allocation priorities as a result of this separation.”  They also told us that the new company, whatever its name is, would have around $1 billion of new debt and leverage at the time of separation of around three times debt to EBITDA.  They assured us the new company would pay that down to close to two times within “a couple of years.”  Some or all of that new debt comes back to VF as cash and will replace the lost EBITDA from the jeans business.

They were not specific about how that will work.  You can understand why I’d really, really, really, like to be looking at a proforma balance sheet to figure this out.  They also noted that the costs of doing the deal weren’t quantified yet.

I’m cautious in my conclusions because of the lack of solid information.  Certainly the jeans business qualifies as the kind of business VF has divested before.  Strategically, I understand why they’d want to move on from jeans.  Perhaps they waited this long because of the size of the business and the fact that it was a foundational and critical piece of VF back when it was known as Vanity Fair.  As they acknowledge, they used to need it for its cash flow.  Now they don’t.

Some of the advertised benefits of the spin off are a bit too touchy feely for me.  That doesn’t mean they aren’t real, but it’s very hard to evaluate them.  I guess I’ve always thought of VF as a company where businesses could realize those benefits from inside the company anyway.

We’ll all know more in the months to come as the process moves forward and solid information is released.  This is a public offering and there will be a prospectus and a road show.  In the meantime, whatever the benefits of the spinoff are or are not, VF is getting rid of a business that’s declining and doesn’t meet its growth/specialty criteria.

Defying Gravity: VF’s Quarter and Van’s Results

I’ve been opinionating for some time now that careful control of distribution was a requirement of brand building in a world of products very similar to competitors.  I’ve further said that it might be a good idea to give up some sales and build the bottom line at some expense to the top line.

I’m squirming around here trying to discern some platitude that explains Van’s results and gets me off the hook.  “The exception that proves the rule” is all I can come up with, though I’ve never entirely known what that meant.

In the quarter ended March 31st, Van’s revenues grew “…39% with strength across all regions, channels and franchises.”  The reported increase was 45%, but that included 6% from favorable foreign exchange rates.  They continue in the conference call, “Revenue in the Americas increased 44%. Europe increased 36%. And Asia Pacific increased 24%. Our wholesale business increased more than 30% and our direct-to-consumer businesses increased nearly 50%, including more than 75% growth in digital, and over 40% total comp growth supported by our customs platform, which tripled in the quarter.”

The brand’s expected growth for fiscal year 2019 that will go through the end of March 2019 (they’ve changed their fiscal year and the quarter we’re talking about now is the transition quarter) is 12% to 13% with 20% growth in the first half.

I can understand that kind of growth for the year, though I continue to wonder how long they can keep it up without a hiccup.  President and CEO Steve Rendle pointed to their product development and launches, specifically noting that 75% of revenue was from other than Old Skool.  He also noted that Van’s “Retail inventory levels are in great shape and we remain disciplined with respect to inventory management, merchandising and assortment planning.”  I like that, but note he specifically said retail inventory levels rather than just inventory levels.

North Face revenues rose 11% and Timberland 5% during the quarter compared to the numbers in last year’s quarter.  The numbers without the foreign exchange impact were 7% and (1%) respectively for the two brands.  The Outdoor and Action Sports segment grew 19% overall for the quarter so the influence of Vans is obvious.

CEO Rendle made a comment about VF becoming a “…a purpose-driven company” and noted it was the title of this year’s annual report.  “It will help us attract and retain the industry’s best talent, it will provide clarity to our decisions and actions, and it will galvanize our associates around a shared purpose and enable us to serve as a powerful force for good in the world. It’s no longer enough to just focus on what we do. It’s equally important to consider both how and why we do it.”

When you are this big, this diverse, and trying to maintain your flexibility, there is a lot of organizational value in having a consensus among employees as to what the company is trying to do and why.  This is an overused word, but it empowers people because when a phone call comes in or a piece of paper comes across their desk, they are more efficient in dealing with it.  Just to use one example I’ve personally dealt with, and one VF is certainly interested in, if you have a potential acquisition come across your desk, there might be a lot of effort put into whether or not it’s of interest.  But if there’s already clarity about what an attractive acquisition candidate looks like, there won’t be.  No paralysis by analysis.

Meanwhile, and in a related vein, VF is changing.  As you know, it’s increasingly dominated by its outdoor and action sports segment.  But it’s brands are changing as well.

On October 2, 2107 VF purchased Williamson Dickie for $798.4 million.  The workwear company contributed $233.1 million in revenue and $10.7 million in net income (net of restructuring charges) during the quarter.

On November 1, 2017, VF bought Icebreaker, an outdoor brand focused on “…high -performance apparel based on natural fibers, including Merino wool…”  No income statement was disclosed.  Probably too small to require it.  They did note a $9.9 million gain on the derivatives used to hedge the purchase price.

As announced on March 10, 2018, VF is in the process of purchasing Altra, “…an athletic and performance-based lifestyle footwear brand…”  The purchases price is $135 million.

VF has also, on March 17, 2018, signed an agreement to sell Nautica for $289.1 million.  Earlier in 2017, VF sold Jansport and its licensing business.

With brands coming and going, and with the increasing dominance of Vans and the outdoor and action sport segment, being “purpose driven,” as Steve Rendle described it, becomes even more important.  Not just because of acquisitions.  VF has always been disciplined and focused in its approach to those.  CEO Rendle goes on to say, “We’re making changes to reposition and strengthen our business, get us closer to our consumers, encourage greater collaboration, and position us to win…”

Yeah, this is all good, but kind of touchy feely.  What might it mean?

Let’s return to Vans for a second.  Obviously, Vans has moved way past being a skate/surf brand.  That may be its roots, but you don’t do however many billions of dollars in revenue Vans is doing without transcending what, I’m kind of sorry to say, is a niche market.  And they expect to keep growing the brand.  What products are they going to sell to whom through which new distribution channel?  How do they make the brand stand for something to people who don’t know or care much about skate/surf?

I think “purpose driven” though it may sound like a platitude, has something to do with figuring that out.

The other thing I won’t be surprised to see, based on some of the comments as well as the coming and goings of brands and the dominance of outdoor and action sports and especially Vans, is some kind of restructuring of which brands are in what segment and what the segments are called.  Here’s what they said on page 18 of the 10-Q

“In light of completed and pending transactions resulting from our active portfolio management strategy, along with recently effected organizational realignments, we are evaluating whether changes need to be made to our internal reporting structure to better support and assess the operations of our business going forward. We expect to finalize our assessment early in Fiscal 2019. If changes are made to our reporting structure, we will assess the resulting effect, if any, on our reporting segments, operating segments and reporting units.”

VF’s revenues for the quarter grew 21.8% from $2.5 to $3.05 billion.  Of that growth, $233 million came from acquisitions, $120 million from foreign exchange and the remainder from their existing brands (organic growth).  You can see this broken down by segment below.

 

 

 

 

Without outdoor and action sports, there is no organic growth.  Below, you see where the operating income came from and how it’s changed since 2017.  2018 in on the left, 2017 is on the right for the quarter ended in March of each year.

 

 

 

 

Wholesale revenue, excluding acquisitions and foreign exchange, rose only 1%.  Looks like direct to consumer is where the growth is.

The gross margin rose from 50.3% to 50.5%.  “Gross margin was favorably impacted by increases in pricing, a mix-shift to higher margin businesses in the Outdoor & Action Sports coalition and foreign currency changes, offset by lower margins attributable to the Williamson-Dickie acquisition and certain increases in product costs.”

Wish I could get my hands on some gross margin information by brand.

SG&A expenses rose from 38.5% of revenue to 40.3%.  “The increase was due to expenses related to the acquisition and integration of businesses and higher investments in our key growth priorities, which include demand creation, customer fulfillment, direct-to-consumer and product innovation. Higher compensation costs also impacted the three months ended March 2018.”

Net income rose 21% from $209 to $253 million.  Even with $10.7 million of income from the Williamson-Dickie acquisition during the quarter, the imagewear segment operating income (which includes Williamson-Dickie) didn’t budge.  All the growth in operating income is from outdoor and action sports and I’d love to know, of that total, how much is from Vans.

The balance sheet, largely due to acquisitions, got weaker.  Working capital fell from $2 billion to $1.23 billion.  The current ratio fell from 2.1 to 1.4 a year ago and debt to total capital was up from 37.2% to 50.4%.  Stockholders’ equity declined 15.7% from $4.37 to $3.69 billion.  What I’d highlight is the increase in short term borrowings from $289 million to $1.53 billion.  They expect to reduce that “in coming months.”  Certain of the current asset accounts rose, but the increases were consistent with revenue growth and the Williamson-Dickie acquisition.

Cash used by operating activities was a negative $243 million.  In last year’s quarter, it was negative $210 million.

I still worry about VF’s dependence on Vans and what happens when the inevitable soft spot comes along.  But this is a company that “gets it.”  They understand the pace of change and the need to be flexible in an unprecedented environment.  They recognize (not everybody seems to yet) that no distinction can be made, for both financial and marketing reasons, between a sale made online and one sold in a store.  They are not (far from it) paralyzed because the future is a bit more blurry than usual.  They try new things.  Some work, some don’t.  They move on.

Not a bad approach.

VF’s Management Process and Strategy: Thoughts on Their Annual Report

I’ve spent some time on VF’s 10-K filing for the year ended December 31, 2017.  It was a thought provoking read (yes, I know I’m the only one who would say that about a 10-K) that left me thinking about how VF tries to derive its competitive advantage.  There are some lessons in it for all of us who sell products that are an awful lot like your competitors’ products.  Here are some VF facts on which we can base the discussion.  I’ll also review their numbers for the year.

  • More than 30 brands (23 of which they call primary) divided into three segments; Outdoor & Action Sports, Jeanswear, and Imagewear. Vans, The North Face, Timberland, Wrangler and Lee are the five largest.
  • They sell through specialty stores, department stores, national chains, mass merchants, and through theirs owned brick and mortar and online retail. In international markets, they also sell through licensees, agents, distributors, and independently operated partnership stores.
  • 65% of revenue is from the Americas, 24% from Europe, and 11% from Asia-Pacific region.
  • Total revenue for the year was $11.8 billion.
  • Direct to consumer revenues were 32% of total revenues. At the end of the year they had 1,518 stores worldwide, opening 111 in 2017.  They also have 1,100 “concession retail stores” mostly in Europe and Asia.
  • Vans, Timberland, The North Face, Kipling, Dickies, Lee, Napapijri, and Wrangler have stores under their names that sell only that brand’s products. There are also 80 outlet stores that sell many VF brands.
  • Ecommerce is 21% of direct to consumer.
  • VF owns 21 factories and produced 23% of 473 million units there. It works with approximately 1,000 other factories in 50 countries.  It has 38 distribution centers.

Consider the complexity.  How many combinations of where it’s made, where it’s sold, how it’s distributed, who the customer is and how the brands are positioned against each other (where that’s an issue) are there?  That’s a big, big number.  To some extent, it’s simplified by the fact that the five largest brands are a big chunk of total revenue, but still, this is quite a management challenge.  Here’s how they describe part of it in the 10-K.

“Managing this complexity is made possible by the use of a network of information systems for product development, forecasting, order management and warehouse management, along with our core enterprise resource management platforms.”

Talking about how VF manages its manufacturing base, the 10-K says:

“Products manufactured in VF facilities generally have a lower cost and shorter lead times than products procured from independent contractors. Products obtained from contractors in the Western hemisphere generally have a higher cost than products obtained from contractors in Asia. However, contracting in the Western Hemisphere gives us greater flexibility, shorter lead times and allows for lower inventory levels. This combination of VF-owned and contracted production, along with different geographic regions and cost structures, provides a well-balanced, flexible approach to product sourcing.”

CEO Steve Rendle’s nearly full-time job must be getting quality people he trusts into the right positions.  They had 69,000 employees at the end of the year.  He notes in the conference call, for example, “To support the execution of our strategy and better enable the growth of our large global brands, we have realigned the roles of our Group Presidents and redirected our leadership talents at our most important objectives. Going forward, each Group President will be responsible for a single geographic region and have one global brand reporting to them.”

So, what are the foundations VF builds its business on?  People (like any organization), systems, procedures, and disciplined management processes.

Oh – wait – I didn’t say brand or product.  From the 10-K: “In addition to the design functions of each brand, VF has three strategic global innovation centers that focus on technical and performance product development for apparel, footwear and jeanswear. The centers are staffed with dedicated scientists, engineers and designers who combine proprietary insights with consumer needs, and a deep understanding of technology and new materials. These innovation centers are integral to VF’s long-term growth as they allow us to deliver new products and experiences that consistently delight consumers, which drives organic growth and higher gross margins.”

I’m guessing they have one innovation center focused on each of their geographic areas.  For certain of their brands (surely the top five) they have enough size to develop, if appropriate, area specific product.

They can do this because of their size.  But size can be dysfunctional if you don’t have the four foundations I mention above.  What are the other benefits of being this big and managing like VF tries to?

Higher gross margin.  Your volume, number of contract manufacturers, and having your own factories will give you some advantage.

Lower advertising and promotion expense as a percent of sales.  They spent $716 million, and in fact have accelerated their brand building spending, but it was just 6% of revenues.

More flexibility and faster response to market changes.  Anybody think that’s competitively useful these days?  It’s valuable in brand building but having the ability to make some product quickly and perhaps in smaller quantities rather than making too much of the wrong stuff is also good for your margin.  There’s also value in having a distribution network that lets you move product around in response to changes in demand.  Also improves inventory control which, I believe, helps with brand building.

The cost of increasingly complex logistics and important systems is more efficiently spent.  That is, VF, as an $11 billion business, doesn’t have to spend 11 times as much as a $1 billion business.

As I watch companies like VF focus on flexibility and shorter product cycles, I continue to wonder about the changing role of trade shows.  For certain products, they seem built on the assumption of product cycles that increasingly don’t address what the market and end consumer want and when they want it.

Let’s move on and look at the numbers.

VF showed a revenue increase of 7.1% in 2017 from $11.0 to $11.8 billion.  $489 million was from existing brands and $247 million from the Dickies acquisition.  $49 million was from a positive foreign currency impact.  The gross margin improved 1.2% to 50.5%. “…reflecting a 180 basis point benefit from pricing, a mix-shift toward higher margin businesses and lower restructuring costs, which was partially offset by a 60 basis point impact from foreign currency.”  SG&A expenses grew 11.9% from $3.99 to $4.46 billion.  As a percentage of revenues, it was an increase of 1.6%.  “This increase is primarily due to investments in our key growth priorities, which include direct-to-consumer, product innovation, demand creation and technology initiatives. The increases were offset by lower restructuring costs in 2017 and a pension settlement charge of $50.9 million in 2016, which did not recur in 2017.”

Operating income rose from $1.368 to $1.503 billion.  Interest income rose from $9.2 to $16.1 million while interest expense was up from $94.7 to $102 million.

Income taxes rose from $206 to $695 million.  The new tax law passed in December resulted in a $465.5 increase.  That’s tax on income that had been earned and held offshore.  It’ a one-time thing.  The result was a 42.7% decline in net income from $1.07 billion to $615 million.

As you probably know, VF acquired Dickies in 2017 and has put Nautica up for sale.  On the income statement, they separate discontinued operations, and provide separate information on the late in the year acquisition of Dickies.  I’m not breaking any of that out in my discussion and want to explain why.

The first of four long term drivers of their strategies is, “Reshape our portfolio. Investing in our brands to realize their full potential, while ensuring the composition of our portfolio positions us to win in evolving market conditions.”  Buying and selling brands is part of their normal operations.  They are very disciplined about what they buy and how much they will pay.  They don’t necessarily buy something every year, but it’s an active and ongoing part of their operations and I don’t believe in viewing their results net of it.

Acquisitions remain a top priority for VF as they are “…transforming VF into a more digitally-enabled consumer and retail-centric organization.”

Below are revenues and operating income by segment- what they call coalitions.  The key thing to notice is that Outdoor & Action Sports provided 69.5% of revenue and 72% of operating income.

 

 

 

 

 

 

 

 

 

 

 

 

Vans’ revenues were up 17% in 2017.  The North Face was up 4% and Timberland 2%.   Total segment revenues were up 8% for the year.

“Global direct-to-consumer revenues for Outdoor & Action Sports grew 17% in 2017, driven by an expanding e-commerce business, comparable store growth and a 1% favorable impact from foreign currency. Wholesale revenues increased 2% in 2017, driven by growth in the Vans brand and Europe, partially offset by the above-mentioned U.S. retailer bankruptcies, lower year over- year off-price shipments and efforts to manage inventory levels in certain markets.”

The dominance of and dependence on Vans, as well as its continued and rapid growth is rather remarkable.  You won’t be surprised to learn that CEO Rendle lists “…protecting and enabling the explosive growth in Vans…” as the first of their 2018 top priorities.  VF expects “…high-teen growth from Vans through the first half of this year.”

During the conference call, an analyst asks the following question, which has been on my mind for a while as well.

“You talked about protecting the brand. You talked about not letting it overheat. What does that mean to how you’re going to manage the brand into the wholesale channel and your DTC, right? Are you going to constrict some of the deliveries into the wholesale channel? Are you going to limit some of the inventory across the channel? Are you going to segment the styles further? How do you plan to maintain a double-digit growth rate, as you alluded to, so that this doesn’t roll over, like we’ve seen other brands do in the not-too-distant past?”

Good question.  You can read into it the inevitable and often discussed in Market Watch public company problem; How do you grow without screwing up the brand?  Here’s part of Steve Rendle’s answer.

“…our Vans team is really the benchmark business on how they look at product segmentation across the different consumer touch points that we have to sell into, with our stores being the most premier expression of our brand. They’re really evolving how they’re looking at using stores and coming up with a mix of formats that play into the specific communities across the globe, but being very thoughtful, and direct partnerships with those wholesale partners, placing the right amount of inventory, being very thoughtful about not having one style over-torque, but really having it be a balanced approach with the right amount of newness to keep the brand moving forward each season.”

His answer sort of comes down to, “We manage the brand better than other brands are managed.”  Apparently so.  Yet it doesn’t really address the public company conundrum and I’ve never known a brand that didn’t, eventually, hit a dump in the road- “roll over” as the analyst puts it.  And I wonder, given the relative growth rates, why they can’t manage The North Face and Timberland as well as they are managing Vans.  It has something to do with the brand and the competitive environment, not just the brand management it seems.

Given the dependence on Vans, I hope they can continue to be disciplined in how they grow sales while protecting the brand.

A quick note on “risk factors” as listed endlessly in the 10-K.  I used to spend a lot of time on them.  Now, I find myself skimming them and rarely having anything to say about them- and not just for VF.  That’s because risk factors seem to be evolving from meaningful business considerations to a list of anything that the lawyers think could possibly go wrong.  They aren’t written to inform investors as much as to protect the company.

The balance sheet is weaker compared to a year ago.  Total equity fell 25% from $4.9 to $3.72 billion.  The current ratio is down from 2.4 to 1.5 times and cash declined from $1.227 billion to $566 million.  Debt to total capital was up from 31.9% to 44%.

The growth in receivables and inventories seems consistent with revenue growth and the acquisition of Dickies.  Also due to the Dickies acquisition, short term debt jumped from $26 to $729 million.  Hope they can refinance that before rates rise.  Long term debt was also up a bit from $2.04 to $2.19 billion.

The percent of their earnings they paid out as dividends was 96.2%.  That’s up from 59.9% last year and 38% in 2013.  It’s not that the balance sheet is weak- it’s just not as strong as it was.  If I were an investor in VF, the balance sheet changes and payout ratio would leave me wondering what happens if Vans should hit that bump.

The majority of VF’s growth for the year came in it’s fourth quarter, when revenues jumped 20.5% from $3.04 to $3.65 billion.    They reported a loss of $90 million in the quarter but remember the big accrual for taxes they were required to take due to the new tax law.  Vans, by the way, was up 35% in the fourth quarter, which puts some perspective on the 17% growth for the year.

Like all companies, VF tries to put its best foot forward in its public filings and conference calls.  I’m sure they have as many things go wrong as the next company.  Still, I walk away from reading their 10-K (and that of some other companies) with a strong sense that what used to give smaller companies a chance for an advantage is no longer exclusively available to those smaller companies.

Advantage Big Guys with Solid Processes and Cash Flow: VF’s Quarter

Before I dive too deep into the financial weeds, let’s look at VF’s overall strategy as explained by CEO Steve Rendle and Chief Financial Officer Scott Roe in their conference call discussing the results for the quarter ended June 30, 2017.

Strategy Stuff

Steve: “…while we expect the retail landscape to remain uncertain, we will invest against our largest growth opportunities to create momentum rather than wait for it.”

They have the cash flow and balance sheet to do this.

Read more

“Sacrifice a Little Growth…for Quality.” VF’s March 31st Quarter

Well, there you have it.  At some level, it is that simple.   But let me complete CFO Scott Roe’s comment in the conference call.  “…we are sharply focused on fundamentals and willing to sacrifice a little growth in the near term for quality. Our efforts are clearly paying off in the gross margin line. And we believe our decisions will improve the long-term health of both our brands and the marketplace.”

They improved their gross margin 1.3% (remember that’s a mixed retail and wholesale gross margin and, unfortunately, they don’t break it down between the two).  Distribution matters these days in brand building, and you can afford to give up some sales if you increase your gross margin that much.  In fact, I’d suggest you get that margin increase precisely because you made some distribution decisions that improved the “quality” of your sales.  Scott notes later, referring to off price business, that they’ve “…already cleaned a lot of that up.”

Read more

How Was VF’s Year?

It’s accurate to say that VF ran into the same issues and economic dislocations as other brands and retailers.  During their fourth quarter, ended December 31, 2016, revenues fell 2.7% from $3.41 billion to $3.32 billion in the quarter ended December 31, 2015 (the prior calendar period- PCP).  Net income was also down from $312 to $264 million, or by 16.7%.

For the year, revenue was almost the same at just over $12 billion.  Net income fell 12.8% from $1.32 in 2016 to $1.07 billion in 2015 (also the PCP).  More details and nuance later.  I wanted you to have those numbers as we talk strategy.

Read more

We’re All in This Together: Things to Think About from VF’s Quarterly Report

We’re All in This Together:  Things to Think About from VF’s Quarterly Report

VF’s 10-Q for the quarter ended September 30 showed up last week.  As usual, I’ll look at the numbers.  But I want to focus on several statements and action VF highlights in their conference call and 10-Q.  They highlight the extent to which we’re all dealing with the same economic and business conditions, and how we’re mostly dealing them in the same way. There’s also a couple of good ideas in here and maybe an “AHA” moment.

I’ll start by quoting CEO Eric Wiseman’s comment on the business environment.

Read more

VF’s June 30 Quarter: It’s Not Easy Out There for Anybody

After the results we’ve seen from VF in previous quarters and years, this quarter’s can only be characterized as disappointing.  Just goes to show you how difficult the market is right now.  They’ve got lots of company.

Total revenue rose just 0.75% to $2.445 billion.  VF ended the quarter with 1,461 brick and mortar stores worldwide. Direct to consumer business was up 6% in the quarter and accounted for 27% of total revenues.  “The increase in direct to consumer revenues…were due to new store openings and an expanding e-commerce business.”  The increase was not, apparently, due to higher comparable store sales or I assume we would have been told about it.  International revenue was 35% of total revenue.

Read more

VF’s Quarter: It’s Not Easy for Anybody Out There

VF filed its 10-Q for the quarter ended April 2nd on May 10th.  The results, while in line with expectations, showed VF under the same kind of pressure other public companies are dealing with.  Even their action sports segment, where most of their growth has been coming from, experienced very modest sales growth and reduced operating income.

Read more