How VF Keeps Doing It: Size, Flexibility, Diversification, Disciplined Management Processes, Balance Sheet

VF’s secret sauce isn’t secret.  It’s just hard to do.  Executing the strategy takes leadership, a quality team, organizational consensus, and a certain level of confidence and perhaps willingness to fail to take advantage of uncertain times.

You’ve probably realized that every company needs those things.  So let’s take a deep dive into how VF does what it does with less emphasis than usual on the nuts and bolts of the financials.  The results for the year were strong and some numbers will show up in this discourse.  Here’s a link to VF’s 10-K.  Not suggesting you get down into the footnotes but reviewing the first maybe 10 pages on their business and strategies might be useful.

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Emerald Exposition’s Results, SIA and the Trade Show Environment

Emerald and SIA are kind of, for now anyway, joined at the hip due to their ownership/continued involvement in the Snow Show.  They are both trying to respond to profound changes in the active outdoor market that are changing their business models.  I thought I might kill the proverbial two birds with one stone and see how they’re both doing and speculate on where that interrelationship might go.

Emerald went public on April 28, 2017 at $17.00 a share.  It reached a high of $24.45 on November 29, 2017 and since then has fallen to $12.34 as of 10:17 AM Pacific Time on May 24, 2019.  That’s a decline of 27.4 percent from it’s offering price and 49.5% from its high.

Emerald currently operates “…more than 55 trade shows as well as numerous other face-to-face events.”

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Increasing Snowsports Participation: Are We Asking the Right Questions?

For years bordering on decades, we’ve wrung our hands over the issue of increasing participation.  There’ve been programs and research and money spent. Maybe without those programs things would be worse.  But so far, they don’t seem to have moved the needle the way we want.

We’ve got financial, demographic, and climatic factors in the way of a long-term increase in participation.  In the aftermath of a great season, it’s hard to ask anything besides, “How can we increase participation?”  That sounds to me like the goal- not a helpful question.  Helpful questions address issues impeding achievement of the goal and frame the problem to allow the issues to be addressed.  I want to ask what I think some of those questions are.  I hope you find the exercise helpful and that you might respond by asking some questions I’m missing.

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Hibbett Sports: Annual Results and Omni-Channel Progress After a Remarkably Late Start.

“At the end of the second quarter of Fiscal 2018, we successfully launched our e-commerce website,” Hibbett Sports (HS) tells us in their 10-K for the year ended February 2nd.  This isn’t news.  I wrote about it last October when I discussed their quarterly results.

If you’re not already familiar with HS, you might review that article before continuing.  My goal is to bring you up to date based on their full year results and new information in the 10-K.  Let’s start with this chart.  It shows HS’s annual results for the last five year.

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Volcom Sold by Kering to Authentic Brands Group, Kind Of.

The title of the press release is “Authentic Brands Group Acquires Volcom.”  Well, not exactly.  The Authentic Brands Group (ABG) press release goes on:

“…ABG has taken a minority stake in Liberated Brands, the newly-formed operating company for Volcom. Todd Hymel and Volcom’s current management team have taken the majority stake in Liberated Brands and will maintain the Volcom operations based in the U.S., France, Australia and Japan with continued oversight of the brand’s product development, athlete marketing and its retail and wholesale businesses worldwide. ABG will focus on amplifying brand awareness and business development for Volcom while leveraging Liberated Brands’ specialized retail and wholesale operations as a platform for international expansion of complementary ABG-owned brands.”

Details are lacking, but here’s how I’d describe the transaction from the little I know.  The Volcom management, lead by Todd Hymel, wanted to buy Volcom from Kering.  Okay, let’s stop for a little history and a few numbers.

It was on June 24, 2011 that Kering (then known as PPR) completed the acquisition of Volcom.  The purchase price was $607.5 million.

December 31, 2010 is the last of the full year financials we have for Volcom as an independent public company.  In that year, it had revenue of $323 million, operating income of $30.4 million, and net income of $22.3 million.  PPR, then, paid 20 times operating income.  Big number, as I think we all thought at the time.

We also have a final 10Q for the quarter ending March 31, 2011.  The balance shows cash of $90 million, no long-term debt, and a current ratio of 7.3.  So a rock-solid balance sheet.

I wrote at the time that Volcom did a great job selling from a position of strength rather than when then needed to find a buyer.  Here’s part of what I said.

Over the last year, and maybe more, we’ve noticed that Volcom has had some issues with too much inventory and has had to discount to move it. We see the receivables increase and the allowance for bad debt that’s more than 10% of receivables. We note their comments (like other companies) about issues with rising costs and deliveries.

I’ve written about what a great job Volcom has done in defining and owning their market space, but how it can be hard for a company to grow out of a market position it is so closely identified with. Related to that I’ve noted some of the apparent challenges the brand has had in the department stores.

Volcom’s management didn’t need to sell the company. But if I and others have noticed some of these issues, you know Volcom’s spent a whole lot of time figuring out how to manage them. Apparently, the conversation with PPR took place over a year. With its balance sheet strong, and the brand’s integrity intact, I suspect Volcom looked at the strategic issues I’ve highlighted above and decided it was a good time to negotiate from a position of strength. That’s how you’re supposed to handle the market issues that lead to consolidation.

The limited information we got about Volcom from Kering told us Volcom wasn’t performing even close to a way that could justify the purchase price.  Kering’s decision a year ago to sell it confirms that.  Here’s what a Fashion United article from April 2 said.  “Volcom’s results, impacted by headwinds, still account for a considerable portion of the turnover. In 2017, its turnover was 230 million euros, down 3.2% at constant currencies, compared to 242 million euros in the prior year. Its operating income was stable.”  230 million euros is about $258 million at current exchange rates, well off the $323 million of 2010.

I imagine part of the issue was that Kering didn’t understand what they’d bought and how to manage it.  Sounds a bit like Deckers’ acquisition of Sanuk.  The other piece was that Volcom had a market position it proved hard to expand without damaging the brand.

Okay, back to the present.  Todd and his team set up Liberated Brands to be the operating company for Volcom.   ABG has a minority stake in Liberated- that’s up to 49%.

Kering, we know, spent a year looking for a buyer but ended up selling it to the management group.  My experience is that management groups don’t typically pay the highest prices, if only because they don’t have a lot of money to pay.  And they are hell to negotiate with because they know everything about the brand and it’s prospects.

But we have no details.  Pretty sure Kering got less than the $607.5 million they paid.  A lot less.  Maybe the minority interest that ABG purchased covered it.  Perhaps Kering took back a note for part of the price or kept a piece of equity themselves.  I would expect the Volcom team put up some money but have no idea how much it might have been (or not been).  Many structures are possible.

Regular readers know I’ve been saying for years (decades?) that many brands that were public or part of a public company were better off private. They can focus on the bottom line and brand positioning rather than on revenue growth.  Often, their potential depends on just how used, screwed and abused they were while public.

From the quote in the press release, the Volcom management team is going to “…maintain the Volcom operations…with continued oversight of the brand’s product development, athlete marketing and it’s retail and wholesale business worldwide.”

Meanwhile, “ABG will focus on amplifying brand awareness and business development for Volcom while leveraging Liberated Brands’ specialized retail and wholesale operations as a platform for international expansion of complementary ABG-owned brands.”

Okay, it’s time for a visit to ABG’s web site.  Scroll down that page a bit than look at the number of brands/stores/partners they have.  You’ll see where it says, “We are brand owners, curators, guardians.”  Next, take a look at What We Do to get a sense of the brands they are involved with.

Next, let’s move on to Our Business where you can see the kind of relationships they have with brands.  Finally, check out Who We Are, where you’ll see a group of very experienced executives lead by Founder, Chairman and CEO Jamie Salter.

I know nobody better than Jamie at management of distribution and making money out of brands that have lost some part of their luster.  When it comes to brand management, he’s always been able to get blood from a stone, and I think I’ll just leave that one lying there.

Let’s assume for a minute that I’m right in thinking the Volcom brand might have suffered some damage as part of Kering.  Typically, part of the solution for the buying group, as long as there’s brand credibility left, would be to pull back distribution as part of reestablishing the brand.  ABG plans, as you see in the quote, to place some of its brands into Volcom retail channels.  Pretty clearly, some to many of those brands don’t belong with Volcom.  That will be especially true if part of Volcom’s new strategy is a pullback in distribution.

As this all evolves, it will be interesting to see the extent to which Volcom and ABG management are aligned.  You can see how the expectations of Volcom management might be in conflict with ABG.

Recession as Part of Your Strategy: Zumiez’s Results for the Year Ended February 2nd

Let’s go right to something Zumiez CEO Rick Brooks says at the end of the conference call on their results.

“…our goals [is to] continue to grow the profitability of the business from [an] operating profit perspective.  Now of course if we have recession we’ll go backwards and we’ll see competitors go away across the globe and we expect coming out of the recession we’re going to emerge even stronger with a stronger share position in the marketplace which will allow us to drive operating margin higher again in that case.”

Rick is careful not to predict a recession, though I’ll bet he believes we will have one eventually.  That’s what I believe.  I’m pretty sure that’s what other executives at various companies believe.  Executives who share that belief are building their balance sheets, strengthening their brands, controlling distribution, and positioning themselves to manage expenses.  Like Rick, they expect a recession will hurt, but they expect it to hurt other more- to their benefit.

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Thanks to Their Australasia Segment, Globe Has a Solid Six Months

Globe reported growth in revenue and income for the six months ended December 31 though, as usual, they don’t give us much information on how they did it.  I’ll tell you what I can glean from the public documents.  All numbers in Australian dollars of course.

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“More of the Same” is Not the Way to Prosper When Change in Retail is Rampant: Big 5 Sporting Goods.

I don’t cover Big 5 every quarter.  However, their 10K for the year ended December 30, 2018 requires some discussion.  They seem to be flailing in the emerging retail environment and seem reluctant to respond to all the changes.  They are betting that their old strategy will continue to work.

It appears I’m not the only one who thinks that’s not the right approach.  Go take a look at a chart of their stock (symbol BGFV) since the start of 2017.  Let’s take a look at the numbers before discussing the strategy.

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The Evolution of Sustainability and Implications for your Business Model

Concern with sustainability is hardly new to us.  As an industry, active outdoor has increased its focus on the environment and the impact of climate change for years.  I think it’s in our DNA to believe that’s the right thing to do.  That doesn’t mean we aren’t aware of the impact on what we sell and where we sell it.  Sustainability is changing our business model.

Originally sustainability meant things like using less, recycling what we could, and choosing environmentally friendly materials.  Those things are still important but awareness of the sheer amount of textiles that are being discarded rather than recycled and their impact has caused the way we try to be sustainable to morph.

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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.