VF’s First Quarter: Outdoor and Action Sports Continue to Shine

VF’s March 31 10Q reported an overall 2.15% increase in revenues from $2.556 billion to $2.612 billion from the same quarter last year (Would have been 1% more, but they sold the John Varvatos brand).   But outdoor and action sports revenue was up 9.7% from $1.264 billion to $1.384 billion, representing 53% of total revenue for the quarter.  Here’s the link to the 10Q.

Just to remind you, the brands in the outdoor and action sports segment are Vans, The North Face, Timberland, Reef, Jansport, Kipling, Lucy, Smartwool, Eastpak, Eagle Creek and Napapijri. In 2013, The North Face and Vans are expected to be VF’s two largest brands by revenue, we learn in the conference call.
Total company revenues were up $55 million for the quarter. Outdoor and action sports revenue grew $120 million. Obviously, other segments were down to not up very much and action sports is carrying the load for VF right now. That, of course, is the whole concept behind having a diversified group of businesses.
The gross profit margin improved an impressive 2.4% to 48.1%. The improvement was across the whole company and “…reflects lower year-over-year product costs and the continued shift in our revenue mix towards higher margin businesses.” For the whole of 2013, however, they expect gross margin to be up only about 1%. The biggest improvement is in the jeanswear segment due to a big decline in cotton prices since last year’s quarter. 
Marketing, administrative and general expenses rose from $853 million to $899 million and as a percentage of sales from 33.4% to 34.4%. CFO Robert Shearer tells us that “Half of that increase came from out growing D2C [direct to consumer] business and the other half is due to higher levels of marketing spending.”
Operating income was up 14% from $314 million to $358 million. Outdoor and action sports reported what they call a coalition profit of $226.5 million, representing 53.5% of total coalition profits for the quarter of $423.6 million. Lower other expenses, including a lower tax rate, helped net income to increase from $215 million to $270 million.
The balance sheet is in good shape with a current ratio of 1.9 and a debt to total capital ratio of 28.4%, down from 36.1% a year ago. I was impressed to see a decline in inventory from $1.52 billion to $1.41 billion, though of course some of that decline is the result of the sale of the John Varvatos brand.
North Face revenues grew 6% globally, with a 25% increase quarter over quarter in the direct to consumer (D2C) business. There was a “slight” increase in wholesale business. Revenues in the Americas region were up 3%. They don’t break out the United States. Outside the Americas, the brand grew 11% “…with balanced strength on a D2C and wholesale basis.” In Europe, the increase was “modest.” Online was up more than 30%. Asian North Face revenues rose more than 40%. No idea what the base number is.
It’s really interesting to see VF take The North Face and evolve it from more of a technical mountain brand to a lifestyle, fashion brand. Obviously, that’s necessary if they expect it to continue its growth.
“Global revenue for Vans in the first quarter was up 25% with strong double-digit growth in all 3 regions, including both the wholesale and the D2C businesses.” In the Americas, it was more than 20%. Outdoor and action sports Group President Steve Rendle noted strong sell through in men’s apparel at the wholesale level. He said it was up over 50% year over year. I suspect that’s from a small base.
Outside of the Americas, Vans revenues grew 30% with D2C up more than 40%. Europe by itself was up 30% and Asia more than 20%.
Timberland revenues were up 2% for the quarter, including “double-digit growth” in D2C. Outside of the Americas, revenue was flat. VF acquired Timberland just over a year ago, and its integration is still a work in progress. I will be very interested to watch what VF does with Timberland. I wonder if there won’t be an evolution similar to what we’ve observed with The North Face.
We learn that “Reef had a very good quarter,” but that’s all we learn.
VF expects the direct to consumer business to represent 23% of total revenues in 2013 and expect to see it expand in the future. They plan to open about 160 stores this year after ending last year with “…roughly 1,100 doors across all of our brands across the world.”
One of the analysts asked, “And online, cannibalization with wholesale, is there any channel conflict there? I thought CEO Eric Wiseman’s answer was instructive, though he avoided directly addressing the issue of competing with the wholesale channel except to say “We try very hard to use this [D2C strategy I think he means] as a supportive strategy for our brands and to avoid cannibalization. And we actually work with our wholesale partners to where – they know where we’re going to put stores.”
I’m lacking some details here, but telling them where the new stores are going is hardly working with them.
Let me continue to quote his answer at some length:
“A great example of this is Vans, which in the last 2 or 3 years, has put up a lot of stores around New York City, around Boston, now around Philadelphia, where we didn’t have substantial distribution. And we just didn’t have the doors there that let the brand speak to the customers… And that’s true in markets in Europe and in Germany. It’s true in the U.K.”
“…didn’t have the doors there that let the brand speak to the customers…” he says.  Hmmm. So apparently they think that the other retailers that carry their brands in those areas weren’t doing a very good job? Or at least they believe they can do a better job themselves. 
He continues:
 “That’s how we look at it. And we have so much runway, because we ended last year with roughly 1,100 doors across all of our brands across the world. So we’re so relatively undeveloped that we still see lots of runway before the cannibalization thing comes into play. The e-commerce thing is a tricky thing. Because we don’t know if that’s — we can’t really say where those customers are coming from, whether they’re new customers to the brand, whether they used to shop in our stores or somebody else’s stores. What we do know is we have to create a compelling way for our consumers to engage with our brands from their phones, from whatever devices they have, and we have to let them shop while they’re there.”
Bottom line is we can expect more stores from VF and they’d like to perpetuate the idea that this is somehow good for other retailers that carry their brands. Like all of the rest of us, they are unclear as to if and how online sales relates to and impacts, for better or worse, brick and mortar sales.
A couple of weeks ago at the IASC Skateboard Industry Conference, I made a presentation suggesting, among other things, that distribution was much more complex that it used to be and that deciding who and where to sell was much more critical to your brand positioning. I further said that if you can’t get big sales increases, you can still hope to improve your operating income through recognizing the links between how you operate and manage your inventory and your marketing. I also noted that being more purposeful with your distribution and controlling consumer touch points had to potential to reduce expenses and improve margins and brand positioning. 
Effectively, VF is implementing most of the strategy I suggested. If they think it’s a good idea, you should at least look into it for your brand or store.        



8 replies
  1. Bob Hall
    Bob Hall says:

    Glad to see your analysis on VF, Jeff. Given their many successes, how can we NOT study them, and even admire them, despite the growing fears that VF is somehow “bigger” than the OR industry? Yet as TNF goes mainstream (or worse yet, “fashion” using your words!), therein is at least one ray of hope for “new shoots” — “core” brands that are technical, and speak precisely to the dedicated enthusiast. The beast (VF) must be fed, and such new brands eventually become the sustenance (aka the liquidity event) for the best of the core founders & builders out there. It’s “OK” to conceive, to build responsibly, to harvest….and to re-pot….bh

    • jeff
      jeff says:

      Hi Bob,
      Agree. The public company syndrome requires growth that eventually pulls a brand away from the core market and makes room for new core brands.

      Thanks for the comment.


  2. Glenn Brumage
    Glenn Brumage says:

    Thanks for the analysis and insightful comments.

    On the subject of distribution, fact is, no matter how big or small the brand two things have changed. First it’s easier to reach and build a relationship with your specific consumer. Second the distribution landscape has changed.

    You could blame the internet but you might as well blame Edison, Alexander Graham Bell and Jobs.
    Look up “Luddite”.

    We have no choice but to recognize the change has already passed and plan our business around both.

    I’m currently preaching the following motivational phrase.
    That goes for brands and retailers alike. The consumer ultimately decides.


    • jeff
      jeff says:

      Hi Glenn,
      Still trying to chase down whether you caused the tequila currency crisis or not.

      You have to be special to the consumer. If you aren’t you are dead. Especially in this industry, there is always another choice that’s just as good. How can you do anything but tightly manage your distribution? What’s the choice?


      • Glenn Brumage
        Glenn Brumage says:

        I have plausible deniability when it comes to the Tequila crash. past that, I plead the fifth.

        The discussion continued at Surf Summit. I wish you were there for it. I met a brilliant and interesting man from Google, Mike Yapp. He added more facts and credibility to the fact that the change has already come and will exponentially continue. Kurzwiel had it partially right.


        • jeff
          jeff says:

          I wish I’d been there too. Planned to go and then got invited to speechify at IASC and just couldn’t fit it in. Did you get the sense at the summit that people were aware of the impact and extent of the change?

  3. Glenn Brumage
    Glenn Brumage says:

    More than last year.
    There is still resistance that I believe comes from ignorance. When explained logically, they start to come around.

    • jeff
      jeff says:

      It really requires a whole new way of thinking, which is always hard. Read what I’m about to post on Skullcandy. I think Darling gets it.


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