VF’s Quarter and some Broader Considerations

As I’ve told you, I’m not so much interested in analyzing the financial statements of big multi-brand corporations like VF (or Nike, or PPR, or Jarden, etc.) but of seeing, to the extent we can, what they are doing in the action sports/youth culture space (or whatever industry we’re in). Mostly I don’t think you want to hear about Footnote F on pension plan contributions but might be interested in any strategic implications or trends I can glean.

To be honest, I do actually want to mention Footnote F briefly. VF noted one of the reasons their operating expenses as a percentage of sales rose was due to an increased pension expense. Companies with pension plans (as opposed to 401Ks) have to fund those plans based on complex actuarial calculations. When returns don’t meet what they project, they have to put more money into the pension plan, and that’s an expense. 

Continuing to do what I said I wasn’t going to do, VF noted that their gross margin for the March 31 quarter benefitted by 0.4% by a “…change in inventory accounting policy that did not recur in 2012.”
You’ll be pleased to learn I’m not going to go into that in detail. The point is that this arcane accounting stuff does matter. As much as we’d like it to go away, it’s hard to evaluate results without considering it.
VF’s sales for the quarter were $2.53 billion, up 31% from $1.94 billion in the same quarter last year. 12% of that growth was organic (from brands they already owned) and the rest was from the acquisition of Timberland. Direct to consumer business is 19% of the total, and international is 45%.
Net income for the quarter was $215 million, up from $201 million last year. Their balance sheet is just fine and I think with that we can move on to discussing their outdoor and action sports coalition (“the coalition”) where Vans, The North Face, Reef, and now Timberland reside.
The big news is that we got an actual number on Reef! Its revenues grew by 11% during the quarter. It’s not like that’s momentous or anything, but as it’s been many quarters since VF has offered any number on Reef at all, I take it as a sign that revenues were not necessarily increasing in prior quarters and now they are.
For the quarter, the coalition had revenues of $1.26 billion and generated an operating profit of $201 million. That’s 49.4% of the quarter’s revenues and 55.5% of its operating income. In the quarter last year the coalition’s revenue was $788 million. Of that growth of $472 million, $356 million came from the Timberland acquisition and $134.5 million was organic.
VF’s overall gross margin was down 1.5% during the quarter, but we’re told it was up in the coalition, though we aren’t told how much. The North Face and Vans revenues grew 14% and 25% respectively. Their direct to consumer business rose 18% and 21% respectively. The North Face’s annual sales are approaching $2 billion. Vans has passed $1 billion.
In the Americas, the coalition’s revenues grew 41%, with 29% of that being from Timberland. International revenues rose 84% in the quarter, with 65% of that increase from the Timberland acquisition. Ignoring the Timberland acquisition, the coalition’s operating margin grew from 18.3% in the quarter last year to 20.3% in this year’s quarter. You can see why they like this piece of their business.
With those numbers in mind, let’s list VF’s overall strategies. According to CEO Eric Wiseman, they are:
-Building lifestyle brands.
-Growing internationally.
-Serving consumers directly through our growing base of retail and online stores.
-Win with winning retailers. 80% of VF’s business is wholesale. They expect direct to consumer to top out at about 22%.
-Enable VF’s future. They “…recognize the importance of consistent investments behind a best-in-class infrastructure, including talent development, supply chain capabilities and technology.” The company’s capital expenditures in 2012 are expected to be $375 million.
-Lead in innovation. Their definition of innovation is “…something new that creates value.”
 With that as background, let’s consider the specific strategies for The North Face and Vans. Consistent with what CEO Wiseman said, coalition President Steve Rendle describes The North Face strategy as follows:
“The North Face key strategies in 2012 include delivering the most important, innovative outdoor products in the industry, leveraging our brand authenticity to connect more deeply with active consumers, providing a premium retail experience both in our owned stores and wholesale partner’s locations and growing our international business.”
He goes on to discuss how they connect with consumers:
“Centered on bold, athlete-tested, expedition-proven storytelling campaigns, we continue to invest in expeditions and events that define our brand through the eyes of the hard core user.”
Gee, some of these strategies sound vaguely familiar. If I were to summarize, I’d say that VF is busily turning The North Face into a $2 billion and growing action sports brand. 
Just one other thing on The North Face. They also note they are “…implementing a global product line rationalization program with the goal of reducing SKUS by 15% by fall of 2013.” I think every brand and retailer can benefit by reviewing their stocking units and figuring out which ones they can really do without.
Essentially they are pursuing the same strategies with Vans, though of course it’s already a solid action sports brand.
Timberland is apparently introducing apparel next year. It will be interesting to see how that’s positioned.
At some level, I’m starting to ask what the difference between “outdoor” and “action sports” is. Core action sports brands have often had trouble growing out into the broader market because they didn’t understand fashion or didn’t have the financial resources or infrastructure. But those brands expanded distribution enough that brands like The North Face (and maybe Timberland?) can approach it from the outside.
Maybe the thought for today is that it’s necessary for you to spend some time carefully defining what market you’re in. That’s hardly a new idea. But there was a time when you could say “action sports” and kind of know who your customers and competitors were. I’m not sure that’s true anymore.



5 replies
  1. Rob Valerio
    Rob Valerio says:

    “bold, athlete-tested, expedition-proven storytelling campaigns” sounds exactly like something this company I’ve heard of called Burton has been doing for years. Let’s see, there’s snowboarding companies and then there’s lifestyle companies. I wonder what is a bigger market, participants or followers?

    • jeff
      jeff says:

      Hi Rob,
      I thought of Burton too as I wrote, though they are hardly the only example. I’m guessing of course, but I think the followers market might be a bit larger………………………


  2. Rob Valerio
    Rob Valerio says:

    My thought here is maybe the big fashion companies might be able to seriously dent the markets of the largest action sports companies because they know how to distribute at the next level. Burton always seemed to me to be out of growth potential because they were so dominant in their distribution channels. It still feels to me that the best strategy is to grow your company as big as you can and then sell it to a larger company that knows how to take it to the next level.

  3. Micky McDonald
    Micky McDonald says:

    Another great article Jeff.
    With regards to your closing comments, how long have we been using the term “action sports” and have we been using it long enough to exclude brands like TNF from the category? Further, is their entry into this category any different from the surf brands starting to make snow products or ski companies starting to make snowboards? How long has skiing been an “action” sport rather than just a sport or pastime?
    The evolution of our industry shouldn’t be limited to certain players and in my opinion should be inclusive (I have even described it as “our” industry which is also a little silly!). Why should TNF not be a valid action sports clothing company any more than the next start up?
    Great product and innovation are what drives consumer demand and TNF (and VF) are reaping the rewards for doing both. Ultimately, the consumer will decide what products they use for their chosen activity and it looks like they are choosing a lot of TNF!

    • jeff
      jeff says:

      Hi Micky,
      The North Face doesn’t care if we want to exclude them or not. They are just doing what they think they should do and we’ve spread our distribution wide enough that there are openings for brands like TNF to enter “our” industry from the top down rather than the bottom up.

      I think skiing is a sport or pastime. I think snowboarding is becoming that way if it hasn’t already. It’s inevitable. And yes, the consumer always gets what they want no matter how much we talk about what the industry is or is not. Long boards in skateboarding come to mind.

      Thanks for the comment.

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