VF’s Quarter. Thank God for 10Qs (What an odd thing to say)

VF had a quarter in which total revenues rose 14.3% from $2.73 billion to $3.12 billion. Net income was up 26.8% to $381 million. I don’t find it as clear cut as that sounds, and the way to approach analyzing it is to go right to Note G- Business Segment Information in VF’s 10Q and reproduce part of it for our discussion. So here it is.

 

VF refers to its business segments as coalitions. In the chart above you see the revenue and operating profit each coalition produced during the quarter. Total company revenue rose by $398 million. The Outdoor & Action Sports coalition, which includes Vans, The North Face, Timberland and Reef, grew by $415 million, or 104% of total revenue growth.
 
Without the growth in Outdoor & Action Sports, VF’s total revenue declined very slightly.
 
Total coalition profit (profit before interest, taxes and corporate overhead which I call operating profit) grew by $111 million. Outdoor & Action Sports operating profit grew by $92 million to $413 million, representing 83% of operating profit growth and 67% of total operating profit. Outdoor and action sports revenue was $1.85 billion, up 29% from $1.44 billion in the same quarter last year. It represented 59% of total revenues for the quarter.
 
I guess we better dig into the Outdoor & Action Sports results as they appear to be kind of important to VF’s overall results and because they are what we’re most interested in.
 
First, let’s remember that Timberland, which is part of that segment, was acquired by VF on September 13, 2011. So its results were included in VF’s numbers for only a few weeks in last year’s quarter, but in the whole quarter this year. 
 
In last year’s quarter, “Timberland contributed $163.6 million of revenues and $11.0 million of pretax income…” In this year’s September 30 quarter, it contributed $499.1 million of revenues and $55.8 million of pretax income.
 
Let’s adjust the Outdoor and Action Sports segment for those revenue numbers. Without Timberland last year’s quarterly revenues would have been $1.27 billion. This year they would have been $1.35 million. That is growth of 6.3% in revenue for Outdoor & Action Sports.
 
I’m not going to try and do that adjustment for operating income, because the operating income number I have for Outdoor & Action Sports is before interest, taxes and corporate overhead, but the number they give for Timberland’s quarterly impact is just pretax and I’m afraid I’d be comparing apples and oranges.
 
The North Face and Vans grew 5% and 21% during the quarter respectively. Those brand’s direct to consumer businesses grew 10% and 18% respectively. Outdoor & Action Sports U.S. revenues increased 26% with 16% of that increase coming from Timberland. International revenues for the coalition rose 32%, but 30% came from Timberland. European revenues rose 24%, but fell 6% excluding Timberland.
 
We get some further interesting comments on those brands in the conference call. The North Face’s revenue growth in the Americas was in the high single digits. It experienced mid single digit declines in revenue in Europe for the quarter, though they say the brand continues to take market share there. If their revenues can decline, but they can still take market share, things must be pretty hard in Europe.
 
They also note that The North Face’s constant currency revenue were up 60% in Asia. No idea what size numbers we’re talking about.
 
Vans grew at a mid-teens rate in the U.S. Constant currency revenues were up more than 45% in Europe and more than 40% in Asia. Both Vans and North Face are increasing their marketing investments.
 
Total Timberland revenues actually “…declined slightly in the third quarter.” The growth in Timberland we talked about before was for the period when VF owned them. Timberland was obviously generating revenues before the acquisition. I gather it was down more (“moderately”) in the Americas due to the hangover in inventory from last year’s warm winter. It was flat in constant dollars in Europe. There’s further discussion about how they are still integrating Timberland into their business model with expected improvements in performance.
 
The company’s overall revenue growth of 14.3% came mostly from Timberland. Only 2% of that growth was organic. Direct to consumer revenue grew 28%, with 19% coming from Timberland. Direct to consumer was 18% of total revenue.
 
Gross margin grew nicely, from 45.3% to 46.7%. “Gross margin increased in the third quarter in nearly every coalition due to a greater percentage of revenues from higher gross margin businesses and the impact of lower product costs. The increase in the first nine months of 2012 also reflects the continued shift in the revenue mix towards higher margin businesses, including the Outdoor & Action Sports, international and direct-to-consumer businesses.”
 
Strategy
 
The first thing I’d note is CEO Eric Wiseman’s conference call comment that “We’re seeing some slowing in the U.S. economy, increasingly challenging conditions in Europe and slowing growth in China.” Those issues aren’t unique to VF.
 
Let’s go on and quote him again. “As you know, we’re constantly looking at the shape of our portfolio because we believe that the diversity of our portfolio is our strength.” What that means is that they will sell businesses that don’t meet their expectations and look to buy ones that do. And while, “We’re pretty focused on the integration of Timberland this year for all the appropriate reasons…acquisitions are our priority, and we’re beginning to look into 2013 about what we might do.”
 
Right now, Vans appears to be the best performing sizeable brand VF owns, and you know that performance has their attention. They are trying to create some of Van’s attributes at The North Face and I expect they will do the same thing with Timberland once it’s fully integrated.
 
Given the results they are getting from Vans and expect from The North Face and Timberland, I wonder if the sale of some of their brands that aren’t performing as well isn’t in the cards.
 
It used to be hard to be a big company and be “cool” in this industry. That doesn’t seem to be the case anymore. Either the formula has changed or they’ve figured it out. Or maybe it doesn’t matter like it used to. I just think the lines between action sports, youth culture, and fashion have blurred to such an extent that it’s harder to keep a specific identity that really differentiates you.            

 

 

2 replies
  1. Bob Hall
    Bob Hall says:

    Month after next all aspiring OR exhibitors will be in SLC, full of hope yet again. Will we be watching the “walking dead” (all the non-VF, non-Jarden, etc. brands)”? Or will there be more life-giving oxygen for niche players (as the Fortune 500 brands go mainstream, like TNF, Timberland, K2, Vans, etc.)?

    P.S. Many thanks, Jeff, for your steady flow of solid analysis!

    • jeff
      jeff says:

      Hi Bob,
      Plenty of oxygen for niche players. But they will have to be really, really careful they know just what that niche is. It’s not so much that the Fortune 500 owned brands are going mainstream, but that they are redefining what action sports is. Maybe that’s the same thing.

      Thanks for the comment.

      J.

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