VF’s Quarterly Result; Why is it We Bother?

We review VF’s results because they own brands we are interested in. Same reason we review Jarden’s, PPR’s and other companies. But we rarely get much information on those brands because they are part of a larger segment by which the corporations represents its business. And, in the case of VF, we get literally nothing on Reef because it’s so small that its contribution to the action sports and outdoor segment isn’t significant I guess.

This is, in part, the inevitable result of consolidation. But if we’re paying attention to these conglomerates, in spite of the lack of information on brands we’re interested in, there must be a reason.

It’s because for most brands in our industry, the focus is on youth culture or fashion or some other word as much or more than the core action sports market. That much larger target is where most of the customers are. We use terms like “consolidation” and “vertical integration” benignly, and it’s a little too easy to forget just how hard these trends make it for specialty shops, smaller companies, and brands that are strictly wholesale. I don’t say that critically of companies that are consolidating and integrating, but as a reminder to those of you who aren’t of what your competitive environment looks like.
Let’s get to the specifics of VF and then I’ll point you to something you might want to read.
Revenues for the quarter ended September 30 were $2.75 billion, up 23% from the same quarter last year. However, the acquisition of Timberland was completed during the quarter and it contributed $163.6 million, or 7%, of the increase to revenues. Direct to consumer and international grew 15% and 29% organically (excluding acquisitions) during the quarter. Including acquisitions, the numbers were 21% and 44%. A weaker U.S. dollar increased the quarter’s revenues by $56 million.
I guess what we’re most interested in is VF’s outdoor and action sports group that contributed, including Timberland, $1.437 million in revenue, up 37% from $1.045 billion in the prior year’s quarter. This is the segment that includes Vans and Reef, as well as The North Face and others. It’s 52% of VF’s revenues for the quarter. The next closest segment, of their six, is about half that. Profit from the action sports and outdoor segment before interest, taxes and common corporate expenses was $321 million, up from $248 million in the previous year’s quarter. That’s 65% of the quarter’s profit before the expenses I mentioned. No wonder VF likes action sports and outdoors.
Action sports and outdoor business in the Americas rose 21% in the quarter (13% excluding Timberland). Worldwide, The North Face and Vans grew 22% and 25% respectively. In Asia, the segment’s revenues were up 81% (50% excluding Timberland). “Direct-to-consumer revenues in this coalition [segment] rose 31% in the 2011 quarter (20% excluding Timberland), with increases of 29% and 18% in The North Face® and Vans® direct-to-consumer businesses, respectively. Direct-to-consumer revenue growth was driven by new store openings, comp store revenue growth and an expanding e-commerce business.”
The gross margin percentage fell from 46.5% to 45.3%. There was a “…1.8% net impact from higher product costs that were not fully offset by pricing increases. This decline was partially offset by a greater percentage of revenues coming from higher gross margin businesses, including the Outdoor & Action Sports, international, and direct-to-consumer businesses.” Not so different than a lot of other companies.
Having read that quote, anybody want to speculate on where VF if going to focus its attention?
Net income was $301 million, up from $243 million in the same quarter the previous year. Timberland contributed $8 million of the increase.
The balance sheet took a bit of a hit because VF borrowed money to pay for Timberland. The current ratio fell from 2.5 a year ago to 1.5. Debt to total capital was up from 20.1% to 40.1%. Short term borrowings rose from $49 million a year ago to $1.145 billion at the end of this quarter. They expect the short term borrowings to be repaid by year end. They also borrowed $900 million in longer term debt for the acquisition. $400 million matures in August of 2013. $500 million isn’t due until 2021.
Receivables grew 40% from $1.1 billion to $1.548 billion. But $315 million of that was the result of the Timberland acquisition. As you think about inventory levels for VF and other companies, remember that higher prices mean higher inventory even when the units don’t change. VF says 9% of its inventory growth was the result of higher prices.
One of the analysts in the conference call pointed out that Timberland did some of its own manufacturing, and asked if VF might see this as an opportunity to make some more of its other products as well. It’s something it sounds like they will look into, but it’s too soon after the deal closing for them to be specific was the response. 

As you have probably concluded for yourself, VF is doing just fine.  Rather than think up some clever closing paragraph, I thought I’d offer you a link to an article that Rob Valerio of business consultants CPO sent me on the expansion strategies of retail CEOs.  It doesn’t refer just to our industry, and VF is much more than a retailer.  Still, you’ll see certain continuity between the strategies retailers in general are using and what VF and others in our industry are doing.  As I said at the start of this article, independent retailers, small brands, and brands that are strictly wholesalers are being pressured by bigger, sophisticated companies.  You may not be able to do what VF does, but you can look at some of these strategies and pick a few places where you can perhaps do something new, different or better.   


3 replies
  1. Rob Valerio
    Rob Valerio says:

    Jeff- thanks for the shout out. You point out concern for the small and medium sized business in markets where big players use all points of customer contact to sell products. It shows big businesses unleveling the playing field on consumer product choices at retail.

    This push toward retail exclusives, private label, and ecommerce means small brands that can’t do all of these are getting sidelined. Unless they are phenomenal marketers, the small and medium businesses seem to be facing a glass ceiling of distribution.

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