VF Corp improved its guidance for the full year (to $12.0 billion from $11.8 billion) despite a more challenging than expected operating environment in the second quarter. Overall revenues for the group that owns brands including Vans, The North Face (TNF), Timberland, Icebreaker and Smartwool increased by a reported 23 percent to $3,198 million in the three months ended Sept. 30, falling short of analysts expectations for a top line of $3,500 million after a “significant” amount of orders were shifted into the third quarter due to supply chain bottlenecks. At constant currency rates, revenues were up by 21 percent.
VF’s sales growth in the quarter got a slight boost from acquiring the streetwear brand Supreme, which it purchased in December 2020 for $2.1 billion. Excluding Supreme, sales were up by a reported 19 percent, or 17 percent in constant currency terms, led by EMEA and North America, which had been hit by Covid-19 the year earlier.
The group highlighted difficulties in the Asia Pacific region, where some 5 percent of stores were closed at the beginning of the quarter due to a resurgence of Covid-19. While virtually all stores have been reopened, the consumer environment in China remains “challenging” amid a continuing backlash against Western brands like Vans that has mainly been felt in lower digital sales.
Although most of its supply chain is now operational, VF noted that the resurgence of Covid-19 lockdowns in sourcing countries like Vietnam had added to manufacturing capacity constraints during the second quarter, on top of supply chain woes tied to port congestion and increasing ocean lead times.
While 85 percent of VF’s production capacity was operational throughout the second quarter, it experienced severe problems in southern Vietnam, accounting for about 10 percent of overall sourcing. VF attributed about half the overall shift of revenues from the second to the third quarter to Vietnam.
Supply chain strains have led VF to use expedited freight when necessary, bumping up costs. Matt Puckett, CFO of the group, said some of the pressures on cargo are expected to extend into the calendar year 2022.
In the second quarter, VF’s net income jumped by 81 percent to $464.1 million. The gross margin widened by 2.90 percentage points to 53.7 percent, largely on the back of reduced promotional activities. The adjusted gross margin increased by 3.00 percentage points to 53.9 percent due to higher full-price realization, lower markdowns, a favorable mix and about 0.20 point positive impact from Supreme. When compared to its prior peak gross margins in fiscal 2020, VF said its current year gross margin was impacted by about 1.80 percentage points headwind from incremental expedited freight and foreign exchange. The adjusted operating margin in the second quarter widened by 3.60 percentage points to 16.7 percent.
VF’s DTC sales were up a reported 32 percent or 31 percent higher at constant currencies, reflecting organic growth of a reported 21 percent and 20 percent at constant forex.
By segment, revenues for Active grew by 16 percent to $1,392 million as its profit inched up to $284.3 million from $259.1 million. Growth for the segment reflected an 8 percent gain in sales at Vans and an 8 percent contribution from acquisitions. While Vans “accelerated meaningfully” in EMEA during the quarter, the brand faced headwinds in the Asia Pacific and the U.S., where a surge in the Delta coronavirus variant led to lower-than-expected back-to-school sales.
Outdoor saw a 31 percent increase in revenues to $1,507 million, with that segment’s profit more than doubling, to $284.1 million from $132.5 million. TNF saw sales increase by a reported 31 percent, while Timberland saw sales jump by 26 percent, both thriving despite also suffering from delayed deliveries. TNF grew by 40 percent in constant currencies in EMEA, while Timberland’s recovery took place almost entirely in the U.S. The group’s three smaller brands – SmartWool, Icebreaker and Altra – have been growing mid-to-high-teens, contributing annual revenues of nearly $550 million.
For Work, revenues climbed by 18 percent to $299.2 million, and segment profit soared to $62.0 million from $8.2 million.
On a geographical basis, international revenues in the second quarter increased by 18 percent, reflecting 15 percent growth in constant currencies. Europe increased by 19 percent or 17 percent at constant currencies. Sales for Greater China grew by 9 percent, or by just 3 percent in constant currencies, with Mainland China growing a reported 9 percent and 2 percent at constant forex.
VF expects to post revenues of about $3,600 million in the third quarter, reflecting high-single-digit organic growth versus the fiscal year 2020.
For the full year ending in March 2022, or fiscal 2022, VF still anticipates revenues of $12.0 billion, up about 30 percent on the year and including about $600 million from Supreme. However, its Active segment is seen doing slightly worse than previously anticipated, while guidance for Outdoor and Work has been increased slightly.
By segment, revenues for Outdoor are now expected to increase between 25 and 27 percent versus previous expectations of 24 to 26 percent. Revenues for Active are forecast to rise between 35 and 37 percent versus previous expectations of a 37 to 39 percent increase, while revenues for Work are now seen rising between 19 and 21 percent, up from previous expectations of a 16 to 18 percent gain.
Direct-to-consumer revenues are forecast to grow between 34 and 36 percent versus previous expectations of 39 to 41 percent growth, including Digital revenue growth of about 20 percent versus previous expectations of 29 and 31 percent.
International revenues are now seen increasing between 24 and 26 percent against 25 to 27 percent growth previously. The group now sees sales rising by 30 to 32 percent in both EMEA and the non-US Americas, up slightly from previous expectations. In Asia Pacific, on the other hand, sales are seen increasing by 12 to 14 percent, well below the previous 18 to 20 percent growth forecast.
VF said its gross margin outlook for the full year is now about 56 percent, compared to previous estimates for a gross margin exceeding 56 percent. The new forecast includes 0.40 percentage points of freight costs on top of what it had expected in July.