The North Face has been thriving in Europe, the Middle East and Africa (EMEA) in the first quarter, leading to sales growth of 19 percent in constant currencies. But its owner, VF Corporation, was impacted by sluggish sales for Timberland and its jeans brands in a weak U.S. market.
The North Face (TNF) managed a global sales increase of 6 percent for the quarter, up by 8 percent in constant currencies. While demand was strong in Europe, sales increased by 4 percent in the Americas and they dwindled by 1 percent in constant currencies in Asia-Pacific.
The results appeared to back up the group's strategy to try and replicate some of the moves that worked in Europe, in order to adjust its approach in other markets. This particularly applies to segmentation for The North Face and Timberland. As previously reported, Arne Arens, who previously headed TNF in Europe, has moved to the U.S. to take up the same function in that market.
The uptick in TNF's European sales includes a rise of nearly 30 percent in its wholesale turnover, with strong demand across all categories and channels, which the group expects to continue for the remainder of the year. The sales rise of 4 percent in the Americas came from a low teens rise in own retail sales, with strong demand for its rainwear, while U.S. retail bankruptcies contributed to a low single-digit slump in the outdoor brand's wholesale turnover.
The brand's wholesale turnover was down at a high single-digit rate in Asia, where own retail sales moved up at a low double-digit rate. VF said the Chinese market remained strongly promotional, which prompted TNF to consolidate its retail partners and to aggressively manage its inventories. VF continues to project high single-digit sales growth in Asia for TNF in the full year, weighted toward the second half. Although the quarterly performance at TNF was slightly above VF's expectations, the group hasn't altered its forecast of a global sales rise at a mid-single digit rate for the outdoor brand for the full year.
The VF group's Outdoor & Action Sports division raised its turnover by 2 percent to $1,678.8 million for the quarter, up by 4 percent in constant currencies, with a mixed regional performance that resulted in a 7 percent sales rise for Vans and a 4 percent decline for Timberland, both in constant currencies.
The sales drop at Timberland combines low single-digit growth in own retail sales with a high-single-digit sales contraction in Timberland's wholesale business. Yet the VF group is projecting that Timberland will return to growth in the second quarter and that the uptick will accelerate in the second half, due to stronger international sales and a more diversified and segmented assortment in the Americas.
Sales were off by 7 percent in the Americas for the first quarter, entirely due a decline in wholesale turnover. The group is striving to reduce its reliance on classic Timberland boots in the Americas – a strategy that has already paid off in other markets. The transition is well underway in Timberland's own retail business, but it should take a while longer for wholesale accounts.
The group expects Timberland to return to growth in the Americas in the second half. It has just appointed Tracy Smith, formerly president of Geox for the U.S., as vice president and general manager of Timberland North America. She started her career at Florsheim and then worked for Cole Haan.
Timberland's European sales were aligned with the level of the year-ago period, with low single-digit growth in own retail sales and a flat wholesale turnover, due to a shift in the timing of shipments to distributors. Timberland Europe is anticipated to return to growth in the second quarter, and the order book suggests that it should accelerate into the high-single-digit range in the second half.
The Timberland brand's Asian business was off by 5 percent for the quarter. Its own retail sales dropped at a mid-single digit rate, despite strong online sales in China and low single-digit comparable sales growth, because the company decided to close down under-performing stores in established markets. Timberland's wholesale turnover in Asia tumbled at a high single-digit rate.
Adding the weak performance of the jeans business, the VF Group saw its sales from continuing operations dip by 2 percent to $2,581.7 million for the quarter, down by 1 percent in constant currencies. This excludes sales of divisions that have been divested or put up for sale, namely the Licensing Business and the Contemporary Brands unit.
The group's underlying sales contracted by 5 percent in the U.S. market, while they moved up by 5 percent in EMEA and by 4 percent in Asia-Pacific, including a 10 percent rise in China. The Americas outside of the U.S. delivered a sales increase of 8 percent for the quarter.
The dip in global sales came from the group's wholesale business, where revenues were down by 4 percent, while direct-to-consumer sales advanced by 7 percent in constant currencies. This includes a comparable store sales rise in the mid-single digits and digital sales rising by 26 percent in constant currencies. The group ended the quarter with 1,511 stores, as compared with 1,431 in March 2016.
VF's gross margin from continuing operations improved by 1.5 percentage points to 50.2 percent. Exchange rate changes had a negative impact of 0.4 percentage points, but this was more than compensated by lower product costs and an improved mix. The group's operating income was down by 7 percent to $291 million, with exchange rate changes accounting for 5 percentage points of the decline. VF ended the quarter with a 20 percent decline in net profit to $209.2 million.
VF outlined a detailed five-year plan for its various brands and the entire company at its investor day, as previously reported. This projects sales of $3.0 billion for TNF by 2021, with compound annual growth rates of 6 to 8 percent, while the implied target for Vans stands at $3.5 billion, with annual growth of 8 to 10 percent. The group's strategy generally calls for the VF to become more agile and consumer centric.
The VF group's guidance for the full year is that sales will increase at a low single-digit percentage rate, including a negative impact of about 2 percentage points from exchange rate changes. The gross margin is projected to increase by 0.2 percentage points to 49.6 percent, while the operating margin should reach about 14 percent, consistent with last year's adjusted operating margin. Earnings per share are projected to contract at a low single-digit percentage rate.