VF Corporation slightly raised its guidance for the full year after sizeable gains for its largest outdoor and sports brands in the second quarter. They were driven by own retail sales and international markets, with particularly buoyant demand for The North Face in Europe.
The seasonally small quarter marked another shift from wholesale to retail sales, which was accentuated by U.S. retail bankruptcies. VF's direct-to-consumer sales were up by 14 percent for the quarter, with a rise of more than 35 percent in the group's online business.
VF pledged to invest an extra $40 million to build on its current growth. Some of that should go directly to marketing and retailing for its three largest brands, TNF, Vans and Timberland, along with digital development. Other resources will be allocated to investments in other strategic priorities and management.
The VF group's total sales were up by 1.7 percent to $2,333.3 million for the quarter, an increase of 3 percent in constant dollars. The group's sales outside the U.S. rose by 6 percent in constant currencies, including growth of 18 percent in China.
VF's outdoor and action sports brands recorded an increase of 3.8 percent to $1,466.2 million, up by 5 percent in constant currencies. Jointly, TNF, Timberland and Vans raised their sales by 7 percent for the quarter.
TNF alone saw its sales move up by 6 percent in constant currencies. The rise was supported by strong retail sales. TNF's wholesale business was nearly flat, but it would have increased at a high single-digit rate without the recent retail bankruptcies in the U.S. market.
TNF's growth was fueled by buoyant sales in Europe, the Middle East and Africa (EMEA), which went up by 26 percent. The brand's European wholesale business soared by nearly 40 percent while its retail sales moved up at a high single-digit rate. TNF's sales are projected to increase by more than 15 percent in Europe for the balance of the year (more on this in the next article).
The outdoor brand's growth was much weaker in the Americas, where sales went up by just 1 percent in constant currencies. They were impacted by a high single-digit decrease in wholesale turnover, chiefly due to U.S. retail bankruptcies, offset by a rise of more than 40 percent in online sales.
TNF's turnover in Asia Pacific was up by 1 percent in constant currencies as well. The launch of the Outdoor Training range in Asia was accompanied by a marketing campaign and the opening of the brand's first outdoor training station in Shanghai.
VF said it was continuing to consolidate its retail partnerships and to aggressively manage its inventory in China, where the outdoor environment remains strongly promotional. It predicted accelerated growth for TNF in the second half, including mid-single-digit growth in the third quarter.
VF anticipates that TNF's sales growth for the year will be at the higher end of an earlier projection for a mid-single-digit sales increase, with growth in the second half weighted toward the last quarter.
The second half should include the launch of a new range of skiwear and an updated Summit Series range. The management has particularly high expectations for the Ventrix jacket, which is meant to target some broader market partners.
Timberland returned to growth in the second quarter, as anticipated. Its sales were up by 3 percent in constant currencies, with small increases in both wholesale and retail sales.
In constant currencies, the brand's turnover was up by 4 percent in EMEA, as expanding retail sales made up for a small decline in wholesale revenues. The group said its regional growth was vigorous and broad-based, with sales rises of more than 35 percent in platforms such as Sensor Flex and Aero Core, and high single-digit growth in apparel. Timberland is expected to deliver high single-digit sales growth in the region during the second half.
Timberland managed a sales increase of 4 percent in the Americas as well, but the brand's sales in Asia-Pacific were down by 1 percent in constant currencies, impacted by a decision to shutter underperforming stores in some mature markets. Sales in China soared by 60 percent and online sales jumped by more than 50 percent across the whole region. The Timberland brand is predicted to deliver low single-digit growth for the full year.
The largest and fastest-growing VF brand, Vans, raised its sales by 9 percent in constant currencies for the quarter. Its underlying sales were up by 5 percent in EMEA, 7 percent in the Americas and by 29 percent in Asia-Pacific (more on this brand in SGI Europe).
Operating profits for the entire outdoor and action sports division, which further includes Eagle Creek, Reef, Smartwool and more, slumped by 1.2 percent to $121.8 million. But this was entirely due to exchange rates, since operating profits advanced by 12 percent in constant currencies.
VF's gross margin on continuing operations went up by 1.6 percentage points to 49.7 percent. However, income from continuing operations declined by 16 percent to $114.9 million, due to the extra investments. This amounted to a drop in the group's operating margin of 1.3 percentage points to 7.1 percent, including a negative impact of 0.7 percentage points from exchange rate changes.
The group's performance was outlined in a conference call with analysts steered by Steve Rendle, who became its chief executive at the start of this year. It marks the beginning of a five-year strategy detailed by the VF group at an investor day earlier this year. He was upbeat about the implementation of the strategy, although sales were flat at nearly $4.9 billion and income from continuing operations was down by 13 percent to $329.5 million for the first six months of the year.
The company expects its sales to increase by about 2 percent to $11.65 million for the full year, up by 3 percent in constant currencies. This compares with earlier guidance of a low single-digit percentage rate increase, including a negative impact of two percentage points from exchange rate changes.
The outdoor and action sports business is predicted to raise its sales by about 5 percent, up by 6 to 7 percent in constant currencies, against the earlier guidance of a mid-single-digit percentage rate increase.
While VF previously anticipated a sales rise at a high single-digit rate for own retail sales, the latest projection calls for them to increase by 10 to 11 percent, with a contribution of more than 25 percent from online sales.
VF predicts that its gross margin will land at 49.8 percent, up by 0.2 percentage points compared with the previous estimate and by 0.4 percent compared with the gross margin for 2016. The guidance for the operating margin is unchanged at about 14 percent.