The investments made by The North Face in the women's outdoor market have started to pay off, as sales of women's performance products were among the drivers of an 8 percent sales hike for the outdoor brand in the three months to the end of June, the first quarter in a new fiscal year for VF Corporation.
After several acquisitions in the last year, VF reorganized its business to form an Outdoor division, which includes TNF, Smartwool, Icebreaker, Altra and Timberland, albeit excluding the Timberland Pro range. The group previously blended outdoor with action sports.
The new Outdoor division raised its turnover by 6 percent to $568.6 million for the quarter, up by 3 percent in constant currencies and flat in organic terms, but it suffered a loss of $83.4 million for the three months, after booking a loss of $62.0 million in the year-ago period.
The underlying sales rise for TNF in the quarter amounted to 5 percent, including increases of 12 percent in Europe, the Middle East and Africa (EMEA) and 26 percent in Asia-Pacific, while sales remained were flat in the Americas. The She Moves Mountains campaign supported demand in the women's category. The Urban Exploration theme continues to resonate strongly in Europe and Asia as well as in North America, after TNF brought in some products from Europe.
For TNF, it was the tenth consecutive quarter of double-digit growth in the EMEA region. Kath Smith, who has just left the group after leading its European operations for the past three years, told us at the OutDoor show in Friedrichshafen that this performance was the result of a “clever” segmentation strategy, coupled with the development of an “incredibly strong product offer,” targeted at the different segments.
Analyzing sell-out data and using Google Analytics, TNF has been able to follow the evolution of consumption trends and to define the best possible products for different types of customers in different regions of Europe and for different sales channels. For example, Italian customers go for a shorter jacket with a tighter fit than people in Northern Europe. Furthermore, the products offered to department stores are different from those proposed to specialty outdoor stores. The assortment is different at retail stores located in the cities from the range proposed in the resorts.
Like in the rest of the world, the brand's first dedicated women's campaign has had a strong effect sales of women-specific products in Europe, triggering increases of between 25 and 100 percent in this category, but genderless products have also seen growth since last March. Another successful initiative has been the organization of excursions and other activities in TNF's 13 “community stores” across Europe, which have seen the participation of about 800 people every week.
Steve Rendle, VF's chief executive, emphasized in a conference call with analysts that TNF's flat turnover in the Americas included a jump of 20 percent in sales to quality retail partners, after the brand moved to clean up its distribution. The company boasted strong sell-through after it refined and upgraded its distribution across various categories. VF said that its wholesale business should increase this year.
More broadly, TNF has been focusing on fewer and more intense relationships with key accounts, which allow for improved merchandising and full assortments adjusted for the retailer and its customers. VF managers said that these partners are increasingly digital, such as Zalando, Asos and Amazon. Other key partners mentioned in the discussion included Moosejaw, Dick's Sporting Goods and JD Sports Fashion, a familiar European account that has just moved into the U.S. market.
Timberland's sales moved up by 2 percent in reported terms during the quarter. However, they slipped by 1 percent in constant currencies, declining by 1 percent in EMEA and by 14 percent in Asia-Pacific, while growing by 6 percent in the Americas.
Across the VF group, the most impressive growth came from Vans, which raised its sales by another 35 percent. This amounted to 32 percent in constant currencies, including increases of 23 percent in EMEA, 27 percent in Asia-Pacific and 36 percent in the Americas. Rendle said the Vans brand is outperforming its long-term targets, with growth across all distribution platforms and product groups.
Vans is part of a newly-formed Active division, which includes Kipling, Napapijri, Jansport, Reef, Eastpak and Eagle Creek. This is the group's largest division, with a sales increase of 25 percent to $1,136.9 million for the quarter, up by 22 percent in constant currencies and 25 percent in organic terms. Its profit soared by 46 percent to $269.2 million (more on these brands in Sporting Goods Intelligence Europe).
The remainder of VF's activities has been split between two other divisions. Work includes Dickies, Timberland Pro and eight other brands. The Jeans division is built around Lee, Rock & Republic and Wrangler, excluding its workwear label.
TNF's performance contributed to a jump of 23 percent in the group's turnover to $2,788.1 million in the quarter, with an increase of 12 percent from continuing operations excluding its acquisition of Williamson-Dickie, Icebreaker and Altra. VF boasted a sales hike of 21 percent for its three largest brands combined. Its discontinued operations include the Nautica brand, the Licensed Sports Group and other licensing business.
Rendle said that the quarterly performance had been stronger than anticipated, with broad-based improvements across its brands and platforms. He was enthused about the progress made toward the targets set out in the group's 2021 plan.
The entire group's direct-to-consumer (DTC) sales moved up by 22 percent, with a contribution of 6 percentage points from acquisitions and an increase in the physical store network to 1,513 units in June, up from 1,432 at the same time in 2017. Digital sales alone were up by 54 percent, including a rise of 21 percentage points from acquired brands. This compares with a sales increase of 23 percent for VF's wholesale business, which went up by 21 percent in constant currencies and by 10 percent in organic terms.
VF's gross margin from continuing operations firmed up by 0.7 percentage points to 50.3 percent, and it was up by 1.7 percentage points to 51.3 percent on an adjusted basis and without the impact of acquisitions. The adjusted basis excludes costs relating to acquisitions and the provisional impact of U.S. tax legislation.
VF's operating income reached $230.9 million on a reported basis and it was up by 57 percent to $250 million on an adjusted basis, but including a contribution of $20 million from acquisitions. The operating margin on an adjusted basis increased by 2.0 percentage points to 9.0 percent, and by 2.1 percentage points to 9.1 percent without acquisitions. VF ended the three months with net income of $160.4 million, up by 46 percent.
The group upgraded its forecast for the full year to predict sales in the range of $13.6 billion to $13.7 billion. This would amount to an increase of 10 percent to 11 percent, with organic growth of more than 5 percent. The projections includes a negative impact of more than $150 million from unfavorable exchange rate changes, relative to the prior forecast. Previously, the company had predicted that sales would reach between $13.45 billion and $13.55 billion, which would have been an increase of 9 to 10 percent.
The latest guidance anticipates sales increases of 13 percent to 14 percent for the Active division and 6 percent to 8 percent for the Outdoor brands, with a low single-digit rate on an organic basis. The turnover of the Vans brand is projected to rise by at least 15 percent. The forecast includes growth of 11 percent to 13 percent for own retail sales, with a jump of more than 30 percent for digital sales.
The gross margin forecast is unchanged at about 51 percent, while the operating margin is expected to increase by 70 basis points to about 13.4 percent, up from the earlier forecast of 13.2 percent. VF anticipates earnings per share in the range of $3.52 to $3.57, up by 12 percent to 14 percent, and compared with the earlier range of $3.48 to $3.53. VF will provide further updates at an investor day in September.
Rendle will then probably update investors on a decision, taken by VF a few months ago, to make “purpose” as important as “performance” in its strategic decisions and its business approach. As reported by SGB, Rendle explained at the Camber Outdoors Thought Leaders Breakfast in July that VF is striving to become a purpose-led, performance-driven corporation. The purpose was described as powering movements of sustainable and active lifestyles for the betterment of people and the planet. TNF's initiatives in the circular economy, covered previously in The Outdoor Industry Compass, are very much part of this purpose. The acquisition of Icebreaker was described as a purpose-led transaction as well, intended to expand the group in the area of natural fibers.