VF Corp. is projecting a re-acceleration in the compound annual growth rate (CAGR) of The North Face (TNF) to a rate of 6 to 8 percent, taking its turnover up to $3.0 billion by 2021 from the current level of $2.3 billion. The direct-to-consumer (DTC) business is set to expand at a 7 to 9 percent rate at TNF, to reach 46 percent of its turnover.
The product offer will include more lifestyle offerings and more footwear, which now represents only 10 percent of TNF's sales (we were led some time ago to believe that it represented 15 percent of sales). VF also wants to rebuild TNF's place in the outdoor specialty market.
The leading American outdoor brand is seen raising its sales at a CAGR of 4-7 percent in the U.S. market, 7-9 percent in Europe and 8-10 percent in Asia-Pacific. The fast expansion of international sales should reduce the U.S. share in TNF's turnover to 40 percent in 2021, down from 63 percent. The current split has EMEA at 22 percent and Asia Pacific at 10 percent, with another 5 percent of the sales coming from the Americas excluding the U.S.
As previously reported, TNF suffered a drop of 7 percent in its sales during the fourth quarter ended Dec. 31, declining by a low double-digit rate in the Americas and by mid-single-digit rate in Asia-Pacific, while growing at a high-teen rate in Europe, the Middle East and Africa (EMEA). TNF began to show signs of fatigue in the fourth quarter of 2015, when it posted its first quarterly decline in sales since the recession, blaming mainly warm winter weather. Subsequent bankruptcies in the retail space, including Sports Authority, Sport Chalet and others, worsened the problems, although TNF did post quarterly sales gains of 6 percent and 2 percent in the first and second quarters of 2016, respectively, but they were followed by a drop of one percent in the third quarter.
The new strategy adopted by TNF was outlined by Arne Arens, who has been most recently in charge of the brand for EMEA and has just been appointed in the same job for the Americas (read the details in a separate article in this issue). His contribution on behalf of the brand at the investor day was all the more relevant since the global strategy is taking on some of the recipes that have been working in Europe, leading to strong double-digit growth in the region last year.
TNF's market approach focuses on four distinct categories, from mountain sports to mountain athletics, urban exploration and mountain lifestyle. The VF group will be putting more emphasis on categories such as mountain athletics, covering training and running, to help reduce the seasonal aspects of the brand.
Mountain Sports is the largest category, but Arens said the brand should be able to continue expanding in this market. Among the priorities, TNF wants to reinforce its business with outdoor specialist retailers and to pursue investment in EMEA and Asia-Pacific for faster growth. Another is to increase sales of footwear, which make up just 10 percent of TNF's sales. This combination of tactics is anticipated to lead to annual sales growth at a mid-single digit rate over the next five years. With Mountain Athletics, the brand is targeting growth at a low-teens rate to double in size over the next five years.
Mountain Lifestyle products are intended for more casual activities, such as sitting around a campfire with friends or connecting with them on the weekend. TNF aims to come up with more Mountain Lifestyle products that are relevant to young consumers, to help drive annual growth at a high-single digit rate in the next five years.
Urban Exploration targets urban consumers and Arens is aiming for major market gains in this category. The growth should be supported by strong development in Asia-Pacific and heavy investments in DTC, with a specific Urban Exploration store concept. TNF already has some of them in China and Hong Kong, which are among the brand's most productive. Arens said the brand may open up to 100 more Urban Exploration stores in Asia by 2021, especially in China as well as Malaysia, Singapore andTaiwan.
TNF intends to take advantage of this segmentation with innovation that is more aligned with these specific categories. The same applies for DTC sales, which should lead to a transformation of the group's physical store network with distinct concepts. That could mean a flagship store in the center of town, an Urban Exploration store in a more urban, fashionable part of town, and a Mountain Athletics store in an area where consumers train.
The same type of segmentation could be applied to the brand's wholesale business, helping to make it less seasonal and to differentiate its distribution. An example that came up is that of the JD banner, a key account in the U.K. and other European countries, where TNF reaches young and urban consumers.
The Mountain Sports category accounts for 61 percent of TNF's sales, against 19 percent for Mountain Lifestyle, 13 percent for Urban Exploration and 7 percent for Mountain Athletic. The target is to grow beyond Mountain Sports, raising the share of the others to 44 percent of TNF's business in 2021. Mountain Athletics is targeted to deliver the fastest growth, with a five-year CAGR of 11 to 13 percent, against 9 to 11 percent for Urban Exploration, 8 to 10 percent for Mountain Lifestyle and 4 to 6 percent for Mountain Sports.