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How Long Before Vans Turnaround Takes Off?

Vans had another poor showing for VF Corp. amid a mixed-bag second quarter. The North Face owner also revised its guidance for fiscal 2023 to reflect challenging macroeconomic headwinds.

In A Nutshell: VF is continuing to “adapt to a more variable and softening consumer environment,” chief financial officer Matt Puckett told Wall Street analysts on a Wednesday earnings call discussing the three-month period ended Oct. 1.

“Globally, both our wholesale and direct-to-consumer businesses generated low single digit growth in Q2,” he added. VF said revenue in the Americas dropped 3 percent, but excluding Vans its revenue gained 3 percent. VF is down 10 percent in China where Covid has broadly affected economic growth.

Vans sales dropped 11 percent in the Americas in the quarter and 13 percent globally after sagging 7 percent in Q1. Revenue for the brand was $1.9 billion, down a comparable 10 percent. Lower back-to-school sales and wholesale partners’ increasing caution drove “higher cancellations and lower traffic affecting our direct channels,” Puckett said. A survey published earlier this month found that while the skate shoe brand is still popular with teens, Converse is gaining share at its expense.

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Dickies dipped 17 percent in the Americas and 15 percent globally due to “inventory adjustments” made by its largest retail partner.

By contrast, The North Face “continues to deliver strong and broad-based performance, and prove its undisputed leadership in the outdoor category,” chairman, president and CEO Steve Rendle said. Revenue is up 14 percent versus 2021, reflecting double-digit growth across all regions and channels. This has led to “our biggest second quarter ever for the brand,” with year-to-date growth of 21 percent, he said.

The North Face had “a good start to the season in outerwear,” showing strength with soft shells, fleece and lightweight insulated jackets as consumers gear up for colder conditions. Its third installment of a Gucci collaboration “drove meaningful brand heat,” Rendle said.

Timberland’s sales grew 3 percent from the year prior, impacted slightly by shipment timing.

Though lockdowns continue to disrupt production and logistics in China, “We are otherwise open for business from a Covid standpoint across the value chain,” Puckett added. He pointed to improving ocean transit times and port dwell times, as well as falling consumer goods imports, with both ocean and air spot rates declining as a result.

Last quarter, VF introduced a supply chain financing program with its finished goods suppliers, in which it takes ownership of inventory at the point of shipment and holds it for about an additional month. Because of these changes in process, inventory levels are up 88 percent from the year-ago period.

Net Sales: VF revenue reached $3.1 billion, up 2 percent in constant dollar terms, and up 4 percent excluding China. Second-quarter sales dropped 8 percent, bringing year-to-date revenue to minus 6 percent and minus 1 percent excluding China.

After accounting for a negative foreign exchange translational impact of about $195 million—nearly double Q1—sales were down 4 percent on a reported basis in the second quarter.

Earnings: Adjusted operating income was approximately $380 million, and VF returned $294 million in cash to shareholders bringing the year-to-date total to nearly $390 million.

The company reported an adjusted gross margin of 51.5 percent, falling 240 basis points. It lowered its adjusted operating margin guidance for fiscal 2023 to approximately 11 percent from 12 percent. The EPS range is now anticipated to be $2.40 to $2.50, relative to $3.18 last year and previous guidance of $2.60 to $2.70. It expects adjusted gross margin to decline 100 to 150 basis points versus the original down-50-basis-points guidance. It’s planning to cut $10 million from original capital expenditure guidance of $240 million. Adjusted cash flow from operations is now guided to $0.9 billion from $1.0 billion.

The revisions assume no additional Covid impact in major revenue-producing or production markets as well as no significant worsening of inflation or consumer confidence.

CEO’s Take: “While consumer health remains relatively intact across most of our markets, we continue to see global trends result in more choiceful and cautious spending behavior,” Rendle said. “In North America we saw mixed back-to-school results across product categories, and today are seeing variable traffic patterns across channels and an elevating promotional environment in most markets.”

Additional reporting by Jessica Binns.