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10-Week Vietnam Delays Force New VF Strategies

The owner of Vans, The North Face and Timberland is battling eight- to 10-week delays in Vietnam, the Covid-stricken nation that produces 25 percent of its product.

In a Nutshell: “Our global supply chain environment remains challenging and has continued to deteriorate following our Q1 call in late July,” VF Corp. CFO Matt Puckett  told Wall Street analysts. “The resurgence of Covid-19 lockdown and key sourcing countries like Vietnam has resulted in more impactful production delays and our logistics network continues to face unprecedented challenges.”

VF sources 10 percent of its good from the southern area of Vietnam, though the country overall accounts for 25 percent of the Denver company’s mix. Within Vietnam VF is working with multiple partners across a range of provinces in both the northern and southern regions, with access to a number of different ports.

Operations have been severely impacted by labor and equipment availability. “As a result, our dwell times at points of destination have increased significantly,” Puckett said, with some supply delays extending “eight to 10 weeks.”

Expediting freight across a large number of air providers has helped, and VF also doubled its network of ocean carriers while expanding the number of global ports where it delivers product. It’s also having wholesale partners directly ship goods.

Wholesale cancellation rates are below historical levels, signaling strong demand and tight channel inventories. Puckett said all of VF’s brands are experiencing delays for collections, styles and—in some cases—insufficient sizes, limiting the brands’ ability to meet strong demand. “For example, the Supreme brand has experienced around 30 percent less inventory around drops,” he said. “So despite strong sell-through trends, we are losing volume from limited supply.”

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VF sees an “improving outlook across the majority of our brands and regions,” CEO Steve Rendle said. Even though pieces of VF’s business have shifted “slightly differently than we anticipated six months ago, we are delivering high single-digit organic growth versus Fiscal 2020. That gives me a lot of confidence in the resiliency that we enjoy from the diversity of VF’s business model in our ability to accelerate momentum going forward,” he added.

Mergers and acquisitions (M&A) have long played a key role in VF’s business model as it looks for new growth opportunities for where it can grow brands organically. For VF, that’s still a part of its core DNA, even against the backdrop of the pandemic and its challenges.

“Active portfolio management remains an evergreen process and M&A remains our top capital allocation priority. This is a differentiator and a competitive advantage as we continue to refine our portfolio mix to maximize exposure to the most attractive parts of the marketplace,” Rendle said.

“The innovation of Supreme continues to move according to plan,” he added, noting growth opportunities. “Our teams are learning from this highly productive business, including how they manage product creation—building energy ahead of drops and optimizing assortment and product flow across regions with great agility. Looking forward, we remain confident in the significant whitespace opportunity for this brand across geographies with a clear opportunity to leverage VF platforms. Supreme remains on track to become a $1 billion dollar brand in the coming years.”

Relying on expedited freight has raised full price DTC gross margins at Vans above 2020 levels, supported by discounting below pre-Covid levels. Growth in the active space dovetails with casualization trend, he said.

The North Face saw “sharp acceleration of underlying demand,” alongside margin improvement and the international businesses gaining share. “This will be a $3 billion business,” Rendle said, adding that the brand will continue to benefit from broad-based brand momentum fueled by innovation, extremely clean distribution channels, increasing year-round relevancy and ongoing tail winds from the outdoor marketplace.

Rendle said work brand Dickies could approach $1 billion in sales next year as it celebrates its 100th birthday, and that the pro business remains a growth driver for Timberland, which delivered 25 percent growth in the quarter.

Smartwool, Icebreaker and Ultra represent nearly $550 million in revenue. All three are profitable, riding the tailwinds around health and wellness, active outdoor lifestyles and sustainability.

Net Sales: For the second quarter ended Oct. 2, net revenues rose 23 percent to $3.20 billion from $2.61 billion.

Revenue for its Active business rose 16 percent, including an 8 percent contribution from its Vans brand. Outdoor revenue rose 31 percent, including a 31 percent increase from its The North Face brand. The Work segment revenue rose 18 percent in the quarter, including a 21 percent contribution from its Dickies brand.

For the six months, net revenues rose 46 percent to $5.39 billion from $3.68 billion.

Earnings: The company reported an 81 percent gain in net income to $464.1 million, or $1.18 a diluted share, from $256.7 million, or 66 cents, a year ago.

The company reaffirmed its full year outlook, presuming “no material deterioration” to its business from Covid-19 impact. It expects revenue to be around $12 billion, reflecting 30 percent growth and a $600 million contribution from its Supreme brand. International revenue is forecasted to grow between 24 percent and 26 percent, while direct-to-consumer (DTC) revenue is expected to increase between 34 percent and 36 percent, below prior guidance for an increase of 39 percent and 41 percent. DTC guidance includes a digital revenue growth forecast of 20 percent, below the prior expectation of 29 percent to 31 percent.

Revenue for its Outdoor segment is expected to rise between 25 percent to 27 percent, slightly above prior forecasts of up 24 percent to 26 percent. The Active segment is expected to rise between 35 percent and 37 percent, slightly below prior guidance of an increase of 37 percent to 39 percent. And revenue for its Work segment is expected to grow 19 percent to 21 percent, above the prior guidance of an increase between 16 percent to 18 percent.

Adjusted earnings per share for the year is expected in the $3.20 range, including a $0.25 contribution from the Supreme brand.

For the six months, net income was $788.3 million, or $2.00 a diluted share, against a net loss of $28.9 million, or a 7-cent loss, in the same year-ago period.

CEO’s Take: “I believe VF’s long term prospects are even more attractive today. We’ve accelerated our transformation strategy. We have further optimized our portfolio, and importantly this portfolio today is capable of delivering greater broad-based strength relative to where we were before the pandemic,” Rendle said.