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VF Refocuses on Regional Production

VF Corp. slashed its full-year outlook as it braces for lower-than-expected second quarter results on weaker than anticipated back-to-school performance at Vans and a more promotional environment in North America.

The parent company of Vans, The North Face, Timberland and Supreme revealed the downgraded guidance at its annual investor day on Wednesday, with revenue now expected to be up approximately 5 percent to 6 percent in constant dollars, versus the company’s previous 7 percent growth outlook.

Adjusted earnings per share (EPS) is expected to be in the range of $2.60 to $2.70, versus $3.18 in the prior year and compared to previous outlook of $3.05 to $3.15. This marks the second time the company has cut its EPS estimates this year. VF also forecasts adjusted gross margin to decline approximately 50 basis points (0.5 percentage points) versus previous outlook calling for modest growth.

Brand revenue at Vans is expected to be down mid-single-digit percentages versus its previous outlook of a mid-single digit percent increase. The North Face revenue is expected to deliver at least low-double-digit percent growth, in line with its previous outlook.

Second-quarter revenue across all VF Corp. brands is expected to be up in the low-single-digit percentages, with adjusted EPS expected to be in the range of 70 to 75 cents.

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At the investor day, executives shared VF Corp.’s five-year growth strategy and roadmap.

A major part of the strategy comes from VF’s pivot to a DTC-centric supply chain, backed by local-for-local production and diversification. Cameron Bailey, executive vice president of global supply chain at VF Corp., stressed that while in-region production is nothing new for the company, this strategy will taking a bigger role to get products to customers faster.

“In this fiscal year, we will produce approximately 29 percent of the total volume of products for North America in that region,” Bailey said. “That same number for the EMEA region is about 24 percent.”

Bailey said Timberland’s footwear production set up shop in Portugal in the first quarter of fiscal 2021. While 500,000 pairs of Timberland boots were manufactured in fiscal 2022, this number is already expected to nearly triple to 1.3 million pairs this year.

And in Mexico, Vans partnered with two suppliers to establish footwear production last year, producing 330,000 pairs of Vans. That number is projected to double to 750,000 pairs this year, before heavily increasing to 2.3 million pairs by fiscal 2025.

VF Corp. is also retrofitting its 44 global distribution centers with automated Locus Robotics technology to pick and move product in the facilities.

Bailey highlighted two of the company’s highly automated distribution centers, including its 750,000-square-foot facility in Bardon, England that opened in April 2021. The center houses three brands, including The North Face, Timberland and Vans, and can distribute products 90 percent of U.K. consumers in two days or less.

In Spring 2023, a 1.2 million-square-foot advanced fulfillment center is expected to open in Ontario, Calif. This facility is anticipated to double the volume of a standard distribution center, but with one-third of the labor. The DC will include 38 robotic cranes, 304 robotic shuttles for product storage, 28 goods-to-person stations, and five high-speed e-commerce lanes.

Over the past two holiday peak seasons, VF has averaged 2.5 to 3 business days from click to delivery, Bailey said.

Velia Carboni, executive vice president, chief digital and technology officer, also emphasized the firm’s digital product creation space, which can further accelerate time to market and engage more consumers.

“We have the opportunity to bring more consumers into the way we create products because we’re leveraging digital tools,” Carboni said. “What’s really exciting about this is you can create photorealistic detailed models. The days of creating all the samples, taking time to ship to the manufacturing site, and wasting materials are over. It’s an exciting chance the expedite the process.”

The shift in supply chain strategy has been reflected in the percentage of revenue by channel, which is now 46 percent DTC and 54 wholesale. Three years ago, VF generated 40 percent of revenue through DTC and 60 percent through wholesale.

Supreme’s brick-and-mortar first’ expansion

Supreme, the brand VF acquired in 2020, aims to scale across the globe. Currently, the streetwear brand is only accessible to 20 percent of consumers worldwide, giving the company significant runway, according to Susie Mulder, global brand president, Timberland.

As such, Supreme plans to double the brand’s 2020 market coverage by 2027, opening two new stores shortly in Chicago and Beijing and expanding sales to countries such as Australia and Indonesia.

“We’re brick-and-mortar first—always preceding digital—to create spaces for new consumers to engage with the brand in a really authentic way and generate demand, ahead of the e-commerce launch,” Mulder said.

Mulder also alluded to Supreme expanding its categories and products across apparel, footwear, bags and accessories.

VF’s five-year growth plans

VF’s five-year growth plan expects revenue to rise at a mid-to-high-single-digit percentage compound annual growth rate (CAGR) through the 2027 fiscal year.

Each individual brand has its own five-year CAGR goals, with The North Face and Supreme leading the way at projected high-single to low-double-digit growth. Vans and Timberland are expected to grow in the mid-single digits through 2027, while Dickies is anticipated to grow in the high single digits.

Revenue from VF Corp.’s outdoor emerging brands Altra, Smartwool, and Icebreaker, which represent 5 percent of the business, is expected to grow in the mid-to-high teens.

EPS is expected to grow at a five-year CAGR of high-single to low double-digit percent compared to last year’s adjusted EPS of $3.18.

Operating margin across is expected to reach approximately 15 percent by 2027, representing a low double-digit five-year operating profit CAGR (in constant dollars), driven by both gross margin expansion and SG&A leverage.

Free cash flow generation is projected to be approximately $5.5 billion, with a total of approximately $7 billion in cash expected to be available to return to shareholders through dividends and share repurchases.