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VF Rides The North Face as Supply Constraints Ease

VF’s third-quarter results included The North Face’s best quarter in its history, but the company’s call also shed light on concerns for its Vans brand and China.

In a Nutshell: “We delivered strong results in Q3 with organic revenue growth of 16 percent and organic earnings growth of 32 percent amidst continuing macro headwinds. Our business is strong and healthy,” Steve Rendle, chairman, president and CEO, told investors during a conference call on Friday. “We achieved our Q3 plan driven by a robust holiday performance and an exceptional quarter from The North Face, which gained further momentum and surpassed $1.2 billion in revenue, a record in its history.”

The CEO said the company continues to see robust demand for its outdoor and active categories on a global basis. “Outdoor participation continues to grow, supported by secular trends towards more active healthy lifestyle. Across the Americas and EMEA regions, consumers started the holiday season early and were returning to in-store shopping prior to surges in the Omicron variant, which negatively impacted retail store traffic later in the quarter,” he said.

But Rendle also addressed what’s been unfolding in the APAC region for consecutive quarters. Following a strong rebound in the first half of 2021, the CEO said the Chinese economy has seen slowing growth as China’s government has taken an aggressive policy response to Covid-19 surges, which in turn pressured consumption in the back half of the year.

“To mitigate these headwinds, our teams are maximizing new social commerce opportunities to offset lower traffic on certain digital-tightened platforms with plans to amplify key festival activations with new targeted marketing stories and product drops,” he said.

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Matt Puckett, executive vice president and chief financial officer, said the environment in China was “more challenging than expected” as Covid-related lockdowns continue to drive volatility. “Outside of China, other markets in Asia performed better, reporting positive growth this quarter as restrictions were gradually lifted in Malaysia, Taiwan and Northern Asia. We’ve seen a nice acceleration in Korea and double-digit growth in Japan,” Puckett said.

Looking ahead, the CFO said its APAC outlook in October had expected an improving environment as the company entered its fourth quarter. “This timing is now less certain. And we expect the Chinese New Year holiday to be impacted by constrained travel and consumption. As a result, we now expect low-single-digit growth for China in fiscal ’22, with China representing about 8 percent of VF revenue this fiscal year. We remain very confident in VF’s long-term growth prospects in China and the broader APAC region,” Puckett said.

As for the company’s brands, Rendle said The North Face delivered its “largest quarter” in its history, surpassing $1 billion for the first time with revenues of more than $1.2 billion in the quarter. The brand is VF’s largest and it represents over a third of VF’s third-quarter revenues. Global North Face revenues rose 27 percent above pre-pandemic levels, with continued broad-based strength across regions, channels and product categories, Rendle said.

VF’s other top brand Vans grew 8 percent in the third quarter, representing modest growth relative to pre-pandemic levels. For the first nine months, Vans generated an additional $232 million in revenue across its digital platforms versus the same period in fiscal 2020. The brand didn’t meet third-quarter expectations due to mixed holiday performance, a reflection of “heightened disruption across China and a slower than expected recovery in Classics footwear,” Rendle said. Apparel for the Vans brand grew 29 percent in the quarter. The CEO said Vans’ main skate story will be the Lizzie, the first signature shoe from Olympic athlete Lizzie Armanto, which will reinforce the brand’s leadership position in skate.

Footwear brand Timerland posted 11 percent growth in the quarter, led by a “very strong sell-out season with key accounts in the U.S. and in VF’s own channel,” Rendle said. Dickies grew 14 percent in the quarter, driven by strength in the Americas.

The Supreme brand continues to see strong demand and sell-through both online and in its stores, delivering nearly $200 million in revenue in the third quarter. “The Supreme team remains highly focused on their store-led geographic expansion strategy as a key element in showcasing the brand and its unique collection. The brand opened two stores in Europe this year, in Milan and Berlin, executing against its international expansion strategy,” Rendle said, adding that VF’s excited about Supreme’s longer-term potential as a key brand within the company’s portfolio.

In addition, the company said the majority of VF’s supply chain is currently operational. It noted that while Covid-19-related manufacturing capacity constraints continued during the third quarter, the situation has improved over time. VF said it expects to be “back to nearly full capacity in the coming weeks.”

Shares of VF were trading down in the range of 7 percent on Friday, or around $62.

Net Sales: For the three months ended Jan. 1, 2022, net revenues from continuing operations rose 22 percent to $3.62 billion from $2.97 billion. Last June, VF completed the sale of its occupational workwear business.

The company said that international revenue rose 19 percent. By geography, European revenue rose 26 percent, while Greater China revenue fell 6 percent, which includes an 8 percent  decline in Mainland China. Direct-to-consumer revenue rose 30 percent, while digital revenue increased 21 percent.

For the nine months, net sales rose 35 percent to $9.02 billion from $6.66 billion.

Earnings: Net income increased 49 percent to $517.8 million, or $1.32 a diluted share, from $347.2 million, or 88 cents, in the same year-ago period. On an adjusted basis, earnings per share (EPS) from continuing operations rose 45 percent to $1.35.

Wall Street was expecting adjusted EPS of $1.21 on revenue of $3.6 billion.

For full year fiscal 2022, VF is projecting revenue of $11.85 billion, reflecting growth of 8 percent and a $600 million contribution from the Supreme brand. Adjusted EPS for fiscal 2022 is expected to be around $3.20. Wall Street’s consensus estimates had pegged adjusted EPS at $3.17 for the year on revenue of $11.95 billion.

For the nine months, net income grew four-fold to $1.31 billion, or $3.32 cents a diluted share, from $318.3 million, or 81 cents, in the year-ago period.

CEO’s Take: “The broad-based momentum across our brands is testament to the resilience of our diversified portfolio model, which has enabled us to deliver a strong quarter and reaffirm our full year earnings outlook in a challenging environment. I am confident that VF remains well-positioned for continued, profitable, long-term growth,” Rendle said.