Is it go big or go home at VF Corp.?
On Tuesday, the company guided its outlook for fiscal year 2023 to the low end of its prior forecast, as turnaround efforts at Vans met headwinds. Perhaps more importantly, the firm reaffirmed a decision to focus on its biggest consumer opportunities—one that could put its Global Packs business on the market.
In a Nutshell: VF is continuing with its portfolio optimization strategy, one that includes a review of strategic options for its Global Packs business. That move could see VF put its Kipling, Eastpak and JanSport brands on the market. VF is also concluding a number of asset sales in the back half of fiscal 2023, including the sale and leaseback of its European headquarters in Stabio, Switzerland.
With Benno Dorer as the new interim president and CEO, the company is undergoing some changes. “VF will sharpen its near-term focus on the biggest consumer opportunities within our existing brand portfolio and on enhanced operational performance,” Dorer told investors on the company’s third-quarter earnings conference call. Dorer, who was the lead independent director on the VF board, succeeded former CEO Steve Rendle in December.
As for the third quarter, which he described as “challenging,” Dorer said the company still managed to grow revenue by 3 percent amidst a “difficult geopolitical and economic backdrop.” Of its different trading markets, its EMEA (Europe, Middle East and Africa) business “continues to be a bright spot.” Outdoor brands remained the most consistent performer, led by The North Face, and Timberland saw sales climb 6 percent in the quarter, with “solid performance in EMEA and in wholesale, globally,” he said. Sales in Asia saw sequential improvement, with third-quarter revenue up 4 percent. “This was driven by the beginning of what could be a return to stronger momentum in Greater China,” Dorer said.
But Dorer also said that after a two-month review of operations, “We are not reaching our full potential as a company.” He explained that improvement is largely within the control of the company, and that VF’s “near-term priority is to put aggressive plans in place to improve our execution.” And while The North Face provides consumers with exciting products, engaging content online and great shopping experiences, that is clearly not the case with its Vans brand, where inconsistency has been a problem.
He said the challenge at Vans is predominantly in its Americas market, and is executional in nature. As third-quarter revenue dropped 13 percent in the Americas, Dorer said VF will help to define Vans’ overall growth strategy and that its impact on direct-to-consumer (DTC) plans could come as early as this summer. He also spoke about untapped opportunities, such as the Ultra Range product line, where awareness is low even among Vans loyalists and which the brand has begun boosting to drive growth.
“We will significantly increase our investment in product innovation, funded by a reduction in costs in lower-value areas,” Dorer said. “Vans product development investment as a percentage of revenue lags well behind the company average. We will change that, starting with fiscal year ’24.”
Executives at VF’s Investor Day presentation in November said the firm’s five-year strategy includes a pivot to a DTC-centric supply chain model that’s backed by local-for-local production.
Dorer added that even VF’s supply chain, which has long been a core competitive advantage, requires additional focus. That includes delivering products to customers on-time and at a lower cost to VF. Supply chain challenges in the quarter included lengthened manufacturing and freight lead times, larger up front product buys and higher-than-normal customer order cancellations.
“So, to improve execution, we have two near-term key priorities, which represent significant value-creation opportunities. First, turning around our Vans performance through improved consumer execution, and second, returning to supply-chain excellence across the company,” Dorer said. He added that the company will leverage its logistical partnerships to improve ocean and parcel rates for fiscal year 2024.
Separately, the company is also cutting its dividend by 40 percent. Dorer said the cut right-sizes the dividend to its target dividend payout and debt-to-EBITDA ratios.
Matt Puckett, executive vice president and CFO, said the North American market was “particularly challenging at Vans and also at Dickies,” VF’s workwear brand. He also noted that the company’s “wholesale partners have adopted a more conservative approach to the Spring-Summer order book, impacted by both higher inventory levels in the channel and the ongoing challenging macroeconomic environment.” Puckett said VF expects to continue to see declines in the business, particularly in the Americas, through the first-half of fiscal 2024.
Net Sales: Net sales for the three months ended Dec. 31 fell 2.6 percent to $3.53 billion from $3.62 billion a year ago.
For the nine months, net sales were down 1.6 percent to $8.87 billion from $9.02 billion.
Earnings: Net income was down 1.9 percent to $507.9 million, or $1.31 a diluted share, from $517.8 million, or $1.32, in the year-ago period. Adjusted earnings per share was $1.12.
For fiscal year 2023, VF expects revenue to rise 3 percent in constant dollars, in line with its prior outlook range that includes a high-single-digits percent decline in Vans revenue, versus prior guidance of down mid-single digits percent, and at least a 14 percent revenue increase for The North Face, compared to the prior forecast of up at least 12 percent. Adjusted earnings per share were guided to a range of $2.05 to $2.15. The company expects to reduce inventory by $300 million during the fiscal year’s fourth quarter.
Net income for the nine months dropped 74.5 percent to $333.5 million, or 86 cents a diluted share, from $1.31 billion, or $2.89, a year ago.
CEO’s Take: Consistent with the near-term objective to focus on the biggest consumer opportunities, “we are shifting resource priorities across the company. This will include rightsizing our dividends, exploring the sale of non-core assets and cutting costs in lower-value areas to strengthen our execution, and to enable incremental, targeted investments in our brands and the consumer,” Dorer said.