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Vans Owner Sees Retailers Getting Cautious, Consumers Getting ‘Choiceful’

VF Corp. still has work to do at Vans, while The North Face remains a bright spot in the first quarter. Sourcing and supply chain issues are improving, although softening consumer spending has some retailers pulling back on their open-to-buy.

In a Nutshell: Chief financial officer Matt Puckett told Wall Street analysts in the company’s first-quarter conference call that the Timberland owner is seeing some retailers become increasingly cautious.

“The consumer remains solid at the higher end, but the value end has been more impacted and we have seen certain retailers begin to take a more cautious approach to open-to-buy generally,” Puckett said.

Direct-to-consumer and wholesale sales grew by double digits in the quarter, while the “outdoor segment continues to grow strongly,” he said.

“We are starting to see the level of supply chain disruption ease, albeit nowhere near the pre-pandemic normal,” he added.

From a logistics viewpoint, Puckett said the Dickies parent is “seeing improved transit times across the water, reflecting a slight ease in congestion and shortened dwell times in port. This is leading to overall better predictability and reliability.” In addition, spots rates for both ocean and air are dipping, but still high relative to historical levels, he pointed out.

VF rolled out a supply chain financing program with most of its finished goods suppliers. This means VF is taking ownership of inventory at the point of shipment starting in the first quarter, versus in the past when it would take product at the destination point. While there is no impact on cash flow, the change means VF now owns inventory one month sooner, which is driving its higher inventory level.

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Beginning with purchase orders issued from Sept. 1, VF will also be increasing payment terms with the majority of its finished goods suppliers. “This change will improve VF’s overall cash flow, while at the same time benefiting the supplier base,” Puckett said.

VF said raw materials suppliers in China are operating, despite an eight-week lockdown in the quarter driving logistical challenges and ongoing product delays. “Most final product manufacturing and assembly suppliers” are now largely back to normal operating levels, it added.

While stores in Asia were closed during the quarter, including Mainland China, all stores are now open.

VF chairman, president and CEO Steve Rendle told analysts the quarter saw strong customer engagement with the company’s outdoor, streetwear and active brands, despite inflation and challenging macro trends.

“Excluding China, consumer health is generally good across our markets,” he said, adding that softening sentiment has led to consumers becoming “more choiceful and cautious” in their near-term spending.

Rendle said VF is “working closely with our retail partners to drive sell-through and ensure our family of brands remains at the forefront of consumers’ minds,” while also mitigating Covid headwinds.

VF is committed to returning cash to shareholders in the form of its stock dividend, he said, which totaled $194 million for the quarter.

Sales for The North Face rose 31 percent to $481.1 million, while Timberland sales grew 8 percent to $269.5 million. Sales at Vans fell 7 percent to $946.8 million, largely due to Covid disruption. Sales also were down 15 percent to $170.4 million for Dickies. Sales for its other brands, including Supreme and Smartwool, rose 9 percent to $393.9 million.

For Vans, Rendle said the company is seeing early signs of positive response from customers as its rebuilds its core classics strategy. The bright spot in the quarter was The North Face, where growth was fueled by its 365 product initiatives, “with warm weather apparel and accessories, as well as rainwear generating strong performances.”

For Timberland, Rendle said growth was driven by men’s footwear, led by outdoor, across lifestyle hike and trekkers, while apparel—accounting for 20 percent of the brand’s quarterly sales—was also strong in lightweight outerwear.

Net Sales: Net revenues for the quarter ended July 2 rose 3 percent to $2.26 billion from $2.19 billion.

The increase in revenue was helped by a increases in the Americas and EMEA (Europe, Middle East and Africa) regions, which helped to offset a decline in APAC (Asia Pacific) due to Covid.

VFs’ gross margin fell 260 basis points to 53.9 percent, most driven by mix and higher freight costs, partially offset by price increases.

Earnings: The company posted a first quarter loss of $56 million, or 14 cents a diluted share, against net income of $324.2 million, or 82 cents, in the year-ago period. On an adjusted basis earnings per share were 9 cents a diluted share.

Rendle said the company is maintaining its “operating outlook for Fiscal Year 2023, a testament to the resiliency of our purpose-built family of brands.”

For the fiscal year, the company expects adjusted earnings per share of $3.05 to $3.15, implying 4 percent to 7 percent growth versus the prior year on a constant dollar basis. Total revenues are expected to rise 7 percent in constant dollars, unchanged from prior estimates.

CEO’s Take: “While uncertainty persists across geographies and marketplaces from ongoing macro-economic headwinds, we are focused on the things that we can control and will continue our strategic investments to ensure long-term, sustainable and profitable growth,” Rendle said.