In releasing its financial results for the fourth quarter ended on March 31, the management of VF Corp. insisted that the company is in a better position than some of its competitors to navigate through the “storm” caused by the coronavirus pandemic for several reasons, including good liquidity, a flexible and sophisticated supply chain and a three-year-old digital transformation program, which is being boosted now, absorbing 80 percent of its capital expenditures.
The management even indicated that it could take advantage of interesting new opportunities to acquire “attractive assets” which have been weakened by the disrupted Covid-19 environment.
The company still expects to generate free cash flow of $600 million during the current financial year in spite of lower revenues, which will likely register a decline of slightly more than 50 percent for the quarter ending on June 30 alone. It has cut forward orders by between 20 and 30 percent.
A tough quarter
After booking 9 percent organic growth in the previous nine months and despite a strong start in January, VF’s revenues fell by 11 percent to $2,102 million in the quarter ended on March 31, with a drop of 10 percent in constant currencies. Extraordinary charges including a $323 million impairment for Timberland pushed the group into a net loss of $483.8 million for the quarter, up from $128.8 million in the year-ago period.
Excluding charges, VF suffered a 70 percent decline in adjusted net earnings to $40 million. The gross margin fell by one percentage point to 53.9 percent on an adjusted basis, due in part to strong inventory clearance activity, and the adjusted operating margin went down by 3.5 percentage points to 4.1 percent.
Together, the group’s four biggest brands – The North Face, Vans, Timberland and Dickies – experienced a drop of 10 percent on a currency-neutral basis during the fourth quarter. Sales declined by 6 percent at Vans, by 13 percent at TNF and by 18 percent at Timberland.
Regionally, Asia-Pacific was hit the hardest with group sales falling by 22 percent including a drop of 31 percent in China. The U.S. was down by 10 percent. Sales in the EMEA region fell by 5 percent and they are expected to remain weak, normalizing by year-end.
During the quarter, Vans performed best in Europe, where the sale decline in local currencies was limited at 2 percent because of a 30 percent increase in digital wholesale revenues. Higher sales of apparel were offset by a 7 percent drop in footwear. The Heritage and Progression segments of Vans’ collection went down. The brand’s sales through its own digital and physical retail channels in Europe were off by 12 percent in the quarter but recovered in April.
Timberland’s sales declined by 8 percent in the U.S., by 18 percent in EMEA and by 34 percent in Asia-Pacific, with Timberland Pro, outdoor shoes and apparel performing better than other portions of its product portfolio. In the EMEA region, the brand’s wholesale revenues fell by 19 percent, dragged down by the important Italian market, where the coronavirus crisis was particularly severe. Retail sales were off by 15 percent in Europe, but digital was flat and up in April.
More over the internet
In line with its consumer engagement strategy, VF has been accelerating its investments in the digital channel in terms of marketing and sales. It is focusing in particular on ease of shopping over the internet. From next month on, European customers will be able to pick up orders placed over the internet at a specific store, which American customers can do already.
The group is also banking on its loyalty programs for consumer analytics and the frequent launch of innovative products, like now in China. These programs currently have between 7 and 8 million members at TNF and some 12 million members at Vans in the U.S. The numbers are also growing in Europe with 300,000 new members for its Vans Family program in the U.K. alone since last July.
Customers have responded well, especially in North America, to the “Shoe Box Challenge,” a creative online contest launched by Vans. TNF’s donations to medical workers have led to strong traffic on its website, with more than 80 percent of visitors being first-timers, and even stronger conversions.
Sales over the internet grew by 9 percent in the latest quarter. A chart shown to investment analysts indicated that sales over the internet were up at a triple-digit rate in the Americas in April, while sales at its brick-and-mortar stores were down by nearly 90 percent because of retail lockdowns in the region. Own e-commerce was up by about 20 percent in China and the EMEA region while sales at the group’s physical stores were off by around 30 percent and 90 percent, respectively. In March, while the group’s physical stores recorded a drop of around 40 percent in all three regions, sales over the internet rose only in China, at a rate of around 30 percent.
In the last financial year, total DTC sales accounted for about half of the group’s total turnover. E-commerce represented 20 percent of total revenues including sales through the wholesale partners’ web stores, and 12 percent of revenues when it comes to own e-commerce.
Asked about a possible downsizing in the brick-and-mortar retail channel, the management pointed out that it has a certain flexibility in its lease contracts for physical stores with landlords, which allows it to turn around about one-quarter of its store fleet every year.
Vans stood out in the financial year
For the full financial year, VF’s revenues from continuing operations were up by 2 percent to $10.5 billion, but on an adjusted basis, excluding acquisitions and divestitures, they were 3 percent higher than in the previous year in dollars and 4 percent higher in local currencies. The Active segment generated 6 percent higher sales in constant dollars, including a rise of 11 percent for Vans. Outdoor segment revenues increased by one percent on a currency-neutral basis, with TNF up by 5 percent and Timberland continuing to lose ground. Also in local currencies, digital revenues went up by 17 percent and sales in China grew by 14 percent.
The group’s adjusted gross margin showed an increase of 0.7 percentage points to 55.5 percent for the year. The operating margin declined by 2.8 percentage points to 12.8 percent. Adjusted net earnings fell by 46 percent to $679.4 million.
In reported dollars, the Active segment generated 4 percent higher revenues of $4.92 billion and one percent higher operating income (Ebit) of $1,136.8 million for the year. In the Outdoor segment, sales were flat at $4.64 billion and Ebit declined by 5 percent to $516.1 million.
Cash flow from continuing operations rose by about $800 million and the company returned $1.7 billion to shareholders through share repurchases and dividends – both of which have been suspended since Covid-19 struck the industry. As reported, VF has taken quick action to improve its liquidity, notably through a $3 billion bond offering which has helped create a treasure chest of $5 billion.
Inventories were 10 percent higher than a year earlier at the end of the financial year. However, the disruption caused by Covid-19 is expected to lead VF to engage in ongoing promotional activities for the balance of this year, especially through markdowns and higher sales at outlet stores for its weaker brands in the first half.