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VF’s North Face Combats Warm-Weather Concerns

Second-quarter profits decline as revenues accelerate in second quarter.

Timberland store

Retailers’ memories of a warm winter are continuing to haunt VF Corp.’s The North Face brand during a sweltering summer.

This story first appeared in the July 22, 2013 issue of WWD.  Subscribe Today.

Reporting second-quarter results that beat analysts’ estimates Friday even as revenues fell slightly shy of them, VF indicated that North American stores are taking a conservative approach to cold-weather oriented merchandise as they plan for fall. That’s hurt North Face’s advance orders for the season in the Americas, even though second-quarter global volume for the brand rose 5 percent. The brand’s sales were up 40 and 10 percent in the less penetrated markets of Asia and Europe, respectively, despite a “modest decline” in the brand’s wholesale business in the Americas.

“Retailers who’ve been hurt with inventory in the last two winters are buying cautiously and closer to need, taking delivery later,” Eric Wiseman, chairman, president and chief executive officer of VF, told WWD Friday, adding that a 53-week fiscal calendar this year will push the brand’s biggest shipping week into the first week of October, the start of VF’s fourth quarter, from the last week of September, when the third quarter ends.

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During the company’s conference call, he emphasized that low in-season demand and “inventory overhang” were a problem throughout the outdoor industry. “It’s not just The North Face,” he said, “but all the brands that play in that space….Retailers are going to wait and see how the weather unfolds.”

The weather wasn’t an issue in Europe, where the conditions were more seasonal.

Timberland’s revenues were down 3 percent in the quarter, with European revenues off at a double-digit pace, but the challenge for the brand was more a matter of European economics. Timberland is VF’s largest business in Europe, and its largest market in Europe is Italy.

“We don’t believe we’re losing market share in Italy, but the Italian specialty store business is very, very tough,” the ceo noted. “The market is softer, but we’re getting a bigger piece of it. Since we don’t have the levers to fix the Italian economy, we’re pulling the levers to invest in other markets like Germany, the U.K. and France.”

The third of VF’s trio of billion-dollar brands in its outdoor and action sports coalition is Vans, which saw global revenues rise 15 percent worldwide.

Overall in the three months ended June 29, net income slipped 11 percent to $138.3 million, or $1.24 a diluted share, from $155.3 million, or $1.40, a year ago. Stripping out special items in both periods, including the benefit from the sale of John Varvatos during last year’s quarter, adjusted earnings per share was $1.27, 10 cents better than the consensus estimate of $1.17 and 16 cents above the year-ago adjusted figure.

Revenues grew 3.7 percent to $2.22 billion, below the $2.26 billion estimated by analysts, versus $2.14 billion in the 2012 quarter.

Gross margin hit an all-time high of 48.5 percent, versus 46.1 percent in the second quarter of 2012, as cost of goods sold fell 1 percent, to $1.14 billion, and the company’s product mix continued to shift toward higher-yielding retail and international businesses. Direct-to-consumer rose to 22 percent of revenues, and international to 34 percent, from 21 and 33 percent, respectively, a year ago.

“We have said we expect 50 to 60 basis points of margin improvement a year over a five-year span, and that’s mostly a reflection of our mix,” Wiseman said. “We don’t expect 240 basis points of improvement every quarter, of course, but we do expect both DTC and international to grow faster than our domestic business.”

Surveying the company’s large denim business, Wiseman noted softness at Seven For All Mankind, the premium brand that’s the biggest component of the contemporary coalition. “The premium denim business has had a pretty soft year, and we didn’t get much support from our wholesale customers,” he said. “But we had a double-digit increase in the brand’s DTC operations. That tells me the product is good.”

VF continues to forecast growth for the coalition despite a slow start and declines in both its sales and profits in the second quarter.

In the jeanswear coalition, revenues grew 3 percent, to $611.7 million, and operating income 16.6 percent, to $108.9 million, to generate the highest quarterly operating margin — 15.7 percent — within the company. With operating income up 21.8 percent to $100.5 million on a 6.1 percent sales rise to $1.1 billion, outdoor and action sports generated a 9.1 percent operating margin.

The Lee brand saw worldwide revenues expand 10 percent as “the midtier channel is getting healthier,” according to the ceo, and the company has seen success in its initiative to place the brand in more department stores, including Belk, Macy’s and, most recently, Bon-Ton.

“What we’re demonstrating is that we have the right products at the right price point,” Wiseman said.

During the first half, net income advanced 10.3 percent, to $408.7 million, as revenues grew 2.9 percent, to $4.78 billion.

Shares closed Friday at $196.94, down $2.59, or 1.3 percent.