VF Corp. just sent fashion a warning flare on China.
The powerhouse owner of Vans, The North Face, Supreme and Dickies posted a better than half-billion-dollar profit for the third quarter, but said China has become something of a sticking point, weighing modestly on its sales outlook for the year. (Vans has also become a soft spot for the company.)
Steve Rendle, chairman, president and chief executive officer, told analysts on a conference call Friday that global demand for outdoor and active goods continues to grow “supported by secular trends toward more active, healthy lifestyles.”
And while the Omicron variant hurt store traffic later in the holiday season generally, Rendle said a “more pronounced macro disruption” has been unfolding in the Asia Pacific region for a while.
“Following the strong rebound in the first half of 2021, the Chinese economy has seen slowing growth, reflecting the government’s aggressive policy response to virus surges, pressuring consumption in the back half of the calendar year,” Rendle said.
Traffic is also lower on key online outlets and the company is changing tack to compensate.
“Our teams are maximizing new social commerce opportunities to offset lower traffic on certain digital titan platforms with plans to amplify key festival activations with new targeted marketing stories and product drops,” Rendle said. “We’re focused on increasing conversion in owned and partner brick-and-mortar stores through operational enhancements while improving partner inventory levels.”
Rendle stood by the opportunity in China, where the company has restructured to have management close to the business. But clearly headwinds have picked up.
China has loomed large in fashion for decades, first as a vast source of low-cost production and then as an all-important consumer base. But lately, Beijing has been asserting itself more in the corporate sphere, particularly stepping into the tech sector and at consumer giant Alibaba. The government has also been pursuing a strict approach to COVID-19 lockdowns to avoid the spread of the virus, although that could be a harder approach to maintain as the virus lingers.
This year, VF is looking for digital revenue growth of more than 15 percent, down from the 20 percent previously projected, a step back that the company attributed to China.
Asked about the trend toward domestic brands in China, Rendle said there was something to the “rise of nationalism that’s talked about.”
“But from a brand standpoint within our portfolio…we monitor week-by-week consumer sentiment linked to brand origin and we’ve not seen any impact there,” the CEO said.
The company is nonetheless trying to position itself to avoid any problems along those lines.
“This is an important part of our go-forward strategy…really speaking to the Chinese consumer as a Chinese consumer and elevating our local-for-local product creation, demand creation and really tailoring events that are relevant to them and their needs,” Rendle said.
China also figures into the company’s Vans business.
The brand’s sales grew 8 percent in the third quarter, a modest improvement from pre-pandemic levels.
“Vans did not meet expectations in the third quarter with mixed holiday performance reflecting heightened disruption across China and a slower-than-expected recovery in Classics footwear,” Rendle said.
VF’s overall saw third-quarter net income increased 49.1 percent to $517.8 million, or $1.32 a diluted share, from $347.2 million, or 88 cents, a year ago. Adjusted earnings of $1.35 a share came in well ahead of the $1.21 analysts projected.
Shares of the company fell 6.5 percent to $62.96 on Friday as investors took it all in. VF is still one of the largest companies in fashion with a market capitalization of $24.7 billion.
BMO analyst Simeon Siegel said: “We recognize the strength of the brands, but it is hard to ignore that despite the inventory scarcity across the industry, GM [gross margin] continues to disappoint, and we continue to worry that current valuation leaves little margin of error and sits well above multibranded peers.”
The analyst noted that gross margins came in at 56.3 percent of sales, opposed to the roughly 57 percent projected.
VF’s revenues for the three months ended Jan. 1 were up 22 percent to $3.6 billion from $3 billion.
The North Face brand led the company on the top line with a 28 percent sales increase while Timberland was up 11 percent and Dickies rose 8 percent.
The company reaffirmed its annual earnings guidance, calling for adjusted profits of $3.20 with a 25 cent contribution from Supreme.
But the sales outlook for the year came down modestly, to $11.85 billion from the $12 billion projected in October.
In the grand scheme, a $15 million miss in such a large business is still something of a rounding error.
Still, Wall Street watches revenue outlooks closely for any signs of changes in trend.
By category, the outdoor business is running ahead of plan, with sales seen up 26 percent to 28 percent instead of the 25 percent to 27 percent projected. But the active division, which includes Vans, is now seen rising by 31 percent to 33 percent instead of 35 percent to 37 percent.
The outlook on the Supreme brand, which is expected to produce sales of $600 million, did not change. And the work division, which includes Dickies, is still expected to see sales rise between 19 percent and 21 percent.
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