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VF Corp Releases Q3 Fiscal 2022 Statement: Vans Up 8% with Strong Digital Growth

VF Reports Third Quarter Fiscal 2022 Results; Reaffirms Full Year Fiscal 2022 Earnings Outlook

Third Quarter Fiscal 2022 Income Statement Review

• Revenue increased 22 percent to $3.6 billion. Excluding the impact of acquisitions, revenue increased 15 percent driven by the EMEA and North American regions, which experienced a negative impact from COVID-19 in the prior year period.
• Gross margin increased 140 basis points to 56.1 percent, primarily driven by reduced promotional activity and offsetting incremental freight costs. On an adjusted basis, gross margin increased 60 basis points, including a 20-basis point positive impact from acquisitions, to 56.3 percent.
• Operating income on a reported basis was $678 million. On an adjusted basis, operating income increased 40 percent to $643 million, including a $54 million contribution from acquisitions. Operating margin on a reported basis was 18.7 percent. Adjusted operating margin increased 230 basis points, including a 50-basis point positive impact from acquisitions, to 17.7 percent.

Full Year Fiscal 2022 Outlook
VF’s full year outlook assumes no material deterioration to the company’s current business operations as a result of COVID-19 and related governmental actions and regulations. VF’s full year fiscal 2022 outlook includes the following:

Revenue is expected to be approximately $11.85 billion, reflecting growth of around 28 percent, including an approximate $600 million contribution from the Supreme^® brand. By segment, revenue for Outdoor is now expected to increase between 26 percent and 28 percent versus the previous expectation of a 25 to 27 percent increase; revenue for Active is now expected to increase between 31 percent and 33 percent versus the previous expectation of a 35 to 37 percent increase; revenue for Work is still expected to increase between 19 and 21 percent.

International revenue is expected to increase between 22 percent and 24 percent. By geographic region, in the EMEA region, revenue is expected to increase between 28 percent and 30 percent. In the Asia Pacific region, revenue is expected to increase between 7 percent and 9 percent. And, in the Americas (non-U.S.) region, revenue is expected to increase between 33 percent and 35 percent.

Direct-to-consumer revenue is now expected to increase between 32 percent and 34 percent versus the previous expectation of 34 percent and 36 percent, including Digital revenue growth of greater than 15 percent versus the previous expectation of about 20 percent.

“We delivered strong double-digit top and bottom line results and returned about $500 million in cash to shareholders in the third quarter, all of which has been achieved amidst continuing macro headwinds,” said Steve Rendle, VF’s Chairman, President and CEO. “The broad-based momentum across our brands is testament to the resilience of our diversified portfolio model, which has enabled us to deliver a strong quarter and reaffirm our full year earnings outlook in a challenging environment. I am confident that VF remains well-positioned for continued, profitable, long-term growth.”

Discontinued Operations – Occupational Workwear Business
On June 28, 2021, VF completed the sale of its Occupational Workwear business. The Occupational Workwear business was comprised primarily of the following brands and businesses: Red Kap^®, VF Solutions^®, Bulwark^®, Workrite^®, Walls^®, Terra^®, Kodiak^®, Work Authority^® and Horace Small^®. The business also included a license for certain Dickies^® occupational workwear products that have historically been sold through the business-to-business channel. Accordingly, the company has reported the related held-for-sale assets and liabilities as assets and liabilities of discontinued operations and included the operating results and cash flows of the business in discontinued operations for all periods, through the date of sale.

Adjusted Amounts – Excluding Transaction and Deal Related Activities.
The adjusted amounts in this release exclude transaction and deal related activities associated with the acquisition of the Supreme^® brand. Total transaction and deal related activities include a decrease in the estimated fair value of the contingent consideration liability of $50 million in the third quarter of fiscal 2022 and $158 million in the first nine months of fiscal 2022, and integration costs of approximately $1 million in the third quarter of fiscal 2022 and $6 million in the first nine months of fiscal 2022.

COVID-19 Outbreak Update
The majority of VF’s supply chain is currently operational. Suppliers are complying with local public health advisories and governmental restrictions which has resulted in isolated product delays. COVID-19 related manufacturing capacity constraints have continued during the third quarter, though the situation has improved over time. VF expects to be back to nearly full capacity in the coming weeks. Additionally, continued port congestion, equipment availability and other logistics challenges have contributed to ongoing product delays. VF is working with its suppliers to minimize disruption and is employing expedited freight as needed. VF’s distribution centers are operational in accordance with local government guidelines while maintaining enhanced health and safety protocols.

In North America, no stores were closed during the third quarter. Currently, all stores are open. In the EMEA region, 6% of stores were closed during third quarter. Currently, only one store is closed. In the APAC region, including Mainland China, nearly all stores were open at the beginning of the third quarter. No stores were closed at the end of the quarter. Currently, 1% of stores are closed.

Brand comments from earning call:
“Moving into our brand highlights for the quarter. I will start with the North Face, our largest brand this quarter, representing over a third of VF’s Q3 revenues. TNF delivered the largest quarter in its history, surpassing $1 billion for the first time, with revenues of over $1.2 billion in the period. This was truly fantastic performance during the brand’s highest volume quarter of the year. Global TNF revenues grew 27% above pre-pandemic levels with continued broad-based strength across regions, channels and product categories. The North Face also delivered significant improvements in profitability, with strong brand positioning driving higher quality sales. All regions were ahead of plan and surpassed prior peak levels. Looking ahead, following the strong holiday outperformance at TNF, we are raising our full year 2022 outlook to growth of 29% to 30%, representing 18% to 19% growth relative to fiscal ‘20. This compares to our previous expectation of 16% to 18% growth versus fiscal ‘20.”

“Moving on to Vans, which grew 8% in Q3, representing modest growth relative to pre-pandemic levels. Global digital growth continues to be strong, up 54% relative to fiscal ‘20 driving 9% D2C growth relative to pre-pandemic levels. In the first 9 months of the year, Vans generated an additional $232 million in revenue across its digital platforms relative to fiscal ‘20. While we have made great progress in certain regions and products, on a global basis, Vans did not meet expectations in Q3, with mixed holiday performance, reflecting heightened disruption across China and a slower-than-expected recovery in Classics footwear. The Americas business was a highlight, delivering a sequential improvement with the U.S. market posting its first positive growth versus fiscal ‘20 since the start of the pandemic, fuelled by digital growth of approximately 50%.”

“Global Classics footwear showed encouraging sequential improvement, but remains below pre-pandemic levels. While we are making strides to reignite this category, we are simultaneously driving growth in other areas of the brand, which are gaining share within the mix. We continue to see broad-based strength across the Progression footwear line highlighted by MTE, up 56% and UltraRange, up 30% relative to fiscal ‘20 levels. Progression now represents nearly a quarter of the Vans footwear mix. Apparel grew 29% in Q3, representing 12% growth versus fiscal ‘20 with broad-based, diversified growth across customer segments, including increased traction in use. Vans continues to develop exciting product stories, which will launch in coming months. Main skate story will be the Lizzie, the first signature shoe from Olympic athlete, Lizzie Armanto, reinforcing the brand’s leadership position in skate and to women’s sport. The Lizzie will incorporate eco-cushioning and the new 3D [indiscernible] toe for increased durability, micro waffle thread and 6 thick rubber for maximum grip.”

“The Progression pipeline is also strong with several key launches ready for fiscal ‘23, including Circle B launching next month. This is a new silhouette for Vans and is the brand’s first shoe designed to round the concept of circularity. Vans consumers remained highly engaged with the brand. Vans Family membership is approaching 21 million globally, increasing nearly 50% over the past 12 months, with growing activations across all regions. While we are encouraged by the sequential improvement of the business fundamentals, we acknowledge that the Vans brand continues to perform below the expectations set in May ‘21. Our teams are focused on three drivers of the weaker-than-expected performance: China, plastic footwear and brand heat.”

“Moving to Classics, we are returning to an always-on Classics demand creation model with a higher degree of innovation and design supported by enhanced and targeted marketing support, with a dedicated campaign launching globally throughout this year starting with the U.S. market next month. Applying learnings from the skate high campaign was launched during back-to-school and has led to over 20% growth over the past two quarters from that silhouette.”

“And finally, brand heat. While Vans brand health is strong, its brand heat remains below pre-pandemic levels and has significant potential and scope to be reignited. To address this, we are focused on increasing the flow of innovation and product stories, increasing wearing occasions for existing consumers and investing in attracting and retaining new consumers. We remain encouraged by the early results of our 52-week drop strategy, which we are leveraging to reward our loyalty members with early access to new product stories and to drive energy and engagement with new and existing consumers. We believe the pivot in our Classics marketing underway will play a key role here as well. Vans has a long history of success with a rich heritage and strong brand equity. I am confident there is a long runway ahead for future growth.”

“Moving to Dickies which grew 14% versus fiscal ‘20 levels driven by continued strength in the Americas, elevated sell-through and strong demand signals indicated the brand’s evolving integrated marketplace segmentation is delivering as planned and the brand continues to see growth from both the workwear and work-inspired segments. We are also pleased to see the brand profitability continuing to improve ahead of plan. And finally, the Supreme brand continues to see strong demand and sell-through both online and in its stores. The brand delivered nearly $200 million in revenue in Q3, despite closing doors globally at various stages due to pandemic surges. We had a strong close to the fall season as the Supreme teams, partnering with VF supply chain, were able to align inventory flow with their revised drop schedule.”

“The Supreme team remains highly focused on their store-led geographic expansion strategy as a key element in showcasing the brand and its unique collection. The brand opened 2 stores in Europe this year, in Milan and Berlin, executing against its international expansion strategy. The team continues to stay the course and create brand awareness in an intentional and authentic way. We are excited about Supreme’s longer term potential as a key brand within the VF portfolio.”

EMEA
The EMEA region continued to show great momentum this quarter with our business delivering 25% organic growth versus last year and 23% growth relative to fiscal ‘20 with strength across all key markets. The latest virus surge has spurred new restrictions across Europe, namely in Austria, the Netherlands, Germany and the U.K. This has contributed to declining consumer confidence, deteriorating traffic and stretched retail staff in our stores. Our D2C brick-and-mortar business was able to deliver positive growth above prior peak levels despite a deterioration in traffic to 40% below fiscal ‘20 levels during the final weeks of the quarter. This is a clear testament to strong consumer demand and our ability to continue executing in-store with high levels of conversion.