V.F. Corporation (NYSE:VFC) Q1 2024 Earnings Call Transcript

V.F. Corporation (NYSE:VFC) Q1 2024 Earnings Call Transcript August 1, 2023

V.F. Corporation beats earnings expectations. Reported EPS is $0.09, expectations were $-0.11.

Operator: Greetings and welcome to VF Corporation’s First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. At this time, I would like to hand the call over to Allegra Perry, Vice President of Investor Relations. Thank you, you may begin.

Allegra Perry: Good afternoon, and welcome to VF Corporation’s first quarter fiscal 2024 conference call. Participants on today’s call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts referred to on today’s call will be on an adjusted constant dollar basis, which we’ve defined in the press release that was issued this afternoon, and which we use as lead numbers in our discussions, because we believe they more accurately represent the true operational performance and underlying results of our business.

You may also hear us refer to reported amounts, which are in accordance with U.S. GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management’s view of why this information is useful to investors. Joining me will be VF’s President and Chief Executive Officer, Bracken Darrell; and EVP and Chief Financial Officer, Matt Puckett. Matt will then host the question-and-answer session and will be joined by several VF executives. I’ll now hand over to Bracken.

Bracken Darrell: Hello, everyone. I’m happy to join my first conference call with VF as CEO. While my role today will be a little bit more limited then what I’m used to, given I’m on my 12th day here, I am super excited to be here. VF’s portfolio of globally powerful and iconic brands, deeply embedded purpose and impressive talent, all give me a lot of confidence. These are the key ingredients needed to unlock the company’s significant value potential and return to strong, sustainable and profitable growth. I joined VF after 10 years as CEO of Logitech, where I’m proud to have overseen a transformation of the company that grew its value tenfold. We did it by putting the customer at the center of everything we do. I’m passionate about building brands through a design and innovation focus.

With unique products and immersive storytelling, consumer experience is elevated and so is growth. While, I’m just roughly 10 days in, I already feel at home here. I’ve spent time in our offices in Denver meeting with our brands based here and with many, many VF associates. I visited our European team in Stabio and I’ll be in Costa Mesa at the Vans offices tomorrow morning. I’ve been in our stores in Denver, San Francisco, New York, London and more cities. I’ve been in three of our Supreme stores around the world and many Vans and North Face stores. I talk to customers everywhere I go and I started to dig into the brand equity data. My conclusion is that our brands are as strong as I expected. Our team is loaded with talent. Our business is simply not performing at the level equal those, but it’s because of things in our control.

I feel a strong sense of urgency with respect to the challenges we face, and we’ll collectively work with the team to get VF back on track through disciplined and thoughtful actions. I’m looking forward to speaking with all of you again at our Q2 earnings results to share my perspectives on my first few months in the role. This company has what it takes and I’m excited about the future of the VF and its ability to return to delivering strong shareholder returns. I’ll now turn it over to Matt to talk you through the quarter.

Matt Puckett: Thank you, Bracken, and welcome to VF. Your impressive track record and strong background and innovation and design brings a new dimension to leading VF and reinforces my confidence as we turn the page to our next dynamic chapter. I also wanted to extend our gratitude to Benno, who’s been instrumental in laying a solid foundation for VF’s return to strong, sustainable and profitable growth. We are refocusing our efforts toward the consumer and by taking aggressive actions to strengthen the business operationally and financially and personally a great partner to me. We are fortunate to have him continuing as a valued member of the VF Board. I’m more confident than ever that with Bracken as our new leader VF has everything it takes to succeed in the future.

Before I get into the business and financial results, let me give you an update on our two most important near-term priorities that we’ve been highlighting in recent quarters. The supply chain and Vans. First, in the supply chain, where we saw further progress during the quarter as industry conditions continued to improve and our own actions to address execution yielded results. Lead times into the quarter at normalized levels, while our on-time performance and in-stock percentages were both back in line with our targets. We are appreciative of the quick and aggressive actions taken by the supply chain and brand teams to position us to now consistently meet our customers’ expectations and maximize on the opportunities that present themselves in season.

Next, Vans, which was down 22% in the quarter and was disproportionately impacted by the brand’s wholesale business in the Americas, which was down 40% as anticipated. This includes intentional actions we’ve taken to right size inventory in advance of the important back-to-school season. We were encouraged by the results in China and in the digital business, which have both meaningfully improved relative to the prior quarter’s trend versus last year. While the brand’s overall performance was largely anticipated, it’s not where we should be and we remain intently focused on the actions to turn around the brand. Now an update on the key focus areas of product, consumer and go-to-market. First and foremost, product. We’re increasing our level of investments to create new relevant product that excites consumers while developing existing franchises that are working well.

UltraRange and MTE silhouettes continue to outperform growing 13% and 39% in the quarter respectively with newer line including new school and Lowlands, all generating strong sales growth. The soft launch of the Pinnacle range OTW during Paris Fashion Week in June, created excitement and energy laying the groundwork for the full launch in early 2024. Another key focus area we’ve shared previously is an opportunity to better understand and integrate the consumer into our decision making. Our significant global segmentation refresh is on track and in the meantime, our bands family membership keeps growing, now approaching 29 million members, adding one million members in Q1 and more than doubling in two years. We continue to improve the Vans go-to-market activities.

Our initiatives to sharpen our focus around fewer key products and stores are well underway and are benefiting the quality and productivity of our store assortments with our in-store skew reduction actions expected to be fully completed in August. We’ll also be launching our redesigned vans.com platform in time for the holiday season. Vans is a great brand and we’re confident in its enduring strength and importantly, the energy and intensity that this leadership team is bringing to the effort every day. Now turning to a review of the quarter. Q1, our smallest quarter and facing the toughest prior year compare came in line with our expectations, both on the top and bottom lines. That said, overall our performance was not up to the standard we expect to achieve.

Revenue was down 8% in line with guidance and wholesale particularly pressured the top line in the U.S. On a two-year basis, revenue was about flat. Let me first unpack the performance by region. Revenue in the Americas region was down 15% in the quarter, primarily due to the wholesale channel pressures we outlined in May. These had an impact across most of the portfolio and in particular they Vans and Dickies. The quarter’s results were impacted by the right sizing of inventories across the channel and the implications of our poor customer service from last fall. Our business in EMEA, which as you know has grown consistently and strongly, also saw softer trends in the quarter with revenue in the region down 3% in Q1, driven by high single digit decline in wholesale as retailers grew more cautious.

Our direct-to-consumer business was up mid-single digits in the quarter, a sign of resilient consumer demand for our brand and evidence of our continued strong execution of integrated go-to-market strategies. Last, we continue to see growing momentum in the APAC region with revenue up 18%. All channels grew by double digits in the region with deep [indiscernible] fueled by brick and mortar traffic growth. Greater China saw further acceleration of 31% and benefited from the comparison to the prior year lockdown impacts. The North Face continues to be the key driver of our performance and was up more than 50% in Greater China, benefiting from outdoor market tailwinds and recovering domestic travel. Now let me complete the picture of the brand’s performance starting with The North Face, where revenue was up 12% in the quarter against a tough prior year compare plus 37% and driven by broad based growth across products, channels and regions.

Globally high demand for our icons, as an example, the Basecamp duffle as well as the Voyager Packs [ph] line generated very strong performance aided by the summer travel season. Our lifestyle product, the urban exploration line and our rain wear also saw good momentum. Growth was led by DTC, driven by digital, as the brand’s product innovation and sharp execution resonated with consumers. Number one was down 6% in the quarter, in line with our expectations. The brand was up against the tougher prior year compare and results were impacted by wholesale in the Americas as partners continued to reduce inventory levels. Results were positive in the other two regions. Globally, product innovation is resonating as the new hiking silhouette Motion 6 delivered outsized sell through performance and we made good progress on women’s, with strong growth in sandals and apparel for her.

Dickies results were disappointing and significantly challenged during the quarter, down 19%, as the work segment continues to be impacted by a weaker value and consumer, primarily in the U.S. Soft results in the Americas and APAC were partially offset by continued growth in Europe. Importantly, we have made progress on rightsizing inventory levels in the channel. Moving down the P&L, Q1 gross margin was down 130 basis points. As expected, business mix remained a positive contributor to margin in the quarter, up 80 basis points, driven primarily by DTC and international growth. Rate was down to 200 basis points, more than offsetting mix benefits, reflecting the ongoing impact of higher promotions. Where it’s worth noting the negative impact is about one third of what it was over the previous two quarters and higher product costs which are moderating and which were partially offset by strategic pricing actions and finally, negative currency impacts.

Photo by Ian Deng Quddu on Unsplash

Adjusted operating margin was down 380 basis points, reflecting the impact of the lower gross margins and SG&A deleverage. SG&A declined versus last year by 3% in constant dollars, which exhibits our focus on reducing costs and managing the P&L in times when the revenue line is under pressure. SG&A deleveraged 250 basis points in the quarter reflecting DTC and other fixed cost deleverage in addition to the impact of continued strategic investments in technology, marketing and distribution. Q1 loss per share was $0.15, also impacted by elevated interest expense and a modestly negative impact from tax. Turning to the balance sheet and cash flow, I’ll start with inventory, where we saw further sequential progress in improving the overall health of our inventory position, ending the quarter slightly ahead of our plan with inventories up 19% versus last year, compared to organic growth of about 46% at the end of the fiscal year and up 75% the quarter before that.

The increase in inventory now represents a true organic comparison as we fully lap the impact of the supply chain financing program implemented in Q1 of fiscal 2023. Inventory composition remains primarily core carryover and replenishment, which has a higher likelihood of being sold at full price or with a minimal markdown. Cash from operations, which as a reminder is also benefiting from the extension of payment terms as part of the supply chain financing program, was 164,000,000 in the quarter. We know the quarter was roughly $3 billion in liquidity in line with our plan and about flat to the end of the fiscal year. The free cash flow of $79 million in essence offset by the dividend payments of $117 million. As it relates to the outlook, before I unpack the numbers, let me give you a little context for how we see the balance of the year evolving.

We see several areas of strength worth calling out which give us confidence as we look forward. The North Face is maintaining strong momentum and we expect this to continue with investments being made to further fuel this growth. Our China business is gaining momentum and we believe our brands have significant growth opportunities in this market where we are under penetrated. Certainly the outdoor and travel part of the market continues to be strong and The North Face as the number one international outdoor brand in China is driving and benefiting from that trend. Our DTC trends AMEA remained strong and in fact comp growth has accelerated in June and July. Finally, we are seeing an improved performance in the supply chain, which will allow us to deliver the planned cash flow benefit from reducing inventories and capitalize on revenue opportunities as they present themselves through the balance of the year.

However, we continue to face a few meaningful headwinds. Vans performance remains difficult as work to turn around the brand continues with a great deal of urgency. Our wholesale business, particularly in the U.S., remains challenging as our key partners maintain a more cautious stance on forward orders. And the work segment of the Dickies business has remained softer for longer than we anticipated. It’s still early in the year and our teams across the business are working diligently to maximize the opportunities our brands have to deliver compelling experiences and products to consumers across channels. And we have great confidence that we’ll see progressively improving results. Now moving on to the specifics of our updated outlook, we are revising our full year revenue expectations to be modestly down to flat as we take a more conservative posture on the balance of the year.

The reason for the change in revenue outlook is based primarily on wholesale. Despite the progress made in lowering inventory levels, our wholesale business remains pressured, while our sellout transfer evolving favorably in the outdoor segment In particular, selling is challenged across the segment.

GSV: Overall for VF, we continue to expect a better second-half revenue performance relative to the first half, reflecting an improving wholesale performance, moderating declines at Vans and easing prior year compares as we move to the back part of the year considering the challenges we faced last year and our own poor execution, which muted our performance. We are maintaining our EPS guidance range of $2.00 and five to $2.25 for the year. As a reminder, this includes a higher level of interest and a higher tax rate. Worth highlighting, the underlying operating earnings are anticipated to grow faster than EPS. We achieved our earnings target in Q1 and highlight that we have a number of levers across margins and spending to protect profitability.

We continue to appropriately manage our costs and inventory position in order to protect the P&L and the balance sheet. We’re increasingly confident in our ability to deliver higher gross margins. The year ago period will benefit from moderating promotions as we lapped last year’s impacts, clearer visibility to easing product costs including freight and increasingly favorable mix reflecting the outperformance and strength of our DTC and international businesses. This guidance takes into account our continued commitment to first investing in key capabilities where we continue to see opportunities to fuel organic growth and focused on areas that create value for our customers and consumers. Let me give you some examples. Product innovation and domain creation at The North Face with a higher spend as a percent of revenue; the opening of the Ontario California distribution center, our most highly automated facility that will allow us to more efficiently service orders and which will generate cost savings over time at full scale; the enhancement of our consumer facing digital ecosystem with the launch of an updated digital platform in the U.S. to which most of our brands have now migrated.

Second, we continue to reduce cost aggressively if it’s not adding value for the consumer. And some examples here include; stopping technology spending that is not consumer facing or impacting; aggressively optimizing our distribution capacity, considering reduced unit sales volumes; and pausing discretionary spending. As an example, open roles that are not critical to revenue driving activities and brand building strategies. Now let me give you a couple of updates from the drivers of cash flow. We continue to expect free cash flow in line with our plan, driven both by growth in cash earnings and a reduction in working capital, primarily from activities to reduce inventory levels and recognizing the full benefit of revised payment terms with our product suppliers as we migrate through fiscal year 2024.

Importantly, we expect inventory to be near to normalized levels by the end of this calendar year and down at least 10% year-over-year at the end of the fiscal year, which would equate to a reduction of about $250 million. We maintain tight control and discipline on all capital spending and in light of business conditions, we’ve paused lower priority projects. Moving on to debt, we remain laser focused on reducing our leverage. We have ample liquidity and financial flexibility to pursue our key priorities. Our number one financial objective is to return VF to our historical balance sheet strength. Accordingly, we will use any excess free cash flow to reduce debt and you can be sure that any strategic decision we are making is through this lens.

We expect to end this fiscal year with gross leverage of about four times, and we’ll continue to make progress on the path to moving toward our target of 2.5 times. Now, you may have noticed I haven’t talked a lot about the macro environment in my comments. We remain intently focused on our own issues and on what we can control, and so much of what we have to do relies on fixing those issues. At the same time, we’re not oblivious to the external conditions and they do inform our near-term tactics and strategies. The environment itself remains difficult and volatile. We recognize that many consumers are feeling impacts to their disposable income and are continuing to deal with inflation facing higher interest rates and in the U.S. the upcoming into the student loan pulse.

In summary, for fiscal year 2024, we are slightly more cautious on the evolution of revenue, but remained confident we will deliver increasing operating earnings to improve gross margins and strong cash flow, together enabling us to achieve our debt reduction targets, all leading to a strength in financial position. Finally, I’ll give you an update on the Timberland Travel Case. The latest development being that oral arguments occurred last week, which was sooner than we anticipated. This advanced timeline indicates the First Circuit Appeals Court could issue an opinion as early as the next few months. We previously expected this vision could occur within this fiscal year and in light of the pace at which the oral arguments proceeded, it’s now increasingly evident that this will be the case.

We continue to believe the timing and treatment of the income inclusion at issue is appropriate. Looking ahead to the future, we are confident that we have all the right ingredients to succeed and to return to our standard of delivering superior shareholder returns driven by strong, sustainable and profitable growth. We have a portfolio of world renowned and beloved brands which are well positioned in big and growing spaces that continue to benefit from macro consumer tailwinds. We’ve taken significant actions to strengthen our business operationally and financially. I’m confident these initiatives will yield tangible benefits. We continue to work to drive improved product margins including better go-to-market efficiencies, product cost optimization and strategic pricing actions.

These near and medium term actions, combined with the ongoing focus to drive down costs which are not consumer facing, will support an expanding margin profile over time. We remain committed to our purpose, which is at the heart of everything we do, will continue to remain central to our culture and to our strategy. Our team of passionate, highly skilled and deeply committed associates continues to be a key asset to unlocking our full potential. In closing, we can and we will better harness the power and strength of VF, while continuing to focus on sharpening execution, optimizing earnings and cash flow and strengthening the balance sheet. All of which will enable VF to begin to fulfill its full potential this year and beyond. With that, we’ll now be joined by several members of the team to answer your questions.

Martino Scabbia Guerrini, who run our business in AMEA and APAC and in the emerging brands and our brand leaders from Vans and North Face, Timberland, Supreme. Kevin Bailey, Nicole Otto and Susie Mulder. So now, open the line and take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first questions come from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your questions.

Dana Telsey: Hi, good afternoon everyone and Bracken welcome. Given your experience at your former company Logitech, what is most similar? What is most different as in the work to transform VF? And then Matt on the results today, it looks like wholesale was the weakness nearly everywhere. How much of it was the impact overall in the Americas and Europe and how does it differ by brand? Thank you.

Bracken Darrell: Hi Dana, I’m not quite ready to start to make comparisons between VF and Logitech, but I would just say the biggest surprise so far is how at home I feel, no surprises yet. So I’ll update you more at the end of next quarter.

Matt Puckett: Yes Dana nice to speak with you. You’re right, most of the issues that we saw in our reported results certainly reside in the wholesale line and that’s kind of what we expected. I think we’ve kind of talked about that in May. It is certainly an issue that’s predominantly in the U.S. and in the Americas, to some degree in Europe, obviously APAC not so much, in APAC it’s — the wholesale business is relatively smaller there. If you look at it across brands, disproportionate impacts to the Vans and Dickies, which continue to be the two businesses that are struggling the most from a sell through and sell out perspective. The North Face generally pretty good and Timberland some timing issues with both of those brands.

If you look at the outdoor segment generally I think you’re going to see, we see better results across the board and that’s certainly the case in the wholesale business and again we see the more difficult results in those couple of brands that we’ve continued to have challenges from a sellout perspective and we’ve talked a lot about that. All of our brands are having some impact from what’s happening in the wholesale channel particularly in the U.S. as wholesalers are resetting inventories and that’s been underway and in many cases making good progress, in other cases taking a bit longer and that’s kind of the cautious approach that they’re taking to forward buys. We’re seeing that affect all of our businesses. But clearly when you have a business that’s not selling through, you give them even more reason to potentially be very cautious and pull back and we’re seeing that certainly in the Vans business.

Dana Telsey: Got it. And just one follow-up. As we move through the year and maintaining the guidance, any puts and takes as you see it either top line or margin in the cadence of the remaining quarters? Thank you.

Matt Puckett: Yes, sure thing. So from a top line perspective it will sequentially get better. Q2 will be less negative than where we were in Q1. We said from the beginning the first half of the year we’ll be relatively challenged given what we see in wholesale and that stays the same. So we’ll see sequential improvement as we move through the year. From a profitability standpoint we hit our targets in the first quarter, our internal targets from a profitability standpoint and in fact we obviously hit our kind of what we thought we’d be from a revenue standpoint. When I step back and look at things though, increasingly confident in our ability to drive higher gross margins this year and as we look at where we sit from an inventory standpoint, we’re making really good progress a little bit ahead of schedule and reducing our inventories and I look at the overall health of our inventory, I feel good about where we’re positioned, relative to where we’ve been certainly.