Despite reporting earnings that fell short of estimates, VF Corp. chairman, president and CEO Steve Rendle is encouraged by the momentum across the company’s portfolio — but he’s also candid about near-term supply chain challenges, and the hard work ahead.
For the second quarter of its fiscal 2022, VF — the parent company to Vans, Supreme and others — reported revenue growth of 23% to $3.2 billion. That missed the $3.31 billion mark expected from analysts surveyed by Yahoo Finance.
Although the company fell short of analyst expectations, a result of delayed shipments across its banners due to supply chain challenges, there were several bright spots reported. For instance, revenue for the company’s outdoor arm increased 31%, including a 31% climb by The North Face. Also, its work business revenue increased 18%.
Following today’s earnings webcast, Rendle spoke with FN to break down the quarter, the supply chain challenges and the road ahead.
Given the supply chain issues across the company, how are you adjusting for both the short-and the long-term?
“Short-term, it’s heads down. Our team, which we do consider to be one of our biggest competitive advantages, is working with our supply partners, working within the logistics networks, preparing our distribution centers to move quickly when these goods arrive. It’s hands on every day, working with a plan to move the goods as quickly as we can as they come available into our customers’ or retailer’s hands. Longer term, we’ve been very focused on a diversified footprint for the way we produce our products. It wasn’t that long ago when a lot of people were talking about the concentration in China, and now we’re talking about Vietnam. Vietnam is our largest concentration at about a quarter of our total production, and then it spreads out across the whole host of other great countries. As we think to the future, how do we move production closer to where the consumer is? To us, that would mean greater production in Mexico or Central America to service North America. How do we think about leveraging aspects of the European region? Maybe it’s footwear in Portugal, outerwear in Eastern Europe. Our supply chain teams are constantly looking at managing risk and mitigating potential impacts from whatever could come. What’s driving it is how do we service the consumer more quickly and more efficiently through our supply chain relative to the different regions?”
Is there any shifting that you’re doing immediately?
“We are moving production today from some of these countries where we’ve seen this outsized impact due to the COVID surge. The footprint will remain the same, but we are moving [some] spring and fall production into other parts of our network. But this notion of being diversified, moving goods into Europe for Europe, moving goods toward the western hemisphere that are directed toward North America, that would be part of the strategy as well. We’re not ready to declare a massive shift, I think it’s just level-setting and working with our partners to best serve our delivery needs.
What consumer markets are most exposed?
“U.S. And Europe is where we really saw the most impacts from a Q2 standpoint. It doesn’t mean Asia is immune, but in a lot of cases we do have local-for-local production for China, so we’re producing within that country for that consumer. It’s not just the production capacity, but it’s the logistics dynamics that we’re having to manage as we move goods from origin to where it ultimately is going to be sold.”
The VF outdoor and work businesses have been boosted from the pandemic. How do you continue the momentum as COVID-19 restrictions loosen?
“Outdoor and work have been parts of the market that have stayed strong. The outdoor trend is tied to health and wellness, and others continued to work and were in a part of the market where they needed to continue to connect with brands like ours. We see these only strengthening. The strength of our outdoor portfolio, the products and the experiences that connect us with those consumers, we see that growing with the strategies we’ve been deploying. At The North Face, they think about the on-mountain and off-mountain aspects of the brand. And Altra is driving trail running as the platform to move into road running. When we think about Dickies, it’s servicing that core worker, while also acknowledging the work inspired part of this brand.”
How has moving the headquarters to Denver played into your strategy?
“It really strengthened it. The move to Denver was very strategic. We would not undergo that amount of work and energy if it weren’t. By co-locating our outdoor brands in one location, there’s an ability to interact cross-brand or with your colleagues in brand. Denver has an environment for us to attract employees that really embody what each one of our brands stands for: to have access to the outdoors and the activities that they love. This strengthened our ability to drive the outdoor part of our strategy. Connecting our corporate teams in an environment with our brands only helps us to be better providers of the services that are required.”
Supreme is on track to be VF’s fifth billion-dollar brand, but inventory on Q2 drops dropped by 30% because of supply chain issues. How concerned are you? And how do you rectify this for the short term?
“They did have an outsized exposure to parts of Vietnam, they have slowed down and not just their own brand, but some of the collab products as well. We now have a line of sight with factories open to those production needs to the drop schedule, we have better visibility today than we did six weeks ago. We’re positive as we go into the second half. The agility of their model, being able to adjust week by week based on flow, is an advantage and it’s going to help them navigate as the supply chain starts to catch up with the plan. We remain extremely positive about this brand. It has such a unique position in connection with its consumer, it’s merchandise strategy and its weekly drops is such an important part of the model. We all acknowledge that there’s opportunity to leverage the scale and capability of our supply chain, we’ll continue to be thoughtful around that. The future is geographic expansion and really helping that team capitalize on their vision of how this brand can expand and connect with more consumers, leveraging our international platforms that we leverage our supply chain for product.”
What have you learned about Supreme since the acquisition? And how can that be applied to your other banners?
“It is this nimbleness, and it’s this thinking through every week, thinking like a retailer about what does my consumer want? What does my consumer need? How is that making them feel? Being able to just stay in that constant flow of conversation and product. Vans Is probably the first place where you’ve seen this come to life. They’re flowing things every week, but it’s never been organized and articulated to the consumer so they can become part of that. The 52-week drop plan that we’ve begun to talk about, Vans will publish the 52-week drop schedule this quarter, they’ll really enable the Vans family specifically to know what’s coming, where that product will drop so they can be prepared and really engage in an even stronger level as opposed to just hoping I find out or I saw it coming. Now, we’re going to be very articulate on a weekly drop cadence, and these are going to be in small drops like they did with an MTE x Dime drop to big drops like they just did with the Vans ‘Horror’ collection with global audience reach, those will be articulated and really helping the loyal consumer know what’s coming, how to find it and be prepared.”
Is VF still in acquisition mode? What would you look for in a company to add to your portfolio?
“We have three capital allocation priorities. Number one is M&A, and it will remain No. 1; [next] is how we service our dividends. And today, we announced the reinstatement of our share buyback policy. Those are the three primary uses of capital. And we’ve talked a lot about the three lenses: the strategic, financial and the ownership lenses, directed at three important parts of the market where we see tailwinds. That would be the outdoor, the active athleisure space and work and work lifestyle. We think we’ve got two of the most important brands in Dickies and Timberland Pro — and then the adjacency of streetwear that really does touch outdoor and active as well. The North Face, Vans and Timberland have been collab partners for Supreme for a very long time. Those are the spaces that will continue to look, we’ll be thoughtful around what brands can help VF continue to achieve our potential, and how we can help those brands achieve their potential. We’re very focused on paying down the debt as we continue to look strategically for that next appropriate and strategic acquisition.
What is your outlook for holiday?
“We’re excited. There’s consumer confidence, we see it across the globe. We have line of sight to deliveries, and the wholesaler outlook remains intact. Vans is leaning into driving strong messaging around classics. We saw great growth with Sk8 Hi in Q2. How do we take that energy and move it into other aspects of the Vans offering? We continue to drive Ultra Range and MTE, there are exciting things going on in that part of the line. Consumers are ready. Our job is to get the goods here and to service them.”