VF Earnings Call Nuggets: Revenue Guidance and Gross Margin Outlook

VF Corporation (NYSE:VFC) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Revenue Guidance

Michael Binetti – UBS: Bob, can I just clarify quickly the comments you made on the revenue guidance just there. I think you were saying that – maybe you were saying that third quarter would be in line with the annual 6% guidance excluding the shifts, but then be lower if you include the shifts. Did I read that correctly?

Robert K. Shearer – SVP and CFO: You’re right, Michael. What we’re saying is that third quarter revenues will be in line with the 6% annual guidance. That includes the impact, obviously, of the shifts that we mentioned. So what we are saying is the third quarter otherwise would have been stronger. We said the third quarter would have been more balanced with the fourth quarter had it not been for the revenue shifts. So the 6% includes those shifts.

Michael Binetti – UBS: Then can you help us gross up the comments on The North Face cadence that you talked about to the overall outdoor coalition outlook for third and fourth quarters?

Steve Rendle – VP and Group President, Outdoor & Action Sports Americas: Mike, I am not sure I completely understand what you mean by gross up.

Michael Binetti – UBS: So it sounds like there is going to be some North Face order growth shifted into fourth quarter from third quarter. How does that fit within the guidance for the outdoor revenue growth in the back half between third quarter and fourth quarter?

Steve Rendle – VP and Group President, Outdoor & Action Sports Americas: The shifts that we’ve mentioned in the calendar coupled with the retailer caution, we see a shift from Q3, what we have seen historically in Q3 to Q4. Without those shifts, we would see a much more balanced order flow – shipment flow. But as we are looking at it today, we’ve got a low-single digit Q3 and a high or a low double digit for Q4.

Robert K. Shearer – SVP and CFO: Michael, so for the third quarter for Outdoor & Action Sports, I think this is – I want to make sure we answer your question. So, the third quarter would look pretty much in line once again with our annual guidance of the 6% to be more in line. And then obviously the fourth quarter will be considerably stronger.

Michael Binetti – UBS: Then could you comment on where the backlogs are today for The North Face?

Steve Rendle – VP and Group President, Outdoor & Action Sports Americas: The backlogs for The North Face, the shape of our order window this year is a bit different, as I mentioned the calendar shift and the caution. The order book we have in hand is in line with our expectations. It was absolutely understood and calculated in the high-single digit full year guidance that we provided in February.

 

Gross Margin Outlook

Robby Ohmes – Bank of America: Actually, a couple of questions. Just the first question is you’ve mentioned retailer cautiousness in the Americas for North Face several times. Are you seeing retailer cautiousness across other brands and why or why not? Then the second question is just on the gross margin outlook. I think you guys said some of the effective, you could see more, I think Bob, you might have said could see more gross margin upside, but you may invest in that further upside. Could you walk us through what could drive further gross margin upside versus your guidance. Then also what kind of spending you would envision implementing beyond what’s in the plan right now if you get that gross margin upside?

Eric C. Wiseman – Chairman, President and CEO: Robby, Bob and I will go back and forth on some of these. First question about retailer cautiousness is it just for The North Face, and it’s not a North Face issue, it’s an outdoor industry issue. The outdoor industry in North America has suffered two much warmer than normal winters and because of that – there has been inventory overhang at the end of each season, as you’ve seen. This year, we got a little lucky in that spring was cool and we sold a lot of that stuff through. So, it’s not The North Face, it’s for all of the brand to play in that space. Retailers are buying much closer to demand. They’re going to wait and see how the weather unfolds. However, the orders that we have don’t assume a frigid winter. It assumes a modest improvement in the weather patterns for this year. We didn’t talk about that for Europe and the reason for that is, Europe had a cold winter last year. They had been a nice healthy cold wet winter. So, the buying there from the retailers who buy our brands, this is just at a much more normal cadence, so they didn’t have that issue to deal with. Bob, do you want to talk about the gross margin?

Robert K. Shearer – SVP and CFO: Sure. Robby, so one of the things that we have been seeing relative to our gross margin is the mix has been very favorable. In the second quarter for example you know that mix has been averaging around 60 basis points or 70 basis points on a full year basis of benefit and in the second quarter it was more like 80 basis points. So, that’s been one of the factors that’s been very positive to us. Our gross margins have just been running very, very strongly all year long. We talk a lot about reductions in product costs, the mix piece, of course will be there and is there. The product cost reductions as well have especially benefited the first half. But the other thing that’s been very strong for us is our inventory management. So, we talked during the second quarter that our inventories were down by 3%. Lower inventories means less risk; it means we sell off less at lower prices, and it improves our gross margin. So, those are the kind of things that could help us as we look to the third and fourth quarters. In addition to that, we’re always going to be a little cautious on our gross margin and our gross margin expectations, there is still a lot of the years to go. Now relative to those investments, they’d be the same kind of investments that we’ve been making in the past. This is the same kind of thing that we’ve done when we’re seeing some room in the gross margin, we’ve taken that opportunity to make investments, particularly, I’d say in two areas, primarily in the marketing side as well as product. It’s also very, very likely that a lot of those investments would be made behind our five largest brands, which is what we’ve been doing, especially behind our three – the three top brands that are in the Outdoor & Action Sports area. But beyond that, to address opportunities, for example in Asia and China specifically, as we see the opportunities there, we would make investments against those opportunities as well. So very consistent with what we’ve done. Again, it’s been very good for us over the past and we’d do the same kinds of things looking forward.

Eric C. Wiseman – Chairman, President and CEO: Robby, we talk a lot about that one of the strengths of VF is the number of levers that we have to pull to keep moving forward. We clearly have places in geographies in the world that are not conducive to additional investment, and we have many that are. Bob mentioned a really important one, which is China. We, as you know, have had fantastic growth. Karl Heinz mentioned that in Asia Pacific, our The North Face business was up 40% in the quarter, and that business is really moving. So, one of the places we might invest would be behind The North Face in China, and we look at each brand in each geography and look at brands like Kipling or The North Face or any of the top five, where we have a lot of momentum. We need to keep that momentum going because there are some markets that just are struggling right now. Does that help you?

Robby Ohmes – Bank of America: Yeah, that’s very helpful.

A Closer Look: VF Earnings Cheat Sheet>>

More Articles About:    

More from The Cheat Sheet