MARKET WATCH: VF’s Retail Strategy and Annual Report

VF, though impacted by the recession in the third quarter and expecting it to last through 2009, had a good year in 2008. I’ll go over those numbers briefly, but there’s nothing all that intriguing or educational I feel the need to spend a bunch of time on.

What’s more interesting is how VF describes its direct to consumer strategy. They spend more time than a lot of companies do describing it, but their overall thinking isn’t that different from other brands going direct to consumers (which seems to be, pretty much, all brands). There are some implications and commonly held assumptions that are worth examining.

HERE’S the link to the whole filing. VF Corporation

But first, the numbers:

Total sales for the year grew 5.9% to $7.64 billion. The first three quarters all showed growth, but fourth quarter sales fell 2.2% to $1.91 billion. Gross margin rose from 43.5% to 43.9%. Marketing, administrative expenses rose from 30.1% to 31.7% “due to the growth in our direct-to-consumer business, which has a higher expense ratio.” More on that later.

The effective income tax rate was 28.9% down from 32.3% in 2007, contributing to net income rising 1.9% from $591.6 to $602.7 million.

The balance sheet remains strong, with current ratio having risen from 2.3 to 2.6 and debt to total capital falling (that’s a good thing) from 26.4% to 25.2%. Accounts receivable actually fell even with the increase in sales- a good result. Inventory was up just a little over 1%.

VF has 25 brands, but they do not break out sales for each. I’d like to have some specifics on Vans and Reef too, but they aren’t provided. For reporting purposes, they divide their brands into five coalitions; Outdoor and Action Sports (including Vans and Reef) Jeanswear, Imagewear, Sportswear, and Contemporary brands. If you click on the link above and go to page three, you’ll see the brands listed by coalition.

VF characterizes the Outdoor and Action Sports group as their fastest growing. Its revenue increased 15% in 2008. “The growth in these brands, particularly The North Face® and Vans®, included geographic expansion and the opening of additional owned retail locations. Domestic revenues for our outdoor and action sports businesses increased 11%, while international revenues increased 21%, with the favorable effects of foreign currency accounting for $57 million or 6% of this increase.”

Profits for that group were up 16% in 2008. This coalition had revenue of $2.74 billion and profits of $454 million, the biggest contribution of any of the coalitions.
Direct to Consumer

Worldwide, VF had 698 stores at the end of 2008. These included brands outside of the Outdoor and Action Sports group. In addition, “our licensees, distributors and other independent parties operate over 1,200 retail stores dedicated to our brands. These stores are located primarily in Eastern Europe and Asia.” They currently market seven of their brands, including Vans, online and plan additional ecommerce sites in 2009.

Total retail and ecommerce sales accounted for 16% of 2008 revenues, up from 14% in 2007. “We expect our direct-to-consumer business to continue to grow at a faster pace than VF’s overall growth rate as we continue opening retail stores for our lifestyle brands.” They opened 89 new stores in 2008 and expect to open 70 in 2009.

This is what VF says about their full price retail stores:

“Our full price retail stores allow us to showcase a brand’s full line of current season products, with fixtures and imagery that support the brand’s positioning. These stores provide high visibility for our brands and products and enable us to stay close to the needs and preferences of consumers. The proper presentation of products in our retail stores also helps to increase consumer purchases of VF products at our wholesale customers.”

I can’t imagine any brand with retail stores saying much different. They also mention that their return on investment and gross margin is higher in its retail stores than in VF overall. And then they go into the part about how their outlet stores let them get rid of excess inventory “while maintaining the integrity of our brands.”

Sounds wonderful. You can see why any brand would want to open lots and lots of retail stores. Two problems with it though. First (and I brought this up years ago), opening retail stores is at least partly a response to running out of other ways to increase distribution of your products (for any brand). To me, a strategy of brands opening retail stores is at least partly a recognition that you couldn’t get the growth you needed/wanted from your existing distribution without damaging the brand. So in some ways it’s not a positive strategy. It’s a response to a dilemma that all successful brands eventually face.

Second, there’s the little matter of the economy. We’re not just in a recession. This is a long term change in consumer spending and saving habits. Go talk to somebody who lived through the great depression and ask them about their lifelong spending and saving habits. I am not predicting a great depression with 25% unemployment, but consumer behavior is going to change for at least the medium term.

I don’t think it’s enough for brands to be tinkering with their strategies because of the recession. They should be questioning their fundamental assumptions- including the idea that more retail stores are a source of growth and product differentiation. It just may be that you’ll have to earn money the old fashioned way- differentiating your product and managing distribution cautiously. Accelerating sales growth may not be on the horizon. The stock market certainly seems to think that.

VF, of course, is not exactly a typical action sports company. It’s got 50,000 SKUs over thirty brands. It has 30 of its own manufacturing facilities and works with 1,600 contract manufacturers. Of its 46,600 employees, only 19,900 are U.S. based. Its ten largest customers accounted for 26% of its 2008 revenues and included Kohl’s, Macy’s, J.C. Penney, Sears, Target, and Wal-Mart.

Wal-Mart is its largest customer (almost all sales come from VF’s Jeanswear Coalition) and accounted for 11% of 2008 revenues.

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