Apparel and footwear giant VF Corp. (VFC) is one of the best-run retailers out there, so when it appears to catch a cold, one best pay attention as it may have broader implications.
The case of the sniffles indeed surfaced during the quarter in the company's wholesale business, which is tasked with getting The North Face, Vans, Wrangler/Lee and Timberland products onto the racks of major retailers such as Macy's (M) and Dick's Sporting Goods (DKS) . Sales in the Americas at the North Face and Timberland brands each fell by mid-single-digit percentages. At jeans brands Wrangler and Lee, sales in the Americas each declined by high-single-digit percentages after showing steady growth in prior quarters. Vans was the lone bright spot in the Americas, with sales up by a high-single-digit percentage amid a flurry of product innovation.
From my vantage point, the company's sluggish quarter isn't a VF Corp. issue per se (the market seemed to degree, only sending shares down slightly despite the quarter and guidance reduction). Walk into any mall or sporting goods retailer right now and The North Face brand has its usual best-in-class product. Vans sneakers are rocking in large part because Converse has gotten kind of played out. If anything, Timberland's struggles this year are more indicative of a broader trend toward wearing athletic and casual shoes -- which should worry anyone holding shares in Wolverine Worldwide (WWW) , Columbia Sportswear (COLM) , etc.
So in this regard, VF Corp. remains in a good place in a retail sector chock-full of irrelevant brands. In fact, that place may get better from a profit perspective -- sometime in early 2017 the company will likely hold an investor day under incoming CEO Steve Rendle that outlines a new long-term strategic vision. That investor day could be held after VF Corp. inks some more deals to reshape its portfolio of non-strategic brands (Nautica has to be axed; who wears Nautica?).
But in talking with VF Corp. CEO Eric Wiseman Monday afternoon, I came away concerned on the quarters coming from Macy's, Kohl's (KSS) and other department stores. The concerns extend to the apparel and footwear vendors such as Under Armour (UA) that sell into department stores and sporting goods retailers. (Under Armour is part of TheStreet's Growth Seeker portfolio.)
Here are several takeaways:
Sporting goods retailers -- mostly Dick's Sporting Goods now that mostly everyone else is out of business -- have a good chunk of winter inventory packed away from last year's unseasonably warm winter. Yes, that comfy black North Face hoodie you see on the racks may have been sitting in a stockroom for about a year. As a result of the inventory overhang and desire not to get burned by ordering too much this year, too, sporting goods retailers are not making huge up-front commitments to vendors such as VF Corp. I suspect this will be heard somewhere on Under Armour's earnings call this morning.
The cautious approach to inventory planning due to weather factors (last year and this year in the form of a warm fall) is also playing out at the department stores. But the reality is that the department store space is a hot mess at the moment. Macy's is part retailer trying to earn a couple of bucks this holday season, part hardcore numbers cruncher on what stores it will close after the holiday season. Sears (SHLD) and Kmart are in disastrous shape. And all these companies are also trying to figure out their digital strategies. The fundamental wholesale model that for years has underpinned vendors like VF, Under Armour and others continues to be upended. Hence, you have many of these companies focusing on opening their own amazing-looking retail stores (VF and Under Armour leading the charge here) in order to control their own destiny.
The U.S. consumer continues to be in a "buy it when I need it" mindset, thanks in large part to the advances in mobile shopping and reduced delivery times. There is dwindling desire to buy a winter coat when they first appear at Macy's in September. In truth, the entire supply chain for mall retailers is outdated and a major risk to operating in the age of digital. Companies will have to take a page out of the book of Under Armour and Reebok and start to bring some manufacturing back to the U.S. to shorten lead times.
If there is any upshot to this gloomy near-term sentiment, is that many apparel and footwear vendors are only one good spate of cold weather in the U.S. away from delivering serious fourth-quarter sales and profit upside. The commitments to winter gear have just not been placed to any sizable degree, putting companies such as VF in the position of being a trusted replenishment partner.