EVENTS TO WATCH
VFC - Bad Setup Going Forward
Not a good quarter. 2% revenue growth and flat earnings pretty much says it all. While VFC technically hit the quarter, it was an ugly one from an otherwise quality company. This company only beat 2 of the past six quarters. It's no surprise the CFO Bob Shearer (one of the best in the business) retired.
Currency took 600bps off the top line, 70bps off of EBIT margins and cost VFC 13 points of earnings growth. That being said, sales still decelerated on a 1 & 2 yr basis on a currency adjusted basis. This is the first time in 11 quarters VFC did not grow earnings where 2% sales growth deleveraged into flat EPS growth.
Of course currency was a big headwind, but that's no secret. The question is, will the market continue to give global brands a free pass. We hear a lot of concern about NKE's ability to weather the FX market, but based on the guidance coming from NKE, VFC, RL, WWW, and COLM it seems to be the best operator. Despite the biggest FX hit Nike has felt in over five years, the company basically plans to leverage its top line growth rate into earnings by a factor of 2 (+msd sales into +dd eps).
VFC's DTC continues to outpace consolidated sales growth up to 24% of sales from 23% last year, but was up only 5% (11% constant currency) a 700bps deceleration sequentially on the 2yr trend line. Having said that, the company now has over 1300 units globally. And, The North Face DTC was up 20% in constant currency compared to the company at 11%. That’s not good with for wholesale partners. Especially as the company is guiding to another year of 30%+ e-comm growth.
This is the worst SIGMA move we've seen from VFC in many years, with the sales/inventory spread at -5% at 4Q12. This is hardly a bullish margin setup, which makes it even more unrealistic to bank on VFC returning to 'smoke the quarter' mode anytime soon.
COLM - Columbia Meaningfully Outperforming The North Face
Takeaway: This was a mixed bag. On one hand, this was the smallest beat (3%) the company has reported since 4Q12 -- and we all know that this is a company that smokes every quarter come hell or high water. But on the other hand, when we strip out the impact of PrAna, organic sales grew at 4%, and earnings grew at 12% -- which is very respectable from where we sit. It's also important given that COLM appears to be meaningfully pulling ahead of VFC's Outdoor businesses -- which is a rarity.
This chart is extremely telling. It shows the spread in growth for The North Face vs. the Columbia Brand (excl Mountain Hardware, Sorrel, and PrAna). Anything North of the x-axis represents TNF outperformance in a given quarter, while anything below = COLM outperformance. Over the past 5 quarters, COLM has materially outperformed TNF and in 1Q15 comped the comp. The sustainability is a critical issue for us to dig into. There's a call to be made here.
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