The consumer narrative has taken a hard turn — and the latest results from outdoor and active giant VF Corp. show just how dramatic the plot change is for fashion.
“Consumers are becoming more choiceful and cautious,” said Steven Rendle, VF’s chairman and chief executive officer, in an interview with WWD. “Here in the U.S., inflation [and] geopolitical noise are all causing consumer sentiment to soften.”
That isn’t news in and of itself. Discount giants Walmart and Target sent the signal flare up over the summer, warning that their shoppers were weakening and, in some cases, having to make tough choices between food and other goods as prices on consumer goods hit a 40-year high.
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But where just a few months ago the story from Rendle and VF was one of a softening in its more value-oriented businesses but strength higher up the price chain, now all of its consumers are feeling the pinch.
“We’re seeing it pretty broadly across all income levels,” Rendle said. “Consumers are just getting cautious.”
That caution has now caused VF to cut its outlook again, in part due to the impact of currency fluctuations. Adjusted earnings per share this year are now expected to come in at $2.40 to $2.50 — down from the $2.60 to $2.70 projected in September, the $3.05 to $3.15 projected in July and the $3.30 to $3.40 forecast in May.
That steady move down — unusual for a company as buttoned up, well-funded and consistent as VF — reflects a host of troubles, some specific to the company like the reset at Vans, and some more general.
In addition to the threat of recession and higher prices in the U.S., the European market is expected to slow, especially with high fuel prices from Russia’s war in Ukraine meeting cooler weather in winter. And China’s zero-COVID-19 policies have also restricted access to shopping in the mammoth growth market.
All of that is just proving to be too much for shoppers.
“People are pulling in their horns,” Rendle said.
Many consumers still have money to spend, but appear to be catching a sense of where the economy is going and holding off. For now that’s hard for companies like VF that ramped up inventory amid supply chain back-ups, but could ultimately help an eventual recovery.
“The consumer balance sheet continues to be relatively healthy and that will be true going into next year and could be an element of something that you would look at from a positive standpoint,” the CEO said.
“We continue to see unit sell-through,” Rendle said. “We haven’t really seen a change in that, average unit retail [prices] or what they’re purchasing.”
Instead, the issue is getting people into stores and shopping — so VF is working on driving traffic, particularly at Vans.
In this push, the company is not alone and many brands are beginning to cut prices to keep business moving, a well-practiced move in fashion that can lead to a kind of downward spiral that has consumers seeing discounts as kind of a pre-condition to shopping.
Price cutting isn’t really VF’s game, but it’s a game the company — parent to not just Vans but The North Face, Timberland, Dickies, Supreme and more — is ready to play if necessary.
“It’s definitely getting more promotional and we see that in the wholesale channel,” Rendle said. “We’re absolutely prepared to elevate promotions in our own environment to make sure that we’re getting our fair share of customer traffic [and] conversion….There’s a lot of companies like ours that are sitting on more inventory than they normally would.”
At the end of the second quarter, VF’s inventories were up 88 percent from a year earlier — an unusual increase driven by a $510 million boost in in-transit inventory after VF modified terms with suppliers to take ownership of goods when they’re shipped instead of when they arrive. Accounts payable also increased due to the switch, rising 91 percent.
Against this backdrop VF is working to turn around the Vans business, which is the company’s largest and most profitable brand, but saw revenues fall 13 percent in the quarter to $1 billion (down 8 percent in constant currencies) with a disappointing back-to-school run.
But Rendle stressed the importance of having a portfolio of brands and noted that, excluding Vans, VF’s business grew 11 percent in the first half and is looking to carry that momentum through the rest of the year.
As fashion heads into an uncertain fall, it is facing an unusual set of circumstances with uber-high inflation, war in Ukraine and so on, but it’s an environment something like the kind of economic crisis companies have come to expect.
That at least is an improvement from two years ago, when many people were locked away in their homes.
“COVID-19 was a pandemic that was a health and wellness impact and the world shut down,” Rendle said. “What you see now are the after effects of the pandemic and the impacts of supply chain disruptions.
“It is more normal,” he said. “We know how to operate in this thing, we didn’t know how to operate in a pandemic. Now you have to hunker down and manage your way through this excess inventory position.”
And cut costs.
VF recently eliminated more than 600 rolls — including cutting some open positions and some reorganization — reducing annual costs by just over $100 million on a go-forward basis.
Matt Puckett, chief financial officer, said that while some cuts were made at the brand level, most of them came at the corporate level.
“There’s a lot of things inside an organization like ours that, over time as you expand…you get to the point where you’ve got a lot of things and you’re doing a lot of things in a world-class manner,” Puckett said. “We just make choices, we make sure the things that we spend our time and our energy against are strategic in nature. We have to close our books, we have to file our taxes, but there’s a lot of opportunity for us to be really sharp.”
Despite the surprise cut to the outlook, shares of VF had a mixed day on the market Thursday, trading up for a time before closing down 2.7 percent to $27.45.
But the company has some hearts and minds to win on Wall Street.
Ike Boruchow, an analyst at Wells Fargo, noted “visibility remains extremely low” at the company.
“VF continues to struggle to right-size the Vans business, while their current inventory position coupled with a bloated marketplace heading into holiday is causing more headwinds than was believed just 30 days ago,” Boruchow said. “We struggle to find a bull case to make on the story today — as their negative revision cycle continues and valuation is not nearly as compelling as other names in the space.”