VF Corporation's inventory management push during the quarter cost it. Gross margin contracted by 100 basis points to 52.1%, primarily driven by elevated promotional activity to clear excess inventory and the timing of net foreign currency transaction activity, according to the company's financial results.
The company ended the year with owned inventory down 18% YoY, CEO Steve Rendle said on the company's earnings call.
"Anytime you're running lean inventories, that's probably a positive — now the potential negative is if demand picks up more than you think," Edward Jones analyst Brian Yarbrough said by phone. "With all the supply chain issues and bottlenecks we're seeing right now, it's going to be more difficult to meet at-once orders if demand really picks up. But they had way too much inventory, and from an investor standpoint, I'd rather see them miss out on sales. Because anytime you're clearing goods, that puts in the consumer's mind, 'Well why should I pay full price because eventually this will go on sale.'"
VF Corporation and its brands are having to navigate a retail environment that is complicated by the pandemic while also transitioning its business toward consumer sales.
The conglomerate is selling more of its own goods and less via retailers. Direct-to-consumer sales were up 36% in the quarter, with e-commerce up 106%. This year the company expects direct-to-consumer revenue to increase between 38% and 40%, including digital growth of between 29% and 31%.
After taking a hit during the pandemic, in part due to temporary store closures and inventory snafus but also to lifestyle changes, Vans is making a comeback, CEO Steve Rendle told analysts Friday morning. That will continue as stores reopen in Europe, where in some areas locations remain closed due to the pandemic.
"As we think about this year, as those stores reopen, the upside could be very significant," he said. "And we know that [stores] are a very powerful part of the connection to their consumers. This is where we really have a distinct competitive advantage. We have a higher loyalty member engagement."
"In apparel, we expect there to be replenishment in general, aside from pent-up demand," Jane Hali & Associates analyst Jessica Ramírez said by phone. "Even if people aren't fully shopping yet, there's a need for replacements and sneakers is one of them — outside of the running sneakers that people bought last year."
The current supply chain environment has complicated inventory management for many retailers. Longer lead times and shipping delays have made it difficult to get the inventories that companies need to meet elevated demand. While VF Corporation has cut its inventories, others have taken the opposite approch. Walmart is one example of a company that has taken steps to increase its inventory as it works to avoid missed sales.
But the context for VF Corporation is also important. Inventories surged a year ago after its brands were hit hard by store closures.
"We believe that promotional environment will begin to moderate as the impacts of excess inventory and retail consolidation begin to stabilize," CFO Scott Roe said last year after forecasting "high teen inventory growth" in the following quarter. It didn't end up being that bad with inventories up 2% YoY in its first quarter.
Matt Leonard contributed to this report.