ROBIN LEWIS So, right off the bat, how the heck can one person run a $10 to $12 billion company?
ERIC WISEMAN You can’t! VF has been, and I hope always will be, a team sport. When I look at the leadership teams around VF there’s no question that we have really talented people, but we don’t have “superstars.” What we do have is people who work extremely well together, who compliment each others talents, and who are committed to the teams success. That dynamic drives whatever success we’ve had. And, since you know me pretty well, you obviously know that I’m not capable of “running” VF….if I was I’d have a much different balance in my life.
RL So, Eric, the numbers on VF under your watch as CEO speak for themselves, and they would say you’re doing a great job.
EW For about five years now, since we’ve changed directions corporately, we’ve been executing on the right things. So, when you execute against the right things it generally works for you.
RL Going into the last half of this year against a rather negative global and U.S. economic backdrop, do you want to revise your earlier 15% growth projection for 2012, or at least hedge your bets, and if so, in what areas of the business?
EW Well, so far, this year is playing out as we planned it to. We get a lot of advice, of course, as we put together our annual plans. We thought this year we could grow 8% organically – we have some wrap-around from Timberland in our number – and we expected the headwinds to increase as the year went on.
So here we are half way through the year and we grew 10% in the first half, which is right on what we planned. We expect to grow at less than 8% in the last half of the year, to get to an overall 8% organic growth number for the year. I don’t know exactly how it’s going to go for the second two quarters, but we expect it to slow down for the reasons you mentioned. But so far, it has played out about as we thought, and we’re right on track.
RL Given this tough, and sure to get tougher, environment, where are the “white spaces,” the opportunities for VF going forward?
EW China, India, South America, Russia, and Turkey are geographic white spaces where we have not yet brought the full potential of our brand portfolio to life. The next big white space is taking our big brands and making them bigger. The truth is, no one ever thought that a brand like The North Face, or Vans, would be where they are today. When we bought them, The North Face was a $200 million brand, and Vans was just over $300 million. Today, The North Face is closing in on $2 billion and Vans is at $1.2 billion, and they both think they can add another billion dollars in the next five years. These guys haven’t missed a plan since we’ve owned them. It’s an interesting point that just three or four years ago, we had one brand, Wrangler, that was a billion dollars in size; today, we have five: Lee, The North Face, Vans, and Timberland, in addition to Wrangler.
And that didn’t happen accidentally; we really focused investment on brands we thought had broad-reach capabilities, and we really drove those investments. During the recent recession, we thought, “Let’s do something different and increase our advertising spend by $100 million, and put half of it on the global growth of The North Face and Vans, because we didn’t think our competitors would have that size checkbook.” We took our ad spend up from $450 million to $550 million dollars in one year and focused it on a few opportunities that accelerated our growth rates.
The next big white space for us is the really interesting opportunity to develop our smaller brands like Kipling, Napapijri, and Lucy. When we bought them, they were between $50 and $70 million, and Kipling’s well past the $200 million mark now. Ten years ago, VF used to be very democratic with our resources; we took a peanut butter-spread approach across the organization. Four years ago we said, ‘No no no, we’re not going to do that; we may starve a few brands, but we’re going to go where we see the best return for our shareholders, short- and long-term.’ And we’ve really been aggressive in expanding our investment behind a few brands, and a few markets, and it’s worked really well.
RL Why the focus on outdoor action sports brands (now close to 50% percent of the business), vs. more traditional fashion and/or casual apparel?
EW Back in 2004 and 2005, we conducted very thorough strategic planning, working weekly on ‘What should VF look like in five years?’ And that effort was under Mackey’s leadership (former CEO Mackey McDonald).We looked hard at different segments of the industry, and made choices about what our shape should look like five years down the road. One of the things we looked at was the growth dynamics in apparel and footwear. We looked at the earnings multiples of the public companies that were in that space; we looked at the brands, and which brands had emotional connections with their consumers. We looked at the financial metrics, the returns. And out of all that, the outdoor (and action sports) industry became a place that we really wanted to be. Apparel and footwear in that sector are worn by people when they’re pursuing their passions, whether they’re back-country skiing, mountain climbing, hiking with their children, or camping. What they wear matters to them because it has a function, and most importantly, in some cases, a life-saving function; people develop real emotional connections with that stuff. And we said, ‘That’s where we can grow.’ Those brands are sustainable if you can keep the emotional connection strong. Also, it isn’t as dependent on fashion trends, and mountaineering, surfing or skating are global activities, so you can speak to people in many countries. So we decided to acquire and build in that space. At the same time, we decided that the intimate apparel category didn’t fit that model for us. There aren’t very many global intimate apparel brands that have equal success around the world, and that’s why we got out of that business.
RL What fits in VF’s future and why? And how does image-wear fit in your portfolio and what are its growth drivers?
EW We describe ourselves as active portfolio managers and at least once a year we go through a very formal process of looking at each business and identifying the strategic reasons that it should be a part of our future. Image-wear is a huge winner for us; that business is very profitable and generates a lot of cash. Here’s the surprise: VF’s fastest growing brand, for the last six quarters has been Bulwark, which makes flame-resistant apparel. We sell it to the oil and gas exploration industry, power companies, linemen. I honor the brand that grows the fastest in the prior quarter by drinking exclusively out of one of their water bottles. I carry my Bulwark water bottle to every single meeting; I carry it when I speak to audiences – I put it proudly on the podium so people can see the label. And for the last year and a half, I have been carrying a Bulwark bottle.
RL Your direct-to-consumerbusiness grew at a meteoric rate. With this segment expected to continue to grow faster than your wholesale business, particularly as many of your brands are selling into traditional mass and mainstream retail channels that are slow-growing, how long before over 50% of VF Corporations’ business will be direct-to-consumer?
EW We are going to open about 130 to 140 stores this year and our target has been to get 22% of our revenue from our stores. What’s really interesting is when we were at 18% three years ago, we thought we’d get to 22% really quickly. But what’s happened is that our wholesale business, including the wholesale revenues that we make to the partners who own and operate other free-standing stores, has actually been higher than our retail growth. In China, for example, we find partners who can open stores for Vans, Kipling, or The North Face, whatever the brand is. And, when that happens, they are obviously buying the product from us. They lease the building, hire the staff, which we help train, and have their own operating system that runs their stores. But we have a lot of input into the content of the store, including the products, fixturing and in-store point of sale that we either provide or give them the design guidelines. Everything inside the store has to meet our visual standards, so we have a guide for what a North Face store or a Vans store or a Kipling store should look like, and they’ve got to meet that standard. We want it to be transparent for the consumer; it shouldn’t matter to them who owns the store – all that should matter to them is the brand experience. We count all of that revenue as wholesale, and it’s one reason our wholesale growth rate has stayed really robust.
The wild card is the digital relationship we’re building with consumers who want to come to our Websites to hear our stories, and many of them are now buying from us online. It’s a wild card, because we can’t control that. We want to have really rich digital content and engagement with consumers, because we have a lot of brands that resonate with young people, and it’s important that we’re relevant to them. While they’re there, you know, a lot of them want to go shopping. So, all in all we’re talking about 22% to 25% contribution, (from our direct-to-consumer business)
RL Considering that it doesn’t matter whether you call it wholesale or retail since it’s really about controlling the brand and it destiny, how has your business at JC Penney fared during their business decline? And, are you committing to their major shop-in-shop program?
EW The only results we’ve all seen so far are for the first quarter. And we did better in the first quarter than they did overall, so we were a positive in their mix. I don’t know about the second quarter yet. Lee is our biggest business. Our second biggest business there is Vans; our third is our licensed sports business – all the team jersey stuff – and the fourth is JanSport. We have been part of the submission process for 2013 for the in shop in store program, and our hope is that we would be selected for that process; we’re confident that we will be. Ron has a very clear vision for what he thinks the opportunity is for JC Penney, I don’t know that he’s wrong, so we’re engaged, trying to make Penney’s work. Just like we’re engaged with Kohl’s or Macy’s or REI or Dick’s Sporting Goods, trying to help their model work.
RL Why are there no full-price Nautica stores at this point?
EW We had other areas to address at Nautica first, and to the great credit of that team, they have methodically addressed them. We had an outlet operation that wasn’t operating at the right level a year ago; today it is. We had a wholesale business that wasn’t operating at its potential; and today it is. We had a licensing business there, that had a few years of going in the wrong direction; it’s doing very well right now. So we are actively discussing where Nautica’s full-price retail stores should be, and what they should look like, and my expectation would be in the next year we’ll be opening a couple of those.
RL Your supply chain has been a “competitive weapon” for many years according to Mackey, your predecessor. What is your sourcing strategy, the “third way,” and why don’t you use third-party sourcing agents.
EW VF Corporation this year will sell about 450 million units of apparel and footwear. So when you divide that back into 365 days a year, we shipped, every day of the year, we have to sell and ship one and a quarter million pieces a day. So, when we talk about our supply chain as a competitive weapon, it starts with how incredibly diverse and sophisticated we have to be to do that, and serve our customers at a high level. Doing that, we own just 38 of the factories that we operate. We use about 1,500 contractor facilities, not all at the same time, and not all year long. We have 29,000 associates. So it’s a really big, well run, complicated piece of our company.
We use very few third-party sourcing agents, only when they can do something that we can’t, or they can do something at a higher quality and lower cost than we can. We usually find that the service, quality, and cost is best if we control the whole process. And we service our customers at a very high level, with very low inventories because we have this really diverse network. The “third way” is when we utilize proprietary factory engineering and proprietary factory equipment; a lot of equipment that’s in our factories is designed, engineered, and constructed by us. We take some of those skills, and we’ll go to a dedicated partner, so a factory that works only on our products, and we will take what we know about running a factory, some of what we know, not all, because we have a few secrets that we keep to ourselves, and we take some of that, and teach
that factory how to do it.
Because a lot of the sourced factories that we use, whether they be in Vietnam or China or wherever they are, have historically thrown labor at their problems because labor was so cheap. Now that labor’s becoming so much more expensive, we’ve been able to help control our costs by taking some of our factory engineering skills and process skills to those factories so that they can get the kind of labor efficiency that we have in ours. In our factories in Mexico, for example, where we make a lot of our mass-channel jeans, the reason we have those factories is we can’t buy those products cheaper anywhere in the world, we’ve tried. But those factories are so fine-tuned that they produce goods at a lower price than any factory in any place in the world, and that’s why they’re part of the family.
RL According to your annual report, VF Corporation is the only apparel company to engage MIT’s Media Lab in search of innovation. What is your philosophy on looking outside for innovation?
EW We are working really hard on a robust innovation platform around VF to touch every part of the business. And as a result of that, we’ve gone outside the industry, to partner with clever people who are doing things that may not be relevant to the apparel industry. So we are the sole apparel partner of the MIT Media Lab. There’s a lot of times, incredibly smart people in places like MIT are working on inventions, but they don’t always know what their practical use is. We’re trying to see how they could help us in some way; it could be in a product; ,for one of our factories; for our global business technology group – it could be anywhere. We also worked with Robert Redford and the Sundance Group with our brand people on storytelling. We wanted to think about the next emotional level of marketing, and it’s got to get better than a flyer in the Sunday paper that says “Come buy me at 50% off.” There’s got to be a deeper emotional connection. So who’s great at telling emotional stories? The film industry. And so we’ve been out to Hollywood, and worked with directors, and actors, and with Sundance on how to tell a really rich story. How do you grab somebody by the heart, and attract them to you?
RL Can you talk more about innovation?
EW North Face is launching a new performance technology this year called Flash Dry. It’s a mid-layer piece that wicks moisture away from you and it dries in a flash. That’s kind of how it got named. We’ve worked with professional lighting people on how you bring this tech story to life with really clever lighting. We had our retail store people go to to learn what might work in their stores. Another example is our work on water-repellent fabrics in India with our jeans business. Most of the people in India get around on scooters, bicycles and motorcycles, and there’s a funny little season there called the monsoon season. If you’ve ever worn a pair of wet jeans, they’re just not comfortable to be in. So we’ve launched a pair of jeans that flat out don’t get wet; you can pour gallons of water on them, and it is repelled immediately.
RL Finally, what are VF’s major weaknesses and threats.
EW I think the threat is how do we stay nimble and innovative at the brand level, while the brands are part of such a large corporation? That’s something that we have to work at, or we risk destroying the entrepreneurial spirit that built these businesses. We work really hard at letting the brands run their businesses, and interfere with them as little as possible so that they can achieve their own destinies. All our brands have to learn how to stay nimble and innovative.