Altra's 40% Surge Softens the Blow of Vans' 10% Slide at VF Corp

By James Calloway

Running brand Altra grew revenue 40% in Q2, and Needham analyst Tom Nikic expects that growth to fully offset this year's declines in Vans footwear. That's the number doing the heavy lifting inside VF Corp.'s latest quarter, because the company's biggest problem brand didn't get better.

Vans tumbled nearly 10% year on year to about $548 million, marking its second straight disappointing quarter. The rest of the portfolio carried the load: total VF revenue rose 1% to $2.7 billion, with The North Face up 4% to $1.2 billion, Timberland up 4% to nearly $526 million, and "other brands" — excluding the Dickies workwear label sold about a year ago — up 6% to over $414 million. Altra drove much of that gain.

What's holding Vans back?

Nikic didn't mince words in a Wednesday client note, calling it an "excruciatingly long Vans turnaround."

"While there are still green shoots at Vans, and guidance is for trends to improve significantly in [the second half of the fiscal year], the glacial pace of the turnaround continues to be frustrating," he said. "That said, we believe brighter days are ahead for Vans (eventually) and the rest of the portfolio is strong."

The numbers back him up. VF's direct-to-consumer sales inched up 1% to $915 million, and Vans' global DTC actually grew. But wholesale fell 6% to $1.8 billion, and Vans sat at the center of that weakness.

CEO Bracken Darrell told analysts on Wednesday's call that retailers spent Q2 working through their Vans inventory. Orders for the next two quarters are picking up, he said, and new product is coming — "a pile of new things sitting next to me, and there's a bigger pile coming." He also flagged apparel and women's footwear as open opportunities for the brand.

Why the CEO stays upbeat

Darrell's enthusiasm, at least, isn't in short supply.

"We are super, super excited about Vans. I think we're really on a roll," Darrell said. "I don't expect that level of innovation and renovation to stop. It's going to keep going. Probably it might even accelerate, but it'll keep going right through the end of this year, on into next year, and the year after that."

The company is putting inventory behind that optimism. Net inventories rose 7% compared with a year ago to support demand in the second half of the year, VF said in a press release.

Can Altra cover the gap?

Altra's trajectory gives the story its most concrete twist. The running label notched $300 million in revenue last year and kept growing fast in Q2 "despite a challenging marketplace," Nikic said.

"The brand is growing so fast that the growth in Altra footwear this year is expected to fully offset declines in Vans footwear," he said. A sub-$1 billion brand neutralizing the damage from a $2 billion-plus one is the arithmetic VF investors will watch.

Margins and the balance sheet also cooperated in Q2. Lower product costs and favorable currency exchanges pushed gross margin up 290 basis points to 55.4%, excluding Dickies. Net debt fell by more than $1 billion, a 20% drop from last year.

The takeaway in plain words: VF's smaller brands are winning fast enough to mask Vans losing slowly — and if wholesale orders pick up as Darrell expects next year, the portfolio math gets easier.