VF Corp has been manufacturing uniforms in Kenya for the past two years

VF Corp has been manufacturing uniforms in Kenya for the past two years

US apparel giant VF Corp has confirmed its interest in Africa as a sourcing destination as it continues to create a "balanced portfolio" of countries where it can manufacture its products.

The owner of The North Face and Timberland brands has been manufacturing uniforms in Kenya for the past two years and last November said it was looking to move into Ethiopia, a country that has benefited from increasingly free access to western markets.

Speaking on the firm's earnings call on Friday (24 July), chief executive Eric Wiseman told analysts that VF's supply chain strategy for the last 20 years has always been to have a "balanced portfolio" of countries it can manufacture its products in; not chasing the lowest cost but the best business model for the company.

"As a result of that, we are spread pretty wide in terms of the regions of the world and number of countries that we have facilities in that we either own and operate or that we source from, including a small presence in Africa," Wiseman said.

"Africa is a place that interests us. It is emerging on the scene and it is kind of a new place for the apparel and footwear industry to go to - and we are there in a very small way trying to learn what role that may have in our future."

Wiseman reiterated that cost was not the first factor in deciding on sourcing destinations. Quality, he said, was of primary concern, followed by working conditions.

"We won’t source products in a place that doesn’t have good working conditions for the people that work in those factories," he told analysts. "The third thing we look for is service. Now we have quality of the products, good working conditions and a place that can service our demand and then the last thing we look for is cost, in that order. And to the extent countries can tick those boxes in that order, we go there."

VF Corp's sourcing strategy, The Third Way, has been in force for a number of years and involves the company creating and growing mutually beneficial, long-term relationships with strategic suppliers.

Through the programme, VF engineers and trainers work closely with factory owners to implement manufacturing best practices, including improving safety and productivity and ensuring water, electricity and other resources are used wisely. It also incorporates VF’s approach to employee-focused workplaces to improve morale, and decrease turnover and absenteeism.

Currently, VF has Third Way facilities in Bangladesh, Cambodia, the Dominican Republic and Nicaragua. Its target is to increase production at Third Way facilities to 40% of its total manufacturing.

Wiseman told analysts: "The Third Way is one way to produce in factories that we own and operate; the second is in a factory that’s purely a third-party relationship; and the third way is in a factory where we have a strategic alliance with the factory bringing everything we know about making product into a factory that’s owned and operated by somebody else.

"We have some of those set up around the world and we have a couple now set up in Bangladesh. It is a place where we find we can take a potentially attractive factory in a market that meets all the criteria and make it even better, because we are pretty good manufacturing operators ourselves. We have a lot of tricks up our sleeves and we share them with some of those factories, and the model will continue to see more of that. I can’t speak to what percentages of our products come out of that today but it’s a growing percentage."

Portfolio focus

The comments came as VF Corp reported "strong" earnings and sales growth in its second-quarter, raising its profit guidance for the full year. The growth was driven primarily by sales in the company's outdoor-and-action sports segment and came despite effect on sales of the strong dollar.

VF's outdoor segment represents more than half of the top line and has driven results for the group of late. In the most recent period, outdoor sales grew 9% to US$1.4bn, helping to offset flat sales in jeanswear and a 10% drop in contemporary brands.

Addressing the question of how VF sees its portfolio shaping up in the near future, Wiseman said: "It’s something that we look at all the time and we want to be in a position five, ten years from now where we have a compelling and a relevant portfolio."

More specifically, however, he did comment on the outdoor segment, an area where Wiseman said VF is best, growing the most, and investing the most.

"We invest disproportionately in [outdoor] brand spend and we invest disproportionately in [outdoor] new stores and e-commerce sites because we like the characteristics of them and the stickiness with consumers when we are helping them live out their lives doing the activities they like to do. So, you will see us invest in that type of thing in our portfolio beginning with an emphasis on Outdoor & Action Sports."

After posting a strong first half, VF said it now has a greater level of confidence as it enters the second half of 2015.

For the full-year, the company is forecasting EPS, on a currency neutral basis, to increase 15% compared to an adjusted EPS of $3.08 in 2014. This is an increase from the previous expectation of 14% per share growth provided in May.

With a healthy balance sheet, Wiseman said acquisitions remain VF's number one priority, followed by dividends.

He added: "We have said consistently we won’t let cash accumulate; we’ll return that to shareholders as we’ve done over $1.3bn over the last couple of years. If we had cash accumulate, we would absolutely not let it sit there, we would find a way to return that back to shareholders."