In the highly competitive retail landscape, innovative companies like VF (NYSE:VFC) lead the industry due to their ability to constantly change and adapt to the needs of consumers. However, this ability demands a leadership team that is constantly in tune with current trends.
In the company's latest 10-K filing, VF management highlighted the importance of being able to assess and react quickly to the ever-changing needs of consumers in an effort to maintain brand strength. While VF's management team has performed well in this regard so far, the company's dependence on powerful brand images is one of the largest risk factors for investors to consider going forward.
Brand strength is in short supply
In the general retail landscape, there are not too many brand names that stand out, which makes the handful of those that resonate well with consumers all the more valuable.
VF owns several popular brands, but the company's two biggest names are The North Face and Timberland, both of which figure prominently in VF's signature Outdoor & Action Sports product category.
Over the years, The North Face and Timberland have become increasingly popular among consumers. However, they are only valuable as long as consumers continue to identify with each brand. Any disruption in VF's ability to market each brand correctly could mean serious growth hurdles.
The company's 10-K filing reads:
VF's success to date has been due in large part to the growth of its brands' images and VF's customers' connection to its brands. If we are unable to timely and appropriately respond to changing consumer demand, the names and images of our brands may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider our brands' images to be outdated or associate our brands with styles that are no longer popular.
Such is the nature of any retail business; it is entirely dependent upon the notoriously fickle temperament of the consumer.
VF is one of the best
The problem that VF faces is one that all other retailers face. Some companies are simply better at staying atop consumer trends than others. An example of a retailer that has failed to keep in touch with its target audience is lululemon athletica (NASDAQ:LULU).
The popular yoga-apparel manufacturer has witnessed a severe drop in brand strength over the last year or so. The decline was due to a number of issues, most notably a defective product recall and numerous public relations blunders. The company's problems multiplied to the point where even loyal consumers began questioning their support for the Lululemon brand.
However, for Lululemon and its shareholders, the results were one and the same: slowing growth and a plunging share price.
Fortunately, the management team at VF has done a great job at identifying major trends and capitalizing on them. For example, the company has made numerous acquisitions in the rapidly growing outdoor-lifestyle segment. As a result, the overall company is now weighted heavily toward a product segment that is popular and which resonates extremely well with consumers.
Additionally, both The North Face and Timberland are supported by robust advertising campaigns that encourage consumer engagement. Whether it is through print ads or social media, VF continually fosters the idea of its two signature brands as being made for the adventurous.
A recent example is The North Face's 'Never Stop Exploring' campaign, which uses a combination of impressive aerial photography and the voices of iconic explorers to great effect.
The very nature of the retail business means there is no sure thing for investors. Since consumer trends are constantly changing, a successful company must be able to do so as well.
Some companies are more successful than others at maintaining a lasting and powerful brand image. VF is one of a select few companies to have found success for many years, which makes it one of the safest investments in the retail space.