VF Corp and Others Learn the Importance of Innovation In a Tough Economy

NEW YORK ( TheStreet) -- Memo to consumer products companies: Innovate, or else.

While stocks are surging and consumer confidence remains high, the who's who of consumer companies are finding that to get finicky U.S. consumers to pry open their digital wallets, the products on offer must be ridiculously innovative. If they aren't, those products are probably going to be left collecting dust on the shelves at a Wal-Mart (WMT) or a  Macy's (M). 
"The economy hasn't been a headwind lately; I don't think it has been a tailwind. Within this neutral economy, we have been trying to do whatever we can to deal with [what] we've been handed," explained VF Corp (VFC) President and CEO Eric Wiseman, in an interview.

This neutral economy, which is not too hot nor too cold, has sent VF, owner of household name clothing brands such as North Face, Timberland, Wrangler and Vans, off to invest good sums of money on developing and marketing products a consumer likely doesn't have in his or her closet.

Some of those products come from within VF Corp's North Face outdoor apparel brand, and sport names like "Fuseform" and "Thermoball" that just sound technologically superior to a typical jacket found at department stores. Fuseform's name is a play on how the lines' garments are constructed, from two materials woven into a single fabric. According to VF Corp, the jackets, which could fetch up to $299, are lighter, less bulky, stronger and more durable than competitors' brands thanks to a new manufacturing process.

As for Thermoball, which is made from a new synthetic, lighter-weight down that took VF Corp some time to develop, prices range from $180 to $199 for a men's or women's jacket.  The jackets are easier to move in than traditional down jackets, which are often heavier. 

"These are smaller, more expensive products -- but are technically amazing products," pointed out Wiseman.

Sales of Thermoball products surged by a triple-digit percentage both at department stores and in the company's own retail stores in the first quarter, according to VF Corp. Overall revenue for the North Face brand in its Americas segment rose by a mid-single digit percentage, led primarily by e-commerce and retail store operations.

Several other fresh innovations for VF Corp have popped up in the denim category, where products are sold under the Wrangler and Lee brands. The U.S. denim market was weak in 2013 and 2014 amid consumer interest in slim fit jogger pants and tight-fitting yoga pants. So to get consumers interested in buying jeans again, VF Corp unveiled jeans with stretch fabric for women who were choosing to wear Lululemon (LULUyoga pants. As for men, the Wrangler brand is now hawking denim that boasts new technology to keep men cool.

Wrangler went on to report a low double-digit growth rate in sales within the U.S. mass retail channel, which includes stores like Wal-Mart. As for Lee, sales in the Americas region saw a low single-digit percentage decline due to ongoing competitive activity, mostly in department stores.

The success of VF Corp.'s latest product innovations was front and center in the company's first-quarter earnings and latest guidance.

Excluding the effects of the stronger U.S. dollar, sales rose 8% year over year, and EPS gained 13%. Citing greater confidence in its business trends, the company lifted its EPS growth forecast for 2015 to 14% from 12%, excluding the detrimental impact of currency adjustments.

Said Wiseman on the guidance raise, "The new products we are launching, the takeoff rate on these is really high, which gives us confidence." VF Corp execs hinted at a steady stream of new products arriving in the quarters ahead, perhaps in the area of training, designed to continue to entice choosy consumers.

The company's Mountain Athletic brand, which is a division inside North Face, recently unveiled a training collection. The collection, engineered by a brand that has historically focused on outdoor gear, seeks to tap into the product performance cred of North Face amongst those that sweat it out in Crossfit sessions or more normal gym activities. It puts North Face squarely in competition with the apparel kings of local gyms across the country -- Nike (NKE) and Under Armour (UA).

Wiseman suggested that if people trust wearing North Face to go up Mount Everest in the worst of weather conditions, the new workout threads deserve a look by a person striving to make it through a rigorous gym session.

But the necessity on the part of consumer products companies to innovate doesn't just apply to those selling pricey, weather-resistant jackets.

Take things as simple as Rubbermaid food storage containers, Sharpie highlighters or potato chips.

"I would have expected to have seen more consumer momentum in the U.S. than we have to date -- I would have thought that the reduction in energy ... and gasoline prices would have driven change in the trajectory of (consumer) purchasing behavior," said Newell Rubbermaid (NWL) President and CEO Michael Polk on the company's first-quarter earnings call.

Polk added, "We obviously see positive trends in attitude through the consumer confidence data in the U.S., but has that translated to, or converted to, a difference in actual behavior -- I don't see it yet." The company has not assumed in its financial guidance for the year that the U.S. economy gains too much steam from current conditions, if at all.

That has placed extra pressure on Rubbermaid execs to come up with interesting new products that capture the attention of value-conscious consumers.

The company has introduced "easy find lids" for its food-storage containers, featuring lids that snap together and snap to the bottom of the container.  Say goodbye to cupboards filled with mismatched container lids. At Rubbermaid's Sharpie marker division, it's promoting a highlighter with a see-through tip to better see what is being highlighted. 

Consumers have responded to these product wonders with their dollars. Sales at Rubbermaid's writing segment, excluding the negative effect of currency, rose 9% in the first quarter, led by North America. The food storage business was called out by the company for having "strong growth" in the quarter.

Rubbermaid reiterated its full-year sales and EPS outlook, excluding the impact of currency.

Meanwhile,  beverage and snack giant PepsiCo (PEP) has unleashed a round of new snack products to tempt consumers flush with a couple extra bucks saved at the gas pump.

PepsiCo's Frito Lay division introduced Doritos 3D jalapeno pepper chips and Rold Gold pretzel dippers in the first quarter. The company also took Cheetos -- long known for its tangy orange cheese topping -- and unveiled a new product with cinnamon sugar flavoring. Frito Lay North America's organic volume and revenue increased by 3% and 4%, respectively, in the first quarter. "Frito Lay clearly ticked up another notch," said PepsiCo executive vice president and CFO Hugh Johnston in an interview with TheStreet.

Pepsi reiterated that it expected mid-single-digit percentage organic revenue growth and 7% core constant currency EPS growth in 2015.  Both measures strip out the impact of volatile currency adjustments.

The experiences of these consumer titans sheds light on an interesting paradigm in the U.S. economy right now -- consumers need to be seriously prodded, specifically with a worthwhile new product, in order to spend. Personal spending, according to the Commerce Department, rose a meager 0.4% in March. In February, spending rose 0.2%. Retail sales increased 0.9% in March, the largest gain since the same month a year ago -- it snapped a three-month stretch of declines.

Sluggish spending is happening in the face of many U.S. consumers feeling more optimistic about their financial well-being, which is being supported by steady gains in employment and resilient stock markets. According to the University of Michigan, consumer confidence increased in April to the second-highest level in more than eight years. Claims for unemployment insurance recently hit a 15-year low.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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