V.F. Corporation

Greetings and welcome to the VF Corporation second quarter fiscal year 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the form of presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allegra Perry, VP of Investor Relations. Thank you. You may begin.

Good afternoon and welcome to VF Corporation's second quarter fiscal 2023 conference call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts referred to on today's call will be on an adjusted constant dollar basis. which we've defined in the press release that was issued this afternoon and which we use as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results in a business. You may also hear us refer to reported amounts, which are in accordance with U.S. GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Unless otherwise noted, results presented on today's call are based on continuing operations. Joining me on the call will be VS Chairman, President, and Chief Executive Officer Steve Rendell, EVP, and Chief Financial Officer Matt Puckett. Following our prepared remarks, we'll open the call for questions. I'll now hand over to Steve.

Good afternoon everyone and thank you for joining our second quarter fiscal 2023 earnings call. I'll provide an operational update for the quarter and for the year to date and Matt will provide a review of our financial performance. I'd like to first start with a few words on the macroeconomic environment, which even since we met for our investor day exactly a month ago, continues to dynamically evolve. While consumer health remains relatively intact across most of our markets, we continue to see global trends result in more choiceful and cautious spending behavior. In North America, we saw a mixed back-to-school result across product categories and today are seeing variable traffic patterns across channels and an elevating promotional environment in most markets. The situation in China continues to improve, although rolling lockdowns have slowed this progress. Despite continued softness in China, we're seeing pockets of growth in this market, led by the North Face, as the brand's global leadership role in the important outdoor TAM continues to influence this relatively under-penetrated market. Outside of China, we're seeing further improvement across the rest of Asia, led by Japan and Korea, which remain highly influential on greater China. And we had another quarter of strong growth across our portfolio of brands in Europe, despite a backdrop of deteriorating consumer confidence. Despite this mixed macroeconomic picture, our portfolio of brands continues to deliver a broad-based performance as consumers continue to prioritize their active lifestyles and lean on our brands to fulfill those needs. And the investments we're driving into our key strategic growth capabilities and platforms continue to support the growth of our brands. For the quarter, our revenue grew by 2% and our adjusted operating income was approximately $380 million. We returned $194 million in cash to shareholders, bringing the year-to-date total to nearly $390 million. As you heard at our recent Investor Day, we are committed to building on those things that have always made us uniquely BF and to growing our highly intentional portfolio of brands. So to start with Vance, our actions to accelerate momentum at the brand are still early. And as anticipated, sales in the second quarter were lower. primarily as a result of a disappointing back-to-school season in the Americas. Q2 sales were down 8%, bringing year-to-date revenue to minus 6% and minus 1%, excluding China. As mentioned at Investor Day, we have a deep and broad bench of strong talent at VF and are now strategically deploying this into the band's business. We recently made two important appointments, adding a new position of Chief Product and Merchandising Officer and bringing a key leader from North Face to head up digital. In terms of Vann's product, innovation in the progression footwear line, which today represents 25% of brand sales, continues to drive an uptick in demand with the new Ultra Range EXO MTE High showing strong initial sell-through. As you heard from Kevin Bailey at Investor Day, it'll take some time for the product-facing initiatives to be introduced. And when they come, we are confident that they will have a positive impact on the brand's results. Traffic to our stores and digital platforms continue to be below historic levels, while the industry-leading conversion in-store remains in line with our historic levels. And our test and learn in-store merchandising sprints are showing early indications of improvement in both stores and online. Our focus in the second half is to prioritize initiatives that drive traffic into our direct channels where we have the opportunity to benefit from our strong conversion rates. I remain confident that we have the right people and the right strategy and will execute to deliver results advanced. Now to the North Face, which continues to deliver strong and broad-based performance and prove its undisputed leadership in the outdoor category with revenue up 14% versus last year. reflecting double-digit growth across all regions and channels and leading to our biggest second quarter ever for the brand, bringing the year-to-date growth to 21%. As you heard from Nicole Otto at the Investor Day, product innovation remains at the forefront of the brand's continued momentum, with a good start to the season in outerwear, which showed strength in softshells, fleece, and lightweight insulated jackets as consumers prepared for the coming fall-winter conditions. In addition to the good performance of outerwear, the continued focus on 365-day apparel in the Americas led to a double-digit growth in D2C for this region. Bags and luggage saw global success with recovering summer travel and a strong back-to-school season driving energy for the brand. And finally, the North Face and Gucci Chapter 3 CoLab launched and drove meaningful brand heat. The brand continues to push boundaries with its technical innovation and was recently recognized by Outside's 2023 Winter Gear Guide, which featured eight, that's right, I said eight products from the North Face as season must-haves. In addition, I'm extremely proud that the North Face Vective Fastback Insulated Futurlite Boot received the Editor's Choice Award and a feature-length review alongside its inclusion in the Best Winter Hiking Boots of 2023. I encourage you to check this out. The North Face continues to deploy innovative tactics in order to deepen its understanding and connection with consumers and to enhance engagement. Explore Pass membership added more than 800,000 new members in Q2, surpassing 15 million members in total. Overall, the brand has strong and balanced momentum and is well positioned to continue to generate long-term sustainable growth. On to Timberland. Q2 sales growth was up 3% versus last year, impacted slightly by shipment timing. Sales for the first half are up 7% versus last year, running slightly ahead of its long-term plans as the brand continues to perform well. You heard recently from Global Brand President Susie Mulder about Timberland's sharpened focus and its paying off. Our new integrated brand and product campaign, Built for the Bold, taps into our cultural relevance and work in outdoor heritage with progressive products like the GreenStride Turbo Hiker, the number one new Fall 22 style across all regions and channels, and the new TrailQuest Hiker, driving growth during launch week. As part of our marketplace strategy, the campaign launched in New York City and London, driving sales, traffic, and strong growth across digital platforms. Overall, the campaign has topped an impressive 1 billion impressions. We continue to see momentum in EMEA with growth over 50% in our community membership month over month and with the business being up nearly 20% in the quarter. We also continue to drive brand heat and attract new consumers with collaborations like Venetta Carter with more than 70% of purchasers in EMEA being new to the brand. And finally, our pro business returned to growth this quarter fueled by strong performance in brick and mortar, and a new campaign focused on bringing new consumers into the skilled trades. In all, a solid quarter for Timberland with momentum as we head into Q3. Finally, to round out the big four, Vickies. Global revenue was down 15% in Q2 and 14.5%. In the quarter, we saw strong growth in EMEA driven by work lifestyle as the brand continues to gain traction in this region. These results were outweighed by further impacts in the Americas relating to our largest wholesale customer, which continues to tightly manage inventory levels. This performance impacted global results by about 10% in the quarter. Outside the value consumer, the brand is healthy, as you recently heard from new global brand president Lance Meller at our Investor Day. The ICOMS business was up mid-single digits in the Americas, with women's being a significant contributor. While overall, Asia-Pac continues to feel the impacts from COVID-related disruption, we continue to make progress in key markets beyond greater China, experiencing significant growth with partners in Japan and successful expansion in South Korea. On the marketing front, the Made in Dickey's campaign, celebrating the brand's 100-year anniversary, continues to support brand awareness with a meaningful growth in impressions, driving organic pickup, on prominent social media platforms. Vickie's continues to expand its appeal with new consumers in all regions, while maintaining strong brand momentum, giving us confidence in our long-range plans for the brand. Turning to the rest of the portfolio in Q2, I'll start with Supreme, where the brand grew revenue by 7%. The fall-winter season has had a good opening. We've dropped the new Yoji Yamamoto collection, as well as the Nike ACG release. and launched the Andre 3000 poster campaign. Stores continue to see strong foot traffic in all regions, with Japan showing particularly good trends leading into the reopening of tourism. We also renovated our Harajuku store with the opening event featuring performances by Blady and Young Lean. Our outdoor emerging brands in aggregate grew by 14%, driven by continued outstanding growth at Altra, which achieved a strong double-digit growth rate in both road running and trail running, and was up mid-teens in the Americas and triple digits in the MEA. The brand's performance has been fueled by continued success of the Lone Peak, as well as launches of key styles like Torn 6, Olympus 5, Outroad, and the Mont Blanc Boa. Smartwool revenue in Q2 grew by low double digits, driven by apparel up in the mid-20 range, which saw continued momentum in base layer and the launch of intranet mid-layer collection Icebreaker was up mid-single digits, led by strong brick-and-mortar performance and the launch of Shell Plus, a 100% natural outer layer, which has already won multiple innovation awards. Icebreaker launched their fourth transparency report, celebrating 95% plastic-free materials and pioneering the journey towards regenerative wool practices. Momentum in our PACS business continued in Q2, with high teens growth for the quarter. driven by strong back-to-school performance and continued recovery in global travel trends. Across the majority of our business, we are delivering strong revenue growth, as the investments behind our strategic growth platforms are yielding positive results. As we have highlighted before, our intentionally built portfolio of brands is generating broad-based growth, excluding Vans, which is early in its work to reset, refocus, and reaccelerate, The remainder of our portfolio grew revenue by 11% in the first half, with outdoor emerging brands continuing to gain scale and our PAX business recovering nicely and seeing an acceleration of growth to plus 25% across the same period. Regionally, our EMEA business continues to deliver consistently strong results, outperforming the broader European marketplace. Our first half revenue was up 16%, highlighting the strength of our portfolio. the relevance of our brands across all markets, and the important strength of our international platforms. The North Face business continues to power forward, including, and importantly, the North Face Group first-half revenue by nearly 30% in Greater China, where most brands inside VF and across the broader market have been impacted by ongoing disruption. And the Dickies brand is continuing to gain momentum across the work lifestyle segment, where sales excluding China We're up about 20% in the first half. We are continuing to actively manage the near-term challenges presented by our largest brand, Vans, the ongoing COVID-related disruption in China, and the broader macroeconomic and geopolitical challenges, which have created an unprecedented level of uncertainty, which all businesses and consumers are navigating. I remain confident in our ability to deliver on our overall revenue targets as we prepare to maximize our potential when the macroeconomic environment improves, leveraging VF's powerful brands, unique business model, and critical strategic growth platforms. In summary, our performance in Q2 reflects a balanced delivery of results and speaks to our resiliency as we adapt to an increasingly variable and softer consumer backdrop. Our purpose-built portfolio of iconic, deeply loved brands continues to benefit from strong tailwinds in the outdoor, workwear, streetwear, and active spaces. We continue to invest behind digital and innovation, with our brands generating a regular cadence of new product initiatives, driving an increasingly closer connection to our consumers. The quality of our performance is a testament to our deep bench of strong talent and the incredible teams whose enthusiasm, hard work, and commitment continue to enable us to deliver results. I remain incredibly impressed and grateful for their ongoing contributions. I will now hand over to Matt to take you through our financial performance. Matt?

Thanks, Steve, and good afternoon, everyone. As Steve mentioned, we delivered a balanced set of results in Q2 as we adapt to a more variable and softening consumer environment. Revenue was up 2% in constant dollar terms and up 4% excluding China. For half one, revenue was plus 4% and plus 7% excluding China. After accounting for a negative FX translational impact of approximately 195 million, nearly double the level seen in Q1, sales were down by 4% on a reported basis in the quarter. Globally, both our wholesale and direct-to-consumer businesses generated low single-digit growth in Q2, and DTC returned to growth at the VF level, despite a lower performance than anticipated from Vans North America. Our adjusted EPS was 73 cents, down 34% or down 27% on a constant dollar basis. About one-third of this reduction versus last year relates to non-operating impacts. Before I unpack the P&L in more detail, I'll give you an update on the operating environment across our primary geographies. While rolling lockdowns continue to disrupt operations in China during Q2, we are otherwise open for business from a COVID standpoint across the value chain. Revenue in the Americas was down 3%, but up 3% excluding vans, against a difficult macro backdrop characterized by softer traffic and components of our D2C network, higher inventory levels across the marketplace, and an increasingly promotional environment. Our outdoor businesses continue to perform strongly, led by the North Face, growing low double digits in the quarter, and continued to generate strong sell-out across channels. Bans performance in the region was down 11%, impacted by lower back-to-school sales, an increasingly cautious approach by our wholesale partners leading to higher cancellations, and lower traffic affecting our direct channels. Finally, Dickey's down 17% was impacted by further inventory adjustments made by our largest third-party retailer. Across the rest of the business, the brand was down low single digits overall, despite similar inventory pressures and other more value-in consumer work accounts. This was helped by double-digit growth in work-inspired products. Our business in EMEA remained strong, despite a further deterioration in consumer confidence and the corresponding impact to traffic levels. Revenue in the region was up 12% in the quarter and by 16% in the year to date, driven by broad-based growth across all brands. with all brands growing and 10 brands growing double digits in the quarter. So DDC and wholesale are up double digits, again signaling the broad-based strength our brands are enjoying in the region. Within wholesale, the third-party digital business was softer, reflecting a more conservative approach to inventory, as well as some cancellations amidst lower traffic. By market, four of the five largest markets generated strong double-digit growth, France, Italy, Spain, and Germany. As anticipated, APAC progressively improved in return to growth, with revenue plus 2% in Q2, in line with our plans, a testament to the strength of our brands and to the efforts of our teams to respond with agility to ongoing market headwinds, particularly in China. The performance in Greater China improved to down 10% in the quarter, in contrast to down 30% in Q1, but continues to be impacted by widespread rolling COVID lockdowns and restrictions, as well as lower consumer spending. This result was largely in line with our expectations for the half. The rest of Asia improved further, growing 30% during the quarter. The outdoor segment continues to experience favorable tailwinds, and the North Face delivered yet another quarter of strong double-digit growth across the region, highlighted by revenue growth of nearly 30% in the first half in Greater China. Now moving on to gross margin, where we were again adversely impacted by a number of factors in the quarter, Our adjusted gross margin was down by 240 basis points. As anticipated, and after two negative quarters, the mixed impact was flat in a quarter. Rate was down 220 basis points, primarily reflecting higher discounts, increased promotional activity, and elevated inventory levels. Higher product costs have been offset by planned price increases. Turning to an update of the supply chain environment, our supply chain is one of our key strategic platforms and a competitive advantage for VF. As you heard from Cameron Bailey at our recent Investor Day, we continue to act with agility and speed, leveraging our scale and diversification to mitigate ongoing headwinds and disruption. Our sourcing and production base remains open and is operating with greater diversification, stemming from a concerted effort to move production closer to consumption where it makes sense. We are still feeling the effects from the eight weeks of large-scale lockdowns in China during Q1 as the impacts work through the system. And while much more stable, we continue to deal with ongoing micro-lockdowns and the impacts to operations in China during Q2. That said, our diversification, scale, and agility are enabling us to adjust as needed to minimize disruption. From a logistics standpoint, we are seeing a further improvement in transit times across the water and dwell times in port, which are contributing to improving overall predictability and reliability. Although it's worth noting that variability continues to remain somewhat elevated as compared to the pre-pandemic environment. Overall, we've begun to reduce lead times from both a production and logistics perspective, although the total cycle time is still higher than historical levels. We anticipate closer to normal lead times as we move into fall 2023. On the cost side, both ocean and air spot rates reduced further during the quarter, but remain substantially higher than historic levels. Finally, our port and route diversification strategy in North America remained in place as we continue to follow the ongoing West Coast labor negotiations. This allows us to more consistently and better serve the consumer, but adds cost in the short term. In summary, while the situation continues to improve gradually, the supply chain overall remains disrupted relative to the pre-pandemic norm. So let me spend a couple minutes on inventory, which of course is the hot topic at the moment. As we mentioned on our last earnings call, during Q1 we implemented a supply chain financing program with the majority of our finished goods suppliers. This results in us taking ownership of inventory at the point of shipment rather than at the destination point, meaning we own the inventory for an additional month or so. There's no impact on cash flow since the point at which payment is due to the supplier hasn't changed. The increase in inventory is offset by an increase in accounts payable, as evidenced by our Q2 result, where payables were up 91% in the quarter. As part of the program, and as of September 1st, VF has increased payment terms with the majority of its finished goods suppliers. This change will begin to benefit VF's overall cash flow later in half two, and this impact has been contemplated in our operating cash flow outlook. Inventory levels are up 88% versus last year, including an increase of about $510 million in in-transit inventories relating to the supply chain financing program. Excluding this factor, inventories are up 58% versus last year. On an organic basis, excluding in-transit versus Q2 of fiscal 20, which is a pre-pandemic comparison, gross inventories are up about 35%. Roughly 75% of the increase versus last year was to right-size the inventory levels from their unusually low levels and to support this year's growth plans. The balance of the increase largely represents higher than planned levels of inventory at Vann's and Dickey's, primarily in core products. Actions are underway to mitigate this and ensure we are well positioned at our fiscal year end, and importantly, as we manage the overall health and levels of inventory towards spring and summer 2023. These include adjustments to forward purchases where possible, controlled sell-down of excess and distressed inventory, and in some cases where the stock is largely replenishment, plans to carry a higher level of inventory in the near term, such as in the case of core Dickies Workwear product. Now to wrap up the P&L. Our adjusted operating margin was down by 440 basis points, reflecting lower gross margins as well as ongoing targeted investments, which we continue to make to advance our key strategic priorities and support our brand's growth opportunities. SG&A was up 7% on a constant dollar basis in the quarter, still above but more in line with our full-year revenue growth outlook of 5% to 6%. Operating expense deleveraged in the quarter, the result of three key factors. First, we continue to invest behind our key strategic priorities. Those investments were up by 9% in the quarter, primarily reflecting initiatives in the digital and technology space and continued investment in demand and product creation in the brands. Second, our revenue growth of plus 2% in the quarter is projected to be our lowest quarterly growth of the fiscal year. And finally, lower profit margins in our highly profitable Vans direct-to-consumer business, reflecting the brand's recent performance. We are continuing to maintain strict cost management against all controllable spend. Moving on to our outlook for the rest of fiscal 23. We are confirming our full-year revenue outlook a plus 5% to 6% constant dollar growth, and now expect about 6.5 points of impact from foreign currency translation on reported revenues. And considering the velocity with which the macro environment and the marketplace has evolved, even since we last updated you just a month ago, we're taking a more cautious approach in planning profitability for the balance of our fiscal year. That said, we're proactively taking near-term actions to drive higher revenue and profit in our half-toe amidst a difficult and highly promotional environment. Specifically, we are leveraging our portfolio strengths and sharing learnings across the organization in order to, first, increase consumer traffic, engagement, and conversion in our direct channels, leveraging better performing tactics across our company, and deploying these to other areas. Second, we'll drive the profitable sale of excess inventory utilizing our own channels first, followed by other important strategic partners. Third, we will work with our brands, particularly those that are performing well, to position the businesses that spring 23 early in our fiscal Q4 where opportunities exist to drive incremental revenue. And finally, we will reduce all non-strategic controllable spend in the year-to-go period. We remain committed to maximizing profitability in the back half of the year in the face of a challenging set of macro factors. Within the details of our fiscal year 23 revenue outlook, a plus 5% to 6% constant dollar growth We are anticipating the North Face will grow by at least 12%, suggesting an implied half-two growth rate of at least 7%. Our VANS guidance for the year to be down mid-single digits implies a low to mid-single digit decline in half-two, a slightly better result than in half-one where the brand declined 6%, driven by easier prior year compares in China. Moving on to our fiscal year 23 adjusted gross margin outlook. Considering a more impactful promotional environment reflecting the heightened and increasing levels of inventory across the marketplace and ongoing U.S. dollar strengthening, we now anticipate gross margins to be down by 100 to 150 basis points versus last year. As a result of the lower gross margin and greater foreign currency impacts, we are lowering our adjusted operating margin guidance to be approximately 11%. Our EPS range is now anticipated to be $2.40 to $2.50, relative to 318 last year. As we've mentioned previously, there are several non-operating factors that are impacting the compare to last year, and these have only increased with the larger foreign currency headwinds. The total negative impact versus last year of these factors, led by FX translation impact of 31 cents, is about 50 cents. Finally, a quick update on our projected cash evolution this year. Our four-year guidance implies continued healthy cash generation over the course of the year with adjusted operating cash flow, excluding the one-time Timberland tax deposit, expected to be at least $900 million. To give you an update on the Timberland tax deposit, the appeal was filed on October 7th, and we made the forecasted payment of $876 million in the early part of Q3, while at the same time drawing down $800 million against a recently established term loan facility with capacity up to $1 billion. We've approved a further increase in the dividend to $0.51 a share as part of our ongoing commitment to return cash to shareholders. Finally, our balance sheet remains sound, with liquidity expected to exceed $2.3 billion at year-end. I'd like to conclude my prepared remarks by reiterating the confidence we have in our strategy and our commitment to delivering superior shareholder returns. We will continue to invest in our portfolio of brands and our strategic platforms in order to further strengthen our business model and position us to drive consistent, sustainable, and profitable growth over the long term. As I said at Investor Day, we are committed to being a growth company consisting of growth brands and are well positioned to perform despite a softening consumer environment and continued elevated uncertainty. Finally, I continue to be impressed with the invaluable contributions and achievements of our teams, which make all the difference in ensuring VF is well positioned to continue to deliver against our strategy. Thank you. We're happy to now open the line and take your questions.

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 at this time. One moment while we pose for our first question. Our first question comes from Michael Benetti with Credit Suisse. Please proceed.

Hey, guys. Thanks for taking our question here. Matt, I want to dig in on some of the actions to drive revenue and profit that you spoke to. I know you gave us a little list there, but maybe just a little bit more on what we'll actually see what you're doing since you introduced the highlights there. And then, you know, as we look at VANS and we, you know, I know you said there's a little bit of an easier compare on China when we look at it on a one-year basis. When we look on a multi-year basis to pre-COVID, it looks like the revenues for vans will need to accelerate a little bit in the back half to get to the down mid-single from where it was in second quarter. Is there any numericals you can give us to help us get the building blocks to what rolls off or what comes online that should help for a better trend on a multi-year basis?

Yeah, sure, Michael, and thanks for the question. It's nice to hear your voice. First, I would say relative to the actions, We're not happy at all about what we're seeing in terms of the profit projection and the approach that we took to adjusting the full-year profit outlook while revenue remains intact. We just see some headwinds on the horizon associated with rising inventory levels and a promotional environment in the marketplace that's going to be all around us. We certainly expect that's going to have some impact on our business. I think we felt like it was important to plan prudently in that regard. But despite that, you know, we're going to work really hard to kind of bring that profitability level back. And that really is what those actions are all about. You know, as it relates to driving traffic and conversion in our own formats, in our own stores, in our own websites, you know, one of the biggest opportunities we see is to really look across, and this is kind of the power of our platform in a sense, look across our businesses and where we see things working well tactically and you know, within digital marketing and, you know, tactics to drive digital commerce. Where are things working well, and how do we deploy those in other brands or other places where we're not seeing the same kind of benefit or the same kind of returns on the tactics that are being deployed today? And, you know, just to be honest, probably no surprise, the North Face, we're seeing, you know, those things work a little better, and Vans is an area where we see opportunity. And so we've got some of our best people across the company kind of working on that. In fact, we've moved a couple people permanently you know, into the van business with obviously great track records in other parts of our company. And Steve may talk a little bit more about that. But we're also using some third parties to help us really do this. So we see opportunity to be more efficient in how we're deploying some of the tactics and some of the spin in certain parts of our business, and we're aggressively and fast after that. We work really hard to kind of leverage the channels at our disposal, first and foremost our own channels, to sell off some of the excess inventories that we see building and We're in a pretty good place overall from an inventory standpoint relative to where we plan to be. We're higher in certain areas, and I think I mentioned that in the comments, in a couple of brands in particular. But as we look across all of our brands, we're going to take opportunity to kind of peel back inventory a little bit, leveraging our own channels, and doing this ultimately to drive some additional profitability. You know, we're looking in a few places where we see the business performing quite well to maybe set floors a little bit early in spring 23 and drive a little bit more revenue in our fiscal year that we would view as incremental and maybe an additional turn as an example. And then lastly, as we always do, it's kind of a broken record in some ways, but I think even more aggressively in the short term, we're looking at all non-strategic controllable spend and are going to reduce as we move through the balance of the year with a with an eye toward driving higher profitability. So those are the actions. I mean, there's a heightened sense of urgency given kind of the environment that we face and our commitment to driving consistent, sustainable, profitable growth. We take that really seriously, and we're after it.

Michael, let me build a little bit here on the traffic and conversion piece. I think an important part here, and this really is leveraging the portfolio and the cross-functional teams, and expertise that we have, not only in brands and functions, but we have assembled cross-functional teams organized in pods, working in very agile ways against four very specific areas of focus. One is around consumer acquisition. How do we acquire that consumer? How do we move that consumer in and drive traffic to our environments? When we have that consumer, how do we retain them? Third would be how do we really enhance that consumer experience? So we have a higher likelihood of moving them through to the fourth point, which is conversion. So very, very specific sets of actions being worked on by these cross-functional pods. And probably at the last point here is this is something that we're taking so seriously is that Matt and I are meeting with these teams on a weekly basis to keep track of, understand, and help take – any kind of roadblocks out of their way so that we can move very quickly and agilely through this process.

Yeah, Michael, and your question about the vans, kind of, you know, the drivers in the back half of the year, I guess a couple of things that, you know, I don't know exactly what kind of period, you know, the period you're looking at and, you know, the stack itself. Our view of that would say if you go back four years, you know, kind of pre-COVID and look at the CAGR, it's pretty consistent in the first half to the second half at the total vans level globally. That's one thing I think that I would say. As we look at our assumptions in the back half of the year relative to what we saw occur in the first half of the year, it's really all driven by an accelerated impact and benefit from China. I will tell you, in fact, we are planning Vans North America to be a little tougher in the back half than actually what we saw occur in the first half. So we're planning pretty cautiously there overall. And if you think about where we are, down mid single digits, which we delivered a down six, I think, here in half one, implies low single to low mid down in the back half of the year. It's really all driven by that acceleration in greater China, which is obviously coming against easier comparison.

Thanks, guys. Thanks, Michael.

Our next question comes from Omar Saad with Effacore Partners. Please proceed.

Yes.

Thanks for taking my question. I had a couple quick brand questions. Is Dickies the only kind of pandemic-winning business, or at least that portion of Dickies, a pandemic-winning business, kind of giving back some of those gains? And then North Face, any early reads on winter demand in places where the temps have started to drop? Any early reads on that appetite for that category as winter starts to set in some places? Thanks.

Stephen, yeah, I can take the Dickies part. Sure. Yeah, Omar, for sure, Dickies is filling the impact here in the first half of the year of, you know, what's going on in the U.S. market, and obviously particularly with our largest retail partner, you know, and the exposure to that value and consumer. To your point, you know, we've done really well from a growth standpoint over the last couple years with Dickies. I wouldn't call it giving it back. We think this is kind of, kind of short-term in nature as some inventories were being right-sized. And certainly that consumer being impacted pretty significantly by the inflationary challenges on food and fuel and those types of energy costs, those types of things, impacting that lower value in consumer more significantly and more quickly, quite honestly, has impacted the work component of that business in the short term. But what we also know is inside the business and inside even that retailer is our brand continues to perform on the floor better than the competitive set. And that business goes away pretty quickly at times when they pull back on inventory. They can shut the brakes pretty quick. At the same time, they can hit the gas pretty quickly as well. And as we come out of this over time, hard to predict how that will play out. But as it does and when it does, we expect the business to kind of pick right back up and accelerate. Meanwhile, the lifestyle part of the business continues to perform incredibly well. And that's really how we think about the long-term growth drivers of this business is getting our fair share of the work component, as you'd expect us to, but really driving outsized growth internationally and here in the U.S. in the lifestyle product. So, yeah, a little bit difficult in the short term, but doesn't change our confidence in where this brand is heading and really kind of the momentum that the business has.

Yeah. And so, Omar, in the North Face, you know, we're – We continue to be very excited and proud of what that team has done, up 21% through the first half and affirming that outlook of 12% for the year, which is slightly ahead of that high single, low double that we committed to just a month ago on the investor day. I think what should be good from a confidence-building standpoint is the growth It's broad-based. We're seeing it across all regions. We're seeing it across all channels, and we're seeing it across all product categories. Certainly, the brand is benefiting from that outdoor TAM and the energy that's really come into that particular part of the market, but it's also benefiting from its number one influencing position and really driving that with strong, authentic product. We talked a lot here. over the last few calls about the commitment to 365 apparel and moving beyond just outerwear, being able to focus on those everyday ready-to-wear apparel items, which is giving us permission to move now more to that active component of the consumer's life that they're asking us to participate in. Our footwear, last year we launched, or a couple years ago we launched Vective, and to be able to now talk about getting... A major award, you know, for the Vective Fast Pack, you know, future-light style is an affirmation of the quality of the team, you know, the quality of their consumer understanding and the differentiated product that they're putting into the marketplace, specifically here with the Vective. Then you see Outerwear continuing to work extremely well. You know, those kind of shoulder-season fleece, lightweight shells, lightweight insulated jackets doing really well. But now as we come into cold weather, yesterday you may have seen it, the cause drop highlighted some of the heritage Nupce, Himalayan parka, I think the mountain jacket was in there and the Denali. And really, I think what you see there is leveraging historical strong styles done in a very brand right way with a partner like cause driving that halo impact that then cascades then across everything they're doing in that snow ski category, the commitment to climb, hike, active, as you look at the online presentation and the re-merchandising of that homepage. This is a brand that now has really anchored its product creation capabilities, strengthening its storytelling capabilities with the addition of our new CMO, a new chief product and merchandising officer that's only going to help us to strengthen and focus that product offer. And then with Nicole's expertise in direct-to-consumer and the online engagement, we think we've got a real winning formula here to continue to drive that long-term, sustainable, consistent growth.

Thanks for the call.

Thanks so much. Our next question comes from Jonathan Komp with Robert W. Baird. Please proceed.

Yeah, hi. Good afternoon. Thank you. I just want to ask maybe another question on vans. I'm curious just your latest view when you look at the geographic divergences and Europe looks like it's holding up so much better. I'm curious what you currently think and make of that trend. And as you think about vans, When would you expect to see signs of progress and what are you looking for in the Americas to know that you're on the right track here?

I think the way you're looking at it is absolutely correct. Our European business in general continues to show exceptional performance and within that is certainly the Vans business. We've talked pretty openly and I think Kevin did a good job unpacking this for everybody in the investor day, but The primary opportunity here is our North America business, and within the North America business, it's our direct-to-consumer channel. And this emphasis we're putting today around traffic and engagement, retention, all the way through to conversion, VANS is squarely in the middle of that. We have a number of test-and-learn actions that have been taking place the last couple weeks. Taking those learnings now, and we'll apply it to the balance of our portfolio. but really looking at what will be required to utilize this strong component of our go-to-market set of options where we've got such strong conversion. How do we start pulling consumers across that lease line in to engage with us on our footwear and apparel story? So number one is the Americas, and within that are North America D2Cs. China is a significant opportunity as well. We've been certainly impacted with the COVID environment there. But again, at the Investor Day, Kevin spoke a lot about really pushing decision-making into the regions and providing more and more latitude for local decision-makings around product, around storytelling, certainly staying within the confines or the framework of the brand strategy. but really giving more freedom and more empowerment to the regions. And you see that taking place in Europe and taking those learnings and applying that now more effectively with our Asia team, specifically in greater China.

Okay, that's helpful. Maybe just one follow-up, a broader question on the margin outlook. Guiding to 11% operating margin for the year now, will be the lowest you reported in some time outside of COVID, maybe the last decade or so. So just, Matt, I don't know if there's any way to think bigger picture about what's temporary in the margin that's impacting it this year versus more lasting. And then are you willing to quantify any of the actions you're taking to tighten up on the cost side? Thank you.

Yeah, great question. I would tell you that we believe there's quite a bit that's impacting us this year that is, I'll say, relatively short-term in nature, impacting the margins. And that's primarily and certainly in the gross margin line. Clearly, there's a little bit of pressure on elements of our fixed-cost base, obviously something like the Vans store base itself and kind of what we're seeing there in the revenues. and kind of the performance in the stores. But from a margin standpoint, we're dealing with higher levels of, I would say, inefficiencies from a supply chain standpoint, freight and how we're moving freight, the extra storage costs given the higher inventory levels is in there that we would say is transitory. But then really the big one is just kind of the assumptions that we're making right now relative to what may be required in the marketplace from a promotional standpoint, both our own channels but also in support of our wholesalers. We talked about here even in Q2 the rate impact largely being the result of higher discounts, some additional promotions already showing up a little bit in our own channels, particularly outlets, and then higher discounts. higher costs as well, and certainly some additional inventory reserves given our elevated inventory. So there's a lot there that I would say, you know, really everything we've just done from a margin standpoint is all tied, in my view, to kind of things that are commensurate with the current market place and environment and are not what we'd expect to see persist moving forward. I think we still are really confident in our ability to drive expanding gross margins over time, our ability to drive higher prices over time to mitigate kind of inflationary product cost increases, which, by the way, we continually and consistently have been able to do. So there's a lot there that's transitory that we would expect that over time will come back to us. As it relates to SG&A, you know, the actions that we recently announced of over 600,000 roles or positions that were eliminated across our company, both role eliminations for open roles and also kind of reorganizations. The overall impact of that on an annualized basis, and we'll get a little bit of that this year, certainly not anywhere near all of it, but it's a bit over 100 million. And this is on top of 100 million that we've taken out really over the last couple years as part of Project Enable, which was a set of actions we announced back during the pandemic. So Over a couple hundred million of costs that will have come out versus the pre-pandemic level that I'll call fixed, kind of G&A primarily, although it expands into other parts of SG&A, but largely G&A. So those are some of the actions, and there's obviously some benefits that will accrue to us next year as we get the full impact of those things hitting our financials. You know, the 11%, I agree, it's not at all where we expect to be or where we want to be, and you'll see us recover pretty quickly as we get past this kind of moment in time.

That's really helpful. Thank you. Thank you, John.

Our next question comes from Laurent Vassisvelstou from B&B Barabas. Please proceed.

Good afternoon. Thanks for taking my question. Steve, Matt, I would love to ask about Supreme. I didn't see how the brand performed on a revenue perspective for this quarter in the slides. Any context on how it performed? What drove that performance? And then maybe a little bit more context, Matt, on the impairment charge. What drove that? And what's your confidence to get to that algo that you called out a month ago of high single-digit, low double-digit growth for the brand? Thank you.

So, Laurent, thanks for the question. I'll go ahead. I'll take Supreme. You know, from a Q2 standpoint, Supreme was up 7%, and this is despite opening up about a week later than planned based on a decision to make sure we hit market with an optimized assortment. I remember us talking quite a bit last year where we came to market with, you know, well under normal percentage allocations against key styles. And this year the team took a very proactive approach to hit the market second half here, running with the right assortment at the right time. So we were up 7%. Even despite some supply chain disruptions, the brand has done well. We expect an acceleration as we move into the second half because we continue to get better and better position from an assortment and product flow standpoint. A couple of wins here. You were able to see these stores when we worked together in Europe, but the Berlin and Milan stores are performing really well. Now as we come out of that COVID environment, we have the luxury of consumers being able to move, tourism becoming more prevalent. Those stores which opened under the cloud of COVID now are performing extremely well. From there, we've got some new stores coming. We talked in my prepared remarks around the Dover Street Market opening up in Beijing. That's the first time Supreme will be represented in a physical, authentic way within the Dover Street Market environment. That's more of a shop-and-shop, but it'll be a great affirmation of the ability to expand or what we talked about, really grow wide. We also... Get a refit to our Harajuku store in Tokyo. It's probably the most prominent, well-known store in the Japan market, and they're seeing just really strong results and energy resulting from that. We have a new store coming in Chicago later this fall, which will be the first new store in the U.S. market in a while, and very excited at what that means. Again, we bring the brand through the physical environment first into new parts of the market where we know consumers are, as we look to continue to provide better and better access. So that geographic expansion continues to be a very important part of the longer-term growth, and being able to get back to seeing that value come into the brand this year is a good proof point to the acquisition thesis coming in here and just gives us more and more confidence in the team's ability to execute.

Yeah, I'll just add one comment. I'll get your question on impairment too, Laurent. But as Susie talked, even at the investor day, really the long-term growth plan is best categorized as a grow-wide strategy, giving more consumers access to this brand. And that really speaks to geographic expansion. And it's kind of core and central to the acquisition thesis itself, leveraging VF's capabilities, VF's platforms, to more easily, more frictionless, not necessarily faster per se, but certainly the opportunity to go at the right pace over time, but to open more doors internationally to give this brand access to more, to give consumers around the world access to this brand. That's the vast majority of what's driving the growth. We're not counting – this is not about – you know, saturating the markets where we are today, right? We're very careful and cautious on kind of the scarcity model, but it's really giving more access to this brand around the world. And that's why we're excited to really start to see the expansion take shape here in the next couple years, you know, in Asia in particular and obviously beyond. So I just wanted to remind you of that. As it relates to the impairment, I guess first and foremost, I would say – It's all driven by what I'll call non-operating factors. You may even remember that earlier this year, we actually made an additional payment, earn-out payment, associated with the acquisition, which obviously says you performed a little bit better than the original set of assumptions, and there was an earn-out. It was a bit lower than we might have originally expected, given the early performance of the business because of some of the supply chain challenges that we saw last year impact the brand. from a COVID standpoint, but we did actually pay a bit of an earn-out, which kind of implies we're on track, and we are on track versus our internal expectations. So what we're dealing with here, and by the way, we wouldn't have even been testing the business from an impairment standpoint if not for what we're seeing in the marketplace relative to interest rates and what that does to the discount rate and how you kind of present value those cash flows. and obviously the currency environment and the U.S. dollar translation from the Japanese yen and also from the currencies in Europe. So for those two factors, we determined we needed to test. We tested, probably not surprisingly, given the fact that it's a fairly recent acquisition and how materially a couple of those things have moved in terms of interest rates and what that means to discount rates as you evaluate those cash flows. you know, we're dealing with the non-cash impairment. But none of that's related to our operating performance or our operating results. And we still feel really good about where we are and everything that Steve mentioned earlier and that I kind of layered on there as well in terms of kind of where we are and the outlook. You know, we feel good.

That's very helpful, Matt. Second question is on gross margins. You lowered it by about 50 to 100 bits. Could you possibly give us the bridge? How much of it is incremental effects, supply chain costs, bottlenecks? We heard from one footwear company talk about it last night. Or is it driven by markdowns? And any context on that would be helpful. And how do we think about the GM for 3Q versus 4Q? Any high-level color would be very helpful. Thank you.

Yeah, sure. So I would say, in our case, Laurent, the smaller impacts, and I'll start with the smaller impacts, and I'm not going to necessarily give it to you exactly in terms of the percentages, but let's say in the neighborhood of probably 25% of the total is a combination of some supply chain inefficiency, mix, and currency. The balance, and so the majority, is the assumptions that we're making on what's going to be required given inventory positions, and the operating environment that we expect that we're going to face as we move through fall and holiday, whether that's discounts to wholesale partners or more aggressive actions that we'll take in our own channels, in particular our outlets. But in some cases, we'll be ready, depending on where the market is and what the competitive set is, to have to be targeted in appropriate ways, even in our full-price channels, as we move through the fall holiday season. And that will certainly vary by brand, and within brands will vary by product category. We'll be very targeted in that. But we expect and we're positioned, as we've kind of guided here, to be able to take those actions when and where necessary. As it relates to kind of your question, third, fourth quarter, you know, I think I'd say a good way to think about the third quarter is kind of down, you know, 50 to 100 basis points and then more flattish in the fourth quarter. And mix actually begins to be kind of a nice tailwind for us as we get into Q4, by the way.

Very helpful. Thank you very much.

Thanks, Laurent.

Our last question comes from Matthew Boss with JP Morgan. Please proceed.

Great, thanks. So, Steve, what gives you confidence in keeping the five to six constant currency top line as we think about the dynamic macro backdrop? And then, Matt, could you elaborate on the heightened inventory and increased promotional activity in the marketplace, maybe relative just to 30 days ago? And specifically, how do you feel about your own inventory levels by brand today?

Thank you, Matt. What gives me confidence? There's quite a bit. I'll rattle off just a few points here. I think coming into where we are beginning of the second half is the consistent performance that we saw across the portfolio, ex-vans up 11% in the first half. and the ability for us to kind of project that to be pretty similar into the second half. Our European business continues to perform well, and that cross-sharing ability within our portfolio, the assistance that they're providing our Asia team as we stand up, in some cases new operating disciplines in our Shanghai office, which is still fairly new, bringing those same disciplines, that same set of integrated marketplace set of capabilities to continue to broaden really their influence. Our China recovery continues, and we expect that the second half will continue to be what we've seen coming out of Q2 and certainly coming into Q3. Our back half isn't reliant on a hockey stick from Vance. We have a much more – balanced view to be able to drive that 5% to 6%. We certainly sit in parts of the market where there's a lot of tailwinds. The active lifestyle needs-based component of our portfolio playing into the outdoor and active TAMs certainly positions us really well. And then having the number one brands in many of those spaces to engage and ultimately drive those high-value experiences gives me a lot of confidence that we've got the right you know, really the right portfolio, you know, driving the right strategy. But most importantly, we have the right people, strong, deep bench of leaders. You saw them, you know, speak to you at the investor day, sitting alongside them in each of one of our businesses, you know, fits strong, capable leaders. You know, we're moving leaders based on the strength of our bench into our Vans business. We're being able to hire extremely high-caliber talent into our North Face business as well as into our Dickies business and Timberland business. So if there's the last thing here, it's the people, driving the strategies and being able to really maximize the tailwinds and that momentum that we've carried out of the first half.

I'll add a couple of quick points just kind of from the numbers side that gives me confidence. One, and probably most importantly, is when you look at what have been consistently our best performing brands over the last several quarters, it's kind of the outdoor segment, right? I mean, generally the outdoor brands have been strong. TNF, obviously the headliner there, but across that group of brands, they're a larger penetration to the total in the back half by a pretty meaningful amount. It's kind of six to eight point increase in penetration to the total. So the fact that our kind of best performing businesses are a larger part of the business in the second half of the year, gives me confidence. And then the other thing is just clearly what we're going to see, the movement we're going to see from a contribution to total from Greater China in the back half of the year versus the really tough first half and particularly the tough Q1. So a couple of data points there that I think are probably helpful as you think about that. As it relates to your question on what are we seeing in the environment, how is it different even in the last four to six weeks? In our view, it's become more promotional. We're seeing it particularly in the Americas and particularly in China. Inventories are building. We're kind of seeing that. We're understanding that as we kind of see what the market is showing. We're clearly paying really close attention to the competitive set and the competitive environment from an inventory and promotion standpoint. And kind of the signals that we see there would tell us that we may be heading into a time where it's going to be more disruptive than we even anticipated, again, just a few weeks ago. And I think, you know, kind of one of the things that's happening is we expect probably a compressed full-price selling window. You know, retailers are being very careful about taking in inventory and, you know, taking advantage of any opportunity to kind of delay receipts, you know, looking for 100% sales when they might normally take a 90% sale, you know, as an example to delay the receipt of something. And then I think our anticipation that retailers they may break earlier and the market itself may just break earlier from a promotional standpoint as we head toward the holidays. That window of full price selling we expect could be further compressed. I think those are a couple of key things, Matt, that we're viewing as we evaluate what the market conditions are and what we think it may bear over the next few months. In our own inventory, as I said, a lot of what we're seeing in the increase certainly set aside the in-transit accounting change there that we've hopefully explained clearly at this point. But set that aside, we're still up a lot for sure. We're up nearly 60% to last year. A lot of that was planned because we were way too low last year. A lot of that is in those brands. where we haven't been able to service the business as consistently as we would have liked, and in some cases we're still not all the way to the finish line there. But we plan much higher inventories to get back to more normalized service levels, and certainly we plan for a pretty healthy growth assumption in a number of those brands. We sit higher than our plan today, for sure, primarily in a couple of brands. Fortunately, a lot of that's in core product. We have pockets of area where we're a little bit higher than we'd like to be across the world. We're still a little bit higher in time than we'd like to be, and that's kind of a comment that might be applicable across a number of the brands. And so we're going to be very targeted and choiceful, but we're going to be aggressive to make sure we are taking advantage of traffic and getting our kind of fair share of the business in an appropriate way. So I think we feel like we have a good plan to manage our inventories back down pretty close to plan at year end. We'd probably still be a little high because there are certain core products. Some of the Dickies products in particular just doesn't make sense to do anything other than just kind of right-size that over time with forward purchases. So we'll be a little heavier in a few places, but we're going to be very focused on leaving this year clean, setting us up for next year to have strong and healthy margins, but also take advantage of the opportunity to generate both top and bottom line over the course of the next several months.

Great. That's helpful, Cutler. Best of luck. Thank you, Matt. Thanks, Pat.

Thank you. At this time, I would like to turn the floor back over to Steve Rindle for closing comments.

Great. Thank you, everybody. Thank you for your questions and, most importantly, for your interest. To close things out, I'd like to reinforce just a few points that I think are important for you to remember before we get the chance to engage with you again in January. The first thing is that, you know, We're going to continue to navigate the many macro challenges that we see today. VF and our brands are sharply focused on taking the necessary actions to drive performance and deliver against our strategy and, most importantly, our financial commitments. I think secondly is our businesses remain to be very resilient with our overall full-year revenue outlook holding. Importantly, we're performing well across our portfolio Certainly without the exception of bands, but the balance of our portfolio growing low double digits in the first half with the line of sight to do the same as we move into the second half. I think this is demonstrated certainly by the fact that we grew constant currency revenue, mostly in our outdoor brands, but the strength that we see in our emerging brands and I think the importance that that shows you of our model and our portfolio strategy. Last, and I would just hammer home that we are going to remain extremely focused on those things that we control. We know what's required to ensure we deliver consistent, sustainable, and profitable growth. We have the right brands, the right strategies, and certainly the right people in the place to get the job done. Most importantly, no one is more determined than this leadership team and this organization to deliver on our expectations. If Again, thank you for joining us. Thank you for your interest, and we look forward to updating you as we turn the corner into next year.

This concludes today's teleconference and webcast. You may disconnect your lines this time, and thank you for your participation, and have a great day.