V.F. Corporation

Greetings and welcome to the VF Corporation third quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal 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, Vice President of Investor Relations. Thank you. You may begin.

Good afternoon and welcome to VF Corporation's third quarter fiscal 2024 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 of our 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. Joining me on the call will be VF's President and Chief Executive Officer, Bracken Darrell, and EVP and Chief Financial Officer, Matt Puckett. Following our prepared remarks, we'll open the call for questions. I'll now hand over to Bracken.

Hello, everyone. Thanks for joining us. It's nice to be here with you for my second earnings call with VF six months in. Before I get started, I'd like to let you know about an important development within my leadership team. Matt Puckett, who's sitting right next to me, will be stepping down as our CFO later this year. He and I have agreed that it's time to make a change as part of the overall transformation efforts we're introducing across the company. Matt will stay on until we appoint his successor to help ensure a smooth transition. I want to thank Matt. His tenure at VF spans almost 23 years, with roles across the organization and around the world. Since my arrival last July, Matt has been a valuable member of the team and an important player in helping to advance our transformation agenda. I really appreciate his contributions and his continued service to VF during the transition. He's also just a great person, and we'll miss him. But not just yet. He'll be here for a while. Moving back to the quarter, or back to today's order of business, first I'll review the quarter, then I'll update you on our four near-term priorities we described in last quarter's call, which we call re-invent, I'll then talk briefly about our newly announced strategic portfolio review, and then I'll hand it over to Matt to cover the financials a little more deeply. Q3 was a particularly disappointing quarter, with total revenue down 17% compared to down just 4% last quarter, where the results did benefit from that timing shift in deliveries. Results were challenged across our brands, including the North Face and the rest of the outdoor brands. The big delta came down to five things. Number one, unseasonably warm weather most of the quarter. The average temperature was 3 to 4 degrees higher than average in the northern hemisphere. Number two, a difficult compare given the operational challenges we faced last year. As a reminder, last year we were late with deliveries, leading to revenues that would have been recorded in the second quarter coming in the third quarter. We corrected these operational issues this year, which led to a tougher compare. Number three, continued America's underperformance. This was the last quarter operating without an America's regional platform, and we expect these changes to result in improved America's results over time. Number four, we also made our results this quarter a little worse by cleaning up vans as we reset our channels. And finally, number five, there was some impact on the cyber incident as we closed the quarter. These are disappointing numbers across the board, and we're acting with urgency to improve performance, but we did not report another quarter like this. We expected a weaker quarter for the North Face, but results were worse than our expectations, impacted largely by the Americas region, while international performance remained strong. Of course, the weather was a factor, as temperatures were substantially warmer than normal throughout the quarter. Of note, in January, the weather got cold, and the North Face returned to growth across all three regions. We believe our performance is strongly held back by the operating model that we're now transitioning away from. Let's talk a little bit about the Americas. We now have our new commercial organization in America's platform in place and are confident this will translate to improved results for the brand and across the rest of our brands. At Vans, the decline looked like it did last quarter by the numbers, but underneath, there's a lot changing. I've been spending more than half my time with our team reviewing strategies, new products, and marketing plans. Product and marketing are obviously every brand's foundation. Brand turnarounds have certain features, Three of them are a clear brand purpose, a product plan that will eventually result in growth, and marketing that weaves them together. If you look at the history of every great brand, a founder creates a trademark and launches its products under it. But as truly strong brands move through time, ownership evolves and almost becomes shared. The best brands learn to share and pay respect to their most important customers, those who are the most influential. While customers don't create products in marketing campaigns usually, They are the ones who drive the success through their ownership and advocacy. During the period from 2015 to 2020, the brand really took off. It got energized and accepted by new groups thanks to cultural trend makers. More celebrities started to wear them. Moms bought them for their kids. We actually took our eye off the core youth audience that had been the lifeblood of Vans. The brand had to evolve, but rather than continue to respect and serve the youth audience that had built the brand, We only fed the trend that grew it rapidly. We largely withdrew marketing to the core youth and instead focused on everyone else. We extended our lineup to lower price points and value stores, and we offered more and more color waves of the same old things to pour more fuel into a fire built on a trend. The trend fuel burned out 18 months ago. The trend moved on. When a brand loses its way, the answer starts at its foundation, its purpose and target audience. So now I'll whet your appetite with my opinion about where we are. We have created a package of a deeply rooted brand purpose, clear segmentation, 18-month marketing plan, and a solid product roadmap. This package is in place. We have a map back to growth for Vans. I'm not ready yet to commit to when the brand will return to growth, but it will. In the meantime, let me talk about a few dynamics we're starting to see emerge. First, we continue to see a strong performance from newer things in the band's product portfolio, which are becoming a larger share of our business. The new school, for example, is still small, but it's growing well, especially among young girls in the U.S. I'm not pointing to that style to suggest it's the turnaround shoe. There won't be a single one, as you will see. We will have a cascade of new products over the next several years, but I am encouraged by how this style is resonating with the very cohort we've lost over recent years. We're resetting the marketplace in Q3 and Q4, changing our marketing, and beginning to launch relevant new products in the coming seasons. I'm energized by the progress at Vance, including with the search for a new brand president. There's more to come. Timberland also sagged under the weight of the warm, high-season weather and underperformance in the Americas. Importantly, our global DTC business was only down a bit single digits in the quarter despite the weather. The important news this quarter was my announcement of Nina Flood as the new global brand president. She is the second strong internal VF leader I've promoted within my leadership team, the first being Martino, who runs a global commercial organization. Nina brings extensive experience across general management, brand marketing, and strategy, with a 20-year career at VF spanning multiple leadership positions. I've been impressed by Nina since the first time I met her six months ago in Stabio. In early Q4, you might have seen the brand's Louis Vuitton-Timberland collaboration created enormous buzz at Paris Fashion Week, and I'm excited about the brand's potential. More to come on that in future calls. To round out our highlights, VF continues to be recognized for our sustainability leadership by MSCI, where as of December 2023, we carried the top rating available for companies for the first time. In fact, we are the highest ranked in our industry. I'm immensely proud of our ongoing commitment to sustainability, and it shows what we're capable of in this business across all parts of it when focused and invested. I'm keenly aware that sustainability performance without company performance is not satisfying. To me, it's not just a good thing to do, but it's an example of what we're capable of in every part of our business. Now we have to work to get our company performance to match that. Now let me update you briefly on reInvent. which prioritizes aggressively four key areas we introduced last quarter, which are, first, fix the U.S., second, deliver the van's turnaround, three, lower our cost base, and four, strengthen our balance sheet. As part of the recently established global commercial structure led by Martino, the America's regional platform is taking shape. Every day this platform improves, and changes have already resulted in giving management greater transparency on the business. and it will take time to bring it up to the standard we have around the world. EMEA and APAC have consistently outperformed our U.S. business, and Martino has imported the same key processes to the U.S. platform, including the areas of key account management, go-to-market execution, merchandise planning, and forecasting. The overall discipline of one approach has been sorely missed in the U.S. The Americas team is expected to be fully in place and operational as we begin the next fiscal year. I discussed the band's turnaround already. I'll just reiterate a few things. Along with the work we are doing on brand purpose, product innovation, and marketing, we're resetting the marketplace to accelerate our progress now. This marketplace cleanup will integrate with products and marketing spun from the same storylines, and that is a new approach relative to the past few years. I'm excited about what's ahead. On costs, we're on track to deliver the $300 million fixed cost savings target, which is entirely within our control. This quarter, we began to simplify and right-size the company's structure, real estate, and others non-strategic areas. I will talk you through some of the numbers here. There's more to do, but we're making very good progress. Reducing debt and strengthening the balance sheet remains a top priority, and during the quarter, we benefited from the reduction of inventories and the recent reduction of the dividend. We're already reducing the net debt substantially this quarter versus last year, and that's before we sell any assets. We've also identified non-core physical assets which will be monetized in the coming quarters. And we're activating a plan to pay down our next two rounds of debt without refinancing. As the next phase of our transformation plan, today we announce a strategic review of our brand portfolio in alignment with the board of directors. This is the next natural step in our turnaround plan as we continue to execute on reInvent. BF has a long history of growth and value creation through evolution of our portfolio. We're objectively assessing what fits and what doesn't as we look to reshape our business toward the greatest opportunities for near and long-term profitable growth and value creation. Looking ahead to the rest of the fiscal year, as we continue to implement actions and make instrumental change across our business, we remain focused and committed to achieving our cash flow objective for fiscal 24. We eliminated revenue and profit guidance for now, but we're committed to cash flow and we're on track to deliver it. Now let me briefly address the cyber incident we experienced in December. It obviously impacted us, but it could have been much worse. I'm super impressed by the quality of work done by our teams across the company. Rarely have I seen a company rally so quickly and so effectively to a cause. Great preparation beforehand, leadership and teamwork during, and meticulous follow-through mitigated the impact. I don't think it could have been handled much better, and I'm really proud of the team. We've instituted a range of additional controls to de-risk the potential for any future incidents. Now I want to summarize what I see VF becoming over the next several years. We're leveraging our strengths, world-class brands and great people, while taking action to make VF leaner, faster, and stronger through proactive measures. As I outlined last quarter, this will take time, but we're making progress quickly and building on what we laid out just a few months ago. The ultimate outcome will be a leaner, more cohesive set of brands, relentlessly focused on the consumer, and will deliver industry-leading innovation in products and marketing, enabled by much more efficient operations. Design, or perhaps a better word for it in this industry for now, innovation, will be at the center of our transformation agenda. Our commercial operations will run efficiently and effectively across all three regions. Each brand will have powerful capabilities to build innovative products, consumers are hungry for with powerful marketing to tell their story. With that, I'll now hand this over to Matt to talk you through the financials.

Thank you, Bracken. Before I get into the financial update, let me take a minute to reflect on my time at VF. I've lived and loved VF for over two decades, and my time with this great company has provided me with many enriching and fulfilling experiences across our business and across the world. I'm thankful for those many opportunities and, more importantly, for the great friendships and and relationships that have come from it. However, there always comes a time for change, and Bracken and I are aligned on this being the right time. While I'll be stepping down in the coming months, in the interim, I remain committed to helping pursue the transformation agenda, leading the finance organization, and supporting the transition. Now, turning to the quarter. Throughout Q3, we remained highly focused on strengthening both our business fundamentals and our balance sheet. At the same time, we are advancing our transformation program, reInvent, with a sense of urgency and resolve to execute against and identify new and additional opportunities to reshape and improve VF. Now I'll start with a review of the quarter, then provide an update on reInvent, and finish off with some thoughts on the year-to-go period. Total revenue was down 17% for the quarter, as both global VANs and the Americas results remained pressured, as expected. On a global basis, wholesale led to a decline of down 28%. while DTC was down 9%. Excluding vans, DTC was down 3%. Before going into a review of the regions and brands, I'll spend a few minutes outlining some items which impacted the quarter. First, Q3 was impacted by the expected timing-related shifts in wholesale, where on-time deliveries this year benefited Q2, while impacting Q3 relative to the prior year period. This had an overall impact of about 2.5 points on total revenue in the quarter, and 5.5% across the global wholesale revenue. Second, as Bracken mentioned earlier, we took proactive measures to accelerate the Vance turnaround by introducing several reset actions at the brand in Q3, which impacted total VF revenue about 1.5% in the quarter and may have a further impact into Q4. These actions are largely focused on ensuring we have a clean marketplace with the right level of healthy inventory, into which we can more effectively introduce upcoming newness while positioning our partners and bands for overall better sell-through and profitability, as well as delivering a more compelling brand presentation to consumers. Finally, results were impacted by the cybersecurity incident in December, which briefly disrupted our ability to fill orders over the pre-holiday period. We estimate the overall impact to Q3 revenue was less than 2%. From an EPS standpoint, the estimated impact was approximately 4 to 5 cents on the quarter, This does not include any potential recovery from cyber insurance. I'd like to take this opportunity to commend and thank our teams, particularly those in digital and technology, who worked tirelessly through the holidays for the truly amazing effort that allowed us to quickly recover and return to servicing consumers and customers. Moving to the operating review by region, America's was down 25% in the quarter. As anticipated, we saw the most pressure in wholesale, which was down 35%. D2C, down 16%, reflected softer sell-throughs throughout the holidays, particularly outside of promotional windows, in addition to weaker sell-through on cold weather and seasonal products, particularly in the outdoor segment. EMEA was down 12%, excluding impact from the wholesale shipment timing, the decline would have been about 7%. We are seeing slowing consumer confidence and greater caution continuing in the wholesale channel. D2C was down 1%, but up slightly, excluding vans, with the north face up mid-single digits. Like the Americas, we also experienced a more challenged sell-through on cold-weather seasonal products across Europe. The APAC region continues its growth path and was up 3% in Q3. Aside from Vans and Dickies, all of our brands that operate in the region were growing, led again by strength in the North Face. Also to note, VF revenue was up 7% in Greater China. Turning to the performance by brand, the North Face revenue was down 11% in the quarter, Excluding the wholesale shipment timing shift, the North Face revenue would have been down mid-single digits. The Americas region results were challenged and our performance fell short of our expectations. After a slow start to the fall-winter season, momentum remained subdued and performance was choppy throughout the quarter. While core best-selling lines continued to deliver strong sell-through, we saw softness in cold-weather items and some seasonal product offerings. The brand remained relatively stronger in international markets. In APAC, momentum continued in the quarter with the brand growing 28% in the region and more than 30% in Greater China. In EMEA, Q3 was down 5%. However, DTC growth continued in the region and was up 6% this quarter. Overall, in EMEA, when looking across Q2 and Q3 combined to neutralize the impact of shipment timing across the quarters, the brand was up high single digits within the region. BAM's Q3 revenue was down 29% and down across all three regions. broadly in line with half one when accounting for the intentional reset actions we took in the quarter to clean up the marketplace and reposition our wholesale channel. These negatively impacted global revenue by about five points in Q3 and may have a further impact in Q4 as we complete the work. Timberland was down 22%, driven largely by the Americas region, where channel inventory and retailer caution remained a headwind. And specific to the brand's assortment, boots and other seasonal product have been challenged this season, Internationally, the business performed relatively better, highlighted by low single-digit growth in APAC. Dickey's results continue to be pressured, with revenue down 17% in the quarter. America has again experienced declines with softer sellout trends in the core work business and specifically in the value-oriented distribution. International markets were impacted by the results in Europe, which were down as a result of wholesale timing shifts into Q2. However, the underlying business continues to be good, and the APAC market continued its reset. Supreme saw its positive momentum from last quarter continue with broad-based growth across regions and benefited from entry into Korea, with the ongoing strong performance in the new store in this market that opened in August. Overall strong sell-through across product categories led to improving profitability. Now, moving down to P&L. Q3 gross margin expanded by 40 basis points to 55.3%, as tailwinds from channel and regional mix more than offset the impact of negative foreign currency transactions. Overall, promotions were about flat versus last year, reflecting the continued elevated levels of promotional activity across our markets, our ongoing efforts to reduce inventory, in particular leveraging our own outlets, as well as the impact of the VANS marketplace reset actions. SG&A was down 5% in constant dollars during the quarter from lower distribution, administrative, and marketing costs, offset partly by higher digital and technology spending. However, the larger revenue decline this quarter drove significant SG&AD leverage of 590 basis points. This more than offset the gross margin expansion, leading to an operating margin contraction of 560 basis points, which underlines the urgency we have in reducing fixed costs. Diluted earnings per share of 57 cents reflects the lower volume and operating margin, along with higher interest expense, all of which was partially offset by a lower tax rate in the quarter. Despite the difficult operating performance, we made progress on our number one financial priority to reduce debt and leverage. In Q3, we delivered an approximate $640 million reduction in net debt relative to last year. This better than planned result was largely attributable to lower working capital and strong execution by our teams to maximize free cash flow. As a result, we achieved a larger than anticipated reduction in inventories, sequentially down over $330 million relative to Q2, and down over $440 million, or 17% at the end of the quarter relative to the prior year. Our ability to meet near-term inventory objectives reflects the agility in the supply chain, a return to more effective sales and operations planning, and improved collaboration across the business. Liquidity at the end of the quarter stood at $2.8 billion, and net debt was $5.2 billion, down from $5.9 billion in the prior year. In the third quarter, the company initiated an in-depth strategic review of all brand assets within the portfolio to ensure we are focused on our greatest long-term value-creating opportunities. We'll provide further updates when appropriate. Now moving on to reInvent, where I want to expand on Bracken's update. First, we made progress in executing our call savings program as we worked towards our gross target of $300 million. The actions we've taken on reInvent around streamlining the organization and optimizing our call structure have begun to bear fruit. In fiscal Q3, we booked approximately $50 million in charges, of which about $20 million were non-cash. These charges are included in our reported results, but excluded from adjusted operating earnings and earnings per share that I just reviewed. The turnaround work remains in progress advance. During the quarter, we took actions to reset the wholesale channel to ensure the brand's market positioning and product assortments are aligned with the brand direction. The impact on revenue in the quarter was approximately $50 million. As part of our priority to reduce debt and leverage, we continue to work hard to right-size our inventories. We expect a further reduction in inventories in Q4 across the broader portfolio. In addition to the cash generated from lower inventories and the previous reduction in the dividend, we have also continued an effort we began last year to monetize non-core physical assets across several areas. Notably, this work now includes the closure of the corporate aviation program. We've begun the marketing process and expect to dispose of these assets over the next few quarters. To the extent the strategic review process results in the divestment of any brands, this would also support this objective. In summary, we're encouraged by the progress we're making on reInvent. We have a lot more to accomplish, the impact of which will be increasingly visible in the coming quarters. Finally, let me bring you back to the near term with some thoughts on the year-to-go period. Our outlook on free cash flow for fiscal 24 is unchanged, and we expect to deliver about $600 million for the year. This is supported by the work we continue to do to reduce inventories, which we now expect to be down at least 10% at year end, reflecting the additional progress we've made compared to previous guidance of down mid to high single digits. We anticipate liquidity to be approximately $2.3 billion at year end, and we continue to expect the second half gross margin for fiscal 24 to be up relative to last year. While we're not providing any additional guidance today on fiscal 24 or fiscal 25, We expect impacts from the following areas for the next several quarters. Fans turn around actions as we take the steps necessary to reposition and reset the brand. Continued caution from wholesalers in our key markets, translating to softer future order books globally, but with the greatest impact in the Americas. The North Face wholesale channel, particularly in the U.S., will remain challenged. And finally, a choppier Americas and European macro environment. With respect to re-invent and the actions underway, we expect actual gross savings within fiscal 24 to be at least $60 million, the majority of which is within SG&A. And we continue to be on track to deliver the $300 million in annualized gross savings, with the vast majority of the savings in place on a forward-run rate basis by the middle of next fiscal year. But keep in mind, in fiscal 25, while we will benefit from the incremental impact from re-invent actions year over year, we will face headwinds from an expected increase in incentive compensation and a more normalized amount of inflation. Looking at all this from a cash perspective, we continue to anticipate the cash costs associated with reinvent actions to be largely offset by net proceeds from the sale of non-core physical assets that I referenced earlier in my comments. This will play out over the next several quarters. Finally, in closing, while our financial results in Q3 were challenged, I am pleased that we were able to expand gross margin reduce inventories, and generate strong cash flow. And importantly, we are reiterating our fiscal 24 cash flow guidance, despite the continued challenged earnings results. The actions we are implementing as part of reInvent are substantial. We have moved from planning to execution across many initiatives, including our call savings program, restructuring actions, and operational improvements. In addition, we've initiated a strategic review of the portfolio, designed to ensure the brands within VF are aligned to both our strategic and financial objectives. While the impacts are not visible in our financial results yet, I'm confident these actions will reset the business and enable us to stabilize and then grow revenue, improve profitability, and reduce debt and leverage, positioning VF to deliver shareholder value creation. With that, we will now take your questions.

Thank you. We will now be conducting 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 that your line is in the question queue. And 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. In the interest of time, we ask that you please limit to one question. Our first question comes from the line of Michael Bonetti with Evercore. Please proceed with your question.

Thanks for taking our question, and I just want to, Matt, wish you well on your next venture. It's been a pleasure talking with you over the years here. I guess, Bracken, I guess the big question on our mind here is what kind of – maybe you can walk us through some of the filters you're looking at as you focus on which of the brands make sense in this portfolio and the strategic review. And then I guess – I'm curious, Matt, maybe you could walk us just a little bit more through the puts and takes on gross margins. If there's any numbers you could offer with, especially the comment that promos were in line to last year, you know, just looking at the revenues and the commentary on bands in particular, you guys seem to be really pushing hard to get through a lot of inventory. It wasn't intuitive to us. The grosses would be, would be positive in the quarter. So maybe just a little help understand the puts and takes there.

Okay. I'll go really quickly, Michael. So first of all, the number one thing is being in a good market. I think So first, I think I said this on the last call, I love businesses that sit in growing markets. I also love businesses that are leaders within their markets. And then the third filter would be, really, do we add value to the business within that market? So I think those are the three primary filters we'll put on this and are putting on this, and we'll have a lot more to update over time.

Hey, Michael, thank you. Great to speak with you today. You know, I'm not going to give exact numbers, but I'll tell you the primary drivers on the margin line. So positives were mixed, and it is a bit larger than what we would normally see, considering the mix of the business, particularly associated with the big decline that we saw in wholesale and the relative strength in international markets and primarily in the APAC region. So mix is a bit bigger number. Freight continues to be a real favorable number for us and a really modest benefit from price. Big offset is FX. FX is almost offsetting that mixed benefit, so that's probably the single biggest drag is FX. This will be the worst quarter for us from an FX transaction standpoint that we'll see. A bit higher inventory reserves, modestly higher product costs. Promotions about flat, really part of your question was there. I think there's a couple things to remember there. We've made a lot of progress across the last 12 months in reducing inventories. We continue to be aggressive about doing that, but we're in a better place than we have been. So while we continue to see a lot of promotional activity in the marketplace, particularly with our wholesale accounts, to some degree, particularly in the Americas, we're a little cleaner in our D2C channels. We're moving a lot of inventory through our outlets. But if you kind of pull up and look at our margins this quarter, our D2C full-price channels really across the board, including in vans, we're a bit better, you know, full-price stores and our online business. And so that's where we're seeing the business start to get healthier more quickly is in our own channels.

Okay. Thanks for all the help.

Thanks, Michael.

Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Hi, Brooke.

Hi, good afternoon. Thank you so much for taking our question. And Matt, thank you as well. I was hoping you could expand on the North Face and the results that you saw in the quarter, as well as your outlook for TNF wholesale in the U.S. to remain challenged. Can you talk to your view of maybe the impacts from underlying macro and weather that we've seen this quarter and what we might see in U.S. wholesale for the next couple of quarters versus the underlying growth opportunity of that brand in calendar 2024 and longer term?

Yeah, I think Matt and I will split this. I'll give you a view of the underlying growth opportunity. I continue to be super excited about the North Face. I think the brand is very strong. All indications are that the brand strength continues to be in place and the activations that we're doing, the various marketplace activities we're doing are working. But underneath it, as you said, we've got a pretty tough marketplace, both in wholesale and the weather was obviously really tough. You want to answer that last part of the question on wholesale, Matt?

Yeah, I think Brooklyn wholesale, I mean, what we're seeing is, you know, we knew coming into the season it was going to be a little more difficult. Order books were down. We've said that all along. And part of that is our own issue from the last year where we didn't really service the business. So we're kind of behind the eight ball coming in. And then weather didn't help. The marketplace remains pretty dynamic and pretty promotional, particularly in the outdoor segment. I think that's kind of what you see and what we see and understand across the market. And I think we're going to see that play out over the next couple of seasons as wholesale partners continue to plan very cautiously. We're seeing that, and that's how we're thinking about planning our business. All that said, the strength of the brand remains really, really good. All the metrics that we look at from a consumer standpoint continue to be good. Our D2C business generally is good. When the weather's gotten better here in January, our D2C business is up in all three regions. In fact, the brand is up in all three regions, but particularly in D2C. I think the underlying drivers of opportunity and the underlying drivers of the business are really strong. The wholesale channel, particularly here in the U.S., is difficult in the near term, and we expect it to continue to be.

Great. Thanks so much.

Thanks, Brooke.

Our next question comes from the line of Adrian Yee with Barclays. Please proceed with your question.

Hi, Adrian.

Great. Thanks so much. Hi, Bracken. Matt, thanks for all your help in the partnership over the years. It's been fantastic. So thanks. I just want to put that out there. You're welcome. My question is going to be on the marketplace cleanup. How much of it was the shift into 2Q and how much of it is going to be an overhang as we go into fourth quarter? And I'm going to split it. So Bracken, for you on that same question, you know, we've seen sort of marketplace actions change. Is it to get out of particular channels, to reduce stores in accounts? We've seen some times where they go pretty deep and the brand visibility kind of goes away, et cetera. So I'm just wondering where the push point is on that. And my last really quick one is, how are you going to be taking advantage of the scape moment at the Olympics? Thank you.

On the Q2, Q3, or I would say Q3, Q4, the reset's kind of equally distributed across both quarters, and most of it is not exiting channels. That's not the reset we're talking about. It's really pulling inventory, unproductive inventory out of those channels so that the productive inventory can move, the faster movers. There is a larger marketplace change that will happen in Europe and to some extent the U.S., but that's going to happen more gradually. In terms of what we'll be doing at the Olympics, we're obviously not talking too much about it yet. We kind of keep that close to our best, but we do have some pretty interesting plans.

Fantastic. Best of luck.

Thank you.

Thank you. Our next question comes from the line of Lorenz Valescu with BNP Paribas. Please proceed with your question.

Hi, Lorenz.

Hi, Bracken. Good afternoon. Thanks very much for taking my question, Matt. Thank you. It's been a pleasure over the years. I wanted to just ask about debt pay down. Bracken, I think you mentioned you're confident about not refinancing the $1.75 billion that's come due, I think, December and the spring of 2025. Maybe can you just, for the audience, can you just help us bridge through how do you get that from a free cash flow perspective? Any update on that? on the PAC business. And then, Matt, you mentioned the non-core physical assets. There's some corporate aviation program that you might sell off. Are there any other assets, physical assets you might sell off? And if that's the case, could you potentially size that up so we can then model the free cash flow over the next few quarters?

Yeah, well, let me jump in and try to take that one. And great to speak with you. I'll start from the back end. The non-core physical assets, which are largely related to the elimination of corporate aviation program, there's also a couple of buildings that are involved as well. It's a meaningful number. I wouldn't give you the exact number, but kind of north of 50 million and maybe pretty close to 100 in the end. So that's kind of what you're looking at. And that will likely play out over the next two to three quarters. I think we'll be able to get most of that done. So that's hopefully helpful there. As it relates to the debt pay down, yes, our objective is to not refinance those two tranches of debt that are due this December and next April. To do that, we obviously need to sell the PACS business, and we're continuing to work toward that. You know, we expanded or opened up the aperture from a – from a marketing standpoint last quarter, and that's been really good. We've got a number of parties who are highly interested and engaging, who are kind of a round of bids, and in the middle of pretty substantive due diligence as we speak. So good progress there. As it relates to the underlying business, we're going to generate a reasonable amount of cash flow this year, and we've kind of confirmed that $600 million. I'd suggest that next year will be a bit stronger than that as we kind of normalize and continue to drive down inventories. We're going to make a lot of progress reducing inventories this year, but given where the business is from a top-line perspective, we'd expect more opportunity next year. I think I've said before that cash flow next year could be kind of in line with who we started this year, and I still think that's kind of a fair assessment.

Very helpful. Thank you very much. Thanks, Laurel.

Our next question comes from the line of Matthew Boss with JP Morgan. Please proceed with your question.

Hey, Matthew.

So, Bracken, could you elaborate on your confidence in VF's future rising, the statement in the release, or maybe how best to gauge sequential signs of progress that you may be seeing under the surface relative to the reported results? And then, Matt, I guess maybe – What's the best way to think about the right structural gross margin multi-year for the business? And what portion of the $300 million cost savings should we anticipate to fall to the bottom line?

Yeah, I'll go quickly on your first question, Matthew. First, I have... I have a lot better transparency on the business today than I did three months ago and certainly six months ago. You know, I have a better sense of where the business is going to land. You know, I feel much more comfortable that I understand where the business is landing in the Americas in a nearer timeframe. You know, despite the terrible quarter we just had, you know, I feel like I have better transparency, especially in the last couple of months than I've had since I've been here. You know, I went through guidance earlier. You know, Matt and I talked through it. We went through guidance because of that lack of transparency, lack of clarity. So that's number one. The second one is I feel just really, really good about the brands. The deeper I get into them, the better I feel. You know, I was excited coming in, and the more I look into what's out there, what we're capable of, and really what the fundamental consumer power of the brands is, I'm really excited about them. Even the ones that some, they probably won't be part of VF, I feel really good about them. The third one is the team. Since I've been here, I think we've promoted two very strong people within VF, and there are a lot more strong people within VF. In fact, we'll be promoting another one to a big job here shortly, which we haven't announced yet, so I can't. But we'll also be bringing in some other people from the outside. In fact, internally, we're announcing one of those today who will be on my staff. So we've just got a lot of really strong people on this team. As much as I hate to see Matt leave, I think the team itself is very strong here, up and down. I'm very excited about it. And I guess the last part is, Matthew, I think you were on our first earnings call where I said, guys, this feels a lot like my last company, what I went into at the beginning. It really does. And I feel about the same at about the same time frame. You hate to see numbers like we have right now. I absolutely despise it. But it's a bellwether, and it intuitively gives me a stronger sense for where we're going. I feel... You don't know you're coming out of it until you bounce, and we certainly aren't bouncing yet, but we will. And I feel more confident about that than ever.

Hey, Matt. In terms of gross margins, so I'm going to be careful here to not guide you to anything, but what I would say is if you kind of step back and look at where we are, and good to see our margins turn positive, and that will continue, I think, moving forward as we think about Q4 and beyond. We're sitting today a couple hundred basis points, maybe even a little bit more, below where we were just a couple years ago, all attributable to promotional activity and higher inventories and inventory reserves, et cetera. You know, we're not assuming that that's going to snap back overnight, but we also expect that there's an opportunity there as we manage the business more effectively, as we have cleaner inventories, you know, and as we obviously benefit from a marketplace that presumably over time will get better. So I think gross margin expansion opportunities are there. Aside from the, you know, the promotional scenario, which, you know, can play out over time, if I just look at the nearer term, right over the next several quarters, you know, mix will continue to be a good guy. You know, we think about channel mix. We think about geographic mix. Inflation, which has been pretty significant this year, is waning. In fact, we see that waning here even in Q4. Won't be as big of an issue next year. Now, notwithstanding the current issue that we're dealing with relative to the cost of freight and what's going on in the Suez Canal, that could dent that a little bit. And that could be not an immaterial number. But overall, inflation in the near term is a lot more manageable. FX will be less of a headwind. And there's a little bit of benefit, not significant. Most of the reinvent benefit sits in SG&A, but a little bit of benefit in gross margin. So there's more, I think, good guys than bad guys in front of us. But the big lever for us and for our businesses over the course of the next several quarters and really the next couple years is how do we just get healthier and how do we sell more at full price and drive down promotions? I think that'll be really critical. As it relates to the second question, I think on re-invent, and we've said we plan to re-invest 25 to 35% of the savings across time, particularly in product and marketing.

Did we cover Matthew?

Thank you. Our next question comes from the line of Bob Drewble with Guggenheim. Please proceed with your question.

Hi, Bob. Hi, Bracken. Just got a couple of quick questions. First, on vans, is there anything more you can share with us on your 18-month plan just around, I don't know, marketing? Are you planning to bring the Warped Tour back, pricing within the brand? Anything along those lines would be helpful. And the second question is just around inventories. With the inventories down, I think it was at 17%, are there any pockets by brand geographically that you're concerned about, either both in your business or at the wholesale level?

Thanks. Thanks, Bob. I'm going to let Matt take the second question, but I'll take the first one. You know, I'm not ready to be too specific on that yet, you know, partly because I know that I've got a new brand president coming in, so we'll have the latitude to make some changes. But what I would say is we've got a great, I mean, I think a strong, you know, kind of very punctuated, plan that integrates the marketing insights and then the marketing programs with the new products that are launching. And I've been through both sides of that equation, the two of them together, two or three times now. And I'm still not done, but I feel good about it, very good about it. We do not have plans to bring back the Warped Tour, although that certainly crossed my mind and we're talking about it a little bit. The Warped Tour was a really powerful thing, but it took time to grow and would take quite a bit of time to rebuild. I think the objective, though, of making sure that we're really deeply in the hearts and minds of that youth audience is mission critical for us.

Hey, Bob. So in inventory, a couple things. I will give you one number here that maybe is really useful. Relative to the 17%, Vans is actually down almost 30%. So Vans is in a really good place, I think, relative to where we sit from a top line in the reset actions in the Vans marketplace. with the actions we're taking, is by and large gonna be about what we would like it to be as we get toward the end of the fiscal year. Maybe just modestly higher from a weeks of supply standpoint in the US, but pretty close. So I think we feel pretty good there. If you look at the overall average of 17, Vans is on the higher side of that. Dickies is on the higher side in terms of reduction. North Face is kind of right on the number, and Timberland and all the other brands are And Supreme is actually probably the only brand where the inventories are modestly higher, and obviously the business is performing well. So I think overall we feel pretty good about where we are. You know, if I say that if there's a pocket or two of inventory, it's certainly coming out of the outdoor segment, coming out of this fall-winter selling season. And I think probably particularly in the Timberland business here in the U.S. is something that we're taking a hard look at. But, you know, relatively speaking, bands in the north face are in pretty good shape.

Thank you, Bob.

Our next question comes from the line of Paul Lejouet with Citi. Please proceed with your question.

Hi, Paul. Hey, thanks. Thanks, guys. You mentioned some of your wholesale partners are being cautious, I think, on their ordering. But curious where you're seeing sell-out performing better than sell-in. What brands, what regions, and how long do you see that dynamic lasting before sell-in and sell-out are more aligned? And then just a quick second question. On the strategic review, is that all being done internally by you guys or are you using some outside consultants? Sorry if I missed it. I'm just curious who's involved in that.

Yeah, I'll take the last one, and I'll let Matthew take the first one. Yeah, the strategic review, it's an internal exercise. We do, you know, we get the advice of the people you would expect us to in that context, but we don't have a consulting firm or someone we're working with. We have a really strong team internally that's doing the analysis, and then we're working with the board on that. We've got, you know, two different groups on the board who are really strong in this area, a lot of portfolio experience there. So that work has been ongoing. It's been going, so... I feel really good about it. Do you want to answer the first question?

I think the most obvious place I would point you to where the sell-out or sell-through is better than the sell-in is in Europe. We're seeing that, I'd say, generally across the board, maybe a little less so in vans, but generally across the board, the business is a little stronger, I would suggest, than maybe what the financial results imply. And I won't be surprised. I don't think you have to be surprised if that doesn't continue for a little bit of time as as wholesalers continue to be pretty cautious. But in Europe, that's true. Certainly, you know, with vans and the reset actions, you know, there's a lot of noise in some of those numbers that distort the wholesale results for vans as we do that. So the sellout is certainly a little bit better, but not good, right? It still continues to be in a place that we're not happy with.

That probably goes without saying, but supreme sellout continues to be very strong.

The only thing I'd say about Europe is inventories in the marketplace across the board are really well positioned. U.S., there's a couple pockets, as I said earlier, I think particularly Timberland where we're probably a little bit higher than we like to be, but Europe is in a good place from an inventory standpoint, as is Asia, by the way.

Got it. Thanks, guys. Good luck.

Thank you, Paul.

Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Hi, Jim. Hello, everyone. Thank you for taking my question. Bracken, I want to dig in on the portfolio review. Your message last quarter was no sacred cows, the boars aligned, et cetera. The announcement of a portfolio review doesn't seem like new news. Can you give us a sense of where you are in the process? Have banks been appointed to shop brands deemed unstrategic? And then when I think about the criteria you've outlined, growing markets, leaders in the markets, it seems kind of a short list of brands that fit. Am I correct to interpret that that suggests a large-scale realignment of the portfolio as possible?

I wouldn't go that far, but I would say you're right that we've been working on this for longer than we've been talking about it. I will try to do that regularly so that we don't just come out with things that aren't really pretty well along. So we are well along the way on this portfolio review. And while we haven't hired bankers beyond the discussion that you know of, we're certainly downstream on discussions on exactly what we do from a portfolio standpoint. And I don't have more to say about that now, but you'll hear more as it comes.

Okay. And then maybe just a question on the mechanics of the van's realignment. Can you help us maybe better understand what that means? What were the specific tactics to try to clean up inventory in the channel? If you could explain more, that'd be helpful. And I'm curious, in that context, how did you miss on sales but over-deliver on the inventory?

Yeah, let me try to answer that one, and then Matt can also help. You know, it's essentially tapping in two steps. The first one was this quarter, the last quarter, the second one will be in the next quarter. And what we're really doing is pulling, you know, kind of the icons that are not selling. That inventory is too high in the channel, so we're pulling that back out or they're returning it. And then we're opening up basically an open to buy for the product that is selling. So it's really just cleaning out the channels. You want to add anything to that, Matt?

And Jim, you're right. There's a little bit of an inventory impact when you bring back returns or accrue for returns in this case. I think in most cases, the product is still kind of flowing and the work is happening, but you're accruing for returns, which has an inventory implication in that entry. So that's in the number. I think overall, we've just been able to aggressively sell through excess inventories, again, in our own outlet stores in particular, as well as leveraging in some cases the off-price channel within the wholesale space, and working aggressively to pull back on buys, which we've said all along we're working to do and probably been a little bit conservative in some of our planning in terms of how that may ultimately play out. So a little bit of favorability there as well.

Understood. Thank you.

Yeah, I'll give you a quick example of the impact it's had. Over the holidays, we had several people tell me they couldn't buy a new school product, because it wasn't available in their sizes yet. The inventory is overstocked inside of Channel. This is before we started doing this reset, so this should clean that up.

Our next question comes from the line of Jay Soule with UBS. Please proceed with your question.

Hi, Jay. Hi, Bracken. Thanks so much for taking my question. Matt, thanks for all the help. Two questions. The first question is, you talked about promoting two people and you're resetting the teams. How far are you along from having the go-forward team really fully set? In other words, how many more months or quarters do you expect to be working on this before you feel like, okay, the team is in place, now it's about executing? And then maybe for Matt, on the free cash flow guidance, it sounds like probably a little bit less net income than you expected before, but more from inventory and it sounds like there's some other asset sales that are impacting that. If you could just sort of give us like the pieces in qualitative terms just to help us do a little math on how the free cash flow guide is the same, that'd be helpful. Thank you.

You know, that's a hard question to answer. I would say we've made a lot of changes already. You know, so our team has evolved forward quite a bit. The structure of the company now has changed quite a bit. Our operating model, All those things are rolling aggressively forward, and as we enter Q4, especially as we move into the beginning of next fiscal year, I think we'll be very far along in terms of having an organization that I think is really poised to win in this turnaround. So I'd say we're pretty far along, Jay, and I'm excited about it. I really feel like we have a team that is here to win, and I think you roll forward a couple months and we'll be there.

Jay, I think how you described it's probably fair, a little bit tougher this quarter than what we anticipated. We talked about that relative to the outdoor segment from a revenue standpoint, but better on the inventory line. I think there's a lot in free cash flow, though, right? And when you look at the year-to-go period, the biggest levers are on the balance sheet, not on the P&L, right? And as you think about not only inventory, but accounts receivable, all the liabilities, et cetera, CapEx. Honestly, the... Sales of assets, I wouldn't suggest that's free cash flow necessarily. We're not counting it that way, kind of below that line, so that's not really in the number. But, you know, we're still in line for the $600 million, a few puts and takes, but we're really encouraged by the inventory, I think, particularly. Great to see where we are at the end of the third quarter ahead of schedule.

If I could just go back to your first question, Jay, and maybe use the question to make a comment about how fast we're moving on the org side. Since I've been here, we have a new head of people, so CHRO, a new head of commercial, which is an internal promotion. We'll have a new head of design by the beginning of the next fiscal year. That's kind of agreed to. Matt will be leaving, so we'll have a new CFO at some point early in the next year. We'll have a new head of Timberland. We'll have a new head of Vance. So we've actually changed a lot. We will have changed a lot of the team here and promoted a lot of people in this company during that time frame. So I'm really excited about the team we have in place, and I think it's going to get stronger and stronger. Okay, thank you so much. Thanks, Jay.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Hi, good afternoon. Hi, Bracken. As you think about the DTC channel, which you talk about as more improved than what you're seeing out of wholesale, how does it differ by digital and DTC? What are your plans for each brand on the physical store side? And is there any color by brand performance differentiation in the DTC channel? Thank you.

You know, I'd say every brand has a sizable DTC e-com. And not everybody, not every brand has a sizable footprint in bricks and mortar. And it really varies around the world. You know, in the, I'll start with Vann's. Vans has a very large, especially U.S.-based brick-and-mortar business as well as an online business. A lot of people may not realize that we're one of the most developed DTC businesses. Our North America business is one of the most developed DTC businesses in all of footwear and apparel. I mean, we're something like 60% of our total business is DTC in the U.S., maybe even higher than that. So it's very developed. I don't expect that to change dramatically one way or the other. I imagine the e-com will grow and the bricks and mortar will shrink relative to each other And hopefully wholesale will begin to grow relative to our own bricks and mortar. So I would expect that will happen. The North Face, we have a great DTC business that can be even bigger. It's mostly e-com in the U.S. We have very little of our own stores, relatively speaking, in the U.S. And that's kind of true in Europe. But in that case, we're adding more stores in Europe probably than we have in the U.S., I think, if I have my facts right. And I would think that will continue. And I'm going to hold APAC out for a second. Timberland has a very developed DTC bricks-and-mortar business in Europe and very, very little in the U.S., which is one of the things that we struggle with here in the U.S. Big business, all wholesale, less control. I don't think we have any plans to change that. But I would say, generally speaking, all those businesses are going to have a larger and larger e-com business. It's a core part of our strategy.

Got it. And then just on the CapEx side for this year, any changes to CapEx and how you're thinking about it going forward?

No, I don't think we have a significant plan to alter the way we're thinking about CapEx. We don't have a big investment plan in CapEx, at least not in our normal one.

Most of our CapEx moving forward will be related to DTC, honestly, Dana. We'll be continuing to support the expansion where it makes sense and the brands that have expansion opportunities. North Face is one. Supreme is one, for sure, and kind of the ongoing refreshment of those stores. Infrastructure-wise, nothing significant planned, and obviously we're working aggressively to kind of reduce our footprint in many cases. It's kind of the opposite.

Thank you, and best of luck, Matt.

Thanks, Dana.

Thank you, Dana.

Thank you. Our final question comes from the line of Ike Borchow with Wells Fargo. Please proceed with your question.

Hi, Ike. Hey, Bracken. Hey, so just two questions for me. I guess maybe Matt, the first one is on North Bay. So just trying to fully understand, I know you're not giving guidance, but on the North Bay specifically, trying to marry the quarter, even excess shifts down mid-single with the comment on January being positive, should we not read too much into that January because of the cold? I'm just kind of curious, any thoughts on the brand trajectory from here? And then Bracken, just not to be too direct, but to Jim's question about the no sacred cows, is it fair to say that the three big brands are not a part of the strategic portfolio review or is everything, are all options on the table right now?

You know, we've been very explicit about saying we're not going to address that comment. Any question about that? We meant it when we said no sacred cow, so we're really taking an objective look at all the brands. And other than that, we'll come back and update you over time.

I think your question on the north face, as we look forward, we expect D2C to grow. And we expect D2C to grow in the fourth quarter, and we expect D2C to continue to grow in Good to see the business bounce back in January, particularly the early part of January, really strong as the weather turned here and to some degree in Europe as well. But what we've said, wholesale is going to be pretty choppy. We've got order book visibility, obviously, for spring and how that will play out and pretty good understanding of what fall is going to look like. So we'd expect that to be more difficult over the next few quarters.

I'm sorry to interrupt. I just don't want to piecemeal out that answer. I think we need to give it in a more complete way later. Oh, I understand. Thanks, Eric. Okay. Okay, that was the last question. All right. Well, thanks to all of you for tuning in. Despite these clearly disappointing results, I am super excited about VF's future, as I said earlier. I think the steps we're taking to turn things around are happening. The implementation is real, and the change is happening fast internally, even though you probably can't feel it. You certainly can't see it yet in our numbers. I've said it before. We have world-class brands and amazing talent. The foundations on which to rebuild are here to have a great business. So I look forward to talking to you again during the quarter and as we close this next quarter and start the next fiscal year. Thanks again. And, Matt, thank you.

Thanks, Brian. Thanks, everyone.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.