V.F. Corporation

press star, then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Allegra Perry, Vice President, Investor Relations. Please go ahead.

Hello and welcome to VF Corporation's third quarter fiscal 2025 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 that are filed regularly with the SEC. Unless otherwise noted, amounts referred to on today's call will be on an adjusted, constant dollar and continuing operations basis, which we've defined in the presentation that was posted this morning on our investor relations website, 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 US GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the presentation 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, Paul Vogel. Following our prepared remarks, we'll open the call for questions. I'll now hand over to Bracken.

Thank you, Allegra. Hello, everyone, and thank you for joining us today. As I open this call... You can see it was a good Q3. What I'm most excited about is what you really can't see yet. Our transformation is well underway, and Q3 was an excellent quarter of progress across our business inside the company. We're systematically remaking the company for long-term value creation, double-digit operating margins, and strong and sustained growth. We showed you in October nine work streams that will essentially bring us to best-of-breed processes – And you know we've reset the entire leadership team. But you might not be aware that we're now resetting the rest of the organization beneath those leaders. So between the work streams we spoke about in October and the organization changes I'm explaining here, we're building new structures and processes to be more effective, more efficient, and in the end, more creative. It's not just about saving money. It's about, in the end, we will be a reinvented company better position to deliver strong and sustainable returns for investors. If I sound energized by this, it's because I am. This is going to create strong value, great products, elevated brands, and a terrific place to grow and learn for our people. Now, enough about what's going on inside the company. Let's talk about what we just reported. Q3 was stronger than we expected. We grew revenue 2% while we significantly improved profitability. The key point to make here is that the actions we've taken so far are delivering results. Now let me call on some important features of the quarter. Virtually every brand was stronger this quarter than last quarter. The North Face and Timberland both grew. Vans delivered another quarter of sequential improvement in trend. Regionally, the Americas delivered another strong quarter of improvement, going positive for the first time in over two years. Our wholesale channel was positive on a global basis. DTC showed progressive improvement again this quarter globally. Gross margins were up 150 basis points and operating margins were up 360 basis points to over 11%. And net debt was down nearly $2 billion. None of these were a surprise to us, but it's a quarter of measurable progress across the board. Now to really understand our trend line, you need to look at our Q3 and Q4 together. While the Q3 results are better than expected, some of what benefited this quarter is outsized wholesale performance due to stronger reorders, lower cancellations, and orders pulled forward by our retail customers into Q3 from Q4. Regardless, we feel really good about the underlying performance for the second half of the year. Now let me give you an update on reInvent. As I indicated at our Q2 Earnings Investor Day Part 1 and the start of this call today, we're making strong progress on our transformation program. You'll recall we have four stated priorities. First, lower our cost base. We're on track to deliver the initial $300 million in gross cost savings with another $55 million generated during Q3. Remember, this is the $300 million we said would be fully actioned by the end of last quarter, so Q2, and fully reflected in the P&L by the end of this coming quarter, so Q4, so by the end of the fiscal year, as we promised. The work is complete. The cost reduction is showing up, and all $300 million will be in the run rate as we exit fiscal 25 as planned. On top of that, you've heard Paul and me say we have no intention of stopping here. As of our October Investor Day, you know why we said that. Because we were, in fact, already working on process and organizational changes that I referenced early in the call that will contribute to unlocking another $500 to $600 million in operating income expansion, half of that in SG&A. That's part of our approach to delivering our medium-term operating margin target in fiscal year 2028 of at least 10% before any growth. So far, so good. Everything's on track. Let me underline a point that might already be obvious to you by now. While the cost side of these work streams will help us return to sustained double-digit profitability, this work is even more important than the bottom-line impact it will deliver. These actions are absolutely instrumental towards enabling growth. They form part of a comprehensive plan to enable the company to be more creative and more powerful in product creation and marketing. These projects enable this creativity through better consumer insight and targeting. as well as the standardization of all the processes we can to best-in-class levels to enable higher impact from good ideas in both revenue and profitability. We also continue to reinvest some of those savings back into product creation and brand building. You'll hear more about these areas at our upcoming Investor Day Part 2. More on that later. The second priority was to strengthen our balance sheet. We made big progress during the quarter with a reduction of net debt of almost $2 billion versus this time last year. Just to reemphasize that, we have reduced the net debt, not including lease obligations, which are required from an accounting standpoint to be included when we call it net debt. So excluding those lease obligations, we've reduced the net debt by almost 40% in the last year alone. So we're demonstrating our commitment to move our leverage ratio down to three ways. First, we divested non-strategic assets. planes, buildings, and of course, Supreme. Second, we reduced our working capital primarily by cleaning up our inventory and making it fresh. And finally, and most importantly, we're improving our operating earnings. You now see how effective this triple threat approach can be to rapidly dropping our leverage levels. There's more to do, but we are squarely on track to continue to deliver the balance sheet to get to our two and a half medium term leverage target. Our third priority was to fix the U.S. As you know, we adopted our global commercial model in the Americas a year or so ago to try to bring its performance up toward the other region's historical performance levels. And it's working. Our America's business improved again relative to last quarter with revenue up 2% in Q3 versus down 9% in Q2. That's the first quarter of growth in over two years. It's early days, so we may not see growth every quarter as turnarounds often aren't linear, but it's good to see green numbers again. And we have a lot, and I do mean a lot, of improvement ahead of our America's business. Finally, deliver the van's turnaround. The brand's overall performance in Q3 was down 8%, a further improvement compared to last quarter, down 11%. I feel very good about the steps we're taking, but sustained turnarounds take time. Underneath the numbers, I want to call out a few things, primarily in our key focus areas of product and marketing. New products continue to outperform our big established franchises. New School remained the number one growth driver and the number two franchise globally, and is in line with our strategy to win with youth and women. We won't rely on just one style to build our business in the future, and we have momentum in our newest styles, both Highland and Upland. Highland and Upland. In many ways, the Vans brand continues to have enormous potential. It was recently named the number three most authentic brand from the Authenticity 500 Index as the ranking of the world's most authentic brands. The message here is that we have a lot of growth potential as we keep improving our execution. Brand elevation is also fertile ground for Vans, as evidenced by exceptionally strong sellout for our OTW holiday collaborations, including the Satoshi partnership, Homegirls collaboration, and Beatrice DuMont. And those two last ones are targeted at women. The New America's regional platform is also starting to deliver. For the holiday period, our U.S. non- Excuse me. For the holiday period, our U.S. non-value channel footwear generated strong, positive sellout year over year for the first time since February of 2022, led by our largest accounts. We're making progress and are more confident than ever of the brand's growth potential. We have a lot of pistons to fire on at Vance. Product, marketing, distribution, brand elevation, and more. And we're putting each one in place. I couldn't be more excited about the initial work done by Sun at Vance, and you'll hear more about it directly from her in just a few weeks. Now let's turn to the North Face, where revenue in Q3 was up 5% versus last year and positive in each region, with even stronger performance in DTC. We're pushing the boundaries with our marketing and our brand building. Notably, the North Face Skims collaboration set a new bar for global collaborations, execution, and impact, and was one of the fastest-selling collections in the history of North Face. We were also thrilled to see our product teams being recognized with multiple awards for design and innovation across footwear and apparel. The North Face core underlying brand history is oversized relative to the size of this business, in my opinion, and I love that position. It means growth is ahead. You'll hear more about the plans for North Face directly from the brand president, Carolyn Brown, at that investor day. Finally, I'll say just a few words about Timberland. The brand was also positive for the quarter, with revenue up 12% versus last year. Performance was driven by core strength across regions, supported by the iconic campaign launched in September. Nina Flood is our new Timberland brand president there, and she'll give you more color on our plans for the next Investor Day. Now looking ahead. The second half of this year is expected to be broadly in line with our expectations. As I said earlier, we did a little better in Q3 driven by the stronger than expected DTC and outsized wholesale performance and expect the Q4 trend to be a little lower relative to Q3. Turnarounds are not linear. For fiscal year 26, the first half of next year could look similar to the second half of this one as we put more of our game plan in place. And overall, we feel terrific about the progress we're making. Now, I want to say a few words about that investor day that I've mentioned several times. Now, at part one, back in October 2024, we unveiled our corporate strategy, showing you how we were rebuilding the company from the ground up. You heard about our focus on cost and creating a solid P&L structure. That's only the start of what we're doing to transform VF. The best is yet to come. And in fact, we're coming back on March 6th, mark that in your calendars, with part two here in New York, which is focused on brand strategy, where you'll get to hear directly from our brand presidents. Of course, they're still relatively new to our business and their roles, but I can't wait for you to meet them. This really is the most exciting part of our transformation, and you'll hear about it in our plans for growth. As you've heard me say before, we're all here, and it's all about growth in the long term. I'm now going to hand over to Paul, who is sitting in front of me wearing a Philadelphia Eagles jersey, shoulder pads, and a helmet, and Vans cleats, which we don't actually sell publicly, but he had them made. You may know Paul is quite an Eagles fan, and they are going to the Super Bowl. And he'll take you through the financials in more detail. And I'll come back at the end for closing remarks.

Paul. All right. Thanks, Bracken. Go birds. As Bracken mentioned, Q3 was another quarter of progress in achieving our key priorities. Turning to the financials in Q3, the quarter delivered further sequential improvement with revenue coming in better than our guidance and with strong profitability. We saw better overall performance in Q3 led by a number of factors, some of which may impact Q4. Looking at both Q3 and Q4 together, we are right on track with where we thought we'd be. Previously, we had say that every quarter of the year would show sequential improvement. However, given the strength in Q3, the balance has changed. Second half of the year is performing in line with our expectations and will show meaningful improvement over the first half of the year. So while we no longer expect Q4 growth to be higher than Q3, the second half growth and overall trends are improving as planned. So what has changed? First, DTC was better than expected in Q3. We had a good holiday season, which was particularly strong in the North Face and Timberland. Second, we saw outsized wholesale performance due to additional reorders, lower cancellations, and a favorable shift to deliveries into Q3 from Q4, a portion of which came from partners taking on inventory sooner than expected ahead of an earlier lunar new year. Third, on reported revenue, FX headwinds were less than forecasted. As a reminder, we had anticipated 100 basis points negative impact in the quarter, which did not occur. And fourth, on costs, we're starting to see the impact from some of our newer initiatives, which positively benefited distribution and IT costs. Now let's go through the P&L. Q3 revenue was up 2% versus last year. This marked the fourth consecutive quarter of sequential improvement in revenue. By brand, the North base was up 5%. Momentum in Greater China remained strong, while the Americas had a better performance over the holiday period. Vans was down 8%, improving from down 11% in Q2. The actions taken last year to clean up our inventory are continuing to deliver benefits, especially on profitability as we right-size the brand's cost structure. Timberland was up 12%, improving from down 3% in Q2. We saw broad-based growth across regions, driven by continued strong momentum in premium boots. Finally, to finish off the top four brands, Hickey's was down 10%, a slight improvement from down 11 in Q2. Moving to the regions, all three were positive in the quarter. The Americas was up 2%, the Mayo was up 1%, and APAC was up 5%. And turning to channel, we improved sequentially in both DTC and in wholesale. DTC was down 2%, while wholesale was up 8%. And on gross margin, as expected, we were up 150 basis points versus last year to 56.3%. This was due to lower product costs and fewer promotions. SG&A dollars were down 3%. We leveraged SG&A by 210 basis points to 44.9% of sales. We are on track to deliver the 300 million run rate of initial gross reinvest cost savings with 55 million of savings generated in the quarter. This led to an operating margin of 11.4%, up 360 basis points versus last year, and adjusted operating income was up 49% versus last year to $324 million. Adjusted diluting earnings per share of $0.62 versus $0.45 last year. Turning to the balance sheet, we continued to make good progress on inventories as we ended Q3 down 14% versus last year. And as we said at the time of our Q2 earnings, we completed the sale of Supreme at the beginning of October and paid down the $1 billion term loan. And as a result, as Bracken mentioned, net debt was down $1.9 billion versus last year. And we're on track towards our medium-term leverage target of 2.5 times that we shared with our most recent investor day. Now, moving on to guidance for Q4. For revenue, we expect Q4 to be down 4% to 6% on a reported dollar basis. We are modeling FX to have approximately a negative 200 basis point impact on our reported growth rates. So on a constant dollar basis, which is the true underlying trend in the business, we are forecasting down 2% to 4%. And if you put Q3 and Q4 together and look at the second half as a whole versus last year, revenue would be flat to down 1% on a constant dollar basis. This represents a progression in trend versus Q1 and Q2 and is right in line with our expectations. Moving down the P&L, we expect Q4 operating income to be in the range of break-even to a loss of $30 million, with gross margin continuing to benefit from lower product costs. and fewer promotions and fewer reserves. SG&A dollars are expected to be up slightly versus last year due to increased investment in marketing and product in Q4. For the full year, we are raising our free cash flow guidance to $440 million, with both better underlying fundamentals and higher asset sales contributing to the improvement. So in summary, we continue to make great progress on our key financial priorities and our turnaround plan. I will now turn it back to the operator for Q&A.

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

All right.

Your first question comes from the line of Michael Donetti with Evercore. Please go ahead.

Okay. Go, Michael. Well, congrats on the Eagles. Congrats on the Eagles, Paul. I'm glad to hear you're excited. Just a quick one on how we're looking at the – I'm happy to hear you're wearing cleats during an earnings call. Just a quick one on the team. Can you just talk, it sounds like there's a little bit of a shift into third quarter out of fourth quarter. And when we look at the revenues, you know, how material is that? Or just maybe a bigger picture, you know, some high level thoughts on what you've been, you know, where we'll see the deceleration, just the broad brushstrokes, regions, channels, and brands where we'll see the deceleration 4Q to help us think about that. And then I guess more importantly, longer term with VANS being such a big swing factor and stabilizing the revenue and margin trajectory here. Talk about what we're going to see as we build to key moments like Sun and her team's first line. You know, it seems like back to school is probably when that starts to come together. And as you focus on shifting from the good defense you've seen here in the cleanup effort to offense, what have you shown to your retail partners already? What kind of feedback, good or bad, are you getting as we start to pivot Vans back to, you know, what you've been talking about for a while here, long-term growth?

I'll take the first one. OK, perfect.

Yeah. So on the Q3, Q4, I would say a couple of things. One, if you think about the outperformance in Q3, it was split between wholesale and DTC. Wholesale is probably a little bit bigger portion than DTC. So on the wholesale side, you know, it was a mix. I'd say probably part of it, maybe half of it was related to some of the pull forward I mentioned with respect to Lunar New Year and some of our partners taking deliveries earlier. And some of it was just reorders based on the stronger performance in the holiday season. So that was the wholesale side. So some of that will impact the wholesale in Q4. And then DTC just performed stronger, and right now we're not necessarily anticipating that similar strength in Q4. It did outperform, so we don't have that same level of outperformance in Q4 that we saw on the DTC side in Q3.

I just want to add one thing on Vans in particular when you think about – and this isn't really Q3 or Q4 – But I'll start with maybe a prelude to the answer to your question. We've got a lot of moving parts underneath Vans in the marketplace. We've closed, I think, 9% of our total doors globally in our DTC channel. We've closed about... Sorry, we closed 14% of our own stores. I think we closed about 9% of the stores of wholesale in the U.S. alone. We've also added stores, so that's a net number. So there's a lot of moving parts underneath that are really reset our business from a commercial perspective to be in a great place as new products flow through there. Now, you asked, you know, when will we start to see what Sun's working on? She'll give you a little glimpse, and we're going to give you a little glimpse of a few things we're working on now at the Investor Day. I've told her, and I'm telling you, I'm going to keep the expectations low for Vance as long as possible because I want to give her plenty of room to operate. She is a real operator. She is deep in the middle of stuff. You'll probably see a few things she's touched back to school, even more at Holiday, and as you go into next year, even more and more. But it's going to take time, you know, as you know. The product development cycles for this business are longer than they should be. We're not going to fix that right away, but we're also working that in the background. So stay tuned, but I feel super good about where we're going with ads. Next question. Thank you, Michael.

Your next question comes from the line of Matthew Boz with JP Morgan. Please go ahead.

Hey, Matthew. Great, thanks. Hey, so maybe a two-part question. On the top line, could you speak to recent wins at Timberland, progress you're seeing at North Face, maybe relative to some of the softer trends at Dickies? And then just on the overall progression, if we took a step back, maybe could you just elaborate on comments I think you made around the front half of 26 looking similar to the back half of 25?

Yeah, absolutely. So Timberland, you know, Timberland, there's just a lot of excitement. You know, I think you probably can. I don't know if you follow us close enough. And many of you do. You probably can see it. We've done some really the Timberland. I would say the Timberland brand building activity started the first year I got here with the anniversary of the famous yellow boot. And it's coinciding with hip hop. And we quietly, although in a very cool way, did a bunch of cool stuff that year. Some cool collaborations. We created a movie. But nobody really heard it. But I would say some of the key players in the Influencer Award heard it, and it picked up steam and kept picking up steam right through the year. And, you know, then we did the Louis Vuitton – uh collaboration and and batega veneto just most recently and you know so there's just a lot of good momentum there and the whole game plan there is obviously you know get get as much as you can out of this yellow boot franchise but also expand and roll through with other franchises and contrary which might not think might think you know the yellow boot's not not 70 of our business it's it's a And it will probably be smaller and smaller over time as we move into other things. So Nina will go through that. But I feel really excited about where we're going with Timberland. But there's a lot of room to work there and a lot of places to go. On TNF, you know, I think the TNF story has not really changed much. I think we have a great team in there. And that team is led by Caroline, who's doing a fantastic job. You know, we're probably texting back and forth five times a day because she's excited about what she's doing, about what they're doing. So you'll hear more from her. I will not steal any of her thunder except to say I'm really pumped about what she and all the brand presidents are doing. Dickies is a deep turnaround. It's a small business for us. It's got maybe relative to its size, it might be the smallest in revenue. In other words, there's more potential there than in some ways maybe any other brand we have, although they all have a lot of potential. But Dickies really has a lot. But it's a deep turnaround. And you're just going to be patient with us on that one. I feel really good about the leader we've put in place there. We announced that we're moving the business just to make it harder on us. We're moving the business to California. But there are good reasons to do that. We're going to have a campus really in California now for that business advance. So I feel good about it. You asked about my reference to first half could look kind of like the back half of this year. I think that's really just an attempt to say, we're not really trying to give you a strong growth forecast into next year at this point. It's too early for that. We're giving you Q4. What we are saying is, Keep an eye on the profitability. We're going to absolutely improve that. You're going to see it systematically improve while we're rebuilding a lot of things in the company to drive long-term growth. When will that growth come? We're not ready to say yet, so we're just trying to really dampen expectations. Great. That's the block. Thank you.

Your next question comes from the line of James Duffy with Stifel. Please go ahead.

Hello, James.

Maybe I can make up a question.

Mr. Duffy, your line is now open.

Hey, Jim. We can't hear you.

Sorry, I had you on mute. Oh, no problem. Great to hear from you guys. Really great results from the North Face and Timberland. I'm curious if you have the inventory to participate in some of the demand you might be seeing here in January, and then also hoping you can share some perspective on what those results might mean for forward orders as we look to Fall holiday 2025. Thanks.

That's a clever way to ask that question. You know, there's always, you know, you always got, in our case, I think we've done a good job bringing our inventory levels down and our inventory is pretty fresh. You never have exactly what you need everywhere, so we don't. But, you know, look, our supply chain is working pretty effectively. It can work a lot better, by the way, over time. But I'd say so far, so good.

You want to add anything to that, Paul? No, I think a lot of initiatives, we talked about the investor day. You might need to pull your helmet up a little bit.

In terms of the integrated plan and stuff, I think that will also help us sort of make sure inventory is in the right place moving forward. So we're getting there.

Is there anything you guys can share on discussions with wholesale customers and what that looks like for the order book into fall next year?

You know, I don't think we have too much to say about going into fall next year. But I would say, you know, the spring order book was, I think we've said before, is light. You know, and we knew that beforehand. And, you know, it's kind of a reflection of the past and kind of a general sentiment, especially in the U.S. on that. I'm not worried about that at all. I really feel good about the product portfolio we're bringing out. The cool thing, for those of you who have been in our business for a long time, you know you get to look at three seasons out all the time. So I really feel good about the products we have coming out season by season by season across our brands. you know, and, and I think we'll, you'll, you'll, you'll see that as we, as we get together, we'll give a little bit of glimpse of some of this when we get together in the investor day, but you'll see more of it as it starts to unfold. But yeah, no, I'm, I think the, so far everything is really on track for a product development stand as we go, as we go forward and, and you'll see us continue to ramp that in marketing.

Very good. Thank you very much.

Thanks Jim.

Your next question comes from the line of Lorraine Hutchinson with Bank of America. Please go ahead.

Hello, Lorraine.

Thanks. Good morning, everybody. Good morning.

Brock, you talked about Vann's U.S. non-value channel sellout positive. I was just curious, what's the mix of the value channel for Vann's? How important is that in your go-forward plan? And then can you talk about the health of the inventory in the channel across value and non-value?

Yeah, the health of the inventory looks good. You know, vans will always have a value channel component. So I don't want you to step off this call thinking, you know, the value channel is 10%. It's only for selling off, you know, product that didn't sell in our non-value channel. So it's not. It's probably a third of our business. It'll stay about there. And it's, as I said, the health of the inventory looks really good. Now, we brought that down. It was probably up to over half of the business at one point.

And you think a third is kind of the go-forward ratio that you would expect?

I think so. It could drift lower than that over time. I'm not afraid of the value channel. I think you could tend to think the value channel is just discount, discount, discount. Actually, the profitability of the value channel can be very good. We want to make sure we're serving. The cool thing about Vans is it does serve a very broad consumer base. And we wanted to. So we want to be where our customers really want to shop. And the value channel is definitely part of that. But yeah, I would guess that the non-value channel will grow faster over time. If you look at this two years from now, three years from now, I'll bet the non-value channel will look bigger. We've opened doors in the non-value channel as we've closed doors in the value channel. So we've probably added 800 doors in the non-value channel when we've closed 1,800 in the value channel. So we've, we've changed the mix and that could, I could continue a little bit.

Okay. Thank you.

Thank you.

Your next question comes from the line of Laurent Vazilescu with BNP Paribas. Please go ahead.

Hello Laurent. Good morning. Hi Bracken. How are you? Congrats on the results here. I wanted to ask you Bracken, um, with regards to your comment around the second half. I know it's initial, but it's good to hear that it's similar trajectory to the second half of the fiscal year. Is that common on a constant currency basis? Yes.

Thank you for asking that. By the way, I'll let you finish your question in a minute. Paul and I were having a discussion yesterday on where to put the emphasis on constant currency reported. That's a regular debate between that goes on before you report and you set up a standard. And we really haven't locked that in yet. But yeah, I think constant currency is super important here, especially in an environment where you've got volatile currencies, which we have had over the last, not wildly volatile, but volatile. So we'll try to put more emphasis on that constant currency going forward. Okay. Not on profit, by the way. Profit will always be reported.

Okay. Okay. Perfect. Understood. And then So Bracken, Paul, I'm trying to understand the slides here on the SG&A dollars guided to be up lightly for 4Q. I would assume that's on an adjusted basis. And if that's the case, maybe I'm just modeling this wrong, but it applies 4Q gross margins up significantly higher than what you just posted in 3Q, like up 300, 400. But is that the right way to think about it, Paul? And if that's the case, Should we initially think gross margins will be strong in the second half of the calendar year? I think, Bracken, you mentioned that profitability will continue to improve into next fiscal year. Thank you very much.

Yeah, so I'll take both of those on the SG&A and the gross margin. So on the gross margin side, you know, we do expect gross margins to be up. You know, there's a couple of factors at play here. One is the actions from last year are still benefiting us year over year. So that's a part of it. And then, you know, secondarily, as you said, kind of equally or maybe not quite equally, but you know, we are benefiting as we talked about some of the product costs of have improved and, and lower promotions as well. So overall gross margins sort of organically are heading in the right direction. And then you throw on top of it, the benefits we have kind of on the, on the comp from, from last year on the SG&A side, yeah, we're modeling it up slightly. You know, the two real big factors in that would just be marketing. That's that's a little higher in, in, in Q4 and, And then again, we still have one more quarter of the sort of bonus accruals hitting us this year that didn't really impact us last year.

Very clear, Paul. Thank you very much.

Thanks, Laura.

Your next question comes from the line of Adrian Yee with Barclays. Please go ahead.

Hey, Adrian.

Great. Thank you very much. Hey, congratulations. Great quarter. Nice to see it. So Bracken, my question is going to focus on Vans. That was the only brand that missed sales relative to consensus expectations. You're giving it time. What customer feedback are you getting from the core Vans customer? You're broadening it out to more board and action sports. So just how are you targeting kind of a broader audience? And then when is the right time to put some demand creation investment behind that? And then, Paul, I have a quick one for you. which is really you're taking measures throughout the entire infrastructure of the company. I'm assuming that supply chain is going to be, you know, one of them. Can you remind us kind of where your sourcing base, Vietnam China, is exposed and what measures you're taking to speed up and make that supply chain more efficient? Thanks.

Okay, I'm going to dodge your question, not because I don't have an answer, but I'll give you a little bit of one, because I really want to let Sun answer that. both the feedback from customers as we continue to think about who we're really targeting, and also demand creation investment. What I will say is we're not starving bands to demand creation. We are experimenting with what kind of demand creation, where we're spending our money, especially during the holiday period, and we're learning. So I think you'll see us continue to change what we're doing there, although you can't really probably easily see what we did last quarter or what we did the quarter before that, but Suffice to say, we're in deep learning mode and action mode. So you'll see us keep adjusting what we're doing on bands from a marketing perspective. And the target audience piece, I will absolutely defer and let Sun talk in March. But I feel very, very good about the decision she's made. And as you said, we are going broader into action sports and beyond.

Yeah, so on supply chain, I would say, you know, obviously, if we're looking at the whole business, we'll look at everything. So nothing to really add there specifically other than, you know, we're going to continue to look to become as efficient and best in class in everything we do. With respect to kind of the regions, I'm going to read into this a little bit and think maybe this is around tariffs and those types of things. We have very, yeah, we have very, very minimal exposure of things coming out of China and Mexico, Canada. So the impact for us is very, very small.

And then just one clarifying question to the GM. So just to make sure we don't get ahead of our skis for first half of next year, the last year, the reset actions were about 200 bps. So the organic would be anything above 200 bps of gross margin expansion for the fourth quarter?

Yes.

Okay. Thank you very much. And really great quarter, great progress.

Thank you very much. Thank you.

Your next question comes from the line of Brooke Roach with Goldman Sachs. Please go ahead.

Good morning, and thank you for taking our question.

Thank you, Brooke.

Paul, we've seen some outperformance for a couple quarters in a row on the SGMA line. Can you talk a little bit more about where you're outperforming your own expectations on reinvent cost savings? And as you bridge from the fourth quarter of this year to your midterm targets, How are you thinking about the opportunity to flow additional savings to the bottom line near term versus additional reinvestments in the brands through marketing or other talent investments that you might think are necessary to drive long term health of the business?

Yeah, sure. So I would say over the last couple of quarters, a lot of it honestly is just an execution. Right. So we've had plans in place against reinvent. Yeah. you don't always expect to get maybe a full hundred percent of everything you think you're going to get in a quarter. And honestly, the last couple of quarters we've done really well in terms of hitting all the targets probably at or better than we thought, which is just a testament to the team and how hard they're working in terms of really putting all the reinvent actions in place. And so honestly, it's nothing more than that other than just really great execution from the team on the saving side. And then again, As we talked about, so all of those that kind of first phase, that first $300 million is fully actionable. We'll have the full run rate by the end of this fiscal year, which will all flow into next year. And then we're starting to see the very early beginnings of the additional benefits we talked about the investor day. So we talked about $500 to $600 million of incremental operating income benefit. That's kind of spread up a little bit up and down the P&L, not just SG&A, but I assume half that's SG&A. And we started to see a little bit of that. I wouldn't expect too much of that, you know, in Q4, but we're starting to see a little bit of that benefit roll through as well.

Great. Thanks so much. I'll pass it on.

Thank you, Brooke.

Your next question comes from the line of Jay Soul with UBS. Please go ahead.

Great. Thank you so much. So two questions for me. Number one, can you just Talk us through what you're seeing in China. I think you said sales are up 4%. I think it's up 5% year to date. And then on the balance sheet, given the progress you made in the quarter, reducing debt, what's the outlook from here? How much of a priority is it now? Is it the same level of priority that it's been? Or do you feel like maybe free cash can be used for some different purposes going forward? Thank you.

I'll let Paul answer that second one on China. You know, I think we're probably seeing the same thing everybody else is. The economy itself is pretty soft relative to the past. I mean, the good news is we've got a very strong business, especially in the North Face in China, continue to grow double digits, you know, so really good. Another good performance there. And I have, as most people here are, probably uncertain about what will happen near term, but really optimistic about the long term in China. So we're going to keep the pedal to the metal and keep investing there and building business there. You want to answer that first?

Yeah, on the free cash flow, our focus will continue to be to pay down debt. It's really the focus one and two in terms of what free cash flow. And Brack and I have talked about the, you know, we have the target of, you know, two and a half times or better, which we put out there. And I think you can assume, unless we were to say otherwise, that our real focus is getting there as fast as we can. And then we'll think about, you know, other uses of free cash flow.

Yeah, exactly. We won't be doing any acquisitions anytime soon. We've got so many opportunities to improve this business without doing that and get growth. We don't need to worry about that for now.

Got it. Thank you so much. Thanks, Jay.

Our last question comes from the line of Bob Durbel with Guggenheim. Please go ahead.

Hi. Good morning. Just a couple of questions. The first one is on the wholesale pull forward, can you quantify the dollar number, the shift from Q4 into Q3?

You want to take that one, Paul?

Yeah, I'm not going to quantify it, but I will say that of the – remember, they're not going to answer your question, but I'll answer as best I can, which is wholesale was a little bit more of the outperformance than DTCO. They both outperformed. And within the wholesale, I'd probably say about half of it, plus or minus, was pulled forward, and the other half was just better reorders given some of the strength we saw on Q3.

Yeah, I'll give a little more color. Paul's quite nervous to give more color because he and I haven't agreed on how much we're going to say and not say because it's always a little tricky. And making sure you have your facts clear. You know, we had reorders. You had better reorders and lower cancellations. And you have some... orders that were pulled forward from the future quarter to this quarter. So it was the combination. Then you have cold weather, which drove our DTC business stronger too. So we're just not going to take all those things to the bank. Into Q4. And I think that's the right answer. And none of those are things you can really count on, especially if you understand order flow, you know, we can't count on reorders because the way our seasons work, they work in a two quarter cycle. So, you know, the second quarter of our cycles when you have reorders, so reorders won't happen in Q4. So that number is gone. So it's a little bit noisy. That's why we're not being a little more specific than that. But bottom line is, you know, I think we, I think we've judged this about right.

And then, Bracken, on vans, when you look at sort of the regional breakdowns, you know, vans down 31% in APAC. Can you just comment a bit on that result and sort of what drove that and how you're seeing the business there?

Yeah, I would say vans got hit a little bit later maybe. fundamentally, and then pretty hard. If you look at our vans business in APAC, I think at its peak it was $600 million, something like that. So think about how much potential there is there. So we're not chasing anything short-term in vans right now. And I hope that's obvious to you. It is to me. I just block everything that I hear that sounds like we're trying to do something really short-term. Because the potential is so big here. I don't know what our run rate would be right now in that Q3, but I'll bet it's 250 or something. So we're down that much in APAC, in China in particular. And part of that is really a – and I mentioned this the last couple of calls, I think – You're really resetting our store footprint there. A lot of it is partner stores, so they're not our stores. So there's a lot of work going on there and a lot of work on the team, et cetera. So I would say just like the rest of the world. But you're right. Vans and APAC is a little bit of a special case that I'm excited about the whole business. I think APAC is a really interesting case where how long will it take us to get back to $600 million? We'll see. But I do think you know China, and you know that once you get things right, the growth comes fast. So we don't have things right there yet, obviously, but we will. Great. Thank you. Thanks, Bob. Well, it sounds like that was the last call. Boy, that went fast. I think Paul's just in a hurry to get the Super Bowl pre-party. Let's start this morning. But thanks to all of you. You know, I just want to close out by saying this was a quarter of really strong progress. And we're on track with the turnaround. We're on track with this transformation. We're not doing anything short term here. We're aimed at really creating a new kind of company that can drive really strong, long-term, sustainable growth and profitability and top line. We continue to advance all those things we talked about in October. So nothing there has changed. You can just imagine we're now three months further down the road with very aggressive progress. And there are other things we're doing that you don't know about yet. And as I mentioned, so we're going to be back in March. You're going to hear from these brand presidents. Each session won't be really, really long. So you won't get a deep, hearty strategy from each one of them. But you'll get a good feel for what we're doing. And most importantly, you'll get a good feel for them. And the bottom line is I'm super excited about this business. It's nice to have a good, strong quarter behind us, but we're already deeply into the future here. So thanks, everyone. Look forward to talking to you in person during the meetings in between or on the next call a quarter from now. Or sorry, on our March meeting, which will be in New York. Thanks, everyone.