Q2 2020 Earnings Call
Greetings and welcome to the F. Corporation second quarter fiscal 2020 earnings Conference call. At this time all participants are in a listen only mode. A 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 Joe Alkar Vice President of Investor Relations. Thank you Sir you may begin.
Good morning, and welcome to VF Corporation second quarter fiscal 2020 earnings 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 FCC.
Unless otherwise noted amounts referred to on today's call will be on an adjusted constant dollar basis, which we define in the press release that was issued this morning.
Use adjusted constant dollar amounts 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 press release, which identify and quantify all excluded items and provides management's view of why this information is useful to investors.
During the first quarter of fiscal 2020 accompany completed the spinoff of its jeans business, which included the wrangler, we and rock and Republic brands as well as the VF outlet business into an independent publicly traded company under the name contour brands.
Accordingly, the company has removed the assets and liabilities of the jeans business as of the day noted above and included the operating results of this business in discontinued operations for all periods presented unless otherwise noted results presented on today's call are based on continuing operations.
Joining me on today's call will be vs Chairman, President and Chief Executive Officer, Steve Rendle, and Chief Financial Officer, Scott growth. Following our prepared remarks, we'll open the call for questions Steve.
Thank you Joe and good morning, everyone Im pleased with the strength and quality of our second quarter results driven by our largest brands.
And our international and DTC platforms.
Our results for both the second quarter in first half for the year, we're right in line with our expectations and we delivered these results while investing more behind our growth priorities and despite absorbing the impact of a more uncertain geopolitical and macroeconomic environment.
We are steadfast in our commitment to continue to evolve and transform VF into a more consumer minded and retail centric enterprise and our results demonstrate the power consistency and resiliency of our diversified value creation model.
Looking at our second quarter in more detail.
Revenue increased 7% or 8% on an organic basis growth was driven by our two largest brands bands in the north face, which grew 16% and 10% respectively.
As a strong momentum for both brands continue.
The strength of our vans brand was fueled by strong back to school season, the brands growth in our business overall remains well balanced and diversified across geographies channels and product categories. While the core heritage business continues to generate strong double digit growth, we're particularly encouraged by almost 30% growth and progression footwear.
Driven in part by the new coffee, Chris Cushe franchise, and continued momentum in apparel and accessories, which grew almost 20%.
Based on our second quarter performance and our increased visibility to the full year, we are again, increasing our growth outlook for the vans brand.
We now expect 13% to 14% growth for the full year slightly ahead of the brands long term growth target.
Similarly momentum in the North face continued in the second quarter is the brand achieved double digit growth driven by strong back to school results and strength across all regions. The brands mountain lifestyle and urban exploration product territories are performing well as the brand execute against its strategy to attract new consumers and capitalize on growth.
Opportunities beyond core mountain sports.
On October Onest, the north face launched future light and nearly four weeks in demand in sell through have been stronger than expected.
For the financial impact of future light is in fiscal 2020 will be somewhat limited the disruptive innovation is casting a strong halo for the brand.
We're looking forward to the second half for the year when the investments in future lights, specifically demand creation come to life and consumers have the opportunity to experience a broader product assortment across the portfolio.
Based on our second quarter performance and our increased visibility to the full year. We are again, increasing our growth outlook for the north face brand. We now expect 9% to 10% growth for the full year slightly ahead of the brands long term growth target.
In line with expectations Timberland indicates we're up 1% and down 3% respectively.
Similar to last quarter timberlands results across the globe were mixed as solid revenue growth in us and APAC were offset by softness in EMEA.
Notably the planned business model changes in South America negatively impacted global revenue growth by 1%.
For the full year, we continue to expect low single digit growth for the global Timberland brand, including sequential improvement in Europe .
The performance of the tickets brand in the second quarter was impacted by the timing of shipments in the us mass channel compared to a year ago.
Excluding the timing issue revenue increased 6% globally, driven by solid growth in lifestyle, China, DTC and digital wholesale all key growth drivers for the brand over the next five years for the full year. We continue to expect mid single digit growth for the decrease brand locally.
Looking at our growth platforms international increased 8%, including nearly 25% growth in China, 9% growth in non us Americas, and 5% growth in Europe with strength from the gas region, Italy and France.
Direct to consumer increased 12%, including a 9% total comp in nearly 20% growth in digital.
Our fundamentals remain strong as gross margin a key driver of our value creation model reached 53.1%, providing us the fuel to continue to drive investment in the capabilities required to sustain our growth momentum.
And lastly, adjusted EPS increased 8%.
The second quarter two $1.26.
To briefly recap our first half results revenue increased 9% gross margin expanded by 100 basis points to 53.6% and EPS increased 18% versus the prior year.
Quality and fundamentals of our business are sound, we're executing well and our transformation is fueling broad based growth across the portfolio as we head into the second half of the year.
We are confident in the trajectory of our business into the updated outlook provided today.
However, the environment has become more uncertain over the past several months Scott will cover the details in a moment, but several factors, mainly FX tariffs and the ongoing disruption in Hong Kong have largely offset the underlying operational strength of our business. Since we provided our last outlook in July .
While all of the items just mentioned our small individually collectively they are weighing on our opportunities for upside performance for the remainder of fiscal 2020.
Regarding business conditions across the globe us consumer and retail environment remains relatively strong unemployment is low and we expect to healthy fall holiday season. In contrast, the industrial and manufacturing sectors have weaken somewhat over the past few months, resulting in more tempered growth expectations across the more cyclical.
Oh parts of our work portfolio.
In EMEA uncertainty related to Brexit continues to impact consumer confidence, resulting in a slight deceleration in our UK market Cross the rest of Europe performance has been generally solid as we head into fall holiday.
In APAC, despite the rhetoric, our brands continued to perform very well in China to date, we've not experienced a meaningful change in consumer behavior as results of trade tension.
Further the situation Hong Kong as modestly impacted our regional performance. We will continue to have out evaluate all aspects of our business as events continue to unfold.
Adding to our Denver relocation Im pleased to report that our move is it at this point essentially complete collectively we now have a process approximately 800 associates, who are living and working in the Denver Metro area.
And in summer 2020, we're excited to have our ice breaker North American business in our smart will business from steamboat Springs during the rest of us here in Denver.
The nearly five months since the move began in the progress in collaboration have seen to date across our brands and corporate leadership team has been amazing.
Finally, as many of you are aware, we have posted in Investor Day, and Beaver Creek, Colorado in late September we shared information about our evolved integrated business strategy individual brand strategies regional overviews, and our global supply chain and digital technology organizations. The theme of our Investor day was the power of and which emphasizes the opportunity.
These we see ahead would we strike the balance between working with a deep sense of purpose will also remaining sharply focused on delivering strong business results at top quartile returns to our shareholders.
We also reinforced our continued focus on transforming to a more consumer minded retail centric and hyper digital enterprise, if you're not able to tend to encourage you to listen to the webcast.
To capture the spirit, our evolution and our focus on always becoming a better version of ourselves at the Investor Day event. We also introduced a redesigned logo and branding that honors our 120 year history, while also conveying the energy confidence and optimism we have for our future.
Our evolve logo features a new tagline that clearly communicates the type of company. We are and will continue to be purpose led performance driven.
This marks our first logo update in 21 years, but it's important to note that our new corporate brand is about much more than just an updated design. It's about elevating how we position our company and engage with our associates and outside stakeholders as we move forward, our communication will become sharper more purposeful and more consistent around the world.
We believe the new logo and branding sets a powerful tone for enhanced communication and positioning.
So in summary, halfway through the year, our businesses performing right inline with our expectations, we remain committed to investing in our brands for the long term and we remain confident in our ability to deliver our outlook and another year of top quartile returns for our shareholders and with that I'll turn it over to Scott.
Thanks, Steve.
Our second quarter and first half results were strong and right in line with our expectations. The fundamentals of our business our solid highlighted by year to date revenue growth of 9% 100 basis points of gross margin expansion and 18% EPS growth.
Our intensely focused on executing against our strategic objectives and driving our key growth engines and platforms as we head into the second half of the year.
As Steve mentioned in his opening remarks, the environment has become more uncertain over the past 90 days, while it's impossible to predict changes in consumer or business conditions, we believe our diversified portfolio and TSR algorithm give us the capacity to consistently deliver top cortile returns.
For those of you that joined us on that at the Investor Day last month, Optionality and portfolio resiliency were key themes throughout our presentation and further support our ability to deliver against our long term commitments.
Before getting into our second quarter results I should point out that our reported GAAP figures include the impact of recent Swiss tax legislation, which positively impacted our second quarter EPS by 41 cents.
Certain provisions of the recently approved Swiss tax reform were enacted during the most recent quarter, resulting an adjustment to deferred tax positions of approximately $164 million for the quarter and the first half of fiscal 2020 My comments going forward, we'll focus on adjusted results excluding dust.
Onetime benefit.
So now, let's recap our second quarter results.
Revenue increased 8% organically led by our largest brands across our strategic growth platforms are big four brands grew 9% collectively driven by mid teen DTC growth, including 20% growth in digital and double digit comp growth.
Wholesale increased at a high single digit rate and our big four brands generated balanced growth across all geographic regions.
Vans delivered another strong quarter with 16% growth driven by a strong back to school season.
Growth remains well balanced across channels geographic regions and product categories based on vans, 19% growth in the first half as well as our increased visibility into the full year. We are again, increasing our outlook to range of 13% to 14% slightly above the brands long term commitment.
The north face delivered another quarter of Doug double digit growth with valid strength across regions and channels and as Steve covered earlier the successful future light launch at the beginning of this month has generated strong brand heat globally, which further supports our bullish outlook for the brand heading back into the back half of the year and.
Into fiscal 2021.
Based on TNS, 10% growth in the first half and our increased visibility into the full year. We are again, increasing our outlook to a range of 9% to 10% slightly above the brands long term commitment.
The momentum we have in our two largest brands is strong and as a reminder, 80% of our growth over the next five years is expected to come from bands in the north face, giving us high confidence in our ability to meet or exceed our commitments.
Timberland performed inline with expectations with low single digit growth in the quarter strength in North America, and Asia was partially offset by softness in Europe .
We continue to expect low single digit growth for timberland this year, including slightly stronger growth in the second half as the brand European business begins to improve.
Vicky's revenue was impacted this quarter by the timing of shipments in North America. Excluding this time in global brand revenue increased 6% led by 22% growth in Asia, and 13% Global DTC growth the brands key growth drivers outlined last month at the Investor Day.
Work lifestyle apparel do you see.
China and digital are all performing well and we have full confidence in our 5% to 6% target for fiscal 2020.
Our DTC business grew 12% driven by 18% growth in digital and a 9% total comp.
Wholesale also performed well with 6% growth led by double digit growth in the north face and vans and 21% growth with our digital wholesale partners around the globe.
Our ongoing transformation and hyper digital strategic focus continues to fuel broad based growth across the portfolio in both the DTC and wholesale channels.
Moving on to our performance by geographic region revenue increased 8% both in the us and internationally.
Outside of the U.S. performance was balanced with 16% growth in Asia, 9% growth in non us Americas and 5% growth in Europe .
China remains, particularly strong with 24% growth, including balanced double digit growth across channels and at each of our big four brands.
Turning now to profitability gross margin expanded by 90 basis points. This quarter to 53.1% driven primarily by continued favorable mix shift towards higher margin businesses and the timing of foreign currency transaction gains our gross margin for the first half was up by 100 basis points.
Operating margin expanded by 40 basis points to 17.9%, including 10% investment dollar growth and our strategic priorities, including demand and product creation B to C technology and supply chain.
Consistent with the earnings algorithm, we laid out at our Investor day for both the second quarter and the first half we were able to use our structural gross margin expansion to accelerate investments while at the same time delivering double digit operating earnings growth and Thats our model.
EPS increased 8% compared to the prior year as 10% operating earnings growth and lower interest expense were slightly offset by a higher tax rate in the quarter.
For the first half EPS increased 18%.
Including low teen operating earnings growth in line with our internal plans and ahead of our long range target of 10% to 12%.
Turning to the balance sheet inventories were up 10%. This quarter slightly ahead of our forward revenue outlook as we enter the key holiday season, our owned inventory as well as inventory levels at our retail partners remain in good shape, we expect inventory growth to be more in line with our forward revenue growth expectations as we exit fall holiday.
Season, and enter fiscal 2021.
Adjusted leverage remains below targeted levels at just under two times. So we have significant capacity and our maintaining dry powder to pursue our M&A agenda.
As you likely saw in our release, we've raised our quarterly dividend by five cents to 48 cents per share representing 12% growth and as we covered with you and Beaver Creek, we're committed to double digit dividend growth as a key component of our balanced diversified TSR model.
Moving now to our updated fiscal 2020 outlook based on our second quarter and first half performance and our increased visibility into the full year. Our fiscal 2020 outlook now includes the following.
We continue to expect revenue to approximate $11.8 billion represented reported growth of approximately 6%.
On an organic constant dollar basis. This now represents more than 8% growth as unfavorable foreign currency rates have negatively impacted our revenue outlook by approximately $60 million relative to the outlook we provided in July .
Excluding the impact of FX the increase in our underlying operational outlook is largely driven by continued strength at bands and the north face.
On a constant dollar basis, we are raising our outlook for bands to 13% to 14% slightly ahead of the long range growth target for the brand has broad based momentum continues we're also raising our outlook for the north face to 9% to 10% again slightly ahead of the long range gross target for the brand.
We now expect 1% to 2% growth in timberland versus our prior expectation of 1% to 3%.
And our outlook for the Dickies brand remains solid at 5% to 6% growth, which compares to our prior expectation of 5% to 7% growth.
We now expect the growth of our strategic platforms International and D to C to be at the high end of our previously communicated ranges international is expected to increase between eight and 9% and D to C is expected to increase between 12, and 13%, including about 25% growth.
Digital.
Moving down to CNL, we're maintaining our gross margin target of 54.1%, which implies about 80 basis points of expansion for the full year, including about 50 basis points with expansion in the back half of the year driven primarily by mix relative to the to the first half we expect a smaller benefit from FX.
Transaction in the second half compared to the prior year.
We continue to expect operating margin for the year to be 13.8%, which implies 90 basis points of expansion for the full year, including SGN a leverage for the second half of fiscal 20, which we anticipate will be most pronounced in the fourth quarter.
Bps is still expected to be in the range of three dollarsthirty two to three dollarsthirty seven cents, representing 16% to 18% reported growth.
On an organic constant dollar basis EPS growth is now expected to exceed 20% as unfavorable FX rates of negatively impacted our EPS outlook by about three cents relative to the outlook we provided in July .
I'd like to take a moment and address a few other items impacting our full year 2020 outlook and particularly our second pass.
We talked earlier about an increasingly uncertain environment versus 90 days ago.
More specifically FX the ongoing disruption in Hong Kong and incremental tariffs have negatively impacted our fiscal 2020 outlook by about seven cents relative to the outlook. We provided in July while none of these items just mentioned our material in isolation collectively they are impacting our fiscal 2020 EPS growth.
By about two percentage points relative to the fire outlets.
As further testament to the themes of Optionality and portfolio resiliency, we are reaffirming our fiscal 2020 EPS guidance of $3 32 to three dollarsthirty seven cents. Despite these incremental headwinds, while we're not immune to geopolitical and macro factors, we remain confident in the us.
Underlying strength and quality of our business and in our ability to deliver on our growth and TSR commitments.
So in summary at the midpoint of fiscal 2020, we're pleased with the performance of our portfolio. Our fundamentals are strong and our core growth engines and platforms are well positioned as we head into the fall holiday season, we are purposefully investing to sustain and accelerate our growth momentum.
And our balance sheet is well positioned to continue reinvesting in our business capitalizing on M&A opportunities and pursuing other capital allocation priorities to further enhance the strength of vs organic plan.
And now I'd like to turn the call back to the operator and open up for your questions.
Thank you ladies and gentlemen at this time, we will be conducting the question and answer session. If he would like to ask a question. Please press star one on your telephone keypad and confirmation from indicate that your line is on the question Q.
You May press Star Kayla, if you would like to move your question from the Q4 participants Ethan speaker equipment and may be necessary to pick up your handset for pressing the star Keith.
Our first question comes from the line of Michael Binetti with Credit Suisse. Please proceed with your question.
Hey, guys. Good morning, Thanks for taking your questions here.
The kinds of for you on on the brands on on fans obviously thats.
Given how much of the growth is driven obviously, we've all been watching the on the deceleration you guys have spoken to it and the and the glide pass down there.
Relative to how you guys are thinking about it I know you set to Q is right in line with your internal plan you get that slowdown in the U.S. any you. Obviously the compares are probably the reason why but anything here unusual to call out that gives you confidence that we don't continue to decelerate further or break away from the plan in any way into H. I am going into 2020.
For for vans, and then I North face you noted that.
No you're forecasting revenue growth now above the long term targets slightly this year. So I guess it begs the question why does north face slow from here given the work you've done to Rebase that brand. The consumer study and then future like being a first big innovation platform. You guys have had an in several years, maybe you could talk to us about the implied slow down there.
For the second half thanks.
Yes, Michael Scott here first of all on the on the Dan's question, where yeah were in line actually were tracking modestly better and I'll remind you that we both for vans and an order space we've increased our.
Guidance based on the strength today than what we can see on a go forward basis. So I'd say in line and slightly even better on both of those brands from an expectation standpoint also one thing just to remember as it relates to both timberland and.
Bands in the second half, we've we did some structural changes in our Casa business.
Exiting some unprofitable markets and that'll have a modest drag in the second half I think something like a half somewhere between after full point of growth impact in the in the second half on both of those brands.
And it Michael on your question on North face.
We have real reconfirmed, our actually increased our guidance to 9% to 10% and yes, we've been tracking.
You know double digits.
Yeah, we remain extremely confident in the strategy that arnie laid out in our Investor day.
The launch of future light and the Halo that thats casting over the brand you know as far as an innovation platform, but more importantly, just bringing the brand in front of more consumers through the increased marketing.
We continued to be very very confident.
In in a long term growth prospects of north face I wouldn't I guess I wouldnt characterize it we're seeing a slowdown work we're seeing a continued improvement we've talked about we're early in our journey a lot of work has been done and Theres a lot more work to to be done to put this brand.
In a really solid position, but we couldn't be more confident to where we are today.
Now with the results which seemed today.
Okay seemed like it if I could just follow up with one Scott and could any help you could help us think about threeq versus fourq as far as where you've left.
The.
Guidance for the second half of the year any any any help on cadence will be helpful. Thanks, guys yellow I guess two things Michael I'd point out. So we talked about the gross margin about 50 bips expansion into second half of that.
As more structural lindstrom mix. So you can expect that on a fairly linear linear basis, and we also talked about.
Some.
DNA leverage in the second half I know near and Dear to your heart.
Particularly in the for that particular early in the fourth quarter I do listen to your Michael.
Particularly in the fourth quarter, because remember we're up against some pretty big investments. We did last year in terms of incremental investments in Q4 last year. This year those are more.
Evenly spread throughout the year, so on a quarter by quarter basis, you'll see a relatively larger profit increase in the fourth quarter compared to third quarter.
Thanks, a lot for all helped guys have going on now.
Sure Michael.
Thank you. Our next question is from Jason what can you be please proceed with your question.
Okay. Your line is why do you May proceed with your question.
Hi, sorry about that.
I just wanted to ask you about the strategic investments that you made in fiscal 20 that impacted the operating margin that you show the operating margin bridge and the slide deck.
What impacted that half in terms of basis points was that the entire 70 basis point impact.
On margin that have chosen to slide or was it only a piece and then maybe a little bit more about what those investments where.
Yes first of all you're accurate in the way you characterize that.
That is that that is the entire amount.
So it's the same things we've been sorry, my Jay its data see in digital it's it's demand creation.
It's their innovation.
Innovation agenda as you know that it's this is the same things that we just highlighted Beaver Creek that we we believe are creating a meaningful pointed difference for our brands and and these platforms or our powerful and we intend to continue to invest in those things.
Got it maybe when you talk about tariffs it sounds like it's a two three pending impact.
Is that sort of pre medication I do know do you expect to be able to work that number lower as we go through years, you work on ways to sort of offset the tariffs or is that sort of post everything that you plan on doing.
No there I mean, thats, the grass amount, but remember.
As we look forward we've talked about for example, some of the mitigating actions.
What about 7% of our.
You asked sourcing came from China. It this year, we expect that to be more like 4% next year. So the terrorists came mid year. So there is a knock on effect on the other hand, we're mitigating the impact as you look going forward.
Yeah.
That's a long way of saying is as we look forward unless there is another tweeter. Another series of side tariffs that comair and you shouldn't expect much from an ongoing basis relative to tariffs.
Okay, and then maybe last one for me the 30 basis points of leveraging the quarter within gross margin.
It's a nice number and you know when the Investor Day last month, you talked about maybe 3% to 4% shareholder return coming for margin expansion, but that was mostly sounded like mix. So what sort of the level of sales growth. Obviously, you had 9% comp in the quarter, what's the level sales through if you need to continue to deliver the leverage on fixed cost can see to drive gross margin on top of which will get from banks.
Yeah, we just laid out a long term algorithm Mary said, 7% to 8% and so thats our expectation first of all and and we also said implied in that is as you know some maybe modest leverage but essentially our operating margin expansion comes from now structural gross margin advantage that we have an.
Thats really the engine that allows us to reinvest set again no no change in the way we look at it I wouldn't say this though.
There is optionality in the model when I spoke a lot about that in our Investor day, So should we see a fundamentally different.
Environment, which we don't today by the way or should we see a fundamentally different environment. There are levers we can pull the modulator.
Expenses and need to commitments that we've made from an earnings standpoint.
I got it thank you so much.
Yes.
Thank you then next question is from Sam Poser with Susquehanna. Please proceed with your question.
Good morning. Thank you. Thank you for taking my question.
I'm really I'm really wanted to get some more color on.
The Dickies brand the work category and then.
Paul or brands that you know you spoke of.
In some detail at the Investor Day, you can give us some color on sort of on sort of the momentum on the smaller brands and then on and then a little more color on this timing issue.
Of the work.
Yeah, maybe maybe I'll start Sam just on on the numbers side of the so.
First of all you know I'm going to talk about Vicky's, which is the largest.
Version of work I guess about 40% or so I remember last quarter, we've talked about the first half would be impacted by.
A couple of factors one of which we talked about last quarter, which was the reset in in Japan.
And then the other is timing of particular large north American customer of ours, but what we mean by that as a year ago, we had a very large.
Floors. So obviously you get the pipe so that makes the comp in this particular quarter pretty tough interestingly, if you excluded that customer the dickies brand grew about 6% in the quarter, but more importantly, as we look at the for the full year, we just talked about an outlook of 5% to 6%, which is inline with our long term aspect.
Stations NRG, even despite some modest.
Pressures on the more cyclical part of the work business.
So you know remember dickies has a unique aspect to it to with that work lifestyle and as we look at the second half of the year. The international business. You don't have the you don't have the impact of the mitigation of the Japan three said that's behind us in the second half and we see.
Significant growth in particularly in China, and also in Europe , and the lifestyle business and that was over 20% in Q2, and we expect that to continue to accelerate throughout the balance of the year.
A little shape on the rest of the word portfolio, which which again if we say overall, we got about 40% exposure to the to the more cyclical prior to the business relatively more of that sits in those more traditional work businesses and we have seen some modest slowdown, but even with that we grew about 3%.
On the in the in the first half and we expect similar actually slightly better in the second half primarily due to the the acceleration of the timberland pro business in the second half. So hopefully that gives you a little insight into what's going on on a on the number side of it Sam.
Yeah, Tim Indeed, you can't really quickie quickly on Vicky's, then I'll answer your question on the emerging brands and we were really confident the knick indicates brand you will we see is a is greater mixing towards the that work lifestyle piece. The Denny I spoke a lot about in our Investor day coming that will really come to life.
First and foremost in China.
And we've seen that have a really strong impact on our growth there and we'll be able to represent that very well to our own digital platforms are do you see platforms.
And we'll watch that really expand across the globe and have a a long term impact on how this brand evolves beyond that traditional work environment.
On the emerging brands.
Yeah. We you know we're excited to share those brands with everybody at our Investor day, we committed to those brands growing low double digits in.
Performance that we've seen to date.
Is in line with those with those commitments are our plan is not to share.
Those brands on a on a quarter by quarter basis, but periodically give you an updated insight into how we're doing.
But I'd say, we remain very confident we believe it sitting inside those emerging brands is a breakout opportunity and hence no our excitement to share those with you when we're together at Beaver Creek.
And just to add onto that from a number of standpoint, as we said it'd be it or create those brands.
Make a big impact in the short term there that they have a strategic relevance that Steve and the team intact and and there.
We believe can be.
The north face in advance of Tomorrow, you know that really as we think about managing both the longer term and a shorter term elsewhere, where these become relatively more more impactful.
Great. Thank you guys very much continues.
Yeah.
Thanks Sam.
Thank you. Our next question is from Erinn Murphy with Piper Jaffray. Please proceed with your question.
Great. Thanks, Good morning, I wanted to start that conversation just a little higher level, Steve with what you are referencing on the global consumer it sounded like you said the U.S. consumer you still feel relatively okay about the consumer going into holiday can you just expound upon that what are you seeing currently with how retailers are interacting with vendors anything from the promotional landscape and then really.
Stepping across the pond, how do you feel that the European consumer into holiday.
That would be helpful. Thank you.
Sure.
Yeah in my remarks, and I definitely did say that we we don't see any significant.
Changes in consumer behavior with our brands.
And our D to C results.
From a traffic conversion both in store and online continue to support that.
You know that said you know we're paying attention there's a lot of.
Rhetoric in a in the marketplace that could you know it.
Could change how consumers are thinking, but I think thats why were spending the time really putting our brands in a positive light in front of our consumers and a you know really inviting them to be part of our of our purpose. Let journey. So really no no change there and as we look at our and our wholesale partners.
No no no change in behavior. There are our retailers are are well set for this.
Fall holiday season.
And notes as we head mouth into the the cold part of the of the season, we're confident in our ability to deliver.
With our partners as we jump across the pond as you would say.
We see no strength in our in our German Austria Swiss.
French Italian marketplaces, there is a little bit of.
You know softness in our UK business, we have seen a slight reduction in traffic.
We think this is a you know kind of a point in time and is is the rhetoric their services settled and and they're truly is a a path forward. We're very well positioned London is a very critical market for what our brands come to life with.
Flagship store environments, and we think as we mentioned denying Beaver Creek, where we'll be opening a new timberland flagship there along with advanced flanks flagship.
So long term we.
We feel good about our opportunities in Europe , we just need navigate some of these interesting times in the UK.
Aaron just put some numbers on it just a reminder, you may have seen it but we did take up our our Europe or our EMEA guidance, even despite what Steve mentioned relative to Brexit and while we're on the international train. We also took up Asia. Despite what's going on in Hong Kong in China. So we do see.
Strength in the international markets.
Maybe Scott just to that end can you just share a little bit more about what you're specifically thing in Hong Kong I mean, there's obviously been.
Even with relation to some of your brand to the fans in particular, a little bit as a negative press. There can you just share kind of what you saw during the quarter in you know to your point, China overall, it's still relatively resilient. So any help on kind of flow between the two thank you.
Yeah, maybe Stephen of those talk a little bit about this but relative to the you know the impact there has been an impact as as we Uh huh.
Pointed it out but keep in mind, the Hong Kong market, specifically the city of Hong Kong is relatively small as a part of our total China business and we see really strong elements elsewhere in China.
But Hong Kong, specifically is definitely impacted.
It's just not large enough to have a huge impact on overall vs.
And I think the results that we see in China are largely offsetting.
What we see going on it in Hong Kong today can you bring up you know vans and.
You know what we what we've seen going on there I think just important to note that our our vans brand can remains very committed.
Around their purposes.
Really enabling create a self expression and the custom culture competition.
<unk> is really about supporting individual artists and.
And really.
Operating in a very apolitical way and we remain in our vans brand remains very committed to driving that purpose forward into and doing it in in a way that really doesn't bring politics and that really focuses on the individual artist and that and that cents accretive self expression and we're navigating that very well.
And if anything here just in even stronger commitment.
Coming across all the regions.
And then just one more for me just on van can you talk about how you see the potential incremental opportunity given skateboarding is now an Olympic sport is that something you guys are gonna be kind of playing into if you go into that Jim hand 2020.
For sure.
I think that's why you know you here Doug speak so confidently about why skateboarding is that true authentic expression of up brands creative self expression in how they will activate around the Olympic games. It will be a very important part of that.
That time point of time I would also tell you Aaron.
Climbing is part of the Japan Olympics in our North face brand is a key sponsor up of a number of different.
You know countries around the globe climbing team and a you'll see us very well represented there as well.
Great. Thank you so much.
Thank you. Our next question is from Matthew Boss with Jpmorgan. Please proceed with your question.
Great. Thanks, So maybe at the North face brand on future light, how best to think about the phasing of shipments that we'll see from here and on profitability of the brand any structural impediment to returning to prior peak operating margins at the North face, which I think would equate to close to 500 basis points of opportunity.
So Matt I I will take a future lighting, then I'll happily, let Scott handle that second part of your question [laughter].
Yeah, so future like phasing, we're about four weeks into into the launch in.
To date.
Sell through is strong and actually ahead of expectation and I mentioned earlier, you know the future light advertising a cat is catching a really strong halo over the brand and we're seeing.
Strong response, yeah, especially in these core markets at North American Europe , with where these more premium mountaineering ski silhouettes come to life.
Phasing.
As we were really now into that point in time third quarter and how it carries into fourth quarter is where.
The phasing of those deliveries are at their strongest and now you see us very well sorted in our own stores and I'm very well assorted across the globe in those key specialty retailers.
So we're we're right now in a in the heat.
Of this launch and.
What you see at retail and online is the is the full representation, but I think it's really important remind everybody that this is a very limited launch I mean, our summit series steep series and flight series. So that's not a very large.
Number of styles, you'll see that grow as we move into spring 20, and another leap forward as we move into fall 20.
The brand begins to.
Replace current waterproof vehicle technologies with the future like platform.
And Matt relative to the operating margin just just like we reminded you from the topline standpoint remember the vans in other words base are really outsized drivers from both the top and bottom line standpoint, that's true and outdoor.
As well there's no structural reason why we can't continue to.
See operating margin expand we're going to approach a mid teens.
Earnings growth in in the outdoor sector. This year and that's continued progress along a path that we see.
We don't see any reason why we can you know returned to I'll call. It more historical type operating margins in the outdoor sector, you're probably looking at the at the quarter and where the growth is not quite as strong as what we expect for the full year couple of things to remember a number one we already had a.
Big.
Marketing campaign embedded relative to future life, because this is a really big idea and and.
An opportunity for the brand and creates a halo and there we talked a quarter ago about putting even more money to work and so.
That is is spread through the balance of the year, but certainly is impacting profitability profitability in the current quarter.
Great and then maybe on vans any shifts in demand with later back to school timing. This year, we've heard that from some others out there how would you rank opportunities to further bought broaden the reach of the brand from here and maybe as a microcosm just any learnings from the recent success of that a CE pro launch, which I know was at 100 dollar price point.
I'm, a little bit higher than in some of your other launches.
Oh, it's the so that's I don't think theres anything from a phasing standpoint that that we would call out.
Specifically.
I'll take the last part of your question then remind me of of the middle but on the ACEEE lunch I key learnings there.
At that age you are that's a that's up higher than normal price point and it gives you know personally that that product in a couple callaway sold out almost immediately.
So we know that there are significant demand for innovative product beyond those core heritage styles, and that's why the progression part of the vans.
Go forward strategy is so important as being able to push new ideas, new price points higher age you ours.
As a way of.
Driving this brand long term so.
Really really important and very strong validation based on that particular platform and I'm sorry, the middle part of the question.
You kind of just answered it was it was opportunities to further broadening the reach of the brand.
Okay got it really is around the progression.
You know footwear, it's about apparel.
And accessories, you know they continue to drive.
You know very very strong growth in it and are important parts of just expanding the wearing occasions and the opportunities for consumers to participate in the brand.
Great color best of luck.
Thanks, Matt.
Thank you. Our next question is from Laurent Vasilescu with Macquarie Group. Please proceed with your question and good morning. Thanks for taking my question.
Scott I wanted to follow up on the timing shifts between quarters Dickies was down 4%. Excluding the timing was up 6% is $25 million delight number to think about finished timing shifts and were there any other timing shift for the other big brands that we should consider.
Yes, so I.
I don't have to go back and think about your math your private knowing year, you're probably in the ballpark, but let's let's confirm that.
That number offline I guess the bigger.
Let me answer the second part no other big timing shifts really although if you look listen our first quarter, we at 86% EPS growth rate and said for the first half 18%. So of course, there's there's some timing shifts that we saw between Q1 in Q2 I think the bigger.
Picture here is don't get to.
Isolated on any particular quarter it right. Our first half we grew 9% on the topline 18% on the bottom line, we've got a similar topline implied in our guidance for the second half and actually accelerating from an earnings standpoint. So you know as we look at it.
You know yeah, a little bit of.
Quarter to quarter noise, but if you zoom out and look at the Big picture. You know. This is this is a very solid year and actually ahead of the guidance that we just laid out in Beaver Creek.
Okay very helpful. Thank you and then I wanted to.
A follow up on M&A I think in the prepared remarks, you talk about dry power to pursue your M&A and agenda can you remind us how much leverage you're willing to take on to maintain your credit rating how much time with it would be would you would want to get back to just under two times. It starts to target longer term and would you be willing to issue equity for the for the right size.
Deal.
Okay. So first of all at our current if radian or it's a.
Debt to EBITDA was two times is what our target is we're a little south of that right now so.
Obviously, even at that there's capacity, we've shown our willingness to lever up as long as there is a glide path. There is no absolute number it depends on their said it depends on the circumstances, but I I think it's fair to say within a couple of years period more or less.
As long as we could get back to a reasonable leverage rate in general are the rating agencies are gone with us on that we've got history that shows that I think we have a lot of credibility that but that they would stay with US. We've also said we're willing to take a one step.
Downgrade.
It's triple B, plus still investment grade still access the CP, but obviously more capacity that takes you about a half a turn up in terms of debt capacity and then finally here. The last element is yeah, we're willing to issue equity for the right deal.
So but that all together and it says we could do a really big deal.
Very helpful. Thank you very much gotten best of luck.
Yes.
Thank you. Our next question is from Bob durable with Guggenheim Securities. Please proceed with your question.
Hey, guys. Good morning, just wonder if I could ask a couple of questions on timberland.
When you look at the regional performances in the difference is especially America's versus Europe can you just help us understand that a little bit better, especially the wholesale piece is the European weakness all UK in timberland.
Sure. So timberland North America, you know the performance we see there.
Is our classic business stabilized you know a number of quarters ago, and we've seen no good performance with that being got baseline Foundation.
But where we're seeing improvement.
I was on a number those diversification factors specifically some of the new you know the newer footwear.
You know, where we're bringing a little bit more of a contemporary styling.
But we're also seeing really good sell through on our in our apparel category.
Both here in North America, but also in Europe .
So you know the focus there there Bob just continues to.
Put the proper diversity.
First vacation tools in place for this brand to move beyond the heritage footwear to move beyond the Brown shoe classification and really start to unlock has some of these more lifestyle elements.
Certainly within footwear getting to that younger consumer with more than just food.
But starting to elevate our presence with apparel and we're really pleased with what we see going on barrel category.
In Europe , you know, yes, UK is part of of our issue, but it's really you know that the classic the men's footwear business last year with wells with some of the weather conditions that we we.
Endured slowed down.
And it's a it's a significant part of the business and that's what you see impacting our results, but there as well.
Women's footwear apparel are doing well and you know the product enhancements that Martino represented at Beaver Creek.
It's those start to come online.
We see line of sight through our order book for Spring 20, you know we're confident we're working on the right things It Guy who will just take us time to get these products into the marketplace to get that consumer response, and it's we start to see that sell through.
From a cost that's footwear.
We're confident.
Plan, we Havent place will will drive our long term growth.
Jack.
Got it and.
If I could just asked on the inventory take inventory up 10% and should I think you said owned inventory and partners are in good shape, but in terms of as you look forward was there is is there a big front load on the inventory side are there any pockets within your inventory that you are concerned about or.
Just trying to.
Understand that number a little bit better thanks.
Yeah, Bob the.
Sure to answer is no we're not concerned about inventory, we did build up a little bit in coming into our largest season.
On the service standpoint.
That's been a priority it I'd think about in particular, our largest brand bands.
We have been chasing us for a long time and frankly, our service hasn't been at the level that our partners or or we expect so bringing that back to normal puts a little bit or pressure as well as being ready for what we think is gonna be a good fall winter season right. This is a this is when we make a.
You know make a from a from a north station and in particular standpoint, so yes, it's a little bit up relative to the growth rate going forward, but importantly, we look at the quality of the inventory and we look at where we expect to end. This year, we don't see any issues from an inventory standpoint as it relates to.
Your inventories at retail we told you coming into the season everybody was in pretty good shape. We read the same thing you do I know there are pockets of issues out there at all I can say is as it relates to our brands in our partners, we don't see particular issues.
It is worth noting you know as we de around so did get off to a bit of a slow start in the U.S. importantly, though we've seen that starting to reverse and we've seen that in the most recent months, we've seen improvement from a from a regional activity in from the sell through standpoint.
Great. Thanks, Scott.
Thank you. Our next question comes from Jonathan Komp with Baird. Please proceed with your question.
Yes, hi, Thank you, maybe maybe just a bigger picture question related to some of the the incremental pressures that you called out relative to 90 days ago about seven cents of.
Tariffs in Hong Kong and some of the other uncertainties.
Just curious maybe how you've embedded those assumptions going forward like have you.
Made assumptions at those factors continue and barring any changes in the environment would you still be set up to pretty pretty healthily deliver on what you've laid out going forward.
Yeah, we don't we don't try it again in the prediction business Jonathan I May we look at the most recent trends what we know and we try to factor in what's in front of that's I think I mentioned earlier in the call. For example, we're not expecting more tariffs, but with the tariffs that we know about ways, we've factored those in there.
Well as you know on a go forward basis mitigating actions I think the important thing to remember on that seven cents and the point, we were making is not that we're in a different place. We actually don't believe we're in a fundamentally different place you heard Steve.
Mentioned, how we see their consumer the overall environment at the point of their lives by reiterating our guidance and absorbing that seven cents, we've really operationally.
Absorbed that and strengthen our operational guide by holding our reported guide at 330 from 332 337 that was really the point that we are trying to make not that we're in a fundamentally different place because we're not.
Okay, Great and maybe just one more kind of near term follow up.
Do you think about the next couple of quarters, certainly looks like you know, there's diverging trends maybe across categories.
Some some maybe heavier on inventory some of your categories not so much and then even just merian impacts from from tariffs and the other pieces. How do you think about some of the divergences between kind of the winners and losers as you know look forward to the holiday and any any thoughts there would be would be appreciated.
Lisa just some clarity on the winners and losers is that a brand question or is that a retailer question.
Context.
Yeah, it could be both frankly, but certainly there are some pockets where inventories seems heavier and certain brands and retailers seamless or position then maybe your portfolio. So I'm just curious how you're viewing.
That within the context of your brands and if there's any.
Spillover impact potentially if there's other pockets of weakness is.
Sure.
What we see you know are the there was a strong brands.
We continue to get stronger you know those brands that are bringing you know.
Innovative products driving really powerful brand experiences you know that inviting consumers to be part of the above those of those moments those are the winners in our portfolio. We feel it's very well positioned the work we've been doing over the last two and half years to put ourselves in its place.
Very well positioned to compete.
With that kind of consumer behavior from a from a retailer standpoint, you know again the work that we've been doing over the last two and half years has is really positioned us away from those parts of the market.
What we call here, the kind of the middle of that our glass, where there is quite a bit of.
Quite a bit attention in the system and and some lack of differentiation we're positioned to our own stores are on digital platforms. Our key accounts across the globe really in those pockets of the market.
Where where retail is succeeding and our focus on becoming a more consumer minded retail centric provider of products and experiences not just grew ourselves, but for our wholesale partners as well as to be that better partner, that's able to deliver the proper amount of product at the right time.
For that particular moment into year and in a way you know that helps drive positive margins for both ourselves and our key accounts.
You know is a big part of our of our go forward strategy and you see that working today.
In this in this shift in our portfolio.
Okay, great that that's very helpful to here. Thank you.
Thank you.
Thank you. Our final question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good morning, everyone. As you think about the wholesale and direct to consumer channels. How do you think about them by Brandon what you're seeing for the back half of the air and on direct to consumer with a 9% comp you had what are you seeing from full line in factory stores, and where do you see the basis factory stores today and.
Where it's going thank you.
Okay. So the wholesale D to C.
Five brand I think it'd be part of our of our go forward strategy. The work we've been doing issues really to increase.
You know the you know the.
The level of our of our direct to consumer.
Presence as we move towards you know from a low 30% as we trend now towards a 40% of our revenue coming from our own stores. These are really important shifts. This is a place where we're able to have that strong representation of our brand in very upper authentic environments.
And across our portfolio you know the as we as we evolve our portfolio really is you know with brands that have the ability in the permission to operate in a direct manner.
But we take those learnings into our wholesale partners as well and we talked a lot about key accounts wherever eight where we're able to.
Collaboratively represent our brand within their environments consistent with what we're doing it on stores. So you know that mix.
And focus on D to C helped us be a better wholesale.
Partner as well.
Yes, just a reminder, data also you know outlets for US is not a growth strategy. It's about a third of our earns fleet, but when you consider partner doors and actual consumer facing mono branded stores. It falls to more like 20%. So only about a fifth of our consumer facing outlet.
Retail point of sale, our outlet and we were going to continue to think of it from that standpoint, So we're probably not the best to answer the overall outlet.
Environment, because we are we don't playing it in a meaningful way.
Thank you.
Thank you.
Thank you we have reached the end of our question and answer session I'd like to pass the floor back over to Mr. rental for any additional concluding comments.
Great. Thank you hey, everybody. Thank you.
For joining us. This morning, we're pleased with the strength and quality of our second quarter results.
Yeah, our underlying business is strong and our first half was right in line with our plan up nine and 18% in earnings and our reaffirmation of our of our full year I think is just another.
Data point of our of our commitment and our.
Really our confidence in our ability to deliver against our long range plan, we're very committed to continue to evolve I'm not only our portfolio, but how we operate as a more consumer minded retail centric hyper digital enterprise, putting ourselves our brands in a much more powerful position to connect with our can.
Tumors, and a and drive really how businesses like ours operate forward into the coming years, so before to talking do it with you all I'm in the coming quarters into your thank you for joining us.
Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.
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