Q3 2020 Earnings Call
Greetings and welcome to the VF Corporation third quarter fiscal 2020 earnings Conference call.
At this time, all participants are in listen only mode.
A question answer session will follow the fall presentation.
Anyone should require operator assist destroy the conference. Please press star zero in your telephone keypad as a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Joelle higher. Please go ahead.
Good morning, and welcome to be F. Corporation third quarter fiscal 2020 conference call.
Participants on today's call will make forward looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially.
These uncertainties are detailed in documents filed regularly with the FTC.
Unless otherwise noted amounts referred to on today's call will be on an adjusted constant dollar basis, which we defined in the press release that was issued this morning.
We 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 U.S. GAAP.
Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify quantify all excluded items and provide management's view up why this information is useful to investors.
During the first quarter fiscal 2020, the company completed the spin off of its jeans business, which included the Wrangler, Lee and rock and Republic brands as well as the via outlet business into an independent publicly traded company under the name contour brands. Accordingly, the company has removed the assets and liabilities.
As of the jeans business as of the date noted above and included the operating results of this business and discontinued operations for all periods presented.
Unless otherwise noted results presented on todays 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 Rowe.
Following our prepared remarks, well open the call for questions Steve.
Thank you Joe Good morning, everyone. Our third quarter performance was strong and our year to date results aren't the high end of our long term growth objectives, and we're on track to deliver solid performance this year.
And we're well positioned for continued growth and value creation fiscal 21.
Before we review our third quarter results and adjusted outlook for the year I'd like to take a moment and comment on the news, we disclose Tuesday morning regarding our intent to explore strategic alternatives for the occupational work portion of our work segment hereafter referred to as occupational work brands.
Scott will will cover the specifics.
But I'd like to highlight a few messages preannouncement materials.
Moving and optimizing our portfolio continues to be top strategic priority Privia and exploring strategic alternatives for our occupational work brand is the next natural step in that process.
Decision reflects management's continued focus on transforming VF into a more consumer minded retail centric and enterprise.
<unk> folio of more growth oriented outdoor active and work brands.
First it is important to note that the Dickey drilling program part of our review we remain fully committed to these brands as well as our worthy work purpose territory. There are fundamental differences between the occupational work brands and a decrease in timberland programs, including the ability to connect directly with consumers distribution footprint.
Supply chains infrastructure and financial profile.
Leadership teams within our occupational work brands have done an excellent job building. These businesses over many years, putting VF and an ideal position to find the best future owner, but these brands to better enable their next phase of growth and success.
In terms of timing the review process is underway and we will keep appraised as things evolve over the next few months.
Now, let's review our third quarter results in the current state of our business.
As we head into the final quarter, we remain confident in our ability to deliver another strong year at the high end of our long range plan.
Year to date organic constant dollar revenue and EPS increased 8% and 16% respectively, driven by our two largest brands and our international DTC growth platforms, our strategic growth drivers performed well over the holiday season, and we're all in we are well positioned as we look toward fiscal 2021.
For the quarter revenue increased 6% or 7%, excluding the occupational work brands just discussed while our revenue performance for the quarter was generally in line with our long term algorithm, who was slightly below our expectations due primarily to the performance at timberland more chance challenging conditions in our occupational work brands as well.
As a mixed holiday season in the U.S.
Despite the revenue shortfall the quality of our growth remained strong as evidenced by 100% basis points of gross margin expansion, 12% operating income growth and 14% escrow.
Our performance during the quarter highlights the diversity and resiliency of our operating model and the momentum we have across our strategic growth drivers.
Now, let me turn to the performance of our largest brands.
Fans continues to deliver strong balanced performance across all regions and above its stated long term growth objective.
Revenue for vans increased 13% in the quarter, and importantly growth remains well diversified across product categories channels and geographies.
Heritage footwear increased 8% progression increased more than 30% in apparel increased 14%.
Following another quarter of broad based momentum, we're again, raising our physical 2020 outlook for vans. We now expect revenue per begins to increase about 15% for the full year well ahead of its long term target.
Moving on to the North face revenue increased 8% in the quarter led by our international business growth was balanced across both our DTC and wholesale channels globally, and we saw solid performance in our urban exploration and mountain lifestyle product territories as the brand continues to attract new consumers and capitalize on growth opportunities beyond the core.
On sports.
But were also increased at a high single digit rate during the quarter and non sports strong performance internationally was somewhat offset by more mixed results in the U.S. market.
While limited in scope the performance of future light well exceeded our expectations during the key holiday season and continues to cast a strong halo for the brand.
The disruptive innovation has been available to consumers for about four months now and we're seeing four times the sales volume in our Pinnacle's summit steep and flight series products, which feature of the future like technology.
Given our holiday performance in additional visibility through the ended the year. We now expect revenue for the north face to increase about 9% at the high end of its long term growth objective.
Despite early signs of success this year our results. It timberland were disappointing this holiday season. This revenue decreased 4% in the quarter.
Solid momentum in apparel outdoor footwear, and China was not enough to offset challenging conditions in men's footwear in the Americas in Europe , particularly in our classic business.
Mens nonpacifists in women's performed relatively better as our diversification strategy continues to evolve.
As a result of the third quarter performance and improved visibility through the rest of the year, we're lowering our revenue outlook for the timberland brand in fiscal 2020, and now expect full year revenue to decline between one and 2%.
And last but not least as expected the difference brand had a great quarter as revenue increased 13%.
North was strong across all key strategic growth drivers highlighted by 68% growth in China.
And 16% growth in digital with category momentum across icons and new seasonal product.
After a flat first half we had high expectations for the decrease brand heading into the back half of this fiscal year and a global teams delivered.
The brand launched its yours to make marketing campaign this quarter the largest in brand history, driving significant brand heat and consumer engagement.
We expect another quarter of double digit growth, providing us with strong momentum as we head into fiscal 2021.
We continue to be bullish about the growth opportunities a decrease in or even more confident in our fiscal 2020 revenue growth outlook of 5% to 6%.
Over the last few quarters, we've we've discussed discussed a more uncertain geopolitical and macro economic environment and the impact of this had on our business results and forward outlook.
As we exit the holiday season, I'd like to briefly provide our perspective on business conditions across our largest markets.
US economic backdrop remains generally solid led by a healthy consumer and low unemployment that said, we believe performance across retail and our sector was mix during the holiday season, while inventory levels at retail we're in good shape heading into the fall winter period sell through performance in certain categories was slower than expected which is.
Led to elevated inventories in select areas any more promotional environment.
In Europe International trade and the Brexit uncertainty have impacted business confidence and investment however, consumer confidence and spending remains relatively strong.
Our EMEA business accelerated in third quarter, and our outlook is generally bullish across the region.
In Asia, our brands continued to perform very well in China. Despite continued unrest in Hong Kong. The recent phase one trade deal between China, and the U.S. should yield and more constructive consumer and retail environment.
As I talked about and Beaver Creek, our strategy is to become more consumer minded retail centric and hyper digital in all that we do.
Transforming how we operate is essential to our ability to create value for shareholders and stakeholders.
We are in the early stages of our journey and as our work progresses, we increasingly gain clarity on what is required to achieve our vision.
As we exit fiscal 2020 and transition into fiscal 2021, we will focus our investments on four key programs.
The first is to gain a deeper understanding of new and existing consumers.
We will further focus our investments onto thriving proprietary real time consumer and marketplace knowledge to establish emotional connections guide personalization inspire must have products and create consumer centric experiences that enable lifelong loyal relationships.
The second is developing a more digitally enabled responsive go to market approach will increasingly leverage more end to end digital platforms go to market processes, and best practices and manufacturing innovations and help our brands create and deliver high value products and experiences.
To consumers whenever and wherever they want.
The third is it more seamless integration across physical and digital touch points, we will work to provide a seamless and consistent brand experience across the between all consumer touch points via digital physical owned and partner and strategic wholesale accounts.
The fourth is the construction of more robust engagement levels at helped build and create enduring relationships.
We will invest in leverage best of breed marketing and technology platforms and enable our brands to drive new consumer acquisition and build stronger loyalty through personalized engagement.
Our transformation journey is a multi year endeavor investments over the past two and a half years have laid the foundation that will now begin to build on.
We have an aggressive agenda and look forward to providing more details and updating you on our progress against these programs as the years unfold.
Before turning the call over to Scott I'd like to highlight that on December Fiveth, We launched our latest sustainability and responsibility report made for change.
This report outlines our aspirations for advancing environmental and social improvements across our enterprise and communities worldwide.
Included in the report, we publicly announced new ambitious science based targets and commitments around our use of sustainable materials aimed at reducing greenhouse gas emissions.
Details behind these commitments.
Highlights in the last reporting year and the value. This work adds to our business and stakeholders can be found in the reports.
Consistent with our commitment to be a purpose, let enterprise VF has established a clear position as a leader in the work to combat global climate change.
Looking ahead and with our made for changed strategy, providing the roadmap we will strengthen our role as a company that is leading meaningful initiatives that not only less than or impact on the planet, but also drive purpose led profitable growth for our business in brands and with that I'll turn it over to Scott.
Steve and good morning, everyone.
We are we were pleased with our strong third quarter performance and we remain on track to deliver revenue and earnings growth above our long term commitments.
Before we review our third quarter results in adjusted outlook in more detail I'd like to make a few comments related to the announcement made Tuesday morning of our intent to explore strategic alternatives for the occupational work brands.
In summary, we intend to sell the brands comprising our work segment, excluding the dickies and Timberland Pro brands. The occupational work brands include vs legacy Imagewear business as well as several brands acquired with the Williamson Vicki transaction.
As a reminder, this is primarily a b to b wholesale business and represents the majority of vs existing on manufacturing footprint.
These brands tend to be more cyclical in nature and have minimal exposure to vs International Andy to see growth platforms from a financial standpoint, the occupational work brands contributed about $865 million or revenue and a $130 million of adjusted operating income in fiscal 2019.
As Steve mentioned the review process is underway and we will provide further the details as the process unfolds over the next few months.
So now let's review our third quarter results.
Overall, our performance was strong the brands and platforms that are core drivers of our long term growth objectives performed well during the holiday season, and the fundamentals of our business remain intact, while parts of the portfolio did not fully meet our expectations in aggregate. We were pleased with our results despite of mixed holiday season.
In the U.S.
Our performance in the third quarter highlights the diversity and resiliency of both our portfolio and operating model two themes, we spoke about in detail during our Investor day and Beaver Creek.
For the third quarter total VF revenue increased 6% organically and if you excluded the occupation of work brands the growth rate becomes 7% a full point higher driven by our largest brands.
Growth was relatively balanced by channel in the third quarter as D to C increased 7%, including 17% growth in digital and a 6% total comp and wholesale increased 4%.
Moving onto our performance by geographic region revenue increased 9% internationally and 3% in the U.S., including the occupation of work brands strength internationally was driven by 15% growth in Asia, including more than 30% growth in China, which benefited by about five points from the timing of shipments ahead.
The Chinese new year holiday, our EMEA business also delivered another solid quarter was 7% organic growth led by 13% D to C growth, including an 11% comp and 30% growth in digital.
Our fundamentals remain strong as gross margin expanded 100 basis points organically driven by continued favorable mix shifts towards higher margin businesses and the timing of foreign currency transaction gains.
Operating margin also expanded 100 basis points, representing 12% growth in operating profit. Despite a 9% increase in strategic investment spending and excluding the occupational work brands operating profit increased by 15%.
And to round out the piano EPS increased 14% to $1.23, which includes the occupational portion of our work segment.
Moving to the balance sheet inventory, excluding the occupational work brands increased 8% or 12% for total VF.
Our inventory is a little elevated however, we're comfortable with the quality and expect inventory growth to be in line with topline growth by the end of the year.
Leverage at the ended the quarter remains below our long term target of two times as we balance cash returns with capacity to pursue our M&A agenda, we returned approximately $700 million to shareholders this quarter through dividends and a 500 million dollar share repurchase.
I'll M&A is our top capital allocation priority cash returns to shareholders remain a key component of our TSR algorithm.
Now turning to our updated fiscal 2020 outlook.
As you saw in the release. This morning, we are adjusting our fiscal 2020 outlook. Following our performance. This holiday season and increased visibility for the full year. We now expect revenue to be about $11.75 billion, representing 7% growth on an organic constant dollar basis.
Excluding occupational work brands, our updated outlook represents growth of over 8%.
By brand, we're raising our outlook for vans to about 15% growth, which compares to our prior expectation of 13% to 14% growth. We're tightening the outlook for the north face to about 9% growth. We now expect timberland to decline between one and 2%, which compares to our prior expectation of 1% to 2% growth.
And lastly, we're holding our outlook for dickies at 5% to 6% growth as the business continues to gain momentum.
We expect our strategic growth platforms D to C and international to continue to perform well through the remainder of fiscal 2020, we now expect growth in DTC to to be between 10, and 11% versus our prior expectation of 12% to 13% growth and from a geographic perspective, we now expect.
Act, our international business to increase about 9%, which compares to our prior outlook of 8% to 9% growth.
We continue to see gross margin, expanding 80 basis points to 54.1% and operating margin expanding 90 basis points to 13.8%.
We now expect dps to approximate $3.30, representing about 18% growth. This compares to our prior outlook of 332 to 337, which represented an 18% to 21% growth.
Relative to our prior outlook the reduction in EPS was driven by the performance of Timberland brand and the occupational work brands, partially offset by strength in the vans brands.
As we head into the last quarter of the fiscal year, we are on track to deliver revenue and earnings growth at or above the long term commitments, we laid out and Beaver Creek in late September three of our four largest brands are performing at or above their long term growth objectives and as a reminder, our top two brands.
The van bands in the North face account for it eight over 80% of our growth in the long range plan.
Our strategic growth platforms International and D to C are strong and well positioned to sustain their growth momentum heading into fiscal 2021.
And given our intended actions with our work segment are taking another step to optimize our portfolio simplify our business and elevate our focus on our largest properties and growth opportunities.
Fundamentals of our business are strong we are executing well and we remain confident in our long range organic plan and our ability to deliver on our mid teen TSR commitment.
And our balance sheet is primed and position to capitalize on M&A opportunities that have the potential to drive incremental growth and value creation to our organic plan.
So with that we'll now turn the call back to the operator and take your questions.
Thank you well now be conducting your question answer session.
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One moment, please while we pull for questions.
First question today is coming from Bob Turbo from Guggenheim Securities. Your line is allies [noise].
Hey, guys. Good morning, just two questions for me I guess the first one is.
On the timberland performance.
Can you just talk to sort of the you know the turn into timberland or sort of what needs to happen within that business in sort of the timeline on it and then the second question. I have is just can you can you spend a little bit more on your inventory levels in sort of maybe inventories in the channel in terms of what you see heading into calendar 2000.
Tony Thanks.
Good morning, Bob This is Steve.
So timberland.
Let me just be really Frank with everybody. You. We are not pleased with our performance. We're disappointed and our assumption is you are disappointed as well where we find ourselves. You know is is this is an iconic brand with deep rich heritage.
And we remain very committed to the strategy that we laid out to you all in Beaver Creek.
A lot of foundational work has been done around the brand.
To really understand the consumer and put together the brand architecture that helps drive the most important aspects of our strategy, which is elevating our product we've talked a lot about diversity.
Diversifying our product offer we absolutely need to do that moved beyond classics.
In our men's business to the non classics, but we have to continue to see good growth in our womens.
Apparel and pro business and.
Concurrent with that as we have to find a way to more.
Intimately connected engage with consumers.
As we drive the new brand Foundation forward.
We are not where we'd like to beat on but I think we are very very convicted noted. This brand is one that our skills can absolutely unlock the diversification strategy that we haven't place.
Absolutely gives us confidence that we can be done I think it's interesting if you look at the results this quarter.
Our our apparel business was strong.
Our pro business with strong our with our women's business contributed and it's in aggregate those businesses are about half of the total timberland.
Revenue.
Well, we need to continue to grow.
As in the men classic and non classics, and we laid out that vision in Beaver Creek of the work that needs to be done with the new design teams to new merchandising skills.
To drive that turnaround and we remain very convicted but don't don't.
Let me I'll leave you thinking that were at all pleased we're disappointed and.
Continue to to worked very hard with the with the leadership teams there timberland to put this business in the right place.
Yeah Bob.
As it relates to the inventory levels, I think you're talking about retail inventories and and.
Steve's comments and side as well talked about a mixed holiday performance, a little little softer than our expectation and a few areas and that the knock on effects. It out as a inventory levels are a little elevated.
We also know that the promotional environment started a little earlier and went deeper.
And then we were in some cases and so what we've laid out as a plan for the balance of the year to address that we think thats baked into our guidance and as I said in the prepared remarks, our expectation is both from our inventory and from a retail inventory that will exit this.
Here are in good shape so back in.
You know three months and we'll give you an update on how that progressed.
Thanks, very much guys.
Thanks, Bob. Thank you. My next question today is coming from Dana Telsey from Telsey Advisory Group Your line is alive.
Hi.
Good morning, everyone. I do you think about <unk> performance, but by region, certainly seems like India, and China did well any breakout by brand on what happened in the Americas by channel, whether its wholesale or direct in terms of what you're seeing and then just on ban on what we should be looking forward there.
Going forward, you took up the guidance to 15% for the full year, what should we look for as they go to fiscal 2001. Thank you.
Okay.
He Dana this is Steve. So you know I think you you actually captured our international business was was quite good Europe continues to to do well in a environment that isn't necessarily that strong into our Asia business led by China.
You know continues to perform very well here in the U.S. to our prepared remarks, we saw.
An uptick in the promotional activity.
Starting pretty early and specifically with our cold weather brands.
And the results there really hit the north face in timberland and.
We saw a drop in traffic in our retail.
I didn't notice in the you can see it in our slides.
We did see a reduction in in growth within our brick and mortar indicates a veins we had good ecommerce pick up but.
But we saw weakness in the north face and timberland on that ecommerce side, and we do really relate that to.
The early you know promotional activity.
We did not respond you know you keep you remember back three four years, we did quite a bit of work around rightsizing, though the channel through distribution shoring up the promotional activity that we participated in and we really took the long view and I wanted to preserve the integrity and quality of our brand position.
And with our within our owned environments, we did not chase that that that promotional environment. Yeah. Some might argue that we should have but we really do believe that from a long view shoring up that quality.
Integrity of the brand position is very very important.
But also would tell you know it in the case of our north face business.
We are rebuilding a team you know they just went through a very significant relocation and a in that are do you see in digital teams.
Our our new you know we believe we've got a very strong if not stronger team and our ability to now really engage in drive that particular platform will be back in our control as this team settles into their new position and a and understands that the total brand strategy that they're driving.
Yeah, and then a a relative to your question on bands you know I guess, though that the big picture answer is we really don't see anything fundamentally different right. We just did a 15%, which we know the out of our long range plan, but we also talked about the Oh.
South planning or or or.
Our controlled this out or whatever you want to call it but we planned on and we really don't see anything fundamentally different.
Forward basis.
Thank you.
Thank you. Thank you. Our next question is coming from Michael Binetti from Credit Suisse. Your line is now live.
Hi, Thanks for taking my questions here I wanted to ask about.
Vans in active stay active segment margins for a second.
Down a little bit in the quarter. You you guys went through a huge period of growth with fans.
And the margins being down in this quarter after being up a lot in the first half of the year as we look at the next year.
Fiscal 21, how should we think about the margin.
Compression, we saw on third quarter, I know you'd have some tough comparisons lapping the first half of this year and then I know the longer term structural drivers like do you just see an international Andre this higher over the long term. So it's easy to see that being the case. So you get into second half of fiscal year next year, but I'm thinking more in the near term does the margin need to normalize a little bit in the first half next year.
Lap those big comp growth rates and margin expansion from the first half of fiscal 2000.
Yeah like are great. Greg question. So you know there.
The third quarter, you really after like broaden out and look at the full the full year picture, because there's some timing quarter to quarter.
Well you should expect for the full year is that the margin growth rate will more or less approximate the topline growth rate and that was the way. We planned this business because we're investing back into the growth of bands and that was something I think we've been talking about for for a while here and the great needs, but with this.
Businesses, given it's a gross margin profile that is really the fuel that allows us to continue to invest back into the business. So as as we look forward, we don't see anything structurally different and I'm not going to give guidance for next year at this point, but right now.
Now those gross margins in that growth rate will continue to fuel the investment.
After the to allow us to invest back into the brand.
Okay, Let me back up and ask about.
Some of the Beaver Creek that stuff for a second I'm trying to roll forward. The algorithm you laid out just a few months ago as an analyst day, given what we know about the occupational group at this point. So first starting point was a seven eight year I started a 70% revenue CAGR for five years does that does the sale of occupational move us up to the eight to nine range for the next five years and I know the activation.
This has higher margins about 15% than the overall company I guess, we don't know what's the gross margin or ask DNA improvement was baked into the plan relative to the corporate algorithm. So could you just help us think about how to sale influences. The plans for you know about 40 basis points of EBIT margin expansion per year, and if you ask the 12% to 14% for years.
Yeah, Yeah. So again, we're not we're not going to revise the long term algorithm.
I'd say, Michael it's not materially different and if you think about the go forward. We are you know we know today that certain things are developing somewhat differently.
Timberland is a little slower and its acceleration curve that's moved into the right on the other had you're right. The a sale of occupational will have a tailwind from a growth standpoint, but I I guess at this point, we're not changing our full view and we don't really see a material difference. Okay. Thanks, a lot for help.
Yep.
Thank you. My next question is coming from Erinn Murphy from Piper Salmon is your line is not alive.
Great. Thanks, Good morning, and a couple of questions for me I guess first just on the North face. Thank you guys indicated that the men business performed much better than the women can you just kind of expound on what drove that with a competition in the went inside that media with a little bit softer and relatedly with future light season, you've had it for four months in your direct channel can you.
Just talk about the rollout strategies over the next 12 months.
Our wholesale account starting to Buck for spring, where should we see it.
Hello.
Okay, there and I'll take your question [noise].
So you know good call out you know our men's business in the northeast was good.
We saw solid growth.
Across really all three of the of the brand territories Nonsports Mount life, an urban acts, but really I think it was the mountain life and urban ex where we saw strong growth.
Our with our women's business in the Americas.
Underperformed and you know to my earlier comments around the you know the the early moved to promotional environment. We believe had an impact on our business.
Potentially there was some increased competition and.
Just a may have taken some of that but I think it really comes down to our market segmentation strategy in how we've set our businesses up to succeed.
And going forward you know the north face.
It really take learnings added this quarter and apply it to next fall as they think about the wholesale and retail mix of those core women style.
Women's continues to be one of the primary growth drivers that arnie laid out in the Beaver Creek conversation and a it's a very very important aspect of the long term growth. We we really see this is a and a point in time.
Not not a long term trend and one that we feel confident.
I will not be one now.
On the future like question.
Really you know we're really happy.
With where we are you know we're seeing that.
Prepared remarks, four times you know the sales of the of the summit steep in flight series, Neal where future like products are represented we really have.
The neighbor to really reposition the brand with these collections with that core consumer what we found is it the educational element of future light is is a significant task in the in the future and we've invested heavily around.
You know driving to branded driving need it education, but this is such a disruptive innovation and how the garment fields. How the government performs is markedly different than anything you know that we've seen and been able to use over the last 30 years in the work to drive that education that understanding will come.
10, you into fiscal 21 fiscal 22 as the product line continues to expand you will see an expanded offer in spring 20.
Going on market in rainwear in moving into some more approachable price points that drizzle.
A range accurate at 229 will be the opening price point with future like that is a very strong historical seller and we think this will be a yet another moment to through the raising awareness informed the consumer and as we do that could continue to set ourselves up for future expansion in the coming fall.
All in.
Years after.
Thank you I appreciate it and then just one quick follow up for Scott not just on the digital growth I think you guys reference why it was weaker in at 17% timberland in northeast, but how do you see digital growing in the fourth quarter and as we get into 2021 should it returned back to the longer term CAGR of 24% to 25%. Thank you.
Yeah, we get out I think Steve Unpacked, what we understand at this point other other drivers for why we saw the moderated performance. We're obviously, taking some actions I mentioned some of those in terms of promotion and also just in the way that we're communicating and and the fees.
Back loop that one other things that we have is good insight into consumer feedback and we're making adoptions, where we can so well see some some improvement, but I'm not all the way back to the long term algorithm going forward, we see or we've seen.
The reason why we can achieve out.
Again, the reasons for they underperformance I think Steve.
Act earlier.
Okay. Thank you all.
Yeah. Thanks.
Thank you. My next question is coming from Sam Poser from Susquehanna. Your line is now live.
Good morning, Thank you for taking my question.
I just want a follow up I've two questions one to follow up on timberland and and what's really you know what's being done there too.
Sort of Invigorates the.
I would call it the core heritage business others.
Away from what the classic.
Type businesses.
And when will we potentially begin to see that in earnest given the current deceleration and and this and plan.
Hey, good morning, Sam.
So you know fair question and one that I absolutely expected from here.
We in my earlier comments around you know timberland into classics business.
Yes.
With with.
As Martina laid out in Beaver Creek, we've done a lot of work over the last.
Couple years really understanding the consumer them and it really helping us.
Re frame and rethink the brand brand architecture, and how that drives the creative aspect of the business you. We've we laid out we've added.
New design talent, Christopher Rayburn coming on.
You know the teams you know that you know that surround him the merchandising organization.
What we have to do is not only diversified product, but we have to elevate the product and we need to really think about the aesthetic we need to think about finish.
We're opening up some new sourcing avenues accessing better better manufacturing.
Which will put a and elevated offer from both the materials anesthetic into the into the consumer frame.
Samples that you know that we're seeing right now give us confidence that's why earlier on I said, we remain very convicted that this is a brand weekend that we can drive.
And I think to your point on timing.
Yeah, you're not going to see it in the dramatic way in fiscal 21 to Scott's comment we.
We we don't see fiscal 21 is as a year, where we're going to see breakout performance across the full assortment. We do think our apparel business will continue to drive good double digit growth is we're seeing right now our pro business will continue to be a good performer.
Our women's business here in the Americas is good and we'll continue to drive that but the energy around the mens classic in the non classic diversification.
We'll be major focus it will really be that following year, where we think you'll start to see the evidence in the proof points of that work and really driving off that rich heritage.
Tapping into that outdoor you know heritage and those styles that are that you know so well.
You know will be no really top of mind for us.
Yeah, Sam I'd, just like the add on tier as we think about where we're at and this brand and add what you know that the near to mid term looks like just to build on Steve's comment, but remember part of our strategy is to build the diversified offer but more lifestyle offer and we have some.
That's about as as Steve mentioned with apparel, but that really enables our DTC growth, but the reality is this brand today has about 25% of the overall distribution sitting in D to C. So that large wholesale footprint, particularly in the U.S. coupled with the performance. We just had it all.
Today, and the you know the attendant inventory.
Overhang that that comes with that means we're gonna struggled to grow next year as many of the wholesalers base. There next year buys and and the order books are set based on the performance. They just saw so I think we have to have a several assessment of where we're at EM and next year, we're not giving guidance per se, but we will we will struggle to grow as.
We look at next year and the Timberland Brad.
Thank you and then and then secondly.
Can you give us some idea of the percent of sales.
Within the occupational work business by quarter.
Just to help us or you know sort of forecast forward, a you know with and without that business and can you give us some idea of.
How your foreseeing the occupation movie business to be on a year over year basis are in full year 20, now that we're almost through it.
Use of either release from last years revenue.
Yeah. So on the first part you know there is some seasonality, but it's fairly balanced I'm on a on a full year.
Basis, Sam and I'm, sorry could you repeat the second part of your question.
Can you give us some idea yeah. It was 835 million or 65 million last year can you give us some idea where you're thinking that's going to end up this year.
Or where are.
Yeah, right flat flat flat to slightly down is where we see it for the for the balance of the here and what would be that peak quarter of sales for that business.
Yeah, and I'm I'm, not going to get into that level of detail. Just I. Just refer you back to my earlier comments Sam from the patient with business all right. Thanks, So much have a great because I'd say.
Thank you. My next question is coming from Omar Saad from Evercore ISI. Your line is that alive.
Thanks for taking my question Hi, Good morning, I wanted to ask about the spin off actually the spin offs. At this point you know now with contour and.
Rearview mirror and the announcement around the work where a decision just to sell that business.
I mean, obviously your your reshaping the portfolio to align with kind of the core competency of the compensate company into long term goals, but it also seems like you maybe clearing the decks a little bit here does it make it easier to do a larger acquisition in the future. You know once this is this like kind of last piece is done in terms of the portfolio reshaping is that an appropriate way to think about it maybe you could frame it for us.
And then I had a second question on urban exploration. It was in the North face you know what you learned a in the quarter. How we should think about that component within the north face a over the next to you know over the long term what what the opportunity is there. Thanks.
Great. So Omar I I'll start here, so I'm not I don't think we're in a position to talk to you about the size or magnitude if the acquisition that our last two dispositions, maybe putting us in a position for but what I would tell you that M&A remains that number one priority for capital allocation.
Yeah, we he had been very clear.
With our total addressable market, where we see the opportunity and its we simplify and focus.
Our portfolio Brown around brands that you know really can connect more intimately.
With consumers and have a direct contact to own distribution and a in key partners and it gives you a good sense of.
Where we were looking into where we think we can add value to our portfolio, but absolute size would be difficult.
Really call out for you right now yeah, and I'd just build on the focus and simplification of the model really helps as you think about future activity right show. One just data point acts are at the end of this transaction our portfolio at 12 brands will be roughly half of what it was just a couple of years.
As ago.
But really aligned with that long term growth algorithm that we laid out and Beaver Creek.
As a portfolio of brands you can really drive that that algorithm, but also you know benefit and drive our focus around transformation.
So when you're on your question on urban ex Omar I think the learnings there is that the brand continues to be able to appeal to and attract new consumers.
Leveraging the rich heritage of some of those key icons like the Nuzzi you see you know extreme gear being pulled out of the archives. So what they're finding is yeah. This is a real rich area to to leverage the historical set of brand icons done in a way.
Really promotes the rich heritage not anticipate and supports the more technical side at mountain sports. So.
We see good growth.
And not only here in the U.S., but you know from a global standpoint on into its a real strong part of that go forward strategy.
Got it thanks.
Thanks to my next question is coming from Alex Wovens from Goldman Sachs. Your line is alive.
Good morning. Thanks, so much for taking my question My first question.
His omni occupational what quest split apps can you shed some comments on this and in the opening remarks, but I wonder if you could help us out with where we should and shouldn't expect that to be dis synergies.
From that from that split.
Yeah. So there will be some all the others I would I would characterize this business as moderately integrated so we will have some synergies just to put a number on it and whereas in the neighborhood of $30 million as our expectation now against that likely they will.
The T.S.J. and and of course will will get after those costs over time.
It depends on the buyer in the circumstances, but just to give you some sensor the magnitude. The other thing how that played out as a with this action then it greatly simplifies.
Our focus is our supply chain as well from an end manufacturing standpoint, you know we talked about a this gets us out of the apparel manufacturing. So as you can imagine that gives opportunities for a simplification and cost reduction as well.
Great. That's helpful. And then if I may another question on the North America.
Drop.
Can you shed a lot of comments on the more promotional environment and a holiday period to the extent that it's possible isn't a way of passing through how much of the weakness in North America was a softening and underlying consumer.
Capital spending bus as you know the impacts of.
Warmer weather trends have us is what has been pretty pretty good winter last year.
Do you guys, how many and any thoughts on on you know on on that split.
Yeah, Alex I don't think it's it would be really difficult I think really pinpoint what were those key drivers you called out some of them I think you know the U.S. consumer you know remains strong.
What we saw in our product category, specifically cold weather product.
Was a slow start to the season the quick moved.
Motion environment, I'm, certainly did have an impact.
But I could also say <unk>.
When when brands are deeply focused in understanding the consumer needs in putting the right products in front of consumers that right time, you can apps you can absolutely see you know the sales with unit we plan for so.
We're not going to focus on any one of those of those key drivers if we're going to be very focused on our our consumer I'm understanding how that will help us drive a more retail centric approach to our go to market strategies.
And you continue to elevate our our digital skills to be able to really engage and ER and drive deeper connections with our consumers.
Great. Thanks, so much.
Thank you. Our next question is coming from Matthew Boss from JP Morgan Your line is not alive.
Great. Thanks, So on a gross margin what was the benefit this quarter from the FX transaction gains and just the expectation for the fourth quarter and how best to think about the impact on the fourth quarter gross margin as a whole from the more promotional backdrop and elevated inventories that you cited.
Yeah, Matt a we didn't break that out per se that but certainly FX did benefit the third quarter and and it does turn negative or really for the first time this year and a in the fourth quarter and of course out or on an ongoing basis. So I, what I will say as this you know if you look at our employee.
Wide guidance that fourth quarter would would say that our implied margin in the fourth quarter is down to that.
Underneath that the the structural gross margin mix remained strong it's there and that will continue on an ongoing basis or the two factors. One you mentioned is that the FX and this we're talking about transactional FX, which relates to add just put in place over the last 12 18 months or so.
And that's something we've been talking about for a long time that now turns negative in the quarter also while tariffs not a big impact overall or even for the year. We do see for the first on the negative tariff impact in the fourth quarter now interestingly on a go forward basis based on where we're out right now to us.
Seem to be about a push year on year and again really relatively small in the overall scheme of things. So that's what's going on a gross margin right. The change in the FX cadence underneath that you've Gotta continued makes benefit which is structural and will continue and then a little bit of noise on.
On the tariff one final thing I alluded to this or in my earlier comments as well relative to the inventory I'm being a little elevated and certain pockets, but it also factored in to be a little more market appropriate from a promotional cadence standpoint, and that's also baked in to our guidance as you look at the fourth quarter.
Great and then just a follow up on the portfolio pruning, So and I guess, maybe larger picture how should we be thinking about the strategy moving from pruning to M&A and how would you prioritize maybe best particular categories of increased interest on the radar I think within that core addressable market that you outlined.
At the analyst day.
Yeah. So so you have right, where I was going to start which is that but those tams their total addressable market.
It is where we're focused and remember the three lenses that we looked at both the portfolio that we have and the portfolio targets that we evaluate how it's it's really pretty consistent straightforward. We're looking at it and strategically as it is at an attractive segment of the market.
Financially does it need to characteristics that we're looking for and from an ownership standpoint that we bring something to the party as it consistent with our what our purpose and does it made the profile of the target a investor that that we're going after so you know I think in that is a pretty good export.
Nation as a of the actions that we've taken and also gives you a pretty good indication of that kind of areas that we're looking from an acquisition standpoint.
Great. Thanks.
Thank you. My next question is coming from Jim Duffy from Stifel. Your line is not alive.
Thanks, Good morning.
Hi, guys two lines of questioning for me first we've heard a lot about the U.S. market dynamics in the quarter can you speak to Asia is there a way to size the impact of the Hong Kong disruption and can you speak to what you're seeing relative to expectations and other countries.
Maybe I'll put some numbers out of her so are you know our Hong Kong businesses important it's been a good business, but it's not that large in the scheme of things like we said you know in a and 100 million range overall and that has been significantly impacted through the air and we really haven't seen.
Much of the change in trend.
Relative to Hong Kong or you know interestingly it will start to lap that we're having that conversation internally here as we get into the new year, we'll start to.
Laugh when we started to see a those issues. The good news for US is that China and a in the region as really been strong and you saw 30% that's somewhat artificial anyway. So there's about five points due to the timing of Chinese new year. So there's a lot of quarter to quarter noise in that but still.
If you like we've been in that 25, plus kind of growth rates you consistently in China, and that's really driven the strength of Asia and really why were at the top end of our long range estimates overall.
Great I wanted to dig in some on the inventory can you guys speaking more detail on the geographic and brand level inventory picture. It seems inventories most out of balance for the vocational work business and terminal and how can you talk about planned skipped the inventories back in line and the financial impact and then Scott is that cleaned up in the Fisk.
Fourth quarter is there some lingering impact as we go into fiscal 21.
Yeah. So so you're talking about our inventory, obviously and so where if you look at the ongoing core inventory, we were up like 8%.
And as we think about going forward, we said we'd be balanced between revenue and sales so long way of saying, where we think we're okay from an inventory standpoint by the end of the year any actions. It may be taken we believe are baked into the outlook and and so we'd say in a pretty good so obviously wed.
Means it flipped plus 12 for the us.
The the occupational business is really elevated right now it's a it's a unique model because in that business. You have specific customers you have to its all about service you maintained the inventory and most of these agreements actually habit.
Was it says should there be access at the end of the program that then they will buy that that will take that inventory. So it's good evidence away. We just have too much of it as the short answer and as you can imagine given to the actions that we recently announced you know taking that radical are very costly short term.
Actions to try to reduce the inventory wouldn't make a whole lot of sense, because it's good quality inventory and eventually it's going to be it's gonna be used so hopefully that gives you as the picture.
It does thank you.
Thanks, Jim.
Thank you. Our next question is coming from Jonathan Komp from Baird. Your line is now live.
Yeah, Hi, Thank you, Steve maybe just a follow up more related to timberland and portfolio management actions I guess, it's very clear your history.
When parts of the business aren't meeting your strategic and financial goals, you've been very quick to take action, but in the case of like Timberland, where.
Very clearly fits strategically, but it's not it's not necessarily hitting your financial goals can you maybe just talk more philosophically about kind of your pain patients enrolling to see things out and any any thoughts there.
Sure.
I would start noted our our willingness to look at divestitures really is come online. The last three years. So as we agree as we have made no driving in shaping our portfolio our number one strategic choice and really focusing now on on the part.
So the market.
Yeah, we laid out with a total addressable market and Beaver Creek.
How are we characterize our brands ads.
Global activity based lifestyle brands that connect keep can connect directly with consumers you know what their predominant through their own and digital channels.
That frame has helped us really look at what brands, we feel we're best stat.
Or said differently, where are we the best owner and where are we not the best owner and what we've trimmed are really good brands, but the brands that don't really aligned with that long term long term view to point on timberland it absolutely aligned with with the consumer you know that position in the marketplace.
Turning to connect with consumers my earlier points that you know we're disappointed in our ability to execute.
In our in our conviction around the strategy you know that we have been working on you know really over the last 18 to 24 month that aren't that Martino articulated in Beaver Creek.
We don't have endless Patriots, we certainly have a very focused approach and a and clear set to keep you guys that we will look for our brand teams all brand teams to deliver on a year over year basis.
But that's really what you all to lead this call knowing that we are still deeply committed the timberland breed, we we understand where the issues are you know my comments around you know not only the diversification the product, but the but the quality it'd be aesthetic of the product across all of the different growth drivers.
We will you could be very close and how were how we're doing there will give you the proof points as this strategy starts to take hold.
But we do not have endless patients and you know it is really around the proof points indicate you guys that we work with on it on a year over year basis with our brands.
That will ultimately drive the decisions long term.
[laughter].
Okay. That's very helpful. And then just separately as you look out to 2021 I think this time last year you gave some high level thoughts on a few of the brands for the year ahead.
You didn't give that this year. So I'm just wondering maybe outside of timberland just had a high level is there anything across the brands that you would think is kinda beyond or different than maybe closer to the long term plan that you've laid out when you look across the brands.
You know Jonathan not really I mean, we fundamentally believe where are not in a different environment. We see the the long range plan that we just talked about in September as as intact. Now obviously, if you pieces are moving as I mentioned I think on ER and.
But that is question.
Structurally you're gonna see with the with the sale of occupational that's a tailwind to growth. The what we just talked about in timberland is sort of a headwind, but overall, we don't see ourselves in a fundamentally different place I'd just like to remind as you think about this year in the and the guidance change or the outlook change that we just talk through.
Yeah, the a uptick in bands the ER, the adjustment and timberland essentially our awash and what's left is the occupational reduction so using different words, if it weren't for occupational we'd still be in the range that we talked about three months ago add.
And I'd say, that's really the big picture. So if you look at the ongoing algorithm for via which will obviously exclude the occupational work group.
We say yeah evolved a little differently, but more we don't see anything fundamentally different on a go forward basis, but three months, we'll be back we'll give you guidance for next year and and clean up the details.
That's very helpful. Thank you.
Okay. Thank you. Our final question today is coming from Ike Boruchow from Wells Fargo. Your line is now live [noise].
Hey, Thanks for taking my question is Scott two questions for you just to follow but one more time on the inventory the slower than expected growth and that categories up all cold weather that outerwear is that outerwear and footwear I was kind of curious if there's any more color you can kind of give there and then anymore color on the types of channels where that inventory.
Well the slow moving inventory was was a broad based was it your DTC.
Departments or just any more color there would be really helpful.
Yeah, really I'd say, the if I take it was mixed as this is the answer I mean certain categories. We saw a relatively a better sell through and others. We saw a not quite as strong you know Senate or some of the more insulated a colder weather jackets as Steve mentioned, a women's versus men.
And and really again of course, timberland, having such a large classic.
Business some of that a classic boot inventory that those are the main areas, but I would say get a unless I mean, even retailer the retailers. Some are in great shape somehow relatively more and we look at it over over all we would say slightly elevated right not not a disaster not not a huge issue, but a little more than we would like.
To see and that's why we've taken some of the actions that I mentioned earlier.
Earlier, and again to the best in our knowledge Weve got it built into our outlook and we have a good fast the exit in good shape.
Obviously, not all those levers are within our control and in three months, we'll give you an update on on how that played out and give you an indication of where we stand going into next year.
Got it thanks gotten them just one quick follow up just when we think about what you're trying to monetize the the work where asset for should we look at the dickies transaction to give US you know some kind of guidance I know you can't tell us what you're trying to sell it for but I'm just kind of curious the framework that maybe you're using when you think about that.
Yeah of course, I'm not going to negotiate against myself here, so, but but yeah. You can look at comparable transactions I would say this interestingly they a interest for this asset has been a exceedingly high and frankly, a higher than we expected. So both on the sponsors side end to end a [noise] strategic side. So.
You know, we're optimistic that well, let's let's see where that plays out we'll have visibility to that in the next couple of months.
Thanks Scott.
Thank you we should've our question answer session outlets to turn the floor back over to see for any further closing comments.
Great. Thank everybody for joining us this morning, I'm, just going to reiterate our third quarter performance.
Is strong and our year to date results are at the high end of our long term growth objectives, and we're on track to deliver solid performance for this year.
As we look at the you know the market signals that we continue to monitor our focus on transforming to become more consumer minded retail centric in more hyper digital in how we operate our business could not be more timely.
The moves were making with our portfolio will allow us to have greater focus not only by management, but also how we invest against our brand properties, but also our transformation agenda to put us in a much stronger position in the future as we drive against you know the L. R. P that we laid out.
For you all and Beaver Creek, we look forward to catching up with you own may and giving you insight into how we look at fiscal 2021, and our continued drive against that long range plan.
Thanks.
Thank you that does conclude today's teleconference. You may disconnect. Your lines. This time and have a wonderful day, we thank you for your participation today.