Q1 2021 VF Corp Earnings Call
[music].
Greetings and welcome to via corporations first quarter fiscal Twentytwenty, One conference call.
This time, all participants are in 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.
I'd now like to turn the conference over to your host Joe Alkar, Vice President of Investor Relations.
Good morning, welcome to VF Corporation's first quarter fiscal 2021 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 could 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 defined in the press release that was issued this morning.
Well use adjusted constant dollar amounts as lead numbers and our discussion because we believe they more accurately represent the true operational performance and underlying results of our business.
You May also hear us referred to reported amounts which are in accordance with U.S. yet.
Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identifying quantify.
All excluded items and provide management's view of why this information is useful to investors.
During the fourth quarter of Twentytwenty the company determined that the occupational workwear business met the held for sale in discontinued operations accounting criteria.
Accordingly.
The company has reported that related assets and liabilities of the occupational workwear business in discontinued operations as of the date noted at the.
And included the operating results of this business in discontinued operations all periods presented.
Unless otherwise noted results presented on todays call are based on continuing operations.
Joining me on today's call will be V S 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 and welcome everyone I Hope my comments. This morning find you and your loved ones healthy insight and please bear with its again has today you will be conducting its call from separate locations.
I'd like to begin by taking a moment in sharing some thoughts and recent events and outrage over the issues at racial and justice and systemic discrimination did it gripped our nation.
Racism in discrimination are not welcome at VF Corporation, we are a purpose that diverse and inclusive company I just like the consumers of our brands. That's in our brands had been champing equity equality and belonging for a long time, whether that's through a specific support for initiatives in organizations from our individual brands we're supporting.
Dozens of minority led and focused organizations defended the foundation along with other forms of corporate support.
This isn't new territory for us interactions are woven into a culture that has been built over 100 years.
We'd be AFE will continue to do what's right and lead by example to not just words, but actions as always we remain absolutely committed to ensuring that our company is one where everyone feels welcome supported and inspired to the exactly who they are.
<unk> for providing an update on the current environment and how VF is navigating the unique challenges in business disruption presented that cobot 19 in recent protests across the globe I Wonder again Express my deep gratitude for the way our management team and associates around the world have come together and responded to these crises.
Our teams have moved the speed agility determination and focus and I'm humbled to have the opportunity to lead Viet during this time.
We've prepared ourselves well for times such as these yes is built for this.
Our strong brands, coupled with our purpose led people first approach and our financial and supply chain disciplines, and our fortress balance sheet allow us to whether any storm I'm confident that the actual emerge in a position of strength.
Cool by the clarity of our strategy and our portfolio in business model transformation, which will position us to thrive in deliver accelerated growth and value creation in the years ahead.
Now turning to our business our first quarter results were better than expected led by our international and digital platforms. Scott will go through the details in a moment.
The end of June, but the majority of our stores reopened we saw encouraging signals its consumer spending in core outdoor active and athletic categories with resilient.
Business fundamentals continued to improve throughout the quarter with particular strength in our digital business growing 81% and our China business returning to growth one quarter earlier than our expectations.
This improving trend has continued in July despite some store inquiry closures in some parts of the U.S.
We're in the midst an unprecedented change across the retail landscape and consumer trends and behaviors your evolving faster than ever before.
Participation in outdoor activities in consumer interest in outdoor exploration is increasing.
Health and wellness and the pursuit of a more active lifestyle and accelerating casualization as a trend likely to be a mainstay in post cobot world.
There was an elevated focus on environmental sustainability that will lead to a greater commitment to combating global climate change.
And there are growing expectations for purpose driven actions from brand to care for their local communities in address issues relevant to their consumers.
But these changes didnt start because of coated these trends for core underpinnings of the strategy, we laid out in 2017 and updated last fall and Beaver Creek.
And these trends have influenced our portfolio decisions over the past several years and continue to guide our acquisition agenda.
Ever there's no doubt the recent events will serve to accelerate these consumer behaviors, leading to a dramatic reorganization of the marketplace.
Here's the good news, we believe the set of actions we laid out a few years ago have helped to reset the foundation to capitalize on these new realities. We believe the portfolio. We have today sits at the epicenter of the trends just outlined and is poised to capitalize on these ships and our brands are uniquely positioned to not only benefit from these changes in can.
Soon where value systems, but at the opportunity to drive an influence them.
Well the cobot 19 pandemic has presented unprecedented challenges and disruption to our business and is also presented us with the opportunity to accelerate key elements of our strategy and business in operating model transformation and at this point I'd like to highlight just a few.
Beginning with our distort Asia strategy.
The Asia Pacific region, and more specifically, China has been a lead market into cobot 19, pandemic and we've applied many of our learnings from China across the globe.
Our business in mainland China is strong and recovering sharply since February with growth of 9% in the first quarter.
We expect our business in mainland China to accelerate in the mid teens in the second quarter achieved more than 20% growth for the full year.
Essentially performing in line with the growth target, we presented in Beaver Creek.
Highlights from China for the quarter include the opening up more than 160 partner doors led by advancing Dick he's in the face of a challenging in uncertain retail environment.
Reflecting the confidence our partners have an enduring strength of our brands.
The 35% digital growth versus low single digit growth for all apparel and footwear categories.
The acquisition of 8 million, new consumers, who are now interacting with VF brands on T Mall, and the introduction of new growth platform and pilot with Alibaba and Tencent, providing VF brands access to millions of new consumers. In addition to ongoing data and analytics support.
Moving to digital and our hyper digital business model transformation, our global digital business increased more than 80% in the first quarter led by 115% growth in the Americas region, and nearly 90% growth across our big four brands.
As a result of these this strong performance, we expect growth in digital with more than 40% for the year and coupled with our pure play digital wholesale business, we expect our digital penetration to be more than 25% of fiscal 21 revenue.
Within digital our consumer centric strategy recognizes that transactional activity is only one measure of success. We are increasingly focused on engagement metrics consumer capture and consumer lifetime value.
Highlights from our digital for the quarter include.
Buy online pick up in store and ship from store capabilities have fully launched in the vast majority of our stores in the U.S.
The North case will launch BOPUS and ship from store in EMEA in August and BOPUS and ship from store for timberland in the U.S. anemia is underway.
Subside functionalities being piloted in both the Americas anyway.
We have today to the deferred payment option in our U.S. retail locations.
We achieved more than 30% growth with Salon donates those two of our largest digital wholesale partners globally.
We experienced double digit growth in bands App downloads versus last quarter.
Vance family loyalty program surpassed 12 million members.
We've seen loyalty translate into higher purchase frequency and higher average order value, resulting in 35% greater spend from bands family loyalty members relative to nonmembers.
Digital engagement accelerated for the north face as well social channel growth exploded during the quarter roughly doubling the total number of social followers. All key engagement measures were up 20% to 30% driven by our athletes storytelling series Summer base Camp program, all trails partnership and the strong support.
The brands Cobot, 19, and black lives matter response.
New customer acquisition increased 275% strongly supported by the health care first responder initiative.
The north face loyalty program increased more than 20% and we saw significant increases in brand awareness from the key 18 to 35 year old demographic and our customer penetration migrated toward a younger female consumer.
We're clearly encouraged by the trends in our digital business in the early results you're seeing from recent investment.
I don't want to stress that we're early in our digital journey. The F. has a massive opportunity to invest and extend our digital advantage.
On our last call, we highlighted at 90% of the strategic investments in this year's plan, we're focused on our digital transformation.
Digitalization applies across all aspects of consumers' lives not just how they shop, but how they engage with brands.
We've accelerated our thinking and actions around our digital initiatives in response to the current environment.
We know that with our powerful brand portfolio strengthening our digital enterprise capabilities will fuel accelerated sustainable growth and returns as we emerge from this crisis.
Let's spend a few minutes and provide a little color on some of our most critical initiatives.
We're working on the Digitization of our entire value chain from design and manufacturing through just to be distribution, while developing a 360 degree view of our consumer to support seamless customized integration across all touch points.
This is all developing to the perspective.
Sooner journey, which are chief digital officer covered during our Investor day last fall.
We are increasingly leveraging product and consumer data at the differentiator using our analytics engine to create more individualized experiences engaging consumers, while providing product development insights.
The man chain analytics investment across our platform will allow our brands to understand what is trending in what channels, the gold, making our digital marketing more timely relevant and contextual.
We're working toward more focused product lines, using our consumer understanding to work with greater agility to simplify and streamline the more frequent flow of consumer relevant products.
We continue to elevate could future role of the store focused on creating authentic brand experiences injecting energy and providing a platform for new product stories offering the omnichannel capabilities, which are increasingly becoming table stakes at retail.
These are important initiatives that have the potential to drive a step function change in our digital transformation I look forward to sharing additional details in the months ahead.
Lastly, as you may have seen parents in Calvert research and management re ranked their annual list of the 100, most sustainable companies, placing a greater waiting on social responsibility actions, including those in response to covert 19.
This re ranking led the f. from a commendable number 21 on the original 2020 list to being names number one overall.
This recognition is an honor that gives us great pride and it further cement our position as a company that sets high standards and leads by example, not to win awards, but because it's the right thing to do.
To close while much has changed since our 2017 Investor day, our long term strategic vision remains intact as the key pillars of our long range growth plan have only mid been made more urgent by current events.
Our brands are well positioned in a large and growing outdoor active and athletic markets and a consumer trend serving as the basis of our strategy of only accelerated in the current environment. Looking ahead I believe that truly purpose led brands and companies like ours will they are better than others. When the situation is over.
That's because we made principal decisions based on what's right for people and our planet whether its elevating our actions to combat global climate change, we're helping to tear down the structures of systemic racism the target the black community and other people of color.
Yes, we'll always leave with purpose and act with integrity.
And by continuing to foster a sense of community with our consumers. During these trying times, we're positioning VF and our brands for a brighter future purpose led and performance driven it's in our DNA.
And now I'll turn it over to Scott.
Thanks, Dave and good morning, everyone I Hope you and your families are all healthy and safe.
The pace of change across the retail landscape and within VF is unlike anything I've seen during my career.
You could have ever imagined a quarter and which VF revenue declined to 47%.
These are truly unbelievable times, but with great change comes great opportunity and VF is well positioned to take full advantage of the seismic shifts rippling across apparel footwear and retail.
Before jumping into the details of our first quarter performance I want to remind you of our approach to these unusual times.
We've taken bold actions to protect the enterprise, including securing adequate liquidity in the face of uncertainty aggressively rightsizing inventory buys and expenses to conserve cash add refocusing our investments in efforts against those brands channels and regions, where we have relative advantage, including digital and try.
China.
Collectively these actions gave us the ability and confidence to put people first and avoid for allowed us to meet all of our obligations to preserve the dividend and to continue to invest in those capabilities that we believe will put us in an advantage position upon emergence from this crisis.
So let's go a bit deeper to update our progress in a few of those areas starting with the strength of the balance sheet.
Let's go disciplined and balance sheet flexibility are a bedrock of Viasat 121 year legacy vs entered this crisis with a fortress balance sheet and and strong liquidity and as a result of the liquidity and capital structure actions, we executed earlier this year coupled with prudent.
Management and focus on our expenses working capital and Capex and Capex investments, we entered the quarter with approximately $2.8 billion of cash and short term investments. In addition to $2.2 billion remaining under vs revolving credit facility.
While our recent actions may ultimately prove conservative there a clear a testament of B.S. balance sheet flexibility and financial strength.
The fire power, we have provides us with significant flexibility and optionality as we navigate the ongoing disruption caused by big pandemic and to take advantage of the opportunities that present. It allows us to remain on the offensive and continue to invest in our strategic priorities, while pursuing our acquisition agenda.
Moving on to supply chain flexibility inventory management and operational rigor.
The sophistication and scale of our global supply chain, coupled with our operational discipline are hallmarks of B S and the source of competitive advantage, particularly during times of uncertainty on marketplace disruption.
As the pandemic began to scale globally, our operational leaders mobilize quickly to thoroughly assess inventory positions and make meaningful reductions in a rigorous and thoughtful demand supply matching process.
Importantly, our inventory was up 2% at the end of the first quarter, which was better than expected due to a combination of higher revenue timing of receipts and in some cases supply delays.
While these supply delays did cost us some revenue in the quarter, most notably in the van spread they don't give us concern on a full year basis and will began to normalize over the next several months.
And remember we expect our inventory declined on a year over year basis throughout the remainder of the year.
While we expect lower inventory levels, we preserved investment and product innovation and newness across our brands and it's important to remember that our brands have a relatively high percentage of core product.
We maintain an active and transparent dialogue with our key partners and strategic suppliers as we work together on forward purchase commitments and product Assortments.
We continue to collaborate with key retail partners regarding appropriate levels of future inventory considering the involved the evolving environment.
Throughout these conversations our focus is undeniably on the long term health and sustainability of the us our brands and our partners.
Remember, we've said from the beginning that we're focused on emerging from this year in a healthy position.
Even at the cost of short term sales and gross margin.
One results are very encouraging and give us confidence that we're well on our way to achieving that objective.
Lastly, I'd like to spend a few minutes on our digital performance and they accelerated mix shift we see happening in our business as a result of cobot.
The F D to C digital business grew 81% and the corridor and accounted for 35% of total revenue.
The growth in our digital business was broad based both geographic region and by brand.
Hi region digital in the Americas increased 115% Europe increased 56% and Asia increased almost 40% by brand digital increased 89% in bands I, 124% in the north face, 63% and timberland and 45.
Percent indicates.
As Steve highlighted in his opening remarks, we're seeing strong momentum across our digital platform, resulting in deeper engagement.
The investments, we've been prioritizing and digital over the past several years continue to show strong returns, which give us confidence to can tend to you and our path towards digital transformation.
Now turning to a summary of our first quarter results.
Revenue declined 47% versus the prior year better than our expectations driven by our international and digital platforms reopening plans were delayed in the Americas relative to our initial expectations. However, once stores opened our performance was largely better than expected we saw.
Steady improvement throughout the quarter in both Europe, and Asia, and China returned to positive gross sooner than expected.
Although Q1 is our smallest quarter, we're pleased with our execution.
Based on the trends, we're seeing we're optimistic as we move through the remaining summer months and into early fall, but more on that in a moment.
So you may be wandering in light of a 47% decline in revenue and a step back and reopening plans in certain parts of the club why we have confidence in the forward trajectory in underlying fundamentals of our business.
So allow me to spend a few minutes on the key performance indicators, we are monitoring, which we believe represent the true underlying health of our brands and our business and reflect the large growth opportunity in front of us.
Consumer spending globally, and outdoor active and athletic categories remains resilient.
These markets are large growing structurally attractive and spending in these categories will continue to be positively influenced by consumer trends, such as outdoor participation health and wellness and casualization.
VF on some of the most powerful brands that participate in these categories and our portfolio is well positioned to benefit.
Our business in July continued to sequentially improve with revenue down less than 25% led by significant improvement at vans and dickies.
We expect our dickies brand to return to mid single digit growth in the second quarter, and we expect our vans brand to be down less than 15%, we expect sequential improvement across nearly all brands in our portfolio.
[noise], greater China increased 3% in the quarter, including 9% into mainland Inflecting to gross one quarter sooner than we expected.
China has been the lead market in the cobot pandemic and we view it as a strong leading indicator in terms of overall performance and shape of recovery.
We expect mid teen growth in our mainland China business in Q2 with more than 20% growth plan for the full year.
Our D to C digital business increased 81% in the first quarter and we expect more than 40% digital growth for the full year. The performance of our digital platform along with investments, we're making to continue to drive a more accelerated shift in our digital transformation are starting to pay off we're driving.
New consumers to our brand franchises and building, even stronger connections and affinity with our loyal customers.
And lastly, I'd like to provide a little color on recent performance in sell through trends in our largest accounts.
Generally when wholesale doors were up and we saw strong demand for example in the U.S. wholesale where doors were open then sell through was up high single digits.
Our brands retail inventories were well positioned specifically the north face in timberland inventory levels are in sync with forward revenue projections, while vans retail inventories are below historical levels.
So we're clearly optimistic about the early signs we're seeing in our business now let me give you some color on the state of our business from a geographic standpoint.
In the Americas at the end of June.
We were operating with roughly 75% of our own stores open and our wholesale partners had reopened the majority of their stores. However, the recent rising covered cases across certain parts of the give us has led to isolated store closures.
As we set today roughly 80% of our own stores are opened in the region [noise].
Throughout the quarter, we continued to see strong conversion and sequential improvements in traffic trends, although regional and Consistencies and capacity issues brought about by new store safety measures presented some challenges.
In Europe, we've seen a gradual reopening across countries and sequential improvement in the region as the quarter progressed at the end of June more than 90% of our stores were opened.
However, isolated virus outbreaks continued to cause disruption as we sit today nearly all of our stores are up and across Europe. Most markets performed above expectations. Our business saw strong digital performance throughout the quarter, including continued momentum from our key digital wholesale partners we continue to.
Invest behind our digital capabilities and are working closely with key partners, such as Salon, Doe and Ace us to help fuel continued acceleration in Europe.
In Asia consumer confidence and the economic recovery outlook is currently stronger than any other regions as of June all of B F. D to C stores had resumed operations across all markets. We've seen a continual gradual recovery in China Korea grew 30% while the rest.
Hey, APAC showed more modest improvement.
So with that as a brac drop in mind I'd like to cover just a few other components of our first quarter results.
Gross margin contracted 220 basis points to 54.1%, which was better than expected as the positive impact of mix shift was offset by the impacts of a highly promotional marketplace.
We're pleased with the progress we've made and Rightsizing our inventory a little more quickly than we had planned without resorting to excessive discounting.
Further the continued acceleration of our digital transformation will continue to provide favorable structural gross margin mix benefits as we move forward.
Total SGN a declined over 20% as we managed our investment and discretionary spending in light of the current environment that said, we continued to preserve and prioritize investments in our strategic priorities, specifically D to C and digital including digitally focused demand creation data and analytics.
Okay and technology, while re examining every aspect of our structural overhead in light of the rapidly changing marketplace and our portfolio and business model transformations.
Turning to capital allocation.
Well share repurchases remain a key element of our long term plan and TSR algorithm our share repurchase program remains frozen for the time being as we prioritize liquidity the dividend and M&A optionality over the near term and speaking of our dividend. It remains an integral part of our ongoing TSR model and we.
We remain committed to our dividend of course subject to board approval.
Switching now to the divestiture of our occupational work portfolio a quick update.
Our process remains active and on schedule, we remain in conversations with a large number of interested buyers and remain confident that will be in a position to share more specifics over the coming months as the process unfolds.
Regarding our outlook for the balance of fiscal 2021.
While our results for the quarter were better than expected and we're optimistic about recent trends across the business. We believe it's still too early to provide a formal outlooks for the year given the continued uncertainty of the duration and severity of the pandemic.
As we sit today, we remain confident in our free cash flow outlook of at least $600 million through a combination of operating earnings working capital management and lower Capex. We continue to expect to exit fiscal 2021, with our revolver Undrawn and a cash balance of at least $3 billion.
Resulting in net leverage at less than three times.
Remember expected proceeds from the sale of the occupational work business would provide us with an additional source of cash and liquidity.
And finally based on our July performance and current visibility, we expect Q2 revenue to be down less than 25%, which includes the impact of stores that have recently re closed primarily in the U.S. market.
So to wrap things up we set out this year with two goals one to protect the enterprise and manage the now.
And to taking actions and making investments to prepare for the next.
And while it's still early we're seeing positive proof points that give us confidence that were on the right track.
With one quarter in the books were modestly ahead of our expectation with respect to revenue earnings cash and liquidity.
We continue to make investments against our key strategic priorities the underlying momentum of our brand portfolio and our balance sheet strength give me confidence in our ability to capitalize on growth opportunities, both organically and Inorganically and drive accelerated growth in the near term, we will continue to folks.
US on key strategic choices around the transformation to our retail centric digitally it'll add enterprise.
The combination of all these levers coupled with a diversified TSR model will place V. S in an advantaged position.
And with that we can now open the line and take your questions.
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Our first question today is from Laurent Vasilescu of Exane BNP Paribas.
Oh I apologize actually.
Yeah.
[noise] ailerons good morning.
Hi, I think you mentioned July was down less than 25% I think in line with your Twoq you revenue guide.
All right or are you assuming that August and September you know.
Improve or are there any onetime factors that we should consider is that like back to school or is it just some of the re closures that you've seen in the Americas any context on that would be very helpful.
Yeah, maybe maybe I'll start there yet so the underlying trend Laura continues to improve sequentially remember, we talked about some supply some inbound delays relative to advance.
From a wholesale standpoint in Q1, I mean, we're talking about a matter of weeks here. So is that pushed into Q2. That's part of the reason as we've seen those timing delays have actually now shipped in the month of July that that boost said a little bit but as we go through the quarter. We continue we expect to see.
Ah continued sequential improvement by the way that's true for the for the balance of the year not just not just for the second quarter.
Okay very helpful. And then Scott I think on the gross margin. It's always very helpful to have the slides.
That 220, that's just that the rate declined to 430 I think you mentioned it was driven by promotions. It how do we think about mix and rate on how they evolve over the coming quarter, especially considering your inventories situations print in pretty good shape and then one small housekeeping question I saw the cash like you.
I have about 700 million a purchases of short term investments just curious to know the decision factor on on that would would be very helpful.
Yeah, I got it so a little bit on the on the gross margin what we saw in the quarter and that the evolution. So in Q1.
You know we did a one at one of the swing factors is FX I remember we talked about FX is is gonna be a a negative as we look at the full year.
Somewhere around 50, bips or so.
50, 60 bets for the full year, but in the first quarter given the substantial changes in the in that business conditions in light of covered we had some in effective hedges, which rolled off which actually because they were in the money created a positive.
In Q1 that will reverse through the balance of the air and in Q2, well see that swing. The other way from a you know from a a negative impact from FX and then as we think about promotions those are going to gradually improve as we move through the year and in fact, as we think about that.
Full year margins in the fourth quarter, we would expect to be.
Nearing are nearing flat to gross compared to the prior year. So.
Hopefully that gives you a little bit of shape of how we expect that to evolves.
As it relates to the short term investment. These are truly short term investments I mean liquidity.
Ah protection is our number one.
Goal here and we've made sure that these are very short tendered investments just chasing a little bit more yield were not used to have had as much cash on the balance sheet and so I'm trying to try to get a little bit of return while not at all given any concern about short term cash availability or liquidity.
Okay. That's all that's about.
Very helpful. Thank you very much and best of luck.
Thanks, Ron.
The next question is from Matthew Boss of Jpmorgan. Please proceed with your question.
Great. Thanks, Steve maybe on topline progression, what I guess what level of visibility do you have today on the timeline that you've laid out for topline stabilization in Europe by the third quarter and North America by the fourth quarter.
Well, what we what we can see you certainly our forward wholesale order books I think we talked last.
Call about you know there you know the reduction that we saw there the to Scott's comments you know that continued collaborative work than we do with our key wholesale partners. When doors are open we've seen really strong sell through.
So the order book visibility, we have the teachers, what's giving us confidence to it could to call out that progression.
From a DTC standpoint, we're seeing much greater penetration certainly like digital business.
That's harder to call you don't have forward orders based there, but the but the confidence that we have there with our digital penetration our brands.
You know quick shift to engaging consumers and the resulting.
Uptick in sentiment and loyalty you know that we've seen near driving the results gives us confidence that our digital business will continue to to perform at the level you know that Scott mentioned in his call, we will calling that'd be about a 40% growth rate.
For the full year, which is quite a bit higher than our our long term projection, which you would expect that's where consumers are able to transact and engage with with businesses today, but you know we also see that when our stores are open.
Traffic is not at historic levels, but we are seeing really strong engagement good conversion.
And you know that's built into those projections as well.
Yeah, Matt just to build on that too I would just point out the inventory being in good shape as well right, which gives us.
You know we've talked we gave some shape on that in the prepared remarks, but you know the fact that we've got a we've made good progress against a retail inventory is getting a good.
At work supply demand match et cetera that that gives us some confidence as we look forward as well.
That's great color and Scott maybe to follow up as you map it out today.
When when would be best or when do you see the consolidated revenue base returning to pre pandemic levels. I think you were at 10.5 billion or more I'm, just kind of thinking you know what would be the rank order of recapture if you mapped it out today between the big four brands and getting back to the revenue basis that we had prepared.
And dynamic and any color there would be really helpful.
Yeah, I mean, it's it's a difficult question, Matt because none of US know the you know the depth and severity or duration of Ah Ah that kind of it impacts what re closures may or may not look like a et cetera. So I would I would put that in the unknowable category, but here's the way I I think about.
We think about the general trajectory. So we clearly had a rebaselining of our expectations based on all the factors that we know about the closures in the and the contraction the business, but as we think about forward growth rates, both from a top and bottom line.
There's no reason that we can say that that we wouldn't we wouldn't be able to achieve those long range a growth targets. So you know from the Rebased lines starting point as you think about those growth rates. It really comes down to the the duration in severity a have a great closures and other disruptions I mean.
To add to that Matt you know just a few things to consider.
You know vans, China digital all those factors are tracking ahead of our long range plan as you think about timberland being a little bit behind us selling occupational work, which is positive from a makes us a little more growthy from you know from a overall mix standpoint, so there's puts and takes.
But but as we look at it long term that that growth algorithm.
Okay Center. She no reason why why we can achieve that.
That's that's very helpful. Thanks for all the transparency.
Yeah. Thank you.
The next question is from Sam Poser Susquehanna. Please proceed with your question.
Hi, Thank you this is well on for Sam.
Okay, I, just wonder to talk about SGN <unk>, how are we supposed to think about actually NAND for for Twoq you into the balance of year are we going to see.
Declines that we saw one Q.
If you can put a little shape on that that'd be helpful.
Yeah, I guess I'll take that so HM.
You know if you look in in Q1, if you look at the that flows through as you know using rough numbers about 30%.
And so that I'll give you some some sense of.
You know, how fixed and variable and and also remember, we're continuing to prioritize and invest in our and our transformation our digital.
Transformation and those strategic priorities you know we haven't we havent pulled back on that as you say going forward I guess I'd just take it.
Q2 remember my comments on gross margin. So gross margin is gonna be a little less or.
It's going to be a slightly down from what we saw and Q1 and as it relates to ask DNA.
Yeah were sequentially improve or increasing our investments in marketing throughout the year kind of make sense right as more consumers more doors are open more markets are up and more consumers are there were continuing to increasingly lean and from a marketing standpoint, and also just the timing as some of those strategic investments that I mentioned that we're prioritizing.
So you can think about a flow through in Q in Twoq, you have something around 40%.
Overall, so that 30 to 40 in the relevant range you know into in the current conditions is probably a good way to think about flow through for the balance of the year I I would just caveat that though to say if we found ourselves in a fundamentally different position. If we had massive re closures or like a considerable Matt.
CRO pull back then and clearly there is more variable levers that we can pull at this point you know we've we've had more of a forward looking bullish position in terms of investments and maintaining those investments. So that we can emerge from this period and an advantage position in a position.
And the strength.
That's great that's super helpful.
And then and just one other thing that's you know I noticed in the Americas, There's a large celebration of the digital business in June.
Is that just because PNM was reopening and dollars are shifting to the physical locations from online.
And are you seeing this continued into July like what's the dynamic going on there.
I'm going to grab that Scott.
Yeah sure Yeah, well you know it again I I always cautious not too far ahead in predicting this very dynamic environment, but yeah. We.
I think it's a it's a factor of of.
Just a there's a lot of demand for our brands right now and engagement you that Steve mentioned in our last call the pivot and some of the upping our game in terms of digital digital engagement and how that is.
Impacting all all of our all of our touch points from a retail standpoint, I don't think there's one reason that that we see that we see that that acceleration I think its many factors that holidays, you talk about pets I was I was referring to it looked like it was a big deceleration between from May.
On the gene.
Oh, I'm, sorry, you're talking about those specifically digital okay, I mean, I'm, sorry artists understood, Yes, sorry, yeah sure as as as doors open. It I'm sure that's going to have some impact and we would expect some moderation, but but but there's no doubt we've seen a step change in you know a consumer.
Behavior, and and Oh, we don't know exactly how that's got to that put and take is get a moderate but but clearly that the trends that we've seen in terms of consumer behavior in online shopping or has taken a step change forward and end up but but it will moderate somewhat as as doors up and then we have.
I've seen that we have seen that.
Great. Thank you I'll pass it off thank you.
Yeah.
The next question is from Michael Binetti of Credit Suisse. Please proceed with your question.
Hey, good morning, guys I, just when asked a little bit more about bands in the near term and I have.
Another question, but you give us a little more color on the July trends that you mentioned for vans. I think you said you know between the channels in the U.S. spend so volatile here as you pointed out a few times I think he said at the wholesale doors are open now you're seeing high single digit trends do you know any thoughts on how that how that reflects on.
In market share in the quarter to date as we're kind of getting back open and then any comment on D to C. As we reopened and then I guess I'd also like to know you know your thoughts on back to school I guess anybody on the lines that kids is kind of wondering or are they going to go back to school and therefore, I guess for people to focus on the apparel and <unk>.
We are industry today.
Do they need the two to three new outfits that they usually get this time of year as they are going back to school I'm, just curious how you're planning and how your wholesale.
Counterparts are planning for [noise] fairly unknowable back to school.
Period this year.
[noise], Michael I can start and then maybe Scott you want to fill in maybe some of the numbers here because I think.
Yeah, the from from advance perspective, Michael you know the.
The underlying momentum of the vans brand continues to be really strong and if there's been some questions out there around.
Band strip overall strength and I would tell you we remain extremely confident around a long range plan that we laid out.
Back in 2017, an updated Beaver Creek and engagement metrics that we have that we we watch number I really didn't paying close attention to getting a lot of the ban bands.
Hey, there's over last few months is it the consumer remains extremely engaged specifically on the content.
The bands brand has been sharing to really engaged it's community is we look into July we see a continued.
Improvement as doors reopened and consumers engage in the bricks and mortar environment.
But we continue to see strong results across to our digital engagement in digital sales. So I guess I'd love to leave with everybody on the call. Today. It's just the continued confidence that we had in our bands business in the underlying momentum that other bands brand carried into you know that's coated environment.
And how they really used our digital platforms or did you engagement capabilities to continue to build you know that one to one relationship with dead strong and growing bands family.
Part of the CLM model.
Scott if you want to fill in some of the numbers that as well yeah. Yeah. I don't know this helps Michael but as you think about.
You know the van business, the shape of the business more than 50% D to C and that's our largest retail footprint.
And you know they've been a little disproportionately impacted as you think about kind of it 75% or the deed a brick and mortar revenue D to C revenue comes from the U.S. and the UK, which obviously have been hot spots and when you're thinking about the U.S. ER business in particular about a third of the U.S. business NB 25.
For sand at the brand over all is in the state of California.
You have Florida, Texas, Arizona, New York. These are the biggest stage or the biggest footprint.
For for vans and those are also some biggest a hot spots from a from a caveat standpoint, so I only bring that up to say, there's a lot of noise in the and demands a D to C. Right now given just where they were they operate.
<unk>.
Helpful. Thanks, and into the question on back to school Michael.
Yes, I think we're all wondering though my children are no longer in school since so many of our employees are dealing with this and this is really top of mind for us it's an employer.
And as Weve, you know really executed a people first approach from the beginning of this.
Yeah, we do see it moving to the right, but where we do have you back to school connections are packs business and then band to north face to a lesser degree or we do see interest in those core product categories, but we think it will move to the right and as schools do reopened and I think that demand.
And in that interest in the products you'll be at the three out that you referenced I do think you know families. In children will continue to look for that and we're well positioned.
To go to supply that demand.
Now, let me ask a follow up a little bit more of a longer term question here, but you know you obviously mentioned some of the big seems to casualization seeking outdoors, but obviously the biggest one world pretty sure will happen will be the dishes to sales to ecommerce can you just help us think through the the impact to margins in the business as you become a bigger.
Commerce business, and obviously should be higher gross margin wheel cannot kind of do the math on rents versus no rents those kinds of things, but [noise].
There's been a lot of discussion about you know who's going to have major tailwinds or EBIT margins as the world becomes a bigger or digital purchase or in these categories of I'd love to hear your.
Any help you cut off on what he thinks about the margin Tailwinds that come online E. Commerce is going to drive more of the Beaver Creek plant and we saw.
Uh huh.
So in God I I'll, Yeah, I'll take that so you know in isolation, a there's no doubt that it's a good thing for us long term that a if.
We continue to see digital growth outpace, which I think everybody, including us we'd expect that to be to be true. It's our most profitable channel and and in isolation. That's a positive thing you know there's also her and a and horizon issue here in the in the short term covered related impact.
Acts are causing us and disruption, but think about you know social destined gene and DCH fulfillment or those kind of things as we think about working through customer service challenges et cetera. The good news as we're our supply chain teams really good at this kind of stuff and already we're starting to see efficiencies and I'm confident that I've.
Your time.
We're going to figure out how to adapt to the new world. So overtime that should should not be an issue. It's a it's a bit of a challenge than that in the short term, but the other thing Michael there remember is as many of the pieces are moving here. So as we think about all of those factors together I just always caution people don't don't just.
Isolate on one factor, but specifically answering your question is is the growth of digital the good thing from us from us from a margin standpoint, yeah. It is a good thing for us.
Next August.
Yeah. Thanks, Michael.
The next question is from Alexandra Wallace of Goldman Sachs. Please proceed with your question.
Good morning, Thank so much but taking a question here you mentioned elevated promotional activity in the Mark and I Wonder if I could dig into that a little bit more on can you talk about about me, but the level of promotional thing in the market Amendment, perhaps common thing by brand or by distribution channel.
Now and then you know any thoughts on the outlook kind of promotional level as we go into back to school and and holiday and we'll be very interesting.
You want me to grab that Scott.
Yeah, Yeah, if you start and then I'll comment on the back if that works.
Okay. Yeah, it's still Alex you know, we absolutely saw an uptick in promotional activity, especially in that April may timeframe.
As.
As you know inventories were where the issue that so many businesses were looking like looking at and honestly consumers began to expect that.
We've seen it moderate as a especially for our businesses our inventory levels that come into a much greater.
Control and we think we would see a continued moderation I do think an interesting fact to keep in mind. We've seen this in China, which for US is it really does the early early indicators of consumer behavior is your outlet business has been strong on there is consumer demand in that channel.
With consumers are also looking for newness and where there is newness our ability to sell at full price is is greatly enhance so there's there's a real there's a real on the economy in the marketplace, where there's newness full price drives when we're selling goods from prior.
Our season and a in less and more of those traditional items. There. There has been a consumer interest in seeing a promotional element. So I think for US is our as their inventories of Rightsized and we're we're getting that seasonal balance and seasonal flow of newness with that core product a week.
Certainly see that.
You know that promotional element lessening and putting us back in a position of.
More normalized.
Type of selling prices.
Yeah, I'd really nothing that Alex I was going to go there to relative to the to the focus on inventory and the fact that by getting.
Taking that aggressive approach a well we'll work through this in a relatively.
Rapid matter and exit this year hopefully that in a clean.
You know it was clean inventories and ER and a much more full price business as we enter next year.
On that thanks, I'm not sure the color I mean, one more question for me if I may he mentioned strengths that was saying broadly a coffee outdoor category.
Mean that elsewhere without those participation really increasing I want you called out strengths in certain categories in particular like 10.
Can you talk a little bit about you know the impact mobile and any color on in south are trying but some of your outdoor brand I'm answering this summer period, how youre thinking about the out to a season in that context, and then just perhaps you could clarify I think there.
Based numbers expected to be able to weekends and then the consolidated revenue growth in upcoming caught that perhaps you could scale that you know some of the strength of the thing in in outsourcing that might be some timing shift from that.
This is Scott Wonder I start with more of that high level that you kind of come back to that final piece.
It clearly Alex's you know the the trend you know to the outdoor a marketplace.
Married with the you know.
Mitigant uptick in consumers' attention around health and wellbeing.
Really positions US well you know with you know just not our north base business, but with all of our outdoor focus brands and we've seen.
You know really strong engagement as weve changed the tone of our messaging talking about the the value of outdoors and playing up you know our strong commitment to sustainability.
The context of North face, we did you really strong.
Ah selling of our tents sleeping bags.
And as that is that kind of moves through not only our own our own channels, but we saw that in our specialty channels as well consumers are now starting to look at those other items that you would use simi outdoors, you know outdoor footwear outdoor apparel and we can deadlines up extremely well for where we will be in the fall winter.
We start to bring in our AR.
Our insulated outerwear or mid layers, and our and clearly our our rainwear rainwear and performance ski where and I think that's where the innovation commitment that we have per each of our brands most notably the North case, you know future light continues to expand into more styles spring 20, we had the drizzle.
As a new style on what was historically a $199 price point moved to 29, and we saw exceptional sell through specifically with women on that style, giving us confidence it is that.
Q2 light expands into our fall off for a minute marries with some new innovations in our down and insulated categories. You know that you know that consumer demand is there and a that comment I made earlier about newness positioning us in a really good place.
I think that would be true.
For our Smartwool ours are icebreaker brand or Napapijri business, primarily in Europe that that the bread level of newness that right level of innovation I'm, giving consumers are reason.
Who look to our brands first you know when they're making that choice.
Yeah, It Alex I guess to follow up on the last part of your question you know the I guess it was around TNF Ah Ah why is it not stronger and and Q2 really were seeing timing related issues primarily supply delays.
Our our costing us a better growth as we see a little shift from Q2 into Q3 and by the way we see this in both timberland and the north space and we saw shifts from Q1 to Q2 and vans, particularly.
As we look at that supply demand match, we see and the colder weather brands more of a Q2 to Q3 shifts.
Which is reflected in both the timberland and TNF forward like that we provided so as you look at the subsequent quarter, then you'll see relative stronger performance at some of that some of that demand just shifts a little bit to the right.
Okay. Thank you so much in all the best.
<unk>. Thank you.
[noise]. The next question is from Erinn Murphy of Piper Sandler. Please proceed with your question.
Great Good morning, and get to here can you all I guess my first question is on decades, it definitely theme to eat relative bright spot in the portfolio into quarter can you speak to why that wise.
The channels that at all then or the customer would just love to hear a little bit more about Adnan.
Sure I'll start Aaron in those Scott if I Miss anything.
Fill in the I'm, sorry, Dickies business you know certainly.
You know it carried some momentum in from our Q4 in done and we've been talking about our confidence around just how the dickies branded more that lifestyle expression of workwear is really relevant in this evolving consumer marketplace in its we entered the cobot environment Dickies did enjoy.
The.
Element of essential retail being a you know one of their key U.S. distribution channels and no. Hence we were able to continue to supply and there was good good demand throughout the quarter and we were able to really capitalize on that here, but it could digital engagement that dickies has has increased this.
Through the cobot environment, not just here in the U.S., but in Asia, and Europe really understanding engaging with their consumers in new innovative ways Dickies business in Asia was the first to provide a virtual shopping experience.
With curated online Assortments and ER in store merchant you know there to service that one to one consumer need so really looking at innovative ways to engage our consumers.
And certainly supporting the frontline worker here in the U.S.
Yeah, just put the brand front and center with consumers and we were able to capitalize not through those distribution channels you know that were open.
In a lot internationally I guess to add there we we see that continuing yeah. We don't see that is a is a one quarter. One done we do the this brand has momentum and I'm you know the offer an engagement with the female consumer.
Things are seeing going on with our our overalls and a in bottoms and we're really in a really strong place with this brand is taking on more than just to work.
Approach, but that kind of that really playing on that maker shaper lifestyle aspect.
Got it and I guess I'm just to clarify that anything about the second quarter up mid single digit if that what you're seeing in terms that Pos just because you are intimate mass channels that are trending today and they just clarification on that and the second clarification just on the order book last quarter, you talked at being talked about it being down 25% to 30% at all.
Any update how that looks now that we're pretty close but at the then thank you.
Sure.
I think on a on your comment around Q2 that nuclear beach, we call that we out there I mean that is really what we see from a from an order book standpoint, and sell crew improving could there be upside meal. We you know we're prepared to service that that is that comes.
And more than you know not just the essential retailers, but more of their retailers coming online across the globe.
Yeah, We think we continue to see no good opportunity predict keys to meet or potentially exceed that long term growth algorithm, we spoken about.
Yeah. The order book had saved about particularly in China right at the China business continues to really really do well sorry to interrupt there, but no no no problem.
In the order books, you know I think it's got called that out in his in his comments you know just a collaborative approach that we have with our our wholesale partners could see our key wholesale partners across the globe.
Nothing to change I mean, what that view looks like and what we called for the year really it's reflective of.
The outcome of those conversations and where there's opportunity to service demand I think thats, where our supply chain I'm really does stand out but you know.
We have been very thoughtful about pulling in or inventory and managing to where we see demand.
Honestly earned if we if we leave a little bit of ban on the table that does not bother us. This is a really long term game that we're playing.
And then we've got a lot of history. You remember you know this strong north based growth years in the <unk> through the 2000, we often left demand on the table then that fueled demand going into next year, which fueled stronger order books in our ability to drive you know what the brand was pushing.
From an innovation standpoint.
Great. Thank you bye.
There.
The next question is from Bob Dribble of Guggenheim Securities. Please proceed with your question.
Hi, Good morning Chip just it's still a couple of questions for me I think first I mean on following Aaron's question. The northeast generally when you think about sort of fall winter.
Co vid, whether you know can you just give us a higher level perspective on how you're planning like your own inventory purchases around you know that uncertainty with the you know more whether potentially weather impacted business. Because my first question on the north face and I think the second question.
Is just you you talk about either optimizing the portfolio.
When you think about acquisitions, you think about your liquidity you think about you know the the workwear and the potential divestiture.
It is is that something when you think about an acquisition at this point in time <unk> are you going to want to get rid of the <unk> you know divest to work wear business first or do you think to everything has to clear before you guys make another move out. So you just give us current thoughts on how you're approaching the optimizing.
The portfolio strategy right now thanks.
Sure. So when I grabbed the weather impact and then if you want to take the optimized up portfolio, we can kind of split it up here.
Bob I think is we if we look at the north face in the north face opportunity and I guess I would reflect more because I think about consumer behavior and you know the.
No the engagement that we see with consumers going outdoors.
We don't think that's going to change.
As the winter months calm and and you get the people you know how to continue to have some level of work from home sheltered home.
<unk>.
The desire to go outdoors have the you know the the products that enable you to do that and this is where the innovation in the newness is so critical it's getting consumers a reason.
To improve their comfort I'm in the outdoors. We think you know, we're well positioned not just with their north face brand with our but with our outdoor portfolio and the appropriate products that we have for that outdoor experience, but also that casualization play that.
Happens more net in that does stay at home and that would be everything from our mid layers to our outer layers.
We don't think the consumer behavior will will be such that you know going outdoor stops we think perhaps.
That trend you know, maybe we'll be even stronger.
We all desire to get out of our homes and have some outdoor.
Experience.
Yeah, and and I I, Bob as it relates to your question if I understood. It right, you're you're asking our portfolio actions dependent on the timing of the occupational work a closure if that was your question.
Not necessarily a you know all in liquidity that we've shown you is without any proceeds from the occupational work business. So you know we've we've looked at our capital structure, our our liquidity, our cash positions, our obligations et cetera, and and look forward.
And said, Okay weekend, you know if anything we get from occupational there's really additive to your all those projections and and you know we feel that we have a sufficient.
Dry powder to handle our all of our obligations and we've said we continue to look at a at that potential acquisitions, having said that or pretty far down the road in this process and there's a lot of interest. So you know I said in my prepared remarks that our expectations are.
That a in the next a couple of months, we'll have something to say as it relates to occupational work hopefully a good hopefully that addressed your question, but I definitely think Scott.
Yep.
Our final question today comes from Adrian He of Wolfe Research. Please proceed with your question.
Yes, thank you very much.
Steve I was wondering if you can expand on your thoughts on acquisition strategy with all the changes some co they'd have the characteristics of what makes it attractive potential target change maybe shifting from a traditional product based business model tighter digitally native or something technology that can drive digital and then on for Scott.
Maybe different first on both of you gave the analytics what level of deployment I currently.
Is it currently focused on for the product catalog in search engine optimization and when can we start to see the gate analysts further back on your supply chain to inform you on demand forecasting. Thank you very much.
A few great questions to end to it.
I would tell you are our Scott I'll I'll start.
I'm on the acquisition PC you know our.
Our where we focus and where we see opportunity I'm really does not change the total addressable market that Scott mentioned, you know from the outdoor the active.
And in new Jason sees it or you know our around that those core categories, that's where we see the energy in the marketplace I'm, continuing and clearly that is where you know ours, we've been evolving our portfolio.
As we continue to transform the yeah, we have talk in the past about just not looking at a physical brand assets, but also looking at capabilities that could enhance or elevate our our capabilities, especially in the digital area. So that is on the table net.
May not be always an acquisition, but it could be a partnership more from a capability.
You know that we look at so nothing no change in fact, it and it remains the number one choice you know that we have for capital allocation, but you know clearly we are very focused on on maintaining the health of our enterprise for the long term so.
Being much more I think focused in to the in critical as we look at potential opportunities.
If you look at the data and analytics part of our agenda on that is are very important part of our of our transformation in an area that we see great opportunity to enhance you know really our end to end the understanding of the value chain. So consumer insights to to guide you're not only the product.
Decisions that we make but also the experiences that we provide you know across you know the visual the virtual and physical environments. The demand you know sensing and being able to and build that back into our supply chain.
For a better.
Product flow all of that is on the table and I would just I guess they we're in the early stages. We had been on this transformation journey for the last three to four years.
And the data and analytics and more importantly, the insights.
Part of our data strategy.
Where our transformation is a really important part of that long term.
Vision, you know that we haven't you know today the insights that we have per our north face in vans business, specifically for consumer is really helping guide a lot of our engagement.
And is in many ways, we believe helping drive those strong results that we've seen through Q1 from a digital conversion and we'll continue to use that to drive that consumer interaction both through their digital but also the physical environments. If things continue to open.
Great Great answer. Thank you very much best of luck.
Thank you.
That's all the time, we have for questions today, I would like to turn the call back to Steve Rendle for closing remarks.
Great. Thank you everybody for joining us we know this has been a very busy week for you and we appreciate your giving his time on a Friday morning, I guess, maybe with a couple of really simple clots and you said this in our script, but you know VF is built for this you know our operational and financial Finance disciplined you know have put us in a very strong.
Position to navigate the early stages of the cobot pandemic.
And now you can see that in and are in our results clearly in our quick moved to to get arc, our inventories and its strong place.
We are our powerful brands or engaging with consumers and and very unique in car for raising that too that we made early in the quarter has really put us in a strong position.
We could not be more I'm pleased with the investments, we're making along our transformation agenda and where we are not in that multiyear move that we've talked to you about over the last couple of years.
India. We you know we're doing slightly better than we expected and we will continue to build on that strength and a focus on the areas, where we've seen strong performance specifically digital in China.
We continue to drive improving results through the through the balance for a year. So thank you for joining US we really appreciate you taking the time.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.
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