Q2 2021 VF Corp Earnings Call

[music].

Hello, and welcome to the V.F. Corporation second quarter fiscal 2021 earnings conference call. At this time all participants are in listen only mode. If anyone should require operator, that's probably the conference. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation as a reminder, this.

Conference is being recorded its now my pleasure to introduce your host Joe Al Qaeda, Vice President Investor Relations corporate development and Treasury. Please go ahead Sir.

Good morning, and welcome to VF Corporation second quarter fiscal 21 conference call artist.

Participants on today's call will make forward looking statements. These.

These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These.

These uncertainties are detailed in documents filed regularly with the SEC.

Unless otherwise noted amounts referred to on today's call will be on an adjusted constant dollar basis, which we define 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 the U.S. GAAP.

Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the release, which identify and quantify.

All excluded items and provide management's view of why this information is useful to investors.

During the fourth quarter of 2020, the company determined that the occupational workwear business might be held for sale and discontinued operations accounting criteria.

Accordingly, the company has reported and related assets and liabilities of the occupational workwear business in discontinued operations as of the date noted above.

And included the operating results of this business in discontinued operations for all periods presented.

Unless otherwise noted results presented on today's call are based on continuing operations.

Joining me on today's call will be EPS, chairman, President and CEO, Steve Rendle and CFO Scott Roe.

Following our prepared remarks, well open the call for questions Steve.

Thanks, Joe and good morning, everyone welcome to our second quarter call as always I Hope My comments. This morning by you and your loved ones healthy and sales.

For those of you that have stayed close to the to the story you are familiar with our now when next approach and navigating the most challenging days or the pandemic, while also preparing ourselves to emerge stronger within what we believe will be a new normal environment.

Global pandemic continues and certain geopolitical uncertainties persist I believe we are officially entering the next that.

That isn't to say the challenges brought about by the global pandemic are behind US in fact, we expect the impact of this crisis to be prolonged requiring us to remain agile and adaptable to whatever may come our way we.

We should accept that uncertainty change and the need to operate in an increasingly volatile world isn't what the next is all about and it presents great opportunities for our company and our strong portfolio of brands.

Fortunately because of the continued dedication commitment and perseverance of our associates across the enterprise. We are entering the next from a position of strength.

Throughout today's call I Hope you can sense that we're pleased with the stabilization and early recovery, we're beginning to see across the entirety of our business and with this confidence we've decided to increase our dividend for the 40 eightth consecutive year we're in.

We are increasingly confident with our positioning as we head into the next year and the opportunity to drive our portfolio against our long term vision and commitment to top quintile value creation.

Our success is anchored in our strong financial underpinnings evident in how we've managed to heightened uncertainty for the past 10 months.

Yes, it's always been known for its industry, leading operational rigor and financial discipline.

Our proactive measures to protect our people.

Strengthen liquidity manage inventories and prove prudently control discretionary spending have allowed us to continue investing and what matters. Most in this environment, but.

The capabilities required to ensure that our consumers not only transact with directly with us, but that we can maintain ongoing direct relationships with them.

Further strengthening the affinity they have for our brands.

We're using our position of strength to continue playing offense to ensure we're able to regain its strong momentum we had heading into the crisis.

We are focusing our investments behind our transformation to become more consumer minded retail centric and hyper digital in everything we do.

Our investment priorities for this year balance near term brand specific initiatives with longer term enterprise wide platform investments that create leverage capabilities to deliver greater value.

These priorities were pressure tested during the early days independently and we quickly aligned on the right mix of priorities to maintain strong near term momentum, while we execute our plan for long term value creation.

The long term strategic vision guiding our actions is not new it was set in motion nearly four years ago with the launch of our strategy and then.

And I'm pleased with how far we've come on our transformation journey through thoughtful and disciplined investments in talent digital infrastructure and ongoing strategic repositioning over the past four years, we've evolved from a wholesale dominated business with only 5% digital revenue to streamlined portfolio with over 40%.

To see and more than 25% total digital penetration.

The evolution of our business has been accelerated through active portfolio management.

Which will continue to be our first strategic priority.

Following the divestiture of our occupation workwear portfolio, our operating model simplifies further.

12 brands with the greatest capacity to thrive in our hyper digital retail centric enterprise.

Yet another milestone it be EPS strategic and disciplined portfolio transformation.

Scott will cover our Q2 results and full year outlook in more detail, but I'd like to share a few highlights around two of our most critical strategic pillars digital and China.

Looking back at that building blocks of our Twentytwenty four plan over half of the EPS planned revenue and earnings growth over the five year period came from these two growth drivers we knew.

We knew entering this crisis that digital and China would help us weather the storm and drive accelerated growth on the other side.

As the year has progressed, we continue to gain confidence from the momentum of these key growth engines are.

Our digital businesses grew 42% in the quarter with strength across regions and brands. We also.

We also continue to see strength in key digital wholesale accounts, particularly internationally.

Together with digital pure play wholesale our total digital penetration was nearly 25% in the quarter.

I'd like to spend a few minutes unpacking or digital momentum across our largest brands.

Vans digital business grew 49% as the brand continues to engage with consumers by providing new content and activities to deepen consumer connectivity to purpose and creativity.

The brands deep connection is reflected in continued improvements in loyalty and member engagement, but.

A portion of Vance family members transacting on vans Dot Com has doubled relative to Q2 last year with loyalty members accounting for nearly half of U S. D to C sales.

Continued advancement in the customs platform also remains a differentiator for the brand, enabling more unique creative journeys a co creation with our consumers driving significant increases in dwell time and engagement.

Coming next month fans will be the first major global brand to offer customization on T. ball, a testament to the scale and sophistication of the customs platform and the strength the vans relationship with one of our most valued digital partners.

The North face also saw strong digital growth across regions up 40% globally. The brand continue to connect with consumers through engaging purpose led marketing activations, including the north face Summer base camp walls are meant for climbing and the north face Girls Scouts partnership.

Recent high profile co labs, including the announcement of our first ever collaboration with Gucci also contributed to brand heat and engagement engine.

Digital loyalty team members increased over 20% as the brand continues to attract new female and younger consumer cohorts.

Timberlands digital business increased 62% in the quarter.

In the Americas recent high profile Influencer adoption and the Jimmy Choo collaboration contributed to strong brand interest over the quarter driving 90% consumer acquisition growth with our data platform will occur.

We are encouraged by the brand's recent momentum, including the brand heat outside of just core classics.

The brand delivered a successful non classics digital launch in China called My first Eco Capex Mad very campaign, which drove the nearly 270% increase in traffic on T mall during the event.

And finally, dickies generated 34% digital growth momentum from both core work and work inspired categories.

Brand interest accelerated in the quarter to multiyear highs supported by engaging online maker workshops and the launch of the brand's first ever global campaign, United by Dickies.

Collectively our big four brands achieved digital growth of nearly 50% this quarter the Brad.

The brands continued momentum in addition to ongoing improvements in digital consumer engagement give us confidence in our fiscal 2021 target of greater than 40% digital gross and 25% digital penetration for the year.

Moving on to China, which we continue to view is the leading indicator for the recovery path of our other regions.

Our business returned to positive growth in mainland China last quarter and has accelerated to 19% in Q2, driving our Asia Pacific region to overall positive growth.

Consumer resilience in confidence remains strong, particularly with brands able to engage in new and effective ways through digital channels and to an elevated brick and mortar shopping experience.

Performance in China was led by 25% growth advance and nearly 60% growth it dickies [noise].

We're also excited about the appointment of anymore as our first president of greater China.

When his deep experience in the region and understanding of the Chinese consumer will help us accelerate our growth strategy in this fast paced digitally driven marketplace trying to.

Kinda presents a tremendous opportunity for the and our brands and winning is an ideal leader to drive this growth.

Moving onto the global consumer it is evident that secular trends in fitness health and wellness casualization, and the desire to get outdoors, and live and active lifestyle or accelerating or poor.

Our portfolio of brands sits at the epicenter of these fundamental tailwinds, which will be a meaningful contributor to growth in the years to come.

Consumer insights are also increasingly pointing to another fundamental change, which may be less apparent to those outside of our sector.

Consumers are increasingly expecting brands to use their business as a force for good.

Consumers are prioritizing purchases that align with their values.

Our research shows that over two thirds of millennials and Gen D had changed the purchasing habits due to climate change.

And by 2027, we believe this generation will account for two thirds of apparel and footwear revenue in the U.S.

The combination of our exposure to large growing addressable markets as well as our brands purpose, let positioning give the VF portfolio a unique opportunity to thrive in this evolving consumer environment.

The ethanol brands continued to take a leadership position within our industry on matters related to inclusion diversity and racial equity.

We recently published our second annual inclusion and diversity annual profile, which I encourage you to review on our website.

Additionally, our brands are stepping up and activating their own programs to address racism engage their consumers in the process.

The vans brand recently announced their specific commitments and the timberland brand just began communicating their own initiative operation purpose, which focuses on four pillars to fight systemic racism inside the workplace and the community at large.

People community design education and entrepreneurship.

I'm incredibly proud of the way the App and our brand teams have responded to the racial and social issues that plague our world I look forward to providing continued updates on the progress and positive impact we make.

Before concluding my prepared remarks, I want to provide some additional context to the organizational structure announcement made earlier this week.

Given our continued focus on our transformation, we're taking steps to further refine our operating model to become an integrated brand building company as we do this we know that our brands success requires differentiated approaches based on the unique profiles and opportunities.

To support this work we're evolving our organizational framework and have you begun to map our leadership to the structure of core brands and emerging brands.

Core brands traditionally referred to as our global brands are large brands that are significant financial drivers for VF there.

Vans, the north face and timberland or the EPS core brands today emerge.

Emerging brands or brands that present strong potential to become a core brands by accelerating consumer acquisition and loyalty through differentiated growth strategies and capabilities geographies and new categories.

It has become evident overtime that emerging brands require more agile operating model than our largest brands they require different playbook driven by an emphasis on continuous learning and testing.

We see our emerging brands as being the ideal proving ground for VF in terms of consumer product and talent strategies.

These organizational actions aren't important beginning to what were calling project enable a multiyear initiatives designed to enable our ability to accelerate in advance our business model transformation and position ourselves to drive long term growth for all of our brands.

We'll do this by evolving the organizational designs for our enterprise led functions and core and emerging brands to ensure we have the right structures capabilities resources and talent in the right place to propel us forward.

One of the key objectives of enable is to deliver global cost savings of about 125 million over a three year period. These savings will be used to fuel our transformation agenda and highest priority growth drivers.

We are highly confident that these changes and our strong group of leaders will help us move forward toward this vision.

And now I will turn it over to Scott.

Thanks, Dave and good morning, everyone with the first half of our fiscal year behind us I'm proud of our execution and optimistic about the stabilization and early signs of recovery, we see across our business our year to date results have surpassed our internal expectations across all brands driven by our key growth pillars digit.

<unk> and China, we have a great handle on inventories both owned and across the wholesale marketplace and last but not least we continue to see strong engagement between our brands and a relatively resilient global consumer we.

We were quick to act in the early days of the pandemic to put our people first strengthen liquidity manage costs and tightly control inventories, thus positioning our brands. The exit this period of disruption in an advantaged position are funny.

Our financial and operational discipline has provided be asked what the ability to continue to invest in consumer engagement and product newness throughout this crisis, while rolling out critical omni channel capabilities ahead of the fall holiday season.

Before covering the details of our second quarter I'd like to spend a few minutes on the current state of our business and operating environment by region I'll start with a pack.

China continues to lead our recovery growing 14% in the quarter, including 19% in the meantime, as our stores were essentially open throughout the period.

Our relationships with partners in the regions remains strong and we continue to expand partner doors in mainland China led by Dickies in advance we continue to enhance the synergies between our brands and our digital wholesale partners continuously developing our digital ecosystem in the region to elevate the shopper experience and seamless.

Online to offline integration.

We are pleased with the steady recovery in EMEA, where most markets outperformed expectations in Q2.

Our retail business returned to growth with B to C up 6% led by 54% growth in digital as our stores have fully reopens.

Traffic remains depressed the cost countries, but we continue to see much stronger in store conversion.

During the quarter, we continued our rollout of omni channel capabilities activated ship from store and buy online pick up in store at vans Timberland and the north face we continue to see sell through momentum building in the region, particularly at bands and TNS, giving us further confidence about our positioning heading into holiday.

And finally in the Americas were pleased to see stores essentially fully opened for the first time since mid March by the end of Q2, only 19 doors remained closed in L. a county traffic remains challenged however productivity was strong and we are encouraged by continued momentum in our digital business in the region.

Americas digital growth grew 45% in Q2, but accelerated in September to over 60% as we began to enter the critical Q3 holiday period.

Ship from store functionality was activated across 200 vans doors and all TNF full price stores in late August.

Buy online pick up in store and curbside pickup capabilities have also been implemented in certain stores with promising early results.

We're pleased with our progress and rolling out these capabilities as consumers increasingly expect this functionality heading into the holiday season.

We're also encouraged by the performance of the Americas wholesale business during the quarter with sell through trends accelerating across the big four brands are key accounts remain healthy and the channel inventory levels have progressed ahead of our initial planning what should be a positive set up heading into Q3 as well as for next year's fall order book.

So moving on to other Q2 financial highlights.

As expected the back to school environment was uneven and our brands experienced limited disruption due to the timing of inventory receipts. However, we were pleased with the underlying sequential improvement as the quarter progressed.

Total revenue declined, 19%, which exceeded our expectations of down less than 25% for the quarter.

[noise] total DTC declined 17% driven by store closures and weaker back to school traffic our own digital business grew 42% with broad based strength across the portfolio. For example, our big four brands collectively grew 47% and our key emerging brands saw over 50% digital.

Growth this quarter.

Our brick and mortar wholesale business is also progressing ahead of expectations as a result of stronger than expected sell through and an earlier anticipated start to holiday selling window.

Our brands continue to successfully navigate some modest supply delays, which impact the cadence of our business.

As expected gross margin contracted 350 basis points to 50.9% driven by promotional activity and a 110 basis headwind from the timing of net FX transaction activity.

Mix represented a 50 basis point headwind due to wholesale timing noise, which is unique to this quarter. We still expect the mix benefit for the full year to be two times, our normal structural long term target primarily due to our accelerated digital penetration this year.

We still expect a somewhat elevated promotional environment in the second half of the year with margins Stabilising by yearend.

Asked DNA declined about 14% in Q2 supporting a roughly 40% earnings flow through on the revenue declines in line with our guidance from the last call consistent with our earlier comments, we're taking advantage of our position of financial stability to invest ahead of revenue to support a greater acceleration in the business.

Given the stability, we see across the portfolio today, we expect this investment philosophy to remain in place as we enter the second half of the year.

Our inventories declined 10% during the quarter slightly better than expectations. We're pleased with the progress made across both owned and channel inventories through the first half of the fiscal year and are confident with our inventory positioning heading into the fall holiday period.

As we covered in our last call we've been thoughtful with our forward inventory commitments. This year infusing appropriate innovation and newness into our fall holiday product offerings, while ensuring we exit this year and a clean and healthy position.

While this may ultimately cost of sales in the current year. We believe this is the right approach given the uncertain environment and an appropriate investment in brand equity in gross margins going forward.

As I alluded to earlier, we continue to experience supply disruptions, which at times present shipping timing delays.

However, we have seen sequential improvement over the course of the year and expect delivery timing to be largely normalize by year end.

We have plans in place to manage peak holiday deliveries and are generally pleased with our inventory levels in the marketplace today and we're confident in our ability to exit fiscal 21 with the appropriate inventory levels to service our forward growth plans are linked.

Our liquidity position remains strong with approximately $2.7 billion of cash and short term investments. In addition to over $2.2 billion remaining undrawn on our revolver, we still.

We still expect to generate at least $600 million of adjusted free cash flow this year and for the sale of occupational work to add additional liquidity over the coming months arc.

Our capital allocation priorities remain unchanged supported by our robust liquidity position.

We remain fully committed to our dividend, which continues to be an integral part of our TSR model and a differentiator in our space.

As you likely saw in our release, we are raising our dividend at 49 cents per share payable in December.

This marks the EPS 40, eightth consecutive year of dividend increases and underscores our confidence in the future and while the dividend remains a critical part of our ongoing TSR algorithm M&A remains our top capital allocation priority and given our excess liquidity position and the stability, we observe across the business today.

Our confidence to execute an acquisition is clearly greater today than it was just a few months ago, we won't.

We will remain prudent and disciplined guided by our three lens approach and focus on delivering top quartile TSR and as a reminder, our share repurchase program remains suspended to preserve optionality.

Moving on to our fiscal 2021 financial outlook, while the operating environment remains uncertain our performance through the first half coupled with increased visibility it gives us more confidence in the stability and trajectory of the business. We therefore are providing a more detailed outlook for this year, assuming no material deteriorate.

And and current business conditions due to cobot.

We expect our business to continue to sequentially improve in Q3 and returned to growth in Q4.

And for the full year, we expect revenue of at least $9 billion and adjusted EPS of at least $1.20 and we continue to expect adjusted cash for free cash flow of at least $600 million across.

Across the brands, we expect bands to decline at a low double digit rate, implying at least high single digit growth in the second half. We also expect TNF to decline at a low double digit rate for the year, implying low single digit growth in the second half we forecast timberland to decline at a high teen rate for the year with continued success.

Actual improvement through the back half finally, we expect dickies to increase at a high single digit rate in fiscal 2021, implying at least low double digit growth in the second half.

As we head into the balance of the fiscal year. Several fundamentals give me confidence in the underlying health of our model and our ultimate ability to exit this crisis in an advantaged position.

First accelerating tailwinds in our core categories active outdoor and work.

Jacket continued broad based momentum in China and across the digital channel driving an acceleration across our big four brands, coupled with continued strength in consumer engagement third.

Third clean inventory levels across our channels of distribution.

And finally, our excess liquidity position, providing optionality, both for continued organic investment and M&A.

The strategy, we laid out one year ago, and Beaver Creek remains the playbook for success in a post coded world and aggressive digital transformation focused on direct consumer engagement concentrated exposure to growing structurally attractive addressable markets and a commitment to continuous reshaping of the brand for portfolio too.

To accelerate our strategy.

While we don't know how much longer. This current period of disruption will last we are confident in our ability to ultimately return to our long term algorithm on the other side of this crisis.

So now I'll turn the call over to the operator for queuing day.

Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one under telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star Q., if he'd like to remove your question from the Q.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing star one one moment please poll for questions.

Our first question today is coming from Jonathan Komp from Baird. Your line is now live.

Yeah, Hi, Thanks, and good morning.

Wow first ask just given the comments about September that you made any chance you could shake <unk> third quarter, what you're thinking in terms of the sequential improvement a little bit better for us and then maybe more broadly looking into what's called 22, given me trajectory, you're implying for the fourth quarter.

Can you can you just help share any thoughts on how you're gonna balance kind of about the pace of a top line recovery away.

The need to invest but also to show a nice recovery on the bottom line and maybe tie that in with the new project enable off dynamics that you mentioned.

Good morning, Jonathan looks like I'm right out of the box here, so happy to happy to take that [laughter]. So first of all <unk>. The question was around Q3 shaping for the year you know we didn't give specific guidance on Q3, but.

I'll I'll just go through what we did say and I think this will get you get you pretty close so you know the the topline we talked about at least 9 billion.

Implies low single digit second half growth and we said we would return to growth in the fourth quarter. So from that you can imply kind of a trend line and how you balance that between Q3 or in Q4 as it relates to gross margins, we said they'd be about flat by the fourth call.

Order and progressively in improving you know, we we talked about the mix will be there for the.

Be there for the year about two times, what we've seen from our normal 40 to 50 basis points, you know structural advantage that we see from mix and promotional headwinds that have begun to abate and we'll see that continuing through the through the balance of the year. So that should give you some sales.

Some color on gross margin, we talked about asked DNA being flat in the second half and that includes additional investments that we've made to continue the momentum and really build on that momentum as we exit.

From the cobot period in the back half of the year as Steve says the you know the next period.

And finally, a buck 20 from an earnings standpoint implies about a 40% flow through for the full year. So I think within that Jonathan you've got a lot of the data that you need to get the shape and and if not then or.

John and Mallory can can take you through that in more details you know.

You know I think the second part of your question was around.

The desire to invest versus earnings and again, we've given you a shape in terms of what what you can expect at least $1.20 from an earnings standpoint, and hopefully what our prepared remarks of giving you. Some context on is we while we are cutting costs and what we would call discretionary costs.

You know in the short term, we're also leading in on our transformation agenda, but that 30 million additional investment.

Based on the additional confidence we have are lean and then a little even a little harder right now on those those investments primarily around our digital transformation digital demand creation et cetera that we believe are going to give us a continued momentum as we as we exit this year and into next year, we haven't.

Really given any guidance on 22 so.

Stay tuned for that and the last question was around enable you know Steve talked about what enable is about it's really I don't need to repeat that in terms of not just layering on our digital investments, but really re purpose seen in rethinking our organization fundamentally are we talking about a target of $125 million.

Over a three year period, what we have done is broken that down for you by year. What you should know, though is that as we think about the transformation.

The ongoing leverage as we combine working smarter and rethinking the way in which we organized a coupled with the growth that we see longer term will allow leverage and margin expansion overtime. So that's probably as much as I can give you on that right now Jonathan.

Yeah, Great all right. Thanks, guys appreciate all the color.

Mhm happy to do it.

Thank you. Our next question today is coming from Omar Saad from Evercore ISI. Your line is that a lot.

Good morning, Thanks for taking my question and thanks for all the updates.

Steve and Scott I wanted to ask you guys at this moment, we're having an outdoor is this is this a once in a lifetime opportunity should you guys really be accelerating your marketing given your outdoor exposure across our brand portfolio.

To give to really take advantage of this moment in time, where people are spending so much time outside.

That's my first question and then I also wanted to kind of ask for an update on north face.

You know the management changes there you know any sort of additional color around [noise] aren't there has been an important though to the to the recovery of that business and the turnaround there and then our retailers also are you seeing any reorders acceleration given that a lot of them at cut their orders for north face for the fall are you seeing any sort of retailers coming back and asking for more again. Thanks.

Well good morning, Omar it's Scott I'll start like leaving out EW.

Jump back in and filling a blank so threed three questions. There you know the outdoor moment, we absolutely cdnineteen you've spoken about it quite well there isn't there was a trend.

Towards outdoors and People's desire to get outside linked to health and wellness and I think there is a moment in time and as we came into the pandemic. The outdoor sector was in a position of growth as well and I think this is really bodes well for.

For our brands and for the sector in general that people will continue to focus about you know that outdoor activity health and wellness and ER and how can they kind of take it.

Take advantage of this but do you get a moment time. So we're we're very well positioned for that you asked about the north face management.

I Kinda pool, you up one notch yes.

In my prepared remarks, and Scott just spoke about project enable as we as we think about our future and we think about our transformation we.

We find ourselves today.

Smaller portfolio of brands focused on three very specific parts of the total addressable market that are growing and a as we seek to simplify our structure and really focus our energy gets those key aspects of our transformation, we saw an opportunity to.

You know really start on the top.

And and best align our talent with our biggest opportunities and a you know arnie has been a strong.

Strong you know part of the North face performance and we wish him well. This is really about simplifying our organization structure, putting our very best people against our biggest opportunities and are really looking to leverage those key enterprise platforms that we've been investing behind driving our core.

In emerging brands forward.

Yeah. The last part of your question Omar was about retail Reorders I would tell you. It's a little early as we come into this fall holiday period that caught talk about Reorders. What we have seen is a great interest in our wholesale partners to take those initial drops of their fall order books and.

And you'll get those placed a little bit earlier than we may have expected. So I think we're positioned as we enter the fall holiday period.

We've seen good energy you know start here in September carried into October and if that continues I think there's an opportunity, but I would just remind you we've been very thoughtful.

And controlled in our inventory purchases there is not a tremendous amount or any excess inventory to service.

A big reorder pop or what we would expect to see is really good sell throughs clean inventories and positioning ourselves well.

For those next you know two seasons spring and fall order books, you know that our teams are working on.

Thanks to all our that they have that they only had I would say is one part of your question was around should we be leaning in on at Best Medicine, and we are I mentioned, the Thirtyth the 30 million of digital and certainly a good chunk of that is focused on a on the north face as well just to address that point.

Great Good luck.

Yes, I think similar [laughter]. Thank you. Your next question today is coming from Camilo Young from BTG. Your line is now but [noise].

Thanks, Good morning, everyone I'm not shoveling a quarter.

I want.

I have a couple of questions first on gross margin and inventory Scott you talked about high inventory in the channel feeling very comfortable with that.

Maybe just square that up with the progression of gross margin and why.

Line Q4, we should expect to see flat high gross margins as opposed to a little bit earlier in Q3, maybe just help articulate the distinctions between how does an amex, while still anticipating the promotional environment seems like you've got your inventory in a much better place you're comfortable with it yet it seems like there should be a faster gross margin uptick.

And then my second question [noise].

[noise] excuse me is on that M&A [noise].

And.

More specifically you know where were approaching the election here within a couple of weeks.

If there is a a biden victory with the anticipation is that capital gains tax.

Taxes will increase does that incentivize you to complete a deal faster and get it done before yearend love your thoughts on that.

[noise] [noise], yeah. So sounds like this one's me, Steve Yeah, Camilo or you know as you think about gross margin trajectory I guess really just consistently from what we've said all year.

We see it largely playing out the way we anticipated so so remember those those promotional activities.

To clear inventory excess inventory and the dead inventory that was in the stores et cetera, We said that would be accelerated in the first half and moderating throughout the year and really kinda back to quote normal by by the by the fourth quarter.

And we really saw that if you like even in the second quarter when you tie.

When you take out the transaction impact the rest of the decline is largely due to promotional activity and and it's you know, there's 200 basis points or so of that promotional impact in the second quarter that number was about 500 in the first quarter right. So still.

Still high still elevated, but but sequentially improved from the prior quarter and we see that trend continuing and moderating by the end of the year and I guess back to quote normal and that's why we've been aggressive in getting after it right. So that we didnt have all that excess inventory either in our own warehouses or inbound or at at.

Retail and it's not perfect I'm, not saying there are pockets here and there, but by and large we're really clean by historical levels and that bodes well for for less promotion on a go forward basis, and we know that's good for brand health and that's also good for creating demand and scarcity, which tends to.

Well for the future. So that's that's one point the other another point on gross margin again is that that mix benefit which will continue through the balance of the year. So what we expect to see continually improving gross margins again in a quote normalized level or back to quote normal levels.

By the fourth quarter. So that's that's how the shaping is coming together you know I guess, Steve maybe you know the first thing I'd say is timing, we don't try it out gas politics in terms of timing because you can't out yesterday that it's possible that there [laughter]. So I'll, let all that potential sellers speculate on whether.

Let's get him and pack their timing or not I don't know, Steve if you'd add anything to that.

Yeah, no not not really coming on that other than you know M&A continues to be that no you number one choice for capital allocation.

There's opportunities come you know, we're certainly prepared to act.

But it but it will be disciplined they won't really be driven by political situation to be more around.

Around is that the right asset at the right time fitting into our strategy.

Understood and Steve if I could follow up on that do you feel that you have enough visibility and confidence.

Empty available opportunity set such that a and in your own business. It sounds like you are such that you don't need to wait for a full recovery to be active on that front that you have enough information.

In the discussions that you're having to engage in a transaction.

It does it answer your question this way Camillo and are now in the next approach I mean, weve moves quickly against our objectives to really strengthen you know that.

You know the foundation of our enterprise through our actions.

Early in this pandemic, we're sitting in a good place with ample liquidity a business that is improving and.

And ER and an outlook, where we see stores opened.

Supply you know beginning to meet our demand and a really good connections with our consumers through our digital assets. You know digital performance is exceeding our expectations. So we're in a good position we are feeling confident around the future outlook I will tell you that we do think that this situation we find or.

Ourselves in today will be prolonged but with this focus on being agile and adaptable. We're in a good spot. So if the if the right asset were to come.

You know, we're we're well positioned.

To be able to act and I think you would you would absolutely see us.

Pulled the trigger.

<unk>.

Yeah and commence her much one at <unk> <unk>.

Went when they add on on that is that it also depends on on what what type of asset write and where we said we have more more confident today than we did 90 days ago. That's it that's a fact, but a you know it's still an uncertain environment and show that the you know the resilience and the type of asset.

Matter in terms of the timing from a from an acquisition standpoint.

Understood. Thanks, very much and good luck guys with the holiday season.

You bet. Thanks, Thanks, a lot.

Thank you next question is coming from Michael Binetti from Credit Suisse. Your line is now live.

Hey, guys. Good morning, Thanks for all that detail here so.

So Scott just one near term one on and then I have a longer term question, but on vans. When you know when you look at the big swings in the wholesale business quarter to quarter. You know the America wholesale business was down about 80% in the first quarter than up 10 in the second quarter. He said to cut your customers in that channel inventories are very low and.

Steve last quarter told me you thought back to school was delayed not cancelled it was nice to see that looks like it came true, but we you know it looks like September had some [noise].

Pent up demand that got the kind of unleashed I guess anything you're seeing in October that may benefit you know in a period, where we may benefit less from pent up back to school I mean, I'm really trying to figure out what gives you confidence that there's not another deceleration ahead for vans and the whole sales side <unk> third quarter for fourth quarter whenever if the Pos trends.

Don't don't hold up just since we know September was a pretty meaningful popped. It could have had some onetime demand in there [laughter].

Mhm.

Yeah. So you know.

I think you you kind of hit the key points in your question there Michael but you know we did see if you remember Q1, we had a relatively.

A more difficult quarter in Q1 or for vans, and we talked about some inbound delays and that that was timing between Q1 and Q2 and indeed, we did see that come to pass. So that's one proof point you know encouragingly, we saw our China business accelerate for vans up 25% our digital.

As you know plus 50% in Q2, great great proof points of of the health of the business and.

No.

Give us confidence for the future and lastly, we did see a wholesale orders moved to the last right and I think that's a combination of.

Of interest and demand a clean inventories and you know it was encouraging to see that some of that demand on the wholesale side shifted shifted up into the.

End of the quarter based on demand. So you know listen it's still an uncertain environment generally, but we continue to make progress and it was really encouraging to us to see you know that the strengthen the brand and particularly in some of those what we would say forward looking indicators like China.

Like digital.

Okay, and then I know.

And then I know.

You know I know you reflected again said, you're not going to give us much.

Look for 2022, yet, but I think youve drop some hints that you know some of the components of the building blocks of the 2019 analyst day, I think you feel like the algorithms intact, but there might be some changes to the past to which you get there I think you said that a few times over the last few months, maybe some initial thoughts on what you see is the same and that some of the big differences in that in the 2024 plan and.

One of those is you know the fairly obvious fact that it's a bigger digital world ahead, maybe talk to us about how the bigger digital business would impact the operating margins of the business and you know if he if you plan to hold the algorithm intact I guess that would imply a digital is a positive impact to your margins, you'll you'll find ways to reinvest.

Some of that to get back to the same operating margin or EPS cadence, maybe just a few thoughts on on how you look at the high level plan as you go out to 22.

Yeah. So so we're not going to talk about it but you're going to ask me about it anyway [laughter] right again right. So it was good.

[laughter].

You know here's the thing you know we're not we're not oh the problem when you isolate on one aspect of the plan without the benefit of the full context is is that you know you don't you don't get the full context, right and and so I'm always cautious and I would always caution you guys not to get ahead of us here right.

All the factors that we see are are are give us confidence that we have the levers to pull to maintain our investment and also to maintain the margin expansion that we've committed to longer term.

You know, let's set aside that we don't know exactly when this rebaselining occurs and when we're out of that kind of impact that you know that these are things that are unknowable, although the progress. We've made so far has been largely in line and maybe a little better than what we expected, but a few things that we know right or the digital acceleration that we had been planned.

Need for has lurched forward and that's that's not going to change right. We don't know exactly how it's all going to balance out.

Balance out, but but we believe that you know the investments, we're making and the fact that our digital channel is our most profitable though those are all good things and allows us both the gross margin and the operating margin to continue to invest back in the business that was part of your question and I would agree but you're right. We want to we want to we want to be a leader in this.

Area and this is what our whole transformations about so what I would take away from it Michael is we have the lever is based on the changing algorithm. We think we have the levers in place that would allow us to both continue to opera or invest and to get the margin expansion consistent with that algorithm and that's why I and Steve.

Ladies and others continue to make the comment you know.

Where where it won't come back we'll give you guys once or twice, we get some stability here in that situation will come back with another investor day, what clean all this EPS, where yet but in the meantime, as you're trying to figure out what these puts and takes me I what I would take away is we have the ability to invest and we have the ability to expand our margins and you should feel good about.

That long term algorithm.

I'm afraid that's about as far as we can go right now yeah. That's helpful. Thank you.

And Michael I would just add little more simplistically here as you know we entered the crisis in a good position we had we had good momentum.

Weve reshaped our portfolio no with very unique and differentiated brands that are squarely planted.

In the parts of the market that are growing and in fact are seeing even greater headwinds no.

We have confidence in the long term out in that long term algorithm. We played laid out last year and Beaver Creek, what's unknown and it would you know we'll just have to have time <unk> really play this out for us.

What's the shape of the of the recovery.

We're position Tim to move along that path the investments made around our transformation that digital growth that we're seeing are really strong proof points of this strategy that we have in place.

You know really it's it will be a timing issue related to the to the shape of the recovery, where we're positioned to move well.

Is that all starts become more more clear.

Awesome, Thanks, a lot sales.

Thank you next question today is coming from Matthew Boss from JP Morgan. Your line is there a lot.

Great Thanks, and congrats on a nice quarter.

Thanks, Matt Steve. Thank you, so maybe to switch gears to timberland well well ahead of forecast this quarter, what drove the better than expected topline and any signs that you're seeing do you believe gives you renewed confidence in their turn around for that brand.

[noise] Yeah, no great great to have a you know how that question come out and we're really pleased with the with the results that we see with our Timberland brand you know the sequential improvement in this quarter.

It is a proof point of what we've been talking to you guys about for the last number of quarters, you know that the people we have in place you know from Martino.

From Martino, providing that brand leadership to the creative talent.

Driving the product creation, our new marketing leader, Nick you've seen a change in the in that tone and the and the quality of the creative.

And I think what you see you know at this particular point in time is you know.

People are looking for those authentic icon you know that they depended on in the past, but the outdoor trend has been benefiting timberland you know through the last six months our outdoor categories.

Categories doing well to the new release that we had here in China. The Mad Berry is a new contemporary execution of outdoor the garrison.

Pete you see coming here in the U.S. that's up on our line today just to you know there's a good introduction of some new styles. This is part of the work that our teams have been doing we're seeing on the energy building around some of those core icons, the yellow boot, but even more importantly variations.

That that we've had some great Influencers, you know show up wearing our products and the expenses to proof of the quality and authenticity of this brand.

But it's it's it's early we're encouraged and excited for our you know our team and the work that they're doing.

We will continue to to do the work to diversify the product offer away from you know take to build on the non classics to build on our womens our pro business is doing well it grew low single digits in the quarter. So there's a number of proof points you know across the timberland brand. It continued to give us confidence that this brand has.

The ability to achieve its long term growth algorithm and in really driving against the new creative you see coming from a brand.

Engagement standpoint, and how that's coming to life in the products.

Great and then yeah.

Hey, Matt can I, just add one one perspective here to remember you know from a from an order book standpoint, and the inventory at retail coming into the season. It was not quite as strong from a timberland standpoint, and so we've we've you know with our buys and and given the lead times are reflected.

So our ability to chase is going to be somewhat limited, but this is really positive.

A really positive development for the brand as you think about cleaning the inventory its creating some of that scarcity or people are making more money from a margin standpoint, all of that sets up well. If you think about the future for the brand and that it's a it's a change in sentiment, which is which is really positive for for for timberland right.

Oh, sorry, sorry to interrupt, but I think no absolutely and that's great color on great to hear maybe just circle back to vans. So a you've cited a number of the accelerating tailwinds out of the pandemic and casual is clearly one of them. How do you think about the total addressable market for vans multiyear.

Could it actually potentially be larger and then just maybe circle back what what's your market share today, what do you think the opportunity is just larger picture, how how would you rank the growth opportunities for the brand multiyear from here is as we think about the vans.

HM.

Alex Scott I'll start you up into it but you know fill in the blanks here, Yes, I think you know the the total addressable market. You know you know Matt too we see for the vans business continues to be same you know the active.

Athleisure, you know part of that marketplace is large it's growing in it and you know bands kind of moves over into that that street wear category as well in any.

In any bets, where the power of the of the messaging of creative self expression and the <unk>.

And just the efforts to the team have taken you know as of late to really increase the quality of the content, how we engage with that content across social media channels and in our own environments. You know to drive that you know that long term loyalty on Dean Your art can you talk a lot about brand love.

We're really.

Really in a good position to continue to grow in that active at leisure you know marketplace and the efforts that they've made around classics that progression footwear.

Apparel I'm all of that all that work continues to be paying dividends at the we see really balanced growth across regions and across categories and I think you see you know the brand continue to be very thoughtful around the product launches the Simpsons co labs.

Cool labs that we launched just a few weeks ago with extremely successful you see some new styles Skeight hi, and.

And our ultralight.

Category up with the new M. T E aspect that we come into the winter months. So just continue to be very thoughtful around how they are creating products and and matching that up with the brand position yes.

Market share, we don't I don't think we've come out and really talked about our absolute share Scott Joe you know help me here no no yeah, we haven't we haven't see.

But you know we you know we we continue to think that you know, we're growing and opportunity to continue to acquire more consumers to Vance family.

You know membership program.

Has been a you know really huge success, we're approaching 13 million people as part of that.

And you know 50% of our U S. D to C sales on this last quarter came through that damn bands family membership program. So absolute proving that we can engage consumers grow the number of consumers that the brand speaks to and really building that brand family.

Around the whole passion around creative self expression, which is a very unique position for them in the market you know versus their competitive set.

No. The only thing I would add is you know the this total addressable market and I would say markets. Because if you know this this brand plays across multiple areas as Steve just mentioned and that's one of the strengths of the broad consumer base you know.

You know everybody is trying to say well what is opposed cobot world look like in light of you know where you were before kind of it and we would say the trends that we see accelerating casualization you know the deep deep brand love and engagement only or a stronger through this period, so well that Tam was always attractive and.

And we had a you have a unique positioning which is is both distinct but broad if anything that's more even more attractive now in light of what we see changing consumer behaviors look like.

Congrats again and best of luck.

Thank you.

[laughter].

Thank you. Our next question today is coming from Sam Poser from Susquehanna. Your line is now live.

Good morning, and thank you so much for taking my questions I've got a handful I'll just make a list of them go through yesterday that you said that you expected to be flat in dollars was that in dollars or as a percent of sales.

Got it your commentary and then yeah.

Yes, it was in dollars or I guess it was as a percent dollar us dollar solid yeah. Okay.

For the fourth quarter in the fourth quarter right.

In the in the second half.

<unk>.

Okay, and then as you heard me Yeah, I said the second half yeah, okay. Okay.

Thank you and then can with vans is you know people people are concerned is what's happening with vans and maybe some of the the way the sales or is this more usually more of a supply situation or the man situation and then also could you give us.

The status of the factories in the Dominican for Timberland and and then lastly is the FX transactional headwinds the 110 basis points is that expected to continue for the balance of the year.

Let me have follow ups with.

His question.

Wow a lot a lot of questions there Stan [laughter] can I get that so the last one I'll say, yes, FX continuing for the balance of the year, but moderating as the year goes on.

That was one timberland and Steve I'll, just rip off this and you know I'm sure [laughter] I mean this so timberland we made some recent announcements as you know, we're reducing our own manufacturing footprint and some of the actions we've done in the D.R.

Really related to that I think you can assume that.

No. We've we this is a well thought out strategic move in and we've got a you know our supply chain team is on it.

And you know, we've we've got an orderly transition.

Planned for for those actions, which had been announced so that's really not different from the long term path that we've been talking about for quite a while here. It's just you know.

You know one when stepping away <unk> I'm, sorry, you had a question relative to vans and I Didnt can you repeat that I'm sure I wondered I wondered if you know, though there's a lot of concern about you know the momentum of bands and the changing is the is the there.

And I don't know, but weakness or perceived.

Slowed down based on questions.

It's this is bad it's more of a supply issue right now where you're making sure. It's very very clean so business really can't sort of get <unk> head of itself. So it's not a demand driven issue as much more of a supply driven issue or is there something else there relative to the <unk> to the momentum of the brand.

Yeah, well you guys have talked about weakness, we never have we know I understand that when people [laughter] I I understand I just couldn't help it but anyway the.

You know I I mean, the demand is there come on to the the engagement of our of our consumers around ads, it's been consistent and you know some of the things that get.

Commented on you know remember our plan here, which we've talked about now consistently right. We said we were a bit tone deaf early on and we we changed our our marketing channel and you know that probably what we call project pivot and we moved away from some of the more transactional related communications and bottom of the fun.

Will activate activations when people were you know going through a lot personally in their life and and in a focus more on deep engagement with with our consumers as opposed to transaction as time has gone on we're changing that cadence both in terms of the the right amount of investment and also the timing and.

Execution of that investment. So if you then look at things like search and interest you know of course, that's going to be impacted by those actions in the short term, but over time, we're seeing those investments increase and you're going to see you're going to see that continue to build underneath all that you know we've seen consistent.

Demand for the for the brand you know I I just point you back Sam that digital up 50% you know 70% up in the first half China, leading the way I mean, you know from from our standpoint. This is played.

This is played out largely as we expected and actually even a little bit better based on some of the demand moving to the left that that doesn't happen just because the supply that happens because of interest right and and engagement with the brand. So you know I guess, what I would say is this is playing out largely as we had anticipated and.

And and if anything maybe slightly better I don't know, Steve if there's any color you could add there.

And maybe on a couple of these Sam just to kind of build on vans.

Yeah, we have spoken about you know the impact advance has seen due to their outsized exposure to California, and the store openings no. That's.

The mix.

In the end the concentration of stores [noise] for vans here in the U.S. is unique for them and you know certainly we've had to navigate that and there were some supply delays.

You know some due to you know how we quickly moved our inventory, but also you know the impact that the pandemic had on our suppliers, who we've worked very closely with who is sure. There are people you know were as safe and cared poor as our own.

But you know as we move through you know the pandemic here, we are seeing a really good improvement. So we have great momentum with its brand name.

First half digital growth up 70% you know the the Vance family membership program continuing to grow and the ability for this team to create compelling content and continue to drive those those really compelling brought you know drops you know continue to feel very confident about bands in our opportunity on.

On the on the D.R. Timberland question Sam.

Just a quick quick add here as part of our portfolio transformation is we.

Okay, TB has standing up as their own public entity, you know the divestiture of our occupational workwear business, we have looked to transform that internal manufacturing footprint you know that we have historically maintained.

I think the good news here as we do that is the you know that internal talent you know that drives has driven those.

Those capabilities over the years will maintain their presence with us and we've talked a lot about our third way manufacturing footprint in how we partner you know with our manufacturing partners across the globe that that knowledge base and skill you know stage I'm <unk> as.

As timberland grows we will have a new will continue to differentiate the product offer and the type of manufacturing the type of skills required to produce these new styles is evolving and.

And Ah, that's what's giving us confidence is as we transform our portfolio the need and the ability to transform our our supply footprint and the partners that we work with.

Will.

Continue to evolve so.

So just.

Really key part of our transformation.

Thanks, I have one last thing on the gross margin, what if everything's clean and you were down 100 basis points in your gross margin in the fourth quarter of last year why Wouldnt. The fourth quarter, you know look more like let's say 19, Oh, sorry fiscal 19 levels rather than last year's level.

Well Weve given you a shaping salmon and you know while we have more more visibility we don't have perfect visibility show you know could it be better maybe there's still a lot of moving parts. You know we've we've got a lot to we've got a lot of D to C that needs to happen in the second half.

And so I think you can assume that what we see today based on the trends and everything. We know is a is what we are confident that in that or could it be.

Could it be better yeah, I mean could there be.

Some negative things that happened that we can't see that's possible to do so so that's that's why we why we ended where we did.

Okay. Thanks, very much and the continued success well huh.

Yeah, Thanks, Sam [noise].

Thank you. Our final question today is coming from the wrong, but for those who from Exane BNP Paribas. Your line is now live.

Well good morning. Thank you very much for taking my question I'm, Steve Scott I was hoping to understand that.

I understand the cadence of North America.

Versus a mail, they're both declined or didn't seem rate. Your your how do we think about the cadence for the third.

For the third quarter, I know, you're not giving us the top level topline overall guidance for the third quarter, but should they should they be should it be moving in tandem again any thoughts on on how Europe is playing out.

Especially since there is some locked down measures put in place on it with some countries out there.

Yeah, maybe I I guess that the only thing I would say here is that you know we have generally seen Europe from a recovery standpoint slightly out of North America. That's notwithstanding what may happen you know to the point the last point that you just.

I'm a lot. So you know we haven't seen a significant impact, but we we watch the same news that you do and I would say this fits in that category of of the uncertainty and unknowable, but in general our Europe business has been a little bit ahead from a from a recovery standpoint then.

And what we've seen in North America, and that would be what we assume you can you can see that in the business evolution slide page 29 of the deck that that we provided with.

With the with the announcement and how we see it and that's that's really about as much color as we can give you right now around no that's.

No that's very helpful and then maybe.

On capacity constraints I think there's a number of brand operators out there talked about capacity constraints.

For the peak holiday shopping season ends thoughts is there a limitation for your digital business to grow at a certain rate just because of a higher base are you using threepl and any thoughts on on that would be helpful. As we think about PTC versus wholesale for the for the third quarter.

<unk>.

Yeah.

You want me to start at Sea bird Yeah.

Yeah. So so we took the best of our ability we've we've prepared a.

You know in light of whatever covered restrictions, we have been and we have looked at you know whether it be offsite storage and <unk> just different things that are our supply chain is has looked at looking at peak volumes and to the best of our ability and knowledge to see it we think we're prepared.

But you know the.

That being said, it's a it's an environment where things can change and if you should have an outbreak or whatever that a you know where people first so we're not going to take any chances and we would we would react to that and in the event that it would happen so without.

Without any unforeseen circumstances occurring we think we're well prepared or not for the peak and and you know we think we'll be able to meet those objectives. Now I will say this to you know service levels aren't great and every aspect because of really things that have already happened our supply chain is largely back.

In business and operating today, but that doesn't mean that things that happened you know 468 weeks ago aren't impacting US now they are right in terms of new product deliveries being a little late you know certain certain things that are not.

That are not at the levels of stock that we would want to see you know, there's it's getting better every day.

Again, largely where we are.

We're paying the sins of the past in other words, where backup and then running today. So we're not creating new problems that we're getting out of the of the issues that are that are in the past, but you know it would be wrong to give you. The picture that this is normal because it's it's not normal it's just getting better and we have better and better visibility.

Do you know when those get well dates are and how how that whole.

You know supply demand matches is setting up so with everything we can see just to reiterate it we've got the capacity lined up we've got you know DC last mile. All those things and we believe we are prepared for for this peak.

Very helpful. Thank you very much for all the color best of luck.

Great. Thanks, Laura Yeah. Thanks, Thanks for my Q, we reached end of our question and answer session I like to turn the floor back over to Steve for any further or closing comments.

Great. Thank you and thank you everybody for joining us this morning, I hope you're walking away with a sense of.

Just how you know how.

How happy how comfortable you are with the stabilization in early recovery you know that we're beginning to see across yes.

As we enter the next you think you see us leaning in investing behind marketing you know continuing to invest behind our transformation.

On the confidence that we had our board had to increase our dividend yeah coming out of this quarter. There's many proof points that are giving us confidence as we begin to enter the next.

We're early and you know, though we are seeing signs of improvement we will remain cautious we remain agile and adaptable and really drive against those opportunities that we see coming I'm here in the future we're positioned extremely well in those costs.

Most of the markets that are growing with a very unique and.

And differentiated portfolio supported by strong enterprise functions in regions with very specific skills that enable the success of our brands.

And we look forward to continuing to talk to you here in the coming quarters and wish you all a great day and stay stay safe.

Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.