Q3 2021 VF Corp Earnings Call
[music].
Greetings and welcome to the VF Corporation third quarter fiscal 'twenty 'twenty One earnings conference call. At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded and it's not my pleasure to turn the call.
Over to your host Joel out higher Vice President of Investor Relations Corporate development and Treasury. Please go ahead Sir.
Good morning, and welcome.
Third quarter fiscal 'twenty, one and conference call for it.
Yes.
Call will make forward looking statements.
These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially.
These uncertainties are detailed and 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 defined and the press release that was issued this morning.
We 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 refer to reported amounts which are in accordance with U S. GAAP.
Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors.
During the fourth quarter of 'twenty and 'twenty the company determined that the occupational workwear business met the held for sale and discontinued operations accounting criteria.
Accordingly.
The company has reported the related assets and liabilities of the occupational workwear business and discontinued operations as of the day noted above and.
And included the operating results of this business and discontinued operations for all periods presented.
Unless otherwise noted results presented on today's call.
Based on continuing operations.
Joining me on today's call will be Vf's, chairman, President and CEO, Steve Rendell and CFO Scott Rowe.
Following our prepared remarks, we'll open the call for questions Steve.
Thank you Joe and good morning, everyone and welcome to our third quarter call as always I hope our comments today and find you and your loved ones are healthy and safe.
And as we put in 'twenty and 'twenty behind US. We've unfortunately experienced a tumultuous start to 'twenty 'twenty, one highlighted by the political and ideological divide and our nation as well as the ongoing challenges presented by the pandemic across the U S UK and other countries around the world.
Even so I remain optimistic about the year ahead and to improvements in our geopolitical and macroeconomic and pandemic related situations and I'm confident and B S plan to accelerate growth continued advancing our business model transformation and deliver on our commitments to our shareholders and stakeholders around the world.
<unk> performance during the third quarter was largely ahead of expectations. Despite additional COVID-19 related disruption to our business.
Consumer engagement with our brands remain strong and we have conviction that the secular trends related to casuals nation health and wellness and the desire to get outdoors will be enduring.
Our business is on track to return to growth and the fourth quarter and I am confident that the strategy, we have in place positions us well to accelerate growth as we head into fiscal 'twenty and 'twenty two.
I'd like to begin my prepared remarks, a day with a brief recap of where we left things on our October call at that time, our business had essentially fully reopened across the globe and underlying business trends had continued to stabilize and we saw strong momentum in China and across our digital platform, which we continue to view as leading indicators for our business Comping.
From this momentum as well as early signs of stability and recovery across our portfolio more broadly supported our preliminary outlook for fiscal 'twenty 'twenty, one and the decision to raise our dividend.
Further in early November we announced the acquisition of Supreme and our willingness to execute the transaction during the pandemic was a function of the resiliency of Supreme and business model.
Our early and decisive actions to ensure liquidity as well as our increased confidence and the trajectory of our organic portfolio and.
Forward to today, our business has continued to perform ahead of expectations and our cockpit and and visibility heading into fiscal 'twenty and 'twenty two continues to improve.
While the environment has proven to be somewhat more difficult than expected and performance of our business demonstrates the resilience of our portfolio.
While the full extent of these headwinds was not contemplated in our initial fiscal 'twenty 'twenty one outlook, we were able to more than absorbed these impacts as a result of the continued strength of our digital and China businesses as well as better than expected performance from our north face and timberland brands globally as.
As a result for the momentum we see building across our portfolio fueled by by our business model transformation, coupled with the closing of the Supreme transaction, we are raising our fiscal 'twenty 'twenty, one outlook, Scott will impact the details and I'm on it.
Before getting into the highlights for the quarter I'd like to provide and update on our progress against our business model transformation.
And understanding and focusing on our consumer connectivity is at the heart of our transformation journey. Our teams continue to activate capabilities to better understand and build more intimate relationships with our consumers digitize the go to market process and enhance and integrate the online and offline consumer experience.
The continued impact of the pandemic has forced and ongoing reaffirmation of our priorities and we remain committed to both the near term brand specific initiatives and long term enterprise wide platform investments.
Continued investment behind our transformation is critical to our success and long term growth aspirations and pleased with the significant progress we've made throughout 2020 and as evidenced by the resiliency of our performance. During this past holiday season, and the momentum and is building across our portfolio as we head into fiscal 'twenty and 'twenty two.
A recent proof point of visa accelerated initiatives has been enabling our brands to build omni channel consumer journeys and optimize supply chain efficiency.
On our last call we shared that ship from store functionality was activated across the majority of our vans and north face full price stores ahead of the holiday season spin.
Specifically within our EMEA platform, our teams engineered homegrown solutions to deliver buy online pickup and store ship from store and reserve online buy and store right before lockdown measures applied across the region.
These businesses were able to utilize retail inventories and leverage ship from store capabilities. When the stores were forced to shut down and supporting and 81% increase and digital revenue.
Phase two of this project is currently underway with a plan to go live in the coming months, including save the sale functionality, which will allow our brands to leverage retail inventory when and I did and it's out of stock on line.
Turning to our brand highlights from the quarter.
And revenue continued to sequentially improve declining 8% is 48% growth and digital was more than offset by brick and mortar store closures.
And the Americas and EMEA markets.
The brand accelerated to 9% growth and APAC led by 58% digital growth and 21% growth and China.
From a product standpoint, all weather mtge's styles increased at a double digit rate and the ultra range increased high single digits as vans consumers turn to more outdoor and active oriented franchises.
Vans ranked number one among the largest brands during the singles day on Tmall, gaining 700000, new consumers.
Also in November vans customs launched on Tmall, and becoming the first global brand offering a full customization engine on this platform.
Collaboration with day drove the lunch generating 870000 unique visitors on the customer site that day.
The vans family member base continued to grow globally with membership approaching 14 million consumers.
Although the headline number for vantage reflects the challenging brick and mortar operating environment and the U S and Europe, we remain confident and the underlying trajectory of the business and expect at least low double digit growth and the fourth quarter on a reported basis.
Continued momentum in China and across the digital platform normalized inventory levels across all regions and strong consumer growth and engagement support the brand's return to growth beginning in the fourth quarter.
Moving on to the North face revenue declined 2%.
<unk> sequential improvement and the Americas and double digit growth in Europe and Asia.
Europe remains a bright spot for the brand with 17% growth, including 112% digital growth.
Offsetting the impact of significant store closures and the region.
Global TNF digital increased 61% with accelerated growth across all regions driving a return to positive growth and D to C.
And North America, and VIP loyalty program, do drew 840000, and sign ups and more than 90% increase versus last year.
TNF continued to drive a significant increase and consumer engagement through authentic and purpose led marketing activations.
Core off mountain icons, such as the Nuzzi franchise performed well and the TNF Gucci co lab generated tremendous brand energy with over 15 billion media impressions since its December launch.
Yes, you heard that right over 15 billion media impressions since its December launch.
On mountain product also performed well highlighted by future lights expansion deeper into the product assortment and leading to triple digit growth versus the prior year.
The new footwear platform vectors has been well received exceeding our initial sell and targets for this spring launch.
And we're pleased with the performance of the North face and encouraged by the brand's strong momentum heading into next year.
On a reported basis, we now expect fiscal 2021 revenue for the north face to declined less than 10%, including greater than 20% growth during the fourth quarter.
Timberland revenue declined 17% relative strength from apparel and positive growth and both outdoor footwear and the pro business were more than offset by softness and classic footwear, which was significantly impacted by limited inventory availability Tim.
Timberland continues to drive brand energy with key Influencers and retailers through high profile collaborations and the launch of new franchises.
New work Summit Booth was launched this quarter contributing to a record traffic to timberland Pro's digital site, which saw more than a 100% growth for <unk>.
<unk> by the opportunity for true cloud, a new innovative eco friendly franchise made from renewable and recycled materials and green stripe and new franchise anchored and outdoor.
And while still early I am pleased with timberlands progress and the evolution and diversification of timberlands, new and innovative product portfolio.
Continued momentum from Timberland pro apparel, and non classic footwear, coupled with improving demand and inventory levels for core classics position. The timberland brand for continued progress heading into fiscal 2022.
<unk> revenue increased 7% with strong demand across all regions and growth across all channels. The work inspired lifestyle product portfolio continues to develop at a rapid pace increasing at a double digit rate across all three regions work inspired lifestyle product now represents about a third of global brand <unk>.
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Brand interest accelerated in the quarter over and indexed towards the key 18 to 24 year old consumer demographic supported by the United by Dickies Global campaign and focus on the brands icon stories.
And finally, we were thrilled to have closed on the acquisition of Supreme. This move is further validation of the actions we've taken over the past for years to position our portfolio into those parts of the market, where there is strong consumer engagement and demand. We're confident that the Supreme transaction will serve as a spark for another layer of transformative growth and value creation for VF and our ste.
Holders and.
Early January we announced the transformation plan for APAC for operations. This represents the first significant action under project enable.
Highlights include the following.
We will transition our brands and central operations to Shanghai, we.
We will transition the Asia products supply hub to Singapore, and I'll also redeploying some of the product supply talent and resources throughout primary sourcing countries to work more closely with key suppliers and drive greater efficiency.
We will establish and additional shared services center, and Kuala Lumpur, Malaysia to serve as the home for central activities within our enterprise functions.
As you would expect we will take great care and as we move through the transition process. During the next 12 to 18 months.
And as always we are committed to supporting the personal needs of all impacted and relocating associates and their families.
So to close I want to thank our people for their incredible efforts throughout 2020, as we balanced navigating the dynamic near term environment, while remaining focused on our long term priorities and business transformation I'm encouraged by the recent performance and resilience of our business and optimistic about the growth outlook for our brands as we move into for.
2022 and beyond.
As we've said from the onset of the pandemic with Great change comes great opportunity I am confident VF will emerge from this pandemic and an even stronger position ready to build upon our storied history and established track record of delivering strong returns to all stakeholders.
And now I will turn it over to Scott.
Thanks, Steve and good morning, everyone.
What a year beginning with the unprecedented enterprise preservation actions at the onset of the pandemic to the acquisition of Supreme and this has been and unbelievable period for VF and I'm grateful for the work that's been done by our teams around the globe to position us for growth and success moving forward.
To recap our quick and decisive actions to ensure liquidity have allowed us continued investing throughout this disruptive period highlighted by our ability to acquire Supreme a perfect complement to our portfolio and accelerant to our long term strategy and transformation agenda.
Our aggressive control of inventory, while prioritizing newness has allowed us to maintain Brian brand momentum, while positioning us for a return to profitable growth from the beginning of the fourth quarter and into the next fiscal year.
And our sharp control on discretionary spending and the launch of project enabled presents a tailwind towards operating leverage moving forward and the ability to direct more dollars to our highest priority growth investments.
While the near term environment remains noisy, including Lockdowns and store closures and inventory constraints I could not be more pleased with the overall health of our enterprise and the composition of our portfolio heading into next year.
I'll open with a quick update on Supreme which I know is of interest and many of you as announced on December 28, we closed the acquisition for an aggregate purchase price of approximately $2 $1 billion.
Subject to customary adjustments, we expect Supreme to contribute about $125 million of revenue and five cents of adjusted earnings to the fourth quarter of fiscal 'twenty and 'twenty one.
And as disclosed in our announcement, we expect Supreme to contribute at least $500 million for revenue and at least 20 of adjusted earnings and fiscal 2022.
We're now moving into the integration phase and carefully onboarding Supreme into the VF family.
Focused on applying the appropriate amount of governance, and oversight where needed while maintaining a light touch approach and other areas to avoid overburdening the brand and we're committed to keeping that business as usual for the brand and its teams while at the same time and understanding how we can begin to enable the brand's growth and strategic vision while activating.
Synergy opportunities where appropriate.
While it's early days, there's a lot of excitement about the future among both the VF and Supreme teams and we're off to a great start.
Moving onto and overview of the operating environment across the regions starting with the Americas continued virus related lockdowns and disruption present near term challenges without said the outdoor and active categories continue to outpace overall apparel performance and demand trends have remained resilient.
Retailer inventories appear to be well positioned exiting the holiday season, but do but do remain abnormally low in certain categories and channels.
Spike continued traffic headwinds, our Americas business sequentially improved with nearly 50% digital growth offset by store store closure headwinds.
Moving on to the EMEA region, where we've seen a second wave of the virus introduce more severe lockdown measures than previously anticipated.
And as a result, the broader EU economy has been among the hardest hit by the pandemic this quarter as.
And as the vaccine rollout is starting across Europe. The region is bracing for another wave of COVID-19, and the U K recently extended more restrictive lockdowns and till February thereof.
And our reasons for optimism however, with digital acceleration continuing throughout the region as we've seen across our owned brands and with our digital partners, such as Orlando and Asos.
DFS EMEA digital business grew more than 80% and the quarter, despite half of our brick and mortar stores being closed for a large portion of the quarter. The EMEA region saw a meaningful sequential improvement and returned to positive growth on a reported basis.
Finally, the APAC region continues to offer greater stability than any other even as the effects of the pandemic leaner.
China has seen a pick up and consumer spending with positive growth and apparel and footwear categories. We continue to view APAC is the leading indicator of the larger macroeconomic environment, our mainland China business grew 15% led by strength at vans, which grew 21%.
The D to C business and mainland China accelerated to 20% growth led by 24% growth and digital.
China retail partner inventory continues to improve and are part of our comp sales returned to growth. This quarter. We're excited by the continued momentum in China and have high confidence and our outlook of 20% growth this year.
Now turning to highlights from the quarter.
Total VF revenue declined 8% in line with our expectations and.
International declined 4% as a 4% decline and EMEA was offset by 1% growth and APAC, including 11% growth and greater China.
Our D to C business also declined 4% driven by store closures and continued soft traffic and the Americas and EMEA, our digital business grew 49% with strong performance across virtually every brand and the portfolio and.
Including our pure play digital wholesale partners. Our total digital business represented about one third of total revenue in the quarter.
We now expect D to C digital revenue growth to exceed 50% for fiscal 2021 on a reported basis and including our digital wholesale business. We expect total digital penetration to approach 30% for the year.
Gross margin contracted 150 basis points to 55, 7% the third consecutive quarter of sequential improvement aided by moderating promotional activity.
The decline versus last year was primarily driven by higher levels of promotion and 90 basis points from FX transaction, partially offset by 90 basis points of favorable mix benefit.
While the promotional environment remains a headwind it has evolved slightly better than our expectations as we move into the fourth quarter and into fiscal 'twenty and 'twenty. Two we expect the impact of promotions and discounting to continue to moderate.
Our SG&A spending declined about 4% relative to last year as we've returned to more normalized levels of strategic investment spending including demand creation approaching historical levels of investment as.
And as expected, we did experience cost pressure from higher freight and distribution expenses. Although these were more than offset by reductions in discretionary spending and leveraged elsewhere throughout the cost base, we expect to continue to invest and our strategic priorities and the fourth quarter as we returned to growth.
Inventories were down 14% at the end of the third quarter consistent with our prior expectations, we expect to exit our fiscal year and March with inventories at equilibrium and support of our forward growth outlook.
We also see relatively clean inventory levels at retail globally positioning our brands for a return to more profitable growth heading into next year.
As expected service and in stock levels improved as Covid related disruptions had less of an impact and the quarter.
Our liquidity position remains strong.
We ended Q3 with approximately $3 $9 billion of cash and short term investments and addition to roughly $2 billion remaining undrawn on our revolver.
After funding the Supreme acquisition, we expect to exit fiscal 2021 with more than one 5 billion and cash and nearly $2 billion remaining undrawn on our revolver.
Our capital allocation priorities remain consistent supported by our robust liquidity position.
We remain fully committed to growing our dividend, which continues to be and integral part of our GSR model our share repurchase program remains on hold as we focus on deleveraging the balance sheet following the acquisition of Supreme.
So now turning to our updated outlook.
We are raising our fiscal 2021 outlook and now expect full year revenue to be between 9.1, and $9 2 billion and full year EPS of approximately $1 30.
The increase and our outlook includes the accretion from Supreme and the fourth quarter results, implying a modestly higher outlook for the organic business. We're also raising our free cash flow outlook to approximately $650 million.
I know many of you are eager to understand our initial expectations for fiscal 2022.
While it's too early to provide a preliminary outlook at this time I will provide a few high level comments to help you understand how we're thinking about the evolution of our business as we head into next year.
Overall, we see and improving consumer backdrop, particularly in our core categories, along with brand momentum across our largest properties globally.
<unk> shift towards digital and China are beneficial to our fundamentals and recent portfolio actions are immediately accretive to our revenue growth and margin profile. We continue to see encouraging signs of stabilization and the retail marketplace and and normalization of inventory flows from a healthier supply chain.
We intend to continue to distort investments towards our strategic priorities and business model transformation and support of our powerful brand portfolio.
Taken together I remain optimistic about the strength of our growth algorithm going forward and I'm confident and our ability to emerge from this crisis in an advantaged position.
Portfolio actions, we've taken over the last five years have left us well positioned to continue delivering superior returns to our shareholders.
So now I'll turn the call back to the operator, and we will take your questions.
Thank you and other conducting a question and answer session.
You'd like to be placed and the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. They may be necessary to pick up your handset before pressing star one one moment. Please.
While we pull for questions.
First question today is coming from Michael Binetti from Credit Suisse. Your line is not a lot.
Hey, guys. Thanks for all the detail today I guess I just start on a couple of comments that you made Scott I guess two changes I heard.
Where that project and Eagle should add some efficiency on the cost base and I know before when we initially got you look at Supreme you assume no synergies and the guidance you gave us out of the gate I think today, you said you'd be looking for some areas of synergy where appropriate. Obviously you continue to mention to US you want to leave that business alone as it's doing a nice job, but I'm trying.
And think of how best to think about what the size of the project enable efficiencies could be do you envision flowing that through if at all as you start to roll that project out or is the plan to reinvest that and fall.
Yeah.
I'll just obsolete I'd love to hear your thoughts on those.
Sure sure Michael Good morning, and thanks for that for your questions yet relative to enable we talked about $125 million of a benefit over roughly a three year period.
Today, you saw and the comments the first major action under project enable related to our Asia Pacific business. The two components of that are building on our already present, Shanghai front and business focused on China and and.
Moving most of the remaining.
Jobs from Hong Kong, Shanghai, and and on the supply chain really to two things strategically moving into country more closer to the sourcing.
Sourcing locations, which has a labor arbitrage benefit and addition to be just better and better able to manage the business and then moving to Singapore, which obviously and Kuala Lumpur, which also has some financial benefits, but you know.
I guess, Michael the way that I think and my prepared remarks, I said enable is not about cost it's fundamentally about transformation and realigning our business, but it does have a cost benefit obviously, the $125 million and.
So the way I would think about this modeling going forward is.
And while we've got a lot of incremental investments around the transformation, specifically around digital and and some of it.
Our capabilities around consumer data et cetera, rather than that as being incremental and being a drain we're looking at redeploying cost and offsetting many of those so that we can see leverage and the SG&A base over time.
And another question related to this that you might have.
This is some big actions that we just.
Announced today and what does that mean from a cash flow standpoint going forward well the both the.
Restructuring and some of the outgoing costs will happen over time as well the benefit so we don't see a material impact and any particular quarter from a cash on cash basis. So hopefully that gives you. Some color. There we really see this as a way to maintain leverage and the SG&A base and and redeploy.
Cost so that we can offset the transformational investments that are that we see coming and have been investing and frankly overtime.
As it relates to Supreme Yeah.
The point that I think youre, referring to at the time of acquisition.
And the modeling that we put out really assumed very very limited and essentially no synergies. We said that doesn't mean that we don't see the opportunity but it also is recognizing this is a beautiful simple machine and we don't want to mess it up frankly and.
This business. This acquisition was based on strategy and opportunity and a new growth factor they have beautiful fundamentals already and we don't need synergies too.
Make the deal work economically that was the that was really the intent of the earlier comments, having said that as we engage with with the team and Theyre going to lead this where they have.
Where they have opportunities for growth like new geographies for example, where they're not present, we absolutely see opportunities to reduce friction and and and create some leverage with our strong platforms and these new geographies. The point, we were making is that wasn't factored into the deal economics. So.
As we get further down this integration path and were just starting my expectation is we'll find those areas of synergies and when we do we'll talk about that and and update the.
Any guidance that we have relative to the accretion there.
Okay. Thanks for the details.
Sure. Thanks, Michael.
Thank you and next question today is coming from Matthew Boss from Jpmorgan. Your line is now live.
Great. Thanks, and maybe first on van any way to parse out the impact from store closures or COVID-19 restrictions this quarter or said differently could you speak to maybe the underlying trends that youre seeing.
Our region and just your confidence and demand trends advanced exiting the pandemic relative to pre crisis.
Yes, Steven you want me to do the numbers first maybe.
Yes sure go ahead, Scott and then I'll pick it up at the tail.
Yeah, Okay, Yeah, Matt So a couple of things to think about.
The footprint of vans from a brick and mortar standpoint, you know you've got a third of our brick and mortar and California, and a third and in Europe. When you look at the global brand and and you might remember D. C is about and it's more than 50% of the vans brand overall.
And you put with that these are our most productive doors right and so they punch above their weight from their disproportionate in terms of the relative impact.
And the overall brand. So 90 days ago, we didn't we were essentially opening for business and and all geographies and and we Didnt anticipate that we would have these re closures and you're seeing the impact of that so.
As it relates just to the to the guide this year, that's really the primary driver remember also I mean, you have wholesale doors and the same regions as well, but the biggest issue for us, which was frankly around the brick and mortar stores.
And I think I would just follow we continued to be very encouraged about the vans business and and most importantly, how.
The vans business continues to engage with its existing customers.
We talked about and family members, which has been a big investment over the past few years drove over 50% of the U S D to C business.
You know all of our businesses are experiencing episodic impacts.
Due to the Covid pandemic.
And is certainly impacted.
Based on the heavy concentration of stores with the brick and mortar closures, but we've also.
And they've had to endure.
You know how to recover from our early moves on mitigating inventory and pulling back on marketing and just getting there their rhythm and choreography.
Of new products married with with appropriate stories to drive that engagement and ultimately drive.
The conversion just getting back into that rhythm and we are seeing that today and as we move into spring 2021.
And really see that optimized level and I'll come back to what we have historically been.
Accustomed to.
Great and then just a follow up on the margin side. So your guidance implies operating margin I think around 6% to 7% and in the fourth quarter. Scott could you just break down the expectation for gross margin and the fourth quarter, maybe relative to the 106 sure at this point and traction in the third quarter.
Sure Matt Yeah.
First of all just to bring you back and remind you of the glide path that we expected our gross margin and you know generally notwithstanding the.
And the vans brick and mortar comment that I just mentioned generally we're seeing that develop in fact and the third quarter. We said promotional activity was slightly better than we had and <unk>.
Dissipated and as we look to the fourth quarter, we really don't see any any material change in the and the patients.
Our markdowns are or the promotional activity, what we do see and expect a modest decline in gross margin from from previous expectation to think about maybe 100 basis points or so and that's really driven by mix the difference and mix right. So as you see less direct to.
Or you're going to see.
Youre going to see a little bit lower gross margin and the fourth quarter, maybe to give you some confidence that as we look forward and we're not giving guidance and 2022, but I can give you a few data points that maybe it will help you think about the go forward.
Picture for.
From a margin standpoint, we would expect 2022 margins to be back to historical peak levels and I think.
About the organic business 55, 5% plus and accretion from <unk>.
Supreme So a little better we would expect margin gross margins to be a little better than even where we were.
Pandemic and the and the 'twenty and 'twenty timeframe, which I think is really kind of underneath what your your question is the other thing I would say is remember the actions that we took while we're sure that it had some impact in terms of sales and <unk>.
Some of the relative performance this year constraining inventory et cetera that the goal there was to emerge and a clean position and and at a position of strength going into next year. So you know just remember there's two sides to those impacts are short term disruption, but we believe we're setting ourselves up well for for next year.
That's great color and best of luck.
Yeah. Thanks, Matt.
Thank you for our next question today is coming from Alexandra <unk> from Goldman Sachs. Your line is now live.
Good morning, Thanks, so much for taking the question and for all the color so far.
And my last question was a high level question on the momentum of your direct to consumer digital business and <unk>.
Decelerated in the quarter, despite the overall acceleration and top line trends for the business and I was wondering how that was changing and adapting you'll hang king and key next year on the potential for digital growth against the toughest and pilots with us yet and put it on.
The way you know weapon digital penetration to get to and fiscal 'twenty came and how.
Much more runway is there so that channel.
Sure, Alex and Steve I'll go ahead and start Scott.
And if I Miss anything here.
I think we're very excited about the impact of our decisions for the last few years to really invest behind our transformation.
And and build this consumer first mentor.
<unk>.
We committed to get our digital.
For about 20% of our business when we met with everybody back and Beaver Creek seems like eons ago.
And as we've gotten through this year, we've exceeded that number about 23% and combined with our U S. Wholesale are our digital penetration is about.
And 30%.
So I think.
But what's important for us.
Really the penetration.
Percent, but more about building vs. The seamless.
Connections between the virtual and the physical.
And building those optimized consumer journeys.
And that allow us to really.
Meet our consumer where they are so thinking about through a mobile first mindset.
UX CX aspect of our platform is thinking about the services required within our stores to be able to not only optimize service, but optimize use of inventory.
And I would just tell you that the store element of our direct to consumer strategy long term is a very critical role.
And on.
And how we connect with consumers, but also how we bring technology.
You know the store, we've opened recently and Milan or E cheap and he's really a test case of blending technology with physical and and building a higher level of engagement and experience. So long answer Alex, but it's really less about penetration and it's more about these optimized consumer journey through the seamless integration.
Both environments.
Yes, the only thing I'd add real quick Steve is just just some numbers you know we've had our 'twenty and 'twenty four.
E com growth.
We've already hit and exceeded that and the and the low twenty's and when you consider what we call digital wholesale think about Salon day digital partners, we're approaching 30% where that ends up it's it's hard to know, we're kind of agnostic between growth and and our own stores and and and the digital.
Frankly, we see that as merging and and being more seamless as Steve mentioned, so where.
Where exactly that.
Shakes out we haven't declared yet, but we expect that both will continue.
Continue to be more and more important to us and that's why we're making the investments that we're making.
Awesome. Thank you and then one more on and supply chain you made some comments that you've actually seen us net lease from suppliers.
Product for your supply chain and <unk>.
Moving.
And any disruption.
And for other downstream.
What's required.
Ports.
There are some bottlenecks and delays that was wondering and you were saying that are we expecting to see it and then.
And.
And essentially at some of them for.
Yes, Alex.
We've said that just as a general comment the supply chain performance on time deliveries et cetera continue to improve but they're not normal right. We are still seeing impacts of COVID-19.
Really throughout the value chain and yes, we've seen isolated port issues we've.
And we've had instances where we've re re routed.
Sailings etcetera in order to cash.
Account for that so far that has not been a major issue for us.
But definitely it is not normal but it continues to improve and that's the way I would characterize it we wouldn't say that that's been you know.
A material impact and the business per se, but it goes back Steve made the choreography comment comment and when you have marketing and hitting at a certain time.
And in your stores and a retail store and and maybe or a few weeks late that can be that can be a big impact right in terms of the choreography of having product hit at the right time at the time, you have your marketing lined up and and getting all those pieces together, so I would say and continues to improve.
We know, it's having some impact but it's it's a it's hard to exactly identify what what those are the great News is we got the best supply chain and the industry and and they continue to make significant improvements.
Fantastic. Thanks, so much.
Mhm and.
Thanks, Alex.
For the next question today is coming from Bob <unk> from Guggenheim. Your line is now live and.
Good morning.
Just a couple of questions on the wholesale business.
And you think about the next few quarters with a lot of the sort of fits and starts at retail and your own stores, but also your wholesale partners can you just talk about the plans on inventory buys and just sort of how you guys are investing for the next few quarters around replenishment et cetera, and then.
And just similarly on the wholesale side can you just talk generally.
And any areas, where you're gaining shelf space or losing shelf space and if theres any Mike competitive makeup of the store is changing dramatically or anything like that you might be able to share with us. Thanks.
Yeah, Bob on the first part of your.
Comment.
I would say generally first that the environment at least as and.
And the parts, we play and the wholesale business remains conservative but constructive.
You know order books as we have said now multiple times of has been conservative versus historical levels. We see you know I would say improving sentiment going forward and and continued constructive.
You know our support from from the wholesale channel, but but but still still a conservative environment. So that's just general right and and I would say our position hasn't materially changed either.
And we talked about and the early days of Covid, we were were pretty darn aggressive on inventories.
And we now are getting to the point, where we're normalizing and we expect by the end of the year I think we used a word.
Equilibrium.
And in terms of inventory positions versus forward sales and that's both the reach out comment and and our own inventories. So so you know our posture, Bob as a kind of as we've said and developing as we expected.
Not in a normal environment again from a from a overall posture, but it continues to be more constructive and and again, where we're super.
Pleased with the way that our key retailers and partners have worked with US again, and they're not canceling orders orders are sticky and they may be conservative, but they're doing what they say.
The second part of your question, Steve maybe maybe you want and address that in terms of yeah mhm.
Yeah, Bob so.
Wholesale.
Has and will continue to be a very important part of our of our go to market set of choices.
And I would tell you.
The the key accounts that are businesses focus on and we continue to just build stronger and stronger and more productive relationships. If you think about our EMEA business.
The relationships, we have with the pure play digital partners like a lando asos.
And even what we see with JD and <unk>.
K and store and online.
And our success, there and how we balance between our own environments and their environments is really very critical and Asia, We think of Ali as a wholesale partner and.
And the comments, we made about bands being the number one large brand during <unk>.
11, and 11 and the first to launch accustomed platform on the Ali costumes environment.
And you know those types of opportunities come based on the strength of and relationships and then if you think about.
Our dickies business here in the U S and.
There.
The ability to service essential retail that has been open throughout the pandemic brings.
Bring needed products to to their consumers through those strong relationships.
Say this is one of our core core go to market.
And.
The elements of our strategy and it's always been a big part of DFS tool.
Toolkit on how we really partner with and service those those wholesale partners and the very best way.
Great. Thank you.
Thank you for the next question is coming from commodity on from BTG. Your line is not a lot.
Thank you and good morning, everyone.
And I was hoping you could give a little more color.
And just your commentary around and he just touched on inventory and I'm curious to see if you can.
Help articulate.
How much what was the limitations on northeast and timberland.
And from your inventory constraints during the quarter, and and how that might be and fronting fourth quarter and.
And you talked to kind of my high level perspective around those inventory levels started to normalize.
But I'm, just curious to see as to what and when.
Are we thinking that the commentary around.
Normalization by the end of Q4 suggests that you'll be and I think it position and your fiscal 'twenty two.
With the appropriate amount of inventory given your expectations.
Yeah.
Yeah, Camilo, we haven't quantified it and I can tell you.
And in certain areas. It's it's significant tens of millions of dollars, we haven't given that number.
You know publicly but.
The areas, where we're seeing really.
And impact on sales, particularly our and the outdoor area.
Timberland brand in particular around some of its core styles.
The north face and certain outdoor categories certain.
You can see it and your channel checks and online and it's hard to hard to see and and we know as Steve mentioned earlier too from for the vans business. We've seen we've seen that the constraints, we put on and.
From an inventory standpoint, and also cost of sales. So I think you answered the question.
And the question.
Our expectation is as we leave this year that.
And that were in equilibrium and.
And where were.
Balanced and and should see that.
Those inventory pressures.
And we should be and a more normalized.
Posture going into next year.
So sort of taking that one step further you typically and.
And bill to order, maybe plus a little bit.
But given that there's likely a and expectation of conservatism around wholesale orders.
And the performance and the demand for the new products and the innovation that are coming to market with.
Would you consider building some back stock into next year.
So they can meet more and that incremental demand even through your own DTC channels is that would be.
And it looks like to that growth rate.
And not having to rely on and.
What will likely be very tepid and and cautious wholesale positioning.
Yeah.
Yeah, you know I guess at this point Camilo and I would say to that and Steve you may want to jump in here, but I don't think you know you shouldn't expect us to go ditch to ditch in terms of risk posture any but it is a more.
<unk> environment, and it's going to be less conservative and and that would be from our standpoint, and I think also for the general market and should think about the wholesale business remember too.
Our highest and best presentation of the brand is and our own digital and <unk>. So we're going to build to what we believe is our best estimates of what demand is and and we would expect a more constructive environment generally next year and and less conservatism.
The last thing is the one other reasons, we took the aggressive postures that we did this year is knowing that it was going to be uncertain and and that's why we keep saying, we and our intent is to emerge and are in and advantaged position. So you know has there been some some demand buildup.
We need and we needed to see some of that and a brand like the timberland and sorry.
And Jeff.
The sell through and create some.
Some unmet demand that's not a bad thing for for these brands as we look forward. So I think you can expect a more constructive environment is it going to be.
No ditch to ditch or dramatically different I would say, no, but but but you should see our and improved our position next year that would be our expectation.
Camilo I would I would also add.
You will also see and we've been talking about this for a while.
But just a higher degree of frequency of new stories.
Across all of our brands.
But more frequent drops with more compelling stories not depending so much on that early drop with the reorder sequence behind it clearly that's important on your core styles, but you'll see us continue to advance this idea of more frequent deliveries.
New innovations new color stories co labs married with the appropriate amount of marketing.
And to drive that demand, so it'll be and.
And increasing that.
Kind of leveling off.
And that old traditional model to the to the new model and we continue to pivot to our transformation.
It sounds like the Supreme acquisitions, or any sort of factor into the thought process and that we're not I guess, just one final if I could squeeze it in non Supreme.
Any updated thoughts on how we should think about the flow through from the stronger EBIT margin contribution relative versus the.
Reinvestment of that margin profile.
Are you looking to release some of that accretion and down to the bottom line.
The gross margin and opportunity are or reinvest a portion of it how should we think about just the.
Natural and higher margin structure of that business and to your intent on Philips hue vs read nothing.
Yes, Camilo I guess I'd, just reiterate what we said earlier.
Point.
The 500 million and 20 cents.
And clearly this we have optionality in this model and the reason, where we're holding back a little bit in terms of declaring more than that.
Is is where we're and the integration process right, where we're just getting started and we want to understand the balance between the needed investments and and how do we enable their growth and.
And the flow through I guess, the the really good news here that I would just leave you with is the fundamentals are really strong. The optionality is really good we just need to understand better how we balance growth and profit and and what that looks like going forward. So you can you can take what we said to the bank.
And could it be better it could but we need to understand what the relative investment profile versus the flow through and looks like and and we'll be back next.
Next quarter and give you more give you more insight into what that what we see that look and Mike.
And thanks, so much for that color that's good line.
Thanks Camilla.
Thank you for next question today is coming from John Kernan from Cowen and company. Your line is now live.
Yeah, Good morning, excellent and thanks for taking my question.
I wanted to go to north face that Europe up 22% Asia Pac up 16.
We've seen some of the momentum building and north face feels like it's gaining share here in America just wanted to check.
And your pulse in terms of what's embedded for the guidance after north space, particularly in the Americas and as we go into next year.
I guess would start here and I'm, Scott if you want to fill and the numbers.
To your point you know the the.
The north face business is continuing to show sequential improvement and we are very encouraged with the progress it's early.
But we're very very encouraged the international business has been the point of strength, Europe and Asia and.
And we're very pleased with the progress we're seeing here in the Americas.
And what we.
We're very confident about what that future looks like the where the north day sits and the total addressable market the outdoor trend, we're extremely well positioned.
Continue to drive that.
That lead brand.
Point of view that we have and this Tam and.
And you continue to think very positive about the MLP that we laid out and Beaver Creek.
Got it maybe Scott you gave us some.
Really helpful commentary on how to think about gross margin and returning to prior peaks next year, just curious on the SG&A profile.
Any color you can give there it looks like just based on the guidance you gave.
And $8 down around mid single digits.
For the year. This year is there anything that you.
He can talk to in terms of the SG&A rate long term now that digital is obviously going to be distorted a bit more in terms of the mix and the identified any anything from a cost structure.
This year it might come out of the business.
Yeah, Let me I'll make a couple of comments there you know first of all as you look at the implied guidance.
The full year and back into the fourth quarter.
And I'd just remind you guys. There's a lot of noise here and we had a COVID-19 corner last year you got a good quarter. This year, just one little sound bite for you to think about we.
We're trending very positive a year ago, and then unwound, our incentive comp is as COVID-19 dramatically change the picture and the fourth quarter, a year ago, and that's about a $50 million delta year on year net.
And your Youre up against and I, just point that out just to.
To remind you all and Theres a lot of noise and and you got to be careful about making.
Big assumptions on flow through going forward.
Without without our guide here and I know youre looking for that Guy.
And maybe this will help let me, let me give a little more shaping on 'twenty and 'twenty. Two first of all just starting at the top of the P&L, we expect to get back to pre Covid quarterly peak revenues at some point during next year 2022.
Even happen as quickly as mid year, but you know there's there's there's uncertainty.
And what this glide path looks like exactly but.
We do see getting back to those are and if that's been a question that many of you have been asking us for quite a while and and just wanted to give you that picture I already talked about gross margin what our expectations are for next year.
As it relates to operating margin you know one thing that we've seen this year that that we I'll just and that's myself personally.
Not giving guidance, we don't have all the answers yet, but I would expect operating margin to be a little stickier.
In terms of the recovery and the reason I say that is primarily and brick and mortar.
And we don't see a light switch here, where all of a sudden Europe and and everything goes back to the kind of levels and the productivity that we saw previously.
And as a good example of that what we're seeing and this year's guide right. They are.
And our closures and reopening.
They are encouraging our business or our brick and mortar is really profitable, but it was even more profitable at its peak and the and the productivity that we saw based on traffic patterns, you know pre COVID-19 versus when we reopen.
People are nervous right and and they're slower Florida come back every indication is theyre going to come back and that we're going to see you know a longer term path, we're as confident as ever and brick and mortar and it's an important part of our of our of our.
Overall consumer delivery, but but I would expect productivity and brick and mortar to lag a little bit and its recovery and that probably puts a little drag.
And that shows up and SG&A, but that would put a little drag and into next year.
So no from a L RFP and and long term earnings and the fact that we're seeing revenue line of sight and revenue. The fact that our gross margins are are are healthy and we see a line of sight to get back to peak levels, we know that structural mix benefit.
Is there and you see that this quarter, you'll see that and the fourth quarter, you know 90 basis points or so this quarter and mix.
And our fastest growing businesses are our highest gross margin and said that structural margin is there those are the factors when the topline and margin is there that gives me the confidence that cut.
Coupled with the Optionality and the model that we have we have a lot of confidence and our long range plan.
And what could make that happen quicker or.
Or slower it really is the consumer and how we emerge from this and our.
And our people comfortable what happens with the vaccine and Theres just a lot of uncertainties and that's why we can't give you more granularity at this point on 2022, but as time goes on you know and a corner from now when we reported and give our guidance. Our expectation is we'll have even better visibility and and be able to give you a little more shaping on what 2022 should look like.
So hopefully that'll help you it's not exactly.
You know the full picture, but as you think about modeling and hopefully that gives you some some color there.
Super helpful. Thank you.
Yep.
Thank you next question today is coming from Erinn Murphy from Piper Sandler Your line is not a lot.
Good morning, and I guess my question is on Europe, if you could share a little bit more about what youre seeing and the spring summer 'twenty, one order books and have the recent locked down are you seeing any of your kind of wholesale partners need to take receipt of product later, just given some other noise. Just curious if we'll see any kind of shifts between Q4 and Q1 and then Scott just clarify.
And what you just said on 2022 from a kind of going back to pre Covid peak revenue I'm, assuming that's excluding that prime just wanted to clarify that that's right. Yeah. Yeah. That's right just to get the second part, yes. So I was talking about organic like for likes and that would be continuing ops and and so without the occupation of.
Work and excludes Ukraine.
Yeah. So in Europe, you know first of all day Europe business has been remarkably resilient and yeah, we haven't I'm not prepared to talk about exactly what we're seeing and order books, but I would say that we have a really constructive key partner base there.
We have some unique partners here with cylinder and Asos for example, the digital and tightened switch has really been resilient through this COVID-19 period, and then just wonderful partners.
With the brand and and that didn't happen by accident and obviously that's been cultivated over many years bye bye and Martina and our leadership and and the Europe region, but.
It's been it's been really resilient and while order books are impacted by the shutdowns and and and whatnot.
And we're bringing their inventories in line our performance has really been exceptional and our inventories are in good shape and and our expectation is that notwithstanding COVID-19 related things that can't be predicted.
And that we're setting up well and as you.
You think about next.
And next year.
Okay, and then just one follow up on the North face if you could speak a little bit more about the footwear launch it sounds like it's been optic and Mark just remind us where that distribution has right now and what's your expectation to scale it and fiscal 2022.
Sure and I'll I'll grab that so yeah you.
You as usual keep good track of what's going on with social media to the new vector launch went live yesterday it's.
It's live.
Here in the U S in specialty running as well as to the VIP north face consumer and.
And it's also live and other.
Other parts of the world and a very kind of focused early launch.
Perspective, and it will it will hit full volume by mid February.
And and yeah early reactions have been very positive.
You know that the cell and exceeded expectation and.
And and the early read on just the and the social media.
Storytelling behind it has been doing very positive so very optimistic as we talked about and Beaver Creek. This is.
A big point in time for the for the North face team and.
And new point of view around footwear.
Tied with.
And they're directing the brand on that more of a 365 day per year availability of relevant products for.
For on mountain off mountain usage, so exciting and more and more to come.
Great. Thank you for them.
Thanks Sharon.
Thank you. Our next question is coming from Jonathan Komp from Baird. Your line is now live.
Yeah. Thank you just first just a quick follow up Scott on your comments for next year, which were really helpful. Could you just maybe directionally talk about or are you more or less confident and any of the brands, particularly since you've mentioned kind of the upside scenario on the revenue recovery I'm just curious if any.
Stand out there more or less confident and.
Yeah Baby and I don't know if you want to take that Steve I, just just a I would say just a couple of comments.
Before maybe you you'd come over the top here and see one branch and I haven't talked about is dickies, which is too bad because dickies as you know over $100 million of our acquisition plan.
It really making good progress there.
And there there and particular, the dickies lifestyle part of the business and particularly in Asia, but now launching in Europe.
It's been a really good story and unfortunately, we haven't talked much about it so.
And that's what I would point out and and and.
And we have optimism I mentioned the outdoor brands.
And the perspective my own personal perspective here is.
We've been on a journey on both timberland and north face and and we I think have been very transparent and in terms of what we see as the opportunities, it's really encouraging to see and our social media.
Heat and.
The performance I think we're leaving a little on the table is not a bad thing as we set up for next year and you know that's that's encouraging and as it relates to the and that's the you know it's been.
High singles or high teen performers and SAR acquisition and.
And we are at periods, we have the noise and we and our.
Quarter to quarter and I get it you guys are looking at that and it's a big part of the algorithm, but this is a powerful machine with many vectors. So.
As I look at the long term I I tried to separate the short term noise from what I believe it for long term opportunity and so.
And that's my windage on it and Steve maybe not maybe you want to add to that.
Yes, I know, Jonathan I would support 100% of what Scott just said I mean, we believe and every one of our of our children.
The dickies comment and it's extremely well well put.
This brand has performed all year long.
And as they begin to get that balance of that core work with work lifestyle, and and really driving that authentic brand message to.
New younger consumer you know really good you know.
Global opportunity across each region.
North face and timberland and sit squarely in the outdoor Tam.
And we've learned from this year.
The demand signals that we see going into next year. It gives us great confidence.
Vans and other connection to their consumers.
Being one of the greatest strength, we we know the issues that have impacted our vans business. This next this year, we are extremely well positioned to gain momentum our optimism continues to be.
Strong.
And our emerging brands and you know all our ultra business the small.
Hum.
<unk>.
Really had a good year and we will continue to build momentum agile smart, we'll and icebreaker.
Our Napa business as we think about opportunities.
And opportunities beyond its core markets in Europe. So I think every one of our businesses extremely well positioned.
And the business model transformation that we have in place to really take that consumer understanding and apply that to our go to market set of choices and and really.
Proactively engage across.
All of those different touch points, but.
But we would be remiss to say, if we wouldn't we're not super excited about our newest add.
Add to the portfolio and Supreme as we learn more about each other.
And the opportunity ahead for.
And the Supreme business and their ability to tap into the VF regional.
Portfolio capabilities, our supply chain capabilities to optimize what they already do very well.
We see great opportunities to continue to grow there.
And and then just bigger picture when you think about margin by brand do you think theres enough recovery our expansion potential at the outdoor brands that could.
To offset presumably fans and it takes longer for for margin to recover for most.
However to stores obviously.
How do you think about it and by brand and how the margin might might play out.
Okay.
Yeah, Jonathan and I mean, just Directionally, obviously, we will give you more granularity on what we see next quarter at least for for the next year, but you know they are.
The relative outsiders and and the three other org.
Organic brands that we have.
In terms of margin expansion and Theres, a lot of room to run and as we start to see.
And the traction that debt that we just talked about.
The leverage and opportunity for that margin expansion is.
And is absolutely there.
Already have amazing margins advance. So yeah, you know that's one of the advantages of our <unk>.
Portfolio.
And diverse.
Offering right is we have multiple levers to pull and again to the earlier comment on Supreme Beautiful fundamentals right and a lot of Optionality. There. So this will be a <unk> and important and big profit and top line driver for VF over time, what we don't know yet is is exactly what are the.
Those investments and how do we balance and what flows through.
And we owe you that will come back and give you more granularity, but the beauty is it for prestige brand with whats wonderful fundamentals and it will be a very important growth driver for this company over the next you know for.
Foreseeable future.
Great I appreciate the color.
Thank you Donald Okay. Thank you.
And of our question and answer session and I'd like to turn the floor back over to Steve for any further or closing comments.
Great. Thank you everybody for joining us.
This has been quite a year for each and every one of us.
And I couldnt be more proud of our people and the.
The work that everyone has put in to be able to navigate what is.
It's been a very challenging environment.
And just makes me extremely proud we have great conviction.
About the transformation that we've been undergoing for the last two years and how it is positioning us to really optimize the connections we have with our consumers and build those those seamless frictionless consumer journey to service them, where they are at.
And the portfolio that we have.
We're continuing to evolve has positioned us to to really.
Capture and.
Important part of the marketplace and as we look at the Tam that we've positioned ourselves into.
And we remain cautious, but we are extremely optimistic there are still.
And some waves to navigate as we emerge from the pandemic, but we're still extremely well positioned to Scott's point, we do see ourselves returning and.
And so our peak.
Levels as we move through fiscal 'twenty, two and extremely positive about the opportunities ahead. So thank you and we look forward to talking to you a few months and closing out.
21, and and positioning ourselves to move into a much more.
Positive and dynamic fiscal 'twenty two.
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.