Q2 2022 VF Corp Earnings Call
Greetings and welcome to VF Corporation's second quarter fiscal 2022 conference call.
At this time all participants are in a listen only mode.
Question.
The session will follow the formal presentation.
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As you know this conference is being recorded.
I will now turn the conference over to John Kelly Senior Director of corporate development Investor Relations. Mr. Kelly you may now begin.
Good morning.
And answering and welcome to VF Corporation's second quarter fiscal 2022 conference call.
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 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 defined in the press release that was issued this morning.
We use adjusted constant dollar amounts as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business.
You may.
Paresh 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.
Due to the significant impact of the coronavirus pandemic on our prior year figures today's call will also contain certain comparisons to the same period in fiscal 2020.
These comparisons are all on a reported dollar basis.
On June 28, 2021, the company completed the sale of its occupational work right business.
I also hear accordingly, the company has reported their lifted held for sale assets and liabilities of this business as assets and liabilities of discontinued operations and included the operating results and cash flows of this business and disc ops for all periods through the date of sale.
Unless otherwise noted the results presented on today's call are based.
Business continuing operations.
Joining me on the call will be Vf's, chairman, President and CEO, Steve rental and EVP and CFO, Matt bucket.
Following our prepared remarks, we'll open the call for your questions.
Steve.
Thank you John and good morning, everyone welcome to our second quarter call.
Based on because we moved through the halfway point of our fiscal year I remain encouraged by the underlying momentum across the portfolio and the broad based nature of this strength gives me confidence that we're driving the right strategy to accelerate growth in the quarters ahead.
Looking through pandemic related disruption and near term headwinds in China, we continue to see a healthy.
The landscape is strong consumer outlook and accelerating demand signals across our business.
The recovery has not been as linear as we had anticipated for some parts of our business.
I'm proud of how our teams continue to deliver through the volatility this.
This is certainly where we excel we're focused on what we can control.
Retail despite a more challenging environment than we had envisioned we were able to reaffirm our fiscal 'twenty two revenue and earnings outlook, a clear Testament to the resiliency and Optionality of our model.
We see our business emerging in an even stronger place than before the pandemic.
We've accelerated our strategy to be a more digitally enabled enterprise while driving significant.
Investment behind key capabilities to connect with our consumers.
We are driving organic growth as we elevate direct channels is stored Asia led by China and accelerate our consumer minded retail centric hyper digital business model transformation.
On top of that our number one strategic priority to drive and optimize our portfolio is netted.
Thickening significant benefits.
Over the past five years, we have strategically evolved and simplified our portfolio from 32 brands to 12 brands each with significant DTC and international opportunity squarely focused on large growing addressable markets.
<unk> trends around outdoor and active lifestyles health and wellness.
The casualization and sustainability.
Only strengthened over the past 20 months and our current portfolio is well positioned to benefit from these accelerating tailwind.
Active portfolio management remains an evergreen process and M&A remains our top capital allocation priority.
This is a differentiator and a competitive.
This vintage for VF as we continue to refine our portfolio mix to maximize exposure to the most attractive parts of the marketplace.
We are confident that we have the right strategy and our continued execution on each of these key strategic pillars position VF for a stronger emergence.
Now moving into our Q2 results.
If it had been noisy our second quarter results highlight ongoing progress against our strategy and reflect the healthy accelerating underlying business with broad based strength across our portfolio.
I'll start with vans, which delivered 7% growth in Q2.
Like meaningful wholesale shipment pushed into Q3 representing sequential.
And underlying demand despite a more challenging than anticipated operating environment.
The EMEA business has accelerated meaningfully during the quarter. However, in the U S encouraging brick and mortar recovery trends, which had been building into July were impacted by the delta search and its implications across our most important markets.
We'll improve has led to sharp shifts in store traffic trajectory during the peak back to school window.
Additionally, the brand faced headwinds in Asia Pacific with virus disruption across the region and a more challenging near term consumer environment in China.
Well vans Americas Q2 recovery did not meet our expectations.
Pleased with our team's response, we're focused on what we can control.
Our retail associates are driving best in class conversion up 20% relative to pre pandemic peaks this quarter in the Americas and despite the impact of expedited freight the vans Americas team has brought full priced deep sea gross margins above fiscal.
I'm pleased to 'twenty levels supported by discounting below pre COVID-19 levels.
At the same time, leveraging our strong inventory position, we've secured additional shelf space with several key wholesale accounts for the second half.
So despite a more challenging operating backdrop than anticipated we were able to hold on to the low end of our prior outlook for vans and.
2007% to 9% growth relative to fiscal 2020.
We're confident advanced strategic choices as evidenced by improving demand signals and strong consumer engagement.
September vans core collection launch supported the fifth highest sales day on record for our Americas, DTC digital business, achieving 100% sell through within.
So we're encouraged by the ongoing strength from progression footwear lines up 15% relative to fiscal 2020 led by ultra range in MTBE and are pleased with the continued growth in vans family membership, reaching $18 5 million consumers globally.
Our confidence in our long term runway for vans remains unchanged the brand came.
To this disruptive period exceptionally strong and consumer engagement has remained healthy the active space remains a large and growing Tam and the casuals nation trend continues to present, a long term tailwind for vans.
And although the vans remains a very important part of our story, we must remember that <unk> is not just one brand.
We have a diversified.
<unk> portfolio of global brands, each with exposure to attractive terms with enduring tailwind we have significant shared platforms of expertise highlighted by our international platforms and global supply chain, which are enabling broad based profitable growth and as a result, our model drives ongoing capital allocation optionality to.
<unk> enhanced DFS growth and shareholder return profile.
We'll build on many of these themes shortly but I'd like to start with an overview of the broad based momentum we're seeing across the portfolio.
Starting with the north face, which delivered 29% growth in Q2, despite significant wholesale shipments pushed into Q3, representing a sharp acceleration.
Furthering demand alongside meaningful margin improvement in our international businesses are gaining share, but the underlying U S business has accelerated meaningfully this quarter on tight inventories driving high quality sales.
We remain encouraged by the strength across categories as TNF has been successful at balancing on and off mountain messaging.
Of underlying consumers.
Not in platforms like future light active and the recently launched advanced Mountain continued to drive strong sell through and reinforced tnf's performance credibility.
<unk> mountain lifestyle apparel and equipment are delivering outsized growth at <unk>.
<unk> 365 to eight demand persisted.
Led by.
<unk>, two aware apex and duffels.
We also saw strong performance from more versatile athletic inspired products highlighted by the wander franchise.
We are raising the outlook for TNF, 27% to 29% growth in fiscal 2022, we continue to believe this moment for peanuts is underappreciated.
<unk> will be a $3 billion business delivering high teen growth relative to fiscal 2020 levels with strong margin expansion underway.
Looking into next year, the north face will continue to benefit from broad based brand momentum fueled by innovation extremely clean distribution channels, increasing year round relevancy and ongoing.
The wins from the outdoor marketplace supported by growing consumer interest in active outdoor lifestyles.
We therefore expect the northeast to be at least within its long term plan range of high single digit growth in fiscal 2023.
Moving onto Dickies, which continues to build upon its incredible run delivering 19% growth.
<unk> quarter.
Brand is driving their integrated marketplace strategy supporting growth horizontally across work in work inspired categories.
Well as vertically as they focus on higher tiers of distribution and bring new consumers into the brand sell through remains elevated and demand signals continued to be strong.
It's across the globe the Dickie team remains focused.
Growth in the key drivers of their business expanding core work, where beyond traditional channels and leveraging the brands authenticity to accelerate the lifestyle segment.
Icons had been a focus for the marketing and sales teams and the results are compelling highlighted by the accelerated growth of the 874 work Pan.
There are several versions.
Of this 50 year old <unk>.
On a reported by ongoing innovation, which collectively have delivered over 100% growth year to date.
In addition to the strong growth trajectory dickies, we remain encouraged by the significant margin expansion runway, which accelerated in Q2 on the back of strong full price selling and SG&A leverage we're proud of the continued success that they can.
We feel as another underappreciated part of the story.
We are raising the outlook predictor as to at least 20% growth in fiscal 'twenty, two representing at least 30% growth relative to fiscal 'twenty.
We expect the brand will approach $1 billion next year as Dickie celebrates its 100 year anniversary.
Next timberland.
<unk>, which grew 25% growth in Q2, despite significant wholesale shipments pushed into Q3, representing an acceleration of underlying demand over the quarter.
The pro business remains a consistent growth driver for the brand supported by a new campaign celebrating the skilled trades to inspire the next generation of worthy workers. Despite historically.
<unk> inventory levels core boots, and outdoor footwear continued to show strength as we head into the holiday.
Each growing over 40% in Q2.
Timberland continues to create and own boot culture with the September introduction of Green stripe Eco innovation in boots for the first time.
Solar rich hiker launched with much fat.
<unk> in New York City, and posted 50% sell through in North America too.
Two more green stride drops will hit in October driving further momentum behind this important franchise at the same time the true cloud collection. Another eco leadership story drove strong traffic and social engagement across all regions.
We believe the timberland brand is in a much healthier.
<unk> transitioned today relative to where it was before COVID-19.
This leadership team has a sharpened focus on the brand's product architecture getting back the timberlands core work and outdoor sustainability and craftsmanship, while increasing energy and newness.
We have refocused strategic clarity around the target consumer and on executing the right go to.
To your point of choices the.
The brand is demonstrating strong marketplace discipline, reducing discounts and thoughtfully rebuilding depleted inventory, while driving significant improvements in profitability.
The integration of Supreme continues to move according to plan and our teams are learning from this highly productive business, including how they manage product creation.
Markets building energy ahead of drops and optimizing assortment and product flow across regions with great agility.
Looking forward, we remain confident in the significant white space opportunity for this brand across geographies with a clear opportunity to leverage VF platforms.
Supreme remains on track to become DFS 5 billion dollar brand in the coming.
Years, and lastly, when speaking to the broad based strength across our portfolio I'd like to briefly shine a light on our three outdoor emerging brands Smartwater icebreaker and altra.
This group collectively represents nearly $550 million in revenue with a mid to high teen growth profile longer term.
While smaller today these brands are all.
Profitable and are exposed to the attractive tailwind around health and wellness active outdoor lifestyles and sustainability and we're seeing it in their results.
Smart will brand is up nearly 6% year to date, representing high teens growth relative to fiscal 2020.
We have accelerated investment in brand awareness campaign, highlighting the high <unk>.
Performance and versatility of this product while targeting an active younger consumer.
We're seeing that pay off with broad based strength across categories led by apparel and outsized growth from new consumers or other natural fiber brand icebreaker and successfully relocated the core leadership team from New Zealand to our <unk> headquarters further.
Trading into our EMEA platform, which will accelerate the brand's global reach the brand has grown nearly 30% year to date with balanced growth across its largest markets in Europe and the U S.
Base layers, Ts and underwear represent about 70% of icebreaker global revenue confirming the consumer appeal of a 100.
Percent natural product and Mexican next to skin categories.
And lastly, ultra the fastest growing brand in our portfolio is celebrating its 10th anniversary this year by establishing its legendary loan peak franchise is the number one trail running business in the U S. The brand has continued to build accolades from the running community with awards from Runner's.
Other self magazine women's health and outside magazine across multiple franchises through the first half of the year. The brand has grown over 60% relative to fiscal 2020, and we expect this to accelerate into the back half of the year as the brand continues to expand its presence in road running with innovative new styles and designs we.
This world Madis opportunity for ultra to expand distribution domestically and internationally leveraging its differentiated product and continued strong tailwind for this category.
We see significant potential for each of these brands to deliver outsized growth in the years to come.
We've demonstrated the ability to scale brands and the big businesses and have confidence that over time.
Ctrip outdoor emerging brands will become another strong component of Vf's financial algorithm.
As I conclude my prepared remarks, I'd like to remind everyone that before the pandemic our portfolio was on track to deliver high single digit revenue growth and high teens earnings growth in fiscal 2020, while we remain in a disrupted environment I believe vf's long.
Long term prospects are even more attractive today.
We've accelerated our transformation strategy, we have further optimized our portfolio and importantly, this portfolio today is capable of delivering greater broad based strength relative to where we were before the pandemic.
This gives us even greater confidence in our ability to drive high single digit topline.
And low teens earnings growth at a minimum as we emerge as an even stronger company.
And now I will turn it over to Matt.
Thanks, Steve Good morning, everyone I'm happy to give an update on our progress as we navigate the recovery and importantly, I'm encouraged by the resiliency of our business during the first half of fiscal 2022.
The environment.
<unk> has clearly evolved differently than we had planned in may however, our teams remain focused on what we can control and they are delivering the underlying topline recovery across the majority of our business has exceeded our plan offsetting new challenges in the APAC region and ongoing disruptions across the supply chain network.
Through thoughtful allocation.
Of investment we've been able to drive continued strategic investment spending while leveraging other parts of our SG&A base to protect earnings.
As a result, I am proud of our ability to hold on to our fiscal 2022 earnings outlook of about $3 20.
Despite a more challenging than anticipated operating environment, including an incremental headwind.
About nine from expedited freight.
This should be a strong signal that this management team is committed to leveraging the significant optionality in our model to deliver on our earnings commitments.
Before unpacking, our Q2 results I want to quickly run through the operating environment across the region and share the latest outlook for our global supply chain.
Starting with the Americas region product delays and reduce traffic during virus surges impacted the business during our highest volume periods. This quarter. However, the region was able to deliver 22% organic growth in Q2, representing continued sequential underlying improvement.
Retailers remain bullish on the upcoming holiday season, and we are focused on delivering.
In time to support strong demand signals.
Cancellation rates remain historically low due to tight inventories conversion remains exceptionally strong and we see continued reductions in promotions compared to last year.
Having strong average selling prices.
Next to the EMEA region delivered mid teen organic growth in Q2.
Despite meaningful supply chain disruption, particularly for the north face.
The underlying business continues to perform above the overall market supported by strong performance of key digital Titan.
This region was strong before the pandemic and has shown incredible resiliency throughout this disruptive period.
Stores are showing continuous recap.
Product or volumes, despite softer street traffic in large metro areas, we're encouraged to see the brick and mortar DSD business for both the north face and vans and quite meaningfully this quarter each returning to positive growth relative to fiscal year 'twenty.
Recovery momentum and sustained growth are expected to accelerate throughout the year as vaccine rollouts progressing.
Recapture finally, the APAC region delivered low single digit organic growth, despite a more challenging backdrop and anticipated for parts of our portfolio.
Due to a resurgence of COVID-19 across the region economic growth and consumer confidence has softened since July.
Parts of our business in China have been further impacted by weaker digital traffic for.
Domestic brands.
This has been more impactful for active brands relative to outdoor.
Across the portfolio. We believe we are performing better in our respective categories versus other international brands and while we remain bullish on the long term opportunity in the region. These pressures have impacted our near term outlook.
We now expect low teen growth in.
We're not in fiscal 2022.
Moving on to our global supply chain the environment remains challenging and has continued to deteriorate. Following our Q1 call in late July.
The resurgence of COVID-19, Lockdowns in key sourcing countries like Vietnam have resorted resulted in more impactful production delays and logistics.
China continues to face unprecedented challenges.
We are experiencing increasing product delays from the supply chain disruption, which is creating meaningful quarter to quarter volatility in our results let.
Let me unpack all of this in a little more detail.
Due to the us large and strategically diversified sourcing footprint, our overall production capacity.
<unk> network has remained better positioned than most with about 85% of production operational throughout the quarter pressures are generally concentrated in the southern region of Vietnam, which represents about 10% of BFS overall sourcing mix.
We remain confident in our ability to navigate the production environment. However.
The logistics network remains under increasing pressure ports.
Ports are generally open but operations remains severely impacted by labor and equipment availability servicing significantly higher shipped volumes.
As a result, our dwell times at points of destination have increased significantly.
In aggregate supply delays are pervasive and in some cases.
<unk> ended eight to 10 weeks.
As a result in the most recent quarter, we had a material shift of revenue from Q2 into Q3 with more than half of this tied to Vietnam.
Despite these delays cancellation rates have remained below historical levels signaling strong demand and tight channel inventories.
However delays ultimately.
Have extend packed product availability across the marketplace.
Really all of our brands are experiencing delayed collections style and in some cases insufficient size assortment limiting their ability to fully meet strong demand.
For example, the Supreme brand has experienced around 30% less inventory around drops so despite strong sell through.
We are losing volume for limited supply.
This environment is where our world class supply chain differentiate yourself highlighting the significant competitive advantage VF has created with this platform.
We have always maintained a diversified sourcing footprint to provide resiliency against unforeseen changes in the operating or geopolitical environment.
Similarly, our example, our largest market Vietnam only represents about a quarter of our sourcing mix and within Vietnam. We work with multiple partners have a presence in multiple provinces, both between the northern and southern regions of the country and maintain access to multiple ports.
Our teams are leveraging <unk> scale and relationships to navigate the challenging.
And logistics environment in the most cost effective way, we continue to utilize expedited freight across a large number of air providers.
We have doubled our network of ocean carriers and significantly expanded the number of ports utilized across the growth the globe.
Our commercial and supply chain teams are working closely with our key wholesale partners increasing.
Challenging using direct shipping and our work indicate we're doing better than most of the competitive set of keeping product on the shelves.
Our relationship with these key wholesale partners continues to strengthen with our open transparent and timely communication throughout this dynamic situation.
So despite the unprecedented level of disruption across the global.
Mobile supply chain, our teams have been able to keep product flowing supporting our strong holiday growth plan and allowing <unk> to effectively hold our revenue guide for fiscal 2022.
Moving into some additional highlights on our second quarter.
Total VF revenue increased 21% to $3 2 billion, despite a significant amount.
<unk> shifted from Q2 into Q3, implying continued sequential underlying improvement for the portfolio.
For context, we estimate this shift represented a mid to high single digit impact to Vf's Q2 growth rate relative to fiscal 2020.
Our adjusted gross margin expanded 300 basis points.
Count of 43, 9% due to higher full price realization lower markdowns favorable mix and around 20 basis points contribution from Supreme.
When compared to prior peak gross margins in fiscal 2020, our current year gross margin was impacted by about 180 basis points headwind from incremental expedited.
Fitbit and FX.
Excluding these two items our organic gross margin in Q2 with over 100 basis points above prior peak levels, driven by favorable mix and strong underlying margin rate improvement.
And as a reminder, our Q2 2020 gross margin was very strong so our ability.
I'd have forever to deliver this level of underlying expansion against fiscal year 'twenty margins is a strong testament to the health of our brands in the marketplace.
Our SG&A ratio improved in Q2 down 100 basis points organically to 37, 2% despite elevated distribution spend and continued growth in strategic investments.
To list strong underlying leverage was driven by discretionary choices and is a clear reflection of the optionality within our model supporting organic EPS growth of 60%.
I am proud of our team's ability to deliver earnings of $1 11 in Q2, despite incremental expedited freight expense and significant wholesale.
The timing headwinds in the quarter, reflecting the strong underlying earnings momentum of the portfolio.
Now a few comments on our on our revised fiscal 2022 outlet.
We are holding our revenue guidance to be about 12 billion. Despite a weaker China outlook in the near term and a lower than back and a lower than expected back.
Shipment performance at vans in the U S and ongoing supply chain challenges.
All of this highlighting the broad based strength across our brands and geographies.
Our gross margin outlook is now about 56%, including 40 basis points of incremental freight cost relative to what we had expected in July imply.
Implying and underwrote and improve.
Back to school underlying gross margin outlook and adjusting for incremental freight and FX. Our fiscal 2022 outlook implies over 100 basis points of underlying gross margin expansion relative to peak gross margins in fiscal 2020, driven by favorable mix and clean full price sell through.
We are holding.
Proving bringing margin outlet to around 13% for fiscal 2022, despite the incremental freight costs covered.
As Steve said, we're focused on what we can control and for me SG&A control is clearly top of mind.
We are offsetting supply chain and distribution cost headwind, we spend reduction actions while protecting.
Our off road <unk> and demand creation.
The business is driving impressive underlying leverage and our confidence is strong that we can continue to accelerate this overtime.
Finally as discussed we are reaffirming our full year earnings outlook of around $3 20.
Despite about <unk> <unk> of incremental cost directly attributed.
<unk> in the supply chain disruption.
A strong testament of portfolio resilience resiliency and the Optionality of our model.
So we've introduced an important concept that VF is not just one brand and I want to reiterate this as I conclude our prepared remarks before the pandemic was more reliant on the vans brand.
Today. However, we are a much larger portion of our business performing at or above our expectations.
There is broad based momentum across the portfolio.
<unk> also has a power has powerful enterprise platforms highlighted by our world class supply chain, which provides a significant competitive advantage to our business and.
And lastly, DFS.
<unk> capacity to drive meaningful incremental shareholder value through capital allocation Optionality.
We've demonstrated this over the course of the pandemic by maintaining our dividend and trading our occupational work business for the Supreme brand.
And as you may have noticed in this morning's release, our share repurchase program has been been reinstated.
With the remaining authorization to repurchase up to $2 8 billion of common stock.
As we have line of sight to our leverage threshold. We have this additional optionality and we'll be opportunistic in share repurchases moving into the balance of this fiscal year.
<unk> is not just one brand we are a diversified portfolio of strong brands supported by world.
Class enterprise platforms, which we believe at minimum can drive high single digit revenue growth low teens earnings growth growth and provide meaningful capital allocation optionality moving forward.
Let's open the line for your questions.
Thank you.
I will now be conducting a question and answer session if.
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Please poll for questions.
Thank you and our first question comes from the line of Matthew Boss with Jpmorgan. Please proceed with your questions.
Great. Thanks, So maybe to start with vans, So global brand revenues.
More or less flat to pre pandemic in the first half of the year I guess could you just help walk through drivers behind the confidence in seven to nine.
<unk> for the year, what exactly accounted for the forecast cut this year and any change to 12% to 13% as a multiyear target.
Hey, good morning, Matt.
Maybe just start off we see nothing in the van strategy that would tell us that we.
We cannot grow double digits long term.
This brand fits into an active Tam.
With a very.
Corrective on a day today.
Think only growing as casualization megatrend accelerates.
We've grown high team since the acquisition that's over a decade of high.
Teens growth.
And we continue to see significant international White space.
In China, and Europe, but continue to see growth here in the U S.
I think what gives us confidence as we look forward.
As we have a renewed focus on our icon management strategy.
A proof point this quarter was the 25% growth that we saw in our skate high.
They leaned into marketing that particular icon.
And as we come through Q3 towards the back half you will see us begin to.
Elevate.
The icon in general and really getting back.
Back into the systematic cycle.
Pushing the five key icons, while we also continue to support our.
Our progression, which is where the ultra fit MTBE.
Where we've seen very strong sell through.
As well as leveraging the growth in apparel.
Which is really opening up those multiple wear occasions that the brand can enjoy.
We will continue to leverage the indoors in store experience.
That is a core element of how this brand connects with it.
With it with its consumers.
And we'll continue to lean into growth.
Western Europe.
Look too.
Really support our Asia teams as we focus on that China growth trajectory and getting that brand back in sync with what we know is very possible as the brand pushes the the notion of creative self expression and a very brand right, but local.
Here in the humor relevancy to elevate the brand there in China.
Hey, Matt I'd, just add a couple of things in terms of in terms of thinking about the acceleration in the back half of the year. That's implied in this is a true statement across all of our brands, but certainly there is a significant inflection in the wholesale business base.
Based on the order books.
Consider that we've talked about the differences in the spring order books versus the fall order books and the <unk>.
Time that those order books were placed.
The impact of that pretty significantly and just to give you. An example for bands on a global basis in our wholesale business was down.
Ill at high single digits in the first half, we expect it's going to be up sort of low double digits.
In the second half and again, that's supported by the order books that we have and we've really got visibility at this point pretty much all the way through the end of our fiscal year. So that's one thing I think thats understood.
Understanding and certainly again, it's relevant for all of our brands.
The other thing is our demand creation efforts will accelerate from a spend standpoint in the back half.
And that's always been our plan and you'll see that we've got that built into our modeling from the beginning we did have.
A bit of an acceleration through back to school versus what we saw in the first half of the calendar year, but even more so as we move into the holiday so strong demand.
Creation investments as strong programs coming.
For the year the port support the business.
And then probably the last thing as we've said all along we expect some continued improvement in our traffic into our large and highly productive brick and mortar base of business and we've generally seen that.
We did see a little bit about.
A little bit lower than our.
I'm interested in the month of August in particular here in the U S. In terms of the traffic build and we think that we're certainly Titan.
In some ways to the Delta variant and some of the new restrictions that were placed back on consumers. They are in that period of time, but generally from the beginning of this calendar year all the way through September setting aside all of that we've seen the business sequentially improved.
Patients from a traffic standpoint September was our best month of the quarter October has actually started off good we're actually we're actually on track.
And honestly, we're slightly ahead of our expectations in the Americas region.
From a DTC perspective here in the month of October So just a few more data points. Therefore, you relative to really what supporting.
Proved acceleration implied in the outlook.
That's great color, Matt maybe just as a follow up on the gross margin. So the 56% for the year I guess could you just break down the underlying drivers of that improved in the outlook, which helped to offset.
The worst freight headwind and just any color.
<unk> in the third quarter versus the fourth quarter as we think about gross margin.
Yeah sure. So it's pretty it's pretty simple I think in terms of the underlying drivers masses that are offsetting it continued to see some headwinds from from expedited freight and we mentioned that in our prepared remarks.
It's underlying.
And right.
It's better sell through.
And ultimately the merchandize margins are stronger and Thats generally we're seeing that we're seeing that across the board. So I think that's pretty straightforward.
As it relates to some some shaping in the second half what I would say about about gross margin is.
We expect Q3 to be about 57% with organic expansion a little bit stronger than what we saw in Q2.
And we will continue that will continue to have some expedited freight hitting that quarter as well a lot of what went into the went into the forecast that different from the prior forecast is sitting in the third quarter.
Underlying best of luck.
Yes, Thank you Matt.
Our next question is from the line of Erinn Murphy with Piper Sandler. Please proceed with your question.
Great. Thanks, Good morning, I guess I have a question first on China. It did decelerate versus the last quarter you called out some of that Covid challenges there, but if we take a step back can you just share.
Great I'll say more about your confidence in the region longer term and then I do think you cut your APAC region outlook by about 600 basis points, but that all China or are there. Some other regional headwinds we need to be mindful of.
Hey, good morning, Ed.
In the region.
Issue sits squarely in China.
Sure of what have been some delta impacts in and some of the smaller markets.
<unk> seen us.
It's certainly an issue building here in China.
A number of factors that are impacting our China business first is the resurgence of COVID-19 across the greater China region.
It's really has had an impact.
Economic growth and more importantly, consumer confidence and we've seen that in our store traffic coming into brick and mortar and we've also seen that challenging some of the digital Titan platform traffic.
We have a big presence from a digital standpoint.
And some of our legacy marketing tool.
Tools.
Yeah.
Specifically key opinion leader marketing.
There are no longer available and having a short term impact doesn't mean long term that we won't adjust in fact, we are.
But that did have a short term impact but.
But I think importantly, what we do expect to see a reacceleration and I think there is.
<unk> on EBIT key reasons here of our decision to establish an even stronger structure and presence in Shanghai.
We've been working on now for many months allows us to better understand the marketplace variables and to speak to the local consumer and a more relevant.
Ah centric way for each one of.
Three.
Our decision to high higher or.
Our leader in China, and expand wins scope beyond just greater China is.
It's having a very outsized impact her confidence and experience and understanding the local market local consumers and how to engage with our key strategic partners.
Our brands certainly elevating our brands and our business is ability.
To understand the consumer navigate some of these new new variables that we see.
As we stand up our brand teams in Shanghai net local at local market knowledge.
It's going to help us really bring our.
Our brand purpose RPF purpose for our associates to bear and we're seeing that as a really important element today as we refocus on the health and wellbeing of our associates Theres a notion here in our brand marketing, we see it coming to life in North base will really putting our purpose in place.
And.
And really elevating our messaging and our connections and delivery of value around health and wellbeing to the Chinese consumer.
And really looking to improve their life through engaging with our brands. The experiences that are our brands enable and and connecting in a much more one to one way.
We think these strategic shifts that we've been really driving over the last 12 months to 18 months position us in a very strong way to navigate these new variables.
And get that Reacceleration back into the business.
Great. Thank you and then if I could.
Just a couple of data points there to build.
Since Pete again.
When you think about.
The China reduction that's implied in the guide about a third of that is coming from let's call. It COVID-19 related impacts primarily primarily demand I mean, there's a little bit of supply challenges, there, but primarily demand.
Then the rest is.
Sort of.
The comments that Steve made about the consumer and what we've seen here in the short term.
And then just and then as he said there are certainly some COVID-19 related impacts across the rest of the region.
As we saw some lockdown measures and closed stores and just generally.
Consumer confidence in some of those other and some of those.
Countries that waned a bit during the quarter.
Got it.
Maybe last thing I would say did I think it's important.
From a <unk> perspective, we certainly didn't really change our guidance. We did soften the language slightly I can tell you thats, all really driven by China without that you wouldn't have seen any change and I would also tell you.
What we saw occur in China, we would have not changed our vans outlook.
Okay. That's very helpful. And then just if I can add one more as we move into holiday, obviously inventory is very clean.
What is your promotional outlooks for this holiday and then move.
The move into the early part of 2022, we'll all be particularly in <unk>.
Without lapping a pretty hefty stimulus just curious on do you see that promotional outlook evolving as you move into the first calendar quarter. Thank you.
Yes, I would say, we expect promotions the promotional environment to be quite clean.
For the holiday time period.
We are set up and what we expect.
<unk> inventories continue to be really lean.
The marketplace.
That's the case for our brands and I would say for most so we expect a really clean and lack of promotional kind of environment certainly versus versus historical and.
And as we as we think about moving into spring next.
And even beyond.
Certainly certainly our view will be that the promotional environment is going to continue to be quite good.
I'll remind you that our business historically is clean we don't promote a lot and our brands.
That's been one of the things we've been trying to help everyone understand when you look at the two.
<unk> year payers versus some of the peer set our business was really clean and healthy two years ago. It's that way now we expect it will be next year as you think about gross margins next year, we expect margins will expand our bottom line I think we expect margins will expand probably at least a half a point in line with our LLP.
Theres some headwinds input.
Two year cost inflationary pressures you elevated freight costs that are certainly going to continue for a period of time, but there is tailwind as well as I said promotional environment remained claims we certainly would expect we're not going to see the same level of expedited freight that we've seen this year are mixed benefit will be intact you've.
We've got continued momentum in some of the brands we've had.
Input duties to strengthening gross margins on the back of stronger brand equity Timberland Vicky's are examples of that and then last but certainly not least the biggest the biggest.
I think tool in the toolbox here is pricing and we certainly expect and we've talked about youre going to start to see meaningful impacts from pricing as early as our fiscal Q4 and as we think.
Opportunity $3 22, and even more so fall 'twenty two of next year.
Thank you so much.
Our next question is from the line of Bob <unk> with Guggenheim. Please proceed with your question.
Hey, guys.
I guess the first quick question is are you thinking of changing the name of the company to vans given.
About the questions that we have on vans.
But I do have a couple of questions on sort of frame if you could.
I think you talked about Supreme missing.
Or just missing some supply opportunities in terms of the business can you quantify that a little bit in <unk>.
As you think about the back half of the year do.
Do you expect to sort of get that product in and we will continue to sell it there and could you just give us an update on the international expansion plans for the Supreme business over the next 12 months. Thanks.
Yeah.
Hey, Bob Good morning.
Supreme.
Just had a disproportionate impact to the supply chain disruptions that we're talking about so they've got an exposure into Vietnam.
If you think about the model due to the nature of how they flow product they don't carry forward inventory.
But a particular drop is not able to.
To be delivered on time, yes, they have an agile model and they are able to move around but the impacts that <unk> seen this quarter were such that.
It had a pretty material impact on what we were able to do in Q2.
Good news is sell through trends continue to be very strong and.
We.
We saw a decrease in inventory we did see a continued strong interest in a clear opportunity for the brand.
Two to continue to grow but I think the supply chain interruptions are helping us all see.
The further benefit of the supply chain integration that is in place that will help us.
If our Supreme team really diversify their footprint.
And focus in areas, where we can help them maintain better flow as we think about.
Longer term and coming into the second half we have line of sight to delivery.
The inventory required for those for the weekly drops and that wasn't true six.
Help.
So I think theres a lot of confidence here that we can recapture that momentum and.
We really start to recapture that lost volume in some of the most recent drops and we've seen really strong evidence of that demand.
So I think I think in light of this disruption the planned at this group operates with.
Two weeks ago agility to be able to flex.
Continues to be a competitive advantage and as they integrate into our supply chain will help be able to mitigate some of these impacts to your European question.
Our international expansion Covid has had an impact on our team's ability to travel begin to meet and work with.
On the European and international team.
Work is.
<unk> virtually.
Pre team needs to get into market.
The model by which they look for new stores that really anchors the brand in new cities.
Has been slow based on Covid.
This work with our team.
Are you certainly will help them speed up.
That knowledge basis to hit market.
But we are certainly a few months off of what would have been.
Our plan that we were ready to execute one into fiscal 'twenty three.
But geographic expansion potential.
<unk> very strong a key part of our growth.
<unk>.
You'll see us continue to open stores, both in Europe and.
And Asia as the teams were able to get into market.
Great.
And I guess, just a bigger question on you talked about wholesale shipments sort of not making the second quarter shifting into the third I think you specifically called it out for.
<unk> and <unk>.
Can you quantify how much of the wholesale.
Business will.
Shifting to the third from the second or you know what you missed in the second and that Youll catch up in a third one.
Yes, sure Bob Let me see if I can.
If you what you need here. So first of all this is why we didn't.
For guidance.
For the for the quarter or try to try to call. The call. The split there between Q2 Q3 as we knew it was going to be a pretty volatile environment and it's certainly played out that way.
From a timing shipment timing perspective.
Said mid to high single digit impact to Vf's organic growth.
Provided in the quarter relative to fiscal 'twenty.
So and Thats really impactful across all of our businesses certainly several points of growth for for the big three brands.
And also as Steve just described pretty impactful for Supreme.
In the quarter as well and this was this was especially true I would.
U S and Europe and to a lesser degree to some degree in Asia, all those small impacts there.
Brand level van.
Vans would've been sort of at pre pandemic levels.
In the quarter and TNF in Timberland in particular would show meaningful acceleration versus where we were in Q1.
Adjusting for the impact of the wholesale shipment timing and I think in terms of in terms of what we expect we expect virtually all of that is going to get out the door.
And ship here in Q3.
And as a result, one of the reasons that we've been comfortable.
Essentially holding our full year revenue.
One book.
And then coupled with what we see in terms of the strong underlying momentum from a sell through perspective.
Great. Thank you.
Bob.
Next question is from the line of Michael Binetti with Credit Suisse. Please proceed with your question.
Hey, guys. Thanks for all the detail here.
Outlook, Steve I think thanks for all the color here today I think I think the most helpful thing and I can't believe we are still here in late 2021 talking about these big coronavirus disruptions, but I guess here we are so.
I really appreciated some of the commentary on the revenue and EPS outlook as I can tell you starting to look ahead to fiscal 'twenty three already and I know you spoke to north.
And dickies outlooks for 2023, and you gave US an overall revenue and EPS thought I'm wondering if you could help us to complete the picture on what you. How you were initially thinking about vans and timberland for 'twenty three.
And then I guess.
Matt.
I know you just gave us a little bit of color on Bob's question on revenues in third quarter versus.
Quarter is there any way you could quantify what you see as the revenue dollars for the quarter growth rates into the quarter.
It sounds like a lot of the wholesale snapback is in third quarter, but we've heard some of the other athletic brands and footwear brands speak to some supply chain constraint landing in the March quarter. So your fourth quarter I'm just curious what your what you baked into the fourth quarter there.
Four things.
Okay. Thanks, Mike I'll start.
Our fiscal 'twenty three clearly it's early for us to be able to talk about how we're looking at that.
But I think the confidence that we have in our portfolio.
Which we've spent a lot of time strategically evolving to where we are today.
Yes.
Each one of our brand has the potential of achieving its long range plan.
And you see that happening this year.
With many of our brands specifically to vans, we see them getting back to low double digit growth and being able to deliver that on a consistent basis.
North face business is building momentum you've.
Really begin to talk.
A lot of confidence the work that's been done to to really strengthen that team.
Tighten up our merchandising strategies get the flow between the unknown mountain product collections.
We are raising our outlook for the year on a two year basis to 16% to 18%.
<unk> heard us.
As a proof point of that confidence timber.
Timberland and collecting.
We see there.
I am really owning and driving that food culture and.
We.
Really drive our integrated marketplace strategy and the merchandise flow the new products coming with green strides through cloud.
<unk> and some of the things you see going on in the women's business.
It gives us confidence that this business is.
Reflecting and has great potential.
Take one more point, our dickies business.
Raising our outlook.
As we did this year.
Now to greater than 30% on a two year stack.
This business is very unique we saw this with the point of acquisition and the way. Our team is really looking at horizontally playing out that work and work inspired piece, but also thinking on a vertical axis against the different distribution opportunities and moving into higher tiers of distribution with higher.
With product with a little bit more style, a little bit more quality of materials and opening up that lens and grabbing new consumers on a global basis. We are a brand that has the potential of achieving $1 billion here quickly while at the same time.
Becoming.
A benefit from an operating margin standpoint to the larger VF.
Yes, Michael your question on <unk>.
Shaping of revenue so yes, I'll answer your question.
Barring further supply chain disruption, but certainly contemplating what we know today.
And in particular around the flow of inventory as Vietnam ramps up.
I'd tell you in Q3, we expect revenue to be about $3 6 billion.
Including high single digit organic growth versus fiscal year, 'twenty and let me just fill in the rest of the blanks, while we're at it because I assume it is going to come up we talked.
About gross margin I'd say operating margin of about 16% earnings of at least $1 20 inclusive of about <unk> <unk> of incremental expedited freight versus fiscal year 2000.
Okay. So the other three from the nine one goes in the fourth quarter it sounds like a little bit of a place holder there.
Well the nine is the incremental <unk> from our prior outlook. This outlook that fixed is just to give you a sense of the difference versus the two year compare.
From an earnings standpoint about <unk> in that quarter as our current view.
Okay, and I guess the elephant in the room is how much is in that three $3 $6 billion from square game.
[laughter] Oh I can't believe you made it this far in the global without a question.
Yeah.
Alright, let me say this Michael.
My team is we saw a nice spike will scrape I'd call. It a small spike, but I will promise you. This is not a damn Daniel event.
<unk>.
It helped raise some media attention that will leverage <unk>.
Point of us leaning into the classics campaign, we will use this moment.
And continue to build on vans connection to pop culture.
But I think we're we're focused on the things that we can control and the flow of new products and.
And as that has on vans connection to consumer.
More where our emphasis is for sure.
Got it thanks again for the details guys.
Thanks, Michael.
Our next question is from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Hi, good morning, everyone.
The benefit as you talked about the wholesale business and the shift to the back half of the year are you seeing a different by brand in terms of that.
That shift and is it specific accounts where you.
Talked about the strengthening and what you're seeing and then just lastly on price is price besides full.
So are you seeing are you taking any price on any of the brands with any of the newer product that you're introducing thank you.
Hi, Dana.
Nice to talk to you.
So in terms of the shipment timing I think.
It's impacting all of our brands I would say, it's most impactful.
So for the outdoor brands and honestly I would say the two brands that are probably feeling at the most or the north face and Supreme honestly, but all of our businesses and as I said, it's impacting at least several points of growth for the big three.
As it relates to the comments about about strength in sell through.
Full price that's broad based.
You know really across the businesses.
Talking specifically about the U S. We see.
See it.
Big brands certainly we're also seeing it with the emerging brands in the outdoor emerging brands in particular that Steve talked about so it's not any one place.
Certainly the north face.
This brand is really strong and the.
Our product is moving really quickly as we can get it onto the shelves. We're seeing we're seeing significant growth in sell through despite inventories and still well below where they would have been two years ago. So it just speaks to the velocity that we're seeing from a sell through perspective in particular in that brand.
Got it.
No go ahead go ahead. So you go on just one follow up on the digital business, which I think the guidance had been adjusted to 20% growth from previously 29% to 31% is that due to the stores reopening or is there anything youre seeing in China or the other markets.
Given that adjustment.
Yeah its primary.
Primarily a China impact.
Dana.
That's really that's really the primary driver I mean, there's maybe a couple of modest.
Very small changes in other parts of the business that basically at the China story.
And just lastly on the freight side do you expect that to go into 2022.
Calendar 2022.
Yeah, we do we expect that we expect the freight some.
Some of the pressures there.
On freight and I assume youre asking about cost right.
We expect that to continue from an inflationary standpoint, you know moving into calendar 2022.
Over time, I think it will begin to moderate.
Count bit, but we're planning as if we're going to continue to see a pretty meaningful increases in freight.
Moving forward now we do expect the level of expedited freight that we've had to navigate this year because of the.
Cut downs in the Covid challenges in the supply chain will certainly look a lot different next year, that's our expectation, but in terms of the underlying.
Buying rates around freight and just the challenges are.
Around capacities and those kinds of things that we expect to continue for several quarters.
Thank you.
Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your questions.
Thanks, Good morning, guys hope you're doing well.
You've spoken about this a little bit as it relates to supply chain disruptions, but im hoping you can.
Discuss.
Some of the inventory flow dynamics, what that might result in in terms of mismatches in assortments.
<unk>.
And I'm curious is that likely to have an enduring impact or what are the strategies to manage through that.
Hey, good morning, Jim.
I think long term this is.
Okay.
Isn't an issue, it's really short term that our teams are having and navigate.
Yes.
A disrupted supply chain is certain factories were shut down others have been operating at less than Max capacity.
But then as we.
Look to bring our goods onshore to the different shipping lanes.
It's really a short term issue Jim.
I think we can for the most part get ourselves back into.
Zinc as we come through Q3, and certainly positioned ourselves well.
For spring 'twenty, two deliveries, but it's an issue that we don't typically have to deal with it.
It's really it's more broken Assortments, where you may not have every item.
As planned for a floor set either in our environments, where our.
Our wholesale partners.
But that's yes, that's where our teams swing into action and are able to navigate what we do have to reset those assortments and get the proper amount of product.
As we can.
Wait for the supply chain to be able to fill back in the gaps.
Great. Thanks.
I want to ask on the ultra brand.
Valuations of some of the comps in the marketplace represent a beacon.
Can you maybe give us an update on the size of the altra business and.
The expected trajectory for that as you look out over the next year or so.
Yes, so Jim.
I would give you some exact size I would tell you it's more than double.
What it was when we acquired it exit at this point.
Moving towards moving towards Triple here fairly quickly I would say.
And that and that thing and we've said that business is growing around.
Sort of 30% or north.
The 30% and as we look into sort of a near term view.
No reason to think we're not going to continue to see this spring certainly north of 20% to 25.
Over the next several years, yes, Tim.
Tim It is such a unique position in the market from it.
It thinks about.
On the foot and.
And how the athlete's foot needs to two.
To really move through the different motions of running and trail running.
We're seeing that really play out.
The loan peak.
No. It's no secret that it's been called out as the number one trail running shoe here in the U S.
It's by multiple publications.
As the teams understanding.
Building on that 10 year history.
But we're playing at a very significant Tam.
With a very unique.
A brand.
That is scaling at a at a very rapid rate and I'm glad you picked this up because.
<unk> talked about our outdoor emerging brands over $550 million in revenue, they're profitable, they're growing high teens in each one of them are insignificant Tam. If you think about that in context of what's going on in the broader marketplace and some of the ipos that we see.
<unk> has a history of growing brands.
What we've done with the north face and vans as well.
We have the potential of doing with brands that can altra and in helping them achieve their full potential by.
By leveraging the skills and capabilities and leveraging those aspects of our model.
To really help them drive their growth.
You asked the question, we're excited about altra and what it means not just for the team but for broader VF.
You bet. Thank you guys.
Thank you Jim Thank you.
Our final question is coming from the line of vessels.
<unk> <unk> with Exane BNP Paribas. Please proceed with your question.
Good morning, Thanks for taking my questions.
Want to ask about Dickie materially raised our guidance from the brands in the mid <unk> growth to over 30%, what's driving that is that driven by a particular region product category new distribution.
Or is it driven by some of the entrants into the scrub business.
And can you see this brand surpassed the $1 billion, mark, whereas the Pam limited to $2 billion target.
Hey, good morning, I. Appreciate you asking the question Youre going to get tired of this work, but because growth is broad based.
It's happening across both work.
And as <unk> talked about the work inspired or the lifestyle component of the brand really leveraging that work.
Element more broadly.
It's growing across all regions.
And it's growing vertically.
<unk> its core work.
But looking for new points of distribution.
And even into tier tier, one and tier zero type distribution channels.
The brand had a really interesting pop up shop with Fred Segal during the quarter.
Significant sell through and energy just validating this team's approach to.
The thing the elements of the brand exit to work I'm extending it into that maker economy.
But really building a strong community.
Around all the aspects of.
Creative self expression, certainly moving into that major piece.
There is a scale.
Harlem to this brand its always been there with the 874 work pant and really acknowledging that.
Speaking to that consumer helping stretch into a new concentric circle.
But it really just looking at the integrated marketplace opportunity.
And really leveraging the core work heritage.
Driving those icons, but youll continue to see us evolve our product offer.
Higher price points.
Higher quality materials and make into those higher tiers of distribution.
But continuing to expand internationally in Europe and Asia.
And really.
<unk> urging that core work heritage that comes from the U S marketplace.
Very helpful. Thank you very much and then my last question.
Sure.
Obviously theres a lot of chatter around cotton I think 10 years ago I'm sure. You were asked repeatedly about cotton, obviously be spun out contour brands, but just if you can just remind.
About your cotton exposure, just your hedging and just the contracts.
I don't think you buy directly Titan, but any thoughts.
On just raw material inflation broadly would be appreciated.
Yes, Ron.
I assume that one I should probably take.
Yes, cotton certainly.
There are programs in terms of how we're how we're buying cotton and that's all I think fairly straightforward and consistent with what the industry would do by and large but I think its work.
Recognizing as we've evolved our portfolio over time to be more focused on outdoor and active cotton is probably less in terms of.
Minus.
The component parts of our product than it would have been historically, it's about 10% of the <unk> product cost today.
And based on what we know about the pricing as well as again, our forward contracts et cetera, we expect this to negatively impact our product cost.
Somewhere between a half a point and a point.
The.
In fiscal 'twenty, three very very limited impact this year really sort of.
Immaterial and we're planning overall product cost inflation next year to be let's call it somewhere around a mid single digit headwind.
Sort of in total.
Thank you very much mark for all that color I appreciate.
So I think you said gross margins will still be up.
Next year is that is that still the right way to think about it. Despite the inflationary environment. That's the right way to think about it.
Thank you Matt.
Thank you Lauren.
Thank you at this time I'll turn the call over to Steve Mento for closing remarks.
Thank you everybody for joining us. This morning, just a few things I'd love to reiterate we're very pleased with our broad based strength across our portfolio and then more part of the execution of our teams.
Particularly in this changing and challenging environment.
We are seeing improving outlook across the majority of our brands and regions.
You have to take a lot of pride in our organization's ability to continue to adjust to these unprecedented times.
While the pieces of our business have come together slightly differently than we anticipated six months ago, we are delivering high single digit organic growth versus fiscal 2020.
Excuse me a lot of confidence.
The resiliency that we enjoy from the diversity of DFS business model and our ability to accelerate momentum going forward.
Thank you for your time, and we look forward to talking to you next quarter.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.