Q1 2023 VF Corp Earnings Call
Greetings and welcome to the V F Corporation first quarter fiscal 2023 conference call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation I'd been ever should require operator assistance Center Conference. Please press star zero on your telephone keypad. Please.
Please note this conference is being recorded.
I will now turn the conference over to your host Allegra Perry Vice President of Investor Relations. Thank you you may begin.
Good afternoon, and welcome to VF Corporation's first quarter fiscal 2023 conference call participants on today's call will make forward looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the 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 afternoon, and which we use as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business.
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.
On June 28th 2021 the company completed the sale of his occupational workwear business.
Accordingly, the company has reported the operating results and cash flows of this business in discontinued operations for all periods through the date of the sale.
Unless otherwise noted results for today's call are based on continuing operations joining.
Joining me on the call will be Vf's, Chairman, President and Chief Executive Officer, Steve Rendell and EVP and Chief Financial Officer, not Puckett. This quarters earnings presentation has been designed as a visual aid to our prepared remarks, you have the option to follow along via the slide window in the webcast portal. The presentation is also available.
To download on our website.
Knowing our prepared remarks, we'll open the call for questions I'll now hand over to Steve.
Good afternoon, everyone and thank you for joining our first quarter fiscal 'twenty three earnings call I'll.
I will take you through an operational update of our business, which will be followed by a review of our financial performance by our CFO Matt bucket.
Want to start by addressing the evolution of the macro environment. Since we last met in mid May.
Excluding China consumer health is generally good across our markets, although I won't be the first person to point out that the sentiment has softened leading to changing behavior amongst consumers were being forced to be more choice full and cautious in their spending in the near term.
From our point of view, we see this being largely confined to the value into the marketplace, where VF has very little exposure to date, we've seen limited impact on our mid to higher end consumer, whereas the majority of our brands are positioned in terms of demographic and distribution we.
The strong and resilient family of brands that are well positioned within their respective segments and across the portfolio. We have a greater number of high performing brands today than ever before.
Our teams are healthy and maintained good momentum and we remain under penetrated in certain areas that the opportunity to gain further share in growing markets.
We are continuing to invest in our brands, enabling the creation of innovative products and capabilities to drive enhanced consumer engagement and loyalty across all touch points.
We're working closely with our retail partners to drive sell through and ensure our family of brands remains at the forefront of consumers' minds.
Through our well established strategic platforms and capabilities, we are mitigating headwinds faced across the marketplace and the persistent impact of Covid in China, while reinforcing our competitive advantages.
Amidst this backdrop, we delivered a healthy top line performance in Q1, achieving revenue of $2 3 billion up 7% on a constant dollar basis ahead of our initial expectations and in fact, excluding China the business grew low double digits.
Big four brands grew 6% in aggregate led by the north face and timberland.
The remainder of the portfolio grew 16% and.
And lastly, before I go into more details on the brands I'd like to highlight that we remain committed to returning cash to shareholders with our dividend, which amounted to $194 million in the quarter.
I'll start with Vince I'd like to take a minute to update you on the work underway. They go into the details of the brand's performance.
Behind the scenes our teams are diligently working to address the key headwinds we've identified.
First on China, which was largely in line with our cautious expectations, reflecting macro challenges in COVID-19 disruption drives.
Driving energy and engagement bands opened its first owned Taiwan store in June along with the brand mobile App, we launched a new collaboration with brain dead, we sold out completely in the first hour.
Our 618 shopping event was expanded onto the <unk> and <unk> platforms and rose by mid single digits versus last year.
Finally, we partnered with Tencent on 58 virtual products for phase one of our meta versus activation.
And in four days achieved 43 million impressions.
We remain confident of the long term growth opportunity Vance Hasnt China.
Second we're seeing early signs of positive response from customers on our ongoing efforts to rebuild our core classic strategy and energy around our five icons.
Classics since Forever campaign is showing improved ROI in the first two months with over 25 million views globally phase.
<unk> Phase III campaign launched with support from Anderson Park fans music Influencer, including live appearances in London stores and alive performance at our house of vans venue.
First signature product drops on our U S online platforms sold out in 24 hours.
Brand heat has begun to show some bright spots, we saw nearly 8% growth advanced family members versus Q4, reaching nearly 24 million members globally, which represents a 41% increase versus last year. We also generated strong sell through of sailor Moon, and stranger things collaborations including exclusive online <unk>.
<unk> pre releases.
Our stranger things collaboration was the second biggest customers launched and Terry clutter in the inline product will launch in early September we.
We hosted prelaunch events for our new Pinnacle business unit at Paris fashion week with top tier accounts, including a sell in event and a twitch livestream of the brain dead launch.
The Joe fresh goods political co lab sold through quickly with three times average sales price in resale market.
The second drop is coming in holiday.
Finally in our Americas DTC business, we're working through a set of agile actions to capture and optimize traffic and drive higher conversion such as front of store merchandising updates.
And quick floor set changes, we're seeing a positive initial response across key product styles. We continue to monitor our customer satisfaction levels, where we're scoring above the peer set.
<unk> Q1 sales declined by 4%.
Excluding China global sales were up 4%.
As mentioned a number of targeted actions are being implemented advanced under the leadership of Kevin Bailey.
While our financial performance is not yet where we'd like it to be we are encouraged by the work underway to reignite momentum.
The brand is healthy which is clearly evident when we launched truly innovative product as indicated with the recent global collaborations.
All of which resonated with our consumers and generated high rates of sell through.
We continue to see strong growth in our advanced family membership, where members have high higher frequency and rates of spend.
Overall, we're encouraged with the early progress being made with actions underway and confident long brands long term prospects to reignite growth.
The north face had another outstanding quarter with sales up 37%, representing broad based growth across regions and channels.
Growth during the quarter was fueled by our 365 product initiatives with warm weather apparel and accessories as well as rainwear generating strong performances.
<unk> continued to drive brand heat, including the members only to Earth day, inspired collaboration which drove high digital sell throughs in the U S and EMEA are.
A return to travel lines also performed well, including bags and luggage.
We still are early positive performance for our <unk> business for back to school.
Our marketing campaigns are clearly resonating with our consumers start.
Starting with our full circle Everest expedition, which promoted access to the outdoors with over 5 billion impressions.
Our pride campaign was well received and allowed us to broaden our reach and welcome new consumers to the brand.
And the North face ranked number one in pre sale revenue for the outdoor category during the all important 618, China shopping holiday.
We continue to see growth in our explore pass loyalty program as we celebrated its one year anniversary with over 900000 sign ups translating to 50% growth year over year.
Finally, we are thrilled to have welcomed Nicole auto as our new brand president during the quarter following a successful transition period.
She brings with her deep understanding of the consumer engagement strategies and a wealth of industry experience.
As a proven innovator and future focused leader she steps in at an opportune time with strong product pipelines positioning the team to further drive our strategies.
The positive inflection of timberland to continued in Q1 with another quarter of double digit sales growth up 14% driven by strong performances in EMEA and Asia Pacific.
We're sharpening our consumer focus and accelerating our launch culture to attract new consumers to the timberland brand and it is paying off as we see success stories from the elevation of our iconic boat shoes globally with generation vote to the creation of a footwear design and innovation experience inside fortnite.
Our commitment to product innovation and craftsmanship continues to serve US well, our Q1 growth was driven by mens footwear led by outdoor across lifestyle hike truckers and seasonal executions like trail ready sandals.
Apparel was also strong, especially lightweight outerwear and logo Tees was apparel as a whole accounting for 20% of quarterly sales.
We continue to drive eco innovation with a focus on circularity and building a greener future.
On Earth day, we introduced the timber loop Trecker, our first footwear product that can be disassembled and recycled at the end of its journey.
We also expanded our Timberlake Takeback program from the U S to include the U K, France, Italy and Germany.
In pro we saw excitement around our first collaboration with Samuel Adams with a limited edition work boot selling out in one week.
She gives like these are key to connecting new and existing consumers from work to work to weekend.
Across the board we are excited about the trajectory of the timberland brand and its opportunities for future growth.
Finally on Dickies Global brand sales were down 13%, reflecting softer trends in the Americas value and consumer and a more conservative inventory posture of our largest customer in the U S.
It's worth noting that excluding sales from this customer revenue in the Americas and globally were up mid single digits in Q1.
In APAC Dickies was impacted in China by Lockdowns with positive growth across other markets in the region.
A reset European business has seen continued strong performance with regional sales up 30% driven by work lifestyle products.
We kicked off our 100 year anniversary campaign made in dickies, which drove higher traffic to an average order value on our E com sites in the U S and EMEA.
We are generating solid growth globally across icons womens and work lifestyle, while workwear has been soft, reflecting a larger exposure to the value and <unk>.
Exciting collaborations such as with Supreme and New York Sunshine are generating momentum in energy, while enabling dickies to broaden its distribution into tier zero counts.
The underlying performance of Dickies remains positive.
Outside the top four brands the balance of the portfolio generated revenue growth of 16%.
Starting with Supreme The brand was broadly flat in the quarter and largely in line with our plan our European stores performed well and benefited from the openings in Berlin and Milan in the prior year, where there continues to be a high level of energy and excitement for the brand as.
As we indicated in May we're excited to be resuming enhancement and expansion of the store network in coming months.
<unk> also returned to conducting in person consumer engagement with recent events in Milan, New York, and Paris, which have received a positive response.
We continue to be pleased with the performance of our outdoor emerging brands, which collectively grew 15% driven by ultra which was up 34% maintaining its number one position in trail and capturing new consumers as it leverages its new products on the road, we continue to focus on product innovation and development and recently entered the space of speed.
Shoes with the launch of the vantage carbon shoe.
We're seeing an improving performance of our <unk> business with stronger demand across the bag and travel category and our brands in the Americas and EMEA during the first quarter.
Revenue was up more than 30% versus last year, a little ahead of schedule driven by healthy order books higher reorder rates in anticipation of back to school shipments for the season is off to a good start.
Now, let me take a minute to update you on the progress we're making on our purpose led sustainability initiatives.
Part of our roadmap to meet our science based targets VF is invested across a number of key regenerative materials.
Through a collaboration between vans, the north face and Timberland, we invested in the first regenerative rubber pilot in the world in Thailand with Paragenesis International.
We continue to partner with New Zealand Marino to create the first regenerative world platform in the world in collaboration with Smart <unk> and ice breaker.
These projects help deepen the understanding of these benefits to support farmers regenerative journey that has been creating a captive supply of raw materials for use in our products.
We continue to receive recognition for our efforts in transparency with timberland in the north face tied for second place advanced taking third place on the fashion transparency index.
Finally, we remain committed to advancing our efforts on diversity and inclusion with the first all black Mount Everest climb sponsored by the <unk> Foundation, the north face and Smartwater.
In summary, we delivered a solid topline performance in Q1 ahead of our initial expectations at midst the softer consumer environment and importantly, we're maintaining our operating outlook for fiscal 'twenty three.
This is a testament to the resiliency of our purpose built family of brands, which is focused on the outdoor street wear and active spaces that benefit from favorable consumer tailwind.
Remain impressed by and proud of our teams, whose passion perseverance and execution continue to drive our success.
Looking forward.
Uncertainty persists across geographies and marketplaces from ongoing macro economic headwinds we are confident in our strategies. We remain focused on the things that we can control and we will continue our strategic investments to ensure long term sustainable and profit growth.
With that I'll hand over to Matt and take you through the financials.
Matt.
Thanks, Steve and good afternoon, everyone.
As Steve mentioned, we delivered a topline performance in the quarter that was better than our initial expectation and was achieved amidst a softening consumer environment revenue was up 7% in constant dollar terms and up low double digits. Excluding China include.
Including the negative FX translational impact of nearly $100 million sales were up by 3% on a reported basis.
Our EPS was <unk> down 68% on a reported dollar basis and down 59% in constant dollars largely in line with our expectations. However, we incurred about <unk> <unk> of non controllable impacts relative to our plan primarily driven by FX.
Before I unpack the P&L, let me talk about the operating environment across our primary geographies.
Globally today, we are open for business from a COVID-19 standpoint across the value chain. Although we are still feeling the effects of isolated impacts from COVID-19 related lockdowns in China during Q1.
Revenue in the Americas was up 7% our performance has overall been resilient considering the softer macro backdrop and subdued traffic levels in our DSD network.
While the outdoor segment has been the key driver vans also generated growth with regional revenue up 3% for the brand.
The consumer remains solid at the higher end, but the value and has been more impacted and we've seen certain retailers begin to take a more cautious approach to open to buy generally however, we continue to see the strength of our brands position us to take advantage of opportunities in the marketplace as they arise.
In the quarter EMEA was our strongest performing region with revenue up 24%.
All markets were up driven by Italy, and France. This was achieved despite softer consumer confidence which continues to impact traffic levels.
All brands recorded growth with particularly strong performance was generated by the north face timberland tax smart roll and Vicki and importantly, both direct to consumer and wholesale grew by double digits.
APAC was down 15% with Q1 being a tale of two stories.
China, we experienced meaningful impacts from rolling lockdowns across the quarter with overall sales down 37% on the mainland in line with our expectations.
Consumer spending post lockdown has been soft to date as expected.
It is worth noting that the outdoor segment continues to grow strongly with the north face generating double digit growth in the market during Q1.
Overall, the business has seen a progressive improvement throughout each month of the quarter.
And the rest of Asia, our business is recovering nicely with high teens growth being seen across markets.
Turning now to gross margin, we were adversely impacted by a number of factors in the quarter. Our adjusted gross margin was down 260 basis points largely in line with our plan excluding transactional currency impacts.
Anticipated this was driven primarily by mix, particularly reflecting the evolution of channels and brands, which together impacted margins by 160 basis points.
And higher freight freight costs, which were partially offset by price increases.
We maintain a relatively low level of promotional activity, which remains in line with last year.
Let me take a moment and update you on the supply chain environment.
This is a competitive advantage for VF and we continue to use our scale and diversification to mitigate headwinds.
Relative to the last time, we updated you were starting to see the level of supply chain disruption, albeit nowhere near the pre pandemic normal.
In terms of sourcing our supply base is fully operational as we step into Q2, and we continue to work to move production closer to consumption, where it makes sense for us to do so.
The eight weeks of Lockdown in China during the quarter will take some time to flow through the system and overcome but we're well placed to recover from this relatively quickly.
In terms of logistics, we're seeing improved transit times across the water, reflecting a slight easing congestion and shortened dwell times important.
This is leading to overall better predictability and reliability.
From a cost standpoint, there is some abatement in spot rates, both ocean and air, albeit these remain high relative to historic levels.
I'd like to thank our supply chain teams for their continued hard work perseverance and performance in this disruptive environment.
Moving on to inventory there are a couple of things to unpack here relative to the headline number first we've implemented a supply chain financing program with the majority of our finished good suppliers in connection with the rollout of this program. We began taking ownership of inventory from the suppliers at the point of shipment in Q1 different from the past when we generally took ownership at the destination.
Point.
The results in.
This resulted in <unk> owning the inventory and additional months or so.
Although we are taking ownership of the inventory sooner there is no impact on cash flow since the point at which payment is due to the supplier did not change accordingly, the increase in inventory is offset by an increase in accounts payable, which was up 91% in the quarter.
Now that the supply chain financing program has been established.
<unk> on purchase orders issued from September <unk>.
We'll be increasing payment terms with the majority of its finished good suppliers. This.
This change will improve <unk> overall cash flow while at the same town benefiting the supplier base.
This impact is contemplated in our operating cash flow outlook.
Second the on hand inventory excluding in transit grows by about 50% as planned on a two year organic basis, excluding in transit, which is a better comparison, considering last year's unusually low levels inventories were up 26%. This planned increase reflects anticipated deliveries to support on time shipping of complete assortments.
We feel good about our inventory levels, although although we are closely monitoring our own and channel inventories.
In light of the softer consumer environment, and ensuring we maintain a control controlled promotional strategy.
And finally adjusted <unk> adjusted operating margin was down by 340 basis points largely in line with our plan, reflecting the lower gross margins and the targeted investments we continue to make in our strategic priorities.
Our strategic investments increased by 7% in the quarter, primarily reflecting initiatives in the digital and technology space.
On a constant dollar basis, SG&A was up 8% and our smallest quarterly quarter of the year broadly in line with our revenue growth, reflecting our continued focus on managing the P&L and maintaining cost discipline.
We will continue with a very thoughtful and purposeful approach to managing costs across the business.
Turning to our fiscal 'twenty three outlook I am pleased to confirm that we're maintaining our currency adjusted fiscal 'twenty three outlook, while revising our earnings outlook on a reported dollar basis to reflect ongoing negative impacts from foreign currency fluctuations.
We expect total revenue to be up at least 7% in constant dollars unchanged from our prior outlook.
We now expect adjusted earnings per share of $3 five to $3 15.
Implying 4% to 7% growth versus the prior year on a constant dollar basis. This reflects.
The significant strengthening of the U S dollar across most most major global currencies and contemplates current FX rates through the balance of the fiscal year.
As a result of and to account for this currency impact, we now expect gross and operating margin to be up slightly versus last year.
Our operating profit guidance implies growth of about 10% on a constant dollar basis.
Finally, I'd like to give you a short update on the timberland tax case.
The judge ruling issued on July 14th formalized the decision and started the appeals clock, we expect to make the deposit during our third quarter of this fiscal year.
We remain confident in our strategy and the strength of our family of brands that benefit from favorable consumer tailwind in our teams to drive sustainable and profitable growth. Despite a softening consumer environment and continued elevated uncertainty.
To round out my remarks, I'd, just like to add that I'm proud of the great work of our teams that has enabled <unk> to continue continued to deliver against our strategy.
With that we'll now open the lines and take your questions.
Thank you.
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We ask that you please limit to one question.
Our first question comes from the line of Laurent <unk> with BNP Paribas. Please proceed with your question.
Good afternoon. Thanks for taking my question I wanted to follow up on your prepared remarks, and ask about the general health of the consumer.
What youre seeing from a macro and market standpoint, we've seen a number of retailers and brands actually pre announce which typically don't pronounce most notably a German brand just two days ago with north face up 37% likely outperforming this year.
Can we glean anything on the state of the sporting goods channel versus other channels.
Yes.
I appreciate you <unk>.
Interesting question, it's one we spend quite a bit of time on looking at not only our own data, but broader market data and as I said you know the consumer health.
From our vantage point is generally good across all markets, China certainly lagging.
The impact of the Lockdowns.
Has had an impact but sentiment is softening and theres a lot of data out there that would support that.
And certainly consumer behavior is changing.
<unk> are becoming more choice full as household expenses are up.
In some cases up significantly.
As we look at it and as we reflected over our business, we see it primarily in that value and consumer.
And that's the part of the market as you know over the last five years, we've done quite a bit of work to to mitigate our exposure and we really only have one brand and its.
It's just a small percent of their total revenue.
So where we see for our market.
Our consumer there is limited impact on that mid to higher end consumer and I think where you're going the macro trends of outdoor certainly health and wellness for us.
Continue to support solid sell through and where we're positioned.
With our own our own stores and our own digital and our key accounts, we continue to see good sell through.
Very attentive to.
The right product in the right environment at the right time to the best of our ability with the current supply chain, but really managing closely to ensure we've got the.
The products that are selling and where they're not moving quickly to place the right products in place.
So weak.
I can speak for us Laura we're well positioned to the energy you see in the north face the energy, we see at timberland in our emerging brands, specifically ultra smart Wo continue.
To give us a lot of confidence that the work we've done the strategies in place, but most importantly, with the people we have working across these brands continue to keep us well positioned.
Very helpful. And then Steve last quarter, you talked about sequential improvement over the quarters, how do we still think about that.
And then with regards to there were some channel dynamics between DTC and wholesale.
Overall, how do we think about that and then Matt just a quick question just on <unk>.
Modeling question I think last quarter, you talked about 23 of unfavorable non operating impacts re items with a 25 cent adjustment. This quarter was that just largely FX, where there other factors to consider thank you.
So to the first part of your question, maybe let me first say that.
I think it's important we're not meeting our expectations and bands and.
While we're not we're still confident we've got the right leader you heard from Kevin in our last meeting.
The strategies that are in place, but most importantly, the actions that he is driving across the.
The business absolutely are are showing benefit and giving us confidence that we are on the right track.
From a quarter standpoint, and I guess to your sequential question queue.
Q1, we missed really based on a lower DTC traffic and Comping, a strong year last year.
There was slightly lower revenue in China than planned.
But on the positive side, our European business continues to do well and was above expectation.
As we think sequentially.
Our focus on our own D to C, where we can control that narrative, where we can really drive that experience. We think about the classics campaign that we have in place.
While also staying mindful of the progression side of it.
Of the product offer we've seen continued double digit growth with ultra our skate high continues to grow at a double digit rate.
We see sequential improvement as we go across the year and I guess, what gives us confidence in that is where we drop new products with new innovation and new innovative partners to the comments in our remarks, we're on stranger things the sailor Moon co lab and brain dead, we're seeing good sell through.
There is risk in this business I don't want to it all I will say that there is not but we have a really good understanding of where it is.
And mitigating actions in place too.
Make sure that we continue to move against that long term strategy because theirs.
Every evidenced in our side that this is a strong brand.
It has enjoyed significant growth in the past and it remains very relevant and tremendous number of consumers still coming in engaging and joining our loyalty program.
We've kind of reinforces the confidence that we have in the trajectory.
Have in the future.
Yes, I'll add one point on vans in terms of just the sequential <unk> certainly we performed a little below our expectations in the quarter, but were not significantly off our plans the brand did grow 4% ex China in the quarter against.
I actually was probably the toughest compare of the year from us from a quarterly perspective so.
Everything Steve said as well as kind of just looking at the numbers from a compare standpoint, and obviously expecting the China business to improve sequentially through the year as well and we remain we remain confident in how we how we see the brand position for the year I Love you asked the question on nonoperating impacts right and you've got the details there you're spot on.
The answer let me try to answer this or not confused because it's easy to get confused I believe the 43 since we talked about before.
Which we gave you all of those pieces the currency component of that was translation only.
When we when we laid that out that that 23 is now become kind of 39.
And most things are unchanged.
Currency translation is kind of 16 17 cents worse.
Which is a piece of the 25.
Reduction in the rest of this transaction currency transaction, it's flowing through our P&L and primarily through our gross margin. So that's that.
That's how to think about kind of two thirds translation, one third transaction of that 25 minute reduction and if you thought that translation against what we were talking about previously, which I think is appropriate.
Get right at right at 40 minutes impact now year over year from a from a non operating point of view.
Very helpful. Thank you very much and I'm looking forward to September .
Thank you Ron Yeah, Thanks, a lot for Houston.
Our next question comes from the line of Camilo Lyon with BPI. Please proceed with your question.
Great Hi, this is Mckenzie pointsman answer Camilo.
Thanks for taking our questions. My first question is just on China I'm, just curious given given the choppiness in that market can you just talk about your opportunity there and how youre planning to manage inventory just given kind of the choppiness there. Thanks.
Yeah, let me start with that and maybe Steve will want to talk about kind of the.
The growth opportunity.
Clearly, we think long term.
Remains a clear opportunity for growth we are navigating short term challenges.
Guided the business to be down about 35% in the first quarter and we kind of largely fell in line with that at down 37%.
Yeah.
If you look across the rest of the region, we actually saw really really good growth.
Importantly, the outdoor brands maintained momentum aided by the kind of market tailwind.
But it really coupled with consistent performance and execution of our brand themes there, particularly in the north face. So I think we're navigating that in a way that we anticipated.
A lot of what we saw occur in Q1 in terms of the results was us taking swift and aggressive actions with our retail partners to pull back on inventory level and get our weeks of supply down which is really what's happened. We do expect sequential improvement in the in the market moving forward, but we will still be negative in Q2. It is our expectation that kind of mid <unk>.
<unk> is probably the way to the mid teens to 20% is kind of the way to think about that and then returning to some level of growth as we move into the back half of the year.
And maybe just kind of finish that out we continue to see long term opportunity in China and remain very committed to the Chinese market and the Chinese consumer.
There is significant distribution opportunity and significant brand awareness opportunities.
And I think what's interesting when you look at the consumer trends within the Chinese market our portfolio is extremely well suited.
For long term growth and you certainly see that in the north face business we've.
We've established a structure in Shanghai.
Developing our local teams.
Strengthening that local knowledge, but most importantly, really connecting closely to serving the health and well being of the Chinese consumer.
We think that will service extremely well on the long term.
That's great thanks for that.
And then I think you've kind of touched on this in the prepared remarks, but just some more color on discussions that youre, having with your wholesale partners for fall and holiday.
Are you seeing any more incremental caution any cancellations and just maybe where the thing is cancellation risk might be from a timing perspective would be helpful.
Yes, I'll take that one.
I guess, one thing important to to.
Recognize I think and really important for us as we purposely pivoted our portfolio really away from those channels, which generally are more challenged and more susceptible to higher levels of promotional activity and maybe more exposed to some of the impacts.
From an inflationary standpoint on that lower end consumer.
With that we've got a higher penetration of both direct to consumer and international which are which are less promotional.
Specifically with the retail partners.
Our key strategic partners, both in the U S and in Europe .
We generate high margins with our brands and we remain the partner of choice for those retailers. We've got strong brand, we've got great kind of connectedness to those to those businesses.
Transparency and frequent dialogue and ultimately that allows us to work very closely together on issues.
And how we see that evolving over time as it relates to cancellations.
At this stage our business model, we have we always have cancellations and <unk>.
Something that's contemplated but when we look at where we are today our sell through remains good our sales to stock ratios are well balanced and really the overall inventory is healthy so.
While we are watching this very closely and we certainly will see some cancellations, we feel kind of balanced.
Terms of how we're viewing that and certainly all of that's contemplated in our outlook.
Great. Thanks, so much best of luck for the afternoon.
Thank you.
Our next question comes from the line of Matthew Boss with Jpmorgan. Please proceed with your question.
Great. Thanks, So Steve could you speak to the energy that you cited at north face and anything driving the sequential moderation that I think is embedded in the low double digits guide for the year and then just at the overall portfolio level you held your topline guide, but any underlying changes by brand maybe <unk>.
<unk> to 90 days ago that you cite in the topline outlook overall.
Yeah, So I'll take the first half and on the north face it.
In the last call, Steve I think did a great job really breaking down the broad based strength across regions channels and product categories and that continued Matthew as we went into.
Into Q1 here.
No TNF is so well positioned in that outdoor marketplace, where there is a good tailwind and just the sheer authenticity of the brand and its relevance both on mountain and off mountain as Hell.
Helping the brands stay very much in front of its core consumers.
I think we're there.
You see the real energy is in the product and marketing and what the teams are driving there from a real innovation and.
And newness standpoint, you've heard us talk a lot about the 365 day initiative.
It came through really quite.
Significantly here in Q1 with our warm weather products.
As well as rainwear, selling extremely well and as we've come in here.
<unk> back to school, we're starting to see backpacks pick up.
Also our travel product.
But I think it's the marketing that's really driving this week.
We carried that momentum out of the fall. This full circle Everest expedition that we mentioned in our repaired prepared remarks. This is the this is the first all black expedition to Mount Everest and really drives hard against this outdoor industry opportunity of includes building a stronger more inclusive community and also the pride camp.
Pain opening up to a broader set of consumers and inviting them also to be part of that outdoor community.
It's just continuing to strengthen the brand leveraging that authenticity and setting it up really well for the balance of the year.
And that relative to kind of the kind of the guide.
We've consistently shown now across multiple quarters last year or this quarter.
This purpose built family of brands is performing well and is able to deliver on our commitments at the VA VF level fact in Q1, we exited a little bit better than our initial expectations.
With that with that revenue growth of seven ex the top four brands combined grew six and importantly, the rest of the portfolio grew 16%.
Contributing in an accretive way to <unk> results.
The answer to your question about TNF, and then kind of more broadly that the rest of the portfolio. We did not change any any underlying outlooks, but as we contemplate the puts and takes and Steve referenced.
We probably do see a little a little more risk to vans, but essentially certainly some offset to the north face but.
In our view, it's really early in the year end.
The change anything doesn't we don't feel compelled to do so based on our kind of how we view the overall business and how we view each of the brands by the way.
Clearly <unk> had a strong quarter the.
The indicators.
Are flashing green at the moment, but remember, it's a small quarter small for VF and it's even smaller floor for the north face.
We did benefit from some wholesale shipment timing differences, which were planned so that wasn't a surprise.
We had some some shipments that came into the end of the end of the quarter from last year and and importantly, we're shifting this year closer to one time not perfectly on time by any stretch, but definitely in a better way in terms of shipping.
Stripping out and so it's kind of more normal shipping patterns through the quarter helped us as well.
But certainly we feel good about where the north face is in.
And have a lot of confidence in the trajectory of the business overall.
That's that's great color and then Matt maybe just on the gross margin outlook was foreign exchange was that the entire driver of the full year revision or any change to the promotional forecast embedded within gross margin and just anything to think about in terms of the cadence. If we're thinking of gross margin in the second quarter maybe.
Maybe relative to the back half of the year.
Yeah, absolutely so the.
The gross margin change, which were up 50 before its up slightly so.
Call that maybe around a 40 basis point change something to that effect.
Largely driven by by currency FX, but also.
We have modeled in and assuming a slightly more promotional environment.
The business.
<unk>.
And.
I think the other thing to recognize there is we've got lots of levers in gross margin. There is a little bit of favorability in terms of our outlook relative to the use of air freight as we move through the balance of the year. So a couple of puts and takes there, but we have I think importantly, assuming a modestly higher promotional environment as we move through the year implied in the guide is it.
Two the evolution.
Certainly expect a sequential improvement in gross margin throughout the year.
Theres a few factors that really drive that mix won't be the same negative.
As it was in Q1 based on China, and kind of just kind of how we see the mix evolving across channels and brands through the balance of the year. So there'll be there'll be still some negative negative impact I think in Q2, but as we move through the balance of the year that will start to right size and that will change.
The cost compares from a freight standpoint.
We will not be as impactful Q1 far and away the toughest compare from a freight both in terms of rate last year in Q1. The rates did not had not moved as aggressively as they did beyond that and then from an airfreight standpoint.
Move through the year, that's going to be a favorable tailwind to us from a comparative standpoint, and then I think important to note we did see kind of pricing benefits in Q1.
With four meaningful that actually will increase as we move through the year.
Just based on the kind of the timing of some of those price increases and when they hit the market in particular for the north face and timber limit those brands that are more heavily weighted towards the fall and winter.
Gross margin will still be negative in Q2, I think it's worth worth knowing that.
That's helpful Best of luck.
Yes, Thank you Matt.
Our next question comes from the line of Bob durable with Guggenheim Securities. Please proceed with your question Hi.
Hi.
Okay. Good afternoon, just a couple of questions from me.
When you the business is very strong in Europe .
So I think that you can talk about the state of the consumer in the U S. What are your assumptions around what you expect out of Europe over the next few quarters.
And then the second question is more on some of the volatility that you're seeing in your DTC business can you just talk about.
The assumptions around that piece of the business.
How you are planning it.
Almost curious around inventory that you have around that and I had a follow up on some inventory questions as well.
Okay Bob.
I'll start with with maybe the Europe part.
Come into here on maybe a little bit.
Yes.
Clearly Europe is continues to be a terrific performing market for us and it's been.
<unk> been and remains the fastest growing region.
Strong momentum.
The integrated marketplace strategy.
Across brands, there that's being applied really consistently.
The execution of that and it just continues to deliver great results, we're not going to grow 24%.
Across the year necessarily quarter by quarter.
Certainly work.
Knowing that but.
But we're really confident in what we're seeing because it's broad based across markets and it's broad based across brands every brand grew in the region in the quarter and we said that more often than not of late we saw double digit growth.
Across both direct to consumer and wholesale and so we just got a lot of confidence in what we're doing the strategies and really how the teams are bringing our strategies July from a not from a marketplace management standpoint in the region.
And then Bob on the DTC question.
This is obviously one of those what are the key strategic pillars in the evolution of VF and certainly our brand portfolio.
It remains a very important part of our of our long term algorithm for sure I guess, you just take a step back.
The one thing that.
You can see that we've done.
As in our two largest DTC businesses north face vans.
Both of our leaders come with exceptional background, both from a brick and mortar and digital standpoint.
The benefits of VF, and our portfolio model and the sharing across our teams.
As we as we work on our vans business as Nicole comes in and gets set into north face business, our ability to share test learn and quickly scale the ideas that drive consumer engagement.
You think about consumer acquisition from an omni standpoint, not just brick and mortar, but how we think about inclusively stores to online.
We're really we've got the right leaders in the right place.
To help us really continue to elevate.
Our our understanding and their ability to engage consumers and pull them across our lease line via that digital or virtual.
Our physical and look to convert them.
Great and maybe just follow up on the inventory.
So I think at.
At least the organic inventory.
You have there's a lot of moving pieces to inventory generally, but when you look closely at the inventory.
In terms of by brand or by region.
You said youre comfortable with it but can you just maybe put some numbers around if there are any other.
Pockets that you are concerned about with the absolute.
With the absolute number around where that inventory level sits today.
Yeah sure Bob happy to try to help you get there.
Yes overall, we feel good about where we are certainly as we said I think I think if we look across the different business units. There is areas, where we probably a little bit elevated we were that way in China were kind of coming into a better position in China with the actions that we've taken in the quarter.
I've kind of plan to.
Moving forward I think we feel pretty good about where we are there and quickly getting into a better place in a healthy place.
Certainly the dickies business as a brand where we're a little bit elevated at this stage.
Given given kind of our broccoli, we've seen that business kind of change in the U S market with that lower end consumer.
We referenced in the prepared remarks kind of kind of a softening of sellout, but also some inventory actions right. So it's been pretty pretty aggressive actions in terms of thinking about kind of model stocks and in stock ratios.
Kind of kind of lowering the expectations in that regard, which kind of pushes some inventory backup stream pretty quickly and so we'll work our way through that the good news is that's all core inventory right. So we're a little bit elevated at this point.
These brand.
But not something where we're not capable of managing through and I think the important thing is now that the inventories at retail are quickly in the right place with the.
With key partners.
We see.
Improving sell out that will generate incremental volume very quickly as well just as we saw it kind of move the other direction. So that's one.
One thing and then certainly across the rest of the brands you advance is a little high in a few places.
If I'm honest, but again, not something thats unmanageable, and again driven by core products the <unk>.
<unk> based in timberland are relatively well positioned I think the north face in some cases still missing some key things that we'd like to have.
And so we're working really hard to continue to drive.
Back into a better overall stock position from a north face standpoint, but hopefully that gives you a little more color.
Thank you.
Thank you Bob.
Our next question comes from the line of Michael Binetti with Credit Suisse. Please proceed with your question.
Hey, guys. Thanks for taking our questions here.
Maybe just following up on an earlier question a little help orienting the model as we connect to <unk> here, how to think about growth for north face and <unk> and vans and <unk> I guess, both in total and in China for vans I'm, just curious if matt's comments earlier on how you're thinking about the total company improvement.
And China going to mid teens to 20 in the second quarter.
Love to zero in on the brands a little bit there.
North face too as we get into seasonally more important and then I guess just bigger picture can you help us understand when we look at relative revenues relative to 2019.
I know Europe's got a lot going on right now is positive for the broader retail market, but advance it looks like it's up about 20% in Europe versus Americas down nine and I'm, just I'm trying to understand the difference in the consumer response to the brand in those two markets and what you see.
Different from the consumer and how they're reacting to vans in the U S from Europe .
Okay. Thanks, Michael I'll take that question.
The guide.
The outlook for Q2, and how to think about that a little bit by brands try to shape that for you a bit.
Yes, I think.
Certainly the north face.
The outlook would not imply a large quarter like Q2, we're going to see the kind of growth that we saw in Q1, So youll see some deceleration there, but we'll still see solid growth in the north face is our expectation really across quarters.
As we look across the year.
Certainly bands, we'll see some sequential improvement as our expectation in.
In Q2 into Q3 and into Q4, that's really driven by improvement in China.
China's case in Q2, it's kind of kind of less negative. So that 15 to 20 is kind of a down 15 to 20, I think you got that but down 15% to 20 in China.
For <unk> assets.
We haven't talked about it by brand, but you will see some sequential improvement in vans driven by kind of the China <unk>.
Implications as well as kind of modest improvements in the other parts of the business.
So on your on the vans.
Revenue compare between EMEA and here in the U S.
I think the way I would go at that Michael was.
Talk about Europe , specifically and what we've seen over there.
You were just with US I think you saw the strength of our of our European platform.
The.
The coordinated way that we go to market.
So those key account relationships are really quite critical.
And we look at those both from a physical.
<unk>, but also the those key digital retailers, where we've been able to leverage the scale of VF.
Two to drive those the season to season initiatives, putting ourselves in a place to really get in front of the consumers with the with the right product I would tell you the integrated marketplace strategy that's used in Europe .
It's really quite strong.
Deep understanding of that specialty consumer.
Lifestyle.
And some of those more sport inspired parts of the distribution and.
Really thinking through where replacing the products and in driving icons.
Kind of consistent season to season basis, our growth historically has come in those key markets of the UK and Germany as we come into this year, we're starting to see really nice growth in France and Italy.
I think you kind of combine that you put together multiple quarters of very strong growth contrast, it here in the U S, where we have such a high concentration of owned stores, where we have seen.
The traffic compression as we continue to work to bring that back.
And.
Honest to be honest with you I think our integrated marketplace learnings from Europe are now coming here to the United States, Kevin will leverage those along with his team and I think we'll you'll start to see us.
Really merchandise appropriately or differently too to give consumers different views of the brand and a stronger use of our assortment to drive drive the revenue here in North America, taking those learnings and Thats one of the key benefits of our VF model.
Being able to look at the powerful strategic platforms.
Internationally and share those learnings openly.
Take those learnings quickly and move them into positive results.
Thanks, a lot for all the detail.
Okay.
Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.
Good afternoon, and thank you so much for taking our question.
A lot of Crimson covered but I wanted to follow up on the comments that you made about ZFS Dan's stores in the Americas.
Can you quantify the store productivity of the vans America brick and mortar fleet that youre seeing now versus pre COVID-19 levels, perhaps what level of improvement is baked into the guide for second half and the implications for fixed cost leverage and margin that you anticipate as you continue to rollout those additional brand campaigns. Thank you.
Hi, Brock.
I'll take that.
Overall today, we're kind of 85% to 90% productivity from where we were.
Pre COVID-19 and we've seen.
That kind of sequentially improve but it didn't so much in Q1, thats been a kind of quarter to quarter improvement, but in this quarter, which is obviously a smaller quarter from a from a store revenue standpoint, we didn't see the kind of improvement and that was really I think tied to kind of kind of traffic compares which were ended up being different than our expectation.
As we move across the balance of the year, what we expect is going to by the end of the year to be right at right at 100% productivity from where we were.
Pre pandemic.
Kind of where we are and what our what our modeling would assume clearly clearly you are right.
Some implications there on the P&L today in terms of kind of absorbing the fixed cost associated with that store fleet that said its a really highly profitable set of stores that we have even EBIT operating at kind of a 90% productivity level Super profitable, we regenerate a lot a lot a four wall profit in overall on earnings with the EBIT.
<unk> for the brand, but but there is there is some overhang there that continues as those productivity levels are a little bit below where they had been historically, which we're obviously extremely high.
Great. That's very helpful. If I could just ask one follow up can you provide an update on your pricing actions are you seeing any pushback from partners or from the consumer from some of the early pricing the pricing that you've taken and have there been any changes to your pricing plans for the next few seasons.
Yes by and large no I mean, we're right on track.
Our average price increase on carryover product with somewhere between 3% and 4% in the quarter.
Which is exactly what we expected it to be I think one thing that's kind of a proof point there is banned in our.
In our stores in the quarter, our AUR was up 10%.
And by the way our gross margin in our stores and online and collectively at the channel level across brands were higher than they were last year and certainly in line, where they have been historically.
So the prices themselves and that's a clear example in vans, but everywhere, where we see it.
Not seen a meaningful impact from a pricing standpoint beyond what we would've expected. So we feel pretty good we're going to see that that impact that 3% to 4% I mentioned, we'll grow a little bit as we move into the back half of the year as some of the brands that we're kind of kind of lower impact in the first half are really in particular, the first quarter related to spring product, we will start the <unk>.
Weigh in there a little bit more.
Thank you so much I'll pass it on.
Thank you Brian Thank you.
Our final question comes from the line of Ike Russo with Wells Fargo. Please proceed with your question.
Hey, guys. Thank you, Matt just a couple of follow ups just on the inventory. Thanks for all the color can you kind of help us think about how to.
What you were expecting three months from now when you guys report Q2 on the balance sheet and then I think to Matt's question. The gross margin. Appreciate another decline in <unk> can you kind of give us the magnitude of decline that you're expecting and then the last one is to Matt's question. You I think you said a little bit of an elevated promo.
<unk> outlook versus three months ago is that broad based or is that.
Specific to <unk>.
Bands or to any geographies or anything so thank you.
Yes.
No.
A lot there I think I get it all the.
Inventory position three three months from now.
I'm not going to give you a number but we will be will be kind of at where we plan to be which is which is going to be probably better positioned than we were two years ago. So I expect it will continue to see an increase versus the two year compare clearly we're going to have for a period of time that impac.
The impact of the in transit inventory, which is kind of a new thing but.
But as we look forward and we look at kind of our days of supply and by the way are days, where we ended Q1, we're kind of in line with with our expectations.
Yes.
We feel good about where we are and I think what we're focused on right now is making sure that we've got the right inventory to support continues to be strong.
Sort of growth outlook across our brands.
As we look through the balance of the year, we're going to manage very carefully.
In terms of that.
We think about the environment that we're operating in for sure, but we feel good about where we're positioned there.
As it relates to.
Gross margins in Q2, I would expect there'll be down about about a point.
Great. Thank you.
Thanks, Mike.
Thank you ladies and gentlemen, we have reached the end of our question and answer session. I will now turn the call back over to Steve Randall for closing remarks.
Hey, Thank you everybody for your questions today I'd love to leave you with three takeaways.
As you heard we are delivering against our revenue targets, we've reaffirmed our outlook for the year and we are generating healthy profit margins.
Despite what is a softer consumer environment.
This is a direct reflection of the resiliency and strength of the family of brands.
And certainly the hardworking passionate teams that we have across our business.
Second we're going to remain focused on those things that we can control.
Absolutely be thoughtful about our investment approach to supporting our growth and how we think about the long term view of our portfolio.
And lastly, we are confident about where <unk> is positioned to generate that long term sustainable growth.
Our portfolio carried momentum in it continues to show that momentum and we're really excited to have posted here in Denver on September 28th in and get you up to speed on how we look at the years here to come. So thank you for your time and we look forward to seeing you here shortly.
This concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation and have a wonderful day.
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