Q2 2023 VF Corp Earnings Call
[music].
Greetings and welcome to the VF Corporation second quarter fiscal year 2023 earnings Conference call.
At this time all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded it.
It is now my pleasure to introduce your host Allegra Perry VP of Investor Relations. Thank you you may begin.
Good afternoon, and welcome to VF Corporation second 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 Dr.
Filed regularly with the S E C.
Unless otherwise noted amounts referred to on today's call will be on an adjusted constant dollar basis, which we've 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 in our business.
You May also hear us refer to reported amounts which are in accordance with U S. GAAP.
Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors.
Unless otherwise noted results presented on today's call are based on continuing operations. Joining me on the call will be Vf's, Chairman, President and Chief Executive Officer, Steve Wendel, EVP, and Chief Financial Officer not Puckett.
Following 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 second quarter fiscal 2023 earnings call I will provide an.
Operational update for the quarter and for the year to date and Matt will provide a review of our financial performance.
I'd like to first start with a few words on the macroeconomic environment, which even since we met for our Investor day exactly a month ago continues to dynamically evolve.
While consumer health remains relatively intact across most of our markets. We continue to see global trends result in more choice school and cautious spending behavior.
In North America, we saw mixed back to school result across product categories, and today are seeing variable traffic patterns across channels and an elevated promotional environment in most markets.
Situation in China continues to improve although rolling Lockdowns have slowed this progress.
Spike continued softness in China, we're seeing pockets of growth in this market led by the North face is the brand's global leadership role in the important outdoor Tam continues to influence this relatively underpenetrated market.
Outside of China, We're seeing further improvement across rest of Asia led by Japan, and Korea, which remained highly influential on greater China and.
And we had another quarter of strong growth across our portfolio of brands in Europe , Despite a backdrop of deteriorating consumer confidence.
Despite these mixed macro economic picture our portfolio of brands continues to deliver a broad based performance as consumers continue to prioritize their active lifestyles and lean on our brands to fulfill those needs.
And the investments, we're driving into our key strategic growth capabilities and platforms continue to support the growth of our brands.
For the quarter, our revenue grew by 2% and our adjusted operating income was approximately $380 million.
We returned $194 million in cash to shareholders, bringing the year to date total to nearly $390 million.
As you heard at our recent Investor Day, we are committed to building on those things that have always made us uniquely be up and to growing our highly intentional portfolio of brands.
To start with Vance, our actions to accelerate momentum at the brands are still early.
And as anticipated sales in the second quarter were lower primarily as a result of the disappointing back to school season in the Americas Q.
Q2 sales were down 8%, bringing year to date revenue to minus 6% and minus 1% excluding China.
As mentioned at Investor Day, we have a deep and broad bench of strong talented and are now strategically deploying this into the vans business we.
We recently made two important appointments.
Adding a new position of chief product and merchandising officer, and bringing a key leader for north face to head up digital.
In terms of advanced product innovation, and the progression footwear line, which today represents 25% of brand sales continues to drive an uptick in demand with the new ultra range. So MTBE high showing strong initial sell through.
As you heard from Kevin Bailey Investor Day, it'll take some time for the product facing initiatives to be introduced and when they come we are confident that they will have a positive impact on the brand's results.
Traffic to our stores and digital platforms continued to be below historic levels, while the industry leading conversion in store remains in line with our historic levels.
And our test and learn in store merchandising Sprint's youre showing early indications of improvement in both stores and online.
Our focus in the second half is to prioritize initiatives that drive traffic into our direct channels, where we have the opportunity to benefit from our strong conversion rates.
I remain confident that we have the right people and the right strategy and we will execute to deliver results advance.
Now to the northeast, which continues to deliver strong and broad based performance and prove its undisputed leadership in the outdoor category with revenue up 14% versus last year, reflecting double digit growth across all regions and channels and leading to our biggest second quarter ever for the brand.
Bringing the year to date growth to 21%.
As you heard from Nicole auto at the Investor Day product innovation remains at the forefront of the brand's continued momentum.
With a good start to the season in outerwear, which showed strength in soft shells fleece and lightweight insulated jackets as consumers prepared for the coming fall winter conditions.
In addition to the good performance of outerwear to continued focus on 365 day apparel in the Americas led to a double digit growth in D. C for this region.
Bags and luggage for a global success with recovering summer travel and a strong back to school season, driving energy for the brand.
And finally, the north face and Gucci Chapter three co lab launched and drove meaningful brand heat.
The brand continues to push boundaries with its technical innovation and was recently recognized by outside 2023 Winter Gear Guide, which featured eight that's right I said eight products from the north face as season must haves.
In addition, I'm extremely proud that the north face vector fastback insulated future light boot received the Editor's Choice Award and a feature length to review alongside its inclusion in the best winter hiking boots in 2023.
I encourage you to check this out.
The north face continues to deploy innovative tactics in order to deepen its understanding and connection with consumers and to enhance engagement.
Explore pass membership added more than 800000, new members in Q2, surpassing 15 million members in total.
Overall, the brand has strong and balanced momentum and is well positioned to continue to generate long term sustainable growth.
On to timberland.
Q2 sales growth was up 3% versus last year impacted slightly by shipment timing.
Sales for the first half were up 7% versus last year running slightly ahead of its long term plans as the brand continues to perform well.
You heard recently from global brand President Susie Molder about timberlands sharpened focus and it's paying off.
Our new integrated brand and product campaign built for the bold taps into our cultural relevance and work and outdoor heritage with progressive products like the green stripe Turbo hiker. The number one new fall 'twenty two style across all regions and channels and the New trail quest hiker driving growth.
During launch week.
As part of our marketplace strategy. The campaign launched in New York City, and London, driving sales traffic and strong growth across digital platforms. Overall. The campaign has topped an impressive 1 billion impressions.
We continue to see momentum in EMEA.
With growth over 50.
50% in our community membership month over month.
And with the business being up nearly 20% in the quarter.
We also continued to drive brand heat and attract new consumers with collaborations like venetic Carter with more than 70% of purchases and EMEA being new to the brand.
And finally, our pro business returned to growth this quarter fueled by strong performance in brick and mortar and a new campaign focused on bringing new consumers into the skilled trades.
In all a solid quarter for timberland with momentum as we head into Q3.
Finally to round out the big four Vicky's global revenue was down 15% in Q2 and 14% in the half.
In the quarter, we saw strong growth in EMEA driven by work lifestyle as the brand continues to gain traction in this region.
These results were outweighed by further impacts in the Americas relating to our largest wholesale customer which continues to tightly manage inventory levels.
Performance impacted global results by about 10% in the quarter.
Outside the value consumer the brand is healthy.
As you recently heard from New Global brand President Lance Miller at our Investor Day.
The icons business was up mid single digits in the Americas with women's being a significant contributor.
While overall Asia Pac continues to feel the impacts from Covid related disruption, we continue to make progress in key markets beyond greater China experiencing significant growth with partners in Japan and successful expansion in South Korea on.
On the marketing front maiden Vicky's campaign <unk>.
Celebrating the brands 100 year anniversary continues to support brand awareness with a meaningful growth in impressions driving organic pickup on prominent social media platforms.
<unk> continues to expand its appeal with new consumers in all regions, while maintaining strong brand momentum, giving us confidence in our long range plans for the brand.
Turning to the rest of the portfolio in Q2, I will start with Supreme where the brand grew revenue by 7%.
The fall winter season has had a good openings, we've dropped the new Yohji Yamamoto collection as well as the Nike ACG release and launched the Andre 3000 poster campaign.
Stores continue to see strong foot traffic and all regions with Japan, showing particularly good trends leading into the reopening of tourism.
We also renovated our harajuku store with the opening event featuring performances by Brady and young Leanne.
Our outdoor emerging brands in aggregate grew by 14% driven by continued outstanding growth at ultra which achieved a strong double digit growth rate in both road running and trail running was up mid teens in the Americas and triple digits in EMEA the.
The brand's performance has been fueled by continued success of the loan peak as well as launches of key styles like torn six Olympus five out road and the Montblanc pillar.
<unk> revenue in Q2 grew by low double digits, driven by apparel up in the mid 20 range, which saw continued momentum in base layer and the launch of entry mid layer collection.
Ice breaker was up mid single digits led by strong brick and mortar performance and the launch of shell plus.
100% natural outer layer, which is already won multiple innovation awards.
Breaker launched their fourth transparency report celebrating 95% plastic free materials and pioneering the journey towards regenerative practices.
Momentum in our <unk> business continued in Q2 with high teens growth for the quarter driven by strong back to school performance and continued recovery in global travel trends.
Across the majority of our business, we are delivering strong revenue growth is the investments behind our strategic growth platforms are yielding positive results.
As we've highlighted before our intentionally built portfolio of brands is generating broad based growth excluding vans, which is early in its work to reset refocus and reaccelerate.
The remainder of our portfolio grew revenue by 11% in the first half with outdoor emerging brands continuing to gain scale and our pacs business recovering nicely and seeing an acceleration of growth to plus 25% across the same period.
Regionally, our EMEA business continues to deliver consistently strong results outperforming the broader European marketplace.
Our first half revenue was up 16% highlighting the strength of our portfolio the.
The relevance of our brands across all markets and the important strength of our net international platforms.
The north face business continues to power forward, including and importantly, the north face group first half revenue by nearly 30% in greater China, where most brands inside VF and across the broader market have been impacted by ongoing disruption.
And the Dickies brand is continuing to gain momentum across the work lifestyle segment, where sales excluding China were up about 20% in the first half.
We are continuing to actively manage the near term challenges presented by our largest brand vans the ongoing COVID-19 related disruption in China, and the broader macroeconomic and geopolitical challenges, which have created an unprecedented level of uncertainty.
All businesses and consumers are navigating.
I remain confident in our ability to deliver on our overall revenue targets as we prepare to maximize our potential when the macroeconomic environment improves leveraging vf's powerful brands unique business model and critical strategic growth platforms.
In summary, our performance in Q2 reflects a balanced delivery of results and speaks to our resiliency as we adapt to an increasingly variable and softer consumer backdrop.
Our purpose built portfolio of iconic deeply loved brands continues to benefit from strong tailwind in the outdoor workwear Street wear and active spaces, we continue to invest behind digital and innovation.
With our brands generating a regular cadence of new product initiatives driving an increasingly closer connection to our consumers.
The quality of our performance is a testament to our deep bench of strong talent and the incredible teams, whose enthusiasm hard work and commitment continue to enable us to deliver results I remain incredibly impressed and grateful for their ongoing contributions.
I will now hand over to Matt to take you through our financial performance.
Matt.
Thanks, Steve and good afternoon, everyone.
As Steve mentioned, we delivered a balanced set of results in Q2, as we adapt to a more variable and softening consumer environment.
Revenue was up 2% in constant dollar terms and up 4%, excluding China for half one revenue was plus 4% and plus 7% excluding China.
After accounting for a negative FX translational impact of approximately $195 million nearly double the level seen in Q1 sales were down by 4% on a reported basis in the quarter.
Globally, both our wholesale and direct to consumer businesses generated low single digit growth in Q2, and DTC returned to growth at the <unk> level, Despite a lower performance than anticipated from Vance North America.
Our adjusted EPS was <unk> 73.
Down 34% were down 27%.
Constant dollar basis.
About one third of this reduction versus last year relates to non operating impacts.
Before I unpacked, the P&L in more detail I'll give you an update on the operating environment across our primary geographies.
Rolling Lockdowns continued to disrupt operations in China. During Q2, we are otherwise opened for business from a COVID-19 standpoint across the value chain.
Revenue in the Americas was down, 3%, but up 3%, excluding vans against a difficult macro backdrop characterized by softer traffic in components of our DTC network higher inventory levels across the marketplace and an increasingly promotional environment.
Our outdoor businesses continued to perform strongly led by the north face growing low double digits in the quarter and continued to generate strong sellout across channels.
<unk> performance in the region was down 11% impacted by lower back to school sales and increasingly cautious approach by our wholesale partners, leading to higher cancellations and lower traffic effecting our direct channels.
Finally, dickies down 17% was impacted by further inventory adjustments made by our largest third party retailer.
Across the rest of the business the brand was down low single digits overall, despite similar inventory pressures and other more value in consumer work accounts. This was helped by double digit growth in work inspired products.
Our business in EMEA remained strong despite a further deterioration in consumer confidence and the corresponding impact to traffic levels.
Revenue in the region was up 12% in the quarter and by 16% in the year to date.
Driven by broad based growth across all brands.
All brands growing at 10 brands growing double digits in the quarter.
So DTC and wholesale are up double digits again signaling in the broad based strength our brands are enjoying in the region.
Within wholesale to third party digital business was softer, reflecting a more conservative approach to inventory as well as some cancellations amidst slower traffic.
By market for the five largest markets generated strong double digit growth, France, Italy, Spain and Germany.
As anticipated APAC progressively improved and returned to growth with revenue plus 2% in Q2 in line with our plans a testament to the strength of our brands into the efforts of our teams to respond with agility to ongoing market headwinds, particularly in China.
The performance in greater China improved to down 10% in the quarter in contrast to down 30% in Q1, but continues to be impacted by widespread rolling Covid, lockdowns and restrictions as well as lower consumer spending.
This result was largely in line with our expectations for the half the.
The rest of Asia improved further growing 30% during the quarter.
The outdoor segment continues to experience favorable tailwind in the north face delivered yet another quarter of strong double digit growth across the region highlighted by revenue growth of nearly 30% in the first half in greater China.
Now moving on to gross margin.
Again adversely impacted by a number of factors in the quarter. Our adjusted gross margin was down by 240 basis points.
As anticipated and after two negative quarters, the mix impact was flat in the quarter.
Rate was down 220 basis points, primarily reflecting higher discounts increased promotional activity and elevated inventory levels higher product costs have been offset by planned price increases.
Turning to an update of the supply chain environment. Our supply chain is one of our key strategic platforms and a competitive advantage for VF.
As you heard from Cameron Bailey at our recent Investor Day, We continue to act with agility and speed, leveraging our scale and diversification to mitigate ongoing headwinds and disruption.
Our sourcing and production base remains open and is operating with greater diversification stemming from a concerted effort to move production closer to consumption, where it makes sense.
We are still feeling the effects from the eight weeks of large scale lockdowns in China during Q1 as the impacts work through the system.
And while much more stable, we continue to deal with the ongoing micro lockdowns and the impact to operations in China during Q2.
That said, our diversification scale and agility, we're enabling us to adjust as needed to minimize disruption.
From a logistics standpoint, we are seeing a further improvement in transit times across the water and dwell times in port, which are contributing to improving overall predictability and reliability.
Although it's worth noting that variability continues to remain somewhat elevated as compared to the pre pandemic environment.
Overall, we've begun to reduce lead times from both a production and logistics perspective, although the total cycle time is still higher than historical levers levels.
We anticipate closer to normal lead times as we move into fall 2023.
On the cost side, both ocean and air spot raised rates reduced further during the quarter, but remained substantially higher than historic levels.
Finally, our port and route diversification strategy in North America remains in place as we continue to follow the ongoing west coast Labor negotiations.
This allows us to more consistently and better serve the consumer.
<unk> cost in the short term.
In summary, while the situation continues to improve gradually the supply chain overall remains disrupted relative to the pre pandemic norm.
So let me spend a couple minutes on inventory, which of course is the hot topic at the moment.
As we mentioned on our last earnings call. During Q1, we implemented a supply chain financing program with the majority of our finished good suppliers.
This resulted in us taking ownership of inventory at the point of shipment rather than at the destination point, meaning we own the inventory for an additional month or so.
There is no impact on cash flow since the point at which payment is due to the supplier hasnt changed the.
The increase in inventory is offset by an increase in accounts payable as evidenced by our Q2 results were payables were up 91% in the quarter.
As part of the program and as of September one DFS increased payment terms with the majority of its finished good suppliers.
This change will begin to benefit Vf's overall cash flow later in half two and this impact has been contemplated in our operating cash flow outlook.
Inventory levels are up 88% versus last year, including an increase of about $510 million in in transit inventories relating to the supply chain financing program.
Excluding this factor inventories are up 58% versus last year.
On an organic basis, excluding in transit versus Q2 of fiscal 'twenty, which is a pre pandemic comparison gross inventory gross inventories are up about 35%.
Roughly 75% of the increase versus last year was to rightsize the inventory levels from the unusually low levels to support this year's growth plans.
The balance of the increase largely represents higher than planned levels of inventory at vans and dickies, primarily in core products.
Actions are underway to mitigate this and ensure we are well positioned in our fiscal year end and importantly, as we manage the overall health and levels of inventory towards spring and summer 2023.
These include adjustments to forward purchases, where possible controlled sell down of excess and distressed inventory and in some cases, where the stock is largely replenishment plans to carry a higher level of inventory in the near term such as in the case of core Dickies workwear products.
Now to wrap up the P&L, our adjusted operating margin was down by 440 basis points, reflecting lower gross margins as well as ongoing targeted investments, which we continue to make to advance our key strategic priorities and support our brands growth opportunities.
SG&A was up 7% on a constant dollar basis in the quarter still above but more in line with our full year revenue growth outlook of 5% to 6%.
Operating expense Deleveraged in the quarter. The result of three key factors first we continued to invest behind our key strategic priorities those investments were up by 9% in the quarter, primarily reflecting initiatives in the digital and technology space and continued investment in demand in product creation and the brands.
Our revenue growth of plus 2%.
The quarter is projected to be our lowest quarterly growth of the fiscal year.
And finally lower profit margins in our highly profitable van direct to consumer business, reflecting the brands recent performance.
We are continuing to maintain strict cost management against all controllable spend.
Moving onto our outlook for the rest of fiscal 'twenty three.
We are confirming our full year revenue outlook of plus 5% to 6% constant dollar growth and now expect about six five points of impact from foreign currency translation on reported revenues.
And considering the velocity with which the macro environment and the marketplace has evolved even since we last updated you just a month ago, we're taking a more cautious approach in planning profitability for the balance of our fiscal year.
That said, we are proactively taking near term actions to drive higher revenue and profit in our half two amidst the difficult and highly promotional environment.
Specifically, we are leveraging our portfolio strength and sharing learnings across the organization in order to first increase consumer traffic engagement and conversion in our direct channels.
Leveraging better performing tactics across our company and deploying these to other areas.
Second we will drive the profitable sale of excess inventory utilizing our own channels first followed by other important strategic partners.
Third we will work with our brands, particularly those that are performing well to position the business to set spring 'twenty three early in our fiscal Q4, where opportunities exist to drive incremental revenue and finally, we will reduce all nonstrategic controllable spend in the year ago period.
We remain committed to maximizing profitability in the back half of the year in the face of a challenging set of macro factors.
Within the details of our fiscal year 'twenty three revenue outlook of plus 5% to 6% constant dollar growth. We are anticipating the north face will grow by at least 12%.
<unk> and <unk> II growth rate of at least 7% are.
<unk> guidance for the year to be down mid single digits implies a low to mid single digit decline in half two.
Lightly better result than in half, one where the brand declined 6% driven by easier prior year comparison in China.
Moving on to our fiscal year 'twenty three adjusted gross margin outlook.
Considering a more impactful promotional environment, reflecting the heightened and increasing levels of inventory across the marketplace and ongoing U S. Dollar strengthening we now anticipate gross margins to be down by 100 to 150 basis points versus last year.
As a result of the lower gross margin and greater foreign currency impacts we are lowering our adjusted operating margin guidance to be approximately 11%.
Our EPS range is now anticipated to be $2 40 to $2 50 realm.
Relative to $3 18 last year.
As we've mentioned previously there are several nonoperating factors that are impacting the compare to last year and these have only increased with the larger foreign currency headwinds.
The total negative impact versus last year of these factors led by FX translation impact of <unk> 31.
Is about 50.
Finally, a quick update on our projected cash evolution this year.
Our full year guidance implies continued healthy cash generation over the course of the year with adjusted operating cash flow, excluding the onetime timberland tax deposit expected to be at least $900 million.
To give you an update on the timberland tax deposit. The appeal was filed on October 7th and we made the forecasted payment of $876 million in the early part of Q3, while at the same time, drawing down $800 million against our recently established term loan facility with capacity up to $1 billion.
We've approved a further increase in the dividend to <unk> 51, a share as part of our ongoing commitment to return cash to shareholders.
Finally, our balance sheet remains sound with liquidity expected to exceed $2 3 billion at year end.
I'd like to conclude my prepared remarks by reiterating the confidence we have in our strategy and our commitment to delivering superior shareholder returns.
We will continue to invest in our portfolio of brands in our strategic platforms in order to further strengthen our business model and position us to drive consistent sustainable and profitable growth over the long term.
As I said at Investor Day, we are committed to being a growth company consisting of growth brands and are well positioned to perform despite a softening consumer environment and continued elevated uncertainty.
Finally, I continue to be impressed with the invaluable contributions and achievements of our teams, which make all the difference in ensuring VF is well positioned to continue to deliver against our strategy.
<unk>.
We're happy to now open the line and take your questions.
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One moment, while we poll for our first question.
Yeah.
Our first question comes from Michael Binetti with Credit Suisse. Please proceed.
Hey, guys. Thanks for taking our question here, Matt I wanted to dig in on some of the actions to drive revenue and profit that you spoke to maybe just I know you gave us a little less there, but maybe just a little bit more on what we'll actually see what youre doing since you introduced the.
The highlights there and then as we look at vans and we I know you said, where there is a little bit of an easier compare on China. When we look at on a one year basis what when.
When we look on a multiyear basis pre COVID-19 it looks like.
The revenues for vans only to accelerate a little bit in the back half to get to the down mid singles from where it was in second quarter or is there any any numerical as you can give us to.
To help us get the building blocks to what rolls off for what comes online that should help for a better trend on a multiyear basis.
Yeah sure sure Michael and Thanks for the question, it's nice to hear your voice.
First I would say relative to the actions.
Happy at all about about about the what we're seeing in terms of the profit projection I think the approach that we took to adjusting the full year profit.
Outlook, while while revenue remains intact and we just see some headwinds on the horizon associated with kind of rising inventory levels in a promotional environment in the marketplace, that's going to be all around us and we certainly expect that's going to have some impact on our business and I think we felt like it was important to plan prudently in that regard.
We're going to work really hard to kind of bring that profitability level back and that really is what those actions are all about.
As it relates to driving traffic and conversion in our in our own.
Formats in our own stores and our own websites.
The biggest opportunities we see.
It's a really look across.
And this is kind of the power of our platform in a sense look across our businesses, where we see things working well tactically within digital marketing and.
Tactics to drive digital commerce.
Where are things working well and how do we deploy those in other brands or other places we're not seeing the same kind of benefit at the same kind of returns on the tactics that are being deployed today and just to be just to be honest, probably no surprise the north face we're seeing those things work a little better in band is an area, where we see opportunity and so we've got some of our best people across.
The company kind of working on that in fact, we've moved a couple of people permanently into the.
Van business.
Obviously, great track records and other parts of our company and Steve May talk a little bit more about that but we're also using some third parties to help us really do this so we see opportunity too to be more efficient in how we are deploying some of the tactics and some of the spend in certain parts of our business and we are aggressively and fast after that yes.
Worked really hard to kind of leverage the channels at our disposal first and foremost our own channels to sell off some of the excess inventories that we see building we're in a pretty good place overall from an inventory standpoint relative to.
We plan to be were higher in certain areas and I think I mentioned that in the comments a couple of brands in particular, but as we look across all of our brands, we're going to we're going to take opportunity to kind of Peel back inventory, a little bit leveraging our own channels and doing is ultimately to drive some additional profitability.
We're looking at in a few places where we see the business performing quite well too.
Set floors, a little bit early in spring 'twenty, three in and drive a little bit more revenue in our fiscal year that we would view as incremental and additional term as an example, and then lastly, as we always do kind of a broken record in some ways, but I think even more aggressively in the short term. We're looking at all non strategic controllable spend and are going to rich.
<unk> as we move through the balance of the year with a with an eye towards driving higher profitability. So those are the actions I mean, there's a heightened sense of urgency given kind of the environment that we face and our commitment to driving consistent sustainable profitable growth.
Take that really seriously and we're after it.
Michael Let me build a little bit.
Here on the traffic and conversion P. J I think an important part here and its really is leveraging the portfolio and the cross functional teams and expertise that we have not only brands had function, but we have assembled.
<unk> functional teams organized in pods, working and very agile ways against four very specific areas of focus one is around consumer acquisition, how do we acquire that consumer how do we move that consumer in and drive traffic to our environments. When we have that consumer how do we retain them.
And B, how do we really enhance that consumer experience.
So we have a higher likelihood of moving them through to the fourth point, which is conversion. So very very specific sets of actions being worked on by.
These cross functional pods.
And.
Probably at the last point here is this is something that we're taking so seriously is that Matt and I are meeting with these teams on a weekly basis to keep track of understand and and help take any kind of roadblocks out are there ways that we can move very quickly and actually through this process.
Yes, Michael on your question about the vans kind of the drivers in the back half of the year.
Got a couple of things.
What.
Period over period Youre looking at the stack itself, our view of that would say if you go back four years kind of pre Covid and look at the CAGR, it's pretty consistent in the first half to the second half of the total at the total land level globally.
That's one thing that I would say as we look at our assumptions in the back half of the year relative to what we saw occur in the first half of the year, it's really all driven by an accelerated.
Impact and benefit from China.
I will tell you in fact, we are planning vans North America to be a little a little tougher in the back half than actually what we saw occur in the first half. So we're planning pretty cautiously there overall and.
If you think about where we are.
Down mid single digits, which we delivered a down fix I think here in half one implies low single to low mid down in the back half of the year, It's really all driven by that acceleration in greater China, which is obviously coming against easier compares.
Thanks, guys.
Thanks, Michael.
Our next question comes from Omar Saad with Evercore partners. Please proceed.
Hi, yes.
Thanks for taking my question I had a couple of quick brand questions is sticky is the only kind of pandemic winning business or at least that portion of dickies, a pandemic when the business is kind of giving back some of those gains.
And then north face any.
Early reads on winter demand in places, where the temperature started dropping kind of any early reads on that appetite for that category as winter starts to set in some places.
Steve I can take the Dickies partners sure.
Sure.
Omar for sure Dickies filling.
The impact here in the first half of the year.
Whats going on in the U S market, and obviously, particularly with.
With our largest retail partner.
And the exposure to that value in the consumer to your point, we've done really well from a growth standpoint over the last couple of years with Dickie.
Wouldn't call it giving it back where we think this is kind of kind of short term in nature. Some inventories were being right sized and certainly that consumer being impacted pretty significantly by the inflationary.
Challenges on food and fuel and those types of energy costs, those types of things impacting that lower value in consumer and more significantly and more quickly quite honestly has impacted the work component of that business in the short term, but what we also know is inside that inside the business and inside even that retailer or brand continues to perform.
On the floor better than the competitive set so as that business goes away pretty quickly at times when they pull back on inventory. They can shut the breaks pretty quick at the same time that can hit the gap pretty quickly as well and as we as we come out of this over time hard to predict how that will play out as it does and when it does we expect the business to kind of pick right back up and accelerate Meanwhile.
Now the lifestyle part of the business continues to perform incredibly well and that's really how we think about the long term growth.
Drivers of this business is getting our fair share of the work component as we as you would expect us to but really driving outsized growth internationally and here in the U S and our lifestyle products. So yeah, a little bit difficult in the short term it doesn't change our confidence in where this brand is heading and really kind of the momentum that the business has.
Yes.
Yeah, So omar on the north face.
We continue to be very excited and proud of what that team has done up 21% through the first half.
And.
Affirming that outlook of 12% for the year, which is slightly ahead of that high single low double that we committed to just a month ago in the Investor day.
Which should be good.
From a confidence building standpoint as the growth is.
It's broad based we're seeing it across all regions, we're seeing it across all channels and we're seeing it across all product categories.
Certainly the brand is benefiting from that outdoor Tam in the energy Thats really come into that particular part of the market, but it's also benefiting from its number one.
Influencing physician and and really driving that with strong authentic product.
We talked a lot here.
Over the last few calls about <unk> commitment to 365 apparel and moving beyond just outerwear.
Able to focus on those every day ready to wear with ready to wear apparel items, which giving us permission to move now more to that active component of the consumer's life that they're asking us to participate in our footwear last year, we launched a couple of years ago, we launched effective and to be able to now talk about getting.
A major award for <unk> fast pack future life style is an affirmation of the quality of the team.
Quality of their consumer understanding and the differentiated product that they're putting into the marketplace.
Specifically here with effective.
Then you see outerwear continuing to work extremely well.
<unk> kind of shoulder season fleece lightweight shelves lightweight insulated jackets doing really well.
But now as we come into cold weather yesterday, you may have seen it the costs drop.
Highlighted some of the heritage <unk> Himalayan Parka the mountain jacket was in there in the Denali and really I think what you see there is leveraging historical strong styles done in a very.
Brand right way with a partner like cars driving that that Halo impact that then cascades Zen across everything they're doing and that snow ski category. The commitment decline hike active as you as you look at the online presentation in the re merchandising of that homepage.
This is a brand now has.
Really anchored its product creation capabilities strengthening its storytelling capabilities.
With the addition of our new CMO.
New chief product and merchandising officer that it's only going to help us to strengthen and focus that product offer and and then with Nicole expertise in direct to consumer in the online engagement.
We've got a real winning formula here.
To continue to drive that long term sustainable consistent growth.
Thanks for the color.
Thanks Omar next.
Our next question comes from Jonathan Komp with Robert W. Baird. Please proceed.
Yes, hi, good afternoon. Thank you just wanted to ask maybe another question on vans.
I'm curious just your latest view when you look at the geographic divergences in Europe looks like it's holding up so much better I'm curious.
What are your current currently think make of that trend.
And as you think about vans.
When would you expect to see signs of progress and what are you looking for in the Americas to know that Youre on the right track here.
I think the way Youre looking at is absolutely correct.
European business in General continues to show exceptional performance and within that is certainly the vans business.
We've talked pretty openly I think Kevin.
Good job on packing this for everybody in the Investor day, but.
The primary opportunity here is our North America business and within the North America business, its our direct to consumer channel.
And.
Emphasis we're putting today around traffic.
And.
Engagement retention all the way through to conversion.
<unk>.
Squarely in the middle of that and we have a number of test and learn actions that have been taking place the last couple of weeks.
Those learnings now and we'll apply it to the balance of our portfolio.
But really looking at what will be will be required to utilize these.
This strong component of our go to market set of options, where we've got such strong conversion, how do we start pulling consumers across that lease line into engage with us on our footwear and apparel story. So number one is the Americas and within that our North America DTC.
China is.
Significant opportunity as well.
Ben certainly impacted with the Covid environment there.
But again at the Investor Day, Kevin spoke a lot about.
Really pushing decision, making into the regions and providing more and more latitude for local for local decision makings around product around storytelling, certainly staying within the confines of the framework of the brand strategy.
But really giving more freedom and more empowerment to the brain to the regions and you see that taking place in Europe , and taking those learnings and applying that now more effectively with our Asia team specifically in greater China.
Okay. That's that's helpful. Maybe just one follow up a broader question on the margin outlook.
<unk>, 211% operating margin for the year now.
Who will be the lowest reported in some time outside of Covid maybe.
The last decade, or so so just Matt I don't know if theres any way to think bigger picture about what's temporary and the.
And the margin that's impacting it this year versus more Alaska and then.
Are you willing to quantify any of the actions you are taking.
To tighten up on the cost side. Thank you.
Yeah, Great Great question I would tell you that we believe there is quite a bit that's impacting us this year.
I'll say relatively short term in nature impacting the margins and that's primarily in certainly in the gross margin line.
And clearly there's a little bit of pressure on elements of our fixed cost base, obviously, something like the vans store base itself and kind of what we're seeing there in the revenue.
And kind of the performance in the stores, but from a margin standpoint, we still got it.
We're dealing with higher levels of.
I would say inefficiencies from a supply chain standpoint freight.
And how we're moving freight.
Extra storage costs, given the higher inventory levels.
As in there that we would say it's transitory, but really the big one is just kind of the assumptions that we're making right now relative to.
What may be required in the marketplace from a from a promotional standpoint, both both our own our own channels, but also in support of our wholesalers.
We talked about here, even in Q2 the rate impact largely being the result of higher discounts some additional promotions.
I'm already showing up a little bit in our own channels, particularly particularly outlets and then higher higher cost as well and certainly some additional inventory reserves given our elevated inventory. So there is there's a lot there that I would say really everything we've done from a margin standpoint is all tied in my view to kind of things that are that are.
Commensurate with the current marketplace and environment and are not what we would expect to see persist moving forward. So I think we feel really confident in our ability to drive expanding gross margins over time, our ability to drive higher prices over time to mitigate kind of inflationary product cost increases, which by the way we continually and consistently.
<unk> been able to do.
So theres a lot there that's transitory that we would expect that over time, we'll come back to us as it relates to SG&A.
The actions that we recently announced.
Over 600.
Rolls or positions that were eliminated across our company both both.
Role eliminations for open roles and also kind of reorganization.
The overall impact of that on an annualized basis, and we will get a little bit of that this year.
We're not anywhere near all of it but it is a bit over $100 million.
And this is on top of $100 million, we've taken out really over the last couple of years as part of project enable which was an opposite of actions we announced.
Back during back during the pandemic. So over a couple of hundred million dollars of costs that will have come out versus the pre pandemic level, then I'll call fixed kind of G&A, primarily although we would expand into other parts of SG&A, but largely G&A.
So those are some of the actions and Theres. Some theres, obviously, some benefits that will that will accrue to us next year.
We get we get the full impact of those things hitting our financials. So.
The 11% I agree its not not at all where we expect to be or where we wanted to be and youll see us recover pretty quickly as we get past this kind of a kind of moment in time.
That's really helpful. Thank you.
Thank you John .
Our next question comes from Lauren <unk> from BNP Paribas. Please proceed.
Good afternoon, and thanks for taking my question, Steve Matt I would love to ask about Supreme I Didnt see.
The brand performed on a revenue perspective for this quarter in the slides.
Any context on how it performed what drove that performance and then.
Maybe a little bit more context on the impairment charge what drove that.
What's your confidence to get to that to that algo that you called out a month ago, a high single digit low double digit growth for the brand. Thank you.
So florent. Thanks for the question I'll go ahead I'll take Supreme.
From a Q2 standpoint Supreme was up 7% and this is despite.
Opening up about a week later than planned.
Based on a decision to make sure we hit market with an opt by optimized assortment remember us talking quite a bit last year, where we came to market with.
Yes.
Well under normal percentage allocations against key styles and this year. The team took a very proactive approach to to hit the market.
Second half here running with the right assortment at the right time, So we were up 7%.
Even despite some supply chain disruptions the brand has done well, we expect an acceleration as we move into the second half.
Because we continue to get better and better positioned from an assortment and product flow standpoint.
A couple of wins here you were able to see these stores and we work together.
In Europe , but the Berlin, and Milan stores are performing really well.
Now as we come out of that Covid environment, we have the the Lux.
Luxury of consumers being able to move tourism, becoming more prevalent.
Those stores, which opened under the cloud of Covid now, we're performing extremely well.
And.
From there we've got some new stores coming we talked in my prepared remarks around the Dover Street market opening up in Beijing. That's the first time Supreme will be represented in a physical.
<expletive> Wei with.
In the Dover Street market environment.
More of a shop in shop, but it'll be a great affirmation of the ability to expand or what we talked about.
Really grow.
Grow wide.
We also.
Get a refit to our Harajuku store in Tokyo is probably the most prominent.
Well known store in the Japan, Japan market and they are seeing just really strong.
Results in energy, resulting from that we have a new store coming in Chicago.
Later, this fall, which will be the first new store in the U S market in a while and are very excited to what that means is we again, we bring the brand through the physical environment first into new parts of the market, where we know consumers are as we look to continue.
To provide better and better access.
So that geographic expansion continues to be a very important part of the longer term growth and being able to get back to seeing that value come into the brand. This year is a good proof point to the acquisition thesis coming in here and just gives us more and more confidence in the team's ability to execute.
Yeah.
Yes, I'll just add one comment I'll get to your question on impairment to Lora.
As Susan talked even at the Investor Day, you really the long term growth plan.
Best Best categorized as a grow wide strategy.
Giving more consumers access to this brand and that really speaks to geographic expansion and it's kind of core and central to the to the acquisition thesis itself leveraging <unk> capabilities be it platforms.
Easily more frictionless, not necessarily faster per se, but certainly the opportunity to go with the right pace over time, but to open more doors internationally to give this brand access to more to get the consumers around the world access to this brand. That's the vast majority of what's driving the growth. We're not counting this is not about.
Saturating the markets, where we are today right, we're very careful and cautious on kind of the scarcity model, but it's really getting more access to this brand around the world.
It's why we're excited to really start to see the expansion take shape here in the next couple of years.
In particular, obviously beyond so I'm just wondering instrument to remind you that as it relates to the impairment I guess, I guess first and foremost I would say.
It's all driven by what I'll call non operating factor.
Factors you may even remember that earlier this year, we actually made an additional payment earn out payment associated with the acquisition, which obviously says we performed a little bit better than the original set of assumptions and there was an earn out it was a bit lower than that.
And we might have originally expected given the early early performance of the business because of some of the supply chain challenges that we saw last year impact the brand from a COVID-19 standpoint, but we did we did actually pay a bit of an earn out which kind of implies we are on track and we are on track versus our internal expectations. So what we're dealing with here and by the way.
Wouldn't have even been testing the business from an impairment standpoint, if not for what we're seeing in the marketplace relative to interest rates and what that does to the discount rate and how you kind of present value those cash flows.
And obviously the currency environment.
And the U S dollar translation from the Japanese yen and also from the currencies in Europe . So for those two factors, we determined we needed to test we tested probably not surprisingly given the fact that it's a fairly recent acquisition.
And how materially a couple of those.
Things have moved in terms of interest rates and what that means to discount rate.
As you evaluate those cash flows.
We're dealing with what the noncash impairment, but none of that is related to our operating performance.
Our operating results and we still feel really good about where we are and everything that Steve mentioned earlier in the night, but I kind of like.
Layered on there as well in terms of kind of where we are and the outlook.
Good.
That's very helpful.
Second question is on gross margins you lowered it by about 50 to 100 beds could you, possibly give us the bridge how much of it is incremental FX.
Supply chain costs bottlenecks, we heard from one footwear company to talk about it last night.
Or is it driven by markdowns in any context on that would be helpful and how do we think about the GM for <unk> versus <unk> any high level color would be very helpful. Thank you.
Yeah sure. So I would think in our case.
There are some smaller impacts and I'll start with a smaller impact and I'm not going to necessarily give it to you exactly in terms of in terms of the percentages, but let's say in the neighborhood of probably 25% of the total is a combination of some supply chain inefficiencies.
Mix.
And currency.
Balanced and so the majority is the assumptions that we're making on.
What's going to be required given inventory positions.
The operating environment that we expect that we're going to face as we move through fall and holiday and you know whether that whether that discounts the wholesale partners or more aggressive actions that we'll take in our own channels in particular, our outlets, but in some cases, we'll be ready depending on where the market is and what the competitive set is to have to be targeted in appropriate ways, even in our full price.
Channels as we move through the fall holiday season, and that will certainly vary vary by brand and within brands will vary by product category will be very targeted in that but we expect and we are positioned.
Kind of guided here to be able to take those actions when and where necessary.
As it relates to kind of your question third and fourth quarter.
I'd say that a good way to think about the third quarter is kind of down 50 to 100 basis points and then and then more flattish in the fourth quarter.
Mix is actually begins to be a kind of a nice tailwind for us as we get into Q4 by the way.
Very helpful. Thank you very much.
Thanks, Laura.
Our last question comes from Matthew Boss with Jpmorgan. Please proceed.
Great. Thanks, So Steve what gives you confidence in keeping the five to six constant currency top line.
As we think about the dynamic macro backdrop, and then Matt could you elaborate on the heightened inventory and increased promotional activity in the marketplace, maybe relative just 30 days ago and specifically how do you feel about your own inventory levels by brand today.
So thank you Matt.
It gives me confidence through there's quite a bit of rattle off just a few points here I think coming into.
Where we are.
Beginning of the second half is the consistent performance that we saw across the portfolio ex vans up 11% in the first half.
And the ability for us to kind of project that to be pretty similar to the second half our European business performed continues to perform well and that cross sharing ability within our portfolio.
Assistance.
Providing our Asia team.
As we stand up in some cases, new operating disciplines in our Shanghai office, which is still fairly new now, bringing those same disciplines that same set of integrated marketplace set of capabilities.
We continue to broaden their really their influence our China recovery continues and we expect that.
In the second half we will continue to be.
What we've seen coming out of Q2, and certainly coming into Q3.
Our back half isn't reliant on a hockey stick from Vance.
We have a much more.
A balanced view to be able to drive that 5% to 6%.
We certainly sit in parts of the market, where theres a lot of tailwind the active lifestyle needs based component of our portfolio playing into the outdoor and active tambs certainly positions us really well in and having the number one brands in many of those spaces to engage and ultimately drive those high value.
Experiences. It gives me a lot of confidence that we've got the right.
Really the right portfolio driving in the right strategy, but most importantly, we have the right people.
Strong deep bench of leaders you saw them speak to you at the Investor day sitting alongside them in each of one of our businesses.
Strong capable leaders, we're moving leaders.
Based on the strength of our bench into our vans business, we're being able to hire extremely high caliber talent into our north face business as well as into our dickies business in timberland business.
So if there is the last thing here, it's the people driving the strategies and being able to really maximize the tailwind and that momentum that we've carried out of the first half.
I'll add a couple of quick points, just kind of from the number side that gives me confidence.
One and probably most importantly is when you look at what.
<unk> been consistently our best performing brands over the last several quarters, it's kind of the outdoor segment right. I mean generally the outdoor brands have been strong TNF, obviously, the headliner there but across that group of brands. There are larger penetration to the total in the back half by a pretty meaningful amount, it's kind of 6% to eight point increase in penetration to the total so the fact that.
Our best performing businesses are a larger part of the business in the second half of the year gives me confidence and then the other thing is just clearly what we're going to see the movement, we're going to see from a contribution to total from from greater China in the back half of the year versus versus the really tough first half and in particular, the tough Q1. So a couple of data points there that I think.
Our probably helpful. As you think about that.
As it relates to your question on what are we seeing any environment how is it different even in the last four to six weeks.
It's in our view, it's become more promotional we're seeing it particularly in the Americas and particularly in China inventories are building, we're kind of seeing that we're understanding that as we kind of see what the market is showing clearly.
Paying really close attention to the competitive set and the competitive environment from an inventory and promotion standpoint, and kind of kind of the signals that we see there would tell us that we may be heading into a time, where it's going to be more disruptive than we even anticipated again, just a few weeks ago and I think.
Kind of one of the things that's happening is we just we expect probably a compressed full price selling window retailers or are being very careful about taking an inventory and taking advantage of any opportunity to kind of delay receipts looking for 100% feels when they might normally take a 90% feel as an example to delay the receipt of something and then and then I think our.
Anticipation that.
They may break earlier right and the market itself may just break earlier from a promotional standpoint, as we head towards the holiday so that that window of full price selling we expect could be further compressed and so those are I think those are kind of a couple of key things.
Matt that we that we're viewing as we as we kind of evaluate what the market conditions are and what we think it made there over the next few months so.
And our own inventory as I said, a lot of what we're seeing in the increase certainly set aside the in transit.
The accounting change there that we've hopefully explained clear.
Clearly at this point, but.
Set that aside we're still up a lot for sure were up nearly 60% to last year a lot of that was planned because we were way too low last year a lot of that is in those brands.
We haven't been able to service the business as consistently as we would've liked and in some cases, we're still not all the way to the finish line here, but we planned much higher inventories to get back to normal more normalized service levels and certainly we plan for a pretty a pretty healthy growth assumption in a number of those brands, we sit higher than our plan today for sure.
Primarily in a couple of brands.
Fortunately a lot of that being core product.
We have pockets of.
Area, we're a little bit higher than we'd like to be across the world, We're still a little bit higher in China than we'd like to be and Thats kind of a comment that Mike is applicable across a number of the brands and so we're going to be very.
Targeted and choice full but we're going to be aggressive to make sure. We are taking advantage of of traffic and giving our kind of fair share of the business in an appropriate way. So I think we feel like we have a good plan to manage our inventories back down pretty close to plan at year end, we'd probably still be a little high because there are certain core products.
Dickies Dickies products some of the biggest products in particular, just doesn't make sense to do anything other than just kind of kind of rightsize that over time with forward purchases, but.
So it will be little heavier in a few places, but we're going to be very focused on leaving this year clean setting us up for next year to have a strong and healthy margins, but also take advantage of.
The opportunity to generate both top and bottom line over the course of the next several months.
Great. That's helpful color best of luck.
Thank you Matt Thanks, Pat.
Thank you at this time I would like to turn the floor back over to Steve window for closing comments.
Okay. Thank you everybody and thank you for your questions and most importantly for your interest to close things out I'd like to reinforce a few points that I think are important for you to remember before we get the chance to engage with you again in January .
First thing is that we are going to continue to navigate the many macro challenges that we see today VF and our brands are sharply focused on taking the necessary actions to drive performance and deliver against our strategy and most importantly, our financial commitments.
Secondly is our businesses it remains to be very resilient with our overall full year revenue outlook holding Inc.
Importantly, we are performing well across our portfolio.
Certainly without the exception of bands, but the balance of our portfolio are growing low double digits in the first half with a line of sight to do the same as we move into the second half.
I think this is demonstrated certainly by the fact that we grew constant currency revenue and.
No.
Mostly in our outdoor brands, but the strength that we see in our emerging brands.
I think the importance that that shows you of our model and our portfolio strategy.
Yes.
I think last and I was just hammer home that we are going to remain extremely focused on those things that we control. We know what's required to ensure we deliver consistent sustainable and profitable growth and we have the right brands the right strategies and certainly the right people into place to get the job done and.
Most importantly, no one is more determined than this this leadership team and this organization to deliver on our expectations. So again. Thank you for joining us. Thank you for your interest and we look forward to updating you as we turned the corner into next year.
This concludes today's teleconference and webcast you may disconnect. Your lines at this time and thank you for your participation and have a great day.