Q1 2024 VF Corp Earnings Call
Greetings and welcome to VF Corporation's first quarter 2024 earnings call.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation.
Should require operator assistance during the call. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded at this time I would like to hand, the call over to Allegra Perry Vice President of Investor Relations. Thank you you may begin.
Good afternoon, and welcome to VF Corporation's first quarter fiscal 2020 for conference call participants on today's call. We 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.
The old 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.
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.
Joining me it will be <unk>, President and Chief Executive Officer Bracken Darrell.
<unk>, EVP and Chief Financial Officer, Matt Pocket not.
Matt will then host the question and answer session and we'll be joined by several VF executives.
Now handover to Bracken.
Hello, everyone I'm happy to join my first conference call as CEO .
While my role today will be a little more limited than what I'm used to given up on my 12 day here, Hi, I'm Super excited to be here.
These portfolio of globally powerful and iconic brands deeply embedded purpose and impressive talent all it gives me a lot of confidence.
The key ingredients needed to unlock the company's significant value potential and returned to strong sustainable and profitable growth.
I joined <unk> after 10 years as CEO of Logitech, we're proud to have overseen the transformation of the company grew its value tenfold we.
We did it by putting the customer at the center of everything we do.
Passionate about building brands through design and innovation focus.
With unique products and immersive storytelling consumer experiences elevated and so is growth.
Just roughly 10 days.
Already feel at home here.
I've spent time in our office in Denver.
With our brands based here and with many many of the associates.
I visited our European team is W. L.
It'll be in Costa Mesa vans offices Tomorrow morning.
I have been in our stores in Denver, San Francisco, New York, London and more cities.
Three of our stream stores around the world and mini vans and north face tours.
I talked to customers everywhere I go.
Started to dig into the brand equity data.
My conclusion is that our brands are as strong as I expected. Our team is loaded with talent our business is simply not performing at the level equal dose, but it's because of the things in our control.
I feel a strong sense of urgency with respect to the challenges we face and will collectively worked with team to get <unk> back on track through disciplined and thoughtful actions.
I'm looking forward to speaking with you all of you again at our Q2 earnings results to share My perspective on my first few months in the role.
This company has what it takes and I'm excited about the future and its ability to return to delivering strong shareholder returns.
I'll now turn it over to Matt to talk you through the quarter.
Thank you Bracken and welcome to VF Youre.
<unk> impressive track record and strong background in innovation and design brings a new dimension to leading VF and reinforces my confidence as we've turned the page to our next dynamic chapter.
I also wanted to extend our gratitude to benno.
The instrument and instrumental in laying a solid foundation for <unk> returned to strong sustainable and profitable growth are refocusing our efforts towards the consumer and by taking aggressive actions to strengthen the business operationally and financially and.
And personally a great partner to me.
We are fortunate to have them continuing as a valued member of the board.
I'm more confident than ever that with bracken as our new leader.
VF has everything it takes to succeed in the future.
Before I get into the business and financial results. Let me give you an update on our two most important near term priorities, we've been highlighting in recent quarters the.
The supply chain and van.
First in the supply chain, where we saw further progress during the quarter as industry conditions continued to improve and our own actions to address execution yielded results.
Lead times ended the quarter at normalized levels, while our on time performance and in stock percentages for both back in line with our targets.
We are efficient with quick and aggressive actions taken by the supply chain and brand teams to position us to now consistently meet our customers' expectation and maximize on the opportunities that present themselves in season.
Next vans, which was down 22% in the quarter and was disproportionately impacted by the brand's wholesale business in the Americas, which was down 40% as anticipated.
This includes additional actions we've taken to rightsize inventory in advance of the important back to school season.
We were encouraged by the results in China and in the digital business, which are both meaningfully improved relative to the prior quarter's trend versus last year.
While the brand's overall performance was largely anticipated if not where we should be and we remain intently focused on the actions to turn around the brand.
Now an update on the key focus areas of product consumer and go to market.
First and foremost product, we're increasing our level of investments create new relevant product cycle.
Tumors, while developing existing franchise that are working well.
Ultra range in MTBE silhouettes continued to outperform growing 13% and 39% in the quarter, respectively with newer lines, including New school and low land all generating strong sale throughs.
The soft launch of the Pinnacle range OTW during Paris fashion week in June create excitement and energy laying the groundwork for the full launch in early 2024.
Another key focus area. We've shared previously there is an opportunity to better understand and integrate the consumer into our decision making.
Our significant global segmentation refresh is on track and in the meantime, our vans family membership keeps growing now approaching 29 million members, adding 1 million members in Q1 and more than doubling in two years.
We continue to improve the vans go to market activities.
Our initiatives to sharpen our focus around fewer key products and stories are well underway and are benefiting the quality and productivity of our store assortments.
With our in store SKU reduction actions expected to be fully completed in August .
Well also be launching a redesign Vance dot com platform in time for the holiday season.
The answer is a great brand and we are confident and enduring strength and importantly, the energy and intensity that this leadership team is bringing to the effort every day.
Now turning to a review of the quarter.
Q1, our smallest quarter and facing the toughest prior year compare came in line with our expectations both on the top and bottom lines.
That said overall, our performance was not up to the standard we expect to achieve.
Revenue was down 8% in line with guidance and wholesale, particularly pressured the top line in the U S.
On a two year basis revenue was about flat.
Let me first unpack the performance by region.
Let me first unpack the performance by region.
Revenue in the Americas region was down 15% in the quarter, primarily due to the wholesale channel pressures we outlined in may.
These had an impact across most of the portfolio and in particular at vans and dickies.
The quarter's results were impacted by the right sizing of inventories across the channel and the implications of our poor customer service from last fall.
Our business in EMEA, which as you know has grown consistently and strongly also saw softer trends in the quarter with revenue in the region down 3% in Q1, driven by high single digit decline in wholesale as retailers grew more cautious.
Our direct to consumer business was up mid single digits in the quarter assign a resilient consumer demand for our brands and evidence of our continued strong execution of integrated go to market strategies.
Last we continue to see growing momentum in the APAC region with revenue up 18% all channels grew by double digits in the region with DPP fueled by brick and mortar traffic growth.
Greater China saw further acceleration of 31% and benefited from the comparison to the prior year Lockdown impacts.
<unk> space continues to be the key driver of our performance and was up more than 50% in greater China benefiting from outdoor market tailwind and recovering domestic travel.
Now, let me complete the picture of the brand's performance, starting with the North face where revenue was up 12% in the quarter against a tough prior year compare plus 37% and driven by broad based growth across products channels and regions.
Globally high demand for our icon as an example, the base camp vessel as well as the Voyager pack line generated very strong performance aided by the summer travel season.
Our lifestyle product the urban exploration line and our Rainwear also saw good momentum.
It was led by DTC driven by digital as the premium product innovation and sharp execution resonated with consumers.
Timberland was down 6% in the quarter in line with our expectations.
The brand was up against a tougher prior year compare and results were impacted by wholesale in the Americas as partners continued to produce inventory levels.
<unk> were positive in the other two regions.
Globally product innovation is resonating as the new hiking silhouette motion fixed delivered outsized sell through performance and we made good progress on womens with strong growth in sandals and apparel for her.
<unk> results were disappointing and significantly challenged during the quarter down 19% as the work segment continues to be impacted by a weaker value in consumer primarily in the U S.
Soft results in the Americas, and APAC were partially offset by continued growth in Europe .
Importantly, we have made progress on right sizing inventory levels in the channel.
Moving down the P&L Q1, gross margin was down 130 basis points.
As expected business mix remains a positive contributor to margin in the quarter up 80 basis points, driven primarily by DTC and international growth.
Rate was down 200 basis points more than offsetting mix benefits.
Reflecting the ongoing impact of higher promotions.
It's worth noting the negative impact is about one third of what it was over the previous two quarters.
Also higher product costs, which are moderating and which were partially offset by strategic pricing actions.
And finally negative currency impacts.
Adjusted operating margin was down 380 basis points, reflecting the impact of the lower gross margin and SG&A deleverage.
SG&A declined versus last year by 3% in constant dollars, which exhibits our focus on reducing costs and managing the P&L and times when the revenue line is under pressure.
SG&A Deleveraged 250 basis points in the quarter, reflecting DTC and other fixed cost deleverage. In addition to the impact of continued strategic investments in technology marketing and distribution.
Q1 loss per share was <unk> 15.
Also impacted by elevated interest expense and a modestly negative impact from tax.
Turning to the balance sheet and cash flow.
Start with inventory, where we saw further sequential progress in improving the overall health of our inventory position ending the quarter slightly ahead of our plan with inventories up 19% versus last year.
Compared to organic growth of about 46% at the end of the fiscal year and up 75% the quarter before that.
The increase in inventory now represents a true organic comparison as we fully lap the impact of the supply chain financing program implemented in Q1 of fiscal 'twenty three.
Inventory composition remains primarily core carryover and replenishment, which has a higher likelihood of being sold at full price or with a minimal markdown.
Cash from operations, which as a reminder is also benefiting from the extension of payment terms as part of the supply chain financing program was $164 million in the quarter.
We ended the quarter with roughly 3 billion in liquidity in line with our plan and about flat to the end of the fiscal year with free cash flow of $79 million in essence, offset by the dividend payment of $117 million.
As it relates to the outlet before I impact the numbers, let me give you a little context for how we see the balance of the year evolving.
We see several areas of strength worth calling out which gives us confidence as we look forward.
North face with maintaining strong momentum and we expect this to continue with investments being made to further fuel this growth.
Our China business is gaining momentum and we believe our brands have significant growth opportunities in this market, where we are underpenetrated.
Certainly the outdoor and travel part of the market continues to be strong and the north face is the number one international outdoor brand in China is driving and benefiting from that trend.
Our D to C trends in EMEA remained strong and in fact comp growth has accelerated in June and July .
Finally, we are seeing an improved performance in the supply chain, which will allow us to look to deliver the planned cash flow benefit from reducing inventories and capitalize on revenue opportunities as they present themselves through the balance of the year.
However, we continue to face a few meaningful headwinds.
Vance performance remains difficult as work to turnaround the brand continues with a great deal of urgency.
Our wholesale business, particularly in the U S remains challenging as our key partners maintain a more cautious stance on forward orders.
And the work segment at the Dickies business has remained softer for longer than we anticipated.
It's still early in the year and our teams across the business and working diligently to maximize the opportunities our brands have to deliver compelling experiences and product to consumers across channels and.
We have great confidence that we will see progressively improving results.
Now moving on to the specifics of our updated outlook.
We are revising our full year revenue expectations to be modestly down to flat as we take a more conservative posture on the balance of the year the.
The reason for the change in revenue outlook is based primarily on wholesale.
Despite the progress made in lowering inventory levels, our wholesale business remains pressured.
While our sellout trends are evolving favorably in the outdoor segment in particular element challenged across the segments.
The balance of the year, our order books have evolved a little more muted than previously anticipated in both the U S and Europe and reflect the continued cautious posture by many of our partners.
This has affected brands across the portfolio and is skewed disproportionately to vans.
As a result, we now expect wholesale across the app to be down mid to high single digits for the year with most of that pressure coming in our Americas business and to a lesser extent in Europe .
Alongside desk. However, we are encouraged by the trends in our DTC business and we continue to expect growth in this channel during the year, including in the U S.
Overall for VF, we continue to expect a better second half revenue performance relative to the first half, reflecting an improving wholesale performance moderating declines in band and easing prior year compares as we move through the back part of the year continuing to challenge challenges, we faced last year and our own poor execution, which muted our performance.
We are maintaining our EPS guidance range of $2 five to $2 25 for the year.
As a reminder, this includes a higher level of interest and a higher tax rate.
Worth highlighting the underlying operating earnings are anticipated to grow faster than EPS.
We achieved our earnings target in Q1, and highlight that we have a number of levers across margins and spending to protect profitability.
We continue to appropriately manage our costs and inventory position in order to protect the P&L and the balance sheet.
We are increasingly confident in our ability to deliver higher gross margins.
Year to go period will benefit from moderating promotions as we lapped last year's impacts.
Visibility clear visibility too easy product costs, including freight.
An increasingly favorable mix, reflecting the outperformance and strength of our DTC and international businesses.
This guidance takes into account our continued commit commitment to first investing in key capabilities, where we continue to see opportunities to fuel organic growth and focused on the areas that create value for our customers and consumers. Let me give you some examples.
Product innovation and demand creation at the north face with a higher spend as a percent of revenue.
The opening of the Ontario, California distribution center, our most highly automated facility that will allow us to more efficiently service orders and which will generate cost savings overtime at full scale.
The enhancement of our consumer facing digital ecosystem with the launch of an updated digital platform in the U S, which most of our brands have now migrated.
Second we continued to reduce cost aggressively where it's not adding value for the consumer and.
And some examples here include stopping technology spending that is not consumer facing or impacting.
Aggressively optimizing our distribution capacity considering reduced unit sales volumes.
And pausing discretionary spending as an example open roles that are not critical to revenue driving activities and brand building strategies.
Now let me give you a couple of updates on the drivers of cash flow. We continue to expect free cash flow in line with our plan driven both by growth in cash earnings and a reduction in working capital primarily from activities to reduce inventory levels and recognizing the full benefit of revised payment terms with our product suppliers as we migrate through fiscal year 'twenty.
Four.
Importantly, we expect inventory can be near to normalized levels by the end of this calendar year and down at least 10% year over year at the end of the fiscal year, which would equate to a reduction of about $250 million.
We maintained tight control and discipline on all capital spending and in light of business conditions, we paused lower priority projects.
Moving on to debt, we remain laser focused on reducing our leverage.
While we have ample liquidity and financial flexibility to pursue our key priorities are number one financial objective is to return to our historical balance sheet strength.
Accordingly, we will use any excess free cash flow to reduce debt.
You can be sure that any strategic decision we are making is through this land.
We expect to end this fiscal year with gross leverage of about four times and will continue to make progress on the path to moving toward our target of two five times.
Now you may have noticed I havent talked a lot about the macro environment in my comments we.
We remain intently focused on our own issues and on what we can control.
So much of what we have to do relies on fixing those issues.
At the same time, we're not oblivious to the external conditions and they do inform our near term tactics and strategies.
Environment itself remains difficult and volatile.
We recognize that many consumers are feeling impacts to their disposable income and are continuing to deal with inflation facing higher interest rates and in the U S. The upcoming into the student loan pulse.
In summary for fiscal year 'twenty four we're slightly more cautious on the evolution of revenue, but remain confident we will deliver increasing operating earnings to improve gross margins and strong cash flow together, enabling us to achieve our debt reduction targets, all leading to a strengthened financial position.
Finally, I'll give you an update on the timberland fax case, the latest development being that oral arguments occurred last week, which was sooner than we anticipated.
Disadvantage timeline indicates the first circuit Appeals court could issue an opinion as early as the next few months.
We previously expected decision could occur within this fiscal year and in light of the pace at which the oral arguments preceded it is now increasingly evident that this will be the case, we continue to believe the timing and treatment of the income inclusion that issue is appropriate.
Looking ahead to the future. We are confident that we have all the right ingredients to succeed and to return to our standard of delivering superior shareholder returns driven by strong sustainable and profitable growth.
We have a portfolio of world renowned and beloved brands, which are well positioned and big and growing spaces and continue to benefit from macro consumer tailwind.
We've taken significant actions to strengthen our business operationally and financially I am confident these initiatives will yield tangible benefits.
We continue to work to drive improved product margins, including better go to market efficiencies product cost optimization and strategic pricing actions.
These near and medium term actions combined with the ongoing focus to drive down costs, which are not consumer facing will support an expanding margin profile over time.
We remain committed to our purpose, which is at the heart of everything we do we will continue to remain central to our culture and to our strategy.
Our team of passionate highly scaled and deeply committed associates continues to be a key asset to unlocking our full potential.
In closing, we can and we will better harnessed the power and strength of <unk>, while continuing to focus on sharpening execution, optimizing earnings and cash flow and strengthening the balance sheet.
All of which will enable <unk> to begin to fulfill its full potential this year and beyond.
With that I will now be joined by several members of the team to answer your questions Martinez, probably guerrini, who runs our business in EMEA and APAC and in the emerging brands and our brand leaders from vans, the north face Timberland Supreme.
Kevin Daly, Nicole auto and Susie molder.
We'll now open the line and take your questions.
Thank you we will now be conducting a question and answer session.
Like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for your questions.
Our first questions come from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your questions.
Hi, good afternoon, everyone and Bracken welcome given your experience.
At your former company Logitech what is most similar what is most different as in the work to transform DFS and then Matt on the results today. It looks like wholesale was the weakness nearly everywhere how much of it was the impact overall in the Americas and Europe .
How does it differ by brand. Thank you.
Thanks, David I'm, not quite ready to start to make comparisons between.
The large tech.
I would just say.
Biggest surprise, so far as a whole by field.
No surprises yet so I'll I'll update you more.
At the end of next quarter.
Yes, Dana nice to speak with you you're right most of the most of the issues that we saw in our reported results. It certainly reside in the wholesale line and that's kind of what we expected I think we can kind of talk about that in may it is certainly.
An issue that's predominantly in the U S and in the Americas to some degree in Europe , obviously APAC not so much in APAC is the wholesale business is relatively smaller there. If you look at it across brands disproportionate impacts to the vans and dickies, which continue to be the two businesses that.
Are struggling the most from a sell through and sell out perspective.
The north face generally pretty pretty good and.
And timberland some timing issues with both of those brands. If you look at the outdoor segment generally I think youre going to see we see better results across the board and that's certainly the case in the wholesale business and and again, we see the more difficult results in those couple of brands that we continue to have challenges from a sellout perspective, and we've talked a lot about that.
All of our brands are having some having some impact from what's happening in the wholesale channel, particularly in the U S. As wholesalers are resetting inventories and thats been underway and in many cases, making good progress in other cases, it's taking a bit longer.
And that's kind of the cautious approach that they're taking the forward values, we're seeing that affect all of our businesses, but clearly when you have a business that is not selling through.
You gave them, even more reason to potentially be very cautious and pull back and we're seeing that certainly certainly the base business.
Got it and just one follow up as we move through the year and maintaining the guidance any puts and takes as you see it either top line or margin and the cadence of the remaining quarters.
Thank you yeah, Yeah sure thing so from a from a topline perspective, it'll it will sequentially get better.
Q2.
It will be less negative than where we were in Q1, we said from the beginning the first half of the year will be relatively.
Challenge given what we see in wholesale in that that that stays the same so we will see sequential improvement as we move through the year.
From a profitability standpoint, we hit our targets in the first quarter, our internal targets from a profitability standpoint in fact, we obviously hit our kind of where we thought we'd be from a revenue standpoint.
Step back and look at things that we increasingly confident in our ability to drive higher gross margins. This year and as we look at where we sit from an inventory standpoint, we're making really good progress a little bit ahead of schedule and reducing our inventories and kind of when I look at the overall health of our inventory and feel good about where we're positioned relative to where we've been certainly since they will see a moderating promote.
<unk> environment as our view moving forward, we know we're going to see that in our own channels and in the wholesale business.
Inventories are going to be down a lot and the fact that we're actually moderating our assumptions and wholesale means we're going to sell in less than that probably even helps that picture to some degree so feel good about where we're heading there and we'll see we'll begin to see benefits in terms of favorability on the promotional line I think as we move even over the next couple of quarters, yes, the benefits of a business mix will continue.
To be quite strong given kind of where the revenues coming from by geography and by channel and then I'd say, a clear visibility to easing easing product costs both.
Both in terms of <unk>, but in particular on the freight line. So.
So we will have some.
A little bit of benefit there as you think about the net the net impact of price versus cost so with more clarity and understanding where we sit feel good about margins and SG&A, we're going to be very careful we will continue to maintain a pretty pretty strict controls around around how we're spending our money and as we've shown even here in Q1 when revenue is a little more difficult it will be very prudent and careful.
Spending standpoint.
Thank you.
Thank you our next questions come from the line of Simeon Siegel with BMO capital markets. Please proceed with your questions.
Thanks, Hi, everyone. Good afternoon and welcome Steve.
So just maybe to elaborate a little bit more on how you view the promotional landscape.
Talk about what you can control or not but any any color. There that you can dig into and then sorry, if I missed it did you did you say what Dan's data see how that performed that would be helpful. Thank you.
Yes, we didn't we didn't say what <unk> was.
But let me let me, let me come back to that in terms of the promotions.
I think.
First and foremost the inventory positions are going to be a lot cleaner than where we were last year, we know where our own inventory position is.
As we head into the fall holiday season.
And with the actions that our partners have taken and obviously, what's contemplated in our in our outlook for the year with much with much lower wholesale volume.
We're going to be much better positioned there and remember too.
For us are our promotions last year and a level of discounts were impacted by some of our own self inflicted wounds right, where we were late and shipping and we had to offer.
Additional discounting to secure some of those volumes and so we're up against that and we are not going to repeat any of that given given where we sit today from an inventory standpoint, and really where the supply chain fits in their ability to service the business and deliver on time. So inventories are going to be cleaner certainly the wholesale marketplace is taking a more prudent and cautious approach.
Our internal view of inventories will be positioned us to be a lot cleaner I will say the one place where we will continue to be pretty aggressive in promotions and we've contemplated this in our outlook obviously as is in our own outlet stores.
That's where we're moving through the excesses and we've carried forward some excess inventory as we've talked about from last year. That's contemplated in how we're how we're filling those stores as we move through the balance of the year and so we'll continue to be pretty aggressive there, but it'll be more comparable to last year versus I would say worse and we will see nice benefits in our full price channels and in our wholesale business.
From a land standpoint in the first quarter, we were down right at double digit from a DTC perspective.
Got it. Thank you and then just lastly, if I can within the gross margin mix benefit any way to help think about whats coming from channel versus geography, and how to think about that going forward. Thank you.
Yeah, it's kind of it's kind of split relatively evenly.
Certainly our in our international business continues to be a growth driver for us and there's a nice margin benefit from that and then with D to C slightly negative in the quarter, but.
But a fairly wide margin away from wholesale.
You get a nice benefit so it's about equal between those two pieces of the business and moving forward. We delivered about 80 basis points of favorability in the first quarter as we move through the balance of the year.
Something in that range, maybe a little bit below that is probably the way to think about it.
Perfect. Thanks, so much guys Thats left for the rest of year.
Thank you. Our next question is coming from the line of Lauren vessel Luskin with BNP parabolic. Please proceed with your question good.
Good afternoon. Thank you very much for taking my question and back and great to have you on the call and we look forward to your updated thoughts in 90 days from now thank you.
Matt.
Thanks for all the color.
Wanted to follow up on on Dana's question, I think you alluded to.
<unk>, maybe slightly negative I see consensus.
Modeling for our revenues to be flat just so just for the audience. Maybe can you give a little bit more color just like guidance guideline.
Guidelines, Unlike how do we think about <unk>.
Revenues and then.
And then I have a follow up question on gross margins and SG&A.
Yes, so we don't have guidance for Q2, <unk>, so I'm not going to I'm not going to give you guidance.
But what I'll say is it'll be sequentially less negative I would also suggest that where we sit today.
We would expect a little bit more.
A slight benefit from currency.
On a reported basis in Q2, and certainly you can you can figure that out as you look at where rates are versus last year, but.
So sequentially less negative.
Also I would.
Mind, you that last year had some noise in it in Q2 right we were late shipping.
In particular in the outdoor segment, the north face and timberland and most prominently we relate delivering fall, we expect to be able to flow product for this fall and normally and we're positioned to certainly be able to set those floors at the right time and so there is some noise there as you think about.
Yes.
The flow of wholesale shipments, particularly in the outdoor segment between Q2 Q3, so something just to remind you as you think about the modeling but.
That's as far as I'm going to go.
No. Thank you Matt for that and then on the gross margin.
It sounds like it and tell us if we're wrong.
You're taking down the gross margin rate was supposed to be exceeding a 100 basis points for the year is it still the case.
And and maybe if you could give us some guardrails around how do you think gross margin should shake out for the year and then it's nice to see you on the SG&A front that you can protect that.
The earnings for this year, but the 3% decline in SG&A can you just maybe walk us through what drove that and how do we think about that for the balance of the year.
Yes sure so.
Margins would we still expect.
We didn't change anything there in my view up at least 100 basis points and actually my point, there would be increasingly confident in our ability to drive those higher gross margins and that's kind of the points I made I made earlier about how we see favorability and business mix that we saw in Q1 kind of continuing the promotional environment is going to.
Swing back in terms of that.
The comp is going to get kind of the tailwind of that begins even in the next quarter really Q2 to Q4 last year, we had well north of 200 basis points every quarter in fact 300 basis points or so in the last half last part of the year. So that comes back in our favor and even if we see a bit elevated level of promotions.
We're going to see improvement year over year, that's our expectation and then the product cost.
Eases and actually potentially becomes a tailwind in half two.
In terms of what we see and the good news is we have pretty clear visibility visibility now from a cost standpoint, all the way through the fiscal year. So those are a couple of points I'd make on margin, but confidence in where we sit today Ron I think it is the message I'd want you to take away.
SG&A certainly when we see revenue under pressure, we've got levers we can pull as we as we manage our controllable spending theres a lot of fixed costs in a business like ours, certainly, but there's a lot that's in our control to there's discretionary spending that we can pull levers against we.
We can stop things that we think in the short term are aren't having a significant impact on what we're trying to accomplish in executing with the consumer and with our customers. We've done that we're working aggressively to optimize things like distribution capacity I mentioned that but similar types of things when you think about where our revenue is under pressure.
How do you kind of rationalize where it makes sense across your footprint and your capacity in different areas.
And certainly things like just just pausing on projects that are longer term oriented to focus on the near term and the benefit there is costs, but also the benefit is focus and that's really important to us as well that we focus on the things that we've got to get fixed and we got to get right and actually it is.
It's kind of nice with us.
As we begin to work with bracket adhere to to kind of take a hard look at all of those things and that's something we're doing and certainly began to do in Q1 as we pulled back on some spending.
Very helpful. Thank you Matt for all the color.
Yeah, you got it thank you.
Thank you our next questions come from the line of Jay sole with UBS. Please proceed with your questions.
Great. Thank you so much I guess, if we can talk a little bit more about vans.
I think Kevin Bally Youre on the call.
If you go back to January maybe some of the opportunities that youre seeing maybe some of the green shoots I mean are those still have.
I mean, you talked about some like some of the newer footwear styles working better, but just give us an overall view of where things stand today with fans with the brand and the progress Youre, making turning around the brand it would be very helpful. Thank you.
Yes, Thank you Jay.
Go ahead Kevin.
To say one thing and then I'll turn it over to you and I know I know you will agree with this.
We're not looking for a quick fix in this business, we're setting up the brand for long term profitable growth and we're not going to sacrifice that objective.
That's really important in it.
It's taking is taking longer than we would've liked.
Certainly the results that we saw this quarter, even if it's what we expected it's not good it was poor.
Disappointing to see but the team is working aggressively against the right things.
To turn the brand around and I know you I know you want some details on that so Kevin maybe maybe unpack some of the things youre going after.
Yes, no thanks, Matt and Jay Youre spot on I think as Matt said certainly.
We're not happy delivering that kind of decline in the quarter. However, it was in line with our expectations as we anticipated that based on order book and what we are seeing a year ago or a little less than a year ago with the order book, but.
But that said as Matt said, we believe we can execute better and deliver better on our potential overall the indicators on the brand remains strong I think I said at Investor day, consumers, where really the piece that we needed to put at the front of our decision making.
We're still seeing stable considerations strong sentiment scores, Matt referenced our loyalty program. Its two times the size of two years ago. So that's part of it is solid as you asked about specifically the green shoots in product that really is where I put my first attention because products in this footwear and apparel space is such a long lead time issue.
And the new intros are working well so things that we address around style newness versatility comfort, which is what we had been hearing from our consumers, but not responding adequately enough too are starting to come to fruition with the products that we're bringing out like the new school like the low end like for Mary Jane.
Those are nice green shoots there is still small at this point and not enough to offset the decline we've seen in classics. However, the work we're doing in the background to bring bigger stories to the market faster that will deliver more results, we still feel really confident in.
And then as Matt referenced really leaning into expanding our franchises.
I think in the past our focus on classics was so big.
But it distorted our opportunities and what we're doing with things like the ultra range in the LTE growing at double digit Solta range, I think 13 for the quarter empty at 39% for the quarter, that's really where we believe there is a lot more opportunity to broaden our product meeting. So those are particularly important Matt referenced launching pinnacle and youll start to see that.
Spring when the line first really comes to market.
Then we have been continuing to work on consumer and getting really deep into understanding our segmentation study integrating consumer data and analytics into everything we do et cetera. Those are really our big priorities. However, we still believe execution is the opportunity and what we're doing with SKU reduction of $20 to 30% that'll be completed in August .
Our U S stores that changes store layouts simplifies the shopping experience for consumers, but still delivers on the business. We want to say overall I think the things. We said we're going to focus on are really working.
Got it. Thank you so much that's very helpful.
Absolutely.
Thank you. Our next question is come from the line of Jonathan Komp with Baird. Please proceed with your questions.
Yes, hi, Thank you welcome bracket and just maybe one follow up if I could your initial intuition just on the timeline too.
Turnaround any of that brand is tower in focus or implement some changes just curious to get your.
Your thoughts there and just more of a broader question Youre, obviously inheriting a financial plan for this year, but any thought to.
It's essentially a broader reset that would enable you to really accelerate some of the investments in the different areas of the business.
Yes, as I said, it's a little too early for me to respond to either one of those but what I would say is.
I am.
I said earlier.
Felt right at home the one the one or two things that I feel most excited about coming in here.
One the brands are even stronger than I expected.
It's nice to see on new we have strong brands that doesn't go through I feel really good about the brand equities and the potential of each brand and the people here are really strong.
I'm Super optimistic 12 business, so I'm not ready to start talking about what we're going to do next but but I'm really excited about about being here.
And I promise you I want to raise your question next quarter.
Understood and I appreciate that thank you.
Matt if I could follow up then on the DTC assumption for the year I think constant currency was down slightly for the quarter could you just give us more insight what you're planning for the year and especially for the vans business, what's what's needed in the second half in order to hit the guidance here.
Yes, certainly.
DTC was slightly negative in the quarter.
Of course, it's a smaller DTC quarter for us.
And as a bigger part of the quarter a bigger part of the total in the quarter, even if the business is declining.
Especially relative to the outdoor businesses that are certainly much more weighted.
Toward the latter part of the year, so there's that going on.
Look at kind of the underlying kind of carve out.
Vans, which obviously, we've talked a lot about the <unk> results in.
In Q1, I think we're up 7% for <unk>.
Total total VF and I don't think I know they were up 7%.
Q1, which is kind of in line with where we've been and.
And if you think about across the year, that's kind of the range that we're looking at.
From a from a DTC perspective.
Growth and growth across all regions and certainly.
Expecting to see growth in the <unk> business as we move through the year and we've talked about at some point in the year seeing here in the back half of the year seeing the vans business begin to grow that's certainly going to be driven by by the direct to consumer business. Now all of that is also impacted by the comps and the compares right. The compares get certainly.
Quite a bit easier for bands in particular.
But for some of our other brands as well as we move through the year. So DTC will be a growth driver for us for the year it will grow across regions and generally expect it to grow across brands.
That's helpful color I appreciate it thank you.
Yes. Thank you.
Thank you. Our next question is coming from the line of Brooke Roach with Goldman Sachs. Please proceed with your questions.
Good afternoon, and thank you so much for taking our question Bracken welcome and my question for Matt and I. Just wanted to just have one quick follow up on the vans business.
I'm curious, what you're seeing in vans, China, and the brand equity that youre seeing in that region as the market continues to reopen and APAC. This quarter was down a couple of percent in constant currency.
How is that Brian trending there what are the initiatives there and what's embedded in the China outlook for the vans brand into the back half and then maybe for Kevin as you think about vans America and the challenge that Youre seeing in classics relative to the green shoots that you're seeing in some of the new product lines is there any stabilization in trend in classics sell through relative to where it had been.
Trending as a result of some of these new initiatives that you've been implementing thank you.
I broke nicely nice to speak with you.
I'll take a little bit there, Kevin, but I'm actually also going to ask as Martina to chime in here because I know he is actually on the ground in China in the last few weeks and I spent time with the team there and certainly looking across all the brands and he's got his pulse on that so I think it would be interesting.
Certainly you would be interested to hear his perspective on vans in China. We certainly are seeing the business we saw growth in vans in China in the quarter. So so clearly we're in a better place there in terms of kind of the inventory reset that's been underway. So we're cautiously optimistic that we're in a place where we'll continue to see good results coming out of that region as we move forward across the year.
Overall in APAC, it's been Korea has been weaker for us in vans is a big one of our bigger businesses in Korea Korea has been more challenged.
But.
We're in a better place having today with vans in the region and particularly in China than we were.
Six months ago, Martina or anything you want to say about what's what's happening on the ground there with the team.
Yes, Thanks, Matt.
Hello Lucas.
First of all we see China in a positive <unk>. So Q1 was up in the high single digits for advanced in China, which is which is good news and I think when I was there a couple of weeks ago, what I hope to see is really as China reopens very strong engagement from consumers in stores and beyond.
All lines and don't forget that we are still underpenetrated in China, we thought that the hip growth consumer demographic. There. So so with a growing emerging middle class.
The big opportunity and at the same time.
As we.
Go back and saw and launch new products. We also drive local for local process, sorry, fellas. So the assets will also benefit from a stronger cobalt in particular from a stronger local execution and the recent tuck the design that we invested in creative and talk to actually to to design and <unk>.
Clients across China and Asia.
Going to drop new products also profile specifically in the second half of this year. So overall.
Sentiment in China is turning positive as defense movie opens in bank is part of that and Kevin maybe you want to add something.
The grain side.
Yes, I can just add on China broke and then I can talk specifically to classic, which you asked about I think Martino hit a lot of it localization is really key.
China being our newest market, we have to really build classics was and understood. The consumer understanding of the brand. However, they are very specific ask Martina said, we're leaning into localization to bring what they want from our product to the market.
I'd also say they recovered really quick from Covid on inventories with our partner stores and that really has given us the opportunity to start moving faster as Marcelino said achieved the kind of growth, we're seeing in China due to the C and.
And the last thing I'd really say there is really about scale <unk> has taken on a real life in China has that started to grow and the team ran a really strong go skateboarding day, and we're really leading there and we stood up escape school.
With one of the big digital players. So the team there is doing a lot Kansas is still not on trend from just search trends, but we're feeling good about where China is.
And how it's growing we see a lot more opportunity.
To get to your question on Americas, and stabilization on Classics, I think I said at Investor Day, we became over reliance on plastics and particularly on really just a couple of styles and that really was a big piece of power under performance and then we didn't have a strong product pipeline behind it. So what you see in these green shoots, albeit small right now.
The opportunity to start doing franchises beyond classics. So our focus really is to your point on stabilization is just that stabilize our classics business brings style iterations to the market around classics, which is where we're seeing success with our wholesale partners and our consumers want newness, but build more and more.
The product propositions around classics that are adjacent but relevant and give us a greater opportunity to diversify our product pipeline to the consumers. So stabilization of classic is absolutely critical as far as seeing it yet.
Not really yet because of the amount of product was in the marketplace.
Thank you.
Thank you our next questions come from the line of Ike Barra Chow with Wells Fargo. Please proceed with your questions.
Hey, Thanks for taking the question Matt.
Matt maybe you can you just help me with two questions first on Dickies. The decline you saw in the quarter.
A surprising was that versus your plan can you talk a little bit more about what's going in from a selling perspective to the mass channel over the last couple of months and then is there any update on the <unk> business is still something that you guys are.
<unk> to divest at some point this year, just kind of looking for an update there. Thanks.
Yes. Thanks.
I've got to take both of those.
I would say dickies was disappointing in the quarter Didnt meet our expectations.
Just to be Frank.
The business continues to be impacted by soft results in the Americas and the network channel sell through is falling short of expectations.
I think we continue to see kind of outsized impacts from some of the challenges in the marketplace that are impacting that.
That value in consumer.
A little more so than what we're seeing in other parts of our business.
If theres a bright spot to some degree our inventory positions are now.
And a pretty good place.
Particularly our largest account theyre in theyre in a better place.
If sell through improves across the pad and certainly for us for dickies were in a position that we can capitalize on that and we will we will see a nice replenishment a pop at some stage, but but to date the.
Underlying sell through has continued to be short of our expectations.
Europe continues to grow I think that's another day and driven by the lifestyle part of the business that's been important to us.
But ultimately we've got we've got to we've got work to do here to improve that that basic work business in the U S and ensure we're driving that business effectively and so that's that's a big focus of the team today as it relates to Pac's first first.
First off.
The business continues to perform well if anything is a little better in Q1.
Than we anticipated and it's set up for a really good back to school.
We remember we grew the topline nicely last year across the year top and bottom line and that continued into Q1. These brands continue to kind of have momentum and benefit from consumer trends, but I'd be remiss, if I didn't say, how happy and proud I am of the team and the work that they're doing not easy environment win.
What's going on around them with all the conversation that you ask about what is happening and they continue to do amazing work in that regard so really impressed by what's happening there and the process is continuing and it takes time, there's a lot of interests. We're progressing discussions with a number of parties and we'll be disciplined in the dealmaking, especially in light of where the businesses.
The results are good we are generating good growth, we're generating strengthening EBITDA.
Acknowledging where the capital markets are today, we're just not going to accept the valuation we're not comfortable with and until we find the right buyer for these brands.
At a valuation that we are happy with we will continue to be very discerning. So.
That's kind of the update I'd give you there.
Thanks, Matt and just one more quick one.
<unk> bands in the back half.
You've asked a few different ways, but I believe in May you had said you expected to return to growth in the back half and I believe your comments today.
Moderate the declines.
Do you expect bands to be growing in any quarter of this year or should we now start to think about next year, when the business potentially and flex the topline.
Yes.
In May we did not at least certainly not our intention we did not indicate that we were projecting growth in the back half of the year. What we've said consistently and I think we're still saying today is that we expect to see the business returned to growth at some point later this year inflect to growth and we haven't been specific on exactly when that is or or kind of what the order of <unk>.
Magnitude of that is but.
That's what we said.
Got it thank you.
Thank you. Our next question comes from the line of John Kernan with TD Cowen. Please proceed with your questions.
Excellent. Thanks for taking my question.
Matt just on the capital structure.
How are you approaching.
Capital allocation that dividend commitment.
Debt refinancing and you obviously have the potential sale of the backpack business, if valuations get better there.
Should we think about debt pay down dividend and overall capital allocations going forward.
Yes.
I would say nothing's really changed from our stance on this over over the last couple of quarters and certainly on the back of the cut in the dividend that we made a couple of quarters ago.
Our capital we're focused on ensuring we've got.
And the investments in the capital allocated to our organic portfolio.
If necessary to kind of drive the growth that we're planning in that business overtime. So big focus there for sure that we're not we're not choking the business and we're not.
As it relates to free cash flow.
Certainly dividend is something that we remain committed to.
And our target and our target is about a 50% payout.
That's kind of what we're targeting and we're in.
In line with that we think this year and kind of even if you look at it in terms of the percent of net income or free cash flow kind of both and then after that I would tell you that all excess free cash flow, we are using to pay down debt and reducing that is our number one financial priority I think I made that clear in the prepared comments.
That remains consistent.
As we think about the choices that we're making from a capital allocation everything is really through the lens of shrinking our balance sheet, which really goes to reducing debt and reducing leverage.
That's our primary focus.
Understood. That's helpful and just one quick follow up for Kevin.
And specifically on vans that when we see the pressure in the U S wholesale channel across a lot of brands at this point.
Just curious when do you think.
Open to buy dollars and maybe more.
Our risk appetite within that U S wholesale channel might start it's at.
Spring Summer next year like what's on the calendar when you start to look at the business. How do we think about the recovery in that U S wholesale channel.
Yes, John Thats, a good question and I think that's the way we're thinking about it is that the opportunity as we get into the back half of this year, where we're hearing some retailers.
You see all their reports as well inventory traffic promotions all affected business in general.
We've been focused on marketplace cleanup marketplace execution getting the newer product in their hands because that's what consumers are asking for so I think we still believe that's going to happen as we get into the back half of this fiscal year for us.
And I got to believe that things should start to stabilize in the marketplace as we turn the corner into spring Summer next year.
As Matt said the order of magnitude is always is a little hard right now with our wholesalers.
Alright, thanks, everybody and welcome.
Thank you.
Thank you our final question will come from the line of Adrienne <unk> with Barclays. Please proceed with your questions.
Great. Thank you very much and nice to meet you back in as well.
Matt.
Yes.
Matt.
G&A for you I guess.
I'm still a little confused and I made it to be not interpreting the comments correctly on the gross margin for the quarter.
The benefit from the mix of 80 basis points, but how did the free and the promotions come through the P&L in Q1, and then how should we think about the shaping of that for the rest of the quarters, knowing that freight is going to turn into a tailwind. That's number one and then number two can you talk about on TNF and the timing. So you made a comment.
And that last year Q2, you couldn't ship and then I think didn't have a lot of inventory.
Inventory and then you did ship in the third quarter Q1 is your smallest quarter. So I'm just trying to figure out how we should think about kind of the ebbs and flows a year on year changes in the TNF falls out there. Thank you.
Yeah, Thanks, Adrian so gross margin.
I think you've got it in terms of Q1 nice mix benefit 80 basis points.
Offset by a couple of hundred basis points of negative rate, which is which is about evenly split between promotions.
And FX.
Product costs were a bit of a negative but that was largely offset by pricing and to your point.
Point that I made product costs are easing as we move through the year on the back of freight in particular and eventually we think become a modest tailwind certainly in the back half of the year. That's how it that's how I would characterize that.
As it relates to the north face and they May ask Nicole just to chime in here on a couple of things really around just kind of kind of where we are in the trajectory of things, but yes. There is some timing issues.
Little bit between Q2, and Q3 that will will navigate.
Last year, we were late shipping.
And so we shipped a little bit more in Q3 versus Q2 than we might normally ship.
And the good news is we're well positioned this year to ship and a more optimal way which is.
We'll work our way through what that means in terms of the result, as we get there, but most importantly, it positions us to be on the floor and have those floor sets for fall.
To maximize full price selling so anything you want to add there Nicole I, just think we had a little bit of a timing issue between.
<unk> in Q1 in our result.
But as you said, we were going to monitor our operational and our sell through performance as we look at Q2, and Q3 together and normalize over the few quarters.
Really trying to hit the key dates for back to school and holiday are stocked with our partners and of course without that.
Okay Super helpful. Thank you very much best of luck.
Thank you.
Thank you we have reached the end of our question and answer.
The session.
That does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.