VF Corp (VFC) — Q1 2015 Earnings Call Transcript

Thank you, operator, and good morning to everyone, and thanks for joining us on our call today to discuss VF's first quarter 2015 results. Before we begin, I'd like to remind everybody that participants on this call will make forward-looking statements. These statements are based on current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in documents filed regularly with the SEC. I would also like to let everyone know that unless otherwise noted, amounts that our participants refer to on today's call will be in currency neutral terms. By our definition, which is detailed in our press release issued at 7 AM Eastern this morning, currency neutral amounts exclude both the impact of translating foreign currencies into U.S. dollars and the impact of currency rate changes on foreign currency denominated transactions. You may also hear us refer to reported amounts which are in accordance with U.S. GAAP and include translation and transactional impacts from foreign currency exchange rates. We've chosen these currency neutral amounts as a lead number in our discussions, because we feel they more accurately represent the true operational performance in underlying results of our business and brands. Reconciliations of GAAP measures to currency neutral amounts can be found in the supplemental financial information included within the press release, which identifies and quantifies all excluded items. Joining us on today's call will be Chairman, President and CEO, Eric Wiseman; Scott Roe, our CFO; and VF Executives, Scott Baxter, Steve Rendle, and Karl Heinz Salzburger. Following our prepared remarks, we'll open the call for questions and ask that you please limit yourself to two questions per caller. Thank you and now, I'll turn the call to Eric.

Thanks, Lance. Good morning, everyone, and thank you for joining us today. You once hear us speak about consistency in VF's financial performance and the strength of our business model about our powerful brands and our powerful platforms, which work together to deliver strong returns to our shareholders. Along with consistency, we also underscore the confidence we have in our ability to execute against our long-term goals while delivering near-term results. I am happy to report that our fundamental business is incredibly strong and the momentum we've established continues to build. In fact, our performance in the first quarter of 2015 clearly demonstrates how we're expanding on that momentum. Currency neutral revenue, gross margin, and earnings showed strong gains during the quarter, making it a terrific start to the year. Taking a look at our operational highlights, which are currency neutral, revenue was up 8% with growth in nine of our 10 largest brands, four of our five coalitions direct-to-consumer and wholesale, and in every region around the world. Our Outdoor & Action Sports coalition was up 10%, we also saw solid growth from our Jeanswear coalition with a 6% increase and our Imagewear coalition which grew by 8%. And congratulations to the Eastpac team, which was VF's fastest growing brand in the quarter. Our direct-to-consumer business grew 11% and included mid-single-digit comps. Our international business grew 9%, with Europe up 4%, Asia up 17%, and a 16% increase from our Americas non-U.S. region. Gross margin, which I'll discuss on a reported basis, was 49% in line with our expectations and, not surprisingly, held back by the continued strengthening of the U.S. dollar, actually by about 50 basis points in the quarter. All of which led to 13% earnings per share growth for the first quarter, indeed a very strong start to our year. Since the last time we spoke, the U.S. dollar has continued to strengthen against global currencies, in fact, the euro to dollar relationship, which is VF's most significant foreign currency exposure, was as high as 1.21 and as low as 1.05; that volatility, along with all new assumptions, has produced a negative $0.06 impact to our earnings for the full year. Yet even with these additional headwinds, I am proud to report that on a GAAP basis, there is no change to our expectations for 3% revenue growth or a 49.2% gross margin rate and 4% EPS growth to $3.20 per share in 2015. Now take out the impact of currency and our expectations for 8% revenue growth and a 49.5% gross margin rate also remain unchanged. However, due to underlying brand and operational strength and greater visibility to how the full year should play out, we're now raising our full year currency neutral earnings growth expectation to 14%, up from the 12% outlook we gave in February. This growth rate would of course be ahead of our 2017 plan for the second year in a row and clearly a bullish statement about our outlook for VF. In summary, while macroeconomic, geopolitical, and currency challenges continue to make headlines, the things we can't control, we have great confidence that we are in command of the things we can control: our brands, our platforms, and our operational disciplines, all of which empower us to deliver consistent, sustainable, and profitable growth to our shareholders. 2015 is off to a great start. We've got our heads down and are executing well against our plans. We are confident. So with that, I'll turn the call over to Steve, Karl Heinz, and Scott to take us through our five largest brands, and then Scott Roe, certainly not new to VF but new to this world, will go to our financial results. So Steve, it's over to you.

Thanks, Eric. Revenues for the North Face in the first quarter were up 7%, which was in line with our expectations and included growth in all regions and channels. Globally, we saw particular strength in our D2C business with revenues up 20%. Exiting the fall winter season, inventories in our stores as well as our wholesale partners are very clean with excellent sell-through as the colder weather wrapped around the world. Looking towards the coming fall winter season, the brand's order book is in line with expectations and we feel very confident in our ability to deliver low double-digit global growth for the full year. Now, back to the quarter. In the Americas, revenues were up at a mid-single-digit rate with D2C up more than 10%, including strong growth in our e-commerce business driven by solid increases in both traffic and conversion. And speaking of e-com, we're getting ready to re-launch new websites for both the North Face and JanSport this month, bringing them onto the same newly upgraded platform as Vans and Timberland - a great example of our one VF approach as we leverage core competencies within centers of excellence across our portfolio. During the quarter, ThermoBall continued to build even greater momentum with triple-digit growth at both wholesale and D2C. We also launched the North Face's FuseForm technology a bit more broadly with the Dot Matrix jacket and Ultra-Light Rain Shell that utilizes our revolutionary reading process to form multiple fiber types into a single fabrication to maximize functionality and performance. The launch was supported by a meaningful increase in demand creation to inform and amplify connections with consumers. The performance of the product and feedback from consumers thus far has been solid. We are encouraged as we look to continue to build momentum this fall with an even broader exposure in the re-launch of our summer series collection. We're also increasing demand creation investments for the North Face's Mountain Athletic training collection including our first ever spring TV commercial. Launched only a year ago, the line continues to gain momentum and is helping further shift the consideration set of existing and new consumers towards the North Face as a four-season brand. This year's collection also includes women's products for the first time. Now to Karl Heinz.

Thanks, Steve, and good morning. The North Face's international business was up at a low double-digit rate driven by more than 30% growth in D2C revenues. In Europe, revenues were up at a high single-digit rate driven by significant strength in our D2C business and comps greater than 25%. During the quarter, we celebrated 30 years with our anniversary Mountain Jacket to great success and saw continued momentum from our ThermoBall, FuseForm, and running footwear products. In Asia, revenues were up at a low double-digit rate with both wholesale and D2C showing solid growth. A few highlights included launching our first-ever Chinese New Year collection and a collaboration with Tmall to promote our TNF 100 event on ultra-marathon trade running race. Based on feedback from both of these efforts, we have great confidence about how we are positioning the brand, and it is a very important goal for market. Overall, we continue to feel really good about the North Face's international business and our global outlook for the full year. Now let's turn to Vans.

The Vans strong momentum continued with global revenues up 16% and balanced strength in both D2C and wholesale. This marks the brand's 22nd consecutive quarter of double-digit growth—that's five and a half years—another amazing result from this team. In the Americas, revenues were up at a high teen rate with mid-teen growth in D2C and more than 20% growth in our wholesale business. We saw very strong growth in both footwear and apparel and are very excited to see significant momentum in one of our newest categories and lines, the mountain addition collection. Designed for the elements, mountain addition products still look just like iconic Vans products, but feature weather-proofing, heat retention, and traction technology as well. This is a critical growth strategy for Vans as we seek to become more meaningful in all four seasons, especially when cold and wet weather sets in and people tend to think less about canvas. And after selling out of the entire line in its first season, demand for this coming fall winter is very strong. We also continue to find interactive, innovative ways to bring the Vans brand to life and are seeing the creative expressions in art, music, action sports, and street culture. A great example of this is the continued expansion of our House of Vans concept using pop-ups at exciting events like the South by Southwest Music Festival in Austin and the SIA Tradeshow in Denver. And finally, to sneak this in a bit ahead of time, next year is a big year for the Vans brand given their 50th anniversary, so we're already gearing up to celebrate in a way that only Vans can do. Definitely stay tuned for this one.

Vans' international business was up at a mid-teen rate, driven by balanced wholesale and DTC results. In Europe, revenue grew at a mid-single-digit rate, driven by more than 20% growth in DTC and solid results in our wholesale business. Key footwear product highlights included a great performance from our enhanced comfort ISO collection as well as strong response to our printed styles. We also have strong growth in our apparel and accessory lines driven by DTC and wholesale. Both men and women's products are showing strong momentum with double-digit pace. We also continue to engage consumers through unique events such as Vans Snow Day and High Standard—all fantastic ways we're bringing the Vans brand to even more European consumers. In Asia, Vans continued to outperform with revenue increasing more than 45% and equally strong DTC and wholesale growth. Momentum continues in this region due to smart localized products, especially in apparel, relevant brand-right demand creation investments, events that speak to the authenticity of our brand, and a really sharp presentation at retail. The business is firing on all cylinders in an ecosystem that has the consumer at the center of everything it does. So overall, really great momentum at Vans and globally we've continued to see a mid-teen increase in revenues for the full year and now on to Timberland.

Timberland revenues were up 10% driven by a mid-teen increase in global wholesale sales. The Americas recorded its sixth consecutive quarter of double-digit growth with revenues up at a high teen rate driven by nearly 30% wholesale growth and this resulted balanced with gains across the portfolio including both men's and women's in footwear and apparel. In footwear, it's been particularly exciting to see continued momentum in our women's collection as new products hit the mark in terms of style, relevance, and trend. In our industrial Pro line, the Pro Boondock and Powertrain collections had especially strong results as work consumers continue to respond favorably to these new innovative platforms. On the demand creation side, Timberland continues to drive brand heat and relevance through its Mark Makers program. For seasons now, the brand has been outfitting influential trendsetters from head to toe and creating compelling content to engage consumers across multiple media platforms. And finally, as I mentioned earlier, we just launched Timberland's new website on April 14, marrying great content with new functionality to create a holistic brand and product experience for Timberland outdoor lifestyle consumers. So far, we're very encouraged by the early results, especially related to traffic and conversion. So, continued success, balanced growth, and amazing product—all reasons we continue to be very bullish on Timberland.

Timberland's international revenues were up at the low single-digit rate. In Europe, revenues were also up at a low single-digit rate. The men's business since reflects Sensorflex and Cupsole products continue to build on the strong momentum from last year and casuals began to gain traction on the women's side. Our new website has seen very positive early results, a great indicator that our one VF approach has meaningful global benefit. Turning to Asia, revenues increased at high single-digit rate with strong wholesale growth. A couple of highlights included our new catalogue out sole boots and the new boots in particular that had great marketing support. Additionally, apparel had a strong quarter driven by outerwear and tops. For the full year, global Timberland is right on track to grow revenues at a low teen percentage rate. Now let's turn to Scott and Jeanswear.

Thanks, K.H. Our global Jeanswear business was up 6% with positive results in all three regions, wholesale and DTC in both the Wrangler and Lee brands. In the Americas region, Jeanswear revenues were up at a mid-single-digit rate despite ongoing challenges and softness in the overall denim market. Revenues for Wrangler in the Americas were up at a low double-digit rate. In the mass channel, we saw continued momentum driven by new products, improved brand presentation, and category expansion, which created higher demand and conversion in our core pants business. Additionally, the expansion of our lifestyle products including broader offerings in both men's and women's tops gives us confidence that we're on track for meaningful growth in this important channel in 2015. In our Western business, customers are responding well to our new product introductions including the advanced comfort line, which will see greater mid-tier expansion in the second quarter. We've also seen positive reaction to our expanded Western performance platform with the launch of our Cool Vantage line—a jeans for hot weather that maximizes breathability for work or play. And on the workwear side, our new Wrangler Riggs campaign that features some exciting new products has been a big win with both retailers and in consumer tests, giving us confidence as we roll this out nationally. Turning to Lee, the Americas business was down slightly, yet we are encouraged by strong seasonal sales and continued momentum of our modern series products for both male and female consumers with continued traction in our department store business and enhanced demand creation support especially for the crucial fall season. We expect this brand to show slight growth over last year. K.H.?

Our international Jeanswear business was up at the mid-single-digit rate driven by a mid-single-digit increase in Europe and a high single-digit increase in Asia. In Europe, the Keeps You Cool product continues to drive outstanding performance for the Wrangler business and we've also seen initial strong response to our born and ready platform. In Lee, we saw brand momentum continue, which led to our eighth consecutive quarter of revenue increases in the region. We are also excited to report that our women's business has returned to double-digit growth driven by a number of new product initiatives. In Asia, our Wrangler business continued to focus on the denim performance range launching new finishers including water-repellent and dust-proof styles. At Lee, we continue to see strong reception for our key product collection stores and introduced new assortments in a number of lines during the quarter. In summary, we're off to a great start to 2015 in our global Jeanswear business and expect momentum to continue throughout the year to reach our target of low single-digit revenue growth. And now back to Scott on Imagewear.

Thanks, K.H. Our Imagewear coalition posted strong revenue growth of 8% in the first quarter driven by mid-teen growth in our workwear business, particularly the Red Kap brand. With a very strong start to the year, we're on track for mid-single-digit revenue growth in 2015. Now over to Scott Roe for our financials.

Thanks, Scott. Well, that sure is a lot for a CFO to like in this quarter. Our diverse portfolio of brands continues to thrive based on innovative products, connecting with consumers where, when, and how they shop, and the amazing opportunity that we have to expand our business around the world looks more robust. In our first quarter, revenues on a currency neutral basis were up 8%, and as Eric mentioned, we saw growth in nine of our 10 largest brands, four of our five coalitions, and in every region around the world. By channel, our direct-to-consumer business grew by 11% and we saw a high single-digit increase in sales to our wholesale customers. The Outdoor and Action Sports coalition continues to lead the way, and the Jeanswear and Imagewear businesses maintained the momentum we saw at the end of 2014. Growth in all regions, all channels, and across multiple coalitions underscores the power of VF's portfolio. As expected, our gross margin rate was down 40 basis points to 49% in the quarter due to the negative impact of foreign currency; however, to give a bit more context around this, on the plus side and in line with our expectations, our typical mix benefit of about 60 basis points from our highest margin businesses was closer to 40 basis points as strong growth in Jeanswear and Imagewear, which carry relatively lower margins tempered our normal mix benefit. More than offsetting this mix benefit was about 30 basis points of higher cost due in part to timing factors we discussed during our last call and about 50 basis points of foreign currency headwinds driven by the continued strengthening of the U.S. dollar. In fact, with an average euro rate of 1.12 versus 1.37 in the first quarter of 2015 and 2014 respectively, it was one of the largest movements we've seen since the financial crisis of 2008. Despite the strengthening of the Swiss franc which added nearly 20 basis points of expense in the quarter, our SG&A as a percentage of revenues was about flat. This demonstrates the power of our business model as we continue to invest in D2C and demand creation while leveraging other expenses. First quarter operating margin was 14%, which includes a negative 70 basis points impact from currency headwind. Carrying that down, currency neutral earnings per share increased 13%. On a reported basis, EPS was in line with last year's first quarter. Now taking a look at our performance by coalition, revenues for Outdoor and Action Sports were up 10% on a currency neutral basis, and an even stronger result when you consider this quarter was negatively impacted by the 53rd week which traded a very strong retail week in early January for a relatively weaker week in early April; yet, we saw solid growth in both our wholesale and D2C businesses including positive results from nearly every brand and double-digit growth in Vans, Timberland, and a high single-digit increase for North Face. 2015 is right on track. Reported operating income for the coalition declined 5% and operating margin came in 120 basis points lower than last year at 16.2% predominantly due to changes in foreign currency rates as nearly half of the Outdoor Action Sports business in the quarter was outside of the U.S. The decline was also related to the impact from the 53rd week and our increased D2C investments including 116 additional retail stores compared with the same period last year. As we've seen during the past few years, the addition of stores earlier in the year pressures earnings in the first half while paying off in the second half as we entered the peak retail season. For the full year, there is no change to our expectation that currency neutral revenues for the Outdoor and Action Sports coalition will grow at a low double-digit rate. Turning to Jeanswear, revenues were up 6% currency neutral and included positive global results for both Wrangler and Lee. Reported operating income grew 2% and operating margin increased 20 basis points to 18.9%. We are really pleased with Jeanswear's performance and remain confident in our ability to achieve low single-digit growth for the full year. Results in our Imagewear business were strong with 8% currency neutral revenue growth driven in part by our Red Kap business. Reported operating income for the coalition was up 9%, which resulted in a 30 basis point expansion in operating margin. As the year plays out, we expect revenue growth rates for Imagewear to be more consistent with our full year expectation of mid-single-digit growth. Our Sportswear business grew 3% reflecting similar increases in both wholesale and D2C channels and a high single-digit increase in revenues from Kipling. Operating income was up slightly and operating margin was in line with last year's results. For the balance of the year, we expect a similar growth rate to close out the first half and the full year to remain on track with our expectation for a mid-single-digit increase in revenue. Our Contemporary Brands business continues to experience challenging consumer demand for premium denim and women's contemporary apparel which resulted in a 7% currency neutral decline in revenues and a decline in profitability. We continue to expect about flat results on a year-over-year basis for this coalition. Turning now to our balance sheet, our inventories were up 7%, right in line with expectations. During the first quarter, we bought back 10 million shares for a total of approximately $730 million. There are currently no plans to purchase additional shares in 2015. We also made a discretionary contribution of $250 million to our U.S. pension plan which is now fully funded, something we are proud to report. So let's turn to our full year outlook now and we'll start with currency, since it plays such a central role in this year's story. In February, we laid out our assumption of a 1.30 to U.S. dollar relationship, with the direction that a $0.05 move in the euro on a full year basis would need an impact on revenues of about $125 million and $0.05 per share on our EPS. Now with one quarter behind us and a revised euro to U.S. dollar assumption of 1.10 for the balance of the year, our $0.05 move in the euro would mean an impact on revenues of about $80 million or $0.04 per share in EPS. Keep in mind that other currencies have also continued to devalue against the U.S. dollar. However, the euro remains our most significant exposure and as a reminder, our first and third quarters are the largest for our international businesses and therefore a stronger dollar would have the most significant impact on our results during those periods. Using the 1.10 to dollar assumption, there is obviously some impact on our expected full year reported results. So let's take a look now at how that flows through the P&L. At the top line, there is no change to the outlook we gave in February. We continue to expect currency neutral revenues to be up 8% in 2015, which is in line with the growth rate we laid out in our 2017 plan. And we expect reported revenues to be up 3%, putting us at about $12.7 billion for the year. Our full year currency neutral gross margin assumption remains about unchanged at 49.5%, which would be equal to our 2017 target two years ahead of plan. Independent of foreign currency, the annual expansion in gross margin of about 60 basis points, primarily from the favorable mix shifts that we've seen for so many years remains intact. Despite even greater strengthening into the U.S. dollar, we continue to expect that same 49.2% gross margin rate for the full year on a reported basis, all of which takes us to the bottom line. On a reported basis, despite an additional $0.06 negative impact from changes in foreign currency—about half of which relate to the euro and the balance relates to other currencies—we expect 4% EPS growth to $3.20 compared with last year's adjusted EPS of $3.08. This means we are taking up our full year currency neutral EPS outlook to 14%, that's two more points of growth than our previous outlook, once again putting us ahead of our 2017 pace. So what gives us confidence in our ability to absorb $0.06 of currency impact? First, the continued momentum that our brands are realizing around the world and the underlying strength that these brands provide sound footing for the year. Second, with four months behind us, fall order books in hand and more visibility into our second half, we are even more confident in how our story should play out over the year. Greater visibility, coupled with a solid first quarter has built confidence. Confidence in our business model that continues to deliver consistent results even in a dynamic environment. And with that, I'll turn it back over to the operator for your questions.

I guess I had two questions. The first one is on the inventories; when you look at sort of the revenue base in real dollars and then the inventory levels, can you just talk us through how you're balancing those numbers? With inventories up seven and the revenues up two, just sort of reconcile that for us a little bit?

This is Scott, I'll take that. Matching supply and demand in any case is difficult, and it was particularly difficult in the first quarter given the disruptions relative to the port strike. We generally manage through that very well; we saw that coming, we did things like extend lead times in some cases, broaden inventory early. And you really didn't hear us talk about the impact to our quarter for the port strike—that's because it was relatively significant. Sure we have some disruption, but it was minimal and not big enough to talk about. So as it relates to the inventory, we see we are very confident in the quality of the inventory; it's matched with future orders, and as a matter of fact our days are down slightly compared to a year ago.

And I just have a question on the jeanswear business. Scott, can you elaborate a little bit on the Americas business, I guess specifically the Wrangler and the mass business? What's going on there? Those numbers are quite impressive, so if you could elaborate a little bit that would be helpful for us.

Over the last couple of years you've heard me talk a lot about our product and our product engine, our innovations, our demand creation. What you're seeing is a combination of a lot of hard work from the Wrangler team on new product innovations that have come to light. So you've got advance comfort, heavily touched, a couple of just examples that have now gained broad distribution within the mass channel. And then with our demand creation platform, the consumer has really taken those products—both male and female—and then in addition to that, if we're speaking just specifically in that channel, in the mass channel, we've got a really strong selection this year from the seasonal standpoint. So our consumer has loved our assortment and the takeout has been fantastic; so more to come in the future. We feel really good about where the business is, feel really good about our innovation pipeline and the products that are in that, and we'll continue with a more assortment, more product innovations, and better distribution within the products that I just spoke of.

Scott, just a little bit more color on direct-to-consumer perhaps. You guys plan that business to grow I think double digits this year versus only five in the quarter, You mentioned that store growth rate would accelerate a little bit. But there are some pretty big comparisons coming in the back half. Can you walk us through some of the big line items like footage cadence and comp sales to get back to the run rate that you pointed for the year?

Yes, I guess first just in terms of some stats, we're going to open about 125 stores this year on an annual basis. From a comp standpoint, we're more or less the same as we saw last year, a little better than acceleration, and obviously that's in the back half of the year during the peak season.

And Michael, one way you can think about that is we're going to have a 125 net new stores open this year, so that will help us. We also have a lot of topmost stores going into the first half of this year. The way we've talked about comps is overall comps are in the mid to single, so low to mid single digits. But it varies by geography, obviously much stronger in the Asia Pacific region than in the United States, and all that's really about our brick-and-mortar stores. You have to remember that our e-com business is going to grow by over 30% as it has the last few years, and we expect it to happen this year too. So that's a really strong horse pulling that wagon for us.

And then just one quick follow-up, Scott. Hate to do this to you, but I'm going to ask you to ask you to one of Bob's comment some last quarter—last quarter Bob mentioned it—you guys have mentioned him a few times—that you'll be at your 2017 guidance for the gross margin by the end of this year and made a lot of progress on that early. So as we look into next year, Bob mentioned that obviously he doesn't want us flatlining on our longer-term model starting in 2016, just flatlining the gross margin. So he said to us, I believe, to still expect the 50 to 70 basis points of gross margin expansion per year that you guys guided to in your Analyst Day. We are all staring at the gross margin pressure, and we've heard from other companies that the transactional pressure will have an impact in the first half of 2016. So are you guys going to see the same dynamics on gross margin from FX as your hedges roll off into the first half of '16? And then how do we get to the expanded gross margin reported rate next year if that is the case? Thanks.

You partially answered the question in the way you asked it, because we will see that 60 basis points, plus or minus mix benefit, going forward. We've seen that for the last several years, and there is no reason we wouldn't expect that going forward now. We're not going to give guidance on 2016; it's not time for that. But in general, of course if the euro were to stay where it is today—and few can predict that you are better than anybody else—sure that would have some pressure. On the other hand, we've talked about input costs generally are lessening, and of course, we always have pricing levers that we can pull, which we have in the past. So again, I can't give you exact guidance on '16, but we would say the mix there is no reason that mix benefit won't continue to be there, and there are many other levers besides currency which will be impacting our 2016 guidance.

I appreciate the commentary on the outlook for 2015 and the raising of guidance on the bottom line. But I think one of the reasons why you are raising it because you have more confidence in what you're seeing for the later part of the year. But I don't think revenue guidance is going up. So can you reconcile that for us?

Yes, so you're right, Kate, we have maintained the 8% currency neutral and 3% as reported. But that confidence within that obviously we're feeling better about the year, and that means that we see some slight improvement on the top line if you are trying to model that out. It's not enough to change the overall guidance, but yes, we're feeling more bullish, and that really should translate into a little bit better top line.

And then my second question is on contemporary. Down quarter but guiding flat for the year. Could you walk us through the cadence of growth for the rest of the year and what's giving you confidence of accomplishing that in the contemporary category?

Kate, this is Steve. So, contemporary, as we mentioned, continues to see pressure in the sectors that they do business in—specifically women's premium and men's and women's premium denim and women's contemporary. As last year, we saw our D2C as a bright spot in our go-to-market in our ability to tell our stories to our consumers in a really clear and productive way. We're seeing strength in some of our wholesale partners, which is giving us confidence this year to couple with our D2C carrying forward into the balance of the year. And really good balanced growth between both 7 For All Mankind and Splendid Ella Moss is giving us confidence that we'll be in that flat range from a full year standpoint.

So, you have three brands that are all more or less around the $2 billion level today. Can you guys talk about market share penetration today and broader growth in each category as we think about the longer-term complexion of your portfolio?

I will take this one. I'm going to try to pull some things out of my memory bank. North Face at about $2.3 billion. We've come out and stated it really operates in a market that's about $26 billion in total in that outdoor performance category—that will put them in an 8% share. Vans is just over $2 billion, pressing that mark last year; action sports at a $29 billion market has been around that 7% range, and Timberland approaching $2 billion at $1.8 in that outdoor lifestyle category—we have somewhere around $36 billion, so quick math would say that's mid-single-digit market share. What we don't capture in that is the athletic, training, lifestyle, and some of the youth culture numbers. And if we were to layer that in against each one of those three segments, each one of them would be about $70 billion in total, which really translates into a lot of headroom for each one of these brands in their respective sectors.

So, as you think over the next couple of years—over the long term, I mean, it seems like there is the ability that every single one of these brands could potentially double. Is that out of the realm a possibility?

It's absolutely not out of the realm of possibility. I think as we spoke to you at our Investors Day, we really laid out those strategies that are deeply embedded in our knowledge of our consumer and how that informs product and demand creation in our go-to-market with our D2C. We are extremely confident in these three brands continuing to grow but also taking that knowledge that we've developed with these three brands and applying it to other brands within our portfolio. I think you see some of that going on right now with our Wrangler brand, and you will see that really coming to life in other brands like Kipling and such.

Matthew, this is Scott. I'll take that one. First, you are correct, the CP balances are seasonal—that's really what that is. It's a seasonal timing issue. We will be out of CP by the end of the year, and that's just the way that the ups and flows come through the year. And as would be typical, we're a little ahead of where we were last year, but we'll be out of that by the end of the year. As it relates to capital allocation, really no change in the way we've talked about that. Acquisitions remain our first priority, followed by dividends, and we've said consistently and we demonstrated we won't accumulate cash. So in the event that one of the first two levers are not available, then we would look at returning that to shareholders through repurchase, which we have done over the last two years.

I have two sourcing-related questions. First is on input costs. I think Scott mentioned that input costs were up a bit during the quarter. What are you seeing in terms of input costs going forward? Do you anticipate a benefit in the second half of 2015 regarding cotton and oil-based synthetics? And if that's the case, could you potentially quantify it?

Scott here, and I will take that, Laurent. What we're seeing is that we did indeed see a higher input cost in the first quarter, and we see that through the first half; that's starting to mitigate in the second half slightly, particularly more in leather than cotton, although there is a little benefit there. On the other hand, we did see that labor in overhead is an increasing cost. So really not significant in the second half. Going into next year, we should see some tempering in petrochemicals, leather again, which we've seen high costs come down. But again, I'm not—I can't quantify that nor would we give any kind of guidance into 2016 at this point.

And then my second question on the Trans-Pacific Partnership. The U.S. is at the cusp of a free trade agreement with much of Asia which could potentially eliminate footwear and apparel tariffs. Curious if you are factoring in the TPP in terms of your long-term view on sourcing across geographies, and if you could see any potential savings on tariffs, what would you do with the savings? Would you reinvest it in marketing, R&D, reduce prices, or flow it to the bottom line?

I guess I will take that one. We have been watching this for a number of months even years; this has been going on, and it does appear that we are making some progress. It will have some benefit to us; we're still evaluating that. I mean, the details aren't fully worked out, and we would have to look at it. Our priorities in terms of should there be some opportunities, our priorities remain the same. We would be investing in those growth drivers which have been successful for us so far. Our lifestyle brand, international and DTC, would be our priorities from an investment standpoint.

And we do that because that's in the best interest of our shareholder contract.

Outdoor Action Sports, it's been such a big segment of the business for so long, it seems like it slowed this quarter even—I know the reported numbers are non-indicative of the underlying growth, but still seem to decelerate a little bit price lower than it's been in a while. Are there timing issues going on there? You also sound really confident about the outlook for that business for the rest of the year in North Face, for example, the retail reported numbers look really good in the quarter. Help me understand some of the dynamics going on in this quarter if there is anything to call out.

Omar, this is Steve, I will take that. I'm just going to fill in from the international standpoint. So we absolutely remain very confident in our Outdoor and Action Sports businesses. I think the effect that you see in Q1 that we didn't detail necessarily in our remarks was that we had an impacted 53rd week; two specifically, the North Face and Timberland, two big drivers, which was equal to 3 percentage points of growth. So if we were to put that for each one of those brands, North Face would have been at 10% and Timberland would have moved into the low teens. Kind of factoring that and understanding that we had that in our plans, we saw that coming, continues to give us confidence in the guidance that we gave last quarter.

Omar, there is not too much to add on the international side; it's a similar picture. Starting with Asia, you heard us—we're doing really well in Asia. We expect nice growth in most of the Asian markets on the large brands. And similar picture in Europe—the guidance we gave for Europe is to grow high single digits. So there were some issues by quarter, but the full year outlook is really good.

And Omar, it's Eric. I will finish that comment; Steve mentioned that the 53rd week switch that we had cost Timberland and the North Face 3 percentage points of growth, which is true. For the global Outdoor and Action Sports coalition, it cost us 2%. So what we reported—what we talked about is 10 is our constant currency number would have been a 12%.

I think you called out Kipling and Napapijri a quarter or two ago as potential next billion-dollar brands. Any updates there?

Starting with Kipling, you heard us say Kipling was the fastest growing brand last year and two years ago, and based on the outlook we have this year, it would be the fastest brand again for the third year in a row. So it's good. We had a good quarter; we don't release those numbers, but we had a good quarter in all three areas, I guess that's the good news—in the U.S., in Europe, and in Asia and in several channels in wholesale and D2C. Napa is a similar picture; Napa is predominantly Europe—we see a good year for Napa and up high single-digit. So the smaller brands are growing, especially Kipling, as it's becoming a meaningful business for us.

And maybe one last quick question for Eric and Scott. The acquisition environment kind of remains a little bit stuck and the willingness is there. Can you talk about your willingness to pursue other strategies in terms of maybe not just capital and using debt and cash but is there potential to issue equity to make a bigger acquisition—maybe help loosen the wheels a little bit?

We get that kind of discussion from last week when we talked with them. We're very—we continue to remain very disciplined about exploring our acquisition opportunities and creative about how we might bring one in. Of course, the good news as a shareholder is we're real disciplined about what we'll pay to, it's not part of how you pay for and what you pay, and we just haven't found the right combinations to unlock that opportunity. Just know that we are diligent and something that we work on every single week, and eventually, we will bring something in, but nothing to report today.

Creativity is on the table.

This is actually [indiscernible] for Robby. Thanks for taking our questions. Scott, can you give you an update on the trends in the mid-tier channel for Jeanswear in the U.S.? And then have you seen any change or improvement in the—kind of low to middle income consumer in the Jeanswear business?

We've seen very positive trends in the mid-tier channel, so we've seen enough fix in our business; we're really pleased with it. The consumer is coming back to that channel for sure; I think the consumer is really dialed into innovation in that channel. So we spend a lot of time on some innovative products, our Easy Fit, our Comfort Fit, our Modern Series. Those products are really taking with the consumer very well. So really feeling bullish about that; and I think the single most important thing for us right now in the mid-tier channel is that we've introduced Wrangler to mid-tier channel very successfully. So we're rolling Wrangler out, still has a lot of opportunity, a lot more distribution in the mid-tier channel. And so we've got a really powerful two brands that we're bringing to the mid-tier channel in that bottoms category right now—that's pretty important for us.

Yes. And then just in terms of the really strong growth of Vans in Asia, how should we think about that growth longer-term? And then can you maybe talk about how many doors you have in China now and where that could go over time?

You've heard us saying Vans had an amazing run in the last quarters in Asia, and it has been a meaningful brand for us. Now we have declared that growth, which was in the aisles of 50%, will that stay? Probably hard going forward. But we are very, very confident on our long-term goals. The good news is that the brand is doing well by geography, not only in China but in Asia, all over in Asia and the more developed countries, Korea and Japan, but also in developing markets like Malaysia or Indonesia. It's doing well by channel; we see good comps on who it's doing well and who sell. And it's doing well by category and Footwear and Apparel. So yes, we are very positive for the long-term outlook for Vans in Asia. Now the question on the doors, was that related to China?

Yes.

Yes, I always say we have around 2,500 doors altogether on primarily five brands, which, if you benchmark that with the big, big brands that are playing in Asia, they are all working around 5,000. So, I think the answer is implied—we still have room to grow by adding doors over time.

The new markets we started—we launched our VF subsidiary in Korea two years ago, and we built the Vans brand there with our starting point. Karl Heinz and I were actually there last month celebrating the success of that team; it is off to a fantastic start. We think the brand has a lot of legs, particularly in the Asia Pacific region.

What percentage of Vans sales came from footwear versus apparel? And can you talk about the penetration of men's versus women's in Vans and the opportunities there? Where is the growth going to come from besides just more doors?

This is Steve. From an America standpoint, the predominant percent of our growth in Q1 was footwear. So we are continuing to see expanded growth in our apparel; high-teen growth this last quarter. Right in line with what we see going on with our footwear. Men's and women's in footwear, it's kind of hard to tell because many of our styles are unisex, but if we were to try to overlay, we're probably about 60:40 men's to women's if we were to try to capture the meaning of that unisex sizing. And where will the growth come in the future? We have a tremendous amount of opportunity here in the North America market. You've heard us talk about our expansion strategies—we move geographically with our stores that help supercharge our wholesale distribution. The brand is moving into athletic; we opened up with sporting goods this quarter in a significant number of doors and new initiative that they have, and we're continuing to work with our partners at Foot Locker to expand the growth there. So a lot of opportunity here in United States, Canada; our Mexico business is extremely strong and at the front end of its growth, and we're just beginning to convert distributors in South America. That will give us a tremendous amount of upside in those developed markets there as well.

And seeing that picture for us on the international side, you heard me saying before—we have it by geometry. We just opened a subsidiary in Korea where Vans is doing extremely well. It just started two years ago—a long, long way to go; we still have the South Asian market, which we just started. We also have distributors there, which one they would probably can convert. So geography for sure, the other one is category—similar picture for us; apparel is small but it is growing faster than footwear. So that's a big expansion, and then the other one is our DTC, like e-commerce—doing well and in stores. So very, very articulate rate going forward.

I wanted to ask about Outdoor and Action margins in the quarter; it wouldn't make sense—margins came under pressure would make sense as you had a 53rd week, and you had less productive week. So maybe you would have delivered on some of the fixed costs. But you guys also mentioned some demand creation expense in the quarter. So I just wanted to get your view on how we should think about Outdoor and Action margins across the full year and maybe some perspective on what drove the compression in 1Q.

As I mentioned in my comments, Lindsay, this was a particularly big international quarter and also the delta on currency; we had a 1.37 average year ago versus 1.12 in the first quarter. Combination of those two things put a lot of currency pressure on outdoor as margins in the first quarter; it was 80 basis points. And again, you said it in your question—those sales that Steve mentioned under 53-week—that those are profitable sales. So really those are the two largest factors that impacted the quarter. But now when we zoom out and look at the full year, we see kind of normalizing of the margins, and we see expansion; outdoor action sports margins will grow faster than revenue for the full year.

The demand creation expense—is that sort—was the cause of it because it was timing that was particularly one-quarter weighted or is there an incremental step up versus what you were expecting?

We continue to invest in demand creation; it's roughly growing with sales. So it wasn't a big factor in the quarter.

Just real quick, Lindsay, where we put those dollars here in the Americas was first in Q1 around the FuseForm launch to really drive that story to support the placement. As well as I mentioned in my remarks, we're putting significant effort behind mountain athletics as we look to expand the North Face into more of a 12-month out-of-the-year brand and really help drive that shift in outdoor towards the outdoor athletics space that we've been talking about over the last couple of years.

And then, Karl Heinz, I wanted to ask about Europe. On an organic basis, we were a little surprised to see the sequential deceleration in the first quarter versus the run rate you had the last few quarters, especially because it feels like the economy is getting better there. I was just—if you could shed some light on if there was anything particular to happen in the quarter if you are looking for reacceleration across the back half of the year. Thanks.

I guess you heard those saying we are full-year outlook is intact. So the good news is we have seen no changes in our potential for the full year. We have some issues sometimes in the quarter, but no—the answers were pretty confident we have seen no signals which would change our mind for the full year goals which we have given. And this is true for the large brand but also for the smaller brands which I commented before.

And just to add to that, Steve mentioned the 53rd week impact could also be a factor in Europe as well, which will hold down your growth rate a little bit in the first quarter. We still high single digits for the year, and there is no change in the overall.

The first quarter came in as we expected.

I guess Steve, for you just on Timberland for a sec. The growth in Americas is 30% wholesale growth. I was just wondering may be you can talk about you mentioned women's, you mentioned the pro-line. But a little color maybe on anything on distribution or pricing may be how we think about that momentum for the balance of the year. Just a little more color about that business please.

We've been very bullish for the last umpteen quarters about the growth of Timberland, and I think you can probably hear that in our comments today—it's broad-based, we are seeing success across all of our collections certainly driven from the heritage of the boot but absolutely moving into casual silhouettes, both spring and fall. We're seeing it across all channels—our own B2C as well as wholesale—and across wholesale, the various points that we come to sell in and we're seeing it in men's and women's as well as youth. I think it's really safe to say that these brands are our leaders, and they have really embraced the information that they've taken out of our consumer research, and applied it to their product strategy—this is a global comment and we really have understood how to bring our brand to life to our consumer, delivering content to where they are. We see this continued growth; we're very bullish, and we see great upside not just in our footwear but also in our Pro Workwear business and as well as apparel.

Any color, Steve, at all on how apparel's been doing for you? What some of the learnings—just some of the data points?

We are learning—it's a really good word to use—and I think we've been clear, we started slow and we are incrementally increasing doors with the partners that we've launched with. Each year or each season we continue to see good growth. We're seeing Riggs—we sell through Riggs here in the U.S. market at a high-single-digit rate; that's good from a retail sale point and that's helping us gain confidence to expand our collection, expand our doors, and really move towards that long-term projection. Apparel is much larger on an international standpoint, with our largest penetration in Europe, but also significant growth and opportunity in Asia.

And then Scott, real quick to you just on the inventory growth—just maybe how we think about that throughout the balance of the year—is that such a trend more in line with sales or reported sales in the back half of the year? Just a little color there please.

Sure. I mean we don't give quarterly outlooks, but I would say for the year when you look at our cash flow and our balance sheet projections, we see no issue with inventory; we're really confident that the quality is there, and we're not concerned about the inventory.

Good morning everybody. I just wanted to ask a question on e-commerce. Could you just give us some color on how e-commerce businesses for your various brands are performing? I know you have a bunch of digital platform launches and re-launches over the last few years. So how has that impacted those businesses, and how should we think about the performance, the e-commerce performance of those businesses as you start to compare against those platform re-launches?

Let me make an opening comment on that, and I'll hand it over to Steve and Karl Heinz. Some context, Matt, in 2007—now I know I just went way back in history, but I have to know the numbers, so I'll do that. Our global e-commerce business across all brands was $7 million. So we have been working hard since that time to try to put in place e-com platforms around the world that make sense. When I look at that as part of our future growth, I look at it as being one of the largest sources of our future growth because of how underdeveloped we are versus all the other levers we have to pull. And as you would expect while we're building these sites brand by brand and country by country, we're focused most on our biggest brands and we have a lot of brands to add and a lot of countries to add and a lot more to deal with. And with that, I'll turn it over to Steve and let you continue.

I mean, e-commerce, to Eric's point, is really new. I mean, it's one of the tools, and it was North Face that has led the initiative to really understand how to really bring our brand to life digitally. Year-to-date, our e-commerce business is about 18% of our D2C. We talked a lot about our new platforms; Vans came live on last year and we saw a great acceleration in the second half of the year, and that absolutely continues to be the case here this year. Timberland has just launched in April. North Face and JanSport are going live today, and following them will be our Wrangler, Lee businesses, our Lucy, Reef, and SmartWool towards the back half of the year. So we are really happy with our website; it's an adaptive responsive website. I don't want to get too geeky here, but our brands have rich, rich content, and we've developed a content platform that marries content with product, helps us tell very, very strong stories connected with our products, drives conversion and, ultimately, helps drive sales. It's also a site that's very easy to adapt content for mobile as we see our consumers shift to accessing our sites from their mobile devices.

Thank you. And operator, that will conclude our remarks today. I think Eric might have a couple words, and we'll close the call.

I'll just thank all of you for spending your morning with us talking about the current status and future of our company. As I said in my comments, we are confident about where we are this year. And I think I also mentioned that we are heads down ensuring that we deliver the results that we've promised for this year. And the last comment I'll make is a special shot after Bob—we know you're listening.

Bob, give me a call and let me know what's like on the other side of this line. Thanks, everybody. See you in 90 days. Bye-bye.