VF Corp (VFC) — Q1 2018 Earnings Call Transcript

Good morning, and welcome to VF Corporation's transition period earnings call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts referred to on today's call will be in adjusted and currency-neutral terms, which we define in the press release that was issued this morning. We use adjusted and currency-neutral amounts as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts, which are in accordance with U.S. GAAP. Reconciliations of GAAP measures to adjusted and currency-neutral 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. During the fourth quarter of 2017, the company reached the decision to sell its Nautica brand business, and the sale was completed on April 30, 2018. Accordingly, the company has classified the assets and liabilities of the Nautica brand business as held-for-sale and included the operating results of this business in discontinued operations for all periods presented. During the second quarter of 2017, the company completed the sale of its Licensed Sports Group or LSG business. In conjunction with the LSG divestiture, VF executed its plan to exit the licensing business, which comprises the LSG and JanSport brand collegiate businesses. Accordingly, the company has removed the assets and liabilities of the licensing business and included the operating results of this business in discontinued operations for all periods presented. Unless otherwise noted, results presented on today's call are based on continuing operations. Joining me on today's call will be VF's Chairman, President and Chief Executive Officer, Steve Rendle; and Chief Financial Officer, Scott Roe. Following our prepared remarks, we'll open the call for questions.

Thanks, Joe, and good morning, everyone, and welcome to our transition period earnings call. VF's results for the period were stronger than we expected as the broad-based growth acceleration that began in the second half of 2017 continued. Our core growth engines are driving strong global momentum as we begin to enter the acceleration phase of our 2021 growth plan. It is early in our journey, and we continue to deliver on our commitments and remain sharply focused on the foundation we're setting to position VF for sustainable long-term growth and value creation. Taking a look at our results for the quarter. Revenue increased 17% to $3 billion or 8% on an organic basis. Our big 3 brands grew at a combined rate of 18% with our Vans brand delivering another record quarter, up 39%, with strength across all regions, channels and franchises. Momentum in The North Face continues to build with 7% growth. And on an organic basis, international increased 8%, led by 12% growth in Europe. Direct-to-consumer increased 24% with more than 40% growth in digital, and our Workwear business increased 4% with Williamson-Dickie up 11% on a pro forma basis. Our fundamentals remained strong as gross margin, a key driver of our value-creation model, improved 160 basis points on an organic basis to 51.9%, a record for VF. And finally, adjusted EPS increased 22% to $0.67, slightly ahead of the outlook we provided in February. Reshaping our portfolio remains our top priority, and we are committed to optimizing our portfolio to align with our financial aspirations. As you know, during the quarter, we made further progress on this front. On Monday, we announced the completion of the sale of our Nautica brand to Authentic Brands Group. I would like to personally thank the Nautica employees for their hard work and dedication to VF throughout the years. In March, we announced the acquisition of Altra, a technical, high-growth and award-winning footwear brand. This addition brings to VF a capability that when applied across VF's outdoor, D2C and international platforms, will serve as a catalyst for growth. And lastly, in early April, we formally welcomed Icebreaker to the VF family. This acquisition amplifies VF's natural fiber capabilities, which will be leveraged across multiple brands in the portfolio and provide yet another catalyst for growth. Icebreaker also marks VF's first purpose-led acquisition. One of the most important and exciting elements of our business transformation is our work to become a purpose-driven company. It was the title of this year's annual report, and we see purpose as a tremendous unlock that will fuel growth for VF and our brands around the world. It will help us attract and retain the industry's best talent. It will provide clarity to our decisions and actions, and it will galvanize our associates around a shared purpose and enable us to serve as a powerful force for good in the world. It's no longer enough to just focus on what we do. It's equally important to consider both how and why we do it. As we look ahead to fiscal 2019, we plan to deliver on our commitment as a top-quartile value creator. Key areas of focus for the coming year include reshaping and optimizing our portfolio. And while M&A will continue to be a top priority, we're intensely focused on protecting and enabling the explosive growth in Vans, shepherding the positive momentum of The North Face while focusing on reenergizing growth in Timberland North America, continuing our consumer-centric transformation work with a particular focus on increasing speed to market and streamlining our product portfolios for greater marketplace agility. And we will focus resources on our D2C platform and our digital transformation, prioritizing capabilities that will enable us to best serve consumers through digitally enabled transactions. And finally, as we work to increase our metabolic rate, we will begin to create a culture of lean operational excellence to unlock investment capacity and fund our strategic growth initiatives. VF is on a transformational journey, one that is guided by a thoughtful strategy and our diverse group of talented associates around the globe. We're making changes to reposition and strengthen our business, get us closer to our consumers, encourage greater collaboration and position us to win. And we will continue writing another successful chapter in the history of VF. So with that, let's take a deeper look at the performance for the quarter. Beginning with The North Face brand. Global revenue increased 7%, driven by 19% growth in our direct-to-consumer business, including more than 30% growth in digital. As expected, wholesale declined slightly as we continue to focus on reducing inventory at retail and improving the mix of first-quality sales. By region, revenue in the Americas increased 3%, driven by 11% growth in direct-to-consumer, including more than 20% growth in digital. As expected, wholesale declined at a mid-single-digit rate. From a product perspective, growth in the quarter was driven by outerwear, including the Apex Flex franchise that entered its second year. The brand's lifestyle and accessories product also performed well across all channels of distribution. We're seeing strong momentum in our women's business in the first season after the integration of the lucy product engine into The North Face. We see this as a strong growth catalyst for the run, train category globally. Earlier this month, TNF launched the Move Mountains spring campaign, the brand's first campaign dedicated to women. At the heart of the campaign is a celebration of women role models who are pushing the boundaries of exploration, including our own North Face athlete team with Hilaree Nelson, Margo Hayes and Ashima Shiraishi as well as new ambassadors like women's empowerment advocate and actress America Ferrera and NASA scientist Tierra Fletcher. In Europe, the brand's strong momentum continued with revenue growth of 19% with balanced performance across all channels. Wholesale revenue increased 15%, driven by deepening strategic partnerships in the region and strong sell-through. Direct-to-consumer increased nearly 30%, including more than 50% growth in digital. Turning to product. Iconic outerwear continues to drive demand, including our Nuptse and Mountain jacket with seasonal material and color offerings, adding incremental momentum to an improving set of styles. As expected, Asia declined 5%. Direct-to-consumer increased over 50% in the region. With our China investments now behind us, we expect high single-digit growth for The North Face brand in Asia in fiscal 2019. Globally, we continue to expect 6% to 8% growth for The North Face brand in fiscal 2019, including mid-single-digit growth in the Americas. And in terms of shaping, growth will be slightly tilted to the second half as we expect mid-single-digit growth in the first half of the fiscal year. Now to Vans. The brand had another record quarter, and the performance of the brand globally is nothing short of outstanding. Revenue increased 39% with broad-based growth across all regions, channels and product categories. Revenue in the Americas increased 44%. Europe increased 36%, and Asia Pacific increased 24%. Our wholesale business increased more than 30%, and our direct-to-consumer businesses increased nearly 50%, including more than 75% growth in digital and over 40% total comp growth supported by our customs platform, which tripled in the quarter. Turning to the product. Classic footwear increased more than 50% with strength in the Old Skool and Slip-On styles with particular momentum in checkerboard designs as we head into the summer months. Now to answer a question likely on your mind, Old Skool is clearly an important franchise, but it's just not one thing in this brand. In fact, 75% of sales in the quarter came from franchises and categories other than Old Skool. For example, apparel and accessories increased over 35%. Progression footwear increased 30% with growth from our new signature Pro Skate, the Chima Pro 2, designed and built with Australia's finest skateboarder, Chima Ferguson. This franchise includes lightweight durability and new cushioning technology, which drove a 90% increase over last year. Looking at apparel. The brand launched the new Versa Hoodie with strong sell-through globally. The innovative highly functional hoodie at a $95 price point showcases an evolution of style, comfort and skateboarding must-haves all in one. Vans' commitment to deep consumer connectivity continues to drive excitement for the brand. During the quarter, Vans launched the Vans Family loyalty program in the U.S., which allows members to access exclusive designs, experiences and earn and redeem points from purchases. In the first 6 weeks, more than 1 million brand fans joined, surpassing our expectations. For fiscal 2019, the diversity of Vans' growth and the team's not-just-one-thing mentality will continue to sustain our strong momentum. Retail inventory levels are in great shape, and we remain disciplined with respect to inventory management, merchandising and assortment planning. Vans' long track record of consistent performance gives us high confidence the brand will deliver 12% to 13% growth in fiscal 2019, including 20% growth in the first half. Switching to Timberland. As expected, global revenue declined 1%. Direct-to-consumer increased 12%, including 45% growth in digital, offset by a high single-digit decline in wholesale. In line with expectations, Timberland brand revenue in the Americas decreased 7% with high single-digit growth in direct-to-consumer, offset by a low double-digit decline in wholesale. Our non-classic footwear increased at a mid-single-digit rate as our diversification strategy continues to progress. However, these gains were offset by a decline in our core classics footwear business. Men's apparel, a key strategic growth driver, increased more than 20% with strength in outerwear. And momentum in our Timberland PRO business continued with mid-single-digit growth. In Europe, Timberland brand revenue increased 4%, driven by a 20% increase in direct-to-consumer, including over 85% growth in digital. Wholesale declined at a low single-digit rate primarily as a result of shipment timing. Our locally designed product continues to drive demand, highlighted by our new women's collection, Berlin Park, which increased at a high single-digit rate. In men's footwear, casual and sport lifestyle collections, including the new FlyRoam Go, drove growth in the quarter, supported by the strong marketing campaign across the region. Men's apparel also performed well with strength in outerwear, which completely sold out in our digital channel. Timberland's Asia business increased 2%, with more than 40% growth in China, partially offset by softness in Japan. High single-digit growth in our direct-to-consumer business, including more than 60% growth in digital, was partially offset by a decline in wholesale, most notably in Japan. Timberland Asia's latest apparel collaboration with Tokyo-based monkey time drove significant brand heat, selling out in Korea in the first 30 minutes. On a global basis, we expect Timberland brand revenue to increase 2% to 4% in fiscal 2019, driven by high single-digit growth internationally. In North America, we are focused on our diversification initiatives as well as reenergizing growth in our core footwear franchises. The brand remains strong globally, and we're confident in our ability to deliver on our strategy. Moving to the Wrangler brand. Global revenue increased 1% with revenue in the Americas up 1%, Europe up 2% and Asia down 7%, driven primarily by ongoing challenges in India. Looking at the Americas, revenue growth was driven by core men's denim, which increased at a mid-single-digit rate, as well as strong growth from our outdoor collection. Digital wholesale and direct-to-consumer continued to be key growth areas for the brand, increasing 75% and nearly 15%, respectively. During the quarter, Wrangler continued to elevate the brand and extend into new channels with its women's line making progress with upper-tier retailers. The success of Wrangler in these important new channels is validation of the brand's ability to extend beyond its core distribution. Now to the Lee brand. Global revenue declined 11% as 14% growth in direct-to-consumer was offset by a low teen decline in wholesale. The Americas business declined 13% due in part to shipment timing. Adjusted for shipment timing, mid-single-digit growth in the men's business was more than offset by a decline in women's. The Europe business was down slightly as high single-digit growth in D2C was offset by a low single-digit decline in wholesale. In Asia, revenue declined 11% as growth in direct-to-consumer was offset by a decline in wholesale due in part to ongoing challenges in India. Looking to fiscal 2019, we expect Jeanswear revenue to be relatively flat as we work to stabilize the business and improve profitability. Now turning to Workwear. Revenue increased 4% on an organic basis driven by double-digit growth in Wrangler RIGGS, 9% growth in Bulwark and 6% growth in Timberland PRO. On a pro forma basis, Williamson-Dickie also had a strong quarter with 11% growth driven by strength in lifestyle, international and direct-to-consumer. We expect mid-single-digit growth from our Workwear businesses on an organic basis in fiscal 2019 driven by continued strength in Timberland PRO, Bulwark and Wrangler RIGGS. On a pro forma basis, the Dickies brand is expected to increase at a mid-single-digit rate with double-digit growth in lifestyle, international and D2C.

Thanks, Steve. The broad-based growth acceleration that began in the second half of 2017 continued into the transition period. Our performance for the quarter as well as our growth outlook for fiscal 2019 is stronger than we expected 90 days ago and clearly demonstrates that the investments made in our strategic priorities over the past year are beginning to yield returns. Our core growth engines are driving strong global momentum as we began to enter the acceleration phase of our 2021 growth plan. Our business is strong and getting stronger. And our intense focus on fundamentals and quality growth as well as recent portfolio moves give us even more confidence in our ability to continue to deliver top-quartile shareholder value. So let's dive into the results of the quarter. Revenue increased 17% or 8% organically to $3 billion, which was about $100 million above the outlook we provided in February. Revenue from our big 3 brands increased 18% on a combined basis, led by 39% growth at Vans and 7% growth at The North Face. The growth of Vans remains strong and well diversified across regions, channels and product categories. In fact, every channel in every region grew more than 20%. We are also pleased with the progress in The North Face brand as the initiatives and investments to accelerate global growth are beginning to manifest. Momentum continued in our Workwear business with mid-single-digit growth on an organic basis. Williamson-Dickie again achieved double-digit growth on a pro forma basis led by strong performance in international, lifestyle and direct-to-consumer. Total international grew 16% or 8% organically, led by 12% growth in Europe. Now let me zoom in a click and give you some highlights about Europe. This represents the third consecutive quarter of double-digit growth with continued strength across all major countries. Our big 3 brands increased more than 20% on a combined basis across Europe, and D2C was up over 20% with more than 55% growth in digital. Wholesale increased 9%, highlighted by 15% growth at our key strategic accounts. So congratulations to our European team for their continued success. China increased 11% or 1% on an organic basis. We've made significant progress in China, working with our retail partners over the past 2 quarters. With these investments now behind us, we expect high teen growth in China for fiscal 2019. Our direct-to-consumer business increased 29% or 24% on an organic basis, led by more than 40% growth in digital and 18% brick-and-mortar comps. Our D2C strength is broad-based with more than 20% growth in both the U.S. and international and double-digit growth in each of our big 3 brands globally. Even more impressive, when you consider that the organic door count was down 3% compared to last year. Wholesale revenue increased 12% or 1% on an organic basis, driven primarily by continued strength in Europe and our digital wholesale accounts globally. Gross margin increased 50 basis points to 50.8%. Excluding the impact of Williamson-Dickie, gross margin increased 160 basis points to 51.9% as our ongoing mix benefit and focus on quality growth continues to drive strong performance. SG&A as a percentage of revenue increased 120 basis points to 39.9% as investments in our strategic priorities continue to fuel growth. On an organic basis, our demand-creation investment alone increased more than 20% or 50 basis points versus the prior year. The remainder of the SG&A increase was focused on the D2C platform, particularly digital. Adjusted operating margin declined 80 basis points to 10.8%. Excluding the impact of Williamson-Dickie, operating margin was 11.2%. And to wrap up the P&L, adjusted EPS increased 22% to $0.67, including $0.03 contribution from Williamson-Dickie acquisition, slightly ahead of the outlook we provided in February. Turning to the balance sheet. Inventory increased 17% or less than 2% on an organic basis. We repurchased $250 million of stock primarily to offset equity dilution for the coming fiscal year. And while our leverage ratios are currently elevated due to the timing of recent portfolio activity and share repurchases, given our strong cash flow outlook as well as proceeds from the Nautica sale, we expect leverage to return to more normalized levels in the coming months. So moving now to the outlook for fiscal 2019. We expect revenue to range from $13.45 billion to $13.55 billion, representing growth of about 9% to 10%. On an organic basis, our outlook reflects about 5% growth. We currently do not expect FX to have a material impact on the 2019 outlook. By coalition, we expect 8% to 10% growth in Outdoor & Action Sports or 6% to 8% growth organically. We expect more than 35% growth in Imagewear or low single-digit growth on an organic basis. We expect the organic Workwear business to increase at a mid-single-digit rate, and we expect relatively flat revenue in Jeanswear. International revenue is expected to increase 13% to 15% or 8% to 10% on an organic basis with high single-digit growth in Europe, low double-digit growth in Asia and mid-single-digit growth in the non-U.S. Americas. Our organic D2C business is expected to increase 8% to 10% with more than 25% growth in digital. Gross margin is expected to approximate 51%, primarily driven by mix, including about 20 to 30 basis point negative impact from the Williamson-Dickie acquisition. Operating margin is expected to approximate 13.2%, which implies modest SG&A leverage despite continued investments behind our strategic priorities. Our tax rate is expected to approximate 17%, and we expect adjusted EPS in the range of $3.48 to $3.53, representing between 11% and 13% growth. So wrapping up our outlook, we expect cash from operations to exceed $1.6 billion. We have high confidence in our fiscal 2019 outlook as we accelerate into the next growth horizon. We have global momentum, and we are investing behind our strategic priorities to continue to fuel sustainable growth. We will continue to reshape our portfolio, and our diversified value-creation model will continue to deliver top quartile returns for our shareholders. So now I'll turn it back to the operator, and we'll open the call for your questions.

I wanted to ask about the D2C numbers you threw out there, Scott. Obviously, the sales were great, in the 20s, organic with stores down, driven by digital. What are you guys really doing there to activate it? It seems like you're seeing a real inflection. And given the lack of store growth underneath the revenues, should we start thinking about profitability in the D2C channel globally inflecting as well?

Yes. Well, absolutely. Profitability has been improving over time in D2C, and we see that really accelerating. Omar, this goes back a couple of years. We started talking about reducing the number of openings, focusing more intently on productivity. And this is not just in one area, it's in a myriad of areas. We named a head of our D2C initiative within our company who is leading this effort, Scott Baxter. And it's really a culmination of a lot of effort over a long period of time that has ended up in this result. The other thing is, on the real estate side, we've been more aggressive at closing underperforming stores and getting more selective about where we open new stores. That with some insights and analytics to better site those stores. We're really seeing we're making better decisions, and that's paying off. But Steve, I think the brand side is even more important, right?

Yes, Omar. I would just add to Scott's point on productivity, we really focused on service and that in-store experience, starting first with the in-store merchandising, really focusing on the product, the stories, but really paying a lot more attention to the level of service, the people that our consumers interact with. And elevating our stores is really that most premier expression of just not our product but what our brands stand for from an experience standpoint. And it's really paying off. You clearly see it in Vans. But you see it's coming to life across all of our brands, North Face, Timberland. It's a very important aspect of our integrated marketplace strategy.

And then just a quick follow-up. In terms of the digital component of the D2C growth, what are you doing there to activate such strength there? Is that primarily Vans? Or is it across the brand as well?

Certainly, Vans is an important part, but this is true for all of our brands. We achieved very strong results in our European market and are also experiencing significant growth in Asia. However, the focus is really on enhancing the experience. We are concentrating on improving the digital environment by reducing friction and enhancing search and storytelling. Recently, we appointed a Chief Digital Officer, Velia, who joins us from Fidelity Financials. As she settles in, her work will help us refine our overall digital strategy, not just in e-commerce, but in all ways we utilize digital to improve our capabilities and connect with our consumers. We are about a year into this commitment, and we are beginning to see it take effect and yield positive results.

Omar, just building on that too, a couple of numbers. While Vans was impressive in the digital area, if you look at our digital growth, excluding Vans, it was over 27%. And our long-term growth target is 25%. So you can see this is broad-based. Just another reminder as well, this is our most profitable channel. So I really like to see when our most profitable channels are fastest-growing. That's obviously virtuous for the P&L as well.

Could you provide some details regarding North Face? Specifically, can you quantify how much you are scaling back? You mentioned that an offset is coming from off-price sales that you are trying to reduce this quarter. How has this affected revenues in recent quarters, and when do you expect this impact to lessen in the upcoming quarters?

Yes. So it's varied over time. I mean, this has been a long-standing series of actions, and even some of that knocks on into next year as we think about the marketplace, cleaning up some of the marketplace activity that I think Steve talked about 90 days ago. But in the transition quarter itself, it was a point or 2 impact in this quarter.

In the quarter, the majority of the discussion is focused on Vans within the growth rate category. Can you provide more insight into your expectations for the sustainability of that growth? You mentioned some details earlier, but as you anticipate the next year while considering the previous growth rates of 30% and 40%, how do you expect Vans to perform? Additionally, although we typically don’t receive detailed information on a brand basis, could you elaborate on Vans' contribution to the company's operating margins at this time? Beyond the shift in product mix, are you seeing any significant changes in margins as growth continues to emerge like it has in recent quarters?

I can address that. Vans positively impacts the operating margin and contributes to both gross and operating margins. However, it's not the only driver for VF. Our most profitable segment is international, which outperforms domestic. The strength in Europe is widespread, with all our brands experiencing growth and achieving significant increases in attractive operating margins, as well as substantial after-tax margins from an EPS perspective. So while Vans is appealing, it isn't the sole standout when considering the entire business, though it is beneficial. Looking ahead, we're already comparing against substantial numbers. I noted last quarter that this presents a challenge for us because, as you've pointed out, we’re witnessing impressive growth. It's important to remember that this growth is widespread across the company, although it’s especially rapid for Vans. As we anticipate future performance and face tougher comparisons, we've factored in some expected moderation, which is reflected in our guidance for the latter half of the year. However, up to this point, we haven't observed that moderation.

I wanted to follow up on last year's Investor Day. You've been very active on reshaping the portfolio. Can you provide an update on what inning you're in with the reshaping effort? And I think it was called out that strong free cash flow generation should decline the leverage ratio for 2018. What leverage ratio are you targeting for the fiscal year?

Yes, I'll begin with the straightforward part. Given our credit rating and our targets, we aim to achieve a leverage ratio of 2x EBITDA. We expect to be in that range by the end of the year, give or take. It appears we are on a solid path to reach that goal.

And Laurent, regarding the reshaping of the portfolio, you've seen us actively proceed with the divestitures of our LSG business, followed by CVC, and most recently Nautica. We are carefully considering who the best owners are and how we can align our portfolio with our financial goals. The addition of WD is proving beneficial. The integration is progressing well, and we are on track, if not slightly ahead, with our plans regarding its full contribution. Icebreaker has just joined us, and we are very optimistic about their potential. They are projected to grow in double digits in their first year with us. Additionally, they will play a significant role in developing a natural fiber platform that we can scale across our VF enterprise, which aligns with our purpose-driven focus. We are also eager for Altra to come on board. They continue to grow at remarkable rates, and we anticipate that they will have a substantial influence not only as an independent brand but also in shaping developments within our North Face business. We will remain deliberate and intentional in our acquisitions, whether they involve brands or capabilities. We are already seeing positive results in the early months, and we have a clear vision for where we want to head in the future.

As you consider our long-range modeling, it's important to remember a few key points. Some of the actions we've taken have reduced risks for our future outlook and have bolstered our confidence in achieving our long-term goals. With the assets we currently possess, we have a plan that targets top-quartile TSR performance. While we remain open to acquisitions, it’s essential to recognize that we don't require them to achieve this level of performance. Any acquisition decision would only be made if it adds value to our established plans, which we believe are quite strong. With every strategic move, we are gaining more assurance in our capacity to reach these objectives.

Very helpful. And I want to follow up on the gross margin guide of 51% for the year. Can you talk about the various moving pieces, whether that's FX, commodity, D2C or Williamson-Dickie? And how should we think about the evolution of the quarters relative to the annual guide?

Certainly. To begin with the gross margins, we anticipate that the organic business mix, which has been consistent for years, will remain in the range of about 50 basis points. When considering other organic factors such as pricing, costs, and foreign exchange, we view that as a net neutral effect. Thus, the organic movement is expected to result in an increase of roughly 50 basis points primarily due to the mix. On the acquisition front, notably because of Williamson-Dickie, along with smaller contributions from Altra and Icebreaker, we're projecting around a 20 basis point negative impact. As a result, the 50 basis point mix is offset by 20 basis points from the non-comparable period, leading to a projected gross margin of 51% or an overall increase of 30 basis points for next year. In terms of revenue modeling, we might see a slightly front-loaded performance, although not significantly, especially in the first half compared to the second half, particularly with our new fiscal calendar in play. We expect more pronounced profitability in the latter half of the year, anticipating stronger earnings growth during that period.

You talked a few times on the call about the strength and the success of the European business. So I was just wondering if you can talk about what strategies you think are seeing particular success there and if there's any learnings you can take from that to North America or the Americas in particular.

Sure, this is Steve. Our European business is structured in a way that allows us to effectively share best practices and ideas across all our operations. This is one of our key strengths as the team engages with the marketplace and leverages collaboration to enhance our brands with important retail partners, while also making the most of our direct-to-consumer approach. The brands are interconnected globally, and our teams in Europe have a deep understanding of their local consumers. They are responsible for promoting products that are both part of global offerings and those specifically tailored to the European market. Our model supports and encourages this flexibility to meet consumer demands and allows us to customize our marketing strategies, both online and in-store. The team's collaborative nature plays a crucial role in achieving the consistent growth we are experiencing.

Yes, to expand on that, the model allows brands operating in regions like Europe to function effectively. The challenges of growing the business with that shared model and the efficiencies previously mentioned by Steve are minimal. For instance, with the current growth of Vans, having the ability to pursue that growth, support it, and efficiently manage expenses is a significant advantage. Additionally, as CFO, I must highlight the profitability aspect. There is efficiency in this model, and we can also organize for tax efficiency. The combination of operational advantages discussed by Steve, leveraging the model's backend, along with the tax benefits, makes it a strong asset for us.

As a follow-up, is there a way to apply some of those strategies to other areas of the business? You mentioned that it's unique, but are there insights that can be shared with other regions?

Absolutely. In previous calls, we specifically mentioned The North Face as an example of exceptional growth, which started about seven to eight quarters ago. Last year, we made management changes within our North Face operations by bringing our head of Europe to be the global president here in Alameda, California. The goal was to apply the discipline, skills, and insights gained from our turnaround efforts in Europe to our Americas business as well as to implement those learnings globally. We focused on thoughtful integrated marketplace management, customer segmentation, product tiering, and introducing some of the outdoor lifestyle pieces that were successful in our European market. These strategies have already resulted in impressive growth in our urban and lifestyle collections. We are effectively sharing best practices through management movements. We have also discussed Timberland and how the diversification strategy from Europe has yielded consistent growth quarter after quarter. We are now adopting that same diversification mindset in the U.S. market as well as Asia, and we are beginning to see growth from some of the new collections like FlyRoam and SensorFlex. Although these lines are small compared to our classics, they are producing positive results, showing that we are applying insights from our European platform to energize our business in the United States.

I guess, I first had a question on the model. You guys had obviously very strong sales growth. We're still not seeing the leverage in the model. So I was curious if you could just unpack some of the investments you've made in the sub-quarter. And then what gives you confidence that you're now in a position to kind of pivot as we get into fiscal '19 to see that SG&A leverage?

Yes. A few points to mention. The situation remains consistent. Going back to our intentions stated in Boston, we have outlined our strategic priorities and investments on our website. These include significant investments in digital direct-to-consumer efforts and the technology supporting them. We have increased our investments over the past year and indicated that while we would maintain these investments, the rate of increase would be less than sales as we advance through the model, with sales expected to accelerate over the five-year period. We are currently seeing this acceleration, perhaps even a bit earlier on the revenue side. As we moderate our investments in response to this revenue growth, we anticipate seeing leverage, which is reflected in our 2019 guidance and expected to strengthen over time. Another source of confidence, along with the revenue growth, is our gross margin. Our gross margin continues to improve, which is crucial to our financial model. The combined evidence of increasing revenue and gross margins reassures us. We have the flexibility to adjust our investments as needed; our decisions are based on where we see the best returns. We are willing to experiment, learn from any missteps, and adjust our approach accordingly. Overall, while there are many moving parts to our strategy, our general direction remains unchanged, and we are actively working to identify opportunities for sustainable long-term growth.

I would like to discuss the Lee business within the jeans segment, which saw a global decline of 11%. What changes are necessary to achieve a more consistent growth rate? Additionally, regarding the overall Jeanswear business margins, I understand there is a restructuring of the cost basis underway. When can we expect to see the impact, and how should we anticipate the operating margin opportunities evolving over the next few years?

I'll begin with the margin aspect. Our primary focus is on expanding margins. Over the past few years, we've seen a decline of a few hundred basis points in margins, with about two-thirds of that attributed to deleverage. This is positive for us because we understand how to address it. We've already initiated some actions, including the investments related to restructuring that you've observed. We plan to continue focusing on this over the next few years. However, I want to emphasize that this won't yield immediate results, so you should envision a timeline of a couple of years for margin expansion. Additionally, part of the equation involves our top line. Our guidance indicates that the business is stabilizing, suggesting a flat outlook. The Wrangler line has performed relatively well, but we've encountered more challenges with Lee, particularly in the women's segment. Moving forward, we are seeing signs of improved performance in the mid-tier. Some initiatives are beginning to show positive results. Nevertheless, the jeans market has remained consistent. The narrative we've been sharing for the past year still holds true. While there will be fluctuations from quarter to quarter, we've acknowledged that short-term visibility is challenging. However, when you take a broader view, our strong brand franchises and position as the low-cost producer give us confidence that we're stabilizing the business and laying a stronger foundation for the future.

And Erinn, I would add, for the quarter, there was quite an impact on timing of shipments, which we have line of sight to see how that will come back next quarter. We've talked for the last year about the strength of our men's business, specifically in the mid-tier, and it continues to do extremely well here with some of the key innovations that they've brought both in denim and some of the different bottoms. Our women's business has been a source of challenge, specifically in mid-tier. We are beginning to see returns to growth with some of our key programs that we've placed in the last quarter or quarter and a half, giving us confidence in what the new management team at Lee is doing to re-energize that aspect of the business. We continue to have some challenges in the women's mass business, and we have line of sight to how to bring that back into control, to Scott's point, to stabilize, while we also are paying a lot of attention to profitability and how to begin to get that business back to the growth that we've seen historically.

Sorry, can you hear me?

Now we got you.

Now we do.

Okay, I apologize for that. I just wanted to know, can you talk about potential synergies between Jeanswear, Workwear, Williamson-Dickie and maybe behind the scenes or getting brands into different retailers, sort of leveraging relationships between those guys? Can you give us any color if there's anything there?

Absolutely, Sam. We do see synergies forming, particularly under our group president, Curt Holtz. These businesses are consolidated, sharing similar customers and models. We are realizing significant synergies in our manufacturing processes, allowing us to utilize our skills and capabilities in manufacturing and materials. This extends to all our backend support systems, including HR and finance. Additionally, beyond Jeanswear, our Dickies business is showcasing growing strength in lifestyle segments, not only in China, Asia, and Europe, but also increasingly in the United States. There are synergies with our Vans business, particularly in engaging the creative self-expression aspect of Vans and how to connect that with our consumers. Our Dickies team is enthusiastic about sharing best practices and, wherever feasible, fostering relationships to enhance the brand in that category.

And two other things. How many of those synergies are incorporated into the guidance we talked about on both sides? Also, regarding Timberland North America, which has been facing challenges, where do we currently stand in terms of its progress toward where it needs to be?

I’ll address the first point regarding what we have achieved. Looking at our total acquisitions, we estimate an impact of approximately $0.10 on EPS, with about $0.07 coming from Dickies, and the rest from Altra and Icebreaker. Considering the cumulative effect with two quarters behind us and the upcoming two non-comparison quarters, it appears we are slightly ahead of our initial expectations regarding the Dickies synergies. We’ve managed to realize these synergies a bit sooner and have seen improved performance in the lifestyle segment mentioned by Steve. Specifically, in Asia, there has been a significant year-on-year increase, even though the numbers are relatively small.

Regarding your question about Timberland, we have been transparent about the current state of this business. We are actively working on diversifying away from the heavy reliance on our classic products. While we view the classics as a crucial long-term part of our brand, we see opportunities to modernize their aesthetic and connect with consumers through new design approaches within this category. It's important for us to expand our offerings in SensorFlex, FlyRoam, and apparel. A vital strategy for achieving this is through direct-to-consumer (D2C) initiatives. Our business in Europe has benefited greatly from our extensive network of D2C stores, allowing us to effectively showcase our brand. However, we do not have that same network in the United States. We are currently testing and validating models that will enable us to enhance our brand narrative and encourage U.S. consumers to move beyond their traditional preference for classic styles. We are adding new skills and capabilities to our team to focus on merchandising and the integrated marketplace, aiming to reignite growth here. We remain confident in our long-term strategy detailed in Boston. Progress is underway in the U.S., and we trust in our team's capacity to achieve these goals, although it will take time as we rely on the wholesale channel for support, which can be more challenging than our direct-to-consumer efforts.

This is Peter McGoldrick on for Jim. I was curious about the growth rate in China for the quarter, the 1% constant-currency organic, and the high teens expectation for 2019. Could you call out the puts and takes for the slowdown and then the drivers of the re-acceleration?

Yes, this is Scott. This aligns perfectly with our plan and what we've been discussing. We began collaborating with our retail partners last quarter, and this progression goes back further. It's essentially the conclusion of that phase. As I mentioned in my prepared remarks, we anticipated high teen growth in China for 2019. This serves as context; while this period is behind us, we're still engaged in some ongoing activities to enhance partner productivity based on previous actions, but we have reached the end of those initiatives, which influenced the quarter. There are two main factors at play: addressing some older inventory and curtailing shipments, an effort that started several quarters ago, and this positions us for a more robust growth foundation moving forward.

And Peter, I would add, as we've really modulated the sell-in and allowing the market to rightsize itself and helping some of our key partners move through the excesses, we've brought new discipline. This is really a great example of where we are becoming more consumer-centric and retail-focused in our skills and capabilities. Kevin Bailey, our leader of our Asia business, is a retailer by background and really bringing those disciplines to how we think even through our wholesale model of being able to really concentrate on sell-through and making sure you've got the right assortments, the right flow and the right experiential marketing to keep the interest level high and continue to pull the consumers into not only our own environments but into our partner environments. And with the cleaner marketplace, we're now able to place these new fresh assortments. And in Asia, our Urban Exploration category for North Face, more broad-based for Vans and the same strategy in Europe being used in Timberland. With that sell-through retail mentality, our teams are becoming much more proactive managers of that retail floor space.

And then just within Jeanswear, are those growth rates that we're seeing across the Wrangler and Lee brands representative of also the denim products specifically? Or is there any difference across categories within the brands?

We mentioned in Wrangler that, for the quarter, we saw our men's denim up mid-single digits as the brand was up 1% here in North America. So we're seeing good growth in our men's denim both in Wrangler and Lee. And we're seeing some softness in our women's business. But what's also encouraging is our brand, especially Wrangler, extends into new distribution channels. Our Modern Series that was launched last year is really taking learnings from our European platform. We're seeing new placements in new upscale specialty distribution as well as better department stores. I'm seeing good sell-through, confidence to build off of this as we come into the fall, but we're also seeing extensions into new categories, new usages like outdoor in our Wrangler brand doing extremely well too.

Could you provide an update on your digital wholesale business? I'm interested in how the relationship with Amazon is developing, particularly regarding North Face. Additionally, I'd like to know how your brands are performing on Walmart's website and in their digital business, as well as where you see growth opportunities for each brand. Has Vans made any decisions about selling on Amazon, and is that something being considered?

Those are a lot of questions, Bob. I'll start with Amazon. We've really increased our attention and interaction with the Amazon team, not just as an individual brand, but we've brought a key account team together focused on really learning Amazon and learning how to really utilize that platform as part of our integrated marketplace choice. We've spent last year, specifically with North Face, working collaboratively to clean up the marketplace. And as we do that, allowing us to put better-targeted assortments onto that platform and also beginning to work with them on how to ensure traffic is moving in a proper way to drive sales. So I would tell you our relationship is improving. Our commitment to a key account team sitting in Seattle to really work from a One VF point of view, we think, will be a real positive. That really is playing off of something we've already done in Europe where there's a key account team working there. On that, Bob, I'd tell you, we've got a lot of experience specifically in Europe with partners like Zalando, where we really have learned how to partner with these new unique selling environments, how to utilize them to tell our stories. And we're bringing that knowledge back here to work with Amazon. Walmart, a really key partner. We support the work that they’re doing to expand their platform. And we continue to work collaboratively with them on how to bring additional brands within our portfolio into their environment to not only help our partners' business grow but also help us access our consumers shopping in that environment. And then your last question was...

Vans, Amazon.

Vans is a brand-by-brand decision, Bob. And at this point, our Vans business has not decided to move onto that platform on either a 1P or 3P, but they're part of the One VF conversation learning along with our other businesses specifically on how to utilize that in the future in their integrated marketplace strategy. I will tell you, part of the Amazon platform, Zappos, all of our brands are there, so you could argue that Vans is within the Amazon environment, but it's there selling Zappos directly.

As you consider pricing, how are you viewing the average unit cost inputs by brand for the remainder of the year? Are there any changes or adjustments we should be aware of? Additionally, regarding digital media, which is becoming increasingly important, what are the associated costs for you? Does this vary by brand? What changes are you observing in this area?

Dana, this is Scott. I'll take the first part. So input cost, there's a lot recently with a stronger dollar and some of the movements in a few commodities like cotton and others. Yes, there is some input cost pressure. But when we look at pricing, which is in that historical kind of 1% range that we've seen over the last several years, we see that pricing is really offsetting input cost. So from a margin standpoint, for us at least, today, we see that as not really a big factor. We'll have to watch it, see what happens. In a strengthening dollar environment, that could drive commodities higher. But so far, we really haven't seen a big impact. Labor pressures also are generally up, although not at an amount that's significant enough to make a material difference to us at this point.

In response to your question about digital media costs, I must admit that I don't have specific details. I haven't noted any changes in costs that would lead us to make different decisions regarding our media strategy and how we engage with consumers. However, I can say that our use of consumer data and analytics to enhance our messaging is increasing. We've discussed our investments in Vans, where we've quickly signed up and activated 1 million consumers. Our digital platform and our interactions there are crucial. While there may be an increase in cost-per-click, I'm not certain it's significant enough to alter our decisions. It’s more about utilizing our information in a more personalized manner within our long-term media strategy.

Well, thank you, everybody. Really appreciate you spending your time with us this morning. I'd love to reinforce a couple of points. We are moving now into the acceleration phase of our 2021 plan. We're very confident in the growth drivers we laid out in Boston. The strength of our Vans business, we see continuing. The momentum returning to The North Face gives us confidence against the commitments we've made there. And the work that we're doing to re-energize Timberland, you can see kind of the sequential set of actions bringing the portfolio up to the high single-digit growth commitments that we made to you all in Boston. We are very committed to continue our transformation to become a more consumer-centric enterprise. And we're excited to unlock the power of both being purpose-led and performance-driven as we create value for our shareholders, our employees, partners, and ultimately, our consumers. So again, thank you for joining us today.