VF Corp (VFC) — Q1 2022 Earnings Call Transcript

Good morning and welcome to VF Corporation's First Quarter Fiscal 2022 Conference Call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts referred to on today's call will be on an adjusted constant dollar basis, which we defined in the press release that was issued this morning. We use adjusted constant dollar 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 US GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Due to the significant impact of the coronavirus pandemic on our prior year figures, today's call also contains certain comparisons to the same period in fiscal 2020 for additional context. These comparisons are all under the reported dollar basis. On June 28, 2021, the company completed the sale of its Occupational Workwear business. Accordingly, the company has reported the related held for sale assets and liabilities of this business as assets and liabilities of discontinued operations and included the operating results and cash flows of this business in discontinued operations for all periods through the date of sale. Unless otherwise noted, the results presented on today's call are based on continuing operations. Joining me on the call will be VF's Chairman, President and CEO, Steve Rendle; and EVP and CFO, Matt Puckett. Following our prepared remarks, we'll open the line for your questions.

Thank you, John and good morning everyone. Welcome to our first quarter call. We are encouraged by the strong start to our fiscal 2022 year. Our teams delivered an outstanding first quarter, powering VF back to pre-pandemic revenue levels while driving an earnings recovery well ahead of our initial expectations. We continue to see broad based momentum across the portfolio, which furthers my confidence in our ability to accelerate growth through fiscal 2022 and beyond. While the near-term environment remains somewhat clouded by virus surges in Southeast Asia, uncertainties in other regions brought on by the impact of new variants and further pressures on the global supply chain, our teams are executing. We remain focused on the things that we can control and winning the parts of our business with consumers coming back strong. And we remain confident in our ability to continue driving this sharp recovery across our business. Matt will walk you through our results in detail, but I'll start off with some Q1 highlights. VF revenue has surpassed pre-pandemic levels, growing 96% or 83% organically to $2.2 billion with momentum across brands, regions, and channels. Our global DTC business delivered high single-digit growth relative to prior peak levels driven by a strong acceleration from our brick-and-mortar stores in the US and continued strength in our digital. Our organic DTC digital business is now 72% above fiscal 2020 levels including the growing benefit of our omnichannel capabilities as we serve our consumers seamlessly across their choice of channel. We've seen a sharp recovery in our wholesale business, which grew over 100% organically in Q1, approaching prior peak fiscal 2020 levels. Strong sell-through trends and clean channel inventory levels from the past year are now translating into stronger fall '21 and spring '22 order books supporting an improving outlook for our wholesale business for this year and beyond. We've seen a strong recovery in our gross margin, which grew 260 basis points to 56.7% in Q1. This represents organic gross margin expansion relative to prior peak fiscal 2020 levels despite a 30 basis point headwind from a more challenging logistics and freight environment. VF drove organic earnings growth of 133%, delivering $0.27 in Q1, essentially doubling our plan. We're pleased to see our top line momentum and strong gross margin expansion translate into better than anticipated SG&A leverage and earnings flow through, an indication of the upside potential of our model as our recovery accelerates. Now, turning to our brand highlights from the quarter. The Vans brand has returned to pre-pandemic revenue levels, growing 102% in Q1. The recovery has been led by our global DTC business, which drove double-digit growth relative to fiscal 2020 led by 73% growth in digital. This DTC strength has been broad based with each region reporting positive DTC growth relative to pre-pandemic levels. More Vans consumers have returned to in-person shopping experiences earlier than expected and we see encouraging trends in our DTC KPIs with consumers buying more frequently and spending more per purchase relative to historic levels. In EMEA, despite the continued impact of lockdowns and supply chain disruptions, the Vans business grew 125% this quarter representing 30% growth relative to fiscal 2020, with strength across all major markets as stores reopened throughout the region. Vans APAC business grew 19% in Q1, led by 22% growth in China. June marked a milestone for the brand in China with the stock launch of the Vans Family program while the official launch will be celebrated with the Super Brand Day on Tmall tomorrow. We have already registered over one million new loyalty members following the initial launch, bringing Global Vans Family membership to nearly 17 million consumers. Vans kicked off its 52-week drop calendar this quarter seeking to create a consistent, predictable, globally aligned and focused approach to drive brand energy and consumer engagement. Seven weeks into the program, we are encouraged by the initial consumer reads and the instant sellout of several early drops. Internally, the Vans team has increased its focus, energy, and resources around driving newness and compelling storytelling, which we believe will unlock further long-term value for the brand. The team is on track to more formally market the Vans drop list in fiscal Q3 ahead of the fall holiday season. We remain bullish on the setup for Vans moving through fiscal 2022 and are encouraged by the early reads from the back-to-school season underway. We are raising our full year outlook to growth of 28% to 29%, representing growth of 9% to 10% relative to fiscal 2020. Moving on to the North Face. Global brand revenues increased 83% representing 6% growth above pre-pandemic levels. All regions rebounded sharply in Q1, highlighted by continued exceptional performance in EMEA, which grew 142% versus the prior year, and 58% relative to fiscal '20, despite the impact of door closures over the period. The APAC business grew 22% in Q1, highlighted by 80% growth in digital relative to fiscal 2020 levels. The North Face's spring sell-through rates were some of the highest in years reflecting strong progress on the brand's ability to drive 365-day relevancy. TNF continues to drive energy in on-mountain categories with the FutureLight franchise as well as the Vectiv footwear rollout, further establishing its legitimacy in outdoor footwear. We also see outsized growth in the casual categories such as logo wear, which grew over 100% in Q1 as consumers show strong engagement with the brand Off-Mountain. TNF loyalty program the XPLR Pass has grown to over 7 million consumers adding nearly 300,000 new members in Q1, driven by exclusive member experiences and reaching the consumer journey. We continue to be encouraged by the broad-based global momentum at The North Face and now expect the brand to deliver 26% to 27% growth this year, representing 15% to 17% growth relative to fiscal 2020. Alongside the significant top-line recovery, we're seeing strong improvements in profitability and continue to expect mid-teen profitability for TNF in fiscal 2022. The Timberland brand delivered 63% growth in Q1 tracking ahead of plan. We are encouraged by high-teens growth in the Americas, and 87% growth in digital relative to fiscal 2020 level. We continue to see outsized growth from Outdoor, Apparel, and Timberland PRO each growing over 75% in the quarter. Momentum behind core iconic product also continues with heritage styles being in strong demand despite historically low inventories. Our Timberland team remains committed to its purpose-led vision highlighted by the recently announced Global Product Take-Back Program in partnership with ReCircled. Beginning this fall, US consumers will be able to return any Timberland product to a brand store to either be refurbished for resale or recycled into future products. This program supports the brand's bold vision announced last fall for products to have a net positive impact on nature by 2030. We are encouraged by Timberland's strong start to the year and as a result, we now expect the brand to deliver modest growth relative to fiscal 2020 surpassing pre-pandemic revenues beginning in Q2. Dickies delivered another exceptional quarter, growing 58% in Q1, well ahead of our plan as the brand has kicked off several new campaigns and inventories become more available. We've been pleasantly surprised by the intensity of sell-through performance across all wholesale partners in the US. This acceleration continues to be driven by both Work-Inspired Lifestyle product, which reported strong growth across all three regions as well as core work items. Work-Inspired Lifestyle now represents about 40% of global brand revenue. Importantly, the Dickies brand has begun to deliver meaningful profitability improvements driven by both gross margin expansion and SG&A efficiencies. Q1 represented a strong start to our goal of returning to double-digit profit margins in the Work segment in fiscal 2022. Following a strong Q1 performance and accelerating demand signals across channels, we are confident in raising the full-year outlook for the Dickies brand to mid-teen growth in fiscal 2022 representing over 25% growth relative to fiscal 2020 levels. A quick update on Supreme: we continue to be pleased with the integration process. VF's supply chain organization continues to advance engagement with the Supreme teams with particular leverage opportunities in logistics capabilities, scale, and relationships, which couldn't come at a more opportune time. One quarter into our fiscal year, we remain confident in our outlook of $600 million and $0.25 from the brand. Before I turn the call over to Matt, I want to thank our associates from around the world, across our brands and enterprise functions with a particular call out to our supply chain teams who have been working tirelessly over the past 18 months to minimize disruption against the backdrop of unprecedented volatility. Our strong results are a reflection of the consistent execution, hard work, and inspiring dedication of our teams around the world. This continued passion and energy alongside the broad based nature of VF's acceleration give me great confidence in our ability to continue driving the strong recovery underway. While the first quarter represents a small portion of our total year, we're starting off fiscal 2022 building up the great momentum which began in February of this year. And now, I'll turn it over to Matt.

Thanks, Steve. Good morning, everyone. I'm really happy to update you on our strong Q1 results and revised outlook for the year. We are encouraged by the continued broad-based momentum across our business and the set up for each of our big brands heading into the heart of our fiscal year. Despite additional pressures throughout the global supply chain, I remain confident in our team's ability to execute and to build on the strong earnings recovery delivered in Q1. Let me start with an overview of the operating environment across geographic regions. In the Americas, less than 5% of our stores were closed at the beginning of the quarter and all stores are currently operational. The strong US consumer, easing US restrictions, and increased vaccination rates have encouraged a gradual recovery in foot traffic alongside continued strength in conversion. Our Americas DTC business grew 84% organically in Q1, surpassing pre-pandemic levels, led by a sharper than expected recovery in our brick-and-mortar business. Consumer appetite for athletic, athleisure, and outdoor categories remained strong benefiting our direct business as well as the performance of our key accounts. Low inventories and strong sell-through trends continue to drive down promotional activity and improve the quality of sales across the marketplace, which is resulting in stronger than expected order books for the upcoming fall and spring seasons. Moving onto the EMEA region, while lockdown measures continue to affect economic activity, our business has remained resilient, growing 97% organically in Q1, representing 13% growth relative to fiscal 2020. Both wholesale and DTC channels returned to growth relative to 2020. Strength from both our direct digital channel and from digital-tightened partners have more than offset the impact of brick-and-mortar store closures. About 60% of our EMEA stores were closed at the start of the first quarter. As we sit here today, all of those doors have now reopened. Consumer confidence is improving as restrictions ease and we've seen strong performance from our brick-and-mortar fleet following reopening. For example, our UK business delivered triple-digit growth from open doors following 3 months of lockdown, representing growth of nearly 30% relative to fiscal 2020. Finally, our APAC region continues to deliver double-digit growth despite sporadic resurgence of the virus across many market. Our China business grew 12% in Q1, which was impacted by a wholesale timing shift of revenues from Q1 into Q2. Excluding this impact, China would have delivered mid-teen growth this quarter. We continue to see digitally led growth in the region, particularly with our tightened partners, and remain confident in our ability to deliver greater than 20% growth in China in fiscal 2022. While we remain pleased with our APAC performance to-date, we are observing most Southeast Asian markets facing various degrees of lockdowns and travel restrictions, and while only about 5% of our stores are currently closed, commercial activity has been impacted across most APAC markets outside of China and Hong Kong. This latest wave also presents additional near-term uncertainty for our global supply chain. In recent weeks, more widespread virus outbreaks in key sourcing countries with lower levels of vaccinations have resulted in temporary factory lockdowns and manufacturing capacity constraints. Our supply chain also continues to be impacted by port delays, equipment availability, and other logistics challenges. Essentially, every link in the supply chain has been impacted to varying degrees over the last 18 months. And while we're not immune to this, we believe we've managed these challenges relatively better than most. Our teams remain focused on delivering the products to satisfy increasing demand signals in the most cost-effective and efficient way. Some of the actions include using airfreight, other means of expedited shipping, and dual sourcing where appropriate. While we remain confident in our ability to service our strong growth plan, there are financial implications to these actions. For example, we expect to spend more than $35 million in incremental expedited freight charges relative to fiscal 2020. We view our supply chain as a key competitive advantage for VF, and our teams are proving this now more than ever. I want to echo Steve's appreciation for the supply chain teams' incredible execution over the past 18 months. As a result of their tireless and tremendous effort, I remain confident in our ability to continue navigating this dynamic environment. Now, moving into our Q1 financial results. Total VF revenue increased 96% or 83% organically to $2.2 billion, reaching pre-pandemic levels one quarter ahead of our initial expectations. Our Q1 digital business is 72% above fiscal 2020 levels organically, representing a 31% two-year CAGR. We also continuously strengthened from key digital partners globally with pure play digital wholesale growth of over 70% relative to fiscal 2020. VF total digital penetration was roughly a quarter of our Q1 revenues, which represents about 2 times our penetration from the first quarter of 2020. Gross margin expanded 260 basis points to 56.7%, representing organic expansion from Q1 peak gross margin levels in fiscal 2020. Relative to last year, strong expansion was driven by greater full-price selling, partially offset by the expedited freight costs and business mix as our wholesale business rebounded sharply in the quarter. When compared to fiscal 2020 gross margins, we generated a strong mix benefit, partially offset by the incremental air freight costs and FX. Operating margin expanded meaningfully to 6.8% driven by strong gross margin performance and SG&A leverage relative to the prior year. We delivered EPS of $0.27 in Q1, representing 133% organic growth driven by a stronger top line and earnings flow through relative to our initial expectations. Owing to strong broad-based performance in Q1, we are raising our full-year fiscal 2022 outlook. Our outlook today assumes no significant changes to the environment, including increased disruption to our supply chain operations. VF's revenue is now expected to be at least $12 billion, representing at least 30% growth from fiscal 2021 and mid-teen increase relative to our prior peak revenue in fiscal 2020. Excluding the Supreme business, our fiscal 2022 outlook implies organic growth of at least 25%, representing at least 9% organic growth relative to fiscal 2020. As Steve covered, the increase to our revenue guidance is broad based across the portfolio, the stronger outlooks for each of our top core brands, and sizable increases in two of our emerging brands, Altra and SmartWool. Specifically, the improved outlooks are supported by stronger-than-anticipated order books and the accelerating DTC trends we've observed over the past five months. Moving down to P&L; we still expect gross margin to exceed 56% despite a 20 basis point to 30 basis point headwind from additional airfreight that wasn't assumed in our initial outlook. We now expect operating margins to be at least 13%, an improvement of over 20 basis points from our initial outlook, a signal to the upside potential of our model as their topline accelerates. Fiscal 2022 EPS is now expected to be at least $3.20, including a $0.25 per share contribution from the Supreme brand, representing at least 20% earnings growth relative to fiscal 2020. We continue to expect to generate over $1 billion in operating cash flow this year with planned capital expenditures of about $350 million including the impact of growth investments, as well as deferred capital spending from fiscal 2021. As announced on June 28, we closed the sale of the Occupational Work business this quarter providing roughly $615 million of additional liquidity. These proceeds are reflected in our fiscal 2022 outlook for total liquidity to exceed $4 billion. We expect to exit this year with net leverage between 2.5 times and 3 times providing us meaningful near-term optionality to deploy excess capital moving forward. So to conclude our prepared remarks, I'm extremely pleased with the broad based strength we're seeing across our portfolio as we begin fiscal 2022. We took bold decisive actions last year to position our brands and the enterprise with a strong recovery currently underway. And the balanced broad based nature of this recovery, along with the continued optionality that our model provides gives me confidence in our ability to drive sustainable long-term growth moving forward. We will now turn the call over to the operator to take your questions.

Good morning, Steve. Good morning, Matt. Thanks for taking my question. I wanted to ask about Vans, it's nice to see the raised guide for the brand. It looks like Vans was up single digits on a 2-year stack and this is despite I think the toughest compare that you have for the year. How should we think about the growth rates between the first and second halves on a 2-year stack basis? And are you raising the annual guide based on certain regional performance or is wholesale? And then if I go into the minutia here, but it looks like DTC Americas was up, but there might have been a timing shift within wholesale Americas, is that the case?

Good morning, Laurent. It's great to talk with you. Regarding what we saw in Q1, we're pleased with the results, especially the sequential improvement in our direct-to-consumer business and in the Americas. This was quite encouraging. There was a timing impact from wholesale shipping this quarter, amounting to about $30 million, which affected our global results in Q1. Looking ahead, we're incorporating the positive Q1 performance from DTC, primarily in the Americas, and are partially projecting that into Q2 based on favorable trends we've noticed. July is also starting off well, and we're seeing a stronger wholesale order book mainly in the Americas. For your question about growth rates between the first and second halves, our outlook suggests approximately 12% to 13% growth compared to fiscal '20. I believe that covers everything you asked about in terms of the details.

Thank you for your question about Vans. Regarding guidance, we are projecting an impact of $35 million from additional freight, which translates to a 20 to 30 basis point effect on gross margin. Can you elaborate on the expected gross margin in the first half compared to the second half? Additionally, Matt, during the last call, Camilo inquired about our expectations for first half EPS, which was around $1.20 due to the significant impact. How should we assess first half EPS?

Yes so let me first of all, we're not going to give bps specific Q2 outlook today. But certainly as evidenced by our outlook, we're confident in taking the year up. Remember, I would remind you that the September-October timeframe is always the hardest to call from a shipment timing perspective. I mean, there's a significant amount of activity during that period of time as we begin to really load up things on the wholesale side for fall and holiday and just given the supply chain pressures it's really hard to call the puts and takes between quarters. And to some degree, I think we can expect the quarter-to-quarter volatility will continue in the near term. However, though with what we know today while some of the flow may not be perfectly optimized as we begin the season in particular, we don't expect a meaningful impact on our ability to ultimately deliver the fall holiday season. And I'll remind you that as we have continually done we expect that we will perform relatively better than the competitive set. As it relates to gross margin, what I would say is certainly we're holding the year at greater than 56, we talked about the fact that we're absorbing some higher freight, particularly air freight and other forms of expedited freight. I think we said 20 basis points to 30 basis points in the prepared remarks versus our original outlook, so in a meaningful amount, I will tell you that the vast majority of that actually sits in our second quarter as the way we would expect that to play out. The other thing I would remind you that we have currency headwinds that we're up against that will begin to abate a little bit as we move later in the year. The last point I would make around gross margin is we talked about the fact that our pricing actions, which have been relatively limited through spring '21 and fall '21, you'll see the impact of more significant pricing activity as we move into spring '22. So the Q4 window will benefit a little bit more from that perspective as well.

Very helpful. Thank you very much and best of luck.

Thanks, Laurent.

Thanks, Laurent.

Thank you. Good morning, everybody. Just in looking at the detail you provided and the trajectory of the business versus '20, it seems like you're now going to be trending over the long-term EBIT margins that you provided at Beaver Creek how do we think about those implications as to what the business can deliver in this environment of full price sell-through, limited inventories and really accelerating demand on a global basis.

Yes, good morning, Camilo. Today, I'm pleased to report our strong recovery in gross margin during Q1, which we had anticipated. The underlying margins for our organic business are actually exceeding previous peak levels in the first quarter. Regarding our outlook, we are raising our target to at least a 13% operating margin, considering the air freight challenges we are facing. This reflects our confidence in achieving SG&A leverage. In our last call, we mentioned that if we identified earnings opportunities, particularly in Europe, we would expect a solid earnings flow as a result, and we are seeing that materialize despite some unexpected supply chain headwinds related to freight that emerged in May.

Got it. My second question is about the global regions. You mentioned the Americas in your slides, but kept Europe and APAC unchanged from your previous guidance. Considering what you're observing in Europe and the growth potential in meeting demand in China, why didn't you increase the projections for EMEA and the APAC regions?

Yes, that's a great question. First, regarding APAC, China is performing very well, but the rest of Asia is experiencing some volatility due to recent virus flare-ups. While this region isn't a major part of our business, there is some impact throughout the rest of Asia, including countries like Korea, Taiwan, Japan, Malaysia, and Singapore. On the European side, the business remains robust, and it may have been a bit conservative in our initial guidance back in May, particularly with comments related to the Americas. We're observing a strong rebound in the US consumer market, which positively affects our broader business across all major sectors in our portfolio. This resurgence is especially significant for the Vans brand, considering its substantial presence in the US, both in retail and physical stores. This trend is quite encouraging for us. Lastly, we are still taking a cautious approach regarding our direct-to-consumer business for the coming year. We anticipate sequential improvement and noted a stronger performance in Q1, which we expect to carry into Q2, but we remain careful about its development over time. I hope this addresses your question.

It does. Maybe I have just a clarification question on that, is it fair to characterize Europe as maybe being a quarter behind the US in terms of how you're stacking the resurgence in demand, is that a fair and accurate kind of depiction?

Our business has performed well throughout the period. I think it's accurate to describe the consumer sentiment positively. At the start of the quarter in Europe, we faced significant store closures, with more than half of our locations closed initially. Many of those remained closed for a significant portion of the quarter. However, we are now open for business as we finish this quarter. From the consumer perspective, I believe consumer confidence is indeed a fair assessment. Overall, our business has been strong and resilient, and in fact, on a two-year comparison, our performance in Europe improved during the quarter.

Got it. Thanks for the color. All the best.

Thanks, Camilo.

Thanks, Camilo.

Great, thanks. So on the North Face, maybe could you help speak to order trends that you're seeing in the business and just drivers of the 15% to 17% increased outlook this year, which basically doubles your long-term target. Just what you're seeing in the business and confidence in those targets.

Maybe I'll start there. Hey Matt, good morning, the order trends are good. Honestly, the outlook has improved a bit for the North Face, largely due to the US order book. The order books are solid, but what's even more encouraging is the strong sell-through happening across our business, geographies, and channels. This gives us a lot of confidence in what we're doing, as it's clearly resonating with consumers. That strong sell-through is likely to lead to an even stronger order book. Steve, do you want to add anything?

Yes, I would just say it's the North Face sits in that outdoor camp, which has had a lot of energy, last year nets carried into this year and North Face is the number one global brand and with the work that the team has been doing, the focus around really the segmentation between the On-Mountain and Off-Mountain offer, we see very strong growth with our FutureLight products, really proud of the team in the ability to deliver effective and secure. Two outside magazine awards across two different categories for one collection of footwear just really validates North Face's opportunity within that outdoor footwear space. But also you've heard us talk a lot about getting 365-day relevancy to evolve our sportswear specifically our logo wear and to be able to drive triple-digit growth in the quarter. This validates the work being done, the demand that's there for this brand globally, we continue to see very strong results internationally led by Europe and China very strong and it's just great to see the momentum building here, built based on the strong sell-throughs that Matt referenced. The brand is in a really good position for the balance of the year and hence, giving us confidence to raise the outlook.

Great. And then, maybe just to follow up on the expense line Matt how best to think about expenses that you see us as transitory or more one-time to this year. And is there any change to the flattish five-year forecast? I think you laid out, which I think in the next two years would drive pretty material leverage on the SG&A line, just making sure we're thinking about this right.

Yes, we view SG&A expenses in the short term as facing some temporary challenges. We've discussed these issues previously, and the situation remains the same. We are particularly noticing increases in freight costs and related shipping expenses due to supply and demand dynamics, as well as in our distribution efforts. Additionally, we are managing some one-time costs connected to our new distribution capabilities and increased capacity in several locations in the US and the new distribution center in the UK. We aim to navigate these challenges quickly. Regarding our long-term outlook, we were pleased with our Q1 results and the leverage we achieved compared to our original expectations. Some of this is related to timing shifts in spending, but we are satisfied with the progress we've made. We expect to end the year with SG&A leverage and anticipate that next year will align with our long-range goals, pushing us toward the mid-teens operating margin we outlined previously. I hope this provides the clarity you were seeking.

Great. Best of luck.

Hey guys, thanks. I have a few. Thanks for all the help today, and I guess on Vans, guys. Matt, I can tell you see some optimism in the order book in North America. It really helps you talk about that a little bit, what's changing just help us understand where the increases are coming from in that business. I think maybe someone touched on earlier, there was, it looked like a little bit of a wholesale shift that impacted in first quarter, but I think it would be really helpful to understand where the increases are coming in on the wholesale order book particularly in North America relative to where you were 90 days ago.

Yes, good morning, Michael. I would say it's really sort of broad-based honestly across the US market and it's really driven by, as we saw in our own stores. We just see a continued improvement in the business, right. I think a lot of that is tied to the fact that consumers are coming back into stores, we're relatively well positioned from an inventory perspective coming through spring, and as we head into back-to-school. And so we're seeing those sales to stock ratios perform quite well and again that's broad based. We're seeing that in the sort of the specialty channel, we're seeing it with some of our key national partners. So I don't think it's any one place, I think it's relatively broad-based. And as you know the order windows are a little tighter in Vans meaning we're taking orders about 4 to 5 months out based on our shorter lead times there and so we said, we have the opportunity to get after more volume if the business came on a little stronger and we've seen that occur and so that's sort of playing out as we hope it would.

You mentioned in your prepared remarks about Vans being at the forefront of the competitive landscape over the next few quarters. While many footwear brands have not reported recently, I would note that compared to 2019, Vans has demonstrated significant growth rates. Could you elaborate on the factors behind your expectation for Vans to remain a leader in the competitive set in the coming months?

Good morning, Mike. This is Steve, and I'll take that. We believe there is a significant opportunity to excel against our competitors due to our supply chain's capability to meet forward demand and maintain adequate inventory levels for Vans. This has positively influenced both our wholesale and direct-to-consumer performance. You may recall from our last call that I mentioned the considerable potential as direct-to-consumer sales rebounded, and that momentum is continuing as we head into the back-to-school season. The demand trends are promising, and we are well-prepared with the necessary inventory for this period. My comments about the supply chain pertain to our capacity to quickly restock and replenish inventory in response to any higher-than-expected sales, consistent with our current observations.

Mike, I want to add that in relation to our competition, a significant factor is our retail stores and the teams that operate them, who serve as our brand ambassadors. It's been challenging for us, especially during the period when many stores were closed last year, as this affected the overall customer experience and engagement that typically flourishes in our stores. We believe that with our stores now open and customers returning, this will work to our advantage. This consideration is important as we evaluate our position against our competitors.

And I'd pile on there a little bit Mike, we're reaping the benefits of supporting our retail teams through last year by not furloughing them but we carry those talented associates forward and the historical conversion rates that we see we're actually seeing a slight outperformance to that and that's driving, that's another aspect of the strong DTC results that we're currently seeing.

Great, thanks a lot, that's helpful.

Great, thanks. Good morning, Steve. You talked about in your prepared remarks about the wholesale level coming back to almost pre-pandemic levels. Can you share a bit more about the complexion of wholesale today versus pre-pandemic from a mix perspective, how does it look in terms of the composition between key partners, third-party digital? And then I have a follow-up on Dickies. Thanks.

I’ll follow up on your question, Erinn. The key accounts in our wholesale business are extremely important, and some of these key accounts are digital. We’ve discussed our partners in Europe and Asia, but in the US, we are seeing strength in the outdoor and sporting goods sectors. As we position our brands to meet this demand, the pent-up energy we experienced from Q4 into Q1 is boosting our wholesale performance.

Got it great. And then on Dickies, I mean the growth has been really incredible both on the topline and margins, can you share a bit more about where you see the incremental share gains coming from both in the Americas from here as well as in China? Thanks.

Sure, I'll take this one and Matt can add if needed, but we're enthusiastic about the Dickies brand. Since we acquired it, it has significantly exceeded our expectations, even in the face of COVID. We're seeing strong performance in our core work business in the United States. The Work Lifestyle segment is gaining momentum and now accounts for about 40% of our total revenue. Over the last two years, the team has streamlined their approach by focusing on key products and enhancing the lifestyle aspect while still honoring the core workwear. We see opportunities for growth beyond the traditional points of sale, especially in the sporting goods sector. The recent skate collection launch has opened up access to new specialty skate retailers, enhancing our brand presence. It also allows us to elevate our offerings. We recently introduced the Signature Collection, which features higher-priced items with better margins, centered around our key products. The important takeaway is that they have concentrated their efforts across all three regions, building on traditional channels, but because of their broad momentum, they can now branch into new distribution channels and wholesale partners while simultaneously improving our digital outreach and engaging with consumers directly.

Yes, maybe just one thing to add there, maybe a little less sexy but also really important. And to give credit to the teams and thanks for asking about Dickies, the brand is performing and the teams are doing a great job, we didn't make it easy on that after acquisition, we had to spend the Kontoor business and we sold off Occupational Work, all of which had impacts because of the connections in the back end of some of the things that we were doing there. So we've had some fits and starts there in the early days, but we are really now starting to see the benefits in the supply chain through some of the integration activities around demand planning, as an example, which ultimately allows us to service the business in a better way too, so that's certainly helping while at the same time obviously there's a lot of momentum from a brand key perspective. So those things coming together is I think sort of a one-two punch.

Thanks so much.

Thanks, Erinn.

Yes. Excellent, thanks for taking my question. I wanted to go back to Vans, you gave some helpful commentary on North Face and where that business is from a margin standpoint, I think you said mid-teens for this year, which is an impressive recovery. Where does Vans sit in the overall margin profile relative to where it was back in Beaver Creek in pre-fiscal '20 and it was significantly higher from a contribution margin then every other brand in the portfolio. Just curious where that sits now and where you think it's going to go in fiscal 2022 and beyond?

Yes, I think it's still in the same spot right. It sits well above most of our brand portfolio from a profitability standpoint really, strength in the gross margins, strength driven from the direct-to-consumer business that really, really profitable brick-and-mortar franchise. If you think about, I mean the one thing I would say versus pre-COVID levels there is still a little bit of a headwind there primarily because of two things, one the freight side of things that they're dealing with as all of our brands are but remember too, that's the one business where brick-and-mortar is really significant. And while we're seeing sequential improvement and while fortunately, we're seeing that even be a little stronger than we thought. We're still modeling brick-and-mortar to be down across the year and not really fully recover until early fiscal '23. That was my point earlier about, we remain fairly conservative in our outlook there as we move through, in particular back half of the year. So there's a little bit of overhang there in the short term, but, yes Vans profitability that you would have seen in Beaver Creek and what we've talked about historically that remains, and the outlook on a longer-term basis is really compelling in terms of value creation.

Understood. And then just going back to I guess North Face and Outdoor, can you talk to the growth you're giving off of fiscal '20 pre-COVID levels indicates a nice recovery. Can you talk to the sequencing as we go through the year. I think the guidance for the remainder of year was above where you were in Q1, so just curious how we're thinking about North Face as it relates to both wholesale and DTC as we go through the remainder of the year.

Yes. Certainly, and I'm not going to be specific quarter to quarter, but you can expect sequential improvement as we step through the year notwithstanding what could be some volatility from a shipment timing standpoint around that peak shipping window as we begin to move into fall holiday. Yes, I think the thing to remember there is the strength that's still heavily weighted business toward fall holiday wintertime and the strength of our performance last year from a sell-out perspective and the order book profile as a result of that, both in the US and in Europe. So that's a big part of the growth as we see that wholesale business bouncing back sharply and as we see our direct-to-consumer business continue to recover sequentially, as we talked about in Vans, similar kind of comments there.

Understood. Thank you.

Hi, good morning. Thanks for taking the question. I guess I would love to hear some more about what you've learned so far on Supreme, the update, the integration, the game plan, any early learnings, I think the accretion was probably a little bit better than we anticipated. Any commentary you could share with us would be great. Thanks.

Yes, good morning, Bob. I'm happy to share that we are pleased with the progress of our integration. Our focused approach is allowing Supreme to gain insights into VF, while our VF teams are learning about Supreme's business and identifying opportunities to provide support. The brand is meeting our expectations, and we are seeing stronger results compared to our long-term growth targets for the business. We are connecting most effectively with our supply chain teams, which is timely as we aim to leverage our logistics capabilities, scale, and relationships to assist in shipping. We're working closely with the Supreme team to ensure that their weekly drop cycles align closely with the seasonal plan. It's still early in our understanding of the business, but we are very confident in the long-term value creation potential we see for Supreme and are focused on regional expansion and partnering to maximize our skills and capabilities.

Great, thanks. And just on the supply chain. I guess if we go back to the decision to add the incremental airfreight. Is that a function of just trying to make sure you have the product to meet the demand is it incremental bottlenecks that you're seeing in Vietnam or in China and I guess is the expectation just in the coming quarter or if you can just give us an idea in terms of how long do you expect the incremental pressures on the margin from the incremental air freight.

Yes, what we are dealing with is that the business is strong in terms of demand, and we will ensure that we can meet that demand optimally. We are focusing on airfreight and other expedited shipping options to achieve this, although we are experiencing some delays in the supply chain. Generally, these delays are measured in weeks rather than months, particularly in Southeast Asia. Fortunately, most of our factories are operational, though not all, and we are diligently assessing the impact of those that aren't. As I mentioned earlier, we expect some optimization in our logistics at the start of the season, but as we progress, we believe we will be able to support the business and deliver products in time for the fall holiday.

And maybe to pile on here Bob. I think as we look at strategically using airfreight and other expedited forms of moving our goods, we see an opportunity to capture share because we do think in some cases because of our factory partners their current operational capabilities certainly not operating at full capacity but at sufficient capacity. We think we have the opportunity to be in a position to grab share with some of our large brands, certainly with our own distribution, our own DTC and e-commerce, but there are opportunities to work with our key wholesale partners and advantage there position as well.

Thank you.

Yes. Great, thank you. Just maybe one clarification first and thinking about the DTC outlook. I know you raised the full-year target. But are you assuming the trend you're seeing currently for Vans does not continue or is that the message. And I guess globally for DTC have you reflected the more positive order book indications into how you're thinking about your own DTC business.

Yes, from a direct-to-consumer perspective, we've built on what we observed in the first quarter and have raised our DTC projections, especially for the Vans business in the Americas. This trend is mostly reflected across our direct-to-consumer operations, but it's particularly pronounced in Vans. Although we've maintained a cautious approach regarding our revenue assumptions for the latter half of the year, we have notably increased our inventory for Vans to accommodate potential growth, both in our stores and for wholesale reorders. We're taking a more proactive stance on inventory for Vans and to some extent, our Dickies business as well.

Okay. That's really helpful. Thank you. And Steve, if I could follow up one more question on Vans, I'd be curious any learnings you have from the newer approach in the recent months with the product drops in the incremental marketing attention you've been focusing on Vans any learnings from that. And then how should we think about your plans in those areas going forward?

Yes. Thank you for the question. This is an exciting development for Vans. They quickly adapted to the 52-week drop model, which aims to function like a true retail operator by providing a more predictable and visible understanding of product flow. This approach has been very successful so far. We're about 7 weeks in, and they are gaining insights each week on managing their weekly offers, blending content and storytelling, and utilizing broad global drops that can reach multiple distribution channels instead of just select products. The key takeaway is that they are enhancing visibility and giving consumers enough time to learn about upcoming products, generating excitement and demand, as evidenced by significant collections released this year, including Bodega's specialty bob collection, the broad-based SpongeBob SquarePants line, and the recent Metallica drop. Moving forward, the Vans team will refine this model and will start publishing the drop list, which we believe will happen by Q3. This will give consumers visibility of what’s coming, allowing them to prepare to obtain limited drops or join queues for broader releases. This is a thoughtful evolution of an already well-designed market model that drives brand excitement, increases consumer demand, and ultimately builds consumer loyalty.

Yes. That sounds very innovative for a brand like Vans, thank you very much.

Thank you.

So just real quick. Thank you everybody for taking the time to join us this morning. I would just tell you and we couldn't be prouder of our teams who helped us deliver an outstanding quarter. We continue to work hard to meet the demand, and to be able to power back to pre-pandemic revenue levels slightly ahead of where we thought we would and to see that earnings recovery. It's just a validation of our model. The growth is broad based across brands, regions, and channels despite continued COVID-related impacts that we're seeing both from a consumer standpoint but also back through our supply chain. We're going to remain very focused on the things that we can control and we're going to drive against those parts of the business where the consumer is coming back strong and continue to drive towards delivering a year that is stronger than what we originally committed to and meet your expectations, but ultimately drive the value for our shareholders that you expect.