VF Corp (VFC) — Q2 2023 Earnings Call Transcript

Good morning and welcome to VF Corporation’s second quarter fiscal 2023 conference call. Participants on today’s call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in 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 have defined in the press release that was issued this afternoon and which we use as lead numbers in our discussion, because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts, which are in accordance with 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. Unless otherwise noted, results presented on today’s call are based on continuing operations. Joining me on the call will be VF’s Chairman, President and Chief Executive Officer, Steve Rendle; EVP and Chief Financial Officer, Matt Puckett. Following our prepared remarks, we’ll open the call for questions. I'll now hand over to Steve.

Good afternoon, everyone, and thank you for joining our second quarter fiscal 2023 earnings call. I'll provide an operational update for the quarter and for the year-to-date, and Matt will provide a review of our financial performance. I'd like to first start with a few words on the macroeconomic environment, which even since we met for our Investor Day exactly a month ago, continues to dynamically evolve. While consumer health remains relatively intact across most of our markets, we continue to see global trends result in more choiceful and cautious spending behavior. In North America, we saw a mixed back-to-school result across product categories and today are seeing variable traffic patterns across channels and an elevating promotional environment in most markets. The situation in China continues to improve, although rolling lockdowns have slowed this progress. Despite continued softness in China, we're seeing pockets of growth in this market led by the North Face, as the brand's global leadership role in the important outdoor TAM continues to influence this relatively underpenetrated market. Outside of China, we're seeing further improvement across the rest of Asia, led by Japan and Korea, which remain highly influential on Greater China. And we had another quarter of strong growth across our portfolio of brands in Europe, despite a backdrop of deteriorating consumer confidence. Despite this mixed macroeconomic picture, our portfolio of brands continues to deliver a broad-based performance, as consumers continue to prioritize their active lifestyles and lean on our brands to fulfill those needs, and the investments we're driving into our key strategic growth capabilities and platforms continue to support the growth of our brands. For the quarter, our revenue grew by 2% and our adjusted operating income was approximately $380 million. We returned $194 million in cash to shareholders, bringing the year-to-date total to nearly $390 million. As you heard at our recent Investor Day, we are committed to building on those things that have always made us uniquely VF and to growing our highly intentional portfolio of brands. So to start with Vans, our actions to accelerate momentum at the brand are still early. And as anticipated, sales in the second quarter were lower, primarily as a result of a disappointing back-to-school season in the Americas. Q2 sales were down 8%, bringing year-to-date revenue to minus 6% and minus 1%, excluding China. As mentioned at Investor Day, we have a deep and broad bench of strong talent at VF, and are now strategically deploying this into the Vans business. We recently made two important appointments adding a new position of Chief Product and Merchandising Officer and bringing a key leader from North Face to head up digital. In terms of Vans product, innovation in the progression footwear line, which today represents 25% of brand sales, continues to drive an uptick in demand with the new UltraRange EXO, MTE Hi showing strong initial sell-through. As you heard from Kevin Bailey at the Investor Day, it will take some time for the product facing initiatives to be introduced. And when they come, we are confident that they will have a positive impact on the brand's results. Traffic to our stores and digital platforms continue to be below historic levels. While the industry-leading conversion in-store remains in line with our historic levels, and our test and learn in-store merchandising sprints are showing early indications of improvement in both stores and online. Our focus in the second half is to prioritize initiatives that drive traffic into our direct channels where we have the opportunity to benefit from our strong conversion rates. I remain confident that we have the right people and the right strategy, and we'll execute to deliver results at Vans. Now to the North Face, which continues to deliver strong and broad-based performance and prove its undisputed leadership in the outdoor category, with revenue up 14% versus last year, reflecting double-digit growth across all regions and channels and leading to our biggest second quarter ever for the brand, bringing the year-to-date growth to 21%. As you heard from Nicole Otto at the Investor Day, product innovation remains at the forefront of the brand's continued momentum. With a good start to the season in outerwear, which showed strength in soft shelves, fleece and lightweight insulated jackets as consumers prepare for the coming fall/winter conditions. In addition to the good performance of outerwear, the continued focus on 365-day apparel in the Americas led to a double-digit growth in D2C for this region. Bags and luggage saw global success with recovering summer travel in a strong back-to-school season, driving energy for the brand. And finally, the North Face and Gucci Chapter 3 collaboration launched and drove meaningful brand heat. The brand continues to push boundaries with its technical innovation and was recently recognized by Outside's 2023 winter gear guide, which featured eight. That's right. I said eight products from the North Face as season must-haves. In addition, I'm extremely proud that the North Face Vective Fastpack insulated FUTURELIGHT Boot received the Editor's Choice Award and a feature-length review alongside its inclusion in the best winter hiking boots of 2023. I encourage you to check this out. The North Face continues to deploy innovative tactics in order to deepen its understanding and connection with consumers and to enhance engagement. XPLR Pass membership added more than 800,000 new members in Q2 and surpassing 15 million members in total. Overall, the brand has strong and balanced momentum and is well positioned to continue to generate long-term sustainable growth. On to Timberland. Q2 sales growth was up 3% versus last year, impacted slightly by shipment timing. Sales for the first half were up 7% versus last year, running slightly ahead of its long-term plans as the brand continues to perform well. You heard recently from Global Brand President, Susie Mulder, about Timberland's sharpened focus, and it's paying off. Our new integrated brand and product campaign, Built for the Bold, taps into our cultural relevance and work in outdoor heritage with progressive products like the GreenStride Turbo Hiker, the number one new fall 2022 style across all regions and channels, and the new Trailquest hiker driving growth during launch week. As part of our marketplace strategy, the campaign launched in New York City and London, driving sales, traffic and strong growth across digital platforms. Overall, the campaign has topped an impressive 1 billion impressions. We continue to see momentum in EMEA, with growth over 50% in our community membership month-over-month, and with the business being up nearly 20% in the quarter. We also continue to drive brand heat and attract new consumers with collaborations like Veneda Carter with more than 70% of purchasers in the EMEA being new to the brand. And finally, our Pro business returned to growth this quarter, fueled by strong performance in brick-and-mortar and a new campaign focused on bringing new consumers into the skilled trades. Overall, a solid quarter for Timberland with momentum as we head into Q3. Finally, to round out the big four, Dickies. Global revenue was down 15% in Q2, and 14% in the half. In the quarter, we saw strong growth in EMEA, driven by work lifestyle as the brand continues to gain traction in this region. These results were outweighed by further impacts in the Americas relating to our largest wholesale customer, which continues to tightly manage inventory levels. This performance impacted global results by about 10% in the quarter. Outside the value consumer, the brand is healthy, as you recently heard from new Global Brand President, Lance Meller, at our Investor Day. The icons business was up mid-single digits in the Americas, with women's being a significant contributor. While overall Asia Pacific continues to feel the impacts from COVID-related disruption, we continue to make progress in key markets beyond Greater China, experiencing significant growth with partners in Japan, and successful expansion in South Korea. On the marketing front, the maiden Dickies campaign, celebrating the brand's 100-year anniversary continues to support brand awareness with a meaningful growth in impressions driving organic pickup on prominent social media platforms. Dickies continues to expand its appeal with new consumers in all regions, while maintaining strong brand momentum giving us confidence in our long-range plans for the brand. Turning to the rest of the portfolio in Q2. I'll start with Supreme, where the brand grew revenue by 7%. The fall/winter season has had a good opening. We've dropped the new Yoji Yamamoto collection as well as the Nike ACG release and launched the Andre 3000 Poster campaign. Stores continue to see strong foot traffic in all regions, with Japan showing particularly good trends leading into the reopening of tourism. We also renovated our Harajuku store with the opening event featuring performances by Bladee and Young Lean. Our Outdoor emerging brands in aggregate grew by 14%, driven by continued outstanding growth at Ultra, which achieved a strong double-digit growth rate in both road running and trail running and was up mid-teens in the Americas and triple-digits in EMEA. The brand's performance has been fueled by continued success of the loan peak as well as launches of key styles like Torin 6, Olympus 5, Outroad and the Mont Blanc BOA. Smartwool revenue in Q2 grew by low double digits, driven by apparel, up in the mid-20% range. We saw continued momentum in base layer and the launch of the intranet mid-layer collection. Icebreaker was up mid-single digits, led by strong brick-and-mortar performance and the launch of Shell Plus, a 100% natural outer layer, which has already won multiple innovation awards. Icebreaker launched their fourth transparency report, celebrating 95% plastic-free materials and pioneering the journey towards regenerative wool practices. Momentum in our PACs business continued in Q2, with high-teens growth for the quarter, driven by strong back-to-school performance and continued recovery in global travel trends. Across the majority of our business, we are delivering strong revenue growth as the investments behind our strategic growth platforms are yielding positive results. As we have highlighted before, our intentionally built portfolio of brands is generating broad-based growth, excluding Vans, which is early in its work to reset, refocus and reaccelerate, the remainder of our portfolio grew revenue by 11% in the first half, with outdoor emerging brands continuing to gain scale and our PACs business recovering nicely and seeing an acceleration of growth to plus 25% across the same period. Regionally, our EMEA business continues to deliver consistently strong results, outperforming the broader European marketplace. Our first half revenue was up 16%, highlighting the strength of our portfolio, the relevance of our brands across all markets and the important strength of our international platforms. The North Face business continues to power forward, including, and importantly, the North Face grew first half revenue by nearly 30% in Greater China, where most brands inside VF and across the broader market have been impacted by ongoing disruption. And the Dickies brand is continuing to gain momentum across the Work Lifestyle segment, where sales excluding China, were up about 20% in the first half. We are continuing to actively manage the near-term challenges presented by our largest brand, Vans, the ongoing COVID-related disruption in China and the broader macroeconomic and geopolitical challenges, which have created an unprecedented level of uncertainty, which all businesses and consumers are navigating. I remain confident in our ability to deliver on our overall revenue targets as we prepare to maximize our potential when the macroeconomic environment improves, leveraging VF's powerful brands, unique business model and critical strategic growth platforms. In summary, our performance in Q2 reflects a balanced delivery of results and speaks to our resiliency as we adapt to an increasingly variable and softer consumer backdrop. Our purpose-built portfolio of iconic deeply loved brands continues to benefit from strong tailwinds in the outdoor, workwear, streetwear and active spaces. We continue to invest behind digital and innovation, with our brands generating a regular cadence of new product initiatives driving an increasingly closer connection to our consumers. The quality of our performance is a testament to our deep bench of strong talent and the incredible teams whose enthusiasm, hard work and commitment continue to enable us to deliver results. I remain incredibly impressed and grateful for their ongoing contributions. I will now hand over to Matt to take you through our financial performance.

Thanks, Steve, and good afternoon, everyone. As Steve mentioned, we delivered a balanced set of results in Q2 as we adapt to a more variable and softening consumer environment. Revenue was up 2% in constant dollar terms and up 4% excluding China. For the first half, revenue was plus 4% and plus 7%, excluding China. After accounting for a negative FX translational impact of approximately $195 million, nearly double the level seen in Q1, sales were down by 4% on a reported basis in the quarter. Globally, both our wholesale and direct-to-consumer businesses generated low single-digit growth in Q2 and DTC returned to growth at the VF level despite a lower performance than anticipated from Vans North America. Our adjusted EPS was $0.73, down 34% or down 27% on a constant dollar basis. About one-third of this reduction versus last year relates to non-operating impacts. Before I unpack the P&L in more detail, I'll give you an update on the operating environment across our primary geographies. Our rolling lockdowns continued to disrupt operations in China during Q2, and we are otherwise open for business from a COVID standpoint across the value chain. Revenue in the Americas was down 3%, and but up 3%, excluding Vans. Against the difficult macro backdrop characterized by softer traffic and components of our D2C network, higher inventory levels across the marketplace and an increasingly promotional environment. Our outdoor businesses continue to perform strongly, led by the North Face, growing low double digits in the quarter and continuing to generate strong sell-out across channels. Vans performance in the region was down 11%, impacted by lower back-to-school sales, an increasingly cautious approach by our wholesale partners, leading to higher cancellations and lower traffic affecting our direct channels. Finally, Dickies down 17% was impacted by further inventory adjustments made by our largest third-party retailer. Across the rest of the business, the brand was down low single digits overall, despite similar inventory pressures and other more value and consumer work accounts. This was helped by double-digit growth in work-inspired products. Our business in EMEA remained strong despite a further deterioration in consumer confidence and the corresponding impact to traffic levels. Revenue in the region was up 12% in the quarter and by 16% in the year-to-date, driven by broad-based growth across all brands, with all brands growing and 10 brands growing double digits in the quarter. Both DTC and wholesale are up double digits, again, signaling the broad-based strength our brands are enjoying in the region. Within wholesale, the third-party digital business was softer, reflecting a more conservative approach to inventory as well as some cancellations amidst lower traffic. By market, four of the five largest markets generated strong double-digit growth. France, Italy, Spain and Germany. As anticipated, APAC progressively improved and returned to growth with revenue plus 2% in Q2, in line with our plans. A testament to the strength of our brands and to the efforts of our teams to respond with agility to ongoing market headwinds, particularly in China. The performance in Greater China improved to down 10% in the quarter, in contrast to down 30% in Q1, but continues to be impacted by widespread rolling COVID lockdowns and restrictions as well as lower consumer spending. This result was largely in line with our expectations for the half. The rest of Asia improved further, growing 30% during the quarter. The Outdoor segment continues to experience favorable tailwinds, and the North Face delivered yet another quarter of strong double-digit growth across the region, highlighted by revenue growth of nearly 30% in the first half in Greater China. Now moving on to gross margin, where we were again adversely impacted by a number of factors in the quarter. Our adjusted gross margin was down by 240 basis points. As anticipated and after two negative quarters, the mix impact was flat in the quarter. Rate was down 220 basis points, primarily reflecting higher discounts, increased promotional activity and elevated inventory levels. Higher product costs have been offset by planned price increases. Turning to an update of the supply chain environment. Our supply chain is one of our key strategic platforms and a competitive advantage for VF. As you heard from Cameron Bailey, at our recent Investor Day, we continue to act with agility and speed, leveraging our scale and diversification to mitigate ongoing headwinds and disruption. Our sourcing and production base remains open and is operating with greater diversification, stemming from a concerted effort to move production closer to consumption where it makes sense. We are still feeling the effects from the eight weeks of large-scale lockdowns in China during Q1, as the impacts work through the system. And while much more stable, we continue to deal with ongoing micro lockdowns and the impact to operations in China during Q2. That said, our diversification, scale and agility were enabling us to adjust as needed to minimize disruption. From a logistics standpoint, we are seeing a further improvement in transit times across the water and dwell times import, which are contributing to improving overall predictability and reliability. Although, it's worth noting that variability continues to remain somewhat elevated as compared to the pre-pandemic environment. Overall, we've begun to reduce lead times from both a production and logistics perspective, although the total cycle time is still higher than historical levels. We anticipate closer to normal lead times as we move into fall 2023. On the cost side, both ocean and air spot rates reduced further during the quarter but remained substantially higher than historic levels. Finally, our port and route diversification strategy in North America remained in place as we continue to follow the ongoing West Coast labor negotiations. This allows us to more consistently and better serve the consumer, but adds cost in the short term. In summary, while the situation continues to improve gradually, the supply chain overall remains disrupted relative to the pre-pandemic norm. So let me spend a couple of minutes on inventory, which, of course, is the hot topic at the moment. As we mentioned on our last earnings call, during Q1, we implemented a supply chain financing program with the majority of our finished goods suppliers. This results in us taking ownership of inventory at the point of shipment rather than at the destination point, meaning we own the inventory for an additional month or so. There's no impact on cash flow, since the point at which payment is due to the supplier hasn't changed. The increase in inventory is offset by an increase in accounts payable as evidenced by our Q2 results, where payables were up 91% in the quarter. As part of the program and as of September 1, VF has increased payment terms with the majority of its finished goods suppliers. This change will begin to benefit VF's overall cash flow later in the second half, and this impact has been contemplated in our operating cash flow outlook. Inventory levels are up 88% versus last year, including an increase of about $510 million in in-transit inventories relating to the supply chain financing program. Excluding this factor, inventories are up 58% versus last year. On an organic basis, excluding in-transit versus Q2 of fiscal 2020, which is a pre-pandemic comparison, gross inventories are up about 35%. Roughly 75% of the increase versus last year was to rightsize the inventory levels from their unusually low levels and to support this year's growth plans. The balance of the increase largely represents higher-than-planned levels of inventory at Vans and Dickies, primarily in core products. Actions are underway to mitigate this and ensure we are well positioned at our fiscal year-end and importantly, as we manage the overall health and levels of inventory towards spring and summer of 2023. These include adjustments to forward purchases where possible, controlled sell-down of excess and distressed inventory and in some cases, where the stock is largely replenishment plans to carry a higher level of inventory in the near term, such as in the case of core Dickies Workwear products. Now to wrap up the P&L. Our adjusted operating margin was down by 440 basis points, reflecting lower gross margins as well as ongoing targeted investments, which we continue to make to advance our key strategic priorities and support our brands' growth opportunities. SG&A was up 7% on a constant dollar basis in the quarter, still above but more in line with our full year revenue growth outlook of 5% to 6%. Operating expense deleveraged in the quarter, the result of three key factors: First, we continue to invest behind our key strategic priorities. Those investments were up by 9% in the quarter, primarily reflecting initiatives in the digital and technology space and continued investment in demand and product creation in the brands; second, our revenue growth of plus 2% in the quarter is projected to be our lowest quarterly growth of the fiscal year; and finally, lower profit margins in our highly profitable Vans direct-to-consumer business, reflecting the brand's recent performance. We are continuing to maintain strict cost management against all controllable spend. Moving on to our outlook for the rest of fiscal 2023. We are confirming our full year revenue outlook of plus 5% to 6% constant dollar growth and now expect about 6.5 points of impact from foreign currency translation on reported revenues. And considering the velocity with which the macro environment and the marketplace has evolved, even since we last updated you just a month ago, we're taking a more cautious approach in planning profitability for the balance of our fiscal year. That said, we are proactively taking near-term actions to drive higher revenue and profit in our second half amidst the difficult and highly promotional environment. Specifically, we are leveraging our portfolio strength and sharing learnings across the organization in order to increase consumer traffic, engagement and conversion in our direct channels, leveraging better-performing tactics across our company and deploying these to other areas. Second, we'll drive the profitable sale of excess inventory utilizing our channels first, followed by other important strategic partners. Third, we will work with our brands, particularly those that are performing well, to position the business to set spring 2023 early in our fiscal Q4, where opportunities exist to drive incremental revenue; and finally, we will reduce all non-strategic controllable spend in the year-to-go period. We remain committed to maximizing profitability in the back half of the year in the face of a challenging set of macro factors. Within the details of our fiscal year 2023 revenue outlook of plus 5% to 6% constant dollar growth, we are anticipating the North Face will grow by at least 12%, suggesting an implied second-half growth rate of at least 7%. Our Vans guidance for the year is expected to be down mid-single digits, implying a low to mid-single-digit decline in the second half, a slightly better result than in the first half, where the brand declined 6%, driven by easier prior-year comparisons than China. Moving on to our fiscal year 2023 adjusted gross margin outlook. Considering a more impactful promotional environment, reflecting the heightened and increasing levels of inventory across the marketplace and the ongoing US dollar strengthening, we now anticipate gross margins to be down by 100 to 150 basis points versus last year. As a result of the lower gross margin and greater foreign currency impacts, we are lowering our adjusted operating margin guidance to be approximately 11%. Our EPS range is now anticipated to be $2.40 to $2.50 relative to $3.18 last year. As we've mentioned previously, there are several non-operating factors that are impacting the comparison to last year, and these have only increased with the larger foreign currency headwinds. The total negative impact versus last year of these factors, led by an FX translation impact of $0.31, is about $0.50. Finally, a quick update on our projected cash evolution this year. Our full year guidance implies continued healthy cash generation over the course of the year with adjusted operating cash flow, excluding the one-time Timberland tax deposit expected to be at least $900 million. To give you an update on the Timberland tax deposit, the appeal was filed on October 7th, and we made the forecasted payment of $876 million in the early part of Q3 while at the same time, drawing down $800 million against the recently established term loan facility with capacity up to $1 billion. We've approved a further increase in the dividend to $0.51 a share as part of our ongoing commitment to return cash to shareholders. Finally, our balance sheet remains sound with liquidity expected to exceed $2.3 billion at year-end. I'd like to conclude my prepared remarks by reiterating the confidence we have in our strategy and our commitment to delivering superior shareholder returns. We will continue to invest in our portfolio of brands and our strategic platforms in order to further strengthen our business model and position us to drive consistent, sustainable and profitable growth over the long term. As I said at Investor Day, we are committed to being a growth company consisting of growth brands and are well positioned to perform despite a softening consumer environment and continued elevated uncertainty. Finally, I continue to be impressed with the invaluable contributions and achievements of our teams, which make all the difference in ensuring VF is well positioned to continue to deliver against our strategy. Thank you. We're happy to now open the line and take your questions.

Thank you for taking our question. Matt, I want to explore some of the actions you mentioned to drive revenue and profit. You provided a short list, but could you elaborate on what we can expect from those initiatives? Additionally, regarding Vans, you mentioned a slightly easier comparison in China when looking at the one-year basis. However, if we consider a multi-year perspective, it appears that Vans' revenues will need to increase in the second half to reach down mid-single digits compared to where they were in the second quarter. Can you share any numerical insights to help us understand the factors involved in achieving a better trend over multiple years?

Yes. Sure, Michael. And thanks for the question. It's nice to hear your voice. First, I would say, relative to the actions, we're not happy at all about what we're seeing in terms of the profit projection and I think the approach that we took to adjusting the full-year profit outlook, while revenue remains intact. We just see some headwinds on the horizon associated with rising inventory levels in a promotional environment in the marketplace that's going to be all around us. And we certainly expect that's going to have some impact on our business. And I think we felt like it was important to plan prudently in that regard. But despite that, we're going to work really hard to bring that profitability level back, and that really is what those actions are all about as it relates to driving traffic and conversion in our own formats in our own stores and our own websites. One of the biggest opportunities we see is to really look across – and this is kind of the power of our platform in a sense, look across our businesses and where we see things working well tactically within digital marketing and tactics to drive digital commerce. Where are things working well and how do we deploy those in other brands or other places where we're not seeing the same kind of benefit or the returns on the tactics that are being deployed today. And just to be honest, probably no surprise, the North Face. We're seeing those things work a little better and Vans is an area where we see opportunity. And so we've got some of our best people across the company working on that. In fact, we've moved a couple of people permanently into the Vans business with great track records in other parts of our company. We're also using some third parties to help us really do this. So we see an opportunity to be more efficient in how we're deploying some of the tactics and some of the spend in certain parts of our business, and we're aggressively and quickly pursuing that. We're going to work really hard to leverage the channels at our disposal, first and foremost, our own channels to sell off some of the excess inventories that we see building. We're in a pretty good place overall from an inventory standpoint relative to where we plan to be. We are higher in certain areas, and I think I mentioned that in the comments on a couple of brands in particular. But as we look across all of our brands, we're going to take the opportunity to pull back inventory a little bit, leveraging our own channels and doing it to ultimately drive some additional profitability. We're looking in a few places where we see the business performing well to maybe set floors a little bit early in spring 2023 and drive a little bit more revenue in our fiscal year that we would view as incremental and additional term as an example. And then lastly, as we always do, it's kind of a broken record in some ways. But I think even more aggressively in the short term, we're looking at all non-strategic controllable spend and are going to reduce as we move through the balance of the year with an eye towards driving higher profitability. So those are the actions – I mean, there's a heightened sense of urgency given the environment that we face. Our commitment to driving consistent, sustainable profitable growth, we take that really seriously, and we're after it.

Michael, let me build a little bit here on the traffic and conversion piece. I think an important part here, and this really is leveraging the portfolio and the cross-functional teams and expertise that we have, not only in brands and functions. But we have assembled cross-functional teams organized in pods working in very agile ways against four very specific areas of focus. One is around consumer acquisition. How do we acquire that consumer? How do we move that consumer in and drive traffic to our environments. When we have that consumer, how do we retain them? Third, would be how do we really enhance that consumer experience. So we have a higher likelihood of moving them through to the fourth point, which is conversion. So very, very specific sets of actions being worked on by these cross-functional pods. And probably, the last point here is, this is something that we're taking so seriously is that Matt and I are meeting with these teams on a weekly basis to keep track of, understand and help take any kind of roadblocks out of their way that we can move very quickly and agile through this process.

Michael, regarding your question about Vans for the latter half of the year, several points come to mind. I'm not entirely sure which period you are referencing or the specific comparisons. If we look back four years, before COVID, the compound annual growth rate has been quite steady between the first and second halves at the global Vans level. That's one insight to consider. As we project for the latter half of the year based on the first half's performance, our expectations are mainly influenced by a significant positive impact from China. I should mention that we anticipate the Vans North America sector may face more challenges in the second half compared to what we experienced in the first half, so we are approaching this with caution. Currently, we are seeing a mid-single-digit decline, which amounts to a decrease of six in the first half, suggesting we may end up with a low single-digit to mid-single-digit decline in the latter half. This expectation is primarily driven by that increased momentum in Greater China, especially since we are facing easier comparisons.

Thanks, guys.

Thanks, Michael.

Hi, guys. Thanks for taking my question. I had a couple of quick brand questions. Is Dickies the only kind of pandemic-winning business or at least that portion of Dickies the pandemic-winning business kind of giving back some of those gains? And then North Face, any early reads on winter demand in places where the temps have started driving kind of any early reads on that appetite for that category as winter starts to set in some places. Thanks.

Steve, I can take the Dickies part, and if you want to take the North Face.

Sure.

Yes, Dickies is experiencing the effects of the current US market situation, especially with our largest retail partner and its influence on value-driven consumers. We've seen significant growth with Dickies over the past few years. I wouldn't characterize it as losing gains; we believe this is more of a short-term adjustment as some inventories are being aligned. The consumer is currently facing notable pressure from rising food and fuel costs, which has affected our work-related business in the near term. However, we recognize that our brand continues to outperform competitors in-store. When inventory adjustments happen, they can occur rapidly, but they can also increase stock just as quickly. It's hard to predict how things will unfold, but we anticipate that as conditions improve over time, our business will rebound and gain momentum. Meanwhile, our lifestyle segment remains strong. Our long-term growth strategy focuses on capturing our share in the work sector while significantly expanding our lifestyle products both domestically and internationally. Although we face short-term challenges, our confidence in the brand's direction and business momentum remains intact.

Yes, we're very excited and proud of what the North Face team has accomplished, with a 21% increase in the first half and maintaining a 12% outlook for the year, which is slightly above the high single, low double range we committed to just a month ago during Investor Day. The broad-based growth should be confidence-building, as we see it across all regions, channels, and product categories. The brand is benefiting from the outdoor market's potential and energy, as well as from its leading position, driven by strong authentic products. We've discussed the commitment to 365 apparel and expanding beyond outerwear to include everyday, ready-to-wear items, allowing us to engage more with the active aspects of consumers' lives. Our footwear line, particularly the VECTIV we launched a couple of years ago, has received major recognition, which affirms the team's quality and consumer insight. Outerwear continues to perform exceptionally well, especially with seasonal items like fleece and insulated jackets. With the arrival of colder weather, recent drops of heritage styles have showcased iconic pieces, which effectively leverage our strong historical styles in collaboration with partners like COS, creating a positive ripple effect in the snow ski sector and highlighting our commitment to climbing, hiking, and being active through online presentations and homepage remerchandising. The brand has solidified its product creation and storytelling capabilities with new leadership, including a new CMO and Chief Product and Merchandising Officer, which will enhance our product offerings. With Nicole’s expertise in direct-to-consumer strategies and online engagement, we believe we have a strong formula for achieving long-term sustainable growth.

Thanks for the color.

Thanks, Omar.

Yes. Hi. Good afternoon. Thank you. I just want to ask maybe another question on Vans. I'm curious, just your latest view when you look at the geographic divergences and Europe looks like it's holding up so much better. Curious what you currently think and make of that trend. And as you think about Vans, just when would you expect to see signs of progress? And what are you looking for in the Americas to know that you're on the right track here?

I think the way you're looking at it is absolutely correct. Our European business, in general, continues to show exceptional performance. And within that is certainly the Vans business. We've talked pretty openly, and I think Kevin did a good job unpacking this for everybody in the Investor Day. But the primary opportunity here is our North America business. And within the North America business, it's our direct-to-consumer channel. And the emphasis we're putting today around traffic and engagement, retention all the way through to conversion, Vans is squarely in the middle of that. We have a number of test-and-learn actions that have been taking place the last couple of weeks. Taking those learnings now and we'll apply it to the balance of our portfolio, but really looking at what will be required to utilize these strong components of our go-to-market set of options where we've got such strong conversion, how do we start pulling consumers across that line to engage with us on our footwear and apparel story. So number one is the Americas and within that, our North America D2C. China is a significant opportunity as well. We've been certainly impacted by the COVID environment there. But again, at the Investor Day, Kevin spoke a lot about really pushing decision-making into the regions and providing more and more latitude for local-for-local decision-making around product, around storytelling, certainly staying within the confines or the framework of the brand strategy, but really giving more freedom and more empowerment to the regions. And you see that taking place in Europe and taking those learnings and applying that now more effectively with our Asia team, specifically in Greater China.

Okay. That's helpful. Maybe just one follow-up. A broader question on the margin outlook, guiding to 11% operating margin for the year now, will be the lowest you reported in some time outside of COVID, maybe the last decade or so. So just, Matt, I don't know if there's any way to think bigger picture about what's temporary in the margin that's impacting it this year versus more lasting? And then are you willing to quantify any of the actions you're taking to tighten up on the cost side? Thank you.

Yes, that's a great question. We believe there are several factors affecting us this year that are relatively short term, which is impacting our margins, particularly our gross margin. We're experiencing some pressure on parts of our fixed cost base, including the Vans store performance. From the margin perspective, we are facing higher inefficiencies in our supply chain, freight costs, and increased storage expenses due to elevated inventory levels, which we consider temporary. A significant factor is our current assumptions regarding what might be needed in the marketplace for promotions, both in our own channels and in support of our wholesalers. The rate impact is largely due to higher discounts and additional promotions, especially in our outlets, along with increased costs and extra inventory reserves because of our higher inventory levels. Overall, I believe everything we've done regarding margins is linked to current market conditions and is not expected to continue. We remain confident in our ability to expand gross margins over time and to raise prices to counteract inflationary product cost increases, which we have consistently managed to do. We see many of these issues as temporary and expect improvements over time. Regarding SG&A, we've announced the elimination of over 600 roles, which includes cuts to open positions and reorganizations. The annual impact of these changes, which will begin to be felt this year, is just over $100 million, following on top of another $100 million we've already reduced as part of our Project Enable initiative during the pandemic. In total, we've removed over $200 million in costs compared to pre-pandemic fixed G&A levels, though this also extends into other SG&A areas. While the current 11% margin is not where we intend to be, we anticipate a quick recovery as we move beyond this transitional period.

That's really helpful. Thank you.

Thank you, Jon.

Good afternoon. Thanks for taking my question. Steve, Matt, I would love to ask about Supreme. I didn't see how the brand performed on a revenue perspective for this quarter and the slides. Any context on how it performed? What drove that performance? And then maybe a little bit more context, Matt, on the impairment charge. What drove that? And what's your confidence to get to that algo that you called out a month ago of high single-digit, low double-digit growth for the brand? Thank you.

It's Laurent. Thanks for the question. I'll go ahead. I'll take Supreme. From a Q2 standpoint, Supreme was up 7%. And this is despite opening up about a week later than planned based on a decision to make sure we hit the market with an optimized assortment. You remember us talking quite a bit last year where we came to market with well under normal percentage allocations against key styles. And this year, the team took a very proactive approach to hit the market second half here running with the right assortment at the right time. So we were up 7%. Even despite some supply chain disruptions, the brand has done well. We expect an acceleration as we move into the second half, because we continue to get better and better positioned from an assortment and product flow standpoint. A couple of wins here. You were able to see these stores when we work together, in Europe, but the Berlin and Milan stores are performing really well. And now as we come out of that COVID environment, we have the luxury of consumers being able to move tourism becoming more prevalent. Those stores which opened under the cloud of COVID are now performing extremely well. And from there, we've got some new stores coming. We talked in my prepared remarks around the Dover Street Market, opening up in Beijing. That's the first time Supreme will be represented in a physical authentic way within the Dover Street Market environment. That's more of a shop-in-shop, but it will be a great affirmation of the ability to expand or what we talked about really grow wide. We also get a refit to our Harajuku store in Tokyo. It's probably the most prominent, well-known store in the Japan market, and they've seen just really strong results and energy resulting from that. We have a new store coming in Chicago later this fall, which will be the first new store in the US market in a while and very excited about what that means as we bring the brand through the physical environment first into new parts of the market where we know consumers are as we look to continue to provide better access. So that geographic expansion continues to be a very important part of the longer-term growth and being able to get back to seeing that value come into the brand this year is a good proof point to the acquisition thesis coming in here, and it just gives us more and more confidence in the team's ability to execute.

Yes, I would like to make a brief comment regarding your question on impairment, Laurent. During the Investor Day, I emphasized that our long-term growth plan is best understood as a strategy of expanding access to our brand for more consumers, especially through geographic expansion. This is fundamental to our acquisition strategy, as we aim to utilize VF's capabilities and platforms to create smoother, albeit not necessarily faster, opportunities for international growth. We are focused on increasing access to the brand globally rather than saturating our existing markets. We are being careful with our scarcity model, focusing instead on enhancing access worldwide. We are particularly excited about the expansion prospects in Asia over the next few years. Regarding impairment, I want to highlight that it is primarily influenced by non-operating factors. Earlier this year, we made an additional earn-out payment related to the acquisition, indicating better performance than initially anticipated, despite some supply chain challenges tied to COVID that affected early business performance. This earn-out payment suggests we are on track with our internal expectations. Our need to test for impairment stems from market factors such as rising interest rates affecting discount rates and the impact of currency fluctuations, specifically with the Japanese yen and European currencies on US dollar translations. Given these factors, it was predictable that we would test for impairment due to the recent acquisition and the significant changes in interest rates impacting cash flow evaluations. We are currently addressing a non-cash impairment, but this does not reflect our operating performance. We remain confident in our current position and the outlook, as Steve noted, and we believe we're in a good place.

That's very helpful on that. Second question is on gross margins. You lowered it by about 50 to 100 basis points. Could you possibly give us the bridge, how much of it is incremental FX, supply chain costs, bottlenecks? We heard from one footwear company talk about it last night. Or is it driven by markdowns? Any context on that would be helpful. And how do we think about the GM for 3Q versus 4Q? Any high-level color would be very helpful. Thank you.

Certainly. In our situation, I would say there are some smaller impacts to consider. To give you an idea, roughly 25% of the total impact comes from a mix of supply chain inefficiencies, product mix, and currency effects. The majority stems from our assumptions about what will be needed based on our inventory levels and the operating environment we anticipate for the fall and holiday season. This may involve discounts to our wholesale partners or more aggressive strategies in our own channels, especially in our outlet stores. Depending on market conditions and competition, we might also need to make targeted adjustments in our full-price channels throughout the fall holiday season. This will vary by brand and within brands, will also differ by product category. We expect to be very focused in our approach, and we're prepared to take the necessary actions when needed. Regarding your question on the third and fourth quarters, I would suggest thinking of the third quarter as down by 50 to 100 basis points, with more stable performance in the fourth quarter. Additionally, product mix is anticipated to provide a positive impact for us as we enter Q4.

Very helpful. Thank you very much.

Thanks, Laurent.

Great. Thanks. So Steve, what gives you confidence in keeping the 5% to 6% constant currency top line as we think about the dynamic macro backdrop? And then, Matt, could you elaborate on the heightened inventory and increased promotional activity in the marketplace maybe relative just to 30 days ago? And specifically, how do you feel about your own inventory levels by brand today?

Thank you, Matt. I have several reasons for my confidence. First, we've seen consistent performance across our portfolio, with a growth of 11% in the first half. I anticipate that this trend will continue into the second half. Our European business continues to do well, and the collaboration within our portfolio is beneficial. The support from our European team is assisting our Asia team as we establish new operating practices in our Shanghai office, which is still relatively new. This integration is enhancing their influence. The recovery in China is ongoing, and I expect the second half to mirror what we've observed in Q2 and as we enter Q3. Our performance in the second half does not solely depend on a surge from Vans; rather, we have a balanced strategy to achieve the projected 5% to 6% growth. We are positioned well in parts of the market that have strong tailwinds, particularly in the active lifestyle segment, which aligns well with outdoor and active market trends. Having leading brands in these areas enables us to engage customers and generate valuable experiences, bolstering my confidence in our portfolio and strategy. Most importantly, we have a strong team of capable leaders. As demonstrated at the Investor Day, our leaders across various businesses are highly competent. We are shifting leaders into our Vans business based on the strength of our talent pool and are attracting top-tier talent into our North Face, Dickies, and Timberland businesses. Ultimately, it’s the people driving our strategies and helping us leverage the positive momentum we've built in the first half.

I'll share a few quick points that give me confidence as we analyze the numbers. Firstly, our outdoor brands have consistently performed well over the last several quarters, particularly our T&F brand. These brands have seen a significant increase in their market penetration during the second half of the year, about 6 to 8 points higher than before. This growth in our strongest businesses reassures me. Additionally, we expect to see a positive contribution from Greater China in the second half of the year, particularly after a challenging first half and a difficult Q1. Regarding the current market environment, especially in the last four to six weeks, we’ve observed a shift towards more promotional activities, particularly in the Americas and China, where inventory levels are rising. We're closely monitoring competitors and market conditions, which suggest we may encounter more disruption than anticipated. Retailers appear to be cautious about inventory management, often delaying orders to ensure full stock. We anticipate that the window for full-price selling may be shorter as we approach the holiday season. As for our own inventory, even after accounting for some changes, we're up nearly 60% compared to last year. A lot of this increase was planned due to previous low stock levels, and it relates to brands where we've struggled to maintain consistent service. While we’ve aimed for higher inventory levels to normalize service, we are still above our planned levels. This is particularly true for certain brands and regions, including China. We intend to be strategic and assertive in seizing market opportunities to capture our fair share of business. I believe we have an effective plan to align our inventory closer to our targets by year-end, although we may still be slightly above expectations in some areas due to specific products. Overall, we aim to finish the year strong, positioning ourselves for healthy margins and growth moving into next year.

Great. That's helpful color. Best of luck.

Thank you, Matt.

Thanks, Matt.

Thank you all for your questions and your interest. Before we connect again in January, I want to emphasize a few key points. First, we will continue to navigate the macro challenges we currently face. VF and our brands are focused on taking the necessary actions to drive performance and meet our strategic and financial commitments. Secondly, our businesses are proving to be resilient, and our full-year revenue outlook remains steady. We have seen strong performance across our portfolio, except for Vans, with the rest of our brands growing in the low double digits in the first half and we expect the same trend in the second half. This is supported by our growth in constant currency revenue, particularly in our outdoor brands, as well as our emerging brands, underscoring the strength of our business model and portfolio strategy. Lastly, I want to reiterate our commitment to focusing on the aspects we can control. We understand what is necessary for achieving sustainable and profitable growth. We have the right brands, strategies, and people in place to accomplish our goals, and our leadership team is highly dedicated to meeting our expectations. Thank you for joining us, and we look forward to updating you as we move into next year.