VF Corp (VFC) — Q3 2023 Earnings Call Transcript

Good afternoon, and welcome to VF Corporation’s Third 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’ve 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. Reconciliation 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 Interim President and Chief Executive Officer, Benno Dorer; and EVP and Chief Financial Officer, Matt Puckett. Following our prepared remarks, we’ll open the call for questions. I’ll now hand over to Benno.

Hello, everyone. Since I stepped into my new interim role about two months ago, I have been fully immersed in the business. I have uncovered areas of strength and promise but have also gained a deeper understanding of where we must improve. I have been impressed with our talent at all levels and their leadership and commitment to VF, on which our future success is dependent. Many of you know about my career history, which culminated in roles as CEO and Chair of The Clorox Company until my retirement from a full-time corporate career two years ago. This gave me the opportunity to lead a global purpose-driven consumer portfolio company towards more profitable, sustained, and responsible growth with financial discipline, a fully engaged organization, brands people love, consistently strong product innovation, and a differentiated approach to the portfolio to maximize value. You also know that I have served on the Board of VF for the last six years, including as leading independent director from July 2021 until December 2022. I believe that my deep insight into VF, my passion for the company, its people, and brands, coupled with my prior career experience, gives me a solid foundation for the interim CEO role. I do plan to use my time to make a positive difference to VF's business and organization. My overall theme for today is that VF will sharpen its near-term focus on the biggest consumer opportunities within our existing brand portfolio and on enhanced operational performance. Consistent with this objective, we are shifting resource priorities across the company. This will include rightsizing our dividends, exploring the sale of non-core assets, and cutting costs in lower-value areas to strengthen our execution and enable incremental targeted investments in our brands and the consumer. With that, I'm pleased to speak with you today about four topics: VF's results in Q3, our near-term priorities to address performance, how we're taking prudent steps to build a stronger company for the future, and why I'm even more optimistic than I was two months ago about the long-term prospects for VF. First, we overcame a very challenging environment in Q3, where our performance highlighted examples of success while also clearly showcasing areas to improve. Amid the difficult geopolitical and economic backdrop, we grew Q3 revenue by 3% in constant dollars. Today, we are reaffirming our revenue outlook at the low end of our prior range and also at the midpoint of our EPS outlook for fiscal year 2023. Our EMEA business continues to be a bright spot, with Q3 revenue up 10%, our seventh consecutive quarter of double-digit growth driven by broad-based strength, including the North Face at 13% and Vans at 7%. Another strength in Q3 has been our consistent performance of the outdoor brands led, of course, by the North Face, where revenue was also up 13% globally with growth achieved in each region and channel. We also saw nice growth in Timberland, up 6% in the quarter with solid performance in EMEA and in wholesale globally. Our outdoor emerging brands continued to grow strongly, up 10%, highlighted by Ultra. Finally, in Asia, we saw a sequential improvement with Q3 revenue up 4%. This was driven by the beginning of what could be a return to stronger momentum in Greater China, which was close to flat at minus one. Secondly, we are clear-eyed about VF's performance barriers, which are predominantly operational in nature. Our near-term priority is to put aggressive plans in place to improve our execution. We are not reaching our full potential as a company. The good news, though, is that doing so is largely within our control. We must consistently delight consumers with exciting products, engaging content delivered with effective marketing tools and with great shopping experiences in-store and online. Where we do this well, see the North Face and the broader portfolio in EMEA, our brands continue to thrive. But where we are inconsistent, as with Vans being far the highest impact, we must improve our consumer execution to return to full strength. We must also return to delivering products to our consumers and customers on time and at lower cost to VF. The supply chain has long been a core competitive advantage of VF, but our recent performance also requires focus. To improve execution, we have two near-term key priorities, which represent significant value creation opportunities. First, turning around our Vans performance through improved consumer execution; and second, returning to supply chain excellence across the company. On Vans, we have clearly been challenged for some time now. This is predominantly a challenge in the Americas and is mostly executional in nature. For perspective, Vans Q3 revenue rose by 7% in EMEA but declined by 13% in the Americas, which is primarily North America and accounted for 90% of the global Vans Q3 revenue decline. While there are differences in EMEA compared to the North American market, the relatively stronger performance of Vans in EMEA reflects the benefits of a clear growth strategy and stronger marketplace execution. We must do better with Vans in its home market, and we will. Our action plan follows the four growth drivers laid out in our Investor Day last September: consumer, products, marketplace, and operating model. Here are a few specific actions we will take. We will sharpen our view of the changing consumer landscape through new consumer segmentation, which is underway and will inform the business' overall growth strategy and begin to influence our direct-to-consumer plans as of summer this year. We need to delight consumers in ways that are relevant to their specific needs. To do so, we must be more intimately familiar with them. We will also better turn data and insights into significant consumer opportunities available today. For example, a strong untapped opportunity exists with our UltraRange product line, where awareness is very low at around 10% among all consumers and below 30% even among Vans loyalists. We've started to boost awareness, and this is starting to yield results. UltraRange revenue grew 34% in Q3, with much more growth to be had. The MTE and Half Cab product lines have similar potential. Going forward, we will drive these and other promising platforms longer and more continuously. We will significantly increase our investment in product innovation, funded by a reduction in costs in lower value areas with actions, including SG&A reduction and improving store profitability. Vans product development investment as a percentage of revenue lags well behind the company average. We will change that starting with fiscal year 2024. This will help us aggressively pursue new styles and make our innovation pipeline more consistently strong. We will also eliminate unnecessary SKU complexity to simplify and importantly amplify the shopping experience. A small test at our Irvine, California store led to a footwear revenue improvement of plus 12 percentage points with 30% fewer SKUs. We plan to begin expanding this initiative in the fall of fiscal year 2024. We will move our digital spending principle from budget cap based to flexible and ROI-based to take advantage of available spending opportunities that translate into incremental revenue and profits. It is early days, but we've already seen an improvement in profitable DTC growth rates only a few weeks into this change. We will sharpen our processes. In fiscal year 2024, we will go to market at retail, including wholesale customers with clearly aligned and integrated product calendars. This will lead to better plans that are more centered around the consumer. To drive Vans forward, we have made tremendous progress putting a world-class Vans leadership team in place. Two critical leaders, our new Chief Product and Merchandising Officer and our new Chief Digital Officer, have both joined in December and are off to a fast start. Vans continues to be a fundamentally strong brand. The number of consumers buying Vans over the last 12 months has increased, as has brand advocacy. Yet many people buy the brand less often. So we need to fuel the brand more consistently and give reasons for people to buy more Vans. That is on us, and that's what we will do. The ongoing momentum with The North Face further proves this point. The brand continues to perform strongly, driven by strong consumer engagement and iconic products. We will keep investing to fuel that momentum. Our Explorer Pass membership continued to grow significantly in Q3, up 2.1 million members to approximately 17 million in total. It's more than just a jackets marketing campaign; it was launched this season and drove strong outerwear growth globally, with the Nuptse jackets and the recently relaunched Summit Series premium product line leading the business. Our recent first-ever performance-led collaboration launch with an American artist and designer was highly successful. Overall, the brand's momentum is strong and broad-based. The North Face serves as a solid and transferable execution blueprint for Vans, and frankly, the entire VF portfolio in the Americas, where we must grow with consumers more consistently. The second near-term priority at VF is to return to the company's hallmark standard of excellence in the supply chain arena. We are working through a variety of external and internal issues that impacted revenues and profits in a high-volume quarter like Q3. Lengthened manufacturing and freight lead times, larger upfront product buys, unpredicted demand spikes from elevated promotional activity in the quarter, plus higher than normal customer order cancellations have led to unsatisfactory customer service, elevated inventory, and significantly higher costs. We are taking aggressive actions to address these issues. We expect to be able to work excess seasonal inventory down to more normalized levels by the end of Q4 of this fiscal year. Our customer service levels are also improving, albeit still below our own and our customers' expectations. We have a plan in place to get back to target levels by the end of the first half of fiscal year 2024. We will leverage our logistics partnerships to reduce costs by improving ocean and parcel rates for the next fiscal year. We anticipate a return to more normalized and predictable promotional patterns and expect moderating inflation, which should contribute to lower costs through fiscal year 2024. We are committed to serving our customers better and to getting back to robust supply chain performance at improved costs. Much of this is within our control. My third message is that we're taking prudent steps to strengthen VF's financial position and build a stronger company. VF is committed to strong financial discipline. This starts with a strong core and growth that is profitable and sustainable. To reinforce this, we are taking significant actions now. We will focus our near-term growth efforts on our existing portfolio. Smart acquisitions will remain part of the VF playbook. But in the near term, we believe we are best served to return to strong shareholder value creation by capitalizing on the many opportunities offered by our portfolio of beloved brands, including those acquired in recent years. Our growth strategy, laid out during the company's Investor Day last September, continues to provide a solid foundation, but we will lean into the consumer even more strongly than before. We will also pursue strategic alternatives for our PACS business. This business is performing well, but we need to ensure that we are the highest value owner and focus our resources on the highest value opportunities within our existing portfolio. To grow margins and profit while supporting strong investments in the business, we will lean into cost savings through a more systematic and ongoing cross-functional approach to eliminate costs that have lower strategic value and are less consumer-oriented. We are making the tough, but what we believe to be a principled and financially responsible decision to cut our dividend by about 40%. We do not take this step lightly and fully understand the value of a solid dividend as part of a comprehensive approach to total shareholder value creation. However, we believe that it is prudent to right-size the dividend to accelerate the path back to our target dividend payout and debt-to-EBITDA ratios and to rebuild the dividend from there based on solid expected cash flows and a return to sustained earnings growth beginning with fiscal year 2024. Returning cash to shareholders through a strong dividend remains a key capital allocation priority. In a continued difficult environment, we are committed to returning to more profitable and consistent growth next fiscal year. Matt will discuss these actions and the shape of our initial fiscal year expectations in more depth shortly. My last message is that I am even more optimistic today than I was two months ago about VF's future and our ability to deliver strong long-term shareholder value creation. We have significant potential to unlock value from our unique brand portfolio. While not immune to the challenging macroeconomic environment near-term, these brands will benefit from long-term category and consumer tailwinds. We will leverage these tailwinds and apply VF's best practices, scale, and capabilities—a distinct competitive advantage. We have a clear set of near-term priorities to inject consistency of execution, which will improve performance across the business over time. We will sharpen our consumer growth strategies across all our brands and ensure we have the right investments against each of them to realize their full potential, funded by cost savings. We have permission from consumers to broaden our reach by taking many of our brands into new financially attractive categories and countries, and we are developing strong future plans to do so. We are committed to returning to strong operational discipline, which will help drive predictability, profit and margin growth, and strong, consistent cash flow generation. We remain committed to the dividend as part of our comprehensive shareholder value creation plan following today's adjustments. Lastly, we have a talented, engaged, and passionate workforce. We continue to nurture our superb internal talent and attract great new outside hires, reinforcing our confidence that VF remains a top destination for exceptional leaders. Thank you. With that, I'll hand it over to Matt to review the financials.

Thank you, Benno, and good afternoon, everyone. As Benno mentioned, our Q3 results amidst the continued difficult macro environment exhibited areas of strength, as well as parts of the business with clear opportunities for improvement. During the quarter, revenue was up 3%, with balanced growth across both direct-to-consumer and wholesale. Adjusted gross margin was down 140 basis points, and adjusted operating margins declined by 280 basis points, leading to adjusted EPS of $1.12, down 17% or 10% in constant currency. Looking at our revenue results across geographies, the Americas region was down 1% during the quarter. As Benno alluded to in his remarks, North America was particularly challenging for Vans and also for Dickies due largely to the continued impact of inventory actions taken by their largest wholesale partner, as well as softer performance across the value and work consumer segments. Momentum continued in the EMEA region, with revenue up 10%, marking our seventh consecutive quarter of double-digit growth and representing broad-based strength across brands, with 10 out of 11 brands in the geography growing during the quarter, including our five largest brands. Looking at the countries, all major markets were growing, with four of the top five by volume up double digits. Lastly, in our APAC region, we saw further sequential improvement versus the first half, with revenue up 4%, driven by improving performance in Greater China, which was down 1%, coupled with strong mid-teens growth in the rest of Asia, where most countries were up double digits. Moving on to gross margin, which was down 140 basis points during the quarter. As anticipated, we saw mix become a tailwind in Q3 for the first time in several quarters, driven by the strength of our international business and channel mix. However, this was more than offset by rate, which was down 170 basis points due to higher discounts and an increased promotional environment, also impacting our direct channels but was partially offset by strategic pricing actions and foreign exchange transaction benefits. Moving down the P&L, our adjusted operating margin was down by 280 basis points, reflecting the lower gross margin and 110 basis points of deleverage in SG&A, which grew at a 6% rate in constant dollars in the quarter compared to the revenue growth of 3%. The primary driver of deleverage was higher marketing spend, accounting for about 75% of the increase in the SG&A ratio. In addition, deleverage in distribution and freight spending and some direct-to-consumer costs were mostly offset by spending reductions across general and administrative expenses. Regarding our cash position at the end of Q3, as anticipated, our liquidity increased during the quarter to approximately $1.9 billion, benefiting from the seasonality of earnings and a reduction in working capital. During the quarter, we paid the Timberland tax deposits of approximately $875 million, funded by the issuance of a $1 billion term loan, maturing in December 2024. As Benno outlined earlier, we are taking clear actions to improve our operating performance while maintaining cost discipline and continuing to support our brands' growth opportunities. Regarding the supply chain environment, we continue to see higher lead times across the supply chain during the quarter impact the business. In addition, higher volatility on the distribution and logistics side, particularly in the Americas, coupled with the higher volumes of the quarter and event-driven spikes in demand led to inconsistent on-time delivery performance to our wholesale partners and inefficiencies in support of our direct-to-consumer business in the US during parts of the quarter. Looking forward, lead times are improving as anticipated, which should lead to better on-time performance, and we are seeing that with spring deliveries. Importantly, the predictability of ex-factory dates, or when the product leaves the factory, is becoming more reliable and aligned with historical performance. This is an important data point that will better position us to fully service the business in the fall of 2023 and beyond. Moreover, we expect to see reduced and more normalized levels of air freight volumes moving forward, a continued easing of ocean air rates, and generally more modest inflationary impacts expected for fall 2023 and spring 2024 versus what we have seen over the last few seasons. Let me take a moment to unpack our elevated inventory position today and the work we are doing to reduce it over the next few quarters. Net inventory levels are up 101% from last year, with gross inventory, excluding the increase related to a change in eco terms to support the supply chain financing program, up 67% or approximately $850 million. Importantly, from a makeup standpoint, the dollar increase is primarily driven by core and excess replenishment inventory across brands, particularly in the Americas. This is primarily driven by COVID challenges affecting the supply chain, leading to prolonged lead times and earlier and less accurate inventory buys, along with higher cancellations and lower demand, as well as the prior year's value comparison being lower than optimal. We expect to reduce total inventory levels by about $300 million during Q4 but will carry higher levels of core and replenishment inventory into fiscal year 2024 across Dickies, the North Face, and Vans, which are contemplated in the assortment and buy plans for the next season, and which will moderate throughout the back half of calendar 2023. Moving on to the outlook for fiscal year 2023, we are affirming our EPS guidance at the midpoint and our revenue outlook within the previously established range. Within our revenue guidance of about 3% constant dollar growth, we now expect the North Face to be up at least 14%, as the brand's broad-based momentum has continued through Q3 and into Q4. In fact, year-to-date, the brand is growing at 17%. On the other hand, Vans is now projected to experience a decline of high single digits as the performance in the Americas region decelerated in Q3, and we expect Q4 to be impacted by the high inventory levels in the wholesale channel in the US, in particular. On a reported basis, we now see about five points of impact from the translation of foreign currency, which is slightly less negative than our previous outlook. As a result of higher promotional and markdown activity, and also reflecting higher order cancellations, we expect full-year gross margins to decrease by about 200 basis points. We anticipate our operating margin to be around 9.5%. Our tax rate is expected to be 13% as we have a higher mix of profits from lower tax regimes, mainly in international markets. These changes lead to a tightened EPS range of $2.05 to $2.15, which sits within our previous outlook of $2.00 to $2.20. Our adjusted cash flow from operations, excluding the Timberland tax deposit made during Q3, is expected to be about $700 million, as we continue to generate solid cash flows despite near-term setbacks in our operating performance. As we highlighted earlier in the year, we will be disciplined with our approach to spending in non-strategic areas. Today, we've moderated our projected CapEx for the year to approximately $200 million from $230 million previously as we sharpen our investment focus on value creation opportunities and specifically those that impact the consumer experience. In summary, despite the challenges impacting our financial results this year, I am pleased with the great progress and performance we're seeing in several of our businesses and geographies, and at the same time, the clear enterprise focus on improving results in the areas where we are underperforming. So, let me say a few words about next fiscal year, particularly our mindset and preliminary financial expectations. First and foremost, with heightened intensity on planning, we will sharpen our execution in order to strengthen our operating performance and deliver more profitable and consistent financial results in fiscal year 2024. We are monitoring several factors influencing our plans. These include the macroeconomic environment, particularly affecting consumer sentiment and spending on discretionary goods, travel and spending recovery of the Chinese consumer as that market fully opens, inventory rightsizing occurring across the marketplace, and finally, our own progress in turning around Vans and the timing of an inflection in that business. As we focus on driving profit margin expansion during the year, we expect continued broad-based growth across much of the portfolio and all geographies. We anticipate revenue will increase in the range of at least low single digits. Regarding Vans, you heard Benno reference a number of actions to sequentially advance our plans to reset and reaccelerate, some of which will impact the business quickly, while others will take longer. Additionally, our wholesale partners have adopted a more conservative approach to the Spring/Summer order book, impacted both by higher inventory levels in the channel and the ongoing challenging macroeconomic environment. As a result, we will continue to see declines in the business, particularly in the Americas, through the first half of fiscal year 2024. We expect to generate low double-digit operating earnings growth with an expansion in both gross and operating margin. Our actions to increase earnings will include improving profit margins at Vans while revenue stabilizes, generating cost savings from a more efficient supply chain, and continuing to realize the benefits of our ongoing SG&A optimization. We will also benefit from efforts to realign inventories over the next few quarters. Coupled with earnings growth, we expect to deliver meaningful increases in both operating and free cash flows in fiscal year 2024. In fact, we expect operating cash flow to grow at an accelerated rate relative to earnings. I look forward to updating you with more details when we provide our full outlook and plans in May. Our capital allocation priorities in the near to medium term will focus on supporting and driving the performance of our current portfolio, reducing leverage, and returning capital to shareholders in the form of the dividend. Today, we announced several strategic actions to accelerate the path to our target leverage ratios while enhancing our focus on value creation. First, the Board has declared a dividend of $0.30 per share, a reduction of approximately 40% relative to the last quarterly payment. This action demonstrates the company's financial prudence, considering both an uncertain macro environment and recent inconsistent operational performance as we look to right-size the dividend to our target payout ratio of about 50% and accelerate the path toward a gross leverage target of 2.5 times. If we do a little math based on the adjustment to the dividend and the comments today about earnings growth for next fiscal year, the payout ratio would be in the mid-50% range in fiscal year 2024. We will then increase the dividend in the future in line with our earnings growth. Additionally, as part of our ongoing active portfolio management, we are announcing our intention to explore strategic alternatives for our PACS business, which includes the Kipling, Eastpak, and JanSport brands. This process aims to streamline and focus our brand portfolio. As we proceed, we are committed to ensuring these brands are optimally positioned to achieve their full potential while enhancing VF's management focus on key strategic priorities. We are also executing several asset sales, which align with our strategic priorities and are expected to generate more than $100 million in cash proceeds. We will reduce working capital and align inventories to optimal levels over the next few quarters. Lastly, we will increase our efforts to reduce costs in order to direct resources toward the company's highest value creation opportunities. This includes several previously announced cost-saving actions, which have been progressively building toward delivering approximately $225 million in annualized savings once completed in fiscal year 2024. I am confident these actions will enable us to strengthen our financial position and sharpen our focus, specifically providing the financial flexibility to enable an accelerated path toward our target leverage metric. This will ensure that, even in the face of ongoing macroeconomic challenges, we will maintain capacity to fully support our significant organic value creation opportunities while consistently returning cash to shareholders through the dividend. In summary, VF's brand portfolio is well-positioned to deliver long-term, sustainable, and profitable growth. That hasn't changed. Importantly, I am confident the steps we are taking now will lead to elevated shareholder value creation through improved operating performance and consistent earnings and cash flow growth. With that, we will open the line to your questions.

Thank you very much for taking my question. Benno, I'd love to ask about Vans. What gives you the confidence that the changes you're implementing at the brand are the right strategies and will make a difference in turning this business around? And then I have a follow-up question regarding the dividend.

Yes. Thanks for the question, Laurent. There are several ways to answer your question. The first is that we have a role model in-house that does exactly what we're trying to do at Vans, and that's the North Face, which is performing exceedingly well, as evidenced by results even this last quarter. The second thing that gives me confidence is that it's clear that improving performance is not some obscure concept; it's entirely within our control. We know how to do this. The way to bring Vans back is through consistently executing against consumers with excellence. This means great product, great marketing, great shopping experiences, and of course, addressing customer service issues that we talked about. Regarding the specific plan in which we have substantial confidence, there are a number of actions that impact the business now. As mentioned in my remarks, we're moving to ROI-based digital spending and seeing strong results from that. We are boosting awareness of existing product platforms like UltraRange and seeing positive results as well. We have new products expanding now, like low land and our new school shoes and UltraRange VR3; those are launching now, and we believe they're attractive new products. Finally, I've observed the new challenges that we've introduced to complement our leadership team in action, and I have high confidence in them. Adding to that are fundamental changes we're making that will begin impacting the business in the second half of next fiscal year, such as new consumer segmentation, a digital-first operating model, and new go-to-market upgrades, which we've already applied successfully in Europe. The SKU reduction initiative, which yielded strong results in a test store in Irvine, California, is another example. We're increasing spending behind product innovation. These are all tangible actions that have worked for Vans in the past and are working elsewhere in the portfolio. That's the good news. The bad news is that we're in this situation, but the positive aspect is that addressing our performance opportunity with Vans is entirely within our control, and we are on a very specific and credible plan with a high sense of urgency. That is where my confidence comes from.

Very helpful, Benno. And then Matt, on the dividend, what changed since your last update? Is this an indication that capital allocation priorities have shifted? How do we know there isn't a bigger dividend cut coming? And then on the PACS business, I think it's about a $500 million to $600 million revenue business. Can you provide some framework, I think you talked about $100 million cash proceeds from noncore assets. Any benchmark on potential cash proceeds from the sale of these noncore assets?

Yes, Laurent, I'll start with the dividend, and then I'll let Matt address your second question about PACS. As I mentioned in my remarks, we did not take the move to right-size the dividend lightly, but we strongly believe it's necessary and prudent. This step strengthens our balance sheet. Our gross debt to EBITDA right now is approximately 4.5x, and this brings us closer to our target of 2.5:1. It also realigns us to our target payout ratio of 50%, which we expect to reach in fiscal year 2024. Of course, we will continue to offer strong dividends to our shareholders, which is important. To answer your question directly, after this one-time adjustment, we remain dedicated to the dividend. This remains a vital part of our comprehensive total shareholder return strategy. We expect to grow it in line with earnings going forward. Our capital will be allocated to paying down debt and dividends, and importantly, it enables us the flexibility to invest in our brands and consumers. This frees up funds from within our P&L to invest in our brands and consumers but protects us against potential downside scenarios macroeconomically. If there's a downturn, we will still be able to execute this plan. However, in an ideal situation, we will also invest incrementally in our progress. The dividend cut will place us in a position to accomplish this. Matt, would you like to comment on PACS?

Yes, Laurent. We view both the dividend and the PACS announcements as prudent actions at this time. The active portfolio management remains a small core competency and strength of VF and continues to be a priority of our Board. The ongoing evaluation efforts indicated we are likely not the best owner of these brands right now. It's essential to ensure our management team stays focused on our primary strategic objectives while providing these excellent brands the best opportunity to reach their potential. These are core brands with solid revenue and margin growth in fiscal year 2023. That includes Eastpak, JanSport, and Kipling, as they benefit from a return to usage occasions they dominate, like travel gear and school packs. This process will take time; we are in no rush to execute this, and we have confidence we'll find the right owner for these brands. Regarding proceeds, that aligns with what Benno mentioned about proceeds. As we noted earlier, $100 million is primarily related to non-strategic land and real estate, which also includes the previously announced sale and leaseback of our headquarters in Stabio, Switzerland, which made economic sense to us. This entire amount will be cashed in by the end of our fiscal year.

Very helpful. Thank you very much.

Good afternoon everyone. As you think about the initiatives for enhancing the business in all the brands, what do you see as the inventory structure going forward, and how will that change given the wholesale account base and how they're placing orders going forward? Thank you.

Yes, hi, Dana, thank you. Inventory has indeed been a challenge and has been an overhang for us for a couple of quarters. Our inventories nearly doubled in absolute value, if you just look at the balance sheet. There is certainly an impact from in-transit inventory on the comparison. For a more comparable basis, we're up about 67% year-over-year, with most of the increase in the Americas. Moving forward, we actually see opportunities to increase inventory efficiency as we align more closely with market needs. One issue we've faced this year is that prolonged lead times have led to earlier inventory buys, which resulted in lower forecast accuracy, creating excess inventory, further exacerbated by higher cancellations and longer delivery times leading to increased cancellations. Fortunately, the inventory we carry today is primarily core carryover replenishment inventory, and we'll carry that into fiscal year 2024, even after a substantial reduction in Q4. We have plans placed for merchandising and assortment in the upcoming season to address this issue, which we'll see with a broader direct-to-consumer focus. Having a large outlet network will certainly help us move through excess inventory, as that's our first avenue. Moreover, we believe the initiatives we're implementing to modernize the supply chain will enable us to be more efficient in inventory management going forward.

Thank you.

Hey, guys. Thanks for taking the question. First, Benno, the company is known for being a best-in-class supply chain operator over the years. You pointed to a medium-sized list of items indicating things went off track. I’m curious to know what you think happened in the supply chain and what changes you might have seen there. And then, maybe this is for Matt, but it's related to achieving double-digit EPS growth on low single-digit revenue growth next year. I'm thinking about how you're modeling that. It seems like you need to pencil out to about 100 basis points of EBIT expansion, so I would love your take on some high-level drivers there. I’m assuming it tilts towards the back half of the year given comments on Vans revenues in the first half, and how do we think about gross margin expanding next year with inventory up relative to sales in the fourth quarter as we head into the year?

Hey, Michael, thanks for the question. I'll address the supply chain issue. Coming into this role, and as you pointed out, supply chain has long been a core strength for VF. While this reputation is well-deserved, we must be clear-eyed about current challenges. Some of the concerns were recognized prior, particularly longer manufacturing and freight lead times. However, these issues intensified in Q3, particularly in a high-volume quarter, due to volatility, elevated promotions to clear out inventory, cancellations stemming from cautious consumer behavior, and our inability to meet their expectations leading to cancellations in anticipation of further service issues. The convergence of these challenges created a 'perfect storm' in this quarter. However, we expect continuous improvements in lead times, which will aid on-time performance, and we’re seeing positive momentum in spring deliveries. Most importantly, the predictability of ex-factory dates is returning to prior levels, which is encouraging for full service in fall 2023 and beyond. We expect reductions and further normalization in air freight volumes, continued easing in ocean air rates, and more modest inflationary pressures expected for fall 2023 and spring 2024 compared to prior seasons. To further detail our elevated inventory position, net inventory levels are up 101% year-over-year, which is an indicator of the challenges we have faced due to prolonged lead times affecting inventory buys, increases in cancellations, and lower demand. This has led to a significant rise in core and replenishment inventories compared to last year. Despite a expected $300 million reduction in total inventory levels during Q4, we will carry higher levels into fiscal year 2024 across certain brands, moderated through upcoming selling seasons. Specifically, we’re establishing a business-by-business action plan, work closely with strategic supply chain partners to address lead times and costs. Ultimately, everything we're managing is within our control, leading to our intention to restore operational discipline.

Yes, Michael, regarding your second question, we're currently in the midst of our planning process, so I want to remain conscious of not getting ahead of ourselves. However, we wanted to share expectations and thoughts about next year's unfolding. I concur with your observation about what it would take. Regarding my comment on double-digit growth in operating earnings, I haven't specified below EBIT just yet. We do require margin improvement; I view gross margins primarily as key pressure spots. While we anticipate promotional environments will be less intense than prior years, we will start with heavier inventory levels. However, most of this inventory will be core carryover replenishment product and should not necessitate extensive markdowns or discounts throughout next year. We're taking considerable actions to correct seasonal excesses by the end of December, bringing us comparatively to more standard levels again by the end of March, thus setting us to operate more efficiently moving forward. Freight costs are expected to provide some tailwinds coming into the year, and we think the mix will be slightly favorable. Though there are headwinds such as ongoing modest FOB cost increases and potential FX headwinds, we will continue to examine the net effects on gross margins as they will influence overall operations.

Okay. Thanks for all the detail.

Good afternoon. Thank you so much for taking my question. My question is on The North Face. As you exit the lending selling season, can you talk about the channel inventories you have for that brand? Additionally, can you share any insights regarding initial order books for calendar 2023? Are there any exciting new innovations or products we should be focusing on? Alternatively, how do you see the comparative outlook for the following year after such a strong year for The North Face?

Let me take the first part of that, and then Benno can discuss our innovation pipeline. Currently, inventories at retail with our wholesale partners are in a solid position for The North Face. We enjoyed a satisfactory selling season, and our DTC business saw growth of 18% again in the quarter worldwide. We're observing similar sellout results with our wholesale partners, and if anything, we might have benefited from more inventory on the shelves. That said, wholesale partners are taking a cautious approach moving forward, with expectations of a cautious environment in the US and Europe as well.

To address your good question, Brooke, concerning The North Face and our product pipeline: Product is at the heart of our business success, and we have confidence in our innovation pipeline. The North Face excels at platform innovation that can drive growth over multiple years. The Summit Series is an example of this; it has proved successful over an extended period, and we plan to keep pushing it forward. We are relaunching the Summit platform, as there's significant awareness and potential for trials among loyalists, coupled with new apparel and footwear to accompany it. Our sequencing strategy means that while our popular Nuptse jacket is currently in demand, we have the next generation of jackets ready for release. This winter, our Sierra jacket's introduction will ramp up efforts, with hopes that it serves as the next go-to North Face jacket. We are also preparing successors to the Sierra that are driven by a long-term strategic innovation approach. Additionally, we've had success with tactical executions, such as the collaboration with the brand cars, which resonated well with consumers alongside strong digital performance. The North Face has seen excellent digital growth and is a brand that Vans can learn from in this respect. Beyond that, it’s essential not to take growth momentum for granted. We are looking to increase our investment towards consumer engagement through digital performance marketing, brand-building initiatives, and product innovation. We are fully aware that continuous growth requires sustained investment, and we will commit to doing just that.

Great. Thank you so much. Can you just discuss the business in China? Specifically, how has the business in China performed since the country started reopening? Additionally, what guidance do you have for next year considering the market recovery?

Yes, Jay, it is quite early to speak on specific guidance for next year regarding China, but it is a fact that we have seen sequential growth in Q3, with performances landing close to flat at minus 1% in constant currency, which is indeed better than prior quarters. The momentum we have noticed has carried forward into January as the country is continuing its reopening process. Therefore, we remain cautiously optimistic, especially for the back half of fiscal year 2024. However, it's still too early to predict the extent of this momentum. Don't forget that we have a robust long-term investment case in that market, as there are nascent but growing outdoor and active categories. Our leading brands are well-positioned to capture that space and present a great opportunity for digital engagement. We have plans to invest in expanding our brand penetration, especially since it remains lower in there than in our home markets. Furthermore, we have opportunities to enter new categories and new brands, such as Supreme and Ultra which have strong campaigns set for that market. We'll implement our marketing prowess to localize and generate engaging omnichannel experiences.

Got it. Thank you so much.

Thank you all for joining today. As you've hopefully understood from our discussion, our commitment to our consumers, our people, our shareholders, and VF's purpose in service of the greater good will continue to guide our actions. The last two months in the CEO role have reinforced my excitement about the company's potential, and we have clarity on areas that are crucial to help realize it. These areas include world-class leadership, a stable executive leadership team, and a broader organization that is talented and committed to leading the company. We have a clear understanding of what must be done to improve performance and have begun implementing aggressive actions to do so. This entails a much more significant focus on consumers to unlock the full potential of our brands, reinvigorate our strategies, make appropriate investments, advance innovation, and ensure excellent market execution, alongside financial strength and predictability. The Board and I are dedicated to strengthening our financial position while ensuring consistent value creation to emphasize a unique portfolio of core brands. In summary, I'm confident that we are taking the right steps to enhance the strength and consistency of VF's performance to ensure strong shareholder returns over both the medium and long-term, and we look forward to updating you on our progress in May. Thank you all, and have a good rest of your week.