VF Corp (VFC) — Q1 2026 Earnings Call Transcript

Thank you. Hello, and welcome to V.F. Corporation's First Quarter Fiscal 2026 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 and continuing operations basis, which we've defined in the presentation that was posted this morning on our Investor Relations website 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 U.S. GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the presentation, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Joining me on the call will be V.F.'s President and Chief Executive Officer, Bracken Darrell; and EVP and Chief Financial Officer, Paul Vogel. Following our prepared remarks, we'll open the call for questions. I'll now hand over to Bracken.

Thanks, Allegra, and a good early morning to all of you from Vans headquarters on the West Coast. Welcome to our Q1 fiscal '26 earnings call. In spite of all the macro noise out there, we delivered above our guidance this quarter, a good start to the fiscal year. But the much more exciting thing happening is inside the company. You can feel how dramatically we're transforming the processes, teams, product engine and marketing approach, even the culture, almost everything. And that's all happening as we improved our top line trend to negative 2% in constant dollars and flat in reported. A year ago, only 10% of our business by revenue was growing. And today, that number is almost 60%. We also delivered a much stronger bottom line, a loss of $56 million in our seasonally low Q1, about $50 million ahead of the high end of our guidance and ahead of last year. Paul will cover the numbers in more detail, but in short, we're making solid progress towards our goals and are highly confident that we'll turn V.F. back into a growth company. Now let me summarize where we are in the V.F. turnaround as I passed the 2-year mark as CEO this month. I love transformation and we are transforming. We've assembled a great team at the top with some of the industry's best who we've either brought in from the outside or are promoting from the many leaders who grew up in V.F. and experienced it during a strong growth phase. We've dramatically improved our cost structure, reduced well over $300 million of cost and have another $500 million to $600 million of net operating income improvement in our sights. Even more importantly, for the long term, we're building a unified product and marketing engine across each brand globally and leveraging the strong standardized processes we've created. The architecture and organizational structure changes are now complete to deliver results. You'll see more powerful product and marketing as time flows. We prioritize strengthening our balance sheet. And in fiscal 2025, as you know, we reduced our leverage at full turn and have a clear path to below the 2.5 times leverage target that we initially set by fiscal 2028. That's just 2 years away despite the anticipated tariff impacts. Paul will talk more about that shortly. We continue to be focused on paying down our debt, but we're doing it as we invest in growth. So lower costs, improved margins, declining debt and a transformed organization. But what's all this leading to? Why are we doing this? Of course, it's all about one goal, growth. Turnarounds, by definition, start with declines. It's been 2 years of resetting the table and soon, we too will move to growth as we did in every turnaround I've been part of. That's the focus of every leader on my team and throughout the company right now. We're all here to grow. We have so many opportunities for growth. But today, let me focus on them by brand, starting with our top 3. First, we're going to bring Vans back to growth. We don't like the numbers on Vans any more than you, down 15% in Q1. About 40% of the decline can be attributed to channel rationalization actions, as you know. Excluding these, if you look at the underlying trends, Vans is running down high single digits, but we're seeing some bright spots. We'll get Vans back to flat and then to healthy growth as fast as we can. There are some out there who think this will never happen. I sort of love having that point of view out there. I get it. And it's our job to show you how wrong that point of view is. I'll come back to Vans and talk more in just a minute. Second, the North Face grew 5% this quarter, but our goal is to go from mid-single digits to high single digits and even to double-digit growth on a path to doubling revenue. That might sound ambitious today, but it's exactly what our brand president, Caroline Brown, laid out at Investor Day. We aren't promising to achieve those growth rates in the near term, but that's what we're focused on delivering. Our product innovation pipeline continues to build momentum for the brand. Footwear was up strong double digits again this quarter and is becoming a meaningful part of the business. In addition, our bags and packs business also grew strong double digits. But our biggest potential is actually in lifestyle apparel in general and spring and summer in particular. In fact, this is all to say we have many, many untapped growth opportunities in the North Face. Third, we're going to support the sustained momentum and growth of Timberland. The brand grew 9% this quarter with global momentum in the 6-inch boot and a growing business in the boat shoe. Our marketing strategy is working, enhancing the brand's visibility and further broadening its reach and relevance in warmer weather. As we've seen with its presence at events like the Met Gala and the NBA finals and just a lot of organic social media that we see and amplify. We're more confident than ever that the upside opportunity to break out of Timberland's historic revenue range is real, and we have the team in place to do it, led by Nina Flood. This is a business where the brand and the culture are much bigger than the business itself in size, and therein lies the potential. Finally, we'll fuel the other growth engines as they show their potential and truly turn V.F. into a multi-brand powerhouse. Let me point to Altra in this case, which had another strong quarter, up well over 20% and has grown from $60 million of revenue when we bought it to being on track to exceed $250 million this year. And that size with less than 10% awareness in the U.S. and much lower than that in the rest of the world. This is the kind of business that we can scale. It's already tied for the number one shoe in trail running in the U.S. and one of the fastest-growing franchises in the road running business. Now let me return to Vans. As a management team, we know the impact of valuation and we can see the focus around the timing of a turnaround. We get it. So let's talk about what we're seeing in thinking. First, we have a great leader, Sun Choe, and she and her team are executing on the plan laid out at Investor Day. I was just looking at more of our future lineup last week here in Costa Mesa, and things are really coming together. Each quarter, you'll see new entries. This team's freedom to innovate will be less and less constrained by the practicalities of the old product creation process as each quarter passes. So you'll see more and more ahead. But there are already positive signals in the Pinnacle side of the business. We had a 50% increase in appointment bookings at Paris Fashion Week in June, including new accounts and accounts who have delisted Vans in recent years coming back. And if you didn't notice, there was also a strong reaction to the sheer number of skate-inspired silhouettes featured by many luxury brands in Paris this year. These are the style centers and the taste makers. Trends start in the luxury market, as we saw in Fashion Week for Timberland with Louis Vuitton last June. I'm not suggesting that Vans will be growing 9% a year from now, but I am excited to see the tide turning on skate style shoes and luxury where trends start. Premium today is a small part of Vans, but this shows how sensitive this business is to new products. We don't have enough new products in the premium or the mainline yet, but Sun and the team, she is assembling our new product machines. New products are coming. With the recent changes in our supply chain, we're starting to accelerate our pace to market too. Meanwhile, Sun and her team are working away on increasing supply and variety in our latest products that already have strong interest, like the Super Lowpro, the Current Caples Skate, and the latest from OTW, our Pinnacle offering. We're also seeing encouraging signs in one of our classics, the authentic. We have an exciting collaboration with Valentino and that shoe hitting the market this fall. Now what about the actions we're taking to make sure those new products? All of our products are in the right places with the right support for long-term growth and profitability. As we've discussed, we've taken deliberate actions to improve our channel mix to set us up for high-quality sustained and profitable growth. These actions will continue to impact the Vans business through Q3. So as we exit the year, our channels should be at our future state. We're already seeing some solid results in wholesale. Americas sell-out trends continue to improve as non-value accounts grew again this quarter. In DTC, over the last 2 years, we've closed about 140 stores, about 20% of our global network. While it's tough medicine affecting revenue, it's improved our profitability. We've also now reoriented about 90% of our full-price Americas stores to provide greater gender clarity and we'll continue to change the format to show more newness and footwear focus in our visual merchandising. In the pilot store on Fifth Avenue, we delivered positive comps in Q1, significantly outperforming the rest of the fleet. Over in Europe, the elevated London store generated a 15% better revenue performance than the rest of the EMEA fleet, driven by a significantly higher average selling price, 35% higher through a more premium product offering. Based on these early successes, we'll be rolling out our new retail playbook to improve assortment, curation and navigation to other regions. It's also worth mentioning that in EMEA, we've executed on a key city strategy and have elevated our merchandising and focus in those stores. And this is generating exciting early results in that region with those stores starting to perform better than the rest of the network. And finally, on marketing, our approach simply hasn't driven enough traffic. While the whole industry is affected by slower traffic right now, we don't accept that, and we're changing our marketing approach. I can't disclose too much now, but keep watching the space. An aspect of our marketing that is powerful is the long-awaited return of the Vans Warped Tour. And it's a restart year, we planned three locations, and we intended to sell 50,000 tickets in each location, which would be about twice any single Warped Tour event in history. Then we sold out of all three events in hours. We added a lot more tickets and sold those out immediately too. Sunday, I was at the second of these events in Long Beach. And over the two days, we had almost 170,000 people. That's surely the largest single collection of Vans footwear and apparel ever assembled in one place. Everyone was in Vans of all kinds. You could really feel the love for Vans. People came because they love music and they love Vans, and they're inseparable for many. 80, that's 80 different artists, 8 stages and just a huge boost for the brand. To wrap up on Vans, we're on track with the turnaround and could be more excited about what's coming next. Keep watching. We are well on our way to transforming V.F. and this quarter is another step in the right direction. Our powerful portfolio of brands and the sustainable growth model we're creating will help us accelerate growth and improve margins. We're on a path to achieve our targets and build a stronger V.F. Our focus is on growth. I'll now hand it over to Paul, who will go deeper into the numbers.

Thank you, Bracken. Before I start, let me build on what Bracken said and remind you of where we are going. We committed to a 55% gross margin and a 45% SG&A to sales ratio in fiscal '28. And the first quarter of this fiscal year, we are continuing to show progress toward those goals. Our quarterly 2-year stack trends have shown gross margins up roughly 200 basis points with SG&A down 5% over that same time period. We have done all of this without any growth. But as we said time and time again, that's not what we're here for. We are here for growth, and our whole organization is focused on the next stage, which is about growth. So now let me turn to a review of the first quarter. Our first quarter was solid and our operating results came in above guidance, the guidance we provided. We feel particularly good about the improved progress towards our stated medium-term goals. As a quick FYI, before I get into the numbers, currency movements in the quarter were significant, positively impacting reported revenue by 200 basis points. These foreign exchange changes also had a positive effect on gross margin with a negative impact on SG&A. The net of these effects had a negligible impact on our operating income. Q1 revenue was $1.8 billion, flat on a reported basis and down 2% year-over-year in constant dollars. This compares to our guidance of down 3% to down 5%. Excluding Vans, revenue was up 5%. Total revenue in the quarter did benefit from a wholesale timing shift, which landed in Q1 rather than Q2. Excluding this benefit, revenue would have been down roughly 3% at the top end of our guidance range. By brand, the North Face grew 5% led by growth in both DTC and wholesale. Vans revenue in the quarter was down 15%, similar to last quarter, the impact of the direct actions we are taking in the value channel and our own stores was about 40% of the reported decline. And finally, Timberland's momentum continued with revenue up 9%, reflecting growth across all regions. By region, the APAC region grew 4%, while the Americas and EMEA regions were down 3% and down 2%, respectively. Excluding Vans, the America region was up 3% versus last year. And lastly, by channel, DTC was down 4%, while wholesale was flat. Adjusted gross margin in the quarter was up 200 basis points to 54.1%, driven primarily by higher quality inventory, lower discounts and foreign exchange. This reflects our transformation efforts to make us a structurally higher margin business. SG&A dollars were flat year-over-year as we continue to realize cost savings across the business. Our adjusted operating margin for the quarter was negative 3.2%, up 270 basis points year-over-year. We're continuing to make fundamental margin and profitability improvements by reshaping and strengthening the foundation of our business. Finally, adjusted loss per share was $0.24 versus $0.35 in Q1 of last year. Moving on to our balance sheet. Inventories were up 4% or $76 million at the end of the quarter, excluding the impact of foreign exchange, inventories were up 1%. Importantly, we improved the quality of our inventories, which is driving stronger gross margins and our inventory days are down 4% year-on-year. Net debt was down $1.4 billion versus last year or down 20%. Let's now turn to the outlook for the second quarter. We expect Q2 revenues to be down 2% to down 4% on a constant dollar basis. As a reminder, Q1 did benefit by roughly 1 point of growth from a timing shift in wholesale, which will conversely negatively impact Q2 growth by 1%. Taking Q1 and Q2 together, our first half performance is expected to be in line with the comments we provided on our last earnings call in May. Moving down the P&L. We expect Q2 operating income to be in the range of $260 million to $290 million, gross margins will be broadly flat as we continue to benefit from fewer discounts and healthier inventory, but we'll lap the tailwinds from last year's inventory actions. SG&A dollars are expected to be up slightly versus last year mainly due to our decision to invest more into marketing ahead of back-to-school as well as a negative foreign exchange impact. On a constant dollar basis, SG&A is expected to be broadly flat versus last year. And finally, we expect Q2 interest of approximately $50 million and an effective tax rate in the range of 30% to 33%, which is higher than last year's reported tax rate. And in line with my comments last quarter about increasing trend in our tax rate over the next 1 to 2 years and quarterly fluctuations as a result of the change in the global tax rates and in our geographical mix. As a reminder, this higher tax rate will have a minimal impact on cash taxes. Now let me give you a quick update on tariffs as things have moved since we last updated you. When we spoke in May, we quantified the annualized unmitigated impact from the 10% incremental tariff on goods coming into the U.S. as $150 million. Based on what had been agreed at the time in terms of the timing of implementation, we estimated 65% of the impact would hit in fiscal '26, and then we'll start to see the impact flow through in Q3. Based on the latest information that has become public, we estimate an incremental annualized tariff impact of $100 million to $120 million, bringing the total annualized amount to $250 million to $270 million. We expect 50% of this total to flow through in fiscal '26 based on the timing of the expected tariff increases. As we communicated, we have actions in place to mitigate the tariff impact through sourcing savings and pricing actions that will take effect later this year. From a timing perspective, we will begin seeing the impact of tariffs in the P&L before we realize the full offsets from the mitigating actions. Therefore, we expect a negative net impact to gross profit of $60 million to $70 million due to tariffs in fiscal '26. We remain confident we will be able to fully mitigate all currently anticipated tariffs in fiscal '27. On the back of these developments, I also want to update you on the directional year-over-year guidance for operating income and free cash flow in fiscal '26. First, we continue to see operating income up versus last year in fiscal '26. This is inclusive of all expected tariffs that we believe to be on the table at this point as outlined earlier and as we continue to make progress towards our medium-term targets. Second, on cash flow. We continue to expect operating cash flow and free cash flow, excluding the sale of non-core assets, to be up year-on-year, also including all expected tariffs at this point. So let me repeat, free cash flow for the year will be up versus last year, even after we account for tariffs. We are working on a number of initiatives that are expected to improve our free cash flow throughout the year, which gives me confidence that we are well positioned to achieve our guidance. And we anticipate that our leverage will decline at year-end of fiscal '26. In addition to improving our cash flow, we remain vigilant about lowering our debt. As many of you are aware, we utilized our revolving credit facility to manage fluctuating working capital needs throughout the year to ensure we maintain a strong liquidity position moving forward we're in the final stages of executing a $1.5 billion asset-backed revolving loan. This will replace the current revolver we have in place. We are pursuing this option as we believe the asset-backed loan gives us more flexibility, more certainty and eliminates the majority of covenants associated with our current borrowing. It also aligns with the puts and takes associated with the cadence of quarterly working capital needs. So to be clear, we are on track to meet our guidance to reduce leverage to 2.5 times by fiscal 2028. Before we close, I want to highlight changes we've made to our segment reporting as well as post-quarter and update to our financing structure. First, in Q1 fiscal '26, we have changed our segment reporting to make it easier for investors to track our key areas of focus across brands and segments. We will continue to disclose revenue for our top 3 brands, the North Face, Vans, and Timberland, and as for segments, here's what has changed. We have combined Timberland Tree and Timberland PRO into one operating segment. This combined Timberland along with North Face now constitutes our Outdoor segment. Vans and Packs make up the active segment, while Dickies, Altra, Smartwool, Icebreaker, and Napa are reported in the other category. While we will no longer disclose Dickies as a stand-alone brand, we continue to be excited about and committed to growing the Dickies brand. Our new brand President, Chris Goble, has made an excellent start to restating the brand since joining last October and is already executing on the strategy we introduced at Investor Day in March, the leadership team being rebuilt. We believe the brand has significant growth potential under Chris' leadership. By the way, even though we are no longer disclosing separately, Dickies' decline versus last year moderated significantly this quarter. So in closing, we are pleased with our results in the first quarter of fiscal '26, as Bracken said, we are focused now on getting each of our brands growing and getting stronger and stronger. I'll now hand it back to the operator to take your questions.

Great. And nice to see the progress and congratulations on that. Bracken, I guess, I'm going to start with sort of the Warped Tour. So what did you expect to see? I mean, obviously, you gave us some of the metrics, but what did you expect in terms of mind share, market share kind of before the event? And what metrics kind of suggest to you that you've engaged other than selling the tickets in terms of kind of feedback, et cetera? And then Paul, can you talk about the $60 million to $70 million of gross profit impact? Obviously, given the guidance that you had for the first half of the year, all of that is coming in the back half. Are you able to offset this through the SG&A? Can you talk about some of the other parts of the P&L that can offset that? And I'm assuming that, that does not include the price actions that you would be taking? Or just some clarity on how much of that includes forward price actions?

Let me address the first question regarding our expectations for the Warped Tour. Firstly, it's important to note that the Warped Tour has not occurred since 2018. We made the decision to revive it shortly after I arrived here. Credit goes to Kevin Lyman and especially Steve Van Doren for their efforts in reinvigorating the tour. We initially planned three events, expecting a modest impact, but thanks to social media, it feels like it's happening all over the country. We aimed to sell 50,000 tickets, which we expected would be a significant increase from the past peak of 25,000 at any single event. Amazingly, we sold out those tickets in about an hour and a half, leading us to add another 35,000 tickets, which also sold out quickly. The demand was overwhelming, and there's been significant activity on social media regarding this. Regarding the business impact in our first year, with only three cities involved, we sold a substantial amount of merchandise. When you consider all the merchandise sold by us, the event managers, and the various bands, it highlights how effective this event is at driving product sales, especially at the venue. We expect this momentum to continue into the second year of the event. It serves as a major fan fest, and I truly wish every investor could have experienced the incredible atmosphere of the crowd I witnessed on Sunday. I invite you to join us in Orlando this November.

Bracken was very excited with his Warped Tour experience. To clarify the question, the $60 million to $70 million we discussed is primarily expected in the latter half of the year. This figure accounts for everything currently influencing our fiscal year and what we believe we can manage through pricing and other measures. It's important to note that we've been working on improving gross margins throughout the year. While these factors affect gross margins, the environment is not static, and we will continue to focus on gross margin enhancements beyond tariffs. Additionally, we will remain attentive to our other cost initiatives that we have previously mentioned.

To clarify, it's 19% for Indonesia and 20% for Vietnam. Is that the incremental?

Yes, I mean that's what we're going to do. To clarify, everything we have is based on what has been made public by the administration or others. Therefore, we don't have any additional insights beyond anyone else's expectations. We've created our model based on what we perceive to be the most likely outcome derived from public information.

But think of that as another 9 or 10 points in Southeast Asia and something comparable around the world.

I just wanted to get your longer-term views on gross margin. Clearly, we'll have some pressure through the rest of the year from tariffs. But as you step back and you look at the gross margins of each of your brands, where do you see the most opportunity to improve those going forward?

Yes. During our Investor Day, we established a gross margin target to reach and maintain 55% over the next few years, with potential to exceed that. We remain confident in this target as we evaluate our overall business. There are significant gross margin improvement opportunities across every brand; it's primarily a matter of how much we choose to pursue them. For example, in the North Face, we see opportunities for premiumization and product mix enhancements. While I won't get into the specifics of each brand's gross margin, I will say that our long-term growth opportunities are aligned with higher gross margins. Regarding Vans, we highlighted our premiumization efforts, particularly at the Fifth Avenue store, where we are selling 35% more premium products. This underscores the growth potential available. Vans can appeal to a wide range of price points, and as you move up in these price points, gross margins typically increase. We have only just begun to explore the premium mix we can offer. Overall, we see opportunities across all our brands. Paul and I are particularly focused on gross margins, recognizing their critical role in driving business success. If we can optimize gross margin, we believe everything else will fall into place. Moreover, strong gross margins reflect the strength of our brands and business as long as we continue to grow, and we will achieve that growth. Therefore, we expect better gross margins moving forward.

Yes. I would just add, so just kind of refresh to in terms of what we said at the Investor Day, right? We mentioned the three big gross margin initiatives. We mentioned some of the nine initiatives that we talked about that were going to help generate that incremental $500 million to $600 million of operating income. The three that we specifically called out in gross margin were product creation, integrated business planning and markdown management. Markdown management, you can think about is something that is more immediately actionable. The other two take a little bit of time right on product creation and integrated business planning. And so I think you'll start to see the impact of markdown management, you already have, right, in terms of where we've seen sort of better execution there in terms of overall markdown and then you'll see from the product creation and integrated business plan and that stuff that will start to benefit us but really get rolling over the next kind of year or two.

I just want to ask another question about tariffs. It sounds like you're going to mitigate a whole lot of the $250 million to $275 million gross impact. What kind of impact do you expect on unit volumes as you raise prices and do some of the other actions to offset the tariff?

Nobody really knows. This is a very unusual situation where the entire industry is impacted somewhat equally. If our competitive assessment is accurate, it seems that everyone in this industry, whether in footwear or apparel, has been affected similarly by the tariffs. This makes it challenging to model. We have considered various scenarios as you would expect, ranging from a worst-case scenario to a best-case scenario, which we overlook. Instead, we focus on an expected case while ensuring we are safeguarded against potential downsides. Generally, I think we are modeling somewhere around a 1:1 or slightly better, considering the entire industry is raising prices. We'll have to wait and see. Additionally, there could be a macro impact. Paul, would you like to add anything?

No, I would just say exactly that. We have different scenarios regarding various elasticity curves. Some of it will depend on waiting to see how things unfold. Bracken mentioned several of our brands and their current product status, and I believe some of them might have pricing opportunities regardless of tariffs. We'll see how that develops.

Congratulations on a strong quarter. It's great to see the 5% growth rate for North Face in the Americas on a global scale. While I understand it was a minor quarter, I noticed that sales were down 3% over the summer. You mentioned being excited about some upcoming lifestyle products. Could you help clarify the reasons behind the 3% decline during the summer and how it relates to the lifestyle offerings? Additionally, what should we expect regarding North Face in the Americas as we head into fall and winter, considering the order books? Also, Bracken, you've mentioned previously that Europe might be closer to a rebound than the U.S. You noted this earlier this year when we met. Can you explain how this connects to the brand's performance, particularly since it was down 16% this quarter, although you've mentioned improvements at the London store? Please help us understand the current status of the brand in the EMEA region.

Yes, I'll start with your questions about North Face. Generally, I am really excited about our plans for North Face over the next four quarters. In the past, we haven't introduced enough product, and when we have, we haven't invested adequately in it in stores and through wholesale channels to see a significant difference in the spring and summer. As you mentioned, this is a very light seasonal quarter for us, so I wouldn't draw too many conclusions yet. It's still early, and we don't have enough spring and summer product available at this time, but I assure you that the team is focused on this, and they're working hard to improve. As we move into the next spring and summer, you will see more of our products. I am excited about that. Regarding your question about brand forecasting, we're trying to avoid predicting where the business is headed by brand, so I won't go into that. However, regarding your question about Europe, I believe that turnarounds typically have ups and downs, and that's true for Europe as well. We have some strong opportunities in Europe, particularly with our plan to focus on key cities, which is showing positive results. However, I don't think the turnaround in Europe is happening any faster than in the U.S.; it seems to follow a similar pattern, and we expect the turnaround to occur at about the same pace.

Any comment on the forward order book for fall/winter for North Face?

No, we're really trying not to do that. We really don't want to get into any kind of forward-looking forecasting by brand.

It's Tracy Kogan filling in for Paul. I was wondering, are your quarter-to-date trends in line with your revenue guidance of down, I think, 2% to 4%? Or are you expecting trends to accelerate or decelerate from here? And then I thought at Vans, you expected a similar drag from your deliberate actions as you saw in Q4, but it seems like it was significantly less. And I was just wondering if you took fewer deliberate actions than you initially anticipated.

Regarding the first question, we're not going to provide an answer at this time. We have issued our guidance for the quarter, which reflects our expectations, and I'll leave it at that. Concerning Vans, it aligns with our expectations. Last quarter it was around 50%, and this quarter it's approximately 40%. This is simply a matter of how everything works out mathematically. The overall initiatives and intent remain unchanged; it’s really about how the figures play out. So for us, the percentages of 40% and 50% are fairly close, with last quarter being slightly higher and this quarter a bit lower. We've already addressed that the most significant impact would have been seen in Q4 of last year, followed by Q1 and Q2 of this year. We hope to see some easing of that in Q3 and significantly more in Q4.

So one of the call-outs was leaning into marketing for back-to-school. Is this entirely related to the Vans brand? And should we expect this to be a sustained area of investment for fiscal '26?

Yes, back-to-school isn't just about Vans. We are definitely focusing on back-to-school this year. It happens every year, and it will happen again this year. I believe we have a strong program in place. I expect this to become an annual initiative. Looking back, I don't think we executed as well as we could have last year, so we're putting more emphasis on it this year, particularly with Vans. I'm looking forward to seeing how it goes, and I'm optimistic.

I wanted to ask about the free cash flow for the first quarter. It was down $174 million. I think last quarter, Paul, you mentioned there was an intentional timing shift. So by my math, it looks like the free cash flow for the quarter was down maybe even more than $200 million. So I'm trying to understand the deterioration of free cash flow. And can you walk us through how do you get to over $500 million of free cash flow for the remaining quarters?

Yes. So the Q1, it's really around timing. It's around timing of working capital. It's around those types of dynamics. But when you sort of look at the components of free cash flow for the year, right, between our operating income, what we expect to spend on CapEx, how we're thinking about CapEx throughout the year and other movements in working capital, we're right on pace. It's why I don't guide free cash flow on a quarterly basis, but we try and give some idea on an annual basis because you can have a pretty big fluctuations sometimes with respect to timing in any one quarter. As I said, we do feel good about it. There is an incremental impact from the tariffs, which we talked about. We have some offsets that we think we're working on throughout the year to improve free cash flow. And it's a big focus on us. I mean I think Bracken mentioned before, there are a couple of things that we really focus on. Gross margin is one of them. And free cash flow is the other one for me, right? We're really committed to generating incremental free cash flow to paying down our debt, reducing our leverage and we expect free cash flow to be up this year. Again, there's lots of moving parts. There's lots of moving parts in every quarter. There's things that we're working on that will hopefully come through, that will impact our free cash flow throughout the year. And as that happens, we'll update you.

Wonderful. I have a follow-up, Paul. Net debt actually increased this quarter, which may be due to seasonality. You have a target for the next five years, but what is your outlook for net debt? I know you plan to use the $500 million bond. Are you still utilizing the revolver for that? What do you expect for net debt and leverage this fiscal year?

We expect our leverage to decrease going forward. While we haven’t set a specific target for this year, we do aim for a reduction in the medium term. Last year, we finished at a leverage ratio of 4.1 times, and we anticipate closing this year below that figure, making progress toward our goal of 2.5 times. Regarding the $500 million maturity, currency fluctuations have negatively affected our balance sheet, impacting how debt is reported. We still plan to pay the $500 million at the end of the year, primarily through free cash flow, and potentially supplemented by short-term borrowing if necessary. However, we are quite confident that we won't face any issues with this payment.

So Bracken, on your reset actions across the portfolio, what remains or anything new that you anticipate relative to actions in place today? And just on your visibility for the portfolio to soon move to growth that you cited, is there any reason this would not happen in the second half of the year?

I feel good about what we've accomplished, and I believe we're in a strong position. There will always be adjustments and issues to address in a company of our size. However, I think the significant reset actions are largely behind us. While we are not providing guidance for the year and won't discuss much about it now, I assure you that we will maintain transparency as we progress through the year.

No, again, it's a couple of things. One is, obviously, we had some step-ups over last year as we lap some of our other initiatives. We still feel good about the gross margin progression. Again, you saw some of it in Q1. And so again, sometimes there's ebbs and flows with every quarter, but it's flat year-on-year. We feel good about where the trajectory of gross margins have gone overall.

Bracken, I was hoping you could talk about how your conversations with wholesale partners are trending as you've implemented some of these actions across all of your brands in North America, especially given a choppy macro backdrop, are you seeing any signs of hesitancy in taking additional inventory levels or orders into the holiday season? And is that being offset by some stronger product innovation and marketing given what you're doing across the brands?

I believe there is some hesitation among wholesalers globally when it comes to increasing their inventory. We are aware of this, as is the rest of the industry. Additionally, traffic has decreased slightly during the summer, particularly due to uncertainty surrounding potential changes to tariffs. This has created a sense of conservatism, which is palpable. However, we remain as optimistic as ever. We believe we have laid a solid foundation in terms of innovation and will continue to invest in marketing as planned without making any reductions. Our strategy is focused on strengthening our product portfolio, enhancing marketing execution, and driving innovation. We expect these efforts will help counter any reasonable economic concerns. Thank you, Brooke, and to everyone else. As I wrap up, I want to mention that we have just completed my first two years, which have been incredibly exciting, but I anticipate the next two years will be even more thrilling. Everyone prefers focusing on growth rather than cost management and organizational changes, and I certainly align with that sentiment, along with my leadership team. We are genuinely enthusiastic about our growth trajectory. Stay tuned for future updates; it will be enjoyable to connect with you next quarter and the following quarters. If you're interested in the Warped Tour, I have some T-shirts ready to go for when we can meet in person. See you in three months.