VF Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 13 speakers on the call.

Operator

Greetings and welcome to VF Corporation First Quarter 20 24 Earnings Call. As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Allegra Perry, Vice President of Investor Relations. Are ready to begin.

Speaker 1

Good afternoon, and welcome to VF Corporation's Q1 fiscal 2024 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.

Speaker 1

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 press release, which identify and quantify all excluded items participating and provide management's view of why this information is useful to investors. Joining me will be Versus President and Chief Executive Officer, Bracken Darryl and EVP and Chief Financial Officer, Matt Puckett.

Speaker 1

Matt will then host the question and answer session and will be joined by several VF executives. Will now hand over to Bracken.

Speaker 2

Hello, everyone. I'm happy to join my first conference call with BS as the CEO. While my role today will be a little more limited than what I'm used to, given I'm on my 12th day here, I am super excited to be here. BS portfolio of globally powerful and iconic brands, deeply embedded purpose and impressive talent all give me a lot of confidence. Participants are in the process of executing on our strategic priorities.

Speaker 2

These are the key ingredients needed to unlock the company's significant value potential and return to strong, sustainable and profitable growth. I joined VF after 10 years as CEO of Logitech, where I'm proud to have overseen the transformation of the company that grew its value tenfold. We did it by putting the customer at the center of everything we do. I'm passionate about building brands through a design and innovation focus. With unique products and immersive storytelling, consumer experience is elevated and so is growth.

Speaker 2

While I'm just roughly 10 days in, I already feel at home here. I've spent time in our offices in Denver, meeting with our brands based here and with many, many VF associates. I visited our European team in Stavio, and I'll be in Costa Mesa at the Vans offices tomorrow morning. I've been in our stores in Denver, San Francisco, New York, London and more are in 3 of our Stream stores around the world and Minnie Vans and North Face stores. I talk to customers everywhere I go have started to dig into the brand equity data.

Speaker 2

My conclusion is that our brands are as strong as I expected. Our team is loaded with talent. Are not performing at the level equal to those, but it's because of things in our control. I feel a strong sense of urgency with respect to the challenges we face and will collectively work with the team to get BF back on track through disciplined and thoughtful actions. I'm looking forward to speaking with all of you again at our Q2 earnings results share my perspectives on my 1st few months in the role.

Speaker 2

This company has what it takes and I'm excited about the future of BS and its ability to return to delivering strong shareholder returns. I'll now turn it over to Matt to talk you through the quarter.

Speaker 3

Thank you, Bracken, and welcome to VF. Your impressive track record and strong background in innovation and design brings a new dimension to leading BS and reinforces my confidence as we turn the page to our next in a dynamic chapter. I also wanted to extend our gratitude to Benno, who's been instrumental in laying a solid foundation for Versus return to strong, sustainable and profitable growth, by refocusing our efforts toward the consumer and by taking aggressive actions to strengthen the business operationally and financially and personally a great partner to me. We are fortunate to have him continuing as a valued member of the VF Board. Before I get into the business and financial results, let me give you an update on our 2 most important near term priorities that we've been highlighting in recent quarters, participating in the supply chain and Vans.

Speaker 3

1st, in the supply chain, we saw further progress during the quarter as industry conditions continue to improve and our own actions to address execution yielded results. Lead times ended the quarter at normalized levels, all on time performance and in stock percentages were both back in line with our targets. We are appreciative of the quick and aggressive actions are taken by the supply chain and brand teams to position us to now consistently meet our customers' expectation and maximize on the opportunities that present themselves in season. Participants, which was down 22% in the quarter and was disproportionately impacted by the brand's wholesale business in the Americas, which was down 40% as anticipated. This includes intentional actions we've taken to right size inventories in advance of the important back to school season.

Speaker 3

Were encouraged by the results in China and in the digital business, which have both meaningfully improved relative to the prior quarter's trend versus last year. Are participating in the Q1 of 2019. While the brand's overall performance was largely anticipated, it's not where we should be. We remain intently focused on the actions that turn around the brand. Call.

Speaker 3

Now, an update on the key focus areas of product, consumer and go to market. 1st and foremost, product. Are increasing our level of investment to create new relevant products that excites consumers, while developing existing franchise that are working well. With new lines including New School and Lowland all generating strong sales force. The soft launch of the Pinnacle range, in the Q1 of 2019, including the Q1 of 2019, including the Q1 of 2019, including the Q1 of 2019, we expect to be in the Q1 of 2019.

Speaker 3

And other key focus area we've shared previously is an opportunity to better understand and integrate the consumer into our decision making. Are participating in our significant global segmentation refresh is on track. And in the meantime, our Vans family membership keeps growing, now approaching 29,000,000 members, adding 1,000,000 members in Q1 and more than doubling in 2 years. We continue to improve the Vans go to market activities. Are well underway and are benefiting the quality and productivity of our store assortments, store SKU reduction actions expected to be fully completed in August.

Speaker 3

We'll also be launching our redesigned Vans dot are participating in the holiday season. Vans is a great brand and we're confident in its enduring strength participating in the industry and the intensity that this leadership team is bringing to the effort every day. Now turning to a review of the quarter. Q1, our smallest quarter and facing the toughest prior year compare, came in line with our expectations, both on the top and bottom lines. That said, overall, our performance was not up to the standard we expect to achieve.

Speaker 3

Are in line with guidance and wholesale particularly pressured the top line in the U. S. On a 2 year basis, revenue was about flat. Let me first unpack the performance by region. Revenue in the Americas region was down 15% in the quarter, primarily due to channel pressures we outlined in May.

Speaker 3

These had an impact across most of the portfolio and in particular at Vans and Dickies. The quarter's results were impacted by the rightsizing of inventories across the channel and the implications of our poor customer service from last fall. Are participating in the quarter with revenue in the region down 3% in Q1, driven by a high single digit decline in wholesale as retailers grew more cautious. Our direct to consumer business was up mid single digits in the quarter, have signed a resilient consumer demand for our brands and evidence of our continued strong execution of integrated go to market strategies. Participating in the APAC region with revenue up 18%.

Speaker 3

All channels grew by double digits in the region with DTC fueled by brick and mortar Greater China saw further acceleration of 31% and benefited from the comparison to the prior year lockdown impacts. Are covering domestic travel. Now let me complete the picture of the brand's performance, starting with The North Face, were up 12% in the quarter against the tough prior year compare of +37% and driven by broad based growth across products, channels and regions. Globally, high demand for our icons, as an example, the base can't shuffle as well as the Voyager Pax line generated very strong performance aided by the summer travel season. Our lifestyle product, the urban exploration line and our rainwear also saw good momentum.

Speaker 3

Growth was led by B2C, driven by digital, as the brand's product innovation and sharp execution resonated with consumers. Participants were down 6% in the quarter, in line with our expectations. The brand was up against a tougher prior year compare and results were impacted by wholesale in the Americas, as partners continue to produce inventory levels. Results were positive in the other two regions. Globally, product innovation is resonating as the new hiking Motion 6 delivered outsized sell through performance and we made good progress on women's with strong growth in sandals and apparel for her.

Speaker 3

Are in the range of $1,000,000,000. Vicki's results were disappointing and significantly challenged during the quarter, down 19%, as the Work segment continues to be impacted by a weaker value in consumer, Soft results in the Americas and APAC were partially offset by continued growth in Europe. Quarter. Importantly, we have made progress on rightsizing inventory levels in the channel. Moving down to P and L, Q1 gross margin was down 130 basis points.

Speaker 3

Participating in the quarter, up 80 basis points, driven primarily by DTC and international growth. Are in the range of $1,000,000,000. The rate was down 200 basis points, more than offsetting mix benefits, reflecting the ongoing impact of higher promotions. Which are moderating and which were partially offset by strategic pricing actions and finally negative currency impacts. Adjusted operating margin was down 380 basis points, reflecting the impact of the lower gross margin and SG and A deleverage.

Speaker 3

Participants are in the range of $1,000,000,000.

Speaker 4

SG and

Speaker 3

A declined versus last year by 3% in constant dollars, which exhibits our focus on reducing costs and managing the P and L in times when the revenue line is under pressure. SG and A deleveraged 2 50 basis points in the quarter, reflecting B2C and other fixed cost deleverage, in addition to the impact of continue to execute on our continued strategic investments in technology, marketing and distribution. Q1 loss per share was $0.15 also impacted by elevated interest expense and a modestly negative impact from tax. Turning to the balance sheet and cash flow. I'll start with inventory, where we saw further sequential progress in improving the overall health of our inventory position.

Speaker 3

In the quarter, slightly ahead of our plan with inventories up 19% versus last year, compared to organic growth of up 46% at the end of the fiscal year and up 75% before that. The increase in inventory now represents a true organic comparison as we fully lap the impact of the supply chain financing participating in Q1 of fiscal 'twenty three. Inventory composition remains primarily core, carryover and replenishment, participating in the Q4, which has a higher likelihood of being sold at full price or with a minimal markdown. Cash from operations, which as a reminder is also benefiting from the extension of payment terms as part of the Supply Chain financing program was $164,000,000 in the quarter. We knew the quarter was roughly $3,000,000,000 in liquidity, in line with our plan and about flat to the end of the fiscal year.

Speaker 3

The free cash flow of $79,000,000 in essence offset by the dividend payment of $117,000,000 As it relates to the outlook, before I unpack the numbers, let me give you a little context for how we see the balance of the year evolving. We see several areas of strength worth calling out, which give us confidence as we look forward. The North Face is maintaining strong momentum, and we expect this to continue with investments being made to further fuel this growth. Our China business is gaining momentum and we believe our brands have significant growth opportunities in this market where we are underpenetrated. Certainly, the outdoor and travel part of the market continues to be strong in the North space as the number one international outdoor brand in China is driving and benefiting from that trend.

Speaker 3

Are in the range of $1,000,000,000 Our DTC trends in EMEA remain strong and in fact comp growth has accelerated in June July. Finally, we are seeing an improved performance in the supply chain, will allow us to deliver the planned cash flow benefit from reducing inventories and capitalize on revenue opportunities as they present themselves through the balance of the year. However, we continue to face a few meaningful headwinds. Vans performance remains difficult as work to turn around the brand continues with a great deal of urgency. In the U.

Speaker 3

S. And the U. S. Remains challenging as our key partners maintain a more cautious stance on forward orders. And the work segment of the Vickie's business has remained softer for longer than we anticipated.

Speaker 3

It's still early in the year and our teams across the business are working diligently to maximize the opportunities our brands have to deliver compelling experiences and product to consumers across channels. And we have great confidence that we'll see progressively improving results. Now, moving on to the specifics of our updated outlook. Are revising our full year revenue expectations to be modestly down to flat as we take a more conservative posture on the balance of the year. The are in the range of $1,000,000,000.

Speaker 3

The reason for the change in revenue outlook is based primarily on wholesale. Despite the progress made in lowering inventory levels, our wholesale business remains pressured. Participants are evolving favorably in the outdoor segment in particular, sell in is challenged across the segments. Participating in the balance of the year, our order books have evolved a little more muted than previously anticipated in both the U. S.

Speaker 3

And Europe and reflect the continued cautious posture by many of our partners. Participants have affected brands across the portfolio and is skewed disproportionately to fans. As a result, we now expect wholesale across the app to be down mid to high single digits participating in the market with most of that pressure coming in our Americas business and to a lesser extent in Europe. Alongside this, however, we are encouraged by the trends in our GSE business and we continue to expect growth in this channel during the year, including in the U. S.

Speaker 3

Overall for VF, we continue to expect a better second half revenue performance relative to the first half, reflecting an improving wholesale performance, are participating in our own core execution, which muted our performance. We are maintaining our EPS guidance range of $2.05 to $2.25 for the year. Participating in the Q1 of 2019. As a reminder, this includes a higher level of interest and a higher tax rate. It's worth highlighting the underlying operating earnings are anticipated to grow are increasingly confident in our ability to deliver higher gross margins.

Speaker 3

The year to go period will benefit from moderating promotions as we lap last year's impacts, participants are in a position to increase our profitability to easing product costs, including freight and increasingly favorable mix, reflecting the outperformance and strength of our DTC will be participating

Speaker 4

in the international businesses.

Speaker 3

This guidance takes into account our continued commitment to 1st, investing in key capabilities, will continue to see opportunities to fuel organic growth and focus on areas that create value for our customers and consumers. Let me give you some examples. Product innovation and demand creation at The North Face with a higher spend as a percent of revenue. The opening of the Ontario, are participating in the Q4 of 2018.

Speaker 4

The enhancement of our consumer facing digital ecosystem

Speaker 3

with the launch of an updated digital platform in the U. S. To which most of our brands have now migrated. Are participating in the future. We continue

Speaker 4

to reduce cost aggressively, who is not adding value for

Speaker 3

the consumer. And some examples here include stopping technology spending that is not consumer facing or impacting aggressively optimizing our distribution capacity considering reduced unit sales volumes participating. Now, let me give you a couple of updates on the drivers of cash flow. We continue to expect free cash flow in line with our plan, driven both by growth in cash earnings and a reduction in working capital, primarily from activities to reduce inventory levels and recognizing the full benefit of revised payment terms with our product suppliers as we migrate through fiscal year 2024. Importantly, we expect inventory to be near to normalized levels by the end of this We maintain tight control and discipline on all capital spending.

Speaker 3

And in light of business conditions, we paused lower priority projects. Moving on to debt, we remain laser focused on reducing our leverage. While we have ample liquidity and financial flexibility to pursue our key priorities, in line with our expectations. Our number one financial objective is to return ZF to our historical balance sheet strength. Accordingly, we will use any excess free cash flow to reduce debt.

Speaker 3

Future. We expect to end this fiscal year with gross leverage of about 4 times will continue to make progress on the path to moving toward our target of 2.5 times. Now, you may have noticed I haven't talked a lot about the macro environment in my comments. Remain intently focused on our own issues and on what we can control. And so much of what we have to do relies on fixing those issues.

Speaker 3

At the same time, we're not oblivious to the external conditions and they do inform our near term tactics and strategies. The environment itself remains difficult and volatile. Recognize that many consumers are feeling impacts to their disposable income and are continuing to deal with inflation facing higher interest rates in the U. S. The upcoming end of the student loan calls.

Speaker 3

In summary, for fiscal year 'twenty four, are slightly more cautious on the evolution of revenue, but remain confident we will deliver increasing operating earnings to improve gross margins and strong cash flow, together enabling us to achieve our debt reduction targets, all leading to a strengthened financial position. Finally, I'll give you an update on the Timberland tax case. Latest development being that oral arguments occurred last week, which was sooner than we anticipated. This advanced timeline indicates the 1st Circuit Appeals Court could issue an opinion as early as the next few months. We previously expected a decision could occur within this fiscal year and in light of the pace at which the oral arguments proceeds, it's now increasingly evident that this will be the case.

Speaker 3

We continue to believe the timing and treatment of the income inclusion at issue is appropriate. Looking ahead to the future, we are confident that we have all the right ingredients to succeed and to return to our standard of delivering superior shareholder returns, driven by strong, sustainable and profitable growth. We have a portfolio of world renowned and beloved brands, which are well positioned in big and growing spaces that continue to benefit from macro consumer tailwinds. We've taken significant actions to strengthen our business, operationally and financially. Are in the range of $1,000,000,000.

Speaker 3

We continue to work to drive improved product margins, including better go to market efficiencies, product cost participation and strategic pricing actions. These near and medium term actions combined with the ongoing focus to drive down costs, which are not consumer facing, will support an expanding margin profile over time. We remain committed to our purpose, which is at the heart of everything we do. Will continue to remain central to our culture and to our strategy. Our team of passionate, highly skilled and deeply committed associates continues to be a key asset to unlocking our full potential.

Speaker 3

In closing, we can and we will will better harness the power and strength of Versus, while continuing to focus on sharpening execution, optimizing earnings and cash flow and strengthening the balance sheet, all of which will enable BS to begin to fulfill its full potential this year and beyond. With that, we'll now be joined by several members of the team to answer your questions. Are in the line with our business in EMEA and APAC and in the emerging brands and our brand leaders from Vans, The North Face, Timberland Supreme, are in the line and take your questions.

Operator

Thank you. We will now be conducting a question and answer session. One moment please while we poll for your questions. Our first questions come from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your questions.

Speaker 5

Hi, good afternoon, everyone, and Bracken welcome. Given your experience at your former company Logitech, what is most similar, what is most different As in the work to transform the F. And then Matt, on the results today, it looks like wholesale was the weakness nearly everywhere. How much of it was the impact overall in the Americas and Europe? And how does it differ by brand?

Speaker 5

Thank you.

Speaker 2

Thanks, Dana. I'm not quite ready to start to make comparisons between VF and Logitech, but I would just say, the biggest surprise so far is how at home I feel. No surprises yet. So I'll update you more at the end of next quarter.

Speaker 3

Yes, Dana, nice participants I'd like to speak with you. You're right. Most of the issues that we saw in our reported results certainly reside in the wholesale line, and that's kind of what we expected. I think we kind of kind of talked about that in May. It is certainly an issue that's predominantly in the U.

Speaker 3

S. And in the Americas to some degree in Europe. Obviously, APAC not so much and APAC is the wholesale business is relatively smaller there. If you look at it across brands, Disproportionate impacts to Vans and Dickies, which continue to be the 2 businesses that are struggling the most from a sell through and sell out perspective. Participants The North Face, generally pretty good, and Timberland, some timing issues with both of those brands.

Speaker 3

If you look at Outdoor segment generally, I think you're going to see we see better results across the board and that's certainly the case in the wholesale business. Participants And again, we see the more difficult results in those couple of brands and we continue to have challenges from a sellout perspective and we've talked a lot about all of our brands are having some impact from what's happening in the wholesale channel, particularly in the U. S. As wholesalers participants are resetting inventories and that's been underway and in many cases making good progress, in other cases taking a bit longer. Participants And the kind of the cautious approach that they're taking to forwardize, we're seeing that affect all of our businesses.

Speaker 3

But clearly, when you have a business that's not selling through, participants You give them even more reason to potentially be very cautious and pull back and we're seeing that certainly in the Vans business. Participants Got it.

Speaker 5

And just one follow-up. As we move through the year and maintaining the guidance, any puts and takes as you see it either top line or margin are in the cadence of the remaining quarters. Thank you.

Speaker 3

Yes, sure. Thanks. So from a top line perspective, it will sequentially get better. Participants Q2 will be less negative than where we were in Q1. We said from the beginning, the first half of the year will be relatively challenged given what we see in wholesale and that stays the same.

Speaker 3

So we'll see sequential improvement as we move through the year. All participants From a profitability standpoint, we hit our targets in the Q1, our internal targets from a profitability standpoint. In fact, we obviously hit our kind of what we thought will be from a revenue standpoint. When I step back and look at things, we're increasingly confident in our ability to drive higher gross margins this year. And as we look at where we sit from an inventory standpoint, we're making really good progress, a little bit ahead of schedule in reducing our inventories and kind of and I look at the overall health of our inventory, feel good about where we're positioned relative to where we've been certainly.

Speaker 3

And so we'll see a moderating promotional environment is our view moving forward. We know we're going to see that in our own channels. And in the wholesale business, inventories are going to be down a lot. And the fact that we're actually moderating our assumptions in wholesale means are going to sell in less and that probably even helps that picture to some degree. So feel good about where we're heading there and we'll see we'll begin to see benefits in terms of favorability on the promotional line, I think, as we move even over the next couple of quarters.

Speaker 3

The benefits of business mix continue to be quite strong given kind of where the revenue coming from by geography and by channel. And I'd say a clear visibility to easing product costs both in terms of FOBs, but in particular on the freight line. Participants So we'll have some we'll have a little bit of benefit there as you think about the net impact of price versus cost. So with more clarity and understanding where we sit, feel good about margins and in SG and A, we're going to be very careful. We'll continue to maintain pretty strict controls around how we're spending our money.

Speaker 3

And as we've shown here in Q1 when revenue is a little more difficult, we'll be very prudent and careful from a spending standpoint.

Speaker 5

Thank you.

Operator

Thank you. Our next questions come from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your questions.

Speaker 6

Thanks. Hey, everyone. Good afternoon and welcome. So just maybe to elaborate a little bit more on how you view the promotional landscape. I know you're talking about what you can control and not, but any color there?

Speaker 6

Landscape, I know you're talking about what you can control or not, but any color there that you can dig into? And then, sorry if I missed it, did you say what Vans D2C see how that performed, that would be helpful. Thank you.

Speaker 3

Yes, we didn't say what Vans B2C was. But let me come back to that. In terms of promotions, I think, are going to be a lot cleaner than where we were last year. We know where our own inventory position is as we head into the fall holiday season and with the actions that our partners have taken and obviously what's contemplated in our outlook for the year with much lower wholesale volume, we're going to be much better positioned there. And remember too, for us, our promotions last are in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range participants are in the range of $1,000,000 to $1,000,000 to $1,000,000,000 and so we're up against that and we're not going to repeat any of that given where we sit today from an inventory standpoint and really where the supply participants in their ability to service the business and deliver on time.

Speaker 3

So inventories are going to be cleaner. Certainly, the wholesale marketplace is taking a more prudent and cautious approach. Our internal view of inventories will be position us to be a lot cleaner. I will say the one place where we'll continue to be pretty aggressive in promotions and we've contemplated this in our outlook, obviously, is in our own outlet stores. That's where we're moving through the excesses and we've carried forward some excess inventory.

Speaker 3

As we've talked about from last year, that's contemplated in how we're filling those stores as we move through the balance of the year. And so we'll continue to be pretty aggressive are there, but it will be more comparable to last year versus I would say worse, and we'll see nice benefits in our full price channels and in our wholesale business. From a van standpoint, in the Q1, we were down right at double digit from a DTC perspective.

Speaker 6

Got it. Thank you. And then just lastly, if I can, within the gross margin mix benefit, any way to help think about what's coming from channel versus geography and how

Speaker 3

Yes. It's kind of split relatively evenly. Certainly, our international business used to be a growth driver for us and there's a nice margin benefit from that. And then with D2C, slightly negative in the quarter, But a fairly wide margin away from wholesale, you get a nice benefit. So I think it's about equal between those two pieces of the business.

Speaker 3

Are in the range of $0.05 per share. And moving forward, we delivered about 80 basis points of favorability in the Q1 as we move through the balance of the year. Participants Something in that range, maybe a little bit below that is probably the way to think about it.

Speaker 6

Perfect. Thanks so much, guys. Best of luck for the rest of the year.

Speaker 4

Are in

Operator

the queue. Our next questions come from the line of Laurent Vasilescu with BNP Paribas. Please proceed with your question.

Speaker 7

Good afternoon. Thank you very

Speaker 6

much for taking my question. And Bracken, great to have you on the call. We look forward to your updated thoughts in 90 days from now.

Speaker 2

Thank you.

Speaker 6

Matt, thanks for all the color. I wanted to follow-up on Dana's question. I think you alluded to Just for the audience, maybe can you give a little bit more color just like guidelines on like how we think about 2Q revenues? And then I have a follow-up question on gross margins and SG and A.

Speaker 3

Yes. So, we don't have guidance Q2, Laurent, so I'm not going to give you guidance. But what I'll say is it will be sequentially less negative. I would also suggest that Where we sit today, we'd expect a little bit more, a slight benefit from currency On a reported basis in Q2. Certainly, you can figure that out as you look at where rates are versus last year.

Speaker 3

But are sequentially less negative. Also, I would remind you that last year had some noise in Q2, right? We were late shipping, In particular, in the outdoor segment, The North Face and Timberland most prominently, we were late delivering fall. We expect to be able to flow product this fall normally. And we're positioned to certainly be able to set those floors at the right time.

Speaker 3

And so there's some noise there as you think about the flow of wholesale shipments, particularly in the outdoor segment between Q2 and Q3. So something just to remind you as you think about the modeling, but that's as far as I'm going to go. Okay. No, thank you, Matt, for that. And then on

Speaker 6

the gross margin, participants It sounds like tell us if we're wrong, but you're taking down the gross margin rate. It was supposed to will be exceeding 100 basis points for the year. Is it still the case? And I'll Maybe if you could give us some guardrails around how do you think gross margin should shake out for the year. And then it's nice to see on the SG and

Speaker 3

A front that you can

Speaker 6

protect are participating in the earnings for this year, but the 3% decline in SG and A, can you just maybe walk us through what drove that and how do we think about that for the balance of the year?

Speaker 3

Yes, sure. So margins, we still expect that we didn't change anything there in my view, participants Up at least 100 basis points. And actually, my point there would be increasingly confident in our ability to drive those higher gross margins. And that's kind of the points I made earlier about how we see the favorability in business mix that we saw in Q1 kind of continuing. The promotional environment is going to swing back In terms of the comp is going to get kind of the tailwind of that begins even in the next quarter.

Speaker 3

Really Q2 to Q4 last year, we had are well north of 200 basis points every quarter, in fact, 300 basis points or so in the last part of the year. So that comes back in our favor. And even if we see have a good elevated level of promotions. We're going to see improvement year over year. That's our expectation.

Speaker 3

And then the product cost eases and actually potentially becomes a little bit of a tailwind in half 2 in terms of what we see. And the good news is we have pretty clear have a great visibility now from a cost standpoint all the way through the fiscal year. So those are a couple of the points I'd make on margin, but confidence in where we sit today, Laurent, I think is the message I want you to take away. And SG and A, certainly, when we see revenue under pressure, we've got levers we can pull as we manage our controllable spending. There's a lot of fixed costs in a business like ours certainly, But there's a lot that's in our control too.

Speaker 3

There's discretionary spending that we can pull levers against. We can stop things that we think in the short term aren't having a significant impact on what we're trying to accomplish in executing with the consumer and with our customers. We've done that. We're working aggressively to optimize things like participants are in the range of $1,000,000,000 of cash flow. We're going to continue to see the same store revenue in the Q1 of 2019.

Speaker 3

How do you kind of rationalize where it makes sense across your footprint and your capacity in different areas? And certainly, things like just pausing on projects that are longer term oriented participants are in the near term. The benefit there is cost, but also the benefit is focus. And that's really are important to us as well that we focus on the things that we've got to get fixed and we got to get right. And actually, it's kind of nice with as we begin to work with Bracken here too to kind of take a hard look at all those things and that's something we're doing and certainly began to do in Q1 as we pulled back on some spending.

Speaker 6

Are very helpful. Thank you,

Speaker 7

Matt, for all the color.

Speaker 3

Yes, you got it Laurent. Thank you.

Operator

Thank you. Our next questions come from the line of Jay Zoll with UBS. Please proceed with your questions.

Speaker 3

Great. Thank you so much. I guess if we can talk a little bit more about Vans. Participants I think Kevin Bailey, you're on the call. If we go back to January, maybe some of the opportunities that we're seeing, maybe some of the green shoots, I mean, are those still happening, I mean, you talked about some like some of the newer footwear styles working better, but just give us an overall view of where things stand today with Vans, with the brand and the progress you're making, participants are joining around the brand will be very helpful.

Speaker 3

Thank you. Yes, thank you, Jay. Happy to answer. Yes, Kevin, I'm just going to say one thing and then I'll turn it over to you and I know you'll agree with this. We're not looking for a quick fix in this business.

Speaker 3

We're setting up the brand for long term profitable growth, and we're not going to sacrifice that objective. I think that's really important. And all participants It's taking longer than we would have liked. And certainly, the results that we saw this quarter, even if it's what we expected, it's not good. It was poor.

Speaker 3

And it's disappointing to see, but the team is working aggressively against the right things to turn the brand are in the queue. And I know you want some details on that, but Kevin maybe unpack some of the things you're going after.

Speaker 7

Yes. No, thanks, Matt. And Jay, you're spot on. I think as Matt said, certainly, we're not happy delivering that kind of decline in the quarter. However, it was in line with our expectations as we anticipated that based on order book and what we were seeing in

Speaker 2

a year ago or a little less than

Speaker 7

a year ago with the order book. But that said, as Matt said, we believe we can execute better and deliver better on our potential. Participants Overall, the indicators on the brand remain strong. I think I said at Investor Day, consumers were really the piece that we needed to put at the front of our decision making. And we're still seeing stable consideration, strong sentiment scores.

Speaker 7

Matt referenced our loyalty program. It's 2 times its size of 2 years ago. So that part of it solid. As you asked about specifically the green shoots and product, that really is where I put my first attention because products in this around style, newness, versatility, comfort, which is what we had been hearing from our consumers, but not responding adequately enough to, are starting to come to fruition with the product that we're bringing out like the New School, like the Lowland, like the Mary Jane. Those are nice green shoots.

Speaker 7

Are still small at this point and not enough to offset the decline we've seen in Classics. However, the work we're doing in the background to bring bigger are interested in the market faster, that will deliver more results we still feel really confident in. And then as Matt referenced, are really leaning into expanding our franchises. I think in the past, our focus on classics was so big that it distorted our opportunities and what we're doing with things like the Ultra range and the MTE growing at double digits, Ultra range, I think 13% for the quarter, MTE at 39% for the quarter. That's really where we believe there's a lot more opportunity to broaden our product meaning.

Speaker 7

So those are particularly important. Matt referenced launching Pinnacle, and you'll start to see that in spring, when the line first really comes to market. And then we have been continuing to work on consumer and getting really deep into understanding our segmentation study, integrating consumer data and analytics and everything we do, etcetera. So those are really our big priorities. However, we still believe execution is the opportunity.

Speaker 7

And what we're doing with SKU reduction of 20% to 30% that will be completed in August in our participants are in the U. S. Stores, that changes store layouts, simplifies the shopping experience for consumers, but still delivers on the business we want to see. Overall, I think the things we said we're going to focus on are really working.

Speaker 3

Got it. Thank you so much. It's very helpful.

Speaker 8

Are Absolutely.

Operator

Thank you. Our next questions come from the line of Jonathan Komp with Baird. Please proceed with your question. Participants.

Speaker 9

Yes. Hi, thank you. Welcome, Bracken. Just maybe one follow-up, if I could. Your initial intuition just on the timeline to participants are in focus or implement some changes.

Speaker 9

Just curious to get your thoughts there. And just more of a broader participants are in the line with us. You're obviously inheriting a financial plan for this year, but any thought to essentially a broader reset that would enable you to really accelerate some of the investments in the different areas of the business.

Speaker 2

Yes. As I said, it's a little too early for me to respond to either one of those. But what I would say is, I am I I said earlier that I felt right at home. The 1 or 2 things that I feel most excited about coming in here are 1, the brands are even stronger than I expected. And it's nice to see.

Speaker 2

I knew we had strong brands, but as I've gone through it, I feel really good about the brand equities and the potential of each brand. And the people here are really strong. So I'm super optimistic. I'm 12 days in, so I'm not ready to start talking about what we're going to do next, But I'm really excited about being here. And I promise you, I won't evade your question next quarter.

Speaker 9

Participants Understood and appreciate that. Thank you. Matt, if I could follow-up then on the DTC assumption for the year. I think participants are in the are in the range

Speaker 3

of $1,000,000 in the quarter. Of Of course, it's a smaller D2C quarter for us. Vans is a bigger part of the quarter, bigger part of the total in the quarter even if the business has been declining, especially relative to the outdoor businesses that are certainly much more weighted are in the same period toward the latter part of the year. So there's that going on. If you look at kind of the underlying kind of carve out Vans, which obviously we've talked a lot about.

Speaker 3

The B2C results in Q1, I think, were up 7% for total VF. And I don't think, I know, they were up 7% in Q1, which is kind of in line with where we've been. And if you think about across the year, that's are looking at from a D2C perspective and growth across all regions and certainly are expecting to see growth in the Vans D2C business as we move through the year. And we've talked about at some point in the year, participants are seeing in the back half of the year, seeing the Vans business begin to grow, that's certainly going to be driven by the direct to consumer business. Now, all of that's also impacted by the comps and the compares, right?

Speaker 3

The compares get certainly quite a bit easier for Vans in particular, are participating in the same store, but for some of our other brands as well as we move through the year. So B2C will be a growth driver for us for the year. It will grow across regions and generally projected to grow across brands.

Speaker 9

That's helpful color. Much appreciated. Thank you.

Speaker 3

Yes. Thank you. Are.

Operator

Thank you. Our next questions come from the line of Brooke Roach with Goldman Sachs. Please proceed with your questions.

Speaker 10

Good afternoon and thank you so much for taking our question. Bracken, welcome. Thank you. My question is for Matt. And I just wanted to have One quick follow-up on the Vans business.

Speaker 10

I'm curious what you're seeing in Vans China and the brand equity you're seeing in that region as the market continues to reopen. Apex, this quarter was down a couple of percent in constant currency. How is that brand trending there? What are the initiatives there? And what's embedded in the China outlook for the Vans brand into the back half?

Speaker 10

And then maybe for Kevin, As you think about Vans America and the challenge that you're seeing in Classics relative to the green shoots that you're seeing in some of the new product lines, Is there any stabilization in trend in classic sell through relative to where it had been trending as a result of some of these new initiatives that you've been implementing? Thank you.

Speaker 3

Hi, Brook. Nice to speak with you. I'll take a little bit there and Kevin, but I'm actually also going to ask Martino to chime in here because I know he was actually on the ground in China in the last few weeks and spent time with the team there and certainly looking across saw the brands and he's got his pulse on that. So I think it'd be interesting certainly, he'd be interested to hear his perspective on Vans in China. We certainly are seeing the business.

Speaker 3

We saw growth in Vans in China in the quarter. So clearly, we're in a better place there in terms of kind of the inventory reset that's been underway. So we're cautiously optimistic that we're in a place where we'll continue to see good results coming out of that region as we move forward across the year. Participants Overall in APAC, it's been Korea has been weaker for us and Vans is a big one of our bigger businesses in Korea. Korea has been more challenged.

Speaker 3

Participants But we're in a better place, I mean, today with Vans in the region and particularly in China than we were 6 months ago. Martin, anything you want to say about what's happening on the ground there with the team?

Speaker 8

Yes. Thanks, Matt. Hello, Brooks. I think first of all, we see China in a positive, right? So Q1 was up in the high single digits for Vans in China, which is good news.

Speaker 8

And I think when I was there a couple of weeks ago, what I started to see is really as China reopens a very strong engagement from consumers are in stores beyond online. And don't forget that we're still under penetrated in China. We target a broad consumer demographic there. Participants So with the growing emerging middle class and that's a big opportunity. And at the same time, as we go back in store and launch new products, we also drive local for local products, storytelling.

Speaker 8

So the assets will also benefit from a stronger for Vans in particular, from a stronger local execution and the recent Talk to Design Center that we invested in and created in Talk to actually to design and influence across China and Asia is going to drop new products also for Vans Pacific in the second half of this year. So overall, The sentiment in China is turning positive as the country reopens and balance is part of that. And Kevin, maybe you want to add something from the specific grain side.

Speaker 7

Yes, I can just add on China, Brook, and then I can talk specifically to classics that you asked about. I think Martino did a lot of it. Localization is really key. Participants China being our newest market, we have to really build classics as an under for the consumer understanding of the brand. However, they have very specific ask and as Martino said, we're leaning into localization to bring what they want from our product to the market.

Speaker 7

I'd also say they recovered really quick from COVID on inventories with our partner stores. And that really has given us the opportunity to start moving faster, as Martino said, achieve the kind of growth we're seeing in China are ready to see. And the last thing I'd really say there is really about skate. Skateboarding has taken on a real life in China as that started to grow and the team ran a really strong Go Skateboarding Day and we're really leading there and we set up a skate school, with 1 of the big digital players. So, participants The team there is doing a lot.

Speaker 7

Canvas is still not on trend from the search trends, but we're feeling good about where China is, and how it's growing. We see a lot more opportunity. When I to get to your question on Americas and stabilization on Classics, I think I said at an Investor Day, we became over reliant on Classics and particularly on really just a couple of styles. And that really was a big piece of our underperformance and that we didn't have a strong product pipeline behind it. So what you see in these green shoots, albeit small right now, are the opportunities to start building franchises beyond Classics.

Speaker 7

So our focus really is, to your point on stabilization, is just that, stabilize our Classics business, bring style iterations to the market around Classics, which is where we're seeing success with are wholesale partners and our consumers who want newness, but build more and more the product propositions around Classics that are adjacent but relevant and give us a greater opportunity to diversify our product pipeline to the consumer. So Stabilization of Classic is absolutely critical as far as seeing it yet, not really yet because of the amount of product that was in the marketplace.

Speaker 11

Thank you.

Speaker 4

Thank you. Our next

Operator

questions come from the line of Ike Boruchow with Wells Fargo. Please proceed with your questions.

Speaker 3

Participants. Hey, thanks for taking the question. Matt, maybe you can just help me with 2 questions. First on Dickies, the decline you saw in the quarter, just how surprising Was that versus your plan? Can you talk a little bit more about what's going in from a selling perspective to the mass channel over the last couple of months?

Speaker 3

And then, is there any update on the tax business? Is this still something that you guys are expecting to divest at some point this year? Just kind of looking for an update there. Thanks. Participants.

Speaker 3

Yes, thanks. I do think I get to take both of those. I'd say Dickies was disappointing in the quarter, didn't meet our expectations, Just to be frank, the business continues to be impacted by soft results in the Americas in the network channel sell through is falling short of expectations. I think we continue to see kind of outsized impacts are showing some of the challenges in the marketplace that are impacting that value in consumer, a little more so than what we're seeing in other parts of our business. All participants If there's a bright spot to some degree, our inventory positions are now in a pretty good place, in particular our largest account, they're in a better place.

Speaker 3

And participants If sell through improves across the pad and certainly for us, for Dickies, we're in a position that we can capitalize on that and we'll see a nice replenishment will be in the range of $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 Europe continues to grow. I think that's another thing and driven by the lifestyle part of the business that's been important to us. But ultimately, We've got work to do here to improve that basic work business in the U. S. And ensure we're driving that business effectively.

Speaker 3

And so That's a big focus of the team today. As it relates to PACS, first off, The business continues to perform well. If anything, it's a little better in Q1 than we anticipated, and it's set up for a really good back to school. Participants Remember, we grew the top line nicely last year across the year, top and bottom line and that continued into Q1. These brands continue to kind of have momentum and benefit from consumer trends, but I'd be remiss if I didn't say how happy and proud I am of in the work that they're doing, not an easy environment when kind of what's going on around them with all the conversations that you ask about participants are participating in the process.

Speaker 3

It's happening and they continue to do amazing work in that regard. So really impressed by what's happening there. The process is continuing. It takes time. There's a lot of interest.

Speaker 3

We're progressing discussions with a number of parties, and we'll be disciplined in the deal making, especially in light of where the business is. The results are good. We're generating good growth. We're generating strengthening EBITDA and acknowledging where the capital markets are We're just not going to accept the valuation we're not comfortable with. And until we find the right buyer for these brands At evaluation that we're happy with, we'll continue to be very discerning.

Speaker 3

So that's kind of the update I'd give you there. Thanks, Matt. Just one more quick one. On Vans in the back half, I know you've been asked a few different ways. But I believe in May, you had said you expected to return to growth in the back half and I believe your comments today were moderate to declines.

Speaker 3

I'm just Do you expect Vans to be growing in any quarter of this year or should we now start to think about next year when the business potentially inflects the top line? Participants Yes, Ike. We in May, we did not at least certainly not our intention, we did not indicate that we were projecting growth in the back half participating in the Q1 of 2019. What we've said consistently and I think we're still saying today is that we expect to see the business return to growth at some point later this year, inflect to growth. And we haven't been specific on exactly when that is or kind of what the order of magnitude of that is, but that's what we said.

Speaker 3

Participants. Thank you.

Operator

Thank you. Our next questions come from the line of John Kernan with TD Cowen. Please proceed with your questions.

Speaker 12

Participants. Excellent. Thanks for taking my question. Matt, just on the capital structure, How are you approaching capital allocation, the dividend commitment, the debt refinancing? You obviously have the potential sale of the backpacks business, if valuations get better there.

Speaker 12

How should we think about debt pay downs, dividends and

Speaker 3

participants in the capital allocated to our organic portfolio that's necessary to kind of drive the growth that we're planning in that business over time. So big focus there for sure that we're not choking the business And we're not. As it relates to free cash flow, certainly dividend are in line with that. Okay. And then, I'll turn it back to you.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you. Our next question comes from the line of participants That's kind of what we're targeting and we're in line with that we think this year and kind of if you look at it in in terms of the percent of whether it's net income or free cash flow, kind of both. And then after that, I would tell you that all excess free cash flow we are using to pay down debt participants are in the number one financial priority. I think I made that clear in the prepared comments and that remains consistent. So participants As we think about the choices that we're making from a capital allocation, everything is really through the lens of keeping our balance sheet, which really goes to reducing debt and reducing leverage and that's our primary focus.

Speaker 12

Understood. That's helpful. Maybe just one quick follow-up for Kevin. Participants And specifically on Vans, I mean, we see pressure in the U. S.

Speaker 12

Wholesale channel across a lot of brands at this point. And just curious when do you think participants open to buy dollars and maybe more risk appetite within that U. S. Wholesale channel might start. Call.

Speaker 12

Is it spring summer next year? Like what on the calendar when you start to look at the business, how do we think about the recovery in that in the U. S.

Speaker 7

Wholesale channel. Yes, John, that's a good question. I think that's the way we're thinking about it is that the opportunity as we get into the back half for this year, what we're hearing from retailers, as you see all their reports as well, inventory traffic, promotions, all affecting business in general. We've been focused on marketplace cleanup, marketplace execution, getting the newer product in their hands because that's what consumers are asking for. So I We still believe that's going to happen as we get into the back half of this fiscal year for us.

Speaker 7

And I got to believe that things should start to stabilize in the marketplace, as we turn the corner into spring summer next year. But as Matt said, the order of magnitude is always the global heart rate now to get where wholesale is.

Speaker 12

Participants are welcome.

Speaker 2

Thank you.

Operator

Thank you. Our final

Speaker 11

A little confused and I may just be not interpreting the comments correctly. On the gross margin for the quarter, so there was a benefit from the mix of 80 basis are in the range of $1,000,000,000 but how did the freight and the promotions come through the P and L in Q1? And then how should we think about the shaping of that for the rest have the questions that we have today are going to turn into a tailwind. That's number 1. And then number 2, can you talk about TNF and the timing?

Speaker 11

So you made a comment that last year Q2, you couldn't ship and then I think, didn't have a lot of inventory and then you did ship in the Q3, Q1 is your smallest quarter. So I'm just trying to figure out how we should think about kind of the ebbs and flows of year on year in the T and F wholesale business. Thank you.

Speaker 3

Yes. Thanks, Adrian. So, gross margin, I think you've got it. In terms of Q1, nice mix benefit, 80 basis points, participants are offset by a couple of 100 basis points of negative rate, which is about evenly split between promotions in the range of $1,000,000 and FX. Product costs were

Speaker 4

a bit

Speaker 3

of a negative, but that was largely offset by pricing. And to your point, I think the point that I made, product costs are easing as we move through the year on the back of are in particular and eventually we think become a modest tailwind certainly in the back half of the year. That's how I would characterize that. Participating in the North Face. And I may ask Nicole to chime in here on a couple of things really around just kind of the kind of where we are, and the trajectory of things.

Speaker 3

But Yes. There's some timing issues a little bit between Q2 and Q3 that we'll navigate. Last year, we were late shipping. Until we shift a little bit more in Q3 versus Q2 than we might normally ship. And the good news is we're positioned this year to are in a more optimal way, which is we'll work our way through what that means in terms of the results as we get there.

Speaker 3

But most importantly, it positions us to be on the floor and have those will be able to maximize full price selling. So anything you want to add there, Nicole?

Speaker 11

No, I just think we had a little bit of a timing issue between in Q1 and our results. But as you said, we really are going to monitor our operational and are in the range of $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000,000 to $1,000,000,000,000 to $1,000,000,000,000 And holiday forceps with our partners and of course with our DTC business. Okay, super helpful. Thank you very much. Best of luck.

Operator

Thank you. We have reached the end of our question and answer session. And with that, that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time.

Operator

Enjoy the rest of your

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