Matt Puckett
Executive Vice President & Chief Financial Officer at VF
Thank you, Benno, and good afternoon, everyone. We are pleased to have delivered Q4 results in line with our guidance, but acknowledge we still have much to do to fulfill the full potential of the portfolio. The end of the fiscal year was characterized by an ongoing challenged macro environment, particularly in the U.S. The business continued to excel in certain areas. And importantly, we are seeing progress against our near-term priorities. All aspects of the business are still underperforming.
During the fiscal year, revenue was up 3% in constant dollars with growth in both wholesale and direct-to-consumer. Despite softer results in the Americas, we saw strong growth in The North Face and Outdoor emerging brands, which saw growth of 12%, both in the quarter and the year and in the international business, highlighted by exceptional results in Europe and steady sequential recovery in the APAC region. Adjusted gross margin was down 220 basis points and adjusted operating margin declined by 330 basis points, which led to adjusted earnings per share of $2.10 compared to $3.18 in fiscal year '22. As anticipated, liquidity was slightly above $3 billion at the end of Q4, benefiting from our Eurobond offering, but impacted during the year by lower earnings and a significant inventory build.
I also want to mention the Supreme impairment of $313 million recorded in the quarter. The business performance was clearly uneven in fiscal '23. We are now planning more modest growth in fiscal '24 before accelerating in fiscal '25, benefiting from geographic expansion, the pace of which will begin to quicken starting this fall. We remain confident in the brand's long-term growth potential, which will benefit from increasing access to the brand through both geographic expansion and further penetration in current markets, along with product category extension opportunities with current consumers.
Now diving into the fourth quarter results. Revenue performed in line with our expectations, flat in constant dollars, led by the international business, up 8% and outstanding performance in The North Face. Well, I'd be remiss not to mention that the brand grew by double-digits across all channels and all regions on a global basis in fiscal year '23. Our Outdoor emerging brands continued to deliver strong performance and Dickies and Supreme had improving results relative to the third quarter. As anticipated, Vans was down 12% and Timberland declined by 6%. Adjusted gross margin was down 260 basis points and adjusted operating margins declined by 230 basis points with adjusted EPS of $0.17 compared to Q4 fiscal '22 of $0.45.
Taking a closer look at the regions in the fourth quarter, our results reflected a mixed performance across geographies. As expected, the Americas region was soft with revenue down 7% during the quarter. Americas results were particularly impacted at wholesale where regular price distribution was down 17%. North America remained challenging at Vans, which declined 18% in Q4 in the region. Timberland was also muted in the quarter at down 6%, while Dickies showed improvement to down 4%. EMEA continued to deliver strong results, up 8% in Q4, reflecting growth from most brands in the quarter and from all brands on a full year basis. While we are starting to see some impact from macro pressures on consumer spending, most countries saw continued revenue growth in the fourth quarter and all grew for the fiscal year. EMEA's revenue was up 12% for the year, while delivering strong profitability.
Last but not least, we were encouraged to see our business in APAC further strengthen and show sequential progress in Q4 with revenue up 10%, driven by a return to positive growth in Greater China in the quarter, which was also up 10%. In particular, The North Face delivered a standout performance in Greater China, up nearly 40% as the brand continues to fuel demand with the local consumer and achieve high sales productivity amidst the recovering marketplace environment. Across the rest of the region, we saw broad-based growth in major markets during the quarter.
Further unpacking operating performance, Q4 gross margin was down 260 basis points. As expected, business mix remained a positive contributor to margin in the quarter of 60 basis points, driven primarily by the growth of our international business. This was more than offset by rate, down 310 basis points due to the impact of a more promotional environment, transactional FX and higher product costs, partially offset by strategic pricing actions.
Moving on to adjusted operating margin, which was down 230 basis points in the fourth quarter, reflecting the impact of the lower gross margin, partially offset by 50 basis points of SG&A leverage. SG&A declined slightly in the quarter as higher distribution costs and investments in advertising were more than offset by lower general and administrative costs, along with realized gains on sales of assets. Also negatively impacting the comparison was 30 basis points of FX.
Now to share an update on the supply chain environment, we've seen some stabilization in the operating environment since Q3. And as Benno mentioned earlier in the call, some initial signs of improvement are visible since taking aggressive action to return to our hallmark standard of excellence in this area. As we outlined in February, we are returning to a more rigorous approach to planning and coordination between brand operations, sales and finance leaders, which is benefiting our inventory management and forecast accuracy as we progress through future seasons. While we're still continuing with the impact on the business today from higher lead times affecting our planning and buying calendar last year, manufacturing and freight times are now consistently trending down and contributing to better on-time performance and improve customer service with the arrival of Spring product.
Further on logistics, we've seen reliability rates continue to improve, although they still remain below historical levels. And collectively, these trends are expected to continue as we move toward the important back-to-school and fall holiday seasons. We are well on track to achieving our goal outlined last quarter of returning to our targeted on-time performance rates and service levels by the first half of the fiscal year. The Houston cost of air freight is now more normalized. At the same time, ocean rates are coming down and we'll see additional benefits moving into fiscal year '24. FOB inflation remains a factor, but it has moderated to a lower rate for both raw materials and labor costs. The strategic pricing actions planned in fiscal '24 that will continue to be an offset to these increases.
Now a few words on inventory. We achieved the forecasted reduction signaled in February of $299 million during Q4. At the end of the quarter, net inventory was up 62% versus last year, which reflects the continued higher amount of core carryover replenishment inventory, particularly at The North Face and Dickies. Excluding the increase relating to the change in eco terms to support the supply chain financing program implemented in Q1 of fiscal '23, inventory was up $620 million or 46%, a moderation from the year-over increase of 75% at the end of Q3.
Moving on to the outlook for this fiscal year, which we expect to be a year of progress as we both continue to advance towards achieving our long-term goals and navigate a set of near-term macro and micro challenges. Revenue was flat to up slightly reflects the following; a growing direct-to-consumer business globally and in the U.S.; a modest decline in the Americas for the year behind a weaker U.S. wholesale business in an increasingly challenging environment; a cautious posture by most retail partners and the effects of our supply chain mis-steps from last fall.
We expect growth in Europe for the year, although we do anticipate some deceleration considering our evolved view of macro pressures and continued progressive improvement in China, which we've seen gain momentum in recent quarters and expect that to continue. We anticipate gross margin to be up at least 100 basis points, reflecting lower promotions, which we expect to trend toward more historical levels beginning in the fall season with benefits from mix, lower freight costs and strategic pricing actions, all partially offset by higher FOB costs and FX transaction headwinds.
Operating margin will expand, reflecting the higher gross margin supporting targeted investments in our largest value-creating opportunities, namely The North Face and the Vans turnaround. We have continued to invest in key capabilities and support momentum within the portfolio, particularly in the areas of innovation and demand creation, while exercising careful cost management in light of the ongoing challenged macro environment. Earnings per share is expected to be in the $2.05 to $2.25 range, which includes more than $0.30 of negative impact from higher interest, unfavorable foreign currency affecting operating results, normalized incentive compensation and a modestly higher tax rate.
To further help, say, fiscal '24, I want to provide some operational guardrails related to our Q1 expectations. Largely in line with the revenue curve we anticipated in February, we expect Q1 to be down high-single-digits in constant dollars. Notably, VF reported its strongest quarter of last year in Q1 at plus 7% as wholesale was plus 18%. This is exacerbated by wholesale shipment timing that benefited Q1 of fiscal '23 due to supply chain unpredictability at that time. With Q1 being our smallest quarter, results are also subject to greater volatility.
In addition, we have an unfavorable brand mix in the quarter with a bigger SKU event, which will have a disproportionate impact from U.S. wholesale as we expect the brand's revenue to be particularly affected by a continuation of lower wholesale sales in the spring season as we work to right size inventories. As anticipated, we expect wholesale across the after to remain pressured through the first half of the fiscal year, particularly in the U.S., which will impact all of our brands with a meaningful U.S. wholesale penetration. While gross margin is expected to be similar year-over-year in the quarter, SG&A will deleverage from the revenue decline, which will pressure operating margins. This performance in Q1 has been anticipated and is contemplated within our expectations for fiscal year '24.
Now moving back to the full year. Our free cash flow is expected to be about $900 million, driven by growth in EBITDA and a reduction in working capital, primarily from activities to further right size inventory levels as we migrate through fiscal year '24. We continue to expect inventory to be near to normalized levels by the end of the calendar year and fully recovered by fiscal year end, down more than 10% year-over-year at the end of fiscal year '24. These two benefits will be offset by higher tax payments and interest. Noteworthy and as continuously contemplated, the $900 million of free cash flow includes the impact of anticipated tax payments of approximately $290 million relating to intercompany IP transfers completed in a prior period.
VF's strong anticipated cash generation supported by decisive actions we've already taken and will continue to take will ensure our path towards deleverage over the next 24 months. And specific to the balance sheet and expected cash evolution for fiscal '24, we ended this year with about $3 billion in liquidity. And throughout the year, we anticipate using our free cash flow to pay off debt and continue to return cash to shareholders through the dividend, which we project will result in liquidity of at least $2.5 billion at fiscal year end.
Now a brief update on the Timberland tax appeal of the Tax Court decision regarding the tax treatment of the acquisition of Timberland in 2011. The U.S. government filed a brief on May 4, and we'll be filing our response to this brief in early June. We and the government have requested an oral hearing of the case, which we expect will be granted for this fall.
In summary, our focus is clearer than ever on the road ahead. Fiscal year '24 will be a year of progress where we'll advance our key strategic priorities as we continue to focus on the consistent execution of our plans. We will deliver improved operating performance and financial results, fueled by an expansion in gross margins, EBITDA growth and strong cash generation, all of which supports our path to delever and strengthen our balance sheet. Fiscal year '23 was certainly a challenging year in our business and for our teams. But I'm consistently impressed by the resilience and strength of our more than 30,000 associates, which further increases my confidence in the actions we have implemented to enable VF to generate long-term, sustainable and profitable growth beginning in fiscal year '24.
With that, we'll now open the line to your questions.
