Matt Puckett
Executive Vice President and Chief Financial Officer at VF
Thank you, Bracken. It's great that you're here with us as together we face this challenging and critical time in our company's history. Despite these difficult circumstances, I'm energized and positive about the future and the plans that we're laying out today to strengthen our financial position, to improve our operating performance and to position VF to achieve its full potential.
Now let me turn to the results of the quarter. Q2 remained weak overall as bright spots in The North Face and international markets continued to be outweighed by declines in Vans and in our Americas business. That said, we delivered on our commitment to reduce inventory versus last year and paid down EUR850 million term debt in September, ending the quarter with liquidity of $1.7 billion and net leverage of 4.5 times, slightly ahead of our plans midyear.
Revenue for the quarter was down 4% overall, in line with our near-term expectations, but disappointingly, reflecting continued weakness in the US business and in Vans globally, two areas where we're not making the anticipated progress. As indicated last quarter, Q2 revenue benefited from a change in shipment timing, particularly The North Face, as importantly, we have delivered more consistently on time this year and are lapping late deliveries from last year that fell into Q3. Normalizing for this change in shipment timing, which benefited the quarter by a couple of points, overall, Q2 momentum had a relatively similar trajectory to Q1.
By region, the Americas was down 11% in the quarter as results continued to be pressured by wholesale as expected. DTC saw an outsized impact from Vans underperformance. Excluding Vans, Americas DTC was up 5% in the quarter, with all brands except Vans and Timberland recording positive performances.
EMEA returned to growth, up 6%, achieving its first $1 billion quarter in the company's history. Wholesale was up 7%, also reflecting some of the delivery timing benefits highlighted earlier, while DTC was up 3%, led by The North Face, up low teens.
Lastly, revenue in the APAC region was also up 6%, led by Greater China, up 14%. Brick-and-mortar stores rose double-digits driven by increasing traffic and average unit retail. While the consumer continues to be impacted by the economic environment in China, The North Face had another outstanding quarter, up nearly 50% in Greater China, growing across channels.
Now let me turn to the performance by brand and staying with The North Face. The brand had another strong quarter with revenue up 17% or up high-single-digits on a normalized basis, excluding the change in shipment timing, which benefited wholesale at up 19%. Importantly, and continuing the good results for the last several quarters, DTC was also strong, up 12% in this quarter. This compares to a run rate of a little over 20% for the first five months of the fiscal year. However, a later than typical start to the fall season, particularly in insulated outerwear, weighed on September results, which were plus 2%. Globally and across channels, we saw strong performances in bags and packs, supporting a robust back-to-school season.
Vans had another disappointing quarter with revenue down 23%. Slow sell-through rates continued to put pressure on wholesale across all regions, while traffic remained challenged and weighed on DTC. As Bracken mentioned earlier, the brand remains loved by consumers, but we must and will do more to generate demand. Newness and innovation continued to outperform in silhouettes like the Knu Skool, Lowland, UltraRange and MTE, which all saw strong growth during the quarter, though the volumes in these styles continue to have limited impact in offsetting the declines in classic products.
At Timberland, Q2 revenue declined 10% as growth in both EMEA and APAC was more than offset by softness in Americas wholesale. Results were affected by demand softness for six-inch boots, which negatively impacted both the wholesale order book conversion and DTC. Outdoor and women's continued to perform well as the Motion 6 trail and hiking collection became the brand's number two collection globally, and success in women's sandals from spring paved the way for new fall boots.
Dickies continue to feel pressure from the value and consumer in the core work business, and although sequentially improving versus Q1, revenue declined 9% in Q2. Increased caution from key partners has continued to weigh on results.
Last but not least, Supreme had its strongest start to a season in a couple of years with double-digit revenue growth in the quarter. The August opening of Supreme's new store in Seoul is off to a terrific start and has delivered impressive results across a number of metrics, a strong proof point on the road map of our grow wide strategy, which is aimed at expanding access to the brand to more consumers globally.
Now moving down the P&L. Gross margin of 51.3% was down 20 basis points year-over-year, although excluding the impact of additional inventory reserves in Dickies, would have been up 30 basis points. Tailwinds from mix, price and lower promotions were more than offset by product cost and FX headwinds. Positive mix of up 20 basis points in the quarter was driven primarily by international growth, but was a lower-than-anticipated benefit as DTC slowed due to the challenges at Vans.
Rate was down 50 basis points, more than offsetting these benefits, as margin expansion from price and lower promotions, which has improved versus last year but remains higher than fiscal '22, was more than offset by increased product cost and negative transactional currency impacts. During the quarter, we booked an unplanned $15 million distressed inventory reserve associated with Dickies, which flows through the cost line and negatively impacted gross margin by about 0.5 point.
We generated a healthier operating margin of 12% in the quarter, down 30 basis points year-over-year, mainly reflecting the small gross margin decline and slight SG&A deleverage of 10 basis points. SG&A spend in the quarter was down 1% year-over-year as we continued to maintain tight cost discipline and began to generate modest benefits associated with Reinvent but saw some deleverage in digital and technology and distribution expenses.
Q2 adjusted earnings per share was $0.63, down $0.10 versus fiscal '23, largely due to elevated interest and tax, with higher tax driven by jurisdictional mix and the reversal of tax interest income that had been accrued associated with the Timberland tax payment.
A quick comment on the reported tax expense in Q2. On September 8, the Appeals Court ruled in favor of the IRS in the Timberland tax case with regards to the timing of income inclusion from the Timberland acquisition in 2011. We're disappointed with the outcome and still believe in the technical merits of our case. This decision has no impact to our cash debt outlook for fiscal '24 as the payment was made last year. But we recognized a non-cash $690 million net increase to our reported tax expense in Q2, which includes anticipated refunds of some tax payments from prior years. The process of filing amended returns for each tax year across both federal and multiple state jurisdictions will take time, and we're not assuming any benefits to cash over the next 18 months from these refunds.
Turning to the balance sheet and cash flow. I'm pleased to report that our inventory is down 10% at the end of Q2 versus last year, in line with our expectation to inflect at this point in the year. This result, despite ongoing revenue challenges, speaks to the improved performance of our supply chain and the important results our teams are accomplishing to improve operational metrics and benefit cash flow. Our inventory composition remains healthy overall and is concentrated in core and carryover product.
Our use of cash during the first half was slightly better than planned driven by lower working capital with $19 million used by operations and negative free cash flow of $158 million. As a result, liquidity sits at $1.7 billion, which is again better than our plans at this point in the year.
As it relates to debt, we paid down EUR850 million term debt in September and ended the quarter with a commercial paper balance of $1 billion. Midway through the fiscal year and at our seasonal peak levels of working capital, total debt is up modestly versus the beginning of the year.
Now let me talk about Reinvent, our newly announced transformation program. Through Reinvent, we are addressing fundamental structural challenges that have impacted our performance as well as tackling our cost structure head-on as we expect to generate $300 million in fixed cost reductions. We'll streamline operations in line with the changes to the operating model that Bracken discussed to generate efficiencies and create a faster and leaner organization company-wide.
We'll additionally further drive down costs in non-strategic areas and ensure the overall cost structure across the company is balanced to the business and pointed towards our biggest opportunities. This will include reinvesting a portion of the savings directly toward brand building and product innovation, first and foremost, against our largest brand assets.
We expect to achieve the vast majority of the $300 million target on a forward run rate basis by the middle of the next fiscal year. We'd anticipate about half, on a run rate perspective, will be in place by the beginning of fiscal '25 as a portion will, in fact, be achieved in fiscal '24. We'll provide more specifics on our plans and details around timing over the next couple of quarters.
Speaking of fiscal '24, as Bracken explained earlier, we are resetting our expectations for this year to more appropriately reflect the uncertainty and continued underperformance that has impacted our results to date and retracting revenue and profit guidance for the fiscal year while updating our cash flow guidance. Together, myself and Bracken are committed to coming back and reestablishing guidance, and we're fully confident in our ability to consistently meet commitments.
Our decision to retract revenue and profit guidance today centers mainly on four key changes to our assumptions. First, the timing of the Vans turnaround is taking longer than we thought. And specifically, we are now no longer expecting any discernible improvement in half two results relative to half one. Through today's announced actions, we are addressing with urgency the work needed to stabilize the business. Bracken and I plan to share our expectations with the market on the timing of the turnaround when we see a tangible impact from the initiatives underway.
Second, the North America business, primarily U.S. wholesale, is now anticipated to be modestly weaker versus our prior expectations as we look to the back half of the year. And although much less impactful, we now see a choppier macro environment in Europe.
Last, there will be cross currents from Reinvent as we remove costs, change the organization structure and reengineer the Americas for growth. This will create noise in the P&L in the short term.
In addition to the changes just highlighted, most notably Vans, which will directly impact Q3, it's worth reminding the importance of looking at the two quarters, Q2 and Q3 combined, to get a more comparable reading of the season. This is particularly true for The North Face, which is comping bigger distortion from last year's late shipment timing and subsequent benefit in Q3 last year and will, therefore, be negatively impacted in Q3 this year. And to remind you, the third quarter's result -- the third quarter's wholesale result in the brand will also be impacted by the lower overall order book for the season as planned, reflecting greater retailer caution, their focused efforts to reduce inventories and our poor service to customers last year, which we have been working hard to correct.
While we expect the DTC business to continue to deliver healthy growth in Q3, taking it all together, we anticipate global North Face revenue to decline in the third quarter. Stepping back from the near-term impacts and optics I've just explained, we continue to feel very good about the underlying consumer demand for the brand, the broad-based performance across product categories and geographies and the significant growth opportunity that lies ahead for the brand.
Now turning to our balance sheet and cash flow expectations. We continue to focus on reducing inventory and now expect to end the year down mid- to high single digits compared to previous guidance of at least down 10%, reflecting the more challenged Vans and U.S. wholesale outlook. Fiscal '24 free cash flow is now expected to be approximately $600 million, a decrease from previous guidance of approximately $900 million, flowing through the more muted operating results. We now anticipate liquidity of about $2.2 billion by the end of the fiscal year.
Deleveraging the balance sheet remains our top financial priority. We plan to end the year with leverage slightly higher than last year, given the anticipated impacts to half two revenue and profit. We continue to be laser-focused on addressing both the numerator and the denominator moving forward and are taking the necessary steps to impact both, including the $300 million in annualized cost reduction through Reinvent and the reduction to the dividend, which on an annualized basis, is approximately $325 million in cash savings.
Lastly, as an update on our packs business, all three brands continue to perform strongly, and this positions us well as we progress the sales process. We are confident we will achieve our objective.
In summary, we're taking the necessary actions to reset the business and strengthen the balance sheet. Our transformation plan Reinvent directly addresses our biggest performance issues, Vans and the US, and importantly, commits to lowering our cost structure by $300 million. We will make progress toward our number one financial priority of lowering our debt and leverage from these actions, along with the reduction in the dividend, as we set the stage for a return to growth and increased ROIC. We look forward to updating you in coming quarters on our ongoing progress.
Finally, under Bracken's leadership, through our great brands, the continued commitment of our outstanding teams and the Reinvent program announced today, I'm confident we have the foundation to once again deliver strong shareholder returns.
We now open the line and take your questions.
