Greetings and welcome to the V.F. Corporation Second Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Alkire, Vice President of Investor Relations. Thank you, sir. You may begin.

Good morning, and welcome to V.F. Corporation’s second quarter fiscal 2020 earnings 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 defined in the press release that was issued this morning. We use adjusted constant dollar amounts 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 press release, which identify and quantify all excluded items and provide management’s view of why this information is useful to investors. During the first quarter of fiscal 2020, the company completed the spin-off of its Jeans business, which included the Wrangler, Lee and Rock & Republic brands, as well as the V.F. Outlet business into an independent publicly traded company under the name Kontoor Brands. Accordingly, the company has removed the assets and liabilities of the Jeans business as of the date noted above, and included the operating results of this business in discontinued operations for all periods presented. Unless otherwise noted, results presented on today’s call are based on continuing operations. Joining me on today’s call will be V.F.’s Chairman, President and Chief Executive Officer, Steve Rendle and Chief Financial Officer, Scott Roe. Following our prepared remarks, we’ll open the call for questions. Steve?

Thank you, Joe and good morning, everyone. I’m pleased with the strength and quality of our second quarter results, driven by our largest brands and our International and D2C platforms. Our results for both the second quarter and first half of the year were right in line with our expectations. And we delivered these results while investing more behind our growth priorities and despite absorbing the impact of a more uncertain geopolitical and macroeconomic environment. We are steadfast in our commitment to continue to evolve and transform V.F. into a more consumer-minded and retail-centric enterprise, and our results demonstrate the power, consistency, resiliency of our diversified value creation model. Looking at our second quarter in more detail. Revenue increased 7% or 8% on an organic basis. Growth was driven by our two largest brands, Vans and The North Face, which grew 16% and 10%, respectively as the strong momentum for both brands continued. The strength of our Vans brand was fueled by a strong back-to-school season. The brand’s growth and our business overall remains well balanced and diversified across geographies, channels and product categories. While the core heritage business continues to generate strong double-digit growth, we are particularly encouraged by almost 30% growth in progression footwear, driven in part by the new ComfyCush franchise and continued momentum in apparel and accessories, which grew almost 20%. Based on our second quarter performance and our increased visibility to the full year, we are again increasing our growth outlook for the Vans brand. We now expect 13% to 14% growth for the full year, slightly ahead of the brand’s long-term growth target. Similarly momentum in The North Face continued in the second quarter as the brand achieved double-digit growth, driven by strong back-to-school results and strength across all regions. The brand’s Mountain Lifestyle…

Thanks, Steve. Our second quarter and first half results were strong and right in line with our expectations. The fundamentals of our business are solid, highlighted by year-to-date revenue growth of 9%, 100 basis points of gross margin expansion and 18% EPS growth. We are intensely focused on executing against our strategic objectives and driving our key growth engines and platforms as we head into the second half of the year. As Steve mentioned in his opening remarks, the environment has become more uncertain over the past 90 days. While it’s impossible to predict changes in consumer or business conditions, we believe our diversified portfolio and TSR algorithm give us the capacity to consistently deliver top-quartile returns. For those of you that joined us at the Investor Day last month, optionality and portfolio resiliency were key themes throughout our presentation and further support our ability to deliver against our long-term commitments. Before getting into our second quarter results, I should point out that our reported GAAP figures include the impact of recent Swiss tax legislation, which positively impacted our second quarter EPS by $0.41. Certain provisions of the recently approved Swiss tax reform were enacted during the most recent quarter, resulting in adjustments to deferred tax positions of approximately $164 million for the quarter and the first half of fiscal 2020. My comments going forward will focus on adjusted results, excluding this one-time benefit. So now let’s recap our second quarter results. Revenue increased 8% organically led by our largest brands across our strategic growth platforms. Our Big 4 brands grew 9% collectively, driven by mid-teen D2C growth, including 20% growth in digital and double-digit comp growth. Wholesale increased at a high single-digit rate, and our Big 4 brands generated balanced growth across all geographic regions. Vans delivered another strong…

Thank you. [Operator Instructions] Our first question comes from the line of Michael Binetti with Credit Suisse. Please proceed with your question.

Hey guys, good morning. Thanks for taking our questions here. A couple for you on the brands. On Vans, obviously that’s sort of a big driver given how much of the growth it’s driven. Obviously, we’ve all been watching the deceleration. You guys have spoken to it and the glide path down there relative to how you guys are thinking about it. And I know you said 2Q was right in line with your internal plan. You get that slowdown in the U.S. and EU obviously the compares are probably the reason why. But anything here unusual to call out that gives you confidence that we don’t continue to decelerate further or break away from the plan in any way in 2H, I mean into 2020 for Vans? And then on North Face, you noted that you’re forecasting revenue growth now above the long-term targets slightly this year. So I guess it begs the question, why does North Face slow from here, given the work you’ve done to rebase that brand, the consumer study, and then FutureLight being the first big innovation platform you guys have had in several years? Maybe you could talk to us about the implied slowdown there for the second half. Thanks.

Yes, Michael, it’s Scott here. First of all, on the Vans question, we’re – yes, we’re in line, actually we’re tracking modestly better. And I’ll remind you that both for Vans and The North Face, we’ve increased our annual guidance based on the strength today than what we can see on a go-forward basis. So I’d say in line and slightly even better on both of those brands from an expectation standpoint. Also, one thing just to remember, as it relates to both Timberland and Vans in the second half, we did some structural changes in our cost of business, exiting some unprofitable markets and now have a modest drag in the second half. I think something like a half, somewhere between a half to 4 point growth impact in the second half on both of those brands.

Yes. Michael, on your question on North Face, we reconfirmed or actually increased our guidance to 9% to 10%. And yes, we’ve been tracking a couple of digits. We remain extremely confident in the strategy that Arne laid out in our Investor Day, the launch of FutureLight and the halo that that’s casting over the brand as an innovation platform. But more importantly just bringing the brand in front of more consumers through the increased marketing. We continue to be very, very confident in the long-term growth prospects of North Face. I wouldn’t – I guess, I wouldn’t characterize that we’re seeing a slowdown. We’re seeing a continued improvement. We’ve talked about we’re early in our journey. A lot of work has been done and there’s a lot more work to be done to put this brand in a really solid position, but we couldn’t be more confident to where we are today with the results we’ve seen today.

Okay. Seem like – if I could follow up one, Scott. Any help you could help us think about 3Q versus 4Q as far as where you’ve left the embedded guidance for the second half of the year? Any help on cadence would be helpful. Thanks, guys.

Yes. I guess two things, Michael, I’d point out. So we talked about the gross margin about 50 bps expansion in the second half, and that is more structural. It’s from mix. So you can expect that on a fairly linear basis. And we also talked about some SG&A leverage in the second half, I know near and dear to your heart, particularly in the fourth quarter. I do listen to you, Michael. Particularly in the fourth quarter because remember, we’re up against some pretty big investments that we did last year in terms of incremental investments in Q4 last year. This year, those are more evenly spread throughout the year. So on a quarter-by-quarter basis, you’ll see a relatively larger profit increase in the fourth quarter compared to the third quarter.

Thanks a lot for all the help, guys. Have a good one.

Yes, Michael.

See you, Michael.

Thank you. Our next question is from Jay Sole with UBS. Please proceed with your question. Jay, your line is live. You may proceed with your questions.

Hi. Sorry about that. Scott, I just wanted to ask you about the strategic investments that you made in fiscal 2020 that impacted the operating margin that you showed in the operating margin bridge in the slide deck. What impact did that have in terms of basis points? Was it the entire 70 basis point impact on margins that it shows in the slide? Or is it only a piece of that? And then maybe can you help us a little bit more what those investments were?

Yes. First of all, you’re accurate in the way you characterize that, that is the entire amount. So it’s the same things that we’ve been talking about, Jay. It’s D2C and digital. It’s demand creation. It’s our innovation agenda. It’s the same things that we just highlighted in Beaver Creek that we believe are creating a meaningful point of difference for our brands. And these platforms are powerful and we intend to continue to invest in those things.

Got it. And maybe when you talk about tariffs, it sounds like it’s a $0.02, $0.03 impact. Is that sort of pre-mitigation? Do you expect to be able to work that number lower as we go through the year as you work on ways to sort of offset the tariffs or that sort of post everything that you plan on doing?

No, I mean, that’s the gross amount. But remember as we look forward, we talked about, for example, some of the mitigating actions. We’ve said about 7% of our U.S. sourcing came from China this year. We expect that to be more like 4% next year. So the tariffs came mid-year, so there’s a knock-on effect. On the other hand, we’re mitigating the impact as you look going forward. So that’s a long way of saying. As we look forward, unless there’s another tweet or another series of tariffs that come in, you shouldn’t expect much from an ongoing basis relative to tariffs.

Okay. And then maybe last one for me, the 30 basis points of leverage in the quarter within gross margin is a nice number. And at the Investor Day last month, you talked about maybe 3% to 4% of that total shareholder return coming from margin expansion, but that was mostly sounded like mix. So what sort of the level of sales growth, obviously you had 9% comp in the quarter. What’s the level of sales growth you need to continue to deliver to leverage on fixed costs to continue to drive gross margin on top of what you’ll get from mix?

Yes. Well, we just laid out a long-term algorithm, right? So it’s 7% to 8% and so that’s our expectation, first of all. And we also said, implied in that is some maybe modest leverage, but essentially, our operating margin expansion comes from that structural gross margin advantage that we have. And that’s really the engine that allows us to reinvest. So again, no change in the way we look at it. I would say this though, there is optionality in the model. I spoke a lot about that in our Investor Day. So should we see a fundamentally different environment, which we don’t today, by the way, but should we see a fundamentally different environment, there are levers we can pull to modulate expenses and meet the commitments that we’ve made from an earnings standpoint.

Got it. Thank you so much.

Thank you. The next question is from Sam Poser with Susquehanna. Please proceed with your question.

Good morning. Thank you for taking my questions. I’m really wanted to get some more color on the Dickies brand, the work category and then smaller brands that you spoke of, in some detail at the Investor Day. If you could give us some color on sort of momentum on those smaller brands and then a little more color on this timing issue of the Work business?

Yes. Maybe I’ll start, Sam, just on the numbers side of this. So first of all, I’m going to talk about Dickies, which is the largest portion of Work. I guess about 40% or so. And remember last quarter, we’ve talked about the first half would be impacted by a couple of factors, one of which we talked about last quarter, which was the reset in Japan. And then the other is timing of particular large North American customer of ours. But what we mean by that is a year ago, we had a very large floor set to obviously get the pipe fill. That makes the comp in this particular quarter pretty tough. Interestingly, if you exclude that customer, the Dickies brand grew about 6% in the quarter. But more importantly, as we look at the four – at the full year, we just talked about an outlook of 5% to 6%, which is in line with our long term expectations. And that’s even despite some modest pressures on the more cyclical part of the Work business. So remember, Dickies has a unique aspect to it too with that Work lifestyle. And as we look at the second half of the year, the international business, you don’t have the impact or the mitigation of the Japan reset. That’s behind us in the second half. And we see significant growth in – particularly in China and also in Europe in the lifestyle business. And that was over 20% in Q2, and we expect that to continue to accelerate throughout the balance of the year. A little shape on the rest of the Work portfolio, which again if we say overall we’ve got about 40% exposure to the more cyclical part of the business, relatively more of that sits in those more traditional Work businesses. And we have seen some modest slowdown, but even with that, we grew about 3% in the first half. And we expect similar or actually slightly better in the second half primarily due to the acceleration of the Timberland PRO business in the second half. So hopefully, that gives you a little insight into what’s going on, on the numbers side of it, Sam.

Yes. Sam, let me just add really quickly on Dickies, and I’ll answer your question on the emerging brands. We are really confident in the Dickies brand. You will – what we see is greater mixing towards the – that Work Lifestyle piece that Denny spoke a lot about in our Investor Day. And that will really come to life first and foremost in China. And we’ve seen that have a really strong impact on our growth there. And we’ll be able to represent that very well through our own digital platforms, our D2C platforms and we’ll watch that really expand across the globe and have a long term impact on how this brand evolves beyond that traditional work environment. On the emerging brands, we’re excited to share those brands with everybody at our Investor Day. We committed to those brands growing low double digits in performance that we’ve seen to date is in line with those commitments. Our plan is not to share those brands on a quarter-by-quarter basis, but periodically give you an update and insight into how we’re doing. But I tell you, we remain very confident and we believe that sitting inside those emerging brands is a breakout opportunity, and hence, our excitement to share those with you when we were together at Beaver Creek.

And just add on to that from a numbers standpoint as we said in Beaver Creek, those brands don’t make a big impact in the short term, but they have a strategic relevance that Steve and the team unpacked. And there, we believe, it can be The North Face and Vans of tomorrow. That really as we think about managing both the longer term and the shorter term, that’s where these become relatively more impactful.

Thank you guys very much. Continue the success.

Thanks, Sam.

Thanks, Sam.

Thank you. Our next question is from Erinn Murphy with Piper Jaffray. Please proceed with your question.

Great, thanks. Good morning. I guess I want to start the conversation just a little higher level, Steve, with what you were referencing on the global consumer. It sounded like you said the U.S. consumer, you still feel relatively okay, about the consumer going into holiday. Can just expound upon that? What are you seeing currently with how retailers are interacting with vendors, anything from the promotional landscape? And then really stepping across the pond, how do you feel about the European consumer into holiday? That would be helpful. Thank you.

Sure. Yes, in my remarks, Erinn, I definitely did say that we don’t see any significant changes in consumer behavior with our brands. And our D2C results, from a traffic conversion both in-store and online continue to support that. That said, we’re paying attention. There’s a lot of rhetoric in the marketplace that could change how consumers are thinking, but I think that’s why we are spending the time really putting our brands in a positive light in front of our consumers and really inviting them to be part of our purpose-led journey. So really no change there, and as we look at our wholesale partners, no change in behavior there. Our retailers are well set for this fall holiday season. And as we head now into the cold part of the season, we are confident in our ability to deliver with our partners. As we jump across the pond, as you would say, we see strength in our German, Austria, Swiss, French, Italian marketplaces. There is a little bit of softness in our UK business. We have seen a slight reduction in traffic. We think this is kind of a point in time and as the rhetoric there starts to settle and there truly is a path forward, we are very well positioned. London is a very critical market for where our brands come to life with flagship store environments. And we think as we mentioned in Beaver Creek, we’ll be opening a new Timberland flagship there, along with the Vans flagship. So long term, we feel good about our opportunities in Europe. We just need to navigate some of these interesting times in the UK.

Yes, Erinn, just to put on numbers on it, too. Just a reminder, you may have seen it, but we did take up our Europe or EMEA guidance even despite what Steve mentioned relative to Brexit and while we are on the international train, we also took up Asia, despite what’s going on in Hong Kong and China. So we do see strength in the international markets.

So maybe, Scott, just to that end, can you just share a little bit more about what you’re specifically seeing in Hong Kong? I mean, there’s obviously been even with relation to some of your brands, I think Vans in particular a little bit of negative press there. Can you just share kind of what you saw during the quarter? And to your point, China overall was still relatively resilient. So any help on kind of flow between the two? Thank you.

Yes, maybe Steve and I both talk a little bit about this. But relative to the impact, there has been an impact as we pointed out, but keep in mind the Hong Kong market, specifically the city of Hong Kong is relatively small as a part of our total China business and we see really strong elements elsewhere in China, but Hong Kong specifically is definitely impacted. It’s just not large enough to have a huge impact on overall VF.

And I think the results that we see in China are largely offsetting what we see going on in Hong Kong today. And you bring up Vans and what we’ve seen going on there. I think just important to note that our Vans brand remains very committed around their purpose of really enabling creative self-expression. And the Custom Culture competition is really about supporting individual artists and really operating in a very apolitical way. And we remain – and our Vans brand remains very committed to driving that purpose forward and doing it in a way that really doesn’t bring politics in, but really focuses on the individual artist in that sense of creative self-expression. And we’re navigating that very well and if anything, just an even stronger commitment coming across all of the regions.

And then just one more for me just on Vans. Can you talk about how you see the potential incremental opportunity given that skateboarding is now an Olympic sport? Is that something you guys are going to be kind of playing into, as we go into the Japan 2020?

For sure. Yes, I think that’s why you hear Doug speak so confidently about why skateboarding is that true authentic expression of brand’s creative self-expression. And how they will activate around the Olympic Games, it will be a very, very important part of that time – point in time. I would also tell you Erinn, climbing is part of the Japan Olympics. And our North Face brand is a key sponsor of a number of different countries around the globe’s climbing team. And you’ll see us very well represented there as well.

Great. Thank you so much.

Thank you. Our next question is from Matthew Boss with JPMorgan. Please proceed with your question.

Great, thanks. So maybe at The North Face brand on FutureLight, how best to think about the phasing of shipments that we’ll see from here? And on profitability of the brand, any structural impediment to returning to the prior peak operating margins at The North Face, which I think would equate to close to 500 basis points of opportunity?

So Matt, I will take the FutureLight, then I’ll happily let Scott handle that second part of your question. So FutureLight phasing, we are about four weeks into the launch. And to date, sell-through is strong and actually ahead of expectations. And I mentioned earlier, the FutureLight advertising is casting a really strong halo over the brand. And we’re seeing strong response, especially in these core markets of North America and Europe where these more premium mountaineering ski silhouettes come to life. Phasing, as we – we’re really now into that point in time. Third quarter and how it carries into fourth quarter is where the phasing of those deliveries are at their strongest. And you see us very well assorted in our own stores and very well assorted across the globe in those key specialty retailers. So we’re right now in the heat of this launch. And what you see at retail and online is the full representation. But I think it’s really important to remind everybody that this is a very limited launch in our Summit Series, Steep Series and Flight Series. So that’s not a very large number of styles. You’ll see that grow as we move into the spring 2020 and another leap forward as we move into fall 2020 as the brand begins to replace current waterproof, breathable technologies with the FutureLight platform.

And Matt, relative to the operating margin, just like we reminded you from the top line standpoint, remember that Vans and The North Face are really outsized drivers from both the top and bottom line standpoint. That’s driven outdoor as well. There is no structural reason why we can’t continue to see operating margin expand. We’re going to approach the mid-teens earnings growth in the outdoor sector this year, and that’s continued progress along a path that we see. We don’t see any reason why we can’t return to, I’ll call it more historical-type operating margins in the outdoor sector. You’re probably looking at the quarter and where the growth is not quite as strong as what we expect for the full year. A couple of things to remember. Number one, we already had a big marketing campaign embedded relative to FutureLight because this is a really big idea and an opportunity for the brand, and creates a halo. And then we talked a quarter ago about putting even more money to work. And so that is spread through the balance of the year, but certainly is impacting profitability, profitability in the current quarter.

Great. And then maybe on Vans, any shifts in demand with later back-to-school timing this year? We’ve heard that from some others out there. How would you rank opportunities to further broaden the reach of the brand from here? And maybe as a microcosm, just any learnings from the recent success of the ACE pro launch, which I know is at $100 price point, a little bit higher than some of your other launches.

So that’s – I don’t think there’s anything from a phasing standpoint that we would call out specifically. I’ll take the last part of your question, and remind me of the middle. But on the ACE launch, I think key learnings there, that – at that AUR that’s a higher-than-normal price point. And I think as you know personally, that product in a couple colorways sold out almost immediately. So we know that there’s a significant demand for innovative product beyond those core heritage styles. And that’s why the progression part of the Vans go forward strategy is so important, is being able to push new ideas, new price points, higher AURs as a way of driving this brand long term. So really, really important and very strong validation based on that particular platform. And I’m sorry, the middle part of the question?

You kind of just answered it. It was opportunities to further broaden the reach of the brand.

Okay. No, it really is around the progression, footwear, it’s about apparel and accessories. They continue to drive very, very strong growth and are important parts of just expanding the wearing occasions and the opportunities for consumers to participate in the brand.

Great color. Best of luck.

Thanks, Matt.

Thank you. Our next question is from Laurent Vasilescu with Macquarie Group. Please proceed with your question.

Good morning. Thanks for taking my question. Scott, I wanted to follow up on the timing shifts between quarters. Dickies was down 4%, but excluding the timing, it was up 6%. Is $25 million the right number to think about for the timing shift? And were there any other timing shifts for the other big brands that we should consider?

Yes. So I’ll have to go back and think about your math. You’re – knowing you, you’re probably in the ballpark, but let’s confirm that number offline. I guess the bigger – let me answer the second part. No other big timing shifts really. Although if you look – listen, our first quarter, we had 86% EPS growth, right? And so for the first half, 18%. So of course there’s some timing shift that we saw between Q1 and Q2. I think the bigger picture here is, don’t get too isolated on any particular quarter, right? Our first half, we grew 9% on the top line, 18% on the bottom line. We’ve got a similar top line implied in our guidance for the second half and actually accelerating from an earnings standpoint. So as we look at it, yes, a little bit of quarter-to-quarter noise. But if you zoom out and look at the big picture, this is a very solid year and actually ahead of the guidance that we just laid out in Beaver Creek.

Okay. Very helpful. Thank you. And then I wanted to follow up on M&A. I think in the prepared remarks, you talked about dry powder to pursue your M&A agenda. Can you remind us how much leverage you’re willing to take on to maintain your credit rating? How much time it would – you would want to give back to just under two times, if that’s the target longer term? And would you be willing to issue equity for the right sized deal?

Okay. So first of all, at our current rating, it’s – debt to EBITDA is two times is what our target is. We’re a little south of that right now. So obviously even at that, there’s capacity. We showed our willingness to lever up as long as there’s a glide path. There’s no absolute number, it depends on the asset, it depends on the circumstances. But I think it’s fair to say within a couple year period, more or less, as long as we could get back to a reasonable leverage rate in general, other rating agencies have gone with us on that and we’ve got history that shows that. I think we have a lot of credibility that they would stay with us. We’ve also said we’re willing to take a one-step downgrade. At BBB plus, still investment grade, still access to CP, but obviously more capacity. That takes you about 0.5 turns up in terms of debt capacity. And then finally, the last element is, yes, we’re willing to issue equity for the right deal. So put that all together and it says we could do a really big deal.

Very helpful. Thank you very much, guys. And best of luck.

Thank you. Our next question is from Bob Drbul with Guggenheim Securities. Please proceed with your question.

Hey, guys. Good morning. Just wondering if I could ask a couple of questions on Timberland. When you look at like the regional performances and the differences, especially Americas versus Europe, can you just help us understand that a little bit better, especially the wholesale piece? And is the European weakness all UK in Timberland?

Sure. So Timberland North America, the performance we see there is our classic business stabilized a number of quarters ago. And we’ve seen a good performance with that being at baseline foundation. But where we’re seeing improvement is on a number of those diversification vectors, specifically some of the new – the newer footwear where we’re bringing a little bit more of a contemporary styling. But we’re also seeing really good sell-through on – in our apparel category both here in North America, but also in Europe. So the focus there, Bob, just continues to put the proper diversification tools in place for this brand to move beyond the heritage footwear, to move beyond the brown shoe classification and really start to unlock some of these more lifestyle elements. Starting within footwear, getting to that younger consumer with more than just boots, but starting to elevate our presence with apparel and we’re really pleased with what we see going on in apparel category. In Europe, yes, the UK is part of our issue, but it’s really the – the men’s footwear business last year, with some of the weather conditions that we endured, slowed down. And it’s a significant part of the business. And that’s what you see impacting our results. But there as well, women’s footwear, apparel are doing well. And the product enhancements that Martino represented in Beaver Creek, as those start to come online, we see line of sight through our order book for spring 2020. We’re confident we’re working on the right things. It will just take us time to get these products to the marketplace to get that consumer response. And as we start to see that sell-through come across the men’s footwear, we’re confident that the plan we have in place will drive our long term growth projections.

Got it. And if I could just ask on the inventory, took inventory up 10%. And I think you said your owned inventory and partners are in good shape. But in terms of as you look forward, was there – is there a big front-load on the inventory side? Are there any pockets within your inventory that you are concerned about? Or just trying to understand that number a little bit better. Thanks.

Yes, Bob. The short answer is, we’re not concerned about inventory. We did build up a little bit coming into our largest season from a service standpoint. That’s been a priority. As you think about in particular our largest brand, Vans, we have been chasing this for a long time. And frankly, our service hasn’t been at the level that our partners or we expect. So bringing that back to normal puts a little bit of pressure as well as being ready for what we think is going to be a good fall/winter season, right? This is when we make hay from a North Face in particular standpoint. So yes, it’s a little bit up relative to the growth rate going forward. But importantly, when we look at the quality of the inventory and we look at where we expect to end this year, we don’t see any issues from an inventory standpoint. As it relates to inventories at retail, we told you coming into the season, everybody was in pretty good shape. We read the same things you do. I know there are pockets of issues out there. All I can say is as it relates to our brands and our partners, we don’t see particular issues. Now it is worth noting as we think about fall, did get off to a bit of a slow start in the U.S. Importantly though, we’ve seen that starting to reverse. And we’ve seen that in the most recent month, we’ve seen improvement from a retail activity and from a sell-through standpoint.

Great. Thanks, Scott.

Thank you. Our next question comes from Jonathan Komp with Baird. Please proceed with your question.

Yes, hi. Thank you. Maybe just a bigger picture question related to some of the incremental pressures that you called out relative to 90 days ago, the $0.07 of tariffs in Hong Kong and some of the other uncertainties. Just curious maybe how you’ve embedded those assumptions going forward. Like have you made assumptions that those factors continue? And barring any changes in the environment, would you still be set up to pretty healthily deliver on what you’ve laid out going forward?

Yes. We don’t try to get in the prediction business, Jonathan. I mean we look at the most recent trends, what we know and we try to factor in what’s in front of us. I think I mentioned earlier in the call, for example, we’re not expecting more tariffs. But with the tariffs that we know about, we’ve factored those in, as well as on a go-forward basis, mitigating actions. I think the important thing to remember on that $0.07 and with the point we were making is not that we’re in a different place. We actually don’t believe we’re in a fundamentally different place. You heard Steve mention how we see the consumer, the overall environment. The point there was by reiterating our guidance and absorbing that $0.07. We’ve really operationally absorbed that and strengthened our operational guide by holding our reported guide at from $3.32 to $3.37. That was the point that we were trying to make, not that we’re in a fundamentally different place because we’re not.

Okay. Great. And maybe just one more kind of near term follow-up, when you think about the next couple of quarters, certainly looks like there’s diverging trends maybe across categories. Some may be heavier on inventory, some of your categories, not so much. And then even just varying impacts from tariffs and the other pieces, how do you think about some of the divergences between kind of the winners and losers as you look forward to the holiday? And any thoughts there would be appreciated.

Maybe just some clarity on the winners and losers. Is that a brand question or is that retailer question? Just some context.

Yes. It could be both, frankly. But certainly, there are some pockets where inventory seems heavier. And certain brands and retailers seem lesser positioned than maybe your portfolio. So I’m just curious how you’re viewing that within the context of your brands, and if there’s any, I mean, spillover impact potentially if there’s other pockets of weaknesses.

Sure. I think what we see are the strong brands continue to get stronger. Those brands are bringing innovative products, driving really powerful brand experiences. They’re inviting consumers to be part of those moments. Those are the winners. And our portfolio we feel is very well positioned. The work we’ve been doing over the last 2.5 years to put ourselves in this place, very well positioned to compete with that kind of consumer behavior. From a retailer standpoint, again, the work that we’ve been doing over the last 2.5 years has really positioned us away from those parts of the market, what we call the kind of the middle of that hourglass where there is quite a bit of tension in the system and some lack of differentiation. We’re positioned through our own stores, our own digital platforms, our key accounts across the globe, really, in those pockets of the market where retail is succeeding. And our focus on becoming a more consumer-minded, retail-centric provider of products and experiences, not just for ourselves but for our wholesale partners as well, is to be that better partner that’s able to deliver the proper amount of product at the right time for that particular moment in the year, and in a way that helps drive positive margins for both ourselves and our key accounts is a big part of our go-forward strategy. And you see that working today in this shift in our portfolio.

Okay, great. That’s very helpful to hear. Thank you.

Thank you.

Thank you. Our final question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Good morning, everyone. As you think about the wholesale and direct-to-consumer channels, how do you think about them by brand and what you’re seeing for the back half of the year? And on direct-to-consumer, with the 9% comp you had, what are you seeing from full line and factory stores? And where you see the base of factory stores today and where it’s going? Thank you.

Okay. So wholesale D2C by brand, I think a big part of our go-forward strategy and the work we’ve been doing is really to increase the level of our direct-to-consumer presence as we move towards – from a low 30% as we trend now toward a 40% of our revenue coming from our own stores, these are really important shifts. This is a place where we’re able to have that strong representation of our brand in very authentic environments. And across our portfolio, the – as we evolve our portfolio, it really is with brands that have the ability and the permission to operate in a direct manner. But we take those learnings into our wholesale partners as well. And we talk a lot about key accounts and where we’re able to collaboratively represent our brands within their environments consistent with what we’re doing in our own stores. So that mix and focus on D2C helps us be a better wholesale partner as well.

Yes, just a reminder, Dana. Also, outlets for us is not a growth strategy. It’s about one-third of our owned fleet. But when you consider partner doors and actual consumer-facing mono-branded stores, it falls to more like 20%. So only about one-fifth of our consumer-facing retail points of sale are outlet. And we’re going to continue to think of it from that standpoint. So we’re probably not the best to answer the overall outlet environment because we don’t play in it in a meaningful way.

Thank you.

Thank you, Dana.

Thank you.

Thank you. We have reached the end of our question-and-answer session, so I’d like to pass the floor back over to Mr. Rendle for any additional concluding comments.

Great. Thank you. Hey everybody, thank you for joining us this morning. We’re pleased with the strength and quality of our second quarter results. The – our underlying business is strong. And our first half was right in line with our plan, up 9% and 18% in earnings. And our reaffirmation of our full year, I think, is just another data point of our commitment and our – really our confidence in our ability to just deliver against our long-range plan. We are very committed to continue to evolve not only our portfolio, but how we operate as a more consumer-minded, retail-centric, hyper-digital enterprise, putting ourselves, our brands in a much more powerful position to connect with our consumers and drive really how businesses like ours operate forward into the coming years. So look forward to talking to with you all in the coming quarters and thank you for joining us.

Ladies and gentlemen, this does conclude today’s teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.