Greetings and welcome to the V.F. Corporation Second Quarter Fiscal 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Allegra Perry, VP of Investor Relations. Thank you. You may begin.

Good morning and welcome to VF Corporation’s second quarter fiscal 2023 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 have 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. You may also hear us refer to reported amounts, which are in accordance with US 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. Unless otherwise noted, results presented on today’s call are based on continuing operations. Joining me on the call will be VF’s Chairman, President and Chief Executive Officer, Steve Rendle; EVP and Chief Financial Officer, Matt Puckett. Following our prepared remarks, we’ll open the call for questions. I'll now hand over to Steve.

Good afternoon, everyone, and thank you for joining our second quarter fiscal 2023 earnings call. I'll provide an operational update for the quarter and for the year-to-date, and Matt will provide a review of our financial performance. I'd like to first start with a few words on the macroeconomic environment, which even since we met for our Investor Day exactly a month ago, continues to dynamically evolve. While consumer health remains relatively intact across most of our markets, we continue to see global trends result in more choiceful and cautious spending behavior. In North America, we saw a mixed back-to-school result across product categories and today are seeing variable traffic patterns across channels and an elevating promotional environment in most markets. The situation in China continues to improve, although rolling lockdowns have slowed this progress. Despite continued softness in China, we're seeing pockets of growth in this market led by the North Face, as the brand's global leadership role in the important outdoor TAM continues to influence this relatively underpenetrated market. Outside of China, we're seeing further improvement across rest of Asia, led by Japan and Korea, which remain highly influential on Greater China. And we had another quarter of strong growth across our portfolio of brands in Europe, despite a backdrop of deteriorating consumer confidence. Despite this mixed macroeconomic picture, our portfolio of brands continues to deliver a broad-based performance, as consumers continue to prioritize their active lifestyles and lean on our brands to fulfill those needs, and the investments we're driving into our key strategic growth capabilities and platforms continue to support the growth of our brands. For the quarter, our revenue grew by 2% and our adjusted operating income was approximately $380 million. We returned $194 million in cash to shareholders, bringing the year-to-date total to nearly…

Thanks, Steve, and good afternoon, everyone. As Steve mentioned, we delivered a balanced set of results in Q2 as we adapt to a more variable and softening consumer environment. Revenue was up 2% in constant dollar terms and up 4% excluding China. For half one, revenue was plus 4% and plus 7%, excluding China. After accounting for a negative FX translational impact of approximately $195 million, nearly double the level seen in Q1, sales were down by 4% on a reported basis in the quarter. Globally, both our wholesale and direct-to-consumer businesses generated low single-digit growth in Q2 and DTC returned to growth at the VF level despite a lower performance than anticipated from Vans North America. Our adjusted EPS was $0.73, down 34% or down 27% on a constant dollar basis. About one-third of this reduction versus last year relates to non-operating impacts. Before I unpack the P&L in more detail, I'll give you an update on the operating environment across our primary geographies. Our rolling lockdowns continued to disrupt operations in China during Q2, and we are otherwise open for business from a COVID standpoint across the value chain. Revenue in the Americas was down 3%, and but up 3%, excluding Vans. Against the difficult macro backdrop characterized by softer traffic and components of our D2C network, higher inventory levels across the marketplace and an increasingly promotional environment. Our outdoor businesses continue to perform strongly, led by the North Face, growing low double digits in the quarter and continuing to generate strong sell-out across channels. Vans performance in the region was down 11%, impacted by lower back-to-school sales, an increasingly cautious approach by our wholesale partners, leading to higher cancellations and lower traffic affecting our direct channels. Finally, Dickies down 17% was impacted by further inventory adjustments made…

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Michael Binetti with Credit Suisse. Please proceed.

Hey, guys. Thanks for taking our question here. Matt, I want to dig in on some of the actions to drive revenue and profit that you spoke to. Maybe just -- I know you gave us a little list there, but maybe just a little bit more on what we'll actually see what you're doing since you introduced the highlights there? And then as we look at Vans and we -- I know you said there's a little bit of an easier compare on China and when we look at it on a one-year basis. What -- when we look on a multi-year basis, pre-COVID, it looks like the revenues for Vans will need to accelerate a little bit in the back half to get to the down mid-single from where it was in the second quarter. Is there any numericals you can give us to help us get the building blocks to what rolls off or what comes online that should help for a better trend on a multi-year basis?

Yes. Sure, Michael. And thanks for the question. It's nice to hear your voice. First, I would say, relative to the actions, we're not happy at all about the -- what we're seeing in terms of the profit projection and I think the approach that we took to adjusting the full year profit outlook, while revenue remains intact. We just see some headwinds on the horizon associated with kind of rising inventory levels in a promotional environment in the marketplace that's going to be all around us. And we certainly expect that's going to have some impact on our business. And I think we felt like it was important to plan prudently in that regard. But despite that, we're going to work really hard to kind of bring that profitability level back, and that really is what those actions are all about, as it relates to driving traffic and conversion in our own formats in our own stores and our own websites. One of the biggest opportunities we see is to really look across – and this is kind of the power of our platform in a sense, look across our businesses and where we see things working well tactically within digital marketing and tactics to drive digital commerce. Where are things working well and how do we deploy those in other brands or other places where we're not seeing the same kind of benefit or the same kind of returns on the tactics that are being deployed today. And just to be honest, probably no surprise, the North Face. We're seeing those things work a little better and Vans is an area where we see opportunity. And so we've got some of our best people across the company kind of working on that. In fact, we've moved a couple…

Michael, let me build a little bit here on the traffic and conversion piece. I think an important part here, and this really is leveraging the portfolio and the cross-functional teams and expertise that we have, not only in brands and functions. But we have assembled a cross-functional teams organized in pods working in very agile ways against four very specific areas of focus. One is around consumer acquisition. How do we acquire that consumer? How do we move that consumer in and drive traffic to our environments. When we have that consumer, how do we retain them. Third, would be how do we really enhance that consumer experience. So we have a higher likelihood of moving them through to the fourth point, which is conversion. So very, very specific sets of actions being worked on by these cross-functional pods. And probably, the last point here is, this is something that we're taking so seriously is that Matt and I are meeting with these teams on a weekly basis to keep track of, understand and help take any kind of roadblocks out of their waste that we can move very quickly and agile through this process.

Michael, on your question about the Vans kind of the drivers in the back half of the year, you get a couple of things. I don't know exactly what kind of the period you're looking at and the stack itself. Our view of that would say, if you go back four years, kind of pre-COVID and look at the CAGR, it's pretty consistent in the first half to the second half at the total Vans level globally. So that's one thing. I think it's -- that I would say. As we look at our assumptions in the back half of the year relative to what we saw occur in the first half of the year, it's really all driven by an accelerated impact and benefit from China. I will tell you, in fact, we are planning Vans North America to be a little tougher in the back half than actually what we saw occur in the first half. So we're planning pretty cautiously there overall. And the -- if you think about where we are, we're down mid-single-digits, which we delivered it down six, I think, here in half one implies low single to – to low mid down in the back half of the year. It's really all driven by that acceleration in Greater China, which is obviously coming against easier compares.

Thanks, guys.

Thanks, Michael.

Our next question comes from Omar Saad with Evercore Partners. Please proceed.

Hi, guys. Thanks for taking my question. I had a couple of quick brand questions. is Dickies the only kind of pandemic winning business or at least that portion of Dickies the pandemic winning business kind of giving back some of those gains? And then North Face, any early reads on winter demand in places where the temps have started driving kind of any early reads on that appetite for that category as winter starts to set in some places. Thanks.

Steve, I can take the Dickies part, and if you want to take the North Face.

Sure.

Yes. Omar, for sure, Dickies is filling the impact here in the first half of the year of what's going on in the US market and obviously, particularly with our largest retail partner, and the exposure to that value and consumer, to your point, we've done really well from a growth standpoint over the last couple of years with Dickies. I wouldn't call it giving it back that we think this is kind of short term in nature as some inventories were being rightsized. And certainly, that consumer being impacted pretty significantly by the inflationary challenges on food and fuel and those types of energy costs those types of things impacting that lower value and consumer more significantly and more quickly, quite honestly, has impacted the work component of that business in the short term. But what we also know is that inside the business and inside even that retailer, our brand continues to perform on the floor better than the competitive set. So as that business goes away pretty quickly at times when they pull back on inventory, they can shut the brakes pretty quick. At the same time, they can hit the gas pretty quickly as well. And as we as we come out of this over time, hard to predict how that will play out. But as it does and when it does, we expect the business to kind of pick back up and accelerate. Meanwhile, the lifestyle part of the business continues to perform incredibly well. And that's really how we think about the long-term growth drivers of this business is getting our fair share of the work component as we -- as you'd expect us to, but really driving outsized growth internationally and here in the US in the lifestyle product. So yes, a little bit difficult in the short term, it doesn't change our confidence in where this brand is heading and really kind of the momentum that the business has.

Yes. So Omar, on the North Face, we're -- we continue to be very excited and proud of what that team has done, up 21% through the first half. and affirming that outlook of 12% for the year, which is slightly ahead of that high single, low double that we committed to just a month ago in the Investor Day. I think what should be good from a confidence building standpoint is the growth. It's broad-based. We're seeing it across all regions. We're seeing it across all channels, and we're seeing it across all product categories. Certainly, the brand is benefiting from that outdoor TAM and the energy that has really come into that particular part of the market, but it's also benefiting from its number one influencing position, and really driving that with strong authentic product. We talked a lot here over the last few calls about the commitment to 365 apparel and moving beyond just outerwear, being able to focus on those every day, ready-to-wear apparel items, which giving us permission to move now more into that active component of the consumers' life that they're asking us to participate in. Our footwear, last year, we launched -- or a couple of years ago, we launched VECTIV. And to be able to now talk about getting a major award for the VECTIV Fastpack FUTURELIGHT style is an affirmation of the quality of the team, the quality of their consumer understanding and the differentiated product that they're putting into the marketplace, specifically here with the VECTIV. Then you see outerwear continuing to work extremely well. Those kind of shoulder season, fleece, lightweight shelves, lightweight insulated jackets doing really well. But now as we come into cold weather yesterday, you may have seen it, the cause drop highlighted some of the heritage Nuptse, Himalayan Parka, I think the Mountain Jacket that was in there and the Denali and really, I think what you see there is leveraging historical strong styles done in a very brand right way with a partner like COS [ph], driving that halo impact that then cascades and across everything they're doing in that snow ski category, the commitment to climb, hike, active as you look at the online presentation and the remerchandising of that homepage. This is a brand that now has really anchored its product creation capabilities, strengthening its storytelling capabilities with the addition of our new CMO, new Chief Product and Merchandising Officer that is only going to help us to strengthen and focus that product offer. And then with Nicole's expertise in direct-to-consumer and the online engagement, we think we've got a real winning formula here to continue to drive that long-term sustainable, consistent growth.

Thanks for the color.

Thanks, Omar.

Our next question comes from Jonathan Komp with Robert W. Baird. Please proceed.

Yes. Hi. Good afternoon. Thank you. I just want to ask maybe another question on Vans. I'm curious, just your latest view when you look at the geographic divergences and Europe looks like it's holding up so much better. Curious what you currently think and make of that trend. And as you think about Vans, just when would you expect to see signs of progress? And what are you looking for in the Americas to know that you're on the right track here?

I think the way you're looking at it is absolutely correct. Our European business, in general, continues to show exceptional performance. And within that is certainly the Vans business. We've talked pretty openly, and I think Kevin did a good job unpacking this for everybody in the Investor Day. But the primary opportunity here is our North America business. And within the North America business, it's our direct-to-consumer channel. And the emphasis we're putting today around traffic and engagement, retention all the way through to conversion, Vans is squarely in the middle of that. We have a number of test-and-learn actions that have been taking place the last couple of weeks. Taking those learnings now and we'll apply it to the balance of our portfolio, but really looking at what will be required to utilize these this strong component of our go-to-market set of options where we've got such strong conversion, how do we start pulling consumers across that lease line in to engage with us on our footwear and apparel story. So number one is the Americas and within that, our North America D2C. China is a significant opportunity as well. We've been certainly impacted with the COVID environment there. But again, at the Investor Day, Kevin spoke a lot about really pushing decision-making into the regions and providing more and more latitude for local-for-local decision-makings around product, around storytelling, certainly staying within the confines or the framework of the brand strategy, but really giving more freedom and more empowerment to the regions. And you see that taking place in Europe and taking those learnings and applying that now more effectively with our Asia team, specifically in Greater China.

Okay. That's helpful. Maybe just one follow-up. A broader question on the margin outlook, guiding to 11% operating margin for the year now, will be the lowest you reported in some time outside of COVID, maybe the last decade or so. So just, Matt, I don't know if there's any way to think bigger picture about what's temporary in the margin that's impacting it this year versus more lasting? And then are you willing to quantify any of the actions you're taking to tighten up on the cost side? Thank you.

Yes. Great question. I would tell you that we believe there's quite a bit that's impacting us this year that is I'll say relatively short term in nature, impacting the margins. And that's certainly in the gross margin line. Clearly, there's a little bit of pressure on elements of our fixed cost base. Obviously, something like the Vans store base itself and kind of what we're seeing there in the revenue and kind of the performance in the stores. But from a margin standpoint, we still got -- we're dealing with higher levels of, I would say, inefficiencies from a supply chain standpoint, freight and how we're moving freight. The extra storage costs, given the higher inventory levels is in there that we would say is transitory. But then really the big one is just kind of the assumptions that we're making right now relative to what may be required in the marketplace from a promotional standpoint, both our own channels, but also in support of our wholesalers. We talked about here even in the rate impact largely being the result of higher discounts, some additional promotions already showing up a little bit in our own channels, particularly outlets and then higher – higher cost as well and certainly some additional inventory reserves given our elevated inventory. So there's a lot there that I would say really everything we've just done from a margin standpoint is all tied in my view to kind of things that are commensurate with the current marketplace and environment and are not what we'd expect to see persist moving forward. So I think we still are really confident in our ability to drive expanding gross margins over time, our ability to drive higher prices over time to mitigate kind of inflationary product cost increases, which,…

That's really helpful. Thank you.

Thank you, Jon.

Our next question comes from Laurent Vasilescu from BNB Paribas. Please proceed.

Good afternoon. Thanks for taking my question. Steve, Matt, I would love to ask about Supreme. I didn't see how the brand performed on a revenue perspective for this quarter and the slides. Any context on how it performed? What drove that performance? And then maybe a little bit more context, Matt, on the impairment charge. What drove that? And what's your confidence to get to that to that algo that you called out a month ago of high single-digit, low double-digit growth for the brand? Thank you.

It's Laurent. Thanks for the question. I'll go ahead. I'll take Supreme. From a Q2 standpoint, Supreme was up 7%. And this is despite opening up about a week later than planned based on a decision to make sure we hit market with an optimized assortment. You remember us talking quite a bit last year where we came to market with well under normal percentage allocations against key styles. And this year, the team took a very proactive approach to hit the market second half here running with the right assortment at the right time. So we were up 7%. Even despite some supply chain disruptions, the brand has done well. We expect an acceleration as we move into the second half, because we continue to get better and better positioned from an assortment and product flow standpoint. A couple of wins here. You were able to see these stores when we work together, in Europe, but the Berlin and Milan stores are performing really well. And now as we come out of that COVID environment, we have the luxury of consumers being able to move tourism becoming more prevalent. Those stores which opened under the cloud of COVID. Now we're performing extremely well. And from there, we've got some new stores coming. We talked in my prepared remarks around the Dover Street Market, opening up in Beijing. That's the first time. Supreme will be represented in a physical authentic way within the Dover Street Market environment. That's more of a shop in shop, but it will be a great affirmation of the ability to expand or what we talked about really grow wide. We also get a refit to our Harajuku store in Tokyo. It's probably the most prominent, well-known store in the Japan market, and they've seen just really strong results and energy resulting from that. We have a new store coming in Chicago later this fall, which will be the first new store in the US market in a while and very excited to what that means as again, we bring the brand through the physical environment first into new parts of the market where we know consumers are as we look to continue to provide better and better access. So that geographic expansion continues to be a very important part of the longer-term growth and being able to get back to seeing that value come into the brand this year is a good proof point to the acquisition thesis coming in here, and it just gives us more and more confidence in the team's ability to execute.

Yes. I'll just add one comment. I'll get your question on impairment, too, Laurent. But as soon as he talked even at the Investor Day, really, the long-term growth plan is best categorized as a grow wide strategy, giving more consumers access to this brand, and that really speaks to geographic expansion. And it's kind of core and central to the acquisition thesis itself, leveraging VF's capabilities, VF's platforms to more easily, more frictionless, not necessarily faster per se, but certainly the opportunity to go at the right pace over time, but to open more doors internationally to give this brand access to more to give consumers around the world excess to this band. That's the vast majority of what's driving the growth. We're not counting -- this is not about saturating the markets where we are today, right? We're very careful and cautious on kind of the scarcity model, but it's really getting more access to this brand around the world. And that's why we're excited to really start to see the expansion take shape here in the next couple of years in Asia, in particular and obviously beyond. So I just wanted to remind you that. As it relates to the impairment, I guess, first and foremost, I would say, it's all driven by what I'll call non-operating factors. You may even remember that earlier this year, we actually made an additional payment -- earn-out payment associated with the acquisition, which, obviously, says we performed a little bit better than the original set of assumptions, and there was an earn-out. It was a bit lower than we might have originally expected, given the early performance of the business because of some of the supply chain challenges that we saw last year impact the brand from a COVID standpoint,…

That's very helpful on that. Second question is on gross margins. You lowered it by about 50 to 100 bps. Could you possibly give us the bridge, how much of it is incremental FX, supply chain costs, bottlenecks. We heard from one footwear company talk about it last night. Or is it driven by markdowns? Any context on that would be helpful. And how do we think about the GM for 3Q versus 4Q? Any high-level color would be very helpful. Thank you.

Yes, sure. So I would say, in our case, Laurent, there are some -- the smaller impacts, and I'll start with the smaller impact, and I'm not going to necessarily give it to you exactly in terms of the percentages. But let's say, in the neighborhood of probably 25% of the total is a combination of some supply chain inefficiency, mix and currency. The balance, and so the majority is the assumptions that we're making on what's going to be required given inventory positions and the operating environment that we expect that we're going to face as we move through fall and holiday. And whether that's discounts to wholesale partners or more aggressive actions that we'll take in our own channels, in particular, our outlets. But in some cases, we'll be ready, depending on where the market is and what the competitive set is that have to be targeted in appropriate ways, even in our full-price channels as we move through the fall holiday season. And that will certainly vary by brand. And within brands, will vary by product category. We'll be very targeted in that. But we expect -- and we're positioned as we've kind of guided here to be able to take those actions when and where necessary. As it relates to kind of your question, third, fourth quarter, I think I'd say that a good way to think about the third quarter is kind of down 50 to 100 basis points. And then more flattish in the fourth quarter. And mix is actually begins to be kind of a nice tailwind for us as we get into Q4, by the way.

Very helpful. Thank you very much.

Thanks, Laurent.

Our last question comes from Matthew Boss with JPMorgan. Please proceed.

Great. Thanks. So Steve, what gives you confidence in keeping the 5% to 6% constant currency top line as we think about the dynamic macro backdrop? And then, Matt, could you elaborate on the heightened inventory and increased promotional activity in the marketplace maybe relative just to 30 days ago? And specifically, how do you feel about your own inventory levels by brand today?

So thank you, Matt. What gives me confidence? So there's quite a bit. I'll rattle off just a few points here. I think coming into where we are beginning of the second half is the consistent performance that we saw across the portfolio, ex bands up 11% in the first half. And the ability for us to kind of project that to be pretty similar into the second half. Our European business performed -- continues to perform well. And that cross sharing ability within our portfolio, the assistance that they're providing our Asia team as we stand up, in some cases, new operating disciplines in our Shanghai office, which is still fairly new. Bringing those same disciplines that same set of integrated marketplace set of capabilities continue to broaden their -- really their influence. Our China recovery continues, and we expect that the second half will continue to be what we've seen coming out of Q2 and certainly coming into Q3. Our back half isn't reliant on a hockey stick from Vans. We have a much more balanced view to be able to drive that 5% to 6%. We certainly sit in parts of the market, where there's a lot of tailwinds. The active lifestyle needs-based component of our portfolio, playing into the outdoor and active TAMs, certainly positions us really well. And then having the number one brands in many of those spaces to engage and ultimately drive those high-value experiences, gives me a lot of confidence that we've got the right -- really the right portfolio, driving the right strategy. But most importantly, we have the right people strong, deep bench of leaders. You saw them speak to you at the Investor Day, sitting alongside them in each of one of our businesses, its strong capable leaders. We're moving leaders based on the strength of our bench into our Vans business, we're being able to hire extremely high-caliber talent into our North Face business as well as into our Dickies business and Timberland business. So if there's the last thing here, it's the people, driving the strategies and being able to really maximize the tailwinds and that momentum that we've carried out of the first half.

I'll add a couple of quick points just kind of from the numbers side that gives me confidence. One, and probably most importantly is when you look at what have been consistently our best-performing brands over the last several quarters, it's kind of the outdoor segment, right? I mean generally, the outdoor brands have been strong. T&F, obviously, the headliner there. But across that group of brands. They are a larger penetration to the total in the back half by a pretty meaningful amount. It's kind of a 6- to 8-point increase in penetration to the total. So the fact that our kind of best performing businesses or a larger part of the business in the second half of the year gives me confidence. And then the other thing is just clearly the -- what we're going to see, the movement we're going to see from a contribution to total from Greater China in the back half of the year versus the really tough first half and in particularly tough Q1. So a couple of data points there that I think are probably helpful as you think about that. As it relates to your question on what are we seeing in the environment, how is it different even in the last four to six weeks. It's -- in our view, it's become more promotional. We're seeing it particularly in the Americas and particularly in China, inventories are building. We're kind of seeing that. We're understanding that as we kind of see what the market is showing. We clearly paying really close attention to the competitive set and the competitive environment from an inventory and promotion standpoint and kind of the signals that we see there would tell us that we may be heading into a time, where it's going to…

Great. That's helpful color. Best of luck.

Thank you, Matt.

Thanks, Matt.

Thank you. At this time, I would like to turn the floor back over to Steve Rendle for closing comments. End of Q&A:

Great. Thank you, everybody. And thank you for your questions and most importantly, for your interest. To close things out, I'd like to reinforce just a few points that I think are important for you to remember before we get the chance to engage with you again in January. The first thing is that we are going to continue to navigate the many macro challenges that we see today. VF and our brands are sharply focused on taking the necessary actions to drive performance and deliver against our strategy, and most importantly, our financial commitments. I think secondly is -- our businesses remain to be very resilient with our overall full year revenue outlook holding. Importantly, we're performing well across our portfolio Certainly, without the exception of Vans, but the balance of our portfolio growing low double digits in the first half with a line of sight to do the same as we move into the second half. I think this has demonstrated certainly by the fact that we grew constant currency revenue and not -- mostly in our outdoor brands, but the strength that we see in our emerging brands and I think the importance that, that shows you of our model and our portfolio strategy. I think last and I would just hammer home that we are going to remain extremely focused on those things that we control. We know what's required to ensure we deliver consistent, sustainable and profitable growth. And we have the right brands, the right strategies and certainly the right people in the place to get the job done. And most importantly, no one is more determined than this leadership team in this organization to deliver on our expectations. So again, thank you for joining us. Thank you for your interest, and we look forward to updating you as we turn the corner into next year.

This concludes today's teleconference and webcast. You may disconnect your lines at this time, and thank you for your participation, and have a great day.