V.F. Corporation (VFC) Q2 2027 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for joining us and welcome to V.F. Corporation Second Quarter 2027 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed into today's call, please press star 9 to raise your hand and star 6 to unmute. I will now hand the conference over to Allegra Perry, Vice President of Investor Relations. Please go ahead.

Thank you for joining us on V.F. Corporation's second quarter fiscal 2027 conference call. On our call today, we 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 we say otherwise, amounts that are referred to on today's call are all on an adjusted constant dollar, continuing operations, and excluding Dickies basis, which we've defined in the earnings release that was posted this morning on our investor relations website. We use those lead numbers in our discussion as we believe they more accurately represent the true operational performance and underlying results of our business. We may also refer to reported amounts which are in accordance with US GAAP. Reconciliations of GAAP measures to adjusted amounts are found in the supplemental financial tables included in the earnings release, where we identify and qualify all excluded items and provide management's view of why this information is useful to investors. Before we proceed, I want to highlight that scripted remarks have been posted at the start of the earnings call for ease of reference during the call. The scripted remarks will be removed after the earnings transcript is made available on our investor relations website. Joining me on today's call are V.F.'s President and Chief Executive Officer, Bracken Darrell, and Chief Financial Officer and Chief Operating Officer, Abhishek Dalmia. Following our prepared remarks, we'll open the call for your questions. Before I hand it over to Bracken, I will leave you with one of the most incredible videos I've ever seen from a movie featuring The North Face. Everest: The Other Side opens in IMAX theaters this Friday. Enjoy.

Everest has been summited over 13,000 times. But only five people have ever climbed the direct north face, and no one in the world has ever skied it. It's an experience like nowhere else. There's active avalanches. You have a broken leg. No. Was there a part of this that was supposed to be fun? It's the part when you get down and you tell the stories. Oh, right. I've suffered a lot of loss, and the mountains have helped me keep going. Even if we make it to the top, I'd have to ski down the 9,000-foot face. The higher you get in elevation, there's this connection I don't feel anywhere else. They love you, brother. I love you too.

Man, every time I see that, I am inspired. Everest: The Other Side, directed by one of our athletes, Jimmy Chin, and featuring two others, Jim Morrison and the late Hilaree Nelson. It's a unique, first of its kind documentary, one of the most incredible feats of outdoor challenge ever attempted. I can't wait to watch it live again in an IMAX theater when it's released later this week. It's a prime example of how V.F. is deeply rooted in exploration and adventure, product and brand building, and authenticated through remarkable athletes. Our work on design and innovation is being brought to life by our brands and is trusted by the best athletes in the world in the harshest conditions on Earth, just as Jimmy and Jim demonstrate in the film. V.F.'s story is about our amazing brands, and over time, each of these brands will be known more and more for the incredible products we bring to life through design and innovation. I was going to spend most of this call on product and brand building, but before I do that, I want to talk about something that's probably a little under-recognized about V.F. right now. Great sustained performance occurs when your revenue outgrows your cost. Leverage. The really remarkable turnaround stories are often associated with that. Companies compound that leverage, and we all know the law of compounding. By a few years in, the impact is remarkable. None of that is new news to you. What we might not have made clear enough is just how several forms of leverage are all working at once. First, you're starting to see our operating leverage. That's the one where the operating income line outgrows the revenue line. Gross margins expand. The SG&A base is reset. This one you're seeing now, as our revenue has begun to accelerate from down 11% in fiscal 2024, including Dickies, to up 1% last year to 2% or better this year, and so on and so on ahead. Our gross margins have expanded. We have taken our structural cost from SG&A, and as a result, our operating margin has expanded from 4.8% in fiscal 2024, including Dickies, to 7% in Fiscal 2026, to approximately 8%, as reflected in our guidance this year. We expect it to be 10% or more in the full year FY 2029. We are absolutely not stopping at 10%. The second form of leverage is a form of leverage from our declining tax rate. Our unique tax structure results in a relatively high tax rate, which will fall steadily from the mid-30s to the low 20s over the next few years. There is actually a third form of leverage. As we pay off our debt over time, we first reduce our interest expense in coming years, which further increases net income. Our EPS ought to expand faster yet than our operating income. That is not all. Paying down the debt benefits the overall enterprise value of the company, which in turn raises the market cap as the equity value goes up. This combined form of leverage is really unique, and it sets us up for a remarkable period of value creation over the coming years. Now let me turn to our Q2 performance. Revenue grew 1% against our guidance of flat. Operating income was $364 million, about $50 million above our guidance of $315, including gross margin expansion of almost 300 basis points versus last year to 55.4%. EPS was $0.70, up over 40%, more than twice the rate of our operating income growth. While a 40% EPS growth on 1% top-line growth is obviously a quarterly jump that is not predictive of the year, it is a dramatic illustration of all the leverage at once. Today, we are also reaffirming our full-year guidance for fiscal 2027 and our medium-term targets, which Abhishek Dalmia will speak about in a little bit more detail in a few minutes. From a brand perspective, The North Face, Timberland, and Altra all continue to grow, and Vans is broadly in line with our expectations, down 9% in the first half. One of the metrics we track is the percentage of our business that is growing. In fiscal 2024, including Dickies, 43% of our business by revenue grew. This quarter, we are now at 75%. I told you a few years ago we would move from that number of around 40% to 80% or better, which is what you should expect long term from a good multi-brand company. Let me go through the brand highlights, starting with Vans. In case you have not seen all the buzz around Vans, I am going to give you a summary here. Vans continues to be recognized for the innovation and excitement that is happening. Some of you might have seen the latest announcement from a highly respected teen survey that Vans was chosen as one of the top brands by our target consumer. The brand enthusiasm is showing up all over. At ComplexCon, one of the biggest sneaker fan fests in the world, the Satoshi collab shoe launch was so strong that we had to briefly shut down our booth. We followed up that event with a small DTC-only drop of the Satoshi shoe, and it sold out in 5 minutes. This product was also on the top 10 list for ComplexCon Sneaker of the Year for 2026. Just last week, AlixPartners named Vans the number 2 fashion footwear brand in its Consumer Sentiment Index. You can feel throughout our organization that Vans is getting its mojo back. There is beginning to be a swagger in Costa Mesa that was missing for some time. Vans was down 9.8% in Q2, a little below what we indicated. Global DTC was positive for the first time in almost 5 years as our product engine shows up in our channels first. Remember, we started with improved performance in U.S. e-com a few quarters ago, then in Americas DTC in total, and now global DTC was up versus last year. That result reflects continued growth in Americas DTC, improved performance in EMEA DTC, and encouraging signs in APAC as well. Our approach towards the product engine we have built is helping drive these results. We are introducing new ideas first with small batches in e-com, as well as with appropriate partners and cultural platforms, and quickly introducing a few of these ideas into limited stores, our own. Then scaling a subset of those products into the wider fleet. Only after that, our product flows into wholesale, and that will follow 6-9 months behind DTC. In fact, wholesale in Q2 was down slightly more than last quarter. We have a lot of confidence in the wholesale channel for Q3 and especially Q4, based on a strong response from our partners to our increased product newness. That is factored into our second half, which Abhishek Dalmia will talk about later in the call. In fact, this turnaround is primarily driven by our focus on product. We are refreshing our icons and offering new silhouettes. Icons grew in DTC in the quarter, led by Old Skool, as fresh expressions like Pearlized and Souvenir drove excitement and demand. The Pearlized Old Skool Yacht Club achieved 100% sell-through in the Americas in less than 24 hours. Authentic delivered another standout quarter with strong double-digit growth across channels. Slip-On within DTC returned to growth, while smaller franchises like Half Cab and Era had strong growth off a smaller base. Some of the amazing products that are driving that strong DTC performance are our icons, and others are new styles. We are reinvigorating those icons, launching new styles like the Super Lowpro, mules, and the loafer. Together, these are driving energy into the core styles. Our product-led improvement in DTC, in addition to the expected recovery of wholesale, started in Q3 and builds in Q4, is what gives us the confidence to commit to down 2% or better in the second half of fiscal 2027. To summarize, we are 3 months closer to what we told you would happen in wholesale, and we are reconfirming it. Our direction at Vans is clear, and I am confident we will see the acceleration. Next, let us talk about The North Face, which was up 4% versus last year. There is growing excitement about The North Face as well. The same teen survey I mentioned earlier named The North Face a top 10 athletic clothing brand for the first time in 3 years. Growth this quarter was broad-based across categories. Apparel growth was driven by bottoms, reflecting our focus on growing this category, as well as transitional jackets, including the Quest and Yumiori fleece. Footwear was up double digits globally and across all regions, driven by Clyffe, ThermoBall, and Altamesa. Bags was another strong performer, led by Hot Shot and the Base Camp family. There is so much to be excited about for this brand. The U.S. Ski & Snowboard partnership is live. The first drop lands this quarter, and our athletes are already starting to compete in our product and will be through the upcoming World Cup season and at every major event, at least between now and 2034, including the next Winter Olympic Games in 2030 in France. Last quarter, I also teased an innovation that is coming for The North Face, and you can see it. Actually, you can see it right behind me, and Abhishek and I both have them here. The reversible Nuptse. It is our biggest style, and now you can essentially get two jackets for the price of one. We are driving our business behind a wide range of Nuptse for the first time in several years, from the Summit Series to Lifestyle. Our campaign for this will feature none other than Jim Morrison, the star of the Everest film. Many of you have heard me say there are five ways to grow brands: growing the category, growing market share within the category, growing into new categories, growing by elevation, and entering new markets and channels. All of these are relevant at The North Face. The power of our brand gives me the conviction that we can double The North Face over time. Next, Timberland. Timberland grew 4% in the quarter and continues to build strong brand heat and relevance with new consumers. We are seeing that momentum reflected in continued acceleration of search interest in the U.S. and key markets in EMEA, as well as external measures of brand relevance. For the first time ever, Timberland ranked among the top 10 footwear brands in the teen survey we referenced earlier and was also ranked as the number one fashion footwear brand in the Consumer Sentiment Index done by AlixPartners. The Timberland product story is exciting as our diversification strategy begins to take hold. The 6-Inch continued to grow, and momentum is building across our footwear portfolio on key franchises, including Field Boot, Stone Street, Euro Hiker, and Boat Shoes, as well as core PRO franchises. Relative to the 6-Inch boot, shoes and other boots actually grew at a faster rate, reinforcing that growth is becoming increasingly broad-based across the brand. What is even more exciting is the growth potential we see beyond our core footwear franchises. Sneakers and apparel represent significant white space for Timberland. You will not see a meaningful contribution in the near-term numbers yet, but there is a lot happening behind the scenes, and we see substantial opportunity as we invest into those categories. We are also increasing our focus on Timberland PRO, where franchises like Boondock are resonating with the target consumer. Our multi-year NASCAR partnership just went live and is helping us bring PRO to an even broader audience, including last week's Timberland PRO 200 in Phoenix. We see big potential for PRO over time. Finally, we opened five additional full-price stores in the Americas this quarter, bringing us to 19 in the region. We will continue to expand thoughtfully and selectively, focusing on the key cities where we believe Timberland can have the greatest impact. As we look ahead, we feel very good about Timberland's trajectory. The core is healthy, momentum is broadening across the portfolio, and we have multiple growth opportunities ahead that give us confidence in the brand's ability to deliver consistent and durable growth. Next, Altra. Altra had another strong quarter, with growth over 40% and up in every region and channel. This growth was fueled by the brand's robust product innovation pipeline, momentum in its core franchises, and investment in brand awareness, which is reinforcing our brand storytelling. Retailers and consumers understand the power behind the Altra story. Road and trail both grew strongly in the quarter. As a reminder, we already lead in trail, and the market for road running is 10 times bigger. The Torin 9 launch was the biggest launch of the season, with strong sell-through, and the new Vanish Carbon 3 and Tempo 2 elevated our pinnacle race offerings heading into this fall's marathon season. Altra is our fastest-growing brand. To summarize, we are growing at The North Face, Timberland, and Altra, and in other brands. In fact, 75% of our portfolio is now growing. Even at Vans, which will be down 2% or better in the second half, we are on our way. That is the power of V.F. as a multi-brand portfolio company. To put it in context, while Altra is relatively small today, in fiscal 2027, we expect its growth in footwear to fully offset the decline in Vans footwear. Just imagine when we are firing on all cylinders. Let us get into some of the financials, Abhishek.

Thank you, Bracken. Good morning, everyone. As you heard Bracken share the high-level Q2 performance, let me dive into some more details. Revenue was up 1% versus last year, modestly ahead of our guidance of flat or in line with Q1's growth rate. The North Face and Timberland continued to grow, both up 4% in the quarter versus last year. At North Face, we indicated roughly flat in Q2 versus last year, driven by volume moves from Q2 to Q3. We delivered 4% growth in Q2, partially due to earlier demand in Q2 versus Q3 for wholesale and the balance of growth driven by stronger execution, specifically in Americas DTC. The North Face was up 8% in Americas, up 3% in EMEA, and down 4% in APAC. For Timberland, we came in better than Q1 at up 4% versus last year. Americas drove the growth again, up 15% in the quarter, partially offset by international softness. EMEA was up 1%, and APAC, which is relatively a small part of the global business, declined roughly 20% or approximately $12 million versus last year. This was in line with our expectations as we continue to work with our partner in the region. For the quarter, Vans revenue was down 9.8%, about $3 million-$4 million softer than what we indicated, driven by the wholesale softness in Q2 that Bracken mentioned. The expected turn in wholesale in the second half of the year remains on plan. We are three months from when we gave the initial expectation of the second half, have better visibility into the confirmation of our orders for fall/winter 2026, and more importantly, spring/summer 2027. As mentioned, DTC continues to improve globally. Hence, we are confirming our expectation that revenue will be down 2% or better in the second half. Now triangulating the brand performances back to V.F. revenue by region. Americas grew 5%, driven by a strong performance in DTC across most of our brands. EMEA declined 1%, and the decline was impacted mainly by Vans' performance in the region. APAC declined 7% with almost half of the decline driven by Timberland, which was expected and is being worked on by our teams. Overall, the current APAC performance is contemplated in our full-year expectations, and the execution of our brands remains a key priority. Moving on to operating income. In Q2, we delivered $364 million, almost $50 million ahead of our guidance. Of the additional $50 million, approximately half was driven by better delivery on revenue and gross margins, and the other half by a shift of spend from Q2 to Q3. Let me break down the operating income into gross margin and SG&A. Gross margin expanded 290 basis points to 55.4%. Approximately 180 basis points was structural. Lower product costs, our work in integrated business planning, and surgical price increases. The balance 110 basis points was an FX tailwind. If you recall, on FX, in Q1, we had 140 basis points FX headwind, and we still expected the full-year impact to be about flat. Most of those FX moves are driven by transactional hedges and thereby within our expectations. Hence, Q2, Q3, and Q4 carry the tailwind from FX, and we see the majority of that flow through in Q2. Also, there was minimal net impact from tariffs in Q2 as we lap similar rates year-over-year and see the benefits of vendor negotiations as part of our overall tariff mitigation plans. I would also like to take a second to break down the tariff refund accounting, as I know there are a lot of moving parts there. As you recollect, in Q4 of fiscal 2026, we booked the entire refund amount as a receivable, and the entire COGS on the inventory was reversed against, one, the COGS for the goods already sold in 2026, and 2, we took an inventory reserve on the inventory on hand. Hence, any inventory from that refunded amount, that is an adjustment to the reserve and not to the COGS. Tariff refunds therefore have no net impact on gross margins in fiscal 2027. Moving on to SG&A dollars. SG&A dollars were up about 4% versus last year. As I already mentioned, we rebalanced some of our Q2 investments into Q3. This investment in SG&A is already contemplated in our full-year guidance of approximately 8% operating margin. The growth in SG&A dollars is driven by investment in three key areas. One, DTC, where we are investing in the consumer experience and selected fleet expansion. Two, marketing, where we are putting more dollars behind both brand building and demand generation activities. And three, and most important, product design and innovation. These investments are propelling the brand heat and growth across our brands. The structural cost savings we have taken out remain in the run rate, and we continue our work to find additional efficiencies across V.F. Earnings per share was $0.70, up 40% versus $0.49 last year, primarily benefiting from operating income growth. In addition, net interest expense was $24 million, slightly lower than approximately $30 million that we previously indicated. Our effective tax rate came in at approximately 18%. For the full year, our effective tax rate is expected to come in at about high 20s versus our original expectation of the low 30s. This is primarily driven by resolution of some of the historical tax matters. That bottom line performance also reflects the balance sheet work of the past three years, lower debt, lower interest expense, and more durable financial foundation. We are starting to see the leverage that Bracken just talked about. Turning to the balance sheet, net inventory ended the quarter up 7% versus last year. This is a deliberate investment we are making to support the business in the back half of the year. As we told you, inventory will be up for the year fiscal 2027 versus last year. We have an opportunity in managing overall inventory levels, which will be a key priority in fiscal 2028 and beyond. Free cash flow through Q2 was negative $323 million, which includes the tariff refunds received year to date. Normalized for tariff refunds, first half free cash flow is roughly in line with last year and is accounted for within our full-year guidance. Let's now turn to guidance, starting with our affirmation for the full year fiscal 2027. On revenue, we continue to expect growth of 2% or better for the full year. For The North Face and Timberland, we are tightening the range and now expect the full year growth for each to be up mid-single digits versus last year. For Vans, we delivered on our first half expectation and are confirming our second half expectation of down 2% or better, which results in down mid-single digits for the full year. On operating margin, we continue to expect approximately 8%, reflecting gross margin expansion and disciplined SG&A management. As just mentioned, we now expect our full year effective tax rate to be in the high 20s range. On free cash flow, we are on track to deliver our full year guidance of flat to up versus last year on a normalized basis of $405 million. But our actual free cash flow for the year will be approximately $515 million or better. Let me unpack that for you. If you recall, in fiscal 2026, there was a net approximately $100 million benefit from the termination of our pension plan. Adjusting for that normalized fiscal 2026 free cash flow base was about $405 million, which is the baseline for our fiscal 2027 guide. In fiscal 2027, we also received almost all of the tariff refunds, which translates to net cash of approximately $110 million. Hence, our total free cash flow for the full year will be approximately $515 million or better, including the net tariff refund. Finally, we continue to expect our year-end leverage ratio to be between 2.6 and 2.9x. Our capital allocation priorities remain unchanged. As part of that, paying down debt remains our first priority, and we expect to prepay the April 2027 maturity in March. Turning to our outlook for the third quarter, we expect revenue growth of approximately 3% or better. Our operating income is expected to be approximately $390 million or better, which translates to about $50 million or more above last year. This OI guidance includes about $25 million of SG&A dollars shifting from Q2 to Q3 that I just talked about before. By brand, we expect The North Face and Timberland to each be up 4% or better versus last year, and Vans to be down 4% or better versus last year in Q3. Looking a little farther out, we remain on track to achieve our previously defined medium-term targets. First, a leverage ratio of 2.5 x or better by fiscal 2028. Second, an operating margin of 10% or better for the full year fiscal 2029. We continue to focus on execution, specifically around building amazing products and great brands, and are excited about the future of V.F. With that, I will hand it back to the operator for your questions. Thank you.

We will now begin the question and answer session. Kindly limit yourself to one question per person. If you would like to ask a question, please raise your hand using the raise hand function at the bottom of your screen. If you have dialed into today's call, please press star nine to raise your hand and star six to unmute. Please stand by while we compile the Q&A roster. Your first question comes from the line of Anna Andreeva with Piper Sandler. Your line is open. Please go ahead.

Great. Thank you so much. Good morning. Thank you for taking our question. We had a few on Vans. Do you guys see the second quarter as that last quarter of de-stocking and wholesale? Or is some of it continuing into Q3? And how should we think about composition of the brand in the back half, between wholesale and DTC? As you talk about the strong order book, which is great to hear, is majority coming from new partners, or is it a balance with existing ones? Should we see bigger scale and innovation as we move through the year, and kind of moving that a little bit faster than what you've seen so far?

Wow. That's four questions by my count. Good morning, Anna. You fired off quickly. First, the second quarter, yeah, I would say there continues to be a little de-stocking. I think that's kind of natural, and it might continue for a little bit longer. We're very confident. As you said, we have the orders and we have a good visibility on our orders now for Q3 and Q4. We're very confident about that guide for the back half. In terms of, let's see, your second question.

Looking for balance between wholesale and DTC.

Yeah, balance between wholesale and DTC. The natural flow of our business is Q3, our Q3, it tends to be a higher DTC quarter, and then Q4 goes back to higher wholesale. You'll see a bigger effect of the wholesale change in Q4 and a bigger trajectory change. Is it more of an effect of newer products? Will you see more new products in the back half of the year? Certainly in wholesale, you're definitely going to see more. We have a continuous stream of new products coming everywhere else. I actually have a pile of new things sitting next to me, and there's a bigger pile coming. We're really going to continue to refresh our icons, bring out new styles. I mentioned in my script at the beginning how many new things we brought out, how we are refreshing those icons, how the icons are starting to lift again in our own DTC. We are super excited about Vans. I think we are really on a roll. Yes. I do not expect that level of innovation and renovation to stop. It is going to keep going, probably it might even accelerate, but it will keep going right through the end of this year, on into next year, and the year after that. We have got a lot of new categories we have not touched yet, especially in apparel and women's footwear. A lot of good stuff happening. Do you want to add anything?

My fourth question was new partners or existing partners.

Oh, yes. No, this is mostly existing partners. There may be somebody in there who has carried us kind of lightly before, who is excited about us, but for the most part, this is existing partners.

All right. Well, thank you so much. Best of luck.

Thank you, Anna.

Thanks, Anna.

Your next question comes from the line of Michael Binetti with Evercore. Your line is open. Please go ahead.

Hey, guys. I was just checking out. Thanks for all the detail today and the-

Yeah, we can't hear you, Michael.

We can't hear.

We lost you there. We heard the hey, and then we lost you.

Can you hear me okay?

No, we can't hear you.

Uh-

Now we can hear you.

You hear me okay? There we go.

Yeah. Perfect.

Thanks, guys, for all the detail. The North Face movie looks really cool. Can we get a little bit more, I was just reading the 10-Q, it looks like the active segment wholesale was down 18%. I think a lot of that would be Vans, and then we have some inventory, we have the guidance for third quarter. I am just curious if you could kind of walk us a little more closely through wholesale improving from such significant declines right now to what is going to lead us to negative 4% for Vans in total in the third quarter, and then it looks like about flat or better in the fourth quarter. It seems like we need a pretty meaningful change and I guess normal operating pattern for wholesale would be retailers do not start placing positive orders till their POS turns positive. There is obviously a bit of a bet they are making on the product here. If we could just hear a little bit more, because I think that the go-forward look is pretty sensitive to that wholesale order book.

Yeah, I think, first of all, good morning, Michael. Thanks for that question. You are right that the active segment was soft in wholesale in Q2, and as Bracken called out that was driven primarily by Vans. Vans was softer in Q2 compared to Q1 in wholesale. A lot of it, for the prior question, was driven by a little bit of a destocking. We do have visibility into the confirmed and the cancellation orders for both fall/winter 2026, which flows into Q3, and spring summer 2027, which actually starts with Q4. That gives us the confidence in terms of where we see the orders tracking for Vans, and that kind of is factored into the guidance of minus 2% or better. To recap, Q3 is a very heavy DTC quarter for Vans, which obviously continues to perform strongly and is going to improve. It is the wholesale swing is what we are seeing coming through in Q4 of the fiscal year, hence the guide of the back half.

Is there any more context you can add as to what's materially different in Q4 versus Q3 as the retailers kind of talk, even qualitatively?

The biggest difference is around, if you look at the sell-in process, it's on a 6-9-month lag. The spring/summer 2027 sell-in process started somewhere around mid of this year. That's where if you look at the cycle, we started launching a lot of the new silhouettes and the new styles in e-com in Q3 of last year, as Bracken highlighted, in small batches. Really started to replicate that in our limited footprint in the DTC stores, and then started to expand that and bring that into the sell-in process as well. It is a natural progression where wholesale will only catch into this heat on a 6-9-month lag, which starts to swing from Q4, but Q3 is a relatively small wholesale quarter. That's what you start to see more in spring/summer 2027, starting Q4 of this year.

Okay. Thanks a lot, guys. Again, congrats.

Thanks, Michael.

Your next question comes from the line of Adrienne Yih with Barclays. Your line is open. Please go ahead.

Great. Thank you very much, and thanks for reiterating the pattern that is kind of the DTC to wholesale. I guess helping bridge that kind of big jump is the notion that you see the strength that's happening at DTC, and the wholesale part of it is kind of binary, right? Over those six to nine months, is it fair to say that there is an increasing penetration? If you can tell me whether it's units, more SKUs, more doors, and across which regions are you expecting the biggest positive impact?

Yeah. I'll take a stab at that, and then Abhishek Dalmia will clean up whatever I leave out. I think overall the big answer to your jump is just the strength of DTC. We've got so much strength there, and that's not lost on our wholesale partners, and it's because of product and also the heat. I gave just a partial list of all the evidence that's coming in on the strengthening of the brand, and I think that's being product driven and design driven. It's really working and they're seeing it, and so they're bringing in more of it. You asked what explains that jump? What gives us confidence in that jump? It's really we're looking at orders. It's that simple. We got a lot of questions after the last call. What gives you the confidence? We were a little hesitant to go any deeper than that. We're not going to give exact numbers on our order books, but we're looking at firm orders. That's just the way it is. In terms of units, SKUs, doors, I think there's some door expansion on a few things, but for the most part, it's mostly really expanded expectation of sell-through and some new styles that are coming in and being put on the shelf, and so we'll have a bigger offering in a lot of places.

Yeah. To add to that, I think, Adrienne Yih, to your question around units, SKUs, doors, it is all, but it is primarily driven by the existing stores actually opening up more shelf to the brand. That is something which is driving it. We got to remember that Vans is also positioned in a very unique price position, so that also helps in addition to the product heat and the brand heat that we have.

Yeah, I want to double down on that because I think it probably could get lost on people. Even in a K-shaped economy where things are tough, both sides of that K are interesting for us because we have so much elevation potential across all of our brands, but even on Vans, we are selling things now at $120 and above that are actually getting some of the highest recognition. And then we have great product at $60, $70. That is very affordable. So I really feel maybe not totally insulated from, but really protected from fear of the economy too. I feel like we are in a really good space going into post-election in the U.S. and whatever might happen in Q3 and Q4 around the world.

Bracken, just a quick follow-up on that. Can you just talk about, there is a little bit of worry that there is contagion from the lifestyle leisure category with all the retro product that needs to be liquidated. Deckers reported and had a little bit of that kind of spillover. So can you talk about how you are not really in general sporting goods distribution and help everybody understand your wholesale distribution, how different it is, and what insulates you from that particular notion?

Yeah. As you said it, we are much more limited than a traditional athletic shoe in distribution to those sporting goods retailers. We do have some, but it is relatively limited for us. Our biggest opportunities are in lifestyle, and we are looking at order books, and we are feeling good about them.

Great. Thank you.

Thank you. Thanks, Adrienne.

Thanks, Adrienne.

Your next question comes from the line of Laurent Vasilescu with BNP. Your line is open. Please go ahead.

Oh, good morning, Bracken. Good morning, Abhishek. Thanks very much for taking my question.

Hi, Laurent.

Hi. I have two questions, so apologies here. First question is really on the gross margin. Abhishek, I think you gave us the fact that there were three drivers of 180 basis points for the gross margin. Can you maybe just unpack that a little bit more? How do we think about 3Q gross margins? The second question really is around Vans. I think you have a 53rd week in the fourth quarter, so I would assume it's a little bit more weighted, maybe, I don't know, is it 300 basis point benefit on that front? Within this Vans conversation, we do know that Jordans are going to be pulled back. We heard that from Nike. I'm curious, Bracken, if you're going to see some benefit from that to fill up the shelves at some key retailers. Thank you so much.

Why don't I start?

Yeah. Why don't you take gross margin first?

Jump in. Yeah. Hey, Laurent. Thanks for asking that question. I'll start off, and then Bracken will add as needed. On the gross margin, first in Q2, as I highlighted, overall expansion of 290 basis points, 110 basis points is FX. That's FX still is tracking to flat for the full year. The 180 basis points, if you look at it, that's the work that we have been talking around gross margin. In Q1, that was a little bit masked, because if you look at in Q1 as well, we did increase 10 basis points despite 140 basis points of FX headwind. In Q1 as well, there was about 150 basis points of gross margin expansion. This relates to a lot of work that we are doing around the product mix, the surgical price increases that we took coming out of last year, and also a lot of work we are doing around our planning, our sourcing, and our work with our vendors. Remember, the tariff impact is minimal, so a lot of that benefit is flowing through in a full way into Q1 and Q2. To your question around how should we model Q3? Again, because of this tariff refund in Q4, there is going to be a little bit of a balancing act between Q3 and Q4 in terms of the adjusted gross margin and the reported gross margin, which we will explain as we come in. But there will be incremental tariff coming in. We called out about $70 million-$80 million for the second half for overall unmitigated tariff. The best way to think about it is gross margin will be still up for Q3, but it will be not as high as 180 basis points. That is what is factored in in our overall OI of about $390 million, which is a $50 million expansion from last year. That's there. On the 53rd week-

Yeah.

Do you want to go ahead?

Yeah, either one of us can take it. The 53rd week, yeah. I think we said at the beginning of the year, we expect about 50 basis points for the full year, and if you translated that into Q4 only, it would be 300 to 200 basis points, something like that. That definitely affects Q4. The more important thing there, though, is we just have such strong underlying momentum, both on the brand heat side and the product side and the wholesaler interest. And of course, our own DTC is already back to growing consistently now, so we feel super good about Vans.

I would just add one thing on Vans, Laurent. One, we again reiterate, we are 3 months closer to the order books that we actually called out back in July. We are still confirming the full-year guidance to be mid-single digit. We are accelerating Q3 to minus 4 or better from the first half being minus 9, and we are also confirming how we are seeing the order books for spring/summer 2027. Hopefully, that gives the confidence and the assurance of where Vans is going to turn despite the 53rd week.

Actually, you know what, I am going to steal the moment, Laurent, if you do not mind, and answer a question you did not ask, which is we seem to have better visibility on things than we have in the past, and it is true. I think one of the changes Abhishek's made is to really go deeper on some of the fundamentals here, and across our organization, we have better visibility. In fact, I do not know if you saw, but somebody mentioned it, Michael, I think. We actually filed the 10-Q today. I have never in my career filed a 10-Q the same day we did the earnings. We actually filed it before we came on this call. We knew our numbers 5 to 6 days after the call, thanks to the team that Abhishek's got working for him. We are just really on top of things. In fact, we're to the point now where I feel like I could guide for next year right now. That's how strong I feel on the transparency and visibility of our own business. We're not going to do that today. I feel really, really good about Q3, Q4.

Fantastic.

Thank you, Laurent.

Thank you, Laurent.

Your final question comes from the line of Brooke Roach with Goldman Sachs. Your line is open. Please go ahead.

Final question. That was fast. Hey, Brooke.

Good morning, Bracken. Good morning, Abhishek. Thank you for taking our question. Bracken, you mentioned that you have so much more visibility that you could potentially guide for next year today, though you are not going to do it. Wondering if you could provide a few guardrails on how you are thinking about the potential improvement of Vans and the P&L as you look ahead into next fiscal year. How are you thinking about the opportunity for Vans brand margins to improve as you get back to flat growth exiting this year?

I am going to dodge that question for now, and when we do come back and guide for next year at some point in the future, we will go a little deeper on that. What I will say about next year is 2029 is the year after that, and we committed to 10% operating margins in that year, and we are going to deliver that. All our eyes are fixated on making sure we deliver consistent, long-term sustainable growth in both top line and profitability. I have said from the beginning, I was not going to commit to too much on Vans until we are really seeing it. Boy, we are seeing it. We will commit more and more as we go forward, Brooke. I promise you to be a little more explicit on Vans when we do guide at some point for next year.

Okay, great. If I could just ask a follow-up on one that you perhaps might be a little bit more willing to give a little bit more on today. Was hoping you could unpack the comp trends that you are seeing in your physical retail stores versus your e-com business in the Americas in particular, and what you are seeing on traffic versus conversion. Are you seeing that halo effect to the core beyond the key new launches, such as limited edition and Pearlized on your regular traffic for the rest of the assortment?

Yeah, I know you are talking about Vans. So yeah, obviously e-com is stronger than physical retail, which is of course stronger than wholesale. It has been that way, and I think e-com is responding to our direct marketing activities and the newness. The cool thing about e-com is you can put everything on e-com. You cannot put everything in a retail store even. There is just too much. That is not surprising to us. In terms of comp store sales, our comp store sales are improving. I think last quarter we talked about that about 60% of the fleet was growing. It is a little better than that this quarter. We expect something like that trend to continue. At some point, we will probably come back and do the tail end clean up of whatever stores are really not delivering what we think. I do not expect that to be a big number, but it will be something. Overall, the trend is headed in the right direction. You want to add anything to that?

No, I think you said it. In terms of the only one thing I would add to that is from your product question, Brooke, if you look at the explanation that Bracken gave on the product, it is in three big buckets, right? There are a lot of new silhouettes that are coming out, new styles that are coming out, which is obviously generating a lot of heat, like the loafers, the Super Lowpro. There is a lot of reinvigoration of the existing icons. When you do one and two really well, it also really starts to create a better heat. It also starts to create a better heat on the core styles. All three are actually seeing that. Our traffic trends, both in stores as well as in e-com. Even in stores is improving year over year.

Sorry, I tried to flash a not-yet-launched product, and then I got waved from the offside. That has not been launched yet. Do not take a screenshot of that. To close, okay, we delivered a really strong quarter. We are on track to deliver fiscal 2027 guidance, the one we just raised in July, and to achieve the medium-term targets we talked about way back in October 2024, which seems so long ago. What excites me most is what we are building underneath that. My comments about leverage, the various kinds we have over the next several years, were to help highlight what a dramatic impact turnarounds can have if they are built on sturdy foundations to create long-term value. The most exciting, the single most exciting thing is that we are doing is just what we are going to become over the next few years. I spent 12 years at P&G and 11 years at Logitech, 12 in a multi-brand environment, 11 in a mono-brand environment. What made P&G really extraordinary was never one brand. It was their constantly growing knowledge base of how to build brands from small to medium size. Sometimes from zero to one, but certainly from small to medium size, from medium size to large, from large to even larger. They just did it repeatedly, and every experience they had was a learning opportunity for all the other brands. We lived and we worked in a learning lab. The core capabilities across the enterprise just kept improving all the time. We, the presidents of those brands, had the independence to build our own worlds, but also the resources to pull from the best doing it. Nobody has built that in footwear and apparel yet. That's what we're building at V.F. One company that knows how to build brands where design, marketing, planning, innovation, and talent are so strong that every brand is better for being here. We're early in that, but you can already see it in this quarter. Let me leave you with three things. First, this is a brand and product company, and both are working. Three-quarters of our portfolio is growing today against 43% in fiscal 2024, and that's going to go up over time. Second, Vans is turning. The sequence is playing out exactly as we described. E-com first, Americas DTC second, and this quarter, global DTC grew for the first time in almost five years. Third, we have several forms of leverage working at the same time. Growth ahead of costs, gross margin expansion, an SG&A base reset, debt coming down, and a tax rate starting to drift back down. Those are going to compound. You're seeing only the early stages of it so far. We opened with something really inspiring. Let me close with something that's pretty inspiring, too, but it's also just a lot of fun. Meet the Altra legacy team. Thanks again.

Thank you.