V.F. Corporation (VFC) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to VF Corporation Third Quarter 2017 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. I would now like to turn the conference over to your host, Joe Alkire, Vice President of Investor Relations. Thank you, you may begin.

Good morning, and welcome to VF Corporation's third quarter 2017 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 that our participants refer to on today's call will be in adjusted and currency-neutral terms, which we defined in the press release that was issued this morning. We use adjusted and currency-neutral 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 and currency-neutral 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 second quarter of 2017, the Company completed the sale of its Licensed Sports Group or LSG business. In conjunction with the LSG divestiture, VF executed its plan to entirely exit the licensing business, which comprises the LSG and JanSport brand collegiate businesses. Accordingly, the Company has classified the assets and liabilities of these businesses as held for sale and included the results of these businesses in discontinued operations for all periods presented. During the third quarter of 2016, the company completed the sale of its Contemporary Brands businesses. Accordingly, the company has classified the assets and liabilities of Contemporary Brands businesses as held for sale, and included the results 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 VF’s 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?

Thanks Joe, and good morning, everyone. Welcome to our third quarter 2017 conference call. Our third quarter results were a bit stronger than expected. With broad based strength across core growth engines. International, direct-to-consumer, our big three brands and Workwear. Our focus and investment in support of our 2021 strategies driving accelerated growth and value creation across key pillars of our portfolio. We are in the early phases of this strategic journey we began earlier this year and while the rapidly changing consumer landscape and dynamic retail environment around the world is sometimes difficult to predict, we are confident that the choices and capabilities embedded in our strategic growth plan will enable our strong portfolio of diverse global brands to connect more deeply with consumers and fuel accelerated growth. Third quarter revenue increased 4% as our momentum continued to accelerate. As a reminder, our growth rate during the quarter was reduced by about 3% due to the shift in timing of our fall order book, which we discussed during our last call. Our big three brands, Vans, The North Face and Timberland, grew at a combined rate of 6% in the quarter. Our international business grew 10%, including 14% growth in Europe and 9% growth in China. Direct-to-consumer increased 17% with more than 35% growth in digital. Our Workwear business grew 11% and our digital wholesale accounts a key growth driver for VF during the next five years increased more than 20%. Gross margin improved 180 basis points in the quarter, excluding a negative 80 basis points impact from FX. The continued strength of our gross margin demonstrates the power of our diversified model and the discipline and focus we place on quality growth. Adjusted EPS increased 10% to $1.23 in the quarter. This is ahead of the outlook range we provided in July. Based in our strong third quarter performance and confidence in the balance of the year, we are once again increasing our full year outlook, raising our dividend for the 45th year in a row, while at the same time, committing an additional $25 million to fuel growth. Combined with the $40 million we announced in July, we have now committed $65 million of additional investment behind our strategy relative to our initial outlook in February. We will continue to evolve VF and our brands to become more consumer and retail centric. You are beginning and I stress beginning to see that comes to life in our results. We will reshape our portfolio and align ourselves with our financial aspirations. We’ve made progress thus far in 2017, but we are not finished. We see many unique catalysts to ignite accelerated growth and value creation during the next several years and we look forward to updating you on our progress. And finally, before getting into the specific brand results, as you know, we formally welcomed Williamson-Dickie to VF family on October 2nd. Our integration teams have worked in a collaborative matter since we announced the transaction. The teams and those that support them, I extend a sincere thank you. While, it’s early, I couldn’t be more pleased with the chemistry within the teams and even more confident about the value creation synergies, we see within our existing Workwear platform, it’s great to have the Williamson-Dickie people part of VF. With that lets review our third quarter results and dive deeper into our top five brands, Workwear and Sportswear. Beginning with The North Face brand, as expected global revenue decreased 3% driven primarily by the order book timing shift that we discussed during our prior call. As expected on a more normalized basis global revenue increased 3%. D2C results were strong and increased at a low double-digit rate with mid-single digit comps and more than 20% growth from digital, wholesale was down 6% however excluding the order book shift, wholesale would have increased at a low single digit rate. By region, revenue in Americas as expected declined 10%, high single digit D2C growth including more than 12% growth in digital was more than offset by a mid-teen decrease in wholesale which was influenced by the order book shift. Without the shift, revenue in the Americas was down about 1% Turning to product performance, lifestyle, accessories and fall transition products such as rainwear and lightweight piece generated solid growth in the quarter. In August The North Face brand launched its Walls Are Meant for Climbing campaign and partnered with climbing gyms around the world to inspire athletes to climb new heights and explore the outdoors. The campaign intended to unite our global communities to the sport of climbing, is the perfect embodiment of The North Face spirit of exploration In Europe the brand’s momentum continued with revenue growth of 17% including mid teen growth in wholesale and high teen growth in D2C. Our digital business was particularly strong growing more than 50% in the quarter. Consumer demand for The North Face brand remains exceptionally strong across the region with double digit growth across all major product categories, and building on our success in Asia the urban exploration product territories now in select markets across Europe and initial sell through results have been exceptional. Given the broad-based momentum we have in the region we expect growth to accelerate further as we move into the fourth quarter and into 2018. As expected, Asia returned to growth and was up 4%. D2C increased at a mid-teen rate with almost 30% growth from digital and wholesale increased at a low single digit rate. Our fall season is off to a solid start with the strength from the GORE jacket and our urban exploration product territory. Now the outdoor market in China remains highly promotional our brand is strong and we expect accelerated growth as we move into the fourth quarter. There is no change to our full year outlook for The North Face brand as we continue to expect growth to be at the high end of the mid-single digit range. Now to our largest and fastest growing brand Vans, which achieved record setting growth in the quarter. Revenue increased 26% with strength across all regions, channels and product franchises. Revenue in the Americas grew 22%, Europe increased 39% and Asia Pacific grew 23%. D2C increased more than 30% including almost 30% comp growth and 60% growth in our digital business. Wholesale increased 19% with mid-single digit growth in the Americas and more than 35% growth internationally. We offer big congratulations to our Vans team around the world. The consistency and depth of the brand's performance is truly remarkable. The ongoing energy and behind the Vans brand continues to grow with strong momentum across nearly all product categories. Vans icons including the old school and black and white checkerboard designs more than doubled in the quarter. The new Ultra range franchise launch exceeded expectations in our Back to School period with 50% sell through in D2C and about 75% sell through at wholesale, even with the higher average selling price. We also launched our Customs 2.0 platform in Europe, helping to ignite accelerated growth on our digital platform in the region. During the quarter, Vans opened a new aspirational boutique store, The General in Brooklyn, which showcases its elevated product as well as the Vans Customs platform with fabric samples and everything else you need to build a custom pair of Vans. This space exemplifies what Vans is all about, inspiring, created self-expression with consumers in communities it serves. Some of you may be wondering whether this level of growth for Vans is sustainable. Let me just say, the confidence we have in our largest brand is high. The brand is stronger than it has ever been with broad-based growth across all regions, channels and product categories. Retail inventory levels are in great shape and we remain disciplined with respect to inventory management, merchandising and assortment planning. While we see a strong growth trajectory for this brand as we move into 2018, the year-over-year comparisons is going to be difficult. Then again over the past six years, the Vans brand has grown at a mid-teen rate. So, the comparisons have always been somewhat difficult. Based on the strength of our third quarter performance, as well as increased growth expectations for the fourth quarter, we now expect about 15% growth for the Vans brand in 2017, up from our prior outlook at the high end of the low double-digit range. Switching to Timberland, global revenue declined 2% driven by the same shift in timing of the fall order book that impacted The North Face brand. As expected the timing shift reduced global revenue by approximately 5% in the quarter, high single digit growth in D2C, including more than 35% growth in digital was more than offset by a mid-single digit decline in wholesale. Timberland brand revenue in the Americas declined 7%. However, on a normalized basis, revenue increased at a low single digit rate. High single digit growth in D2C was offset by a high single digit decline in wholesale due to the order book timing shift previously mentioned. From a product perspective, our non-classics business increased at a low double-digit rate as our diversification strategy begins to take hold. Our new platforms such as SensorFlex and AeroCore saw more than 75% growth and our women's product also continues to appeal to consumers with 20% growth in D2C. And our Timberland PRO business remained very strong with more than 30% growth. In Europe, Timberland brand revenue increased 3% which was also influenced by a shift in timing of the fall order book. Results were driven by mid-teen growth in D2C and low single digit growth in wholesale. Our digital business was very strong increasing more than 50% with strong results from our new locally designed women's platform. Our momentum across the region is strong and our growth broad-based with high single to low double-digit growth across both footwear and apparel. Timberland Asia business declined 5% driven by the timing of shipments. Mid-single digit growth in D2C was offset by a low teen decline in wholesale. Our outerwear was particularly strong supported by the M65 Jacket campaign. There is no change to our low single digit growth outlook for the Timberland brand in 2017, which includes high single digit growth in the fourth quarter. Moving to the Wrangler brand, revenue increased 4% during the quarter with high-teen growth in D2C and mid-single digit growth in wholesale. Revenue in the Americas increased 6% while revenue in Europe declined 2% and Asia declined 10% because of the ongoing weakness in India. Our third quarter results for the Wrangler brand were in line with our expectations, however, our visibility in the U.S. Jeanswear business remains low and we continue to expect quarter-to-quarter variability in the near term. That said sell-through at retail improved late in the third quarter giving us the confidence that the initiatives put in place by a key customer are showing early signs of success. From a digital perspective, we’re seen strength across our digital wholesale partners, as well as our own wrangler.com business, which increased more than 20%. Our ongoing efforts to elevate the brand may extend more deeply into new channels, such as department stores and specialty retail, also continue to gain traction. Turning to product, our limited release capsules and collaborations have done exceptionally well from our born ready collection, which features unique pieces, it’s celebrated Wrangler's rich heritage to our collaboration with designer Peter Max. And hopefully some of these [indiscernible] Wrangler brand are prominently featured in a store front in Herald Square. There is no change to our 2017 outlook for the Wrangler brand, which includes low-single digit growth in the fourth quarter. Now to the Lee brand. Revenue declined 8% as 15% growth in D2C was more than offset by a low-double-digit decline in wholesale. The Lee Americas business was down 14%, as the brand continues to grapple with ongoing wholesale channel pressures and consolidation. While, our women’s business remains challenged, our men’s denim business is performing well and was up at a high-single-digit rate including strong performance from our Xtreme Comfort khakis and Extreme Motion Denim products. Lee Europe was up 7% with more than 20% growth in D2C, including 40% growth in digital. Wholesale increased at a mid-single-digit rate. In Asia, revenue declined 4% driven by continuing weakness in India. Our women’s business in China increased at a double-digit rate powered by our BODY OPTIX and Jade Fusion innovation platforms. Based on Lee’s third quarter performance as well as slightly weaker than expected growth outlook for the fourth quarter, we are revising our 2017 revenue outlook for Jeanswear. We now expect full year revenue to decline modestly versus our previous expectations without flat revenue. Turning now to Imagewear. Revenue was up 8% in the quarter; the core image business was up 4% excluding the impact of jersey revenue connected to the sale of LSG. Bulwark had another strong quarter and importantly red cap returned to growth as the recovery in the industrial sector continues. Looking at our Workwear platform, which includes our image business, as well as Timberland Pro and Wrangler RIGGS footwear revenue growth accelerated 11% with double-digit growth from our three largest brands. Timberland Pro increased more than 30%, Bulwark was up 12% and Wrangler RIGGS Workwear generated 17% growth. We continue to expect our Imagewear and Workwear businesses to increase at a mid and high-single-digit rate respectively in 2017. Looking at Sportswear. The business continues to stabilize with improvements across the wholesale and D2C. Revenue for Nautica was about flat, while the Kipling Americas business achieved low-single-digit growth. The new management team we put in place earlier this year has worked hard at restoring profitability and their efforts are clearly showing results. Thank you to everybody on the Nautica team. And with that, I’ll turn it over to Scott.

Thanks, Steve. Before I get started, let’s review a few housekeeping items that influenced our reported third quarter results. First, we took $105 million pre-tax non-cash goodwill impairment charge to reduce the carrying value of the intangible assets related to the Nautica brand. Despite recent improvements and financial performance, our strategic assessment of the brand determined the assets to be impaired which resulted in the related charge. Second, we incurred about $5 million of pre-tax acquisition-related expenses associated with the Williamson-Dickie transaction. On a combine basis, the two items just mentioned negatively impacted our reported earnings by $0.26. Now, let’s review our third quarter results, my comments will focus on our adjusted results excluding the impairment and acquisition related expenses just mentioned. Our third quarter results were strong with broad based strength across international and direct-to-consumer platforms, outdoor and action sports and Workwear. Revenue increased 4% to $3.5 billion and excluding the order book timing shift for The North Face in Timberland brands, our underlying growth rate was approximately 7%. Revenue for our big three brands was up 6% on a combined basis led by very strong results from Vans which was up 26%. The underlying passion for Vans across the globe is truly unique. What gets us most excited is how this deep emotional connection coupled with the tribal nature of the Vans family will continue to drive exceptional performance. While we don’t expect to maintain these stellar growth rates indefinitely, these results give us confidence in the vision we have for this brand and the growth targets we laid out in Boston. As expected, The North Face and Timberland brands declined 3% and 2% respectively. However, both brands grew at a low single-digit rate normalizing for the order book timing shift. Our Workwear business increased 11% and importantly our Jeanswear collation continued to sequentially improve driven by Wrangler which returned to growth in the quarter and was up 4%. International increased 10% as our growth continues to accelerate. Our Europe business was particularly strong, up 14%, and just to put some context around the strength we are seeing in Europe, our big three brands grew 17%, wholesale was up at a low teen rate including almost 30% growth from our digital partners. Direct-to-consumer increased at a high teen rate including more than 40% growth in digital and we achieve double-digit growth across almost every mark, every major market. Our European business is clearly firing on all cylinders and as one of our most profitable platforms, when combined with an efficient tax structure enables us to drive significant value creation. The broad base strength we see across the region will carry into 2018, so a big thank you to the European team. China remain strong and was up 9% with particular strength in Vans, D2C and digital. Our direct-to-consumer business was up 17% led by more than 30% growth in digital. Our Outdoor Action Sports, Jeanswear and international businesses all achieved at least high teen growth with double-digit comps in our global brick and motor business. Our efforts to the [steward] investment towards store experience and digital while focusing on the productivity of our fleet are showing results. Wholesale revenue was in line with last year, however excluding the order book shift, wholesale was up at a low single-digit rate. International delivered high single-digit wholesale growth and our digital wholesale accounts grew more than 20%. Gross margin remains strong at 50.1% up a 100 basis points which includes an 80 basis point negative impact from changes in FX, that is 180 basis point increase currency neutral which is pretty much in line with our first half results. Our stronger than expected gross margin was a result of more favorable mix and better full priced sell-through. Our gross margin is the by-product of our disciplined and focused approach on quality growth. Gross margin expansion is a core element of our diversified value creation model and provides us flexibility and fuel to accelerate investments and drive growth behind our largest opportunities. SG&A as a percentage of revenue was up 240 basis points to 33.2% in the quarter. Our ratio was distorted a little bit by the order book timing shift, which resulted in about 40 basis points of deleverage. Let me take a few minutes now and walk you through the remainder of our SG&A increase. More than half of that increase was driven by investments in D2C, demand and product creation, innovation and technology. In fact, most of the increase was in D2C and particularly in digital, which is where we have momentum and stronger profitability, and when coupled with our higher incentive compensation compared to a weaker performance a year ago, we've accounted for more than 90% of the change. Based on our increased confidence, we've committed an additional $25 million of investments in demand creation and strategic priorities this year. That is in addition to the $40 million we announced last quarter. So relative to the initial outlook we provided in February we’ve committed $65 million dollars to transform VF into an agile, digitally enabled consumer centric organization. Now to answer a question likely on your mind, excluding the impact of Williamson-Dickie, we do expect a more moderate pace of SG&A growth in Q4 and as we head into 2018. There is no change in our long-term SG&A, or operating margin targets we communicated in Boston and if anything, we're even more confident in our ability to achieve these targets as we sit here today. Third quarter adjusted operating margin declined 140 basis points to 16.9% including an 80 basis point negative impact from changes in FX. So, on an adjusted basis, EPS increased 10% to $1.23. Relative to the range we provided in July, our third quarter earnings benefited by about $0.07 from FX and a lower tax rate. Turning to our balance sheet, our inventory increased 1%. Our inventory are in good shape and from the days outstanding perspective, it’s starting to come back in line. Given our strong third quarter results and increased growth trajectory we see for the balance of 2017, we are once again raising our full year outlook. Our updated outlook now includes the following. Reported revenue is expected to be up 6%, about 5.5% on a currency neutral basis to approximately $12.1 billion. That compares to our previous expectation of $11.85 billion. Our increased revenue outlook is driven by our core growth engines, Outdoor & Action Sports, most notably Vans, D2C, particularly digital and broad-based strength across our international business. Our revenue outlook continues to contemplate about $200 million contribution from Williamson-Dickie. Gross margin is expected to approximate 50% which includes 50 basis point headwind from FX. This represents 50 basis point improvement relative to our previous outlook of 49.5%. Adjusted operating margin is now expected to be about 13.4% versus the previous estimate of 13.7%. This includes a 50 basis point negative impact from changes in FX as well as the impact of an additional $25 million investment. Excluding the impact of Williamson-Dickie, we expect our adjusted operating margin to be about 13.6%. Adjusted EPS is now expected to be $3.01, up 1% on a reported basis or up 6% on a currency neutral basis, relative to the 2016 adjusted EPS of $2.98. Our outlook includes the $0.05 of additional investment, as well as a $0.02 contribution from Williamson-Dickie. As a reminder, our prior outlook was $2.96. Finally, we now expect our cash flow from operations to reach about $1.5 billion. We remain committed to returning cash to shareholders and our dividend and share repurchase program are key components of our diversified value creation model. Based on our performance and the confidence we have in our strategic growth plan, our Board of Directors approved a 10% increase in the quarterly dividend to $0.46 per share. This marks the 45th consecutive year, we’ve increased our annual dividend. With this increase our calendar 2017 dividend, we’ll reach $1.72, a 12% increase compared with the prior year. When combined with our share repurchase, our cash returns to shareholders in 2017 will approach $1.9 billion, that’s an 8% yield based on our current market cap. So, with three quarters behind us, we are confident in our increased growth outlook and have strong momentum as we move into the fourth quarter. Our core growth engines are delivering double-digit growth, our gross margin is strong, our fundamentals are intact and we are investing in our future and given our momentum and the confidence we have in our growth plan, we’re putting money to work behind our largest brands in growth platforms, while returning additional cash to shareholders. With that, I’ll turn it back to the operator and we’ll open the call for your questions.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Laurent Vasilescu with Macquarie Group. Please state your question.

I want to follow-up on the wholesale business for the fourth quarter. Besides the $100 million shift from 3Q into 4Q, are there any additional shift between the fourth quarter and next year’s sub quarter? And then secondly for the fourth quarter stripping out Williamson-Dickie’s revenues, should we assume wholesale revenues on an organic basis will be up mid-single digits year-over-year?

That’s about right. On the second part of your question Laurent, it should be up about that rate. And no, there is no other big shifts other than order book timing between Q3 and Q4.

And then I wanted to follow-up on the Williamson-Dickie acquisition. Since the acquisition was announced in August, curious to know if you gained any additional learnings you might want to share on the call. And then finally since Williamson-Dickie was an all-cash transaction, can you remind us, how much leverage you want to take on, if you choose to pursue an additional acquisition?

So, I’ll take the second part of that first and before Steve comments on what we’ve learned. We said that we’re guarding our rating, which is generally two times EBITDA, debt-to-EBITDA, two times. However, for the right acquisition we’re willing to stretch that even to the point of one step down rate, if we had the right opportunity. So, if you do the math, that ought to imply, a lot of capacity. The other thing is with our strong cash flow, our metrics snap back into line pretty quick here. So, we’re really -- we have dry powder even today and as we look at the contribution from Williamson-Dickie and the rest of our portfolio, we’re backing in kind of historical levels in a very rapid manner.

And then Laurent, on what we’ve learned with Williamson-Dickie so far, I mean we’re really still early but we couldn’t be at here. We have down there a passionate committed team that looks and acts a lot like VF and are really integrating well with our Imagewear team and the broader Workwear team. Brands are great, we’re very excited about what we’re learning about Dickie’s and the [indiscernible] fitted as globally, and what we think we can do with it here in the United States and the synergies that we’ve called out from the beginning absolutely are there and committed teams working across 12 major work streams getting after just that exactly.

Next question is from Dana Telsey with Telsey Advisory Group. Please state your question.

Good morning and congratulations. As you can think about the strength of the gross margin, how do you think about the puts and takes? Is there anything to note by brand or collation that could be lasting going forward that we should watch for? And just lastly for the incremental investments any color on where that’s going, how are they seasoned and your outlook on it. Thank you.

Yeah, good morning Dana. So, a couple of things on that related to gross margin. The story on gross margin really hasn’t change its mix and the mix is our fast-growing businesses are highest gross margin and you saw in this quarter results particular strength in D2C and digital which that coupled with international and particularly Europe really have popped the gross margin in the quarter. But as we look forward, we expect those same drivers to continue, right. So, it was a little exaggerated in the third quarter also because our wholesale business for all the reasons we’ve talked at for the long time was a little bit down from the timing standpoint, but overall, we see that mix driving forward in the next year and beyond.

And then Dana on the demand -- on how we’re looking at the investments, about half of the investments that you’ve seen is deployed this year are around demand creation and that’s very much focused on Q3 and Q4 specifically towards D2C, our digital platform, but also driving broader brand awareness that benefits not only our broader brand but our wholesale partners. We’re also investing on many of our strategic priorities, in the roadmaps that we’ve put in place specifically around data analytics, what we’re doing with our digital platform, there are investments around advanced manufacturing and some of the innovation work we have going on there and clearly pushing dollars towards our design capability within our big brands.

Dana, also asked about what we’re seeing in the holiday, what’s our outlook from a holiday standpoint.

Fair enough. Okay. So, I’d say Dana, we saw October start a little bit slow but as we see the weather turn in our favor, we’ve seen really acceleration and that’s very much a North America comment. We’re bullish, our order book really reflects how our wholesale partners are thinking about setting up their floors more in line with consumer demand, that’s here in the United States, but it’s also true that how we’re working in Europe and Asia and you really think we’ve got good assortment sitting on the floors at the right time, inventories that are good check, and really now it's about driving sell through and that’s where that demand creation investment has been put forward to help to drive that.

Our next question is from Omar Saad with Evercore ISI. Please take your question.

Thank you. Thanks for taking my question. Good morning. So, if you could talk a little bit more detail about Vans, I mean, the performance there really stands out as you know. Maybe you can go a little bit deeper in some of the strategies that are working, how you’re executing to generate such consistent strong performance globally in a broad-based way? And then maybe tie in digital and social media, if that an important element to what’s going on with that brand and if there are learnings that you’re developing around Vans that you can apply to some of the other assets in your portfolio? Thanks.

Great, Omar. Vans' performance is fantastic and the congratulations you put out to our team. So, I think know what the primary -- one of the primary reasons this brand is doing so well, it is the team that works on this brand across the globe and their intense focus and deeper understanding of who their consumer is. And we talk a lot about our expressive creator and who they are, what's important to them and how to reach them with our demand creation, and that really is about the social media in the digital platform. I think key things that are driving these results, Omar, it starts with product, the way our business team there, it really manages franchises and really things through the integrated marketplace, lands, placing the appropriate products in the right locations. And then the appropriate amount of newness, be it, new [color ways], the collabs that we do season to season, or the Ultra range that we launched this fall that are completely new product, higher price point, is continuing to move the brand further down its path. I would tell you, I think probably our single strength natural product, it’s our D2C and how our brands stories are told within our own environments. You can see that here in the U.S. and across the globe and as we start to really mature and improving that area, we are starting to see us bring a segmented approach to boutiques that come and meet around The New General in Brooklyn to how that complements our street front and mall-based stores and how that all links together with our digital platform. It really is a well-oiled machine, very focused in deep understanding of the consumer and it really is about the digital connectivity and the storytelling that we tell to the digital platform that we think, is one of those key strategic advantages.

Yeah. I will just add-on Omar that -- when you think about our investments and where we're making our investments, a lot of the digital platform inspiration has come out of Vans team, not all, but a lot of it. And as we make our investments, we're investing in [via applied] platforms, so that that learning and that capability can be -- that we can take advantage of that across the entire enterprise. It would be hard for any one brand individually to fund this kind of investment and that's where we think the power of the portfolio when we have this is kind of how we approach these things. And this is one of our key strategic choices that we've made as we outlined in Boston. A close relation to that is also the customs platform, again piloted in Vans, but absolutely applicable for the wider enterprise and we see, this as continuing to grow throughout the organization.

Our next question is from Camilo Lyon with Canaccord Genuity. Please state your question.

I was hoping you could talk a little bit about the FX impact. Seems like there was a pretty large swing from last quarter to this quarter as it relates to the overall guide for the year since it gets about 150 basis points swing to positive. Could you help us frame how that benefit could continue into 2018 and how we should be thinking about that component as that’s been a pretty big bag [indiscernible].

Yes. So obviously, first of all, we don’t try to get cues as it relates to currency. We got a basket of currency we’re looking at and best of our knowledge, we call that, essentially where it is for the balance of the year and that’s reflective and the outlook that we just talked about. As you look into ’18, I guess couple of things. Number one remember that we had with a pretty long tail here, so we’re going out 12 to 18 months. So, a lot of this has already been baked at slightly different rates as you look into next year, so you just got to remember that. Also from a translation standpoint, of course wherever the currencies are right now, that looks like, that’s a tailwind, hopefully that will be the case. I would also just caution you to not focus too much on one factor, right. As we look into next year, cost is up a little bit in the fourth quarter, for example, we’ll see that knock into next year. Yes, currency looks like, it’s a tailwind, but you got to look at the balanced picture and we’re not at the point of giving guidance for 2018 at this point.

And then just two other quick questions. Number one, just on the incremental investments that you’re able to, book back into this business. Should we consider this a pull forward of planned investments or is this resetting a level -- higher level of expense that likely gets free after next year. And then even more broadly speaking about the advanced manufacturing capabilities, can you just remind us, where you’re adding those initiatives and how we should start to see and when we should start to see some of the benefit that you’d expect to deliver from faster, more speed like manufacturing initiatives?

Yes. Camilo, I’ll take the first part of that. Here is what I would say relative to the investments. And remember, we laid out a strategy and behind that strategy a roadmap of investments. And if you think about the shape that we talked about at the plan in Boston, in general, we’re going to see investments a little more front loaded and you’re going to see our top-line continue to accelerate. So, it’s not so much. Yes, we are moving faster down a path. Our intent is to continue to invest, to invest around these priorities. So, while, it may not be the exact same thing, right, we’re making innovations in our digital platform for example, you don’t have to do that twice, that will be the next thing, when you think about customs, mobility, a lot of the innovation initiatives, we’re going to continue to make those investments. Also, as it relates to demand creation, there is two sides to your question number one, if we should have a three-signal event and be in a very different place, could we stop these investments sure, we could. We think about demand creation we look at in [MROI] and we always are judging that the payback is there and whether we are willing to make that investment it is a discretionary investment that we can make a choice on, but our intent is to continue to invest in demand creation, in fact our plans said we intend to increase demand creation as a percentage of sales and grow it faster than sales. So, our intent will be to continue, obviously there is variability if we should have a fundamental change in the market, but we don’t anticipate that nor is that our intention to modulate.

And Camilo on the advance manufacturing portion of your question. I mean this is an exciting area and we’ve talked a little bit, not to a great degree because of much what we’re doing here we consider to be fairly proprietary. But I think it’s fair to say, we have gone through and continue go through really in-depth end-to-end analysis of our total timeline around product creation and breaking down where those elements for us bring innovation and improve speed, efficiency and really affectedness. So, on the upstream side, that’s really looking closely at our design and development capabilities and where can we bring technology to improve speed. But the advance manufacturing piece which is really little bit less than a half of the total time of our timeline is about looking at how do we breakdown material manufacturing and other things that we can do around improving speed at material finishing, adjacent to our production facilities and within the production facilities we’re looking at a whole host of technologies to improve efficiency. I would tell you our supply chain is already very automated, if you were to go into our Jeanswear facilities here in the Americas you’d see a highly automated and efficient model. We think there is improvements to be had there, especially as we can marry up material finishing closer to where we produced. But a lot of things going on inside the black box that we’re standing up here in North Carolina to really test out our theories, prove it and then scale it as we can, not only in our own production, but with key partners.

One final thought too Camilo, as you think about all these investments whether be advance manufacturing or other priorities, our first commitment is to the shareholder, right. And we’ve made commitments and we ensure that we’re delivering against those and we’re always trying to balance delivering our commitments to the shareholder with advancing and future stake growth. And that’s a big part of our conversation on an ongoing basis.

Is there a brand that would get the frontend benefit of those initiatives on the manufacturing front that you’re focusing on or is that a complete portfolio benefit as it starts to rollout?

We’re looking pretty broadly at this point, Camilo, across our portfolio of apparel, footwear and equipment. There are certain categories that probably lend themselves more than the other, but right now we’re more focused on breaking down really the phases of how the product is produced and then we’ll marry that back in to for sure our big three. We’ll see the biggest focus, but there are some brands within our portfolio that are particularly well suited as incubators for us to test, learn before we look to scale to the big three.

Our next question is from Sam Poser with Susquehanna. Please say your question.

Good Morning. Thanks for taking my question. Just a couple of things. When we look into next year, this is just more housekeeping, are you going to sort of restate everything to -- are you creating any Workware segment or how should we’ll be thinking about that with the Dickies acquisition?

Yeah, at this point, Sam, we haven't decided to change any of our reporting segments, obviously that's ongoing evaluations that we're looking at a line of portfolio changes. At this point we haven't made that decision.

Thank you. And then, secondly, one of the things I was seeing, just reported in news was that, you’re getting some placement sort of a Paris Fashion Week with some of The North Face products and so on. Can you talk about that due direction and how you work to exploit that? Is that part of the whole city stuff you are doing out of China? Could you give us some color there?

Yes, Sam. What you have read there is exciting, that's part of our urban exploration territory, that's part of the really breaking down the consumer, use education into the four individual elements. But urban exploration really is coming from Asia in partnership with our Japanese partners, but also the team in China, and what you saw in Paris Fashion Week was a collaboration with a group called [indiscernible] and you are really innovative, it takes on some of our core heritage mountain jackets, long in lengths and all actually made through our technical standards. But what you see their Sam is, our ability to speak to a broad segment of consumers through that technical lens of The North Face, and making sure we stay true to the heritage and the performance, but also bringing the right product that allows that consumer to express themselves as they look at the brand individually.

Just the last -- and following up with that when do you see that expanding, when does that roll to the States and become sort of a broader, you talked about it -- sort of broader quote, you spoke about it at the Investor Day earlier in the year, in a general sense?

Absolutely. So, we mentioned in our prepared remarks, we've got some stores that we're placing in Europe this year. We do have a test environment in San Francisco where our team there can really work with that store on a day-to-day basis. But I think we've really come to a point where we're comfortable with how the brand is expressed within a retail environment. We think that's something we can now pick up and move and you’ll start to see that. We start our own D2C expression coming into all markets -- I mean a little bit bigger way in next fall. But there's an urban exploration component to each of our regions, the work that we do within our urban environments here in the U.S are in many ways coming out of that collection. But specifically, the Asian piece you'll see here more so next year.

Our next question is from Bob Drbul with Guggenheim Securities. Please state your question.

Good morning. On the North Face, I guess the first question is, can you give us an update in terms of the trial that you're planning within a zone sort of where that stands today. And the second question on the North Face is. With the Americas performance where it is, what do you think the inventories are for the North Face brand at retail, in the retail levels right now throughout the channels?

Great. Bob, so take your Amazon question first, it’s early. And I would tell you, we’re being very thoughtful. How does Amazon fit into that integrated market strategy, this brand has, what’s the right segmented offer that can be used within that environment to speak to the consumer and sell-through at the rates that both of us would like to see. Early, it looks good. We’re having significant progress in helping clean up the unauthorized dealers that are on that site and in many ways, have been some of the market pricing dynamics the brands dealt with. So, it’s early, we’re confident, they are a long-term partner, they’re an important partner on a global basis for sure. To your inventory at retail, it’s relatively clean. And the outdoor industry specifically for the North Face has been on this venture for a little over 12 months, we exited last year better than year before. Retailers have really focused, along with ourselves on really bringing product to floor based on where the consumer is shopping for those particular product categories and ways of product. So, we’re very -- feel really good about, where the inventories are. We’re feeling good about the flow of merchandise and it’s really -- are looking at this year in a very positive manner versus last year. I think if you were to contrast North Face, which is very seasonal and we’re paying a lot of attention about the flow, contrast out with Vans, which is really a year round business, there is a lot of earnings from them, as well as Jeanswear on how we should be flowing specific to consumer demand that our North Face team has been tapping into and really now designing through these four territories specific collections based on each of the season and the given need and environmental conditions where the brand can really succeed.

Got it. And I guess just, on the flow, when you think about the acceleration of the Vans business from Q2 to Q3, have you been able to adjust the inventory, the manufacturing plans to meet that high demand going into the holiday season?

Yes. The short answer is yes. We have a relatively shorter lead time as it relates to footwear. We have a really well developed and diversified supply chain around those categories. And so, the other thing remember, part of this acceleration was in Europe, we saw in the first half, we were still fighting through some of those inventory and balances that have gone on for a couple of years and we’re seeing the acceleration in the second half. We saw that comment, right. It’s a little bit stronger than what we’ve even saw. But for the most past, we saw it coming. So, we had our supply chain teed up. I would just give a call out. They’ve done a fantastic job at meeting demands given this is a high-class problem to have, but it’s a real challenge for those guys to keep up with it and I am putting our people up against to anybody in our industry, because they are delivering, right. We’re meeting demand and we see it in the results.

Next question is from Jim Duffy with Stifel. Please state your question.

Couple of questions for me. First, great strength in the D2C business, e-commerce is accelerating and the numbers imply positive comp at retail with the 1,500 some outdoors across the globe. Can you guys comment on what you’re seeing with respect to traffic and conversion and maybe highlight some of the differences between regions and the brands?

Yeah, Jim you captured it well. our D2C businesses is strong and that’s a big part of our strategic focus, it’s where we are absolutely driving investments not only in creating that traffic, but investing behind operational scale. So, specifically your question on traffic, we are seeing with some of our businesses traffic up year-over-year, certainly see good traffic gains in our European business. But I think we’re really getting the performance is on conversion in lot of advances going on to in-store productivity from having a right product at the right time in each of the stores to the quality of the sales experience and our ability to really service consumers quickly and efficiently. So, it’s really a combination of both, but I would tell you it’s really that an operational piece, it’s doing that in, we’re also the investment that we’re making in our one commerce platform that are allowing consumers to look at product online, purchase, pickup in store, return to store, we’re just starting to really simplify and take the tension out of that that purchase decision across all of the formats and that’s driving that traffic, that’s driving that conversion in those results.

I’d just add-on a little bit Jim to thinking about the numbers that you mentioned the 1,500 stores. We, a little more than a year ago came out with the slightly different take on our approach and we’ve slowed the number of net openings, we’re up -- we said about 50 that’s more or less half of what we have been running over the previous years. But within that, we’re still opening about hundred stores and we’re aggressively editing our fleet based on performance. And part of what you’re seeing also is the actions around just improving the quality of the fleet underneath the like-for-like initiatives that Steve just outlined. In fact, for the first time sequentially compared to the prior quarter our number of stores is actually down by two in the third quarter, up versus the year ago, but down by two compared to the prior quarter.

And then to build on that Jim. I mean the types of stores that our businesses are now looking to open, it’s no longer sufficient to have a standard box that we move across the regions, it’s being very thoughtful around what type of store based on the consumer and the market Vans opening a boutique in Brooklyn is a great example of tailoring a retail environment to build that connection, but also bring the right product to the consumer in the communities that they live. Each of our brands are looking at those smaller formats, the more street front locations, the mall locations and really modeling the appropriate type of store. And each of these stores really are starting to take on a smaller square footage increasing that productivity profitability.

Great. My next question is related with the strength that you’re seeing in D2C and the challenges with some of the wholesale partner landscape. Is there any specific effort to deemphasize wholesale volumes or any categories or specific channels which you’re deeming less strategic going forward?

Yeah. I don’t know if I’m directly answering your question, but I’ll just remind you as we laid out our view, we said, when you look at wholesale there’s not a lot of wholesale growth on the net basis overall and really, we said, would be flat in North America with the wholesale growth coming outside of that, underneath that our digital wholesale growth is substantial. So, what that means is, we’re expecting wholesale to be down low single digits in North America over the next five years. But within that, Jim, we’re winning with the winning formats. We have great customers that are big partners with us and they're growing, we're growing. There's others that are in a little more difficult position. So, yeah, we’re moving our exposure to the more troubled areas. We're minimizing that, some of that through portfolio and some of that through just where we're placing our emphasis. But, in general, remember that hourglass of the distribution channels were generally focused on the top and the bottom portions of that -- of that hourglass because that's where we see the relative higher growth as we look over the next five years.

Our next question is from Ike Boruchow with Wells Fargo. Please state your question.

Hi, good morning, everyone. Let me add my, congrats. Scott, I think this is for you, so, it looks like you either hit or beat your plan within the Jeanswear closing for Q3. So, I'm just trying to understand what you see in Q4, maybe that causes you to be a little bit more conservative on that segment to that point. Can you help explain why Wrangler bounced back nicely in the U.S. while Lee worsened further from the run rate you saw last quarter?

Yeah. So, first of all, as we said that is the best thing in this and in a couple of areas, it’s tough for different reasons. But, yeah, Wrangler nice to see sequential improvement and we seem to be generally moving through the plan as expected, despite our [indiscernible] visibility. And I would say, no real change that situation. To be honest and in the Lee business we had a tougher than expected performance and particularly on the women's side. Our men's business is showing real strength, I think Steve mentioned that in the prepared remarks. We have a several styles and innovation that are really resonating but on the women's side, it's been a tougher picture for us. And based on what we see going forward, some of that is channel related, some of that is our own issues, frankly. But as we look forward, we took a more cautious view in the fourth quarter and partially reflecting in some of the results we saw in Q3 as well going forward.

Got it. And there's a quick follow-up, Scott, I think you commented today, AUC was higher in the quarter, I think it's the first time you said that in a while, I think it was a tailwind to the first half. Can you just give a little bit more color about the dynamics on the costing side, where the inflation is coming, this maybe -- is that is ahead that we need to think about for next year?

Yeah. So, if you remember, just zoom in back to the beginning of the year, we talked about -- we had some tailwinds from a cost standpoint through the first half, that turned to a headwind, starting in Q3 and going into Q4, we said Q4 would be the relative largest of the year. But, on balance, it was net zero and cost frankly isn’t a real big factor for this year. So, also remember that we make commitments in arrears. So, when you're thinking about things like leather or cotton [loose], those commitments that we are seeing in the P&L today, commitments that were six months or so previously committed. So, based on where costs are today, hard to predict. I wouldn’t expect cost to be a major issue from what I can see right now going forward. But again, I caution you not to hover too much on those factors. Just, it’s a good reminder, as you think about currency and as you think about costs, we’re looking at -- we’re making longer term commitments, we’re hedging, where it’s appropriate and we’re balancing all this into our merchandising and our pricing discussion. So, as we’re balancing that mix, we don’t see any fundamental change in the trajectory of our margins. And I would suggest that’s the way you should look at it.

Our next question is from Mitch Kummetz with Pivotal Research. Please state your question.

Two questions. First for Steve, just on the Vans business, the wholesale distribution. I think you guys mentioned that Americas was up mid-single-digit. Did like recently kind of from, what I would call more traditional athletic retailers, they’ve called out Vans as a strong brand for them. I’m kind of curious how you’re managing any expansion with those types of retailers. Any concerns with overexposing the brand maybe or alienating any more traditional accounts. If you are growing with those types of retailers?

Our Vans business is better than most. The thoughtfulness that they put into their distribution strategy and how they segment product across the different choices that they have. This is something that they spend a tremendous amount of time thinking about. We are in all of those great retailers that sell footwear, athletic footwear to the athletic lifestyle footwear. And we’re not looking to aggressively open up doors. But I think we are very broad based in thinking about the Vans consumer, from the boutique consumer to the broader application and being very thoughtful around who the partner is, what are the right doors, what’s the right assortment? And then really managing with our partner sell-through. So, we can keep the right level of newness flowing into those doors to continue to drive that forward growth.

And just going to add on, too, Mitch. If we, when we look at the numbers behind this growth, it’s really broad based as Steve mentioned. It’s by geography, it’s by channels and it’s by multiple product categories including apparel. So, it’s really broad based, you’re not see in one particular style or group that’s driving the entire broad, the entire brand it’s really broad based. And that’s gives us confidence as we look forward.

And then Scott on the D2C, from a margin standpoint. I know, you talked about it being a benefit to the gross margin. I’m hoping, you could maybe elaborate on the impact from an EBIT margin standpoint. I mean in the quarter, essentially D2C was all your growth and I want to say, if I do my math right, probably digital was third or more of that. Is there any way you can kind of speak to the margin profile of D2C and digital from an EBIT standpoint, that way we can have some sense as to how that kind of impacts your overall operating margin on a go forward basis as I assume that you would expect that to continue to be a big driver of the top-line?

Yes. Particularly on the digital side and so we haven’t disclosed our relative profitability, I’d say there is never a lot of our profit growth in 2017 has come from our D2C as you can imagine and I’m talking about operating profit. With that gross margin expansion comes SG&A as obvious as it relates to brick-and-mortar but remember we moderated our brick-and-mortar a bit, we’re focusing on more on conversion in comp and we will continue to open stores just not quite at the rate as we have in the past, and we’ve got specific focus on digital which is our single most profitable format that we operate. So, as you think about it forward, it’s a great question. I’m probably not going to fully satisfy you with you my answer, just know that from a return standpoint it’s accretive when we look at our return on capital and again our fastest growing component to that which will continue to mix up is digital versus our most profitable format.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to Steve Rendle for closing remarks.

All right. Just really, quickly couple of things. As you all like to remember, Eric Wiseman will retire from our Board of Directors effective October 28. I would like to take a moment and again thank Eric to the leadership he’s provided all of us here at VF. We owe so much of our past success to his vision and incredible worth ethic along with his thoughtful approach to leading his 60,000-person global enterprise. I’m personally very thankful for his friendship and mentorship over our past 18 years together. Eric, if you’re listening and I’m sure you are, we all wish for your next chapter to be as exciting and fulfilling as the 22 years that you gave to VF. So, with that, I’d like to thank all of you for joining our call today. We are now nine months into our journey to transform VF into more agile and consumer centric enterprise. We are confident in our increased outlook and the momentum that we’re carrying into the fourth quarter. Our core growth engines are delivering double-digit growth. Our gross margin is strong and our operating fundamentals are intact. We’re thoughtfully investing behind our strategic roadmaps and we remain intently focus on delivering value to our shareholders. So again, thank you and we look forward to talking you all again in February.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. And thank you for your participation.