V.F. Corporation (VFC) Q3 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the V.F. Corporation Third Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Alkire. Please go ahead.

Good morning, and welcome to V.F. Corporation’s third quarter fiscal 2020 conference call. Participants on today’s call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts referred to on today’s call will be on an adjusted constant dollar basis, which we defined in the press release that was issued this morning. We use adjusted constant dollar amounts as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts, which are in accordance with U.S. GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management’s view of why this information is useful to investors. During the first quarter of fiscal 2020, the company completed the spin-off of its Jeans business, which included the Wrangler, Lee and Rock & Republic brands, as well as the V.F. outlet business into an independent publicly traded company under the name Kontoor Brands. Accordingly, the company has removed the assets and liabilities of the Jeans business as of the date noted above, and included the operating results of this business in discontinued operations for all periods presented. Unless otherwise noted, results presented on today’s call are based on continuing operations. Joining me on today’s call will be V.F.’s Chairman, President, and Chief Executive Officer, Steve Rendle; and Chief Financial Officer, Scott Roe. Following our prepared remarks, we’ll open the call for questions. Steve?

Thank you, Joe and good morning, everyone. Our third quarter performance was strong, and our year-to-date results are at the high end of our long-term growth objectives, and we are on track to deliver solid performance this year, and we are well-positioned for continued growth and value creation in fiscal ‘21. Before we review our third quarter results and adjusted outlook for the year, I would like to take a moment and comment on the news we disclosed Tuesday morning regarding our intent to explore strategic alternatives for the occupational work portion of our work segment, hereafter referred to as occupational work brands. Scott will cover the specifics, but I would just like to highlight a few messages from the announcement materials. Driving and optimizing our portfolio continues to be a top strategic priority for V.F. and exploring strategic alternatives for our occupational work brand is the next natural step in that process. Our decision reflects management's continued focus on transforming V.F. into a more consumer minded retail center kind of enterprise with a portfolio of more growth oriented outdoor, active, and work brand. First, it is important to note that Dickies and Timberland Pro brands are part of our review. We remain fully committed to these brands as well as our worthy work purpose territory. There are fundamental differences between the occupational work brands and the Dickies and Timberland Pro brands including the ability to connect directly with consumers, distribution footprint, supply-chain infrastructure, and financial profile. The leadership teams within our occupational work brands have done an excellent job building these businesses over many years putting V.F. in an ideal position to find the best future owner for these brands to better enable their next phase of growth and success. In terms of timing, the review process is underway and we will keep you appraised as things evolve over the next few months. Now, let's review our third quarter results and the current state of our business. As we head into the final quarter, we remain confident in our ability to deliver another strong year at the high end of our long-range plan. Year-to-date organic constant dollar revenue and EPS increased 8% and 16% respectively driven by our two largest brands and our International and D2C growth platforms. Our strategic growth drivers performed well over the holiday season, and we are well positioned as we look toward fiscal 2021. For the quarter, revenue increased to 6% or 7% excluding the occupational work brands just discussed. While our revenue performance for the quarter was generally in line with our long-term algorithm, it was slightly below our expectations due primarily to the performance at Timberland, more challenging conditions in our occupational work brands as well as a mixed holiday season in the U.S. Despite the revenue shortfall, the quality of our growth remains strong as evidenced by 100% [ph] basis points of gross margin expansion, 12% operating income growth, and 14% EPS growth. Our performance during the quarter highlights the diversity and resiliency of our operating model and the momentum we have across our strategic growth drivers. Now, let me turn to performance of our largest brands. Vans continues to deliver strong balanced performance across all regions and above its stated long-term growth objectives. Revenue for Vans increased 13% in the quarter and importantly growth remains well diversified across product categories, channels, and geographies. Heritage Footwear increased 8%, Progression increased more than 30%, and Apparel increased 14%. Following another quarter of broad-based momentum we are again raising our fiscal 2020 outlook for Vans. We now expect revenue for Vans to increase about 15% for the full year well ahead of its long-term target. Moving on to the North Face. Revenue increased 8% in the quarter led by our international business. Growth was balanced across both our D2C and wholesale channels globally, and we saw a solid performance in our Urban Exploration and Mountain Lifestyle Product territories as the brand continues to attract new consumers and capitalize on growth opportunities beyond the core Mountain Sports. Footwear also increased at a high-single-digit rate during the quarter. In Mountain Sports, strong performance internationally was somewhat offset by more mixed results in the U.S. market. While limited in scope, the performance of FUTURELIGHT well exceeded our expectations during the key holiday season and continues to cast a strong halo for the brand. The disruptive innovation has been available to consumers for about four months now and we're seeing four times the sales volume in our Pinnacle Summit, Steep and Flight series products, which feature the FUTURELIGHT technology. Given our holiday performance and additional visibility through the end of the year, we now expect revenue for the North Face to increase about 9% at the high end of its long term growth objective. Despite early signs of success this year, our results in Timberland were disappointing this holiday season as revenue decreased 4% in the quarter. Solid momentum in apparel, outdoor footwear, and China was not enough to offset challenging conditions in men's footwear in the Americas and Europe, particularly in our classic business. Men’s, non-classics, and women's performed relatively better as our diversification strategy continues to evolve. As a result of the third quarter performance and improved visibility through the rest of the year, we are lowering our revenue outlook for the Timberland brand in fiscal 2020 and now expect full year revenue to decline between 1% and 2%. And last but not least as expected, the Dickies brand had a great quarter as revenue increased 13%. Growth was strong across all key strategic growth drivers highlighted by 68% growth in China and 16% growth in digital with category momentum across icons and new seasonal product. After a flat first half we had high expectations for the Dickies brand heading into the back half of this fiscal year and the global teams delivered. The brand launched its Yours to Make marketing campaign this quarter, the largest in brand history driving significant brand heat in consumer engagement. We expect another quarter of double-digit growth providing us with strong momentum as we head into fiscal 2021. We continue to be bullish about the growth opportunities at Dickies in our even more confident in our fiscal 2020 revenue growth outlook of 5% to 6%. Over the last few quarters, we have discussed the more uncertain geopolitical and macroeconomic environment and the impact it has had on our business results and forward outlook. As we exit the holiday season I'd like to briefly provide our perspective on business conditions across our largest markets. U.S. economic backdrop remains generally solid led by a healthy consumer and low unemployment. That said we believe performance across retail and our sector was mixed during the holiday season. Our inventory levels at retail were in good shape heading into the fall winter period, sale through performance in certain categories was slower than expected which has led to elevated inventories in select areas and in more promotional environment. In Europe international trade and the BREXIT uncertainty have impacted business confidence and investment. However, consumer confidence and spending remains relatively strong. Our EMEA business accelerated in third quarter and our outlook is generally bullish across the region. In Asia our brands continue to perform very well in China despite continued unrest in Hong Kong. The recent phase 1 trade deal between China and the U.S. should yield a more constructive consumer and retail environment. As I talked about in Beavercreek our strategy is to become more consumer minded retail centric and hyper digital in all that we do. Transforming how we operate is essential to our ability to create value for shareholders and stakeholders. We are in the early stages of our journey and as our work progresses we increasingly gain clarity on what's required to achieve our vision. As we exit fiscal 2020 and transition into fiscal 2021 we will focus our investments on four key programs. The first is to gain a deeper understanding of new and existing consumers. We will further focus our investments on driving proprietary real-time consumer and marketplace knowledge to establish emotional connections, guide personalization, inspire must-have products and create consumer centric experiences that enable lifelong loyal relationships. The second is developing a more digitally enabled responsive go-to market approach. We will increasingly leverage more end-to-end digital platforms, go-to market processes and best practices and manufacturing innovations that help our brands create and deliver high-value product high-value products and experiences to consumers whenever and wherever they want. The third is a more seamless integration across physical and digital touch points. We will work to provide a seamless and consistent brand experience across and between all consumer touch points be it digital, physical, owned and partnered and strategic wholesale accounts. The fourth is the construction of more robust engagement models that help build and create enduring relationships. We will invest in leverage best of breed marketing and technology platforms and enable our brands to drive new consumer acquisitions and build stronger loyalty through personalized engagement. A transformation journey is a multi-year endeavor. Investments over the past two and a half years have laid the foundation that will now begin to build on. We have an aggressive agenda and look forward to providing more details and updating you on our progress against these programs as the years unfold. Before turning the call over to Scott I'd like to highlight that on December 5, we’ve launched our latest sustainability and responsibility report made for change. This report outlines our aspirations for advancing environmental and social improvements across our enterprise and communities worldwide. Included in the report we publicly announced new ambitious science-based target and commitments around our use of sustainable materials and reducing green health gas initiatives. Details behind these commitments highlights in the last reporting year and the value this work as to our business since stakeholders can be found in the reports. Insisting without commitment to be a purpose lead enterprise V.F. has establishes a clear position as a leader in the work to come back global climate change. Looking ahead in with our made for change strategy providing the roadmap we will strengthen our role of a company that is leading meaningful initiatives that not only lessen our impact on the planet but also drive purposely profitable growth for our business and brands. And with that I will turn it over to Scott.

Thanks Steve and good morning everyone. We were pleased with our strong third quarter performance and we remain on track to deliver revenue and earnings growth above our long term commitments. Before we review our third quarter results and adjusted outlook in more detail I would like to make a few comments related to the announcement made Tuesday morning of our intent to explore strategic alternatives for the occupational work brands. In summary, we intend to sell the brands comprising our work segment excluding the Dickies and Timberland programs. The occupational work brands include V.F.’s legacy Imagewear business as well as several brands acquired with William-Dickie transaction. As a reminder this is primarily a B2B wholesale business and represents the majority of V.F.’s existing own manufacturing footprint. These brands tend to be more cyclical in nature and have minimal exposure to V.F.'s international and D2C growth platforms. From a financial standpoint the occupational work brands contributed about $865 million of revenue and $130 million of adjusted operating income in fiscal 2019. As Steve mentioned the review process is underway, and we will provide further details as the process unfolds over the next few months. Now let's review our third quarter results. Overall, our performance was strong. The brands and platforms that are core drivers of our long-term growth objectives performed well during the holiday season and the fundamentals of our business remain intact. While parts of the portfolio did not fully meet our expectations in aggregate we were pleased with our results despite of mixed holiday season in the U.S. Our performance in the third quarter highlights the diversity and resiliency of both our portfolio and operating model, two things we spoke about in detail during our investor day at Beaver Creek. For the third quarter total V.F. revenue increased 6% organically and if you exclude the occupation of work brands the growth rate becomes 7% a four point higher driven by our largest brands. Growth was relatively balanced by channel in the third quarter as D2C increased 7% including 17% growth in digital and a 6% total comp and wholesale increased 4%. Moving on to our performance by geographic region. Revenue increased 9% internationally and 3% in the U.S. including the occupational work brands. Strength internationally was driven by 15% growth in Asia, including more than 30% growth in China which benefited by about 5 points from the timing of shipments ahead of the Chinese New Year holiday. Our EMEA business also delivered another solid quarter with 7% organic growth led by 13% D2C growth including an 11% comp and 30% growth in digital. Our fundamentals remain strong as gross margin expanded 100 basis points organically driven by continued favorable mix shift towards higher margin businesses and the timing of foreign currency transaction gains. Operating margin also expanded a 100 basis points representing 12% growth in operating profits despite a 9% increase in strategic investment spending and excluding the occupational work brands operating profits increased by 15%. And to round out the P&L EPS increased 14% to $1.23 which includes the occupational portion of our work segment. Moving to the balance sheet inventory excluding the occupational work brands increased 8% or 12% for total V.F. Our inventory is a little elevated. However, we're comfortable with the quality and expect inventory growth to be in line with top-line growth by the end of the year. Leverage at the end of the quarter remains below our long-term target of 2 times as we balance cash returns with capacity to pursue our M&A agenda. We’ve returned approximately $700 million to shareholders this quarter through dividends and a $500 million share repurchase. While M&A is our top capital allocation priority cash returns to shareholders remain a key component of our TSR algorithm. Now turning to our updated fiscal 2020 outlook. As you saw in the release this morning we are adjusting our fiscal 2020 outlook following our performance this holiday season and increased visibility for the full year. We now expect revenues to be about $11.75 billion representing 7% growth on an organic constant dollar basis. Excluding occupational work brands our updated outlook represents growth of over 8%. By brand we’re raising our outlook for Vans to about 15% which compares to our prior expectation of 13% to 14% growth. We're tightening the outlook for the North Face to about 9% growth. We now expect Timberland to decline between 1% and 2% which compares to our prior expectation of 1% to 2% growth. And lastly we're holding our outlook for Dickies at 5% to 6% growth as the business continues to gain momentum. We expect our strategic growth platforms D2C and international to continue to perform well through the remainder of fiscal 2020. We now expect growth in D2C to be between 10% and 11% versus our prior expectation of 12% to 13% growth and from a geographic perspective we now expect our international business to increase about 9% which compares to our prior outlook of 8% to 9% growth. We continue to see gross margin expanding 80 basis points to 54.1% and operating margin expanding 90 basis points to 13.8%. We now expect EPS to approximate $3.30 representing about 18% growth. This compares to our prior outlook of 332 to 337 which represented 19% to 21% growth. Relative to our prior outlook the reduction in EPS was driven by the performance of Timberland brand and the occupational work brands partially offset by strength in the Vans brands. As we head into the last quarter of the fiscal year we are on track to deliver revenue and earnings growth at or above the long-term commitments we laid out in Beaver Creek in late September. Three of our four largest brands are performing at or above their long-term growth objectives and as a reminder our top two brands the Vans and the North Face account for over 80% of our growth in the long range plan. Our strategic growth platforms International and D2C are strong and well-positioned to sustain their growth momentum heading into fiscal 2021 and given our intended actions with our work segment we're taking another step to optimize our portfolio, simplify our business and elevate our focus on our largest properties and growth opportunities. The fundamentals of our business are strong. We are executing well and we remain confident in our long range organic plan and our ability to deliver on our mid teen TSR commitment. And our balance sheet is primed and positioned to capitalize on M&A opportunities that have the potential to drive incremental growth and value creation to our organic plan. So with that we will now turn the call back to the operator and take your questions.

Thank you. [Operator Instructions] Our first question today is coming from Bob Drbul from Guggenheim Securities. Your line is now live.

Hey guys. Good morning. Just two questions for me. I guess the first one is on the Timberland performance, can you just talk to sort of the turn in Timberland or sort of what needs to happen within that business and sort of the timeline on it and then the second question I have is just can you expand a little bit more on your inventory levels and sort of maybe inventories in the channel in terms of what you see heading into calendar 2020? Thanks.

Sure. Good morning Bob. This is Steve. So, Timberland just to be really frank with everybody here, we are not pleased with our performance. We're disappointed and our assumption is you are disappointed as well. Where we find ourselves is this is an iconic brand with deep, rich heritage, and we remain very committed to the strategy that we laid out to you all in Beaver Creek. A lot of foundational work has been done around the brand to really understand the consumer and put together the brand architecture that helps drive the most important aspects of our strategy, which is elevating our product. We've talked to you a lot about diversity. Diversifying our product offer, we absolutely need to do that to move beyond classics in our men's business to the non-classics, but we have to continue to see good growth in our women's apparel and pro businesses. And concurrent with that is we have to find a way to more intimately connect and engage with consumers as we drive the new brand foundation forward. We are not where we'd like to be, but I think we are very, very convicted that this brand is one that our skills can absolutely unlock and the diversification strategy that we have in place absolutely gives us confidence that it can be done, and I think it's interesting if you look at the results this quarter, our apparel business was strong. Our Pro business was strong. Our women's business contributed, and in aggregate those businesses are about half of the total Timberland revenue. What we need to continue to grow is in the men's classic and non-classics. Then we laid out that vision in Beaver Creek of the work that needs to be done with the new design teams, the new merchandising skills to drive that turnaround, and we remain very convicted but don't let me leave you thinking that we're at all pleased. We're disappointed and continue to work very hard with the leadership team there at Timberland and we have to put this business in the right place.

Yes Bob, as it relates to the inventory levels, I think you're talking about retail inventories, and Steve's comments and mine as well talked about a mixed holiday performance, a little softer than our expectation in a few areas, and the knock-on effect of that is inventory levels are a little elevated. We also know that the promotional environment started a little earlier and went deeper than we were in some cases, and so what we've laid out is a plan for the balance of the year to address that. We think that's baked into our guidance, and as I said in the prepared remarks, our expectation is both from our inventory and from a retail inventory they will exit this year in good shape. So back in three months, and we'll give you an update on how that progressed.

Great. Thanks very much guys.

Thanks Bob.

Thank you. And our question today is coming from Dana Telsey from Telsey Advisory Group. Your line is now live.

Hi, good morning everyone. As you think about the performance by region, certainly it seems like EMEA and China did well. Any breakout by brand on what happened in the Americas by channel whether it’s wholesale or direct in terms of what you're seeing. And then just on Vans, what we should be looking for there going forward? You took up the guidance to 15% for the full year. What should we look forward as we go to fiscal ‘21? Thank you.

Hey Dana, this is Steve. I think you obviously captured our international business was quite good. Europe continues to do well in an environment that isn't necessarily that strong. Our Asia business led by China continues to perform very well. Here in the U.S. to our prepared remarks, we saw an uptick in the promotional activity starting pretty early and specifically with our cold weather brands. And the results there really hit the North Face and Timberland, and we saw a drop in traffic in our retail, in the notes that you can see it in our slides, we did see a reduction in growth within our brick and mortar. In the case of Vans, we had good e-commerce pickup, but we saw weakness in the North Face and Timberland on that e-commerce side and we do really relate that to the early promotional activity. We did not respond, I think if you remember back three or four years, we did quite a bit of work around rightsizing the channel for distribution, shoring up the promotional activity that we participated in, and we really took the long view and wanted to preserve the integrity and quality of our brand position, and within our own environments we did not chase that that promotional environment. Yes, some might argue that we should have but we really do believe that from a long view shoring up that that quality integrity of the brand position is very, very important. Also, we’d tell you in the case of our North Face business, we are rebuilding a team, they just went through a very significant relocation, and in that our D2C digital teams are new. We believe we’ve got a very strong if not stronger team and our ability to now really engage and drive that particular platform will be back in our control as this team settles into their new position and understands the total brand strategy that they're driving.

And then, relative to your question on Vans, I guess the big picture answer is we really don’t see anything fundamentally different. Right, we just did a 15% which we know is ahead of our long-range plan but we also talked about the soft landing or control descent, whatever you want to call it. But we planned on and we really don’t see anything fundamentally different on a forward basis.

Thank you.

Thank you, Dana.

Thank you. Our next question is coming from Michael Binetti from Credit Suisse. Your line is now live.

Hey guys, thanks for taking our questions here. I wanted to ask about Vans and actives, the active segment margins for a second. You're down a little bit in the quarter. But you guys went through a huge period of growth with Vans, and the margins been down in this quarter after been up a lot in the first half of the year. As we look ahead to next year in your fiscal '21, how should we think about the margin compressionally sounds third quarter. I know you have some tough comparisons lapping the first half of this year and then I know the longer terms structural drivers like D2C and the international drive this high over the long term. So, if you could see that being the case that you get into second half of your fiscal year next year but I'm thinking more in the near term, does the margin need to normalize a little bit in the first half of next year while you lapped those big comp growth rates and margin expansion from the first half of fiscal '20.

Yes Mike, well great question. So, the third quarter you really have to like broaden out and look at the full-year picture because there is some timing quarter-to-quarter. What you should expect for the full-year is that the margin growth rate will more or less approximate the topline growth rate. And that was the way we planned this business because we're investing back into the growth of Vans and that was something I think we've been talking about for a while here. And looking at the great news that this business is given its growth margin profile, that is really the fuel that allows us to continue and invest back into the business. So, as we look forward, we don’t see anything structurally different and I'm not going to give guidance for next year at this point.

Right.

But those gross margins and that growth rate will continue to fuel the investment capacity to allow us to invest back into the brand.

Okay. Let me back up and ask about some of the Beaver Creek stuff for a second. I'm trying to roll forward the algorithm you laid out just a few months ago at the Analyst Day. Given what we know about the occupational group at this point, so if our starting point was a seven to eight year, sorry a 7% to 8% revenue CAGR for five years. Does that, does the sale of occupation move us up to the eight to nine range for the next five years and I know the occupational business had higher margins about 15% in the overall company. But I guess we don’t know what the gross margin or SG&A improvement was baked into the plan relative to the corporate algorithm. So, could you just help us think about how the sale influences the plans for about 40 basis points at EBIT margin expansion for year and EPS of 12% to 14% per year?

Yes so again, we're not going to revise the long-term algorithm. I'd say Michael, well it's not materially different. And if you think about the go-forward, we are you know we know today that certain things are developing somewhat differently. Timberland is a little slower in its acceleration currently that's move into the right. On the other hand, you're right the sale of occupational will have a tailwind from a growth standpoint but I guess at this point we're not changing our full view and we don’t really see a material difference.

Okay, thanks a lot for your help.

Yes.

Thanks. Your next question is coming from Erinn Murphy from Piper Sandler's. Your line is now live.

Great, thanks. Good morning. A couple of questions from me. I guess, first just on the North Face. I think you guys indicated that the men's business performed much better than the women's. Can you just kind of expand on what drove that with the competition and the women's side that maybe it was a little bit softer. , :

Oh great. I'll take your question. So, good callout. Our Men's business in the North Face is good. We saw a solid growth across really all three of the brand territories, not sports, not like an urban ex but really I think that it was not like in urban ex where we saw strong growth. Our women's business in the Americas underperformed. And to my earlier comments around the early move to promotional environment, we believe it's had an impact on our business. Potentially, there was some increased competition and that may have taken some of that but I think it really comes down to our market segmentation strategy and how we set our businesses up to succeed. And going forward, the North Face really take learning that at this quarter and apply it to next fall is I think about the wholesale and retail mix of those core women style. Women, continues to be one of the primary growth drivers that Arne laid out in the Beaver Creek conversation and it's a very important aspect of the long-term growth. We really see this is a point-in-time not, not a long-term trend and one that we feel confident we'll not be one that we see. On the FutureLight question. We're really happy with how where we are we're seeing that in the prepared remarks. Four times the sales of the Summit, Steep, and Flight Series, where FutureLight products were represented. We really have and able to really reposition the brand with these collections with that core consumer. What we found is that the educational element of FutureLight is a significant task. In the future we've invested heavily around driving the brand and driving the education but this is such a disruptive innovation and how the garment feels, how the garment performs is markedly different than anything that we've seen and been able to use over the last 30 years and the work to drive that education that understanding will continue into fiscal '21, fiscal '22 as the product line continues to expand. You will see an expanded offer in spring '20 going on market in rainwear and moving in this more approachable price points. The Dryzzle rain jacket at 229 will be the opening price point with FutureLight that is a very strong historical seller and we think this will be yet another moment to raise the awareness, inform the consumer. And as we do that, continue to set ourselves up for future expansions in the coming fall and years after.

Thank you, I appreciate that. And then just one quick follow-up for Scott. Scott, just on the digital growth, I think you guys referenced why it was weaker in at 17% with Timberland and North Face. But how do you see digital growing in the fourth quarter and as we get into 2021 should it return back to the longer term CAGR of 24% to 25%? Thank you.

Yes, I think Steve unpacked what we understand at this point are the drivers or why we saw the moderated performance. We are obviously taking some actions. I mentioned some of those in terms of promotion also just in the way that we're communicating and the feedback loop. One of the things that we have is good insight and to consumer feedback and we're making adoptions where we can. So, we'll see some improvement but not all the way back to the long-term algorithm. Going forward we see where we see no reason why we can't achieve that again the reasons for the underperformance I think Steve unpacked earlier.

Yes, okay. Thank you, all.

Okay.

Thanks, Erinn.

Thank you. Our next question is coming from Sam Poser from Susquehanna. Your line is now live.

Good morning. Thank you for taking my question. I just want to follow-up, I've two questions. One to follow-up on Timberland and what's really what's being done there to sort of invigorate the I would call it the core heritage business of that away from what other classic yellow boot type businesses. And when will we potentially begin to see that in earnest given the current deceleration and miss of plan?

Yes, and good morning Sam. So, fair question and one that I actually expected from you. So we, in my earlier comments around Timberland and the classic business, with as what Tina laid out in Beaver Creek, you know we've done a lot of work over the last couple of years of really understanding the consumer and its really helping us reframe and rethink the brands, brand architecture and how that drives the creative aspect of the business. We've -- as we laid out, we've added new design talent, Christopher Raeburn coming on. The team's, they surround him, they're merchandising organization. Some that we have to do is not only diversify the product but we have to elevate the products. We need to really think about the aesthetic, we need to think about the finish, we're opening up some new sourcing avenues accessing better manufacturing which will put an elevated offer from both materials in aesthetic into the consumer frame. The samples that we're seeing right now give us confidence, that's why earlier on I said we remain very convicted that this is a brand that we can drive. And I think to your point on timing, it and you're not going to see it in the dramatic way in fiscal '21. To Scott's comment, we don’t see fiscal '21 as a year where we're going to see breakup performance across the full assortment. We do think our apparel business will continue to drive good double digit growth as we're seeing right now. Our Pro business will continue to be a good performer. Our Women's business here in the America's is good and we'll continue to drive that. But the energy around the men's classic in the non-classic diversification will be a major focus. And it will really be that following year where we think you will start to see the evidence and the proof points of that work. And yes, really driving off that rich heritage tapping into that outdoor heritage and new styles is that you know so well you know will be really top-of-mind for us.

Yes Sam, I just like to add on to it. As we think about where we're at in this brand and what the near-to-mid-term looks like. Just to build on Steve's comment, remember part of our strategy is to build the diversified offer, the more lifestyle offer that we have some evidence of that as Steve mentioned about the apparel. But that really enables our D2C growth. But the reality is this brand today has about 25% of the overall distribution setting in D2C. So, that large wholesale footprint particularly in the U.S. coupled with the performance we just had at the holiday. And the attendant inventory overhang that comes with that means we're going to struggle to grow next year as many of the wholesalers base their next year buys and the order books are set based on the performance they just saw. So, I think we have to have a sober assessment of where we're at. And next year, we're not giving guidance per se but we will struggle to grow as we look at next year in the Timberland brand.

Thank you. And then secondly, can you give us some idea of the percent of sales within the occupational work business by quarter just to help us sort of forecast forward within without that business. And can you give us some idea of how you're foreseeing the occupational business to be on a year-over-year basis in full-year '20 now that we're almost through at a vis-à-vis the release from last year's revenue.

Yes. So, on the first part, there is some seasonality but it's fairly balanced on a full-year basis, Sam. And I'm sorry, could you repeat the second part of your question?

Can you give us some idea, it was 835 million or 65 million last year. Can you give us some idea where you're thinking that's going to end up this year or where is your standing?

Yes, flat to slightly down is where we see it for the balance of the year.

And what would be the peak quarter of sales for that business?

Yes, and I'm not going to get into that level of detail I just refer you back to my earlier comments Sam on the paper with this.

All right. Thanks so much. Good luck.

Thanks Sam.

Thank you. Our next question is coming from Omar Saad from Evercore ISI. Your line is now live.

Thanks for taking my question. Good morning. I wanted to ask about the spin-off. Actually the spin-offs at this point now with Kontoor in the rear-view mirror and the announcement around the work where decision to sell that business obviously you are reshaping the portfolio to align with kind of the core competency of the company and the long-term goals but it also seems like you may be clearing the decks a little bit here. Does it make it easier to do a larger acquisition in the future once this look at our last piece is done in terms of the portfolio reshaping? Is that an appropriate way to think about it? Maybe you could frame it for us. And then I had a second question on Urban Exploration. It was in the North Face what you learned in the quarter. How we should think about that component within the North Face over the next, over the long term? What the opportunity is there? Thanks.

Great. So Omar I'll start here. So I don't think we're in a position to talk to you about the size or magnitude of the acquisition that our last two dispositions maybe putting us in a position for but what I would tell you the M&A remains that number one priority for capital allocation. We think we have been very clear with our total addressable market where we see the opportunity and as we simplify and focus our portfolio around brands that really can connect more intimately with consumers and have a direct contact through owned distribution and key partners and it gives you a good sense of where we're looking and where we think we can add value to our portfolio but absolute size would be difficult to really call out for you right now.

Yes and I just build on the focus and simplification of the model really helped as you think about future activity. So one just data point X or at the end of this transaction our portfolio at 12 brands will be roughly half of what it was just a couple of years ago. But really aligned with that long-term growth algorithm that we laid out in Beaver Creek portfolio brands we can really drive that algorithm but also benefit and drive our focus around transformation. So on your question on Urban X Omar I think the learning is there is that the brand you are continues to be able to appeal to and attract new consumers leveraging the rich heritage of some of those key icons like the new tee, you see extreme here being pulled out of the archive. So that what they're finding is this is a real rich area to leverage that historical set of brand icons done in a way that really promotes the rich heritage and authenticity and supports the more technical side of mountain sports. So we see good growth and not only here in the U.S. but from a global standpoint it's a real strong part of that go forward strategy.

Got it. Thanks.

Thanks. Our next question is coming from Alexandra Walvis from Goldman Sachs. Your line is now live.

Good morning. Thanks so much for taking the question. My first question is on the occupational work where to split Scott you shed some comments on this in the opening remarks but I wonder if you could help us out with where we should and shouldn't expect there to dissynergies from that split?

Yes. So there will be some of it there's. I wouldn't characterize this business as moderately integrated. So we will have some dissynergies just to put a number on it and that we're in the neighborhood of $30 million is our expectation now. Against that likely there will be TSA and of course we'll get after those costs over time depends on the bio and the circumstances but just to give you some sense of the magnitude. The other thing I would clean out is with this action then it greatly simplifies or focuses our supply chain as well from a manufacturing standpoint. We talked about this gets us out of the apparel manufacturing. So as you can imagine that gives opportunities for simplification and cost reduction as well.

Great, that's helpful. And then if I may have a question on the North America backdrop. So you shared a lot of comments on the more promotional environment in the holiday period. So to the extent that is possible is there a way of passing through how much of the weakness in North America was a softening in underlying consumer confidence or spending versus the impact of warmer weather trends versus what would have been pretty good winter last year? Do you guys have any thoughts on on that split?

Yes. Alex, I don't think it would be really difficult I think a really pinpoint what were those key drivers you called out some of them. I think the U.S. consumer you know remains strong. What we saw in our product category specifically cold-weather product was a slow start to the season. The quick move to promotional environment. Certainly did have an impact but I could also say that when brands are deeply focused in understanding the consumer needs and putting the right products in front of the consumers at the right time you can absolutely see the sales lift that we planned for. So we're not going to focus on any one of those key drivers. If we remain very focused on our consumer understanding how that will help us drive a more retail centric approach to our go-to-market strategies and continue to elevate our digital skills we could be able to really engage and drive deeper connections with our consumers.

Great. Thanks so much.

Thanks. Your next question is coming from Matthew Boss from JP Morgan. Your line is now live.

Great. Thanks. So on gross margin what was the benefit this quarter from the FX transaction gains and just the expectation for the fourth quarter? And how best to think about the impact on the fourth quarter gross margin as a whole from the more promotional backdrop and elevated inventory that you cited?

Yes Matt. We didn't break that out per se that but certainly FX did benefit the third quarter and it does turn negative really for the first time this year in the fourth quarter and of course that on an ongoing basis. So what I will say is this if you look at our implied guidance the fourth quarter would say that are implied margin in the fourth quarter is down a bit. Underneath that the structural gross margin mix remains strong. It's there and that will continue on an ongoing basis. The two factors one you mentioned is the FX and this we're talking about transactional FX which relates to had just been in place over the last 12 to 18 months or so and that's something we've been talking about for a long time. That now turns negative and a quarter. Also while tariffs not a big impact overall or even for the year. We do see for the first time the negative tariff impact in the fourth quarter. Now interestingly on a go-forward basis based on where we're at right now tariff seem to be about a push year-on-year and again really relatively small in the overall scheme of things. So that's what's going on a gross margin. The change in the FX, cadence underneath it. You got it continued mix benefit which is structural and will continue and then a little bit of noise on the tariff. One final thing I alluded to this in my earlier comments as well relative to the inventory being a little elevated in certain pockets we've also factored in to be a little more market appropriate from a promotional cadence standpoint and that's also baked into our guidance as you look at the fourth quarter.

Great and then just to follow-up on the portfolio pruning. So I guess maybe larger picture how should we be thinking about the strategy moving from pruning to M&A and how would you prioritize maybe best particular categories of increased interest on the radar, I think within that core addressable market that you outlined at the analyst day?

Yes. So you went right where I was going to start which is that those TAMs the total addressable market is where we're focused and remember the three lenses that we look at both the portfolio that we have and the portfolio targets that we evaluate, it's really pretty consistent and straightforward. We're looking at is it strategically as it is it an attractive segment of the market financially does it meet the characteristics that we're looking for and from an ownership standpoint that we bring something to the party? Is it consistent with our purpose and does it meet the profile of the target investor that we're going after? So I think in that is a pretty good explanation of the actions that we've taken and also gives you a pretty good indication of the kind of areas that we're looking from an acquisition standpoint.

Great. Thanks.

Thank you. Our next question is coming from Jim Duffy from the Stifel. Your line is now live.

Thanks. Good morning. Guys two lines of questioning for me. First we've heard a lot about the U.S. market dynamics in the quarter. Can you speak Asia, is there a way to size the impact of the Hong Kong disruption? And can you speak to what you're seeing relative to expectations in other countries?

Maybe I'll put some numbers on it first. So our Hong Kong business is important. It's been a good business but it's not that large in the scheme of things. I think we said it in a 100 million range overall and that has been significantly impacted through the year and we really haven't seen much of a change in trend relative to Hong Kong. Interestingly, we'll start to lap that. We're just having that conversation internally here. As we get into the New year, we'll start to lap when we started to see those issues. The good news for us, is that China in the region has really been strong and you saw 30%, that's somewhat artificial and we said there was about 5 points due to the timing of Chinese New Year. So, there's a lot of quarter-to-quarter noise in that. But still if you like, we've been in that 25% plus kind of growth range consistently in China and that's really driven the strength of Asia and really why we're at the top end of our long range estimates overall.

Great. I wanted to dig in some on the inventory. Can you guys speak in more detail on the geographic and brand level inventory picture? It seems inventories most out of balance for the vocational work business in Timberland. Can you talk about plans to get the inventories back in line and the financial impact? And then Scott is that cleaned up in the fiscal fourth quarter? Is there some lingering impact as we go into fiscal 21?

Yes. So you're talking about our inventory obviously and so if you look at the ongoing core inventory we're up like 8% and as we think about going forward we said we'd be balanced between revenue and sales. So long way of saying we think we are okay from an inventory standpoint by the end of the year. Any actions that may be taken we believe are baked in the outlook and so we'd say pretty good. So obviously what that means if we're plus 12 for V.F. the occupational businesses is really elevated. Now it's unique model because in that business you have specific customers. You have to, it's all about service. You maintain the inventory and most of these agreements actually have a clause it says should there be access at the end of the program that then they will buy that, they'll take that inventory. So it's good inventory. We just have too much of it is the short answer and as you can imagine given the actions that we recently announced taking radical or very costly short-term actions to try to reduce the inventory wouldn't make a whole lot of sense because it's good quality inventory and eventually it's going to be used. So hopefully that gives the picture.

It does. Thank you.

Thank you. Our next question is coming from Jonathan Komp from Baird. Your line is now live.

Yes, hi. Thank you. Steve maybe just a follow-up more related to Timberland and portfolio management actions. I guess it's very clear your history when parts of the business aren't meeting your strategic and financial goals you've been very quick to take action but in the case of like Timberland where very clearly if it's strategically but it's not necessarily hitting your financial goals. Could you maybe just talk more philosophically about kind of your patience and willing to see things out and any thoughts there?

Sure. Well, I would start our willingness to look at the vestiges really has come online the last three years. So as we have made driving and shaping our portfolio our number one strategic choice and really focusing now on the parts of the market that we laid out with the total addressable market in Beaver Creek, how we characterize our brands as global activity-based lifestyle brands that connect can connect directly with consumers with their predominance through their own and digital channels. That frame has helped us really look at what brands we feel we're best at or said differently where are we the best owner and where are we not the best owner and what we've trimmed are really good brands but the brands that don't really align with that long term view. To the point on Timberland it absolutely aligns with the consumer, the position the marketplace and ability to connect with consumers. My earlier points that we're disappointed in our ability to execute in our conviction around the strategy that we have been working on really over the last 18 to 24 months that Martino articulated in Beaver Creek, we don't have endless patience. We certainly have a very focused approach and clear sets of KPIs that we will look for our brand teams all brand teams to deliver on a year-over-year basis but I really want you all to leave this call knowing that we are still deeply committed the Timberland brand. We understand where the issues are, my comments around the not only the diversification the products but the quality in the aesthetic of the product across all of the different growth drivers. We will keep you very close on how we're how we're doing there. We will give you the proof points as the strategy starts to take hold but we do not have endless patience and it is really around the proof points in the KPIs that we work with on a year-over-year basis with our brands. This will ultimately drive the decisions long term.

Okay. That's a very helpful and then just separately as you look out to 2021 I think this time last year you gave some high-level thoughts on a few of the brands for the year ahead. You didn't give that this year so I'm just wondering maybe outside a Timberland just at a high level. Is there anything across the brands that you would think is kind of beyond or different than maybe closer to the long-term plan that you've laid out when you look across the brands?

You know Jonathan not really. I mean we fundamentally believe we're not in a different environment. We see the long-range plan that we just talked about in September as intact. Now obviously a few pieces are moving as I mentioned. I think on Binetti’s question structurally you're going to see with the sale of occupational that's a tale end growth what we just talked about in Timberland is bit of a headwind but overall we don't see ourselves in a fundamentally different place. I just like to remind you as you think about this year and the guidance change or the outlet change that we just talk through the uptick in Vans, the adjustment in Timberland essentially are a wash and what's left is the occupational reduction. So using different words if it weren't for occupational we'd still be in the range that we talked about three months ago and I would say that's really the big picture. So if you look at the ongoing algorithm for V.F. which will obviously exclude the occupational work group we say yes evolved a little differently but more we don't see anything fundamentally different on a go-forward basis. But three months will be back. We will give you guidance for next year and clean up the details.

That's very helpful. Thank you.

Thank you. Our final question today is coming from Ike Boruchow from Wells Fargo. Your line is our live.

Hey, thanks for taking the question. Scott two questions for you just to follow-up on one more time on the inventory; the slower than expected growth. In that category is that all cold weather? Is that outerwear? Is that outerwear and footwear? I'm just kind of curious if there's any more color you can kind of give there and then any more color on the types of channels where that inventory where the slow-moving inventory was. Was that broad-based? Was it your DTC. Was it your department stores? Just and any more color there would be really helpful.

Yes. Really I'd say I give it mix, this is the answer. I mean certain categories we saw relatively better sell through and others we saw not quite as strong. Some of the more insulated colder weather jackets as Steve mentioned women versus men's and really again of course Timberland having such a large classic business some of that classic booth inventory. Those are the main areas that I would say, listen even retailer is a retailer. Some are in great shape. Some have relatively more and we look at it over. Overall we would say slightly elevated. Not a disaster, not a huge issue but a little more than we would like to see and that's why we're taking some of the actions that I mentioned earlier and again to the best of our knowledge we've got it built into our outlook and we have a good path to exit in good shape. Obviously, not all those leverages are within our control and in three months we'll give you an update on how that played out and give you an indication of where we stand going into next year.

Got it. Thanks Scott. And just one quick follow-up just when we think about what you're trying to monetize the workwear asset for should we look at the Dickies transaction to give us some kind of guidance. I know you can't tell us what you're trying to sell it for but I just kind of curious the framework that maybe you're using when you think about that?

Yes. Of course I'm not going to negotiate against myself here. But yes you can look at comparable transactions. I would say this interestingly the interest for this asset has been exceedingly high and frankly higher than we expected. So both on the sponsor side and the strategic side. So we're optimistic. Let's see what that plays out. We'll have visibility of that in the next couple of months.

Thanks Scott.

Thank you. We have reached end of our question-and-answer session. I like to turn the floor back over to Steve for any further and closing comments.

Great. Thank you everybody for joining us this morning. This is going to reiterate our third quarter performance is strong and our year-to-date results are at the high end of our long term growth objectives and we're on track to deliver solid performance for this year. As we look at the market signals that we continue to monitor, our focus on transforming to become more consumer minded, retail centric and more hyper digital in how we operate our business could not be more timely. The moves we are making with our portfolio will allow us to have greater focus not only by management but also how we invest against our brand properties but also our transformational agenda to put us in a much stronger position in the future as we drive against the LRP that we laid out for you all in Beaver Creek. We look forward to catching up with you all in May and giving you insight into how we look at fiscal 2021 and our continued drive against that long-range plan. Thanks.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.