V.F. Corporation (VFC) Q4 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the V.F. Corporation Fourth Quarter and 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, sir.

Good morning, and welcome to V.F. Corporation’s Fourth 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 fourth quarter of 2020, the company determined that the occupational work where business met the health for sale and discontinued operations accounting criteria. Accordingly, the company has reported the related assets and liabilities of the occupational work wear business and discontinued operations as of the date noted above and include the operating results of this business and discontinued operations for all periods presented. During the first quarter of fiscal 2020 the company completed the spin-off of its Jeans 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 and 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 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 welcome, everyone. I hope my comments this morning find you and your family safe and healthy. Please bear with us today because we are all working from separate locations. It is remarkable how quickly the world has changed since our last call just a few months ago. Through the first 10 months of the year, VF had a powerful momentum tracking ahead of our long range plan and now COVID has profoundly impacted the world as well as our business for the last two months of our fiscal year. I've never been more confident in our people, our brands and our future. It's times like these that serve as a purifying fire, separating the best companies from the rest. We've prepared ourselves well for a time such as this. Our strong brands, our financial and supply chain disciplines coupled with our fortress balance sheet allows us to weather almost any storm. I'm confident that VF will emerge from this crisis in a position of strength, prepared to accelerate at a time when many are under tremendous financial strain and unable to adequately invest in their business. And while COVID has appropriately been a dominant theme recently, let's not forget that 2020 has been a year of significant accomplishments for VF. To name just a few, the move to Denver, the release of science based targets in line with our commitment to sustainability, the successful spin-off of Contour brands and the announcement of our intent to sell the occupational workwear business. Even with this exceptional activity, we were managing our way to a strong year. Through the first three quarters of fiscal 2020, we had delivered 9% organic revenue growth, more than 100 basis points of gross margin expansion and 19% organic earnings growth. Vans and North Face, our two largest properties were growing 17% and 9% respectively. And our global B2C platform was growing at a double digit rate, led by 20% digital growth. So what's giving me about our future? First and foremost, our incredible community of associates, from our experienced leadership team actively managing this crisis to our distribution center associates working tirelessly to enable our brands to continue serving their consumers. Words cannot fully express how thankful I am for the entire VF family and their infallible commitment to each other and our business. Next, the nimbleness of our enterprise, which has demonstrated once again the ability to adapt and act with agility to protect our people, protect our enterprise, and preserve liquidity into quickly pivot to those priorities which position us to emerge in an advantaged position. And I'm thankful that we have been aggressively transforming VF into a consumer LED, retail centric, digitally focused enterprise. This transformation, coupled with a renewed focus on the three lens approach to managing the portfolio has honed our organizational focus and simplified our business model. Our ability to pivot in light of changing consumer and distribution environments through portfolio actions has been and will continue to be both a catalyst for growth as well as a hedge against risk. Our movement away from challenged distribution channels while focusing more deeply on the most attractive addressable markets gives us a real advantage in an uncertain and fast evolving world. Finally, for the commitment across our organization to act as a purpose lead performance driven enterprise during the time of crisis, in addition to providing pay continuity to retail associates during the global lockdown and increasing hourly wages for a distribution center associates, VF has committed nearly $7 million in financial support and product donations across more than 20 different branded initiatives. And we're in the process of producing up to 3.5 million pieces of urgently needed PPE for COVID-19 relief efforts. Our most recent COVID related actions are in addition to the ongoing efforts around Made for Change initiatives, leading with science based targets focused on improving people's lives and planet. Using the considerable scale and resources of VF for the betterment of both people and the planet are not just the right thing to do. It's good business as we forge even deeper connections with our consumers during this time of crisis. Collectively, these characteristics positioned VF to not only weather this storm, but to emerge as an even stronger, leaner, digitally oriented enterprise on the other side of the current pandemic. In light of the current environment, in the new world, we find ourselves operating within like to spend a few minutes highlighting the key elements of how VF is managing the now, as well as how we are approaching emergence from this crisis and how we intend to capitalize on the next. Regarding to now, from the early days of the outbreak in China, we've taken a people first approach in our COVID-19 response, prioritizing the health and safety of our people, while also protecting their financial being. As my good friend in North Face athlete, Jimmy Chin told me all storms pass is how you weather them and matters. We have a bias for action and decisiveness to effectively manage this crisis and I'm proud of the actions we've taken guided by our values. As we've implemented measures to care for and protect our people, we've also taken several key actions to advance our enterprise protection strategy. These prudent actions have helped us preserve and enhance liquidity and given us more flexibility to manage our operations through a prolonged crisis. These actions have included reducing discretionary spending and compensation across the VF senior leadership team and our board, proactively executing a $3 billion bond offering to establish a significant cash buffer and ensure over $5 billion of near-term liquidity, implementing a thorough and rigorous review of current inventory and forward inventory commitments. The spending, our share repurchase program, collaborating closely with our most important strategic partners across the value chain and finally proceeding with our previously announced divestiture of VF's occupational workwear business as a potential source of additional cash. One of VF's greatest assets has always been our operational discipline and the rigor with which we manage our balance sheet. Today that discipline, and know-how are coming together to create a range of options for how we maintain and further bolster our position of strength, which Scott will cover shortly. Turning to our brands, all of which remain focused on driving consumer connectivity, and brand new engagement during these unprecedented times. Our brand teams are more than ever using this unique opportunity to share best practices, key insights and learnings among our marketing and digital leaders to accelerate impact and efficiency. We've made a purposeful shift in our consumer engagement actions to employ greater empathy and compassion connecting with consumers in the unique stay at home environment we all find ourselves in. This strategic shift has resulted in stronger engagement and affinity leading to higher consideration and conversion. I encourage you to explore our brand websites and social platforms to see this to come see this come to life. Demonstrated in the North Face of healthcare worker in first responder initiative, coupled with united to move the world program, along with Vans bouncing off the walls campaign, shoe box challenge activation and Foot the Bill program; or Altra's embrace space virtual workouts; and Timberland stay strong campaign. I'm proud of our brand ability to maintain strong emotional connectivity with our consumers. Despite this disruption in the world around us. None of us knows exactly how the COVID-19 outbreak will change our world. But we're already beginning to see signs of what's to come. Unfortunately, our brands and businesses are uniquely positioned to address certain evolutions and consumer behaviors and value systems. For example, we believe people will place greater value on exploring outdoors after spending so much time in their homes. We believe there will be an increased commitment to personal well-being and active lifestyles with health becoming a major new priority. We believe people will have a greater appreciation for the frontline workers, who keep others safe, and the trades' people who keep our world running. We believe there'll be an elevated focus on environmental sustainability that will lead to a sharper focus on combating global climate change and with online shopping, serving as a lifeline for so many consumers around the world during the pandemic; we believe the proliferation of e-commerce will be significant. Regardless of whether these changes are subtle, or seismic, or brand teams are already working to connect even more intimately and meaningfully with consumers in a post COVID world. Today, we're preparing for this new future and positioning our brands to set the standard for what's next. The long-term strategy we've introduced in 2017 has repeatedly proven that we're activating a powerful plan capable of delivering sustainable, high quality growth in top quartile returns. And I strongly believe that our strategy will be even more relevant in the years ahead. We've evolved and focused our strategy since it was introduced, but the key choices at the heart of it remain the same. Driving and optimizing the portfolio, distorting investments toward Asia with a heightened focus on China, elevating B2C and digital, and finally, underpinning our strategy is the steady transformation of our business model to make VF more consumers minded, retail centric and hyper digital in everything we do. As we prepare for the next, our work is focused, amongst other things on evolving our systems landscape and building better capabilities and tools to power our brands forward. We just focused on leveraging enterprise data and analytics with an emphasis on critical end to end data and digital capabilities to drive consumer engagement and loyalty. This will take on a new level of importance as digital activity and engagement continues to rise in a post COVID world. We're also working to become increasingly agile and how our teams work together, enabling us to move faster to seize opportunities whenever and wherever they exist. It will result in a more agile and efficient operating model, an organization designed through the lens of our consumer minded retail centric, hyper digital transformation. Before passing the call over to Scott, I want to reiterate the deep gratitude I have for the incredible effort each of our 50,000 associates put in during this past year. Fiscal '20 was an unprecedented year for many of our teams, even before the pandemic hit, spinning off jeans business, relocating associates and their families to different cities and countries and now managing through the disruption of COVID-19 has been an extraordinary ask. Our associative has been tested to the extreme, and they've responded just as you would expect, with determination and a sharp focus on getting the job done, but they did more than that, I'm so proud of the way our associates had rallied to help others in this time of great need, living out our purpose in a very real and meaningful way. It's been truly humbling to see our teams have answered the call in our communities and it gives me great hope and our collective ability to overcome this moment together, driven by the power of human spirit. It also gives me even greater confidence that VF Corporation will be better on the other side of the COVID-19 crisis. I believe that truly purpose led brands and companies will fare better than others when the situation's over because their decisions will be principled, and based on values that consumers share. That continuing to foster a sense of community with our consumers during these trying times. We're positioning VF in our brand for a bright future. And with that, I'll turn it over to Scott.

Thanks, Steve, and good morning, everyone. I'd like to start by echoing Steve's comments as I too share a deep sense of gratitude for the leadership team and community of associates around the globe. Both Steve and I have been part of the VF family for more than 20 years. And while I have a deep understanding of the depth and unique capabilities resonant within VF, I am nonetheless humble by the commitment and excellence that I've witnessed as this great company continues to rise to the occasion. This exceptional group of people is taking actions to position VF to accelerate upon emergence from the crisis. The individual and collective efforts throughout every region, brand and function are nothing short of amazing. A sincere thank you to each one of you. It's not just what you're doing, but how you're doing it that inspires me personally. The commitment of our associates to each other and to the broader communities in which they work are while continuing to drive our business forward embodies the core DNA of VF as a purpose led, performance driven enterprise. Last fall at our Investor Day, in Beaver Creek, we introduced the topic of portfolio resiliency and specifically highlighted balance sheet and supply chain flexibility, fiscal discipline, diversification and investment optionality as core tenets. That received less focus at the time given the growth trajectory of our business and the economic backdrop at large. However, portfolio resiliency could not be more relevant for where we are today as we manage through what Steve referred to as the now. So, I'd like to spend a few minutes providing insight and context for how we're navigating the current environment. Let's start with balance sheet flexibility and fiscal discipline, bedrock of VF's 121 year old legacy. VF entered this crisis with a fortress balance sheet and strong liquidity. Prior to the outbreak, our leverage was below 2x. We were on track to return close to $2 billion to shareholders in fiscal 2020 through share repurchases and dividends, and we had significant dry powder to execute our M&A agenda. In year one of our long range plan, we were tracking well against the goal to generate more than $8 billion of free cash flow over the next five years. Just a handful of months later, the whole world changed. Revenue across our sector froze overnight, resulting in higher rates of cash burn and disruption across the retail landscape. The Capital Markets remained open, but there were growing concerns about the ability for even high quality companies such as VF to access to credit lines of credit. These are uncertain times. But in this moment of turmoil, we demonstrated both our willingness and our ability to tangibly build excess liquidity to weather the disruption caused by COVID for a prolonged period. With this in mind, we elected to raise $3 billion longer dated debt last month and fully repay our revolver, providing the VF with more than $5 billion of immediate liquidity. While our recent actions may ultimately prove conservative, given the current uncertainty surrounding the retail sector, our actions are a clear testament of VF's balance sheet flexibility and financial strength. Moving to the second dimension of our portfolio, resiliency, supply chain flexibility and operational rigor. The sophistication and scale of our global supply chain coupled with our operational discipline are hallmarks of VF and a source of competitive advantage, particularly during times of uncertainty and marketplace disruption. As the pandemic and to scale globally, our operational leaders mobilized quickly to thoroughly assess inventory on hand and in process. Assess inventory positions of key retail partners, and meaningfully reduce forward inventory purchase commitments through a rigorous and thoughtful demand supply and matching process. We maintain an active and transparent dialogue with our key partners and strategic suppliers as we work together unfolded purchase commitments and product assortments. We also remain in active conversations with our key retail partners as we collaborate on a thoughtful plan to clear excess inventory moving forward, and the appropriate level of future inventory purchases considering the current environment. Throughout these conversations, our focus is undeniably on the long-term health and sustainability of VF's, our brands and our partners. And while many of these conversations are difficult, we have not strayed from our core values, approaching each discussion with honesty, transparency and integrity. Yet another example of how our enterprise scale supply chain flexibility, fiscal discipline and financial capacity, coupled with our deep rooted history of treating each stakeholder ethically positioned VF's to emerge from this crisis in an advantaged position. Turning to the third dimension of portfolio resiliency, investment optionality. Optionality applies to both capital allocation as well as investment spending, both capital and expense. Our short-term capital allocation priorities have changed. While share repurchases remain a key element of our long-term plan, we are taking actions to preserve liquidity and have decided to suspend our share repo programs for the time being. We do have remain committed to our dividend of course subject to board approval. Our dividend has and will remain an integral part of our TSR algorithm over the long-term. And the recent actions we've taken to shore up liquidity give testament to our ability to continue to support the dividend. Regarding investment spending, we have selectively reduced discretionary spending and CapEx in light of the current interest. We have focused our remaining investments on the aspects of our strategy that we believe will be even more important growth drivers in a post-COVID world. Specifically DTC and digital including digitally focused demand creation and technology. And while it's still very early days, our April results support the general belief that digital commerce will only increase in importance. And finally, we are reexamining all structural overhead in light of a rapidly changing world. Historical analog support structures are being reimagined in a hyper digital future. These actions will simplify the business model and increase agility necessary traits in this fast evolving marketplace. So wrapping up the concept of optionality, I will front run a topic I know is on any of your minds in May. First, with regard to our occupational work business proceeding with our sale process. As I'm sure you've noticed in our release, this business has qualified for held for sale, discontinued operations accounting treatment. We remain in active conversations with prospective buyers and are confident we have a transaction completed during this fiscal year. We will keep you apprised as the process unfolds in the coming months. With that said, while the strategic rationale for the divestiture is unchanged, there is no urgency to sell these assets from a financial standpoint. As is always the case a material deterioration in market conditions could impact the ultimate timing of a transaction. As it relates to potential acquisitions, we continue to actively assess strategic opportunities and believe the disruption caused by COVID could lead to an increase in M&A activity and the availability of attractive assets. While our first priority remains stabilizing our organic business, we are well positioned from a liquidity standpoint to pivot to an offensive posture when prudent. M&A remains our top capital allocation and strategic priority on a medium to long-term basis. The disruption underway across our sector will undoubtedly provide ample opportunities for strong companies with demonstrated M&A capabilities to create significant shareholder value through inorganic growth. The final element of portfolio resiliency I'd like to highlight is that of diversification. As companies across the globe report earnings, we are reminded of the advantage of running a global enterprise during this crisis. The ability to extract learnings from reopening protocols, traffic trends, and consumer behaviors in our APAC region allows us to be more informed and planning for the ensuing recovery across other regions. It also gives us a several months head start compared to mono geography companies. Our diversified channel footprint has also been critical, most notably our digital business. While our own D2C digital platform is about 12% of revenue today, our total digital footprint, including digital wholesale, is closer to 20% of the business. The ability to keep these channels open during this lockdown period has been critical in our ability to continually engage with our consumers. And recent trends suggest significant growth in the digital channels is likely to mitigate some of the brick and mortar shortfalls. Although, it's too early to understand fully how this will evolve. I want to conclude my comments on diversification by directly addressing our wholesale footprint in light of the heightened disruption we see underway in certain segments of the distribution landscape. Considering our digital wholesale and international partnership stores, roughly half of our business today is D2C and consumer facing. Of the remaining wholesale business, roughly half is through international wholesale, which was healthy and growing heading into the crisis and remains well positioned. In U.S. wholesale, which represents about 25% of total revenue, we have dramatically reduced exposure to the more structurally challenged mid-tier and department store channels, which now represent less than 5% of VF revenue in fiscal '20. The largest portion of our U.S. brick and mortar wholesale business fits in what we call specialty, which is primarily comprised of differentiated, healthy, outdoor, active and athletic retailers. Most of these retailers are healthy and growing digital businesses of their own. Our key accounts entered in this crisis strong and we are actively working with our partners to emerge from this crisis stronger together. So to summarize, I'm confident that our balance sheet and liquidity positioning, investment optionality supply chain flexibility and portfolio diversification position VF with the capacity to navigate the current environment and provide us with the ammunition to run with accelerated growth and returns as we begin to emerge from COVID. Our diversified QSR model with a strong commitment to the dividend, coupled with both organic and inorganic optionality delivers a unique and balanced value creation model. So now moving on to our fundamentals and recent business performance. Our business was showing strong momentum heading into the final months of our fiscal year as evidenced by 9% organic revenue growth and 19% organic earnings growth during the first three quarters of fiscal 2020. The fourth quarter, however, marked a profound change in conditions. Our Asia business was essentially shut down for two weeks, our European business was closed anywhere from two to three weeks, and our North American business was closed the final two weeks of the quarter. Unsurprisingly, our results for the fourth quarter reflect the operational impacts of the disruption just outlined. Despite this disruption, we're encouraged by the trends we experienced in our digital business during the quarter, which remained operational in all three regions. On a global basis, Vans, The North Face, Dickies and our emerging brands all grew double digits. EMEA generated low-teen digital growth led by more than 40% growth at the North Face. EMEA's digital business declined over 20% in the month of March, but reaccelerated to high-teens growth in April led by triple digit growth in the North Face. The APAC region generated 19% digital growth led by more than 20% growth in China, driven by strength at Vans and Dickies. Our digital trends in APAC were essentially a month ahead of EMEA, with a significant decline in February followed by a sharp rebound in March, with growth of more than 30% led by Vans and Dickies. In April, digital normalized somewhat with growth in the high-teens. The digital business in Americas grew at a low single digit rate during Q4 as strength in Vans was offset by softer trends at the North Face. Following modest declines in February and March, we've experienced a sharp recovery in April, which has continued into May with triple digit growth driven by broad based strength across the Big Four brands. And while it's too early to draw strong conclusions from our quarter to date performance, we are encouraged by the relative consistent phasing of the recovery curves across regions today. As you saw in the release this morning, due to the current marketplace uncertainties, we're not providing a formal fiscal 2021 outlook at this time. However, I can share with you how we expect our business to evolve over the course of the coming year across our three geographic regions, and the approach we're taking to planning our business. Through the remainder of the first quarter, we expect North America and EMEA to begin to reopen, and we expect continued steady improvement in the APAC region. We anticipate disruption across the distribution landscape, resulting in a highly promotional marketplace. We expect high teen inventory growth in the first quarter, followed by lower inventory levels on a year-over-year basis as we move through the balance of the year. Moving into our second quarter, we expect to see sequential improvement in North America and EMEA. But expect both regions to decline significantly on a year-over-year basis. We expect our APAC region to continue to accelerate. We believe promotional activity will likely remain elevated and expect disruption across the distribution landscape to continue. By the third quarter, we believe our APAC business will begin to return to a more normalized growth alongside of stabilizing North America and European marketplace as we enter the fall holiday season. We believe continued promotional activity is likely. We expect our North America and EMEA businesses to return to modest grades by the end of our fiscal year with APAC returning to more normalized growth. We believe that promotional environment will begin to moderate as the impacts of excess inventory and retail consolidation begin to stabilize. Underlying the expected evolution of our business just outlined is an acceleration of our hyper digital transformation. As we look ahead, digital will become even more central to VF's growth and success. Our fiscal '21 investments in digital transformation, which represent about 80% of all planned strategic investment for the fiscal year, offer a springboard of how we will leap into a more advantaged future. I look forward to sharing more details as the year unfolds. Given the recovery expectations just outlined and the visibility they have into the current quarter, we expect revenue in the first quarter of fiscal 2021 to be down slightly more than 50%. For the full year, we expect to deliver at least $600 million of free cash flow through a combination of operating earnings, working capital management and lower CapEx. We believe this supports a year end liquidity position of at least $5 billion with over $3 billion of cash on hand and a net leverage ratio below 3x. These numbers exclude the potential proceeds from our occupational work divestiture, which could provide an additional source of liquidity. So, in closing, VF has navigated many crises over our 121 year history and has demonstrated willingness and ability to evolve our portfolio and strategy to stay relevant as consumer behaviors and the marketplace evolves. There is no question that the COVID-19 disruption will have lasting impacts on our sector. There will be retail casualties, this will accelerate industry consolidation. This will likely excel in the category of trends, which we believe will benefit from activity based lifestyle brands. We are witnessing the acceleration of digital commerce and the critical importance of direct consumer engagement. We also believe this environment will shine an even brighter light on corporate values and highlight the importance of purpose led enterprises. Ultimately, we believe what we're witnessing right now is an acceleration of underlying trends which were forming before the crisis hit, further supporting our consumer minded, retail centric, hyper digital strategy. Further supporting our portfolio reshaping efforts from the past three years, and further supporting our portfolios focus towards activity based lifestyle brands in large, growing and structurally attractive addressable markets. The building blocks of our long-term strategic plan are unchanged, but the pace of market and consumer evolution will undoubtedly accelerate. Fortunately, we've been moving down a path to transformation to this new reality for several years. Using portfolio moves as a catalyst. We will continue to focus our key strategic choices around the transformation to retail centric, digitally led enterprise. The combination of all these levers coupled with a diversified TSR model will place VF in an advantaged position. So, with that, we'll turn the call back to the operator and take your questions.

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

Hi, good morning, everybody. Hope you guys are well. Thanks for the detail. I guess just - I was wondering if you could spend a little more time on inventory levels, I guess by brand and I was just wondering if you could maybe explain a little better in terms of, your plans of - through the promotional environment, whether you would pack stuff away, maybe use of off price just the different approaches you might take in terms of the level of promotion to sort of get the supply demand imbalance in the coming quarter?

Sure. Bob, Scott speaking, I'll take that one. So, we've gone through, as you can imagine a really rigorous process, demand and supply match. And as we looked at forward demand signals, order books, and this varies a bit, depending on the brand and the geography, but in general, we're seeing forward order books, fall, winter, that are down in that 20% to 30% range, and excluding APAC which of course is ahead from a recovery standpoint. And so what we've done as we've even from a buyer standpoint, not even a little more aggressive than that. Below that because our goal here, Bob, is to both make sure we have the right assortments and enough newness on the floor as we go through 2020 - I am sorry fiscal 21. But more importantly, we want to exit this in a point of equilibrium from a target inventory standpoint that means that our only inventory and inventory at retail. So, as a result, what we're doing is we're looking at the inventory that we own, we're aggressively taking, I would say market appropriate discounting to try to clear excess inventory and we expect that to continue through the balance of the year. But we're also looking at building the assortments that ensure we have enough newness and at the same time, being a little more aggressive on the carryover side of the business in order to make sure that as we exit this year, our inventories are back in line that varies by brand, and if you take about our largest brand, Vans, the relatively last seasonal goods as you think about the North Face was relatively low. So, in some cases, we're looking at holding inventory and building those assortments and replacing forward buys. This is also where our outlets really come into play. When we reduce our forward buys for outlets and use them with the goods that we have on hand from a merchandising standpoint, so I hope that gives you some shape of our thinking about inventory and the situation.

Our next question today is coming from Omar Saad with Evercore ISI. Your line is now live.

Thanks. Good morning. Appreciate all the information. I would love more detail on the digital platform you're building and you're talking to a lot about e-commerce and digital and the information you've provided around penetration rates, which is also really helpful. But specifically, where are you on apps, loyalty programs, data analytical capabilities, and also on omni channel purpose. If we remain even a store is open if we remain in a subdued traffic environment, being able to offer the consumer inventory across their channels and touch points that maybe they don't want to go and spend the time in store shopping, where are you on your capabilities for kind of omni channel inventory management? In general, broadly speaking on digital, I know it's a focus but dive in a little bit deeper there for us. Thank you.

Yes. Good morning, Omar, this is Steve. I'll start. I'll tell you the one thing that - one of the things we're most happy about is this transformation that we've been putting in place to last two years in really increasing our focus on our digital platform, our digital capabilities, and our, our consumer facing information around our data platform so you know where we are. It is strong position, and we're continuing to invest in our digital platform specifically, just ease of shopping, different purchase and checkout capabilities, doubling down on our mobile, and to your point on apps. It's an area of great opportunity for us and you can see, both Vans and North Face do use those to some degree, but that's an area where we're going to double down and invest. Our loyalty program, our Vans business is now up over 12 million, and our North Face businesses somewhere in the, I think, 7 million to 8 million consumers in their loyalty program, and it's that level of information. It's giving us insights into where our consumers are, what they're expecting in how we should be engaging with them, and we'll continue to build our consumer data platform and analytics capability to really get closer, build greater engagement and affinity we've pivoted quite a bit on our kind of buy online pick up in store. How we're thinking about buy online, return the store? And then there is new notion of buy online pick up at curve. That that was not something we had in our toolkit a month ago. And in the next two weeks, we'll be standing that up not only here in North America, but in Europe. So, the one thing that gives me so much confidence is the agility that our organization is showing; our digital and technology team, where we've made significant investment in people and capabilities is strengthening us in this time, where consumers have pivoted so strongly towards engaging with brands online, not just on the content but as we've seen significant growth in our online sales April and month to date. We're a really good position and I couldn't be happier with our decision three years ago to make this pivot to be more consumer minded, retail centric and hyper digital and everything we do.

And then one quick follow-up, Steve. [Multiple Speakers]

Real quick.

Sure, Scott. Are you happy?

Yes, sorry. I just wanted to say just to reiterate what Steve said, we talked about focused investments. This is an area where we were - we're not pulling back, right. We're continuing to prioritize on investments. Could we see more short-term profitability by cutting expenses such as this? Yes, we could but this is an area where we're maintaining our assessment though ago.

And - so thanks, Scott. One quick follow-up, where do you - have you said, where you see that kind of 20% overall penetration could go and then, is your digital capabilities that important when you're in discussion with potential acquisition candidates, the digital prowess you can bring to their brand franchises? Thanks.

Remind me, Joe, I don't think we've stated where we think it will go, that 20% is not is both our own as well as our wholesale digital partners. But that is where all of the energy is certainly pivoting from a consumer standpoint, and we see that becoming a much more significant part of our go-to-market strategy. And we think about acquisitions. Certainly brands where they would have this capability within the addressable markets that we've talked about, would be certainly an advantage that we would be looking for, but we're also looking at partnerships, that would bring enhance, skills capabilities in the area of data, and different parts of the analytics toolkit that we would like to get quicker time to value.

Our next question today comes from Michael Binetti from Credit Suisse. Your line is now live.

Hi guys. Thanks for all the detailing with the help of the questions here. I want to ask a little bit of a detail on some of the slides around Vans and D2C translate after the business in total here. I guess on the - from Americas D2C number in February, I know the month was warm. I know you have a lot of cold weather businesses. Could you speak to how much of the D2C comps you saw there were due to mix of North Face and Timberland? And then maybe just a little bit of color on how Vans D2C is trending in the Americas as we start to emerge here in this quarter?

Scott, you want to grab that?

Yes. Sure. So I guess the last part of my question first, Michael. The trends have been really strong and we laid them out in some of the pre-maturing those - that re-released, particularly in April, you're seeing a big surge in our online business. In fact, we're seeing in triple digits across several of our brands and in different regions. So whether this trend continues, don't now, but it's a very encouraging to see that the significant uptick. And I guess Michael helped me with your question around Vans specifically.

Yes. Well, I know Vans was growing at extremely high growth rates for a few years.

That's right.

But a bit in the December quarter and then we don't have specific Vans pieces to look at here through January and February, but the Vans, the total comps provided in North America in February. I'm wondering how much that was impacted by some of the weather brands. I know, the one month, I'm trying to figure out how to think about what Vans is doing before?

Yes, I understand your question. So one thing is remember - one thing we like in our own business are that the multiple years' stacks and you're up against massive numbers in Vans a year ago. And we also talked about the soft landing event. So it's while still impressive, it has moderated, I would say more to a level that's in line with our long-term expectations. But you're right in what your point of view that as we looked at, the colder weather brands seeing a bit of a drag there. And for the issues that we talked about, remember coming into leaving Q3 and coming into the fall holiday, we said as a general statement, we were a little late and not as deep from a promotional standpoint, and that our intention was to increase that we were losing some business in our own.com based on more attractive pricing for similar products and in competing channels. And so we did address that and we did see that trends in a pre COVID basis start to really accelerate as we both became more competitive and also, we're moving a lot of inventory, frankly through the channel from a pre COVID standpoint. And then once Covid hit, of course, all the numbers get a little difficult. But the encouraging thing to us is all brands, cold weather, Vans, all of them we've seen a material acceleration in the month of April and so far, continuing to debate. Again, I'm always cautious to say early days, let's see where this goes. But the green sheets we're seeing there are encouraging.

Hey Michael, I would add real quick just a couple of things real quick. As we - Vans had a good quarter. But what's really in kind of giving us greater confidence is where we stand, April and May. I know you guys' watch quite a bit of what goes on with our brands online. But we spent a lot of time shifting our message to our consumers, getting much more empathetic and really trying to meet our consumers with where they are in this stay at home environment that we're all living in and really changing our messaging much more purpose led and in case of Vans even really up to the content around creativity. I don't know if you've seen anything about the shoe box challenge, but submits coming in from our consumers, the user generated content that we're able to grab from this. But really that greater connectivity and affinity our April and May digital results are up really strong and giving us confidence that this will be continued growth vector for Vans as we wait for our stores to come back online in the coming months.

I guess if I could just get one more in there. I know we've talked about before COVID; Vans' margins were obviously very, very good, lower, mid-20s, I think the way you guys have talked about them at the Analyst Day for brands a few years ago. How did e-commerce margins compared to the overall brand margin since that's going to be a bigger focus going forward and maybe how do the lower volumes impact the Vans D2C EBIT margins. Thanks.

Yes. So, as we I think said fairly consistently, Michael, the margins, both gross margins are going to be similar to what we see in our D2C channel, but without the furlough costs and just the lack of posted that at least in our business that dilution not really being a significant factor. It's our most profitable channel. So as we see the move to digital, that's a good thing from a mix standpoint, from a profitability standpoint.

Thank you. The next question is coming from Jonathan Komp from Baird, your line, is now live.

Yes. Hi, thank you. A bit of a follow-up question, but I want to just understand all the detail of how you see the geographies are covering was very helpful. I'm curious at least maybe directionally how you think about that across your brand and just thinking differences of a brand which has been strong and lots of momentum versus a Timberland, which has been the opposite side of the spectrum. Any thoughts you're willing to share, kind of looking forward on a relative basis.

I was just going to clarify your question. So you're talking about anything different by brand, by geography, anything unique? Is that just wanted to understand the question?

Yes, not quite that broad, but more trying to understand how you're thinking about the ability for the various brands to recover in a scenario that you laid out from a geographic standpoint. Just thinking about the big brand targets, how you're looking you go ahead?

Got you. Okay.

Sure. So, I'll start, Scott. Yes, I think as you see our Asia business is back up and running. All of our stores are open; our partnership stores are open and our digital business is performing extremely well. We are seeing consumer traffic improve week over week, but it is down over last year. But the results we see really are across each of our brands finding unique ways to connect with consumers being online. We're doing virtual shopping events, our Dickies brand has been real innovative and how they're thinking about, connecting the virtual to the store. Those learnings are helping us understand how to activate in Europe and America and these markets come back on and we're back up with about 40% of our stores in Europe today. We have had our digital wholesale partners working with us, since the onset of the Covid crisis and continue to see, really solid growth with them across our full brand portfolio. So, really not one brand overachieving. I will tell you our North Face business is probably the strongest in their online connectivity here in the Americas. We are preparing to open our stores and expect to have stores open in five states next week. And, our DTC brands, specifically Vans and North Face, Timberland to a lesser degree will benefit from that. But what's interesting to my earlier point on the pivot on how we've shifted our marketing in the messaging in our connectivity, our Timberland business has seen exceptional growth through April in a month to date here online and we find that actually extremely positive as it is we now -we do know that consumers are engaged with us. They're extremely interested in the messaging, as well as the products that we're offering. And I think we see a really a universal growth across our portfolio as we have a much more sharing and collaboration on the different approaches, different tactics that have worked first in China, and we'll bring that across each of the other regions.

Yes, I'll just add, as you think about China, as we said it in our prepared remarks, we had the advantage of a couple months head start to see how consumers are reacting and what emergence looks like and as we look at our China business, returning to growth pretty, very broad base and widespread across the month of April, so really encouraging sign and that's really, the basis for how we're trying to understand what this progression looks like as we think about the Europe and North American regions as well.

Okay, thanks. Thanks for that. And then maybe just one follow up on more of the expense side and protecting margin, I understand the thoughtful and unique approach that you're taking, protecting the state of the organization. I guess I just want to understand if we think about the next several quarters, still having pretty significant top line pressure in any thoughts on how kind of the downside flow through on that EBIT line might look relative to what you had in the March quarter here?

We're not giving specific guidance, but a couple of things I can say. So, as we think about gross margin, and in particular, I think I mentioned earlier, we will see some promotional activity as we work on moving three of the inventory in the channel. So, you think about the puts and takes, the structural next benefit we think will be there for the long-term and for next year. Remember, we have from an asset standpoint, the benefit we saw from the hedging standpoint rolls off next year. So, you got to put a take there and promotional activity, as we saw in that evolution will be elevated, we can pretty much do the balance of the year and has got a little bit of pressure from the gross margin standpoint, as you think about next year, not structural, not ongoing. This is more episodic as we deal through this issue. But in the next quarters, we would expect some pressure from that standpoint. Maybe if you think about, earnings again, we gave it a little bit of shape with how the evolution looks especially from a top line standpoint; I'd just remind you of a couple things. We talked about more than $600 million of free cash flow as you looked at cash evolution walk in the materials. We also mentioned reduced CapEx just a reference point. We talked about maintenance CapEx in that 2% range 2% of sales. We talked about aggressive inventory management, which you can assume means that from a working capital standpoint, we should see some benefit. And the remainder of that, of course, are earnings. So that doesn't give you everything but that'll at least get you in the zip code as you think about how we are dealing the flow through.

Thank you. Next question is coming from Jim Duffy from Stifel. Your line is now live.

Thank you, good morning. Hope you and your families are doing well. Difficult times no doubt, but clearly the strategy from eight months ago seems even more relevant today. I have a few questions on the digital business. First, can you speak about the changing economics you're seeing with digital demand creation? What are the changes, you're seeing an add rates and conversion rates with store closed? And then the triple digit North American digital growth seems to be outpacing the digital growth in other regions? Are there things that are more evolved in the North American digital business that can be accelerated in EMEA and APAC?

Okay. I don't think we have the - our ad rates. But let me just start real high level, Jim. We've pivoted our marketing and used to zero based budgeting approach to how we deploy our add dollars and pivoted all of the dollars towards more digital tactics. And clearly that's having significant benefits to our e-commerce trend at this point. We've seen traffic up. But what we've seen even more so is conversion. As we are engaging consumers, great examples are just the level of dwell that we see our Vans business, with the shoe box challenge. People coming online to create a pair of custom shoes to contribute back to Foot the Bill program that they have to support their specialty. So really looking at very different ways of improving content improving just different programs, things to entice consumers in to participate with us. Our North Face business, where we probably seen the most exceptional growth over the last three, four weeks their program to support the frontline workers, specifically medical workers, has brought in a tremendous increase in traffic. We have something like 89% of our traffic, our new consumers, and a very high concentration of females, giving the brand just additional people to speak to connect to. And really, we're not driving transaction as much as we're driving connection, engagement and affinity and bringing you through that funnel, when and if you're available, but really focused on building that much, much stronger engagement for a longer-term benefit. Our growth here in the U.S. is stronger. That's true. But our growth in Europe and in Asia is right in line with where we would expect to be and we are deploying the same tactics that we're using here. And seeing that strong engagement and really looking to build that long-term affinity and continue to draw consumers into our different digital platforms.

Thank you. Our next question is coming from Erinn Murphy from Piper Sandler. Your line is now live.

Great, thanks. Good morning. Hope you all are well. Just two for me, if you guys reopen stores, I'm curious if there's an added cost that you need within your own stores just to ensure the shopping experience is safe. And then what do you expect or how do you expect your staffing requirements to change within stores? And then the second question around product launches for fiscal 2021. I'm just curious if you've had to make any shifts this year or in connect to just given the current environment. Thank you.

Yes. Erinn, I'll start, Scott certainly fill in the blanks here. We are very ready to begin to open our stores. As I mentioned, our stores were open in China. We're begun to open store in Europe and we're preparing here in the United States. Our playbook, you know that we've been able to develop in China over the last four or five weeks is giving us a really good understanding of just what we need to be doing to assure consumers are comfortable. But equally important is that our staff feels comfortable in this new environment. So there are some increased costs associated with bringing that security around proper sanitation, the proper PPE, for people to be using, we have re-merchandised our stores to get that proper social distancing. And, we're not - our traffic is not what it normally is. So our staffing levels are adjusting accordingly to make sure we've got the right people, right level of service, and really providing that personal one-to-one engagement and what's really, really gratifying is the feedback we're getting from our consumers as we open is just a high degree of confidence, and really thankful that we're there. And enjoying the opportunity to get out and engage in a very safe environment. And the second half of your question, Aaron, if you could repeat that, for me.

Just product launches. Yes.

Product launches.

Just has there been any change if you had to change your forecast in terms of when you're launching products this year, just given COVID-19 and some of the impact that had on your inventory value?

Yes. No. Thank you. No, really, if anything, it's heightened the need to be much more retail centric and how we think and operate our stores. And this is a big part of our transformation. The level of newness and the frequency of new reasons to engage be it in store online. I mentioned some of the virtual shopping tests that our Dickies team has been doing in China. Looking really for weekly reasons to engage with us. So, our product offer, our new product release and collab schedules to stay very much intact and Scott's earlier comment around the thoughtful management of forward buys, I mean looking at our on hand inventory that has been done with the same eye to assuring that we have open to buy available for the right level of newness flowing into each of our brands, be it to our own D2C, or with our wholesale partners as that begins to open as well.

Thank you.

I just had one thing, Erinn. Steve asked every day, what - do we have enough newness? There's an intense focus on newness. There's another good byproduct of this process that we're going through is as we're transforming the retail centric, retail first mindset. It's also the reduction in SKUs, the offers are tighter, very much from a perspective of our own retail stores, our own digital environment and how that applies to our wholesale partners. So a lot of the rigor and discipline and focus has been on both newness and ensuring that we have a very tight assortment that makes sense from a retail environment. So there's actually a good byproduct that we add discipline that comes with this constrained environment.

Thank you. Our next question today is coming from Adrienne Yih from Barclays. Your line is now live.

Great. I hope everybody is doing well. Good to hear from you. Steve, I guess my first question is really sort of like more big pictures dramatic outside the obvious shift to digital. What are the other secular consumer behaviors that you're seeing or foresee emerging post-COVID? And then how does each of the four pillar brand stand to gain in that environment? And then Scott, my follow up. Well, my follow up will be on gross margin actually.

To get ready, Scott.

I appreciate that.

So great question. Clearly, the comments - the conversations we've been having about the immediate uptick in digital demand and digital connectivity. In addition to that, things that we're seeing through our analytics and conversations with consumers are some really interesting trends and trends that our portfolio is extremely well aligned against. I think one would be this appreciation for the outdoors. If people are staying at home, if people are less apt to be thinking about travel outside of their - be their home city or home state, this connection with the outdoors and getting back into outdoor activity nearby the house is probably one of the most significant trends coupled with health and wellbeing. And we seeing this coming out loud and clear in China with people just very focused on their individual health, the health would be of the climate. And clearly our purpose led vision and the focus of our portfolio is very strong there. We see actually a lot of interest in supporting the frontline workers across the globe and the work that our Dickies brand has been doing the commitment of 3.5 million pieces of PPE for medical workers here in the States. As well as supporting those workers that are keeping infrastructure up and running. We've seen tremendous interest in supporting and our Dickies businesses is reacting extremely well. So those trends, across the outdoor health and wellbeing, focused on the climate could not be more in line with our portfolio, the reshaping we've been doing the last three years, but also our deep commitment to being purpose led performance driven as our way of creating value for our shareholders.

Great. That's very helpful. So, Scott, just to kind of digging in a little bit deeper on the patterning of the gross margin, in which quarter - obviously there's pressure from promotions, certainly one store is open and then as a channel partners start to liquidate inventory in the fall season, I suppose. When do you see sort of the deepest hit to gross margin in which of those quarters, is that the September quarter? It sounds like inventory gets a little bit better. And then in what format does it take? I understand like at your own D2C you'll be competing on price at retail, but are you getting more vendor allowances, are you giving lower costs on the outset as you forward books six months out. Thank you.

Yes. So in terms of the shaping and you can get some of this in the prepared materials, we talked a little bit about the promotional environment, but for sure in the first half you'll see more pressure and you'll see that start to moderate as you move through the year although elevated for the full year more pressure in the first half. In terms of tactics, we've got a wide range of options and I won't go into too much specifics, but generally, it's partnering with key accounts and looking at from discounting gross to net markdowns et cetera. On a limited basis generally that's how we tend to focus as opposed to wholesale returns or things like that. Those are more of the tactics we use. But one of the best weapons that we have is our outlet networks. And we learned some hard lessons in the past about dumping the bunch of goods into the off price market, third-party off price and you won't see us doing that. That's not to say we don't use these channels, they're good partners and they're effective ways within region to clear goods. But the majority of this is going to be working with key accounts it's going to be in our owndigital.com. And our biggest weapon, as I said, is our outlets. And that's where in a brand appropriate way we can dispose a lot of inventory without causing channel conflicts or having things that boomerang back on us and in the broader marketplace.

Thank you. Ladies and gentlemen, in the interest of time, our final question today comes from Camilo Lyon from BTIG. Your line is now live.

Thanks. Good morning everyone. Hope you guys doing great. Thanks for all the detail. So just two questions for me. The first one, I think you mentioned in your - in the press release this morning that you had some supply chain impacts. I was wondering if you could just delve deeper into which brands are being hurt by some of the supply chain impacts and where that stands and if they've been resolved and if they haven't been, when would you expect that supply chain to really resume kind of the flows that you’re used to. And then the second question is, you spend a lot of time and rightly so the influence of the digital and spend, and overspend on this particular channel and the importance of it. I'm curious to know, what's your view and has your view changed on what the right size, what's the right store based size going forward? And if you're anticipating closing some doors, whether as a result of maybe some mall lease rolling off, lease rolling off or just end up into lease life terms or anything of the sort with respect to active closures?

No Good. Scott, I'll start. Camilo, there's really are no material impacts to our supply chain. If anything the connectivity with our key supply partners both on the garment and footwear production, but also the material side is where we've been spending a tremendous amount of time as we right sized our forward purchases and really aligned our purchase and open to buy against the demand that we see today. If those partnerships that we've built over the years, that are allowing us to make these quick pivots and position ourselves to really meter bring down our current on hands over the course of the year with the proper amount of newness. So really, really no impacts to any degree within our supply chain. And then on the store base size. It's an interesting question. And well, if there's one thing we're seeing as we reopen our stores in China and most recently in Europe, is that local community-based retail footprint. Some people would call that hyper local, is proving to be extremely valuable consumers shopping closer to home in those communities or neighborhoods that they really live in. And as we think about our footprint here in the United States across our Vans, North Face and Timberland businesses, that would be something to pay attention to. Our exposure to the malls is not significant. We have about, 80% of our footprint are in the A malls. And then it really tapers off to B and then the tail sits in the C and D. So we're very well positioned where we're located. But changing your consumer behavior will be a really interesting element of the go forward strategy that we have, as consumers - are they going to be as comfortable coming into the store? Do they want to have a client telling relationship where they can buy online and pick up at curb? We're ready for this. Our teams have been doing quite a bit of preparation; our IT team is providing the technology to be able to do that. But if there's one thing we've learned in China is the store is important. The closer it is to where you live, seems to be a growing trend. And honestly, the footprint in the size and the way that our stores connect with consumers today is very well positioned with that trend that continues.

I just build on that too, Camilo. We talked about this quite a bit, but we pretty aggressively manage our lease terms and at any point in time, essentially a quarter of the fleet 25% is up for renewal every year. So while we're always constantly refining and updating, what our footprint looks like, that also gives us a lot of opportunity as we understand better what retail evolves into. And nobody fully understands that today. We just know that it's changing and we're continuing to adapt. Our ability to turn that fleet is pretty quick.

Thank you. We reached out of our question and answer session; I'd like to turn the floor back over to Steve for any further or closing comments.

Great. Thank you everybody for joining us and putting up with our conversation from home model here. Hope it worked for everybody. I just like to leave you with a couple of thought. VF in the strong, strong history that we have is absolutely built for and prepared to navigate the times that we are in today. The strengths that we have both operational and financial disciplines that have guided us over 120 year history have put us in a very strong position to manage really the foundational elements of our business. Our iconic brands, and the reshaping of our portfolio that we've taken over the last three years, puts us in a very strong position to connect with consumers in these evolving consumer and market trends. And our investments over the past two years to transform VF to be a more consumer minded retail centric hyper digital enterprise. And our deep, deep commitment to elevating our D2C digital and consumer engagement through our data platforms. All are proof point that the strategy we've been working; on the actions we've been taking position us extremely well to navigate and accelerate on the other side of this crisis. And just would really encourage you to stay connected with our brands, watch what we're doing online, engagement strategies that we're putting in place, just to kind of reinforce and give you confidence in the work that we're doing to drive our business and be prepared for acceleration on the other side. Again, thank you for joining us. And we look forward to talking to you in July.

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.