V.F. Corporation (VFC) Q2 2021 Earnings Report, Transcript and Summary

Hello. And welcome to the VF Corporation Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Joe Alkire, Vice President, Investor Relations, Corporate Development and Treasury. Please go ahead, sir.

Good morning. And welcome to VF Corporation’s second quarter fiscal ‘21 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 define 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 workwear business met the held-for-sale and discontinued operations accounting criteria. Accordingly, the company has reported the related assets and liabilities of the occupational workwear business in discontinued operations 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 VF’s Chairman, President and CEO, Steve Rendle; and CFO, Scott Roe. Following our prepared remarks, we’ll open the call for questions. Steve?

Thank you, Joe, and good morning, everyone. Welcome to our second quarter call. As always, I hope my comments this morning find you and your loved ones healthy and safe. For those of you that have stayed close to the VF story, you’re familiar with our now and next approach in navigating the most challenging days of the pandemic, while also preparing ourselves to emerge stronger within what we believe will be a new normal environment. While the global pandemic continues and certain geopolitical uncertainties persist, I believe we’re officially entering the next. That isn’t to say the challenges brought about by the global pandemic are behind us. In fact, we expect the impact of this crisis to be prolonged, requiring us to remain agile and adaptable to whatever may come our way. We should accept that uncertainty, change and the need to operate in an increasingly volatile world is what the next is all about, and it presents great opportunity for our company and our strong portfolio of brands. Fortunately, because of the continued dedication, commitment and perseverance of our associates across the enterprise, we are entering the next from a position of strength. Throughout today’s call, I hope you can sense that we were pleased with the stabilization and early recovery we’re beginning to see across the entirety of our business and with this confidence, we’ve decided to increase our dividend for the 48 consecutive year. We are increasingly confident with our positioning as we head into the next year and the opportunity to drive our portfolio against our long-term vision and commitment to top quartile value creation. Our success is anchored in our strong financial underpinnings, evident in how we’ve managed to heightened uncertainty of the past 10 months. VF has always been known for its industry leading operational rigor and financial discipline. Our proactive measures to protect our people, strengthen liquidity, manage inventories and prudently control discretionary spending have allowed us to continue investing in what matters most in this environment. The capabilities required to ensure that our consumers not only transact with directly with us, but that we can maintain ongoing direct relationships with them, further strengthening the affinity they have for our brands. We’re using our position of strength to continue playing offense to ensure we’re able to regain the strong momentum we had heading into the crisis. We are focusing our investments behind our transformation to become more consumer minded, retail centric and hyper digital in everything we do. Our investment priorities for this year, balanced near-term brand specific initiatives with longer term enterprise wide platform investments to create leveraged capabilities to deliver greater value. These priorities were pressure tested during the early days of the pandemic and we quickly aligned on the right mix of priorities to maintain strong near-term momentum, while we execute our plan for long-term value creation. The long-term strategic vision guiding our actions is not new. It was set in motion nearly four years ago with the launch of our strategy and I’m pleased with how far we’ve come on our transformation journey. Through thoughtful and disciplined investments in talent, digital infrastructure and ongoing strategic repositioning over the past four years, we have evolved VF from a wholesale dominated business with only 5% digital revenue to a streamlined portfolio with over 40% D2C and more than 25% total digital penetration. The evolution of our business has been accelerated through active portfolio management, which will continue to be our first strategic priority. Following the divestiture of our occupational workwear portfolio, our operating model simplifies further to 12 brands with the greatest capacity to thrive in our hyper digital retail centric enterprise, yet another milestone in VF strategic and disciplined portfolio transformation. Scott will cover our Q2 results and full year outlook in more detail, but I’d like to share a few highlights around two of our most critical strategic pillars, digital and China. Looking back at the building blocks of our 2024 plan, over half of VF’s planned revenue and earnings growth over the five-year period came from these two growth drivers. We knew entering this crisis, the digital and China would help us weather the storm and drive accelerated growth on the other side. As the year has progressed, we continue to gain confidence from the momentum of these key growth engines. Our digital businesses grew 42% in the quarter, with strength across regions and brands. We also continue to see strength in key digital wholesale accounts, particularly internationally. Together with digital pure-play wholesale, our total digital penetration was nearly 25% in the quarter. I’d like to spend a few minutes unpacking their digital momentum across our largest brands. Vans digital business grew 49% as the brand continues to engage with consumers by providing new content and activities to deepen consumer connectivity through purpose and creativity. The brand’s deep connection is reflected in continued improvements in loyalty and member engagement. The portion of Vans family members transacting on vans.com has doubled relative to Q2 last year, with loyalty members accounting for nearly half of U.S. D2C sales. Continued advancement in the customs platform also remains a differentiator to the brand, enabling more unique creative journeys of co-creation with our consumers, driving significant increases in dwell time and engagement. Coming next month, Vans will be the first major global brand to offer customization on Tmall, a testament to the scale and sophistication of the customs platform and the strength of Vans relationship with one of our most valued digital partners. The North Face also saw strong digital growth across regions up 40% globally. The brand continued to connect with consumers through engaging purpose led marketing activations, including The North Face Summer Base Camp, Walls Are Meant for Climbing and The North Face Girl Scouts Partnership. Recent high profile collabs including the announcement of our first ever collaboration with Gucci also contributed to brand heat and engagement. Digital loyalty key members increased over 20% as the brand continues to attract new female and younger consumer cohorts. Timberland’s digital business increased 62% in the quarter. In the Americas recent high profile influencer adoption and the Jimmy Choo collaboration contributed to strong brand interest over the quarter, driving 90% consumer acquisition growth with our data platform. We’re encouraged by the brand’s recent momentum including the brand heat outside of just core classics. The brand delivered a successful non-classics digital launch in China called My First Eco Kicks Madberry Campaign, which drove nearly 270% increase in traffic on Tmall during the event. And finally, Dickies generated 34% digital growth momentum from both core Work and Work inspired categories. Brand interest accelerated in the quarter to multiyear highs, supported by engaging online maker workshops and the launch of the brand’s first ever global campaign United by Dickies. Collectively, our big four brands achieved digital growth of nearly 50% this quarter. The brand’s continued momentum and addition to ongoing improvements in digital consumer engagement give us confidence in our fiscal 2021 target of greater than 40% digital growth and 25% digital penetration for the year. Moving on to China, which we continue to view as the leading indicator for the recovery path of our other regions. Our business returned to positive growth in Mainland China last quarter and is accelerated to 19% in Q2, driving our Asia-Pacific region to overall positive growth. Consumer resilience and confidence remained strong, particularly with brands able to engage in new and effective ways through digital channels and to an elevated brick-and-mortar shopping experience. Our performance in China was led by 25% growth at Vans and nearly 60% growth at Dickies. We’re also excited about the appointment of Winnie Ma as our first President of Greater China. Winnie’s deep experience in the region and understanding of the Chinese consumer will help us accelerate our growth strategy in this fast paced digitally-driven marketplace. China presents a tremendous opportunity for VF and our brands and Winnie is an ideal leader to drive this growth. Moving on to the global consumer. It is evident that secular trends in fitness, health and wellness, casualization and the desire to get outdoors and live an active lifestyle are accelerating. Our portfolio brands sit at the epicenter of these fundamental tailwinds, which will be a meaningful contributor to growth in the years to come. Our consumer insights are also increasingly pointing to another fundamental change, which may be less apparent to those outside of our sector. Consumers are increasingly expecting brands to use their business as a force for good. Consumers are prioritizing purchases that align with their values. Our research shows that over two-thirds of millennials and Gen Z have changed their purchasing habits due to climate change and by 2027 we believe this generation will account for two-thirds of apparel and footwear revenue in the U.S. The combination of our exposure to large, growing, addressable markets, as well as our brand’s purpose led positioning gives the VF portfolio a unique opportunity to thrive in this evolving consumer environment. VF and our brands continues to take a leadership position within our industry on matters related to inclusion, diversity and racial equity. We recently published our second annual inclusion and diversity annual profile, which I encourage you to review on our website. Additionally, our brands are stepping up and activating their own programs to address racism and engage their consumers in the process. The Vans brand recently announced their specific commitments and the Timberland brand just began communicating their own initiative, Operation Purpose, which focuses on four pillars to fight systemic racism inside the workplace and the community at large, people, community, design education and entrepreneurship. I’m incredibly proud of the way VF and our brand teams have responded to the racial and social issues that plague our world. I look forward to providing continued updates on the progress and positive impact we make. Before concluding my prepared remarks, I want to provide some additional context to the organizational structure announcement made earlier this week. Given our continued focus on our transformation, we’re taking steps to further refine our operating model to become an integrated brand building company. As we do this, we know that our brand success requires differentiated approaches based on the unique profiles and opportunities. To support this work, we’re evolving our organizational framework and we have begun to map our leadership to the structure of core brands and emerging brands. Core brand traditionally referred to as our global brands, our large brands that are significant financial drivers for VF. Vans, The North Face and Timberland are VF’s core brands today. Emerging brands are brands that present strong potential to become a core brand by accelerating consumer acquisition and loyalty through differentiated growth strategies and capabilities, geographies and new categories. It has become evident over time that emerging brands require a more agile operating model than our largest brands. They require a different playbook, driven by an emphasis on continuous learning and testing. We see our emerging brands as being the ideal proving ground for VF in terms of consumer, product and talent strategies. These organizational actions are an important beginning to what we’re calling Project Enable, a multiyear initiative designed to enable our ability to accelerate and advance our business model transformation and position ourselves to drive long-term growth for all of our brands. We’ll do this by evolving the organizational designs for our enterprise-led functions, and core and emerging brands to ensure we have the right structures, capabilities, resources and talent in the right place to propel us forward. One of the key objectives of Enable is to deliver a global cost savings of about $125 million over three-year period. These savings will be used to fuel our transformation agenda and highest priority growth drivers. We’re highly confident that these changes and our strong group of leaders will help us move forward toward this vision. And now, I will turn it over to Scott.

Thanks, Steve, and good morning, everyone. With the first half of our fiscal year behind us, I’m proud of our execution and optimistic about the stabilization and early signs of recovery we see across our business. Our year-to-date results have surpassed our internal expectations across all brands, driven by our key growth pillars, digital and China. We have a great handle on inventories both earned and across the wholesale marketplace. And last but not least, we continue to see strong engagement between our brands and a relatively resilient global consumer. We were quick to act in the early days of the pandemic to put our people first, strengthen liquidity, manage costs and tightly control inventories, thus positioning our brands to exit this period of disruption in an advantaged position. Our financial and operational discipline has provided VF with the ability to continue to invest in consumer engagement and product newness throughout this crisis, while rolling out critical omnichannel capabilities ahead of the fall holiday season. Before covering the details of our second quarter, I’d like to spend a few minutes on the current state of our business and operating environments by region. I’ll start with APAC. China continues to lead our recovery, growing 14% in the quarter, including 19% in the Mainland, as our stores were essentially open throughout the period. Our relationships with partners in the regions remain strong and we continue to expand partner doors in Mainland China led by Dickies and Vans. We continue to enhance the synergies between our brands and our digital wholesale partners continuously developing our digital ecosystem in the region to elevate the shopper experience and seamless online to offline integration. We are pleased with the steady recovery in EMEA where most markets outperformed expectations in Q2. Our retail business returned to growth with B2C up 6% led by 54% growth in digital as our stores have fully reopened. Traffic remains depressed across countries, but we continue to see much stronger in-store conversion. During the quarter we continued our rollout of omnichannel capabilities, activated ship from store and buy online pick up in store at Vans, Timberland and The North Face. We continue to see sell-through momentum building in the region, particularly at Vans and TNF, giving us further confidence about our positioning heading into holiday. And finally in the Americas, we’re pleased to see stores essentially fully open for the first time since mid-March. By the end of Q2 only 19 doors remained closed in LA County. Traffic remains challenged, however, productivity was strong and we’re encouraged by continued momentum in our digital business in the region. America’s digital growth grew 45% in Q2, but accelerated in September to over 60% as we began to enter the critical Q3 holiday period. Ship from store functionality was activated across 200 Vans doors and all TNF full price stores in late August. Buy online pick up in store and curbside pickup capabilities have also been implemented in certain stores with promising early results. We’re pleased with our progress and rolling out these capabilities as consumers increasingly expect this functionality heading into the holiday season. We’re also encouraged by the performance of the Americas wholesale business during the quarter with sell-through trends accelerating across the big four brands. Our key accounts remain healthy and the channel inventory levels have progressed ahead of our initial planning, which should be a positive setup heading into Q3, as well as for next year’s fall order book. So moving on to other Q2 financial highlights. As expected, the back-to-school environment was uneven and our brands experienced limited disruption due to the timing of inventory receipts. However, we were pleased with the underlying sequential improvement as the quarter progressed. Total revenue declined 19%, which exceeded our expectations of down less than 25% for the quarter. Total D2C declined 17%, driven by store closures and weaker back-to-school traffic. Our own digital business grew 42% with broad based strength across the portfolio. For example, our big four brands collectively grew 47% and our key emerging brands saw over 50% digital growth this quarter. Our brick-and-mortar wholesale business is also progressing ahead of expectations as a result of stronger than expected sell-through and an earlier anticipated start to holiday selling window. Our brands continue to successfully navigate some model supply delays which impact the cadence of our business. As expected gross margin contracted 350 basis points to 50.9%, driven by promotional activity and 110 basis headwind from the timing of net FX transaction activity. Mix represented a 50-basis-point headwind due to wholesale timing noise, which is unique to this quarter. We still expect the mixed benefit for the full year to be two times our normal structural long-term target, primarily due to our accelerated digital penetration this year. We still expect a somewhat elevated promotional environment in the second half of the year, with margins stabilizing by year ends. SG&A declined about 14% in Q2 supporting a roughly 40% earnings flow-through on the revenue declines in line with our guidance from the last call. Consistent with our earlier comments, we’re taking advantage of our position of financial stability to invest ahead of revenue to support a greater acceleration in the business. Given the stability we see across the portfolio today, we expect this investment philosophy to remain in place as we enter the second half of the year. Our inventories declined 10% during the quarter, slightly better than expectations. We’re pleased with the progress made across both owned and channel inventory in the first half of the fiscal year and are confident with our inventory positioning heading into the fall holiday periods. As we covered in our last call, we’ve been thoughtful with our forward inventory commitments this year infusing appropriate innovation and newness into our fall holiday product offerings, while ensuring we exit this year in a clean and healthy position. While this may ultimately cost the sales in the current year, we believe this is the right approach, given the uncertain environment and an appropriate investment in brand equity and gross margins going forward. As I alluded to you earlier, we continue to experience supply disruptions, which at times present shipping timing delays. However, we’ve seen sequential improvement over the course of the year and expect delivery timing to be largely normalized by year end. We have plans in place to manage peak holiday deliveries and are generally pleased with our inventory levels in the marketplace today and we’re confident in our ability to exit fiscal ‘21 with the appropriate inventory levels to service our forward growth plans. Our liquidity positioning remains strong, with approximately $2.7 billion of cash and short-term investments, in addition to over $2.2 billion remaining undrawn on our revolver. We still expect to generate at least $600 million of adjusted free cash flow this year and for the sale of occupational work to add additional liquidity over the coming months. Our capital allocation priorities remain unchanged, supported by our robust liquidity position. We remain fully committed to our dividend, which continues to be an integral part of our TSR model and a differentiator in our space. As you likely saw in our release, we’re raising our dividend to $0.49 per share payable in December. This marks VF’s 48th consecutive year of dividend increases and underscores our confidence in the future. And while the dividend remains a critical part of our ongoing TSR algorithm, M&A remains our top capital allocation priority, and given our excess liquidity position and the stability we observe across the business today, our confidence to execute an acquisition is clearly greater today than it was just a few months ago. We will remain prudent and disciplined guided by our three lens approach and focus on delivering top quartile TSR, and as a reminder, our share repurchase program remains suspended to preserve optionality. Moving on to our fiscal 2021 financial outlook. While the operating environment remains uncertain, our performance to the first half, coupled with increased visibility gives us more confidence in the stability and trajectory of the business. We therefore are providing a more detailed outlook for this year, assuming no material deterioration in current business conditions due to COVID. We expect our business to continue to sequentially improve in Q3 and return to growth in Q4 and for the full year, we expect revenue of at least $9 billion and adjusted EPS of at least $1.20, and we continue to expect adjusted cash flow -- free cash flow of at least $600 million. Across the brands we expect Vans to decline at a low double-digit rate, implying at least high single-digit growth in the second half. We also expect TNF to decline at a low double-digit rate for the year, implying in low single-digit growth in the second half. We forecast Timberland to decline at a high-teen rate for the year, with continued sequential improvement through the back half. Finally, we expect Dickies to increase at a high single-digit rate in fiscal 2021, implying at least low double-digit growth in the second half. As we head into the balance of the fiscal year, several fundamentals give me confidence in the underlying health of our model and our ultimate ability to exit this crisis in an advantaged position. First, accelerating tailwinds in our core categories, active, outdoor and work; second, continued broad based momentum in China and across the digital channel driving an acceleration across our big four brands, coupled with continued strength in consumer engagement; third, clean inventory levels across our channels of distribution; and finally, our excess liquidity position, providing optionality both for continued organic investment and M&A. The strategy we laid out one year ago at Beaver Creek remains the playbook for success in a post-COVID world. An aggressive digital transformation focused on direct consumer engagement, concentrated exposure to growing structurally attractive addressable markets and a commitment to continuous reshaping of the brand for portfolio to accelerate our strategy. While we don’t know how much longer this current period of disruption will last, we are confident in our ability to ultimately return to our long-term algorithm on the other side of this crisis. So now, I’ll turn the call over to the Operator for Q&A.

Thank you. [Operator Instructions] Our first question today is coming from Jonathan Komp from Baird. Your line is now live.

Yeah. Hi. Thanks and good morning. I want to first ask, just given the comments about September that you made, any chance you could shake the third quarter what you’re thinking in terms of the sequential improvement a little bit better for us? And then, maybe more broadly looking into fiscal ‘22, given the trajectory you’re implying for the fourth quarter? Can you can you help share any thoughts on how you’re going to balance kind of that the pace of the topline recovery with the need to invest, but also to show a nice recovery on the bottomline, and maybe tie that in with the new project Enable dynamics that you mentioned?

Good morning, Jonathan. Looks like I’m right out of the box here. So happy to take that job. So, first of all, the question was around Q3 shaping for the year. We didn’t get specific guidance on Q3, but I’ll just go through what we did say and I think this will get you pretty close. So, the topline, we talked about at least $9 billion implies low single-digit second half growth. And we said, we would return to growth in the fourth quarter. So from that you can imply kind of a trend line and how you balance out between Q3 and Q4. As it relates to gross margins, we said they’d be about flat by the fourth quarter and progressively improving. We talked about the mix will be there for the year about two times what we’ve seen from our normal 40-basis-point to 50-basis-point structural advantage that we see for mix. And promotional headwinds that have began to abate and we’ll see that continuing through the through the balance of the year. So that should give you some color on gross margin. We talked about SG&A being flat in the second half and that includes additional investments that we’ve made to continue the momentum and really build on the momentum as we exit from the COVID period in the back half of the year, as Steve says, the next period. And finally, a $1.20 from an earnings standpoint implies about a 40% flow through for the full year. So I think, within that, Jonathan, you’ve got a lot of the data that you need to get the shape and if not, then John and Mallory can take you through that in more details. I think the second part of your question was around the desire to invest versus earnings, and again, we’ve given you a shape in terms of what you can expect at least $1.20 from an earnings standpoint, and hopefully what our prepared remarks have given you some context on is, we -- while we are cutting costs and what we would call discretionary costs in the short-term, we’re also leaning in on our transformation agenda and with that $30 million additional investments based on the additional confidence we have, we’re leaning in a little -- even a little harder right now on those investments primarily around our digital transformation, digital demand creation, et cetera, that we believe are going to give us continued momentum as we as we exit this year and into next year. We haven’t really given you any guidance on ‘22. So, stay tuned for that. And the last question was around Enable. Steve talked about what Enable is about. It’s really -- I don’t need to repeat that in terms of not just layering on our digital investments, but really repurposing and rethinking our organization fundamentally. And we talked about a target of $125 million over a three-year period, what we haven’t done is broken that down for you by year. What you should know, though, is that, as we think about the transformation, the ongoing leverage as we combine to working smarter and rethinking the way in which we organize, coupled with the growth that we see longer term, will allow leverage and margin expansion over time. So that’s probably as much as I can give you on that right now, Jonathan?

Yeah. Great. All right. Thanks, Scott. I appreciate all the color.

Happy to do it.

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

Good morning. Thanks for taking my question and thanks for all the updates. Steve and Scott, I wanted to ask you guys this moment we’re having an outdoor is this a once in a lifetime opportunity? Should you guys really be accelerating your marketing, given your outdoor exposure across your brand portfolio to really take advantage of this moment in time where people are spending so much time outside? That’s my first question. And then I also wanted to kind of ask for an update on North Face. The management changes there. Any sort of additional color around Arne, who has been important to the recovery of that business and the turnaround there? And then are retailers also -- are you seeing any reorders acceleration, given that a lot of them had to cut their orders for North Face for the fall? Are you seeing any sort of retailers coming back and asking for more again? Thanks.

Well, good morning, Omar. Scott I will start, if I leave any out, you jump back in and fill in the blank. So three questions there…

Yeah.

The outdoor moment, we absolutely see, I think, you’ve spoken about it quite well. There is a trend towards outdoors and people’s desire to get outside linked to health and wellness. And I think there is a moment in time and as we came into the pandemic, the outdoor sector was in a position of growth as well and I think this is really bodes well for our brands and for the sector in general, as people continue to focus about that outdoor activity, health and wellness, and how can they kind of take advantage of this particular moment time. So we’re very well positioned for that. You asked about The North Face management, I kind of pull you up one notch, in my prepared remarks and Scott just spoke about Project Enable. As we think about our future and we think about our transformation, we find ourselves today a smaller portfolio of brands, focused on three very specific parts of the total addressable market that are growing. And as we seek to simplify our structure and really focus our energy to get those key aspects of our transformation, we saw an opportunity to really start on the top and best align our talent with our biggest opportunities. And Arne has been a strong part of The North Face performance and we wish him well. This is really about simplifying our organization structure, putting our very best people against our biggest opportunities and really looking to leverage those key enterprise platforms that we’ve been investing behind, driving our core and emerging brands forward. Yeah, the last part of your question, Omar, was about retail reorders. I would tell you, it’s a little early, as we come into this fall holiday period to talk about reorders. What we have seen is a great interest in our wholesale partners to take those initial drops of their fall order books get those placed a little bit earlier than we may have expected. So I think we’re positioned as we enter the fall holiday period. We’ve seen good energy start here in September, carried into October, and if that continues, I think, there’s an opportunity, but I would just remind you, that we’ve been very thoughtful and control that our inventory purchases, there’s not a tremendous amount or any excess inventory to service a big reorder pop. What we would expect to see is really good sell-throughs, clean inventories and positioning ourselves well for those next two seasons spring and fall order books that our teams are working on.

Thanks for the color.

Omar, the only add, I would say is, one part of your question and it was around, should we be leaning in on investments and we are, I mentioned the $30 million of digital and certainly a good chunk of that is focused on The North Face as well. Just to address that point.

Great. Good luck.

Yeah. Thanks.

Thanks, Omar.

Thanks. Our next question today is coming from Camilo Lyon from BTIG. Your line is now live.

Thanks. Good morning, everyone. Nice job on the quarter. I want to -- I have a couple questions. First on gross margin and inventory, Scott, you talked about inventory in the channel feeling very comfortable with that. Maybe just square that up with the progression of gross margin and why Vans [ph] Q4, we should expect to see flat gross margins as opposed to a little bit earlier in Q3. Maybe just help articulate and shed distinctions between those dynamics, while still anticipating the promotional environment. It seems like you’ve got your inventory in a much better place. You’re comfortable with it yet. It seems like there should be a faster gross margin uptake? And then my second question, excuse me, is on M&A, and more specifically, we’re approaching the election here within a couple of weeks. If there is a Biden victory, with the anticipation is that capital gains, taxes will increase, is that incentivize you to complete a deal faster and get it done before your end? I’d love your thoughts on that.

Yeah. So…

Go ahead, Scott.

It sounds like this one’s me, Steve.

Yeah.

Camilo, as you think about gross margin trajectory. I guess really just consistently from what we said all year, we see it largely playing out the way we anticipated. So remember those promotional activities to clear inventory, excess inventory and the dead inventory that was in the stores, et cetera. We said that would be accelerated in the first half and moderating throughout the year and really kind of back-to-quote [ph] normal by the fourth quarter. And we really saw that, if you look even in the second quarter, when you take out the transaction impact, the rest of the decline is largely due to promotional activity and it’s -- there’s 200 basis points or so of that promotional impact in the second quarter. That number was about 500 in the first quarter, right? So, still high, still elevated, but sequentially improved from the prior quarter and we see that trend continuing and moderating by the end of the year, and I guess back to quote normal. And that’s why we’ve been aggressive and getting after it, right? So that we didn’t have all that excess inventory either in our own warehouses or inbound or at retail, and it’s not perfect. I’m not saying there aren’t pockets here and there, but by and large, we’re really clean by historical levels. And that bodes well for less promotion on a go forward basis and we know that’s good for brand health and that’s also good for creating demand and scarcity, which tends to bode well for the future. So that’s one point. The other -- another point on gross margin, again, is that that mixed benefit, which will continue through the balance of the year. So we expect to see continually improving gross margins, again, in a quote normalized level or back-to-quote normal levels by the fourth quarter. So that’s how the shaping is coming together. I guess, Steve, maybe -- the first thing I’d say is, timing -- we don’t try it out guess politics in terms of timing, because you can’t out guesses, right? It’s impossible to do. So I’ll let potential sellers speculate on whether that’s getting impact their timing or not. I don’t know, Steve, if you’d add anything to that, but.

Yeah. No. Not really Camilo. Other than M&A continues to be that number one choice for capital allocation. As opportunities come, we’re certainly prepared to act. But it will be disciplined. It won’t really be driven by a political situation to be more around. Is it the right asset at the right time fitting into our strategy?

Understood? And Steve, if I could follow up on that, do you feel that you have enough visibility and confidence in the available opportunity set such that and in your own business, it sounds like you do, stuff that you don’t need to wait for full recovery to be active on that front that you have enough information and the discussion that you’re having to engage in a transaction?

Yeah. I will answer your question this way, Camilo. Now in the next approach, I mean, we’ve moved quickly against our objectives to really strengthen the foundation of our enterprise through our actions early in this pandemic. We’re sitting in a good place with ample liquidity, a business that is improving and an outlook where we see stores open, supply beginning to meet our demand and really good connections with our consumer through our digital assets, digital performance is exceeding our expectations. So we’re in a good position. We are feeling confident around the future outlook. I will tell you that we do think that this situation we find ourselves in today will be prolonged. But with this focus on being agile and adaptable, we’re in a good spot. So if the right asset were to come, we’re well-positioned to be able to act, and I think, you would absolutely see us pull the trigger.

Thank you so much.

Yeah. And Camilo, just one add on, on that, is that, it also depends on what type of asset, right? And where -- well, we said, we have more, more confidence today than we did 90 days ago. That’s a fact. But it’s still an uncertain environment and so the resilience and the type of asset would matter in terms of the timing from an acquisition standpoint.

Understood. Thanks very much and good luck guys with the holiday season.

Okay. Thanks.

Thanks, Camilo.

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

Hey, guys. Good morning. Thanks for all the detail here. So, Scott, just one -- near-term one on and then I have a longer term question. But on Vans, when you look at the big swings in the wholesale business quarter-to-quarter, the America wholesale business is down about 80% in the first quarter then up 10% in the second quarter. You said the cut -- your customers in that channel had inventories are very low and Steve last quarter told me you thought back-to-school was delayed, not canceled. It was nice to see that looks like it came true. But we -- it looks like September had some pent-up demand that got unleashed. I guess, anything you’re seeing in October that may benefit -- in a period where we may benefit less from pent-up back-to-school. I mean, I’m really trying to figure out what gives you confidence that there’s not another deceleration ahead for Vans on the wholesale side in third quarter, fourth quarter, whenever if the POS trends don’t hold up, just since we know September was a pretty meaningful pop, there could have had some one-time demand in there?

Yeah. So, I think, you kind of hit the key points in your question there, Michael. But we did see, if you remember Q1, we had a relatively more difficult quarter in Q1 for Vans and we talked about some inbound delays and that was timing between Q1 and Q2 and indeed we did see that come to pass. So that’s one proof point. Encouragingly, we saw our China business accelerate for Vans up 25%, our digital was plus 50% in Q2, great proof points of the health of the business and give us confidence for the future. And lastly, we did see wholesale orders move to the last, right, and I think that’s a combination of interest in demand, clean inventories and it was encouraging to see that some of that demand on the wholesale side shifted into the quarter based on demand. So, listen, it’s still an uncertain environment generally, but we continue to make progress and it was really encouraging to us to see that the strength in the brand and particularly in some of those, what we would say, forward looking indicators like China, like digital.

Okay. And then I know you reflected again today that you’re not going to give us much outlook for 2022 yet, but I think you’ve dropped some hints.

Okay.

But some of the components, the building blocks at the 2019 Analyst Day and you feel like the algorithms intact, but there might be some changes to the past to which you get there. I think you’ve said that a few times over the last few months. Maybe some initial thoughts on what you see is the same and some of the big differences in the 2024 plan. And if one of those is the fairly obvious fact that it’s a bigger digital world ahead, maybe talk to us about how the bigger digital business would impact the operating margins of the business. And if you plan to hold the algorithm intact, I guess, it would imply a digital’s positive impact to your margins you’ll find ways to reinvest some of that to get back to the same operating margin or EPS cadence. Maybe just a few thoughts on how you look at the high level plan as you go out to ‘22?

Yeah. So we’re not going to talk about it, but you’re going to ask me about it anyway. That was pretty good.

Right. Right.

That was good.

Right.

That was good. Here’s the thing, we’re not -- the problem when you isolate on one aspect of the plan without the benefit of the full context is that, you don’t get the full context, right? And so I’m always cautious.

Yeah.

And I would always caution you guys, not to get ahead of us here, right? All the factors that we see are giving us confidence that we have the levers to pull to maintain our investment and also to maintain the margin expansion that we’ve committed to you longer term. Let’s set aside that we don’t know exactly when this rebase lining occurs and when we’re out of the curve that impact, these are things that are unknowable. Although, the progress we’ve made so far has been largely in line and maybe a little better than what we expected. But a few things that we know, right, the digital acceleration that we had been planning for has lurched forward and that’s not going to change, right? We don’t know exactly how it’s all going to balance out. But we believe that the investments we’re making and the fact that our digital channel is our most profitable, those are all good things and allows us both the gross margin and the operating margin to continue to invest back into business. That was part of your question and I would agree with you, right?

Yeah.

We want to be a leader in this area and this is what our whole transformation is about. So what I would take away from it Michael is, we have the levers based on the changing algorithm. We think we have the levers in place that would allow us to both continue to offer invest and to get the margin expansion consistent with that algorithm. And that’s why I and Steve and others continue to make the comment. We’ll come back. We’ll give you guys once we get some stability here and the situation. We’ll come back with another Investor Day. We’ll clean all this up for you. But in the meantime, as you’re trying to figure out what these puts and takes mean, I would take away is, we have the ability to invest and we have the ability to expand our margins and you should feel good about that long-term algorithm.

Okay.

I’m afraid that’s about as far as we can go right now, yeah.

That’s helpful. Thank you.

And Michael, I would just add…

Yeah.

… a little more simplistically here is, we entered the crisis in a good position. We had good momentum. We’ve reshaped our portfolio with very unique and differentiated brands that are squarely planted in the parts of the market that are growing, and in fact, you’re seeing even greater headwinds. We have confidence in the long-term out -- in that long-term algorithm we play -- laid out last year in Beaver Creek. What’s unknown and it look -- we’ll just have to have time really play this out to us is what’s the shape of the recovery. We’re positioned to move along that path. The investments we’ve made around our transformation, that digital growth that we’re seeing are really strong proof points of the strategy that we have in place. But really it’s -- it will be a timing issue related to the shape of the recovery. We’re positioned to move well, is that all starts to become more clear.

Awesome. Thanks a lot, Steve.

Thank you. Our next question today is coming from Matthew Boss from JP Morgan. Your line is now live.

Great. Thanks and congrats on the next quarter.

Thanks, Matt.

Steve…

Thank you.

So, maybe to switch gears to Timberland, well ahead of forecast this quarter. What drove the better than expected topline and any signs that you’re seeing that you believe gives you renewed confidence in the turnaround for that brand?

Yeah. No. Great to have that question come at and we’re really pleased with the results that we see with our Timberland brand. The sequential improvement in this quarter is a proof point of what we’ve been talking to you guys about for the last number of quarters, that the people we have in place, for Martino providing that brand leadership to the creative talent, driving the product creation, our new marketing leader, they keep seeing a change in the tone and the quality of the creative. And I think what you see at this particular point in time is people looking for those authentic icons, that they’ve depended on in the past. But the outdoor trend has been benefiting Timberland through the last six months. Our outdoor category is doing well. So new release that we had here in China, the Madberry is a new contemporary execution at outdoor, the Garrison peak that you see coming here in the U.S., it’s up on our line today. Just to -- there’s a good introduction of some new styles. This is part of the work that our teams have been doing. We’re seeing energy building around some of those core icons, the yellow boot, but even more importantly, variations of that boot. We’ve had some great influencers show up, wearing our products and it’s just approved for the quality and authenticity of this brand. But early, we’re encouraged and excited for our team and the work that they’re doing. We will continue to do the work to diversify the product offer away from take to build on the non-classics, to build on our women’s, our Pro business is doing well, it grew low-single digits in the quarter. So there’s a number of proof points across the Timberland brand, that continue to give us confidence that this brand has the ability to achieve its long-term growth algorithm and really driving against the new creative you see coming from a brand engagement standpoint and how that’s coming to life and the products.

Great. And then…

Yeah. Hey, Matt. Can I just add one perspective here too? Remember, from an order book standpoint and inventory at retail coming into the season, it was not quite as strong from a Timberland standpoint.

Yeah.

And so we’ve -- our buys and given the lead times have reflected that. So our ability to chase is going to be somewhat limited, but this is really positive development for the brand. As you think about cleaning the inventory is creating some of that scarcity, people are making more money from a margin standpoint, all of that sets up well as you think about the future for the brand and it’s a change in sentiment, which is really positive for Timberland right now. Sorry to interrupt…

That’s great.

…but I think it’s important.

No. Absolutely. That’s…

Yeah.

And that’s great color and great to hear. Maybe to circle back to Vans, so you’ve cited a number of the accelerating tailwinds out of the pandemic and casual is clearly one of them. How do you think about the total addressable market for Vans multiyear? Could it actually potentially be larger? And then just maybe circle back, what’s your market share today, what do you think the opportunity is? Just larger picture, how would you rank the growth opportunities for the brand multiyear from here as we think about Vans?

Scott, I’ll start.

Yeah. Sure.

And fill in the blanks here. So I think the total addressable market, Matt, you -- we see for the Vans business continues to be same, the active at leisure, part of that marketplace is large, it’s growing and it -- and Vans kind of moves over into that streetwear category as well. And I think that’s where the power of the messaging of creative self expression. And the -- and just the efforts that the team have taken as of late to really increase the quality of the content, how we engage with that content across social media channels and in our own environments. To drive that, that long-term loyalty in the year, our team talk a lot about brand love. We are really in a good position to continue to grow in that active at leisure marketplace and the efforts that they’ve made around classics, the progression footwear, the apparel, all of that, all that work continues to be paying dividends as we see really balanced growth across regions and across categories. And I think you see the brand continue to be very thoughtful around the product launches. The Simpsons collab that we launched just a few weeks ago, it’s extremely successful. You see some new styles, skate high and our ultra category up with the new MTE aspect that we come into the winter months. So just continue to be very thoughtful around how they are creating products and matching that up with the brand position. Market share, we don’t -- I don’t I think we’ve come out and really talked about our absolute share. Scott, joke, help me here?

No. No. Yeah. We haven’t Steve.

But we continue to think that we’re growing and opportunity to continue to acquire more consumers, the Vans family. Membership program has been a really huge success. We’re approaching 13 million people as part of that and 50% of our U.S. D2C sales this last quarter came through that Vans Family Membership program. So absolutely proven that we can engage consumers grow the number of consumers that the brand speaks to and really building that brand family around a whole passion around creative self expression, which is a very unique position for them in the market versus their competitive set.

The only thing I would add is, this total addressable market, and I would say, markets, because it’s -- this brand plays across multiple areas, as Steve just mentioned, and that’s one of the strengths the broad consumer base. Everybody is trying to say, well, what is the post-COVID world look like in light of where you were before COVID, and we would say, the trends that we see accelerating casualization, the deep brand love and engagement only are stronger through this period. So while that TAM was always attractive and we had a -- have a unique positioning, which is both distinct, but broad. If anything that’s more -- even more attractive now in light of what we see changing consumer behaviors look like.

Congrats again and best of luck.

Thank you.

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

Good morning. Thank you so much for taking my questions. I got a handful so I’ll just make a list and then go through it. On the SG&A that you said that you expected to be flat in dollar -- was that in dollars or as a percent of sales, Scott, in your commentary? And then…

Yeah.

Yes. It was in dollars or yes, it was as a percent of sales.

Dollars.

Dollars, dollars. Yeah. Okay. Dollar. And for the fourth quarter -- in the fourth quarter, right?

And the second half.

Okay. And then…

And as you heard me, right? Yeah. I said the second half. Yeah.

Okay. Okay. Perfect. Thank you. And then can -- with Vans is, people are concerned is, what’s happening with Vans and maybe some of the way the sales are? Is this more the ability more of a supply situation or demand situation? And then also, can you give us the status of the factories in the Dominican for Timberland? And then lastly, is the FX transactional headwinds the 110-basis-point, is that expected to continue for the balance of the year? I may follow up with those questions.

Wow! A lot of questions there, Sam. Can I -- so the last one I’ll say, yes. FX continuing for the balance of the year, but moderating as the year goes on. That was one. Timberland and Steve, I’ll just rip off this and I’m sure I may miss some. So Timberland, we made some recent announcements, as you know, we’re reducing our own manufacturing footprint and some of the actions we’ve done in the DR are really related to that. I think you can assume that we’ve -- this is a well thought out strategic move and we’ve got, our supply chain team is on it and we’ve got an orderly transition plan for those actions which had been announced. So that’s really not different from the long-term path that we’ve been talking about for quite a while here. It’s just…

Yeah.

…one step in the way. I’m sorry, you had a question relative to Vans and I didn’t -- can you repeat that?

Sure. I wondered, there’s a lot of concern about the momentum of Vans and the changing, is the Vans, I don’t know if it’s weakness or perceived slowdown based on the questions, is this -- is Vans more of a supply issue right now where you’re making sure it’s very, very clean. So business really can’t sort of get ahead of itself. So it’s not a demand driven issue, it’s much more of a supply driven issue or is there something else there relative to the…

Yeah.

…to the momentum of the brand?

Yeah. Well, you guys have talked about weakness we never have. We …

We know. I understand that. But people can’t.

Yeah.

I understand. I just couldn’t help it, but.

Anyway, the -- I mean, the demand is there, come on, the engagement of our consumers around Vans has been consistent and some of the things that get commented on. Remember our plan here, which we’ve talked about now consistently, right? We said, we were a bit tone deaf early on and we changed our marketing tone, the -- what we call Project Pivot and we moved away from some of the more transactional related communications and bottom of the funnel activations, when people were going through a lot personally in their life and focus more on deep engagement with our consumers as opposed to transaction. As time has gone on, we’re changing that cadence, both in terms of the raw amount of investment and also the tone and execution of that investment. So if you then look at things like search and interest, of course, that’s going to be impacted by those actions in the short-term. But over time, we’re seeing those investments increase and you’re going to see that continue to build underneath all that. We’ve seen consistent demand for the brand. I just point you back Sam to digital up 50%, 70% up in the first half. China leading the way, I mean, from our standpoint this is played out largely as we expected and actually even a little bit better based on some of the demand moving to the left. That doesn’t happen just because the supply that happens because of interest, right, and an engagement with the brand. So, I guess, what I would say is, this is playing out largely as we had anticipated, and if anything, maybe slightly better. I don’t know, Steve, if there’s any color you would add there.

And maybe on a couple of these, Sam, just to kind of build on Vans. We have spoken about the impact that Vans has seen due to their outsized exposure to California and the store openings. That’s the mix and the concentration of stores for Vans here in the U.S. is unique for them and certainly we’ve had to navigate that and there were some supply delays. Some do that how we quickly moved our inventory, but also the impact that the pandemic had on our suppliers who we’ve worked very closely with to assure their people were safe and cared for as our own. But as we move through the pandemic here we are seeing a really good improvement. So we have great momentum with this brand. I mean, we have first half digital growth up 70% the Vans Family Membership program continuing to grow and the ability for this team to create compelling content and continue to drive those really compelling drops, continue to feel very confident about Vans and our opportunity. On the on the DR, Timberland question, Sam. Just a quick add here. As part of our portfolio transformation as we know, KTBS has standing up as their own public entity, the divestiture of our occupational workwear business, we have looked to transform that internal manufacturing footprint that we have historically maintained. I think the good news here as we do that is that internal talent that drives -- has driven those capabilities over the years will maintain their presence with us and we’ve talked a lot about our third way manufacturing footprint and how we partner with our manufacturing partners across the globe. That knowledge base and skill stays. But as Timberland grows, we will have -- you will continue to differentiate the product offer and the type of manufacturing, the type of skills required to produce these new styles is evolving. And that’s what’s giving us confidence as we transform our portfolio, the need and the ability to transform our supply footprint and the partners that we worked with will continue to evolve, so just really key part of our transformation.

Thanks. I have one last thing on the gross margin, what -- if everything is clean and you’re down 100 basis points in your gross margin in the fourth quarter of last year? Why wouldn’t the fourth quarter look more like, let’s say, ‘19, sorry, yeah, fiscal ‘19 levels rather than last year’s level?

Well, we’ve given you a shaping Sam, and well, we have more visibility, we don’t have perfect visibility. So, could it be better? Maybe there’s still a lot of moving parts. We’ve got a lot of D2C that needs to happen in the second half. And so I think you can assume that what we see today based on the trends and everything we know is what we’re confident in and that could it be better? Yeah. I mean, could there be some negative things that happen that we can’t see? That’s possible, too. So that’s why we ended where we did.

Thanks very much and continued success.

Thanks, Sam.

Thanks, Sam.

Thank you. Our final question today is coming from Laurent Vasilescu from Exane BNP Paribas. Your line is now live.

Hello. Good morning. Thank you very much for taking my questions. Steve, Scott, I was hoping to understand the cadence of North America versus EMEA. They both declined the same rate year-over-year. How do we think about the cadence for the third quarter? I know you’re not giving us top level -- topline overall guidance for the third quarter, but should they be moving in tandem again? Any thoughts on how Europe is playing out especially since there is some lockdown measures put in place with some countries out there?

Yeah. Maybe, I guess, the only thing I would say here is that, we have generally seen Europe from a recovery standpoint slightly out of North America. That’s not withstanding what may happen to the point, the last point that you just said, Laurent. So, we haven’t seen a significant impact. But we watch the same news that you do, and I would say, this fits in that category of the uncertainty and unknowable. But in general, our Europe business has been a little bit ahead from a recovery standpoint than what we’ve seen in North America and that would be what we assume, you can see that in the business evolution slide page 29 on the deck that we provided with the announcement and how we see it. That’s really about as much color as we can give you right now, Laurent.

No. That’s very helpful. And then maybe on capacity constraints, I think, there’s a number of brand operators out there talked about capacity constraints for this peak holiday shopping season. Any thoughts, is there a limitation for your digital business to grow as certainly just because of a higher base? Are you using 3PL, any thoughts on that would be helpful as we think about D2C versus wholesale for the third quarter?

I am going to start Steve.

Yeah.

Yeah. So we’ve -- to the best of our ability, we’ve prepared, in light of whatever COVID restrictions we have and we have looked at whether it be offsite storage and just different things that our supply chain has looked at, looking at peak volumes. And to the best of our ability and knowledge to see it, we think we’re prepared. The -- that being said, it’s an environment where things can change and if you should have an outbreak or whatever, that where people first, so we’re not going to take any chances and we would react to that in the event that it would happen. So without any unforeseen circumstances occurring, we think we’re well prepared Laurent for the peak and we think we’ll be able to meet those objectives. Now I will say this too, service levels aren’t great in every aspect because of really things that have already happened. Our supply chain is largely back in business and operating today. But that doesn’t mean that things are happened four weeks, six weeks, eight weeks ago aren’t impacting us now. They are, right, in terms of new product deliveries being a little late and certain things that are not at the levels of stock that we would want to see. Those -- it’s getting better every day. Again, largely we’re paying the sins of the past. In other words, we’re back up and running today. So we’re not creating new problems, we’re getting out of the issues that are in the past. But it would be wrong to give you the picture that this is normal, because it’s not normal. It’s just getting better and we have better and better visibility to when those get well dates are and how that whole supply/demand matches is setting up. So with everything we can see, just to reiterate it, we’ve got the capacity lined up, we’ve got DC, last mile, all those things and we believe we’re prepared for this peak.

Very helpful. Thank you very much for all the color and best of luck.

Great. Thanks, Laurent.

Yeah. Thanks. Thanks, Laurent.

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

Great. Thank you, and thank you, everybody, for joining us this morning. I hope you’re walking away with a sense of just how happy, how comfortable you are with the stabilization and early recovery that we’re beginning to see across VF. As we enter the next year, I think, you see us leaning in, investing behind marketing, continuing to invest behind our transformation, confidence that we had, our Board had to increase our dividend coming out of this quarter. There is many proof points that are giving us confidence as we begin to enter the next. We’re early, and though, we are seeing no signs of improvement, we will remain cautious. We will remain agile and adaptable and really drive against those opportunities that we see coming here in the future. We are positioned extremely well in those parts of the markets that are growing with a very unique and differentiated portfolio supported by strong enterprise functions and regions, with very specific skills that enable the success of our brands. And we look forward to continuing to talk to you here in the coming quarters and I wish you all a great day and stay safe.

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