V.F. Corporation (VFC) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us remotely for the Third Annual Stifel Cross Sector Insights Conference. Hope you're all finding the virtual conference to be a productive experience. This is Jim Duffy, analyst following sports and lifestyle brands for Stifel. For this session, we're very pleased to be hosting V.F. Corporation. Joining us from VF today, Chairman, President and CEO, Steve Rendle; and Executive Vice President and CFO, Scott Roe. A big thank you to the VFC team for being with Stifel for this session. This session is scheduled for 30 minutes. The format will be Q&A. I'll be the moderator. I'll set the stage with 20 minutes or so of questions. We do encourage the audience to submit questions via the digital dashboard. For the last 5 to 10 minutes of the session, I'll represent those audience questions that are showing in the dashboard.

To kick things off, guys, before we get into challenges of the pandemic, I want to be sure we establish a baseline for the business entering 2020. In many ways, Steve, it was like the company was preparing for a changing world order that may be arriving even sooner than you expected. Let's start with the vision that led you to the strategic focus on sustainable active lifestyles and the focus on consumer-minded, retail-centric and hyper digital businesses.

Thank you, Jim. I think it's very true. And we are so well positioned to navigate this point in time. In fact, you could say that VF is built for this. Back in 2016, we began to put in place a new strategy. We worked very closely with our Board, but really taking insights to what was going on in the marketplace at that time. And I think it's relevant because here in the United States, we saw a significant change in consumer behavior, moving more online than within brick-and-mortar. We saw retail consolidation and quite a few bankruptcies. And that really informed the strategy that we put in place and communicated in 2017, where we first spoke about reshaping our portfolio to align with where the market was moving, a deeper focus to China which was already so digitally focused, amplifying our commitment to D2C and digital and then laying out a very clear vision about how we would transform a traditionally strong wholesale operator with deep, deep business disciplines to add this notion of being more consumer-minded, retail-centric and hyper digital in everything that we do. And we've been working on this strategy for the last 3 years. We've been shifting our portfolio, investing behind our digital commerce, mobile-first thinking, adding a consumer data component to our insights capability. And all of this is very much positioning us to navigate a difficult marketplace, where digital is becoming the primary touch point, an understanding in consumer and how to become a more personalized provider of messaging and content, all positioning us very, very well to navigate these times.

And Steve, beyond just the category focus, you've really elevated the purpose-led mission to support multiple stakeholders. Can you talk about the role of this mission in corporate strategy and value creation?

Absolutely. In our Investor Day this last fall in Beaver Creek, we laid out our strategy [ B2B ] point Power of And. And The Power of And was really leveraging that historical performance-driven culture that really is showing through in our supply chain and strong financial operating disciplines. But we put on par with that performance-driven historical perspective this notion of becoming purpose-led. And we have, over the years, last 4 years, crafted and activated a purpose that really captures all of our brands and all of our people across our functions. And that purpose is about powering movements of sustainable and active lifestyles for the betterment of people and the planet. And as we moved into 2017 with our new strategy, we knew that this was something our employees were asking us for. It's not so much what we do, but why do we do it, what are the -- what's the impact that we can have beyond just delivering strong revenue and earnings, important, but we wanted to put on par this notion of really leveraging our commitment to our stakeholders, be it within the communities where we produce products, our worker environment program through our supply chain or coming closer in through our brands and connecting with consumers, connecting with communities, and being really forthright with what that purpose stands for. For Vans, it's creative self-expression. For our North Face brand, it's really about enabling exploration. Dickies, it's about supporting and building the independent maker. Those personal connections and linkage to stakeholders are as important and as powerful as our commitment to our shareholders today. And certainly, what we're looking at today coming out of the pandemic and the issues here in the United States over the last 2 weeks, purpose-led brands, consumers are looking for and demanding that brands stand up and act consistent with what they've said they will do. And as they do that, you're building much greater loyalty and much better long-term affinity.

That's great. The notion being purpose-led has become central to the brand's identities. VF brands have been vocal and taking a stand on many issues recently. Clearly, this dovetails with the mission to support multiple stakeholders, including the customers and employees. Is that translating to improving brand affinity? Do you have evidence that that's the case?

Yes, it is, Jim. I guess where I would start first, we talk a lot internally about our #1 consumer is our employee. And that we have 50,000 employees across the globe and they are all deeply engaged and committed to our purpose. In fact, the way we crafted it was very much a bottoms-up build over a course of 18 months. And every word was carefully chosen, and it connects with our consumers no matter your position or your location within a company or within a region. And so with that framework, the commitments that we've made today in the pandemic of putting our people first, focusing on not furloughing our retail teams, supporting our distribution teams with increased pay, cleaner, more easy to navigate environments as they've stayed working on the frontline. The employee engagement, a recent survey, we saw a dramatic jump in our employee net promoter score. They're giving us high credit for our people-first approach and really maintaining that commitment and positioning our employees to help us emerge even stronger. And as we take that forward to our brands and been able to talk a lot about our people-first approach, supporting our specialty retailers, supporting our supply chain partners, helping them navigate access capital where they need it. And now with the protests that we see here in the U.S. marketplace and our commitment to strengthening already a strong result for inclusion and diversity, but engaging one-on-one listening sessions and asking our black and brown employees to help us understand what we can do differently to improve their work experience, how we can give back to the communities that they live and work in and using our purpose, not as a -- not just an investment vehicle, but really utilizing the strength of our words to inform our actions and mobilize our people to make a change.

I'm sure it's been well received and it certainly hasn't gone unnoticed by consumers. Steve, another component of the strategy distorting to direct channels and digital, it's become more important than ever to have that one-to-one dialogue with consumers. Our research shows that you've been accelerating those efforts through the pandemic and developing a richer consumer dialogue. We know e-commerce trends have been strong with stores closed, but you've enhanced your digital efforts. Are those translating into metrics which are suggestive of lasting benefits such as growth in the customer file, growth in the loyalty program membership?

Yes, Jim. I would tell you the investments and the commitment that we've had over the past 3 years have positioned us at a place where we are accelerating our commitment to this consumer-minded, retail-centric using digital as that tool to advance our skills. And it really does start with that consumer-first mindset and our end-to-end data and analytics platform and the insights capability to take that consumer understanding and translate that into actions. And I would tell you, as we really pivoted here in the last 2 months, we've -- on our e-commerce platforms, we've gotten less about trying to drive transaction. And we've really moved towards engagement and building affinity and really putting empathy first and engaging consumers where they are and trying to bring some fun and some energy into what is a difficult transition to working and staying at home. And we've seen very strong engagement across each of our brands. I always like to talk about the Vans' Shoebox Challenge, which was really just a fun off-the-cuff idea but put up online and engaged consumers to put forward their best creation using their Vans shoebox. And you can go online and you can see some of the outcome of this. But just great engagement, sharing user-generated content to the Vans community and just strengthening that notion of creative self-expression and bringing some fun to what is a challenging day. We're taking that connectivity as we build greater affinity and loyalty and investing, continuing to invest around our digital commerce capabilities with a mobile-first mindset and really looking at how do we create a more seamless connection between the virtual- and physical-owned environments that we have, but also how do we strengthen our partnerships with digital wholesale partners like the Zalando and Asos, using our digital-first mindset that is where consumers are today. They've moved even more rapidly to engaging there, but furthering our investments to strengthen our brand's ability to connect and attract and convert as consumers really start to turn back on that consumption mindset. And we've seen this start in Asia and move very nicely across Europe and the Americas, and that we have seen a nice acceleration in our digital penetration and connectivity with consumers.

That's great. So e-commerce, a low double-digit percent of revenue in fiscal '20, higher, I believe, for Vans and The North Face brands. Inclusive of digital wholesale partners, I think the total approach is 20%. That's still a lot of revenue through brick-and-mortar locations. The disruption there has been severe. Do you have any update on the percentage of your own retail fleet that's open for operations? And are there any notable changes you've seen in consumer behavior across your markets and channels over the past 30 to 45 days?

Scott, do you want to start with some of the details around the numbers and mix that Jim asked about.

Yes. Sure. So in terms of the openings, I have to go back to the last thing we said publicly, but largely, Asia is open for business. As you think about Europe, they've got a little bit of a head start versus North America. I think point in time, we were at 150 doors, if my memory is right, and we were just starting to open the U.S. And as -- it's publicly available now, you can see more and more countries and more and more states are coming open. And so you can assume that the progress that we laid out continues to develop in terms of store openings. As you think about the wholesale side of the business, in our last earnings call, we put out a graphic around a breakdown of our distribution. And most of the concern that we hear from people in your line of work is around U.S. wholesale. And frankly, we agree. We talked about -- Steve mentioned some of the actions we've taken from a portfolio standpoint to, as we would say, derisk our distribution. U.S. wholesale accounts for about 25% of our total. And within that, our largest accounts are really what we term as specialty accounts that we would say are going to be relatively healthier. I think Dick's Sporting Goods, Foot Locker, REI, Genesco, et cetera, et cetera. So we -- well, we do have some -- a relatively significant portion of wholesale accounts. What we're seeing is we're focusing on those winners and those that are key partners and have been great brand-enhancing partners for us. And frankly, we've trimmed the tail on some of the other parts of the distribution that we think are more at risk and not likely to be as strong or even -- maybe not be around. Remember, we didn't expect growth. In fact, we assumed in our long-range plan that U.S. wholesale would be down over our 5-year plan. And we're seeing -- I don't think the trajectory changes. It's just maybe the speed of that has increased. At the same time, we've seen an acceleration in our digital business.

Very helpful. Guys, I want to talk for a moment about some prevailing trends. A lot of data points suggesting there's been a surge in demand for products associated with fitness, active lifestyles, recreating outdoors. Have you seen evidence of this within your portfolio, which seems particularly well suited for it?

Jim, we've seen 3, 4 emerging trends that were honestly there prior to the pandemic, but they've only taken greater shape and acceleration. They are specifically this appreciation for the outdoors. And people are stay at home, they're looking for ways to get outside with their families and enjoy what they can touch from an outdoor standpoint. There's an uptick in health -- a focus on health and well-being across a whole host of different avenues, which our portfolio is very well positioned for. And then there's this focus on sustainability. And certainly, we're all enjoying a much more casual lifestyle as we live and work at home and really only interact with people via Zoom. But in the case of the outdoor trend, we've seen a nice uptick, as an example, in our North Face equipment business. People purchasing tents and sleeping bags at a higher rate and then sharing the experiences that they're creating with these with their families in the backyard, sleeping outside, cooking dinner over their camp stoves, but really trying to generate some new excitement in the stay-at-home environment. And now as states and countries begin to reopen, we are seeing an uptick in outdoor participation in national parks and outdoor environments where people typically would take a more multi-day approach to the outdoors. And our North Face, Timberland, SmartWool, Icebreaker brands are very, very well positioned. This uptick in health and well-being and a deeper commitment to running our Ultra business, though small, is really at the front end of that uptick, and we've seen really nice engagement growth and that also is having a positive impact with our other outdoor brands, The North Face, SmartWool Icebreaker. And then casual lifestyles. Every one of our brands has a great product to offer there. Certainly, our Merino brands in the purpose-led focus that SmartWool and Icebreaker both bring. But Vans as well, for sure, footwear and apparel that they produce, bringing some fun, bringing some creativity to your everyday life in a very casual approach. These trends were here, they're strengthening. And the work that we've done to reshape our portfolio and position us, ourselves in the -- in this total addressable market of outdoor, active and athleisure and this area of work lifestyle is really paying great dividends as we're now in a place in the marketplace with good tailwinds, deep commitment to being purpose-led and performance-driven, enabling us to position well and be well suited to accelerate as everything comes back to a new normal.

Yes. Crisis has a way of accelerating change and trends already underway. I'm certain some of the appeal of those activities will prove durable. I have a question from the audience here on inventory management. Maybe I'll reframe it some. Related to the disruption from store closures and perhaps supply chain-related dynamics, you're seeing sharp pressure to revenue in the June quarter, the fiscal first quarter, you called for revenue down more than 50% year-to-year. Some of your brands like Vans maybe transcend seasons well. Can you talk about the mix of loss sales that are spring/summer specific goods versus those where the inventory will have more relevance later in the year? And then given that uncertainty, how have you approached inventory planning for the fall and holiday season?

Yes. Do you want me to jump in, Steve, on that?

Yes. That's yours, Scott. Happy to let you take that.

I had a feeling that may be true.

Congratulations.

Yes. So you're not the first to ask that question, by the way. So I guess the first part of the question was the seasonality of the inventory. I guess in the question is somewhat the answer. Our largest brand, Vans, is largely nonseasonal. That's not exactly true. I mean there are certain categories and styles that are seasonal. But for the most part, it's our shortest supply chain lead time and also the least seasonal. So that's good news, being the largest brand. Probably The North Face is the most seasonal, given the nature of the product mix. And so the actions we took were immediate and fairly bold. As soon as we saw and understood the magnitude of the issue and started closing stores, we immediately did what VF is good at. I remember Steve in the opening remarks said VF's good at this or made for this time. And it's that discipline around operations, finance and brand management, the 3 legs of the stool that really engaged. And first of all, stopped what supply could be stopped. We looked at channels and opportunities to liquidate in a brand-appropriate way, and I'll emphasize that, what we could of seasonal goods. And then we looked at options to move forward. What we'd -- what we're not doing is dumping a bunch of goods in the off-price market. We are discounting, I would say, at a market appropriate level. We expect discounting to be generally in market through the -- through really this whole fiscal year, but much more pronounced in the first half, and that's logical as you got all this inventory that was in stores, and we lost a big part of the selling season. So we're promoting. That seems to be working well. I would say that both for us and generally in terms of clearing goods. And in some cases, we will pack and hold certain items and dispose of them through our outlet channel. What we're doing is we're reducing our forward buys. That's the second part of this. So stopped what we could in process, move what we could in a brand-appropriate way and then reduce our forward buys. We talked about order books on average being down 20% to 30%. And we bought even below that. So think about those outlets. If I've got goods that are in spring, I could dump them and rebuy them 6 or 9 months later, that wouldn't make a lot of sense. So what we're doing is, in some limited cases, we'll hold those goods and rather than rebuy them for the next season, we'll just repurpose those and reassort them. And that's the kind of activity that's going on. The other thing I would just emphasize, and this has been something that Steve has really hammered home to our brand leadership is we also have to make sure that while we're being conservative from an inventory buy standpoint, that we're allowing room for innovation and newness. Because in the end, we -- that's what drives our brands, that's what drives engagement. We don't want to bring people into our digital sites or across the lease line based on price. In promotion, we want to engage them in a -- through newness and interesting new product, and we made sure that we've carved out space in that buy plan in order to make sure we have bullets in the gun for that newness. So the shape of the inventory, we said we would build -- it would build slightly from the 10% at year-end, it would be in the high teens at the end of this quarter, and then we would start to see it sequentially improve. And by the end of the year, we would be at, we call it equilibrium. So sales stock imbalance and that's our expectation, both for our own inventory and also inventory at retail.

Very helpful. And Scott, there's still a number of uncertainties. I want to talk about the path to stabilization. I interpreted your comments correctly from the earnings call, you're expecting the fiscal first quarter to be the trough, then expecting stabilization and return to growth in Asia Pacific in the September and December quarters and stabilization and a return to growth in Americas and EMEA in the December and March quarters. Is that expectation generally consistent across the major brands?

Yes, it is. And we didn't bifurcate or give any more detail, but I will say this, and this was evident in our last fiscal quarter, which was the first one that was profoundly impacted by COVID. You do see that both Vans and Dickies have relatively been less affected for different reasons. One, Vans, the strong engagement, strong digital presence, all the things that Steve mentioned earlier and a large and growing China business has been a mitigating factor to some of the closures and short-term impact. And then Dickies, also a relatively small but fast-growing Asia business, which is back open. And also remember, many of the distribution channels for that business -- for the Dickies brand on a wholesale -- from a wholesale channel are deemed essential. So think Walmart, for example. And so they've been able to continue to ship to many of their customers, not all, but many of their customers throughout the COVID crisis.

Okay. And then Vans was the business leading growth into the pandemic. It is, however, a more owned retail-centric model. Would you expect Vans to be a brand that leads stabilization and a return to growth? Or is it somewhat handicapped by that more retail dependence?

Yes. Maybe I'll start. I think the -- again, the digital engagement, which we've seen accelerate, and the ability to control our story and the consumer experience in our own doors is a relative advantage. So at the time of disruption, it's our largest brand and we -- we're -- it's not immune. We're obviously seeing an impact, but we do believe that we'll be one of the leaders on the back end.

Great. And then, Steve, maybe this is best directed to you. For the moment, a lot of optimism about reopening and consumer activity, still some uncertainty around what back-to-school means, but it will get cold at some point, there will be a Christmas this year. Hearing you guys talk about orders and how you're managing your inventory flows and the defensive approach of many others in the footwear and apparel categories, do you think there's a chance there won't be enough inventory for the holiday season?

I think it's a little early to make that prediction, Jim. I would tell you, though, how we're thinking about this. And Scott referenced the quick work that we moved to activate around understanding our current on-hands and future orders that had been placed and how did we -- how do we rightsize that to position ourselves to really navigate this and exit the other side with a proper amount of current on-hand inventory but balancing the right level of newness and so I think as we move into back-to-school and as we think about winter and fall holiday, we feel really good about the forward view of product that we have to represent across our own stores, our own digital environments and our key wholesale partners. And we did quite a bit of work on really analyzing what inventory should we have on hand for which partners. And there are, honestly, some partners that we did not put it -- position ourselves to service as well as others just because there was some uncertainty about their ability to navigate and come out the other side strong. So will there be a lack of inventory? Hard to say. But even if there is and being able to come out clean and be able to position yourself with the right inventory at the right time on the other side is far more important to us in trying to service every potential order that we could take with on-hand excess. We'd rather position ourselves deeper connections to our consumers, deeper sense of loyalty and affinity in connecting with us on the long-term and really building that long-term capability and the sustainable growth that we've committed to.

Great. Scott, I want to talk some about liquidity and capital allocation. You are expecting positive free cash flow in fiscal '21 to the tune of $600 million plus. After recent issuance of term debt, more than $3 billion in cash and $5 billion in total liquidity, clearly a strong liquidity position and that doesn't even include any proceeds from the occupational workwear divestiture. Dividend looks safe. Share repurchases, however, have been suspended. Are there certain things you would like to have sight lines to that would get the company comfortable with resuming share repurchases?

Yes, Jim. First of all, everything you said, 100% agree with. And I just want to say the size of the debt offer, the term out, it was exactly what you say. We hit that with the bazooka, with the IDF, making it clear that we're -- we, a, can weather the storm and, b, the dividend is as safe as you can say, subject, of course, always to Board approval. But we would say, from a capital allocation priority, that dividend is clearly there. Our #1 priority has been and remains M&A, and then you would say share repurchases is second. So what needs to happen right now in this horizon we've been in the now phase, which is around protecting the enterprise and ensuring that we weather the storm in a stronger position as we possibly can. The first priority coming out would not be repurchase but would be M&A. And as we look at potential deals that may meet the 3 lenses that we apply to any potential portfolio action, we first need to have the confidence that our organic business, our core business is on sound footing that we've seen the reopenings occur to plan, that the consumer traffic continues to build and that we inflect as we expect into growth both from a top line and an earnings standpoint. Once we're at that point, we would -- then would be at a position to say, okay, we're ready to transact from an M&A standpoint. And then at this point, we're indefinitely on pause from a share repo standpoint. But at some point in our future, once we've delevered, once -- if there are no viable M&A transactions, then at some point, we would reinstate the share repos.

Very helpful. And guys, we're bumping up against time here, but I want to leave it with just one last question. If you think about the things that the management team can control, what are the things that investors should be focused on to grade your success managing through the current crisis?

Sure. I want to grab that, Scott, and if I missed anything, please jump right back in. I would tell you, we've been very declared around our desire and our commitment to evolve to be more consumer-minded, retail-centric with a hyper digital focus across everything that we do. And any proof points of that commitment and that transformation will absolutely be -- you'll be able to see that in our results, our digital penetration, the affinity and loyalty that we're building with our consumers and our ability to continue to engage and expand our offer and our commitment to our consumers. But I also would ask you to watch the actions that we use to really marry our performance results with our purpose-led vision. And the actions that we're taking with our employees, the actions that we're taking with our -- the stakeholders and communities that we so depend on, it's really that power advantage, that balance of performance and execution to drive our results to get back to our growth algorithm that we've committed to in a new normal marketplace, but done through a very strong, purpose-led lens where our stakeholders are benefiting and that connection with our consumer is strengthened.

Yes. And Steve, I would just add. If you think about the financial strength that we had coming into this crisis, that's been a huge benefit. And that, coupled with the discipline that we talked about in the now in protecting the enterprise, taking those proactive actions to ensure that we emerge from this fiscal year in a clean and strong position with a lot of dry powder, I think that will position us well to not only continue investing in our business, which we have even through this period, but also from an inorganic standpoint, the optionality from an M&A perspective. We're set up pretty well for the future. And we think the landscape will be pretty attractive for companies like ours who are in a position of strength.

That's great. So we've come to the end of the session. I'd like to thank everybody in the audience for their interest. A special thank you to Steve and Scott for taking the time to work with Stifel and share their insights. Thank you, guys.

Okay. Thank you, Jim.

Our pleasure.

Thank you for asking us.