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

Well, great. We'll get started with the 9:30 session here. Welcome, everyone. I'm Jon Komp, the senior research analyst from Baird. Very pleased to have V.F. Corp with me today. V.F., as you know, operates a portfolio of authentic performance brands, apparel and footwear. And with me today, we have Bracken Darrell, CEO, who joined in mid-2023, executing on the turnaround; and Paul Vogel, joined as CFO in mid-2024, and hopefully, we'll have a good discussion here. So welcome. Thank you.

Thank you, everyone. Thanks for having us.

I do want to start, Bracken. I know you like to post on social media and have a lot of insights to share. And one of the ones that's caught my attention is you talk about in your past experience as a CEO. You like to go through the exercise of pretending that you -- or the simulation that you'll fire yourself and evaluate if you would rehire yourself as CEO again. So sitting here today, 2 years plus into V.F. Corp. Maybe for all of our friends in the room here, you could walk through that exercise.

Okay. Yes, I actually did that again this year. It started as a -- it wasn't a simulation. When I was at Logitech after I've been there about 5 years, I've really wondered if I was the right person for the next 5 years because the company was so different after 5 years and I thought, "Am I really the right person?" So I literally thought I would quit the next day and ended up staying for another 6 years. But -- and then I slept on it and when I woke up, I thought that was a mistake. I think I can be the right person, but I've got to be very objective going forward. So it started as a real thing. And then I just thought that's a good thing to do every year. So yes, I did do it this year as usual, and I really tried to think about what am I doing that I should be very comfortable undoing. And I won't share that here, but there are always things that you spend your time, you kind of layout your clear plan, you're executing like crazy and then you're like, wow, wait a minute. So as the year unfolds, those things will unfold. I mean, we will absolutely change things that we've already started. What we won't change is the general direction. I'm super excited about this idea of creating a real multi-brand company that takes advantage of the fact that it's got all these different places for learning and the ability to create best-in-class processes in each one of them. We've got -- I'll give you just one example. We're in the early days of all of it. But we're -- I think it's 2 weeks from now. We've got -- and you're going to be there, too. We've got an academy where we're bringing in about, I think, 60 of our top people to really train them for in our culture, our values and really what we're up to. And that's just one of the many things that we'll do -- we'll keep building out until we're really -- all of our key processes have a V.F. way.

Well, one of the things you have changed, you set up a new commercial structure, you have elevated design, you changed our brand leadership. Maybe provide a bit of an assessment of the good, the bad, how that's gone and anything you're willing to share?

I think I feel really good about the changes we've made and the number of new people. We really have changed a lot of leaders at the top, I did not expect to do that. It wasn't because we didn't have great people, but they just were -- we didn't have the right people in the right jobs. And so my leadership team, including our CFO are new. And that's had a couple of advantages. I've never done that before where we changed that many people in the first year or so. But one of the advantages of that is, I think it got everybody right on the same page right away because they came in with the Bracken Darrell sales pitch. And so there's no problem getting people aligned on a vision for what we're trying to do. So that's been really, really good. I think there are other things you'd say, "God, I wish we've moved faster on this earlier." I think -- some of the things, if I look back, I'd say, "Wow, I wish I'd move faster on some of the areas of distribution, for example, in Vans or like right out of the gate." There's no secret that we reduced the number of stores over the last 5 quarters, 4 quarters and reduced our distribution footprint on Vans. And then there are other things that I don't regret doing but you just keep learning. So we're -- and I'm learning this industry, too. It's got lots of similarities to some of the places I've worked in the past, but there's always good new learning. So...

So ultimately, the goal is to get back to growth as a company. I think -- in fiscal Q2, you highlighted, excluding the Dickies business, 70% of your portfolio roughly was back to growth. How should we be thinking about the journey back to growth in total for the company?

Well, I think a really healthy business like ours and my proxies are the past places I've worked. A really healthy business like ours should have, in general, should have -- 75%-plus of your business should be growing at any point in time. You've always got things to work on. And then you should have periods where 90%, 95%, 100% are growing. And that's kind of the model we have in our heads, which is we ought to have a period somewhere ahead of us where everything is growing. And we've got a really healthy business. And then even when that matures and you -- and some things are drop back in the need to be fixed range, we should never drop below 75% or 80% of the business growing.

And what's your take on the consumer environment? Is it a tailwind? Is it a headwind today or upcoming as you think about getting back to growth?

As there are so many assumptions you have to make to decide whether it's a tailwind or headwind. I would say overall, I said this in -- I think the last time I was interviewed on stage, I called the consumer stubbornly positive. And I think I sort of feel the same way today. I mean I think you can hear a mixed message, and I was just saying in a small group earlier, just in the last 2 weeks as I've been moving around, you pick up these little senses here and there. I've heard a little more negative commentary from consumers just -- not the high end, but the medium and lower end consumer. And it's the first time I felt that. And I -- so I'd say maybe it's -- maybe the trend is shifting a little bit. I don't know -- please don't take that as a commentary on our Q3 or on anything. It's just an instinct intuition. But overall, I still think I'm surprised how the consumer, especially in the U.S., is really hung in there, a little less so in Europe, but that's not surprising.

Maybe, Paul, I want to bring you in to talk more about the operating efficiencies and some of the capabilities. You've highlighted some of the work streams. Maybe share an update there.

Yes. I mean, everything is progressing nicely. If you -- I mean, we gave out targets or where we thought we want to exit kind of 2028 from an exit velocity with respect to the 10% operating margin. And we're trending on plan with there. I think if you look at the last couple of quarters, you'll see we've been pretty diligent on the SG&A growth, and we've been pretty diligent on delivering better operating income. So that's number one. And when you kind of tick down all the initiatives, they happened in a layered fashion, right? So if you think of some of the gross margin initiatives, we've got markdown management and some initiatives we have around there, which help in the more short term. We have integrated business planning, which will help us more over the long term in terms of better planning. And so to get the better planning and we get sort of the better inventory management, then actually the markdown management part becomes a little bit smaller. So that will help us on the gross margin side. And then on the SG&A side, again, we're making good progress. We've seen impact on the store side, which is great impact on the technology side, which is great. We still have, I think, even more work we can do to improve some of the admin costs, particularly even in my world in finance, where I think I become even more efficient. So we just keep ticking down the boxes, but -- everything is great. Everything is on track to deliver the goals we put out at the Investor Day. And hopefully, you'll see each quarter, we continue to deliver against those targets of meeting or exceeding our operating income growth.

Maybe just to put one finer point on that. I know we get asked sometimes that the plan for 2028 was for no revenue growth to hit those targets. There's been a little bit of a headwind so far. So are you tracking to plan because you see visibility to top line improvement or because some of the initiatives are coming through faster or better?

Yes. So I'll level on a couple of things. So it was no revenue growth from the period we started, right? So obviously, we had a little bit of a decline in revenue. So that means we would have to take back up to where the baseline was. So it does imply some revenue growth, it's modest, but some revenue growth to get back to where we were at the baseline. And then the rest is just all the efficiencies we've talked about, the improvements on the gross margin side, the improvements on the SG&A. So it does require a little bit of revenue growth from here, not a ton, but it was the baseline of where we exited '24.

Let's maybe turn to Vans, if we could.

What a surprise.

What a surprise, I know. Well, you've been very strategic and clear on the actions you're taking for Vans. I guess the question is, would you say the business is improving faster than the fundamentals would show? Or could -- maybe shed some light there?

Yes. So here's what I would say. I would say the actions we're taking feel right, and I think we have lots of internal data that would say that we're doing the right things. We're launching new products. We're changing our marketing. We certainly changed a lot of people. We've got a full complement of team there now with Sun and Rick and George and others. So I'd say the steps we're taking. And I do think it's yet to show up in the business, in the financial outcome of the business yet. But if any of you -- how many people here have read Atomic Habits? Atomic Habits, not many. Okay, there's an opportunity. But in that book, there's -- he describes how to improve things. He said -- he describes this guy who's sitting on a huge rock. He's a sculptor and he's hammering at the rock, trying to break the rock and he hits at 100 times and 101 and 102 and then 998 and 999. On the 1,000 time, the whole rock shatters in the sculpture. Sometimes that's the way it feels when you're in a turnaround. You just got to keep doing the right things and the right outcomes will follow. So I don't know what strike you think we're on. Some of you may feel like we're at 1,562 or something, but we're striking the right. We're hitting it right. It's going to happen.

I don't think the audience knew this to be interactive this morning. So maybe share more on some of the wins that you see in product and marketing, what are the green shoots you're looking at? And then what's the path as we look forward to have more wins for Vans?

I'd say the -- I'll just throw out a few. I think the Tier 0 stuff that we're doing, and what does that mean? Tier 0 is very, very high end of the market, very small but it's the part that -- where the trends kind of start. And if you look at the OTW, which is the high end of the Vans line, the things we're doing there are all working. I mean it's -- in fact, I've never quite seen anything like it, where everything we launch up there just sells out almost immediately. Or if it doesn't sell immediately, it does well. And the Tier 0 retailers, I think we said this in our last earnings call, are -- we're getting huge interest. I mean, it's really there. So on top of that, if you went to some of these fashion weeks like the last one, I don't remember where it was in the world, but you've got -- you have a surprising member of what looks like a skate shoe showing up. I don't think it's because skate is coming back into fashion. It's just that this overall impact, whether it's us or the -- or just an interest in that more flat kind of bottom shoe, it just seems to be coming. So I think those are really good signs. A few of the things we're launching are also having really good outcomes. I mean, we launched the Super Lowpro way back in the back-to-school period. It sold super well right away, and we had to restock. It continues to do well. We launched a second version of it, this kind of a collapsible shoe, and that's done very well. We launched a skate loafer, very small volumes, done very well. And the embellished old schools and embellish slip-ons have done really, really well. You have lines at complex con for people waiting to buy those. So I think we're seeing really good signs here and there. I'm really fixated on the U.S. market. Our own DTC, we've got a really strong position in DTC in the U.S., where we can experiment with things, try them and change them and 70% of our business in the U.S. is direct-to-consumer, about half and half stores and online. So I'm looking online first then stores then wholesale, but in U.S. before the rest of the world.

And I know maybe lastly on Vans. I know back-to-school, you shared, I think web traffic was positive. And as you think about layering on more initiatives and some of the products you mentioned, is there a point where Vans could really accelerate out of the turn of this turnaround? Or how do you think about ultimately the shape you want to see from the brand?

I'm really hesitant to forecast that because then somebody will write it down, and I'll be told I was dead wrong or underestimated or overestimated or something. What I do say is I'm too long term to worry about exactly what that curve looks like. I'm more interested in it not being a curve and it being consistently up and to the right over time. I want a 3- to 5-year consistent growth path that sets us up to another set of initiatives that will grow beyond that. So that's really where my head is.

Great. North Face, done a lot of work to bring it for Seasons, straight to the summit. Just talk about the positioning there globally and what you're seeing from the brand?

That's another one where our biggest opportunity is the U.S. And I think I said that in the last earnings call, I'll probably be saying this for the next 2 years. We're underdeveloped in the U.S. relative to where we ought to be in Europe or in APAC. I think we've -- if you -- I know there are a lot of Europeans in here, but I'll use a baseball analogy anyway. If you -- I get asked in one of the meetings this morning for breakfast, where are we in some of these things? And I'm going to -- if you say we're in a 9-inning game, I think on North Face and getting to selling stuff throughout the year, we're probably in the second inning. There's just lots of opportunity. We've mapped all the categories that we are in or could be in on 2 dimensions. One is how big is the business today? And then another one is what's the consumer, what right do they give us to play in that category. And a lot of those categories are -- categories that sell strongly in the spring and summer. And we just have lots of opportunities. So I see it more as a category game than as a seasonal game, and this is not a new story for us. I mean, if you followed us, you probably heard the same story for 10 straight years, and we don't seem to have made much difference. We've grown the business nicely in North Face, but we haven't grown the business into the categories that are about more seasons. And I think there's a reason for that. I don't want to get into it here, but we're breaking that down and fixing it. So I'm pretty confident that we'll start to see really significant headway systematically over time into those categories are going to drive more year-round business. But we have opportunities beyond that. I mean we have opportunities for elevation. We sold -- I was talking about -- we put pressure on Summit series, which is the highest priced stuff we've got, we sell more wherever we are in the world. If we launch a leather jacket, leather puffer jacket that we did the last I guess, middle of last quarter, small volumes. leather when it sells for $1,100, we sell out in Italy and in the U.S. and in Japan. So I just think there's -- or sorry, China. I think there's an opportunity for us in multiple dimensions, not just this year on business but also in elevation and also just getting more women in the game. You might have noticed we seem to be shifting some of our marketing more in that direction, and I think it's going to work.

Maybe just one on Timberland then. How do you extend the moment that, that brand is having here?

Well, I don't want it to be a moment, of course, I want it to be a very long-term trend. And I think the key there, as I was talking to Sam Poser, who I'm looking at right over there yesterday. The whole key there is that we really define really well. What are the silhouettes? What are the products that we can move from just yellow boot momentum to momentum in other boots, momentum in other footwear and even momentum in apparel. And we have a really clear game plan for what we're doing there. It's a terrific team. The second side of that is marketing. I think we've probably never had a better marketing program on as we have right now in Timberland. And if you saw some of the people that are wearing it at the Golden Globes last night, things that we're just or 2 nights ago, I guess it was. We're really putting a lot of pressure in the right directions to try to turn this into a lot more than a moment. And we're expanding distribution. So in the U.S., if I ask this room where you're going to buy your next bar of Tims, you'd get a black stair from many of you, especially if you don't live in New York because there's really no where to buy it. And -- or nowhere you would think of to buy it. And so we're going to be addressing that distribution as we go through this year and the next year.

We have -- we only have 8 full-price Timberland stores in the U.S. So...

8.

8. So most of the business is wholesale and outlets. So we think there's a huge opportunity. Again, we'll do it thoughtfully and methodically but there's an opportunity to expand that footprint.

And most of you know that if you do -- if you strategically and smartly open stores, it also helps wholesale. So it's -- and online.

That makes great sense. Maybe a couple of financial questions. But -- two comments I want to explore. Just first, fully offsetting tariffs by fiscal 2027. Can you share more what gives you confidence? And then related to the margin story, can you continue to drive favorable promotions?

I'll take the tariff and let you take the second one. So on the tariff side, what we said actually is that we'd be on a run rate to offset all tariffs within fiscal '27. So we won't completely offset it all in fiscal '27, but we'll be in a run rate by the middle of the year, so to be able to offset the tariffs in fiscal '27. And what gives us confidence is -- the good thing is there's -- well, I was going to say there's certainty, but there's never certainty. At least we know what we're modeling right now in terms of the tariff side. So we've worked with our supplier partners. We work with our wholesalers. We've got a pricing plan in place. And so we feel really good about those 3 things and sort of how they add up to our ability to offset the tariffs. We'll mitigate about $60 million or so in this fiscal year. The impact of tariffs start to hit more in this quarter we just passed as well as Q4, and then they'll roll into fiscal '27. But we feel good about the plan. We feel good about what we have with our partners. And again, we have a strategic pricing plan, different by brand and how we do it, but we feel good about it. And again, we -- there's no change to what we said before, which is within fiscal '27, we'll be on path to offset the tariffs.

Yes. And on your question on promotions, you heard Paul talk about the work we've done in integrated business planning, including markdown management. So we're really trying to minimize the markdowns. And then we'll continue to promote -- we want to promote into the moments, into the key moments, whether it's back-to-school or a holiday period or Black Friday, making sure that promotion is a tool, not a way of life. And we really have corrected our way out of that, to a large extent, I think, across our brands, and we're going to stay there.

Great. Maybe one more on cash flow. I know your target for the year is to grow cash flow and operating income, confidence level there. And then as you think about deleveraging the balance sheet, is there anything that can further accelerate some of the progress you've made already?

Yes. I mean there's no change to what we said in the last quarter in terms of our belief from free cash flow this year. Yes. And for us, it's just continue to execute, right? So we'll continue to grow operating income. Obviously, we've got a target to be on an exit run rate of 10% OI within fiscal '28. So you grow your OI that's going to help on the cash flow. I do think over time, there are some opportunities on the inventory side and the working capital side, which will also help us. Again, that's more on the margin on the -- it's not going to be a huge driver, but I think there's some opportunity there as well. And so we're really confident. Obviously, with the Dickies sale, we're in a great position to pay off the maturity in March. And then we think as get into fiscal '27 with our cash and free cash flow will generate in the next year, the debt coming forward also is -- there's no issues at all. So we feel really great about where we are in terms of our path to pay on debt, and we feel good about where we are in free cash flow position.

Great. That's what we'd like to hear. Maybe Bracken, to wrap up here, we could finish by going off-script a bit. And just as you think about being involved in the business day to day, what's -- could you share some things that get you excited that maybe we all don't see on a normal basis?

If you follow our business and my comments about, I am really excited about the business. I'm -- I was thinking the one thing we haven't talked about is ultra, and I was looking beyond my shoes thinking, when I started here, I thought, well, these look like cloud shoes. You've got these wide toebox. How could anybody want to wear these unless you're really all about running. And then I remember that I spent my whole so much time in design and I thought, polarizing is good. And I've come to fall in love with this look and then -- so are consumers. So our business continues to grow. We grew 37% last quarter. There's so much upside in Ultra. I think if we can solve that problem on Timberland, which we talked about really moving beyond just the yellow boot moment so that it's really about Timberland as a brand. And we're -- I think we have the right team in place, the right strategy to do that. If we can take North Face and really make it a brand for -- that plays across categories is about performance really is about exploration and curiosity. I mean that's really what that brand was built on. The torture test for that is the North -- is that unexplored terrain of the North Face of Mount Everest or -- if you can really turn, exploit that, I think we can. And then if we can get Vans to the point where it's really back to being about -- being off the wall, which there's probably very few people in this room who don't feel a little different from the other people in this room. There's a -- that's a big broad positioning. We've got lots of opportunities to grow. So I'm just really, really excited about that and exploring that by creating a V.F. way. One way of doing things. It really is the best practice in the industry. And we've got a team that's really focused on what is the best practice in the industry, including the new ones that are being developed with AI. Bring that in throughout our business and making sure we're all -- we continue to up the game, that's our road map. I mean that's absolutely what we're doing. And I'm really, really excited about it. And I'm more excited about it now than I was the day that I joined, and I suspect it's going to keep growing.

Well, that's a great way to end. Thank you both. Thanks to everyone here, and thanks to ICR.

Thank you very much. Thank you.

Thank you.