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. 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 48th 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 heighten the 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 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 for 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 collaborations 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 multi-year 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 continue 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's 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 global cost savings of about $125 million over a 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. Americas 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 the 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 point 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-end. 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. 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 in 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 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 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 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. Our first question today is 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 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 bottom line, and maybe tie that in with the new project Enable dynamics that you mentioned?

Good morning, Jonathan. I’m happy to address your question regarding how Q3 is shaping up for the year. While we haven’t provided specific guidance for Q3, I can share information that should give you a good sense of it. We mentioned that achieving at least $9 billion in revenue suggests low single-digit growth in the second half of the year, and we expect to return to growth in the fourth quarter. This will allow you to infer a trend between Q3 and Q4. Concerning gross margins, we anticipate they will be roughly flat in the fourth quarter and gradually improve thereafter. The mix for the year is expected to be about twice what we normally see from our 40 to 50 basis point structural advantage. Additionally, promotional headwinds are starting to ease and should continue to do so throughout the year, which gives some insight into gross margins. We stated that SG&A would remain flat in the second half, reflecting the extra investments we are making to build on momentum as we transition out of the COVID period. Lastly, achieving $1.20 in earnings implies about a 40% flow-through for the full year. I hope this information provides clarity, and if you need further details, John and Mallory can assist you. The second part of your question was about balancing the desire to invest against earnings. As we mentioned, we are expecting at least $1.20 in earnings, and while we are cutting some discretionary costs in the short term, we are also investing more in our transformation agenda. We are committing an additional $30 million to boost our investments, especially in digital transformation and digital demand creation, which we believe will support our momentum as we finish this year and move into next year. We haven’t offered guidance for 2022 yet, so look out for that. Regarding Enable, as Steve explained, it’s not just about layering on digital investments but fundamentally rethinking and repurposing our organization. We have set a target of $125 million over three years, but we haven’t broken that down by year. What’s important is that as we pursue our transformation and become more efficient while aligning our organization, we expect to see leverage and margin expansion over time. That’s about all I can share on that for now, Jonathan.

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

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

Good morning. Thank you for taking my question and for all the updates. Steve and Scott, I wanted to know if this moment we’re experiencing outdoors is a unique opportunity. Should you be accelerating your marketing efforts, considering your outdoor exposure across your brand portfolio, to capitalize on the fact that people are spending more time outside? That’s my first question. Additionally, I would like an update on North Face and the management changes there. Can you provide more details about Arne and his role in the recovery and turnaround of that business? Lastly, are you seeing any acceleration in reorders from retailers, especially since many of them had to reduce their North Face orders for the fall? Are retailers coming back and asking for more? Thank you.

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 really bodes well for our brands and for the sector in general, as people continue to focus on that outdoor activity, health and wellness, and how can they kind of take advantage of this particular moment in 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 controlled 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. Great job on the quarter. I have a couple of questions. First, regarding gross margin and inventory, Scott, you mentioned feeling very comfortable with the inventory in the channel. Could you clarify the relationship between that and the gross margin progression? Why should we expect flat gross margins for Vans in Q4 compared to what we saw earlier in Q3? It seems like, despite being in a better inventory position, we should see a quicker improvement in gross margins, especially considering the promotional environment. My second question is about M&A, particularly with the upcoming election. If there's a Biden victory and capital gains taxes are expected to rise, would that motivate you to complete a deal more quickly before year-end? I’d appreciate your thoughts on that.

Yeah. So…

Go ahead, Scott.

As we consider the trajectory of gross margins, it continues to align with our expectations from earlier in the year. We had mentioned that we would accelerate promotional activities to reduce excess and stagnant inventory, which would be more pronounced in the first half of the year, tapering off through the remainder of the year and approaching normal levels by the fourth quarter. In the second quarter, if we exclude the impact of transactions, the decline can be primarily attributed to these promotional activities, accounting for around 200 basis points of impact, compared to about 500 basis points in the first quarter. While still elevated, this shows a sequential improvement, and we expect this trend to continue, bringing us back to more normalized levels by year-end. Our proactive approach has helped us manage and reduce excess inventory in our warehouses and in retail, which is not perfect but is much cleaner than historical levels. This should lead to less promotion moving forward, benefiting both brand health and creating demand, which is positive for future growth. Additionally, we anticipate that the mixed benefits will persist through the end of the year, allowing for continued improvement in gross margins and reaching normalized levels by the fourth quarter. Regarding timing, we don’t attempt to predict political outcomes as they are unpredictable. I'll let potential sellers speculate on whether that could influence their timelines.

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, it will 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, Scott, that you don’t need to wait for full recovery to be active on that front—that you have enough information and the discussions 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.

It also depends on the type of asset and location. We have more confidence today than we did 90 days ago, which is a fact. However, the environment remains uncertain, so the resilience and type of asset will influence the timing for acquisitions.

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.

Good morning, everyone. I appreciate all the details shared. Scott, I have a short-term question followed by a longer-term one. Regarding Vans, I've noticed significant fluctuations in the wholesale business, with the American wholesale segment down approximately 80% in the first quarter and then up by 10% in the second quarter. You mentioned that your customers in that channel have very low inventories, and Steve indicated last quarter that you believed back-to-school was delayed rather than canceled. It seems that prediction came true, as September showed an increase in demand. I'm curious if you are seeing anything in October that could be advantageous, especially since we might not benefit as much from pent-up back-to-school demand. I'm trying to understand what gives you confidence that Vans won't experience another slowdown in the wholesale segment in the third or fourth quarter if point-of-sale trends do not remain strong, considering there was a significant rise in September that may have included some one-time demand.

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 paths 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.

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 re-base 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? 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.

We entered the crisis in a strong position with good momentum. Our portfolio has been reshaped with unique and differentiated brands that are well-positioned in growing market segments, even as we face significant challenges. We are confident in the long-term strategy we presented last year. What remains uncertain is the nature of the recovery, and we will need time to see how this unfolds. We are ready to navigate that path. The investments we've made in our transformation and the robust digital growth are clear indicators of our effective strategy. Ultimately, the timing will depend on how the recovery shapes up, but we are well-prepared to adapt as things become clearer.

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.

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?

We appreciate the question and are pleased with the results from our Timberland brand. The improvements we've seen this quarter confirm what we've been discussing for several quarters now, particularly the leadership from Martino, which has positively influenced our creative team and product development. Our new marketing leader is also contributing to noticeable enhancements in our creative quality and tone. Currently, there's a demand for authentic icons that consumers have relied on in the past. The outdoor trend has positively impacted Timberland over the last six months, and our outdoor category is performing well. We recently launched new products in China, such as the Madberry, which showcases a contemporary outdoor design, and the Garrison Peak is available in the U.S. We are excited about the introduction of these styles, and our teams are building energy around our classic icons, particularly the yellow boot, along with its variations. Notable influencers have been seen wearing our products, which highlights the brand's quality and authenticity. We are encouraged by the efforts of our team and will continue to work on diversifying our product offerings, focusing on non-classics, as well as our women’s and Pro business, which grew modestly this quarter. Overall, there are several indicators within the Timberland brand that strengthen our confidence in its long-term growth potential, especially with the new creative direction and product life.

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.

We’ve adjusted our purchases, and the lead times reflect that. Our ability to pursue additional opportunities will be somewhat limited, but this is a positive development for the brand. As you consider how inventory cleaning is creating scarcity, it’s leading to improved margins. All of this bodes well for the brand's future and indicates a change in sentiment that is very positive for Timberland right now.

That’s great.

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.

I believe the total addressable market for the Vans business remains unchanged. The active at leisure segment of that marketplace is substantial and expanding, and Vans is also venturing into the streetwear category. This aligns with our messaging focused on creative self-expression. Recently, the team has put significant effort into enhancing content quality and how we interact with that content on social media and in our own platforms, which fosters long-term brand loyalty. Our team frequently discusses brand love, and we are well-positioned to continue growing in the active at leisure market. The work done on classics, progression footwear, and apparel is showing positive results, with balanced growth across regions and categories. The brand is being very strategic with product launches; for example, the collaboration with The Simpsons has been extremely successful, and we are introducing new styles, including the skate high and updated ultra category for the winter months. The focus remains on creating products that align with our brand positioning. As for market share, I don't believe we've publicly discussed our specific share yet.

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.

I just want to emphasize that this total addressable market, or rather markets, is significant because the brand operates in multiple areas, as Steve mentioned. This is one of the advantages of having a diverse consumer base. Many are asking what the post-COVID world will look like compared to pre-COVID times. We believe that the trends we observe, such as the rise of casualization and stronger brand loyalty and engagement, have intensified during this period. While the total addressable market has always been appealing, we possess a unique positioning that is both distinct and expansive. In light of the shifts in consumer behavior, this positioning seems even more attractive now.

Congrats again and best of luck.

Great. Thank you.

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

Good morning. Thank you for taking my questions. I have a few, so I’ll list them and then go through them. Regarding the SG&A that you mentioned, do you expect it to remain flat in dollar terms or as a percentage of sales, Scott? And then…

Yeah.

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

Dollars.

In the fourth quarter, right?

And the second half.

Okay. Okay. Perfect. Thank you. And then…

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

Thank you for the information. Regarding Vans, there are concerns about the sales situation. Is the issue primarily related to supply or demand? Additionally, can you provide an update on the factories in the Dominican Republic for Timberland? Lastly, are the transactional foreign exchange headwinds, which impacted us by 110 basis points, expected to persist for the remainder of the year? I may have follow-up questions on these topics.

Thank you for the questions, Sam. Regarding the foreign exchange impact, yes, it will continue for the remainder of the year but will moderate as we progress. On Timberland, we have made some recent announcements about reducing our manufacturing footprint, particularly in the Dominican Republic, which is related to this strategy. You can be assured that this is a well-considered move, and our supply chain team is actively managing it with a structured transition plan for the announced changes. This aligns with the long-term strategy we've discussed for some time.

Yeah.

I’m sorry, you had a question about Vans and I didn’t catch it. Can you repeat that?

I was wondering about the concerns regarding the momentum of Vans and whether the perceived slowdown is a result of weakness. Is Vans currently facing a supply issue that requires you to keep things very streamlined, preventing the business from gaining momentum? So is this situation driven more by supply rather than demand, or is there something else affecting it?

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.

The demand is there; the engagement of our consumers with Vans has remained steady, and we've received feedback on that. Remember our strategy, which we've consistently discussed? We acknowledged that we were a bit out of touch initially and adjusted our marketing approach, known as Project Pivot. We moved away from more transactional communications and bottom-of-the-funnel activations, especially during challenging personal times for many, and instead focused on fostering deeper engagement with our consumers rather than just driving transactions. As time has progressed, we're adjusting the frequency of our efforts, both in terms of the amount of investment and the tone and execution of that investment. Therefore, when you look at metrics like search and interest, those will be influenced by these strategic changes in the short term. However, over time, we are seeing those investments grow, and you can expect that trend to continue. We've observed steady demand for the brand. Just to highlight, digital sales are up 50%, with a 70% increase in the first half, with China leading this growth. This has unfolded largely as we anticipated and even slightly exceeded our expectations due to the rising interest. This increase is driven by consumer engagement, not just supply. I believe this is unfolding largely as we expected, possibly even better. Steve, do you have any additional insights on this?

To build on our discussion about Vans, we have noted the significant impact they have experienced due to their strong presence in California and recent store openings. The unique store distribution for Vans in the U.S. has posed challenges, particularly with supply delays. However, we have effectively managed our inventory and supported our suppliers, ensuring their safety and well-being. As we navigate through the pandemic, we are observing encouraging improvements. The brand is gaining momentum, evidenced by a 70% increase in digital growth during the first half, continued growth in the Vans Family Membership program, and the team's ability to produce engaging content and successful product releases. We remain very optimistic about Vans and the opportunities ahead. Regarding Timberland, as we transform our portfolio and KTBS becomes its own public entity alongside the divestiture of our occupational workwear business, we are also working on reshaping our internal manufacturing capabilities. The positive news is that the experienced talent that has developed these capabilities will remain with us. We have emphasized the importance of our global manufacturing partnerships, which will continue to evolve alongside Timberland's growth. As we differentiate our product offerings and adapt our manufacturing methods, we are confident in our ability to transform our portfolio and supply chain.

Thanks. I have one last thing on the gross margin. If everything is in order and you're down 100 basis points in your gross margin in the fourth quarter of last year, why wouldn't the fourth quarter resemble more closely the 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. 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 are 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.