Greetings and welcome to the VF Corporation's Third Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It’s now my pleasure to turn the floor over to your host, Joe Alkire, Vice President, Investor Relations, Corporate Development and Treasury. Please go ahead, sir.

Good morning and welcome to VF Corporation’s third quarter fiscal 2021 conference call. Participants on today’s call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts referred to on today’s call will be on an adjusted constant dollar basis, which we defined in the press release that was issued this morning. We use adjusted constant dollar amounts as lead numbers in our discussion, because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts, which are in accordance with U.S. GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management’s view of why this information is useful to investors. During the fourth quarter of 2020, the company determined that the Occupational Workwear business met the held-for-sale and discontinued operations accounting criteria. Accordingly, the company has reported 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 third quarter call. I hope you and your loved ones are healthy and safe. As we move past 2020, we've unfortunately seen a challenging start to 2021 due to the political divide in our nation and ongoing pandemic challenges worldwide. Nevertheless, I am optimistic about the upcoming year and potential improvements in our geopolitical, macroeconomic, and pandemic-related challenges. I have faith in VF's plan to accelerate growth, transform our business model, and meet our commitments to shareholders and stakeholders globally. VF's performance in the third quarter exceeded expectations, despite disruptions caused by COVID-19. Consumer engagement with our brands remained robust, and I believe that trends towards casualization, health and wellness, and outdoor activities will persist. We're on track for growth in the fourth quarter, which gives me confidence in our strategy as we prepare for fiscal 2022. To recap from our October call, by then, our business had nearly fully reopened globally, and trends were stabilizing. We witnessed strong momentum in China and digital platforms, which we view as positive indicators for our business. This confidence, along with signs of recovery across our portfolio, guided our outlook for fiscal 2021 and our decision to raise our dividend. Additionally, we announced the acquisition of Supreme in early November. Our ability to carry out this transaction during the pandemic reflected the resilience of Supreme's business model and our efforts to ensure liquidity, along with our confidence in our organic portfolio. Today, our business continues to perform better than expected, and our confidence in our visibility for fiscal 2022 is growing. Despite a more challenging environment than anticipated, our performance shows the strength of our portfolio. While we did not foresee the extent of the headwinds in our original fiscal 2021 outlook, we absorbed these challenges due to strong performance in our digital channels and China, as well as better-than-expected results from North Face and Timberland globally. Due to this momentum, we are raising our fiscal 2021 outlook, and Scott will provide more details shortly. Before I discuss the quarter's highlights, I want to update you on our progress with our business model transformation. Understanding consumer connectivity is central to this journey. Our teams are enhancing our ability to engage with consumers and improving both online and offline experiences. The pandemic has reinforced our priorities, and we remain dedicated to immediate brand initiatives and long-term investments across the enterprise. Continued investment in our transformation is crucial for our success and growth. I'm pleased with our progress throughout 2020 as evidenced by our performance during the recent holiday season and the momentum heading into fiscal 2022. Our initiatives have enabled our brands to create omni-channel journeys and optimize supply chain efficiency. On our last call, we mentioned launching 'ship from store' capabilities in most of our Vans and The North Face full-price stores prior to the holiday season. This included innovations like buy-online-pick-up-in-store and reserve online for in-store purchases, implemented just before lockdowns. These strategies helped us utilize retail inventories effectively, resulting in an 81% increase in digital revenue. We are now in Phase 2 of the project, planning to go live soon with a feature enabling brands to access retail inventory for out-of-stock items online. Regarding brand highlights from the quarter, Vans revenue saw a sequential improvement, down 8%, with a 48% increase in digital sales offset by re-closures of physical stores in the Americas and EMEA. The brand achieved 9% growth in APAC, driven by 58% digital growth and 21% growth in China. In terms of products, our weather MTE styles also grew significantly, and we had high demand for outdoor and active-oriented products. Vans led on Tmall during Singles' Day with 700,000 new consumers and also launched Vans Customs on Tmall, attracting 870,000 unique visitors. The Vans Family continues to grow, nearing 14 million members. Although the overall numbers reflect market challenges, we're optimistic about low double-digit growth in the fourth quarter based on strong digital performance and normalized inventory levels. For The North Face, revenue declined 2%, but we saw improving trends in the Americas and strong growth in Europe and Asia. Europe showed remarkable 17% growth including a 112% increase in digital. Global TNF digital sales rose 61% across all regions, leading to positive growth in direct-to-consumer sales. In North America, our loyalty program gained 840,000 new signups, a 90% increase from last year. The TNF Gucci collaboration has also attracted significant media attention, helping drive brand engagement. In terms of product, we expanded our mountain gear with Futurelight leading to significant growth, and our new Footwear platform, Vective, outperformed initial sales targets. Timberland saw a decline of 17%, with apparel and outdoor footwear seeing positive growth, although classic footwear sales struggled due to limited inventory. The brand is generating energy through influential collaborations and launching new products. Timberland PRO's new Work Summit boot contributed to significant digital traffic. We're excited about the opportunities presented by eco-friendly products like TrueCloud and GreenStride, and their evolution positions Timberland for growth moving forward. Dickies reported a 7% increase in revenue, driven by strong demand and growth across all channels. The work-inspired lifestyle segment is developing rapidly and now constitutes about a third of our global revenue, particularly among consumers aged 18 to 24 due to our global campaign. Lastly, we are thrilled to have completed the acquisition of Supreme, further confirming our strategy to target areas with strong consumer engagement. We believe this acquisition will catalyze transformative growth and value creation for VF and our stakeholders. In January, we announced a transformation plan for our APAC operations as part of Project Enable. This plan includes moving brand operations to Shanghai, transitioning the Asia product supply hub to Singapore, and establishing a shared services center in Kuala Lumpur to enhance efficiency. We will carefully manage this transition over the next 12 to 18 months, supporting impacted associates. In closing, I want to express my gratitude to our team for their outstanding efforts throughout 2020, as we navigated the dynamic environment while focusing on our long-term goals. I'm encouraged by our recent performance and optimistic about our growth as we enter fiscal 2022 and beyond. With significant change comes substantial opportunity, and I am confident that VF will emerge from the pandemic stronger, ready to build on our history of delivering strong returns to all stakeholders. Now, I will hand it over to Scott.

Thanks, Steve, and good morning everyone. What a year! Beginning with the unprecedented enterprise preservation actions at the onset of the pandemic to the acquisition of Supreme, this has been an unbelievable period for VF and I'm grateful for the work that's been done by our teams around the globe to position us for growth and success moving forward. To recap, our quick and decisive actions to ensure liquidity have allowed us to continue investing throughout this disrupted period, highlighted by our ability to acquire Supreme, a perfect complement to our portfolio and accelerant to our long-term strategy and transformation agenda. Our aggressive control of inventory, while prioritizing newness, has allowed us to maintain brand momentum while positioning us for a return to profitable growth from the beginning of the fourth quarter and into the next fiscal year. And our short control on discretionary spending and the launch of Project Enable presents a tailwind toward operating leverage moving forward and the ability to direct more dollars to our highest priority growth investments. So while the near-term environment remains noisy, including lockdowns, store closures and inventory constraints, I could not be more pleased with the overall health of our enterprise and the composition of our portfolio heading into next year. I'll open with a quick update on Supreme, which I know is of interest to many of you. As announced on December 28, we closed the acquisition for an aggregate purchase price of approximately $2.1 billion, subject to the customary adjustments. We expect Supreme to contribute about $125 million of revenue and $0.05 of adjusted earnings to the fourth quarter of fiscal 2021. As disclosed at announcement, we expect Supreme to contribute at least $500 million of revenue and at least $0.20 of adjusted earnings in fiscal 2022. We're now moving into the integration phase and carefully onboarding Supreme into the VF family. Focused on applying the appropriate amount of governance and oversight where needed, while maintaining a light-touch approach in other areas to avoid overburdening the brand, we're committed to keeping it business as usual for the brand and its teams, while at the same time understanding how we can begin to enable the brand's credit and strategic vision, while activating synergy opportunities where appropriate. While it's early days, there's a lot of excitement about the future among both the VF and Supreme teams, and we're off to a great start. Moving on to an overview of the operating environment across the regions, starting with the Americas, continued virus-related lockdowns and disruption present near-term challenges. With that said, the outdoor and active categories continue to outpace overall apparel performance and demand trends have remained resilient. Retailer inventories appear to be well positioned exiting the holiday season, but do remain abnormally low in certain categories and channels. Despite continued traffic headwinds, our Americas business sequentially improved with nearly 50% digital growth offset by store closure headwinds. Moving on to the EMEA region, where we've seen a second wave of the virus introduce more severe lockdown measures than previously anticipated. As a result, the broader EU economy has been among the hardest hit by the pandemic this quarter. As the vaccine rollout is starting across Europe, the region is bracing for another wave of COVID-19, and the UK recently extended more restrictive lockdowns until February. There are reasons for optimism, however, with digital acceleration continuing throughout the region. As we've seen across our own brands and with our digital partners, VF's EMEA digital business grew more than 80% in the quarter. Despite half of our brick-and-mortar stores being closed for a large portion of the quarter, the EMEA region saw meaningful sequential improvement and return to positive growth on a reported basis. Finally, the APAC region continues to offer greater stability than any other, even as the effects of the pandemic linger. China has seen a pickup in consumer spending with positive growth in apparel and footwear categories. We continue to view APAC as the leading indicator of the larger macroeconomic environment. Our Mainland China business grew 15%, led by strength at Vans which grew 21%. The D2C business in Mainland China accelerated to 20% growth, led by 24% growth in digital. China retail partner inventory continues to improve, and our partner comp sales returned to growth this quarter. We're excited by the continued momentum in China and have high confidence in our outlook of 20% growth this year. Now turning to highlights from the quarter. Total VF revenue declined 8% in line with our expectations. International declined 4% as a 4% decline in EMEA was offset by 1% growth in APAC, including 11% growth in Greater China. Our D2C business also declined 4%, driven by store closures and continued soft traffic in the Americas and EMEA. Our digital business grew 49% with strong performance across virtually every brand in the portfolio, including our pure play digital wholesale partners. Our total digital business represented about one-third of total revenue in the quarter. We now expect D2C digital revenue growth to exceed 50% for fiscal 2021 on a reported basis, and including our digital wholesale business, we expect total digital penetration to approach 30% for the year. Gross margin contracted 150 basis points to 55.7%, the third consecutive quarter of sequential improvement, aided by moderating promotional activity. The decline versus last year was primarily driven by higher levels of promotion and 90 basis points from FX transaction, partially offset by 90 basis points of favorable mix benefit. While the promotional environment remains a headwind, it has evolved slightly better than our expectations. As we move into the fourth quarter and into fiscal 2022, we expect the impact of promotions and discounting to continue to moderate. Our SG&A spending declined about 4% relative to last year, as we returned to more normalized levels of strategic investment spending, including demand creation approaching historical levels of investment. As expected, we did experience cost pressure from higher freight and distribution expenses, although these were more than offset by reductions in discretionary spending and leverage elsewhere throughout the cost base. We expect to continue to invest in our strategic priorities in the fourth quarter as we return to growth. Inventories were down 14% at the end of the third quarter. Consistent with our prior expectations, we expect to exit our fiscal year in March with inventories at equilibrium in support of our forward growth outlook. We also see relatively clean inventory levels at retail globally, positioning our brands for a return to more profitable growth heading into next year. As expected, service and in-stock levels improved as COVID-related disruptions have less of an impact in the quarter. Our liquidity position remained strong. We ended Q3 with approximately $3.9 billion of cash and short-term investments, in addition to roughly $2 billion remaining undrawn on our revolver. After funding the Supreme acquisition, we expect to exit fiscal 2021 with more than $1.5 billion dollars in cash and nearly $2 billion remaining undrawn on our revolver. Our capital allocation priorities remain consistent, supported by our robust liquidity position. We remain fully committed to growing our dividends which continues to be an integral part of our GSR model. Our share repurchase program remains on hold as we focus on deleveraging the balance sheet following the acquisition of Supreme. So now turning to our updated outlook. We are raising our fiscal 2021 outlook, and now expect full year revenue to be between $9.1 billion and $9.2 billion and full year EPS of approximately $1.30. The increase in our outlook includes the accretion from Supreme in the fourth quarter results, implying a modestly higher outlook for the organic business. We're also raising our free cash flow outlook to approximately $650 million. I know many of you are eager to understand our initial expectations for fiscal 2022. While it's too early to provide a preliminary outlook at this time, I will provide a few high-level comments to help you understand how we're thinking about the evolution of our business as we head into next year. Overall, we see an improving consumer backdrop, particularly in our core categories, along with brand momentum across our largest properties globally. The accelerated shift towards digital in China is beneficial to our fundamentals, and recent portfolio actions are immediately accretive to our revenue growth and margin profile. We continue to see encouraging signs of stabilization in the retail marketplace and a normalization of inventory flows from a healthier supply chain. We intend to continue to direct investment towards our strategic priorities and business model transformation in support of our powerful brand portfolio. Taken together, I remain optimistic about the strength of our growth algorithm going forward and I'm confident in our ability to emerge from this crisis in an advantaged position. The portfolio actions we've taken over the last five years have left us well positioned to continue delivering superior returns to our shareholders. So now, I'll turn the call back to the operator, and we'll take your questions.

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

Hey guys. Thanks for all the details today. I guess I'll just start on a couple of comments that you made Scott. I guess two changes I heard were that Project Enable should add some efficiency on the cost base, and I know before when we initially got your look at Supreme you've seen no synergies in the guidance you gave us out of the gate. I think today you said you'd be looking for some areas of synergy where appropriate. Obviously, you continue to mention to us, you want to leave that business alone as it's doing a nice job, but I'm trying to think of how best to think about what the size of Project Enable efficiencies could be, the vision flowing out through it all as you start to roll that project out or is the plan to reinvest that in full? I'll just – obviously would love to hear your thoughts on those.

Sure, sure, Michael. Good morning, and thanks for the two questions. Yes relative to Enable, we talked about $125 million of benefit over roughly a three-year period. Today you saw in the comments the first major action under Project Enable related to our Asia Pacific business. The two components of that are building on our already present Shanghai frontend business focused on China and moving most of the remaining jobs from Hong Kong to Shanghai. And then on the supply chain, really two things strategically moving into country more closer to the sourcing locations, which has a labor arbitrage benefit in addition to being just better able to manage the business and then moving to Singapore, which obviously, in Kuala Lumpur, which also has some financial benefits. But, I guess, Michael, the way that I think in my prepared remarks, I said, Enable is not about cost, it's fundamentally about transformation and realigning our business. But it does have a cost benefit, obviously, the $125 million. And so, the way I would think about this modeling going forward is, while we've got a lot of incremental investments around the transformation, specifically around digital and some of the capabilities around consumer data et cetera, rather than those being incremental and being a drain, we’re looking at redeploying cost and offsetting many of those so that we can see leverage in the SG&A base over time. Another question related to this that you might have, this is some big actions that we just announced today, what does that mean from a cash flow standpoint going forward? Well both the restructuring and some of the outgoing costs will happen over time as well the benefits. So we don't see a material impact in any particular quarter from a cash-on-cash basis. So hopefully, that gives you some color there. We really see this as a way to maintain leverage in the SG&A base and redeploy costs so that we can offset the transformational investments that we see coming and have been investing in frankly, over time.

Okay, thanks for the details Scott. Have a good one.

Sure, thanks, Michael.

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

Great, thanks. Maybe first on Vans, any way to parse out the impact from store closures or COVID restrictions this quarter or said differently, could you speak to maybe the underlying trends that you're seeing by region and just your confidence in demand trends at Vans exiting the pandemic relative to pre-crisis?

Yes Steve, do you want me to do the numbers first maybe?

Yes, sure. Go ahead, Scott and then I'll pick it up with the tail.

Yes, Matt. There are a couple of things to consider. For Vans, one-third of our brick-and-mortar presence is in California, and another third is in Europe when looking at the global brand. Additionally, direct-to-consumer sales account for more than 50% of the Vans brand overall, and our most productive stores contribute significantly. They have a disproportionate effect on the overall brand. Three months ago, we were fully operational in all regions and did not expect to face re-closures, which are now impacting us. This is the main factor in our guidance for the year. It's worth noting that we also have wholesale locations in these same areas, but the main challenge has been related to our brick-and-mortar stores.

We remain very optimistic about the Vans business, particularly in how it connects with its current customers. The investment in the Vans family members has paid off significantly, driving over 50% of the U.S. direct-to-consumer business. Like all businesses, we are experiencing occasional effects from the COVID pandemic, with Vans feeling the impact especially due to the high number of stores that have closed. They have had to navigate our initial strategies to manage inventory and reduce marketing spend while finding the right balance in introducing new products and engaging storytelling. We're beginning to see improvements in that rhythm, and as we approach spring 2021, we expect to return to the levels we've historically seen.

Right. And then just to follow up on the margin side, so your guidance implies operating margins, I think around 6% to 7% in the fourth quarter. Scott, could you just break down the expectation for gross margins in the fourth quarter, maybe relative to the 150 basis points contraction in the third quarter?

Sure, Matt yes. First of all, just to bring you back and remind you the glide path that we expected on gross margin and generally, notwithstanding the Vans brick-and-mortar comment that I just mentioned, generally we're seeing that develop, in fact, in the third quarter. We said promotional activity was slightly better than we had anticipated. And as we look to the fourth quarter, we really don't see any material change in the pace of markdowns or the promotional activity. What we do see is and expect is a modest decline in gross margin from previous expectations, think about maybe 100 basis points or so. And that's really driven by mix, the difference in mix. Right? So as you see less direct-to-consumer, you're going to see a little bit lower gross margin in the fourth quarter. Maybe to give you some confidence though, as we look forward, we're not giving guidance in 2022. But I can give you a few data points that maybe will help you think about the go forward picture. From a margin standpoint, we would expect 2022 margins to be back to historical peak levels. Think about the organic business 55.5% plus and accretion from Supreme. So, a little better, we would expect margins, gross margins to be a little better than even where we were pre-pandemic in the 2020 timeframe, which I think is really kind of underneath what your question is. The other thing I would say is, remember the actions that we took while we're sure that it had some impact in terms of sales and some of the relative performance this year constraining inventory, et cetera, the goal there was to emerge in a clean position in a position of strength going into next year. So, just remember, there's two sides to those impacts, short term disruption, but we believe we're setting ourselves up well for next year.

That's great color. Best of luck.

Yes, thanks, Matt.

Yes, thanks, Matt.

Thank you. Our next question today is coming from Alexandra Walvis from Goldman Sachs. Your line is now live.

Good morning. Thanks so much for taking the question and for all the color so far. My first question was a high-level question on the momentum of your direct-to-consumer digital business. It accelerated in the quarter despite the overall acceleration in top line trends to the business and I was wondering how that was changing or adapting your thinking into next year on the potential for digital growth against the top compares for this year. Put another way, where can digital penetration get through in fiscal 2022 and how much more runway is there for that channel?

Sure, Alex. This is Steve. I'll go ahead and start. Scott, fill in if I miss anything here. I think, yes, we're very excited about the impact of our decisions over the last few years to really invest behind our transformation and build this consumer-first mentality. We committed to get our digital to about 20% of our business when we met with everybody back in Beaver Creek, seems like eons ago. And as we've gotten through this year, we've exceeded that number about 23%. And combined with our U.S. wholesale, our digital penetration is about 30%. So I think what's important for us isn't really the penetration percent, but more about building these seamless connections between the virtual and the physical, and building those optimized consumer journeys that allow us to really meet our consumer where they are. So thinking about, through mobile-first mindset, the UX, and CX aspect of our platforms, thinking about the services required within our stores to be able to not only optimize service, but to optimize use of inventory. And I would just tell you that I think the store element of our direct-to-consumer strategy long-term is a very critical role on how we connect with consumers, but also how we bring technology. The store we've opened recently in Milan or Fiji is really a test case of blending technology with physical and building a higher level of engagement and experience. So long answer, Alex, but it's really less about penetration and it's more about these optimized consumer journeys through this seamless integration of both environments.

Yes, the only thing I'd add real quick Steve is, just some numbers. We've had our 2024 ecom growth, we've already hit and exceeded that in the low 20s. And when you consider what we call digital wholesale, think about this longer ratios, digital partners, we're approaching 30%. Where that ends up, it's hard to know. We're kind of agnostic between growth in our end stores and the digital. Frankly, we see that as merging and being more seamless as Steve mentioned. So where exactly that shakes out, we haven't declared yet, but we expect that both will continue to be more and more important to us and that's why we're making the investments that we're making.

Awesome, thank you. And then one more on the supply chain, you made some comments that you've only seen isolated delays from suppliers, and the flow of product through your supply chain has been improving. Are you seeing any disruptions further downstream at the ports? We've heard reports that there are some bottlenecks and delays there. So I was just wondering if you're seeing that or do you expect to see it, and any potential impacts on the business?

Yes, Alex. We've said that, just as a general comment, the supply chain performance on-time deliveries, et cetera, continue to improve, but they're not normal. Right? We are still seeing impacts of COVID really throughout the value chain. And yes, we've seen isolated port issues. We've had instances where we've rerouted sailings, et cetera, in order to account for that. So far, that's not been a major issue for us. But definitely, it is not normal, but it continues to improve is the way I would characterize it. We wouldn't say that that's been a material impact in the business per se, but it goes back. Steve made the choreography comment. And when you have marketing hitting at a certain time in your stores in a retail store and maybe you are a few weeks late, that can be a big impact. Right? In terms of the choreography of having product hit at the right time at the time you have your marketing lined up and getting all those pieces together. So I would say it continues to improve. We know it's having some impact, but it's hard to exactly identify what those are. The great news is, we've got the best supply chain in the industry and they continue to make significant improvements.

Fantastic. Thanks so much.

Thanks, Alex.

Thank you. Our next question today is coming from Bob Drbul from Guggenheim. Your line is now live.

Yes, good morning. Just a couple of questions. On the wholesale business, as you think about the next few quarters, with a lot of the sort of fits and starts at retail, your own stores, but also your wholesale partners, can you just talk about the plans on inventory buys and just sort of, how you guys are investing for the next few quarters, around replenishment, et cetera? And then just similarly on the wholesale side, can you just talk generally if any areas where you're gaining shelf space or losing shelf space, and if there's any competitive makeup or the storage is changing dramatically or anything like that you might be able to share with us? Thanks.

Yes, Bob, regarding your first point, the environment in the sectors we operate in, particularly the wholesale business, remains conservative yet positive. Our order books have been more cautious compared to historical levels. However, we are seeing a gradual improvement in sentiment moving forward and sustained support from our wholesale channels, although the overall atmosphere still feels conservative. Our position has not significantly shifted; during the early stages of COVID, we took a proactive approach to managing inventory, and we are now reaching a point of normalization. By the end of the year, we expect to achieve balance in our inventory levels relative to future sales, applicable to both retail and our own stock. In terms of our strategy, as we've mentioned, we are progressing as anticipated. While we are still not in a completely normal situation, the outlook is becoming more positive. Additionally, we are very pleased with the collaboration from our key retailers and partners, who are maintaining their orders. Although the orders are cautious, they are stable and reliable. As for the second part of your question, Steve, perhaps you could elaborate on that.

Yes, Bob. So, wholesale has and will continue to be a very important part of our go-to-market set of choices. And I would tell you, the key accounts that our businesses focus on, we continue to just build stronger and stronger and more productive relationships. If you think about our EMEA business, the relationships we have with the pure play digital partners like a Zalando, Asus and even what we see with JD in the UK, in-store and online. Our success there and how we balance between our own environments and their environments is really critical. In Asia, we think of Ali as a wholesale partner and comments we made about brands being the number one large brand, during 11/11, and the first to launch a customs platform on the Ali customs environment. Those types of opportunities come based on the strength of the relationships. And then if you think about our Dickies business here in the U.S. and their ability to service essential retail that has been open throughout the pandemic, bringing needed products to their consumers through those strong relationships. I would say this is one of our core go-to-market elements of our strategy. And it's always been a big part of VF's toolkit on how we really partner with and service those wholesale partners in the very best way.

Right. Thank you.

Thank you. Our next question is coming from Camilo Lyon from BTIG. Your line is now live.

Thank you and good morning, everyone. Scott, I was hoping you could give a little more color on just your commentary around, I mean you just touched on inventory, but I'm curious to see if you can help articulate how much, what were the limitations on North Face and Timberland that stemmed from your inventory constraints during the quarter and how that might be influencing fourth quarter. I know you talked kind of from a high-level perspective around those inventory levels starting to normalize. But I'm just curious to see when are we thinking that the commentary around normalization by the end of Q4 suggests that you'll be in a very good position to enter fiscal 22 with the appropriate amount of inventory given your expectations.

Yes Camilo. We haven't quantified, and I can tell you in certain areas it's significant, tens of millions of dollars, we haven't given that number publicly, but the areas where we're seeing really an impact on sales particularly are in the outdoor area, the Timberland brand in particular, and some of its core styles, The North Face and certain outdoor categories. It's—you can see it in your channel section online and it's hard to see. And we know, as Steve mentioned earlier too from the Vans business we've seen that the constraints we've put on and from an inventory standpoint and also cost of sales. So, I think you have answered the question in the question. Our expectation is as we leave this year, that we're in equilibrium and we're balanced and should see that those inventory pressures abate and we should be in a more normalized posture going into next year.

So taking that one step further, you typically build to order maybe plus a little bit. But given that there's likely an expectation of conservatism around wholesale orders, you see the performance and the demand for the new products and the innovation that are coming to market, would you consider building some back stock into next year so that you can meet more of that incremental demand even through your own DTC channels as that would be a kind of an elixir to that growth rate and not having to rely on what will likely be very tepid and cautious wholesale positioning?

At this point, I would say that while we may not completely overhaul our risk approach, the environment is becoming more favorable and less conservative. This applies to our perspective as well as the broader market when considering the wholesale business. It's important to remember that our brand shines best in our digital and direct-to-consumer channels. We aim to align our production with our best estimates of demand, and we anticipate a more positive environment overall next year, with reduced caution. One reason we adopted an aggressive stance this year was in anticipation of uncertainty, as we aim to come out ahead. Yes, there has been some buildup in demand that we needed to see for brands like North Face and Timberland in terms of sell-through, resulting in unmet demand, which will be beneficial as we move forward. Therefore, you can expect a more positive environment ahead. However, I wouldn't characterize it as a complete transformation, but rather as an improved position for next year, which is what we expect.

Camilo, I would also add, you will also see, and we've been talking about this for a while, but just a higher degree of frequency of new stories across all of our brands, but more frequent drops with more compelling stories, not depending so much on that early drop with a reorder sequence behind it. Clearly, that's important on your core styles, but you'll see us continue to advance this idea of more frequent deliveries of new innovations, new color stories, and collaborations, married with the appropriate amount of marketing to drive that demand. So it'll be an increasing kind of leveling of that old traditional model to the new model as we continue to pivot through our transformation.

Sounds like the Supreme acquisition is already starting to factor into the thought process. I guess just one final if I could squeeze it in on Supreme, any updated thoughts on how you should think about the flow-through from the stronger EBIT margin contribution relative versus the reinvestment of that margin profile? Are you looking to release some of that accretion down to the bottom line? The gross margin opportunity therefore reinvest a portion of it as we think about natural, higher margin structure of that business and your intent on flow-through versus reinvestment?

Yes, Camilo, I want to reiterate what we mentioned earlier. Right now, the $500 million and $0.20 show that we have flexibility in this model. The reason we are being cautious about announcing more than that is that we are in the integration process, and we're just getting started. We need to understand the balance between the necessary investments, how we support their growth, and the flow-through. The good news is that the fundamentals are very strong, and the options we have are promising. We just need to gain a better understanding of how to balance growth and profit moving forward. You can rely on what we've shared. While there's always room for improvement, we need to clarify the investment profile in relation to the flow-through. We will provide more insights on this in the next quarter.

Okay, thanks so much for color. Good luck.

Thanks, Camilo.

Thank you. Our next question today is coming from John Kernan from Cowen and Company. Your line is now live.

Yes, good morning, excellent. Thanks for taking my question. Why don't you go to North Face that Europe up 22% Asia-Pac up 16%. We've seen some of the momentum building in North Face feels like its gaining share here in the Americas. I just wanted to gauge your pulse in terms of what's embedded for the guidance for North Face, particularly in Americas and as we go into next year?

I start here. Scott if you want to fill in the numbers. To your point, The North Face business is continuing to show sequential improvement and we are very encouraged with the progress. It's early, but we're very, very encouraged. The international business has been the point of strength, Europe and Asia. And we're very pleased with the progress we're seeing here in the Americas. And we are very confident about what that future looks like, where The North Face fits in the total addressable market, the outdoor trend, we're extremely well positioned, to continue, to drive that, lead brand point of view that we have in this TAM and continue to think very positive about the LRP that we laid out in Beaver Creek.

Got it. Maybe Scott, you gave us some really helpful commentary on how to think about gross margin and returning to prior peaks next year. Just curious on the SG&A profile, any color you can give there. Looks like, just based on the guidance you gave SG&A dollars down around mid-single digits for the year this year. Is there anything that you can talk to in terms of the SG&A rate long-term now that digital is obviously going to be distorted a bit more in terms of the mix? Have you identified anything from a cost structure basis this year that might come out of the business?

Yes, I'll provide some comments. Firstly, when considering the implied guidance for the full year and looking at the fourth quarter, it's important to note that there has been a lot of noise. We had a COVID quarter last year, and we are experiencing another COVID quarter this year. It's worth noting that we were showing positive trends a year ago, but we had to adjust our incentive compensation as COVID significantly impacted the fourth quarter last year, resulting in about a $50 million difference year-over-year that must be factored in. This illustrates the complexity of making assumptions about future flow-through without our guidance, which I know you are eager to receive. Looking ahead to 2022, we expect to return to pre-COVID quarterly peak revenues at some point during the year, potentially as early as mid-year, although there is uncertainty regarding the exact timeline. We do anticipate returning to those earnings that many of you have been asking about. Regarding gross margins, I have shared our expectations for the next year. On the operating margin front, based on this year's observations, I acknowledge that we are not providing specific guidance as we don’t have all the answers yet. However, I expect the operating margin recovery to be gradual, especially in brick-and-mortar settings. The recovery won't be a swift change where everything immediately returns to prior productivity levels. For instance, looking at Vans, our current guidance reflects the ongoing closures and re-openings. While our brick-and-mortar operations are profitable, they were even more profitable at their peak productivity levels observed before COVID. Consumers are understandably cautious and returning at a slower pace. All signs indicate they will come back, and we see a longer-term recovery path. We remain confident in brick-and-mortar as a crucial part of our consumer delivery strategy, but I anticipate the productivity recovery in these areas will lag, which may exert some downward pressure on SG&A. On the positive side, we are seeing healthy revenue growth and gross margins, and there is a clear path to reaching peak levels again. The structural mix benefit is evident; in this quarter alone, we have seen a roughly 90 basis points impact from our fastest-growing, highest-margin businesses. These factors give me confidence in our long-term plans. Ultimately, the speed of our recovery depends on consumer behavior and how we navigate the current situation. There are uncertainties surrounding vaccine rollout and consumer comfort levels, which is why we cannot provide more detailed guidance for 2022 at this moment. However, as we progress and report next quarter, we anticipate having clearer visibility and will aim to provide a more detailed outlook for 2022. I hope this information helps you model more effectively, even though it may not present the complete picture.

Super helpful. Thank you.

Yep.

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

Great, thanks. Good morning. I guess my question is on Europe, if you could share a little bit more about what you're seeing in the spring, summer ‘21, order books, and have the recent lockdowns? Are you seeing any of your kind of wholesale partners need to take receipt of the product later just given some of the noise? Just curious if we'll see any kind of shift between Q4 and Q1? And then Scott, just clarifying what you just said on 2022 from a kind of going back to pre-COVID peak revenue, I'm assuming that's excluding Supreme, just wanted to clarify that?

That's right. Yes, that's right. Just to get the second part, yes. So I was talking about organic like-for-like, so that would be continuing option and so without the occupational work and excluded Supreme. So in Europe first throughout the year business has been remarkably resilient. And, we haven't, I'm not prepared to talk about exactly, what we're seeing in order books, but I would say that we have a really constructive key partner base there. We have some unique partners there with Solando and Asus for example, the digital Titans which have really been resilient through this COVID period, and then just wonderful partners with the brand and that didn't happen by accident. Obviously, that's been cultivated over many years by Martina and our leadership in the Europe region. But it's been really resilient. And while order books are impacted by the shutdowns and whatnot, as people are bringing their inventories in line, our performance has really been exceptional. And our inventories are in good shape. And our expectation is that notwithstanding COVID related things that can't be predicted, that we're setting up well as you think about next year.

Okay, and then just one follow-up on North Face if you could speak a little bit more about the footwear launch, it sounds like it's been off to a good start. Just remind us where the distribution is right now. And what's your expectation to scale it in fiscal 2022? Thanks.

Sure, Erinn. I'll grab that. So yes, you, as usual, keep good track of what's going on with social media, the new effective launch went live yesterday. It's live here in the U.S. in specialty running, as well as to the VIPeak North Face consumer. And it's also live in other parts of the world in a very kind of focused early launch perspective and it will hit full volume by mid-February. And yes, early reactions have been very positive. The selling exceeded expectation. And the early read on just the social media, storytelling behind it has been very, very positive. So very optimistic as we talked about in Beaver Creek, this is a big point in time for the North Face team. A new point of view around footwear, tied with where they're directing the brand on that more 365 days per year availability of relevant products for on-mountain off-mountain usage. So exciting and more to come.

Great. Thank you all.

Thanks, Erinn.

Thank you. Our next question is coming from Jonathan Komp from Baird. Your line is now live.

Yes, thank you. Just first, just a quick follow up, Scott on your comments for next year, which were really helpful. Could you just maybe directionally talk about? Are you more or less confident in any of the brands particularly since you mentioned kind of the upside scenario on the revenue recovery? I'm just curious if any standout that you're more or less competent in?

Yes, I would like to make a couple of comments before Steve adds his perspective. We haven't yet discussed Dickies, which is a significant part of our acquisition plan, amounting to over $100 million. We've made great progress, especially with the Dickies Live segment, and it's been performing well in Asia and is now launching in Europe. It’s unfortunate we haven’t highlighted it more. Regarding our outdoor brands, I've shared my views on Timberland and The North Face. We are optimistic about the opportunities ahead and it's great to see positive engagement on social media. I believe we're leaving some potential untapped, but that positions us well for next year. As for Vans, it has been performing strongly since our acquisition, and I understand the short-term fluctuations can create noise in the data. However, I'm focused on the long-term potential, trying to distinguish the immediate disruptions from what I believe to be promising opportunities ahead. Steve, would you like to add anything?

Yes, I know Jonathan, I would, support 100% of what Scott just said. I mean, we believe in every one of our children. I think the Dickies comment is extremely well, put, it is this brand is performed all year long as they begin to get that balance of that core work with work lifestyle, and in really driving that authentic brand message to a new younger consumer, really good, global opportunity across each region. North Face and Timberland sits squarely in the outdoor TAM, what we've learned from this year, the demand signals that we've seen going into next year give us great confidence. Vans and their connection to their consumers being one of their greatest strengths. We know the issues that have impacted our Vans business this next, this year we're extremely well positioned position to gain momentum. Our optimism continues to be strong. In our emerging brands, our Ultra business, though small, really had a good year and will continue to build momentum as well Smartwool and Icebreaker, our Napa business as we think about opportunities beyond its core markets in Europe. So I think every one of our business is extremely well positioned. The business model transformation that we have in place is to really take that consumer understanding and apply that to our go-to-market set of choices and really proactively engage across those, all those different touch points. But we would be remiss to say, if we wouldn't, that we're not super excited about our newest add to the portfolio and Supreme, as we learn more about each other, the opportunity ahead for the supreme business, their ability to tap into the VF, regional portfolio, capabilities, our supply chain capabilities to optimize what they already do very well. We see great opportunities to continue to grow there.

And then just bigger picture, when you think about margin by brand, do you think there's enough recovery or expansion potential at the outdoor brands? That could offset presumably, if Vans takes longer for margin to recover? Most whoever just stores? Obviously, just how do you think about by brand how the margin might play out?

Yes, Jonathan. I mean, just directionally obviously we'll give you more granularity on what we see next quarter at least for the next year. But the relative upside is in the three other organic brands that we have, in terms of margin expansion, there's a lot of room to run. And as we start to see, the traction that we just talked about, the leverage and opportunity for that margin expansion is absolutely there. We already have amazing margins advance so, yes. That's one of the advantages of a portfolio and diverse offering, right as we have multiple levers to pull. And again to the earlier comment on Supreme, beautiful fundamentals, right? And a lot of optionality there. So this will be an important and big profit and top line driver for VF over time. What we don’t know yet is exactly what are those investments and how do we balance and what flows through. We owe you that. We'll come back and give you more granularity, but the beauty is, it is a pristine brand with wonderful fundamentals, and it will be a very important growth driver for this company over the next foreseeable future.

Yes, great. I appreciate the color.

Thank you.

Great, thank you.

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

Thank you all for joining us. This year has been significant for each of us. I take immense pride in our team and their efforts to navigate what has been a challenging environment. Our commitment to the transformation we've been undergoing over the last two years is strong, and it positions us well to enhance our connections with consumers and create seamless, frictionless journeys to serve them effectively. Our evolving portfolio is set to capture a crucial portion of the market. While we remain cautious, we are very optimistic. There are still challenges as we move beyond the pandemic, but we feel well positioned to return to our peak levels as we progress through fiscal 2022, and we are excited about the opportunities that lie ahead. Thank you, and we look forward to updating you in a few months as we close out fiscal 2021 and prepare for a more positive and dynamic fiscal 2022.

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