Earnings Call: Q3 2019

Jan 18, 2019

Greetings, and welcome to the VF Corporation Third Quarter 2019 Earnings 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. I would now like to turn the conference over to your host, Mr. Joe Alkire, Vice President of Investor Relations and Financial Planning and Analysis for VF Corporation. Thank you. Please go ahead. Good morning, and welcome to VF Corporation's Q3 fiscal 2019 earnings 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 amounts as lead numbers in our discussion because we believe they more accurately represent 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 Q1 of fiscal 2019, the company completed the sale of its Nautica brand business. During the Q1 of fiscal 2018, the company completed the sale of its Licensed Sports Group or LSG business. In conjunction with the LSG divestiture, VF executed its plan to exit the licensing business and completed the sale of the assets of the JanSport brand collegiate business in the Q4 of 2017. Accordingly, the company has included the operating results of these businesses in discontinued operations due to their respective dates of sale. 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 Chief Executive Officer, Steve Rendle and Chief Financial Officer, Scott Rowe. Following our prepared remarks, we'll open the call for questions. Steve? Thank you, Joe, and good morning, everyone. I could not be more proud of VF's 3rd quarter performance. As I reflect back on my time as CEO, I'm reminded of the commitments we made in Boston almost 2 years ago. At that meeting, we stated our intention to increase the metabolic rate of the company, while pursuing a specific set of strategic choices. Today, we've made significant progress against those initiatives and even in spite of the intense workload, our people delivered VF's strongest quarter in the last 2 years. My profound thanks for the dedication and hard work of our VF associates around the globe. I am proud to be part of this great team. I'd like to call out a few exceptional performances that we've seen over the past quarter. The North Face made significant progress in their journey to return to their rightful leadership position as the largest, most influential global outdoor brand. The brand's focus on purpose led brand and product innovation is starting to gain attention and traction. My congratulations to the team. This has been an intense 2 plus year journey and while it's not complete, we're starting to see the hard work pay off. Vans has delivered another exceptional quarter of growth, further cementing their rightful place as the number 3 global sport lifestyle brand. While obviously a brand this size will grow at these exceptional rates forever, we have great confidence in their ability to sustain double digit growth by relying on not just one thing to drive this business to $5,000,000,000 by 2023. Our international business remains resilient amid political uncertainty and macroeconomic pressures that we're reminded of every day. Our diversified international platform continues to deliver high single digit growth. We declared China a strategic investment priority and it is paying off with over 20% growth in the quarter. In Europe, we've strengthened our platform and continue to broaden our brand offering, which has led us to consistent growth tracking ahead of our long range commitments. And finally, our investments and focus in D2C continue to pay off with yet another strong quarter of double digit growth led by digital. As we approach the VF and Kontoor brand separation, I am confident in our accelerated growth trajectory and the strategic positioning of our portfolio as we head into next year. To address a topic that's likely on your mind, let me take a few moments on general market conditions. Geopolitical and macroeconomic events continue to cause volatility in the marketplace. While these events have the potential to disrupt our business and our consumers around the globe, to date, the impact to our business has been minimal. Now we are more closely monitoring conditions in certain markets such as China and the U. K. For our businesses, the overall consumer backdrop remains quite solid. As it relates to trade, the impact to date has been de minimis. We continue to monitor this situation closely and are developing contingency plans for potential outcomes. Now let's review a few highlights from our Q3. Revenue increased 9% on an organic basis as our growth engines continue to fuel our results. Excluding Kontoor Brands, the VF RemainCo portfolio increased 12%. Our Big 3 brands grew at a combined rate of 16% with our Vans brand delivering another exceptional quarter of 27% growth. Importantly, growth for the Vans brand remains well balanced across channels, geographies and product categories. And the brand continues to focus on icon management and driving a head to toe approach with footwear and apparel up 25% and 23% respectively. The slip on surpassed the old school this quarter as the fastest growing icon as the brand relentlessly pursues it's not just one thing mentality. Momentum in the North Face brand continues to build with a 16% increase, driven by double digit growth in all channels and geographic regions. Americas business increased 15%, driven by 9% growth in D2C and a 25% increase in wholesale. The actions we've taken to reposition the brand in the marketplace continue to yield results and we are confident in the growth trajectory of this brand heading into next year. Looking at product, the brand saw strength from mountain sports, mountain lifestyle and urban exploration product territories with particular strength in outerwear, fleece and sportswear. Earlier this month at the Consumer Electronics Show, The North Face unveiled FutureLight, a new breathable waterproof material set to revolutionize the future of technical fabrics that will be available to consumers in fall 2019. FutureLight was awarded the top honor in the best emerging tech category in Digital Trends Top Tech of the CES Awards. Initial indications in the marketplace are promising that FutureLight will be one of the most dynamic textile innovations the outdoor industry has seen in years. As a result of our strong performance this quarter and our increased confidence in our growth trajectory, we are again raising our full year revenue and earnings growth outlook for fiscal 2019. Our updated outlook now includes 13% revenue growth and 20% earnings growth or 8% revenue growth and 16% earnings growth on an organic basis. Our updated outlook also includes $45,000,000 of incremental growth focused investments. Consistent with last year, as our business outperformed our expectations, we've invested more in demand creation, our digital, data and in store platforms and design and innovation, all through the lens of driving our purpose led vision. I'd like to take a moment and briefly update you on our upcoming spin off of Kontoor Brands and the relocation of our outdoor brands and corporate leadership teams to Denver. We are well positioned for an end of April 2019 separation. Our organization, Board of Directors and external advisors continue to work diligently to ensure both VF and Kontoor are set up for a seamless transition and positioned for success. We will have more specific details regarding the separation in the coming months. In Denver, we're in the process of creating an environment that embodies our purpose led performance driven culture. The moves will commence in June and should be completed by the end of the year. While it's still early, approximately 90% of the brand and corporate leadership teams have committed to make the move so far. We'll have line of sight to the total employee population acceptance rate by the end of the quarter. The upfront planning coupled with our early acceptance results gives us increasing confidence that this move will put us in a stronger position for the future. And in summary, we remain sharply focused on executing our integrated growth strategy and transforming our business into a purpose led, performance driven enterprise capable of and committed to delivering superior returns to shareholders. I'm even more confident in the foundation we're setting to position VF for sustainable long term growth and value creation. And with that, I'll turn it over to Scott. Thanks, Steve, and good morning, everyone. We are pleased to report another strong quarter with balanced growth across our largest brands and strategic platforms. We continue to track ahead of the financial targets established at the beginning of the year as well as the long range plan commitments we laid out in Boston nearly 2 years ago. We continue to invest in our strategic priorities and we are increasingly encouraged by the returns that we're seeing. These proof points give us even more confidence that our growth trajectory is sustainable as we head into fiscal 2020. Before diving into the results for the quarter and our increased outlook for the full year, I'd like to provide a brief update on the upcoming Kontoor brand spin off. We filed the initial Form 10 registration statement with the SEC in mid December. We remain on track for a public filing in early March. However, the government shutdown has the potential to delay the public filing. We will keep you posted as our timeline evolves. Both VF or RemainCo and Kontoor Brands will host investor roadshows in the coming months leading up to our anticipated separation date at the end of April. So now let's review the results of the Q3. Total revenue increased 10%, driven by strength across our core brands, including our international and direct to consumer platforms. Organic revenue increased 9% or 12% excluding Kontoor Brands. Organic D2C revenue increased 11% with 23% growth in digital and a 12% increase in total comp sales. Excluding the impact of acquisitions, our store count was essentially unchanged versus a year ago. Our wholesale business increased 7% organically led by 35% growth in China and a high single digit growth in the U. S. Importantly, excluding Kontoor Brands, wholesale increased at a low double digit rate on an organic basis as we saw strong sell through across key channels and accounts during the holiday season. We are well positioned as we head into fiscal 2020 and initial order book indications are strong across the portfolio. On an organic basis, growth was also balanced geographically. The U. S. Grew 9% while our international business posted 8% growth led by 23% growth in China. Excluding the impact of acquisitions, total Asia increased 16%, Europe increased 4%, and our non U. S. Americas business increased 7%. And while the geographic mix has evolved differently, we expect high single digit organic international growth in the second half in line with the results of the first half. Our European growth is broad based and strength across most brands and countries. When compared to the exceptional performance in the region last year led by The North Face and Vans, growth has moderated somewhat, but it remains diversified and ahead of our long range plan. We remain on track to deliver organic mid single digit revenue growth for Europe. Excluding Kontoor Brands, our European outlook for fiscal 2019 includes high single digit organic growth. Our Big 3 brands increased at a combined rate of 16% in the 3rd quarter. Vans' strong momentum continued with 27% growth and the business remains well diversified as balanced growth across all regions, channels and product categories continues. Vans D2C business generated total comps of more than 20% led by the digital business which accelerated to 53% growth. We have again increased our full year outlook for Vans and now expect about 23% growth or 25% growth on a constant dollar basis for fiscal 2019. We are confident that the Vans brand can sustain low double digit growth in line with their 5 year commitment in fiscal 2020. Our momentum in The North Face continues to build with growth of 16% led by the Americas return to double digit growth. The brand generated balanced growth across all regions and channels providing further confirmation that our acceleration plan is on track. The brand's D2C business increased 11%, led by 20% growth in digital. Strong sell through drove a 21% increase in our wholesale business as shipments were accelerated to meet increased consumer demand. Sell through across all channels was strong during the holiday season and inventory at retail is in great shape. Given our recent performance, 2019 product pipeline and initial order book visibility, we are confident that The North Face can sustain high single digit growth as we head into fiscal 2020. The Timberland brand grew 3%, driven by high single digit growth in North America and 17% growth from digital. In North America, our diversification strategy continues to unfold with balanced growth across both classics and non classics. Timberland PRO also remains strong with 10% growth. Our international business was softer than expected driven mainly by Europe due in part to unfavorable weather trends primarily impacting our classics business. In Asia, Timberland's China business remains strong with more than 30% growth offset by weakness elsewhere in the region. Looking at fiscal 2020, we expect low single digit growth for the brand. Finally, our work business recorded another solid mid single digit organic growth quarter with balanced strength across the portfolio. Dickies grew 6% led by nearly 20% growth in China. We continue to make great strides in the integration, notably the further rollout of our product segmentation strategy with key accounts. The RedCap and Wrangler Rigs brands also performed well. We are updating our outlook for the work business and now expect between 5% 6% growth for fiscal 2019 including accelerated growth in the 4th quarter on an organic constant dollar basis. We expect our work portfolio to continue to generate solid mid single digit growth in line with our long range plan as we head into fiscal 2020. Moving down the P and L, gross margin expanded 60 basis points to 52.2% as our largest fastest growing businesses and platforms continue to drive favorable mix. SG and A as a percentage of revenue declined 210 basis points due to strong leverage and some phasing of expenses and investments, but more on that later. Operating margin expanded 2 70 basis points to 16.6%. Operating income grew 28% on an organic basis, which includes the impact of a slight decline in operating profit in Kontoor Brands. EPS increased 30% to $1.31 a share. Of note, we repurchased $150,000,000 of stock during the quarter using the proceeds from the sale of Reef. We have assumed no additional share repos for the remainder of the year. Turning now to our updated outlook for 2019. Given our strong results for the Q3 and our increased confidence in our growth outlook as we look into fiscal 2020, we expect full year revenue to now be at least $13,800,000,000 representing 8% organic growth on a constant dollar basis. We now expect FX to impact reported revenue by about 130 basis points, including about a $40,000,000 negative impact relative to the outlook we provided on our October call. Excluding Kontoor Brands, our updated outlook reflects growth of about 11% on a constant dollar basis. Our gross margin is now expected to be at least 51%. We are expecting a full year operating margin of about 13.6%, including $45,000,000 of incremental investment relative to the outlook we provided in October. The majority of the incremental investment will impact 4th quarter earnings. And lastly, we are again raising our full year EPS outlook to $3.73 representing 19% growth in fiscal year 2019 including about $0.09 of incremental investment and some additional pressure from FX. I'd like to spend a few minutes and provide some additional context relative to our revised 2019 outlook. In the first half of twenty nineteen, on an organic basis, revenue and EPS increased by 8% and 19% respectively. Excluding Kontoor Brands, organic revenue and EPS was 11% and 25% respectively. Our revised second half outlook includes organic revenue and EPS growth of 8% 14% on a constant dollar basis. Excluding Kontoor Brands, our outlook reflects 11% revenue and 20 percent organic earnings growth building on the momentum from the first half. And for you modelers out there, a little more clarity on our implied 4th quarter outlook. First, we'll see the largest impact of FX for the year in the Q4, which will impact our growth rate by about 3.5 percentage points on the top line and 5 percentage points on the bottom line. The divestitures of Reef and Van Moer will impact revenue and earnings comparisons by about $65,000,000 $0.02 of EPS. And the majority of the $45,000,000 of incremental investments are in the 4th quarter. And finally, relative to gross margin, our implied outlook includes a slight increase for the Q4. However, excluding Kontoor Brands, gross margin is expected to expand by at least 50 basis points. So with a few months remaining in year 2 of our 5 year plan, we continue to execute well. Our momentum and increased confidence in our growth trajectory has allowed us to again reinvest back into our business and fuel growth, while at the same time over delivering on our financial commitments. VF or RemainCo is delivering high single digit organic revenue growth and mid and high teens earnings growth a few years earlier than our Investor Day commits. Margins are expanding and we are investing against our strategic growth imperatives and with more than $1,500,000,000 expected in free cash flow this year, our leverage metrics are essentially back in line with pre WD acquisition levels. This gives us optionality to both pursue our M and A agenda and maintain superior cash returns to shareholders. We are confident with how our portfolio is positioned today and look forward to sharing our fiscal 2020 outlook for Via Francor on our next call together in May. So with that, we'll open the line and take your questions. Thank Our first question comes from the line of Michael Binetti with Credit Suisse. Please proceed with your question. Hey, guys. Good morning. Let me add congrats on a really nice quarter there. Hi, Mike. I guess just looking at Q3, North Face, really nice to see the acceleration there. I was interested to see the 9% direct to consumer growth in contrast to the wholesale 25% growth. And I was wondering if you could just add some context to both of those. I know with the long range plan, you have very big B2C and obviously digital ambitions. And I know the brand is well spread through a lot of the wholesale channel that you wanted to be in, in this point. In fact, I think you pulled back some over the past few years. How do you look at that wholesale growth rate as how much of that is coming from new distribution versus like door growth? Maybe just add some context to that and how you see wholesale for that business going forward, if that's maybe some of a refill as you kind of get momentum in the brand or how should we think about that? Yes. Michael, Scott here. I'll start that at least. First of all, there is a little bit of shifting as we talked about in Q2. There are some orders that shifted to the right. We said in the prepared remarks that based on strong demand and sell through, we saw a little bit from the Q4 come into the Q3, which puts a little bit of a distortion if you just isolate on Q3's wholesale. That's why we tried to show you first half, second half and give you a better a more balanced perspective. But I would say in general, what we're seeing is not necessarily new distribution. It's really seeing more velocity sell through and maybe slightly more penetration as the brand has gained a little more momentum and heat, but not so much like opening up a new a big new customer or things like that. Steve, I don't know if you want to add. And I'd add to that, Michael. What you're seeing really is the results of 2, 3 years of really intense work of cleaning up the marketplace, segmenting the customer base and now placing the appropriate products in each of their key retail partners be it specialty to some of the large nationals. You're seeing an improvement in quality of products. So that is resulting in the velocity of sell through that prompted that pull forward of the Q4 into Q3 giving you that distortion in the wholesale number. But we continue to be very confident in our D2C numbers. The results that we delivered this quarter are right in line with our expectations. We do see opportunities to improve and ideas there would be strengthening the retail environment, stronger merchandising, more focused big seasonal stories as the product offers continue to improve in the coming seasons. Michael, just I don't know if it helps, but our long range plan on the brand from a wholesale standpoint going back to that topic is mid single digits and that's still what we see over a long period of time. So I don't know if you're trying to model it going forward. I'm just curious how it's emerging with some of the growth rates above and below the long range plan. But I guess looking forward on Vans, it looks like your planned ex currency about 15% growth in Q4. So if we put that together with the Q3 and look at the second half, it looks a lot like what you've been telling us the back half was going to look like. It wasn't going to slow as much as some people feared if there was some, I guess, some fashion element or trend element to the old school in particular. And you did add some color about the slip ons taking over as a bigger percent growth driver. I guess you made you did make some comments that next year will be low double digits in line with your long term plan. Would you help us add any context you can at this point? It seems like some of the product portfolio that's driving the growth is turning over. What gets you confident? Obviously, we can see that you're comping the comp here, but can you help us think about how you're building up to the low doubles for next year based on where the product portfolio is going today? Yes, I guess that this is unusual at this point in the year that we would give you shaping on 2020. But the reason we did is we wanted to convey our confidence that we're not hitting a wall here or some of the things that we've heard questions back from your side of the community, not necessarily you specifically. So we look we see our order book, we see our trends, we're looking at forward the consumer feedback that we're seeing in our online environment and our database. So, we have confidence in our long range growth. Could it be a little better? As I said at the very beginning of the year, it could be better. We really haven't seen the brand slow down materially. Again, at some point, the laws of gravity do reestablish themselves. I think the most important thing to remember is we have confidence in the long range plan and so far we really haven't seen that slowdown and we're really encouraged. I'm glad you picked up on that Michael because the resurgence of the slip ons is just a proof point and not just one thing. And we think that's a great thing to keep in mind as you think about the forward growth trajectory of Vans. Thank you. Our next question comes from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question. Great. Thanks. Good morning and nice job. Good morning. I wanted to follow-up on Europe. You talked about a little bit of moderation. I was hoping you could maybe drill down by regions. Are there countries that you're seeing particularly lag at this point? And then with Vans Europe specifically, you've had 2 consecutive quarters of kind of 9% to 10% constant currency growth. I know you guys have made some wholesale adjustments, but I'm just curious, is this the right way we should think about the business as you kind of think about the shaping into 2020 for Europe specifically? Yes, Erin, maybe I'll start there. So, it's true that our Europe business has moderated compared to last year, It's also important to remember last year grew at 12%. And so we would say that you're comping a hard comp and even with the moderation in growth, we're still tracking at or above our long range plan. So we would say our business is stable on a constant currency basis and still tracking ahead of our long range commitment. So I think it's important to keep that perspective in mind. And on a higher level to your Europe comment, Aaron, we really we watch all the countries that we're all aware of, UK, Italy, France, where we see particular political issues. But we really have not seen it have a dramatic impact on our business. We continue to see good balanced growth and tracking right along our long range plan. Okay. And I guess the other part of your question I think was behind that Aaron is, is this kind of growth rate what we should expect for vans in Europe? In our recent Investor Day, we talked about high single digit growth and we're confident that that is absolutely doable. Right now, we're tracking I guess a little bit ahead of that. So I'd say you should not think of a material change in trajectory of the Vans business in Europe. Okay, that's helpful. And then on Timberland, it was nice to see a pickup in North America. I'm curious if you could talk about some of the collaborations you've done with that brand. It seems like it's starting to pick up a little bit. Would love to hear how that's being received. And then I know Europe you commented on weather for Timberland being a bit of the headwind there, but curious again just the product piece, how are you feeling about the receptivity there with some of the newness you've infused? Thanks. Not surprised you picked up on Timberland's activity in Co Labs. I think that's something they've all been they've been very good at. But I think what you'd see now is a more methodical and aligning with co labs that really help enhance and grow the brand and using the boot and finding ways to really spark greater interest in how that the classic category comes to life for consumers. In Timberland Europe, we did see a slowdown in our business. We don't really we don't see that changing our long term view of the brand. I think the positive thing is to really focus on here is the diversification strategy that we've been talking about for the last number of quarters. We really see that taking hold. I mean, Europe, our non classics, including women's, grew over 20% for the quarter and we saw double digit growth in those same categories here in North America. And oftentimes we forget the power of our Timberland Pro business that was up double digits for the quarter. What we saw was some softness in the boot category in Europe specifically. We do really relate that to the weather and really continue to drive forward on that diversification strategy. The addition of Christopher Raeburn as the brand's Global Creative Director and placing a new Design Director in this business, we're just methodically moving along our reset plan to put this brand back in the Thank you. Our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question. Great and congrats on a nice quarter guys. Thanks, Matt. I guess on the gross margin front as we think beyond this year, any larger picture change to the 40 to 50 basis point tailwind that you've been seeing from mix? And then is it still fair to think about the remaining margin components between product cost, pricing and FX? I think you've said in the past that that's basically a wash. Is that kind of best to think about the mix and then the remaining components? Short answer is yes and yes. The 50 plus or minus basis points we see and even of note in the Q4, we if you look at Remainco, the 50 basis point mix we see in our implied guidance. There is a little bit of drag from both FX and Kontoor in the overall margin. And as we look forward, again, we are not giving guidance, but we have said consistently we see that 50 bps going forward. Input costs over time, our assumption has been and history has proven have ebbed and flowed, but pricing has at least offset that and in some cases given us rate increase. So, that's a long way of saying we're still really comfortable with where we're at. We're seeing good evidence of those margins falling through and expect that would be true going into next year. That's great. And then more from a category perspective on on jeanswear, can you just touch on the drivers behind the 3Q decline, the full year guide reduction there and just how to think about this segment going forward? Yes, maybe I'll start there. So, in the Q3, profitability was fairly flat. If you look at the implied guidance, it suggests in the Q4, there will be a pullback. And I guess I would say, we are going to let the Kontoor Group talk about what the future looks like. But a little bit of perspective, one of our jobs as we prepare for this spin is to prepare this company along with the Kontoor management to give them a solid platform and the best opportunity for success going forward. And that means we are frankly we are cleaning up a few things. There is some inventory given the Sears bankruptcy that's a little elevated. We're working to get that down or I should say the Kontoor team is working to get that down and they'll make progress on that by the end of the year. Underperforming doors in certain markets where we don't see big opportunities, we are looking to rationalize. And important to note on the supply chain, as you think about optimizing the supply chain for Kontoor going forward, we have historically had co mingled products. We are moving products into contour only plants or vice versa, VF. And when you make those moves, you have short term disruptions, which increase cost, your efficiencies go down. But that's short term and that's episodic. That has a beginning and an end. And as you think about going forward, optimized focused supply chain around the unique business model of the Kontoor business is going to be better for them and will continue to be that strategic weapon that they've seen historically going forward. And Matt, let me add, Kontoor has in Wrangler and Lee, 2 of the most iconic brands in America. We've got a very experienced management team. We've got a supply chain that has been its historical strength and it's evolving to be in line with where this brand see itself going. If we need to look more long term on what the brand potential what this suite of brands is capable of, as we move through the work we're doing to prepare these brands to be stood up as their own separate public company. And Matt, just one other perspective that may be helpful. I don't know if it's behind your question, but a lot of this short term stuff that the timing of the Sears bankruptcy, other things like that, while the timing is hard, it was not necessarily easy to predict. As we think about our model and our expectations for the business, we are not necessarily easy to predict, as we think about our model and our expectations for the business going forward, it's really unchanged. So you got to I would encourage you to look past some of the short term noise that happens in a transition like this and focus on the strength of these brands, the model, the consistency going forward and that's really what we see going forward and I think as you talk to Kontoor and the road show, those will be the themes that they develop. Our next question comes from the line of Laurent Vasilescu with Macquarie Group. Please proceed with your question. Good morning and thanks for taking my question. I wanted to follow-up on the wholesale guidance for the year. It was raised nicely from originally 9% to 10% to now 11%. This would suggest 4Q wholesale revenue would grow in the mid teen rate on an organic basis. Is that the right way to think about it, Scott? What are the brands that are driving that growth for the Q4? And then how should we think of that number as a barometer for the out quarters? Yes. So, as usual, Laurent, I think you've got it. You might be a little hot, but high single digit organic growth on the organic is kind of where we would say the implied guidance would take you. And it's the same brands that are driving through the year, right? So Vans, The North Face are the 2 biggest drivers. We've seen good wholesale growth here with Timberland in the North America market. Yes, that's right. Timberland North America particularly strong. Dickies, as we've reset new products across much of their distribution. We are seeing good solid wholesale growth there as well. And we in the prepared remarks, just building on that last comment, work we said would accelerate in the Q4 and obviously that's a predominantly wholesale business. Okay, very helpful. And then I wanted to shift focus on the strategic investments. I think they were up 12% in the Q1, then up 8%, then now up 5%. I think you said in the prepared remarks you're going to increase that investment by $45,000,000 in the 4th quarter. How should we think about these investments for the out year for 2020? Yes. So, again, I'd take you back to Boston and just remind you of the algorithm that we talked about. So in general, we said we would maintain our level of investment as our revenue increased and we'll start to see leverage that inflection point hit this year. And we expect to continue to see leverage as you look into next year and beyond. So that's the big picture. When we look at I think you should think about these incremental investments as an acceleration. It's not new initiatives. It's things on our roadmap where we see evidence of return and we believe that by opportunistically advancing some of these investments, we can either shore up or even accelerate our top line growth. So, the first commitment is to the shareholder and delivering on our commitments and you can and will expect leverage next year when we get to the guidance. The other thing I'd say is, if you're looking at the quarters and I know you're in the bowels of the model right now, but at 5% of our strategic investments, there's a steady state of investment around those strategic priorities. And I mentioned some phasing. So there is some phasing of that baseline spending between Q3 and Q4. Q4. And in addition, we made an incremental $45,000,000 investment since the last time we talked 90 days ago. So all that says there is some noise between Q3 and Q4. That's why we put in the prepared materials of first half, second half because I think that's more indicative of the underlying operating trend and performance of the business and kind of takes all that noise out so that you can really see what's going on. Very helpful and best of luck. Thanks, Lauren. Thanks, Lauren. Thank you. Our next question comes from the line of Sam Poser with Susquehanna. Please proceed with your question. Good morning. Thank you for taking my question. I just want to follow-up. There was some shift of some expenses from Q3 to Q4 and that's sort of excluding that 45,000,000 dollars Yes, that's right. And again, Sam, I mean, we are not getting into the quantification. What I would just say to you again, just repeating what I said to Laurent, that's why the second half in our opinion is more indicative of the underlying trend of the business. Remember, a year ago, you had a stub period, you had year end change. There's a lot of mechanics around that create some noise as you look at quarter to quarter. That's why I would just reiterate that the second half is the best look to try to get a beat on what the trend of the business is. Thank you. And then, well, I am just going to ask the question. You talked about M and A and that you are well positioned for it. And yesterday, there was a little bit of a story going around and I wanted to know if you wanted to discuss anything regarding Manhattan Beach, California? I'll answer that, Sam. I think obviously M and A continues to be our number one choice of capital allocation. And I think you all know us well and you've seen how we have been reshaping our portfolio to align with where we see our strengths in the larger consumer marketplace across active, outdoor and work. I would encourage you to remember those facts and when you read things in the news like that, you don't necessarily always have to believe rumors. Okay. And then just lastly, could you talk a little bit about sort of the momentum in North Face and the evolution of the Timberland business and sort of how you're thinking about The North Face and Timberland over the next 2 years on a growth and sort of brand positioning perspective? Sure. I'll start and if I leave something out, I know Scott will fill it back in. First on The North Face, this is we've been on a multi year journey where we started first to really reset that solid foundation with management, the work we did around cleaning up our distribution, the product segmentation, the investments behind product. And I think now you see really an elevated brand voice that's pushing The North Face and their influence to the top of the conversation. And it's really coming from their focus on being purpose led and the guiding principles that leadership team has put in place. I think how you can think about this going forward, Sam, is that you will continue to see this brand innovate. The FutureLight product that I mentioned in my prepared remarks is a great proof point of our innovation engine working on specific technologies that help differentiate our brands. And you will begin to see a methodical cadence season by season, new platforms, new stories that continue to elevate The North Face as that lead outdoor brand and really tipping up their influence. And we've committed to the 6% to 8% growth over the 5 year period. As we said in our remarks, we see that high single digit year. The confidence that we have in the team, the strategy and how they're executing right now is what's reinforcing that. Timberland, it's really a lot of that same playbook that we've been talking about. We've reset our management team. We're surrounding that team now with really good design capability and creative talent. And that will only help enhance our work on diversifying the product offer while respecting the classics, building out these new growth vectors and the diversification into these more lifestyle, women's and outerwear that will put us in a position to achieve that mid single digit growth that we committed to in Boston. I'll be honest, Sam, we're a little bit behind that. But we were pretty clear what our trajectory would look like. Vans was strong when we spoke with you all in Boston. We committed to North Face accelerating and following the North Face acceleration would come Timberland. And we're really seeing that work nicely and with the work vector that we've committed to delivering on its portion of our long term growth, we really feel confident about the plan we put forward and our ability to execute that. Thank you very much. Continued success. Thank you, Sam. Thank you. Our next question comes from the line of Camilo Lyon with Canaccord Genuity. Please proceed with your question. Thanks. Good morning, guys. Great job on the quarter. Good morning, Matt. Just circling back on Vans, in prior discussions over the last year, I think the conversation around Vans was centered around managing a soft landing. This quarter seems to not even seems, but clearly indicates that there's still a lot of growth in demand for the brand. And I think that in that prior soft landing sort of definition, you were really actively managing the wholesale piece with the DTC piece being the wildcard. The question relates to this low double digit growth expectation that you laid out for next year. If you could just parse out how you're thinking about those 2 channels from a growth rate contribution perspective? Because it seems like you obviously have the ability to manage that wholesale, but it's the DTC component that continues to surprise to the upside. So I'm wondering what does that DTC component correspond to in that low double digit expectation? Yes, I guess one thing before we even get into that, just a reminder, since acquisition, this brand has grown at a mid teen rate and you think about the forward guidance being at a mid teen rate. So over a very long period of time, the brand has demonstrated its ability to find that growth path those growth paths on a consistent basis. If you think about D2C, high single to low double is what was in our long range plan and we still see that as the long range. Again, when we come from our current level of performance and moderate into that, law of big numbers, hard comps, eventually we still believe that that is the long range growth path. Again, what makes it a little hard for Steve and I to get our hands on is so far we have not seen even with the extremely large size of this business, we have still not seen that moderation at this point. Yes. And Camilo, this is one of our D2C and digital are one of our key strategic choices and the investments that we're making on an annual basis and where we're able to put additional dollars behind that strategy. Vans is a large part of what's informing those investments and those dollars are being put to work there as they are in other brands. But their connection with their consumer, the growth of their loyalty program, how they use that digital platform, our customs platform, it really is hard to call when you have a brand that has such an intimate connection with a very unique and specific consumer group and they're able to execute that both online and in store in a way that's consistent with their overall culture. We've modeled it to the best of our ability and we do believe over time that's where it will settle in. But right now, as this brand resets itself and claims that number 3 spot, are really happy with the growth and we will continue to invest behind it because we think that is the differentiator for them, but it's also the differentiator for our larger platform of brands and how we will be able to leverage that across our other big consumer focused businesses. I'd just add one thing. You noticed, I think I commented earlier that we unusually for this point in the year gave some shaping to next year. And we have visibility, not quite as far in footwear as we do in some of the other businesses, but through late spring, let's say, we can see visibility on the order book and that gives us confidence that we're not going to see a massive slowdown from the wholesale side looking into next year. So that's probably one of the things behind your question. Again, we do have more forward visibility and from everything we can see, we continue to see that momentum. Just to clarify, so with that comment on the wholesale piece you just made, Scott, it seems like the implied DTC in this low double digit expectation is actually more conservative than the rate that you've been running at. Am I thinking about that correctly? Yes, that's right. Okay, great. So it could be better. Again, we're just we'll be back in 90 days and give you an update. Got it. And then just my second question, you've given great color on the regions and what you're watching out from a macro perspective. I was just hoping to get maybe some high level color on the inventory and the channel of the Big Tree brands by region and how you feel that looks coming out of the season? I guess, I would just say in general, inventories at retail and in our own are generally clean and I would say even very clean. There are a few pockets I mentioned in Kontoor inventory and our in the BF, inventory we own is elevated from where that team wants it to be and we're taking actions to bring that in. But when you look at it in the total VF, we're happy with where we're at. We're in good shape. Fantastic. All the best guys. Thanks Camilo. Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question. Good morning, everyone, and congratulations on the results. On a couple of calls back, you talked about the transforming of the industry and what's happening in the apparel world. And you talked about refurbished goods and how each of the different brands would be transforming itself a little bit and how they distribute goods or how they sell goods. What are you seeing there, whether it's a sustainable part, whether it's subscription, whatever it may be, what are you seeing there and how are you planning? And then on another note, just Workwear, any updates on Workwear and what you're seeing there in terms of demand and growth and product initiatives for next year? And lastly, just components of SG and A and how they're planned? Thank you. So, Dane, I'll start with your first question on how we're looking at some of these new models that clearly the consumer is driving across the pretty much the broad global space. We've had a couple of pilots that we spoke to you about. North Face most notably looking at really taking back products, refurbishing those products and then putting them back out for sale. We have a couple rental pilots that have been underway with our Kipling brand most notably in Europe. And in all cases, these have proven to be very positive, very successful and advancing our ability to work more 1 on 1 with our consumers. So we will continue to expand on that. It's an area where we see investment not only here within the corporate center in being able to strengthen our understanding to build partnerships that will benefit our brands, but it's also helping our brands find these places where they can connect and look for these new growth vectors beyond traditional wholesale and D2C. In the case of Workwear, we what you see happening there is really the portfolio of brands that we've assembled here. Our historical strong brands like Redcap and Bulwark, Timberland Pro on the top end of our segmentation and in the middle sits Dickies working on bringing innovative products both in footwear and apparel. We've got some really interesting products around enhancing motion in apparel. Dickies bringing elements of a stretch to their apparel. Redcap really having been the key innovator there, partnering with some of our outdoor brands and understanding how to bring Stretch into performance apparel, but bringing it to work to enhance their workers' experience and comfort in their day to day life. But I would tell you the most important thing around work is we see an evolving trend, not only here in North America, but in Europe of this emerging makers community. And we are extremely well suited with our portfolio of brands to play to that consumer to participate in how they begin to define themselves. And this is the area where we bring our brand building capabilities to bear and really position ourselves, define ourselves to these consumers and place ourselves in their everyday life to enhance their experiences. And you can really see this taking shape in much of our social media campaigns, specifically with Dickies right now, but really confident in where we are with our work evolution. And I'm happy to let Scott talk to you about the SG and A question. It's going to be mostly around work. No, just kidding. So the SG and A algorithm is really unchanged, Dana, from what we talked about in the Boston plan. They were focusing on distorting our investments against our strategic priorities, which we've consistently laid out, things like demand creation, data, digital, technology, our global business technology, advanced manufacturing, innovation, etcetera. And then we are getting leverage on the back end of the business. That's the power of our platforms, right? And so when you think about continue to invest in those drivers of growth, accelerating top line and then leverage on the back end, that's how you at the VF level see that gross margin sorry, the operating margin expansion through the combination of gross margin expansion and SG and A leverage. Thank you. Thank you. Thank you. Our last question for this morning will come from the line of Alexandra Walvis with Goldman Sachs. Please proceed with your question. Good morning, guys. Thanks so much for fitting me in here. You mentioned at the beginning there that you were closely monitoring the situation in China and you've given some helpful color on your thoughts on that market before. Across the board, you saw pretty strong trends in that market and acceleration from the last quarter. I wonder if you could dive into that a little bit, how you're seeing the strength of the consumer, maybe how that splits across different consumer groups or areas of the country? And at this stage in time, thoughts on the outlook there? Great. I'll go ahead and start and then Scott can fill in the blanks. Where we see the consumer is really through the lens of who are our specific consumers. In general, the economy though slowing is growing well and our consumers and the price points that we bring to the market continue to resonate. And we feel we are in a really strong position in how our brands present themselves, specifically through a lifestyle component, the products from a seasonal basis and the price points position us very well to continue to compete, continue to grow. And I would just remind you that our penetration or overall brand awareness continues to have tremendous upside and as we grow and grow our influence, we will see those numbers grow. But today, where we are, there continues to be a tremendous amount of headroom for us to grow in. Just putting some numbers around that, we saw pretty meaningful acceleration in our China business this year, approaching high teens approaching 20% and in fact, if you look at VF RemainCo, it's in the mid-20s this year after high single digits a year ago. So nice acceleration in the business and that gives us confidence in our forward look for the region. Great. Thank you so much. Thank you. Thank you. This concludes our question and answer session. At this time, I'll turn the floor back to Mr. Rendell for any further comments. Well, thank you everybody for joining us today. I would love to just start off by complementing and thanking our VF team across the globe. We have absolutely increased our metabolic rate. We have been doing a lot over the last 24 months to evolve and reshape ourselves into the company that you see us emerging as and we could not do that without the talent and the commitment of our people. We're intently focused on executing our strategic plan. We're excited to help our Kontoor colleagues position themselves to stand up as an independent publicly traded company here as we move into the Q2 and position themselves for strength, but concurrently position BF to continue our transformation and our long term growth plans. So thank you for joining us today and we look forward to talking to you in May. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.