Earnings Call: Q2 2015

Jul 24, 2015

Good day, and welcome to the VF Corporation Second Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Lance Alega, Vice President of Investor Relations. Please go ahead, sir. Thank you, operator, and good morning to everyone. Thanks for joining us today to discuss VF's 2nd quarter 2015 results. I'd like to remind everyone that participants on this call will be making forward looking statements. These statements are based on current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in documents filed regularly with the SEC. I'd also like to remind everybody that unless otherwise noted, amounts on our participants referred to on today's call will be in currency neutral terms. By our definition, which is detailed in our press release issued at 7 am Eastern Time this morning, currency neutral amounts exclude both the impact of translating foreign currencies into U. S. Dollars and the impact of currency rate changes on foreign currency denominated transactions. You may also hear us refer to reported amounts, which are in accordance with U. S. GAAP and include translation and transactional impacts from foreign currency exchange rates. We've chosen to use currency neutral amounts as a lead number in our discussions because we feel it more accurately represents the true operational performance and underlying results of our businesses and brand. Reconciliations of GAAP measures to currency neutral amounts can be found in the supplemental financial information included with the press release, which identify and quantify all excluded items. Joining us on today's call will be Eric Wiseman, VF's Chairman and CEO Steve Rendell, President and COO Scott Rowe, our CFO and VF Executives Carl Heinz, Sulzberger and Scott Baxter. Following our prepared remarks, we'll open up the call for questions and ask that you please limit yourself to 2 questions per caller. Thanks. And now I'll turn the call over to Eric. Thanks Lance. Good morning everyone and thank you for joining us today. Our second quarter results add another proof point to VF's long and proven track record of delivering consistent profitable growth to our shareholders. Our ability to serve consumers and retail partners and to continuously expand on the momentum we've created has never been greater. In the Q2, currency neutral revenue was up 10%, an acceleration from our Q1 results, including growth in all channels and every region of the world. By coalition, Outdoor and Action Sports accelerated beyond last quarter's results with 16% growth, including double digit increases in nearly all 10 of the brands in the portfolio. Our Jeanswear Coalition continued its momentum with a 4% revenue increase in the quarter, a result we're particularly proud of. In fact, with the strengthening confidence in that business, we've elected to take up our full year guidance our full year growth expectation to mid single digit currency neutral increases. There is definitely momentum happening at Janeswear. 8 of our 10 largest brands grew during the quarter including particularly strong results for Vans, Kipling, Napapurian, JanSport, 10% growth from The North Face and Timberland in their smallest quarter of the year and another solid result from Wrangler. Across our portfolio, the fastest growing brand of the quarter award goes to Eagle Creek with 28% growth. Just named as Consumer Reports top luggage brand for 2015, a big congratulations goes out to the team in Carlsbad. VF's direct to consumer business had a strong quarter as well with 13% revenue growth. Our international business, which was also up 13%, grew 11% in Europe, 12% in the Americas region and 17% in the Asia Pacific region. Reported gross margin was 48.3 percent, down slightly due to the negative impact of foreign currency. Earnings per share was up 22%, which in fairness was helped by about $0.02 from an expected lower tax rate. But even so, without the tax benefit on a currency neutral basis, our EPS was up 17%, a very strong result in our smallest earnings quarter of the year. So strong in fact that we took up our full year EPS to $3.22 which represents 15% currency neutral earnings growth well ahead of our 2017 planned growth rate. Taking a look at the first half of twenty fifteen and there's a lot to like here. We had the strongest first half organic revenue growth since 2012, double digit growth in outdoor and action sports, direct to consumer and international, renewed momentum in our jeans wear business including its strongest first half revenue performance since 2011 and double digit increases in operating income and EPS. Needless to say, I'm extremely proud of the progress we continue to make against our near and long term objectives. We're delivering meaningful innovation across our portfolio, connecting even more deeply with our consumers and are tirelessly working to serve them wherever and whenever they shop and engage our brands around world. Operationally, strategically and financially, we are stronger than we've ever been. Powerful brands, powerful platforms, 1VF with a single-minded focus on delivering consistent, sustainable and profitable growth to our shareholders. And with that, I'm going to turn the call over to Steve, Karl Hines and Scott Baxter to take us through our coalition and brand results and then on to Scott Rowe to review our financial results. Steve over to you. Thanks, Eric. Let's start with Outdoor and Action Sports. With revenue up 16% on top of the 10% growth we had in the Q1, we're really pleased with the momentum this business continues to create and sustain. This quarter's growth was balanced with mid to high teen increases in both our wholesale and B2C businesses. And with double digit growth in almost all 10 brands in this portfolio, we're firmly on track to achieve our 2015 currency neutral growth target. So let's run through the 3 largest brands starting with The North Face. 2nd quarter revenue for The North Face was up 10% with strength across all channels and regions. We continue to see excellent global growth in our D2C business with revenue up 20% for the quarter. Turning to each region. In the Americas, revenue was up at a low double digit rate. The wholesale business grew at a high single digit rate and B2C was up at a mid teen rate including continued strength in our e commerce business. With the successful move of The North Face website to VF's new e commerce platform, we are really pleased to see increased traffic and conversion particularly in mobile. One of the highlights of the quarter was our mountain athletics collection, which saw strong growth including great initial results from our newly launched women's product. To promote mountain athletics, we launched the I Train 4 campaign, which featured a 32nd TV spot as well as digital and display ad that encouraged consumers to share their personal journey and goals. We've also been holding twice a week free outdoor workouts in 5 major cities across the nation, reaching consumers training for everything from bucket list ski adventures, cross country treks or an elusive summit to those training to perform better in everyday life. Athletes everywhere have responded well to these sessions led by expert trainers. Still in its early days, the mountain athletic business is picking up momentum and is clearly helping The North Face move to a year round brand. During the quarter, we successfully relaunched our iconic Hedgehog Hiking Footwear Collection, which was a very strong revenue driver. We also continue to see great response to ThermoBall with incredibly strong comp and balanced men's and women's growth. A collection has quickly become a very meaningful 4 season franchise. Now to Carl Heine. Thank you, Steve and good morning everyone. There's a lot of positive momentum going on outside the Americas. Starting with The North Face, its international business was up a high single digit percentage, driven by almost 30% growth in DTC revenue. In Europe, revenue was up at the mid single digit percentage, driven by strength in our DTC business. We also saw strength in our Mountain Athletics, Hedgehog and ThermoBall collections, so great global response from consumers. During the quarter, we held event that further engaged consumers in the region. The North Face Laveredo Ultra Trail race in June, so more than 1,000 participants run a 75 mile 19,000 foot elevation game course to the Italian dollar mile. In Asia, revenue increased at the low teen percentage, significant growth in the DTC business. Here, we continued our TNF-one hundred trail run series, which drew great interest with over 12,000 participants in 4 events across the Asia Pacific region. We also rolled out our TNF roadshow to 4 locations in Mainland China during the quarter and connected with more than 15,000 consumers in the product. We continue to have great momentum in the Nord Fish business worldwide. And as we look ahead, we are right on track to deliver low double digit global growth for the full year. Now let's turn to Vans. Vans posted its 23rd consecutive quarter of double digit growth, which coincidentally was their growth rate for the quarter as well, 23 and 23. Now that I like a lot. There was strength across all products and channels, including greater than 20% growth in both wholesale and retail, which featured an impressive double digit comp. In the Americas, revenues was also up more than 20% with similar growth rates in the retail and wholesale channels. We often get asked how does Vans continue to do it? And the simple answer is the strength of our team and the strong connectivity the brand has with their consumers who are often more loyal fans than consumers. This authentic connection is earned with youth culture and then translated back through Vans with innovative trend setting product and demand creation that is both inspirational and experiential. This powerful loyalty focuses our execution and keeps us at the center of action sports, music, art and street culture. There were 2 very exciting successful product collaborations this quarter. The first was with Disney, bringing iconic Disney characters and Vans off the wall culture together across all product categories. It started with a kickoff event at Disneyland and led to really strong sell through at both B2C and wholesale. This launch now ranks as Vans' most successful collaboration in the brand's history. The second was Vans' most influential high end bulk product in recent memory. The collaboration with Takashi Murakami, the Japanese pop art icon who is a long time Vans buff himself. The launch kicked off in Men's Fashion Week in Paris and was widely heralded as the must attend event of the week. Boutiques around the world saw long lines even people sleeping in front of stores and a limited edition product sold out in a matter of hours. In addition to connecting with consumers through great new products authentic and relevant consumer activations continue to be a signature of the Vans brand. The Vans Warped Tour kicked off in June bringing music, Vans culture and fans together in more than 40 stops across the U. S. Ending the U. K. In October. And tomorrow, we'll kick off our 3rd year of headlining the Vans U. S. Open of Surfing in Huntington Beach, the world's elite in surfing, skateboarding and BMX reached for the podium amid a festival wide celebration of creative expression, artist exhibits and installation. Now to international. Vans international business was up at the high teen percentage, driven by more than 35% growth in DTC and a mid teens increase in wholesale. In Europe, revenue grew at a mid teen percentage, driven by more than 20% growth in DTC and double digit growth in our wholesale business. We continue to be focused on elevating our storytelling and energizing our product offering and we certainly achieved those goals during the quarter. The region also a record response to the Disney and Murakami product collection. In Asia, Vans continued to outperform with revenue growth of more than 30%, driven by a 60% increase in DTC and more than 20% in wholesale. Here too, we saw strong gains across all product categories and great results from the collaborations launched in the quarter. We also continue to bring unique cultural events to the region, including the celebration of the global Ghost skateboarding day, which brought together more than 25,000 skateboarders in 8 countries. We are thrilled with the continued momentum internationally for Vans. We remain on track to achieve our mid teen growth target for the full year. And now on to Timberland. Timberland continues to build its relevance as a year round outdoor lifestyle brand with its adaptive style that's made for the modern trail. And with a revenue increase of 10% in the Q2 driven by a high teen increase in global wholesale sales, we continue to be really happy with the progress the brand is making against its long term growth target. In the Americas, in a quarter that typically represents less than 15% of Timberland's annual revenue, the brand was up at a mid single digit rate with a low teen increase in the whole. Boots and hikers in both men's and women's led the way. In men's, it was exciting to see the success of the casual growth in collection. We're really starting to break through with true spring product. In women's, casual and plastic boots as well as new spring sandals helped that business more than double in the quarter. As you know, we are big proponents of engaging with our consumers and helping them connect with each other. In the quarter, we launched the new timberland.comwebplatform with an updated look and interface that marries content and commerce. There are also great new features like Shop the Look and Quick Shop to inform style choices, inspire expression and the purchase experience. To round this out, the In My Element page has created a unique community by encouraging consumers to share photos showing how Timberland helps them live their lives to the fullest. It's a great element that was recently recognized by L2 Think Tank as one of the 8 brands making the right moves with user generated content alongside some great companies. On the Timberland PRO side, we continued our when your feet hurt your work suffers media campaign and saw particular strength in our pro boondock and pro powertrain collections. It is clear that this consumer continues to turn to Timberland to provide great innovative products for their on the job need. So double digit growth in the first half and now on to the fun part of the year. Definitely a lot of great things ahead for Timberland in 2015. Timberland's international revenue was up a mid teen percentage. In Europe, revenue was up close to 20% with strong growth in wholesale. In the men's business, Sensaflex and Copsail product continued a strong momentum for the footwear business and the package was driven by positive momentum in shorts, pants and denim. The women's business in Europe was also particularly strong. Turning to Asia. Revenue increased at the high single digit percentage, led by strong wholesale growth. Growth in the footwear business was driven by men's casual styles and sandals and chukka styles continued to drive strong growth in women's. We also revamped our design your own footwear customization webpage, which has seen positive early results. Consumers are loving the enhanced experience and features, which include extended style and color options. We remain on track to grow global Timberland revenue at a low teen percentage rate for the full year. Now let's turn to Scott and jeanswear. Thanks, K. H. And good morning, everyone. Our global jeanswear revenue increased 4% on currency neutral basis with positive results for both Wrangler and Leigh. Overall, we have been very pleased with jeanswear's performance. Our confidence in the business continues to grow, so much so that as Eric mentioned, increasing our full year outlook to a mid single digit increase based on our first half performance and what we see in the second half. In the Americas region, jeanswear revenue was up at a mid single digit rate reflecting healthier demand for jeans and strong results from our shirts, shorts and casual products. Revenue for Wrangler in the Americas was up at a high single digit rate. A few product highlights included our no iron ultimate khaki, which was launched with our first ever casual focused Father's Day campaign. Our Western business saw continued success with our Cool Vantage jeans and innovation that maximizes breathability in hot weather. And on the workwear side, Wrangler rigs exceeded our expectations for the quarter and with plans to roll this product out to additional doors in the Q3, we're excited to see this collection gain better visibility and traction. Turning to Lee. Similar to the Q1, the Americas business was down at a low single digit rate with a mid single digit increase in the U. S. Market offset by weakness in South America. In the States, we continue to see momentum in our modern series product for men and in women's, the introduction of short, capris and jackets made with performance fabrics has been well received. We also recently signed ESPN's Mike and Mike as spokesman for the Lee brand and are excited for that campaign to launch next month. So there's a lot of great traction in the jeanswear Americas business and we're excited to get into the second half of the year. K. H? Our international jeanswear business was up the mid single digit percentage, driven by a low double digit increase in Asia and flat results in Europe. In Europe, revenues for Wrangler were down at the mid single digit percentage due to ongoing weakness in Eastern Europe. In the quarter, Wrangler had a very successful collaboration with Leatherman, which drove great brand awareness and consumer engagement. Lee posted its 9th consecutive quarter of revenue growth in Europe with a mid single digit increase, driven by new women's product and continued response to our contemporary offering, so good momentum there. In Asia, our Wrangler business was up more than 20%. We continue to focus on the denim performance range and we launched SunShield product in key markets as well. We also launched our Proud to be Blue line, which celebrates the Wrangler heritage. At Lee, we saw a low double digit growth including great response to our innovative Jade Fusion Denim, which manages heat and moisture much better than regular denim. Taken together, we have great momentum on our jeanswear business globally, expected continue throughout the year. Now back to Scott on ImageWare. Thank you, Kaej. ImageWare revenue was flat for the quarter with a mid single digit increase in our licensed sports group business being offset by a low single digit decline in our workwear business. In our LSG business, we launched our new cool base jersey for all 30 MLB clubs to a great response with a strong activation campaign featuring celebrities from the worlds of sports and music. And on the workwear side, Redcap showed good growth driven by shop pants and shorts. However, Bulwark had a meaningful slowdown due to reduced oil and gas exploration. For the full year, we continue to expect mid single digit growth for this And now back to Steve. Our sportswear business was up 1%, reflecting a low single digit decrease for Nautica's business and a 20% growth from Kipling. But apart from Kipling, which clearly had another great quarter, the numbers behind Nautica don't paint the full picture. Along with a strategy and brand positioning reset that's well underway including a deep consumer insight study, the work we began a few quarters ago to increase AURs and pursue more full price revenue in lieu of promotion driven sales is working. It's also clearly showing up in our profitability. And with that said, we are maintaining this coalition's revenue outlook of mid single digit growth for the full year. And to wrap up our coalition comments, revenue in our contemporary brands business declined 5% as the overall contemporary category especially here in the U. S. Remains soft. Globally, a low double digit increase in international revenue was more than offset by a low double digit decline in the Americas region. In the U. S, despite the top line performance, we did see sequential improvement in our jeans business with sales stabilizing in the quarter. That said, however, given the year to date results, we are now expecting revenue for this coalition to be down at a mid single digit currency neutral rate for the year. And now on to Scott with a deeper dive into our results. Thanks, Steve. I echo Eric's comments by saying that our second quarter and first half year results speak to the continued strength of our diverse portfolio of brands and our business model. We remain focused on executing our strategic plan, which includes delivering innovative product, maintaining a strong connection with our consumers and strategically investing in our brands. And as a result, we have delivered yet another solid quarter that supports our long term growth commitments. In the Q2, on a currency neutral basis, our revenue rose 10%, which is an acceleration of the 8% increase we saw in the Q1. And at 9% year to date, that's solid growth for the first half of the year. By channel, our direct to consumer business grew 13% in the Q2, reflecting strong results across all regions including a high teen increase in Europe and more than 20% growth in Asia. This performance was led by our outdoor and action sports Coalition with The North Face, Vans, Kipling and Lucy leading the way. In our wholesale business, we also saw strong results with revenue up at high single digit rate with Vans, Timberland, Wrangler, JanSport, Reef and Lucy among the highest growth rates in the quarter. Gross margin for the 2nd quarter was right in line with our expectations at 48.3%, down just 10 basis points to last year's results. This decrease included 50 basis points of mix benefit, which was offset by 60 basis points of foreign currency and rate. And to unpack that a bit, our mix benefit just like in the Q1 was somewhat tempered due to the higher jeanswear revenue. Now keep in mind, even though jeanswear carries lower gross margins, it is still Versus most profitable coalition. So we're okay with that flow through. Foreign currency changes on a year over year basis, including an average euro rate of 1.11 in this year's 2nd quarter versus a 1.37 rate last year accounted for the majority of the headwinds. And finally, recall that the majority of our product costs with ties to commodities like leather, cotton and oil based derivatives will only begin to see benefits flowing through the P and L in the second half of the year, more specifically in the Q4. Now turning to SG and A. Our SG and A ratio to revenue was up 10 basis points due to continued investments in D2C almost entirely offset by leverage. In fact, we're operating 139 more stores now than we did at the same time last year. And that's our model, make investments to drive top line growth, find leverage elsewhere in our expense structure and improve profitability. Our operating income grew 1% and operating margin in the 2nd quarter was 8.9%, down 30 basis points due to the impact from foreign currency headwinds. Excluding currency, operating income was up 10%, resulting in an operating margin of 9.2%. Flicking down into that profitability by Coalition, reported Coalition, reported outdoor and action sports operating income rose 3% and operating margin was 9.7%, 50 basis points below last year. This decline was entirely due to the impact of changes in foreign currency rates as about 40% of the Coalition's revenue came from regions outside of the U. S. On a currency neutral basis, operating income was up 17%, slightly ahead of revenue growth. Operating income from Jeanswear was up 4% in the 2nd quarter and operating margin increased 70 basis points to 17.2%. Excluding the impact of currency, operating income was up 5 percent also ahead of revenue growth. We are really pleased with the global strength we're seeing return to this business. ImageWare operating income was flat with a 10 basis point increase in operating margin to 14.2% held back a bit because of unfavorable changes foreign currency. Without the impact of currency, operating income was up 2%. Sportswear operating income was up 41%, while operating margin improved 2.90 basis points to 10.2% as the move towards higher quality sales begins to gain traction. And Contemporary Brands operating income was down significantly as this category remains challenged. And now on to the bottom line. Our EPS grew 22% on a currency neutral basis. And as Eric mentioned, the result was helped by about $0.02 due to a lower tax rate, which included settlements of prior year's tax audits. While we expected this tax settlement as part of our annual outlook, the fact that it came in our smallest EPS quarter certainly shows up nicely. And even if you take it out, we were still up 17% on a currency neutral basis. On a reported basis, EPS was up 11%. Turning now to some balance sheet highlights. Our inventories were up 8%, which is in line with our expectations ahead of the second half of the year when we will realize about 60% of our revenue. And finally, our Board of Directors declared a $0.32 quarterly dividend payable in the Q3. Now let's turn to our full year outlook beginning with the top line. We continue to expect currency neutral revenue to be up 8% in 2015 consistent with our 2017 commitment. On a reported basis, we expect revenue for the full year to be about $12,700,000,000 Based on first half performance, we did make a couple of changes to our full year currency neutral revenue expectations for 2 of our coalition. As previously mentioned, we're taking Jeanswear up to mid single digit increase from our previous expectation of low single digit growth and we're taking contemporary brands down to a mid single digit decline from the previous nearly flat outlook. Our gross margin expectation for 2015 remains about 49.5% on a currency neutral basis, reflecting a 70 basis point increase over 2014. The primary driver of our gross margin expansion remains the favorable mix shift to our higher margin businesses, which we've seen for so many years. This is a trend we expect will continue. Taking a look at currency assumptions, we've elected to keep our euro to U. S. Dollar assumption at $1.10 for the balance of the year. At this rate, a $0.05 move would translate into a revenue impact of about $60,000,000 and an EPS impact of $0.03 to $0.04 for the second half of the year. Outside of the euro, which represents 40% of our foreign currency basket, other currencies have continued to devalue against the U. S. Dollar. So with this additional pressure in the second half of the year, full year reported gross margin could be about 49%. Moving now to the bottom line. We expect earnings per share on a currency neutral basis to increase 15%, up from the previous expectation of $14, as compared to last year's adjusted EPS of $3.08 On a reported basis, despite the negative impact from foreign currency, we now expect EPS growth of 5% to get us to $3.22 versus last year's adjusted EPS. This compares to our previous EPS guidance of $3.20 which reflected a 4% growth outlook. This places us even further ahead of our 2017 place and in fact is a nice stair step acceleration in the 1st 3 years of our plan, plus 13% in year 1, 14% in year 2 and now plus 15% in year 3. That's not too bad. Now let's see how we look at now let's see how we see the second half playing out. For the Q3, we expect currency neutral and reported revenue to increase at nearly the same rates as the 2nd quarter. Now keep in mind, the Q3 is the biggest international quarter of the year and therefore our most significant FX exposure. In fact, given current rates, we see the potential for about 70 basis points of foreign currency headwinds impacting our operating margin in the Q3. For the Q4, we see revenue growth at a slightly lower rate than the Q3 as we will be up against the comparable period in 2014 that included a 53rd week. The Q4 will also see the strongest margin and profit comparisons for the year when D2C is at its peak, the negative impact of currency moderates and we begin to see the impact of lower product costs. So to wrap it up, there are a lot of green lights as we look out across our portfolio and our execution only continues to get stronger. The initiatives and investments we have in place combined with the power of our diverse portfolio of brands are positioning us to achieve growth targets that we view as pretty strong when you stack us up against the industry as a whole. Equally as important is our proven track record of delivering steady earnings growth that we believe clearly illustrates the strength of our business model and consistent return to our shareholders. After posting a strong first half, we now have an even greater level of confidence as we enter the second half of twenty fifteen. With that, I'll turn it back to the operator for your questions. Thank you. Our first question comes from Ed Yruma with KeyBanc Capital Markets. Hi, good morning and thanks for taking my question. I guess first on the Jean's Wear business obviously nice performance there. How do we think about the drivers of that business? And then second, the incrementality from a margin perspective? I know it's lower gross, but are there certain benefits as that growth rate accelerates? And then finally, with the Nautica reboot, you've done these a number of times. I guess, how should we think about timing and cadence of that process? Thank you. This is Scott. How are you? So from a jeanswear standpoint, we're seeing denim trend up a little bit. So that's been real positive for us. You've seen that this is the Q3 in a row that we've had mid single digit increases. But if you think about jeanswear, this is the culmination of a lot of things. First of all, it's our new innovative products that are coming to market. We've been on an innovation process pipeline now for about 5 years and you're starting to see some of that come out of our pipeline. You're starting to see things like CoolVantage, which we just kicked off here about 45 days ago for tremendous success. That's part of the pipeline. That's part of the creation that we've had. And that's starting to come out and we're seeing really good success. You're also seeing expanded distribution, Ed. You're seeing that our consumers want to see our products in different and more channels because we're just really connecting with them. An example of that would be in the mid tier where you're seeing Wrangler really do very, very well. In addition to that, we've really gotten our demand creation platform harmonized with our businesses. So we're pretty excited about what's going to happen in the second half this year because we're kicking off in the Lee business, Mike and Mike from ESPN. And then we have a really strong advanced comfort platform coming out from Drew Brees on the Wrangler side. And then I think for me, the big benefit has been the real strong leadership that we've seen from our team at both Wrangler and Lee and just the excitement around our products and our people and our innovations. Yes. Ed, Scott speaking here. I guess just on the model, it's a great model is the short answer. We have relatively lower margins when you compare it to average VF, but it's a very efficient machine and we see a lot of leverage. So when we get to top line moving that leverage drives profitability. And remember it's already our most profitable coalition at almost 19%. And then on your Nautica question real quick. We're really at the front end of this work. As I mentioned, we've just finished our consumer segmentation study and that is beginning to inform everything to do with our brand positioning and our brand strategy, which flows through our product and go to market strategy. So from a timing and what can you expect is really over the I think you'll continue to see improvement over the next 12, 18 months as our team really locks on to this new model, new strategy and the product machine is able to start putting the differentiated product into the segmentation strategy. Great. Thanks so much. Our next question comes from Michael Binetti with UBS. Hey, good morning guys. Congrats on a great quarter. Thanks Michael. Eric on the I guess jump while Eric or Scott. You guys had much better trends in the revenue growth in the quarter in constant currency. I'm curious why you didn't feel like taking up the revenue growth overall for the year. Maybe you could help connect us that decision to what you're seeing in the backlogs for the fall and holiday. And maybe if you see the same trends in the direct to consumer business and you're seeing in the enthusiasm for the backlog in your wholesale customers, is that what you would look at and say, okay, we've got room there to then maybe raise the guidance for the year at that point? Yes, Michael, it's a great question and something we talked about a lot. It's the math works and you know how this works that all the numbers between 7.5% 8.5% round to 8% as we report our numbers. So there's $127,000,000 gap there on a $12,700,000,000 business. And we actually our revenue outlook is a little stronger, but the number is still 8, is the way to deal with that I think. Okay. So we're very encouraged by how the back half looks. Scott mentioned in his comments that the back half we're up against the back half that had an important 53rd week last year. So that's part of the dynamic as well. But we're seeing growth in both our wholesale and retail business around the world and our big brands. And it's very encouraging because we have a lot of our bookings in for fall and we have pretty good visibility to the numbers. Yes. And Michael maybe this is Scott. Maybe just building on that as you try to model this out obviously the top line as Eric said is incrementally better. Given our FX environment and our history of tightly controlling expenses that means we're driving leverage. And so the couple of pennies that we took up in terms of bottom line that's really where that's coming from. All right. And Eric seems like you're ready to have a basis point argument with me on revenues there. So thanks for that. If we just look at the gross margin line and start thinking ahead to 2016 a bit, you guys have told us about you guys have mentioned a couple of times that you're getting close to your 5 year margin target early. But obviously, FX has gotten a lot since then. Maybe you can help us think about the 60 to 70 basis points of mix you guys get every year? How should we lay currency on top of that as we look at next year? And then also any kind of comment you could give us on how you're thinking about price increases to as you get into that FX pressure? I think that was like 5 or 6 questions, Michael. Perhaps. Yes. So and you know the first answer I'm going to give you, which is we're not going to give guidance into 2016 at this point. But there's a few things I can say, Michael. So first of all, currency has impacted us this year as we said about 60 basis points and that's essentially offset by the mix benefit that we see and then a little bit of input cost is the rest of the delta to get there for 2015. But pricing has always been a part of our quiver of arrows I guess as we attack things like commodity price and currency. And there's no reason to believe that wouldn't be true in the future. The other thing I always like to point out on this topic is in any given season, more than 50% of our products are new each time. So when we talk about price, really merchandising to a known value as opposed to necessarily raising the price on a like for like basis. Right. Okay. Thanks a lot guys. Thanks, Michael. Our next question comes from Kate McShane with Citi. Thanks. Good morning. Good morning, Kate. My first question was on the rollout of your brands in China. And just has there been any change in strategy there given the environment? Hey, Kate, this is Karl Heinz. No change in strategy. I think we all heard the news recently there were some noise in the economy. And our strategy stays unchanged. I always say that very consistently. This is a marathon. It's not a short term race. We actively work at the moment with 4 brands, which are our major focus. I said it in the past, we still have opportunities in the number of stores. I gave the number compared to benchmark to big players. We still have a lot of room there. And also we had a relatively good quarter. Our comps are strong. So it's really good feedback from China at the moment. Okay. Thank you. And you may have given this I may have missed it, but can you give a comp growth number for your DTC business in your prepared comments? We did not, but I'll make a brief comment on that. We're thinking as we look at our D2C business in total, we think we're going to grow low to mid single digit in our brick and mortar stores. And we've talked about high single digit comp growth in our overall D2C. And that's really pulled up by the rapid growth of our e commerce business, which is has been and continues to be up over 30%. So when you put those 2 together low to mid single digit comps in brick and mortar and up 30% in e comm, we get to a high single digit comp number in our D2C business. Okay. Thanks so much. Thanks. Our next question comes from Matthew Boss with JPMorgan. Hey, guys. Congrats on a nice quarter. Thank you. So on your longer term objectives, split adjusted 2017 earnings target would be about $450,000,000 in earnings. Are you I guess higher level are you still comfortable with this? And if we don't see an acquisition which you had some embedded in there, are there other levers to still think about to be able to get us there? Sure. When we announced the $450,000,000 earnings dollars earnings per share target, we said at that time that we weren't really relying on a big contribution from acquisitions to get to that number. And the fact is we aren't and as Scott pointed out our 3 year trend in EPS growth, we were assuming a 13% compounded EPS growth to get there. And our numbers are 13%, 14% and we're now guiding to 15% this year on a constant currency basis. What's changed is when we gave the $450,000,000 we said we were expecting no change in from FX. FX wouldn't affect that. We pegged it at whatever the rate was at that time. And obviously, we have an FX headwind this year. What's going to happen for the next few years from an FX standpoint? I can't comment on. We don't know. But organically, we are driving greater than the planned organic growth rate in our EPS. So how you think about that? I don't know what to tell you, because I don't know what the foreign currency exchange rates are going to be for the next 30 months. We're exactly halfway through our 5 year plan sitting here right now. Great. And then just a follow-up. So as the balance sheet continues to build here, anything new to think about on the capital allocation front? More so, if we didn't see an acquisition by say the midpoint of next year, is it fair to think about maybe a larger or more consistent share repurchase? Would you look to return cash to shareholders maybe in a different fashion? Well, Matthew, I would say this. There's no change in our position, which has been consistent. Acquisitions remains our number one priority. Dividends is the following. And then we've said consistently we won't let cash accumulate. We'll return that to shareholders as we've done over $1,300,000,000 over the last couple of years. So if we had cash accumulate as I said, we would absolutely not let it sit there. We would find a way to return that back to shareholders. That's great. Congrats again guys. Thanks. Our next question comes from Jim Duffy with Stifel. Thanks. Good morning everyone. Hi Jim. Good morning. My question is a big picture question about the portfolio brands as a whole. A few brands nicely ahead of pace relative to 2017 targets, a few laggards. I suppose that's the benefits of having a portfolio. We're seeing D2C ahead of pace. The world has changed quite a bit in the past few years with the pace at which consumers are embracing shopping directly with the strong brands. Given this kind of new world order, can you provide some updated perspective on strategies to shape the portfolio? How you think about those brands that are laggards? That'd be helpful. Thank you. Sure. I'm going to respond to that in a couple of ways Jim. One thing we are seeing is that our D2C business worldwide is running at a it's going to be a bigger percentage of our company than we originally thought. It's grown about 200 basis points as a percentage of our total revenue over the last couple of years. We did have an accounting change there for a little that affected that. But it's looking like that could continue to that could hit 30% of our total revenue in the next couple of years. So that is different. Consumers are engaging with us as I said earlier to an earlier question primarily through our e commerce sites which are very compelling getting bigger and we have them in more countries. As regards to the shape of the portfolio, it's something that we look at all the time. And we want to be in a position 5, 10 years from now where we have a compelling and relevant portfolio. I can't comment specifically about how we're thinking about adding to that portfolio or subtracting that portfolio because it's been an appropriate comment to make. But it is something we manage. Okay. Can you speak in any general terms about things you would be more likely to add to the portfolio or the characteristics of how you're trying to shape the portfolio? What you'd like to emphasize? And what are some things that you're less interested in emphasizing? Well, you've heard us talk over time about our focus on the outdoor and action sports space. And those activity based brands are where we are best and growing the most and investing the most. We invest disproportionately them in brand spend and we invest disproportionately them in new stores and e commerce sites, because we like the characteristics of them and the stickiness with consumers when we are helping them live out their lives doing the activities they like to do. So you will see us invest in that type of thing in our portfolio beginning with an emphasis on outdoor and action sports. Understood. Thank you. Thanks, Jim. Our next question comes from David Glick with Buckingham Research Group. Thank you. And I'll add my congratulations. Thanks, David. Scott, just a question. I just want to make sure I understand your comments on the gross margin and profit progression for the balance of the year. You said that FX is a little bit greater, but all in Q3, but also you have some of your higher margin brands have a higher penetration as well. Should we think about the gross margin progression for Q3 being kind of similar, maybe a little bit better relative to last year in Q3 and then the big increase over last year in Q4 and the same for EBIT and EPS. Is that the right way to think about it? Yes. I think that's generally right. I mean, we're not being that specific, but I think in terms of the shape you listened well. Okay. Great. And then tax rate still around 24%, is that fair? That's right. About 24%. Last question on jeanswear. It sounds like you have a lot of new product initiatives. And I'm just wondering is this part of a broader improvement in the overall denim market? I mean there's certainly been a lot of discussion about that. Obviously, you guys are doing a lot of things right. But I'm just wondering is kind of the demand sort of bottomed out in the category and really starting to recover overall? Is this a rising tide in addition to some of the strategies you guys are successfully implementing? Yes, David, I think it's a little bit of all of what you said. The market is definitely improving. We've seen a little bit of additional demand around denim. But I think the single most important thing is our folks are really doing a good job as far as helping accelerate that demand with their consumers and with our wholesale customers. We're bringing products to market that the consumer really likes. We've got our new Heavenly Touch, our Advanced Comfort, our Dream Gene. And even I mentioned earlier talking about the Cool Vantage, it's a product that hasn't really been addressed in the marketplace before and we've brought it all the way through our innovation pipeline over the last 3 to 4 years, came to market with it here and it's been a tremendous success. So it's not just that, it's the additional piece and the additional piece is when you bring a product to market that the consumer finds that they have a need for, you have success. And we're really listening to the consumer with our insight process and we're bringing those things to market and the consumer is finding them. And then we just have to have a bigger voice going forward from a demand creation. You heard me talk about some of the things that we're doing there to go ahead and highlight those products and highlight our brands. So as you combine both of those factors, I think it's really good for our jeanswear business. Great. Thank you very much. Good luck. Our next question comes from Laurent Vasilescu with Macquarie. Good morning and congrats on a solid results. So 2 weeks ago on The Wall Street Journal highlighted that VF Corp is one of the brand leaders out there looking at Africa's next frontier from a sourcing standpoint. Can you provide any insights regarding your geographic sourcing strategy going forward? And how should we think about labor cost pressures this year and longer term from a gross margin standpoint? Sure. It's Eric. I'll handle that one. For as long as I've been here and I've been here for 20 years, our supply chain strategy about sourcing product has always been to have a balanced portfolio of countries that we can create our products in, not chasing lower lowest cost, but chasing the best business model for us. As a result of that, we're spread pretty wide in terms of the regions of the world and number of countries that we have facilities in that we either own and operate or that we source from, including a small presence in Africa. Africa is a place that interests us. It is emerging on the scene. And as the article said, it's kind of a new place for the apparel and footwear industry to go to. And we're there in a very small way trying to learn what role that may have in our future. I'm going to take a step back from that. And as we look from look for places to source cost is not the 1st place thing that we look for. We have to first have the quality of products made. If the products it doesn't do us any good to get an inexpensive product that doesn't have great quality that's bad for our brands. Second thing we look for is working conditions. We won't source products in a place that doesn't have good working conditions for the people that work in those factories. 3rd thing we look for is service. So now we have quality of the products, good working conditions in a place that can service our demand. And then the last thing we look for is cost in that order. And to the extent countries can tick those boxes in that order, we go there. Great. And continuing on the sourcing theme, can you provide an update on the 3rd way of manufacturing? I think the last time we heard about the 3rd way was during the 2013 Investor Day. So hoping to get a little bit update on that initiative in terms of the potential for gross margins going forward? Yes. The 3rd way is, given the Reader's Digest version, one way to produce is in factories that we own and operate. The second is in a factory that is purely a third party relationship. And the third way is in a factory where we have a strategic alliance with the factory bringing everything we know about making product into a factory that's owned and operated by somebody else. That was an idea 3 or 4 years ago. We have some of those set up around the world. We have one of those set up or a couple of those set up now in Bangladesh. And it's a place where we find that we can take an attractive a potentially attractive factory in a market that meets all the criteria I said and make it even better, because we're pretty good manufacturing operators ourselves, have a lot of tricks up our sleeves and we share them with some of those factories and that model we'll continue to see more of that. I can't speak to what percentage of our products come out of that today, but it's a growing percentage. Okay, great. Congrats again. Thank you very much. Our next question comes from Dana Telsey with Telsey Advisory Group. Good morning, everyone and congratulations on very solid results. Thank you. Can you talk a little bit about as you think of marketing investment for the back half of the year, how does it differ by coalition? What should we be seeing? And just lastly on the jeans side, mid tier department store performance, how did that look? And was there any change? Thank you. Yeah. Good morning, Dana. This is Scott. I'll start that. Our demand creation is growing a little bit faster than our top line. So just in terms of modeling it out, we continue to make those investments. But importantly, we're also improving the effectiveness of those investments. We're making those dollars work better. I'll give you one simple example. We've had 14 global media agencies and we've embarked on a project to really look at rationalizing that getting more leverage the power of 1BF. And as a result, we've taken that 14 down to 3. And that's resulting in tens of 1,000,000 of dollars of savings over several years. And that's really a way to just put those dollars to work in a more effective way. And from a mid tier standpoint Dana, I think there are 2 things I'd like to talk about. 1 is we brought Wrangler to the mid tier and it's been extremely successful. What I mentioned earlier is our consumer is asking for our product in different channels and that just tells us the strength of the brand that we have and we brought that product to that channel. It's resonated extremely well and we're rolling it out across the channel across the United States with great success. And then on the female side, we're bringing real innovation to the channel. So not just around denim. I think the thing that's really interesting and really exciting for the Lee brand is we're bringing some different fabrications and some different performance type products that have been really success from a female standpoint and the consumer has really liked that in that channel too. So that's a little bit on the male and a little bit on the female within the channel, but we feel really good about what's happening in the second half and what we have in our innovation pipeline going forward. Dana, it's Eric again. It's absolutely fair to say that how to do this because I won't talk about a specific mid tier retailer. But is the mid tier sector healthier than it was 2 years ago? You bet it is. Is it healthier than it was last year? Yes, it is. Where is that going to go? I don't know. But those retailers in that space have been working really hard to become relevant and to get momentum and they're getting some traction. Thank you. Thanks, Dana. Our next question comes from Omar Saad with Evercore ISI. Thanks. Good morning, guys. I wanted to follow-up on Michael's question on FX. I know you're not giving guidance for next year, but just wanted to get a kind of better understanding of kind of the key drivers on the transactional side as your hedges roll for later this year next year? Is it price, merchandising by far the 2 biggest components that you leverage you can pull to manage through that? Is there supply chain efficiencies or product costs coming down or raw materials? Just help me think how to order that and are you still comfortable that it will largely you'll largely be able to handle that issue that FX issue? Yes, Omar, as we've discussed in the past, the answer is all of the above are true, right? All those are levers. And I always just and when we have this discussion, I always encourage people don't isolate too much on one single component of our input costs, because the reality is the markets are pretty efficient. We see commodities now trending down. We see currency going the other way. It's really hard to predict how all those factors are going to come together. But that's why we have hedging programs and that's why we enter into longer term relationships and contracts, so that we can see those coming and design and merchandise around those known input costs. And pricing is absolutely a lever. I made the point earlier in the call that it's not necessarily like for like items, although that will be part of the equation. But really I'd say merchandising and the mix and the innovation that we're bringing to market that we get paid for all those things together mix to allow us to maintain our margins. The other thing I always say too is while the speed with which currency changed this time is a little unprecedented, the fact that it is changing and the relative amount is not unprecedented. We manage this every quarter and the best evidence of our ability to do it going forward is fact that we've done it for many years in the past. So I think a lot of those factors are going to come to bear Omar and we see our models intact and we see no reason why we wouldn't be able to overcome these headwinds. Thanks Scott. That's super helpful. And then Eric, I want to ask a question. I heard you mention Eagle Creek as one of the fastest growing brands. You've got a number of smaller brands in the portfolio that don't get as much attention. Napa, Piri, I know Kipling is doing really well. Reef is one we haven't heard about in a while. Should we think about these smaller brands? Are they all seem to be kind of coming together and starting to reach a critical mass maybe not individually, but as a whole as kind of another leg of growth organic growth for the company? Is that the right way to think about it? Or are they still kind of too small as we think about the broader portfolio? They are yes, you're right. We tend to focus on our big brands because our big brands move the needle for us and that's how we talk on these calls. We have a lot of smaller brands that are doing fantastically well. A brand like Kipling, which was a brand we don't talk about much, it was a small brand. It's approaching the size that Vans was when we acquired it. So it's becoming not such a small brand and it's growing. It's one of our fastest growing brands consistently over the last 4 years. So that's just one. Natapura is another one that you called out. We're having great growth in that brand. Eagle Creek is a very small brand for us, but a really important brand in the outdoor luggage space. And for Consumer Reports readers to have discovered it and named it the best luggage brand of 2015 is remarkable. And I couldn't be more proud of that group. And that we think all those brands have runway collectively, they're an important part of our growth story. Can you give us a sense of the size combined, Nampiri, Kipling, Reef, Eagle Creek, any others that I'm missing in that genre? I couldn't do that accurately in my head on this call. It might be a conversation we have later. Okay. No problem. Thanks a lot guys. Thank you. See you Omar. Our next question comes from Lindsay Drucker Mann with Goldman Sachs. Thanks. Good morning, everyone. Hi, Lindsay. I wanted to ask about Mountain Athletics and just get a better sense of number 1, what kind of distribution that initiative is getting? And maybe Steve you could talk to clearly breaking into training and sort of outside of the outdoor part of action would be a pretty big new category to tap into. And I was just curious from your consumer insights work what your consumer is telling you that how you would position North Face in that category in order to really take off? Thanks. Great, Lindsay. Mountain Athletics is a very important new line extension, new collection that The North Face has been focusing on. It's really important in being able to spread The North Face beyond its second half concentration into becoming a true 12 month out of the year brand. And our consumer insights is what really has led the team to the way it is positioned. And you heard me talk about in my comments, it's about training for the activities that are relevant to The North Face consumer. It could be that ski adventure, climbing, a long hike that someone has been focused on. Or if you're just part of that focused consumer group in your everyday life, it's a method of training that really resonates with you. We see the distribution opportunity being very consistent with where the brand is distributed today. Specialty retail is an important part, but where we're seeing very good placement and very good sell through is in the sporting goods channel. The department store piece, which is smaller for the brand, absolutely has seen good placement. And then our own D2C and specifically e commerce where we're able to really present the brand, present the collection and the theory behind mountain athletics training, we've seen really good strong growth on a quarter by quarter basis. And Lindsay just to give you an international point of view, we just launched it a little bit later than in the U. S. It's in the market right now and the sellout data are phenomenal, really doing well. Great. And just a follow-up for both Timberland and Vans, can you talk about how momentum has been in apparel versus footwear? Are you seeing sort of increased strength in apparel as you focused on that offering? Or is it kind of balanced growth? Yes. So I'll start with Vans. As you saw they had a spectacular quarter yet again and that's broad based. It's across all categories, all genders and all channels and regions. So apparel is growing as a very important element of that brand's go to market strategy. And the collaborations that they've brought to market, Disney wasn't just a footwear collaboration. It came to life in apparel in a really unique and fun way. And at Timberland, it continues to be a big focus for us. As I've said before, we're just beginning to get placement and penetration here in the U. S. Market. Our greatest go to market presence is within our own retail and it's an important focus. It's part of the 3 areas that we've committed to really drive men's footwear, women's footwear and men's apparel. So really happy with both businesses apparel growth. Great. Thanks. Thanks Lindsey. Our next question comes from Mitch Kummetz with B. Riley. Thanks for taking my questions. So Eric, you're now expecting stronger 8% growth this year. I think the only coalition that you formally raised the growth rate was Geneswear. I'm curious on outdoor and action sports. The plan is double digit growth. Are you now kind of assuming stronger double digit growth for the year given how strong that coalition was for the quarter? No comment on outdoor growth for the back half of the year. I will remind you Mitch that particularly at The North Face, the 53rd week last year was extremely helpful. You might remember in the Q1 of this year, we talked about the slowdown in the growth rate at The North Face. It was because they traded the 1st week of January for the 1st week of April. And obviously, in The North Face model, 1st week of January is more important than the 1st week of April. But we're up against that in our growth rates for fall. We're not taking our guidance up in on outdoor or action sports, but we're very pleased with where we're positioned right now. Got it. And then Scott just on kind of reconciling the earnings guidance. Again, the sales assumption is essentially the same, although again maybe a little bit stronger 8% growth, gross margins come down a little bit, EPS bumps up a couple of pennies. Is it really on the SG and A side that we should see kind of the improvement? I think you mentioned tax is the same. Does share count come down at all? And does jeans wear impact kind of the model since you're now expecting more jeans wear growth for the year and that's lower gross margin, lower SG and A? Yes. I guess, I think it was all in there Mitch, but you nailed it. It's really leverage on SG and A is really the what you need to make your model work, because all the other factors. Shares are the same. We said about 24 on the tax rate. Obviously, we talked about the gross margin. So the difference is that higher volume is driving leverage. And remember that jeans wear business that is their model, right? Relatively low margins based on the channels they play in and they drive volume and that drops right to the bottom line. That's why we see that 19% or so operating income for jeanswear. Got it. Thanks guys. Good luck. Our final question comes from David Weiner with Deutsche Bank. Great. Good morning guys. So just my two questions. I guess first I was hoping regarding Europe you could maybe give a little more color by geography, if you could do that, maybe kind of what's working better or if there are any regions that are kind of lagging, if you will? And then in the U. S, are there any callouts in terms of stores that are located in heavier tourist markets? Are you being impacted by tourist inflows into the States? Thanks. David, maybe I start with Europe. As you heard us saying, we had a strong quarter up 11%. I guess the good news is most of our brands in the portfolio were growing. So from a brand point of view that's the first point. The second one, we see good strength in most of the geographies, right? It's not just a hype pumping up in one area. So all over, in Southern Europe particularly strong. It's good in the Scandinavian piece and the U. K. Also the greater German area. And even Greece, I looked into Greece. Even if it's small for us, we have a subsidiary there, but it's a few percent up to last year, so which is really surprising what's going on in that market. Yeah. The Greek comp, okay. Market. Yes. The Greek comp, okay. That's going to put us over the top for the year, I'm sure. Yes. And then David to your tourist question, we have seen those large tourist markets of Southern Florida, New York and to some degree Las Vegas impacted by that international tourists. What's interesting is the offset is we're seeing really strong comps in our international retail as that consumer stays home. I think the important thing to remember the D2C is a smaller percentage of our total revenue, strong wholesale base and very balanced and broad platform by which our businesses drive their revenue. David, we are happy that we got a few American tourists more now in Europe. There you go. Good. Thanks guys. Thanks David. Thank you all for your time and attention this morning. We're thrilled with how the quarter played out with currency neutral growth of 10% on the top line and 22% on the bottom line. I hope you sensed our confidence as we face the back half of this year which is when most of our business comes together, but we are confident. Look forward to talking to you next quarter. Thank you. This concludes today's conference. Thank you for your participation.