Earnings Call: Q1 2015

May 1, 2015

Good day, and welcome to the VF Corporation First Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lance Olega, VP of Investor Relations. Please go ahead, sir. Thank you, operator, and good morning, everyone, and thanks for joining us on our call today to discuss and are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in the documents filed regularly with the SEC. I'd also like to let everyone know that unless otherwise noted, amounts that our participants refer 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 this morning, currency neutral amounts exclude both the impact of translating foreign currencies into U. S. Dollars and the impact on currency denominated transactions. You may also hear us refer to reported amounts, which are in accordance with U. S. GAAP and include translation transactional impacts from foreign currency and 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 business and brands. Reconciliations of GAAP measures to currency neutral amounts can be found in the supplemental financial information included within the press release, which identify and quantify all excluded items. Joining us on today's call will be Chairman, President and CEO, Eric Wiseman Scott Rowe, our CFO and VF Executive, Scott Baxter Steve Rendle and Carl Heinz Salzberger. Following our prepared remarks, we'll open the call for questions and ask that you please limit yourself to 2 questions per caller. Thank you. And now we'll turn the call to Eric. Thanks Lance. Good morning everyone and thank you for joining us today. You often hear us speak about consistency in VF's financial performance and the strength of our business model about our powerful brands and our powerful platforms, which work together to deliver strong returns to our shareholders. Along with consistency, we also underscore the confidence we have in our ability to execute against our long term goals, while delivering near term results. I'm happy to report that our fundamental business is incredibly strong and the momentum we've established continues to build. In fact, our performance in the Q1 of 2015 clearly demonstrates how we are expanding on that momentum. Currency neutral revenue, gross margin and earnings showed strong gains during the quarter making it a terrific start to the year. Taking a look at our operational highlights, which are currency neutral, revenue was up 8% with growth in 9 of our 10 largest brands, 4 of our 5 coalitions direct to consumer and wholesale and in every region around the world. Our Outdoor and Action Sports Coalition was up 10%. We also saw solid growth from our jeanswear coalition with a 6% increase and our imagewear coalition which grew by 8%. And congratulations to the Eastpak team which was VF's fastest growing brand in the quarter. Our direct to consumer business grew 11% and included mid single digit comps. Our international business grew 9% with Europe up 4%, Asia up 17% and a 16% increase from our Americas non U. S. Region. Gross margin, which I'll discuss on a reported basis, was 49%, in line with our expectations and not surprisingly held back by the continued strengthening of the U. S. Dollar actually by about 50 basis points in the quarter, all of which led to 13% earnings per share growth for the first quarter, indeed a very strong start to our year. Since the last time we spoke, the U. S. Dollar has continued to strengthen against global currencies. In fact, the euro to dollar relationship, which is VF's most significant foreign currency exposure was as high as $1.21 and as low as $1.05 during the 1st 4 months of the year. That volatility along with our new assumptions has produced a negative $0.06 impact to our earnings for the full year. Yet even with these additional headwinds, I'm proud to report that on a GAAP basis, there is no change to our expectations for 3% revenue growth, a 49.2% gross margin rate and 4% EPS growth to $3.20 per share in 2015. Now take out the impact of currency and our expectations for 8% revenue growth and a 49.5% gross margin rate also remain unchanged. However, due to underlying brand and operational strength and greater visibility to how the full year should play out, we're now raising our full year currency neutral earnings growth expectation to 14%, up from the 12% outlook we gave in February. This growth rate would of course be ahead of our 2017 plan for the 2nd year in a row and clearly a bullish statement about our outlook for VF. In summary, while macroeconomic, geopolitical and currency challenges continue to make headlines, the things we can't control, we have great confidence that we're in command of the things we can control, our brands, our platforms and our operational disciplines, all of which empower us to continue to deliver consistent, sustainable and profitable growth to our shareholders. 2015 is off to a great start. We've got our heads down and are executing well against our plans. We are confident. So with that, I'll turn the call over to Steve, Karl Heinz and Scott to take us through our 5 largest brands and then Scott Rowe, certainly not new to VF, but new to this role will go through our financial results. So Steve, it's over to you. Thanks, Eric. Revenues for The North Face in the Q1 were up 7%, which was in line with our expectations and included growth in all regions and channels. Globally, we saw particular strength in our D2C business with revenues up 20%. Exiting the fallwinter season, inventories in our own stores as well as our wholesale partners are very clean with excellent sell through as the colder weather wrapped around the world. Looking toward the coming fallwinter season, the brand's order book is in line with expectations and we feel very confident in our ability to deliver low double digit global growth for the full year. Now back to the quarter. In the Americas, revenues were up at a mid single digit rate with D2C up more than 10%, including strong growth in our e commerce business driven by solid increases in both traffic and conversion. And speaking of e com, we're getting ready to relaunch new websites for both The North Face and Jansport this month, bringing them onto the same newly upgraded platform as Vans and Timberland, a great example of our 1VF approach as we leverage core competencies within centers of excellence across our portfolio. During the quarter, ThermoBall continued to build even greater momentum with triple digit growth at both wholesale and D2C. We also launched The North Face's Fuseform technology a bit more broadly with the Dot Matrix jacket, an ultralight rain shell that utilizes our revolutionary weaving process to form multiple fiber types into a single fabrication to maximize functionality and performance. The launch was supported by a meaningful increase in demand creation to inform and amplify connections with consumers. And the performance of the product and feedback from consumers thus far has been solid. We are encouraged as we look to continue to build momentum this fall with an even broader exposure in the relaunch of our Summit Series collection. We're also increasing demand creation investments for The North Face's mountain athletic training collection, including our first ever spring TV commercial. Launched only a year ago, the line continues to gain momentum and is helping further shift the consideration set of existing and new consumers toward The North Face as a 4 season brand. This year's collection also includes women's products for the first time. Now to Karl Heinz. Thanks, Steve, and good morning, everyone. The North Face business was up at the low double digit rate, driven by more than 30% growth in DTC revenues. In Europe, revenues were up at the high single digit rate, driven by significant strength in our DTC business and comps greater than 25%. During the quarter, we celebrated 30 years with our anniversary mountain jacket to great success and saw continued momentum from our thermoball, Fuseform and running footwear products. In Asia, revenues were up at low double digit rate with both wholesale and DTC showing solid growth. A few highlights included launching our first ever Chinese New Year collection and collaboration with Tmall to promote our TNF100 event an ultra marathon trail running race. Based on feedback from both of these efforts, we have great confidence about how we are positioning the brand in this very important growth market. Overall, we continue to feel really good about the North Face international business and our global outlook for the full year. Now let's turn to Vans. Vans' strong momentum continued with global revenues up 16% and balanced strength in both D2C and wholesale. This marks the brand's 22nd consecutive quarter of double digit growth. That's 5.5 years, another amazing result from this team. In the Americas, revenues were up at a high teen rate with mid teen growth in D2C and more than 20% growth in our wholesale business. We saw very strong growth in both footwear and apparel and are very excited to see significant momentum in one of our newest categories and lines, the Mountain Edition collection. Designed for the elements, Mountain Edition products still look just like iconic Vans products, but feature weatherproofing, heat retention and traction technology as well. This is a critical growth strategy for Vans as we seek to become more meaningful in all four seasons, especially when cold and wet weather sets in and people tend to think less about Canvas. And after selling out of the entire line in its 1st season, demand for this coming fall winter is very strong. We also continue to find interactive innovative ways to bring the Vans brand to life, harnessing the creative expression found in art, music, action sports and street culture. A great example of this is the continued expansion of our House of Vans concept using pop ups at exciting events like the South by Southwest Music Festival in Austin and the SIA trade show in Denver. And finally, to sneak this in a bit ahead of time, next year is a big year for the Vans brand, given their 50th anniversary. So we're already gearing up to celebrate in a way that only Vans can do. Definitely stay tuned for this one. Vans international business was up at mid teen rate, driven by balanced wholesale and DTC results. In Europe, revenue grew at the mid single digit rate, driven by more than 20% growth in DTC and solid results in our wholesale business. Key footwear product highlights included a great performance from our Enhanced Comfort ISO collection as well as strong response to our printed styles. We also saw strong growth in our apparel and accessory lines driven by DTC and wholesale. Both men and women's products are showing strong momentum with double digit gains. We also continue to engage consumers through unique events such as Vans Snow Day, Virta Tech and High Standard, all fantastic ways we are bringing the brand to even more European consumers. In Asia, Vans continued to outperform with revenue increasing more than 45% and equally strong DTC and wholesale growth. Momentum continues in this region due to smart localized product especially in apparel, relevant brand right demand creation investments, events that speak to the authenticity of our brand and a really sharp presentation at retail. The business is firing on all cylinders in ecosystem that has the consumer at the center of everything it does. So overall really great momentum advancing globally. We continue to see a mid teen increase in revenues for the full year. And now on to Timberland. Timberland revenues were up 10%, driven by a mid teen increase in global wholesale sales. The Americas recorded its 6th consecutive quarter of double digit growth with revenues up at a high teen rate driven by nearly 30% wholesale growth. And this result is balanced with gains across the portfolio including both men's and women's and footwear and apparel. In footwear, it's been particularly exciting to see continued momentum in our women's collection as new products hit the mark in terms of style, relevance and trend. In our Industrial Pro line, the Pro Boondock and Powertrain collections had especially strong results as work consumers continue to respond favorably to these new innovative platforms. On the demand creation side, Timberland continues to drive brand heat and relevance through its mark makers program. For 4 seasons now, the brand has been outfitting influential trendsetters from head to toe, then creating compelling content to engage consumers across multiple media platforms. And finally, as I mentioned earlier, we just launched Timberland's new website on April 14 marrying great content with new functionality to create a holistic brand and product experience for Timberland Outdoor Lifestyle Consumer. And so far, we're very encouraged by the early results, especially related to traffic and conversion. So continued success, balanced growth and amazing product, all reasons we continue to be very bullish on Timberland. Timberland's international revenues were up at the low single digit rate. In Europe, revenues were up were also up at low single digit rate. The men's business SensorFlex and capsule product continued to build on the strong momentum from last year and casuals began to gain traction on the women's side. And our new website has seen very positive early results, a great indicator that our 1BF approach has meaningful global benefit. Turning to Asia. Revenues increased at high single digit rate with strong wholesale growth. A couple highlights included our new camouflage outsole boots and the Kanto boots in particular that had great marketing support. Additionally, apparel had a strong quarter, driven by outerwear and tops. For the full year, Global Timberland is right on track to grow revenues at a low teen percentage rate. Now let's turn to Scott and Jean Square. Thanks, K. H. Our global Jean Square business was up 6% with positive results in all three regions wholesale and D2C in both the Wrangler and Lee brands. In the Americas region, jeanswear revenues were up at a mid single digit rate despite ongoing challenges and softness in the overall denim market. Revenues for Wrangler in the Americas were up at a low double digit rate. In the mass channel, we saw continued momentum driven by new products, improved brand presentation and category expansion, which created higher demand and conversion in our core pants business. Additionally, the expansion of our lifestyle products, including broader offerings in both men's and women's tops, gives us confidence that we're on track for meaningful growth in this important channel in 2015. In our Western business, customers are responding well to our new product introductions, including the Advanced Comfort line, which will see greater mid tier expansion in the Q2. We've also seen positive reaction to our expanded Western performance platform with the launch of our Cool Vantage line, a gene for hot weather that maximizes breathability for work or play. And on the workwear side, our new Wrangler rigs campaign that features Brett Favre has been a big win with both retailers and in consumer tests, giving us confidence as we roll this out nationally. Turning to Lee, the Americas business was down slightly, yet we are encouraged by strong seasonal sales and continued momentum of our modern series products for both male and female consumers with continued traction in our department store business and enhanced demand creation support, especially for the crucial fall season. We expect this brand to show slight growth over last year. K. H? Our international jeanswear business was up at the mid single digit rate, driven by a mid single digit increase in Europe and a high single digit increase in Asia. In Europe, the Keeps You Cool product continues to drive steady performance for the Wrangler business and we have also seen initial strong response to the Born Ready platform. In Lee, we saw brand momentum continue, which led to our 8th consecutive quarter of revenue increases in the region. We're also excited to report that our women's business has returned to double digit growth driven by a number of new product initiatives. In Asia, our Wrangler business continued to focus on the denim performance range launching new finishes including water repellent and tough gear with sunshield. At Lee, we continue to see strong reception for our key product collection stories and introduced new assortments in a number of lines during the quarter. In summary, we are off to a great start to 2015 in our global jeanswear business and jeanswear business and expect momentum to continue throughout the year to reach our target of low single digit revenue growth. And now back to Scott on ImageWare. Thanks, K. H. Our ImageWare Coalition posted strong revenue growth of 8% in the Q1, driven by mid teen growth in our Workwear business, particularly the Redcap brand. With a very strong start to the year, we're on track for mid single digit revenue growth in 2015. And now over to Scott Rowe for our financials. Thanks, Scott. Well, there sure is a lot for a CFO to like in this quarter. Our diverse portfolio of brands continues to thrive based on innovative products connecting with consumers where, when and how they shop and the amazing opportunity that we have to expand our business around the world. It's never looked more robust. In our Q1, revenues on a currency neutral basis were up 8%. And as Eric mentioned, we saw growth in 9 of our 10 largest brands, 4 of our 5 coalitions and in every region around the world. By channel, our direct to consumer business grew by 11% and we saw a high single digit increase in sales to our wholesale customers. The Outdoor and Action Sports Coalition continued to lead the way and the Jeanswear and ImageWare businesses maintained the momentum we saw at the end of 2014. Growth in all regions, all channels and across multiple coalitions underscores the power of VF's portfolio. As expected, our gross margin rate was down 40 basis points to 49% in the quarter due to the negative impact of foreign currency. However, to give a bit more context around this, on the plus side and in line with our expectations, our typical mix benefit of about 60 basis points from our highest margin businesses was closer to 40 basis points as strong growth in Jeanswear and ImageWare, which carry relatively lower margins, tempered our normal mix benefit. More than offsetting this mix benefit was about 30 basis points of higher cost due in part to timing factors we discussed during our last call and about 50 basis points of foreign currency headwinds driven by the continued strengthening of the U. S. Dollar. In fact, with an average euro rate of 1.12 versus 1.37 in the Q1 of 2015 2014 respectively, it was one of the largest movements we've seen since the financial crisis of 2,008. Despite the strengthening of the Swiss franc which added nearly 20 basis points of expense in the quarter, our SG and A as a percentage of revenues was about flat. This demonstrates the power of our business model as we continue to invest in D2C and demand creation while leveraging other expenses. 1st quarter operating margin was 14%, which includes a negative 70 basis point impact from currency headwinds. Carrying that down, currency neutral earnings per share increased 13%. On a reported basis, EPS was in line with last year's Q1. Now taking a look at our performance by coalition. Revenues for outdoor and action sports were up 10% on a current week, which traded a very strong retail week in early January for a relatively weaker week in early April. Yet with solid growth in both our wholesale and D2C businesses, including positive results from nearly every brand and double digit growth in Vans and Timberland and a high single digit increase for The North Face, 2015 is right on track. Reported operating income for the Coalition declined 5% and operating margin came in 120 basis points lower than last year at 16.2% predominantly due to changes in foreign currency rates as nearly half of the outdoor sports business in the quarter was outside of the U. S. The decline was also related to the impact from the 53rd week and our increased D2C investments including 116 additional retail stores earlier in the year pressures earnings in the first half while paying off in the second half as we enter the peak retail season. For the full year, there is no change to our expectation that currency neutral revenues turning to Jeanswear, revenues were up 6% currency neutral and included positive global results for both Wrangler and Lee. Reported operating income grew 2% and operating margin increased 20 basis points to 18.9%. We are really pleased with Jeanswear's performance and remain confident in our ability to achieve low single digit growth for the full year. Results in our ImageWare business were strong with 8% currency neutral revenue growth driven in part by our REDCap business. Reported operating income for the Coalition was up 9%, which resulted in a 30 basis point expansion in operating margin. As the year plays out, we expect revenue growth rates for ImageWare to be more consistent with our full year expectation of mid single digit growth. Our sportswear business grew 3%, reflecting similar increases in both wholesale and D2C channels and a high single digit increase in revenues from Kipling. Operating income was up slightly and operating margin was in line with last year's results. For the balance of the year, we expect a similar growth rate to close out the first half and the full year to remain on track with our expectation for a mid single digit increase in revenue. Our contemporary brands business continued to experience challenging consumer demand for premium denim and women's contemporary apparel, which resulted in a 7% currency neutral decline in revenues and a decline in profitability. We continue to expect about flat results on a year over year basis for this coalition. Turning now to our balance sheet. Our inventories were up 7% right in line with expectations. During the Q1, we bought back 10,000,000 shares for a total of approximately $730,000,000 There are currently no plans to purchase additional shares in 2015. We also made a discretionary contribution of $250,000,000 to our U. S. Pension plan, which is now fully funded, something we are proud to report. So let's turn our full year outlook let's turn to our full year outlook now and we'll start with the currency since it plays such a central role to this year's story. In February, we laid out our assumption of a €1.13 to U. S. Dollar relationship with the direction that a €0.05 move in the euro on a full year basis would mean an impact on revenues of about $125,000,000 and $0.05 per share on our EPS. Now with 1 quarter behind us and a revised euro to U. S. Dollar assumption of $1.10 for the balance of the year, a $0.05 move in the euro would mean an impact on revenues of about $80,000,000 or $0.04 per share in EPS. Keep in mind that other currencies have also continued to devalue against the U. S. Dollar. However, the euro remains our most significant exposure. And as a reminder, our 1st and third quarters are the largest for our international businesses and therefore a stronger dollar would have the most significant impact on our results during those periods. Using the €1.10 to dollar assumption, there is obviously some impact on our expected full year reported results. So let's take a look now how that flows through the P and L. At the top line, there is no change to the outlook we gave in February. We continue to expect currency neutral revenues to be up 8% in 20 15, which is in line with the growth rate we laid out in our 2017 plan. And we expect reported revenues to be up 3% putting us at about 12 point $7,000,000,000 for the year. On our full year currency neutral gross margin assumption remains about unchanged at 49.5%, which would be equal to our 2017 target 2 years ahead of plan. Independent of foreign currency, the annual expansion in gross margin of about 60 basis points primarily from the favorable mix shift that we've seen for so many years remains intact. And despite even greater strengthening of the U. S. Dollar, we continue to expect that same 49.2 percent gross margin rate for the full year on a reported basis, all of which takes us to the bottom line. On a reported basis, despite an additional $0.06 negative impact from changes in foreign currency, about half of which relate to the euro and the balance relates to other currencies, we expect 4% EPS growth to $3.20 compared with last year's adjusted EPS of $3.08 This means we are taking up our full year currency neutral EPS outlook to 14%. That's 2 more points of growth than our previous outlook, once again putting us ahead of our 2017 pace. So what gives us confidence in our ability to absorb $0.06 of currency impact? First, the continued momentum that our brands are realizing around the world and the underlying strength of these brands provide sound footing for the year. 2nd, with 4 months behind us, fall order books in hand and more visibility into our second half, we are even more confident in how our story should play out over the year. Greater visibility coupled with a solid Q1 has built confidence, confidence in a business model that continues to deliver consistent results even in a dynamic environment. And with that, I'll turn it back over to the operator for your questions. Thank We will take our first question from Bob Drbul from Nomura. Hi. Good morning. Good morning, Bob. I guess I have two questions. The first one is on the inventories, when you look at sort of the revenue base in real dollars and then the inventory levels, can you just talk us through how you're balancing those numbers? And like with inventories up 7% and the revenues up 2% just sort of reconcile that for us a little bit? Sure, Bob. This is Scott. I'll take that. It's matching supply and demand in any case is difficult. And it was particularly difficult in the Q1 given the disruptions relative to the port strike. We in general managed through that very well. We saw that coming. We did things like extend lead times in some cases brought in inventory early. And you really didn't hear us talk about the impact to our quarter for the port strike. That's because it was relatively insignificant. Sure, we had some disruption, but it was minimal and not big enough to talk about. So as it relates to the inventory we see, we are very confident in the quality of the inventory. It's matched with future orders. And as a matter of fact, our days are down slightly compared to a year ago. Great. And then I just have a question on the jeanswear business. Scott, can you elaborate a little bit on the Americas business and I guess specifically the Wrangler and the mass business? What's going on there? And those numbers are quite impressive. So if you could just elaborate a little bit there that would be helpful for us. Sure can Bob. Good morning. Over the last couple of years you heard me talk a lot about our product, our product engine, our innovations, our demand creation. And what you're seeing is a culmination of a lot of hard work from the Wrangler team on new product innovations that have come to light. So you've got it gained broad distribution within the mass channel. And then with our demand creation platform, the consumer has really taken to those products both male and female. And then in addition to that, if we're speaking just specifically in that channel and the mass channel, we've got a really strong selection this year from a seasonal standpoint. So our consumer has loved our assortment and the takeout has been fantastic. So more to come in the future. We feel really good about where the business is, feel really good about innovation pipeline and the products that are in that. And we'll continue with more assortment, more product innovations and better distribution within the products that I just spoke of. Great. Thank you very much. Good luck. Thanks, Bob. And we will take our next question from Michael Binetti with UBS. Good morning, guys. Good morning, Michael. Good morning. Scott, just a little bit more color on direct to consumer perhaps. You guys plan that business to grow I think double digits this year versus only 5% in the quarter. You mentioned that store growth rates accelerate a little bit, but there are some pretty big comparisons coming in the back half. Can you walk us through some of the big line items like footage, cadence and comp sales to get back to the run rate that you pointed to for the year? Yes. I guess first just in terms of some stats, we're going to open about 125 stores this year on an annual basis. And from a comp standpoint, we're seeing more or less the same as we saw last year, a little bit of an acceleration. And obviously, that's in the back half of the year during the peak season. Michael, the way one way you can think about all that is we have we're going to have 125 net new stores opened this year, so that will help us. We also have a lot of sophomore stores rolling into the first half of this year. The way we've talked about comps is overall comps are in the mid to single so low to mid single digits, but it varies by geography. Obviously, much stronger in the Asia Pacific region than in the United States. And all that's really about our brick and mortar stores. You have to remember that our e comm business is going to grow by over 30% has the last few years and we expect it to happen this year too. So that's a really strong horse pulling that wagon for us. Okay. And then just one quick follow-up Scott to hate to do this too, but I'm going to ask you to answer to one of Bob's comments from last quarter. So you mentioned Bob, it's Bob, who. Bob, who, right? Already been deleted, Hey, listen. If you're a betting man, I bet he's on this call right now. So we can have a little fun with him. All right. All right, Bob, well this one's for you then. So last quarter, Bob mentioned that you guys now mentioned a few times that you'll be at your 2017 guidance for the gross margins by the end of this year and made a lot of progress on that early. So as we look into next year, Bob mentioned that as we obviously, he doesn't want us flat lining in our longer term model starting in 2016 and just flat lining the gross margin. So he said to us that's a gross margin expansion per year that you guys guided to in your Analyst Day. We were all staring at the gross margin pressure and we've heard from other companies that gross margin the transactional pressure actually starts to will have an impact in the first half of twenty sixteen. So are you guys going to see the same dynamics on gross margin from FX as your hedges roll off into the first half of twenty sixteen? And then how do we get to the expanded gross margin reported rate next year if that is the case? Thanks. Yes. Well, you partially answered the question in your in the way you asked it, because we will see that 60 basis points plus or minus mix benefit going forward. We've seen that for the last several years. There's no reason we wouldn't expect that going forward. Now, we're not going to give guidance on 2016. It's not time for that. But in general, of course, if the euro would stay where it is today and if you can predict that, you're better than anybody else. Sure, that would have some pressure. On the other hand, we've talked about input costs generally are lessening. And of course we always have pricing levers that we can pull which we have in the past. So again I can't give you exact guidance on 2016, but we would say the mix there's no reason that mix benefit won't continue to be there. And there are many other levers besides currency, which will be impacting our 2016 guidance. Thanks a lot, guys. Thanks, Michael. And we'll go now to Kate McShane with Citi. Hi. Thank you. Good morning. Good morning, Kate. I appreciate the commentary on the outlook for 2015 and the raising of guidance on the bottom line. But I think one of the reasons why you are raising is because you have more confidence in what you're seeing for the later part of the year. But I don't think revenue guidance is going up. So can you reconcile that for us? Yes. So you're right Kate. We have maintained the 8% currency neutral and 3% as reported. But that confidence within that, obviously, we're feeling better about the year and that means that we see some slight improvement on the top line if you're trying to model that out. It's not enough to change the overall guidance, but yes, we're feeling more bullish and that really should translate into a little bit better top line. Okay, great. That's helpful. Thank you. And then my second question was on contemporary. A down quarter, but guiding flat for the year. Could you walk us through the cadence of growth for the rest of the year? And what's giving you confidence on accomplishing that in the contemporary category? Yes. Kate, this is Steve. So contemporary, as we mentioned, continues to see pressure in the sector that they do business in, specifically women's premium men's and women's premium denim and women's contemporary. As last year, we saw our D2C as a bright spot in our go to market and our ability to tell our stories to our consumers in a really clear and productive way. We're seeing strength in some of our wholesale partners. It's giving us confidence this year to couple with our D2C carrying forward into the balance of the year. And really good balanced growth between both 7 For All Mankind and Splendidella Moss that's giving us confidence that we'll be in that flat range from a full year standpoint. Thank you. Thanks, Kate. And we'll take our next question from Matthew Boss from JPMorgan. Hey, good morning. Nice quarter, guys. Thank you. So you have 3 brands that are all more or less around the $2,000,000,000 level today. Can you guys talk about market share penetration today and broader growth in each category as we think about the longer term complexion of your portfolio? Hey, Matthew, this is Steve. I'll take this one. I'm going to have to try to pull some things out of my memory bank. North Face at about $2,300,000,000 and we've come out and stated really operates in a market that's about $26,000,000,000 in total in that outdoor performance category. That would put them at an 8% share. Vans at just over $2,000,000,000 cresting that mark last year. Action Sports, a $29,000,000,000 market has them then around that 7% range. In Timberland, approaching $2,000,000,000 at $1,800,000,000 in that outdoor lifestyle category, we have somewhere around $36,000,000,000 dollars So quick math would say that's mid single digit market share. What we don't capture in that is the athletic, training, lifestyle and some of the youth culture numbers. I mean, if we were to layer that in against each one of those three segments, each one of them would be about $70,000,000,000 in total, which really translates into a lot of headroom for each one of these brands in their respective sectors. Wow. So as you think over the next couple of years over the next over the long term, I mean, is there it seems like there's the ability that every single one of these brands could potentially double. Is that I mean, is that out of the realm of possibility? It's absolutely not out of the realm of possibility. I think as we speak to you at our Investors Day, we really lay out those strategies that are deeply embedded in our knowledge our consumer and how that informs product and demand creation and our go to market with our D2C. We are extremely confident in these three brands continuing to grow, but also taking that knowledge that we've developed with these three brands and applying it to other brands within our portfolio. And I think you see some of that going on right now with our Wrangler brand and you'll see that really coming to life in other brands like Kipling and such. Okay. And then quick follow-up on the balance sheet. So a $1,000,000,000 increase in short term borrowings, is that more seasonality related? And then as you just kind of think forward, any line that you've drawn in the sand to think about potentially increasing the capital allocation, just given the building cash balance, if you were to remain patient on the acquisition front? Yes, Matthew, this is Scott. I'll take that one. First, you are correct. The CP balance is a seasonal that's really what that is. It's a seasonal timing issue. We will be out of CP by the end of the year and that's just the way that the ebbs and flows come through the year. And that would be typical. We're a little ahead of where we were last year, but we'll be out of that by the end of the year. As it relates to capital allocation, really no change in the way we've talked about that. Acquisitions remain our first priority, followed by dividends. And we've said consistently and we've demonstrated we won't accumulate cash. So in the event that one of the first two levers are not available, then we would look at returning that to shareholders through repos, which we have done over the last 2 years. Great. Best of luck. Thanks. Thanks. And we will take our next question from Laurent Vasilescu from Macquarie. Good morning and thank you for having me on the call. I have 2 sourcing related questions. First is on input costs. I think Scott mentioned that input costs were up a bit during the quarter. What are you seeing in terms of input costs going forward? Do you anticipate a benefit in 2H15 regarding cotton and oil based synthetics? And if that's the case, could you potentially quantify it? Yes. So Scott here and I'll take that Laurent. What we're seeing is that we did indeed see higher input costs in the first quarter and we see that through the first half. That starts to mitigate in the second half slightly, particularly significant in the second half. Going into next year, we should see some tempering petrochemicals, leather again, which we've seen hide costs come down. So but again, we're not that's directional and these things change along with currency. So right now, we're I can't quantify that nor would we give any kind of guidance into 2016 at this point. Okay, great. And then my second question is on the Trans Pacific Partnership. The U. S. Is at the cusp of a free trade agreement with much of Asia, which could potentially eliminate footwear and apparel tariffs. Curious to know if you're factoring in the TPP in terms of your long term view on sourcing across geographies? And if you could see any potential savings on tariffs, what would you do with the savings? Would you reinvest it in marketing, R and D, reduce prices or flow it to the bottom line? Yes. So I guess I'll take that one. We've been watching this for a number of months, even years this has been going on and it does appear that maybe making some progress. It will have some benefit to us. We're still evaluating that. I mean the details aren't fully worked out and we'd have to look at it. Our priorities in terms of should there be some opportunities, our priorities remain the same. We would be investing in those growth drivers, which have been successful for us so far. Our lifestyle brands, international and D2C would be our priorities from an investment standpoint. And we do that because that's in the best interest of our shareholders long term. So Okay. Great. Best of luck. Thank you. Thanks. And we'll take our next question from Omar Saad from Evercore ISI. Thanks. Good morning, everyone. Hey, Omar. Hey, Omar. Outdoor Action Sports, it's been such a big segment of the business for so long. It seemed like it slowed this quarter even. I know the reported number is not indicative of the underlying growth, but still seem to decelerate a little bit. It's part of the outlook for that business for the rest of the year. In North Face, for example, the retail reported numbers, it looks really good in the quarter. Help me understand some of the dynamics going on this quarter, if there's anything to call out. Yes. Omar, this is Steve. I'll take that and perhaps Kees might want to fill in from an international standpoint. So we absolutely remain very confident in our outdoor and action sports businesses. And I think the effect that you see in Q1 that we didn't detail necessarily in our remarks was that impact of the 53rd week to specifically The North Face and Timberland, 2 big drivers was equal to 3 percentage points of growth. So if we would put that to each one of those brands, North Face would have been at 10% and Timberland would have moved into the low teens. Kind of factoring that and understanding that we coming continues to give us confidence in the guidance that we gave last quarter. Yes. Omar there's not too much to add on the international side. It's a similar picture. Starting with Asia, you heard us. We're doing really well in Asia. We expect nice growth in most of the Asian markets on the large brands and similar picture in Europe. We still the guidance we gave for Europe is to grow high single digits. So there were some issues by quarter, but the full year outlook is really good. And Omar, it's Eric. I'll finish that comment. Steve mentioned that 53rd week switch that we had cost Timberland and The North Face 3 percentage points of growth, which is true. For the Global Outdoor and Action Sports Coalition, the cost is 2%. So what we reported or what we talked about is 10% as our constant currency number would have been a 12%. Got you, got you. And then I think you called out Kipling and Navapiri in a quarter or 2 ago as brands. Any updates there? Maybe I take it as Carl Heinz here. Starting with Kipling, you heard us saying Kipling was the fastest growing brand in last year and 2 years ago. And based on the outlook we have this year, it would be the fastest growing brand again for the 3rd year in a row. So it's good. We had a good quarter. We don't release that numbers, but we had a good quarter in all three areas. I guess that's the good news in the U. S, in Europe and in Asia and in several channels in wholesale and DTC. NAPA is a similar picture. NAPA is predominantly Europe. See a good year for Napa and up high single digit. So yes, the smaller brands are growing, especially Kipling is becoming a meaningful business for us. All right. And then maybe one last quick question for Eric and Scott. As the acquisition environment kind of remains a little bit stuck and the willingness to sell isn't there, can you talk about your willingness to pursue other strategies in terms of maybe not just capital and using debt and cash, but is there potential to use issue equity to make a bigger acquisition, maybe help loosen the wheels a little bit? Yes. We get that kind of discussion from lots of people when we talk with them. We're very we continue to remain very disciplined about exploring our acquisition opportunities and creative about how we might bring 1 in. Of course, the good news as a shareholder is we're real disciplined about what we'll pay to. Not part of it is how you pay for it, the other is what you'll pay. And we just haven't found the right combination to unlock that opportunity. And just know that we are diligent and it's something that we work on every single week. And eventually, we will bring something in, but nothing to report today. But creativity is on the table. Okay. Yes, it is. Thanks, guys. See you, Omar. Thanks, Omar. We'll take our next question from Robbie Ohmes from Bank of America Merrill Lynch. Hi, good morning. This is actually Rafe on for Robbie. Thanks for taking our questions. Okay. Scott, can you give an update on kind of the trends in the mid tier channel for jeanswear in the U. S? And then have you seen any change or improvement in the kind of low to middle income consumer in the jeanswear business? Sure, Robbie, I can. We've seen very positive trends in the mid tier channel. So we've seen an uptick in our business. We're really pleased with it. The consumer is coming back to that channel for sure. I think the consumer is really dialed into innovation in that channel. So we spend a lot of time on some innovative products, our EasyFit, our ComfortFit, our Modern series. Those products are really taking with the consumer very well. So really feeling bullish about that. Now I think the single most important thing for us right now in the mid tier channel is that we've introduced Wrangler to the mid tier channel very successfully. So we're rolling Wrangler out, still has a lot of opportunity, a lot more distribution in the mid tier channel. And so we've got a really powerful two brands that we're bringing to the mid tier channel in that bottoms category right now that's pretty important for us. Does that answer your question? Yes. That's very helpful. Thank you. And then just in terms of the really strong growth of Vans in Asia, how should we think about that growth longer term? And then can you maybe talk about how many doors you have in China now and where that could go over time? Sure. I'll take this question. You heard us saying Vans had an amazing run-in the last it has become a meaningful brand for us. Now we have declared growth which was in the average of 50%. Will that stay? Probably hard going forward, but we are very, very confident on our long term goals. The good news is the brand is doing well by geography not only in China, but in Asia all over in Asia in the more developed countries Korea, Japan, but also in developing markets like Malaysia or Indonesia. It's doing well by channel. We see good comps on it's doing well in wholesale. So and it's doing well by category in footwear and apparel. So yes, we are very positive for the long term outlook for Vans in in Asia. Now the question on the doors was that related to China? Yes. Yes. I always say we have now I think we have around 2,500 doors altogether on primarily 5 brands, which if you benchmark that with the big, big brands which are playing in Asia, they're all working around 5,000. So I think the answer is implied. We still have room to grow by adding doors over time. Yes. And Karl Heinz touched on this, but new markets we started we launched our VF subsidiary in Korea 2 years ago and we launched the Vans brand there was our starting point. And Karl Heinz and I were actually there last month celebrating the success of that team. It is off to a fantastic start. And we think the brand has a lot of legs particularly in the Asia Pacific region. Great. Thank you. It's very helpful. And we'll take our next question from Barbara Wyckoff from CLSA. Hi, everyone. What percentage of van sales came from footwear versus apparel? And can you talk about the penetration of men's versus women's in vans and the opportunities there? Where is the growth going to come from besides just more doors? Hey, Barbra, this is Steve. From an Americas standpoint, the predominant percent of our growth for Q1 was footwear. So we are continuing to see expanded growth in our apparel, high teen growth this last quarter, so right in line with what we see going on with our footwear. Men's and women's, in footwear, it's kind of hard to tell because many of our styles are unisex. But if we were to try to overlay, we're probably about a sixty-forty men's to women's. If we were to try to capture the meaning of that unisex sizing. And where will the growth come in the future? We have a tremendous amount of opportunity here in the North American market. You've heard us talk about our expansion strategy as we move geographically with our stores that help supercharge our wholesale distribution. The brand is moving into athletic. We opened up with Dick's Sporting Goods this quarter in a significant number of doors in a new initiative that they have. And we're continuing to work with our partners at Foot Locker to expand the growth there. So a lot of opportunity here in the United States, Canada. Our Mexico business is extremely strong and at the front end of its growth and we're just beginning to convert distributors in South America. It will give us a tremendous amount of upside in those developed markets there as well. And Barbara similar picture for us on the international side. You heard Eric saying before, we have it by geography. We just opened a subsidiary in Korea where Vans is doing extremely well. And I know they started 3 years ago long, long way to go. We still have the South Asian markets, which we just started. We also have distributors there, which one day we probably can convert. So geography for sure. The other one is category. Similar picture for us. Apparel is small, but it's growing faster than footwear. So that's a big expansion. And then the other one is our DTC like e comm is doing well and stores. So pretty, pretty articulated way going forward. Thank you. Thanks Barbara. And we'll take our next question from Lindsay Drucker Mann from Goldman Sachs. Thanks. Good morning everyone. Good morning. I wanted to ask about Outdoor in Action margins in the quarter. It would make sense margins came under pressure. It would make sense that if you had if you were trading the week's 53rd week and you had less productive weeks, maybe you would have delevered on some of the fixed costs. But you guys also mentioned some demand creation expense in the quarter. So I just wanted to get your view on how we should think about Outdoor in Action margins across the full year and maybe some perspective on what drove the compression in 1Q? Yes. So as I mentioned in my comments, Lindsay, this was a particularly big international quarter. And also the delta on currency, we had a 137 average a year ago versus 112 in the Q1. Combination of those two things put a lot of currency pressure on outdoors margins in the Q1. It was about 80 basis points. And again, you said it in your question also, those sales that Steve mentioned on the 53rd week, those are profitable of the margins and we of the margins and we see expansion outdoor action sports margins will grow faster than revenue for the full year. The demand creation expense, was that sort of was the call out because it was timing that was particularly 1Q weighted? Or is there an incremental step up versus what you were expecting? Yes. We continue to invest in demand creation. It's roughly growing with sales. So wasn't a big factor in the quarter And that was true for the year. Got it. And just real quick Lindsay, just where we put those dollars here in the Americas was first in Q1 around the Fuseform launch and really driving that story to support the placement. And as well, as I mentioned in my remarks, we're putting significant effort behind Mountain Athletics as we look to expand The North Face into more of a 12 month out of the year brand and really help drive that shift in outdoor towards the outdoor athletic space that we've been talking about over the last couple of years. Great. That makes sense. And then Karl Heinz, I wanted to ask about Europe. On an organic basis, we were a little surprised to see the sequential deceleration in the Q1 versus the run rate you've had for the last quarters, especially because it feels like the economy is getting better there. I was just hoping you could shed some light on if there was anything particular that happened in the quarter or if you're looking for a reacceleration across the back half of the year? Thanks. Yes. I guess you heard us saying we are the full year outlook is intact. So the good news is we have seen no changes in our potential for the full year. We have some issues sometimes in the quarter, but no the answer is we are pretty confident. We have seen no signals which would change our mind for the full year goals which we have given. And this is true for the large brands, but also for the smaller brands which I commented before. And just to add to that, Steve mentioned the 53rd week impact, which would also be a factor in Europe as well, which would hold down your growth rates a little bit in the Q1. We still see high single digit for the year and there is no change in the overall. The Q1 came in as we expected. Got it. Thanks guys. And we'll go now to Chris Svezia with Susquehanna Group. Thank you, everyone. Thanks for taking my questions. Congrats. I guess, Steve, for you, just on Timberland for a sec. The growth in America is 30% wholesale growth. I was just wondering maybe you can talk about I know you mentioned women's, you mentioned the pro line, but just a little color maybe on anything on distribution or pricing and maybe how we think about that momentum for the balance of the year? Just a little more color about that business, please. Sure. We've been very bullish for the last umpteen quarters about the growth of Timberland. And I think you can probably hear that in our comments today. It is broad based. We are seeing success across all of our collections, certainly driven from the heritage of the boot, but absolutely moving into casual silhouettes both spring and fall. We're seeing it across all channels, our own B2C as well as wholesale and across wholesale the various points that we come to sell in. And we're seeing it in men's and women's as well as youth. I think it's really safe to say that this brand and our leaders there have really embraced the information that they've taken out of our consumer research, applied it to their product strategy. That's a global comment. And we really have understood how to bring our brand to life to our consumer, delivering content to where they are. We see just continued growth. We're very bullish and just see great upside, not just in our footwear, but also in our pro workwear business and as well as apparel. Okay. Any color, Steve, at all on how apparel has been doing for you? What's some of the learnings, just of the data points you're seeing there? Yes. Apparel, we are learning. It's a really good word to use. And I think we've been clear. We've started slow and we are incrementally increasing doors with the partners that we've launched with. And each year or each season, we continue to see good growth. We're seeing rates weekly sell through rates here in the U. S. Market in the high single digit rate. That's good from a retail sell point and that's helping us gain confidence to expand our collection, expand our doors and really move towards that long term projection. It's apparel is much larger on an international standpoint with our largest penetration in Europe, but also significant growth and opportunity in Asia. Okay. Thank you. And then Scott real quick for you. Just on the inventory growth, just maybe how we think about that throughout the balance of the year? Does that start to trend more in line with sales or reported sales in the back half of the year? Just a little color there please. Sure. Yes. I mean we don't give quarterly outlooks. But I would say for the year when you look at our cash flow and our balance sheet projections, we see no issue with inventory. We're really confident that the quality is there and we're not concerned about the inventory. Okay. Thank you. All the best to you guys. Thanks. Thank you. And we'll take a question now from Matt McClintock from Barclays. Hi, yes. Good morning, everybody. I just wanted to ask a question on e commerce. Could you just give us some color on how the e commerce businesses for your various brands are performing? I know you had a bunch of digital platform launches and relaunches over the last year or so. How has that impacted those businesses? And how should we think about the performance, the e commerce performance of those businesses as you start to compare against those platform relaunches? Thank you. Let me make an opening comment on that and I'll hand it over to Steve and Carl Hynes. Some context, Matt, in 2007, I know I just went way back in history, but I happen to know the numbers. We have been working hard since that time to try to put in place e com platforms around the world that makes sense. And we are when I look at that as part because of how underdeveloped we are versus all the other levers we have to pull. And as you would expect, while we're building these sites brand by brand and country by country, we're focused most on our biggest brands. And we have a lot of brands to add and a lot of countries to add and a lot more to do. And with that, I'll turn it over to Steve and let you weigh in on this. Yes. I mean, e commerce to Eric's point is really new as one of the tools and it was North Face that has led VF into really understanding how to really bring our brands to life digitally. Year to date, our e commerce business is about 18% of our D2C. We talked a lot about our new platform that Vans came live on last year and we saw a great acceleration through the second half of the year and that absolutely continues to be the case here this year. Timberland has just launched in April. North Face and JanSport are going live today. And following them will be our Wrangler and Lee businesses, our Lucy, Reef and Smartwool towards the back half of the year. So we are really happy with our website. It's an adaptive responsive website and I don't want to get too geeky here, but our brands have rich, rich content and we've developed a content a platform that marries content with product, helps us tell very, very strong stories connected with our products, which drive conversion and ultimately help drive sales. It's also a site that's very easy to adapt content to mobile as we see our consumers shift to accessing our sites from their mobile devices. Thank you very much. All right. Thank you. And operator that will conclude our remarks today. I think Eric might have a couple of words and we'll close the call. Yes, sir. I'll just thank all of you for spending your morning with us talking about the current status and future of our company. As I said in my comments, we are confident about where we are this year. And I think I also mentioned that we are heads down ensuring that we deliver the results that we promised for this year. And the last comment I'll make is a special shout out to Bob Shear. We know you're listening. Bob, give me a call. Let me know what it's like on the other side of this line. Thanks everybody. See you in 90 days. Bye bye. And ladies and gentlemen, this does conclude today's conference. And we thank you for your participation.