Earnings Call: Q1 2014

Apr 25, 2014

Good day, and welcome to the VF Corporation First Quarter 2014 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the call over to Lance Lega. Please go ahead. Thank you, operator, and good morning to everyone joining us today to discuss VF's Q1 2014 results. Before we begin, I'd like to remind everyone that participants on this call will make forward looking statements. These forward looking 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. Participants may also reference non GAAP financial measures. Where applicable, you can find presentations of comparable GAAP measures in our press release, which issued at 7 am Eastern Time and also at bfc.com. Joining us on today's call will be Chairman, President and CEO, Eric Wiseman Bob Scherer, our CFO and VF Executive, Scott Baxter, Steve Rendell and Carl Heinz Stalsberger. Salzberger. Following our prepared remarks, we'll open the call for questions and ask that you please limit your questions to 2 per caller. Thanks. Now I'll turn the call over to Eric Weizmann. Eric? Thanks, Lance. Good morning, everyone. Thanks for joining us. Our strong Q1 results demonstrate more than just our solid performance over the last 3 months. They show the value of how we build our business and how we've executed against our growth strategy during the last 3 years. By consistently leveraging our powerful brand portfolio and our business platforms, we continue to create and transform the market, outperform the industry and position VF for consistent long term growth. 2014 is off to a great start. So let's dive right in with the top line. Total first quarter revenues were up 6.5%, driven by continued strong momentum in our outdoor and action sports coalition. Of note, that coalition grew at a faster rate in the Q1 than in Q4 of last year with revenues up 14% versus 12%. The 3 largest brands, The North Face, Vans and Timberland all posted outstanding results with strong double digit growth in each. Our international business was up 11% and included double digit growth in both Europe and our Asia Pacific regions. And our direct to consumer business grew 16% with double digit growth in both our U. S. And our international business. Combined, this performance translated to a 130 basis point gross margin expansion, lifting us to 49.4% in the quarter including improvements in all five of our coalitions. 1st quarter operating margin reached 14.5 percent, an 80 basis point improvement over last year and our earnings per share increased 12% to $0.67 So overall, we're very pleased with strong momentum in our business and what is setting up to be another record year for VF. And given our Q1 results, we now expect revenues to increase to the upper end of our previously guided 7% to 8% range, so nearly 8%. Supporting this higher growth is an increase in our expectations for outdoor and Action Sports Coalition, which we now expect to be 12% to 13% higher than last year's already strong results. Additionally, we now expect earnings per share of $3.06 which represents 13% growth over 20 thirteen's results. With a great start to 2014 and our outlook for the full year, we are squarely on track to achieve the goals outlined in our 2017 plan. While the past few years have revealed many changes in the world from macroeconomic challenges to consumer trends to a changing retail environment, that dynamic operating environment has highlighted the considerable strengths of VF's powerful brands and powerful platforms. Our ability to deliver consistent sustainable financial performance remains grounded in the cornerstones of our growth strategy, leading in innovation, connecting with consumers, serving consumers directly and expanding geographically. When we deliver on each of these in concert, Versus is at its best. And as I look out across the balance of the year, I can say that I've never been more confident about the potential in front of us. 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 Bob will go through our financial results. Steve over to you. Thanks Eric. Starting with The North Face. Industry leading product innovations and amplified marketing efforts continued to build on the fantastic momentum we saw at the end of 2013. In fact, not only did it carry over, but it accelerated to drive 14% global revenue growth for The North Face in the Q1. The Americas business showed great strength, posting a high teen increase in revenues led by successes in both winter and spring products. Product highlights like ThermoBall and our premium steep series line saw consistent strength over the winter season. And as we made the transition into spring, ThermoBall which is engineered as a transitional weight product remains quite strong along with the spring 2014 launch of our UltraPerformance Footwear collection and the mountain athletic training line, which are driving continued momentum and further validating our expansion into a 4 season brand. Looking out towards fall 2014, we continue to have great product stories from significant expansions in ThermoBall styles in the Mountain Athletics collection to the launch of our new Quantum Outdoor Training collection and the debut of Fuse form in our steep series line, 2014 will be one of the strongest product offerings in TNF's history. To support all this, our targeted brand level campaigns like Mountains Are Calling and The Explorer have created significant social media momentum and driven the highest TNF brand equity scores we've ever posted. In our retail stores and online, we're focused on telling big stories through curated assortments amplified by visual merchandising and superior customer service. To wrap it up, the Q1 in the Americas was a success. Inventories in both the D2C and wholesale channels are in great shape. And with amazing product on deck and solid bookings in hand for this coming fall, we have great confidence in our ability to deliver 12% global growth for The North Face in 2014. Now here's Karl Heinz to run through Europe and Asia. Thank you, Steve and good morning everyone. In Europe, The North Face saw a low single digit increase in revenues in the Q1, which given a much warmer than normal winter, we consider a solid result. DTC revenues were up at the mid teen rate including more than 30% growth in online sales. So we did see some strength in a somewhat challenging market. And perhaps most importantly, I have great confidence that we remain ideally positioned in the European outdoor industry. On the product front, we continue to make significant progress on transitioning apparel to the European fit as well as greater expansion of our snow sports and activity inspired categories to better meet local demand. These are important initiatives that will help The North Face create an even greater connection with our consumers' active lifestyles. Turning to Asia. We saw a mid teen increase in revenues during the quarter with significant DTC strength. In China, the brand was also up at a mid teen rate. We continue to build brand awareness and engage consumers recently resumed our TV campaign in China to build off the strong momentum that we gained from our advertising campaign last fall. With a solid start to the year, 2014 should see another record year for The North Face in the region. Now let's move on to Vans. Global revenue per Vans in the Q1 was up 20% with similar growth in both wholesale and D2Z businesses, another phenomenal performance by the Vans team and the 18th consecutive quarter of double digit revenue growth. Revenues in the Americas region were up at a low teen rate driven by balanced strength in both our D2C and wholesale channels. On the product front in the Americas, there are several exciting things happening in footwear including a great response in our women's business particularly in slip ons in both sell in and sell through. Additionally in Classics, we've seen great success with our collaboration product including our Beatles collection, which coincided with the 50th anniversary of their appearance on Ed Sullivan. On the technical skate front, the Gilbert Crockett Pro model has been successful elevating the brand into higher price points. We also continue to accelerate our apparel rollout with the relaunch of our women's apparel this spring. 2014 also marks the 1st year for Vans moving into a 4 season apparel model with a true summer collection. Finally, we launched a new Vans digital platform in late March at vans.com that merges content and commerce in a new and transformative way for our consumers. We've created what is a truly comprehensive and exciting experience for consumers and we're showing both loyal fans and newcomers that they can turn vans.com to not only connect with the brand, but also to stay connected to what's happening in skate, surf, snow, music, art and street culture. Early reads on the new format in both sales and sentiment have been nothing but positive. All in all, Vans Americas posted a great quarter. 1st quarter revenues from Vans Europe were up more than 20% and included DTC growth of more than 40%. As in Americas, we continue to roll out new and innovative ways to connect with consumers and are working to ensure that Vans is synonymous with youth culture. A great example of this effort is the addition of a house of Vans in London, which is set to open up in August. This location which is similar to the one many of you have been to in New York will bring youth culture together in the heart of the city and provide a unique opportunity for us to engage consumers within the intersection of action sports, music and art. We are also in the process of redesigning the brand's website in Europe. Our European e commerce business although small today represents a terrific opportunity for significant growth. BAN's Asian business grew by more than 40% in Q1, including its Chinese business, which more than doubled. Throughout the region, we have seen great success with our collaborations including the Beatles collection, which has seen significant sell through since its launch. Our core classic product also continues to do incredibly well in this region. In addition to launching the Living of the World brand campaign, we also officially opened the 1st indoor skatepark in Korea, which given we have only been in the country for a little more than a year, represents an incredible opportunity to connect with consumers. Globally, a great start to 2014 and we are on track to deliver a mid teen increase in revenues for the full year. With that, let's move on to Timberland. Carrying the theme forward, Timberland also saw great momentum in the Q1. Global revenues were up 12% and included balanced strength across channels and geographies. So what's working? Pretty much everything. In fact, based on our strong Q1 results, we now expect Timberland to grow 12% in 2014 versus the 10% we discussed in February. In the Americas, revenues were up at a high teen percentage rate, driven primarily by our wholesale business. Sales of core Timberland men's and kids boot styles as well as our hiking boots almost doubled versus last year and our pro line continues to be a game changer in the market place, led by the Direct Attach collection. 4 of our top 6 Timberland product families are now built on the anti fatigue platform. And we also rolled out our spring collection of apparel during the Q1 and it's off to a very good start. In the Q1, we also launched the new Bradstreet collection with the SensorFlex technology. Originally inspired by the technologies for trail running, this platform infuses a new level of comfort and shock absorption that we plan to expand across many of our casual products. To support the launch, we activated TV ads and retail merchandising displays to communicate a message of comfort and versatility. And it's a global effort with more than 1,000 windows that encourage consumers to come in store to learn more about the innovation. Our efforts are definitely paying off as customers are responding really well to this new product. Overall, we are feeling great about the Timberland business. Timberland's revenues in Europe were up at the high single digit rate, an indicator of what we anticipate being a consistent growth story throughout the year. We also saw a strong launch for the new Bradsett collection featuring SensorFlex technology. And in particular, we saw strong results from our classic footwear for women where we introduced a line of new casual transitional products. And similar to Vans, we see e commerce as a huge opportunity. Building off the existing success in the U. K. Market, Immelant is now live in 3 new countries France, Germany and Italy. In Asia, 1st quarter revenues were up at low double digit rate including positive results across all areas of business driven by strength in our Classic Group in both men's and women's. Men's apparel performed well during the quarter, driven by outerwear, as consumers responded well to the new materials and silhouettes that we rolled out. Women's apparel also saw an increase driven by outerwear in particular lifestyle waterproof jacket. Consistent with the North Face and Vans, we are very happy with the momentum of the Timberland brand really proud of the way the team continues to execute against our long term growth targets. Now, I turn it over to Scott to take a look at Jean Square. Thank you, Karl Heinz. Globally, revenues for the Wrangler brand were down 2% and revenues for Lee were down 1% in the quarter. The jeanswear Americas business was down at a high single digit percentage rate due to ongoing challenges in the U. S. Mid tier department store channel and to a lesser extent consumer trends in women's denim. These challenges resulted in a lower single digit decline for Wrangler in the Americas region and a high single digit decline for the Lee brand. Of the high single digit decline in the Jeanswear Americas business, roughly half of the decrease was due to a combination of a decline in the Rockin' Republic brand as we work to realign styles to meet consumer preferences and the exit of a lower profit private label business. That said, our results were consistent with what we expected. We're on track for our full year expectation of low single digit growth. That implies acceleration in the Jeanswear Americas business in the second half of twenty fourteen. So given the environment, why the optimism? Product innovation, expanded distribution and focused integrated marketing campaigns. Let's walk through these drivers and I think you'll better understand what gives us confidence that we'll finish strong in the second half of the year. First, as I just mentioned, we're launching innovative new products focused on comfort, which is what we know our consumers want. In Wrangler, you'll see the introduction of new products in our advanced comfort line. And for the younger Western consumer, we'll be launching ROC 47. To address current trends in LEED's mass business, we plan to launch Heavenly Touch in our mid tier business Easyfit, both of which have stretch fabrication that combines the comfort of leggings with the structural benefits of denim. Mid tier will also see the launch of Modern Series Curvy Fit, a new line that features figure enhancing contoured waist. 2nd, we're expanding our distribution to give more consumers greater access to our brands. Wrangler is moving more significantly into the mid tier, including J. C. Penney, where we've already had a very successful test over the past few months. For Lee, we will see additional door expansion in the department store channel including Macy's and Bon Ton. And finally, we're connecting even better with our consumers. As you know, marketing science is a key asset, VF offers its brands and our findings have been extremely valuable in sharpening our storytelling. We're starting to see great traction from these efforts, including response to campaigns for advanced comfort, which continues to resonate quite well with consumers in the mass channel and heightened visibility for Lee's modern series, which successfully launched last fall. We've also upped our investments in Lee's point of sale, which is currently rolling up to 2,000 doors across the U. S. Another great example of how we're connecting with consumers is our Wrangler network, which started live streaming, PRCA rodeos and country music concerts, an effort that continues to feed a cultural ecosystem with Wrangler at the center. The Q2 will remain challenging for the jeanswear coalition, but we're confident that will return to growth in the second half of the year. Now back to Karl Heinz to discuss jeanswear's international business. Our international jeanswear business performed really well in the Q1. In Europe, revenues were up at high single digit percentage rate including strong growth in both the Brangler and Lee business. And sales in Asia were up at low double digit. Across both regions, key accounts and consumers alike have responded well to the continued evolution of our collections. We look forward to 2014 being one of the strongest gears for our Jean Swerve business in quite a few years. We remain focused on creating and marketing our innovative products in ways that form an even stronger connection with consumers. In Europe, Wrangler has had success with its denim performance product. The Libran continues to see great strength with its best deluxe line for women and its blue label collection for men, which features superior fabrics and comfort at competitive price points. In Asia, we returned to strong growth in the Q1. We saw great performance from lines like our 101 Plus collection, which is a contemporary premium interpretation of our heritage denim offering. This line is seeing great consumer response and sell throughs in both China and Hong Kong. Now Bob will take you through our financial highlights. Thanks, Karl Heinz. Our first quarter is a great example of why BS business model is successful in delivering consistent profitable growth and meaningful returns to shareholders. With diversity across products, brands and consumers across channels, geographies and our supply chain, our unique competitive strengths have us well positioned to deliver yet another record year for VF. In fact, based on Q1 results, I'm happy to report that we're raising our full year revenue and earnings per share guidance, but more on that a little later. Let's take a look at how we did. Total VF revenues were up 6.5% led by our Outdoor and Action Sports Coalition with 14% revenue growth, which as Eric pointed out is even higher than the strong 12% growth they posted in the Q4. Our international and direct to consumer businesses also showed strong gains with revenue growth of 11% 16% respectively. Gross margin was a great story as well reaching 49.4% in the quarter, an all time record for any quarter in Versus history. This marks a 130 basis point improvement over last year. Of this improvement, about 90 basis points was due to mix. In other words, strongest growth in our highest margin businesses and about 30 basis points was due to the previously disclosed reclassification of retail concession fees. Also great to notice the fact that despite some headwinds in a few parts of our business, all 5 coalitions saw gross margin improvement in the Q1. Now I know you're probably questioning how after 130 basis point improvement in the Q1, we're holding our outlook to 49% for the full year. The answer is that as we look forward, we see some foreign currency headwinds and that's especially in the Q2. In addition, the mix benefit was particularly magnified in the Q1 given the strength of outdoor and action sports relative to other businesses. SG and A as a percent of revenues rose by 50 basis points. However, the increase was driven primarily by that same reclassification of retail concession fees. Excluding that SG and A was relatively flat year over year even though we continue to invest heavily in our D2C business and marketing. Obviously, this implies that we're successfully getting meaningful leverage elsewhere in our expense structure. And that's just how we think about our model. We invest heavily against our highest growth and most profitable brands and businesses supported by marketing science, which drives our top line creating leverage elsewhere in our expense structure. And the result continuous improvement in our operating margin. And in the Q1 operating margin improved 80 basis points to 14.5%, all of which brings us to earnings per share of $0.67 which was up 12% over last year. Now I'll make a few comments on our coalition results for the Q1. Revenues for Outdoor and Action Sports Coalition were up 14% with high teen percentage growth in our direct to consumer business and low double digit growth in wholesale sales, Really hitting on all cylinders here, The North Face, Vans and Timberland were up 14%, 20% and 12% respectively. Needless to say, we couldn't be more pleased with the continued strength and momentum of these powerful brands and the entire coalition. And of course, a 21% increase in operating income in the quarter with an improvement in operating margin of 100 basis points to 17.4%. Well, that's not too bad either. Turning to jeanswear. 1st quarter results were in line with what we expected with revenues down 4% due to ongoing pressure in the U. S. Mid tier channel, challenging consumer trends in women's denim and the exit of a lower profit business. That said, revenues outside of the U. S. Which was a third of the business in the quarter were up at a mid single digit rate with particular strength in Europe and Asia. We do expect Changeware to post similar results in the second quarter, however, accelerate meaningfully in the second half of the year driven by a great new product innovations and channel expansion. And for the full year, we continue to expect low single digit growth for this highly profitable coalition. Our ImageWare group had a solid first quarter with 4% revenue growth driven in large part by our licensed sports business, which saw great success from strong NFL postseason sales. 1st quarter operating margin was up a healthy 180 basis points reaching 14.3 percent driven by gross margin improvement and SG and A leverage. During the quarter, we decided to exit the youth business for Major League Baseball, which hurt our top line rate by 4 percentage points, however, sets us up for better profitability in the long run. Our sportswear business grew 3% in a somewhat challenging retail environment. Nautica revenues were flat impacted by the timing programs. Reflecting this shift, 2nd quarter revenues for Nautica should grow at a low double digit rate. Kipling's North American revenue was up at a high teen percentage rate with greater than 20% D2C growth. Globally, the Kipling brand grew 23%. Sportswear's profitability was up slightly with last year's same quarter. Revenue in our contemporary brands business declined 5% in the first quarter with a high single digit decline in North American revenues offset by a high single digit increase in Europe. Globally, the Coalition's D2C business was up at a low teen rate, but this was offset by a similar rate decline in the wholesale business, which continues to experience challenging demand for premium denim. The lower volume caused operating margin to decline 2% to 8%. And similar to ImageWare, we decided to move a portion of this coalition's youth business towards a licensed model. This decision negatively impacted the revenue results by 3 percentage points in the quarter. Versus balance sheet remains very healthy. At the end of the quarter, inventories were up 7% compared with March 2013 levels, including 2 percentage points related to higher costs and changes in foreign currency. During the quarter, we bought 9,100,000 shares of Versus stock for approximately $553,000,000 and in the second quarter, we purchased an additional 2,900,000 shares for $173,000,000 to conclude the share buyback program that we spoke about in February. No additional share repurchases in 2014 are anticipated at this time. Now turning to our outlook for the full year, we now expect annual revenues to increase at the upper end of the 7% to 8% range we gave you in February, so close to 8%, which is in line with the organic growth of our 2017 plan. Driving the increase is across the board strength within our outdoor and action sports brands including the momentum in our Timberland business that Steve mentioned earlier. We now expect revenues in outdoor and action sports to be up 12% to 13%. Full year gross margin and operating margin expectations remain unchanged at 49 percent 15% respectively. And with SG and A, as in the past, we will continue to look opportunistically for areas to make targeted investments in our brands, products and marketing to drive future growth. And we now expect earnings per share to rise to approximately $3.06 per share, representing 13% growth over 2013. Now in terms of the Q2, we anticipate revenues to increase at a similar rate to that of Q1 and again be driven primarily by continued strength from our outdoor and action sports coalition. So to wrap things up, I'm really excited about 2014. It's a year that presents terrific opportunities for us to increase competitive separation, further optimize our profitability and create long term value for our shareholders. So with a great Q1 in the books, we're very pleased by the underlying strength of our business and look forward to successfully executing against our growth strategies in 2014 and beyond. And with that, I'll turn it back to the operator and we can open up the line for questions. Thank you. And we'll take our first question from Michael Binetti with UBS. Congrats on a great quarter and a tough market there. Thanks, Michael. Bob, if I could just a little bit of housecleaning. First of all, your comments on SG and A that will look opportunistically for investments in the brands. Obviously, you give a little confidence in your revenue outlook for the year. But should we interpret that as if the revenues do track in at or above the range that you've given that you would try to dial back some SG and A into investments that might offset some of the upside in EPS for the year? Yeah. Really the way to think about that Michael is what we've been doing is we've been making those investments pretty consistently over the past couple of years. Last year we increased our marketing spend by about $100,000,000 and this year we're looking by the increase by another $50,000,000 And the reality is it's working for us. It's driving the top line. We had a strong Q4 last year and we're seeing a lot of momentum, particularly in our outdoor and action sports business here in the Q1. And we absolutely believe that those investments are part of that. So the idea is that we would look to do the same. We're absolutely committed to our long term targets and the 13% that we mentioned. And when we have the opportunity to make some of those investments, both to help us on a shorter term basis, but especially on a long term basis, that's what we'll do. So again, the point is it's been working for us. And yes, we will look to do the same thing in those highest margin fastest growing businesses. Okay. And then a quick follow-up on a little bit more on 2 things in the jeanswear commentary. First off, the low margin business that you mentioned that you exited any more detail you could give us on that? And then more importantly, we hear a little bit about the you mentioned I think a new platform launch in the second half that kind of supports your guidance for a pretty meaningful acceleration in the growth rate there? Yes. I think it's a couple of things. Let me take the platform first, Michael, since that's the most important one. I think the confidence really is around expanded distribution. So we're taking the Wrangler brand up into the mid tier and we're taking the Lee brand up in the department store channel. But in addition to that, we've got some really innovative products that are hitting the marketplace and that's Heavenly Touch and that's Easyfit, both products that play into this new trend that we've seen in the marketplace. But what's important about that too is, it's not just new products into that trend, it's new products into the jeans wear business also with our Rock 47, which is a big initiative for us for the younger Western consumer. So things like that that also play into our core categories in our business. But also as you think about that, we've got some really strong integrated marketing campaigns and programs that are coming from POS in the stores to broader marketing programs that really support not only our core business, but also support the initiatives that we have going forward. So that gives us great confidence in the second half. The first part of your question was, it was a lower profit business that we made the decision to exit because it didn't fit our core and it wasn't what we did best and we want to focus on the things that we do best and we want to focus on our brands. And then Eric any comments on the acquisition environment out there? Thanks a lot. No, Michael. No comments on the acquisition environment. I will add to Bob's comments about the investment and just kind of go through how we think about it. And Michael, you remember last year, we only grew organically 5%. And that was disappointing to us. And we invested $40,000,000 in the 4th quarter, try to accelerate our growth rate to the 8% target we have in our long range plan. And as Bob said, that seems to be working. So the way I think about that investment is if we make incremental investments or we will make incremental investments that deliver the results we promised in our 2017 plan. And we'll continue to make those investments to make sure that we deliver the 8% organically on the top line and 13% on the bottom line. And that's why we did it last year. Our growth rate was below what we planned. We wanted to back on track to close to 8% and that's where we are. Thanks again, guys. We'll go next to Bob Drbul with Nomura. Hi, good morning. Hey, Bob. I guess the first question is with the quarter ending in March and Easter, can can you just give us Eric, you have usually a very broad read across retail with the portfolio. Can you just walk us through how it impacted the business and sort of how it materialized when Easter happened? And just sort of how you feel about the business at this point in time with Easter now behind us? Sure. I guess the easiest way for me to talk about that Bob is in our direct to consumer business, where we like everybody else felt the impact of an Easter shift. And it was obviously a North American event less significant in China, right? And our direct to consumer business for the quarter was up 16% and that included mid single digit comp store growth, which we're thrilled with. We think mid single digit growth given all the days that stores were closed and the Easter shift is really strong. So we're confident in our direct to consumer business. And Bob on the thanks, Eric. And on the share repurchase program, is that the way that we should think about how you'll approach it going forward as well just go heavy in the Q1 like you did? And just maybe give us an update in terms of like the approach that you've taken with that? Yes, Bob, we have been pretty consistent in that. So when we're looking at buying back some shares, we've done that and got it done pretty much in the Q1. We haven't changed our perspective in terms of our buyback. We still look at it as primarily a means of offsetting the dilutive impact of option exercises. In a year like this, we got a little bit ahead of that, right? Our option exercises are or the buyback will outweigh the option exercises this year. But yes, well, generally the timing is pretty consistent. We've demonstrated that over a number of years. And again, no change in our strategy related to our buyback program. Great. Thank you very much. Thanks, Tom. We'll go next to Matthew Boss with JPMorgan. Thanks. Congrats on a good quarter. Eric, can you talk about in general what you're seeing from the consumer today, drivers of the top line confidence here? I mean, it's definitely one of the rarities out there. And any visibility you can speak to in fall orders, I think, would be really helpful. Sure. The North American consumer is in general struggling we think. I mean they're really resilient. They keep fighting back, but it is not easy out there. And if you look at the Q1 that we just went through, particularly in the mid tier and NASH channel where people have less discretionary income. They were challenged with higher heating bills and health care costs. A whole lot of things came at them that affected their discretionary income and it showed up there. Where we had great growth was in our direct to consumer business worldwide. But we're at a different price level than where the mid tier and mass is in those stores. And we did really well. We also know that while consumer spending was tough to find, if you had amazing products supported by impactful marketing, you could win. And one of the reasons we invested so heavily in the 4th quarter behind our brands was we knew we had the right products that consumers would want. We wanted to make sure that they knew that. And we really dialed up the marketing in the Q4 and that momentum carried forward into the Q1 this year. And we're pretty happy with 6.5% organic growth. Absolutely. So as you look forward in terms of orders, are you seeing your retail partners buy the brands to stock on the shelves that are driving the organic traffic? I'm curious what you're seeing as you see the orders coming in. Sure. The objective that we don't disclose our forward order book. But obviously, if we're sitting at 6.5% and guiding to close to 8% for the full year with the biggest part of the year coming at us, that sends the message that our marketing was effective, our products sold through. And as Steve commented, our product lineup coming into fall in Vans, Timberland and The North Face in particular, Scott talked about our jeans business. We think we had a great product lineup for fall. And we've got orders to support us giving an increase in our revenue guidance for the year. Great. And then last question on Timberland. We've clearly seen the top line inflect here last couple of quarters. Can you talk globally about where you see the biggest opportunity going forward? And from a margin perspective, where you stand kind of versus that mid teens goal? So I'm going to pass that over to Steve and Carl Hynes to comment on. So real quick on the Americas business. We're just seeing really strong growth across all of our regions Canada, U. S, Mexico, all channels and all categories. And it's very much a broad brand momentum. Historically, you've seen Timberland surge in single items or categories. The brand heat that's building around Timberland, we give a lot of credit to the work we've done with our end consumer, really understanding who they are, how to connect with them and how that's influenced our product. The product creation component of this brand has been dramatically elevated. You see that in what at retail today, how we're able to market to and speak at retail today, how we're able to market to and speak with our consumer and connect with them at retail has really been dramatically improved. And as we continue to drive better product at full price through our retail channels, we're seeing strong growth in our gross margins and our ability to really have the dollars to invest back behind this brand. Matthew, just to add a few color in Europe. You heard me saying last quarter, we started to grow. We had a solid growth this one and it's an indicator that we are looking forward to a good year. We had a lot of work to do in the last years with Timberland. We moved it. It's all set now. We have a strong team in place. It's all working basically. Asia is good also. It had been consistently growing since the acquisition double digit. It's strong in Japan, but we have a great opportunity in China where we basically just started and it's one of our smaller brands in China. So it's a long way to go there. And related to the margin question, we are right on track with our acquisition plan in terms of moving toward that mid teen percentage that we committed to initially when we acquired the brand. So seeing nice progress and right on track with where we expect it to be. Great. Best of luck guys. Thanks, Matthew. We'll go next to Kate McShane with Citi. Thanks. Good morning. Hi, Kate. Bob, I wanted to ask you with regards to gross margin. Are you currently ahead of where you thought you would be on gross margins at this point in time when you gave your targets in June? And how should we think about the cadence of gross margin for the rest of the year given some of the FX headwinds and the strength of Q1? Yes. Kay, we're on track with what we expected. We did expect the Q1 to be a little stronger than the overall year guiding to the 90 basis point expansion. In terms of looking out at the last three quarters as I said in my commentary a little pressure on the FX side in the Q2. So we'll likely be a little below the 90 basis point improvement, but nice solid improvement in our gross margin. 3rd quarter should be pretty close to the 90 basis point. And then 4th quarter, as you'd imagine, with the inclusion of the stronger DTC, we'll be a little bit above that. So, yes, we're tracking very, very close to what we expected and are really confident in the 90 basis point expansion for the year. That's helpful. Thank you. And then my next question is for Karl Heinz with the overall environment in Europe. If you could talk on a comp basis because I know you have a lot of white space potential and incremental growth in Europe as well. But on a comp basis, where have you seen the most improvement in your business? And what region or country has surprised you most to the upside? And what area is still struggling? Okay. Thanks for this question. We announced a good quarter in Europe and it's widely reported the economic situation and we can't do a lot there. It's not the best. But I guess the good news is and this is the strength of our portfolio most of the brand also the brands which we normally don't report the smaller ones like Kipling or Napa or Eastpak they're doing really well. They're all growing. And actually what we see especially Southern Europe is coming back strongly. Italy is a big market for us. It's the largest market for timberland. It's really doing well. So we're happy with that. I would say we play out the strength of our portfolio. A lot of things are doing well. And it's we look forward to a good quarter and a good year actually. Thank you. Thanks, Kate. We'll go next to Omar Saad with ISI Group. Thank you. Good morning. Good morning, Omar. Hey, Eric. First question for you. This your Action Sports Outdoor segment obviously has been phenomenal. You've done a lot of great acquisitions there. There's kind of almost a megatrend going on with active active healthy living, active lifestyle. But there's many different segments to this whole phenomenon. Obviously, you've got a lot of them covered in your portfolio. Could you talk about I don't know action sports versus outdoor subsegments within it, where you see the most attractive kind of opportunities from an industry standpoint where the trends are going? There's maybe some areas where you're not as actively involved, maybe the athletic part of the world there. Maybe you feel like some of your existing brand assets you could use to go after the athletic segment or maybe you want to put bring in more assets for that? And just to kind of a broader perspective around that whole segment given how much success you've had and it looks like a trend that's going to continue structurally? Thanks. Sure, Omar. Action sports for us is defined by vans and reef with vans being by far the biggest piece of that business for us. And as we reported, not only our fastest growing coalition in the quarter where we were up 20%, but Vans was our biggest brand in the quarter. So Vans was VF's number one revenue brand in the quarter. So that is a big business for us and it's kind of zeroing in on the $2,000,000,000 mark here pretty quickly. So we are really important in that space and we are the opportunity for us there and was mentioned during some of the comments is our footwear business. So that was a footwear brand that we're taking to apparel and we're doing a better and better job of taking it to both men's and women's apparel going to a 4 season calendar and getting some growth there. The Outdoor Coalition is defined by the 2 big brands really The North Face and Timberland, which reported growth of 14% 12% respectively in the quarter. So those 3 big brands are really pulling more than their share. They're doing really, really well. The athletic space is a space that we operate in the fringe on. Does The North Face have athletic styles? Yes. The mountain athletics program, the new ultra kilowatt line, all of that is geared towards training, not towards team sports, but towards training and fitness. And that is an emerging trend. And between The North Face getting into that space and Lucy being into that space for her and Lucy had a solid quarter, they had double digit growth in the Q1. We think we have the opportunity to do more in that space. Omar, did that address your question? Yes. No, I mean just Not to turn it over to Bob. Of course, Bob, if you've anything to add. But there's just so many opportunities and it's such a secularly growing segment and there's so many other brands out there having success and it doesn't seem like it's going to end anytime soon. It just it's become such a big part of your business. It can become really intricate how you think about the different elements within it and what assets you have to use to go after it and assets maybe you want to bring in, in the future. Yes. And to the point Carl Hynes touched on is one of our strengths in outdoor and action sports in the quarter was it wasn't just those big three brands I mentioned growing. We had momentum in pretty much every space we were in from Smartwold to Lucy to Napapiri. I mean we had a good quarter in that space. All right. One quick follow-up. Maybe Bob to an extent on ASPs, we do seem to be seeing industry wide some premiumization trend or at least a barbell effect in those brands that can chart to generate a higher price point, higher quality, more innovative product. Are you guys seeing that in your businesses or within some of the brands within your businesses? Average selling price is the question. I'm just looking at some of the other folks here in the room as well. Number 1, our pricing is up just a little bit. And I don't think that's exactly what you're getting at, but our pricing is up a little bit. And relative to average prices that we're seeing across the board, I might ask Steve to comment in terms of what you've seen in his business. Yes, sure. In our outdoor and action sports businesses, we've seen our average selling price in our own stores move up incrementally. And where we're able to do that is where we're adding greater value from a technology fit function and form, but also as we're able to really drive home that emotional marketing message that links back to the product and how we move our consumers through the funnel. And we saw great results of that starting last in Q4 for The North Face and really carried through the momentum that we saw coming into Q1. And we use those learnings across all of our brands within this portfolio to drive that. I guess what I'd say there Omar as well is that just what we are seeing is consumers are paying for innovation. I think that's what Steve is saying as well. We're seeing that consistently. It's why we think our innovation platform is so important for us. And that's true for Vans and Timberland as well. I was probably remiss to not mention that. Some of the products that we're seeing move through Vans today as we bring in cushioning technology, durability materials into these skate shoes, we're getting a lot of credit for that and we were able to ask for a higher price and capture that all the way through the channel. And clearly at Timberland, as we've elevated the product, we're seeing starting with the yellow boot all the way through our footwear collection driving full price retail sell through across not only our own channels, but our wholesale partner channels. Got you. Thanks, Ken. Thanks, Kumar. Thanks, Kumar. We'll go next to Dave Winer with Deutsche Bank. Good morning, Dave Winer. How are you? So I wanted to drill down a little bit on expand a little on gross margin. Clearly, you still have mix shifts, the ability to grow gross margin through mix shifts, coalition, geography and channel. But I guess, could you talk longer term maybe the opportunity to grow what other drivers can be used to drive gross margin? I'm thinking specifically, I think you have an initiative in place to switch X percentage of your or migrate X percentage of your production of product from sourcing manufacturing. Maybe an update on how that's coming along? And kind of what are you getting more technical product in that bucket? And kind of what implications that could have for gross margin? Thanks. Yes. So just I guess confirm what you were saying is relative to the mix shift as we look out over the next 5 years and just as we spoke about when we presented our 2017 plan that mix improvement, the mix leverage will continue without a doubt. So we're very, very consistently seeing that 60 to 70 basis points pretty much every quarter and every year and that's exactly what we expect to see over the period. On top of that, we still we continue to manufacture a greater percentage of our own goods in our plants much, much more so than any of our competition. And a lot of that is in our jeans wear business and we produce a pair of jeans at a lower cost and it's available anywhere in the globe. So and we're looking at new ways, new innovative ways to see even further benefits I guess from the capabilities that we have from a manufacturing standpoint. So building stronger partnerships with people outside of our existing space in terms of where we manufacture goods today is part of our story. So the idea is leverage the skill set that we have that can't be matched by anyone else in the industry from a manufacturing standpoint and leverage that skill set in lower costs and available by others. Okay. Thanks. We'll go next to Erinn Murphy with Piper Jaffray. Great. Thank you. Good morning. I guess, Carl Heinz, just for you, a follow-up on the Italian comments you made. You talked about it doing a little bit better. I guess, my understanding just broadly in Italy is that the pressure over the last several years has really just been this continued calling away of the independent channel, the multi branded retailers. They've continued to shutter their doors. I guess, are you guys seeing some stabilization in the wholesale channel as well? Or at this point, is it really just improvements in the direct to consumer piece of that business? Thank you, Erin. I think it's both. We have a pretty strong component of owned I mean partnership stores primarily with Timberland. We have more than 100 stores. So that is one component. We also see the overall economy is doing a little bit better, which is good. And we also see the larger customers having stabilized, Queen and all the guys you know. So the Italy is a very fragmented market as you know. But for sure we have seen a stabilization there. And the outlook I think is better than it used to be last year. But again, it's a market where we are very strong with partnership stores especially in Timberland and they clearly help us. Thank you. That's really helpful actually, Karl Heinz. And then I guess just on the North Face overall for Q1 versus Q4, I mean really good incremental improvement there as well. Just from a product perspective, if you guys could just reflect on what's driving some of that incremental strength in the Q1? Thanks. Is this question in Europe or in general? Sorry, in general, actually for the entire line. Well, I think Steve mentioned it well. They have a lot of new stuff happening in new products primarily. This is product industry as you know and we came out with a lot of innovation and it's paying off. Turboball is one example. We mentioned that clearly. And that's where our strategy is also going forward. Consumers are looking and paying for innovation. So I can build on that a little bit. I think from a if you were to look at it from a 4 season basis or first half, second half, we had really significant launch with ThermoBall last fall. The emotional marketing with this singular focus against that initiative driving consumer through that funnel to conversion was a very powerful campaign. We brought that into spring with the launch of our ultra performance footwear as well as our mountain athletic training apparel, while also continuing to support ThermoBall as it really is a 3 season jacket transitional weight. But this early question around the fitness trend, the Mountain North Face has significant permission to move into this athletic space, but we're doing it in a very authentic way, where we're using Mountain Athletics as an apparel collection and coupling it with training seminars or workouts. San Francisco, Washington, D. C. Are great examples where we had these TrainSmarter outdoor training events where we were able to bring consumers to train with our athletes and begin to tailor programs for the sports that The North Face builds products for. So definitely looking to expand technical collections based on our consumers' needs and really link it with emotional marketing and that pull through push through retail. Thank you and congratulations. Thanks, Ann. We'll go next to Dana with Telsey Advisory Group. Good morning, everyone and congratulations. As you think about the product costs and obviously pricing, what are you seeing in terms of product costs? Does it differ in terms of region or differ in terms of product category? And then on Southern Europe coming back, is that from locals, from tourists? Are you seeing it in wholesale, retail? Thank you and congratulations. Thanks Dana. I'll start on the cost side. Really not a lot of movement in costs overall for the year. We came into the year expecting a little bit more and that's been a little better situation than we first thought. So what we're seeing from a cost side is the number would be about 0.5 point of cost increase overall for our business and that's been offset by a little pricing. So pricing net of cost is neutral for us in 20 future orders, which are nicely up. We see it in our retail which are nicely up. We see it in our retail trends. We see it in our partnership stores. And in overall, as I mentioned before, the overall economy is for sure improving in all these markets. And I would add also the strength of our portfolio is for sure helping us. Customers are looking to reliable vendors with strong initiatives and for sure we are one of those. Thank you. Thanks, Dana. We'll go next to Lindsay Drucker Mann with Goldman Sachs. Thanks. Good morning, guys. Hi, good morning. I have a question on just on jeanswear. Scott, I was hoping you could give a little more detail on the channel expansion. So maybe more specifics on where you're going into, how much incremental square footage that adds to your distribution or sort of how incremental you think it could be for sales? And then the sequencing of it, is it really a 3Q event or is it something where we get an initial start in 3Q and there's more expansion to be had as we move across the next several quarters? Thanks. Sure. You bet. So let's start with the beginning. Let's start with mid tier. We have the Wrangler brand as you know has been very strong in the mass channel for many years and also in the Western channel. The brand has gained a lot of strength in the last few years relative to the health of the brand and how people work with the brand and how people that live the lifestyle of the brand. And as these channels merge a little bit closer together, we saw a real opportunity to bring that brand to mid tier and to bring it to that mid tier American consumer. And that's going to start really strong probably Q4, first half of next year. But the testing has already been done in the first half of this year and we really like what we see and we really like the response that we've gotten from that consumer. So that's a big channel. There are really big consumers in that channel, really big customers in that channel. So we feel like that's a really good thing going forward for the Wrangler brand and it's pretty new for the brand and a lot of opportunity going forward. From a Lee perspective, the Lee brand has the permission to go to a channel a little bit higher and that being the department store channel. What we haven't talked enough about and probably spend enough time talking about is the fact that Lee has actually been at the department store channel for many years with a couple of customers and has full distribution at 1 large department store channel. And with that, we've really expanded that to the other big department store players in the country and have had great traction on leaf female. So obviously, as we continue to have really good traction on leaf female, we're going to think more broadly about male 2 and that and we think that that's going to gain really good traction in addition to what we already have in the second half of this year. So you'll see more traction there in the second half and then we'll expand it to male in 2015 going forward. So all in all, there's a lot of opportunity for both brands to expand and grow. And then could you guys help us quantify maybe how incremental that might be to sales for you over the second half? That's kind of hard to do right now over the second half. But as the year progresses, I think that be an opportunity for us to discuss that going forward. But it's clearly a factor that we as we indicated, we expect our acceleration in our jeanswear business and numbers in the second half and it's clearly a factor. Yes. It's certainly baked into the plan going forward. Thanks a lot. You bet. Thanks, Lindsay. We'll go next to Barbara Wykoff with CLSA Americas. Hi, everybody. Good quarter. Of the brands in your existing portfolio outside of the top 5 big ones, are there any that could be accelerated to add more scale like Kipling, Lucy, Nepagiri? How would you do that? And if so, how would you do that? Yes, yes and yes to those 3 brands. In fact, we have active initiatives underway in all of those brands to have them to be amongst the size that our current big brands are, particularly around Kipling where we've been working for quite a while on a growth program there. Kipling was a very small business when we bought it. It is not a very small business anymore. Last year, it was VF's fastest growing brand for the year and grew was our fastest growing brand in 3 of the 4 quarters of last year. So it has terrific momentum. Nautica for the last 24 months has had terrific momentum. Natapiri has great momentum. So we each of our brands is part of our growth strategy and we're investing in all of them to achieve what they believe their potential is different by brand. Okay, great. Thanks. And then could you share any kind of market share information you might have U. S, Europe, Asia for outdoor and action sports and jeans? We really don't have that information in outdoor and action sports because the categories are so broadly defined. It's hard to look at them when we look at apparel versus equipment versus footwear. We don't really have that information. And in James Blair? Very similar. It's hard to define exactly from a category standpoint. Okay. Thanks a lot. Thanks Barbara. We'll go next to Robbie Ohmes with Bank of America Merrill Lynch. Good morning. Thanks for taking my question. I just had a follow-up on hey Eric, how are you? I just had a follow-up on China. Could you guys talk about maybe what the overall environment looks? It's pretty incredible, the growth you guys are doing. Is the Chinese consumer sort of reaccelerating again? Others in other categories have had more problems, I'd say, over the last 12 months over there or more? And then maybe just a shorter follow-up, the 100% growth in Vans, can you help us think about what the sort of annual growth rate for Vans should be? Is it can you do a 100% for the year over there? Or how long can you maintain that growth? Thanks. Thank you. Let me start with the last piece. Doing 100% every quarter I think is hard. Having said that, I always give the same answer. China is a great long term opportunity for us. It's like a marathon, right? And we do well every quarter. I want to remind you we have we're acting in China with primarily 4 brands where we're investing at the moment directly and have very long and big opportunities in terms of penetration. Our total door count is all 4 combined 2,500 doors, which is still very, very low. So I guess the opportunities going forward is long term, we only operate with 4 brands at the moment. We have opportunities in penetration. And specifically Vans you mentioned clearly 100% is hard to achieve. But Vans is a fast growing brand. It resonates well with consumers. It's one of the top 4 and it's for sure a big, big opportunity for us in China. Yes. Robbie to add some perspective. 2 weeks ago today, Carl Hynes 2 or 3 or yesterday, Carl Hynes and I were in China opening an 850,000 square foot distribution center that we just built for over $60,000,000 about an hour outside of Shanghai. So we are committed to China. We see enormous potential there. Across our portfolio, we're focused on a few brands now and all of them are at the early stages of their development. So we put a big stake in the ground and plan to grow there in a big way. That sounds great. Thanks so much. Thanks, Robbie. We'll go next to Lawrence Vasilescu with Macquarie. Thank you for taking my question. Overall impressive numbers out of Asia. Follow-up on Ravi's question on China. With the anticipated DC in Kunshan, can we anticipate additional one time investments for this to fuel future growth? Well, we've been investing in that region. We've been focused on it now for about 7 or 8 years. We've been there for a long time. We opened our first subsidiary there in 1995. So that was Li and so coming up on the 20th anniversary of VF direct investment in China. But a lot of that momentum has happened in the last 5 to 7 years. And our Asia Pacific region should break $1,000,000,000 this year and China is just over half of that. We make investments behind our brands. We're making investments in infrastructure to support our brands. We've made a lot of investments in marketing in the last couple of years to build categories that didn't exist. A great example of that is the outdoor category didn't really exist there 5 to 10 years ago. And we've been investing a lot to help define what that category should look like in that region. And The North Face is a leader in outdoor in China. And I think we launched there in 2007. So still very early days lots of potential and we're excited by it. Okay. Great. And then in terms of labor costs, are you seeing anything for the balance of the year? No change. No change certainly from what we anticipated. No. We're not seeing any escalation or any reductions either pretty stable environment. Okay, great. Thanks. You bet. We'll go We'll go next to Edward Yruma with KeyBanc. Hi, good morning. Thanks for sticking me in there. You guys recently realigned your management structure I think to more closely mirror the structure you had in international. I guess any outcomes you're looking for as a result of that? And how do you think this will help accelerate your growth in the U. S? Thanks. Sure. 1 of our platforms that we're one of the things that we think will deliver more potential to VF is what we call 1VF, which is having our we're organized by brand and we empower each brand to achieve their potential. But we gain most when we work across our company. And our hope is that this structure will encourage more of that, because it takes a lot of individual leaders working together to make that happen. Everybody's kind of heads down on their brand, but we find the more we share the better we get. So that was a big point underlying the organization structure change. Great. Thanks so much. Thank you. Let's turn it back to our speakers for any additional Sure. Hey, listen, we've got the years off to a great start. We appreciate your interest in our company. We look forward to catching back up in 90 days and we'll give you another outlook on how we're doing. Thanks so much. Bye bye. Thank you. This concludes today's conference. Thank you for your participation.