Great. We'll get started with the 9:30 A.M. session here. Welcome, everyone. I'm Jonathan Komp, the senior research analyst from Baird. Very pleased to have VF Corp with me today. VF Corp, as you know, operates a portfolio of authentic performance brands, apparel, and footwear. With me today, we have Bracken Darrell, CEO, who joined in mid-2023 executing on the turnaround. Paul Vogel joined us, CFO, in mid-2024. Hopefully, we'll have a good discussion here. Welcome. Thank you.
Thank you, everyone. Thanks for having us.
I do want to start, Bracken. I know you like to post on social media and have a lot of insights to share. And one of the ones that's caught my attention is you talk about in your past experiences as CEO, you like to go through the exercise of pretending that you or the simulation that you'll fire yourself and evaluate if you would rehire yourself as CEO again. So sitting here today, two years plus into VF Corp, maybe for all of our friends in the room here, you could walk through that exercise.
Ok, yeah. I actually did that again this year. It started as a, it wasn't a simulation. When I was at Logitech, after I'd been there about five years, I really wondered if I was the right person for the next five years because the company was so different after five years, and I thought, oh, am I really the right person? So I literally thought I would quit the next day, and I ended up staying for another six years. And then I slept on it, and when I woke up, I thought, no, that was a mistake. I think I can be the right person, but I've got to be very objective going forward. So it started as a real thing, and then I just thought, you know, that's a good thing to do every year. So yeah, I did do it this year, as usual.
I really tried to think about what am I doing that I should be very comfortable undoing? And I won't share that here, but there are always things that you spend your time, you kind of lay out your clear plan, you're executing like crazy, and then you're like, wow, wait a minute. So as the year unfolds, those things will unfold. I mean, we will absolutely change things that we've already started. What we won't change is the general direction. I'm super excited about this idea of creating a real multi-brand company that takes advantage of the fact that it's got all these different places for learning and the ability to create best-in-class processes in each one of them. I'll give you just one example. We're in the early days of all of it, but I think it's two weeks from now.
You're going to be there, too. We've got an academy where we're bringing in about, I think, 60 of our top people to really train them in our culture, our values, and really what we're up to. That's just one of the many things that we'll keep building out until we're really all of our key processes have a VF Way.
One of the things you have changed, you set up a new commercial structure, you elevated design, you changed out brand leadership, maybe provided a bit of an assessment of the good, the bad, how that's gone, and anything you're willing to share.
You know, I think I feel really good about the change we've made and the number of new people. We really have changed a lot of leaders at the top. I did not expect to do that. It wasn't because we didn't have great people, but we didn't have the right people in the right jobs, and so my leadership team, including our CFO, are new, and that's had a couple of advantages. I've never done that before where we changed that many people in the first year or so, but one of the advantages of that is I think it got everybody right on the same page right away because they came in with the Bracken Darrell sales pitch, and so there's no problem getting people aligned on a vision for what we're trying to do. So that's been really, really good.
I think there are other things you'd think, God, I wish we'd moved faster on this earlier. I think some of the things, if I look back, I'd say, wow, I wish I'd moved faster on some of the areas of distribution, for example, in Vans, like right out of the gate. There's no secret that we reduced the number of stores over the last five quarters, four quarters, and reduced our distribution footprint on Vans. And then there are other things that I don't regret doing, but you just keep learning. And I'm learning this industry, too. It's got lots of similarities to some of the places I've worked in the past, but there's always good new learning, so.
So ultimately, the goal is to get back to growth as a company. I think in fiscal Q2, you highlighted excluding the Dickies business, 70% of your portfolio, roughly, was back to growth. How should we be thinking about the journey back to growth in total for the company?
I think a really healthy business like ours, and my proxies are the past places I've worked, a really healthy business like ours should have, in general, should have 75%+ of your business should be growing at any point in time. You always got things to work on. Then you should have periods where 90%, 95%, 100% are growing. That's kind of the model we have in our heads, which is we ought to have a period somewhere ahead of us where everything's growing. We've got a really healthy business. Then even when that matures and some things drop back into the need-to-be-fixed range, we should never drop below 75% or 80% of the business growing.
What's your take on the consumer environment? Is it a tailwind? Is it a headwind today or upcoming as you think about getting back to growth?
You know, there's so many assumptions you have to make to decide whether it's a tailwind or a headwind. I would say, overall, I said this in, I think, the last time I was interviewed on stage. I called the consumer stubbornly positive, and I think I sort of feel the same way today. I mean, I think you can hear a mixed message, and I was just saying in a small group earlier, just in the last two weeks, as I've been moving around, you pick up these little senses here and there. I've heard a little more negative commentary from consumers, just not the high-end, but the medium and lower-end consumer, and it's the first time I felt that, and so I'd say maybe the trend is shifting a little bit. I don't know. Please don't take that as a commentary on our Q3 or on anything.
It's just an instinct, intuition. But overall, I still think I'm surprised how the consumer, especially in the U.S., has really hung in there. A little less so in Europe, but that's not surprising.
Maybe, Paul, I want to bring you in to talk more about the operating efficiencies and some of the capabilities you've highlighted, some of the work streams. Maybe share an update there.
Yeah, I mean, everything is progressing nicely. I mean, we gave out targets of where we thought we want to exit kind of 2028 from an exit velocity with respect to the 10% operating margin, and we're trending on plan with there. I think if you look at the last couple of quarters, you'll see we've been pretty diligent on the SG&A growth, and we've been pretty diligent on delivering better operating income. So that's number one, and when you kind of take down all the initiatives, they happen in a layered fashion, so if you think of some of the gross margin initiatives, we've got markdown management and some initiatives we have around there which help in the more short term. We have Integrated Business Planning, which will help us more over the long term in terms of better planning.
And so if you get the better planning and we get sort of the better inventory management, then actually the markdown management part becomes a little bit smaller. So that'll help us on the gross margin side. And then on the SG&A side, again, we're making good progress. We've seen impact on the store side, which is great, impact on the technology side, which is great. We still have, I think, even more work we can do to improve some of the admin costs, particularly even in my world in finance, where I think I've become even more efficient. So we just keep ticking down the boxes. But everything's great. Everything's on track to deliver the goals we put out at the investor day. And hopefully, you'll see each quarter we continue to deliver against those targets of meeting or exceeding our operating income growth.
Maybe just to put one finer point on that, I know we get asked sometimes that the plan for 2028 was for no revenue growth to hit those targets. There's been a little bit of headwind so far. So are you tracking the plan because you see visibility to top line improvement or because some of the initiatives are coming through faster or better?
Yeah, so I'll level on a couple of things. So it was no revenue growth from the period we started. So obviously, we've had a little bit of a decline in revenue. So that means we would have to take back up to where the baseline was. So it does imply some revenue growth. It's modest, but some revenue growth to get back to where we were at the baseline. And then the rest is just all the efficiencies we've talked about, the improvements on the gross margin side, the improvements on the SG&A. So it does require a little bit of revenue growth from here, not a ton, but it was the baseline of where we exited 2024.
Let's maybe turn to Vans, if we could.
What a surprise.
What a surprise, I know. Well, you've been very strategic and clear on the actions you're taking for Vans. I guess the question is, would you say the business is improving faster than the fundamentals would show or could maybe shed some light there?
Yeah, so here's what I would say. I would say the actions we're taking feel right, and I think we have lots of internal data that would say that we're doing the right things. We're launching new products. We're changing our marketing. We've certainly changed a lot of people. We've got a full complement of team there now with Sun and Rick and George and others. So I'd say the steps we're taking, and I do think it's yet to show up in the business, in the financial outcome of the business yet, but if any of you, how many people here have read Atomic Habits? Atomic Habits? Oh, not many. Ok, there's an opportunity, but in that book, he describes how to improve things. He describes this guy who's sitting on a huge rock. He's a sculptor, and he's hammering at the rock, trying to break the rock.
And he hits it 100 x and 101x and 102x and then 998x and 990x. And on the 1,000th time, the whole rock shatters in the sculpture. Sometimes that's the way it feels when you're in a turnaround. You just got to keep doing the right things, and the right outcomes will follow. So I don't know what strike you think we're on. Some of you may feel like we're at 1,562 or something. But we're striking the right. We're hitting it right. It's going to happen.
I don't think the audience knew this would be interactive this morning. So maybe share more on some of the wins that you see, product and marketing. What are the green shoots you're looking at? And then what's the path as we look forward to have more wins for Vans?
You know, I'd say I'll just throw out a few. I think the Tier Zero stuff that we're doing, what does that mean? Tier Zero is the very, very high end of the market, very small. But it's the part where the trends kind of start. And if you look at the OTW, which is the high end of the Vans line, the things we're doing there are all working. I mean, in fact, I've never quite seen anything like it, where everything we launch up there just sells out almost immediately, or if it doesn't sell out immediately, it does well. And the Tier Zero retailers, I think we said this in our last earnings call, we're getting huge interest. I mean, it's really there.
So on top of that, if you went to some of these fashion weeks, like the last one, I don't remember where it was in the world, but you have a surprising number of what looks like a skate shoe showing up, and I don't think it's because skate is coming back into fashion. It's just that this overall impact, whether it's us or just an interest in that more flat kind of bottom shoe, it just seems to be coming, so I think those are really good signs. A few of the things we're launching are also having really good outcomes. I mean, we launched the Super Low Pro way back in the back-to-school period. It sold super well right away, and we had to restock. It continues to do well. We launched a second version of it that's kind of a collapsible shoe, and that's done very well.
We launched a Skate Loafer, very small volumes, done very well, and then the embellished Old Skools and embellished Slip-Ons have done really, really well. You had lines at ComplexCon for people waiting to buy those. So I think we're seeing really good signs here and there. I'm really fixated on the U.S. market, our own DTC. We've got a really strong position in DTC in the U.S. where we can experiment with things and try them and change them, and 70% of our business in the U.S. is Direct-T o-C onsumer, about 1/2 and 1/2 stores and online, so I'm looking online first, then stores, then wholesale, and U.S. before the rest of the world.
I know maybe lastly on Vans. I know back to school you shared, I think web traffic was positive. As you think about layering on more initiatives and some of the products you mentioned, is there a point where Vans could really accelerate out of this turnaround? How do you think about ultimately the shape you want to see from the brand?
You know, I'm really hesitant to forecast that because then somebody will write it down, and I'll be told I was dead wrong or I underestimated or I overestimated or something. What I say is I'm too long-term to worry about exactly what that curve looks like. I'm more interested in it not being a curve and it being consistently up and to the right over time. I want a three-year - five-year consistent growth path that sets us up to another set of initiatives that will grow beyond that. So that's really where my head is.
Great. North Face, you've done a lot of work to bring it for all seasons, Street to the Summit. Just talk about the positioning there globally and what you're seeing from the brand.
You know, that's another one where our biggest opportunity is the U.S. And I think I said that in the last earnings call. I'll probably be saying this for the next two years. We're underdeveloped in the U.S. relative to what we ought to be in Europe or in APAC. I think if you, I know there are a lot of Europeans in here, but I'll use a baseball analogy anyway. I get asked in one of the meetings this morning for breakfast, where are we in some of these things, and if you said we're in a nine-inning game, I think on North Face and getting to selling stuff throughout the year, we're probably in the second inning. There's just lots of opportunity. We've mapped all the categories that we are in or could be in on two dimensions. One is how big is the business today?
And then another one is, what's the consumer? What right do they give us to play in that category? And a lot of those categories are categories that sell strongly in the spring and summer. And we just have lots of opportunities. So I see it more as a category game than as a seasonal game. And this is not a new story for us. I mean, if you followed us, you probably heard the same story for 10 straight years. And we don't seem to have made much difference. We've grown the business nicely in North Face, but we haven't grown the business into the categories that are about more seasons. And I think there's a reason for that. I don't want to get into it here, but we're breaking that down and fixing it.
So I'm pretty confident that we'll start to see really significant headway systematically over time into those categories that are going to drive more year-round business. But we have opportunities beyond that. I mean, we have opportunities for elevation. We sold. I was talking about if we put pressure on Summit Series, which is the highest priced stuff we've got, we sell more wherever we are in the world. If we launch a leather jacket, a leather puffer jacket that we did last, I guess, middle of last quarter, small volumes, leather one, it sells for $1,100. We sell out in Italy and in the U.S. and in Japan. So I just think there's, or, sorry, China. I think there's an opportunity for us in multiple dimensions, not just this year-round business, but also in elevation and also just getting more women in the game.
You might have noticed we seem to be shifting some of our marketing more in that direction, and I think it's going to work.
Maybe just one on Timberland then. How do you extend the moment that that brand's having here?
I don't want it to be a moment, of course. I want it to be a very long-term trend. I think the key there is I was talking to Sam Poser, who I'm looking at right over there yesterday. The whole key there is that we really define really well what are the silhouettes, what are the products that we can move from just Yellow Boot momentum to momentum in other boots, momentum in other footwear, and even momentum in apparel. We have a really clear game plan for what we're doing there. It's a terrific team. The second side of that is marketing. I think we've probably never had a better marketing program as we have right now in Timberland.
And if you saw some of the people that are wearing it at the Golden Globes last night and things, and we're just, or two nights ago, I guess it was, we're really putting a lot of pressure in the right directions to try to turn this into a lot more than a moment. And we're expanding distribution. So in the U.S., if I asked this room, where are you going to buy your next pair of Timbs, you'd get a blank stare from many of you, especially if you don't live in New York, because there's really nowhere to buy it or nowhere you would think of to buy it. And so we're going to be addressing that distribution as we go through this year and the next year.
We only have eight full-price Timberland stores in the U.S., so.
Eight.
Eight. So most of the business is wholesale and outlet. So we think there's a huge opportunity. Again, we'll do it thoughtfully and methodically, but there's an opportunity to expand that footprint.
Most of you know that if you strategically and smartly open stores, it also helps wholesale and online.
That makes great sense. Maybe a couple of financial questions, but two comments I want to explore. Just first, fully offsetting tariffs by fiscal 2027. Can you share more what gives you confidence? And then related to the margin story, can you continue to drive favorable promotions?
I'll take the tariff, and I'll let you take the second one. So on the tariff side, what we said actually is that we'd be on a run rate to offset all tariffs within fiscal 2027. So we won't completely offset it all in fiscal 2027, but we'll be in a run rate by the middle of the year. So to be able to offset the tariffs in fiscal 2027. And what gives us confidence is the good thing is there's, well, I was going to say there's certainty, but there's never certainty. At least we know what we're modeling right now in terms of the tariff side. So we've worked with our supplier partners. We've worked with our wholesalers. We've got a pricing plan in place. And so we feel really good about those three things and sort of how they add up to our ability to offset the tariffs.
We'll mitigate about $60 million or so in this fiscal year. The impact of tariffs start to hit more in this quarter we just passed, as well as Q4. And then they'll roll into fiscal 2027. But we feel good about the plan. We feel good about what we have with our partners. And again, we have a strategic pricing plan, different by brand and how we do it. But we feel good about it. And again, there's no change to what we said before, which is within fiscal 2027, we'll be on path to offset the tariffs.
And on your question on promotions, you heard Paul talk about the work we've done in Integrated Business Planning, including markdown management. So we're really trying to minimize the markdowns. And then we'll continue to promote. We want to promote into the moments, into the key moments, whether it's back to school or the holiday period or the Black Friday, making sure that promotion is a tool, not a way of life. And we really have corrected our way out of that to a large extent, I think, across our brands. And we're going to stay there.
Great. Maybe one more on cash flow. I know your target for the year is to grow cash flow and operating income confidence level there. And then as you think about deleveraging the balance sheet, is there anything that can further accelerate some of the progress you've made already?
Yeah. I mean, there's no change to what we saw in the last quarter in terms of our belief in free cash flow this year. Yeah, and for us, it's just continue to execute, right? So we'll continue to grow operating income. Obviously, we've got a target to be on an exit run rate of 10% OI within fiscal 2028. So you grow your OI, that's going to help on the cash flow. I do think over time, there's some opportunities on the inventory side and the working capital side, which will also help us. Again, that's more on the margin. It's not going to be the huge driver, but I think there's some opportunity there as well, and so we're really confident. Obviously, with the Dickies sale, we're in a great position to pay off the maturity in March.
And then we think as you get into fiscal 2027 with our cash and free cash flow we'll generate in the next year, the debt coming forward also, there's no issues at all. So we feel really great about where we are in terms of our path to pay down debt. And we feel good about where we are in a free cash flow position.
Great. That's what we like to hear. Maybe Bracken, to wrap up here, we could finish by going off script a bit. And just as you think about being involved in the business day to day, could you share some of the things that get you excited that maybe we all don't see on a normal basis?
You know, if you follow our business and my comments about it, I am really excited about the business. I was thinking that the one thing we haven't talked about is Altra, and I was looking down at my shoes thinking, you know, when I started here, I thought, man, these look like clown shoes. You've got these wide toe box, and how could anybody want to wear these unless you're really all about running? And then I remembered that I spent my whole so much time in design, and I thought, you know, polarizing is good, and I've come to fall in love with this look, and so are consumers. You know, so our business continues to grow. We grew 37% last quarter, and there's so much upside in Altra.
I think if we can solve that problem on Timberland, which we've talked about really moving beyond just the Yellow Boot moment so that it's really about Timberland as a brand, and I think we have the right team in place, the right strategy to do that. If we can take The North Face and really make it a brand that plays across categories, it's about performance. It really is about exploration and curiosity. I mean, that's really what that brand was built on. The torture test for that is that unexplored terrain of The North Face of Mount Everest.
Or if we can really exploit that, and I think we can, and then if we can get Vans to the point where it's really back to being off the wall, which there's probably very few people in this room who don't feel a little different from the other people in this room, that's a big broad positioning. We've got lots of opportunities to grow. So I'm just really, really excited about that and exploiting that by creating a V.F. way, one way of doing things that really is the best practice in the industry. And we've got a team that's really focused on what is the best practice in the industry, including the new ones that are being developed with AI. Bring that in throughout our business and making sure we continue to up the game. That's our roadmap. I mean, that's absolutely what we're doing.
I'm really, really excited about it. I'm more excited about it now than I was the day that I joined. I suspect it's going to keep growing.
Well, that's a great way to end. Thank you both. Thanks to everyone here. And thanks to ICR.
Thank you, very much.