V F : Transcript Q1 2022

Corrected Transcript

30-Jul-2021

VF Corp. (VFC)

Q1 2022 Earnings Call

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VF Corp. (VFC)	Corrected Transcript
Q1 2022 Earnings Call	30-Jul-2021

CORPORATE PARTICIPANTS

John Kelley	Matt Puckett
Senior Director, Corporate Development & Investor Relations, VF Corp.	Chief Financial Officer & Executive Vice President, VF Corp.
Steven E. Rendle
Chairman, President & Chief Executive Officer, VF Corp.

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OTHER PARTICIPANTS

Laurent Vasilescu	Erinn E. Murphy
Analyst, Exane BNP Paribas	Analyst, Piper Sandler & Co.
Camilo Lyon	John Kernan
Analyst, BTIG LLC	Analyst, Cowen & Co. LLC
Matthew R. Boss	Robert Drbul
Analyst, JPMorgan Securities LLC	Analyst, Guggenheim Securities LLC
Michael Binetti	Jonathan Robert Komp
Analyst, Credit Suisse Securities (USA) LLC	Analyst, Robert W. Baird & Co., Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: Hello, and welcome to the VF Corp, First Quarter Fiscal 2022 Conference Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to John Kelley, Senior Director of Corporate Development and Investor Relations. Mr. Kelley, please go ahead.

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John Kelley

Senior Director, Corporate Development & Investor Relations, VF Corp.

Good morning, and welcome to VF Corporation's first quarter fiscal 2022 conference call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC.

Unless otherwise noted, amounts referred to on today's call will be on an adjusted constant dollar basis, which we defined in the press release that was issued this morning. We use adjusted constant dollar amounts as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts which are in accordance with US GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors.

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VF Corp. (VFC)	Corrected Transcript
Q1 2022 Earnings Call	30-Jul-2021

Due to the significant impact of the coronavirus pandemic on our prior year figures, today's call will also contain certain comparisons to the same period in fiscal 2020 for additional context. These comparisons are all on a reported dollar basis. On June 28, 2021, the company completed the sale of its Occupational Workwear business. Accordingly, the company has reported the related held-for-sale assets and liabilities of this business as assets and liabilities of discontinued operations and included the operating results and cash flows of this business in disc ops for all periods through the date of sale. Unless otherwise noted, the results presented on today's call are based on continuing operations.

Joining me on the call will be VF's Chairman, President and CEO, Steve Rendle; and EVP and CFO, Matt Puckett. Following our prepared remarks, we'll open the line for your questions. Steve?

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Steven E. Rendle

Chairman, President & Chief Executive Officer, VF Corp.

Thank you, John, and good morning, everyone. Welcome to our first quarter call. We are encouraged by the strong start to our fiscal 2022 year. Our teams delivered an outstanding first quarter, powering VF back to pre- pandemic revenue levels, while driving an earnings recovery well ahead of our initial expectations. We continued to see broad-based momentum across the portfolio, which furthers my confidence in our ability to accelerate growth through fiscal 2022 and beyond.

While the near-term environment remains somewhat clouded by virus surges in Southeast Asia, uncertainties in other regions brought on by the impact of new variants and further pressures on the global supply chain, our teams are executing. We remain focused on the things that we can control and winning in the parts of our business where the consumer is coming back strong. And we remain confident in our ability to continue driving this sharp recovery across our business. Matt will walk you through our results in detail, but I'll start this off with some Q1 highlights.

VF revenue has surpassed pre-pandemic levels, growing 96% or 83% organically to $2.2 billion, with momentum across brands, regions and channels. Our global DTC business delivered high single-digit growth relative to prior peak levels, driven by a strong acceleration from our brick-and-mortar stores in the US and continued strength in our Digital. Our organic DTC Digital business is now 72% above fiscal 2020 levels, including the growing benefit of our omni-channel capabilities as we serve our consumers seamlessly across their choice of channel. We've seen a sharp recovery in our wholesale business, which grew over 100% organically in Q1, approaching prior peak fiscal 2020 levels.

Strong sell-through trends and clean channel inventory levels from the past year are now translating into stronger fall 2021 and spring 2022 order books, supporting an improving outlook for our wholesale business for this year and beyond. We've seen a strong recovery in our gross margin, which grew 260 basis points to 56.7% in Q1. This represents organic gross margin expansion relative to prior peak fiscal 2020 levels despite a 30-basis-point headwind from a more challenging logistics and freight environment. VF drove organic earnings growth of 133%, delivering $0.27 in Q1, essentially doubling our plan. We're pleased to see our top line momentum and strong gross margin expansion translate into better-than-anticipated SG&A leverage and earnings flow-through, an indication of the upside potential of our model as our recovery accelerates.

Now turning to our brand highlights from the quarter. The Vans brand has returned to pre-pandemic revenue levels, growing 102% in Q1. The recovery has been led by global DTC business, which drove double-digit growth relative to fiscal 2020, led by 73% growth in Digital. This DTC strength has been broad-based, with each region recording positive DTC growth relative to pre-pandemic levels. More Vans consumers have returned to in-person

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VF Corp. (VFC)	Corrected Transcript
Q1 2022 Earnings Call	30-Jul-2021

shopping experiences earlier than expected, and we see encouraging trends in our DTC KPIs with consumers buying more frequently and spending more per purchase relative to historic levels. In EMEA, despite the continued impact of lockdowns and supply chain disruptions, the Vans business grew 125% this quarter, representing 30% growth relative to fiscal 2020, with strength across all major markets as stores reopened throughout the region.

Vans APAC business grew 19% in Q1, led by 22% growth in China. June marked a milestone for the brand in China with the soft launch of the Vans Family program. While the official launch will be celebrated with the Super Brand Day on Tmall tomorrow, we have already registered over 1 million new loyalty members following the initial launch, bringing global Vans Family membership to nearly 17 million consumers. Vans kicked off its 52-week drop calendar this quarter, seeking to create a consistent, predictable, globally aligned and focused approach to drive brand energy and consumer engagement. Seven weeks into the program, we are encouraged by the initial consumer reads and the instant sellout of several early drops.

Internally, the Vans team has increased its focus, energy and resources around driving newness and compelling storytelling, which we believe will unlock further long-term value for the brand. The team is on track to more formally market the Vans drop list in fiscal Q3, ahead of the fall holiday season. We remain bullish on the setup for Vans moving through fiscal 2022 and are encouraged by the early reads from the back-to-school season underway. We are raising our full year outlook to growth of 28% to 29%, representing growth of 9% to 10% relative to fiscal 2020.

Moving on to The North Face, global brand revenues increased 83%, representing 6% growth above pre- pandemic levels. All regions rebounded sharply in Q1, highlighted by continued exceptional performance in EMEA, which grew 142% versus the prior year and 58% relative to fiscal 2020, despite the impact of door closures over the period. The APAC business grew 22% in Q1, highlighted by 80% growth in Digital relative to fiscal 2020 levels.

The North Face's spring sell-through rates were some of the highest in years, reflecting strong progress on the brand's ability to drive 365-day relevancy. TNF continues to drive energy in on-mountain categories with the FUTURELIGHT franchise as well as the new VECTIV footwear rollout, further establishing its legitimacy in outdoor footwear.

We also see outsized growth from the casual categories such as logo wear, which grew over 100% in Q1, as consumers show strong engagement with the brand off-mountain. TNF's loyalty program, the XPLR Pass, has grown to over 7 million consumers, adding nearly 300,000 new members in Q1, driven by exclusive member experiences enriching the consumer journey. We continue to be encouraged by the broad-based global momentum at The North Face, and now expect the brand to deliver 26% to 27% growth this year, representing 15% to 17% growth relative to fiscal 2020. Alongside the significant top line recovery, we're seeing strong improvements in profitability, and continue to expect mid-teen profitability for TNF in fiscal 2022.

The Timberland brand delivered a 63% growth in Q1, tracking ahead of plan. We are encouraged by high-teens growth in the Americas and 87% growth in digital relative to fiscal 2020 levels. We continued to see outsized growth from outdoor, apparel and Timberland PRO, each growing over 75% in the quarter. Momentum behind core iconic product also continues, with heritage styles seeing strong demand despite historically low inventories.

Our Timberland team remains committed to its purpose-led vision, highlighted by the recently announced global product take-back program in partnership with ReCircled. Beginning this fall, US consumers will be able to return any Timberland product to a brand store to either be refurbished for resale or recycled into future products. This

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VF Corp. (VFC)	Corrected Transcript
Q1 2022 Earnings Call	30-Jul-2021

program supports the brand's bold vision announced last fall for products to have a net positive impact on nature by 2030. We're encouraged by Timberland's strong start to the year, and, as a result, we now expect the brand to deliver modest growth relative to fiscal 2020, surpassing pre-pandemic revenues beginning in Q2.

Dickies delivered another exceptional quarter, growing 58% in Q1, well ahead of our plan. As the brand has kicked off several new campaigns and inventories become more available, we've been pleasantly surprised by the intensity of sell-through performance across all wholesale partners in the US. This acceleration continues to be driven by both work-inspired lifestyle products, which reported strong growth across all three regions, as well as core work items. Work-inspired lifestyle now represents about 40% of global brand revenue.

Importantly, the Dickies brand has begun to deliver meaningful profitability improvements, driven by both gross margin expansion and SG&A efficiencies. Q1 represented a strong start to our goal of returning to double-digit profit margins in the Work segment in fiscal 2022. Following a strong Q1 performance and accelerating demand signals across channels, we are confident raising the full year outlook for the Dickies brand to mid-teen growth in fiscal 2022, representing over 25% growth relative to fiscal 2020 levels.

A quick update on Supreme. We continue to be happy with the integration process. The VF supply chain organization continues to advance engagement with the Supreme teams, with particular leverage opportunities and logistics capabilities, scale and relationships, which couldn't come in a more opportune time. One quarter into our fiscal year, we remain confident in our outlook of $600 million and $0.25 from the brand.

Before I turn the call over to Matt, I want to thank our associates from around the world, across our brands and enterprise functions, with a particular call out to our supply chain teams, who have been working tirelessly over the past 18 months to minimize disruption against the backdrop of unprecedented volatility.

Our strong results are a reflection of the consistent execution, hard work and inspiring dedication of our teams around the world. This continued passion and energy, alongside the broad-based nature of VF's acceleration, give me great confidence in our ability to continue driving the strong recovery underway. While the first quarter represents a small portion of our total year, we're starting off fiscal 2022, building off the great momentum, which began in February of this year.

And now, I'll turn it over to Matt.

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Matt Puckett

Chief Financial Officer & Executive Vice President, VF Corp.

Thanks, Steve. Good morning, everyone. I'm really happy to update you on our strong Q1 results and revised outlook for the year. We're encouraged by the continued broad-based momentum across our business, and the setup for each of our big brands heading into the heart of our fiscal year. Despite additional pressures throughout the global supply chain, I remain confident in our team's ability to execute, and to build on the strong earnings recovery delivered in Q1.

Let me start with an overview of the operating environment across geographic regions, In the Americas, less than 5% of our stores were closed at the beginning of the quarter and all stores are currently operational. A strong US consumer, easing US restrictions and increased vaccination rates have encouraged a gradual recovery in foot traffic, alongside continued strength in conversion.

Our Americas DTC business grew 84% organically in Q1, surpassing pre-pandemic levels, led by a sharper than expected recovery in our brick-and-mortar business. Consumer appetite for athletic, athleisure and outdoor

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