Transcript Q2 2022

Corrected Transcript

22-Oct-2021

VF Corp. (VFC)

Q2 2022 Earnings Call

	Total Pages: 23
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VF Corp. (VFC)	Corrected Transcript
Q2 2022 Earnings Call	22-Oct-2021

CORPORATE PARTICIPANTS

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

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OTHER PARTICIPANTS

Matthew R. Boss	Dana Lauren Telsey
Analyst, JPMorgan Securities LLC	Analyst, Telsey Advisory Group LLC
Erinn E. Murphy	Jim Duffy
Analyst, Piper Sandler & Co.	Analyst, Stifel, Nicolaus & Co., Inc.
Robert Drbul	Laurent Vasilescu
Analyst, Guggenheim Securities LLC	Analyst, Exane, Inc.

Michael Binetti

Analyst, Credit Suisse Securities (USA) LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Greetings. Welcome to the VF Corporation Second Quarter Fiscal 2022 Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to John Kelley, Senior Director of Corporate Development and Investor Relations. Mr. Kelly, you may now begin.

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John Kelley

Senior Director - Corporate Development and Investor Relations, VF Corp.

Good morning and welcome to VF Corporation's second 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've 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.

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VF Corp. (VFC)	Corrected Transcript
Q2 2022 Earnings Call	22-Oct-2021

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.

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. 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 in 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 call 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 second quarter call. As we move through the halfway point of our fiscal year, I remain encouraged by the underlying momentum across the portfolio and the broad-based nature of this strength gives me confidence that we are driving the right strategy to accelerate growth in the quarters ahead.

Looking through pandemic-related disruption and near-term headwinds in China, we continue to see a healthy retail landscape, a strong consumer outlook, and accelerating demand signals across our business. While the recovery has not been as linear as we had anticipated for some parts of our business, I'm proud of how our teams continue to deliver through the volatility. This is certainly where we excel. We are focused on what we can control. And despite a more challenging environment than we had envisioned, we were able to reaffirm our fiscal 2022 revenue and earnings outlook, a clear testament to the resiliency and optionality of our model.

We see our business emerging in an even stronger place than before the pandemic. We've accelerated our strategy to be a more digitally enabled enterprise, while driving significant investment behind key capabilities to connect with our consumers. We are driving organic growth as we elevate direct channels, distort Asia led by China, and accelerate our consumer-minded,retail-centric,hyper-digital business model transformation.

On top of that, our number one strategic priority to drive and optimize our portfolio has netted us significant benefits. Over the past five years, we have strategically evolved and simplified our portfolio from 32 brands to 12 brands, each with significant D2C and international opportunity, squarely focused on large, growing addressable markets. The macro trends around outdoor and active lifestyles, health and wellness, casualization and sustainability have only strengthened over the past 20 months. And our current portfolio is well-positioned to benefit from these accelerating tailwinds.

Active portfolio management remains an evergreen process, and M&A remains our top capital allocation priority. This is a differentiator and a competitive advantage for VF as we continue to refine our portfolio mix to maximize exposure to the most attractive parts of the marketplace. We are confident that we have the right strategy and our continued execution on each of these key strategic pillars positions VF for a stronger emergence.

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VF Corp. (VFC)	Corrected Transcript
Q2 2022 Earnings Call	22-Oct-2021

Now moving into our Q2 results. While noisy, our second quarter results highlight ongoing progress against our strategy and reflect the healthy accelerating underlying business with broad-based strength across our portfolio.

I'll start with Vans, which delivered 7% growth in Q2 despite meaningful wholesale shipments pushed into Q3, representing sequential improvement in underlying demand despite a more challenging than anticipated operating environment.

The EMEA business has accelerated meaningfully during the quarter. However, in the US, encouraging brick- and-mortar recovery trends, which had been building into July, were impacted by the Delta surge and its implications across our most important markets. This led to sharp shifts in store traffic trajectory during the peak back-to-school window. Additionally, the brand faced headwinds in Asia-Pacific with virus disruption across the region and a more challenging near-term consumer environment in China.

While Vans Americas Q2 recovery did not meet our expectations, I'm pleased with our team's response. We're focused on what we can control. Our retail associates are driving best-in-class conversion, up 20% relative to pre- pandemic peaks, this quarter in the Americas. And despite the impact of expedited freight, the Vans Americas team has brought full-priced D2C gross margins above fiscal 2020 levels, supported by discounting below pre- COVID levels. At the same, leveraging our strong inventory position, we've secured additional shelf space at several key wholesale accounts for the second half.

So despite a more challenging operating backdrop than anticipated, we are able to hold on to the low end of our prior outlook for Vans and now expect 7% to 9% growth relative to fiscal 2020. We're confident in Vans' strategic choices as evidenced by improving demand signals and strong consumer engagement. The September Vans x Horror collection launch supported the fifth highest sales day on record for our Americas D2C digital business achieving 100% sell-through within days.

We're encouraged by the ongoing strength from Progression Footwear lines, up 15% relative to fiscal 2020, led by UltraRange and MTE, and are pleased with the continued growth in Vans Family membership reaching 18.5 million consumers globally.

Our confidence in the long-term runway for Vans remains unchanged. The brand came into this disruptive period exceptionally strong, and consumer engagement has remained healthy. The active space remains a large and growing TAM, and the casualization trend continues to present a long-term tailwind for Vans.

And although Vans remains a very important part of our story, we must remember that VF is not just one brand. We have a diversified portfolio of global brands, each with exposure to attractive TAMs with enduring tailwinds. We have significant shared platforms of expertise, highlighted by our international platforms and global supply chain, which are enabling broad-based profitable growth. And as a result, our model drives ongoing capital allocation optionality to further enhance VF's growth and shareholder return profile. Matt will build on many of these themes shortly, but I'd like to start with an overview of the broad-based momentum we're seeing across the portfolio.

Starting with The North Face, which delivered 29% growth in Q2 despite significant wholesale shipments pushed into Q3, representing a sharp acceleration of underlying demand alongside meaningful margin improvement. Our international businesses are gaining share, while the underlying US business has accelerated meaningfully this quarter on tight inventories, driving high-quality sales.

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VF Corp. (VFC)	Corrected Transcript
Q2 2022 Earnings Call	22-Oct-2021

We remain encouraged by the strength across categories as TNF has been successful at balancing on and off- mountain messaging to its consumers. On-mountain platforms like FUTURELIGHT, VECTIV and the recently launched Advanced Mountain Kit continue to drive strong sell-through and reinforce TNF's performance credibility. Off-mountain lifestyle apparel and equipment are delivering outsized growth, a strong 365-day demand persisted, led by logo wear, daypacks and duffels.

We also saw strong performance from more versatile athletic inspired products highlighted by the Wander franchise. We are raising the outlook for TNF to 27% to 29% growth in fiscal 2022. We continue to believe this moment for TNF is underappreciated. This will be a $3 billion business delivering high-teen growth relative to fiscal 2020 levels, with strong margin expansion underway.

Looking into next year, The North Face will continue to benefit from broad-based brand momentum fueled by innovation, extremely clean distribution channels, increasing year-round relevancy and ongoing tailwinds from the outdoor marketplace, supported by growing consumer interest in active outdoor lifestyles. We, therefore, expect The North Face to be at least within its long-term plan range of high-single-digit growth in fiscal 2023.

Moving on to Dickies, which continues to build upon its incredible run, delivering 19% growth in the quarter. The brand is driving their integrated marketplace strategy, supporting growth horizontally across work and work inspired categories, as well as vertically as they focus on higher tiers of distribution and bring new consumers into the brand. Sell-through remains elevated and demand signals continue to be strong. Across the globe, the Dickies team remains focused on the key drivers of their business, expanding core Workwear beyond traditional channels and leveraging the brand's authenticity to accelerate the lifestyle segment.

Icons have been a focus for the marketing and sales teams, and the results are compelling, highlighted by the accelerated growth of the 874 work pant. There are several versions of this 50-year-old icon, supported by ongoing innovation, which collectively have delivered over 100% growth year-to-date.

In addition to the strong growth trajectory at Dickies, we remain encouraged by the significant margin expansion runway, which accelerated in Q2 on the back of strong full-price selling and SG&A leverage. We're proud of the continued success at Dickies, which we feel is another underappreciated part of the story. We are raising the outlook for Dickies to at least 20% growth in fiscal 2022, representing at least 30% growth relative to fiscal 2020. We expect the brand will approach $1 billion next year as Dickies celebrates its 100-year anniversary.

Next, Timberland delivered 25% growth in Q2 despite significant wholesale shipments pushed in the Q3, representing an acceleration of underlying demand over the quarter. The PRO business remains a consistent growth driver for the brand, supported by a new campaign celebrating the skilled trades to inspire the next generation of worthy workers. Despite historically low inventory levels, core boots and outdoor footwear continue to show strength as we head into the holiday, each growing over 40% in Q2.

Timberland continues to create an own boot culture, with the September introduction of GreenStride eco- innovation in boots for the first time. The Solar Ridge Hiker launched with much fanfare in New York City and posted 50% sell-through in North America. Two more GreenStride drops will hit in October, driving further momentum behind its important franchise.

At the same time, the TrueCloud collection, another eco leadership story drove strong traffic and social engagement across all regions. We believe the Timberland brand is in a much healthier position today, relative to where it was before COVID.

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