VF : Transcript Q3 2023

Corrected Transcript

07-Feb-2023

VF Corp. (VFC)

Q3 2023 Earnings Call

	Total Pages: 19
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VF Corp. (VFC)	Corrected Transcript
Q3 2023 Earnings Call	07-Feb-2023

CORPORATE PARTICIPANTS

Allegra Perry	Matt Puckett
Vice President-Investor Relations, VF Corp.	Chief Financial Officer & Executive Vice President, VF Corp.
Benno O. Dorer
Interim President, Chief Executive Officer & Director, VF Corp.

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OTHER PARTICIPANTS

Laurent Vasilescu	Brooke Roach
Analyst, Exane, Inc.	Analyst, Goldman Sachs & Co. LLC
Dana Lauren Telsey	Jay Sole
Analyst, Telsey Advisory Group LLC	Analyst, UBS Securities LLC

Michael Binetti

Analyst, Credit Suisse Securities (USA) LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Greetings, and welcome to the VF Corporation Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the conference over to our host, Allegra Perry, Vice President, Investor Relations. Thank you. You may begin.

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Allegra Perry

Vice President-Investor Relations, VF Corp.

Good afternoon, and welcome to VF Corporation's third quarter fiscal 2023 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 afternoon, and which we use 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. Unless otherwise noted, results presented on today's call are based on continuing operations.

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VF Corp. (VFC)	Corrected Transcript
Q3 2023 Earnings Call	07-Feb-2023

Joining me on the call will be VF's Interim President and Chief Executive Officer, Benno Dorer; and EVP and Chief Financial Officer, Matt Puckett. Following our prepared remarks, we'll open the call for questions.

I'll now hand over to Benno.

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Benno O. Dorer

Interim President, Chief Executive Officer & Director, VF Corp.

Hello, everyone. Since I stepped into my new interim role about two months ago, I have been fully immersed in the business. I have uncovered areas of strength and promise, but also gained a deeper understanding of where we must improve. And I have been impressed with our talent at all levels and their leadership and commitment to VF on which our future success is dependent.

Many of you know about my career history, which culminated in roles as CEO and Chair of The Clorox Company until my retirement from a full-time corporate career two years ago. This gave me the opportunity to lead a global, purpose-driven consumer portfolio company towards more profitable, sustained and responsible growth with financial discipline, a fully engaged organization, brands people love, consistently strong product innovation and a differentiated approach to the portfolio to maximize value.

You also know that, I have served on the board of VF for the last six years, including as lead independent director from July 2021 until December 2022. I believe that, my deep insight into VF, my passion for the company, its people and brands, coupled with my prior career experience gives me a solid foundation for the Interim CEO role. And I do plan to use my time to make a positive difference to VF's business and organization.

My overall theme for today is that, VF will sharpen its near-term focus on the biggest consumer opportunities within our existing brand portfolio and on enhanced operational performance. Consistent with this objective, we are shifting resource priorities across the company. This will include rightsizing our dividend, exploring the sale of non-core assets and cutting costs in lower value areas to strengthen our execution and to enable incremental targeted investments in our brands and the consumer.

With that, I'm pleased to speak with you today about four topics. VF's results in Q3, our near-term priorities to address performance, how we're taking prudent steps to build a stronger company for the future, and why I'm even more optimistic than I was two months ago about the long-term prospects for VF.

First, we overcame a very challenging environment in Q3 where our performance highlighted examples of success while also clearly showcasing areas to improve. Amidst the difficult geopolitical and economic backdrop, we grew Q3 revenue 3% in constant dollars. And today, we are reaffirming our revenue outlook at the low end of our prior range and also the midpoint of our EPS outlook for fiscal year 2023.

Our EMEA business continues to be a bright spot, with Q3 revenue up 10%, our seventh consecutive quarter of double-digit growth driven by broad-based strength, including The North Face up 13% and Vans up 7%. Another strength in Q3 has been our consistent performance of the outdoor brands led, of course, by The North Face where revenue was also up 13% globally with growth achieved in each region and channel. We also saw nice growth in Timberland, up 6% in the quarter with solid performance in EMEA and in wholesale globally. And our outdoor emerging brands continued to grow strongly, up 10% highlighted by Ultra. Finally, in Asia, we saw a sequential improvement with Q3 revenue up 4%. This was driven by the beginning of what could be a return to stronger momentum in Greater China, which was close to flat at minus one.

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VF Corp. (VFC)	Corrected Transcript
Q3 2023 Earnings Call	07-Feb-2023

Secondly, we are clear-eyed about VF's performance barriers, which are predominantly operational in nature. And our near-term priority is to put aggressive plans in place to improve our execution. We are not reaching our full potential as a company. The good news, though, is that doing so is largely within our control. We must consistently delight consumers with exciting products, engaging content delivered with effective marketing tools and with great shopping experiences in-store and online.

Where we do this well, see The North Face and the broader portfolio in EMEA, our brands continue to thrive. Where we are inconsistent with Vans being far the highest impact, but not the only example, we must improve our consumer execution to return to full strength. We must also return to delivering products to our consumers and customers on time and at lower cost to VF. Supply chain has long been a core competitive advantage of VF, but our recent performance also requires focus.

So, to improve execution, we have two near-term key priorities, which represent significant value creation opportunities. First, turning around our Vans performance through improved consumer execution; and second, returning to supply chain excellence across the company.

On Vans, we clearly have been challenged for some time now. This is predominantly a challenge in the Americas, and it is mostly executional in nature. For perspective, Vans Q3 revenue rose by 7% in EMEA, but declined by 13% in the Americas, which is primarily North America and accounted for 90% of the global Vans Q3 revenue decline.

While there are differences in EMEA compared to the North American markets, the relatively stronger performance of Vans in EMEA also reflects the benefits of a clear growth strategy and stronger marketplace execution. We must do better with Vans in its home markets, and we will.

Our action plan follows the four growth drivers laid out in our Investor Day last September; consumer, products, marketplace and operating model. Here are a few specific examples of actions. We will sharpen our view of the changing consumer landscape through a new consumer segmentation, which is underway and will inform the business' overall growth strategy and begin to influence our direct-to-consumer plans as of summer this year. We need to delight consumers in ways that are relevant to their specific needs. And to do so, we must be more intimately familiar with them.

We will also better turn data and insights into significant consumer opportunities available today. For example, a strong untapped opportunity exists with our UltraRange product line. Here, awareness is very low at around 10% among all consumers and at below 30% even among Vans loyalists. So we've started to boost awareness, and this is starting to yield results. UltraRange revenue grew 34% in Q3 with much more growth to be had.

The MTE and Half Cab product lines have similar potential. And going forward, we will drive these and other promising platforms longer and more continuously. We will significantly increase our investment in product innovation, funded by a reduction in costs in lower value areas with actions, including SG&A reduction and improving store profitability.

Vans product development investment as a percentage of revenue lags well behind the company average. We will change that starting with fiscal year 2024. This will help us aggressively pursue new styles and make our innovation pipeline more consistently strong. We will also eliminate unnecessary SKU complexity to simplify and importantly, amplify the shopping experience.

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VF Corp. (VFC)	Corrected Transcript
Q3 2023 Earnings Call	07-Feb-2023

A small test at our Irvine, California store led to a footwear revenue improvement of plus 12 percentage points with 30% fewer SKUs. We will begin to expand this initiative as of fall fiscal year 2024. We will move our digital spending principle from budget cap based to flexible and ROI-based to take advantage of available spending opportunities that translate into incremental revenue and profits. It is early days, but we have already seen an improvement in profitable DTC growth rates only a few weeks into this change.

We will sharpen our processes. In fiscal year 2024, we will go-to-market at retail, including wholesale customers with clearly aligned and integrated product calendars. This will lead to better plans that are more centered around the consumer.

And to drive Vans forward, we have made tremendous progress putting a world-class Vans leadership team in place. Two critical leaders, our new Chief Product and Merchandising Officer; and our new Chief Digital Officer, have both joined in December, and they're off to a fast start.

Vans continues to be a fundamentally strong brand. The number of consumers buying Vans during the last 12 months was up, as was brand advocacy. But many people buy the brand less often. So what we do need to do is to fuel the brand more consistently and give people more reasons to buy more Vans. That is on us, and that's what we will do.

The momentum we continue to generate with The North Face further proves this point. The brand continues to perform strongly, driven by strong consumer engagement and iconic products. And we will keep investing to fuel that momentum.

Our XPLR Pass membership continued to grow significantly in Q3, up 2.1 million members to approximately 17 million in total. It's more than a jackets marketing campaign, launched the season and drove strong outerwear growth globally with the Nuptse jackets, and the recently relaunched Summit Series premium product line leading the business.

Our recent first-everperformance-led collab launch with American artist and designer, KAWS, was highly successful. Net, the brand's momentum is strong and broad-based. The North Face is a solid and transferable execution blueprint for Vans, and frankly, the entire VF portfolio in the Americas, where we must grow with consumers more consistently.

The second near-term priority at VF is to return to the company's hallmark standard of excellence in the supply chain arena. We are working through a variety of external and internal issues that impacted revenues and profits in the high-volume quarter like Q3. Lengthened manufacturing and freight lead times, larger upfront product buys, unpredicted demand spikes from elevated promotional activity in the quarter, plus higher than normal customer order cancellations add up to unsatisfactory customer service, elevated inventory and significantly higher costs. So we're taking aggressive actions to address these issues.

We expect to be able to work excess seasonal inventory down to more normalized levels by the end of Q4 this fiscal year. Our customer service levels are also improving, albeit still below our own and our customers' expectations. We have a plan in place to get back to target levels by the end of the first half of fiscal year 2024.

We will also leverage our logistics partnerships to reduce costs by improving ocean and parcel rates for the next fiscal year. And we will see a return to more normalized and predictable promotional patterns and anticipate moderated inflation, which we expect will contribute to lower costs through fiscal year 2024. We are committed to

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