V.F. Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 23, 2023

Key Takeaways

  • VF delivered full year fiscal 2023 revenue up 3% in constant dollars with earnings per share of $2.10, as 10 of 12 brands were flat or growing and The North Face drove ongoing strength globally.
  • Supply chain execution improved ahead of plan, with on-time performance and customer service targets met two quarters early and inventory reduced by about $300 million.
  • The Vans turnaround is on track, as emerging platforms UltraRange and MTE grew 51% and 34% respectively, a new “New School” shoe sold out in two weeks, and membership nearly doubled to 28 million.
  • For fiscal 2024, VF expects flat to slight revenue growth, at least 100 basis points of gross margin expansion, and earnings per share of $2.05–2.25, with Vans returning to profit growth in H2 and further investment behind The North Face.
  • VF projects about $900 million in free cash flow, will use excess cash to reduce debt toward a mid-term 2.5× leverage target, maintain its dividend, and resume disciplined M&A once leverage is in range.
AI Generated. May Contain Errors.
Earnings Conference Call
V.F. Q4 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Welcome to the 4th Quarter 2023 VF Corporation Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Allegra Perry.

Operator

You may begin.

Speaker 1

Good afternoon, and welcome to VF Corporation's 4th 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 a adjusted Constant dollar basis, which we like to find 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.

Speaker 1

You may also hear us refer to reported amounts, which 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 on why this information is useful to investors. Unless otherwise noted, results presented on today's call are based on continuing operations. Joining me on the call will be BS Interim President And Chief Executive Officer, Benno Dohr and EVP and Chief Financial Officer, Matt Tuckett. Following our prepared remarks, we'll open the call for questions. I'll now hand over to Benno.

Speaker 2

Hello, everyone. It's been nearly 6 months into my interim role as CEO of VF. I'm proud to be part of this beautiful company, of the products that we create for our consumers, the difference we make to so many people's lives, To witness so many highly skilled and committed people create engaging styles and shopping experiences for our consumers And how people know, wear and love our brands on streets, trails and mountains around the world. Having an even deeper Appreciation of VF's possibilities now, I'm incredibly optimistic about the company's future. I'm pleased to report that VF is stable, Delivering against our commitments with strong discipline and making solid progress against our executional priorities.

Speaker 2

Today, I will build on themes introduced in February and highlight progress to sharpen our focus on the biggest consumer opportunities within our brand portfolio and on enhanced operational performance. I will cover 3 areas. 1st, an overview of VF's performance in Q4 fiscal year 2023 and an update on work underway in pursuit of our near term priorities. 2nd, an outline of the primary objectives for fiscal year 2024, which will be a year of transition and progress. And third, why I believe even more today in VF's unique value proposition and are planned to return to strong growth and long term shareholder value creation.

Speaker 2

First, we delivered revenue and profits In line with guidance for Q4 to close our fiscal year 2023, and we've made solid progress towards our priority areas of focus. Against the backdrop of continued challenging macroeconomic conditions, we grew full year revenue by 3% in constant dollars With 10 out of our 12 global brands flat or growing revenue, 5 of them double digits and delivered earnings per share of $2.10 At the midpoint of our guidance, revenue in Q4 was flat in constant dollars. Some highlights from our quarter performance to close out the fiscal year. Outdoors saw ongoing strength led by continued stellar performance at The North Face. Vans It was down in Q4 as expected, but we saw encouraging green shoots from new product launches and our increased focus on maximizing existing product platforms.

Speaker 2

We delivered sequential improvement in both Dickies and Supreme, which stabilized in Q4 behind very strong growth in our key market Japan. EMEA continued to execute well with its 8th consecutive quarter of strong growth and Greater China's emerging momentum coming out of Q3 Accelerated with Q4 revenue returning to positive growth. The North Face continues to execute strongly With engaging marketing and a steady stream of innovative styles, our core snow sports category was a standout in Q4, while the Iconic Nup C jacket continued its strong momentum. We saw further growth in trail running footwear, The North Face continues to resonate with a growing consumer base with the Explora Pass adding over 1,000,000 new members to surpass 18,500,000 global members at the end of Q4. Shifting to the near term priorities outlined in February.

Speaker 2

Importantly, our company's supply chain performance improved significantly and our work to turn around Vans is on track. We are on or ahead of plan on our work to restore excellence in the area of supply chain. In Q4, We reached our target to reduce inventory by about $300,000,000 and while it remains elevated, trends are good. We talked about our unsatisfactory customer service in Q3. I am pleased that our on term performance has generally returned to target levels a full 2 quarters ahead of plan.

Speaker 2

And finally, while our costs remain elevated in Q4, our cost focus and planning discipline are starting to bear fruit and we are on track to see lower costs in fiscal year 2024. On Vans, there are some positive developments. Our 2 emerging product lines of focus, Ultra Range and MTE, were up 51% and 34%, respectively. We are just scratching the surface on these. We also demonstrated that we can energize Vans fan base when we have meaningful product news.

Speaker 2

In Q4, we had a highly successful start of our retro inspired new school platform. This new shoe Shows the potential to grow into a meaningful growth driver for Vans over time. Our Global Vans family membership grew to 28,000,000 members by end of Q4, Nearly twice the number from 2 years ago. Clearly, there's much work ahead of us, but there are encouraging signs for us to build on. My second message is that fiscal year 2024 will be a year of transition and progress, positioning us We will show progress in several areas with sensible revenue projections, increased marketing investment and a sharp focus on margin, leading to solid operating profit growth and cash flow generation.

Speaker 2

Here are some highlights from our 2 biggest brands. On Vans, we continue to expect the brand to return to growth during the course of the second half of the fiscal year. Importantly, Vans will return to profit growth for the full fiscal year and even ahead of its return to revenue growth aided by cost savings And SKU simplification. The Vans team is operating with a great sense of urgency and projects are on track. We continue to strengthen our team.

Speaker 2

A new brand campaign launched in April. We are sharpening our go to market process with a focus on digital. We will increase our product development investment in fiscal year 2024, tease our new Pinnacle premium line at the Paris Fashion Show next month And aggressively drive Ultra Range, MTE and New School, while seeding the style 93 women's sander launch now for a full launch this fall. More innovation will follow. Our consumer understanding work is in progress, Sharpening our focus later this calendar year and we are improving our shopping experience with a significantly reduced SKU count throughout 2023.

Speaker 2

Moving on to the North Face, we are increasing product and marketing investments To support consumer acquisition, innovation and marketplace sell through and the expansion of the brand into new adjacent categories based on the clear permission from consumers to do so. Regionally, our focus is to improve execution in the Americas. The Q1 will be difficult here as we work to regain the confidence of an already cautious set of U. S. Wholesale customers In our ability to deliver full customer service after a difficult 2022 in that respect, But we should see significant improvements starting this fall.

Speaker 2

The recent appointment of Jen McLaren to a newly created role to lead our U. S. Key account management will bring stronger focus as we work with customers to capitalize on the many available partnership opportunities that exist. We expect EMEA to be resilient and generate profitable revenue growth in fiscal year 2024 Behind it, hallmark execution strength and APAC is anticipated to grow double digits this fiscal year, which we will fuel with increased brand investments. What is important to us is that we have grown the right way, meaning profitably and sustainably, expanding margins and generating significant cash flow in fiscal year 2024.

Speaker 2

To do so, while supporting strong investments in the business, we are leaning into the more profitable parts of the portfolio and implementing a strong cost savings plan with a more systematic and ongoing cross functional approach to eliminate costs that have lower value to consumers. Yes, fiscal year 2024 will be about progress and focus on what we can control In a difficult macroeconomic environment, steadily, methodically and with discipline, we will set the stage for an acceleration of value creation in fiscal year 2025 and beyond. Finally, I'm more confident than I was even 6 months ago In VF's value proposition and our plan to return to strong growth and long term shareholder value creation. B. F.

Speaker 2

Distinctive business model unites a portfolio of iconic and deeply loved brands in profitable, large and growing spaces With strong enterprise capabilities for speed, consistency and scale efficiencies. We have significant growth opportunities in APAC and particularly in Greater China, where we have strong category tailwinds and tremendous brand penetration upside. BS Enterprise capabilities in supply chain, digital and technology and international go to market platforms give us a competitive advantage, which we will fuel with strong investments in our brands and consumer capabilities. We are disciplined And dynamic capital allocators with a history of long term value creation. Near term, we will invest in organic growth To maximize the potential of our unique portfolio, while returning to disciplined M and A midterm to further strengthen our roster of brands.

Speaker 2

And we will continue to generate strong cash flow to reduce debt to target levels midterm and to return cash to shareholders Through a competitive dividend. We believe that this is a solid long term investment thesis, especially when combined with our clear plan to Accelerate a return to profitable growth with strong operational discipline, an increase in product and marketing investments and an expansion in margins through cost savings and more differential portfolio management. Lastly, We remain strongly committed to our company's purpose, not just because it is the right thing to do, but also because it drives value for shareholders. In summary, I'm confident VF is well positioned to return to strong long term shareholder value creation. Thank you.

Speaker 2

I'll now hand it over to Matt to talk through the financials.

Speaker 3

Thank you, Benno, and good afternoon, everyone. We are pleased to have delivered Q4 results in line with our guidance, but acknowledge we still have much to do to fulfill the full potential of the portfolio. The end of the fiscal year was characterized by an ongoing challenged macro environment, particularly in the U. S. The business continued to excel in certain areas And importantly, we are seeing progress against our near term priorities, although aspects of the business are still underperforming.

Speaker 3

During the fiscal year, revenue was up 3% in constant dollars with growth in both wholesale and direct to consumer. Despite softer results in the Americas, we saw strong growth in The North Face. In Outdoor Emerging Brands, which saw growth of 12% both in the quarter the year and in the international business, highlighted by exceptional results in Europe and steady sequential recovery in the APAC region. Adjusted gross margin was down 220 basis points And adjusted operating margin declined by 3 30 basis points, which led to adjusted earnings per share of $2.10 compared to $3.18 in fiscal year 'twenty two. As anticipated, liquidity was slightly above $3,000,000,000 at the end of Q4, benefiting from our Eurobond offering, but impacted during the year by lower earnings and a significant inventory build.

Speaker 3

I also want to mention the supreme impairment of 313,000,000 The business performance was clearly uneven in fiscal 'twenty three. We are now planning more modest growth in Before accelerating in fiscal 2025, benefiting from geographic expansion, the pace of which will begin to quicken starting this fall. We remain confident in the brand's long term growth potential, which will benefit from increasing access to the brand through both geographic expansion and further penetration in current markets, Along with product category extension opportunities with current consumers. Now diving into the 4th quarter results. Revenue performed in line with our expectations, Flat and constant dollars, led by the international business up 8% and outstanding performance in The North Face.

Speaker 3

Where I'd be remiss not to mention that the brand grew by double digits All channels and all regions on a global basis in fiscal year 'twenty three. Our Outdoor Emerging Brands continued to deliver strong performance Dickies and Supreme had improving results relative to the Q3. As anticipated, Vans was down 12% and Timberland declined by 6%. Adjusted gross margin was down 260 basis points and adjusted operating margins declined by 230 basis points

Speaker 2

With adjusted EPS of $0.17

Speaker 3

compared to Q4 fiscal 'twenty two of $0.45 Taking a closer look at the regions in the 4th quarter, Our results reflected a mixed performance across geographies. As expected, the Americas region was soft with revenue down 7% during the quarter. America's results were particularly impacted at wholesale, where regular price distribution was down 17%. North America remained challenging Advance, which declined 18% in Q4 in the region. Timberland was also muted in the quarter at down 6%, while Dickey showed improvement to down 4%.

Speaker 3

EMEA continued to deliver strong results, up 8% in Q4, reflecting growth from most brands in the quarter and from all brands on a full year basis. While we are starting to see some impact from macro pressures on consumer spending, most countries saw continued revenue growth in the Q4 and all approved for the fiscal year. EMEA's revenue was up 12% for the year, while delivering strong profitability. Last but not least, we were encouraged to see our business in APAC Further strengthened and showed sequential progress in Q4 with revenue up 10%, driven by a return to positive growth in Greater China in the quarter, which was also up 10%. In particular, The North Face delivered a standout performance in Greater China, up nearly 40%, The brand continues to fuel demand with the local consumer and achieve high sales productivity amidst a recovery marketplace environment.

Speaker 3

Across the rest of the region, we saw broad based growth in major markets during the quarter. Further unpacking operating performance, Q4 gross margin was down 260 basis points. As expected, business mix remained a positive contributor to margin in the quarter of 60 basis points, driven primarily by the growth of our international business. This was more than offset by rate, down 3 10 basis points Due to the impact of a more promotional environment, transactional FX and higher product costs, partially offset by strategic pricing actions. Moving on to adjusted operating margin, which was down 2 30 basis points in the 4th quarter, reflecting the impact of the lower gross margin, partially offset by 50 basis points of SG and A leverage.

Speaker 3

SG and A declined slightly in the quarter as higher distribution costs and investments Now to share an update on the supply chain environment. We've seen some stabilization in the operating environment since Q3. And As Benno mentioned earlier in the call, some initial signs of improvement are visible since taking aggressive action to return to our hallmark standard of excellence in this area. As we outlined in February, we are returning to a more rigorous approach to planning and coordination between brand operations, sales and finance leaders, benefiting our inventory management and forecast accuracy as we progress through future seasons. While we are still contending with the impact on the business today from higher lead times And improve customer service with the arrival of spring product.

Speaker 3

Further on logistics, we've seen reliability rates continue to improve, although they still remain below historical levels. And collectively, these trends are expected to continue as we move toward the important back to school and fall holiday seasons. We're well on track to achieving our goal outlined last quarter of returning to our targeted on time performance rates and service levels by the first half of the fiscal year. The Houston cost of airfreight is now more normalized. At the same time, ocean rates are coming down and we'll see additional benefits moving into fiscal year 'twenty four.

Speaker 3

FOB inflation remains a factor, but it has moderated to a lower rate for both raw materials and labor costs. We have strategic pricing actions planned in fiscal 2024 Now a few words on inventory. We achieved the forecasted reduction signaled in February of $299,000,000 during Q4. At the end of the quarter, net inventory was up 62% versus last year, which reflects the continued higher amount of core carryover and replenishment inventory, Excluding the increase relating to the change in Incoterms to support the supply chain financing program implemented in Q1 of Inventory was up $620,000,000 or 46%, a moderation from the year over increase of 75% at the end of Q3. Moving on to the outlook for this fiscal year, which we expect to be a year of progress as we both continue to advance towards achieving our long term goals And navigate a set of near term macro and micro challenges.

Speaker 3

Revenue of flat to up slightly reflects the following: A growing direct to consumer business globally and in the U. S. A modest decline in the Americas for the year behind a weaker U. S. Wholesale business in an Increasingly challenging environment, a cautious posture by most retail partners and the effects of our supply chain missteps from last fall.

Speaker 3

We expect growth in Europe for the year, although we do anticipate some deceleration considering our evolved view of macro pressures. We continue progressive improvement in China, which we've seen gain momentum in recent quarters and expect that to continue. We anticipate gross margin to be up at least 100 basis points, Reflecting lower promotions, which we expect to trend toward more historical levels beginning in the fall season, with benefits from mix, Lower freight costs and strategic pricing actions, all partially offset by higher FOB costs and FX transaction headwinds. Operating margin will expand, reflecting the higher gross margin supporting targeted investments in our largest value creating opportunities, namely The North Face and Advanced Turnaround. We We'll continue to invest in key capabilities and support momentum within the portfolio, particularly in the areas of innovation and demand creation, while exercising careful cost management in light of the ongoing challenged macro environment.

Speaker 3

Earnings per share is expected to be in the $2.05 to 2.25 range, which includes more than $0.30 of negative impact from higher interest, unfavorable foreign currency affecting operating results, normalized incentive compensation And a modestly higher tax rate. To further help shape fiscal 'twenty four, I want to provide some operational guardrails related to our Q1 expectations. Largely in line with the revenue curve we anticipated in February, we expect Q1 to be down high single digits in constant dollars. Notably, BF reported its strongest quarter of last year in Q1 at plus 7% as wholesale was plus 18%. This is exacerbated by wholesale shipment timing that benefited Q1 of fiscal 'twenty three due to supply chain unpredictability at that time.

Speaker 3

With Q1 being our smallest quarter, results are also subject to greater volatility. In addition, we have an unfavorable brand mix in the quarter with a bigger SKU to Vans, as we work to right size inventories. As anticipated, we expect wholesale across the year to remain pressured through the first half of the fiscal year, particularly in the U. S. This will impact all of our brands with a meaningful U.

Speaker 3

S. Wholesale penetration. While gross margin is expected to be similar year over year in the quarter, SG and A will deleverage This performance in Q1 has been anticipated and is contemplated within our expectations for fiscal year 2024. Now moving back to the full year. Our free cash flow is expected to be about $900,000,000 driven by growth in EBITDA and a reduction in working capital, primarily from activities to further rightsize inventory levels as we migrate through fiscal year 2024.

Speaker 3

We continue to expect inventory to be near to normalized levels by the end of the calendar and fully recovered by fiscal year end, down more than 10% year over year at the end of fiscal year 'twenty four. These two benefits will be offset by higher tax Noteworthy and is continuously contemplated, the $900,000,000 of free cash flow includes the impact of anticipated tax payments of approximately $290,000,000 relating to intercompany IP transfers completed in a prior period. CF's strong anticipated cash generation supported by decisive actions we've already taken and will continue to take will ensure our path towards deleverage over the next 24 months. And specific to the balance sheet and expected cash evolution for fiscal 2024, we ended this year with about $3,000,000,000 in liquidity. And throughout the year, we anticipate using our free cash flow pay off debt and continue to return cash to shareholders through the dividend, which we project will result in liquidity of at least $2,500,000,000 at fiscal year end.

Speaker 3

Now a brief update on the Timberland tax appeal of the Tax Court decision regarding the tax treatment of the acquisition of Timberland in 2011. The The U. S. Government filed a brief on May 4th and we'll be filing our response to this brief in early June. We and the government have requested an oral hearing of the case, which we expect will be granted for this fall.

Speaker 3

In summary, our focus is clearer than ever on the road ahead. Fiscal year 2024 will be a year of progress where we will advance our key strategic priorities as we continue to focus on the consistent execution of our plans. We will deliver improved operating performance and financial results, fueled by an expansion in gross margins, EBITDA growth and strong cash generation, all of which supports our path to delever and strengthen our balance sheet. Fiscal year 'twenty three was certainly a challenging year in our business and for our teams. But I'm consistently impressed by the resilience and strength There are more than 30,000 associates, which further increases my confidence in the actions we have implemented to enable DF to generate long term sustainable and profitable growth beginning in fiscal year 2024.

Speaker 3

With that, we'll now open the line to your questions.

Operator

Thank you. And at this time, we will be conducting a question and answer A confirmation tone will indicate your line is in the question It may be necessary to pick up your handset before pressing the star And our first question comes from the line of Abi Zviyanjit with Piper Sandler. Please proceed with your question.

Speaker 4

Great. Thanks so much for taking my question. So, I guess, just can you talk a little bit about the whole I mean, it sounds like next quarter will be challenging from both the footwear and apparel for Saks Fifth Group. Can you just really talk about the differences, I guess, What you're seeing in footwear with both Vans and Timberland and the difference between that in North Face? And then I guess complementary to that, how willing are retailers then to take New product advance since that will be driving kind of second half growth.

Speaker 4

Thanks so much.

Speaker 3

Yes. Hi, Abby. I'll start that one and certainly Benno can add if he wants to on the new product in particular. I would say overall, The environment generally is challenging, right? I think that's well understood in the near term, I would say.

Speaker 3

I'd highlight kind of 2 main issues for us. Certainly, the macro, wholesale partners generally taking a more cautious approach to order book. That's certainly prevalent In the U. S, but beyond, in Europe, we're seeing some of that as well. And as they think about the fall order book positions, they're being very cautious and very careful.

Speaker 3

And Certainly, coming off of a year last year where inventories got distorted way too high and created a really heavy promotional environment, Certainly reacting to that, I think is one thing and then I think just a general kind of cautious tone around consumer. But for us at VF, we're also dealing with quite honestly the effects Certainly, in our first half of our own missteps from fall last year, our supply chain in fall of 'twenty two didn't perform to the level that we expect Kind of our own expectations and our own bar, but we'll largely be past that moving over the next couple of quarters. And certainly, as we move toward the holiday sales season, we'll We'll be in a much better place. As it relates to footwear versus apparel, I don't think we're seeing a discernible difference in terms of how retailers are Hi, Megan. I would say generally speaking to answer your question, certainly new compelling interesting product, they're always Eager to understand what we have to offer there and willing to take those things because that certainly helps from a traffic driving perspective.

Speaker 1

Thank you.

Operator

Our next question comes from the line of Brooke Roach with Goldman Sachs.

Speaker 5

Good afternoon. Thank you for taking the question. Can you talk to the confidence that you have in the drivers of margin inflection forecasted in your outlook today against the choppy macro, what levers do you still have to pull if the consumer environment gets weaker? And Matt, can you quantify your expectation for each of the moving pieces in gross margin, particularly the lower promotional effect that you're anticipating in the back half? Thank you.

Speaker 3

Yes, certainly, Brooke. I would say gross margin up at least 100 basis points is Certainly, the biggest driver of margin expansion as we look at the fiscal 2024. As I unpack that, a moderating promotional environment is assumed to Some degree beginning from fall, I would say beginning from fall, not back to, I would say, normal levels, but certainly moderating and improving from there. And we have a lot of confidence in that, especially kind of in terms of

Speaker 2

our view and visibility of where

Speaker 3

we think inventories will be positioned, certainly our own inventories, but the market itself. So That's a good guy for us. I think we're being fairly cautious in our projection of that, but that's a big part of the gross margin increase. That's certainly not getting recovering everything we lost this year. We talked about significant reductions in margin over the last couple of quarters being heavily driven by promotion.

Speaker 3

So while some improvement, not all of it, business mix will continue to be a benefit. Think about that kind of in the 0.5 point range. I think it's fair On a full year basis. And then we've got the benefit of lower freight costs coming into the margins and strategic price increases, which will largely offset continued higher FOBs, although moderating and some foreign currency headwinds inside of product But gross margin clearly is a big driver for us. SG and A will be fairly cautious in terms of how we think about spending as we move through the year, Given the environment, but we're continuing to drive, it's becoming a kind of a routine discipline here as part of our Revised and I would say, revamped planning process in some way to really get after cost savings on an ongoing basis.

Speaker 3

So we're never stopping there and we're looking for ways To reduce costs, to funnel investments back towards the consumer and quite honestly back towards the things that are working.

Speaker 5

Thank you. And if I could just follow-up, can you provide a little bit more color on your leverage targets and actions that you're taking to strengthen the balance sheet throughout the year?

Speaker 3

Yes. So accelerating our path towards our target leverage, which is 2.5x gross over time, That work is one of our top priorities and certainly a focus of our capital allocation. So the next couple of years, it's a heavy emphasis. We're going to generate strong free cash flow this year and we'll use that to pay we'll pay a dividend as we announced, a continuation of the dividend, But more commensurate and in line with our policy of kind of a 50% payout target. And then beyond that, we'll pay down debt.

Speaker 3

The drivers of free cash flow are going to be consistent EBITDA growth. Certainly, good progress in 'twenty four. Expect to see that further accelerating beyond there. Big working capital benefits this year, both from an inventory unwind standpoint, but also we've got a benefit in accounts payable as we get the full Anniversary of the terms change that we put into place over the last few months and a continued sharpened focus on capital investments. We expect to spend about $200,000,000 this year on CapEx, which is a little lower than our kind of long term average spend and really all geared toward the consumer.

Speaker 3

So those are the things we're thinking about. I would expect at the end of this year, our gross leverage would be under 4x and our net would be in the mid-3s. And then kind of sequentially similar kind of progress as you move into fiscal 2025.

Speaker 5

Thank you very much.

Speaker 3

Thank you, Brook.

Operator

Our next question comes from the line of Paul Lejuez with Citigroup. Please proceed with your question.

Speaker 3

Hey, thanks guys. I'm curious if you can talk about what you're seeing in your DTC channel for each brand and how that compares to The sell through that you're seeing at the wholesale channel. And then one other just bigger picture. And you guys have purchased businesses, you've spun off businesses, you've done both of those things. I'm curious where your heads are at And in terms of whether or not you're in the mindset of still acquiring more at some point or maybe likely to sell or spend something off?

Speaker 3

Thanks. Yes, I'll take the first part and let Benoit talk about the second part of your question. D2C is a growth driver for us and will continue to be. Approaching 50% of the business certainly and over time we expect will be half of the business and beyond as we think about our long term plan. Q4 was another strong result overall and consistent with the last couple of quarters, up low single digits and despite the challenges The bans and to some degree the choppiness that we've seen over the last few quarters in China.

Speaker 3

So we're really seeing good results across much of the portfolio that We'll continue and we're benefiting from the investments that we've made in DTC and I think about digital or data and analytics, Brand loyalty programs, consumer insights, a sharper focus on ROI, the omni capabilities. So we feel good about the progress That we're making and the opportunity here that will be further fueled as Vans begins to turn around its business later this year. As it relates to wholesale and sell through, I mean, we're continually seeing consistently good results in the businesses that are consistently performing. Vans It's been challenged and I think we it continues to be that way in its classic products in many cases, but buoyed and strengthened obviously by newness Some of the things that we've put into place and Benoit talked about some of those things in his prepared comments. But I think the underlying sell through In the businesses that are performing is pretty consistent across B2C and wholesale.

Speaker 2

And then Paul, regarding M and A, so near term, Clearly, we're focused on organic growth to pay down debt. Also, that's based on belief that M and A should come on top of A strong operating performance and we're in the process of making significant progress on that. And then we'll turn M and A back on once we're close to target debt. We certainly want to get bigger, not smaller. We feel like we're in an attractive space with a lot of interesting targets.

Speaker 2

And our promise to our investors is that we're going to continue to do M and A with a lot of discipline. We're looking for Same growth, margin accretive growth and ongoing consumer tailwind. So near term, it's all about organic growth investments and then M and A will turn back on mid term. Thanks, guys. Good luck.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Laurent Vasilescu with BNP Paribas, please proceed with your question.

Speaker 6

Thank you very much. Good afternoon, Benno, and good afternoon, Matt. Thanks very much for taking my questions. In your press release, you talk about how 10 of the 12 brands were flat or actually grew for fiscal year 2023. A lot of us model for at least for the big four brands.

Speaker 6

Can you maybe just give us some context of just how we should think about at least the 4 big brands, so we can get confidence around the full year guide. And then maybe just, Matt, if you can give a little bit of shape of the curve of the year, How should this unfold by quarter? And then I have a follow-up question.

Speaker 3

Okay. Thanks, Florent. Great to talk to you. First off, let me just click up in terms of your question about brands and the outlook. We've got a realistic plan.

Speaker 3

It's not an easy external environment. It's not an easy external environment, certainly in the near term, but we've got a lot of confidence in the things that we're doing. The initiatives and the actions we've been driving are working and many parts of our portfolio are performing. The North Face consistently is delivering outstanding results. Our EMEA business Growing strongly for the last several years, including 12% in fiscal 'twenty three.

Speaker 3

Our direct to consumer business, we continue to make investments, is consistently growing. Our operational execution continues to improve with better planning now firmly in place and impacting the go forward. Our supply chain performance improved Allot in Q4 with better on time performance and customer service. We've met our guidance down for the last couple of quarters, including a large inventory reduction here recently. We took decisive actions to strengthen our financial position and have a clear plan to reduce our leverage levels as I talked about.

Speaker 3

The right work against our strategy at Vans is progressing and will lead to that business starting to turn around later this year. We've got a powerful portfolio of brands positioned to benefit Strong and growing tailwind marketplaces and our 30,000 associates around the world are consistently delivering the things that are necessary to win in the marketplace today and set us up So our plan is working. We're on track. We feel really good about where we are and the direction that we're heading and the opportunity ahead. And From an outlook standpoint, I think that kind of summarizes how we think about it.

Speaker 3

Your question is a little more specifically. It's certainly within I laid out some of the assumptions, which are probably more channel based and macro and the like. But The North Face momentum will continue. We'll continue to have really good results there. It's not immune to some of the wholesale challenges that we mentioned in the short term In the U.

Speaker 3

S. And to a lesser degree, but to some degree in Europe, we expect fans to return to growth during the course of the second half. We're going to see improving results in both Supreme and Dickies. In both of those brands, we expect to grow and we'll continue to see good performance in the outdoor emerging brands. And we're as we begin to even evolve our operating model there to accelerate value creation in those brands.

Speaker 3

As it relates to the curve, Q1 will clearly be The toughest compare versus last year and also probably most severely and acutely impacted by kind of the right sizing of inventories in the wholesale channel and the actions that wholesale partners are taking. So that will begin to ease sequentially improve. And then it will be, think a more consistent performance as we move kind of in the latter part of the year, but clearly Q1 will be a bit more challenged.

Speaker 6

Very helpful, Matt. And just a quick follow-up. Just curious to know how the permanent CEO search is progressing. Should we anticipate some news at some point this summer or should we anticipate it for later this fall?

Speaker 2

Hi, Laurent. I'm not going to give you a better forecast, but we said 6 to 12 months and now we're still Short of 6 months. It's a rigorous process. We're casting on we have cast a wide net internal candidate, external candidates. The process I can say is that my confidence in the ability to hire a great new CEO has never been hired.

Speaker 2

We'll update you when the news is ready. And in the meantime, as you hopefully can see from today's report, this team is stable, Very committed and engaged and the business progress is very solid As is our progress on engaging the organization. So the goal here is to find the right CEO, not A fast CEO and we're very much on track to deliver that in the time range that We talked about at the beginning of this process.

Speaker 6

Great to hear. Thank you very much.

Operator

Our next question comes from the line of Jeanie Stitcher with BTIG. Please proceed with your question.

Speaker 1

Hi. Thanks very much for taking my question. On Vans returning to growth in the back half of the year, I want to know how we should think about the pacing in terms of DTC versus And then I know you tested some changes to the stores business for Vans in terms of reduced SKUs and some of the in store merchandising. I want to get an update on What you were seeing there in terms of early reads? Thank you.

Speaker 2

Yes, Jeannie, thanks for that. So As you think about the fiscal year, what we commented on is that we'll return to sales growth sometimes during the course of the back half, But that will be growing profit in the full year, even ahead of sales growth. That's what we predicted in February. That's what we're So the plan is really unchanged and the work is on track and executed with great sense of urgency. As you think about DTC versus wholesale, we certainly expect DTC to grow quite a bit ahead of wholesale, But in DTC, you should see the movement earliest and you should see growth in the channel for the fiscal year.

Speaker 2

Everything else, all the work, including SKU simplification is on track. We are rolling out a new store Layout with improved merchandising and we will be done with that by the end of 2023 and we expect the SKU count by the end of fiscal year 'twenty four to be about 30% lower All very consistent, all focused on product and consumer engagement, On productivity, on organization, on cost efficiencies, all on track and proceeding with great sense of urgency.

Speaker 1

Great. Thanks very much and best of luck.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Bob Drbul with Guggenheim. Please proceed with your question.

Speaker 6

Hi, good afternoon. I was just hoping that you could elaborate a little bit more on China either by brand sort of Q4 into Q1, just what you're seeing there. I know you said, I think, double digit for the year for 'twenty four, but if you could maybe just address some The recent performance and really how you're feeling within what you're seeing, that would be great. And then just a second quick question is just on Supreme. I know you wrote some you took a write down 300 some million.

Speaker 6

Just how you feel about that business and sort of what you're really seeing Real time, with the strength of the brand at this point? Thank you.

Speaker 2

Yes. Feeling bullish about China. As we turn to growth in Q4 at plus The lead in growth here was up nearly 40% in Q4 and we certainly expect continued momentum in fiscal year 'twenty four. First, we have a lot of underpenetrated brands with a tremendous amount of upside. 2nd, there's a lot of category tailwinds with government support.

Speaker 2

And 3, we're certainly also reaping the benefits of our own focus. As you probably know, we moved our headquarter to Shanghai For the region with the local leader in that city, we have more localized innovation and marketing plans and we're certainly investing to fuel into that long term growth opportunity. So I'm very bullish about Greater China and feel very good about where we stand and What it will do for the business in fiscal year 'twenty four? Supreme, the best way I'd describe It remains a great brand and acquisition. There's no doubt about it.

Speaker 2

We saw sequential improvement in Q4, which is good, And we're expecting growth from the business, margin accretive growth to the company in fiscal year 'twenty four. And We're very confident in our worldwide strategy. We told that our goal is to increase global access to the brand from today 20% Of global consumers to 40% in 3 years. And there are 3 strategic pillars behind it. 1st, grow brand awareness.

Speaker 2

2nd, Expand the new categories, including footwear and last but not least, geographic expansion with keen eye and focus The key to that is store openings, which of course is the key the big reason why performance, as Matt said earlier, was perhaps a little more uneven. Last A couple of years, we've done very little of that, given COVID, but we'll reaccelerate that work. Our stores are performing really well. Our best market is Japan these days, which is growing strongly and it's no surprise that that's also the market where we have the most stores, Even more stores than in the United States. We've recently entered the Beijing market and that store is performing well.

Speaker 2

The latest store openings in the U. S, in Los Angeles, where we've moved the previous location and in Chicago performing well, And we're now focused on opening more markets in Asia. So long term growth tailwinds on a great brand with a lot of opportunities ahead.

Speaker 3

Thank you.

Speaker 2

Thanks, Bob.

Operator

Our next question comes from the line of Adrienne Yih with Barclays, please proceed with your question.

Speaker 7

Good afternoon. Thank you. Benno, my question is on sort of the Wholesale business in general, clearly last year the retailers were kind of building up safety stock and I think that's what that you were referring to Hi, this is destocking. Is this should we think about it as sort of the normalization of kind of the timing shift that happened last And it would seem that after we get through this next four quarters that by this time next year, right, the retail channel has to grow sales, so they We'll be back on potentially buying flat to up. So if you can just kind of help contextualize that.

Speaker 7

And then Matt, With regard to the promo comments, two things. When did you strategically raise prices? I think it was maybe fall of last year. And are you already seeing sort of reduced pricing concessions or any of that type of thing for the back to school or fall order book that gives you comfort?

Speaker 2

Thank you. I'll take the one on U. S. Wholesale. I think we've commented on this.

Speaker 2

Customers clearly are a little cautious. Everybody is sitting on higher inventories, so that will depress the business Short term for everybody in our categories and I think the particular challenge that we have at VF is that we're dealing with the hangover from Our 2022 customer service issues, we have to regain customers' confidence back in our ability to fully meet their needs and that's sort of a wait and see. We think that that's going to certainly have a negative impact During the first half of the fiscal year, where we'll see a very market difference between DTC and a more cautious outlook on wholesale. And then as we get to the backup of the fiscal year, we expect the 2 to move more in line and we expect Significant recovery in U. S.

Speaker 2

Wholesale and certainly continued strength in the DTC channel.

Speaker 3

If I understood your pricing question, I'll answer what I think I heard. If I'm not capturing it, you can let me know. But we took quite a bit of This past year, I think we talked about mid single digit price increases kind of broadly speaking, broad based. I will tell you, at the end of the day, probably 95% of what we planned occurred. So those prices those price increases went into the And have stuck and products generally have performed, notwithstanding kind of the overall macro.

Speaker 3

But in terms of the evaluation of the individual products We feel really good with what we got done there. We're a little bit more modest this year in terms of price increases, Not as broad based, I would suggest, and probably more in the low single digit, a couple percent range is what we've got baked in. So So kind of more normalized. That's about what we'd see on a normal year. So price increases this year are certainly a little bit lower.

Speaker 3

But we feel good We have a rigorous process as we've talked about a lot in terms of how we do this work and how we make those decisions. So we feel good about how that

Speaker 7

Okay. And then the second part of that was just the confidence in promo. Is that coming from the DTC business and evidence there? Or are you actually giving fewer kind of pricing concessions on the fallback to school kind of orders?

Speaker 3

Yes. Well, I think it's both, right? We are giving fewer concessions at this stage. I mean, we're seeing the order books And our expectation moving into the fall season is that we won't have the issues. Remember, our issues were exaggerated last We were late.

Speaker 3

Honestly, we were late on delivering product, in particular in the outdoor segment. Our outdoor brands, in particular, suffered there. And we had to offer a lot of additional pricing concessions to get product in and on the And on the floor, we won't have to do that this year. We're well positioned. Our supply chain is in a good place, and we fully It will be on time or even maybe above our targets from a kind of service level perspective.

Speaker 3

So we've got our normal Expectation of discounts and maybe a little bit of excess to give us some room, but overall, we feel good. And certainly, to your point, B2C, Which is nearly half the business fully in our control and we feel good about how we've got that position both from an inventory and a merchandise plan standpoint.

Speaker 2

Yes. A few guys, we're building on Matt's point. So clearly, as inventories ease up in the category, It's very consistent with fast behavior that promotions are lower. That's what we're assuming. That said, we assume that promotions are still elevated from 'twenty two.

Speaker 2

We think that's We're also not assuming that we're recapturing the full margin benefit from the higher 'twenty three promotion. So This is another example of being financially prudent and disciplined and having a balanced plan That gives us room to react should things get worse, but also room to do a lot better If things perhaps are a little trendier than we currently assume. So we think our plan is straight down the middle With perhaps a slight eye on being conservative.

Speaker 7

Fantastic. That's very helpful. Thank you.

Operator

Our next question comes from the line of Gabby Carbone with Deutsche Bank. Please proceed with your question.

Speaker 1

Hi, good afternoon. Thanks for taking my question. I just want to follow-up on Vans. You mentioned some big growth numbers for All Terrain and MTE. How do you view the opportunity to build those franchises?

Speaker 1

And what do you think is making them so successful?

Speaker 2

Could you repeat the very last question, please? The very last part of your question, I did not get that.

Speaker 1

Yes. Just how do you view the opportunity to build those franchises? What do you think is making them so successful?

Speaker 2

Yes. So, as we analyze where we stand with the We've done a lot of over the last 6 months, we realized that there's a big opportunity taking franchises that are out But have a very low awareness to the next level. And that's why we're so bullish on NPE and on Ultravan's awareness generally On both platforms, even though they've been around for several years, hovers at around 10% and even loyalists Advance show awareness of below 30% on those 2. So what we're focused on in general in Vans is to tell View bigger stories and dedicate ourselves more to platforms and MT and AltaRange are too. So we're building awareness And we're backing it up with new products and news and we're reintroducing these platforms to consumers And that's what's working.

Speaker 2

Alta range plus 51%, NPE plus 34%, They're both part of what we call Progression, and Progression is about 30% of Vans. So These absolutely have the potential to be very meaningful for the brand in the future. And that's perhaps The model is platform approach and building awareness over a longer period of time that we're also applying with new school, Which we've ceded in Q4, very successful, sold out within 2 weeks. We are leaning into inventory and think that could be meaningful. And just this last week, we began seeding A new women's sandal, we call it Style 93 that is going to see a full launch this fall And we're also very bullish about this and the ability to turn into a meaningful platform.

Speaker 2

So this is a change in how we treat new products, Fewer stories, bigger stories backed with more money over a longer period of time in order to make them more sticky. This is a good approach that's showing some really strong green shoots. That's a proof point that we're Effectively able to engage consumers when we have relevant product news and we tell stories in an engaging way.

Speaker 1

Great. Thank you so much.

Speaker 2

Thank you.

Operator

And our last question Will be from Jim Duffy with Stifel. Please proceed with your questions.

Speaker 3

Good afternoon. Thanks for taking my question.

Speaker 2

I'm hoping you can speak more

Speaker 3

on the inventory posture. What's the carryover seasonal inventory composition? Can Orders for new receipts, I presume that down meaningfully versus a year ago. Can you perhaps give us an order of magnitude on that? Yes.

Speaker 3

Hey, Jim. Inventory, we said we're going to reduce inventory in Q4 and we did that. So we feel good about kind of having our arms around what we're going to get done here. We continue to carry higher levels of core and carryover in excess, much of And I've said, we've said a few times we're comfortable carrying this into 24 because We've got plans to consume this inventory within kind of normal planned assortments across channels through the balance of spring and then really into fall holiday. So that's yes, that doesn't give us a lot of concern.

Speaker 3

I mean, certainly, I'd rather not have that inventory and rather have that cash and manage it differently, but we'll be able to work our way through that. I mentioned, I think, in my prepared comments, up about $620,000,000 ex in transit at the end of the year, which equated to 46%. To give you a little bit of color there, about 15% of that increase, that $620,000,000 is what I call prior season discontinued product, all right. So That's a number, right? Nothing, but it's not unmanageable at all and will be sold primarily through our own outlets and at normal intervals in the excess channel as we normally would.

Speaker 3

So we've got plans to move through this inventory. We're on track, as we laid out a few months ago, To reduce inventory levels, to reduce days of supply while protecting brand equity, we'll continue to do that over the next few quarters. We expect to make Strong progress by the middle of our fiscal year, with inventories actually inflecting and declining at that point, near to normalized levels by the end of the calendar year and really kind of fully recovered Covered by the end of the fiscal year, and I would suggest down more than 10% year over year at that point in time. So that kind of gives you a little bit of the glide path of how we're thinking about it. Hopefully, that's helpful.

Speaker 3

It is. Can you comment on the purchase orders for new receipts? Right. No, you're right. Purchase orders are down.

Speaker 3

I'm not going to quantify that, but they're down. If you think about a reduction of inventory of a little over 10% and what that means from a COGS Consumption standpoint, you can kind of do the math there and tie that into what we've laid out in terms of from a revenue standpoint, flat Upload single with some improving margins, all that adds up to a fairly meaningful reduction in purchases for sure. Excellent. Thank you so much. Yes, you got it.

Speaker 3

Thank you, Jim.

Operator

And we have reached the end of the question and answer session. I'll now turn the Back over to Ben O'Dura for closing remarks.

Speaker 2

Thank you all for joining us today. We appreciate you and look forward to We will be speaking with you again in early August when we will report fiscal 'twenty four Q1 earnings. And until then, please be well and be safe. Take good care.

Operator

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your

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