V.F. Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2021

Key Takeaways

  • Revenue: Q1 net sales surged 96% to $2.2 billion, organic growth +83%, surpassing pre-pandemic levels with digital sales 72% above FY2020.
  • Margins & EPS: Q1 gross margin expanded +260 bps to 56.7%, operating margin improved to 6.8%, and adjusted EPS rose 133% to $0.27.
  • Upgraded Outlook: Fiscal 2022 revenue is now targeted at ≥$12 billion (+30% vs FY2021, mid-teens vs FY2020), with EPS ≥$3.20 and operating margin ≥13%, including a $0.25 Supreme contribution.
  • Vans Momentum: Vans sales jumped 102% in Q1, D2C double-digit growth vs FY2020, wholesale >100% increase, leading to a full-year Vans outlook of +28–29% (+9–10% vs FY2020).
  • Supply Chain Pressures: VF expects >$35 million in incremental expedited freight costs vs FY2020 and a 20–30 bps gross margin headwind due to ongoing COVID-related disruptions in Asia.
AI Generated. May Contain Errors.
Earnings Conference Call
V.F. Q1 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

Hello, and welcome to the ZF Corp First Quarter Fiscal 2022 Conference Call and Webcast. At this time, all participants are in a listen only mode. 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 Kelly, Senior Director of Corporate Development and Investor Relations.

Operator

Mr. Kelly, please go ahead.

Speaker 1

Good morning, and welcome to VF Corporation's Q1 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 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.

Speaker 1

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 U. S. 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.

Speaker 1

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 and disc ops for all periods through the date of sale.

Speaker 1

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 Brendel and EVP and CFO, Matt Puckett. Following our prepared remarks, we'll open the line for your questions. Steve?

Speaker 2

Thank you, John, and good morning, everyone. Welcome to our Q1 call. We are encouraged by the strong start to our fiscal 2022 year. Our teams delivered an outstanding Q1, Powering VF back to pre pandemic revenue levels, while driving an earnings recovery well ahead of our initial expectations. We continue to see broad based momentum across the portfolio, which furthers my confidence in our ability to accelerate growth through fiscal 2022 and beyond.

Speaker 2

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 but 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 us off with some Q1 highlights. CF revenue has surpassed pre pandemic levels, Growing 96% or 83 percent organically to $2,200,000,000 with momentum across brands, regions and channels.

Speaker 2

Our global B2C business delivered high single digit growth relative to prior peak levels, driven by a strong acceleration from our brick and mortar stores in the U. S. And continued strength in our digital. Our organic B2C 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.

Speaker 2

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 56.7 percent 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%, expansion translate into better than anticipated SG and 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. Savans brand has returned to pre pandemic revenue levels, Growing 102% in Q1.

Speaker 2

The recovery has been led by global D2C business, which drove double digit growth relative to fiscal 2020, led by 73% growth in digital. This D2C strength has been broad based with each region recording positive D2C growth relative to pre pandemic levels. More Vans consumers have returned to in person shopping experiences Earlier than expected and we see encouraging trends in our D2C 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. Banned's APAC business grew 19% in Q1, led by 22% growth in China.

Speaker 2

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 Super Brand Day on Tmall tomorrow, we have already registered over 1,000,000 new loyalty members following the initial launch, bringing global Vans family membership to nearly 17,000,000 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. 7 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.

Speaker 2

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 off 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.

Speaker 2

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 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 Explore Pass, has grown to over 7,000,000 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.

Speaker 2

Alongside this significant top line recovery, we are seeing strong improvements in profitability and continue to expect mid teen profitability for TNF in fiscal 2022. The Timberland brand delivered 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 continue 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 South seeing strong demand despite historically low inventories.

Speaker 2

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, U. S. 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 program supports the brand's bold vision announced last fall for products to have a net positive impact on nature by 2,030.

Speaker 2

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. Vicki's delivered another exceptional quarter growing 58% in Q1, well ahead of our plan. As the brand has kicked off several new campaigns and inventory has become more available, we've been pleasantly surprised by the intensity of sell through across all wholesale partners in the U. S.

Speaker 2

This acceleration continues to be driven by both work inspired lifestyle product, 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 and 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 to mid teen growth in fiscal 2022, representing over 25% growth relative to fiscal 2020 levels.

Speaker 2

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 at a more opportune time. 1 quarter into our fiscal year, we remain confident in our outlook of $600,000,000 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, We have been working tirelessly over the past 18 months to minimize disruption against the backdrop of unprecedented volatility.

Speaker 2

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 While the Q1 represents a small portion of our total year, we're starting off And now I'll turn it over to Matt.

Speaker 3

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.

Speaker 3

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 U. S. Consumer, easing U.

Speaker 3

S. Restrictions and increased vaccination rates Have encouraged a gradual recovery in foot traffic alongside continued strength in conversion. Our Americas D2C 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 categories remain strong, benefiting our direct business as well as the performance of our key accounts. Low inventories and strong sell through trends continue to drive down promotional activity and improve quality of sales across the marketplace, which is resulting in stronger than expected order books for the upcoming fall and spring season.

Speaker 3

Moving on to the EMEA region. While lockdown measures continue to affect economic activity, our business has remained resilient, Growing 97% organically in Q1, representing 13% growth relative to fiscal 2020. Both wholesale and B2C channels return to growth relative to 2020, as continued strength from both our direct digital channel and from digital Titan partners That's more than offset the impact of brick and mortar store closures. About 60% of our EMEA stores were closed to start the Q1. As we sit here today, all of those doors have now reopened.

Speaker 3

Consumer confidence is improving as restrictions ease and we've seen strong performance from our brick and mortar fleet following reopening. For example, our U. K. Business delivered triple digit growth from Opendoorz following 3 months of lockdowns, representing growth of nearly 30% relative to fiscal 2020. Finally, our APAC region continues to deliver double digit growth by sporadic resurgence of the virus across many markets.

Speaker 3

Our China business grew 12% in Q1, which was impacted by a wholesale timing shift of revenues from Q1 into Q2. Excluding this impact, China would have delivered mid teen growth this quarter. We continue to see digitally led growth in the region, particularly with our Titan partners and remain confident in our ability to deliver greater than 20% growth in China in fiscal 2022. While we remain pleased with our APAC performance to date, we are observing most Southeast Asian markets facing various degrees of lockdowns and travel restrictions. And while only about 5% of our stores are currently closed, commercial activity has been impacted across most APAC markets outside of China and Hong Kong.

Speaker 3

This latest web also presents additional near term uncertainty for our global supply chain. In recent weeks, more widespread virus outbreaks Key sourcing countries with lower levels of vaccination have resulted in temporary factory lockdowns and manufacturing capacity constraints. Our supply chain also continues to be impacted by port delays, equipment availability and other logistics challenges. Essentially, every link in the supply chain has been impacted to varying degrees over the last 18 months. And while we're not immune to this, We believe we've managed these challenges relatively better than most.

Speaker 3

Our teams remain focused on delivering the products to satisfy increasing demand signals In the most cost effective and efficient way. Some of the actions include using airfreight, other means of expedited shipping and dual sourcing where appropriate. While we remain confident in our ability to service our strong growth plan, there is a financial implication to these actions. For example, we expect to spend more than $35,000,000 in incremental expedited freight charges relative to fiscal 2020. We view our supply chain as a key competitive advantage at BF and our teams are proving this now more than ever.

Speaker 3

I want to echo Steve's appreciation for the Supply chain team's incredible execution over the past 18 months. As a result of their tireless and tremendous effort, I remain confident in our ability Now moving into our Q1 financial results. Total VF revenue increased 96% or 83% organically to $2,200,000,000 reaching pre pandemic levels 1 quarter ahead of our initial expectations. Our Q1 digital business is 72% above fiscal 2020 levels organically, representing a 31% 2 year CAGR. We also continue to see strength from key digital partners globally, with pure play digital wholesale growth of over 70% relative to fiscal 2020.

Speaker 3

ZF's total digital penetration was roughly a quarter of our Q1 revenues, which represents about 2x our penetration from the Q1 of 2020. Gross margin expanded 260 basis points to 56.7 percent, representing organic expansion from Q1 Gross margin levels in fiscal 2020. Relative to last year, this strong expansion was driven by greater full price selling, partially offset by the expedited freight costs and business mix as our wholesale business rebounded sharply in the quarter. When compared to fiscal 2020 gross margin, we generated a strong mix benefit, partially offset by the incremental air freight cost and FX. Operating margin expanded meaningfully to 6.8%, driven by the strong gross margin performance and SG and A leverage relative to the prior year.

Speaker 3

We delivered EPS of $0.27 in Q1, representing 133 percent organic growth, driven by a stronger top line and earnings flow through relative to our initial expectations. Following the strong broad based performance in Q1, We are raising our full year fiscal 2022 outlook. Our outlook today assumes no significant changes to the environment, including increased disruption to our supply chain operations. VF revenue is now expected to be at least $12,000,000,000 representing at least 30% growth from fiscal 2021 and a mid teen increase relative to our prior peak revenue in fiscal 2020. Excluding the Supreme business, our fiscal 2022 outlook implies organic growth of at least 25%, representing at least 9% organic growth relative to fiscal 2020.

Speaker 3

As Steve covered, the increase to our revenue guidance is broad based across the portfolio with stronger outlooks for each of our top four brands And sizable increases in 2 of our emerging brands, Altra and Smartwool. Specifically, the improved outlooks are supported by stronger than anticipated order books and the accelerating D2C trends we've observed over the past 5 months. Moving down the P and L, we still expect gross margin to exceed 56% despite a 20 basis point to 30 basis point headwind from additional airfreight that wasn't assumed in our initial outlook. We now expect operating margin to be at least 13%, an improvement of over 20 basis points from our initial outlook, a signal to the upside potential of our model as our top line Fiscal 2022 EPS is now expected to be at least $3.20 including a $0.25 per share contribution from the Supreme brand, representing at least 20% earnings growth relative to fiscal 2020. We continue to expect to generate over $1,000,000,000 in operating cash flow this year with planned capital expenditures of about $350,000,000 including the impact of growth investments as well as deferred capital spending in fiscal 2021.

Speaker 3

As announced on June 28, we closed the sale of the occupational work business this quarter, providing roughly $615,000,000 of additional liquidity. These proceeds are reflected in our fiscal 2022 outlook For total liquidity to exceed $4,000,000,000 We expect to exit this year with net leverage between 2.5 times and 3 times, providing us meaningful near term optionality to deploy excess capital moving forward. So to conclude our prepared remarks, I'm extremely pleased with the broad based strength we're seeing across our portfolio as we begin fiscal 2022. We took bold decisive actions last to position our brands and the enterprise for the strong recovery currently underway. And the balanced broad based nature of this recovery, Along with the continued optionality that our model provides gives me confidence in our ability to drive sustainable long term growth moving forward.

Speaker 3

We'll now turn the call over to the operator to take your questions.

Speaker 2

Thank you.

Operator

We'll now be conducting a question and answer Our first question today is coming from Laurent Vasilescu from Exane BNP Paribas, your line is now live.

Speaker 4

Good morning, Steve. Good morning, Matt. Thanks for taking my question. I wanted to ask about Vans. It's nice to see the raised guide for the brand.

Speaker 4

It looks like Vans was up single digits on a 2 year stack. This is, I think, the toughest compare that you have for the quarter for the year. How should we think about the growth rates between the first and second halves On a 2 year stack basis, and are you raising the annual guide based on like certain regional performance or is it wholesale? And then If I go into the minutiae here, but it looks like DTC Americas was up, but there was might may there might have been a timing shift Within Wholesale Americas, is that the case?

Speaker 3

Hey, Laurent. Yes, you got a lot in that. So, I think we'll make sure we try to get through it all. Good morning and great to talk to you. Yes.

Speaker 3

So, let me start with in terms of What we saw in Q1, as you laid out there, we're really happy with the result that we saw, Certainly, sequential improvement, in particular, in our direct to consumer business and also in the Americas, in particular, from a DTC perspective. So that was really encouraging. There was some timing impact in the quarter from a wholesale shipping standpoint. So we and By the way, that's all sort of caught up in terms of that in July. That was about $30,000,000 So, a few points of growth on a global basis Impacted the results in Q1.

Speaker 3

So, as it relates to our outlook, basically what we're doing here is we're flowing through the Q1 beat From a D2C perspective, again, that was primarily in Americas. We're partially extrapolating that into Q2 based on the trends that We've seen, and by the way, July is off to a good start. And then we're dialing in some stronger wholesale order book that we're seeing. Again, most of that all in the Americas. I would what I would say in terms of so your point about first half, second half, I'd really just point you to the fact that our year to go outlook now implies about 12% to 13% growth versus fiscal 2020.

Speaker 3

So hopefully that I think did that get everything you asked there in terms of some of the details?

Speaker 4

You did. Thank you. Thank you very much for that on Dan's. And Matt, Steve, maybe a couple of questions on the on how we think about the guidance. Obviously, you're giving annual guidance, but You talked about $35,000,000 impact from incremental freight, 20, 30 bps on the GM.

Speaker 4

Can you talk about the shape of the gross margin between the first half and second half? And I think remind me, Matt, I think during the Q and A last call, Camilla asked about how do we think about first half EPS and I think it was about $1.20 Just due to the size of the impact of or just the magnitude of the beat, How do we think about first half EPS?

Speaker 3

Yes. So, let me first of all, we're not going to give specific Got Q2 outlook today, but certainly as evidenced by our outlook, we're confident in taking the year up. Remember, I would remind you that the September, October timeframe is always the hardest to call from a shipment timing perspective. I mean, There's a significant amount of activity during that period of time as we begin to really load up things on the wholesale side for fall and holiday. And just given the supply chain pressures, It's really hard to call the puts and takes between quarters.

Speaker 3

And to some degree, I think we can expect that quarter to quarter volatility will continue in the near term. However, though, with what we know today, while some of the flow may not be perfectly optimized as we begin this season in We don't expect a meaningful impact on our ability to ultimately deliver the fall holiday season. And I'll remind you that as we have Continually done, we expect that we'll perform relatively better than the competitive set. As it relates to gross margin, What I would say is, certainly, we're holding the year at greater than 56. We talked about the fact that we're absorbing Some higher freight, particularly air freight and other forms of expedited freight.

Speaker 3

I think we said 20 basis points to 30 basis points in the prepared remarks, so versus our original outlook. So in a meaningful amount, I will tell you that the vast majority of that actually sits in our 2nd quarter, is the way we would expect that to play out. The other thing I would remind you that we have currency headwinds that we're up against that will begin to abate a little bit as we move later in the year. And probably the last point I would make around gross margin, we talked About the fact that our pricing actions, which have been relatively limited through spring 2021 fall 2021, You'll see the impact of more significant pricing activity as we move into spring 2022. So the Q4 window will benefit a little

Operator

Thank you. Your next question today is coming from Camilo Lyon from BTIG. Your line is now live.

Speaker 5

Thank you. Good morning, everybody. Just in looking at the detail you provided and the trajectory of the business versus 'twenty, it seems like You're now going to be trending over the long term EBIT margins that you provided at Beavercreek. How do we think about those implications as What the business can deliver in this environment of full price sell through limited inventories and really accelerating demand on a global basis.

Speaker 3

Yes. Camilo, good morning. Yes, I guess what I would say to that is certainly we're really encouraged by, first of all, The sharp recovery in gross margin that we saw in Q1, which we've signaled and we certainly anticipated, but certainly happy to see That play out as anticipated and the underlying margins in terms of the organic business actually above prior peak levels in our Q1. And so and I think what you could I think Think about relative to the outlook raise, up to at least 13% operating margin, Given the airfreight headwind that's at play and that we're calling out, I think it really speaks to our confidence in seeing that SG and A leverage beginning to play out. We said in our last call that If we saw some earnings opportunity, which obviously we're seeing that come to pass a bit and calling the year up, You'd expect a strong earnings flow through as a result of that.

Speaker 3

So I think again seeing that play out despite the fact that we've got some headwinds on the supply chain side relative Afraid that we didn't anticipate in May.

Speaker 5

Got it. And my second question is Going back to the global regions or the regions rather, You raised in your slides, you raised the Americas, but you kept Europe and APAC the same as the prior guide. Given what you're seeing in Europe in particular and what you talked about from a growth perspective in meeting demand in China, Why would you not have raised EMEA and the APAC regions?

Speaker 3

Yes, good question. So let me start with, 1st of all, APAC, China continues to be really strong, but you got to remember, rest of Asia It's pretty volatile at the moment, given flare ups in virus. So, it's not an enormous part of our business, but when you at that total region, there is some impact across what I'll call rest of Asia. Think about Korea, even Taiwan, Japan, Malaysia, Singapore, etcetera. So on the Asia side, there's the puts and takes there, I think, in terms of how we think about that business.

Speaker 3

The Europe business continues to be quite strong, And probably what's at play here a little bit too is when we laid out our initial guidance in May and talked about the opportunity, It could be a little bit conservative. I think that was predominantly in Americas related comment. So I think we're seeing the Americas business in the U. S. Consumer Come back strong, and that's playing out across our businesses, by the way.

Speaker 3

That's a broad based comment across all of our big Businesses and really across our portfolio as we see the U. S. Consumer coming back strong. And certainly that's important from From a go forward standpoint and obviously it's critical to the Vans business, I think in particular given the size of that business in the U. S.

Speaker 3

As well as the size of The brick and mortar business here as well. So, that's obviously really encouraging for us. And probably the last thing I would say, we still are maintaining a fairly cautious approach from a year to go perspective in our direct to consumer business. We've got sequential improvement coming as Our expectation, we saw a stronger result in Q1. As I said, we've extrapolated that a bit into Q2, but we remain careful there in terms of You know how that will play out over time.

Speaker 3

So hopefully that answers your question.

Speaker 5

It does. Maybe I can just a clarification question on that. Is it fair to characterize Europe as maybe being a quarter behind the U. S. In terms of how you're stacking the resurgence in demand?

Speaker 5

Is that a fair and accurate kind of depiction?

Speaker 3

Well, our business has been really good, all the way through. I would say it's Fair characterization in terms of the consumer, and certainly the fact that we opened a quarter in Europe with significant door I think over half our doors were closed in the beginning of the quarter and many of those were closed through a third to half of the quarter. And we're open for business here now, obviously, as we closed the quarter and as we sit here today. So I think from a consumer standpoint, consumer confidence, yes, that's a fair Our business though has been really good and resilient all the way through. Our business actually on a 2 year stack in Europe was up in the quarter.

Speaker 5

Got it. Thanks for the color. All the best.

Speaker 3

Thanks, Camilo. Thanks, Camilo.

Speaker 2

Thank you.

Operator

Our next question today is coming from Matthew Boss from JPMorgan. Your line is now live.

Speaker 6

Great, thanks. So on The North Face, Maybe could you help speak to order trends that you're seeing in the business and just drivers of the 15% to 17% increased outlook this year, Which basically doubles your long term target. Just what you're seeing in the business and confidence in those targets?

Speaker 3

Yes, maybe I'll start there, Matt. Good morning. The order trends are good. And honestly, we the outlook has come up a bit In The North Face and the vast majority of that I think is related to U. S.

Speaker 3

Order book, just to be blunt. So the order books are good, but probably what's more encouraging, and I'll let Steve talk a bit here is the sell through Continues to be really strong across our business, across geographies and across channels. So that's giving us a lot of confidence in the things that we're doing, that that's really resonating with the consumers. That strong sell through, obviously, that begets Stronger order book. So Steve, I don't know if there's anything you want to add there.

Speaker 2

Yes. I would just say, it's the North Face sits in that in the outdoor TAM, which has had A lot of energy last year and that's carried into this year. And North Face is that number one global brand. And with the work that the team has been doing, the focus around really the segmentation between the On Mountain and Off Mountain offer, We see very strong growth with our FutureLight products. Really proud of the team and the ability to deliver Vectiv And secure 2 outside magazine awards across 2 different categories for one collection of footwear just really validates North Face's opportunity within that outdoor footwear space.

Speaker 2

But also you've heard us talk a lot about getting 365 day relevancy To evolve our sportswear, specifically our logo wear and to be able to drive triple digit growth in the quarter, And this validates the work being done, the demand that's there for this brand. Globally, we continue to see very strong results Internationally, led by Europe and China, very strong and it's just great to see the momentum building here, built Based on those strong sell throughs that Matt referenced, the brand is in a really good position for the balance of the year, hence giving us confidence to raise the outlook.

Speaker 6

Great. And then maybe just a follow-up on the expense line. Matt, How best to think about expenses that you see as transitory or more one time to this year? And is there any change to the flattish 5 year forecast, which I think you had laid out, which I think in the next 2 years would drive pretty material leverage on the SG and A line, just making sure we're thinking about this right?

Speaker 3

Yes. So yes, there's certainly when you think about SG and A in the short term, there are some transitory Headwinds, I think we talked quite a bit about that in May and that hasn't really changed. I think we specifically see that in some of the freight costs, some of the freight out costs where Yes, we've seen a pretty significant increase. I think a lot of that's around supply and demand, as well as in distribution. We've got some one time costs that we're navigating here in the short term as we bring on board some new distribution capabilities, some new Capacity in a couple of places in the U.

Speaker 3

S. As well as our new distribution center in the U. K. So We'll quickly sort of lap that and move past that and sort of grow through that. So certainly, I think there's some transitory headwinds.

Speaker 3

As it relates The longer term view, what we've said is that we expect and first of all, really happy to see our Q1 results, right, and the leverage that We saw there versus our original expectations. Now, I will say some of that's timing related certainly in terms of the spend shift The spend timing, some of that's shifting out a little bit, but happy to see that kind of progress. We've said that we expect to exit the year with SG and A leverage, and we said we expect to see next year, we'll be sort of right on track with The long range algorithm and sort of the path towards that mid teens overall operating margin that we laid out in Beaver Creek will be back On that path. And so, hopefully that gives you the sort of the context you're looking for.

Speaker 6

Great. Best of luck.

Operator

Thank you. Our next question today is coming from Michael Binetti from Credit Suisse. Your line is now live.

Speaker 7

Hey, guys. Thanks. I have a few. Thanks for all the help today. On I guess on Vans guys, Matt, I could tell you see some optimism in the order book in North Erica, it really helps you talk about that a little bit, what's changing?

Speaker 7

Just help us understand where the increases are coming from in that business. And I think maybe someone touched on earlier that there was looked like a little bit of a wholesale shift that infected Q1. But I think it'd be really helpful to understand where the increase

Speaker 3

Yes. Good morning, Michael. I would say it's really sort of broad based honestly across the U. S. Market.

Speaker 3

And it's really driven by as we saw in our own stores, we just see continued improvement in the business, Right. And I think a lot of that's tied to the fact that consumers are coming back into stores. We're relatively well positioned from an inventory perspective Coming through spring and as we head into back to school. And so we're seeing those sales to stock ratios perform quite well. And again, that's broad based.

Speaker 3

We're seeing that in the sort of the specialty channel. We're seeing it with some of our key national partners. So I don't think it's any one place. I think it's relatively broad based. And as you know, the order windows are a little tighter in advance, meaning We're taking orders about 4 to 5 months out based on our shorter lead times there.

Speaker 3

And so we said we'd have the to get after more volume if the business came on a little stronger and we've seen that occur and so that's sort of playing out

Speaker 7

And then I guess you made a comment in the prepared remarks On Vans that you thought we would see some reflection of Vans being at the top of the competitive set over the next few quarters. And we haven't seen many of the footwear brands report yet here lately. And I would You also have 2019, you guys are having very strong growth rates in Vans in 2019, so you are comparing against that. But I'm trying to think, Maybe you could just tell me a little bit more what was behind the comment that

Speaker 2

you think you expect to be

Speaker 7

at the top of the competitive set as we look at Vans over the next few quarters?

Speaker 2

Good morning, Michael. This is Steve. I'll take that. Hi, Steve. Where we see the opportunity to Perform at the high level here against our competitive set is really within our supply chain's ability to service The forward demand that we see and really keep Vans positioned with inventory, which is having Certainly a positive impact on their ability to see this the wholesale lift, but also the D2C lift that we're seeing.

Speaker 2

You all might remember in the last call, I talked about having significant as D2C came back on board and that momentum is building and carrying us really nicely into The back to school timeframe here. The demand trends are encouraging and Our ability we're set for back to school with the inventory required. And that comment about the supply chain really is about our ability to chase back into and that inventory if we see an outsized sell through consistent with what we see here today.

Speaker 3

And maybe I'll add one thing there that we've talked about the point about versus the competitive set. Part of that really is also around our retail stores, right? And the retail store teams and those The associates really that are the brand ambassadors. We've talked about that's been a bit of a challenge for us quite honestly as stores were closed throughout A large part of last year not having that, which is a big part of sort of the overall ecosystem, not just the opportunity to buy in stores, The experience that you get and the connection and the engagement that oftentimes is most robust in those stores. And so we know that as stores are open, as consumers Back end stores, that's going to play to our advantage.

Speaker 3

And so that's the part of that thinking in terms of how we feel versus the competitive set.

Speaker 2

And I'd pile on there a little bit, Michael. I mean, we're reaping the benefits of supporting our retail teams through last year by not furloughing them. But we carry those talented associates forward. And the historical conversion rates that we see, we're actually Seeing a slight outperformance to that and that's drive that's another aspect of the strong B2C results that we're currently seeing.

Operator

Okay. Thanks a lot for the help guys. Thank you. Our next question is coming from Erinn Murphy from Piper Sandler. Your line is now live.

Speaker 8

Great. Thanks. Good morning. Steve, you talked about in your prepared remarks about the wholesale levels coming back to almost pre pandemic levels. Can you share a bit more about the complexion of wholesale today versus pre pandemic from a mix perspective?

Speaker 8

How does it look in terms of the composition between key partners, 3rd party digital. And then I have a follow-up on Vicky's. Thanks.

Speaker 2

Okay. Yes, I'll just follow the line of your question there, Aaron, I think the key account component of our wholesale business is critically important and some of those key accounts are digital, Digital key accounts, and we've talked a lot about our European partners, our Asia partners. But here in the U. S, we're seeing strength in the outdoor Space, we're seeing strength in the sporting goods space. And as we get our brands in a position to Still that demand, the pent up energy that we saw coming out of Q4 into Q1 It's driving that wholesale performance.

Speaker 8

Got it. Great. And then on Dickies, I mean, the growth has been really incredible, both on the top line as well as the margins. Can you share a bit more about where you see the incremental share gains coming from Both in the Americas from here as well as in China. Thanks.

Speaker 2

Sure. Let me I'll grab this one. Sure. And Matt, I haven't seen anything fill in the blanks here. But we're excited about the Dickies business.

Speaker 2

Since our acquisition, This brand has significantly outperformed our acquisition plan and even despite COVID. We're seeing strength in our core work business Here in the United States, we're seeing really nice acceleration in the work lifestyle component. That's now about 40% of our total revenue. So this team over the last two years has really simplified Their approach to the business, focusing on their core icons, building out the lifestyle Piece of the business, while really respecting that core workwear, we have channel Expansion opportunities that we see going on beyond just that those core work points of sale were growing into sporting goods. The recent launch of the skate collection is accessing a whole host of new specialty skate accounts, which is just a great brand building image component.

Speaker 2

It's also giving them permission to elevate some of the offer. We've recently launched the Signature Collection, which is an elevated higher price point, better gross margin, collection of items really built off those core icons. So I think the point here is they've focused the business. It's broad based across all three regions, Building against the traditional channels, but because of this broad based momentum, they're able To now extend into adjacent channels of distribution, new wholesale partners, while we at the same time build our digital acumen and our ability to speak to consumers directly.

Speaker 3

Yes. Aaron, maybe just one thing to add there, maybe A little less sexy, but also really important, and to give credit to the teams. And thanks for asking about Dickies. I'd go to Gracie. The brand performing and the teams are doing a great job.

Speaker 3

We didn't make it easy on them after acquisition. We had to spend the Kontoor business and we Sold off occupational work, all of which had impacts because of the connections in the back end of some of the things that we were doing there. So we've had some fits and starts there in the early days, but we're really now starting to see the benefits in the supply chain from some of the integration activities Around demand planning as an example, which ultimately allows us to service the business in a better way too. So that's certainly helping, While at the same time, obviously, there's a lot of momentum from a brand heat perspective. So, those things coming together, is the I think sort of

Operator

Our next question is coming from John Kernan from Cowen. Your line is now live.

Speaker 9

Yes, excellent. Thanks for taking my question. I wanted to go Back to Vans, you gave some helpful commentary on North Face and where that business is From a margin standpoint, I think you said mid teens for this year, which is an impressive recovery. Where does BAND sit in the overall margin profile relative to where it was back in Beaver Creek in pre fiscal 2020. And it was significantly higher From a margin contribution margin than every other brand in the portfolio, just curious where that sits now and where you think it's going to go in fiscal 2022 and beyond.

Speaker 3

Yes. I think it's still in the same spot, right? It fits well above Most of our brand portfolio from a profitability standpoint really strengthen the gross margins, Yes. Strength driven from the direct to consumer business, they're really, really profitable brick and mortar franchise. As you think about I mean, the one thing I would say Versus pre COVID levels, there's still a little bit of a headwind there, primarily because of 2 things.

Speaker 3

1, the freight side of things that They're dealing with as all of our brands are. But remember too, that's the one business where brick and mortar is really significant. And while we're seeing sequential improvement and while fortunately we're seeing that even be a little stronger than we thought, we're still modeling brick and mortar to be down Crossed the year and not really fully recover until early fiscal 2023. That was my point earlier about we remain fairly conservative in our outlook there as we move through, in particular the back half of the year. So there's a little bit of overhang there in the short term.

Speaker 3

But yes, Vans profitability That you would have seen in Beavercreek and what we've talked about historically, that remains and the outlook on a longer term basis, It's really compelling in terms of value creation.

Speaker 9

Understood. And then just going back to, I guess North Face and Outdoor, can you talk to the growth you're giving off of Fiscal 2020 pre COVID levels indicates a nice recovery. Can you talk to the sequencing as we go through the year? I think the guidance for the remainder of the year was above where you were in Q1. So just curious how we're thinking about North Face as it relates to both wholesale and DTC as we go through the remainder of the year.

Speaker 3

Yes. Certainly. I'm not going to be specific quarter to quarter, but you can expect sequential Improvement as we step through the year, notwithstanding what could be some volatility from a shipment timing standpoint around That peak shipping window as we begin to move into fall holiday. I think the thing to remember there is the strength It's still a heavily weighted business toward fall, holiday, winter time And the strength of our performance last year from a sellout perspective and the order book profile As a result of that, both in the U. S.

Speaker 3

And in Europe. So that's a big part of the growth as we see that wholesale business Bouncing back sharply. And as we see our direct to consumer business continue to recover sequentially as we talked about in Vans, similar

Operator

Our next question is from Bob Drbul from Guggenheim. Your line is now live.

Speaker 10

Hi, good morning. Thanks for taking the question. I guess I would Love to hear some more about what you've learned so far on Supreme, the update, the integration, The game plan, any early learnings, I think the accretion was probably a little bit better than we anticipated. Any commentary you could share with us would be great. Thanks.

Speaker 2

Yes. Good morning, Bob. So I would tell you first, we're really happy with the progress of our integration, The thoughtful, really targeted approach that we're taking, allowing Supreme the opportunity to learn about VF, Our VF teams, the ability to learn about the Supreme business and where There are those opportunities to provide capabilities. The brand is performing in line with our Expectations and those expectations, we're seeing stronger results versus the long range growth targets that we have for the business. I think where we're connecting most probably most effectively is with our supply chain teams.

Speaker 2

And it couldn't certainly couldn't come at a better time as we look to leverage our logistics capabilities, leverage our scale And the relationships, specifically to assist in shipping and work in partnership with the Supreme team to Sure. Their weekly cycle of the drops stay as close as possible to Going in seasonal plans, it's early certainly in the in our understanding of the business, but we're very confident about the long term value creation thesis that we put forward for the Supreme business and continue to see regional expansion and partnering with the team to leverage our skills and capabilities. Great.

Speaker 10

Thanks. And just on the supply chain, I guess if we go back to the Decision to add the incremental air freight, is that a function of just trying to make sure you have the product to meet the demand? Is it incremental bottlenecks that you're seeing in Vietnam or in China. And I guess, is the expectation Just in the coming quarter or if you maybe can just give us an idea in terms of how long do you expect the incremental Pressures on the margin from the incremental airfreight? Thanks.

Speaker 3

Yes. I mean, certainly, What we're dealing with there, what we've said, I think the posture we've taken here is that the business is strong from a demand standpoint We're going to ensure that we can satisfy that demand in the most optimal way. So we're certainly looking where it makes sense. We're going to Stand against airfreight and other expedited freight avenues to ensure we do that. We're seeing certainly some delays In the supply chain, I will tell you, for us, it's generally weeks and certainly not months, but we are seeing some delays in the supply Given the environment in Southeast Asia in particular, fortunately, by and large, most of our factory base is Operational, that's not 100%, but most of it is operational, and where it's not.

Speaker 3

Obviously, we're working really hard To understand what those impacts will be and I think again as I said earlier, we anticipate maybe some sub optimization from a flow standpoint at the beginning of the season, but We certainly expect as we move through the season, we're going to be able to support the business and ultimately deliver things for fall holiday.

Speaker 2

Maybe to pile on here, Bob. I think as we look at strategically using airfreight and other Expedited forms of moving our goods, we see an opportunity to capture share, because we do think In some cases, because of our factory partners, their current operational Capabilities, certainly not operating at full capacity, but at sufficient capacity. We think we have the opportunity to be in a position to grab share with some of our large brands, certainly with our own distribution, our own D2C and e commerce, but There's opportunities to work with our key wholesale partners and advantage their position as well.

Speaker 10

And Steve, if I could just hop on that. And are you saying that you've taken additional orders because you feel like you can meet the demand? Or Are you still working with your original order books across the various brands? Just trying to understand the dynamics.

Speaker 2

Yes. So job 1 is to really fill the initial order demand. We did see additional Demand come in to our fall order books. That's reflected in our outlook. And within that, There is some additional goods to service upside demand.

Speaker 2

You know us well, it's not going to be An exceptional amount, but we are really playing to win because we see an opportunity here to recapture share and advantage at Leased our largest brands, but really looking across our whole portfolio, because of the strength and capability of our supply chain teams. It's not going to be easy. I mean, this is a very difficult environment. We're not the only ones to talk about that. But this is where our teams really come to life.

Speaker 2

This is where BF is built To compete in this kind of environment, and we feel very confident about our ability in those things that we can control To supply the demand and airfreight, expedited freight is a critical part of our being able to do that.

Speaker 3

Thank

Operator

you. Thank you. Our next question is coming from Jonathan Komp from Robert W. Baird. Your line is now live.

Speaker 11

Yeah, great. Thank you. Just maybe one clarification first. Thinking about the D2C outlook, I know you raised the full year target, but Are you assuming the trend you're seeing currently for Vans does not continue? Is that the message?

Speaker 11

And I guess globally for D2C, have you reflected the more positive order book indications into how you're thinking about your own D2C business?

Speaker 3

Yes. I think from a D2C perspective, what we've done is certainly we've sort of banked what we saw in Q1, and we've begun to uplift our D2C projections, In particular in Q2, in particular in the Vans business, and in particular in Vans Americas. So, I mean, that's a statement that's true across The majority of the direct to consumer business, we're reflecting some of those trends, but it's most significant in that Vans business. So we are doing that. I think just to the point we had in the last question, what we have done, we haven't we've been pretty cautious still in our assumptions from a revenue perspective in the back half of the year.

Speaker 3

We haven't really changed those just to be frank. So what we have done in particular in Vans, and this is the point that Steve was making, we are leaning in a little bit from an inventory perspective to create Some additional capacity there for upside, whether that be in our own stores or potentially even in terms of wholesale reorders. So We're beginning to lean in a little more aggressively from an inventory posture standpoint in Vans in particular and to some degree in our Dickies business as well.

Speaker 11

Okay. That's really helpful. Thank you. And Steve, if I could follow-up one more question on vans. I'd be curious any learnings you have from The newer approach in the recent months with the product drops and the incremental marketing attention, you've been Focusing on Vans, any learnings from that?

Speaker 11

And then how should we think about your plans in those areas going forward?

Speaker 2

Yes. No, thank you for that question. This is an exciting development for Vans. It's something They pivoted and moved on very quickly. Just remind everybody this idea of a 52 week drop model was to really think and act like a true retail operator and bring a more predictable, A more visible understanding of the product flow and use this to create brand heat.

Speaker 2

And we've seen that play out extremely well. We're only about 7 weeks in. They're learning every week about just how to really manage the offer for the week, how to marry the content and the storytelling, channels of distribution versus very select, Vault type products. But the point here is they're providing visibility And they're giving visibility in enough time for consumers to learn about it, build the excitement and that frenzy Demand that we've seen really reflect itself in some of the key collections that have dropped this year, bodega From a specialty vault collection to the broad based SpongeBob SquarePants, and most recently the Metallica drop, What you're going to see us do or our Vans team do as they get just refining the model, They'll start to publish the drop list and we think that's something that will be possible by Q3. So they'll give the consumer Visibility of what's coming and begin to allow themselves to be positioned to capture The product, if it's a limited drop or be in the queue, if it's a broader based drop.

Speaker 2

So I think this is just a really thoughtful Evolution to what was already a well designed go to market model, but this is about driving brand heat And increasing consumer demand and ultimately consumer loyalty.

Speaker 11

Yes, that sounds very innovative for a brand like Vans. Thank you very much.

Speaker 2

You bet. Thank you. Thank you. We have reached the

Operator

end of our question and answer session. I'd like to turn the floor back over to management for any further or closing

Speaker 2

Great. So just real quick, thank you everybody for taking the time to join us this morning. I would just tell you We couldn't be prouder of our teams who helped deliver an outstanding quarter. We continue to work hard to meet the demand And to be able to power back to pre pandemic revenue levels, slightly ahead of where we thought we would and to see that earnings recovery It's just a validation of our model. The growth is broad based across brands, regions and channels.

Speaker 2

Despite continued COVID related impacts that we're seeing both from a consumer standpoint, but also back through our supply chain. We're going to remain very focused on the things that we can control, and we're going to drive against those parts The business where the consumer is coming back strong and continue to drive towards delivering A year that is stronger than what we originally committed to and meets your expectations, but ultimately drive the value for our shareholders that you expect.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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