Matt Puckett
Executive Vice President and Chief Financial Officer at V.F.
Thank you, Bracken, and welcome to VF. Your impressive track-record and strong background in innovation and design brings a new dimension to leading VF and reinforces my confidence as we turn the page to our next dynamic chapter. I also wanted to extend our gratitude to Benno, who's been an instrumental in laying a solid foundation for VF's return to strong, sustainable and profitable growth by refocusing our efforts towards the consumer and by taking aggressive actions to strengthen the business operationally and financially, and personally, a great partner to me. We are fortunate to have him continuing as a valued member of the VF Board. I am more confident than ever that with Bracken is our newly leader, VF has everything it takes to succeed in the future.
Before I get into the business and financial results, let me give you an update on our two most important near-term priorities that we've been highlighting in recent quarters: the supply chain and Vans. First, in the supply chain, where we saw further progress during the quarter, with industry conditions continue to improve and our own actions to address execution yielded results. Lead times ended the quarter at normalized levels, while our on-time performance, and in-stock percentages were both back in line with our targets. We are appreciative of the quick and aggressive actions taken by the supply chain and brand teams to position us to now consistently meet our customers' expectations and maximize on the opportunities that present themselves in the season.
Next, Vans, which was down 22% in the quarter and was disproportionately impacted by the brand's wholesale business in the Americas, which was down 40% as anticipated. This includes intentional actions we've taken to rightsize inventory in advance of the important back-to-school season. We were encouraged by the results in China and in the digital business, which are both meaningfully improved relative to the prior quarter's trend versus last year. While the brand's overall performance was largely anticipated, if not where we should be, we remain intently focused on the actions to turn around the brand.
Now, an update on the key focus areas of product, consumer and go-to-market. First and foremost, product. We're increasing our level of investment to create new relevant products that excite consumers while developing existing franchises that are working well. UltraRange and MTE silhouettes continue to outperform, growing 13% and 39% in the quarter respectively, with newer lines including new school and Lowland, all generating strong sell-throughs. The soft launch of the Pinnacle range, OTW, during Paris Fashion Week in June created excitement and energy, laying the groundwork for the full launch in early 2024.
Another key focus area we've shared previously is an opportunity to better understand and integrate the consumer into our decision-making. Our significant global segmentation refresh is on track. And in the meantime, our Vans family membership keeps growing, now approaching 29 million members, adding one million members in Q1 and more than doubling in two years.
We continue to improve the Vans go-to-market activities. Our initiatives to sharpen our focus around fewer key products and story are well underway and are benefiting the quality and productivity of our store assortments, with our in-stores SKU reduction actions expected to be fully completed in August. We'll also be launching our redesign Vans.com platform in time for the Holiday season. Vans is a great brand, and we're confident in its enduring strength and importantly the energy and intensity that this leadership team is bringing to the effort every day.
Now, turning to a review of the quarter. Q1, our smallest quarter in facing the toughest prior year compare, came in line with our expectations, both on the top- and bottom-lines. That said, overall, our performance was not up to the standard we expect to achieve. Revenue was down 8%, in line with guidance, as wholesale particularly pressured the topline in the U.S. On a two-year basis, revenue was about flat.
Let me first unpack the performance by region. Revenue in the Americas region was down 15% in the quarter, primarily due to the wholesale channel pressures we outlined in May. These had an impact across most of the portfolio and, in particular, at Vans and Dickies. The quarter's results were impacted by the rightsizing of inventories across the channel and the implications of our poor customer service from last fall. Our business in EMEA, which as you know, has grown consistently and strongly also saw softer trends in the quarter, with revenue in the region down 3% in Q1, driven by high-single-digit decline in wholesale, as retailers grew more cautious. Our direct-to-consumer business was up mid single-digits in the quarter, a sign of resilient consumer demand for our brands and evidence of our continued strong execution of integrated go-to-market strategies.
Last, we continue to see growing momentum in the APAC region, with revenue up 18%. All channels grew by double-digits in the region, with DTC fueled by brick-and-mortar traffic growth. Greater China saw further acceleration of 31% and benefited from the comparison to the prior year lockdown impacts. The North Face continues to be the key driver of our performance and was up more than 50% in Greater China, benefiting from outdoor market tailwinds and recovery in domestic travel.
Now let me complete the picture of the brands' performance, starting with North Face, where revenue was up 12% in the quarter against the tough prior year compare of plus 37% and driven by broad-based growth across products, channels and regions. Globally, high-demand for our Icons, as an example, the base camp duffel as well as the Voyager packs line generated very strong performance, aided by the summer travel season. Our lifestyle product, the urban exploration line and our rainwear also saw good momentum. Growth was led by DTC, driven by digital as the brand's product innovation and sharp execution resonated with consumers.
Timberland was down 6% in the quarter, in line with our expectations. The brand was up against a tougher prior year compare and results were impacted by wholesale in the Americas as partners continue to reduce inventory levels. Results were positive in the other two regions. Globally, product innovation is resonating as the new hiking silhouette Motion 6 delivered outsized sell-through performance and we made good progress on women's, with strong growth in sandals and apparel for her.
Dickies' results were disappointing and significantly challenged during the quarter, down 19%, as the work segment continues to be impacted by a weaker value in consumer, primarily in the U.S. Soft results in the Americas and APAC were partially offset by continued growth in Europe. Importantly, we have made progress on rightsizing inventory levels in the channel.
Moving down the P&L. Q1 gross margin was down 130 basis points. As expected, business mix remained a positive contributor to margins in the quarter, up 80 basis points, driven primarily by DTC and international growth. Rate was down 200 basis points, more than offsetting mix benefits, reflecting: the ongoing impact of higher promotions, it's worth noting the negative impact is about one-third of what it was over the previous two quarters; also, higher product costs, which are moderating and which were partially offset by strategic pricing actions; and finally, negative currency impacts.
Adjusted operating margin was down 380 basis points, reflecting the impact of the lower gross margin and SG&A deleverage. SG&A declined versus last year by 3% in constant dollars, which exhibits our focus on reducing costs and managing the P&L in times when the revenue line is under pressure. SG&A deleveraged 250 basis points in the quarter, reflecting DTC and other fixed-cost deleverage in addition to the impact of continued strategic investments in technology, marketing and distribution. Q1 loss per share was $0.15, also impacted by elevated interest expense and a modestly negative impact from tax.
Turning to the balance sheet and cash flow. I'll start with inventory, where we saw further sequential progress in improving the overall health of our inventory position, ending the quarter slightly ahead of our plan, with inventories up 19% versus last year compared to organic growth of up 46% at the end of the fiscal year and up 75% a quarter before that. The increase in inventory now represents the true organic comparison as we fully lapped the impact of the supply chain financing program implemented in Q1 of fiscal '23. Inventory composition remains primarily core, carryover and replenishment, which has a higher likelihood of being sold at full-price or with a minimal markdown.
Cash from operations, which, as a reminder, is also benefiting from the extension of payment terms as part of the supply chain financing program, was $164 million in the quarter. We ended the quarter with roughly $3 billion in liquidity, in line with our plan and about flat to the end of the fiscal year, with free cash flow of $79 million, in essence, offset by the dividend payment of $117 million.
As it relates to the outlook, before I unpack the numbers, let me give you a little context for how we see the balance of the year evolving. We see several areas of strength worth calling out, which give us confidence as we look forward. The North Face is maintaining strong momentum and we expect this to continue, with investments being made to further fuel this growth. Our China business is gaining momentum and we believe our brands have significant growth opportunities in this market, where we are underpenetrated. Certainly, the outdoor and travel part of the market continues to be strong and The North Face, as the Number 1 international outdoor brand in China, is driving and benefiting from that trend. Our DTC trends in EMEA remain strong and in fact comp growth has accelerated in June and July. Finally, we are seeing an improved performance in the supply chain, which will allow us to deliver the planned cash flow benefit from reducing inventories and capitalize on revenue opportunities as they present themselves through the balance of the year.
However, we continue to face a few meaningful headwinds. Vans performance remains difficult as work to turn around the brand continues with a great deal of urgency. Our wholesale business, particularly in the U.S., remains challenging as our key partners maintain a more cautious stance on forward orders. And the work segment of the Dickies business has remained softer for longer than we anticipated. It's still early in the year and our teams across the business are working diligently to maximize the opportunities our brands have to deliver compelling experiences and products to consumers across channels. And we have great confidence that we'll see progressively improving results.
Now, moving on to the specifics of our updated outlook. We are revising our full-year revenue expectations to be modestly down to flat as we take a more conservative posture on the balance of the year. The reason for the change in revenue outlook is based primarily on wholesale. Despite the progress made in lowering inventory levels, our wholesale business remains pressured. While our sell-out trends are evolving favorably, in the outdoor segment in particular, sell-in has challenged across the segments. Through the balance of the year, our order books have evolved a little more muted than previously anticipated in both the U.S. and Europe and reflect the continued cautious posture for many of our partners. This does affect the brands across the portfolio and it's steered disproportionately to Vans. As a result, we now expect wholesale across VF to be down mid- to high-single-digits for the year, with most of that pressure coming in our Americas business and to a lesser extent in Europe. Alongside that, however, we are encouraged by the trends in our GSD [Phonetic] business, and we continue to expect growth in this channel during the year including in the U.S.
Overall for VF, we continue to expect a better second-half revenue performance relative to the first-half, reflecting an improving wholesale performance, moderating declines at Vans and easing prior year compares as we move through the back part of the year, considering the challenges we faced last year and our own poor execution, which muted our performance. We are maintaining our EPS guidance range of $2.05 to $2.25 for the year. As a reminder, this includes a higher-level of interest and a higher tax rate. It's worth highlighting the underlying operating earnings are anticipated to grow faster than EPS. We achieved our earnings targeting Q1 and highlight that we have a number of levers across margins and spending to protect profitability. We continue to appropriately manage our costs and inventory position in order to protect the P&L and the balance sheet.
We are increasingly confident in our ability to deliver higher gross margins. The year ago period will benefit from moderating promotions as we lapped last year's impacts, clear visibility to easing product costs including freight and increasingly favorable mix, reflecting the outperformance and strength of our DTC and international businesses. This guidance takes into account our continued commitment to, first, investing in key capabilities, where we continue to see opportunities to fuel organic growth and focus on areas that create value for our customers and consumers. Let me give you some examples. Product innovation and demand creation at The North Face, with the higher spend as a percent of revenue. The opening of the Ontario, California distribution center, the most highly automated facility that will allow us to more efficiently service orders and which will generate cost savings over time at full-scale. The enhancement of our consumer-facing digital ecosystem with the launch of an updated digital platform in the U.S. to which most of our brands have now migrated.
Second, we continue to reduce cost aggressively, where it's not adding value for the consumer. And some examples here include stopping technology spending that is not consumer-facing or impacting; aggressively optimizing our distribution capacity, considering reduced unit sales volumes; and pausing discretionary spending, as an example, open roles that are not critical to revenue-driving activities and bringing building strategies.
Now, let me give you a couple of updates on the drivers of cash flow. We continue to expect free cash flow in line with our plan, driven both by growth in cash earnings and a reduction in working capital, primarily from activities to reduce inventory levels and recognizing the full benefit of revised payment terms with our product suppliers as we migrate through fiscal year '24. Importantly, we expect inventory to be near to normalized levels by the end of this calendar year, and down at least 10% year-over-year at the end of the fiscal year, which would equate to a reduction of about $250 million. We're maintaining tight control and discipline on all capital spending. And in light of business conditions, we paused lower priority projects.
Moving on to debt. We remain laser-focused on reducing our leverage. While we have ample liquidity and financial flexibility to pursue our key priorities, our Number 1 financial objective is to return VF to our historical balance sheet strength. Accordingly, we will use any excess free cash flow to reduce debt, so you could be sure that any strategic decision we're making is through this plan. We expect to end this fiscal year with gross leverage of about 4 times and we'll continue to make progress on the path to moving toward our target of 2.5 times.
Now, you may have noticed I haven't talked a lot about the macro environment in my comments. We remain intently focused on our own issues and on what we can control, and so much of what we have to do relies on fixing those issues. At the same time, we're not oblivious to the external conditions and they do inform our near-term tactics and strategies. The environment itself remains difficult and volatile. We recognize that many consumers are filling impacts to their disposable income and are continuing to deal with inflation facing higher interest rates, and in the U.S., the upcoming end to the student loan pulse.
In summary, for fiscal year '24, we are slightly more cautious on the evolution of revenue, but remain confident we will deliver increasing operating earnings through improved gross margins and strong cash flow, together enabling us to achieve our debt reduction target, all leading to a strengthened financial position.
Finally, I'll give you an update on the Timberland tax case. The latest development being that oral arguments occurred last week, which was sooner than we anticipated. This advanced timeline indicates the First Circuit Appeals court could issue an opinion as early as the next few months. We previously expected the decision could occur within this fiscal year, and in light of the pace at which the oral arguments preceded, it's now increasingly evident that this will be the case. We continue to believe the timing and treatment of income inclusion at issue is appropriate.
Looking ahead of the future, we are confident that we have all the right ingredients to succeed and to return to our standard of delivering superior shareholder returns, driven by strong, sustainable and profitable growth. We have a portfolio of world-renowned and beloved brands, which are well-positioned in big and growing spaces that continue to benefit from macro consumer tailwinds. We've taken significant actions to strengthen our business operationally and financially. I'm confident these initiatives will yield tangible benefits. We continue to work to drive improved product margins, including better go-to-market efficiencies, product cost optimization and strategic pricing actions. These near- and medium-term actions, combined with the ongoing focus to drive down costs, which are not consumer-facing, will support an expanding margin profile over time. We remain committed to our purpose, which is at the heart of everything we do, we will continue to remain central to our culture and to our strategy. Our team of passionate highly-skilled and deeply committed associates continues to be a key asset to unlocking our full potential.
In closing, we can and we will better harness the power and strength of VF, while continuing to focus on sharpening execution, optimizing earnings and cash flow and strengthening the balance sheet, all of which will enable us to begin to fulfill its full potential this year and beyond.
With that, I will now be joined by several members of the team to answer your questions. Martino Scabbia Guerrini, who runs our business in EMEA and APAC and in the emerging brands, and our brand leaders from Vans, The North Face, Timberland, Supreme, Kevin Bailey, Nicole Otto and Susie Mulder. We'll now open the line and take your questions.
