VF (NYSE:VFC) held its fourth-quarter earnings conference call on Wednesday. Below is the complete transcript from the call.

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Summary

VF Corp reported normalized growth trends with Q1 seeing specific impacts due to timing shifts, but overall positive demand for brands like North Face.

Mitigating strategies are in place to handle potential product cost increases due to oil prices, with minimal impact expected for fiscal 27.

The company is aiming for a 10% operating margin run rate by the end of fiscal 28, with ongoing efforts to improve efficiency and reduce leverage.

Vans is showing signs of recovery in the Americas, with strategic product launches and marketing shifts contributing to growth.

Timberland wholesale declined due to reduced distressed sales, but overall inventory health is improving, with continued marketing investments planned.

Full Transcript

Laurent

Super helpful. Thank you very much. Very clear. Best of luck.

OPERATOR

Thanks, Laurent. Your next question comes from the line of Brooke Roach with Goldman Sachs. Your line is open. Please go ahead.

Brooke Roach (Equity Analyst)

Good morning and thank you for taking our question. In the prepared remarks you talked a little bit about some of the drivers of product costs as a result of some of these higher oil prices that will be flowing through the P&L. You mentioned several mitigating factors including pricing. Can you unpack for us a little bit more what the annualized headwind will be when it gets fully into your inventory cost and how much pricing actions you are contemplating both this year and into next year as a result of these inflationary factors, whether it is oil costs or tariffs or other factors in the environment. Thank you. Great. And then just a follow up. Can you unpack the trends that you are seeing in EMEA? What assumptions are you embedding for Western Europe beyond the 100basis points related to the Middle East? Are you seeing any change in demand in that region for any of your brands? Great. Thanks so much. Best of luck.

OPERATOR

Your next question comes from the line of Ike Burechow with Wells Fargo. Your line is open. Please go ahead.

Ike Burechow (Equity Analyst)

Hey guys, can you, can you hear me? Perfectly. Excellent.

Bracken

Hey, Bracken.

Paul

Clarification and a question I think for Paul. The, the refund benefit you saw in the first quarter, should we basically be modeling that as a negative impact? 50 million in the fourth quarter of next year. I'm assuming we should. I just want to kind of make sure that that's the case. It's not really a bad guy. So if you really, if you think about it, so the, the, so the full, if you think about the full year at the full year basically assumes that we didn't have to pay the tariffs. We, we took a receivable to account for that which all hit in Q4. So we tried to normalize for Q4. So just as a level set like this, the, the operating margin, the 7% operating margin in fiscal 26 is a good clean margin. I wouldn't think about the benefit. Is it a benefit in Q4? I think more a function of if the tariffs are put back in place at the end of July and if we're back in an environment where, where we're having to overcome the tariffs, it will impact the back half of the year. That was the 70 to 80 million or so that I mentioned earlier in terms of the, the incremental impact we would see in the back half of the year. So it's not really, oh, we had a benefit. We didn't because it's not really a 'benefit'. It's just we had been assuming we're going to have to pay something. We didn't. So there's no impact really at all. We have a clean 7% margin in 26. But next year we will potentially have to face increasing tariffs. If the, if the July announcement goes through and then we have higher top tariffs, it will make Q4 tougher. Compare. But it's not really like for, like, it's more that we will potentially have, you know, tariffs back in the mix for Q4 of next year. I'm sorry.

Ike Burechow (Equity Analyst)

Got it. Okay, that's helpful. And then as a follow up on. On the fiscal 28 margins, I know what the analysts say. I believe you're. I believe you guys said you were committed to achieving a margin of at least 10% in fiscal 28. I think now you're saying it's a run rate. I know there's noise, tariffs, and other factors, so that's understandable. But can you just elaborate what 'run rate' means? You know, that could mean a lot of things. Is there any more clarity you could kind of give us into what your expectation is for the annual margin in 28?

Bracken

Yeah, let me be crystal clear. So when we gave that, we said in fiscal 28, we would deliver 10%, what we meant was a run rate. And we then got a lot of feedback. Very understandable. Like, so you mean for the full year? And we said, no, we didn't mean for the full year. We never intended that to be the full year. The idea was that during the year of fiscal 28, we'd reached that. That point where we'd be a 10% margin business. So we described that a couple of quarters ago. We tried to reiterate that to everybody, that it's. So we use the term exit rate so you can count on as an exit rate fiscal year. As we exit fiscal year 28, we've got a 10% operating margin run rate. So the other way we could have said it, maybe we should have said it is full fiscal 29, you can count on 10% or better. So during fiscal 28, we'll hit 10% sometime during that year, and we have now committed to a 10% exit rate. Is that clear enough?

Ike Burechow (Equity Analyst)

Yeah. I appreciate it. Thanks, Bragan.

Bracken

Great. Thank you. Thank you.

OPERATOR

Thanks for asking that. We were hoping we'd get that. If you hadn't, Abhishek was gonna ask Paul.

Abhishek

My pleasure.

OPERATOR

Okay. And a kind reminder. If you would like to ask a question, please raise your hand using the raise hand function at the bottom of your screen. And if you have dialed into today's call. Please press Star 9 to raise your hand. Your next question comes from the line of JSOL with ubs. Your line is open. Please go ahead. A kind reminder to mute yourself, unmute yourself locally.

Jay

Got it. Can everybody hear me now?

OPERATOR

We can hear you perfectly.

Jay

Super braggin. Thank you so much. I just want to ask about the free cash flow guidance for the year. You know, maybe can you elaborate on what 'flat to up' means and then what are you comparing it to? Because it looks like in the slide deck you're comparing it to 405 million for this year. How do we think about the pension expense and the pension termination cash benefits from this year? Are you excluding those from that number? If you could maybe just define the fiscal 26 number, what's in there and then tell us how you think about free cash flow in 27 in a little bit more detail, that'd be great. Thank you.

Bob

Yeah, sure. So yes, so the pension benefit was when we terminate the pension there was a cash benefit of about $100 million. So our free cash flow including that is 505 on a normalized basis we obviously don't expect that that was a one time thing. We won't get that every year. It's real cash in the door. But so on a normalized basis it's, you know, 405 million is our free cash flow now that's up 90 million versus last year. And so again we had said all along that that we would have free cash flow in fiscal 26 that would be flat to up versus you know, last year and we obviously delivered 90 million more than that. So the base rate, the base number we're talking about is the 405. So it's excluding the pension, it's four or five. And then we said it'd be free cash flow will be flat to up this year. Again the biggest variable there is we are upping our capex spend this year, which I mentioned, we're investing about 100 million more this year in capex than last year. A lot of that is going to investment. Some of that as we talked about is on the growth in timberland and the full price stores that were we're growing in timberland. So even with that increased investment we still believe that we will have free cash flow that is equal to or better than last year. We're going to continue to delever. So as we said, we finished this year 3.1 times. It's a full turn better than last year. We'll get below three times this year. So between 2.6 and 2.9 is what we said. We're still on track to be at 2.5 or better in fiscal 28. So everything is on track. And given the fact that everything's on track and that we actually had an even better improvement in our, in our leverage ratio for, for, for fiscal 25 or fiscal 26, sorry, fiscal 26, that we, we are giving ourselves the ability to invest even more particularly on the, on the store side in fiscal 27. So hopefully that was clear.

Jay

It was. Bob, thank you so much.

Bob

Yep, great.

OPERATOR

Your next question comes from the line of Samuel Poser with Williams Trading. Your line is open. Please go ahead.

Samuel Poser (Equity Analyst)

Hi Sam, good morning. Thank you for taking my questions. I have a handful here. One the 53rd week in fiscal 27, I assume that that will be gross margin accretive because most of that additional business comes from DTC. The wholesale part of that small. Would that be a fair assumption?

Paul

I mean it's small. We haven't really quantified it. I mean your logic is definitely sound, but it's pretty small. And then just while you're on the 53rd week, just to be clear, we said it'd be on a revenue side about at about a half a point to growth overall. So that is helpful because it somewhat mitigates the point or so impact we see from, from EMEA, from the, the conflicts over in the Middle East.

Samuel Poser (Equity Analyst)

Gotcha. And then in, in the north face, how long will it take to double and then with vans how you talked about the speed to market given some of the strength of some of the new shoes, how like if, like when could a wholesale partner write an order for right now and expect to get some deliveries. And lastly on the, there's a new Authentic called the Authentic Kick Down which apparently isn't on website but is being sold through some, some like urban and free people. I'm wondering just the strategy there because you know you talk about your DTC but that's a shoe that appears to be doing decently but isn't showing up on your website. So that's just a lot of questions, a lot of stuff I want to understand.

Bracken

Sure, sure, sure. Absolutely Sam. So first on the doubling of DNF, we're not committing to a time frame but we're very optimistic about it. I do think at some point because we're really laying a lot of groundwork right now to grow across multiple categories around the world, we're really putting the next phase of planning in to drive that long term sustainable Growth. The growth is expected to start accelerating. Now, we're not committing to that and we are not doing it today. But at some point, maybe an investor day, we'll lay kind of a timeline out for that in terms of vans. And can you place an order today? Absolutely, they can. You know how, you know as well as anybody, maybe better than anybody else on this call how how wholesale works. They can play. Absolutely. Place orders today. They've also got product and they're currently in their stores. So it's a. It's a process of one by one by one. And we were just, we were just at a cookout last night with our wholesalers. Four vans, as a matter of fact. And there's a lot of optimism out there. But this is going to take time. You got to keep the momentum going. We've also got to prove to them, as you know, from being a former buyer, we got to prove to them these things are selling. I think they're now seeing it. So the optimism starting now, it's got to turn into order.

Samuel Poser (Equity Analyst)

My question was, if I wrote an order today, could I get it in three months or would it still take six, considering the speed situation?

Abhishek

Let me take that, Sam, because you actually ask a really good question, which is one of the big unlocks we actually execute on last year. So we had a lot of success with Super Low Pro on Vans as well, and that was a great example where we actually saw the initial buys, we saw the momentum in the product. We actually chased down and got the product back on the floor in exactly 77 days. So we did demonstrate that we have the capability, the capacity and the partners on the supply chain side to accelerate any product chase if it's on the same silhouette and the same, you know, with the variation of fabrication and color and material. So that's good news. You know, on your question around wholesale, if we do get the order, we feel very confident that we can meet it. And that's what the team are in the works for in terms of looking at their open to buy and really figuring out what, where we can actually drive. Your last question that you had around, you know, a particular style available only in the wholesale partner. Now, this is the kind of, you know, another shift in mindset that we are seeing at vfx that we are constantly going to be testing different ideas and scaling them pretty fast. Like one of the ideas could be that do we actually take a particular style, a particular silhouette? Test that in wholesale first. Take that in DTC stores first. Take that in online first. So this was one of the examples. I'm glad you observed it. Which is where we are testing that. What if we actually kind of push a certain style more at a rapid speed in wholesale partner first. See the velocity there, see the sell through there, and then replicate that across the other channels.

Samuel Poser (Equity Analyst)

Thank you.

Abhishek

Thank you, Sam.

OPERATOR

A kind reminder to limit yourself to one question per person. If you'd like to ask a question, please raise your hand. If you've dialed into today's call, please press Star nine. Your next question comes from the line of Anna Andreeva with Piper Sandler. Your line is open. Please go ahead.

Anna Andreeva (Equity Analyst)

Great. Thank you so much. Can you guys hear me?

Abhishek

Yes, we can.

Anna Andreeva (Equity Analyst)

Terrific. Yeah, thank you for all the color this morning. Very helpful. We wanted to follow up on Timberland. I think you mentioned wholesale declined on lower distressed sales in the fourth quarter. What was that amount? And is that dynamic continuing into fiscal 27? Just any color on that would be great. And then secondly, you talked about marketing and moving towards the upper funnel across the brands, which makes a lot of sense. Just what was your marketing as percentage of sales for the year and how should we think about that for 27?

Bracken

Yeah. Just to answer your question, of course. So we're investing, I would say, pretty strongly in marketing. So we are at about 8.6% for fiscal year 26, and our game plan is to continue to invest pretty strongly in marketing. I do think there's somewhere in the future where we can bring that down a little bit, or we're probably at the high end of the upper quartile of the industry right there. But given where we are and what we're seeing from a responsiveness standpoint, we'll probably stay in that range for a while, but we'll eventually bring it down.

Anna Andreeva (Equity Analyst)

Okay, fair enough. Thank you so much. Best of luck.

Bracken

Thank you.

OPERATOR

Your next question comes from the line of Lorraine Hutchinson Wood bank of America. Your line is open. Please go ahead. A kind reminder to unmute yourself locally. If you've dialed in, please press Star six to unmute. Hi, everybody. Good morning. I was hoping that you could just help talk through a little bit of

Lorraine Hutchinson

the strategies you've used to turn Vans

Bracken

America to really move that around the world. We got part of your question, but let me try to restate it and see if I got it right. Just say yes. You want to understand a little bit of the Vans strategies that have driven the turnaround in the DTC in the Americas and ultimately presumably that will move around the world, correct? Yeah. So it's, it's pretty much what we've, we have been laying out from, you know, from two years ago. It comes back to product marketing and in this case, really good, great commercial execution. So the product is coming. You've seen a lot of new product from us if you're not already, and I'm sure most of you are. If you're not following us in all the social media feeds, you should. You'll get a lot of color on what we're doing and you'll see just the range of things we're doing and the excitement around them. You know, I'm sitting on, literally, I just wanted to, I was going to bring this out for those of you who are looking at the video, but this shoe we just launched, you know, we had lines in front of stores and all the places we sold it, we actually had fights in front of a couple of them, which we're not proud of. But generating that kind of heat for some of the collaborations that are harder to get, and then bringing those same attributes like the pearlized down into more available, more affordable shoes that you can buy almost everywhere is really part of our game plan. So we're doing that and we've got really, really great product out and coming. The second thing we're doing is, you know, we're really trying to make sure that our marketing is, you mentioned upper funnel, lower funnel. We're really doing a lot on both ends of that spectrum. You know, we're trying to make sure our low funnel marketing is really strong in brand building too. And so we're. You've probably seen the character of our marketing change some. It used to be a lot of skateboarders and now it's a lot more about California lifestyle, some skateboarding and some just off the wall stuff. You know, we have a new campaign on off the wall, but generally speaking, we are trying more and more. You'll see us tie it directly to individual silhouettes and products because we want to make sure it really converts into sales. The third thing we're doing is really great commercial execution. You know, I think, you know, hats off to Brent Heider who's taken over, took over the Americas now is now running our global commercial team. He's really done a super job of raising the caliber of play there and he's got a fantastic team under him, including Jacques and so many others that have really raised the execution level in our stores and in our e commerce execution. You know, Abhishek, who's sitting next to me, his team did a great job of building websites that are more responsive. They look better, they feel better, they sell better. So just all the elements that you would expect us to be doing, I think we're really doing in the dtc and that's going to make its way around the world and into wholesale over time. Thank you, Lorraine.

OPERATOR

The last question for today will come from the line of Blake, Anderson, Wood, Jeffries. Your line is open. Please go ahead.

Blake Anderson

Good morning. Thanks for taking my question. You answered most of them. I just wanted to ask Bracken first on vans. Would be interested to hear how the customer base is evolving kind of versus your expectations over the last year. Can we talk about the growth of new customers versus existing and are there a lot of loyal vans customers out there? Anything on retention rates and how the younger female demographic is trending? I know you guys have mentioned that as a key segment as well.

Bracken

Yeah, I'll give you a little color, but I'm going to go a little deep on parts of this. I'd say the most important thing to point out is that the customer base is predominantly men. I think when we came out of the gate, we really felt like we had a lot of opportunity in women, and we had a lot of opportunity and we have a lot of products out and more coming that are going to appeal to women. We've really doubled down on men, and it's in our DTC in the Americas and it seems to really be working and we're going to keep that up. And now we're also doing a lot more than that. We think there is a big opportunity now. We're also focusing on a couple of different segments. And I won't bore you with our segmentation strategy, but let me just say they tend to be kind of the people that you tend to notice if you walk down the street. You know, they're the ones who look a little cooler, seem like they're on the edge of a trend, and we have different segments to go after it now. That said, we have also expanded our marketing footprint a little bit because we have a lot of lapsed users and even older users who love the brand. And just we kind of fell out of Favor with. So we have broadened our media buys a little bit so that we're reaching even some of these older people, as old as people like me, who love vans and want to buy like the latest stuff that's coming out. So we have a very clear, specific targets, very narrow. But we're opening the aperture a little bit to make sure that our awareness is staying up among a broader group that really wants to buy. And that seems to be working.

Blake Anderson

That's really helpful. If I could ask one more, I was curious, Paul and Abhishek on SGA and cogs. I know there's, you know, big initiatives to generate savings there. Can you quantify at all how much you're taking in savings this year versus last year? Just was curious, you know, directionally, if you can talk anything about, you know, how much you're able to generate, excluding revenue, just taking costs out of the business this year versus last year.

Abhishek

You want to take that? Yeah, I mean, we're not overly specific other than to say, well, a. What, what, what Abhishek had already said. Right. So we have removed 225 million on a run rate basis, you know, some that's been offset by inflation and then specific and decisive investment decisions. We will get estimated leverage this year, but we're not going to specifically talk about the overall numbers other than say, you know, to get to the 8% operating margin on call, the 1 to 2% revenue growth. We're going to see both gross margin expansion and some leverage on the SGA side.

Paul

Yeah. And the only thing I would add is like, you know, I want to underscore the point that I made on the gross margin. We did expand 350 basis points, you know, 360 basis points, but 100 of that was actually through the Dickey's divestiture. So we do see the composition of that 10%, you know, that Bracken mentioned for the full year, FY29 and beyond, you know, could be a little bit of a different mix than what we said earlier between gross margin and sgna, but we see definite opportunities both in gross margin dollars as well as in SGNA dollars going forward.

Blake Anderson

Thanks so much and best of luck for the year.

Bracken

Thank you. Okay, I think that was the last question. The sun is up and very bright here as it often is in California at this time of the day. Just to close, you know, we return to full year growth in fiscal year 26 and we expect to keep growing in fiscal year 27. We're going to continue to expand our margins and continue to reduce our leverage. So all the things that we've been doing, we are going to keep doing more and we're going in the right direction. We'll see more of this, more improvement. The North Face and Timberland are growing. We're seeing tangible signs of momentum advance led by America's dtc. If you didn't get that from that call, we said it many times because we feel so strongly about it. We're growing for the first time in over four years in America's dtc, we're on track to achieve our medium term targets. An exit run rate of 10%, operating margin of fiscal 28 and a leverage ratio of two and a half times or lower by fiscal year 28. So this has been a very strong year for VF and I am super excited about the momentum we have and that we're building for the future. So thanks everyone for the call. Thanks for all the questions and we'll see all of you, many of you around the world as we do investor meetings and things. The quarter ahead. Thank you everyone. Thank you. And thanks two of you. Thank you.

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