V.F. - Earnings Call - Q3 2025

Executive Summary

• VF delivered a clean beat vs its own guidance: revenue of $2.83B (+2% YoY) vs guided $2.7–$2.75B and adjusted operating income of $324M vs $170–$200M, with adjusted EPS $0.62 (vs $0.45 LY) and gross margin at 56.3% (+150 bps YoY on lower product costs/promotions).
• Brand performance diverged: The North Face grew +5% and Timberland +11%, while Vans declined 9% but improved sequentially; all three regions grew with Americas +2% and APAC +5% in Q3’25.
• Balance sheet improved: net debt was down $1.9B YoY, aided by Supreme sale proceeds and inventory rightsizing (inventories -14% YoY); FCF guidance for FY’25 raised to $440M from $425M.
• Management flagged timing benefits in Q3 (wholesale reorders and pull-forwards) and guided Q4’25 revenue down 4–6% (down 2–4% constant currency) with adjusted operating income between $(30)M and $0, tempering near-term expectations; medium-term turnaround and brand strategies remain the focus.

What Went Well and What Went Wrong

• What Went Well

  • The company exceeded revenue and adjusted operating income guidance as DTC outperformed and wholesale saw additional reorders and earlier deliveries; adjusted OI reached $324M vs $170–$200M guided.
  • The North Face (+5%) and Timberland (+11%) led growth, with strength in holiday and premium boots; Americas returned to growth (+2%) for the first time in over two years in Q3.
  • Gross margin expanded to 56.3% (+150 bps YoY) on lower product costs and fewer promotions, and net debt fell $1.9B YoY post-Supreme, reinforcing deleveraging progress.

  Management quotes:

  • “Q3 was stronger than we expected… Gross margins were up 150 bps and operating margins were up 360 bps to over 11% and net debt was down nearly $2 billion.” — Bracken Darrell, CEO.
  • “We saw better overall performance in Q3 led by… outsized wholesale performance… [and] DTC better than expected.” — Paul Vogel, CFO.

• What Went Wrong

  • Vans revenue declined 9% YoY globally (APAC -31%), though trends improved sequentially; management is prioritizing “product, product, product” and a multi-season pipeline but cautioned the turnaround will take time.
  • DTC revenue fell 3% YoY despite improvement vs prior quarters; value channel mix remains ~one-third at Vans as the brand continues footprint and channel resets.
  • Some Q3 strength reflected pull-forward from Q4 and reorders during holiday/cold weather; management expects Q4 revenue down 4–6% and adjusted operating income of $(30)M to $0.

Transcript

Operator (participant)

Hello and thank you for standing by. My name is Bella and I will be your conference operator today. At this time I would like to welcome everyone to VF Corporation third quarter fiscal year 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Allegra Perry, Vice President, Investor Relations. Please go ahead.

Allegra Perry (VP of Investor Relations)

Hello and welcome to VF Corporation's third quarter fiscal 2025 conference call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents that are filed regularly with the SEC. Unless otherwise noted, amounts referred to on today's call will be on an Adjusted Constant Dollar and Continuing Operations basis which we've defined in the presentation that was posted this morning on our investor relations website and which we use as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts which are in accordance with US GAAP.

Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the presentation which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Joining me on the call will be VF's President and Chief Executive Officer Bracken Darrell and Executive Vice President and Chief Financial Officer Paul Vogel. Following our prepared remarks, we'll open the call for questions. I'll now hand over to Bracken.

Bracken Darrell (CEO)

Thank you, Allegra. Hello everyone and thank you for joining us today. As I opened this call, you can see it was a good Q3. What I'm most excited about is what you really can't see yet. Our transformation is well underway and Q3 was an excellent quarter of progress across our business inside the company. We're systematically remaking the company for long-term value creation, double-digit operating margins and strong and sustained growth. We showed you in October nine work streams that will essentially bring us to best-of-breed processes. And you know we've reset the entire leadership team but you might not be aware that we're now resetting the rest of the organization beneath those leaders.

So between the work streams we spoke about in October and the organization changes I'm explaining here, we're building new structures and processes to be more effective, more efficient, and in the end more creative. It's not just about saving money. It's about in the end we will be a reinvented company better positioned to deliver strong and sustainable returns for investors. If I sound energized by this, it's because I am. This is going to create strong value, great products, elevated brands, and a terrific place to grow and learn for our people. Now enough about what's going on inside the company. Let's talk about what we just reported. Q3 was stronger than we expected. We grew revenue 2% while we significantly improved profitability. The key point to make here is that the actions we've taken so far are delivering results.

Now let me call some important features of the quarter. Virtually every brand was stronger this quarter than last quarter. The North Face and Timberland both grew. Vans delivered another quarter of sequential improvement in trend. Regionally, the Americas delivered another strong quarter of improvement, going positive for the first time in over two years. Our wholesale channel was positive on a global basis. DTC showed progressive improvement again this quarter. Globally, gross margins were up 150 basis points and operating margins were up 360 basis points to over 11%. And net debt was down nearly $2 billion. None of these were a surprise to us, but it's a quarter of measurable progress across the board. Now, to really understand our trend line, you need to look at our Q3 and Q4 together.

While the Q3 results are better than expected, some of what benefited this quarter's outsized wholesale performance, due to stronger reorders, lower cancellations and orders pulled forward by our retail customers into Q3 from Q4. Regardless, we feel really good about the underlying performance for the second half of the year. Now let me give you an update on Reinvent. As I indicated at our Q2 earnings investor day part one and the start of this call today, we're making strong progress on our transformation program. You'll recall we have four stated priorities. First, lower our cost base. We're on track to deliver the initial $300 million in gross cost savings with another $55 million generated during Q3. Remember, this is the $300 million we said would be fully actioned by the end of last quarter.

So Q2 and fully reflected in the P&L by the end of this coming quarter. So Q4 by the end of the fiscal year as we promised. The work is complete, the cost reduction is showing up, and all $300 million will be in the run rate as we exit fiscal 2025 as planned. On top of that, you've heard Paul and me say we have no intention of stopping here as of our October Investor Day. You know why we said that? Because we were in fact already working on process and organizational changes as I referenced early in the call, that will contribute to unlocking another $500 million-$600 million in operating income expansion, half of that in SG&A. That's part of our approach to delivering our medium term operating margin target in fiscal year 2028 of at least 10% before any growth.

So far so good. Everything's on track. Let me underline a point that might already be obvious to you by now. While the cost side of these work streams will help us return to sustained double-digit profitability, this work is even more important than the bottom line impact it will deliver. These actions are absolutely instrumental towards enabling growth. They form part of a comprehensive plan to enable the company to be more creative and more powerful in product creation and marketing. These projects enable this creativity through better consumer insight and targeting as well as the standardization of all the processes we can to best-in-class levels to enable higher impact from good ideas in both revenue and profitability. We also continue to reinvest some of those savings back into product creation and brand building. You'll hear more about these areas at our upcoming Investor Day.

Part two. More on that later. The second priority was to strengthen our balance sheet. We made big progress during the quarter with a reduction of net debt of almost $2 billion versus this time last year. Just to reemphasize that we have reduced the net debt not including lease obligations which are required from an accounting standpoint to be included when we call it net debt. So excluding those lease obligations, we've reduced the net debt by almost 40% in the last year alone. So we're demonstrating our commitment to move our leverage ratio down to 3x. First, we divested non-strategic assets, planes, buildings and of course Supreme. Second, we reduced our working capital primarily by cleaning up our inventory and making it fresh. And finally and most importantly, we're improving our operating earnings.

You now see how effective this triple threat approach can be to rapidly dropping our leverage, reduce leverage levels. There's more to do, but we are squarely on track to continue to delever the balance sheet to get to our 2.5 medium-term leverage target. Our third priority was to fix the U.S., as you know. We adopted our global commercial model in the Americas a year or so ago to try to bring its performance up toward the other regions' historical performance levels. It's working. Our Americas business improved again relative to last quarter with revenue up 2% in Q3 versus down 9% in Q2. That's the first quarter of growth in over two years. It's early days, so we may not see growth every quarter as turnarounds often aren't linear.

But it's good to see green numbers again and we have a lot, and I do mean a lot of improvement ahead of our Americas business finally deliver the Vans turnaround. The brand's overall performance in Q3 was down 8%, a further improvement compared to last quarter, down 11%. I feel very good about the steps we're taking, but sustained turnarounds take time. Underneath the numbers, I want to call out a few things, primarily in our key focus areas of product and marketing. New products continue to outperform our big established franchises. Knu Skool remained the number one growth driver and the number two franchise globally and is in line with our strategy to win with youth and women. We won't rely on just one style to build our business in the future and we have momentum in our newest styles, both Hylane and Upland.

Hylane and Upland, in many ways, the Vans brand continues to have enormous potential. It was recently named the number three most authentic brand from the Authenticity 500 Index as the ranking of the world's most authentic brands. The message here is that we have a lot of growth potential as we keep improving our execution. Brand elevation is also fertile ground for Vans, as evidenced by exceptionally strong sellout for our OTW holiday collaborations including the Satoshi Partnership, Homegirls Collaboration and Beatrice Domond. And those two last ones are targeted at women. The new Americas regional platform is also starting to deliver for the holiday period, our U.S. Non. Excuse me? For the holiday period, our U.S. Non Value Channel Footwear generated strong positive sellout year over year for the first time since February of 2022.

Led by our largest accounts, we're making progress and are more confident than ever of the brand's growth potential. We have a lot of pistons to fire on at Vans product marketing, distribution, Brand Elevation and more, and we're putting each one in place. I couldn't be more excited about the initial work done by Sun Choe and you'll hear more about it directly from her in just a few weeks. Now let's turn to The North Face where revenue in Q3 was up 5% versus last year and positive in each region with even stronger performance in DTC. We're pushing the boundaries with our marketing and our brand building. Notably, The North Face SKIMS collaboration set a new bar for global collaborations, execution and impact and was one of the fastest selling collections in the history of The North Face.

We were also thrilled to see our product teams being recognized with multiple awards for design and innovation across footwear and apparel. The North Face core underlying brand history is oversized relative to the size of this business, in my opinion, and I love that position. It means growth is ahead. You'll hear more about the plans for North Face directly from the Brand President Caroline Brown at our Investor Day. Finally, I'll say just a few words about Timberland. The brand was also positive for the quarter with revenue up 12% versus last year. Performance was driven by core strength across regions supported by the iconic campaign launched in September. Nina Flood is our new Timberland Brand President there and she'll give you more color on our plans at the next Investor Day.

Now looking ahead, the second half this year is expected to be broadly in line with our expectations. As I said earlier, we did a little better in Q3, driven by the stronger than expected DTC and outsized wholesale performance, and expect the Q4 trend to be a little lower relative to Q3. Turnarounds are not linear for fiscal year 26. The first half of next year could look similar to the second half of this one as we put more of our game plan in place and overall we feel terrific about the progress we're making. Now I want to say a few words about that Investor Day that I've mentioned several times now, part one. Back in October 2024, we unveiled our corporate strategy, showing you how we were rebuilding the company from the ground up.

You heard about our focus on cost and creating a solid P and L structure. That's only the start of what we're doing to transform VF. The best is yet to come and in fact we're coming back on March 6th. Mark that in your calendars with part two here in New York, which is focused on brand strategy, where you'll get to hear directly from our brand presidents. Of course, they're still relatively new to our business and their roles, but I can't wait for you to meet them. This really is the most exciting part of our transformation and you'll hear about it in our plans for growth. As you've heard me say before, we are here, we're all here, and it's all about growth in the long term.

I'm now going to hand over to Paul who is sitting in front of me wearing a Philadelphia Eagles jersey, shoulder pads and a helmet and Vans cleats which we don't actually sell publicly, but he had them made. You may know Paul is quite an Eagles fan and they are going to the Super Bowl and he'll take you through the financials in more detail and I'll come back at the end for closing remarks.

Paul Vogel (CFO)

All right. Thanks, Bracken. Go Birds. As Bracken mentioned, Q3 was another quarter of progress in achieving our key priorities. Turning to the financials in Q3, the quarter delivered further sequential improvement with revenue coming in better than our guidance and with strong profitability. We saw better overall performance in Q3, led by a number of factors, some of which may impact Q4. When looking at both Q3 and Q4 together, we are right on track with where we thought we'd be. Previously we had stated that every quarter of the year would show sequential improvement. However, given the strength in Q3, the balance has changed. Second half of the year is performing in line with our expectations and will show meaningful improvement over the first half of the year.

So while we no longer expect Q4 growth to be higher than Q3, the second half growth and overall trends are improving as planned. So what has changed? First, DTC was better than expected in Q3. We had a good holiday season which was particularly strong in The North Face and Timberland. Second, we saw outsized wholesale performance due to additional reorders, lower cancellations and a favorable shift to deliveries into Q3 from Q4, a portion of which came from partners taking on inventory sooner than expected ahead of an earlier Lunar New Year. Third, on reported revenue, FX headwinds were less than forecasted. As a reminder, we had anticipated 100 basis points negative impact in the quarter which did not occur, and fourth, on costs, we're starting to see the impact from some of our newer initiatives which positively benefited distribution and IT costs.

Now let's go through the P&L. Q3 revenue was up 2% versus last year. This marked the fourth consecutive quarter of sequential improvement in revenue by brand. The North Face was up 5%. Momentum in Greater China remained strong while the Americas had a better performance over the holiday period. Vans was down 8%, improving from down 11% in Q2. The actions taken last year to clean up our inventory are continuing to deliver benefits, especially on profitability as we right-size the brand's cost structure. Timberland was up 12%, improving from down 3% in Q2. We saw broad-based growth across regions driven by continued strong momentum in premium boots. Finally, to finish off the top four brands, Dickies was down 10%, a slight improvement from down 11% in Q2. Moving to the regions, all three were positive in the quarter.

The Americas was up 2%, EMEA was up 1% and APAC was up 5%. And turning to channel we improved sequentially in both DTC and in wholesale. DTC was down 2% while wholesale was up 8%. And on gross margin as expected we were up 150 basis points versus last year to 56.3%. This was due to lower product costs and fewer promotions. SGA dollars were down 3%. We leveraged SGA by 210 basis points to 44.9% of sales. We are on track to deliver the $300 million run rate of initial gross reinvest cost savings with $55 million of savings generated in the quarter. This led to an operating margin of 11.4% up 360 basis points versus last year and adjusted operating income was up 49% versus last year to $324 million. Diluted earnings per share. Adjusted diluted earnings per share of $0.62 versus $0.45 last year.

Turning to the balance sheet, we continue to make good progress on inventories as we ended Q3 down 14% versus last year. And as we said at the time of our Q2 earnings, we completed the sale of Supreme at the beginning of October and paid down the $1 billion term loan. And as a result, as Bracken mentioned, net debt was down $1.9 billion versus last year. And we are on track towards our medium-term leverage target of 2.5 times that we shared at our most recent investor day. Now moving on to guidance for Q4, for revenue we expect Q4 to be down 4%-6% on a reported dollar basis. We are modeling FX to have approximately a negative 200 basis points impact on our reported growth rates.

So on a constant dollar basis, which is the true underlying trend in the business, we are forecasting down 2%-4%. And if you put Q3 and Q4 together and look at the second half as a whole versus last year, revenue would be flat to down 1% on a constant dollar basis. This represents a progression in trend versus Q1 and Q2 and is right in line with our expectations. Moving down the P&L, we expect Q4 operating income to be in the range of break-even to a loss of $30 million with gross margin continuing to benefit from lower product costs and fewer promotions and fewer reserves. SG&A dollars are expected to be up slightly versus last year due to increased investment in marketing and product in Q4.

For the full year, we are raising our free cash flow guidance to $440 million with both better underlying fundamentals and higher asset sales contributing to the improvement. So in summary, we continue to make great progress on our key financial priorities and our turnaround plan. I will now turn it back to the operator for Q and A.

Operator (participant)

At this time I would like to remind everyone in order to ask a question, press Star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q and A roster. All right, your first question comes from the line of Michael Binetti with Evercore. Please go ahead.

Bracken Darrell (CEO)

Go Michael.

Michael Binetti (Evercore ISI)

Congrats on the Eagles. Congrats on the Eagles, Paul. Glad to hear you're excited. Just a quick one on how we're looking at the. I'm happy to hear you're wearing cleats during an earnings call. Can you just talk? It sounds like there's a little bit of a shift into third quarter out of fourth quarter when we look at the revenues, you know, how material is that or just maybe a bigger picture?

You know, some high level thoughts on what you've been, you know, where we'll see the deceleration, just the broad brushstrokes, regions channel the brands where we'll see the deceleration 4Q to help us think about that and then I guess more importantly, longer term with Vans being such a big swing factor and stabilizing the revenue and margin trajectory here talked about, talk about what we're going to see as we build to key moments like Sun and her team's first line, you know, it seems like back to school is probably when that starts to come together. And as you focus on shifting from the good defense you've heard in the cleanup effort to offense, what have you shown to your retail partners already?

What kind of feedback, good or bad, are you getting as we start to pivot Vans back to, you know, what you've been talking about for a while here, long-term growth?

Bracken Darrell (CEO)

Politics first one, then I'll okay. All right. Perfect.

Paul Vogel (CFO)

Yeah. So on the Q3 Q4, I would say a couple of things. One, if you think about the outperformance in Q3, it was split between wholesale and DTC. Wholesale is probably a little bit bigger portion than DTC. So on the wholesale side, you know, it was a mix. I'd say probably part of it, maybe half of it was related to some of the pull forward. I mentioned with respect to Lunar New Year and some of our partners taking deliveries earlier. And some of it was just reorders based on the stronger performance in the holiday season. So that was the wholesale side. So some of that will impact the wholesale in Q4. And then DTC just performed stronger. And right now we're not necessarily anticipating that similar strength in Q4. It did outperform.

We don't have that same level of outperformance in Q4 that we saw on the DTC side in Q3.

Bracken Darrell (CEO)

I just want to add one thing on Vans in particular when you think about, and this isn't really Q3 or Q4, but I'll start with maybe a prelude to the answer to your question. We've got a lot of moving parts underneath Vans in the marketplace. We've closed, I think, 9% of our total doors globally. In our DTC channel, we've closed about. Sorry, we closed 14% of our own stores and I think we closed about 9% of the stores of wholesale in the U.S. alone. You know, we've also added stores. That's a net number. So there's a lot of moving parts underneath that are really reset our business from a commercial perspective to be in a great place as new products flow through there. Now you asked, you know, when will we start to see what Sun's working on?

She'll give you a little glimpse and we're going to give you a little glimpse of a few things we're working on now at the investor day. I've told her and I'm telling you I'm going to keep the expectations low for Vans as long as possible because I want to give her plenty of room to operate. She is a real operator. She is deep in the middle of stuff. You'll probably see a few things. She's touched it back to school even more at Holiday and as you go into next year, even more and more, but it's going to take time, you know, as you know, the product development cycles for this business are longer than they should be. We're not going to fix that right away, but we're also working that in the background, so stay tuned.

But I feel super good about where we're going with Vans. Next question. Thank you, Michael.

Operator (participant)

Your next question comes from the line of Matthew Boss with JPMorgan. Please go ahead.

Bracken Darrell (CEO)

Hey Matthew.

Matthew R. Boss (Equity Research Analyst)

Thanks. Hey, so maybe two-part question on the top line, could you speak to recent wins at Timberland, progress you're seeing at North Face, maybe relative to some of the softer trends at Dickies. And then just on the overall progression, if we took a step back, maybe could you just elaborate on comments I think you made around the front half of 2026 looking similar to the back half of 2025.

Bracken Darrell (CEO)

Yeah, absolutely. So Timberland, you know, Timberland, there's just a lot of excitement. You know, I think you probably can, I don't know if you follow us close enough and many of you do, you probably can see it. We've done some really, the Timberland, I would say the Timberland brand building activity started a year, you know, the first year I got here with the anniversary of the famous yellow boot and it's coinciding with hip hop. And we quietly, although, you know, very cool way, did a bunch of cool stuff that year, some cool collaborations. We created a movie, but nobody really heard it. But I would say some of the key players in the Influencer award heard it and it picked up steam and kept picking up steam right through the year.

You know, then we did the Louis Vuitton collaboration and Bottega Veneta just most recently. You know, so there's just a lot of good momentum there. The whole game plan there is obviously, you know, get as much as you can out of this Yellow Boot franchise, but also expand and roll through with other franchises, contrary to what you might think. You might think, you know, the Yellow Boots not 70% of our business. It's a. It will probably be smaller and smaller over time as we move into other things. Nina will go through that. I feel really excited about where we're going with Timberland, but there's a lot of room to work there and a lot of places to go on TNF. You know, I think the TNF story has not really changed much.

I think we have a great team in there and that team is led by Caroline, who's doing a fantastic job. You know, we're probably, you know, texting back and forth five times a day and I'm. Because she's excited about what she's doing, about what they're doing. So you'll hear more, more from her. I will not steal any of her thunder except to say, you know, I'm really, I'm really pumped about what, what she and all the brand presidents are doing. Dickies, you know, Dickies is a deep turnaround. It's a small business for us. It's got, maybe relative to its size, it might be the smallest in revenue. In other words, there's more potential there than in some ways maybe any other brand we have. Although they all have a lot of potential. But Dickies' really has a lot.

But it's a deep turnaround and we're all. You're just going to be patient with us on that one. I feel really good about the leader we've put in place there. We announced that we're moving the business just to make it harder on us if we're moving the business to California. But there are good reasons to do that. We're going to get, we're going to have a campus really in California now for that business and Vans. So feel good about it. You may. You asked about my reference to first half could look kind of like the back half of this year. I think that's really just an attempt to say, you know, we're not really, we're not really trying to give you a strong growth forecast into next year at this point. It's too early for that. We're giving, we're giving you Q4.

What we are saying is, you know, keep an eye on the profitability. We're going to absolutely improve that. You're going to see it systematically improve while we're rebuilding a lot of things in the company to drive long-term growth. When will that growth come? You know, we're not ready to say yet. So we're just trying to really dampen expectations.

Matthew R. Boss (Equity Research Analyst)

Great. Best of luck.

Bracken Darrell (CEO)

Thank you.

Operator (participant)

Your next question comes from the line of James Duffy with Stifel. Please go ahead.

Bracken Darrell (CEO)

Hello, James. Maybe I can make up a question.

Operator (participant)

Mr. Duffy, your line is now open.

Bracken Darrell (CEO)

Hey Jim, we can't hear you.

James Duffy (Managing Director)

Oh, sorry, I had you on mute.

Bracken Darrell (CEO)

Oh, no problem.

James Duffy (Managing Director)

It's great to hear from you guys. Really great results from The North Face and Timberland. I'm curious if you have the inventory to participate in some of the demand you might be seeing here in January and then also hoping you can share some perspective on what those results might mean for forward orders as we look to fall holiday 2025.

Bracken Darrell (CEO)

Thanks. That's a clever way to ask that question. You know, there's always, you know, you always got. In our case, I think we've done a good job bringing our inventory levels down and our inventory is pretty fresh. You never have exactly what you need everywhere. So we don't. But you know, look, our supply chain is working pretty effectively. It can work a lot better by the way, over time. But I'd say, so far so good. You want to add anything to that, Paul?

Paul Vogel (CFO)

No, I think a lot of initiatives we talked about the Investor Day.

Bracken Darrell (CEO)

You might need to pull your helmet up a little.

Paul Vogel (CFO)

In terms of the integrated plan stuff. I think that will also help us sort of make sure inventory is in the right place moving forward.

Bracken Darrell (CEO)

So we're getting there.

James Duffy (Managing Director)

Is there anything you guys can share on, you know, discussions with wholesale customers and what that looks like for the order book into fall next year?

Bracken Darrell (CEO)

You know, I don't think we have too much to say about going into fall next year. But I would say, you know, the spring order book was, I think we've said before, is light, you know, and we knew that beforehand and you know, it's kind of a reflection of the past and kind of the general sentiment, especially in the U.S. on that. But, you know, I'm not worried about that at all. I really feel good about the product portfolio we're bringing out, as you know, the cool thing for those of you who've been in our business for a long time. You know, you get to look at, you know, three seasons out all the time.

So I really feel good about the products we have coming out season by season across our brands, you know, and I think you'll see that as we get together. We'll give a little bit of glimpse of some of this when we get together in the investor day, but you'll see more of it as it starts to unfold. But yeah, no, I think so far everything is really on track for a product development standpoint as we go forward. And you'll see us continue to ramp that up in marketing.

James Duffy (Managing Director)

Very good. Thank you very much.

Bracken Darrell (CEO)

Thanks, Jim.

Operator (participant)

Your next question comes from the line of Lorraine Hutchinson with Bank of America. Please go ahead.

Bracken Darrell (CEO)

Hello, Lorraine.

Lorraine Hutchinson (Retail Analyst)

Thanks. Good morning everyone. Good morning, Bracken. You talked about Vans U.S. non-value channel sellout positive. I was just curious, what's the mix of the value channel for Vans?

How important is that in your go forward plan?

Can you talk about the health of the inventory in the channel across value and non value?

Bracken Darrell (CEO)

Yeah, the health of the inventory looks good. You know, Vans will always have a value channel component. So I don't, I don't want you to step off this call thinking, you know, that value channels 10%. It's only for selling off, you know, product that didn't sell in our non value channel. So it's not, it's probably a third of our business. It'll stay about there. And, and it's as I said, the, the health of the inventory looks really good now. We brought that down. It was probably up to over half of the business at one point.

Lorraine Hutchinson (Retail Analyst)

You think a third is the kind of the go forward ratio that you'd expect?

Bracken Darrell (CEO)

I think so. You know, it could drift lower than that over time. I don't, I'm not afraid of the value channel. There's, I think you could tend to think the value channel is just discount, discount, discount. Actually the profitability of the value channel can be very good. It's, you know what we, we want to make sure we're serving. Cool thing about Vans is it does have a very broad consumer base and we wanted to, so we want to be where, where our customers really want to shop. And the value channel is definitely part of that. But yeah, I would guess that the, the non value channel will grow faster over time. You know. You know, as you look, if you look at this two years from now, three years from now, probably look, I'll bet the non value channel look bigger.

We've opened doors in the non-Value channel as we've closed doors in the Value channel. So we've probably added, you know, 800 doors in the non-Value channel. We've closed 1,800 in the Value channel. So we've changed the mix and that could continue a little bit.

Lorraine Hutchinson (Retail Analyst)

Okay, thank you.

Bracken Darrell (CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Laurent Vasilescu with BNP Paribas. Please go ahead.

Bracken Darrell (CEO)

Hello, Laurent,

Laurent Vasilescu (Managing Director)

good morning. Hi Bracken, how are you on the results here?

Bracken Darrell (CEO)

Thank you.

Laurent Vasilescu (Managing Director)

I wanted to ask you, Bracken, with regards to your comment around the second half. I know it's initial, but it's good to hear that similar trajectory to the second half of the fiscal year. Is that, is that common on a constant currency basis or. Okay, just want.

Bracken Darrell (CEO)

Yeah, Flora, thank you for asking that because, by the way, I'll let you finish your question in a minute. But you know, I think Paul and I were having a discussion yesterday on where to put the emphasis on constant currency reported. And you know, that's a regular debate between that goes on and before you report and you set up a standard and we really haven't locked that in yet. But yeah, I think constant currency is super important here, especially in an environment where you've got volatile currencies which we have had over the last. Not wildly violent but volatile. But volatile. So we'll try to put more emphasis on that constant currency going forward.

Laurent Vasilescu (Managing Director)

Okay, thank you very much.

Bracken Darrell (CEO)

Not on profit, by the way. Profit will always be reported.

Laurent Vasilescu (Managing Director)

Okay, okay, perfect. Understood. And then, Bracken. Paul, I'm trying to understand the, the slides here on the SG&A dollar is guided to be up slightly for 4Q. Is that. I would assume that's on a adjusted basis. And if that's the case, maybe I'm just modeling this wrong, but it implies 4Q gross margins up significantly higher than what you just posted in 3Q. Like up 300, 400. That's. Is that the right way to think about it, Paul? And if that's the case, should we initially think gross margins will be strong in the second half of the calendar year? I think, Bracken, you mentioned that profitability will continue to improve into next fiscal year. Thank you very much.

Paul Vogel (CFO)

Yeah, so I'll take both of those on the SG&A and the gross margin. So on the gross margin side, you know, we do expect gross margins to be up. You know, there's a couple of factors at play here. One is the actions from last year are still benefiting us year over year. So that's a part of it. And then, you know, secondarily, as are kind of equally, or maybe not quite equally, but you know, we are benefiting. As we talked about, some of the product costs have improved and lower promotions as well. So overall gross margins sort of organically are heading in the right direction. And then you throw on top of it, the benefits we have kind of on the comp from last year on the SG&A side. Yeah, we're modeling it up slightly.

You know, the two real big factors in that would just be marketing. That's a little higher in Q4, and then again, we still have one more quarter of the sort of bonus accruals hitting us this year. That didn't really impact us last year.

Laurent Vasilescu (Managing Director)

Very clear, Paul. Thank you very much.

Bracken Darrell (CEO)

Thanks, Laurent.

Operator (participant)

Your next question comes from the line of Adrienne Yih with Barclays. Please go ahead.

Bracken Darrell (CEO)

Hey, Adrienne, great.

Adrienne Yih (Managing Director of Consumer Discretionary Analyst)

Thank you very much. Hey, congratulations. Great quarter. Nice to see it. So, Bracken, my question is going to focus on Vans. That was the only brand that missed sales relative to consensus expectations.

You're giving it time.

What customer feedback are you getting from the core Vans customer? You're broadening it out to more board and action sports. So just how are you targeting kind of a broader audience? And then when is the right time to put some demand creation investment behind that? And then, Paul, I have a quick one for you which is really, you're taking measures throughout the entire infrastructure of the company. I'm assuming that supply chain is going.

To be, you know, one of them.

Can you remind us kind of where your sourcing base, Vietnam, China is exposed and what measures are taking to speed up and make that supply chain more efficient? Thanks.

Bracken Darrell (CEO)

Okay, I'm going to, I'm going to dodge your question, not because I don't have an answer, but I'll give you a little bit of one, but because I really want, I want to let Sun answer that. You know, the feedback, both the feedback from customers as we continue to think about who we're really targeting and also demand creation investment. What I will say is we're not starving. Excuse me, we're not starving demand creation. We are experimenting with what kind of demand creation where we're spending our money, especially during the holiday period and we're learning. So I think you'll see us continue to change what we're doing there. Although you can't really probably easily see what we did last quarter or what we did the quarter before that. But suffice to say, we're in deep learning mode and action mode.

So you'll see us keep adjusting what we're doing on Vans from marketing perspective and the target audience piece. I will absolutely defer and let Sun talk in March. But I feel very, very good about the decision she's made. And as you said, we are going broader into action sports and beyond.

Paul Vogel (CFO)

Yeah, so on supply chain, I would say, you know, obviously if we're looking at the whole business, we look at everything. So nothing to really add there specifically other than, you know, we're going to continue to look to become as efficient and best in class in everything we do with respect to kind of the regions. I'm going to read into this a little bit and think maybe this is around tariffs and those types of things. Yeah, we have very, very minimal exposure of things coming out of China, Mexico, Canada. So the impact for us is very, very small.

Adrienne Yih (Managing Director of Consumer Discretionary Analyst)

Then just one clarifying question to the GM. So just to make sure we don't get ahead of our skis for first half of next year. The last year the reset actions were about 200 basis points for the organic would be anything above 200 basis points of gross margin expansion for the fourth quarter.

Paul Vogel (CFO)

Yes.

Adrienne Yih (Managing Director of Consumer Discretionary Analyst)

Okay, thank you very much and really great quarter. Great progress.

Bracken Darrell (CEO)

Thank you very much.

Paul Vogel (CFO)

Thank you.

Operator (participant)

Your next question comes from the line of Brooke Roach with Goldman Sachs. Please go ahead. Good morning and thank you for taking our question.

Brooke (Managing Director of Equity Research)

Thank you Roach.

Paul, we've seen some outperformance for a couple quarters in a row on the SG&A line. Can you talk a little bit more about where you're outperforming your own expectations on reinvent cost savings? And as you bridge from the fourth quarter of this year to your midterm targets, how are you thinking about the opportunity to flow additional savings to the bottom line near term versus additional reinvestments in the brands through marketing or other talent investments that you might think are necessary to drive long term health of the business?

Paul Vogel (CFO)

Yeah, sure. So I would say over the last couple quarters a lot of it honestly has just been execution. Right. So we've had plans in place against Reinvent. You don't always expect to get maybe a full 100% of everything you think you're going to get in a quarter. And honestly the last couple quarters we've done really well in terms of hitting all the targets probably at or better than we thought which is just a testament to the team and how hard they're working in terms of really putting all the Reinvent actions in place. And so honestly it's nothing more than that other than just really great execution from the team on the saving side. And then as we talked about, so all of those, that kind of first phase, that first $300 million will be, you know, is fully actionable.

We'll have the full run rate by the end of this fiscal year, which will all flow into next year, and then we're starting to see the very early beginnings of the additional benefits. We talked about the investor day, so we talked about $500 million-$600 million of incremental operating income benefit that's kind of spread up a little bit up and down the P&L, not just SG&A but assume half that's SG&A, and we started to see a little bit of that. I wouldn't expect too much of that, you know, in Q4 but we're starting to see a little bit that benefit roll through as well.

Brooke (Managing Director of Equity Research)

Great, thanks so much. I'll pass it on.

Bracken Darrell (CEO)

Thank you. Brooke.

Operator (participant)

Your next question comes from the line of Jay Sole with UBS. Please go ahead.

Jay Sole (Managing Director)

Great, thank you so much. So two questions for me. Number one, can you just talk us through what you're seeing in China? I think you said sales are up 4%. I think they're up 5% year to date. And then on the balance sheet given the progress you made in the quarter reducing debt. You know, what's the outlook from here? How much of a priority is it now?

Is it the same level of priority that it's been?

Or do you feel like maybe free cash can be used for some different purposes going forward? Thank you.

Bracken Darrell (CEO)

I'll let Paul answer that. Second one on China, you know, I think we're probably seeing the same thing everybody else is. The economy itself is pretty soft relative to the past. I mean, the good news is we've got a very strong business, especially in The North Face. China continue to grow double digits, you know, so really good, another good performance there. And I have, I'm as most people here are probably uncertain about what will happen near term, but really optimistic about the long term in China. So we're going to keep the pedal to the metal and keep investing there and building business there. You want to answer that first?

Paul Vogel (CFO)

Yeah. On the free cash flow, our focus will continue to be to pay down debt. It's really the focus one and two in terms of what free cash flow. And Bracken and I have talked about the, you know, we have the target of, you know, two and a half times or better, which we put out there. And I think you can assume, unless we were to say otherwise, that our real focus is getting there as fast as we can and then we'll think about other uses of free cash flow.

Bracken Darrell (CEO)

Yeah, exactly. We won't be doing any acquisitions anytime soon. We've got so many opportunities to improve this business without doing that and get growth that we don't need to worry about that for now.

Jay Sole (Managing Director)

Got it. Thank you so much.

Bracken Darrell (CEO)

Thanks, Jay.

Operator (participant)

Our last question comes from the line of Bob Drbul with Guggenheim. Please go ahead.

Bob Drbul (Senior Managing Director)

Hi, good morning. Just a couple questions. The first one is on the wholesale pull forward. Can you quantify the dollar number, the shift from Q4 into Q3?

Bracken Darrell (CEO)

You want to take that?

Paul Vogel (CFO)

Yeah, I'm not going to quantify. I will say that. Really not going to answer your question, but I'll answer as best I can, which is wholesale was a little bit more of the outperformance than DTC. They both outperformed. And within the wholesale, I'd probably say about half of it, plus or minus, was pulled forward and the other half was just better reorders given some of the strength we saw in Q3.

Bracken Darrell (CEO)

Yeah, I'll give a little more. Paul's quite nervous to give more color because he and I haven't agreed with how much we're going to say and not say, because it's always a little tricky and making sure you have your facts clear. You know, we had reorders, you had better reorders and lower cancellations and you have some orders that were pulled forward from last, you know, the future quarter of this quarter. So there's the combination. Then you have cold weather, you know, which drove our DTC business stronger too. So yeah, we're just not going to take all those things to the bank into Q4 and I think that's the right answer. I think none of those are things you can really count on, especially if you understand order flow. You.

We can't count on reorders because the way our seasons work, they work in a two-quarter cycle, so you know the second quarter of our cycles when you'll have reorders, so reorders won't happen in Q4, so that number's gone, so this, it's a little bit noisy. That's why we're not being a little more specific than that, but bottom line is, you know, I think we've judged this about right.

Jay Sole (Managing Director)

Then Bracken on Vans. When you look at sort of the regional breakdowns, you know, Vans down 31% in APAC. Can you just comment a bit on that result and sort of what drove that and how you're seeing the business there?

Bracken Darrell (CEO)

Yeah, I would say Vans came, Vans got hit a little bit later maybe fundamentally and then pretty hard. You know, if you look at our Vans business in APAC, I think at its peak it was $600 million, something like that. So think about how much potential there is there. So we're not chasing anything short term in Vans. Right. And I hope that's obvious to you. It is to me. I just block everything that I hear that sounds like we're trying to do something really short term because the potential is so big here. You know, the, I don't know what our, what our run rate would be right now that, that Q3, but I'll bet it's 250 or something. So we're down that much in, in, in APAC, in China in particular. So.

And part of that is really, and I mentioned this last couple of calls. I think you're really resetting our store footprint there. It's a lot of it is partner stores, so they're not our stores. So there's a lot of work going on there and a lot of work on the team, etc. So yeah, I would say just like the rest of the world. But you're right, Vans in APAC is a little bit of a special case that I'm excited about the whole business. I think APAC is a really interesting case where how long will it take us to get back to $600 million? We'll see. You know, but I do think, you know, China and you know that once you get things right, the growth comes fast. So we don't have things right there yet obviously, but.

But we will.

Bob Drbul (Senior Managing Director)

Great, thank you.

Bracken Darrell (CEO)

Thanks, Bob. Well, it sounds like that was the last call. Boy, that went fast. I think Paul's just in a hurry to get the Super Bowl pre party. Let's start this morning. But thanks to all of you. You know, I just want to, I want to close out by saying this was a quarter of really strong progress and you were on track with the turnaround. We're on track with this transformation. We're not doing anything short term here. We're aimed at really creating a new kind of, that can drive really strong long term sustainable growth and profitability. And top line, we continue to advance all those things we talked about in October. So nothing there has changed. You can just imagine we're now three months further down the road with very aggressive progress. And there are other things we're doing that you don't know about yet.

And as I mentioned, we're going to be back in March. You're going to hear from these brand presidents. Each session won't be really, really long, so you won't get a deep-dive strategy from each one of them, but you'll get a good feel for what we're doing and most importantly, you'll get a good feel for them. And the bottom line is I'm super excited about this business. It's nice to have a good, strong quarter behind us, but we're already deeply into the future here. So thanks everyone. Look forward to talking to you in person during the meetings in between or on the next call a quarter from now or sorry, on our March call, March meeting which will be in New York. Thanks everyone.