V.F. - Q4 2023
May 23, 2023
Transcript
Speaker 11
Greetings. Welcome to the fourth quarter 2023 VF Corporation earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Allegra Perry. You may begin.
Speaker 2
Good afternoon welcome to VF Corporation's fourth quarter fiscal 2023 conference call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts referred to on today's call will be on an adjusted constant dollar basis, which we've identified in the press release that was issued this afternoon and which we use as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business. 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 press release, which identify and quantify all excluded items and provide management's view on why this information is useful to investors. Unless otherwise noted, results presented on today's call are based on continuing operations. Joining me on the call will be VF Interim President and Chief Executive Officer, Benno Dorer, and EVP and Chief Financial Officer, Matt Puckett. Following our prepared remarks, we'll open the call for questions. I'll now hand over to Benno.
Speaker 3
Hello, everyone. It's been nearly six months into my interim role as CEO of VF. I'm proud to be part of this beautiful company, of the products that we create for our consumers, the difference we make to so many people's lives, to witness so many highly skilled and committed people create engaging styles and shopping experiences for our consumers, and how people know, wear, and love our brands on streets, trails, and mountains around the world. Having an even deeper appreciation of VF's possibilities now, I'm incredibly optimistic about the company's future. I'm pleased to report that VF is stable, delivering against our commitments with strong discipline and making solid progress against our executional priorities. Today, I will build on themes introduced in February and highlight progress to sharpen our focus on the biggest consumer opportunities within our brand portfolio and on enhanced operational performance.
I will cover three areas. First, an overview of VF's performance in Q4 fiscal year 2023 and an update on work underway in pursuit of our near-term priorities. Second, an outline of the primary objectives for fiscal year 2024, which will be a year of transition and progress. Third, why I believe even more today in VF's unique value proposition and our plan to return to strong growth and long-term shareholder value creation. First, we delivered revenue and profits in line with guidance for Q4 to close our fiscal year 2023, and we've made solid progress towards our priority areas of focus.
Against the backdrop of continued challenging macroeconomic conditions, we grew full-year revenue by 3% in constant dollars, with 10 out of our 12 global brands flat or growing revenue, five of them double digits, and delivered earnings per share of $2.10 at the midpoint of our guidance. Revenue in Q4 was flat in constant dollars. Some highlights from our quarter performance to close out the fiscal year. Outdoor saw ongoing strength, led by continued stellar performance at The North Face. Vans was down in Q4 as expected, but we saw encouraging green shoots from new product launches and our increased focus on maximizing existing product platforms. We delivered sequential improvement in both Dickies and Supreme, which stabilized in Q4 behind very strong growth in our key market, Japan.
EMEA continued to execute well with its 8th consecutive quarter of strong growth, and Greater China's emerging momentum coming out of Q3 accelerated with Q4 revenue returning to positive growth. The North Face continues to execute strongly with engaging marketing and a steady stream of innovative styles. Our core snow sports category was a standout in Q4, while the iconic Nuptse jacket continued its strong momentum. We saw further growth in trail running footwear, particularly behind our proprietary Active technology, underlying the brand's significant opportunity in footwear. The North Face continues to resonate with a growing consumer base, with the XPLR Pass adding over 1 million new members to surpass 18.5 million global members at the end of Q4. Shifting to the near-term priorities outlined in February. Importantly, our company's supply chain performance improved significantly, and our work to turn around Vans is on track.
We are on or ahead of plan on our work to restore excellence in the area of supply chain. In Q4, we reached our target to reduce inventory by about $300 million. While it remains elevated, trends are good. We talked about our unsatisfactory customer service in Q3. I am pleased that our on-term performance has generally returned to target levels a full 2 quarters ahead of plan. Finally, while our costs remain elevated in Q4, our cost focus and planning discipline are starting to bear fruit, and we are on track to see lower costs in fiscal year 2024. On Vans, there are some positive developments. Our 2 emerging product lines of focus, UltraRange and MTE, were up 51% and 34% respectively. We are just scratching the surface on these.
We also demonstrated that we can energize Vans fan base when we have meaningful product news. In Q4, we had a highly successful start of our retro-inspired Knu Skool platform. This new shoe shows the potential to grow into a meaningful growth driver for Vans over time. Our global Vans Family membership grew to 28 million members by end of Q4, nearly twice the number from 2 years ago. Clearly, there's much work ahead of us, but there are encouraging signs for us to build on. My second message is that fiscal year 2024 will be a year of transition and progress, positioning us to accelerate profitable growth in fiscal year 2025 and beyond. We have an appropriately balanced plan in place for this fiscal year considering our organizational transition.
We will show progress in several areas with sensible revenue projections, increased marketing investment, and a sharp focus on margin, leading to solid operating profit growth and cash flow generation. Here's some highlights from our two biggest brands. On Vans, we continue to expect the brand to return to growth during the course of the second half of the fiscal year. Importantly, Vans will return to profit growth for the full fiscal year and even ahead of its return to revenue growth, aided by cost savings and SKU simplification. The Vans team is operating with a great sense of urgency and projects are on track. We continue to strengthen our team. A new brand campaign launched in April. We are sharpening our go-to-market process with a focus on digital.
We will increase our product development investment in fiscal year 2024, tease our new pinnacle premium line at the Paris Fashion Show next month, and aggressively drive UltraRange, MTE, and Knu Skool, while seeding the Style 93 women's Zelle Sandal launch now for a full launch this fall. More innovation will follow. Our consumer understanding work is in progress, sharpening our focus later this calendar year, and we are improving our shopping experience with a significantly reduced SKU count throughout 2023. Moving on to The North Face, we are increasing product and marketing investments to support consumer acquisition, innovation, and marketplace sell-through, and the expansion of the brand into new adjacent categories based on a clear permission from consumers to do so. Regionally, our focus is to improve execution in the Americas.
The first quarter will be difficult here as we work to regain the confidence of an already cautious set of U.S. wholesale customers in our ability to deliver full customer service after a difficult 2022 in that respect. We should see significant improvements starting this fall. The recent appointment of Jen McLaren to a newly created role to lead our U.S. key account management will bring stronger focus as we work with customers to capitalize on the many available partnership opportunities that exist. We expect EMEA to be resilient and generate profitable revenue growth in fiscal year 2024 behind its hallmark execution strength. APAC is anticipated to grow double digits this fiscal year, which we will fuel with increased brand investments.
What is important to us is that VF grows the right way, meaning profitably and sustainably, expanding margins and generating significant cash flow in fiscal year 2024. To do so, while supporting strong investments in the business, we are leaning into the more profitable parts of the portfolio and implementing a strong cost savings plan with a more systematic and ongoing cross-functional approach to eliminate costs that have lower value to consumers. VF's fiscal year 2024 will be about progress and focus on what we can control in a difficult macroeconomic environment. Steadily, methodically, and with discipline, we will set the stage for an acceleration of value creation in fiscal year 2025 and beyond. Finally, I'm more confident than I was even six months ago in VF's value proposition and our plan to return to strong growth and long-term shareholder value creation.
VF's distinctive business model unites a portfolio of iconic and deeply loved brands in profitable, large and growing spaces with strong enterprise capabilities for speed, consistency, and scale efficiencies. We have significant growth opportunities in APAC, and particularly in Greater China, where we have strong category tailwinds and tremendous brand penetration upside. VF's enterprise capabilities in supply chain, digital and technology, and international go-to-market platforms give us a competitive advantage, which we will fuel with strong investments in our brands and consumer capabilities. We are disciplined and dynamic capital allocators with a history of long-term value creation. Near term, we will invest in organic growth to maximize the potential of our unique portfolio while returning to disciplined M&A midterm to further strengthen our roster of brands.
We will continue to generate strong cash flow to reduce debt to target levels midterm and to return cash to shareholders through a competitive dividend. We believe that this is a solid long-term investment thesis, especially when combined with our clear plan to accelerate a return to profitable growth with strong operational discipline, an increase in product and marketing investments, and an expansion in margins through cost savings and more differential portfolio management. Lastly, we remain strongly committed to our company's purpose, not just because it is the right thing to do, but also because it drives value for shareholders. In summary, I'm confident VF is well positioned to return to strong, long-term shareholder value creation. Thank you. I'll now hand it over to Matt to talk through the financials.
Speaker 10
Thank you, Benno, and good afternoon, everyone. We are pleased to have delivered Q4 results in line with our guidance, but acknowledge we still have much to do to fulfill the full potential of the portfolio. The end of the fiscal year was characterized by an ongoing challenged macro environment, particularly in the U.S. The business continued to excel in certain areas, and importantly, we are seeing progress against our near-term priorities, although aspects of the business are still underperforming. During the fiscal year, revenue was up 3% in constant dollars, with growth in both wholesale and direct-to-consumer. Despite softer results in the Americas, we saw strong growth in The North Face. In Outdoor Emerging Brands, which saw growth of 12% both in the quarter and the year, and in the international business, highlighted by exceptional results in Europe and steady sequential recovery in the APAC region.
Adjusted gross margin was down 220 basis points, adjusted operating margin declined by 330 basis points, which led to adjusted earnings per share of $2.10 compared to $3.18 in fiscal year 2022. As anticipated, liquidity was slightly above $3 billion at the end of Q4, benefiting from our Eurobond offering, but impacted during the year by lower earnings and a significant inventory build. I also want to mention the Supreme impairment of $313 million recorded in the quarter. The business performance was clearly uneven in fiscal 2023. We are now planning more modest growth in fiscal 2024 before accelerating in fiscal 2025, benefiting from geographic expansion, the pace of which will begin to quicken starting this fall.
We remain confident in the brand's long-term growth potential, which will benefit from increasing access to the brand through both geographic expansion and further penetration in current markets, along with product category extension opportunities with current consumers. Diving into the fourth quarter results. Revenue performed in line with our expectations, flat in constant dollars, led by the international business up 8% and outstanding performance in The North Face, where I'd be remiss not to mention that the brand grew by double digits across all channels and all regions on a global basis in fiscal year 23. Outdoor Emerging Brands continued to deliver strong performance, Dickies and Supreme had improving results relative to the third quarter. As anticipated, Vans was down 12% and Timberland declined by 6%.
Adjusted gross margin was down 260 basis points and adjusted operating margins declined by 230 basis points with adjusted EPS of $0.17 compared to Q4 fiscal 2022 of $0.45. Taking a closer look at the regions in the fourth quarter, our results reflected a mixed performance across geographies. As expected, the Americas region was soft, with revenue down 7% during the quarter. Americas results were particularly impacted at wholesale, where regular price distribution was down 17%. North America remained challenging at Vans, which declined 18% in Q4 in the region. Timberland was also muted in the quarter at down 6%, while Dickies showed improvement to down 4%. EMEA continued to deliver strong results, up 8% in Q4, reflecting growth from most brands in the quarter and from all brands on a full year basis.
While we are starting to see some impact from macro pressures on consumer spending, most countries saw continued revenue growth in the fourth quarter and all grew for the fiscal year. EMEA's revenue was up 12% for the year while delivering strong profitability. Last but not least, we were encouraged to see our business in APAC further strengthen and show sequential progress in Q4, with revenue up 10%, driven by a return to positive growth in Greater China in the quarter, which was also up 10%. In particular, The North Face delivered a standout performance in Greater China, up nearly 40% as the brand continues to fuel demand with the local consumer and achieve high sales productivity amidst a recovering marketplace environment. Across the rest of the region, we saw broad-based growth in major markets during the quarter.
Further unpacking operating performance, Q4 gross margin was down 260 basis points. As expected, business mix remained a positive contributor to margin in the quarter of 60 basis points, driven primarily by the growth of our international business. This was more than offset by rate, down 310 basis points due to the impact of a more promotional environment, transactional FX, and higher product costs, partially offset by strategic pricing actions. Moving on to adjusted operating margin, which was down 230 basis points in the fourth quarter, reflecting the impact of the lower gross margin, partially offset by 50 basis points of SG&A leverage. SG&A declined slightly in the quarter as higher distribution costs and investments in advertising were more than offset by lower general and administrative costs, along with realized gains on sales of assets.
Negatively impacting the comparison was 30 basis points of FX. To share an update on the supply chain environment. We've seen some stabilization in the operating environment since Q3. As Benno mentioned earlier in the call, some initial signs of improvement are visible since taking aggressive action to return to our hallmark standard of excellence in this area. As we outlined in February, we are returning to a more rigorous approach to planning and coordination between brand operations, sales, and finance leaders, which is benefiting our inventory management and forecast accuracy as we progress through future seasons. While we're still contending with the impact on the business today from higher lead times affecting our planning and buying calendar last year, manufacturing and freight times are now consistently trending down and contributing to better on-time performance and improved customer service with the arrival of spring product.
Further on logistics, we've seen reliability rates continue to improve, although they still remain below historical levels. Collectively, these trends are expected to continue as we move toward the important back-to-school and fall holiday seasons. We're well on track to achieving our goal outlined last quarter of returning to our targeted on-time performance rates and service levels by the first half of the fiscal year. The use and cost of air freight is now more normalized. At the same time, ocean rates are coming down, and we'll see additional benefits moving into fiscal year 2024. FOB inflation remains a factor, but it has moderated to a lower rate for both raw materials and labor costs. We have strategic pricing actions planned in fiscal 2024 that will continue to be an offset to these increases. Now a few words on inventory.
We achieved the forecasted reduction signaled in February of $299 million during Q4. At the end of the quarter, net inventory was up 62% versus last year, which reflects the continued higher amount of core carryover and replenishment inventory, particularly at The North Face and Dickies. Excluding the increase relating to the change in Incoterms to support the supply chain financing program implemented in Q1 of fiscal 2023, inventory was up $620 million or 46%, a moderation from the year-over increase of 75% at the end of Q3. Moving on to the outlook for this fiscal year, which we expect to be a year of progress as we both continue to advance towards achieving our long-term goals and navigate a set of near-term macro and micro challenges. Revenue of flat to slightly reflects the following.
A growing direct-to-consumer business globally and in the U.S. A modest decline in the Americas for the year behind a weaker U.S. wholesale business in an increasingly challenging environment. A cautious posture by most retail partners and the effects of our supply chain missteps from last fall. We expect growth in Europe for the year, although we do anticipate some deceleration considering our evolved view of macro pressures. Continued progressive improvement in China, which we've seen gain momentum in recent quarters and expect that to continue. We anticipate gross margin to be up at least 100 basis points, reflecting lower promotions, which we expect to trend toward more historical levels beginning in the fall season, with benefits from mix, lower freight costs and strategic pricing actions, all partially offset by higher FOB costs and FX transaction headwinds.
Operating margin will expand, reflecting the higher gross margin, supporting targeted investments in our largest value-creating opportunities, namely The North Face and advanced turnaround. We'll continue to invest in key capabilities and support momentum within the portfolio, particularly in the areas of innovation and demand creation, while exercising careful cost management in light of the ongoing challenged macro environment. Earnings per share is expected to be in the $2.05-$2.25 range, which includes more than $0.30 of negative impact from higher interest, unfavorable foreign currency affecting operating results, normalized incentive compensation, and a modestly higher tax rate. To further help shape fiscal 2024, I want to provide some operational guardrails related to our Q1 expectations. Largely in line with the revenue curve we anticipated in February, we expect Q1 to be down high single digits in constant dollars.
Notably, VF reported its strongest quarter of last year in Q1 at +7%, as wholesale was +18%. This is exacerbated by wholesale shipment timing that benefited Q1 of fiscal 2023 due to supply chain unpredictability at that time. With Q1 being our smallest quarter, results are also subject to greater volatility. In addition, we have an unfavorable brand mix in the quarter with a bigger skew to Vans, which will have a disproportionate impact from U.S. wholesale as we expect the brand's revenue to be particularly affected by continuation of lower wholesale sales in the spring season as we work to right-size inventories. As anticipated, we expect wholesale across VF to remain pressured through the first half of the fiscal year, particularly in the U.S. This will impact all of our brands with a meaningful U.S. wholesale penetration.
While gross margin is expected to be similar year-over-year in the quarter, SG&A will deleverage from the revenue decline, which will pressure operating margins. This performance in Q1 has been anticipated and is contemplated within our expectations for fiscal year 2024. Moving back to the full year. Our free cash flow is expected to be about $900 million, driven by growth in EBITDA and a reduction in working capital, primarily from activities to further right-size inventory levels as we migrate through fiscal year 2024. We continue to expect inventory to be near to normalized levels by the end of the calendar year and fully recovered by fiscal year-end, down more than 10% year-over-year at the end of fiscal year 2024. These two benefits will be offset by higher tax payments and interest.
Noteworthy and as continuously contemplated, the $900 million of free cash flow includes the impact of anticipated tax payments of approximately $290 million relating to intercompany IP transfers completed in a prior period. VF's strong anticipated cash generation, supported by decisive actions we've already taken and will continue to take, will ensure our path towards deleverage over the next 24 months. Specific to the balance sheet and expected cash evolution for fiscal 2024, we ended this year with about $3 billion in liquidity. Throughout the year, we anticipate using our free cash flow to pay off debt and continue to return cash to shareholders through the dividend, which we project will result in liquidity of at least $2.5 billion at fiscal year-end.
A brief update on the Timberland tax appeal of the tax court decision regarding the tax treatment of the acquisition of Timberland in 2011. The U.S. government filed their brief on May 4, we'll be filing our response to this brief in early June. We and the government have requested an oral hearing of the case, which we expect will be granted for this fall. In summary, our focus is clearer than ever on the road ahead. Fiscal year 2024 will be a year of progress where we'll advance our key strategic priorities as we continue to focus on the consistent execution of our plans. We will deliver improved operating performance and financial results fueled by an expansion in gross margins, EBITDA growth and strong cash generation, all of which supports our path to delever and strengthen our balance sheet.
Fiscal year 2023 was certainly a challenging year in our business and for our teams. I'm consistently impressed by the resilience and strength of our more than 30,000 associates, which further increases my confidence in the actions we have implemented to enable VF to generate long-term sustainable and profitable growth beginning in fiscal year 2024. With that, we'll now open the line to your questions.
Speaker 11
Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that everyone please limit themselves to one question to allow everyone in the queue a chance to participate in the Q&A session. Our first question comes from the line of Abbie Zvejnieks with Piper Sandler. Please proceed with your question.
Speaker 0
Great. Thanks so much for taking my question. I guess just can you talk a little bit about the wholesale behavior in the U.S.? I mean, it sounds like next quarter will be challenging from both the footwear and apparel perspective groups. Can you just really talk about the differences, I guess, between what you're seeing in footwear with both Vans and Timberland and the difference between that and The North Face? I guess, complimentary to that, how willing are retailers then to take on, like, new product at Vans that will be driving kind of the second half growth? Thanks so much.
Speaker 10
Yeah. Hi, Abby. I'll start that one. Certainly Benno can add if he wants to on the new product in particular. I would say overall the environment generally is challenging, right? I think that's well understood in the near term, I would say. I'd highlight kind of two main issues for us. Certainly the macro wholesale partners generally taking a more cautious approach to order books. That's certainly prevalent in the U.S., but beyond. In Europe, we're seeing some of that as well. As they think about the fall order book positions, they're being very cautious and very careful.
Certainly coming off of a year last year where inventories got, you know, distorted, way too high and, you know, created a really heavy promotional environment. You know, they're certainly reacting to that, I think is one thing. I think just a general kind of cautious tone around consumer. For us at VF, we're also dealing with, quite honestly, the effects, you know, certainly in our first half of our own missteps from fall last year. You know, our supply chain in fall of 22 didn't perform to the level that we expect and kind of our own expectations and our own bar.
But we'll largely be past that, you know, moving over the next 2 quarters, and certainly as we move toward the holiday sales season, we'll be in a much better place. You know, as it relates to, you know, footwear versus apparel, I don't think we're seeing a discernible difference in terms of how retailers are responding. I would say, generally speaking, to answer your question, certainly new, compelling, interesting product, they're always, you know, eager to understand what we have to offer there and willing to take those things 'cause that certainly helps from a traffic driving perspective.
Speaker 0
Thank you.
Speaker 11
Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.
Speaker 5
Good afternoon. Thank you for taking the question. Can you talk to the confidence that you have in the drivers of margin inflection forecasted in your outlook today against a choppy macro? What levers do you still have to pull if the consumer environment gets weaker? Matt, can you quantify your expectation for each of the moving pieces in gross margin, particularly the lower promotional effect that you're anticipating in the back half? Thank you.
Speaker 10
Yeah, certainly, Brooke. I would say, you know, gross margin up at least 100 basis points is certainly the biggest driver of margin expansion, you know, as we look at fiscal 2024. I unpack that, you know, a moderating promotional environment is assumed to some degree beginning from fall, I would say. Not back to, I would say normal levels, certainly moderating and improving from there. We have a lot of confidence in that, especially kind of in terms of our view and visibility where we think inventories will be positioned, certainly our own inventories, but the market itself. That's a good guy for us. I think we're being fairly cautious in our projection of that's a big part of the gross margin increase.
That's certainly not getting recovering everything we lost this year. We talked about, you know, significant reductions in margin over the last couple quarters being heavily driven by promotion. While some improvement, not all of it. Business mix will continue to be a benefit. You know, think about that kind of in the half a point range, I think is fair on a full year basis. We've got the benefit of lower freight costs coming into the margins and strategic price increases, which will, you know, largely offset continued higher FOVs, although moderating, and some foreign currency headwinds inside of product costs. Gross margin clearly is a big driver for us.
You know, SG&A will be, you know, fairly cautious in terms of how we think about spending as we move through the year, given the environment. We're continuing to drive, you know, it's becoming a kind of a routine discipline here as part of our, you know, revised and I would say revamped planning process in some way to really get after, cost savings on an ongoing basis. We're never stopping there, and we're looking for ways to reduce costs, to funnel investments back towards the consumer and quite honestly, back towards the things that are working.
Speaker 13
Thank you. If I could just follow up, can you provide a little bit more color on your leverage targets and actions that you're taking to strengthen the balance sheet throughout the year?
Speaker 10
Yeah. Accelerating our path towards our target leverage, which is two and a half times gross over time. That work is one of our top priorities and certainly a focus of our capital allocation. The next couple of years, it's a heavy emphasis. We're gonna generate strong free cash flow this year, and we'll use that. We'll pay a dividend as we announced, you know, a continuation of the dividend, but more commensurate and in line with our policy of, you know, kind of a 50% payout target. Beyond that, we'll pay down debt. You know, the drivers of free cash flow are gonna be consistent EBITDA growth. Certainly, good progress in 2024. Expect to see that further accelerating beyond there.
Big working capital benefits this year, both from an inventory unwind standpoint. Also, we've got a benefit in accounts payable as we get the full anniversary of the terms change that we put into place over the last few months and a continued sharpened focus on capital investment. We expect to spend about $200 million this year on CapEx, which is a little lower than our kind of long-term average spend and really all geared toward the consumer. Those are the things we're thinking about.
I would expect at the end of this year, our gross leverage would be under 4 times and our net would be in the mid-3s, and then, you know, kind of sequentially similar kind of progress as you move into fiscal 2025.
Speaker 13
Thank you very much.
Speaker 10
Thank you, Brooke.
Speaker 11
Our next question comes from the line of Paul Lejuez with Citigroup. Please proceed with your question.
Speaker 12
Hey, thanks, guys. Curious if you can talk about what you're seeing in your DTC channel for each brand and how that compares to the sell-through that you're seeing at the wholesale channel. One other just bigger picture. You guys have purchased businesses, you've spun off businesses, you've done, you know, both of those things. I'm curious where your heads are at in terms of whether or not you're in the mindset of still acquiring more at some point or maybe likely to sell or spin something off. Thanks.
Speaker 10
Yeah. I'll take the first part and let Benno talk about the second part of your question. You know, DTC is a growth driver for us. It will continue to be. It's, you know, approaching 50% of the business certainly, and over time we expect will be half of the business and beyond as we think about our long-term plan. You know, Q4 was another strong result, you know, overall and consistent with the last couple quarters, upload single digits and despite the challenges at Vans and to some degree, the choppiness that we've seen over the last few quarters in China. We're really seeing good results across much of the portfolio. That will continue. And we're benefiting from the investments that we've made in DTC.
You know, think about digital, or data and analytics, you know, brand loyalty programs, consumer insights, a sharper focus on ROI, the omni capabilities. We feel good about the progress that we're making and the opportunity here that will be further fueled as Vans begins to turn around its business later this year. As it relates to wholesale and sell-throughs, I mean, we're continually seeing, you know, consistently good results in the businesses that are consistently performing. You know, Vans has been challenged, and I think we, you know, continues to be that way in its classic products in many cases, but buoyed and strengthened, obviously by newness and some of the things that we've put into place.
You know, Benno talked about some of those things in his prepared comments. You know, I think the underlying sell-through in the businesses that are, that are performing is pretty consistent across DTC and wholesale.
Speaker 3
Yeah. Paul, regarding M&A. Near-term, clearly we're focused on organic growth to pay down debt. Also that's based on the belief that M&A should come on top of a strong operating performance, and we're in the process of making significant progress on that. We'll turn M&A back on once we're close to target debt. We certainly want to get bigger, not smaller. We feel like we're in an attractive space, with a lot of interesting targets. You know, our promise to our investors is that we're gonna continue to do M&A with a lot of discipline. We're looking for sustained growth, margin accretive growth and ongoing consumer tailwind. Near term, it's all about organic growth investments and then M&A will turn back on mid-term.
Speaker 12
Thanks, guys. Good luck.
Speaker 3
Thank you.
Speaker 11
Our next question comes from the line of Laurent Vasilescu with BNP Paribas. Please proceed with your question.
Speaker 9
Thank you very much. Good afternoon, Benno, and good afternoon, Matt. Thanks so very much for taking my questions. In your press release, you talk about how 10 of the 12 brands were flat or actually grew for fiscal year 2023. A lot of us model for at least for the big 4 brands. Can you maybe just give us some context of just how we should think about at least the 4 big brands, so we can get confidence around the full year guide? Maybe just, Matt, if you can give a little bit of shape of the curve of the year, how should it unfold by quarter? I have a follow-up question.
Speaker 10
Thanks, Laurent. Great to talk to you. You know, first off, let me just click up in terms of your question about brands and the outlook. We've got a realistic plan. It's not an easy external environment, and certainly in the near term, but we've got a lot of confidence in the things that we're doing. You know, the initiatives and the actions we've been driving are working and many parts of our portfolio are performing. The North Face consistently is delivering outstanding results. Our EMEA business has grown strongly for the last several years, including, you know, 12% in fiscal 2023. Our direct-to-consumer business, we continue to make investments, is consistently growing.
Speaker 3
Our operational execution continues to improve with better planning now firmly in place and impacting the go forward. Our supply chain performance improved a lot in Q4 with better on-time performance and customer service. We've met our guidance now for the last couple of quarters, including a large inventory reduction here recently. We took decisive actions to strengthen our financial position and have a clear plan to reduce our leverage levels as I talked about. The right work against our strategy at Vans is progressing and will lead to that business starting to turn around later this year.
We've got a powerful portfolio of brands positioned to benefit from strong and growing tailwind marketplaces. Our 30,000 associates around the world are consistently delivering the things that are necessary to win in the marketplace today and set us up for growth into the future. Our plan is working. We're on track. We feel really good about where we are and the direction that we're heading and the opportunity ahead. You know, from an outlook standpoint, you know, that kind of summarizes how we think about it. Your question is a little more specifically and certainly within... I laid out some of the assumptions which are, you know, probably more, more channel-based and macro and the like. You know, The North Face momentum, you know, will continue. We'll continue to have really good results there.
It's not immune to some of the wholesale challenges that we've mentioned in the short term in the U.S. and, you know, to a lesser degree, but to some degree in Europe. You know, we said we expect Vans to return to growth during the course of the second half. We're going to see improving results in both Supreme and Dickies. In both of those brands, we expect to grow. We'll continue to see good performance in the Outdoor Emerging Brands. We're, you know, as we begin to even evolve our operating model there to accelerate value creation in those brands.
As it relates to the curve, you know, Q1 will clearly be the toughest compare, versus last year, and also, probably most severely and acutely impacted by, kind of the right sizing of inventories, you know, in the wholesale channel and the actions that wholesale partners are taking. That'll begin to ease, you know, and sequentially, improve. Then, it'll be, I think, a more consistent performance as we move kind of in the latter part of the year. Clearly, Q1 will be a bit more challenged.
Speaker 9
Very helpful, Matt. Just quick follow-up. Just curious to know how the permanent CEO search is progressing. Should we anticipate some news at some point this summer, or should we anticipate it for later this fall?
Speaker 3
I'm not gonna give a wider forecast, but we said 6-12 months, and now we're still short of 6 months. It's a rigorous process we're casting on. We have cast a wide net, internal candidate, external candidates. The process consists of interviews and leadership assessments. What I can say is that we're making strong progress. What I also can say is that my confidence in the ability to hire a great new CEO has never been higher. We'll update you when the news is ready. In the meantime, as you hopefully can see from today's report, this team is stable, very committed and engaged, and the business progress is very solid, as is our progress on engaging the organization.
The goal here, is to find the right CEO, not, a fast CEO. We're very much on track to, deliver that, in the time that, in the time range that, we talked about, at the beginning of this process.
Speaker 9
Great to hear. Thank you very much.
Speaker 11
Our next question comes from the line of Janine Stichter with BTIG. Please proceed with your question.
Speaker 7
Hi. Thanks very much for taking my question. On Vans returning to growth in the back half of the year, want to know how we should think about the pacing in terms of DTC versus wholesale. I know you tested some changes to the stores business for Vans in terms of reduced SKUs and some of the in-store merchandising. I want to get an update on what you were seeing there in terms of early reads. Thank you.
Speaker 3
Yeah, Jeannie, thanks for that. you know, as you think about the fiscal year, what we've commented on is that we'll return to sales growth sometime during the course of the back half, but that will be growing profit in the full year even ahead of sales growth. That's what we predicted in February. That's what we're predicting today. The plan is really unchanged, and the work is on track and executed with great sense of urgency. As you think about DTC versus wholesale, we certainly expect DTC to grow quite a bit ahead of wholesale, given the issues that Matt reported on, which affect Vans, but frankly, affect our whole industry.
In DTC, you should see the movement earliest, and you should see growth in the channel for the fiscal year. Everything else, you know, all the work, including SKU simplification, is on track. We are rolling out a new store layout with improved merchandising, and we will be done with that by the end of 2023. We expect the SKU count by the end of fiscal year 2024 to be about 30% lower than what it was at the end of fiscal year 2023. All very consistent with what we talked about. All very consistent. All focused on product, on consumer engagement, on productivity, on organization, on cost efficiencies, all on track and proceeding with a great sense of urgency.
Speaker 7
Great. Thanks very much, and best of luck.
Speaker 3
Thank you.
Speaker 11
Our next question comes from the line of Bob Drbul with Guggenheim. Please proceed with your question.
Speaker 4
Hi. Good afternoon. I was just hoping that you could elaborate a little bit more on China, either by brand, you know, sort of Q4 into Q1, just what you're seeing there. I know you said, I think double-digit for the year for 2024, but if you could maybe just address, you know, some of the recent performance and really how you're feeling, you know, within what you're seeing, that would be great. Just a second quick question is just on Supreme. I know you took a write down $300 some million. Just, you know, how you feel about that business and sort of what you're really seeing real time, you know, with the strength of the brand at this point. Thank you.
Speaker 3
Yeah, feeling bullish about China. We turned to growth in Q4 at +10%. Recall in Q3, it was -10%, so a positive reflection. The North Face might not surprise you, is also leading a growth year. Was up nearly 40% in Q4, and we certainly expect continued momentum in fiscal year 2024. First, we have a lot of under-penetrated brands with a tremendous amount of upside. Second, there's a lot of category tailwinds with government support. Three, we're certainly also reaping the benefits of our own focus. As you probably know, we've moved our headquarters to Shanghai for the region with a local leader in that city. We have more localized innovation and marketing plans, and we're certainly investing to fuel into that long-term growth opportunity.
A very bullish about Greater China and feel very good about where we stand and what it will do for the business in fiscal year 24. Supreme, you know, best way to describe it is, you know, it remains a great brand and acquisition, there's no doubt about it. We saw sequential improvement in Q4, which is good, and we're expecting growth from the business, margin accretive growth to the company in fiscal year 24. And we're very confident in our worldwide strategy. Recall that our goal is to increase global access to the brand from today, 20% of global consumers to 40% in three years. And there are three strategic pillars behind it. First, grow brand awareness. Second, expand the new categories, including footwear.
Last but not least, geographic expansion with a keen eye and focused on Asia. The key to that is store openings, which of course, is the key, the big reason why performance, as Matt said earlier, was perhaps a little more uneven the last couple of years. We've done very little of that given COVID, but we'll re-accelerate that work. Our stores are performing really well. Our best market is Japan these days, which is growing strongly, and it's no surprise that that's also the market where we have the most stores, even more stores than in the United States. We've recently entered the Beijing market, and that store is performing well. The latest store openings in the U.S., in Los Angeles, where we've moved the previous location and in Chicago are performing well.
We're now focused on opening more markets in Asia. Long-term growth tailwinds on a great brand with a lot of opportunities ahead.
Speaker 4
Thank you.
Speaker 11
Thanks, Bob. Our next question comes from the line of Adrienne Yih with Barclays. Please proceed with your question.
Speaker 1
Good afternoon. Thank you. Benno, my question is on sort of the wholesale business in general. Clearly last year, the retailers were kind of building up safety stock, and I think that's what, Matt, you were referring to, kind of the C-stocking. Should we think about it as sort of the normalization of kind of the timing shift that happened last year? It would seem that after we get through this next four quarters, that by this time next year, right, the retail channel has to grow sales, so they would be back on potentially buying flat to up. If you can just kinda help contextualize that. Then Matt, with regard to the promo comments, two things. When did you strategically raise prices? I think it was maybe fall of last year.
Are you already seeing sort of reduced pricing concessions or any of that type of thing for the back-to-school or fall order book that gives you comfort? Thank you so much.
Speaker 3
Yeah, thank you. I'll take the one on U.S. wholesale. I think we've commented on this. Customers clearly a little cautious. Everybody's sitting on higher inventories, so that will depress the business short term for everybody in our categories. I think the particular challenge that we have at VF is that we're dealing with the hangover from our 2022 customer service issues. We have to regain customers' confidence back in our ability to fully meet their needs. That's sort of a wait and see. We think that that's gonna, you know, certainly have a negative impact during the first half of the fiscal year, where we'll see a very market difference between DTC and a more cautious outlook on wholesale.
As we get to the back half of the fiscal year, we expect the two to move more in line, and we expect a significant recovery in U.S. wholesale and certainly continued strength in the DTC channel.
Speaker 1
Great. Thank you.
Speaker 11
Adrienne.
Speaker 10
Yeah, if I understood your pricing question, I'll answer what I think I heard. If I'm not capturing it, you can let me know. You know, we took quite a bit of pricing action this past year. I think we talked about mid-single digit price increases, kind of broadly speaking, broad-based. I would tell you, at the end of the day, probably 95% of what we planned occurred. So those prices, those price increases, you know, went into the market and have stuck and products generally have performed, notwithstanding kind of the overall macro. In terms of the, you know, the evaluation of the individual products themselves, we feel really good with what we got done there. We're a little bit more modest this year in terms of price increases.
Not as broad-based, I would suggest, and probably more in the low single-digit, a couple % range is what we've got baked in. Kind of more normalized. That's about what we'd see on a normal year. Price increases this year are certainly a little bit lower. You know, we feel good about what we've gotten done there. You know, we have a rigorous process as we've talked about a lot, in terms of how we do this work and how we make those decisions. We feel good about, you know, how that'll play out.
Speaker 1
Oh, okay. Then the second part of that was just the confidence in promos. Is that coming from the DTC business and evidence there? Or are you actually, you know, giving fewer kind of pricing concessions on the fall/back to school kind of orders?
Speaker 10
Well, I think it's both, right? We are giving fewer concessions at this stage. I mean, we're seeing the order books stick. Our expectation, you know, moving into the fall season is that we won't have the issues. Remember, our issues were exaggerated last year. We were late. Honestly, we were late on delivering product, and particularly in the outdoor segment. Our outdoor brands in particular suffered there, and we had to offer a lot of additional pricing concessions to get product, you know, in and on the floor. We won't have to do that this year. We're well positioned. Our supply chain is in a good place and we fully expect it will be on time or even maybe above our targets from a kinda service level perspective.
We've got our normal expectation of discounts and maybe a little bit of excess to give us some room, but overall, we feel good. Certainly to your point, D2C, which is nearly half the business fully in our control and, you know, we feel good about how we've got that positioned, both from an inventory and a merchandise plan standpoint.
Speaker 3
Yeah. If you guys were building on last point. Clearly as inventories ease up in a category, it'd be very consistent with past behavior that promotions are lower. That's what we're assuming. That said, we assume that promotions are still elevated from 2022. We think that's prudent. We're also not assuming that we're recapturing the full margin benefit from the higher 2022 promotion. This is another example of, you know, being financially prudent and disciplined and having a balanced plan that gives us, you know, room to react should things get worse, but also room to do a lot better if things perhaps are a little trendier than we currently assume.
We think our plan is straight down the middle, with perhaps a slight eye on being conservative.
Speaker 1
Fantastic. That's very helpful. Thank you.
Speaker 11
Our next question comes from the line of Gabriella Carbone with Deutsche Bank. Please proceed with your question.
Speaker 6
Hi, good afternoon. Thanks for taking my question. I just want to follow up on Vans. You mentioned some big growth numbers for UltraRange and MTE. How do you view the opportunity to build those franchises, and what do you think is making them so successful?
Speaker 3
Could you repeat the very last question, please? The very last part of your question. I did not get that.
Speaker 6
Oh, yeah. Just how do you view the opportunity to build those franchises? What do you think is making them so successful?
Speaker 3
Yeah. You know, as we, as we analyze where we stand with the consumer, which is what we've done a lot of over the last six months, we realized that there's a big opportunity taking franchises that are out there but have a very low awareness to the next level. That's why we're so bullish on MTE and on UltraRange. Awareness generally on both platforms, even though they've been around for several years, hovers at around 10%. Even loyalists at Vans show awareness of below 30% on those two. What we're focused on in general in Vans is to tell fewer, bigger stories and dedicate ourselves more to platforms. MTE and UltraRange are two.
We're building awareness, and we're backing it up with new products and news, and we're reintroducing these platforms to consumers, and that's what's working. UltraRange plus, 51%, MTE plus, 34%, and they're both part of what we call Progression. Progression is about 30% of Vans. You know, these absolutely have the potential to be very meaningful for the brand in the future. That's perhaps the model, this platform approach and building awareness over a longer period of time that we're also applying with Knu Skool, which we've seeded in Q4. Very successful. Sold out within two weeks. We are leaning into inventory and think that could be meaningful.
Just this last week, we began seeding a new women's sandal, we call it Style 93, that is going to see a full launch this fall. We're also very bullish about this and the ability to turn into a meaningful platform. This is a change in how we treat new products. Fewer stories, bigger stories backed with more money over a longer period of time in order to make them more sticky. This is a good approach that's showing some really strong green shoots and some proof points that we're effectively able to engage consumers when we have relevant product news and we tell stories in an engaging way.
Speaker 7
Great. Thank you so much.
Speaker 3
Thank you.
Speaker 11
Our last question will be from Jim Duffy with Stifel. Please proceed with your questions.
Speaker 8
Good afternoon. Thanks for taking my question. I'm hoping you can speak more on the inventory posture. What's the carryover seasonal inventory composition? Can you give some directional commentary on how inventory is mixed between brands and regions? Maybe if you could give us a sense for purchase orders for new receipts. I presume that down meaningfully versus a year ago. Can you perhaps give us an order of magnitude on that?
Speaker 10
Yeah. Hey, Jim. You know, inventory, we said we're gonna reduce inventory in Q4, and we did that. We feel good about kinda having our arms around what we're gonna get done here. You know, we continue to carry higher levels of core and carry over in excess, much of which is in The North Face and Dickies to a much lesser degree, honestly, in Timberland and Vans. That said, we've said a few times we're comfortable carrying this into 2024 because we've got plans to consume this inventory within kinda normal planned assortments across channels through the balance of spring and then really into fall holiday. You know, that doesn't give us a lot of concern.
I mean, certainly I'd rather not have that inventory and rather have that cash and manage it differently, we'll be able to work our way through that. You know, I mentioned, I think in my prepared comments, up about $600 million or $620 million ex in transits at the end of the year, which equated to 46%. To give you a little bit of color there, about 15% of that increase, of that $620 million is what I call prior season discontinued product. All right? That's a number, right? Not nothing, it's not unmanageable at all and will be sold primarily through our own outlets and at normal intervals in the excess channel as we normally would. We've got plans to move through this inventory.
We're on track, as we laid out a few months ago, to reduce inventory levels, to reduce days of supply while protecting brand equity, and we'll continue to do that over the next few quarters. We expect to make strong progress by the middle of our fiscal year, with inventories actually inflecting and declining at that point, near to normalized levels by the end of the calendar year and really kinda fully recovered by the end of the fiscal year. I would suggest down, you know, more than 10% year-over-year at that point in time. That kinda gives you a little bit of glide path of how we're thinking about it. You know, hopefully that's helpful.
Speaker 8
It is. Can you comment on the purchase orders for new receipts?
Speaker 10
Yeah. Right. No, you're right. Purchase orders are down. I'm not gonna quantify that, but they're down. You know, if you think about, you know, a reduction of inventory of a little over 10% and what that means from a COGS consumption standpoint, you can kinda do the math there and tie that into, tie that into what we've laid out in terms of, from a revenue standpoint, you know, flat to up low single with some improving margins. All that adds up to a fairly meaningful reduction in purchases for sure.
Speaker 8
Excellent. Thank you so much.
Speaker 10
Yeah, you got it. Thank you, Jim.
Speaker 11
We have reached the end of the question and answer session. I'll now turn the call back over to Benno Dorer for closing remarks.
Speaker 3
Thank you all for joining us today. We appreciate you. I look forward to speaking with you again in early August when we'll report fiscal year 2024 Q1 earnings. Until then, please be well and be safe. Take good care.
Speaker 11
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
