FactSet CallStreet VF Corp User Manual

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1-877-FACTSET www.callstreet.com

Total Pages: 24

15-May-2020

VF Corp.

(VFC)

Q4 2020 Earnings Call

VF Corp. (VFC)

Q4 2020 Earnings Call

Corrected Transcript

15-May-2020

1-877-FACTSET www.callstreet.com

CORPORATE PARTICIPANTS

Joe Alkire

Vice President-Corporate Development, Investor Relations & Treasury, VF Corp.

Steven E. Rendle

Chairman, President & Chief Executive Officer, VF Corp.

Scott A. Roe

Chief Financial Officer & Executive Vice President, VF Corp.

.....................................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Robert Drbul

Analyst, Guggenheim Securities LLC

Omar Saad

Analyst, Evercore Group LLC

Michael Binetti

Analyst, Credit Suisse Securities (USA) LLC

Jonathan Robert Komp

Analyst, Robert W. Baird & Co., Inc.

Jim Duffy

Analyst, Stifel, Nicolaus & Co., Inc.

Erinn E. Murphy

Analyst, Piper Sandler & Co.

Adrienne Yih

Analyst, Barclays Capital, Inc.

Camilo Lyon

Analyst, BTIG LLC

MANAGEMENT DISCUSSION SECTION

Operator: Greetings and welcome to the VF Corporation fourth and fiscal 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host, Joe Alkire. Please go ahead, sir.

Joe Alkire

Vice President-Corporate Development, Investor Relations & Treasury, VF Corp.

Good morning and welcome to VF Corporation's fourth quarter fiscal 2020 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 defined in the press release that was issued this morning. We use adjusted constant dollar amounts as lead numbers in our discussion, because we believe they more accurately represent the true operational performance and underlying results of our business.

You may also hear us refer to reported amounts, which are in accordance with US GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press

VF Corp. (VFC)

Q4 2020 Earnings Call

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release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors.

During the fourth quarter of 2020, the company determined that the Occupational Workwear business met the held-for-sale and discontinued operations accounting criteria. Accordingly, the company has reported that related assets and liabilities of the Occupational Workwear business in discontinued operations as of the date noted above and include the operating results of this business in discontinued operations for all periods presented.

During the first quarter of fiscal 2020, the company completed the spin-off of its Jeans business into an independent, publicly traded company under the name Kontoor Brands. Accordingly, the company has removed the assets and liabilities of the Jeans business as of the date noted above and included the operating results of this business in discontinued operations for all periods presented. Unless otherwise noted, results presented on today's call are based on continuing operations.

Joining me on today's call will be VF's Chairman, President and Chief Executive Officer, Steve Rendle; and Chief Financial Officer, Scott Roe. Following our prepared remarks, we'll open the call for questions. Steve?

Steven E. Rendle

Chairman, President & Chief Executive Officer, VF Corp.

Thank you, Joe, and welcome, everyone. I hope my comments this morning find you and your family safe and healthy. Please bear with us today as we are all working from separate locations. It is remarkable how quickly the world has changed since our last call just a few months ago. Through the first 10 months of the year, VF had a powerful momentum, tracking ahead of our long-range plan. And while COVID has profoundly impacted the world as well as our business for the last two months of our fiscal year, I've never been more confident in our people, our brands, and our future.

It's times like these that serve as a purifying fire, separating the best companies from the rest. We've prepared ourselves well for times such as this. Our strong brands, our financial and supply chain disciplines coupled with our fortress balance sheet allows us to weather almost any storm. I'm confident that VF will emerge from this crisis in a position of strength, prepared to accelerate in a time when many are under tremendous financial strain and unable to adequately invest in their business.

And while COVID has probably been a dominant theme recently, let's not forget that 2020 has been a year of significant accomplishments for VF. To name just a few: the move to Denver; the release of science-based targets in line with our commitment to sustainability; the successful spin-off of Kontoor Brands; and the announcement of our intent to sell the Occupational Workwear business.

Even with this exceptional activity, we were managing our way to a strong year. Through the first three quarters of fiscal 2020, we've delivered 9% organic revenue growth, more than 100 basis points of gross margin expansion, and 19% organic earnings growth. Vans and The North Face, our two largest properties, were growing 17% and 9%, respectively, and our global D2C platform was growing at a double-digit rate, led by 20% digital growth.

So, what's giving me confidence about our future? First and foremost, our incredible community of associates, from our experienced leadership team actively managing this crisis to our distribution center associates working tirelessly to enable our brands to continue serving our consumers. Words cannot fully express how thankful I'm for the entire VF family and their infallible commitment to each other and our business.

VF Corp. (VFC)

Q4 2020 Earnings Call

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15-May-2020

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Next, the nimbleness of our enterprise, which has demonstrated once again the ability to adapt and act with agility to protect our people, protect our enterprise, and preserve liquidity and to quickly pivot to those priorities which position us to emerge in an advantaged position. And I'm thankful that we have been aggressively transforming VF into a consumer-led, retail-centric, digitally-focused enterprise. This transformation, coupled with the renewed focus on the three lens approach to managing the portfolio, has honed our organizational focus and simplified our business model.

Our ability to pivot in light of changing consumer and distribution environments through portfolio actions has been and will continue to be both a catalyst for growth as well as a hedge against risk. Our movement away from challenged distribution channels while focusing more deeply on the most attractive, addressable markets gives us a real advantage in an uncertain and fast-evolving world.

Finally, for the commitment across our organization to act as a purpose-led, performance-driven enterprise during the time of crisis. In addition to providing pay continuity to retail associates during the global lockdown and increasing hourly wages for our distribution center associates, VF has committed nearly $7 million in financial support and product donations across more than 20 different branded initiatives, and we're in the process of producing up to 3.5 million pieces of urgently needed PPE for COVID-19 relief efforts.

Our most recent, COVID-related actions are in addition to the ongoing efforts around our Made for Change initiatives, leading with science-based targets, focused on improving people's lives and planet. Using the considerable scale and resources of VF for the betterment of both people and the planet are not just the right thing to do, it is good business, as we forge even deeper connections with our consumers during this time of crisis.

Collectively, these characteristics position VF to not only weather this storm, but to emerge as an even stronger, leaner, digitally-oriented enterprise on the other side of the current pandemic. In light of the current environment and the new world we find ourselves operating within, I'd like to spend a few minutes highlighting the key elements of how VF is managing the now, as well as how we are approaching emergence from this crisis and how we intend to capitalize on the next.

Regarding the now, from the early days of the outbreak in China, we've taken a people-first approach in our COVID-19 response, prioritizing the health and safety of our people, while also protecting their financial well- being. As my good friend and North Face athlete, Jimmy Chin told me, all storms pass. It's how you weather them that matters. We have a bias for action and decisiveness to effectively manage this crisis and I'm proud of the actions we've taken guided by our values.

As we've implemented measures to care for and protect our people, we've also taken several key actions to advance our Enterprise Protection Strategy. These prudent actions have helped us preserve and enhance liquidity and given us more flexibility to manage our operations through a prolonged crisis. These actions have included: reducing discretionary spending and compensation across the VF senior leadership team and our board; proactively executing a $3 billion bond offering to establish a significant cash buffer and ensure over $5 billion of near-term liquidity; implementing a thorough and rigorous review of current inventory and forward inventory commitments; suspending our share repurchase program; collaborating closely with our most important strategic partners across the value chain; and finally, proceeding with our previously announced divestiture of VF's Occupational Workwear business as a potential source of additional cash.

VF Corp. (VFC)

Q4 2020 Earnings Call

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One of VF's greatest assets has always been our operational discipline and the rigor with which we manage our balance sheet. Today, that discipline and know-how are coming together to create a range of options for how we maintain and further bolster our position of strength, which Scott will cover shortly.

Turning to our brands, all of which remain focused on driving consumer connectivity and brand engagement during these unprecedented times. Our brand teams are more than ever using this unique opportunity to share best practices, key insights, and learnings among our marketing and digital leaders to accelerate impact and efficiency. We've made a purposeful shift in our consumer engagement actions to employ greater empathy and compassion, connecting with consumers in the unique stay-at-home environment we all find ourselves in. This strategic shift has resulted in stronger engagement and affinity, leading to higher consideration and conversion.

I encourage you to explore our brand websites and social platforms to see this come to life. Demonstrated in The North Face's healthcare worker and first responder initiative, coupled with the United to Move the World program, along with Vans' Bouncing off the Walls campaign, Shoebox Challenge activation, and Foot The Bill program or Altra's Embrace the Space virtual workouts and Timberland's Stay Strong campaign. I'm proud of our brand's ability to maintain strong emotional connectivity with our consumers despite this disruption in the world around us.

None of us knows exactly how the COVID-19 outbreak will change our world, but we're already beginning to see signs of what's to come. Unfortunately, our brands and businesses are uniquely positioned to address certain evolutions in consumer behaviors and value systems. For example, we believe people will place greater value on exploring the outdoors after spending so much time in their homes. We believe there will be an increased commitment to personal well-being and active lifestyles with health becoming a major new priority.

We believe people will have a greater appreciation for the frontline workers who keep others safe and the tradespeople who keep our world running. We believe there will be an elevated focus on environmental sustainability that will lead to a sharper focus on combating global climate change. And with online shopping serving as a lifeline for so many consumers around the world during the pandemic, we believe the proliferation in e-commerce will be significant.

Regardless of whether these changes are subtle or seismic, our brand teams are already working to connect even more intimately and meaningfully with consumers in a post-COVID world. Today, we're preparing for this new future and positioning our brands to set the standard for what's next. The long-term strategy we've introduced in 2017 has repeatedly proven that we're activating a powerful plan, capable of delivering sustainable, high-quality growth and top-quartile returns, and I strongly believe that our strategy will be even more relevant in the years ahead.

We've evolved and focused our strategy since it was introduced, but the key choices at the heart of it remain the same: driving and optimizing the portfolio; distorting investments toward Asia, with a heightened focus on China; elevating D2C and digital; and finally, underpinning our strategy is the steady transformation of our business model to make VF more consumer-minded, retail-centric, and hyper-digital in everything we do.

As we prepare for the next, our work is focused, amongst other things, on evolving our systems landscape and building better capabilities and tools to power our brands forward. It is focused on leveraging enterprise data and analytics with an emphasis on critical end-to-end data and digital capabilities to drive consumer engagement and loyalty. This will take on a new level of importance as digital activity and engagement continues to rise in a post- COVID world. We're also working to become increasingly agile in how our teams work together, enabling us to move faster to seize opportunities whenever and wherever they exist. It will result in a more agile and efficient

VF Corp. (VFC)

Q4 2020 Earnings Call

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15-May-2020

1-877-FACTSET www.callstreet.com

operating model and organization design through the lens of our consumer-minded, retail-centric, hyper-digital transformation.

Before passing the call over to Scott, I want to reiterate the deep gratitude I have for the incredible effort each of our 50,000 associates put in during this past year. Fiscal 2020 was an unprecedented year for many of our teams, even before the pandemic hit. Spinning off the Jeans business, relocating associates and their families to different cities and countries, and now managing through the disruption of COVID-19 has been an extraordinary ask.

Our associates have been tested to the extreme and they've responded just as you would expect, with determination and a sharp focus on getting the job done, but they did more than that. I'm so proud of the way our associates have rallied to help others in this time of great need, living out our purpose in a very real and meaningful way. It's been truly humbling to see how our teams have answered the call in our communities, and it gives me great hope in our collective ability to overcome this moment together, driven by the power of human spirit.

It also gives me even greater confidence that VF Corporation will be better on the other side of the COVID-19 crisis. I believe that truly purpose-led brands and companies will fare better than others when this situation is over because their decisions will be principled and based on values that consumers share. By continuing to foster a sensitive community with our consumers during these trying times, we are positioning VF and our brands for a bright future.

And with that, I'll turn it over to Scott.

Scott A. Roe

Chief Financial Officer & Executive Vice President, VF Corp.

Thanks, Steve, and good morning, everyone.

I'd like to start by echoing Steve's comments, as I too share a deep sense of gratitude for the leadership team and community of associates around the globe. Both Steve and I have been part of the VF family for more than 20 years. And while I have a deep understanding of the depth and unique capabilities resonant within VF, I'm nonetheless humbled by the commitment and excellence that I've witnessed as this great company continues to rise to the occasion.

This exceptional group of people is taking actions to position VF to accelerate upon emergence from the crisis. The individual and collective efforts throughout every region, brand, and function are nothing short of amazing, a sincere thank you to each one of you. It's not just what you're doing, but how you're doing it that inspires me personally. The commitment of our associates to each other and to the broader communities in which they work while continuing to drive our business forward embodies the core DNA of VF as a purpose-led, performance- driven enterprise.

Last fall at our Investor Day in Beaver Creek, we introduced the topic of portfolio resiliency and specifically highlighted balance sheet and supply chain flexibility, fiscal discipline, diversification, and investment optionality as core tenets. It received less focus at the time, given the growth trajectory of our business and the economic backdrop at large. However, portfolio resiliency could not be more relevant for where we are today as we manage through what Steve referred to as the now. So I'd like to spend a few minutes providing insight and context for how we're navigating the current environment.

VF Corp. (VFC)

Q4 2020 Earnings Call

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Let's start with balance sheet flexibility and fiscal discipline, a bedrock of VF's 121-year-old legacy. VF entered this crisis with a fortress balance sheet and strong liquidity. Prior to the outbreak, our leverage was below 2 times. We were on track to returning close to $2 billion to shareholders in fiscal 2020 through share repurchases and dividends, and we had significant dry powder to execute our M&A agenda. In year one of our long-range plan, we were tracking well against the goal to generate more than $8 billion of free cash flow over the next five years. Just a handful of months later, the whole world changed. Revenue across our sector froze overnight, resulting in high rates of cash burn and disruption across the retail landscape. The capital markets remained open, but there were growing concerns about the ability for even high-quality companies such as VF to access committed lines of credit.

These are uncertain times, but in this moment of turmoil, we demonstrated both our willingness and our ability to tangibly build excess liquidity to weather the disruption caused by COVID for a prolonged period. With this in mind, we elected to raise $3 billion of longer-dated debt last month and fully repay our revolver, providing VF with more than $5 billion of immediate liquidity. While our recent actions may ultimately prove conservative, given the current uncertainty surrounding the retail sector, our actions are a clear testament of VF's balance sheet flexibility and financial strength.

Moving to the second dimension of our portfolio resiliency, supply chain flexibility and operational rigor, the sophistication and scale of our global supply chain coupled with our operational discipline are hallmarks of VF and a source of competitive advantage, particularly during times of uncertainty and marketplace disruption. As the pandemic began to scale globally, our operational leaders mobilized quickly to thoroughly assess inventory on hand and in process, assess inventory positions of key retail partners, and meaningfully reduce forward inventory purchase commitments through a rigorous and thoughtful demand/supply matching process. We maintain an active and transparent dialogue with our key partners and strategic suppliers as we work together on forward purchase commitments and product assortments.

We also remain in active conversations with our key retail partners as we collaborate on a thoughtful plan to clear excess inventory moving forward and the appropriate level of future inventory purchases considering the current environment. Throughout these conversations, our focus is undeniably on the long-term health and sustainability of VF, our brands, and our partners. And while many of these conversations are difficult, we have not strayed from our core values, approaching each discussion with honesty, transparency, and integrity. Yet another example of how our enterprise scale, supply chain flexibility, fiscal discipline, and financial capacity, coupled with our deep-rooted history of treating each stakeholder ethically, can position VF to emerge from this crisis in an advantaged position.

Turning to the third dimension of portfolio resiliency, investment optionality, optionality applies to both capital allocation as well as investment spending, both capital and expense. Our short-term capital allocation priorities have changed. While share repurchases remain a key element of our long-term plan, we are taking actions to preserve liquidity and have decided to suspend our share repo program for the time being. We do, however, remain committed to our dividend, of course, subject to board approval. Our dividend has and will remain an integral part of our TSR algorithm over the long term, and the recent actions we've taken to shore up liquidity give testament to our ability to continue to support the dividend.

Regarding investment spending, we have selectively reduced discretionary spending and CapEx in light of the current environment. We have focused our remaining investments on the aspects of our strategy that we believe will be even more important growth drivers in a post-COVID world, specifically D2C and digital, including digitally focused demand creation and technology. And while it's still very early days, our April results support the general belief that digital commerce will only increase in importance. And finally, we are reexamining all structural

VF Corp. (VFC)

Q4 2020 Earnings Call

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overhead in light of a rapidly changing world. Historical analog support structures are being reimagined in a hyper-digital future. These actions will simplify the business model and increase agility, necessary traits in this fast-evolving marketplace.

So wrapping up the concept of optionality, I will front-run a topic I know is on many of your minds, M&A. First, with regard to our Occupational Work business, we're proceeding with our sale process. As I'm sure you've noticed in our release, this business has qualified for held-for-sale, discontinued operations accounting treatment. We remain in active conversations with prospective buyers and are confident we have the transaction completed during this fiscal year. We will keep you apprised as the process unfolds in the coming months. With that said, while the strategic rationale for the divestiture is unchanged, there is no urgency to sell these assets from a financial standpoint. As is always the case, a material deterioration in market conditions could impact the ultimate timing of the transaction.

As it relates to potential acquisitions, we continue to actively assess strategic opportunities and believe the disruption caused by COVID could lead to an increase in M&A activity and the availability of attractive assets. While our first priority remain stabilizing our organic business, we are well positioned from a liquidity standpoint to pivot to an offensive posture when prudent. M&A remains our top capital allocation and strategic priority on a medium- to long-term basis. The disruption underway across our sector will undoubtedly provide ample opportunities for strong companies with demonstrated M&A capabilities to create significant shareholder value through inorganic growth.

The final element of portfolio resiliency I'd like to highlight is that of diversification. As companies across the globe report earnings, we are reminded of the advantage of running a global enterprise during this crisis. The ability to extract learnings from reopening protocols, traffic trends, and consumer behaviors in our APAC region allows us to be more informed in planning for the ensuing recovery across other regions. It also gives us a several month head start compared to mono-geography companies.

Our diversified channel footprint has also been critical, most notably our digital business. While our own D2C digital platform is about 12% of revenue today, our total digital footprint including digital wholesale is closer to 20% of the business. The ability to keep these channels open during this lockdown period has been critical in our ability to continually engage with our consumers. And recent trends suggest significant growth in the digital channels are likely to mitigate some of the brick-and-mortar shortfalls, although, it's too early to understand fully how this will evolve.

I want to conclude my comments on diversification by directly addressing our wholesale footprint in light of the heighten disruption we see underway in certain segments of the distribution landscape. Considering our digital wholesale and international partnership stores, roughly half of our business today is D2C and consumer facing. Of the remaining wholesale business, roughly half is through international wholesale, which was healthy and growing heading into the crisis and remains well positioned.

In US wholesale, which represents about 25% of total revenue, we have dramatically reduced exposure to the more structurally challenged, mid-tier and department store channels, which now represent less than 5% of VF revenue in fiscal 2020. The largest portion of our US brick-and-mortar wholesale business sits in what we call specialty, which is primarily comprised of differentiated, healthy outdoor, active, and athletic retailers. Most of these retailers have healthy and growing digital businesses of their own. Our key accounts entered this crisis strong and we are actively working with our partners to emerge from this crisis stronger together.

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