Lance Allega - Vice President-Investor Relations Eric C. Wiseman - Chairman & Chief Executive Officer Steven E. Rendle - President, Chief Operating Officer & Director Karl Heinz Salzburger - Vice President & Group President, International Scott A. Roe - Chief Financial Officer & Vice President.

Michael Binetti - UBS Securities LLC Matthew Robert Boss - JPMorgan Securities LLC Laurent Vasilescu - Macquarie Capital (USA), Inc. Lindsay Drucker Mann - Goldman Sachs & Co. Omar Saad - Evercore ISI Camilo Lyon - Canaccord Genuity, Inc. Kate McShane - Citigroup Global Markets, Inc. (Broker) Dana L.

Telsey - Telsey Advisory Group LLC Jim Duffy - Stifel, Nicolaus & Co., Inc..

Good day, everyone, and welcome to the VF Corporation's Second Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lance Allega, VP of IR. Please go ahead, sir..

Thank you. Good morning and welcome to VF's second quarter 2016 results. I'd like to remind everyone that participates on today's call we'll make forward-looking statements. These statements are based on current expectations and are subject to certain uncertainties that could cause actual results to differ materially.

These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts that our participants refer to on today's call will be predominantly in currency-neutral terms which we've defined in the press release that was issued at 6:55 a.m. Eastern Time this morning.

We use currency-neutral amounts as lead numbers in our discussion because we feel it more accurately represents the true operational performance and underlying results of our businesses and brands. You may also hear us refer to reported amounts which are in accordance with U.S. GAAP.

These amounts include the impact from foreign currency exchange rates. Reconciliations of GAAP measures to currency-neutral amounts can be found in the supplemental financial information included with the press release which identify and quantify all excluded items.

On June 30, we announced an agreement to sell our Contemporary Brands business which includes the 7 for All Mankind, Splendid and Ella Moss brands. Appropriately, we have classified the assets and liabilities of these businesses as held for sale and therefore have moved their results into discontinued operations.

Therefore, unless otherwise noted, results presented on today's call are based on continuing operations. Removing this business from the mix impacts the P&L for both 2015 and 2016 and we have furnished a full year 2015 P&L which designates the impacts. There is more detail in the press release we issued this morning.

Joining us on today's call will be VF Chairman and CEO, Eric Wiseman; President and COO, Steve Rendle; President of our International Business, Karl Heinz Salzburger; and our CFO, Scott Roe. Following the prepared remarks, we'll open the call for questions and ask that you limit yourself to two questions per caller. Thanks.

Eric?.

Thanks, Lance. Good morning, everyone. Thank you for joining us for our second quarter 2016 earnings call. All global companies operate in diverse and complicated environments. In over both the short and long-term, VF has been very consistent in our ability to effectively manage our business under a variety of conditions.

We are a company with many capabilities, many opportunities and great confidence in our ability to execute. This doesn't happen by luck or accident but comes from experience, judgment and a track record of consistency.

Our consistency is built on an unparalleled focus on our consumers, optimizing product in retail innovation and superior financial discipline, which together push our operational capabilities to even greater levels. This complements our obsession with a total performance-based approach to shareholder return.

The second quarter, although our smallest by revenue and profit, is exactly the quarter where consistency plays a critical role in supporting any year at VF, and this year is no exception. I'm pleased to report that our second quarter results were a little better than our expectations and that our first half of 2016 came in as promised.

And the fact that this came in as promised gives us great confidence in our ability to deliver on our outlook for the full year. So let's dig down a little bit. Revenue for the Outdoor & Action Sports coalition was up 2%, driven by a 6% increase in Vans and 2% growth in The North Face.

This was tempered by a 7% decline in Timberland, which was softer than we expected, but overall the coalition was in line with where we thought we'd be 90 days ago.

Jeanswear posted its seventh consecutive quarter of mid-single digit growth with revenue up 6% and balanced in both brands and in all regions, a truly impressive performance by our Jeanswear team.

Our Imagewear coalition, which grew 3%, featured our fastest growing business and brand of the quarter with a mid-teen increase in our Licensed Sports Group, driven by nearly 30% growth from our Majestic brand. Congratulations to the dedicated team in that business who clearly delivered for us in the quarter.

To round it out, our Sportswear business saw revenue decline 19%, a result driven by a very challenging U.S. department store and outward environment. And though we expect this environment to remain challenging, we expect this business to modestly improve in the balance of the year.

In February, we said that we intended to take a focused and proactive look at the composition of our portfolio to ensure we are well-positioned to maximize growth and return to shareholders.

During the quarter, we announced that VF had signed an agreement to sell our Contemporary Brands business, which includes 7 For All Mankind, Splendid and Ella Moss to Delta Galil Industries.

This announcement demonstrates that our work as active portfolio managers is progressing, and while it's certainly hard to part with people we've come to know, respect and like, we have every confidence that this talented and passionate group is on the best path for long-term success.

You're also aware that we're exploring strategic alternatives for our LSG business within the Imagewear coalition. This process is ongoing, and we'll update you when we have something more to report. Now, back to some highlights.

Our second quarter direct-to-consumer business was up 7%, including mid-teen international growth and a low single-digit increase in the U.S., and this growth was balanced. In fact, on a global basis 9 of our 10 largest brands saw revenue increases. Our e-commerce business continued strong momentum as well, with revenue up nearly 30%.

In line with expectations, our wholesale business was flat globally, as many partners continue working through inventory from last winter and a sluggish first half of 2016, trends we expect to continue into our third quarter. Our international sales were up 7% overall, with Europe up 3%, Asia up 6% and our non-U.S. Americas region growing 20%.

Gross margin on a reported basis improved slightly to 48.1% and reported earnings per share was $0.35, so a penny better than our original outlook, but in line to support our full year EPS expectation of 5% growth.

Looking into the second half of 2016 with 60% of our revenue and 70% of our earnings still ahead of us, we have resolute confidence in our ability to deliver on our full year outlook.

And to address head-on, what some have called out as concerns, I'd tell you that, yes, we do in fact have wholesale orders in hand and D2C additions in both brick and click to support this expected growth. Yes, our wholesale order book is more fourth quarter weighted than in 2015.

Yes, retailers do have a cautious outlook on winter, and that too is baked in. And finally, yes, our outlook is fourth quarter heavy, yet we are up against what is by far our weakest comparison of the year, which I'll remind you was down 1% in 2015, so math's on our side as well.

That said, you can expect to see VF continue to drive brand energy through product innovation and closer connections with our consumers. We'll continue to leverage the power of our portfolio to deliver long-term improvements in gross margin, drive SG&A productivity and improve overall profitability to maximize shareholder returns.

It's what you come to expect from VF and what we expect from ourselves. Over to Steve..

Thanks, Eric. Starting with the Outdoor & Action Sports coalition, revenue was up 2% in the second quarter driven by a low-double digit increase in D2C and a low-single digit decrease in wholesale.

This result was about what we expected 90 days ago, and keep in mind, the second quarter is Outdoor & Action Sports' smallest quarter of the year both from a revenue and earnings perspective. So in total, we checked the box. Now, let's take a look at VF largest brands.

Globally, second quarter revenue for The North Face was up 2%, driven by more than 20% growth in D2C, which was offset by a high single digit decline in wholesale. In the Americas region, revenue was up at a low single digit rate, with more than 20% growth in D2C, which included strong e-commerce results.

On the wholesale side, revenue was down at a high single digit rate due to bankruptcies and an order book that is planned later in the year, which will naturally shift the majority of growth to the fourth quarter.

During the second quarter, warmer weather categories including sportswear product and accessories saw significant momentum and were up 40% and 60% respectively. In men's fleece sales doubled, driven by a strategic shift to broaden our assortment of technical styles.

In women's, newer silhouettes like the Tomales Bay jacket are also seeing strong response, and we're very proud that Outside Magazine featured several North Face products in their Summer Buyer's Guide, including our Favero 70 pack, which won Outside Magazine's Gear of the Year award.

This demonstrates that our continued focus to broaden our spring/summer assortment is working.

We're also supporting our spring/summer relevancy through consumer experiences, like our Endurance Challenge Series of trail races, which drew over 13,000 attendees across events this past spring, and community workouts that we sponsor twice a week in San Francisco, Boston, Chicago, New York and D.C.

In April, The North Face relocated its Palo Alto, California store and significantly elevated the retail experience through highly curated merchandising and digital storytelling. Through innovative interior sky windows, information is displayed about North Face's global athlete team, weather forecasts, topographic maps and community information.

During the opening weekend, North Face virtual reality was featured, which is an immersive 360°, 3D video and audio experience that virtually drops viewers into outdoor landscapes such as Moab, Yosemite and Nepal, an innovative example and a living lab that represents how we're starting to transform consumer experiences in our own retail stores and one of many that we plan to scale in the upcoming months.

Now to K.H..

Good morning, everyone. The North Face European business had another strong quarter with revenues up at the low teen rate, driven by more than 25% growth in DTC and a mid-single digit increase in our wholesale business. And the growth was balanced and broad-based too, with double-digit increases in the U.K., Germany, Benelux, Italy and Spain.

A great product highlight was our footwear business, which grew more than 20%. This was supported by marketing campaigns and product styles to help build on the momentum the team has been working on. Our Mountain Athletics collection across Europe had a successful start to the year with over 60% sell-through in wholesale and a 60% increase in DTC.

In Asia, second quarter revenue was down at the mid-teen rate, which was about in line with our expectations. This result was driven by low double-digit growth in DTC, including more than 35% growth in the e-commerce business, which was offset by weak wholesale results due in part to timing of shipments.

We expect the region to continue sequential improvement and return to growth in the fourth quarter. During the quarter, we launched our Water Adventure Series, which features sustainable products, including waterproof jackets and bags.

In April, we launched our outdoor training category, which features durable, breathable materials maximized for running and training outdoors. To drive visibility in China and Hong Kong, we continue to host free outside group workout sessions, led by experienced trainers.

Social engagement around this effort has already seen more than 16 million social impressions. Globally, the first half of 2016 finished well for The North Face and we are right on track to reach our full year expectations of mid-single digit growth. Now, on to Vans..

Vans global revenue was up 6% in the second quarter with a mid-teen increase in D2C and flat wholesale results. With nice sequential improvement from the first quarter, regional, product and channel performances were in line with our plan.

Looking at regions, in the Americas, revenue was up at a high-single digit rate with a low-double digit increase in D2C, including over 25% growth in e-commerce and a mid-single digit increase in wholesale.

During the quarter, Vans showed the strength of its diverse classics offerings, specifically the Sk8-Hi and Old Skool side stripes styles driving strong momentum with meaningful increases in women's sell-through. This success bodes well as we look at scaling a number of new silhouettes in the upcoming seasons.

During the quarter, Vans launched another exciting collaboration with Nintendo celebrating their iconic video game heritage, including an extensive collection of footwear, apparel and accessories featuring Nintendo's extensive cast of iconic characters.

The social media reception to this collaboration has been phenomenal and it's performing well against expectations which is no easy feat given it's up against the massive Disney launch of last year's second quarter. With Vans kicking off its 50th anniversary year on March 16, the spring was packed with events across the country.

In May, we continued our programming at the House of Vans in New York, which included music, creative workshops and documentary screenings. In June, the Vans Warped Tour kicked off its 22nd year, bringing music, Vans culture and fans together for more than 40 stops around the country, and tomorrow the U.S.

Open of Surfing kicks off in Huntington Beach where the world's elite in surfing, skateboard and BMX reach for the podium. As a complete immersion into Vans' culture, this festival-wide celebration of action sports, creative expression and youth culture is about as core as it gets..

Vans revenue in Europe was down at the high-single digit rate, the low-double digit increase in DTC offset by a mid-teen decline in wholesale. These results were on track with what we expected 90 days ago as the business continues to manage through elevated inventory.

With a slight decline in Vans Europe expected in Q3, we continue to make progress and expect the business will return to growth in the fourth quarter. In Europe, Old Skool and Sk8-Hi were also very successful, strengthened by high-impact window executions at retail.

Nintendo was also a success in Europe as we integrated the launch with in-store activations, House of Vans launch event and wholesale specific programs. Notably, on the first day of the Nintendo launch, e-commerce had its best sales day ever.

In Asia, Vans revenue was up mid-teens driven by more than 30% DTC growth and a mid-single digit increase in our wholesale business. E-commerce definitely played a significant role in these results by nearly doubling its business.

And similar to the Americas and Europe, Nintendo was a hit with more than 50% sell-through in the first four weeks and e-commerce sell-through of more than 70%, driven by impressive brand activations at key stores, including our retail lab in Korea, so very pleased with these results.

With the first half behind us and the momentum building for Vans globally, there are no changes to our full year outlook for high-single digit growth. Now, on to Timberland..

Timberland global revenue was down 7%, with a low-single digit increase in D2C offset by a low-double digit decline in wholesale sales.

While these results were for the most part in line with our expectations for the brand's smallest quarter, as we enter the second half of the year, we have seen higher than anticipated inventory levels, particularly in our Americas business, and anticipate a more challenging sales environment.

Accordingly, we're electing to take a more conservative view for the balance of 2016 as this product works through the channel. Similar to the context for Vans Europe, we are confident that this is a short-term inventory imbalance versus a brand issue and we're tempering sell-in for a quarter or two to allow inventory to normalize.

Timberland continues to outperform its competition, including market share gains and the brand health metrics that we track including awareness, conversion and sell-through remain strong. In fact, sell-through rates are healthy, which gives us great confidence that this will be a short-term, normalizing some times in the fourth quarter.

Taking a look at the Americas, revenue was down at a high-teen rate, with wholesale business down 20% and D2C down at a mid-single digit rate. Keep in mind that three quarters of Timberland's D2C business in the Americas is outlet-based, which as you know is a channel that has seen reduced traffic.

Notable in the mix, however, was a 25% increase in e-commerce, so solid online growth. Product wise, men's boots continue to be relevant with strong sell-through in wholesale.

Our distinctive Timberland Boot Company collection, driven by a new micro site launch, saw a nice pickup in the quarter, a solid validation of the brand's reach given the collection's premium price points. On the women's side of the business, we continue to be very encouraged by the progress Timberland is making.

Families like the Amherst and Newport Bay drove D2C women's casual comps up nearly 30% in full price and 50% in e-commerce. Contributing to this momentum, we launched our biggest spring effort ever through a partnership with Marie Claire, a program that ran across digital, print and in-store, driving digital engagement up over 80% versus last year.

And finally, with oil rig counts reaching an all-time low in May, the entire Workwear category, including our Industrial Pro business remains under significant pressure..

Revenue in Europe was up at a high-single digit rate for the quarter, driven by low-teen DTC growth. A huge contributor to this came from our e-commerce channel where the brand transitioned to VF's global digital platform, enabling faster, closer consumer engagement and more effective handling of the site.

The wholesale channel increased as well by a mid-single digit rate. Looking at products, after a very successful SensorFlex campaign, we drove traffic through summer heritage collections in men's and women's boat shoes.

With our new advertising campaign in digital and traditional media, we doubled our consumer reach and executed a seamless campaign in more than 600 store windows.

In apparel, we continued our improvement of the product in terms of fit, fabric and style, and did see very nice progress with our spring 2016 collections, driving low-double digit growth in the quarter. So strong progress there.

Similarly, Asian revenue was down high-single digits primarily from weakness in traffic and spending in Hong Kong and Japan, its largest market in the region. E-commerce was a large driver for the quarter with more than 50% growth including apparel, which was up more than 60% in China.

In June, we opened a new workshop retail store in Shanghai, and we have seen strong early results. We're taking a prudent approach to the second half, and we now expect low-single digit global revenue growth for Timberland in 2016. Now to Jeanswear..

In the second quarter, our global Jeanswear business was up 6% with strong growth across both Wrangler and Lee. This marks the seventh consecutive quarter of mid-single digit growth for the Jeanswear coalition. So once again, hats off to the global team.

In the Americas region, Jeanswear revenues were up at a mid-single digit rate, driven by a mid-single digit increase for Wrangler and a low-double digit increase for Lee. Wrangler's mass business remains strong with a high-single digit increase that marks the ninth consecutive quarter of growth for that business.

The story there remains the same, a strong, collaborative retail partnership with the mutual goal of bringing innovation and value to consumers. Our innovation story is stronger than ever. Wrangler Advanced Comfort outdoor performance shorts and Riders by Lee denim shorts and capris each saw meaningful increases in the channel.

In contrast, and a trend we've spoken about over the past few quarters, our Western Specialty business was down as the oil and gas exploration communities continue to be hard hit.

Lee saw excellent consumer response to the new, innovative X-Treme Comfort men's casual pant that has led to market share expansion and wholesale growth through new shelf space as well as expanded distribution.

And in a nod to the ultimate blend of elegance and performance, American ballet star, Misty Copeland, is pictured wearing Lee Dream Jean in the August issue of Cosmopolitan magazine. We saw very strong retail sales of Lee's seasonal products, including shorts and capris, especially once the weather turned warmer in May..

In Europe, revenue for the Jeanswear coalition was up at a high-single digit rate, driven by a mid-teen increase for Lee and a mid-single digit increase for Wrangler. Lee saw great success in the quarter, driven by positive results across all categories.

A couple of highlights include continuing double-digit trends in our top 10 accounts, our at-once business and a strong start for our new Scarlett for women and Rider for men products. Wrangler saw strength in both the wholesale and e-commerce businesses.

During the quarter, we launched an out-of-home marketing campaign across Poland, Germany and Italy that boosted region sell-through for our fall 2016 products. In Asia, Jeanswear revenue was up at low-single digit rate with a mid-single digit increase in Lee, moderated by a slight decline in the Wrangler business.

Lee's online sales more than doubled, helped significantly by the Jade Fusion 2.0 launch. Jade Fusion also led to outstanding digital metrics and achieved a record high social engagement of almost 2 million followers in key Chinese markets.

For the full year globally, there is no change to the expectation of mid-single digit revenue growth in Jeanswear. Now, to Imagewear..

Second quarter Imagewear revenue was up 3%, with our LSG business up mid-teens, offset by a mid-single digit decline in the Workwear business which, similar to Timberland and Wrangler, continue to be impacted by weakness in the energy-related sector.

In LSG, Major League Baseball jersey demand was strong aided by continued success of the Cool Base replica jersey, as well as the addition of three new teams in the Japanese professional league. In the NBA, the Cavaliers' Championship delivered strong results for the license portfolio.

On the Workwear side, while we continue to see consistent strength in Red Kap's automotive shop gear line, it should be no surprise that with oil rig counts at historic lows, both Red Kap and Bulwark sales were down in the quarter.

Given that, we'll begin to lap this decline in the second half and we do expect this business to return to modest growth in the fourth quarter. For the full year, globally there is no change to the expectation that Imagewear revenue will be up at a low-single digit rate.

Our Sportswear business was down 19% in the quarter due to traffic declines in both wholesale and D2C. Revenue at Nautica was down 20% due to the same challenges we've seen in the past few quarters, including heavy discounting and promotional environments in the U.S.

department store channel, our strategic decision to license the women's sleepwear and men's underwear business and traffic declines at outlet where we've closed seven stores this year. Kipling's North America business was down 16% also due to challenging category and channel performance.

Kipling's global business was up 3% driven by strength in both wholesale and D2C in Europe and Asia Pacific. Accordingly, we're now expecting a low-double digit decline in revenues for the full year for our Sportswear coalition. And with that, I'll turn it over to Scott..

challenging department store and D2C conditions with traffic and category weakness. So carrying all this to the bottom line, our reported earnings per share was $0.35 in the second quarter, slightly ahead of where we thought we'd be 90 days ago and overall where we thought we'd be halfway through this year.

And keep in mind, this result includes a $0.06 headwind due to changes in net tax discretes compared to last year. Regarding our balance sheet, inventories were up 6%, of which half remains that same cold weather carryover product we've spoken about on our last two calls. Our inventory is in line with our second half growth projections.

During the quarter, we bought back 1.9 million shares of VF stock for $120 million, bringing our year-to-date total to $834 million, so tracking well against the $1 billion target we set in February.

Turning now to outlook, which like the rest of our results today are based on continuing operations, we now expect full year revenues to increase 3% to 4%, down from the previous mid-single digit expectation. If you take a step back to gain perspective, this change is really about two main factors.

First, we now expect the Outdoor & Action Sports coalition to grow at a mid-single digit rate for the full year, down from the previous high-single digit outlook. This is due to bankruptcy in the sporting goods and action sports channel and revised outlook for Timberland based primarily on challenges in the Americas business.

However, these elements while short-lived in nature do put enough pressure on the year for us to take Timberland's global outlook to a low-single digit growth versus the previous high-single digit increase. The second factor is a lower outlook for our Sportswear business.

For reasons previously discussed, we have updated our full year expectations to a low-double digit decline versus the previous expectation of slight declines. Gross margin is expected to improve by 50 basis points reaching 48.7%.

Now, keep in mind the contemporary business carried a higher-than-VF-average gross margin, so when adjusted for this in continuing operations, 2015's gross margin is 10 basis points lower at 48.2%. Operating margin is expected to reach 14.5% which includes about 60 basis points of FX, so right around 15% for the full year excluding currency.

Note that while the exclusion of contemporary brands hurt gross margin, it helps operating margin.

With respect to tax rate, our outlook for the full year is now about 21% versus the previous about 23%, due to a beneficial shift in mix, new policies related to the treatment of equity comp and longer-term improvements we're making in our global tax structure.

At the bottom line, reported earnings per share is expected to increase 5% to $3.20, up 11% currency-neutral compared to EPS from continuing operations of $3.04 in 2015. So even after adjusting for Contemporary, we've maintained the same growth rate we targeted in February.

For the second half of the year, we expect revenue growth to be up about 5% with a low-single digit increase in the third quarter, followed by a high-single digit increase in the fourth quarter.

With respect to earnings cadence, we expect second half reported EPS to increase at a low-teen percentage rate with a high-single digit increase in the third quarter and a mid- to high-teen increase in the fourth quarter, our easiest comparison of the year.

So to recap the changes to our 2016 outlook, revenue should grow 3% to 4%, down a bit due to bankruptcies, Timberland and Sportswear impacts. Gross margin expansion remains the same, and we took out $0.03 from the bottom line based on what Contemporary Brands would have directly contributed this year.

Flexibility, operational excellence, strong cash flow and balance sheet and strategic financial management, from any angle, our model allows us to transcend short term challenges and consistently deliver total shareholder return, and more importantly, it enables us to continue investing in our business and aggressively manage inventories for the long-term without sacrificing shareholder returns along the way.

We believe this combination uniquely positions us to accelerate growth and profitability when the overall environment returns to greater strength. And with that, we'll turn it back over to the operator and open up the call for questions..

Thank you, sir. Our first question comes from Michael Binetti with UBS..

Hey. Good morning, guys. Thanks for all the detail today. Very helpful. I just want to ask one quick Vans question, then I had a bigger picture question. On Vans, that was better than we thought in the second quarter given some of the trends. You guys had talked about pretty consistently that it was going to be back half story.

But the guidance for the year was always partly based on things that were not in your direct control, there's some inventory from competitors out there in the U.S. with some of the data sources we see, we see other brands making big pushes on market share.

Can you just talk to us about the second half and how you guys think about the competitive landscape for Vans and how much you bake that into the thinking for the improvement there?.

Yeah, Michael, this is Steve. I'll start with the Americas and K.H. maybe will want to add some things from an Asia standpoint. So we've called the year at high single digits and we're pretty much tracking right on plan, seeing great strength in our D2C, most notably e-commerce and then just good solid performance in wholesale.

Second half, really don't see the changing dramatically. The strength of the brand continues.

We talked about the power of our Classics collection with side stripes really performing extremely well and we've got new innovations with Classic Lights, our ISO program and then our Pro Classics where we brought some real performance attributes into the skate platform, we think will just continue to drive us towards the guidance that we put forward at the beginning of the year of up high-single digits..

And, Michael, adding some color on the international side, starting with Asia. Asia is really doing well, as you heard me saying. It's doing well in DTC and wholesale, which gives us great confidence, no really big change. It's doing well in most Asian markets actually. Europe is a different picture.

We reported that widely last time, Q1 was our worst quarter. Q2 is negative but better and we gradually plan to improve this going back to positive numbers in Q4. What gives us strong confidence also in Europe is our DTC numbers which are positive. That shows that the brand has resonated as well with consumers..

And, Michael, I'd add real quick. We aren't seeing any changes in our wholesale orders due to competitors. And clearly, there's some competitors out there doing much better than they have historically, but from a Vans standpoint and our connection to our consumer, we stay right on track..

Okay. That's helpful. Thanks a lot. You guys, I guess stepping back, you guys have always done a great job summarizing the big corporate goals for us and for the investors and for all the employees at the firm to focus on. It's been a while since we got the big goal of the long-term algorithm of 8% organic revenue growth and 13% EPS growth.

But we've seen two headlines from you guys on dispositions this year. The end markets are in a different place than where they were when we first got the algorithm in 2013.

So would you mind just helping us comment on how you think about those goals today and whether absent an acquisition how much more aggressive you could be with transforming the portfolio towards the highest performing businesses?.

Sure, Michael. Eric. I'll take that question. Our organic growth rate goals remain intact. Clearly this year, we're off to a slower start given all the implications of last winter and the inventory hangover that we faced in the first half of this year. But when you step back and look at our organic growth rate, internationally we were up 7%.

That tells us that against that 8% organic growth rate goal outside of the U.S., we're pretty much on track. The most confidence inspiring part of this for me is that in our direct-to-consumer business globally, we were up 7%.

So being up 7% in our stores tells us that consumers are buying from us at the kind of growth rate that we have built into our long-term vision. Unfortunately, that's only about 27% of our business.

Our wholesale business is not experiencing that, but that's not to say that our wholesale business, the consumer take-out from our wholesalers isn't strong. What it says is that they have a lot of inventory and they're buying very cautiously.

Our wholesale business is a reflection of what we're shipping to them this quarter for sale next quarter and not a reflection of consumer engagement.

So we still think we have the brand portfolio and we're doing the right things with our brands to engage consumers at a near 8% growth rate, even this year which is clearly a pretty challenging year around the world. Obviously, the shape of VF is going to change.

It's much easier and easier to manage the timing of selling something than it is buying the right thing..

Right..

We're actively managing our portfolio, working equally hard on both divestitures and on acquisitions. The timing of one is more predictable than the other, but we're committed to both..

Thanks a lot, guys..

Thanks..

Our next question comes from Matthew Boss with JPMorgan. Please go ahead, sir..

Thanks.

So switching gears over to Timberland, by classification, where exactly are you seeing the inventory imbalance, whether it's footwear or apparel? And what gives you the confidence that this is a near-term issue and not something larger?.

Yeah. So this is Steve. I'll start this question. So the inventory imbalance we talked about is primarily Americas issue and we see it primarily in our boots category.

It really started to see this at the beginning of early Q2, both in our wholesale and pro business and it's truly a short-term inventory balance because what we see is just a little bit of inventory sitting in our channels coming out of last fourth quarter. And similar to our Vans Europe business, it's not a product or brand issue.

We feel really good about our brand metrics, as I mentioned in my comments, and we see just over the next quarter or two getting that inventory to normalize.

And why we're so confident about that is we've seen really good rates of sale through the first half that continue into the second half and that e-commerce growth rate of plus 25% continues to give us confidence around our ability to connect with the consumer and represent our brand in a really positive way.

So we see returning to growth in the second half low-single digit, mid-single digit despite we're coming up against a Q3 in 2015 where we grew over 40%. So that's, I would tell you, kind of frame up why we're positive is the brand continues strong. The sell-through rates are good.

We just carried a little bit more inventory in the channels out of second half 2015 into first half that is normalizing now and will be clear as we come into Q3/Q4..

Yeah, Matthew, I may be giving some international color starting with Europe. You heard me saying Europe is really strong. We're doing well in all channels. In wholesale, in DTC we have a new digital platform. We do well in most European countries, but we also do well in many categories of products. So it's a really good story there.

Asia is a little bit different picture. We had planned a softer first semester and planned a stronger second semester. Remember, Q2 is our weakest quarter as well. So numbers are a little bit misleading. But specifically related to Hong Kong and Japan, but we expect Timberland going back to growth in Q3 and Q4..

Great. And then just a follow-up on the larger picture model. As we think about the margin profile on the multi-year basis, has there been any change, it sounds like not through this year, but any change to the 50 basis points a year annual gross margin? It sounds like driven primarily by mix that's unchanged from the past.

And then as we think about SG&A as a percentage of sales beyond this year, any reason to not think about that as more flattish going forward?.

Yeah. So, Matthew, the first question is, really no change at all in our outlook for continued margin expansion. And that's really driven by mix. Even this year 50 basis points is what we've talked about for the full year and that's really driven by that mix. So we see no reason why that won't continue.

As it relates to SG&A, we really haven't talked longer-term beyond this year.

As you can see, we are investing in SG&A this year and, again, that's really, we think, a strength of our model to be able to deliver EPS growth and, at the same time, invest in D2C, innovation, product, those key strategic drivers that are going to set us up for growth in the future..

Great. Best of luck..

Thank you..

Our next question comes from Laurent Vasilescu with Macquarie..

Good morning and thank you very much for taking my questions. I was hoping to follow up on your top line guidance for the year. Does it incorporate expectations for normal winter or colder than normal winter? Also, I think there were some comments in the prepared remarks that retailers are cautious regarding this winter.

Is that a function of too much inventory or just weakness in the consumer?.

Yeah. So I'll start that and maybe the guys will jump in.

In general, while we're considering this a normal winter from our standpoint, it's worth noting that our wholesale partners have taken a very conservative view of the year, right? And maybe some of these imbalances that historically would have just been tolerated, we now see much more aggressive action from a retail standpoint.

Thus, some of the issues that we've seen from our wholesale shipment side..

And I think just to follow that, the caution in our wholesale, retail community, we called that at the beginning of the year. We spoke a lot about how that's baked into our guidance.

And what gives us real confidence about the power of our brands is the performance of our D2C growing high single digits this quarter and the strength of our e-commerce platform growing significantly. And as we expand our e-commerce platform to all of our largest brands, it's now moving internationally.

Just again, it's a continued strength of how our brands are coming to life for our brands..

Okay, great. And then I wanted to follow up on the Outdoor & Action Sports double-digit increase and direct-to-consumer versus Sportswear mid-teen decline.

Can you provide a bit – more color on how store comps performed in these two coalitions for the quarter and your expectations for comps for the balance of the year?.

Yeah. So our Outdoor & Action Sports D2C performance, I mentioned, is e-commerce. We're seeing just great strength there. And our store comps, which we don't talk directly about our brands specifically. We saw those in the flat to up just slightly, which is pretty consistent with what you hear across the board.

Contrast that with Sportswear, over three quarters – well, the majority of our Sportswear retail footprint is outlet. And the outlet channel, as a broad comment, has seen a pretty significant impact in traffic due to the high promotional activity going on across the majority of retail here in the United States.

So our Sportswear team has been specifically impacted just due to the heavy weighting of that outlet mix..

Thank you. Best of luck..

Our next question comes from Lindsay Drucker Mann with Goldman Sachs..

Thanks. Thanks for taking my question. I wanted to ask about the excess inventory – the inventory growth year-over-year, you've called out about half of that is cold weather carryover product.

Is that product that you're going to be redirecting to your outlet stores or your website? Or how are you going to work through that excess that's still on your balance sheet?.

No, Lindsay. That is good inventory that'll go – we have orders against it. That's first-quality good inventory. As we've said, we've been watching this now or talking about this for a couple quarters. We had two options. We could've disposed of it and re-bought it. We saw the demand coming in the back half of the year.

We chose to hold that inventory and we see demand against it. So it's good quality inventory..

Okay, great. And maybe you guys could give some perspective on whether you saw any shift in consumer behavior in the UK or Europe post some of the negative events in those markets, whether it's Brexit or some of the attacks..

I guess you heard me saying, Lindsay, we grew Europe 3%. Most of the brands are doing okay. It's not an easy environment, you're right. There's a lot going on. Specifically to Brexit, we have to see what is going to happen. Negotiation have started, so it's a long-term view. But all in all, actually, we are doing pretty well.

Our DTC numbers are strong in Europe, so that shows that our brands resonate well with consumers..

Great. And just last one.

Could you talk about how your business to off-price has trended?.

From a U.S. standpoint, we're pretty much normal percent to totals as we look at this year, nothing dramatically different whatsoever..

Okay. Thanks very much..

Our next question comes from Omar Saad with Evercore ISI..

Hi, yes. Thanks. Good morning..

Hi, Omar..

Wanted to see if you guys could maybe dive in a little bit deeper on the e-commerce business digital initiatives. And I know it's been growing nicely and I think you guys are maybe a little bit lower penetration than the broader kind of soft goods marketplace.

You know what you're doing there and if you also have any thoughts around working with any new partners on the digital side, perhaps getting access to Amazon and the Prime customer base, if that's something that's – you're thinking about?.

Right. So here within the U.S. business, I'll walk you through that. Our e-commerce businesses, obviously, has been and continues to be a big emphasis of ours.

We put a lot of energy into building our VF platform that now all of our big brands, as well as additional brands are coming on to and we're expanding that into our European marketplace where our large global brands are able to really maximize the power of that content and then transact regionally in a very specific way.

We have a digital lab that sits out in our San Francisco campus that is very connected to a lot of the fast-moving digital trends that we're constantly mining and bringing into that VF platform. And as we look at wholesale partners that we can work with, there's a whole host of really strong, pure plays in each of our businesses.

There's the larger multinational partners that we have great business with, and then clearly Amazon is a good partner for many of our brands and one that we would continue to work with strategically as it fits into each one of our brands' strategies..

Yeah, Omar, Scott here. Just cleaning up too maybe at the heart of your question that we're less than 5% our e-comm overall. We see a lot of opportunity there. It's high margin, our most profitable format.

We've talked about in our long-range plans kind of mid-20s growth rate which is what we're seeing this year and we see a lot of runway on our e-comm..

And, Omar, this is Eric. One of the ways we're getting at that is through – we've been talking about this some over the last 18 months. We've built a new digital and e-commerce technology engine that we're rolling out across the world kind of one brand in one country at a time.

I think in the last 14 months we've done 24 installations and we still have room to grow. And every time we put a brand up on this website – or I'm sorry – on this technology tool in the market, our e-commerce business gets better. To give you some context for how far we are, The North Face in Europe went live on Wednesday.

So we still have a lot of work to do and a lot of opportunity. You're right, we are underdeveloped and we see that as a huge opportunity for us. And we know we have the right tool now, we're just rolling it out across the world and improving our ability to work with it..

Excellent. That's helpful.

And then if I could just ask if there's anything new on the M&A front, Eric, that you want to add?.

Thank you for asking, but no. Sorry. Not trying to be cute, but I – we would never discuss any processes that we're part of, or not during a call. Thank you..

Thanks..

Our next question comes from Camilo Lyon with Canaccord Genuity..

Morning, guys. Thanks for taking the question..

Good morning..

So I guess the other side of the e-commerce question is the wholesale question. Obviously, there's been some challenges in the department stores and I guess the debate now is are these structural challenges or are they cyclical ones.

The traffic trends that we've seen in the channel and the growth in your e-commerce partners in your own businesses, does that – does it fundamentally alter how you view your growth prospects in the wholesale channel for the longer-term? And how do you think about that?.

No, it – look, we've been around long enough. The world is constantly shifting between different channels and structures. To put some context on it, because that VF has changed now, our composition with the exit from the, I guess, potential exit from the Contemporary Brands business, and department stores now represent about 3% of our revenue.

Mid-tier represents about 4% of our revenue. We're much more weighted towards specialty and sporting goods and – but having said that, in all channels in our department – with our department store partners, we're working very hard to make sure we get more than our fair share of their big revenue numbers.

There's still a lot of apparel and footwear sold and we're trying to be a great partner and get more than our fair share, and we do that across – with of course with all of our customers and it does go from year-to-year.

There's different centers of concentration, but I know there's concern about our exposure and that's why I tried to get some context to the size of the business..

That's great.

Can you – Eric, would you care to share a little bit more detail on the coalitions in those exposures?.

I can't do that. Even if I wanted to off the top of my head, I just don't have that information. I'm sorry. They're all – each has a different model and we're a global company with lots of brands. Scott wants to weigh-in..

I'm just going to say we really haven't disclosed that level of detail. We just – we give you the overall percentages..

Okay. Fair enough. And then just another question is on The North Face. Of late during the past year or so, you were to – there have been some other entrants into the category at some higher price points.

I'm curious to get your take on where do you see the opportunities to grow The North Face brand whether it's on the price point perspective if you have an ability to raise part of your premium offering within The North Face or if you see other opportunities to expand where you're currently – the base of consumers that you're currently speaking to..

Sure. The North Face continues to be the number one outdoor brand on a global basis by a long shot. You heard us talk at the beginning of the year that the team has recently gone through resetting the business around four specific consumer usage occasions or four new business units.

Mountain sports which is that most technical expression of the brand, the mountain culture which is more the lifestyle aspect that would come out of that core mountain and into the city, we've got our Mountain Athletics or training category which is a fast-growing, very significant opportunity for both apparel and footwear.

And then we have a new category that's coming out of our Asia business called Urban Exploration, marrying up with what's already a good city expression of the brand here and in Europe but bringing a really interesting Asian flair coming out of Japan and China.

There, our team in Asia has been leading that will allow the brand to come at that city market in a slightly different perspective.

We have the ability to sell higher price points and you absolutely will see us do that through these four new business units, but what you'll also see is real thoughtful line segmentation covering those key price points in those key categories for those channel partners that we do business with across the globe..

Great.

Is that something that we can expect to see this season or is that more of a fall 2017 expression?.

You'll start to see it come to life in fall 2016 but it will really come to life in 2017.

If you happen to be in San Francisco anytime soon, our Palo Alto store which I mentioned in my comments as well as our Post Street store has just been re-merchandised around these four brand territories, and really it's a beautiful experiential expression of the brand..

Great. Good luck, guys. All the best in the back half..

Thanks..

Our next question comes from Kate McShane with Citi..

Hi, Kate..

Hi. Thanks. Good morning. I had a question about cotton.

This we've noticed over the last week or so that cotton costs have gone up and I know it's only a week move or a couple of week move, but can you just remind us the timing of when you lock in your commodity costs? Is this something that you're watching and do you think it's sustainable and how we should think about it on gross margins going forward?.

Yeah, Kate, Scott here. So well first of all, as it relates to 2016, at this point we're committed, right? So any movements that you see now are going to be in the future. We're generally two to three quarters out by the time it rolls into our results. What you see now would be a 2017 impact..

Right. Okay. Okay.

Do you have any view on cotton for the next six months? Is this something that is potentially sustainable, this increased cost? Or is it, are you watching it?.

Yeah. Well of course, we're watching it all the time but we're not in the prognostication business as it relates to cotton. What we do is we lock in within the time of our lead times, and that allows us then to price and react accordingly. But in terms of trying to predict which way it's going, we haven't been very good at that.

I don't know anybody that is..

Okay. And then my second question was just about the reallocation of resources now that the Contemporary business has been sold and is going to close.

Just how should we think about any kind of acceleration of potential investments or reallocation of resources as we get maybe into Q4 from this asset disposal?.

Are you talking about capital or expense was your question?.

Both, if possible..

I'm glad I opened it up to both. Thank you. That's probably a good question to ask, a better question to ask after we have gotten closure on the strategic review we're doing at LSG because that's a big business and they affect our economic model. Scott mentioned that Contemporary has a little bit.

Our gross margin will be a little bit weaker without it, but our operating margin will be a little bit higher. LSG would have another effect on it. We are obviously looking at the shape of the P&L, what it might be after this review is complete, and we might be able to answer that better later.

Having said that, the economic, the P&L model will look different and we're trying to put ourselves in a position to accelerate the organic growth rate in our core brands and the two businesses that we're talking about selling will do that by math because they have not grown at the kind of rate that the rest of the business grows at consistently.

From a capital standpoint, we're going to keep that powder dry until we see how much capital we have, but our priorities remain the same. First is acquisitions, and down the road, we'll be looking at dividends and share buyback. But our priority is acquisitions..

Okay. Thank you..

Thanks, Kate..

See you, Kate..

Our next question comes from Dana Telsey with Telsey Advisory Group..

Good morning, everyone.

As you think about pricing in back half of the year with the new product categories and given the fact that it is more fourth quarter heavy, what should we be looking to for each of the brands? Is there some new product, is there some new marketing initiative that we should be looking to for fourth quarter and potentially into next year as top-line drivers? Thank you..

Yeah, Dana, as it relates to price, we do have price. It will be a little back-half loaded. And we've talked about the FX impacts over the last couple years. We do have price, which more than offsets that FX in the back half..

Got it.

And then anything new on the product offering, whether it's in Timberland or Vans or North Face that we should be watching for with marketing to drive that business?.

Well, our Vans business, as it celebrates its 50th anniversary, has been doing some really creative things certainly with the Nintendo collaboration. You will see some new ideas coming into the marketplace end of this month and early next month that I will leave for you to discover. It's not something we really want to talk about here on the call.

But in the case of The North Face, we'll be really anchoring ourselves in these new brand territories that I've talked about, driving our Summit Series Collection which continues to evolve after its relaunch last year on a global basis and also driving Mountain Athletics and footwear.

And in the case of Timberland, we will continue to drive our boots.

The boot trend is still alive and well, and we've got some just great offerings along with our SensorFlex platform and, you know, that has been in place now for three years and continues to gain momentum and grab share not only here, but mostly we see it in our international markets..

Thank you..

Our next question comes from Jim Duffy with Stifel..

Thanks. Good morning, everyone..

Hi, Jim.

Good morning..

I'm particularly interested in commentary around channel inventories. You mentioned imbalances with Timberland and Vans Europe.

Are there other notable pockets of imbalance? And then in contrast, what are the categories where you have healthier channel inventory positions and the stage seems better set to perform in the second half?.

Yeah, Jim, this is Steve. The imbalance that – from a Timberland standpoint is, as I mentioned, boots, and it's across the dealer distribution that the brands work with.

And it really is inventory that's been carried out of fourth quarter last year, and as they work through it with the strong sell-throughs we see in the first half, we'll return to growth in the second half. Otherwise, we don't see inventory issues other than what we've called out at the beginning of the year.

Caution in especially outdoor, reflecting The North Face order book, but the rest of our business is sitting at a really strong place. Our new innovative products will have great opportunities to be placed in and be put in front of consumers..

Very good. And then, Eric, I'm sorry to do this, but with respect to acquisitions, I recognize it's a situation of preparedness meaning opportunity. We know you're prepared.

So has it been just a matter of pricing that's holding things back? Or are you not seeing properties available that fit the strategy?.

I would say that there's two – it's a complicated answer because we're very, very active..

I'm sure. Yeah..

But the two biggest categories would be some of the properties that we're most interested in aren't available now, and some that we're interested in are not available at a price that we think is prudent to pay..

Fair enough and that does seem prudent. Thank you..

And that concludes today's question-and-answer session. I would like to turn the conference back over to Eric Wiseman for any additional or closing remarks..

Sure. Thank you all for your interest in our company. It's been an interesting year for us.

In the first half, as I said earlier, consumer engagement and purchasing of our brands in our stores and online is right in line with our long-term organic growth goals, and that gives us great confidence that our brands are strong and our teams are executing well.

Unfortunately, our wholesale business growth is off, and that's following a very weak winter last year and all the implications of that on inventory in the channel. But that will get solved with time. With that, I'll just say that we're very confident about our outlook for the second half.

We have good visibility and strong execution skills, and we look forward to giving you guys another update in 90 days. Thanks so much..

And that concludes today's presentation. Thank you for your participation and you may now disconnect..