Joe Alkire - VP of IR Steven E. Rendle - President and CEO and Director Scott A. Roe - VP and CFO.

Robert Drbul - Guggenheim Securities Lindsay Drucker Mann - Goldman Sachs Michael Binetti - UBS Investment Bank Camilo Lyon - Canaccord Genuity Laurent Vasilescu - Macquarie Research Dana Telsey - Telsey Advisory Group Matthew Boss - JPMorgan Samuel Poser - Susquehanna Financial Group Erinn Murphy - Piper Jaffray Kate McShane - Citigroup Inc Jim Duffy - Stifel, Nicolaus & Company.

Good day everyone. Welcome to the VF Corporation Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I’ll turn the conference over to the Vice President of Investor Relations, Joe Alkire. Please go ahead, sir..

Good morning, and welcome to VF Corporation's second quarter 2017 earnings 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 that our participants refer to on today's call will be in adjusted and currency-neutral terms, which we defined in the press release that was issued this morning.

We use adjusted and currency-neutral amounts as lead numbers in our discussion because we feel 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 U.S. GAAP.

Reconciliations of GAAP measures to adjusted and currency-neutral 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 of why this information is useful to investors.

During the second quarter of 2017, the Company completed the sale of its Licensed Sports Group or LSG business. In conjunction with the LSG divestiture, VF executed its plan to entirely exit the licensing business, which comprises the LSG and JanSport brand collegiate businesses.

Accordingly, the Company has classified the assets and liabilities of these businesses as held for sale and included the results of these businesses in discontinued operations for all periods presented. During the third quarter of 2016, the Company completed the sale of its Contemporary Brands businesses.

Accordingly, the Company has classified the assets and liabilities of Contemporary Brands businesses as held for sale, and included the results of these businesses 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 President and CEO, Steve Rendle; and Chief Financial Officer, Scott Roe. Following our prepared remarks, we'll open the call for questions.

Steve?.

Great. Thank you, Joe, and good morning, everyone. The pace of change in both our industry and the broader consumer landscape continues to happen at accelerated rate. 2017 is the year of making transformational moves as we begin to evolve VF and our brands to become more consumer and retail centric in everything we do.

Six months into the first year of our 2021 strategy, our results are right in line with our expectations, and in fact, we’re doing so much better than we anticipated. Our improved performance in the face of an unpredictable retail environment around the world demonstrates the strength of our brand portfolio and diversified value creation model.

We're in the early phases of our journey to become a more agile and consumer centric organization and we are encouraged by our strong start to 2017. During the second quarter, revenue increased 3% which was slightly ahead of our expectations as core growth engines continued to accelerate.

Our big three brands, Vans, The North Face and Timberland, grew at a combined rate of 7%. Our international business grew 6%, including 18% growth in China. Direct-to-consumer grew 14% and our digital business was up more than 35% and growth accelerated to 8% in Workwear.

Our digital wholesale accounts, a key growth driver for VF over the next five years also increased at a high single-digit rate through the first half of 2017. Gross margin improved 160 basis points, an exceptional performance which again exceeded our expectations. VF's brands are strong.

We remain disciplined in our renewed focus on elevating our creative capabilities, specifically in product design to enrich consumers brand experience, coupled with stronger marketplace management, is driving more profitable growth and further strengthening our brand equity.

EPS was $0.29 in the quarter at the high-end of the range we guided to in April. We also repurchased an incremental $200 million of stock which when combined with our strong dividend brings our anticipated total cash returns to shareholders in 2017 to more than $1.8 billion. Strengthening total shareholder return remains a top priority.

As we look to the second half of 2017, we are gaining momentum across key dimensions of our business, and we see several catalysts on the horizon to ignite accelerated growth and value creation in our core growth engines.

As a result, we are raising our full-year 2017 revenue outlook to $11.65 billion based on stronger-than-expected growth in our Outdoor & Action sports business most notably Vans and The North Face brands, D2C and Workwear. Additionally, for the second consecutive quarter we are raising our gross margin guidance now to 49.8%.

Our strong gross margin performance is a central element of our diversified value creation model. It provides us the flexibility and fuel to accelerate investment and drive growth behind our largest opportunities.

In light of our increased revenue growth in gross margin expectations, we are investing an additional $40 million or $0.08 per share in 2017 to amplify our momentum and fuel accelerated growth as we move into 2018.

Our 2017 EPS outlook is now $2.94, which reflects the high-end of our previous outlook and includes the incremental investment just mentioned. Earlier this year, I said that VF is a value creation company and some wondered what that meant. This quarter's results begin to provide evidence of our commitment to value creation.

We're in the business of creating catalysts through our strong portfolio of diverse global brands. We will continue to reshape our portfolio and accelerate growth, and while we expect the retail landscape to remain uncertain, we will invest against our largest growth opportunities to create momentum rather than wait for it.

With that, let's review our second quarter results and dive deeper into our top five brands, Workwear and Sportswear. Starting with The North Face brand. Global revenue increased 6% driven by a 26% increase in Europe, and a 1% growth in both the Americas and Asia.

Revenue growth during the quarter was driven by strong results from our D2C business, which increased at a mid-teen rate. Wholesale was relatively flat for the quarter.

However, excluding the impact of bankruptcies in the Americas, which didn't really start to impact us into the second half of 2016, global revenue for The North face increased at a high single-digit rate. For the first half of 2017, global revenue for The North Face increased 7% or 9% excluding the impact of bankruptcies just mentioned.

By region, revenue growth in the Americas was driven by mid-teen growth in D2C with strong results from digital, which grew more than 40% in the quarter. This was partially offset by a high single-digit decrease in wholesale due in large part to the impact of bankruptcies. Turning to product performance.

The success of the Apex Flex jacket continued with Outside magazine naming it one of the best summer jackets of 2017. And we can't forget to mention The North Face Athlete Alex Honnold, who made climbing history when he completed the first free-solo ascent of El Capitan in Yosemite.

I’m not if sure everyone can appreciate just how remarkable the steep was. A 3,000 foot granite wall in less than four hours, climbing alone and without safety gear with only his shoes, shorts, and chalk bag. The mental and physical strength required are beyond comprehension. Alex your passion encouraged, an inspiration to us all.

Thank you for being the perfect embodiment of The North Face spirit of exploration. In Europe, consumer demand for North Face brand remains very strong across the region. Our wholesale business was particularly solid with growth of nearly 40% and D2C grew at a high single-digit rate.

The brand has tremendous momentum as we move into the second half of the year. Based on the forward-looking visibility we have into our order books as well as broad-based strength across key product categories in markets, we expect more than 15% growth for the balance of 2017.

In Asia, second quarter revenue sequentially improved as high teen growth in D2C was partially offset by an expected high teen decline in wholesale.

From a product standpoint, outdoor training launched on April 1 with more than 40% sell-through, supported by the I Train For marketing campaign across the region and the opening of the first global outdoor training station in Shanghai.

Our urban exploration territory also continues to perform very well in Asia, providing consumers an opportunity to experience the brand new use occasions.

While the outdoor environment remains highly promotional in China, and we continue to consolidate our retail partners and aggressively manage inventory in the marketplace, we expect accelerated growth in the second half of 2017, including mid single-digit growth in the third quarter.

There is no change to our mid single-digit growth expectation for The North Face brand in 2017. That being said, based on our strong first half performance, current order book visibility, and increased confidence for the balance of the year, we now expect growth to be at the higher end of that mid single-digit range.

Regarding the shape of our second half performance, fewer off-price sales and a significant shift in the timing of our order books from September to October, which Scott will touch on later, will likely result in a mid single-digit decline in revenue for the third quarter.

Normalizing for the timing shift, however, revenue growth for the third quarter would be in the low to mid single-digit range. Now to our largest and fastest-growing brand, Vans. Global revenue was up 9% with 7% growth in the Americas, 5% growth in Europe, and 29% growth in Asia.

From a channel perspective, D2C increased more than 25% with 45% growth in our digital business. As expected, wholesale declined at a low single-digit rate. In the Americas, our D2C business remained strong with more than 20% growth in the quarter, including over 25% growth in digital and high teen comp growth.

Wholesale declined at a mid single-digit rate pressured primarily by conditions in the family channel where we are in the midst of a product transition and up against strong distribution gains a year-ago.

Based on current visibility as well as a significant momentum we have in the business, we now expect low double-digit growth in the Americas in 2017. Vans brand growth extends across multiple product categories and families.

While the Old Skool has recently become the number one classic style, the iconic slip on and checkerboard styles and designs are seeing tremendous growth, up more than 65% in the quarter, targeting the core skate community, the new athlete inspired UltraRange Pro was recently launched and at a $90 price point, saw real strength in the market with more than 70% sell-through in skate and board sport accounts.

Vans product collaborations have always been incredibly popular with consumers and the [indiscernible] Co-Lab was no exception.

And last, but not least, our powerful customs platform which blends the experiential with the transactional increased at a triple digit rate and is the only -- and is only beginning to tap its full potential in the market as we add functionality each month.

In Europe, the Vans business is performing better than expected, as demand continues to accelerate. Our D2C performance was exceptional with more than 20% growth driven by more than 40% increase in digital and 20% comp growth. In line with the expectations, wholesale declined at a low single-digit rate due to the timing of shipments.

Based on stronger-than-expected second half orders, we now expect our Vans Europe business to increase at a low double-digit rate for 2017, including strong high teen growth in the second half of this year.

In Asia, our Vans business is firing on all cylinders delivering almost 30% growth, marking the fourth consecutive quarter of more than 20% growth in the region. Results during the quarter were powered by 45% growth in D2C with strength across all markets, including almost 80% growth in digital, in China.

Looking to our outlook for 2017, we now expect global revenue growth for Vans to be at the high-end of our low double-digit growth range. As expected, Timberland return to growth in the second quarter as global revenue increased 3% in line with our low single-digit growth outlook for the year.

Growth was nicely balanced with a mid single-digit increase in D2C, and a low single-digit increase in wholesale. Timberland brand revenue in the Americas increased 4% with high single-digit growth in D2C, including 25% growth in digital and low single-digit growth in wholesale.

Our non-classics business increased at a low double-digit rate during the quarter with more than 100% growth in our new platforms, including SensorFlex and AeroCore. Our Timberland PRO business also remained very strong with more than 20% growth.

Our growth strategy is gaining traction as we work to diversify in North America business toward a more balanced assortment. The strong sell-through we are seeing with our non-classics products gives us confidence, we can drive accelerated growth in the second half of 2017 and into next year.

In Europe, Timberland brand revenue was up 4% in the second quarter driven by low double-digit growth in D2C, partially offset by a modest decline in wholesale. Growth across the region is strong and broad-based with more than 35% growth in our new platforms such as SensorFlex and AeroCore and high single-digit growth in apparel.

Our European business has good momentum and is expected to deliver high single-digit growth in the second half of 2017. Timberland's Asia business improved sequentially, but was down 1% as D2C declined at a low single-digit rate and wholesale was in line with last year.

High single-digit comp growth, including more than 50% growth in digital revenue was offset by our strategic decision to close underperforming doors in some of our more mature markets.

At the same time, our new footwear plus D2C concept is performing well across the region and we continue to achieve scale and significant momentum in China as revenue increased an impressive 60%.

Regarding the shape of our second half performance similar to The North Face brand, a significant shift in the timing of our order books will likely result in a low single-digit decline in revenue for the third quarter. However, when normalizing for the timing shift, revenue growth for the third quarter will likely be in the low single-digit range.

There's no change to our low single-digit growth outlook for Timberland brand in 2017. Moving to the Wrangler brand, as expected, global revenue for the second quarter was down 2%. D2C increased at a low double-digit rate, but was offset by a low single-digit decline in wholesale.

Revenue in the Americas declined 2%, while revenue in Europe increased 5% and Asia which represents less than 3% of global brand revenue declined at a low double-digit rate for the quarter, primarily because of the continuing demand weakness in India primarily related to fiscal policy changes.

As we outlined in April, our U.S business continues to be impacted by inventory destocking related to the strategic repositioning of a key customer and channel consolidation.

And while our forward visibility remains low, and the quarter-to-quarter variability is difficult to predict, we do believe we're on track to return to moderate growth in the second half of this year, most notably in the fourth quarter. And we’re seeing strong growth with our digital wholesale partners and in our own wrangler.com business.

Our efforts to elevate the brand and extend more deeply into new channels, such as department stores and specialty retail are showing early signs of success.

From a product perspective, the 70th anniversary Retro Glory collection continues to attract new and existing consumers with strong sell-through globally, and to wrap up the Wrangler brand, our outdoor line is performing very well. Now to the Lee brand. Revenue declined 6% with 25% growth in D2C offset by a low double-digit decline in wholesale.

The Lee Americas business was down 9%, as ongoing channel weakness and consolidations, as well as difficult market conditions in our women's product more than offset solid performance in our men's business. Xtreme Comfort khakis and Extreme Motion Denim are clearly resonating with the male Lee consumer.

Lee Europe was down 4%, as low single-digit growth in D2C was offset by a mid single-digit decline in wholesale. In Asia, revenue declined slightly as mid single-digit growth in China was offset by ongoing weakness in India.

Our women's business in China increased at a double-digit rate powered by our BODY OPTIX and Jade Fusion innovations, which should drive improved performance in the second half of 2017. Turning now to Imagewear. Revenue was up 12% in the quarter due in part to LSG jersey sales.

As part of the transition agreement with Fanatics, which acquired our licensing business early this year, we will supply jerseys for one-year following the transaction.

Excluding the impact of LSG jersey revenue, our Image business was up 2% and consistent with our growing optimism about our Workwear platform, which includes our Image business as well as our Timberland PRO and Wrangler RIGGS workwear, revenue growth accelerated to 8% in the quarter with at least 20% growth in three of our largest brands, Timberland PRO, Bulwark, and Wrangler RIGGS workwear.

We are very bullish on the Workwear space and are clearly advantaged owner in our highest return on capital business. In addition to the macro tailwinds we see forming, we have a unique opportunity to drive accelerated growth and value creation in a highly fragmented market.

We will accelerate growth by leveraging our expertise, capabilities, and platforms with some of the strongest brands in the sector.

With this solid performance and favorable outlook, we now expect Image revenue to increase at a mid single-digit rate in 2017, excluding the LSG jersey business and up from our previous estimate of a low single-digit rate increase. Looking at Sportswear. Revenue is showing signs of stabilization and profit has improved.

Congratulations to our new management team, which is beginning to make progress in a difficult environment. And with that, I'll turn it over to Scott..

reported revenue is expected to be up 2% or 3% on a currency neutral basis to $11.65 billion. This compares to our previous expectation of low single-digit increase.

Our increased revenue outlook is driven by strength in Outdoor & Action Sports, particularly Vans and The North Face, increased expectation for D2C most notably digital and higher growth from our Workwear businesses. Gross margin is now expected to improve about 40 basis points to 49.8%, which still includes a 70 basis point headwind from FX.

This represents a 20 basis point improvement relative to our previous outlook of 49.6%. Operating margin is still expected to approximate 14% on a reported basis including about a 60 basis point negative impact from changes in FX.

EPS is now expected to be $2.94, down 1% on a reported basis, but up at a mid single-digit rate on a currency neutral basis. Our outlook now includes $0.08 per share or $40 million pre-tax impact from additional investments to fuel accelerated growth into 2018. As a reminder, our prior EPS outlook was a range of $2.89 to $2.94.

Now let me provide a few comments regarding the shape of our second half.

As it relates to the third quarter, which has historically represented the peak for fall shipments, we’ve seen a significant shift in order book timing from the end of September to early October, simply put as consumers by a closer to need, our key retail partners are setting their floors later which pushes our shipments from what has traditionally been Q3 and to Q4.

And while we have visibility to the orders, the shift has pushed almost $100 million of wholesale revenue into Q4 compared to a year-ago. As a result, we expect revenue growth in the third quarter to be in the low single-digit range and EPS to be in the range of $1.09 to $1.12.

Normalizing for the wholesale timing shift, our revenue and EPS growth rate for Q3 would be in the mid single-digit range. Some with the first half behind us, we are confident in our increased growth outlook and have good momentum as we move into the second half of the year.

Our core growth engines are delivering high single-digit growth, our gross margin is strong, our fundamentals are intact, and we are investing in our future growth drivers.

And as Steve mentioned, given our momentum and the confidence we have in our growth plan, we're putting more investment behind our largest brands and growth platforms and returning more cash to shareholders. We will create momentum, not wait for it. If you take away one thing from our comments, I hope that one thing is confidence.

Confidence in our outlook, confidence in our brands and our people, and confidence in our strategy. I’m going to close by addressing the topic I know is top of mind for many investors, the M&A environment. As you recall, reshaping our portfolio is the number one choice in our 2021 strategy. We are committed to active portfolio management.

As we’ve said, we believe we are a value creation company. We have a robust pipeline of opportunities and the activity has increased over the past few months, and we continue to evaluate the shape of our existing portfolio. We look forward to keeping you updated our progress.

With that, I'll turn it back to the operator and we will open the call for your questions..

[Operator Instructions] We will have our first question from Bob Drbul with Guggenheim Securities..

Hi, guys. Good morning..

Good morning, Bob..

Good morning, Bob..

I guess, the two questions, the first one is more on when you look at the third quarter expectation in some of the detail, on like the order book or the changes in the order book, have there been any material changes to the total number or it's just a shift into the third or the timing of it? And the second question that I have is, around the Jeanswear business, can you just give us an update on the transition its underway? Is there really a site line to stabilization in the Jeanswear business where the profit pressures are pretty significant?.

So Bob, I will take the first part of that. First of all, our visibility versus what you guys can see is really what we tried to bridge here, right. We -- there is really no change in what we see for the full-year relative to the order books. It's -- we’re just talking about a little bit of a shift in timing.

And just to put that in perspective, we are literally talking about a couple weeks. But that's the difference between Q3 and Q4. So, absolutely no change in the big picture. Just a little bit of timing between Q3 and Q4.

That's why we tried to zoom out and say if you look at the second half, it's kind of in that mid single-digit range and normalizing, but you’re going to see a little of noise when you compare to last year when you specifically look at just the third quarter..

And Bob your Jeanswear question, really there is little new news and little change to what we’ve talked about in the past. The big room -- big picture remains the same, but our visibility is not great and we expect variability as we continue through the year though. We do see a line of sight to an uptick coming back in the fourth quarter.

And it's important to remember, in our Jeanswear business our international business continues to be strong, especially in China where we see our Lee women's business continue to grow at double-digit great growth rates behind the two innovations, Body Optix and Jade Fusion.

I think once we get through the destocking phase, velocity will increase and that's where I think, we, VF really comes into play and our ability to respond quickly with the strength of our supply chain and the quality of our team that works on that business not to be able to really read and react quickly to be back -- right back in the game..

Great. Thank you very much..

We will go next to Lindsay Drucker Mann with Goldman Sachs..

Thanks. Good morning, everyone.

With respect to your cold weather businesses, specifically North Face, but also Timberland, is your view that you’re retail partners have ordered to reasonable end demand for a normal cold-weather season or are we in a stage here where they’re ordering very, very tight and looking to chase, and have you based your orders on what you're pulling in terms of inventory, in terms of their orders, or have you put yourself in a position where you have excess inventory in order to chase into that demand?.

Yes. Hi, Lindsay. This is Steve. I would characterize the outdoor specialty in even more broadly, the Outdoor Community as buying very tight, with -- two years in a row, multi-years where we’ve seen variable winters. Retailers are playing it very close to the best.

They’re investing behind those brands, that have momentum and bringing those truly innovative products. Our inventory, we -- as you know, we buy to our order book with a real thoughtful amount of reorder around key styles within each of these brands. I would tell you where the strength sits for us.

It's in the performance of our D2C and you saw in this quarter where our comps are strong, our digital is exceptional, and I really would put that behind -- the marketplace is clean. And we're sitting in an environment where -- it's to the rest of the year.

We're not -- our ability to chase is limited from a wholesale and probably where if as we see momentum in digital and D2C. That's really our opportunity from -- if strong trends continue. .

Got it.

And Scott, could you just walk through the drivers of the gross margin improvement in the quarter? I know you talked about FX, but anything specific to channel shift, direct versus wholesale, cost, pricing, etcetera to break down the change that we saw in the quarter would be helpful?.

Yes, sure. So there is about 80 basis points of negative impact from FX. I think it was in the prepared remarks. So that means about 160 currency neutral. That mix has been really consistent at that 50 to 60 basis points, and we saw the mix come in through, that's our D2C, digital, international businesses being strong.

Remember also we talked in February about the shape of cost, right. So cost through the first half is a tailwind to us. It turns to a little bit of headwind in the second half. For the full-year, it's really not much of a factor.

So we're seeing a little bit of benefit now that will turn negative in the second half and -- but really not a huge factor like I said. And then, the other thing is honestly just better fundamentals. We’ve reduced our off-price sales.

We’re focused on -- not bringing excess inventory into the channel and we're seeing more full price sell-through along with better D2C and digital. Those things are all pretty virtuous from a gross margin standpoint..

Great. Thanks so much..

Thank you..

We will go next to Michael Binetti, UBS..

Congrats on a nice quarter. I want to ask you about the $40 million in incremental investment. Obviously, we just went through -- the big five-year outlook with an investment plan there, and so now we’ve got $40 million on top of it.

I just want to ask at a high-level, as you think about that, what are some of the areas that you're seeing? Is it more recent stuff that you’ve seen as an opportunity, you decided to dial-up $40 million or is it just extending things from the Analyst Day and then -- obviously, how do you think about the payback on dialing that up, as you’ve already gave an initial plan? How does that $40 million flow-through to your earnings outlook, maybe in the [indiscernible]?.

Yes, Michael. This is Steve. So, really it's based on our confidence.

As we look at where we are year-to-date and what we -- line of sight to what we have for the balance of year, we just have confidence in what we'd like to do, and what we've chosen to do is thoughtfully invest behind a select number of our strategic choices that we outlined in Boston to get us moving into 2018 where we talked about maintaining and building continued momentum.

So about a quarter of that $40 million is going against demand creation within our big three brands in D2C and digital. We expect that to have an impact this year and into next year, but half is around specific strategic priorities.

Design and innovation, data and analytics, our digital platform, absolutely continuing to move on advanced manufacturing and innovation projects we have in play there and then talent. Talent really is the great driver for us long-term and we are continuing to look at acquiring as well as developing key talent to help us grow long-term..

Got it. And then, on North Face specifically, I think the one thing we heard coming out of the Analyst Day was, I think we’ve some new leadership there. So maybe there would be some more -- more material update to the strategy after the Analyst Day.

I would love to check in on that, how you guys are feeling about innovation for the year and then also just a little bit more on some of the strength you're seeing in Europe? Where is that coming from? It's been several quarters now of very, very big growth above what you see across, I guess, a lot of the channels in Europe from other companies.

So I’d love to hear a little bit more about what's driving that business?.

Yes, and I would love to talk about that. I think you remember, in Boston, we introduced you to Arne Arens, who at that point had been the leader of our European business and we are moving him to be the GM of the Americas business.

He has since been appointed the President of the Global North Face business and just bringing that, that strong leadership presence and vision that he had in Europe to our total global business.

And you just really see that in very short order, the confidence, that -- now sits within that broader North Face team, the clarity of focus against their strategy and you’re starting to see the momentum in our D2C business, specifically. I will answer your point on what -- as we think about year and innovation.

The Apex Flex jacket, which came out in the spring was a really good beginning to seeing new products move into the marketplace.

This fall you're going to see dramatically updated Summit Series collection and there is a jacket in their called the Ventrix, that we're very excited about that not only plays into the Tier 1 aspect of the marketplace, but also into our -- into some of the broader market partners.

We also see some new ski lines coming in conjunction with the focus on mountain sports. And then urban exploration, more of that North Face lifestyle presentation that just gets us into a broader set of usage occasions. I think what you see going on in Europe, really is a much tighter focus.

If you remember couple of years ago, we went through a reset there as well and Arne led the -- the return to growth through a much, much more focused integrated marketplace management and significant segmentation tailoring and merchandising line, specifically to wholesale partners as well as our own D2C.

And as that momentum builds, you’re seeing those results not only in our first half, but in our expectation of getting that mid teen growth through the balance of 2017. So this speaks to the benefit of quality leadership, clarity of vision, and focusing on creating products and brand experiences that consumers can be drawn into..

I guess, just to follow that really quickly, is -- we can see as it go through your stores, in the U.S now some of the bigger ones starting to get segmented harder between the four different North Face segments. Is the thinking that we can really follow that similar road map has driven such nice growth rates in Europe.

In U.S., I guess, as you pull back on some of the wholesale doors, in the U.S., you can -- you still think there is pretty good growth rates ahead for the North Face as you start pushing out similar segmentation strategy here in the D2C side?.

We absolutely do, Michael. I mean, I think you remember at Boston we talked about a brand that would grow, 6% to 8% on a five-year CAGR. We just raised our guidance this year to the high-end of our mid single, which is at the low-end of that 6% to 8% growth CAGR that we posted for the five-year. So we have great confidence.

Just move into these four specific brand territories, just allows our product team and the marketing team to focus on these key usage occasions for our core consumer.

Speaking to the core consumer, but also attracting new consumers and you see that in Europe, you see that in Asia, and we have great confidence that that will absolutely work here in the domestic market..

Okay. Thanks a lot, Scott..

We will go next to Camilo Lyon, Canaccord Genuity..

Thanks. Good morning, gentlemen.

How are you?.

Hey, Camilo..

I was hoping you could speak a little bit about your endeavors around accelerating your speed [ph] to market capabilities and where do you see -- which brands you see the most opportunity and that impacting the P&L, first to last I think that’s clearly a function that you guys are working hard to have and already achieved in, but I’m curious to know where your thoughts on how you can really leverage that to your benefit so you can expect more from your D2C goals across the brand?.

Right. What we talked a little about this Camilo in Boston, and it's a foundational element of our new five-year strategy. It's one of those key choices around transforming to be more consumer and retail centric. And what we’re looking at there is really the end-to-end process of product creation and everything to do with going to market.

We've got a number of projects underway with our largest brands, where we’re really tearing down the timelines of product creation, as well as manufacturing and looking at where can we take time out, how can we use digital technology to advance our ability to be more agile.

But it's also true, the integrated marketplace strategy, segmentation, and merchandising very specific collections to the distribution choice and building really well articulated -- well merchandised collections and flowing them in a more relevant and consistent way.

So moving away from this old wholesale model, that you’ve seen so many people do over the years to being present more often through more thoughtfully merchandised lines and its challenging every aspect of our product creation cycle.

Our supply chain is deeply involved in this project and really helping shepherd how our product creation teams are looking at this, and how they can be more integrated in thoughtful, in improving our speed to market..

Does it right to think that North Face maybe the brand that feels the benefits of the first as you layer on the innovation that you’re talking about, [indiscernible] of your four categories and how you’re improving the global process?.

The North Face is certainly one of those brands, that’s deep into the work. And I think each one of our big brands will benefit, but to your point specifically yes, The North Face will benefit being -- thinking through the lens of four specific territories, across each of the regions into each of the specific channels.

When you can focus on doing fewer things better, the results typically are always very positive..

And then, Scott, since you brought it up, I was just curious to get your latest thoughts on if your hunting ground for acquisition has changed or has evolved, I would assume that the discussion, well -- tell me if the discussions have changed to become a little bit more fluid with respect to valuations and if that’s -- if there's been a closer dialog with respect to the [indiscernible] grounds of where buyers and sellers [indiscernible]?.

Well, I guess, I’d answer it this way, Camilo. One of the nice byproducts of the disruption and carnage in our sector is the fact that valuations are coming a little bit our way and given our strong balance sheet the cash that we generate, that puts us as an advantaged acquirer in the space.

So valuation as I try to say is only one component of the equation, right. And it has to be, first of all, the right brand, the right space, and something that we’re an advantaged owner to make it -- make sense. But given that, valuation is always going to be a key component and valuations in general are moving our directions.

So I would say it's a slightly more favorable environment compared to say the last 12 the 24 months..

And then for your hunting ground, is that -- it used to be, if I recall correctly, you’re focused on the Outdoor & Action Sports face, footwear was a key category that you’ve been looking at, is that evolve?.

Yes, Camilo. This is Steve. I'll take that. If you remember back in Boston, I stated pretty clearly that, I’d really like the external world to not think of us as an Outdoor & Action Sports company, but as a value creation company.

That is deeply informed by our understanding of our core consumer, anchored in our powerful brands and certainly a center of gravity sitting in Outdoor & Action Sports, but it's less about really the -- the sector and it's more about the consumer usage occasions.

And where can we find a way to bring our skills and capabilities and the benefits of our platforms to bear it to unlock these new pools of value. The number one choice in our integrated strategy is reshaping our portfolio and we are extremely committed to doing just that in aligning our portfolio to be consistent with our financial aspirations..

Got it. Thanks a lot guys. Good luck..

We will go next to Laurent Vasilescu with Macquarie..

Good morning and congrats on the continued momentum in the business. I want to follow up on the incremental investment.

In terms of the $0.08 impact, how should we think about it between 3Q and 4Q? And can we potentially further parse out in basis points the SG&A deleverage anticipated for the third quarter versus the leverage expected for the fourth quarter?.

Good morning, Laurent. I would expect a question like that as you're building that massive model. The -- we haven't really shaped it, but Steve made a comment and some of that is in the second quarter. You saw some of that incremental investment. We even got going in the second quarter and it's relatively balanced through the third and fourth.

This is the way I would answer that. So the -- and from a gross margin standpoint, we've talked to you about the full-year, you know with the first half is, you can assume that's fairly linear through the back half. So I think that gives you the pieces to shape the second half of the year and model it out reasonably well..

Okay. Super helpful. And then a non-modeling question. A number of key vendors like Nike and Ralph Lauren have recently outlined efforts to edit this.

Can you count going forward? Your March Investor Day, I think the term editing the portfolio with you several times, so aside from any potential divestitures or acquisitions, are there any internal processes you may be putting in place around [indiscernible] assortment to further drive the gross margin over time?.

Yes. Laurent, that is real key to the transformation project that I answer just a little bit ago. As you think about integrated marketplace and what's the correct number of SKUs in each of the specific deliveries to be agile and relevant to our consumer, editing SKUs to amplify, stronger product is a key part of that.

I don't have any specific metrics that I would share with you today, but it is central to how we’re thinking about editing to amplify and becoming much more agile with how we come to market across each of our big brands..

Okay. And if I could squeeze one more in.

Shipping out the $100 million shift from 3Q and 4Q, can we expect the wholesale business to be roughly a flat to slightly up in the fourth quarter, especially as you lap last year's U.S bankruptcies?.

Yes, that -- that's a reasonable assumption. You'll see relative -- you will see the strongest wholesale growth for the year in the fourth quarter for the reasons that you mentioned also we are lapping -- we have the bankruptcy impact [indiscernible] and we're also starting to lap the destocking activities in the fourth quarter..

Super helpful. Best of luck..

Yes, one other thing just to add on that too, don't forget Vans Europe really is returning back to growth. We talked about that order book being in the double-digit range in the second half. So that’s a third factor..

We will have our next question from Dana Telsey, Telsey Advisory Group..

Good morning everyone and congratulations on the improved results. As you think of the digital wholesale business and the growth that you’re seeing there, how do you think about your strategy with the Amazon's in the world -- of the world? And then, your thinking about D2C, which seems to have accelerated.

What are your plans with store openings and closing in the different regions? Thank you..

So Dana I will start here. So how we -- I think it's more about how do we think about really those the digital wholesale partners that we have across the globe. And there's major pure plays.

There's also key customers that we've been with for years and they are part of that integrated marketplace that have choices that we have and they’re very important part. We talked about that in Boston, that our digital wholesale partners is a significant part of our growth in the next five years. Amazon is an important customer.

And just we have -- some of our brands that have 1P relationships, we have some brands that have 3P relationships and we have some brands that have chosen to continue to look at and measure just how they could successfully work with Amazon more importantly here in the U.S marketplace long-term.

I think it's fair to say, you will see The North Face open up a 3P partnership and have a trial going into fall '17 or you might even want to call that a pilot as we look at how to integrate Amazon into the long-term integrated marketplace strategy for The North Face here in the United States.

We are working with Amazon in Europe and we will look at how we can do that here. But I’d remind you there's a number of great players around the globe, AliBaba's, Orlando [ph], all of those are key wholesale partners for us long-term..

Thank you.

And on the direct-to-consumer piece on the retail stores part?.

Yes, maybe I'll start with a little bit of that. Dana, first of all, good morning. So we talked about the fact that our store count actually was down very modestly versus the last quarter. And that the reason to highlight that is just to pay off the fact that we said we're serious about looking at our portfolio from a profitability standpoint.

We're really focused on improving the performance of and editing our underperforming stores and focusing on those formats and brands which are very successful. So you'll see that even if it costs us a little top line, we're willing to be -- we are willing to take those actions and that really is a pay off against that.

Having said that, we're really committed to brick-and-mortar stores going forward, because we think that's part of that integrated marketplace that Steve mentioned. That's the highest and 10 ultimate experience of our brands and we see that is a critical component to the overall picture.

So we talked about 50 net store openings this year, and you can expect something similar to that going forward according to our long range plan..

Thank you..

You bet. Thank you, Dana..

We will go next to Matthew Boss, JPMorgan..

Thanks.

So on gross margin is it still fair to think about 40 to 50 basis points of underlying expansion from mix just on an annual basis? And if so, can you just walk through the drivers? And then separately on SG&A, I guess, given your comments earlier should we expect expenses to grow below the pace of sales as we move into next year and beyond?.

Yes. So first of all gross margin, yes, you're right in that zone. I mean our mix is a little ahead of our long-term rate. But we’ve said that 40 to 50 basis points should be sustainable and it's pretty simple. Our highest margin businesses are fastest-growing.

That's been true and we expect that to continue to be true, that being our international business are our digital and our D2C in general plus Outdoor & Action Sports are big three brands, have higher gross margins in the total. So that mix we expect to continue. I will just remind you of kind of the formula, right.

Our gross margins expand, we are investing from an SG&A standpoint in those strategic drivers and then looking for leverage as we talk about platforms across [indiscernible] if looking for leverage and all other expenses. And that’s how this formula works together. So as it relates to SG&A, we will continue to invest in SG&A.

Over time that's going to be below our margin expansion. We talked about in our 2021 plan, our operating margin will expand over the next five years. But let's be clear, we are going to continue to invest around as growth drivers particularly D2C and specifically digital underneath that..

Got it. Thank you..

We will go next to Sam poser, Susquehanna..

Good. Good morning. Thanks for taking my question. I’ve got a couple.

Can you clarify the change in your currency neutral revenue guidance between what you had prior and what you’re giving now?.

Yes. I will start. Hey, Sam. Its Scott. So, yes, we said last time low single-digit currency neutral and reported with 2 points of currency, so that obviously if you do the math, that’s about 1%. And now we're raising that to about 2%, at a $11.65 million.

So that's how we get from and to and we've given you a very specific revenue target at $11.6 5 million..

So your currency impact is the same just you’re raising the numbers?.

Well, there is some currency benefit. If we think about what's happened in the currency markets, our largest exposure is the euro and it's a little favorable. Our second largest is the pound, which is very unfavorable. But when you net that together, there is some benefit from a currency standpoint, although not significant..

Okay. And then -- two other just housekeeping. Most of the questions have been answered.

The tax rate you’re looking for the full-year and the share count, what's built into the share count for the -- in this guidance?.

Yes, so what we -- we don't give you the share count per se, but we talked about $1.2 billion of buybacks, so I guess the math can be done. As it relates to the tax rate, we said about 20%. And that’s consistent with what we said in our last guidance..

Well, thank you very much and good luck..

Thanks, Sam..

Thanks, Sam..

We will go next to Erinn Murphy, Piper Jaffray..

Great. Thanks. [Technical difficulty].

Yes. Hi, Erinn. Its Steve. So I think what we see going on there, we put a new leadership team in place there in January. Brendan, brought a really strong understanding of retail.

One of the areas we wanted to quickly shore up was our outlook business and that's really around productivity and how we're really converting the traffic that comes in our doors.

Concurrently with that, we -- last year continue to look at our product offering and evolving that to be -- to allow us in the same idea of integrated marketplace, have -- specific products for each of our different channels of distribution.

And I see -- I think what you see happening this year is what we have going on in the department store is relevant to that consumer. It's different than what you have in our outlet stores and online.

And I think just with a more focused assortment and in a slightly cleaner marketplace, we're seeing that drop to our profitability as we continue to look to reignite sales. I really don't have a line of sight to what the balance of the year.

Otherwise we’re going to continue to do more of the same and bring relevant third and fourth quarter styles through this to the lens of the Nautica heritage, that we've seen working really well. And again just these assortment specific to each of the channels, which is new to some of the things that we've done in the past..

Got it. Thank you..

We will go next to Kate McShane, Citi Research..

Thanks for taking my question.

With regards to the operating margins for Jeanswear specifically, can you help us understand the mechanics of the operating margin during the quarter and for the rest of the year how much of it has to do with the destocking and how much is Apex related?.

Sure. I will take it, Kate. Good morning. So first of all, there's a few dynamics that are going on in the profitability. First, regarding margin. We’ve made a strategic decision to put more innovation and more make into the channel as an offensive move. But it's at a time when pricing is difficult.

So that has put pressure on our margins in the short-term. We think that's the right move. Remember the big picture here, right. We are going through a disruptive phase, but we're really targeting and focused on when we come out of this, right. We’re trying to position ourselves to be the strongest brand standing at the end of this process.

And as a result, we decided from a short-term profitability standpoint we'd make that strategic decision. The other side of that is again we're playing really to win in the long-term. So we've maintained our demand creation investments through this difficult period.

We could have easily made a different decision, which would have helped us from a short-term profitability, but we think again for the same reasons the smart move here is to play for the long game and for the endpoint.

And so we’re going to see tough margins through this year and really those same drivers that I just mentioned that we're seeing in the first half. You will see those themes continuing into the second half..

And Kate, I would add to that, why we made the decision to maintain our demand creation is we see our specialty business specifically the Western category, Wrangler RIGGS, but also mentioned the 70 Retro Style, as we look to open up the lens of our Wrangler brand and open it up to a broader set of channels.

We're seeing really nice traction taking hold in some of these new points of sale in the moving up the distribution channel and we think it's important to continue to invest behind the brand to assure that that continues to go..

Thank you..

Thank you, Kate..

Okay..

Our last question will come from Jim Duffy, Stifel..

Thank you. Good morning, guys. Hope you’re doing well..

Hey, good morning, Jim..

Couple questions for me. You mentioned that the visibility on the Jeanswear business is difficult.

Is the destocking headwind behind you at this point in the Jeanswear category?.

No, Jim, it's not behind us. It's progressing and just [indiscernible] the shape. The reason we say, we kind of know the endpoint here, right.

We know where the floors are going to end up when we say lack of visibility we don't control the pace of markdowns as the floor is cleared, and that can have a really big impact on our sell-through depending on what's on sale, how deep those discounts are etcetera.

So the quarter-to-quarter cadence is going to be a little hard for us to project, but when you step back and say there's only so many -- so much inventory in the floor to be cleared and we know where the endpoint is, you kind of know the goalpost, you’re just not sure exactly what happens in between..

Fair enough. And then building on that, you did a nice job managing the inventories.

Can you talk about some of the things you are doing to keep inventory tightened? How it is that you’re better managing the amount of off-price across all the brands, not just specific to Jeanswear?.

Yes, I guess, I would say it started with the fact that I think from -- we decided to play it a little on the conservative side, right. We didn't build excess inventory. We are -- we gave guidance. It's in the low end of the range and we said we're willing to walk a little bit of revenue in order to improve the dynamics in the marketplace.

So we're not building the field of dreams, right. We're not building inventory in a hope that we will get it. We are not -- we are trying to hold back a little bit and match order books closer to the conservative position. And we've seen over time that that type of action will pay off in the long run.

It hurts us a little bit in the short-term from the top line and short-term earnings, but for the long-term brand health and long-term growth, history has proven that's the right -- the place we want to be..

Okay, good. And then my last question. The sales model for some of the other businesses beyond Jeanswear have historically offered better visibility.

In the U.S wholesale channel, are your partners giving you a better baseline of visibility to plan the business or you just still feel there's a fair amount of uncertainty as they try to get their arms around their own fundamentals?.

You know, Jim, I think -- here in the U.S I think the wholesale community is playing things very, very tight to the West [ph] and rightfully so.

The marketplace is transforming and the historical ways of ordering are needing to change and that's really central to how we’re thinking about our transformation agenda, how we're -- being much more diligent around the integrated marketplace understanding our channel partners.

What's the space that we have to place product in, what's the frequency required to really be present and incent consumers to come in and interact with us either in our own stores or wholesale. So I think things are tightening up and they should for all of us be, I think, more in tune with what our consumers are asking us for.

This notion of transforming is a really important aspect..

Okay. Thank you very much, guys..

You bet..

Okay, Jim..

Thank you, Jim..

That does conclude our question-and-answer session. I will turn the conference back over to Mr. Steven Rendle for additional or closing remarks..

Great. Yes, thank you everybody. I just want to reiterate, we are in the early stages of our journey to become a more agile and consumer centric organization. And we're encouraged with where we are at the start of 2017, but I would just remind us all that we're at the beginning of this journey.

Our core growth engines are delivering high single-digit growth. Our gross margins are improving and then our fundamental business disciplines are very, very intact.

We are choosing to thoughtfully invest in our future growth and the confidence we have year-to-date has us moving more quickly against our design and innovation agenda, driving demand creation, but also looking at some of the core platforms of advanced analytics, advanced manufacturing, and specifically talent.

We are focused on creating momentum against our five year's objectives and we look forward to interacting with you in the future as this -- the strategy unfolds. So thank you..

That does conclude today's conference. Thank you for your participation. You may now disconnect..