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Edited Transcript of VFC earnings conference call or presentation 22-May-19 12:30pm GMT

Q4 2019 VF Corp Earnings Call

GREENSBORO Jun 4, 2019 (Thomson StreetEvents) -- Edited Transcript of VF Corp earnings conference call or presentation Wednesday, May 22, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joe Alkire

V.F. Corporation - VP of Corporate Development, Treasury & IR

* Scott A. Roe

V.F. Corporation - VP & CFO

* Steven E. Rendle

V.F. Corporation - Executive Chairman, President & CEO

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Conference Call Participants

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* Alexandra E. Walvis

Goldman Sachs Group Inc., Research Division - Research Analyst

* Erinn Elisabeth Murphy

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Jay Daniel Sole

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury

* Jonathan Robert Komp

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Laurent Andre Vasilescu

Macquarie Research - Consumer Analyst

* Matthew Robert Boss

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Michael Charles Binetti

Crédit Suisse AG, Research Division - Research Analyst

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

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Presentation

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Operator [1]

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Greetings, and welcome to the V.F. Corporation Fourth Quarter Fiscal 2019 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Joe Alkire, Vice President, Investor Relations. Please go ahead, sir.

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Joe Alkire, V.F. Corporation - VP of Corporate Development, Treasury & IR [2]

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Good morning, and welcome to V.F. Corporation's Fourth Quarter Fiscal 2019 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 referred to on today's call will be on an adjusted constant dollar basis, excluding Kontoor Brands, which we defined in the press release that was issued this morning.

In the context of VF's review of its fiscal 2019 results, excluding Kontoor Brands amounts, exclude the results of VF's Jeans reportable segment, Wrangler RIGGS brand and VF Outlet business. The results are not indicative of the results of Kontoor Brands as a standalone entity and are not representative of VF's discontinued operations view of consolidated results after the separation of Kontoor Brands is complete.

In addition, the release provides adjusted fiscal 2020 outlook information reflecting management's best estimates of the impact the separation of Kontoor Brands may have on VF's fiscal 2019 financial information and fiscal 2020 outlook on a discontinued operations basis, along with other adjustments. VF's analysis of the separation of Kontoor Brands has not been completed and is subject to change. We use adjusted constant dollar amounts, excluding Kontoor Brands, as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business post the separation of Kontoor Brands.

You may also hear us refer to reported amounts, which are in accordance with U.S. GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors.

In connection with the distribution date of May 22, 2019, VF will file its current report on Form 8-K no later than May 29, 2019, which will include supplemental financial information on VF, illustrating Kontoor Brands on a discontinued operations basis under U.S. GAAP for certain historical periods.

During the first quarter of fiscal 2019, the company completed the sale of its Nautica brand business. During the first quarter of fiscal 2018, the company completed the sale of its Licensed Sports Group, or LSG business. In conjunction with the LSG divestiture, VF executed its plan to exit the licensing business and completed the sale of the assets of the JanSport brand collegiate business in the fourth quarter of 2017.

Accordingly, the company has included the operating results of these businesses in discontinued operations through their respective dates of sale. Unless otherwise noted, results presented on today's call are based on continuing operations.

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

Steve?

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [3]

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Thank you, Joe, and good morning, everyone. Fiscal 2019 represented one of the most transformative periods in VF's 120-year history, culminating with the tax-free spin-off of Kontoor Brands. The actions we took last year are just further milestones along the path we laid out in Boston 2 years ago. Since that time, we've boldly reshaped our portfolio, placed significant investments in key capabilities, accelerated growth in our largest brands, delivered sound fundamentals with gross margin expansion and SG&A leverage and returned $3 billion to shareholders, and all through a purpose-driven lens. It's been a busy 2 years.

We made significant strides this year, and we're steadfast to deliver on our commitment to be a purpose-led, performance-driven and value-creating enterprise. And even as our teams have managed an intense workload and a tremendous amount of change, I'm proud to report that we delivered strong financial results and another year of top quartile returns to shareholders.

Excluding Kontoor Brands, highlights from our fiscal 2019 results include revenue growth of 18% or 11% on an organic basis; growth driven by our 2 largest brands, Vans and The North Face, which grew 26% and 10%, respectively; and on an organic basis, international increased 10% led by 25% growth in China and 8% growth in EMEA; direct-to-consumer increased 13% with 26% growth in digital; and our Work business increased 5% with bounced broad-based growth.

Our fundamentals remained strong as gross margin, a key driver of our value-creation model, expanded 90 basis points organically, providing us the fuel to continue to invest in the capabilities required to sustain our growth momentum.

Including Kontoor Brands, EPS increased 22% to $3.78, including $65 million of incremental investment to drive our strategy and accelerate growth. And notably, EPS growth, excluding Kontoor Brands, was even stronger.

And finally, VF delivered yet another year of top quartile returns to shareholders with 20% TSR in fiscal 2019. Since launching our 2021 strategy in Boston just over 2 years ago, VF has delivered an annualized TSR of 29% over this period with a strong balance of both earnings growth and cash returns.

Let me take a moment to address current market conditions as the geopolitical environment has become more uncertain in recent weeks. While current events have the potential to disrupt our business and our consumers around the globe, to date, the impact to our business has been minimal. While we're most -- more closely monitoring conditions in certain markets, such as China and the U.K., for our businesses, the overall consumer backdrop remains quite solid. As it relates to trade, the impact of tariffs to date has been de minimis. We continue to monitor this situation closely and are developing contingency plans for potential outcomes.

For context, post our spin-off of Kontoor Brands, our total cost of goods sold sourced directly from China to the U.S. is 7%, and we will continue to implement mitigating actions to dampen the financial impact of incremental tariffs.

At the beginning of fiscal 2019, I shared 3 key areas where we would focus our attention and investments throughout the year to enable our strategy and fuel growth. I'm pleased to report that we made substantial progress on each of these areas.

First, we committed to reshaping and optimizing our portfolio, while protecting and enabling the explosive growth in Vans, shepherding the positive momentum of The North Face and focusing on reenergizing growth in Timberland North America. As a result, in August, we announced the separation of our Jeans business, which will become an independent publicly traded company beginning tomorrow morning.

In addition to the spin, we took other notable actions to optimize our brand portfolio. We continue integrating Williamson-Dickie into VF as well as the Icebreaker and Altra brands, and we completed the sale of the Nautica, Reef and Van Moer businesses. We enabled the explosive growth of Vans with revenue growth -- with revenue growing 26% for the year on top of 27% in fiscal 2018, adding $1.4 billion of incremental growth over a 2-year period. Vans is tracking well ahead of the $5 billion target we laid out last September.

The North Face brand made significant progress in reclaiming its rightful leadership position as one of the world's largest, most influential outdoor brands and delivered 10% growth with strength across regions and channels, most importantly, with high single-digit growth in North America.

And importantly, the Timberland brand in North America increased 5% driven by double-digit growth from non-Classics footwear, mid-single-digit growth in apparel and stabilization in our Classics footwear business, demonstrating the diversification strategy is working.

Second, we committed to continue our customer-centric transformation work and to distort resources against our D2C platform and our digital transformation. As a result, on an organic basis, D2C grew by 13%, including 13% comps. Digital increased 26% with 50% growth from Vans and more than 20% growth from both The North Face and Timberland. And we directed the majority of the $65 million incremental investment at capabilities that enable our consumer-centric strategy.

And finally, we committed to increase our metabolic rate with the goal of operating with greater speed and agility. We continue to drive a culture of lean operational excellence to unlock investment capacity and fund our strategic growth initiatives. Our management team has remained sharply focused on delivering business results, while also leading our company through a purpose-led transformation journey. The dedication and perseverance that our associates have brought to that task are, in a word, remarkable.

Equally important as the business results we achieved is how we did it. VF associates around the world continue to lead by example and demonstrate our relentless focus on operating with the highest ethical standards. During the quarter, we received third-party recognitions, including one of the World's Most Ethical Companies recognized by Ethisphere Institute due to our continued commitment to leading the industry through ethical business standards and practices.

We were also recognized by Fortune magazine as one of the World’s Most Admired Companies for the 24th consecutive year.

As we enter fiscal 2020, our priorities remain consistent as we continue to advance our most promising areas of opportunity. Our top priorities for the coming year include maximizing value creation and further optimizing our portfolio, continuing to accelerate our consumer-centric transformation and growth work with a particular focus on collaboration between our business' product merchandising, design and development teams in the supply chain, while increasing speed to market; and finally, creating and enabling a purpose-led performance culture across through the activation of our employee value proposition and by defining clear cultural behaviors that are required to deliver on our purpose and business strategy.

At the end of April, our Board of Directors approved the separation of VF's Jeanswear organization or Kontoor Brands. Tomorrow, we expect Kontoor Brands will begin trading on the New York Stock Exchange under the symbol KTB, following distribution after the market closes today. I would like to thank everyone in our Jeans business for their service to VF and wish them well as they embark on their new journey as Kontoor Brands. The histories of V.F. Corporation and Kontoor Brands are woven together in the rich denim history of North Carolina. We are grateful for our time together and confident that Kontoor has a bright future ahead as an independent company.

Now as we continue our journey as a more agile and focused VF, I could not be more proud of all that we've accomplished over the past year, and I'm very excited about what's to come with our next chapter. Fiscal 2020 will undoubtedly be another solid year for our enterprise and one that sets a strong and positive tone for the years ahead.

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

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Scott A. Roe, V.F. Corporation - VP & CFO [4]

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Thanks, Steve, and good morning to everyone. Before diving into our 2019 financial results and 2020 outlook, I'd like to take a moment and reflect on a few of the major milestones we achieved over the past year.

First, we have made significant progress integrating Williamson-Dickie, our largest acquisition since Timberland. We are ahead of our acquisition plan from a growth, profit and return on capital perspective and even more excited about the growth opportunities that lie ahead for what is now our fourth largest brand post the Kontoor spin.

Second, we changed our fiscal year-end and realigned our reportable segments to enhance visibility, reduce volatility and provide greater transparency into the growth and profitability drivers of our portfolio.

Third, we redesigned and simplified our organization in the North American footprint with the goal of operating with greater agility and speed, accelerating innovation and unlocking greater collaboration across brands and functions.

And finally, we continue to reshape our portfolio. Over the past 18 months, we have acquired Icebreaker and Altra, divested Nautica, Reef and Van Moer and have effectively completed the spin of Kontoor Brands estimated to take place tomorrow.

Fiscal 2019 was indeed one of the most transformational years in VF's history. In fact, since the launch of our 2021 plan 2 years ago, we bought and sold 10 businesses with combined annual revenue of more than $5 billion. I'm incredibly proud of our team and the progress we've made reshaping our portfolio.

And underneath all these exciting changes, our management team remained sharply focused on delivering strong results and value creation through a purpose lens. It's not only about making profits. It's how we make them that matters. Our growth has accelerated, and the fundamentals of our business are strong. I'm very pleased with the quality and diversity of our growth and momentum we carry into fiscal 2020. The investments we continue to make and the capabilities needed to sustain our growth are transitioning into strong tangible results, and we're executing exceptionally well and tracking ahead of our 2021 commitments. Altogether, VF, post Kontoor, is a stronger version of itself, more focused and better positioned to build on our long track record of delivering top quartile returns to our shareholders.

Turning to our fourth quarter and full year fiscal 2019 results. Remember that our reported numbers for fiscal 2019 include Kontoor Brands. However, I'll focus the majority of my commentary today on the performance of the RemainCo portfolio.

So let's begin with the fourth quarter. Revenue increased 12% on an organic basis as our core growth engines continue to perform well. Our Big 3 brands grew 13% led by 18% growth at Vans and 11% growth at The North Face. Direct-to-consumer increased 10%, and digital remained strong with more than 20% growth.

By geography, international increased 12% led by 25% growth in China. Our Europe business increased 10%, despite a somewhat more challenging backdrop across the region. This reflects the diversity of growth by brand, geography and channel. And our Americas non-U.S. business also increased more than 20%.

Work grew 6% with broad-based growth across the portfolio, including strong performance from our 2 largest brands, Dickies and Timberland PRO.

Total VF gross margin expanded 30 basis points to 51.1%. Mix in the quarter was negative 20 basis points due mainly to timing of distressed sales. However, our mix benefit in the second half of 2019 was in line with our full year benefit of 60 basis points. Excluding Kontoor Brands, gross margin increased 90 basis points on an organic basis as gross margin expansion continues to be a significant value driver for us, providing the flexibility and opportunity to accelerate investment and the capabilities needed to sustain long-term growth.

Operating profit was about flat, including approximately $65 million of incremental investments. Second-half operating profit increased nearly 30%, and operating margin increased almost 200 basis points driven by both gross margin expansion and SG&A leverage. And that's our model, gross margin expansion, funding investments and capabilities to drive growth, resulting in operating margin expansion.

Moving now to our full year fiscal 2019. Revenue increased 11% on an organic basis with double-digit growth in both the U.S. and internationally and across both our D2C and wholesale channels. Our digital wholesale business, a key growth driver and strategic focus for our long-term strategy, increased at a mid-teen rate. Our Big 3 brands grew at a combined rate of 14% led by 26% growth at Vans and 10% growth at The North Face. D2C increased 13%, including a 13% total comp and a 9% comp in our brick-and-mortar stores. Digital increased 26%, slightly above our long-term target, a reflection of our strategic focus and investment against our vision to become a more digitally enabled enterprise.

By geography, international increased 10% led by 25% growth in China. Our Europe business increased 8% with broad-based growth across brands, geographies and channels. And our Americas non-U.S. region increased 16%.

The performance of our Work portfolio was solid with 5% growth, including diversified growth across all brands in the portfolio as sector fundamentals remained resilient.

Gross margin expanded by 40 bps, excluding Kontoor Brands or 90 basis points on an organic basis. Operating margin -- operating profit increased more than 30%, and our operating margin expanded by 160 basis points to 13.7%.

In addition to our gross margin expansion, strong top line growth drove significant leverage of SG&A, despite investments in support of our long-term strategy.

Including Kontoor Brands, EPS for fiscal 2019 was $3.78, reflecting 18% growth on an organic basis and including $65 million of incremental investments or $0.13 per share. EPS for fiscal 2019 also includes a 9% decline in the operating profit of Kontoor Brands.

So turning to the balance sheet. Inventory remains tightly controlled, increasing just 4% over the prior year. We generated adjusted cash flow from ops of nearly $1.8 billion, in line with expectations, and our return on capital was over 22%. We ended fiscal 2019 with a leverage ratio of about 2x, so our balance sheet leverage has essentially returned to pre-acquisition levels. We also returned approximately $900 million to shareholders through share repos and dividends.

Our diversified business model is delivering exceptional results. And as we enter 2020 with strong momentum across multiple brands, geographies and channels and with a more focused portfolio, we are confident in our ability to deliver yet another year of top quartile value creation.

Let's now turn to fiscal 2020 outlook. As a reminder, our outlook excludes Kontoor Brands and includes the following: we expect revenue to be in the range of $11.7 billion to $11.8 billion, representing 5% to 6% growth compared to the prior year and approximately 7% to 8% growth on an organic constant dollar basis. From a shaping standpoint, FX and the divestitures of Reef and Van Moer will have a bigger impact on both revenue and earnings growth in our first half.

As previewed on our last call, on a constant dollar basis, we expect Vans to grow at a low double-digit rate, surpassing $4 billion in 2020 and tracking well ahead of its plan to reach $5 billion by 2023. Note that our outlook for Vans includes the negative impact from business model changes in South America.

We expect momentum in The North Face to continue into 2020 and still anticipate high single-digit growth with balanced growth in both the first and second halves.

We expect low single-digit growth from Timberland, including the negative impact from business model changes in South America and mid-single-digit growth from Dickies in 2020.

We expect high single-digit growth from our international business, highlighted by mid-teen growth in Asia and 5% to 7% growth in Europe. We anticipate high single-digit growth from our non-U.S. Americas business, adjusted for the impact of planned business model changes in South America. As previously announced, we're in the process of converting our direct business in the region to a license or distributor model. While these markets continue to represent growth opportunities for our brands over the long term, we're narrowing the focus of our management teams and, given the volatility in the region, taking the opportunity to simplify and derisk our operating model in CASA.

Moving on to our channel outlook. We expect low double-digit growth in D2C led by approximately 25% growth in digital and mid-single-digit growth in wholesale. Gross margin is expected to reach about 54%, representing 60 basis points of expansion driven primarily by our ongoing mix shift towards higher-margin businesses. We anticipate operating margin expansion of roughly 60 basis points to 13.7%, despite incremental growth investments as well as dissynergies from the Kontoor separation.

EPS is expected to be $3.30 to $3.35, representing 15% to 17% growth compared to the prior year or approximately 17% to 19% on an organic constant dollar basis. Our 2020 outlook assumes share repos offset dilution.

Now to anticipate a question likely on your mind regarding the $1 billion cash proceeds from Kontoor Brands, we intend to pay off our short-term borrowings, which are about $650 million at the end of fiscal 2019. And while we will be opportunistic with respect to repos, M&A remains our top capital allocation priority. With our leverage ratio back at 2x and the cash from Kontoor Brands, we have significant capacity for M&A, which gives us the opportunity to drive incremental value creation, in addition to the strength of our organic plan.

Cash flow from operations is expected to be at least $1.3 billion on an adjusted basis. Our cash flow outlook for 2020 excludes Kontoor Brands as well as the impact of timing-related items in connection with our fiscal year-end change. On a normalized basis, cash flow from ops is expected to grow roughly in line with earnings.

CapEx is expected to be just under $400 million for 2020 driven primarily by infrastructure investments as a result of our growth. We expect our CapEx on a normal run rate basis going forward to be about $250 million.

So in summary, our business performance is strong, and the execution of this world-class management team has been nothing short of amazing. Our portfolio is much better positioned as we head into next year. Our investments are creating strong demand across the globe. And while we are pleased with our progress to date, the most exciting part of our story is we're just getting started. With the spin-off of Kontoor expected to be completed today, we're looking forward to the next chapter of value creation for VF.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Erinn Murphy from Piper Jaffray.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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I guess my first question is on Vans. You guys talked it tracking nicely ahead of the $5 billion long-term target. If we drilled down into the quarter, the dollar growth was lighter than we've seen in the last 6 quarters. Can you just speak to kind of what some of the drivers (inaudible) in Asia was a little bit slower. And then just thinking ahead to 2020, what is the dollar impact from the South American business model changes to Vans?

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Scott A. Roe, V.F. Corporation - VP & CFO [3]

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Yes. So Erinn, this is Scott. So first of all, in Vans, I guess, the big picture is, remember, we're talking a soft landing and you're seeing that modest deceleration. That's really the big picture, and we don't see anything fundamentally different in that overall trajectory. So that's number one. And while the business is moderating off these growth rates, we still see a very strong business as we leave Q4. And the signs are positive as it relates to Vans, whether that's channel checks, the social media, all those factors remain high. There is some wholesale timing. I think you called out Asia. If you like -- you might recall, the third quarter was exceptionally strong. You've got some noise quarter to quarter, but there's nothing fundamentally that we see here that changes anything we feel about the trajectory or timing of the business. Steve, I don't know if you want to add anything from a Vans standpoint.

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [4]

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No, no. I think you that hit it.

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Scott A. Roe, V.F. Corporation - VP & CFO [5]

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And then as it relates to CASA, we -- you asked about the impact. It's about 1 point worth of growth for the Vans business. And just to give some shape on that, the business ex Kontoor is less than $150 million in total. But obviously, as you change from a direct model in a few of these countries to either a distributor or a licensee, then that has a top line impact. Although from a bottom line standpoint, we think this will be modestly actually positive over time.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [6]

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Got it. That's helpful. And then I guess my second question is just on the ongoing investment this quarter, I think it was another $20 million of incremental investment. Can you just unpack what some of those biggest buckets have been? And then Scott, as you talked about the shaping for 2020 and kind of the components of the guide, you did talk about your planning for ongoing investment. How should we think about 2020 level of investment?

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Scott A. Roe, V.F. Corporation - VP & CFO [7]

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Yes, Erinn. So a couple of things that are, I think, behind your question. So first of all, if you look at our implied guidance, it's a modest SG&A leverage, and so I think that's part of your question. So let me answer that more broadly. As we think about our long-term algorithm, it is absolutely still in place. We've talked about high single-digit top line growth, gross margin expansion, both through mix and also some of the -- frankly, some of the moves we've made from a portfolio standpoint. All those things -- and innovation and all the other things we talk about, pricing power, all those driving gross margin and operating margin expansion.

As it relates to our investments, we've said consistently that we're going to continue to opportunistically invest around those key capabilities and strategic priorities that we think are giving us a separation from our competitive set and really driving some of the growth of our brands. And I would point backwards and say one of the reasons we think we're ahead of our long-range plan is because of some of those capabilities that we've been investing in. Some areas -- I mean, we've talked about them, D2C, digital in particular, which, by the way, drives both gross margin and also as an SG&A component that comes with it, insights analytics, advanced manufacturing, demand creation. It's the same things that we've been talking about, Erinn.

Now as it -- the other thing I would just point out is, listen, this is the first guidance for the year. As you can imagine, we're giving you guidance that we have strong confidence in. As we see opportunities from margin expansion, we're going to make sure we're delivering our commitments to The Street. Don't forget our earnings are up 17% to 19%. I'll say that again, 17% to 19% earnings growth. But we believe the investments back into our business are one of the reasons why we're seeing the success that we are, and that is an area, once we fulfilled our commitment to The Street, that we're going to continue to make those investments.

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Operator [8]

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Our next question is coming from Bob Drbul from Guggenheim Securities.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [9]

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I guess the first question that I have is really, one, are you done with the portfolio or not? Are we going to take a breath from all the model changes and everything because it's a little complicated when you think about where you are right now. But I'm serious, are you guys going to take a break from the portfolio changes? Do you think you're where you want to be to try to, like, go through this next chapter?

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [10]

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Yes. Bob, this is Steve. We apologize for the tremendous number of changes you've all had to negotiate. But let me leave you with this. We've been very purposeful over the last 24 months to reshape our portfolio to align with our long-term growth aspirations. And I think you've -- what you see today is who we intend to be.

Now M&A remains the #1 capital allocation priority that we have. We have the means to do that. We will be very rigorous, very thoughtful and disciplined. But I would tell you, our people would love it as much as you would if we would just let the dust settle, get to our move, execute for a few quarters. But we will be very mindful as we continue to look at the M&A opportunities around us.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [11]

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Got it. Okay. And then I guess the other question I have is when you take a step back over the last few months just at retail, including some of the reports recently from your wholesale customers, the environment has definitely gotten a little bit tougher. And you guys are outperforming. But can you just talk about how the order books for your businesses have materialized on a wholesale basis? And have they strengthened going into fall? Or have there been any pullbacks most recently just by what we've seen for the spring so far?

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Scott A. Roe, V.F. Corporation - VP & CFO [12]

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Yes. Bob, Scott here. The -- I guess the big picture is we've seen -- we see strong order books. And at least in our brands and our key partners, the general sentiment has been positive. Now part of that too is inventories at retail are pretty good shape. I mean not universally. There's always exceptions out there. But as a general rule, it's been a good year. With -- sell-through has been pretty good, at least in the -- where we play. And we're in pretty good shape. So we see confidence. I wouldn't say a big change, frankly. Better or worse, we see continuation of the support that we've seen coming out of the second half.

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [13]

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And Bob, I would add, the result of the portfolio moves that we've made over the last 24 months, we have navigated our way away from that middle portion of the marketplace, and where we have wholesale penetration is in the better parts of the market. And I would also say, the focused efforts that we have to be more retail-minded are putting us in a better position to be a better wholesale provider of quality products, supported by really quality stories that we're able to drive collaboratively with our key account partners to get that consumer traffic and strong sell-through.

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Operator [14]

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Our next question is coming from Michael Binetti from Crédit Suisse.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [15]

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I guess, Scott, my first modeling question is -- to get out of the way is when you get back to your desk, could you update that model and reply and send it back to us? That would help. The -- you've added -- I think you added about $75 million of dissynergies to the baseline, right?

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Scott A. Roe, V.F. Corporation - VP & CFO [16]

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That's right, yes.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [17]

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So but I think a lot of that is related to stranded costs you've incurred related to some of the myriad brand dispositions that have gone on over 18 months. As you've looked around and taken a look at the costs that you're stuck with, with those revenues going away, how did you think about whether you can start to work away with some of that, whether that's in the guidance for the year as you start with the $3.30 to $3.35 guidance for us this year?

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Scott A. Roe, V.F. Corporation - VP & CFO [18]

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Sure. Yes, so first of all, I'll just give you kudos for teasing all this out. Joe sent a decoder ring. I don't if it's been received yet, but that'll help you get through that. So I think what you're doing, just for the benefit of the group, I think it's a good time to reset everybody. So if you take our 2019 results and you look in the prepared materials we sent, there was a bifurcation between RemainCo and Kontoor as we reported it under VF consolidated. But then you take our implied guidance, the $3.30, $3.35, you look at the growth rates, work that backwards, then the implied base is different. And you're exactly right, Michael. It's that -- depending on some of the assumptions you make, you're going to be in that $75 million range. And indeed, that is the dissynergy number.

So as you can imagine, we didn't just wake up one day and say we've got dissynergies. We've been talking to you guys about this transaction for, I guess a year or so. And we've been talking internally for -- going on 2 years. So we had great line of sight to what was coming. The majority of these relate to technology and the technology platform, which is largely unique to the Kontoor business. So the way this is going to work is the -- for a couple of years, as they stand up their own systems, and they've talked about this publicly, they're on a TSA with us, transition services agreement, they're going -- little more than half of that cost is going to be reimbursed by Kontoor to us, and that helps mitigate those costs for that 2-year period. At the end of that 2-year period, we're already underway, and we've been working on plans to get those costs out of our system. So I've made comments in the past about -- in response to either dissynergies, I've always said, yes, they are not significant or not material to VF. And as we look at it on a net basis, they're not going to be that significant on a go-forward basis in the scheme of VF. And we have line of sight to get out of those costs from a structural standpoint over the next 2 years. So hopefully that helps.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [19]

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That does. So the -- I guess, the dissynergy number that we see in the model today is a -- looks a bit overstated in fiscal '20 and we can work through that going forward.

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Scott A. Roe, V.F. Corporation - VP & CFO [20]

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Well, I wouldn't stay overstated. It is what it is. And you'll have a similar number. What I'm saying is against that -- to mitigate that cost, you're going to have an offset from the TSAs coming from the Kontoor business. It is not just technology, but technology comprises the -- by far, the largest piece of that. So what that means is year-on-year, you'll have a lesser dissynergy as you look into the 2020 guidance, and that's implied in there.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [21]

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If I can just follow up on the brands then. Timberland has been described for a while as on the same arc of development similar to what we've seen from North Face in the past few years, but the 1% to 3% rev growth you already gave this year doesn't make a much improvement from recent results. So we've seen interesting ideas like the pop-up on Fifth Avenue. We saw the Champion tie-in over the holiday. We saw the website redesign. Where do you think the disconnect is between expectations for that brand to accelerate and the guidance for this year?

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Scott A. Roe, V.F. Corporation - VP & CFO [22]

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Yes. Let me start, Michael. So first of all, you probably saw the fourth quarter showed some strength, although we would say if you zoom out and click, it really -- the business is showing signs of encouragement. But overall, the trajectory is essentially where we expected it to be as we entered this year. And we would say indications of improvement, modest improvement. But fundamentally, the businesses is going to modestly improve next year.

Remember, in that 2020 guidance, which appears to be about flat, you've got the CASA impact, which I mentioned before. Also one of the things going on within Timberland is a focus on improving profitability. You see some of that drag in the Outdoor results. And you'll see that improve as we go next year. Some of that is at the cost of top line. For example, some underperforming stores, which, at the end of their lease, are going to be closed. So when you put those 2 factors together, it is about 1 point of growth that is hidden in the implied guidance. So again, zooming out and click, I think you should say modest improvement as we're focusing on these fundamentals. That game plan is very similar to The North Face plan over the last -- looking back several years.

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [23]

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And Michael, I'd pile on a just little bit here. I think we've said the last couple calls, we're in that low single-digit growth place for the Timberland brand. We're a little bit behind where we'd like to be, but the diversification strategy that we've been talking about, it's working. We're seeing double-digit growth across all regions with our non-Classics styles. And as those continue to grow, we will change the waiting and dependence of the Classics business that this brand has had for such a long part of its history. We're seeing good growth with our apparel. You also mentioned how we're elevating the brand, and the trial that we did on the pop-up on Fifth Avenue has informed a new brand prototype that you'll see us to continue to roll out thoughtfully, testing and learning this fall. But the team continues to work on elevating the brand, focusing on taking that brand focus into the design and merchandising aspects of the business. We've talked about the addition of Christopher Raeburn and elevating all elements of design and creativity. We're still a little bit behind where we'd like to be, but we remain very optimistic with where we intend to be at a mid-single-digit growth potential in the out-years.

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Operator [24]

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Our next question is coming from Jonathan Komp from Baird.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [25]

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I just wanted to follow up on the G&A question and just maybe to tie in the dissynergies as well as the investment piece. But I know a couple years ago now, in the '21 plan, you put out a goal for 35.5% on the G&A ratio and just given all the business model changes, which obviously changes the cost structure, I'm wondering where that target stands today.

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Scott A. Roe, V.F. Corporation - VP & CFO [26]

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Yes, Jonathan. So obviously, many of those factors are changed because of the -- exactly what you mentioned, the Kontoor spin, the acquisitions, the dispositions. So we're -- for example, we're way ahead on gross margin from what we said. And so we bought some businesses with lower operating margins and all those things. I guess 2 things I would point you to. Number one, think of the general algorithm with the gross margin mix driving our ability to invest in the business, and we will continue to see leverage in SG&A and operating margin over time. And the other thing I'd say is I'd point you to this fall. We recognize the need to reset our long-range plan, and we intend to do that in an Investor Day that we'll host this fall. And given the new shape of the business, we'll reset all those parameters. But you shouldn't take away from that, that, that's a big change. The basic model is the same that you've been used to in terms of the growth rates and the general way that this is going to function. For example, I don't see any change in our gross margin trajectory. We're going to continue to see operating margins expand over time. We will see gross margin -- or SG&A leverage. We just need to reshape that in light of the new business model that we have, and that's what this fall will be about.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [27]

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Okay. Makes sense. And maybe just a follow-up, and this maybe has been touched on a little bit already. But if I look at the results for fiscal '19, I know you beat the original earnings target by a pretty significant amount, almost close to 10%, and that's even with the incremental investments. I'm just wondering kind of the pace of incremental investment to the extent that you'd show upside, either the sales or the gross margin. Is the rate of strategic reinvestment the same as what it was sitting here a year ago? Or how should we think about that?

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Scott A. Roe, V.F. Corporation - VP & CFO [28]

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Yes. That's a hard question to answer because we don't look at it formulaic -- from a formulaic standpoint. The first thing I want to reiterate, we're going to expand our margins, we're going to deliver our commitment to shareholders. And we're -- that is a firm commitment. Steve and I are rock solid on that.

And as we look at investments, incremental investments, it's really about -- we look at these, we rack and stack them, literally. And we look at what are those opportunities, what do we think the payback is going to be, is this going to create a true meaningful impact in the business or create a point of difference. And that's how we make those decisions. And I would just say, they're not all perfect. We haven't made 100%, but we've done a pretty good job looking back. And again, I'd just point to the return on capital of 22% over the last year. We're -- that gives us confidence. And you look at where we're at on our overall growth trajectory, that gives us confidence that, in general, we're making pretty good decisions. And we'll continue to feed the fires that we think are burning, propelling these brands.

I'll give you a couple specific examples that's implied in our 2020 guidance around demand creation. For example, we brought $1.4 billion of growth in the Vans business over the last 2 years. And on top of that, we're still growing within their long-range growth plans. So consolidating all those new consumers into the franchise around innovation products, like ComfyCush, we think that's a really good idea. And this is a moment in time where we want to really consolidate that growth. Think about that 3-year stack just for a minute. I'm just going to back up. Think about the 3-year cumulative growth rate on that business. That's a pretty high bar. And on top of that, we continue to grow. So where we see opportunities, where we think we have a meaningful point of difference, like ComfyCush, which is a -- really an innovation that the Vans team brought, we're going to invest in that. I'd give you another example, FUTURELIGHT in the TNF business. We think this is a moment in time and taking advantage of this moment in time. We're going to invest around that because we think it's a game changer. We think it's disruptive in the industry. So where we see opportunities like that, we're not going to take those advantages.

Now I don't know if that same thing is going to be -- if we should do better this year. I don't know if there'll be that type of investment available or not, so I can't say per se what we would -- whether we would invest or not. It depends on the situation.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]

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Okay. Very helpful. And last if I just could, any color in the shaping of margin expansion throughout the year? I know you gave a couple of pieces around currency and top line, but just any color on the margin expansion.

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Scott A. Roe, V.F. Corporation - VP & CFO [30]

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Sure. So we talked about 60 bps next year largely driven by our mix. And as you think about the other components, currency is a tailwind. And you'll see that more in the first half than the second half just as those, frankly, as those favorable hedges roll in. Against that, we have some cost pressure. Cotton, synthetics, polymers, petrochemical related and labor and overhead are the areas. So if you see those net to a small net positive and then really the primary driver we see is related to the mix. So you'll see a little more gross margin in the first part of the year based on what we see today.

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Operator [31]

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Our next question today is coming from Laurent Vasilescu from Macquarie.

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [32]

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You've seen impressive growth in China last year as that market was called out as a key driver for the 2017 Investor Day. Can you dimensionalize what kind of growth we should expect for this fiscal year? And what brands should be driving that growth in that market?

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Scott A. Roe, V.F. Corporation - VP & CFO [33]

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Yes, I'll put a number on it. So we're -- in Asia, in general, we're looking at mid-teens. In China, it would be north of 20%. So we see continuing strength in the China business that's implied in the guidance. I don't think we've specific -- we've talked about Asia. We didn't specifically talk about China. But we see that momentum in China, which has been in that plus 20% range continuing at a similar pace for 2020.

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [34]

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And look, Laurent, the brands that will be driving that are really the brands that we have present in that marketplace. Vans, The North Face, Timberland, carrying the majority of that top line growth. But Kipling, also a good business for us in the Asia market and specifically China.

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [35]

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Okay. Very helpful. And then I wanted to follow up on Erinn's questions on Vans. I think you obviously gave a lot of detail, but I think you guys called out for equal growth at TNF. How should we think about the growth first half, second half? And then maybe any dimensionalization on growth in wholesale versus retail for Vans overall.

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Scott A. Roe, V.F. Corporation - VP & CFO [36]

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Yes. Laurent, I'll take that one. So in general, the first half will be stronger than the second half in our implied guidance. Again, we're thinking about a soft landing, and so you'll see that kind of shape estimated to take place over the year. And that moderation occurs in both D2C and wholesale, but relatively larger decline in the wholesale business as a percentage. So we're thinking about high single digit from a wholesale standpoint, low teen from a D2C standpoint. And I think that was in the prepared materials as well.

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Operator [37]

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Our next question is coming from Alexandra Walvis from Goldman Sachs.

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Alexandra E. Walvis, Goldman Sachs Group Inc., Research Division - Research Analyst [38]

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First question is on the Work business. You're guiding to a 4% to 6% growth in that segment. I just wanted to step back there and ask about the exposure of that segment now to some of the cyclical end markets. I know that, that was reduced with the Williamson-Dickie acquisition. But I wonder if you could share with us the rough breakdown of that segment to end markets and then perhaps help us to kind of parse through the growth rates of different brands that are embedded in that expectation. I know that you talked about the 5% -- sorry, mid-single-digit growth rate expected for the Dickies brand. I wonder if you could share any color on some of the other big brands there, Bulwark, Red Kap and so forth.

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Scott A. Roe, V.F. Corporation - VP & CFO [39]

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Yes, sure. So I think part of the question was around the exposure to the cyclicality. And so we've said about 1/3 of the business, roughly 30% to 40% of the businesses is exposed to the, what we would call the cyclical parts of the market, like oil and gas, et cetera. And we're seeing real resiliency, I think I said in my prepared remarks in that category. Remember, our expectations for the Work segment are mid-single digits. And we've seen, we're right in that zone, in fact, probably at the upper end of that in Dickies at constant currency, 5% to 7%, really, ahead of our acquisition plan and at the high end of that growth.

The interesting thing, we believe that the grounding and work is really important for the work inspired. But where we see larger opportunity, frankly, is the -- in that maker community, work inspired. And Dickies, in particular, is a great example of that where we're seeing outsized growth in the Asia market, really, in that work inspired side, we call it lifestyle, whatever term you like, and we're going north of 20% over the last year. And we see a similar kind of trajectory as we go forward. That is particularly exciting to us and, frankly, exceeding our acquisition goals from when we bought the brand.

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [40]

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And just real quick, I'll pile on. Clearly, Williamson-Dickies brand is the -- is really that front and center large consumer property, but Timberland PRO business is growing nicely in that high single-digit rate as well. It plays very well into the -- those core work segments, but also has opportunity to move beyond in more of that work lifestyle piece. And then Red Kap and Bulwark in their respective sectors, doing extremely well. And we see opportunities in being able to take our Red Kap brand beyond as well following some of that same playbook we see with Williamson-Dickie. So we remain very optimistic and proud of the portfolio we've assembled and the team that's driving that business.

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Scott A. Roe, V.F. Corporation - VP & CFO [41]

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Yes, sorry, part of your question was around growth rates on specific brands. And we haven't said that publicly. I would just say this -- that we see, I think our comment was pretty widespread growth. And you can assume that if we're saying 5% to 7% overall, that the brands that you mentioned would be in that range from a growth standpoint.

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Alexandra E. Walvis, Goldman Sachs Group Inc., Research Division - Research Analyst [42]

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My second question was on the active division. So you continue to deliver the very strong growth rates in Vans, but the implied growth rates of some of the other brands in that division have been reasonably weak, and I think that's expected going forward. I wonder if you could spend just a moment on some of those brands and the trends that you're seeing there, Eastpak, JanSport. And I think that Napapijri has been a growth spot there. So what's really dragging on that division?

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Scott A. Roe, V.F. Corporation - VP & CFO [43]

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Yes. So one thing that's in the guidance is, remember, we sold Reef and that's not a discontinued operation. It's not material enough. So that really is weighing on the impact of the sector, particularly in the first couple of quarters because that business was very spring-oriented, so you're comping the majority of their business. But if you look, our packs business is in the mid- to high single digit. A couple call outs, our Eastpak and our Napapijri business, which have really put several years in a row of high single-digit growth, even into the double digit, along with a really nice profitability growth. And we don't talk much about these brands, but they are real jewels. And they continue to do well. They're not that large in the scheme of VF, but they grow and they're profitable. And we think that these are exciting brands that you're going to hear more about in the future.

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [44]

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And to that point, I mean these are brands where we're able to really test and learn many of our new brand building ideas and things that we're doing around creative vision work. And that growth that Scott mentioned for both Napa and Eastpak are really a result of greater clarity of what these brands stand for, a rationalization of the styles and the elevation of big stories and focusing on a few markets and really driving strong outsized growth. So think of these as certainly smaller but good growth drivers, but they're important parts of our portfolio for our ability to learn, test and scale. And they're certainly receiving the benefit themselves as they do that work.

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Operator [45]

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Our next question today is coming from Matthew Boss from JP Morgan.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [46]

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So at The North Face, can you walk through the drivers of the brand's accelerated growth profile over the past year? And aside from potential conservatism or maybe tougher comparisons, anything structural behind the moderation to 7% to 9% constant currency growth next year versus double digits this year?

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Scott A. Roe, V.F. Corporation - VP & CFO [47]

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I'll just jump in on the numbers. I don't think you should look at this as a deceleration of The North Face.

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [48]

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You stole my starting point.

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Scott A. Roe, V.F. Corporation - VP & CFO [49]

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Sorry, okay.

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [50]

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No, go ahead. Yes. Yes, I think, is it decelerating? I'm not sure. I think this brand has put a lot of work in over the last couple of years, starting first with the management team cleaning up the marketplace. And amidst all that, standing up a product to creation team that's innovating some very, very strong products. And the growth that we're seeing is really broad-based across each region. North America has returned to growth and it's across each one of their elements of the business from their core Mountain business to their Mountain Lifestyle business and the Urban Exploration. We're really seeing solid growth from each one of those particular consumer expressions of the brand. And as we see this going forward, the innovations that are beginning with FUTURELIGHT, really being able to separate this brand from its peer group. And we talk a lot about returning to that rightful leadership position not only from a product standpoint, but from the things that this brand is doing from a positioning, brand experience and a purpose-led aspect, we're really confident and proud of where we stand. And high single digit at this time of the year is a strong outlook.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [51]

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Great. And then just a -- maybe just a follow-up to put together some of your comments regarding the 5-year targets outlined at the '17 Investor Day. I guess is it fair to say that there's no major changes to the 16% EBIT margin target, despite maybe some different gross margin and SG&A path to get there given the portfolio reshaping?

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Scott A. Roe, V.F. Corporation - VP & CFO [52]

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Yes. I mean I think I would say that our aspiration to 16% is unchanged. But the fact remains, when you take pieces out and put other pieces in, you reset the base. So that margin expansion is there. I think we're talking about horizon, right. And that's why this Fall Investor Day, I think, is really important just to reset all the pieces. For example, the Kontoor business, higher operating margin, and you take that out, that changes the math and, and, and. So there's many examples like that. The most important point I would bring you back to is the basic algorithm is the same with that gross margin expansion and operating margin expansion. So we'll clean that up for you this fall. In the meantime, the takeaway, it's not really -- it's not changed.

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Operator [53]

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Our next question is coming from Jay Sole from UBS.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [54]

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My first question is on some of the other smaller, less talked about brands and portfolio, like Altra and Icebreaker. Maybe, Steve, you could just help us understand, like, what's been the development of those brands that you've acquired.

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [55]

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Sure. Great. We don't talk enough about them. Icebreaker, being our first purpose-led acquisition, had a really strong year, amidst being integrated into VF and having to adapt to a lot of our processes and fitting their culture inside ours, delivered a strong low double-digit growth rate last year and continues to innovate with Merino as their core product in that apparel category. And we continue to be very bullish. You'll see some exciting things coming from the brand this year as we look to continue to evolve their retail representation of this brand as a really strong brand-building component.

On Altra, we've -- they've been part of our Denver relocation and we've -- they've come through that extremely well. They too have had to endure integration. As a small brand, that's not always the easiest thing to do. And we have great admiration for our team and being able to work to that with us. They're now solidly in Denver. We've got a new leader there. And it continues to connect extremely well with that core specialty running, trail running set of retailers and innovating some very interesting new products that will keep them at the forefront of that core running consumer.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [56]

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Got it. And then maybe, Scott, if I can you ask about that $75 million of dissynergies as you've reabsorbed that overhead from Kontoor. As you talk about finding ways to releverage that over the coming years and you've touched on it, can you just give a little bit more detail about how you do it and how much of that $75 million maybe you can eliminate by just becoming more efficient operationally?

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Scott A. Roe, V.F. Corporation - VP & CFO [57]

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Sure. Well, when we buy something, I don't take care of it. First of all, that's my flip answer. But the -- as I mentioned, the largest component of that relates to technology. And without going too deep into it, the technology platform that the Kontoor business operates on is fairly unique to the Kontoor business. And so effectively, what will happen at the end of this period is all of that cost and the contracts and the maintenance of that system will come out of the -- come out of our company, right, it will come out of our cost center. So it really -- there is line of sight to eliminate that cost. Of course, we have other initiatives going on all the time in terms of looking at being more lean as an organization. But when you look at the net impact of this and all of the activities that we have and the growth that we have, we grow into this pretty quickly. It's a relatively small number in the size of, overall, the VF model, and we'll grow into it pretty quickly.

I'm just going to add on, as I know we're ending to the -- getting to the end of the call. There's some other modeling questions that didn't come up that I want to just get on the record because I think it will help Joe in the follow-up. So -- if nothing else. But as our implied guidance, if you go below the operating line and get to the EPS, any other income you'll see there are benefits, and that is really in 2 areas. There's about $70-plus million, call it $75 million of implied benefit there. The biggest chunk of that is going to be from interest. As we get the proceeds from Kontoor, we pay down debt, our average debt load, obviously, year-on-year is going to be less, and you're going to see that benefit. The other is don't forget we froze our pension, so you'll see pension benefits also showing up in that line. And that's a piece that we haven't talked about this morning, but you'll need that as you model the guidance that we have.

The other just general comment I would say remember we've been working on this for a couple of years. And a word I would ask you to take away from this call is optionality. We've talked a lot about investments. We've talked about SG&A. We've talked about some of these other initiatives. We obviously saw this coming. We know that we have line of sight to deliver 17% to 19% operating income and have the ability on top of that to invest back in those areas that, we think, have been paying off. Remember, 22% return on capital over the last year. So we could deliver more earnings. That's absolutely an option from a standpoint -- from an earnings standpoint. But we believe these investments are key to our reason that we're winning and our brands are winning. And we're going to continue doing that where it makes sense.

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Operator [58]

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That does conclude our question-and-answer session. I'd like to turn the floor back over to management at this time.

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Steven E. Rendle, V.F. Corporation - Executive Chairman, President & CEO [59]

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Great. I'd just like to thank everybody for joining us on this call. We have just finished an exceptional year, a year of significant transformation. Where we find ourselves going into fiscal '20 is in a very strong position. We're a leaner, more focused version of ourselves. And I think what you'll see is just continued strong performance as we focus on our purpose-led, performance-driven, value-creating operating model.

So thank you, and we look forward to catching up with you here in a not too many weeks as we finish up our first quarter.

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Operator [60]

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That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.