Greetings. Welcome to the VF Corporation First Quarter Fiscal 2023 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host Allegra Perry, Vice President of Investor Relations. Thank you. You may begin.

Allegra Perry - Vice President of Investor Relations

Good afternoon. And welcome to VF Corporation's first quarter fiscal 2023 conference call.

Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted amounts referred to on today's call will be on an adjusted constant dollar basis which we defined in the press release that was issued this afternoon and which we use as lead numbers in our discussion, because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts which are in accordance with 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. On June 28, 2021, the company completed the sale of its Occupational Workwear business. Accordingly, the company has reported the operating results and cash flows of this business in discontinued operations for all periods through the date of the sale. Unless otherwise noted results on today's call are based on continuing operations.

Joining me on the call will be VF's Chairman, President and Chief Executive Officer, Steve Rendle; and EVP and Chief Financial Officer, Matt Puckett. This quarter's earnings presentation has been designed as a visual aid to our prepared remarks. You have the option to follow along via the slide window in the webcast portal. The presentation is also available to download on our website. Following our prepared remarks, we will open the call for questions.

I will now hand over to Steve.

Steve Rendle - Chairman, President & Chief Executive Officer

Good afternoon, everyone. And thank you for joining our first quarter fiscal 2023 earnings call. I will take you through an operational update of our business which will be followed by a review of our financial performance by our CFO, Matt Puckett.

I want to start by addressing the evolution of the macro environment since we last met in mid-May. Excluding China, consumer health is generally good across our markets. Although, I won't be the first person to point out that sentiment has softened leading to changing behavior amongst consumers who were being forced to be more choiceful and cautious in their spending in the near-term.

From our point of view, we see this being largely confined to the value end of the marketplace where VF has very little exposure. To-date, we have seen limited impact on the mid-to-higher end consumer where the majority of our brands are positioned in terms of demographic and distribution. We have a strong and resilient family of brands that are well positioned within their respective segments and across the VF portfolio, we have a greater number of high performing brands today than ever before.

Our TAMs are healthy and maintained good momentum and we remain under penetrated in certain areas, with the opportunity to gain further share in growing markets. We are continuing to invest in our brands, enabling the creation of innovative products and capabilities to drive enhanced consumer engagement and loyalty across all touch points.

We are working closely with our retail partners to drive sell-through and ensure our family of brands remains at the forefront of consumers' minds. To our well-established strategic platforms and capabilities, we are mitigating headwinds faced across the marketplace and the persistent impact of COVID in China, while reinforcing our competitive advantages. Amidst this backdrop, we delivered a healthy topline performance in Q1 achieving revenue of $2.3 billion, up 7% on a constant dollar basis, ahead of our initial expectations and in fact, excluding China, the business grew low-double digits. Our big four brands grew 6% in aggregate, led by The North Face and Timberland. The remainder of the portfolio grew 16%.

And lastly, before I go into more details on the brands. I'd like to highlight that we remain committed to returning cash to shareholders with our dividend which amounted to $194 million in the quarter.

I will start with Vans, I'd like to take a minute to update you on the work underway, then go into the details of the brand's performance. Behind the scenes, our teams are diligently working to address the key headwinds we have identified.

First on China which was largely in line with our cautious expectations, reflecting macro challenges in COVID disruption. Driving energy and engagement, Vans opened its first owned Taiwan store in June, along with the brand mobile app. We launched a new collaboration with Brain Dead [Phonetic] which sold out completely in the first hour. Our 6.18 shopping event was expanded onto the Douyin and Duwu platforms and rose by mid-single digits versus last year.

Finally, we partnered with Tencent on 58 virtual products for phase one of our Medivir's activation and in four days achieved 43 million impressions. We remain confident of the long-term growth opportunity Vans has in China.

Second, we are seeing early signs of positive response from customers on our ongoing efforts to rebuild our core classics strategy and energy around our five icons. The Classic Since Forever campaign is showing improved ROI in the first two months, with over 25 million views globally.

Phase-2 of the campaign launched with support from Anderson Paak, Vans music influencer including live appearances in London stores and a live performance at our House of Vans venue. The first signature product dropped on our U.S. online platform sold out in 24 hours.

Brand heat has begun to show some bright spots. We saw nearly 8% growth in Vans' family members versus Q4 reaching nearly 24 million members globally which represents a 41% increase versus last year. We also generated strong sell-through of Sailor Moon and Stranger Things collaborations, including exclusive online customs pre-releases.

Our Stranger Things collaboration was the second biggest customs launch since Harry Potter and the in-line product will launch in early September. We hosted pre-launch events for our new clinical business unit at Paris Fashion Week with top tier accounts including a sell-in event and a twitch live stream of the Brain Dead launch. The Joe Freshgoods Pinnacle Colabs sold through quickly with 3 times average sales price in resale market. A second drop is coming in holiday.

Finally, in our Americas D2C business, we are working to a set of agile actions to capture and optimize traffic and drive higher conversion such as front-of-store merchandising updates and quick floor set changes. We are seeing a positive initial response across key product stuff. We continue to monitor our customer satisfaction levels but we are scoring above the peer set.

Vans Q1 sales declined by 4%. Excluding China, global sales were up 4%. As mentioned, a number of targeted actions are being implemented at Vans under the leadership of Kevin Bailey. While our financial performance is not yet where we would like it to be, we are encouraged by the work underway to reignite momentum.

The brand is healthy which is clearly evident when we launched truly innovative product as indicated with the recent global collaborations, all of which resonated with our consumers and generated high rates of sell-through.

We continue to see strong growth in our Vans Family membership, where members have higher frequency and rates of spend. Overall, we are encouraged with the early progress being made with actions underway and confident in long brands, long-term prospects to reignite growth.

The North Face had another outstanding quarter with sales up 37% representing broad-based growth across regions and channels. Growth during the quarter was fueled by our 365 product initiatives, with warm weather apparel and accessories, as well as rainwear generating strong performances.

Collaborations continue to drive brand heat including the Members Only to Earth Day inspired collaboration which drove high digital sell-throughs in the U.S. and EMEA. Our return to travel lines also performed well, including bags and luggage and we saw early positive performance for our PACS business for back-to-school.

Our marketing campaigns are clearly resonating with our consumers, starting with our Full Circle Everest expedition which promoted access to the outdoors with over 5 billion impressions. Our Pride campaign was well received and allowed us to broaden our reach and welcome new consumers to the brand and The North Face ranked number one in pre-sale revenue for the outdoor category during the all-important 6.18 China Shopping Holiday. We continue to see growth in our Explore Past loyalty program and who celebrated its one-year anniversary with over 900,000 sign ups translating to 50% growth year-over-year.

Finally, we are thrilled to have welcome Nicole Otto as our new brand President during the quarter, following the successful transition period. She brings with her a deep understanding of the consumer engagement strategies in a wealth of industry experience. With a proven innovator and future-focused leader, she steps in at an opportune time with strong product pipelines positioning the team to further drive our strategies.

The positive inflection at Timberland continued in Q1 with another quarter of double-digit sales growth, up 14%, driven by strong performances in EMEA and Asia-Pacific. We are sharpening our consumer focus and accelerating a launch culture to attract new consumers to the Timberland brand and it's paying off as we see success stories from the elevation of our iconic boat shoes globally with generation both to the creation of a footwear design and innovation experience inside Fortnight.

Our commitment to product innovation and craftsmanship continues to serve us well. Our Q1 growth was driven by men's footwear, led by outdoor, across lifestyle hike, trekkers and seasonal executions like trail-ready sandals. Apparel was also strong, especially lightweight outerwear and logo keys, with apparel as a whole accounting for 20% of quarterly sales.

We continue to drive equal innovation with the focus on circularity in building a greener future. On Earth Day, we introduced the Timberloop trekker, our first footwear product that can be disassembled and recycled at the end of its journey. We also expanded our Timberloop take-back program from the U.S. to include the U.K., France, Italy and Germany.

In Pro, we saw excitement around our first collaboration with Samuel Adams with the limited edition work boots selling out in one week. Initiatives like these are key to connecting new and existing consumers from work, to work, to weekend. Across the Board, we are excited about the trajectory of the Timberland brand and its opportunities for future growth.

Finally on Dickies, global brand sales were down 13%, reflecting softer trends in the Americas value end consumer in a more conservative inventory posture of our largest customer in the U.S. It's worth noting that excluding sales from this customer, revenue in the Americas and globally were up mid-single digits in Q1.

In APAC, Dickies was impacted in China by lockdowns but saw positive growth across other markets in the region. Our reset European business has seen continued strong performance with regional sales up 30% driven by work lifestyle products.

We kicked off our 100-year anniversary campaign, MADE IN DICKIES which drove higher traffic to and average order value on our e-com sites in the U.S. and EMEA. We are generating solid growth globally across icons, women's and work lifestyle, while work wear has been soft reflecting a larger exposure to the value end.

Exciting collaborations, such as with Supreme and New York Sunshine are generating momentum and energy, while enabling Dickies to broaden its distribution into Tier Zero accounts. The underlying performance of Dickies remains positive.

Outside the top four brands, the balance of the portfolio generated revenue growth of 16%. Starting with Supreme, the brand was broadly flat in the quarter and largely in line with our plan. Our European stores performed well and benefited from the openings in Berlin and Milan in the prior year, where there continues to be a high level of energy and excitement for the brand.

As we indicated in May, we are excited to be resuming enhancement and expansion of the store network in coming months. We have also returned to conducting in-person consumer engagement with recent events in Milan, New York and Paris which have received a positive response.

We continue to be pleased with the performance of our outdoor emerging brands which collectively grew 15% driven by Ultra which was up 34%, maintaining its number one position in trail and capturing new consumers as it leverages its new products on the road. We continue to focus on product innovation and development and recently entered the space of speed shoes with the launch of the Vantage carbon Shoe.

We are seeing an improving performance of our PACS business with stronger demand across the bag and travel category and our brands in the Americas and EMEA during the first quarter. Revenue was up more than 30% versus last year, a little ahead of schedule, driven by healthy order books, higher reorder rates and anticipation of back-to-school shipments where the season is off to a good start.

Let me take a minute to update you on the progress we are making on our purpose led to sustainability initiatives. As part of our roadmap to meet our Science Based targets, VF has invested across a number of key regenerative materials.

Through a collaboration between Vans, The North Face and Timberland, we invested in the first regenerative rubber pilot in the world in Thailand with Pera Genesis International. We continue to partner with New Zealand Marino to create the first regenerative wool platform in the world, in collaboration with Smartwool and icebreaker.

These projects help deepen the understanding of these benefits to support farmers' regenerated journey. It had been creating a captive supply of raw materials for use in our products. We continue to receive recognition for our efforts and transparency with Timberland and The North Face tied for second place and Vans taking third place on the fashion transparency index.

Finally, we remain committed to advancing our efforts on diversity and inclusion with the first All-black Mount Everest Climb sponsored by the VF Foundation, The North Face and Smartwool.

In summary, we delivered a solid topline performance in Q1, ahead of our initial expectations, amidst the softer consumer environment and importantly, we are maintaining our operating outlook for fiscal 2023.

This is a testament to the resiliency of our purpose-built family of brands which is focused on the outdoor, street wear and active spaces that benefit from favorable consumer tailwinds. I remain impressed by and proud of our teams, whose passion, perseverance and execution, continue to drive our success.

Looking forward, both uncertainty persists across geographies and marketplaces from ongoing macro-economic headwinds, we are confident in our strategies. We remain focused on the things that we can control and we will continue our strategic investments to ensure long-term sustainable and profit growth.

With that, I will hand over to Matt and take you through the financials. Matt?

Matt Puckett - Executive Vice President & Chief Financial Officer

Thanks, Steve and good afternoon, everyone. As Steve mentioned, we delivered a topline performance in the quarter that was better than our initial expectation and was achieved amidst the softening consumer environment.

Revenue was up 7% in constant dollar terms and up low-double digits, excluding China. Including the negative, FX translational impact of nearly $100 million, sales were up by 3% on a reported basis.

Our EPS was $0.09, down 68% on a reported dollar basis and down 59% in constant dollars, largely in line with our expectations. However, we incurred about $0.05 of non-controllable impacts relative to our plans, primarily driven by FX.

Before I unpack the P&L, let me talk about the operating environment across our primary geographies. Globally, today we are open for business from a COVID standpoint across the value chain, although we are still feeling the effects of isolated impacts from COVID-related lockdowns in China during Q1.

Revenue in the Americas was up 7%. Our performance has overall been resilient considering the softer macro backdrop and subdued traffic levels in our DSD network. While the outdoor segment has been the key driver, Vans also generated growth, with regional revenue up 3% for the brand.

The consumer remains solid at the higher end but the value end has been more impacted and we have seen certain retailers begin to take a more cautious approach to open to buy generally. However, we continue to see the strength of our brands position us to take advantage of opportunities in the marketplace as they arise.

In the quarter, EMEA was our strongest performing region with revenue up 24%. All markets were up driven by Italy and France. This was achieved despite softer consumer confidence which continues to impact traffic levels.

All brands recorded growth with particularly strong performances generated by The North Face, Timberland, PACS, Smartwool and Dickies. Importantly, both direct-to-consumer and wholesale grew by double digits.

APAC was down 15% with Q1 being at Tele2 stories. First, China, we experienced meaningful impacts from rolling lockdowns across the quarter, with overall sales down 37% on the Mainland, in line with our expectations. Consumer spending post-lockdown has been soft to-date as expected.

It is worth noting that the outdoor segment continues to grow strongly, with The North Face generating double-digit growth in the market during Q1. Overall, the business has seen a progressive improvement throughout each month of the quarter.

Second, in the rest of Asia, our business is recovering nicely with high-teens growth being seen across markets.

Turning now to gross margin, where we were adversely impacted by a number of factors in the quarter. Our adjusted gross margin was down 260 basis points, largely in line with our plan excluding transactional currency impacts. As anticipated, this was driven primarily by mix, particularly reflecting the evolution of channels and brands which together impacted margins by 160 basis points and higher freight costs which were partially offset by price increases. We maintain a relatively low level of promotional activity which remains in line with last year.

Let me take a moment and update you on the supply chain environment. This is a competitive advantage for VF and we continue to use our scale and diversification to mitigate headwinds. Relative to the last time we updated you, we are starting to see the level of supply chain disruption ease, albeit nowhere near the pre-pandemic normal.

In terms of sourcing, our supply base is fully operational as we step into Q2 and we continue to work to move production closer to consumption where it makes sense for us to do so. The eight weeks of lockdown in China during the quarter will take some time to flow through the system and overcome but we are well placed to recover from this relatively quickly.

In terms of logistics, we are seeing improved transit times across the water, reflecting a slight ease in congestion and shortened dwell times in port. This is leading to overall better predictability and reliability.

From a cost standpoint, there is some abatement in spot rates both ocean and air, albeit these remain high relative to historic levels. I'd like to thank our supply chain teams for their continued hard work, perseverance and performance in this disrupted environment.

Moving on to inventory, there are a couple of things to unpack here relative to the headline number. First, we have implemented a supply chain financing program with the majority of our finished good suppliers.

In connection with the rollout of this program, we began taking ownership of inventory from these suppliers at the point of shipment in Q1, different from the past and we generally took ownership at the destination point.

The result in VF - this results in VF owning inventory an additional month or so. Although, we are taking ownership of the inventory sooner, there is no impact on cash flow, since the point at which payment is due to the supplier did not change. Accordingly, the increase in inventory is offset by an increase in accounts payable which was up 91% in the quarter.

Now that the supply chain financing program has been established effective on purchase orders issued from September 1st, VF will be increasing payment terms with the majority of its finished good suppliers. This change will improve VF's overall cash flow, while at the same time benefiting the supplier base. This impact is contemplated in our operating cash flow outlook.

Second, the on-hand inventory excluding in transit grows by about 50% as planned. On a two-year organic basis excluding in transit which is a better comparison considering last year's unusually low levels, inventories were up 26%. This planned increase reflects anticipated deliveries to support on-time shipping of complete assortments.

We feel good about our inventory levels, although we are closely monitoring our own and channel inventories in light of the softer consumer environment, ensuring we maintain a controlled promotional strategy.

And finally, adjusted operating margin was down by 340 basis points, largely in line with our plan, reflecting the lower gross margins and the targeted investments, we continue to make in our strategic priorities. Our strategic investments increased by 7% in the quarter, primarily reflecting initiatives in the digital and technology space.

On our constant dollar basis, SG&A was up 8% in our smallest quarterly - quarter of the year, broadly in line with our revenue growth, reflecting our continued focus on managing the P&L and maintaining cost discipline. We will continue with a very thoughtful and purposeful approach to managing costs across the business.

Turning to our fiscal 2023 outlook, I am pleased to confirm that we are maintaining our currency adjusted fiscal 2023 outlook while revising our earnings outlook on a reported dollar basis to reflect ongoing negative impacts from foreign currency fluctuations.

We expect total revenue to be up at least 7% in constant dollars unchanged from our prior outlook. We now expect adjusted earnings per share of $3.05 to $3.15 implying 4% to 7% growth versus the prior year on a constant dollar basis. This reflects the significant strengthening of the U.S. dollar across most major global currencies and contemplates current FX rates through the balance of the fiscal year.

As a result of and to account for this currency impact, we now expect gross and operating margin to be up slightly versus last year. Our operating profit guidance implies growth of about 10% on a constant dollar basis.

Finally, I'd like to give you a short update on the Timberland tax case. A judge ruling issued on July 14th formalized the decision and started the appeals clock. We expect to make the deposit during our third quarter of this fiscal year.

We remain confident in our strategy and in the strength of our family of brands that benefit from favorable consumer tailwinds in our TAMs to drive sustainable and profitable growth, despite a softening consumer environment and continued elevated uncertainty.

To round out my remarks, I'd just like to add that I am proud of the great work of our teams that has enabled VF to continue to deliver against our strategy.

With that, we will now open the line and take your questions.

Question & Answers

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Laurent Vasilescu with BNP Paribas. Please proceed with your question.

Laurent Vasilescu - BNP Paribas - Analyst

Good afternoon and thanks for taking my question. Steve, I wanted to follow up on your prepared remarks and ask about the general health of the consumer, so what you are seeing from a macro and market standpoint. We have seen a number of retailers and brands actually pre-announce which typically don't pre-announce, most notably a German brand just two days ago. With North Face, up 37% likely outperforming this year, how - can we glean anything on the state of the sporting goods channel versus other channels?

Steve Rendle - Chairman, President & Chief Executive Officer

Hey, Laurent. I appreciate you - this is an interesting question. It is when we spend quite a bit of time on looking at not only our own data but broader market data. And as I said, the consumer health from our vantage point is generally good across all markets, China certainly lagging as the impact of the lockdowns has had an impact.

But sentiment is softening and there's a lot of data out there that would support that and certainly, consumer behavior is changing, consumers are becoming more choiceful as household expenses are up and in some cases, up significantly.

As we look at it and as we reflected over our business, we see it primarily in that value end consumer and that's the part of the market. As you know, over the last five years we have done quite a bit of work to mitigate our exposure and we really only have one brand and it's just a small percent of the total revenue.

So, where we see, for our market and in our consumer, there is limited impact on that mid-to-higher end consumer and I think where you are going, the macro trends of outdoor, certainly, health and wellness for us, continue to support solid sell-through and where we are positioned with our own stores and our own digital and our key accounts, we continue to see good sell through.

We are very attentive to the right product in the right environments at the right time to the best of our ability with the current supply chain but really managing closely to ensure we have got the products that are selling and where they are not moving quickly to place the right products in place.

So we - from - I can speak for us, Laurent. We are well positioned to the energy you see in The North Face, the energy we see at Timberland in our emerging brands, specifically Ultra, Smartwool, continues to give us a lot of confidence that the work we have done, the strategies in place. But most importantly, with the people we have working across these brands continue to keep us well positioned.

Laurent Vasilescu - BNP Paribas - Analyst

Very helpful. And then, Steve, last quarter you talked about Vans sequential improvement over the quarters, how do we still think about that? And then with regards to, there were some channel dynamics between DTC and wholesale for Vans. Overall, how do we think about that? And then Matt, just a quick question, just a modeling question, I think last quarter you talked about $0.23 of unfavorable non-operating impacts, three items. With the $0.25 adjustment this quarter, was that just largely FX or were there other factors to consider? Thank you.

Steve Rendle - Chairman, President & Chief Executive Officer

Okay. The first part of your question and maybe let me first say, I think, it's important. We are not meeting our expectations in Vans and while we are not, we are still confident. We have got the right leader. You heard from Kevin in our last meeting, the strategies that are in place but most importantly the actions that he is driving across the business absolutely are showing benefit and giving us confidence that we are on the right track.

From a quarter standpoint and I guess to your sequential question, Q1, yeah, we missed really based on our lower D2C traffic and comping a strong year last year. There was a slightly lower revenue in China than planned. But on the positive side, our European business continues to do well and was above expectation.

So as we think sequentially, our focus on our own D2C where we can control that narrative where we can really drive that experience, we think about the Classics campaign that we have in place, while also staying mindful of the progression side of the product offer. We have seen continued double-digit growth with Ultra, our skate high continues to grow at a double-digit rate.

We see sequential improvement as we go across the year and I guess what gives us confidence in that is where we dropped new products with new innovation and new innovative partners, to the comments in our remarks around Stranger Things, the Sailor Moon collab and Brain Dead, we are seeing good sell-through.

There is risk in this business. I don't want to at all say that there is not but we have a really good understanding of where it is and mitigating actions in place to make sure that we continue to move against that long-term strategy, because there's every evidence in our side that this is a strong brand.

It has enjoyed significant growth in the past and it remains very relevant and its tremendous number of consumers still coming in engaging and joining our loyalty program. This kind of reinforces the confidence that we have and the trajectory we know we have in the future.

Matt Puckett - Executive Vice President & Chief Financial Officer

Yeah. I will add one point on Vans in terms of this sequentiality. Certainly, we performed a little below our expectations in the quarter. But we are not significantly off our plans. The brand did grow 4% ex-China in the quarter against actually what was probably the toughest compare of the year from a quarterly perspective.

So we - everything Steve said, as well as kind of just looking at the numbers from a compare standpoint and obviously expecting the China business to improve sequentially through the year as well, we remain confident in how we see the brand positioned for the year.

Steve Rendle - Chairman, President & Chief Executive Officer

I love you asked the question on non-operating impacts, Laurent. You have got the details there. You are spot on. Let me try to answer this and not confuse, because it's easy to get confused, I believe.

The $0.23 we talked about before which we gave you all those pieces, the currency component of that was translation only when we laid that out. That $0.23 has now become kind of $0.39, okay. And most things are unchanged.

Currency translation is kind of $0.16, $0.17 cents worse which is the piece of the $0.25 reduction and the rest is transaction. Currency transaction is flowing through our P&L and primarily through our gross margin.

So that's how to think about kind of two-thirds translation, one-third transaction of that $0.25 reduction and if you thought that translation against what we were talking about previously which I think is appropriate, you kind of get right at $0.40 impact now year-over-year from a non-operating point of view.

Laurent Vasilescu - BNP Paribas - Analyst

Very helpful. Thank you very much and looking forward to September.

Steve Rendle - Chairman, President & Chief Executive Officer

Thank you, Laurent.

Matt Puckett - Executive Vice President & Chief Financial Officer

Yeah. Thanks, Laurent. See you soon.

Operator

Our next question comes from the line of Camilo Lyon with BTIG. Please proceed with your question.

MacKenzie Boydston - BTIG - Analyst

Great. Hi. This is MacKenzie Boydston on for Camilo. Thanks for taking our questions. My first question is just on China. I am just curious, given the choppiness in that market, can you just talk about your opportunity there and how you are planning to manage inventory, just given kind of the choppiness there? Thanks.

Matt Puckett - Executive Vice President & Chief Financial Officer

Yeah. Let me start with that and maybe Steve will want to talk about kind of the growth opportunity. Clearly, we think long-term it remains a clear opportunity for growth. We are navigating short-term challenges.

We guided the business to be down about 35% in the first quarter and we have kind of largely fell in line with that at down 37%. If you look across the rest of the region, we actually saw really good growth.

Importantly, the outdoor brands maintained momentum aided by kind of market tailwinds but it really coupled with consistent performance and execution of our brand themes there, particularly in The North Face.

So I think we are navigating that in a way that we anticipated, a lot of what you saw occur in Q1 in terms of the results with us taking swift and aggressive actions with our retail partners to pull back on inventory levels and get our weeks of supply down which is really what's happened.

We do expect sequential improvement in the market moving forward but will still be negative in Q2 is our expectation kind of mid-teens to - probably really mid-teens to 20 is kind of the way to think about that and then returning to some level of growth as we move into the back half of the year.

Steve Rendle - Chairman, President & Chief Executive Officer

Maybe just to finish that out, we continue to see long-term opportunity in China and remain very committed to the Chinese market and the Chinese consumer. There is significant distribution opportunity and significant brand awareness opportunities.

And I think what's interesting, when you look at the consumer trends within the Chinese market, our portfolio is extremely well suited for long-term growth and you certainly see that in The North Face business.

We have established a structure in Shanghai, developing our local teams, strengthening that local knowledge. But most importantly, really connecting closely to serving the health and well-being of the Chinese consumer and we think that will serve us extremely well on the long-term.

MacKenzie Boydston - BTIG - Analyst

That's great. Thanks for that. And then I think you kind of touched on this in the prepared remarks but just some more color on discussions that you are having with your wholesale partners for fall and holiday. So, are you seeing any more incremental caution, any cancellations and just maybe where the biggest cancellation risk might be from a timing perspective would be helpful?

Matt Puckett - Executive Vice President & Chief Financial Officer

Yeah. I will take that one. I guess one thing important to recognize I think and really important for us is we have purposely pivoted our portfolio really away from those channels which generally were more challenged and more susceptible to higher levels of promotional activity and maybe more exposed to some of the impacts from an inflationary standpoint on that lower end consumer. With that, we have got a higher penetration of both direct-to-consumer and international which are less promotional.

Specifically with the retail partners which are our key strategic partners both in the U.S. and in Europe, we generate high margins with our brands and we remain a partner of choice for those retailers. We have got strong brands, we have got a great kind of connectedness to those businesses, a lot of transparency and frequent dialog and ultimately, that allows us, I think, to work very closely together on issues and in how we see that evolving over time.

As it relates to cancellations at this stage, our business model, we always have cancellations and it's something that's contemplated but when we look at where we are today. Our sell-through remains good. Our sales to stock ratios are well balanced and really the overall inventory is healthy.

So while we are watching this very closely and we certainly will see some cancellations, we feel kind of balanced in terms of how we are viewing that and certainly, all of that's contemplated in our outlook.

MacKenzie Boydston - BTIG - Analyst

Great. Thanks so much. Best of luck for the rest of the year.

Matt Puckett - Executive Vice President & Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Matthew Boss - JPMorgan - Analyst

Great. Thanks. So, Steve, could you speak to the energy that you cited at North Face and anything driving the sequential moderation that I think is embedded in the low double-digit guide for the year? And then just at the overall portfolio level, you held your topline guide but any underlying changes by brand, maybe relative to 90 days ago that you would cite in the topline outlook overall?

Matt Puckett - Executive Vice President & Chief Financial Officer

Yeah. So I will take the first half and on The North Face. In the last call, Steve, I think, did a great job really breaking down the broad-based strength across regions channels and product categories and that continued, Matthew, as we went into Q1 here.

TNF is so well positioned in that outdoor marketplace where there is a good tailwind and just the sheer authenticity of the brand and its relevance both on-mountain and off-mountain is helping the brands stay very much in front of its core consumers.

I think where you see the real energy is in the product and marketing and what the teams are driving there from a real innovation and newness standpoint. You have heard us talk a lot about the 365-day initiative. That came through really quite significantly here in Q1 with our warm weather products, as well as rainwear selling extremely well and as we have come in here towards back-to-school we are starting to see backpacks pick up, also our travel product.

But I think the marketing that's really driving this and we carried that momentum out of the fall. This full circle Everest expedition that we mentioned in our prepared remarks, this is the first All-black Expedition to Mount Everest and really drives hard against this outdoor industry opportunity of building a stronger more inclusive community.

And also the Pride campaign opening up to a broader set of consumers and inviting them also to be part of that outdoor community. This is continuing to strengthen the brand, leveraging that authenticity and setting it up really well for the balance of the year.

Steve Rendle - Chairman, President & Chief Executive Officer

And Matt, relative to kind of the guide and we have consistently shown now across multiple quarters last year, this quarter, this purpose-built family of brands is performing well and it's able to deliver on our commitments at the VF level.

In fact in Q1, we actually did a little bit better than our initial expectations, with that revenue growth of 7%, actually the top four brands combined grew 6% and importantly the rest of the portfolio grew 16% contributing in an accretive way to VF results.

To answer your question about TNF and then kind of more broadly the rest of the portfolio, we did not change any underlying outlooks. But if we contemplate the puts and takes and Steve referenced a little, I mean, we probably do see a little more risk to Vans but it's usually certainly some offsets to The North Face.

But in our view, it's really early in the year and to change anything, we don't feel compelled to do so based on kind of how we view the overall business and how we view each of the brands by the way.

Clearly, TNF had a strong quarter. The indicators kind of are flashing green at the moment. But remember, it's a small quarter. It's small for VF and it's even smaller for The North Face. We are - we did benefit from some wholesale shipment timing differences which were planned, so that wasn't a surprise.

We had some shipments that came into the quarter from last year and then, importantly, we are shipping this year closer to on time, not perfectly on time by any stretch but definitely in a better way in terms of shipping out and so kind of more normal shipping patterns through the quarter helped us as well. But, certainly, we feel good about where The North Face is and have a lot of confidence in the trajectory of the business overall.

Matthew Boss - JPMorgan - Analyst

That's great color. And then Matt, maybe just on the gross margin outlook, so was foreign exchange, was that the entire driver of the full year revision or any change to the promotional forecast embedded within gross margin? And just anything to think about in terms of the cadence if we are thinking of gross margin in the second quarter, maybe relative to the back half of the year?

Matt Puckett - Executive Vice President & Chief Financial Officer

Yeah. Absolutely. So the gross margin change which we were up 50-basis-point before, up slightly, so you can call that maybe around a 40-basis-point change, something to that effect, largely driven by currency FX but also have modeled in assuming a slightly more promotional environment across the business.

And I think the other thing to recognize there is, we have got lots of levers in gross margin. There is a little bit of favorability in terms of our outlook relative to the use of air freight as we move through the balance of the year. So a couple of puts and takes there but we have I think importantly assumed a modestly higher promotional environment as we move through the year, implied in the guide.

As it relates to the evolution, we certainly expect a sequential improvement in gross margin throughout the year. There are a few factors that really I think drive that. First mix won't be the same negative as it was in Q1 based on China and just kind of how we see the mix evolving across channels and brands through the balance of the year. So there will be still some negative impact I think in Q2 but as we move through the balance of the year that will start to right size and that will change.

The cost compares from a freight standpoint will not be as impactful Q1, it's far and away the toughest compare from a freight, both in terms of rates last year in Q1, the rates had not moved as aggressively as they did beyond that and then from an airfreight standpoint as we move through the year that's going to be a favorable kind of tailwind to us from a comparative standpoint.

And then I think important to note, we did see pricing benefits in Q1 which were meaningful. That actually will increase as we move through the year, just based on the timing of some of those price increases and when they hit the market in particular for The North Face and Timberland, those brands that are more heavily weighted towards the fall and winter. Gross margin will still be negative in Q2. I think it's worth knowing that.

Matthew Boss - JPMorgan - Analyst

That's helpful. Best of luck.

Matt Puckett - Executive Vice President & Chief Financial Officer

Yeah. Thank you, Matt.

Steve Rendle - Chairman, President & Chief Executive Officer

Thanks, Matt.

Operator

Our next question comes from the line of Bob Drbul with Guggenheim Securities. Please proceed with your question.

Bob Drbul - Guggenheim Securities - Analyst

Hi, guys. Good afternoon. Just a couple of questions from me, first, when you - the business is very strong in Europe, so I think as you talk about the state of the consumer in the U.S., what are your assumptions around what you expect out of Europe over the next few quarters? And then the second question is more on some of the volatility that you are seeing in your DTC business, can you just talk about the assumptions around that piece of the business, how you are planning it? I am almost curious around inventory that you have around that and I have a follow-up on some inventory questions as well.

Matt Puckett - Executive Vice President & Chief Financial Officer

Okay, Bob, I will start with maybe the Europe part and let Steve comment here on DTC a little bit. But, clearly, Europe continues to be a terrific performing market for us and it's been kind of brands and remains the fastest growing region. I think strong momentum. The integrated marketplace strategy across brands there that's being applied really consistently and the execution of that I think just continues to deliver great results.

We are not going to grow 24% across the year necessarily quarter-by-quarter. It's certainly worth knowing that but. But we are really confident in what we are seeing, because it's broad based across markets and it's broad-based across brands.

I mean every brand grew in the region in the quarter and we have said that more often than not of late. We saw double-digit growth across both direct to consumer and wholesale and so we have just got a lot of confidence in what we are doing, the strategies and really how the teams are bringing those strategies to life from a marketplace management standpoint in the region.

Steve Rendle - Chairman, President & Chief Executive Officer

And then Bob, on the D2C question, this is obviously one of the key strategic pillars in the evolution of VF and certainly, our brand portfolio. It remains a very important part of our long-term algorithm for sure.

I guess if you just take a step back, the one thing that you can see that we have done is in our two largest D2C businesses, North Face, Vans, both of our leaders come with an exceptional background, both from a brick-and-mortar and digital standpoint.

And the benefits of VF in our portfolio model and the sharing across our teams, as we work on our Vans business, as Nicole comes in and gets set into The North Face business, our ability to share, test, learn and quickly scale the ideas that drive consumer engagement, you think about consumer acquisition from an omni standpoint, not just brick-and-mortar but how we think about inclusively stores to online.

We are –we have got the right leaders in the right place to help us really continue to elevate our understanding in their ability to engage consumers and pull them across our lease line be it that digital or virtual or physical and look to convert them.

Bob Drbul - Guggenheim Securities - Analyst

Great. And if I could just follow up on the inventory, so I think it was - the organic inventory that you have, there's a lot of moving pieces to the inventory generally. But when you look closely at the inventory, in terms of by brand or by region, you said you are comfortable with it but can you just maybe put some numbers around if there are any other pockets that you are concerned about with the absolute number around where that inventory level sits today?

Matt Puckett - Executive Vice President & Chief Financial Officer

Yeah. Sure, Bob. Happy to try to help you to get there. Overall, we feel good about where we are, certainly as we said. I think if we look across the different business units, yeah there are areas where we are probably a little bit elevated. We were that way in China. We are kind of coming into a better position in China with the actions that we have taken in the quarter and have planned moving forward. So I think we feel pretty good about where we are there and quickly getting into a better place and a healthy place.

Certainly, the Dickies business is a brand where we are a little bit elevated at this stage given how abruptly we have seen that business change in the U.S. market with that lower end consumer and we referenced in the prepared remarks a softening of sell-out but also some inventory actions, right? So some pretty aggressive actions in terms of thinking about kind of model stocks and in-stock ratios and lowering the expectations in that regard which kind of pushed some inventory back upstream pretty quickly. And so we will work our way through that.

The good news is that's all core inventory, right? So we are a little bit elevated at this point in the Dickies brand but not something we are not capable of managing through. I think the important thing is now that the inventories at retailer are quickly in the right place with key partners. If we see improving sell-out, that will generate incremental volume very quickly as well, just as we saw it move the other direction. So that's one thing.

And then certainly across the rest of the brand, Vans is a little high in a few places, if I am honest but again not something that's unmanageable and again driven by core products. The North Face and Timberland are relatively well positioned. I think the North Face in some cases is still kind of missing some key things that we would like to have and so we are working really hard to continue to drive back into a better overall stock position from The North Face standpoint but hopefully that gives you a little more color.

Bob Drbul - Guggenheim Securities - Analyst

Thank you.

Matt Puckett - Executive Vice President & Chief Financial Officer

Thank you, Bob.

Operator

Our next question comes from the line of Michael Binetti with Credit Suisse. Please proceed with your question.

Michael Binetti - Credit Suisse - Analyst

Hey, guys. Thanks for taking all our questions here. Maybe just following up on an earlier question, a little help orienting the model as we connect to 2Q here, how to think about growth for North Face in 2Q and Vans in 2Q. I guess, both in total and in China for Vans, I am just curious about Matt's comments earlier on how you are thinking about the total company improvement in China going to mid-teens to 20 in the second quarter, would love to zero in on the brands a little bit there and North Face, too, as we get into seasonally more important. And then, I guess, just big picture, can you help us understand when we look at relative - revenues relative to 2019, I know Europe has got a lot going on right now and is positive for the broader retail market but Vans looks like it's up about 20% in Europe versus America is down 9% and I am just trying to understand the difference in the consumer response to the brand in those two markets and what you see that's different from the consumer and how they are reacting to Vans in the US from Europe?

Matt Puckett - Executive Vice President & Chief Financial Officer

Thanks, Michael. I will answer your questions here on the guide or on the outlook for Q2 and how to think about that a little bit by brand, I will try to illustrate that for you a bit. I think, certainly, The North Face, the outlook would not imply, in a large quarter like Q2 we are going to see the kind of growth that we saw in Q1. So you will see some deceleration there. But we will still see solid growth in The North Face is our expectation, really across quarters as we look across the year.

Certainly, Vans will see some sequential improvement is our expectation in Q2 into Q3 and then onto Q4. That's really driven by improvement in China and China's case in Q2, it's kind of less negative. So that 15% to 20% is kind of a down 15% to 20%, I think, you got that. But down 15% to 20% in China for VF, we haven't talked about it by brand. But you will see some sequential improvement in Vans driven by the China implications, as well as modest improvements in the other parts of the business.

So on the Vans revenue compare between EMEA and here in the U.S., maybe I think the way I'd go at that Michael is, let's talk about Europe specifically and what we have seen over there and you were just with us. I think you saw the strength of our European platform, the coordinated way that we go to market.

So those key account relationships are really quite critical and we look at those, both from a physical environment but also those key digital retailers, where we have been able to leverage the scale of VF to drive those season-to-season initiatives, putting ourselves in a place to really get in front of consumers with the right product.

I would tell you the integrated marketplace strategy that's used in Europe is really quite strong and a real deep understanding of that specialty consumer, the more lifestyle and some of those more sport inspired parts of the distribution and really thinking through where we are placing the products and driving icons on a kind of consistent season to season basis.

Our growth historically has come in those key markets in the U.K. and Germany. As we come into this year, we are starting to see really nice growth in France and Italy. And I think you combine that, you put together multiple quarters of very strong growth contrasted here in the U.S. where we have such a high concentration of owned stores where we have seen the traffic compression as we continue to work to bring that back.

And honest - to be honest with you, I think our integrated marketplace learnings from Europe are now coming here to the United States. Kevin will leverage those along with his team and I think you will start to see us really merchandise appropriately or differently to give consumers different views of the brand and a stronger use of our assortment to drive the revenue here in North America taking those learnings and that's one of the key benefits of our VF model. We being able to look at the powerful strategic platforms internationally and share those learnings openly and take those learnings quickly and move them into positive results.

Michael Binetti - Credit Suisse - Analyst

Thanks a lot for all the detail.

Operator

Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Brooke Roach - Goldman Sachs - Analyst

Good afternoon and thank you so much for taking our questions. A lot has been covered but I wanted to follow up on the comments that you had made about VF Vans on stores in the Americas. Can you quantify the store productivity of the Vans America brick-and-mortar fleet that you are seeing now versus pre-COVID levels? Perhaps what level of improvement is baked into the guide for second half and the implications for fixed cost leverage and margin that you anticipate as you continue to rollout those additional brand campaigns? Thank you.

Matt Puckett - Executive Vice President & Chief Financial Officer

Hi, Brooke. I will take that. Overall, today we are kind of 85% to 90% productivity from where we were pre-COVID and we have seen that kind of sequentially improve but it didn't so much in Q1. That's been a kind of quarter-to-quarter improvement. But in this quarter which is obviously a smaller quarter from a store revenue standpoint, we didn't see the kind of improvement and that was really I think tied to traffic compares which ended up being different than our expectation.

As we move across the balance of the year, what we expect is going to by the end of the year to be right at 100% productivity from where we were pre-pandemic. So that's kind of where we are and what our modeling would assume.

Clearly, you are right, there are some implications there on the P&L today in terms of absorbing the fixed cost associated with that store fleet. That said, it's a really highly profitable set of stores that we have, even operating at kind of a 90% productivity level, super profitable, we generate a lot of four-wall profit and overall a lot of earnings at the EBIT line for the brand. But there is some overhang there that continues as those productivity levels are a little bit below where they had been historically which were obviously extremely high.

Brooke Roach - Goldman Sachs - Analyst

Great. That's very helpful. If I could just ask one follow-up, can you provide an update on your pricing actions? Are you seeing any pushback from partners or from the consumer from some of the early pricing that you have taken and have there been any changes to your pricing plans for the next few seasons?

Steve Rendle - Chairman, President & Chief Executive Officer

Yeah. Yeah. By and large, no. I mean, we are right on track. Our average price increase on carryover product was somewhere between 3% and 4% in the quarter which is exactly what we expected it to be.

I think one thing that's kind of a proof point there is Vans in our stores in the quarter our AUR was up 10% and by the way, our gross margins in our stores and online and then collectively at the channel level across brands were higher than they were last year and certainly in line where they have been historically. So the prices themselves, that's a clear example in Vans but everywhere where we see it, we have not seen a meaningful impact from a pricing standpoint, beyond what we would have expected.

So we feel pretty good. You are going to see that impact at 3% to 4%, I mentioned, will grow a little bit as we move into the back half of the year as some of the brands that were lower impact in the first half, or in particular, the first quarter related to stream product, we will start to weigh in there a little bit more.

Brooke Roach - Goldman Sachs - Analyst

Thank you so much. I will pass it on.

Steve Rendle - Chairman, President & Chief Executive Officer

Thank you, Brooke.

Matt Puckett - Executive Vice President & Chief Financial Officer

Thank you.

Operator

Our final question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Ike Boruchow - Wells Fargo - Analyst

Hey, guys. Thank you. Matt, just a couple of follow-ups just on the inventory. Thanks for all the color. Can you help us think about what you are expecting three months from now when you guys report Q2 on the balance sheet? And then I think Matt's question, the gross margin appreciate another decline in 2Q, can you kind of give us the magnitude of decline that you are expecting? And then the last one is to Matt's question, I think, you said, a little bit of an elevated promo outlook versus three months ago, is that broad-based or is that specific to some - to Vans or to any geographies or anything like that? Thank you.

Matt Puckett - Executive Vice President & Chief Financial Officer

Yeah. So there's a lot there, I want to make sure I get it all. The inventory position, three months from now, well, I am not going to give you a number but we will be at where we plan to be which is going to be probably better positioned than where we were two years ago. So I expect it will continue to see an increase versus the two-year compare. Clearly, we are going to have for a period of time this impact of the in-transit inventory which is kind of a new thing.

But, as we look forward and we look at our days of supply and by the way, our days we are into Q1, we are in line with our expectations. We feel good about where we are and I think what we are focused on right now is making sure that we have got the right inventory to support what continues to be a strong growth outlook across our brands as we look through the balance of the year.

We are going to manage very carefully in terms of as we think about the environment that we are operating in for sure but we feel good about where we are positioned there. As it relates to gross margins in Q2, I would expect they will be down about a point.

Ike Boruchow - Wells Fargo - Analyst

Okay. Great. Thank you.

Matt Puckett - Executive Vice President & Chief Financial Officer

Thanks, Ike.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call back over to Steve Rendle for closing remarks.

Steve Rendle - Chairman, President & Chief Executive Officer

Hey. Thank you everybody for your questions today. I'd love to leave you with three takeaways. As you heard, we are delivering against our revenue targets, we have reaffirmed our outlook for the year and we are generating healthy profit margins.

Despite what is a softer consumer environment, it is - I think is a direct reflection of the resiliency and strength of the family of brands and certainly the hard working passionate teams that we have across our business.

Second we are going to remain focused on those things that we can control and absolutely be thoughtful about our investment, the approach to supporting our growth and how we think about the long-term view of our portfolio.

And then, lastly, we are confident about where VF is positioned to generate that long-term sustainable growth. Our portfolio carried momentum in. It continues to show that momentum and we are really excited to host you here in Denver on September 28th and get you up to speed on how we look at the years here to come.

So thank you for your time and we look forward to seeing you here shortly.

Operator

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