V.F. Corporation Price & Performance (VFC)

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 presentation which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Joining me on the call will be VF's President and Chief Executive Officer, Bracken Darrell and EVP and Chief Financial Officer, Paul Vogel. Following our prepared remarks, we'll open the call for questions. I'll now hand over to Bracken.

Thank you, Allegra. Hello, everyone, and thank you for joining us today. As I open this call, you can see it was a good Q3. What I'm most excited about is what you really can't see yet. Our transformation is well underway. And Q3 was an excellent quarter of progress across our business inside the company. We're systematically remaking the company for long term value creation double digit operating margins and strong and sustained growth. We showed you in October 9 work streams that will essentially bring us to best of breed processes And you know, we have the we've reset the entire leadership team. But you might not be aware that we're now setting the rest of the organization beneath those leaders. So between the work streams we spoke about in October, and the organization changes I'm explaining here, we're building new structures and processes to be more effective more efficient, and in the end, more creative, It's not just about saving money.

It's about in the end, we will be a reinvented company better positioned to deliver strong and sustainable returns for investors. [indiscernible] I sound energized by this, it's because I am. This is going to create strong value, great products elevated brands and a terrific place to grow and learn for our people. Now enough about what's going on inside the company. Let's talk about what we just reported. Q3 was stronger than we expected. We grew revenue 2% while we significantly improved profitability. Key point to make here is that the actions we've taken during our we've taken so far are delivering results. Now let me call some important features of the quarter. Virtually every brand was stronger this quarter than last quarter. The North Face and Timberland both grew, Vans delivered another quarter of sequential improvement in trend. Regionally, the Americas delivered another strong quarter of improvement, going positive for the first time in over 2 years. Our wholesale channel was positive on a global basis. DTC showed progressive improvement again this quarter globally. Gross margins were up 150 basis points and operating margins were up 3 60 basis points to over 11%. And net debt was down nearly $2,000,000,000 None of these were a surprise to us.

But it's a quarter of measurable progress across the board. Now to really understand our trend line, need to look at our Q3 and Q4 together. While the Q3 results are better than expected, somewhat benefited this quarter's outsized wholesale performance. Due to stronger reorders. Lower cancellations, and orders pulled forward by our retail customers into Q3 from Q4. Regardless, we feel really good about the underlying performance for the second half of the year. Now let me give you an update on Reinvent. As I indicated at our Q2 earnings, Investor Day Part 1, and the start of this call today, we're making strong progress on our transformation program. You'll recall we have 4 stated priorities: First, lower our cost base. We're on track to deliver the initial $300,000,000 in gross cost savings with another $55,000,000 generated during Q3. Remember, this is the $300,000,000 we said would be fully actioned by the end of last quarter, so Q2 and fully reflected in the P and L by the end of this coming quarter, so Q4, so by the end of the fiscal year, as we promised. The work is complete. The cost reduction is showing up and all $300,000,000 will be in the run rate as we exit fiscal 'twenty 5 as planned.

On top of that, you've heard Paul and me say we have no intention of stopping here. As of our October Investor Day, why we said that. Because we were in fact already working on process and organizational changes as I referenced earlier in the call, they'll contribute to unlocking another $500,000,000 to 600,000,000 operating income expansion half of that into SG and A. That's part of our approach delivering our medium term operating margin target in fiscal year 20 28 of at least 10% before any growth. So far, so good. Everything is on track. Let me underline a point that Mike already be obvious to you by now. While the cost side of these work streams will help us return to sustained double digit profitability, this work is even more important than the bottom line impact it will deliver. These actions are absolutely instrumental towards enabling growth. They form part of a comprehensive plan to enable the company to be more creative, and more powerful in product creation and marketing. These projects enable this creativity through better consumer insight and targeting, as well as the standardization of all the processes we can to best in class levels. Enable higher impact from good ideas in both revenue and profitability.

We also continue to reinvest some of those savings back into product creation and brand building. You'll hear more about these areas at our upcoming Investor Day part 2, more on that later. The second priority is to strengthen was to strengthen our balance sheet. We made big progress during the quarter with a reduction of net debt of almost $2,000,000,000 versus this time last year. Just to reemphasize that, we have reduced the net debt not including lease obligations, which are required from an accounting standpoint to be included. When we call it net debt. So excluding those lease obligations, we've reduced the net debt by almost 40% in the last year alone. So we're demonstrating our commitment to move our leverage ratio down to [indiscernible] First, we divested non strategic assets. Plains, Buildings and of course, Supreme. 2nd, we reduced our working capital primarily by cleaning up our inventory. And making it fresh. And finally, and most importantly, improving our operating earnings. You now see how effective this triple threat approach can be to rapidly dropping our leverage levels. Leverage levels. There's more to do. We are squarely on track to continue to delever the balance sheet to get to our 2.5 medium term leverage target. 3rd priority was to fix the U. S. As you know, we adopted our global commercial model.

In the Americas a year or so ago. We've tried to bring its performance up toward the other regions historical performance levels. And it's working. Our Americas business improved again relative to last quarter with revenue up 2% in Q3 versus down 9% in Q2. That's the Q1 of growth in over 2 years. It's early days, we may not see growth every quarter as turnarounds often aren't linear, but it's good to see green numbers again. And we have a lot, and I do mean a lot, of improvement ahead of our Americas business. Finally, deliver the van's turnaround. The brand's overall performance in Q3 was down 8% The brand's overall performance in Q3 was down 8%, a further improvement compared to last quarter, down 11%. I feel very good about the steps we're taking. But sustained turnarounds take time. Underneath the numbers, I want to call out a few things. Primarily in our key focus areas of product and marketing. New products continue to outperform our big established franchises. New School remained the number one growth driver the number 2 franchise globally is in line with our strategy to win with youth and women. We won't rely on just one style to build our business in the future, and we have momentum in our newest styles, both Highland and Upland.

Highland and Epline. In many ways, the Vans brand continues to have enormous potential. It was recently named the number 3 most authentic brand from the Authenticity 500 Index. The ranking of the world's most authentic brands, This the message here is that we have a lot of growth potential as we keep improving our as evidenced by exceptionally strong sellout for our OTW holiday collaborations including the Satoshi partnership, Homegirl's collaboration and Beatrice Demont, and those two last ones are targeted at women. The New Americas regional platform is also starting to deliver. For the holiday period, our U. S. Non generated strong positive sellout year over year for the first time since February of 2022, led by our largest accounts, We're making progress and are more confident than ever of the brand's growth potential. We have a lot of pistons to fire on to fire on Advance. Product, marketing, distribution, brand elevation, and more, and we're putting each one in place. I couldn't be more excited about the initial work done by Sun Advanced, and you'll hear more about directly from her. Just in just a few weeks. Now let's turn to The North Face. Where revenue in Q3 was up 5% versus last year and positive in each region.

With even stronger performance in DTC. We're pushing the boundaries with our marketing and our brand building. Notably, The North Face Skims collaboration set a new bar for global collaborations. Execution and impact, and was one of the fastest selling collection in the history of North Face. We were also thrilled to see our product teams being recognized with multiple awards for design and innovation across footwear and apparel. The North Face core underlying brand history is oversized relative to the size of this business, in my opinion, and I love that position. It means growth is ahead. You'll hear more about the plans for North Face directly from the brand President, Carolyn Brown. At that Investor Day. Finally, I'll say just a few words about Timberland. The brand was also positive for the quarter with revenue up 12% versus last year. Performance was driven by core strength across regions, supported by the iconic campaign launched in September. Nina Flood, is our new Timberland brand President there, and she'll give you more color on her plans the next Investor Day. Now looking ahead, The second half of this year is expected to be broadly in line with our expectations. As I said earlier, we did a little better in Q3, driven by a stronger than expected DTC and outside wholesale performance and expect the Q4 trend to be a little lower relative to Q3.

Turnarounds are not linear. For fiscal year 'twenty six, the first half of next year could look similar to the second half of this one as we put more of our game plan in place. And overall, we feel terrific about the progress we're making. Now I want to say a few words about that Investor Day that I've mentioned several times. [indiscernible] at part 1 back in October 2024, we unveiled our corporate strategy. Showing you how we were rebuilding the company from the ground up. You heard about our focus on cost and creating a solid P and L structure. That's only the start of what we're doing to transform VF. The best is yet to come. And in fact, we're coming back on March 6th with part 2 here in New York. Which is focused on brand strategy. Where you'll get to hear directly from our brand presidents. Of course, there's they're still relatively new to our business and their roles, but I can't wait for you to meet them. This really is the most exciting part of our transformation. And when you and you'll hear about it in our plans for growth. As you've heard me say before, we are here we're all here and it's all about growth in the long term.

I'm now going to hand over to Paul, who is sitting in front of me wearing a Philadelphia Eagles jersey shoulder pads and helmet. And Vans cleats, which we don't actually sell publicly, but he had them made. You may know Paul is quite an Eagles fan and they are going to the Super Bowl. And he'll take you through the financials in more detail, and I'll come back at the end for closing remarks. Paul?

All right. Thanks, Bracken.

Go birds.

As Bracken mentioned, Q3 was another quarter of progress in achieving our key priorities. Turning to the financials in Q3. The quarter delivered further sequential improvement with revenue coming in better than our guidance and with strong profitability. We saw better overall performance in Q3 led by a number of factors. Some of which may impact Q4. Looking at both Q3 and Q4 together, we are right on track with where we thought we'd be. Previously, we had said that every quarter of the year would show sequential improvement. However, given the strength in Q3, the balance has changed. 2nd half of the year is performing in line with our expectations, will show meaningful improvement over the first half of the year. So while we no longer expect q4 growth to be higher than q3, the second half growth and overall trends are improving as planned. So what has changed? First, DTC was better than expected in Q3. We had a good holiday season was particularly strong in The North Face and Timberland. 2nd, we saw outsized wholesale performance due to additional reorders lower cancellations and a favorable shift to deliveries into Q3 from Q4, a portion of which came from partners taking on inventory sooner than expected ahead of an earlier Lunar New Year. 3rd, on reported revenue, FX headwinds were less than forecasted As a reminder, we had anticipated 100 basis points negative impact in the quarter which did not occur.

And 4th, on costs. We're starting to see the impact from some of our newer initiatives, which positively benefited Now let's go through the P and L. Q3 revenue was up 2% versus last year, This marked the 4th consecutive quarter of sequential improvement in revenue. By brand, The North base is up 5%, Momentum in Greater China remains strong, the Americas had a better performance over the holiday period. Vans was down 8%, improving from down 11% in q2. The actions taken last year to clean up our inventory are continuing to deliver benefits, especially on profitability as we rightsize the brand's cost structure. Timberland was up 12%, improving from down 3% in Q2 We saw broad based growth across regions driven by continued strong momentum in premium boots. Finally, finish off the top 4 brands, Dickies was down 10%, a slight improvement from down 11% in Q2. Moving to the regions, all three were positive in the quarter. The Americas was up 2%, EMEA was up 1%, and APAC was up 5%. And turning to channel, we improved sequentially in both DTC and in wholesale, DTC was down 2%, while wholesale was up 8%. And on gross margin, as expected, we were up 150 basis points versus last year to 56.3%, was due to lower product costs and fewer promotions.

SG and A dollars were down 3% We leveraged SG and A by 210 basis points to 44.9 percent of sales, which on track to deliver the $300,000,000 run rate of initial gross reinvest cost savings with $55,000,000 of savings generated in the quarter. This led to an operating margin of 11.4%, up 3 60 basis points versus [indiscernible] and adjusted operating income was up 49% versus last year, 324,000,000 $0.45 last year. Turning to the balance sheet. We continue to make good progress on inventories as we ended Q3 down 14% versus last year. And as we said at the time of our Q2 earnings, we completed the sales supreme at the beginning of October and paid down the $1,000,000,000 term loan. And as a result, as Bracken mentioned, net down with net debt was down $1,900,000,000 versus last year. And we are on track towards our medium term leverage target of 2.5 times that we shared at our most recent Investor Day. Now moving on to guidance for Q4. For revenue, we expect q4 to be down 4% to 6% on a reported dollar basis. We are modeling FX to have approximately a negative 200 basis point impact on reported growth rates.

So on a constant dollar basis, which is the true underlying trend in the business, we are forecasting down 2% to 4%. And if you put Q3 and Q4 together, look at the second half as a whole versus last year, revenue would be flat to down 1% on a constant dollar basis. This represents a progression in trend versus Q1 and Q2 and is right in line with our expectations. Moving down the P and L, we expect Q4 operating income to be in the range of breakeven to a loss with gross margin continuing to benefit from lower product costs, and fewer promotions and fewer reserves. SG and A dollars are expected to be up slightly versus last year due to increased investment in marketing and product in Q4. [indiscernible] For the full year, we are raising our free cash flow guidance to 440,000,000 dollars with both better underlying fundamentals and higher asset sales contributing to the improvement. So in summary, we continue to make great progress on our key financial priorities and our turnaround plan. I will now turn it back to the operator for Q and A. Your first question comes from the line of Michael Dudetti with Evercore.

Please go ahead.

Okay. Go Michael.

Congrats on the Eagles.

Congrats on the Eagles, Paul. Glad to hear you say it. Just a quick one on on how we're looking at I'm happy to hear you're wearing cleats during an earnings call.

Can you just talk? It sounds like there's a little bit of a shift into 3rd quarter out of 4th quarter and when we look at the revenue betting on been where we'll see the deceleration, just the broad brushstrokes regions, channels and brands where we'll see the deceleration in 4Q? Help us think about that. And then I guess more importantly longer term with vans being such a big swing factor in stabilizing the revenue and margin trajectory here. Talk about what we're going to see as we build to key moments like Dawn and her team's first line, It seems like back to school is probably when that starts to come together and as you focus on shifting from the the good defense you've seen here in the cleanup effort to offense. What have you shown to your retail partners already? What feedbacks, good or bad, are you getting as we start to pivot vans back to what you've been talking about for a while here long term growth?

Paul will take the first one then I'll take the first one. Okay, all right, perfect. Yes. So on the Q3, Q4, I would say a couple of things. 1, if you think about the outperformance in Q3, it was split between wholesale and DTC. Wholesale is probably a little bigger portion than DTC. So on the wholesale side, it was a mix. I'd say probably part of it, maybe half of it was related to some of the pull forward I mentioned with respect to Lunar New Year and some of our partners taking deliveries earlier. And some of it was just reorders based on the stronger performance in the holiday season. So that was the wholesale side. So some of that will impact the wholesale in Q4. And then DTC just performed stronger and right now we're not necessarily anticipating that similar strength in Q4. It did outperform So we don't have that same level of outperformance in Q4 that we saw in the DTC side in Q3.

I just want to add one thing on on vans in particular when you think about and this isn't really Q3 or Q4. But I'll start with maybe a prelude to the answer to your question. We've got a lot of moving parts underneath fans in the marketplace. We've got We closed, I think, 9% of our total doors globally in our DTC channel. We've we've closed about about sorry, we closed 14% of our own stores and I think we closed about 9% of the stores of wholesale in the U. S. Alone. We've also added stores. That's a net number. So there's a lot of moving parts underneath that have really reset our business from a commercial perspective. To be in a great place as new products flow through there. Now you asked, you know, when will we start to see what Sun's working on? She'll give you a little glimpse and we're going to give you a little glimpse at things we're working on now at the Investor Day. I've told her and I'm telling you I'm going to keep the expectations low for Vance as long as possible because I want to give her plenty of room to operate.

She is a real operator. She is deep in the middle of stuff. You'll probably see a few things she's touched at back to school even more at holiday and as you go into next year even more. But it's going to take time. As you know, the proactive for this business are longer than they should be. We're not going to fix that right away, but we're also working that in the background. So stay tuned. But I feel super good about where we're going with Vans. Next question. Thank you, Michael.

Your next question comes from the line of Matthew Boss with JP Morgan. Please go ahead.

Hey, Matthew.

Thanks. Hey, so maybe 2 part question. On the top line, could you speak to recent wins at Timberland, progress you're seeing at North Face, maybe relative to some of the softer trends at Dickies? Just on the overall progression, if we took a step back, maybe could you just elaborate on comments I think you made around the front half of twenty twenty six looking similar to the back half of twenty twenty five?

Yes, absolutely. So Timberland, Timberland, there's just a lot of excitement You know, I think you probably can, I don't know if you follow us close enough? And many of you do, you probably can see it. We've done some we really the Timberland I would say Timberland brand building activity started a year 1st year I got here with the anniversary of the of the famous yellow boot and the it's coinciding with hip hop. And we quietly, although in a very cool way, did a bunch of cool stuff that year, some cool collaborations. We created a movie. But nobody really heard it. But I would say some of the key players in the influence world heard it. And it picked up steam and kept picking up steam right through the year. And even then we did the Louis Vuitton collaboration and Bottega Venetos just most recently. And So there's just a lot of good momentum there. And the whole game plan there is obviously get get as much you can out of this Yellow Boot franchise, but also expand and roll through with other franchises. And contrary to what you might not think think, you know, the yellow boots, not 70% of our business.

It's a it will probably be smaller and smaller over time as we move into other things. So Nina will go through that, but I feel really excited about where we're going with Timberland. But there's a lot of room to work there and a lot of places to go. On TNF, you know, I think the TNF story has not really changed much. I think we have a great team in there and that team is led by Caroline, who's doing a fantastic job You know, we're probably, you know, texting back and forth 5 times a day. And and I'm because she's excited about what she's doing, about what they're doing. So you'll hear more more from her. I I will not steal any of her thunder except to say, you know, I'm really I'm really pumped about what she and all the brand presence are doing. Dickies Dickies is a deep turnaround. It's a small business for us. It's got maybe relative to its size, it might be the smallest in revenue. In other words, there's more potential there than in some ways maybe any other brand we have, although they all have a lot of potential.

But Dickies really has a lot. But it's a deep turnaround in broad you're just going to be patient with us on that one. I feel really good about the leader we've put in place there. We announced that we're moving the business just to make it harder on us. If we move into a to California. But there are good reasons to do that. We're going to have a campus You asked about my reference to first half could look kind of like the back half of this year. I think that's really just an attempt to say, we're not really trying to give you a strong growth forecast into next year at this point. It's too early for that. We're giving you Q4. What we are saying is keep an eye on the profitability. We're going to absolutely improve that. You're going to see systematically improve while we're rebuilding a lot of things the company to drive long term growth. When will that growth come? You know, we're not ready to say yet. So we're just trying to really dampen expectations. Great.

That's the block.

Thank you.

Your next question comes from the line of James Duffy with Stifel. Please go ahead.

Hello, James. Maybe I can make up a question.

Sir Duffy, your line is now open.

We can't hear you. Sorry, I had you on mute. No problem.

Great to hear from you guys. Really great results from North Face and Timberland. I'm curious if you had the inventory to participate some of the demand you might be seeing here in January. And then also hoping you can share some perspective on what those results might mean for forward orders as we look to fall holiday 2025.

Thanks.

That's a clever way to ask that question. There's always [indiscernible] But look, we're our supply chain is working pretty effectively. It can work a lot better, by the way, over time. But I'd say so far, so good. You want to add anything to that, Paul?

No. I think a lot of initiatives we talked about at the Investor Day and You might need pull your helmet up a little. In terms of the the integrated plane stuff, I think that that will also help us sort of sure inventories in the right place moving forward. So we're we're getting Is there anything you guys can share on discussions with wholesale customers and what that looks like for the order book into fall next year?

I don't think we have too much to say about going into fall next year, but but I would say, the spring order book was, I think we've said before, is light. And we knew that beforehand. And it's kind of a reflection of of the past and kind of the general sentiment, especially in the U. S. On that. But you know, I'm not worried about that at all. I really feel good about product portfolio we're bringing out. As the cool thing for those of you who've been in our business for a long time, you know you get to look at, you know, 3 seasons out all the time. So I really feel good about the products we have coming out season by season by season across our brands. You know, and and I think you'll see that as we get together. Give a little bit of glimpse of some of this when we get together in the Investor Day, you'll see more of it as it starts to unfold. But yeah. No. I I think so far, everything is really on track from a product development standpoint as we go forward. And and you'll see us continue to ramp that in marketing.

Very good. Thank you very much.

Your next question comes from the line of Lorraine Hutchinson with Bank of America. Please go ahead.

Hello, Lorraine.

Thanks. Good morning, everybody. Good morning. Bracken, you talked about Vans U. S. Non value channel sellout positive. I was just curious what's the mix of the value channel for Vans? How important is that in your go forward plan? And then can you talk about the health of the inventory in the channel across value and non value?

Yes. The health of the inventory looks good. Vans will always have a value channel component, so I don't want you to still want this call thinking, you know, that value channel is 10%, it's only for selling off product that didn't sell in our non value channel. So it's not It's probably a third of our business. It will stay about there. And And it's as I said, the health of the inventory looks really good. Now we brought that down. It was probably up to over half of the business at one point.

And you think a third is the kind of the go forward ratio that you would expect?

I think so. It could drift lower than that over time. I don't I'm not a channel. There's think you could tend to think the value channel is just discount, discount, discount. Actually, the profit [indiscernible] Cool thing about Vans is it does serve a very broad consumer base. Base, and we wanted to. So we want to be where our customers really want to shop and the value channel is definitely part of that. But yes, I would guess that the non value channel will grow faster over time. If you look at this 2 years from now, 3 years from now, probably look, I bet the non VA channel will look bigger. We've opened doors in the non value channel as we've closed doors in the value channel. So we probably added you know, 800 doors in the non value channel, we've closed 1800 in the value channel. So we've changed the mix. And that could continue a little bit.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Laurent Vasilescu with BNP Paribas. Please go ahead.

Hello, Laura.

Good morning.

Hi, Bracken. How are you?

On the results here. Thank you. I wanted to ask you, Bracken, with regards to your comment around the second half. I know it's initial but it's good to hear that the similar trajectory to the second half of the fiscal year. Is that comment on a constant currency basis [indiscernible] [indiscernible] yes, Florent, thank you for asking that because by the way, I'll let you finish your question in a minute. But I think we were Paul and I were having a discussion yesterday where to put the emphasis on constant currency reported. And it's a that's a regular debate between that goes on in before your report and you set up a standard. And we really haven't locked that in yet. But I think constant currency is super important here, especially in an environment where you've got volatile currencies, which we have had over the last not wildly violent, but volatile, So we'll try to put more emphasis on that constant currency going forward.

Okay.

Okay, Praful.

Thank you very much. Not on profit. The way. Profit will always be reported. [indiscernible] Understood. And then Bracken, Paul, I'm trying to understand the slides here on the SG and A dollars guided to be up slightly for 4Q. Is that I would assume that's on an adjusted basis. And if that's the case, maybe I'm just modeling this wrong, but it implies 4Q gross margins up significantly higher than what you just posted in 3Q, like up 300, 400, that's is that the right way to think about it, Paul? And if that's the case, should we initially think gross margins will be strong in the second half of calendar year? I think, Bracken, you mentioned that profitability will continue to improve into next fiscal year. Thank you very much.

Yes. So I'll take both of those on the SG and A and the gross margin. So the gross margin side, we do expect gross margins to be up There's a couple of factors at play here. One is the actions from last year's are still benefiting us year over year. So that's a part of it. And then secondarily, as or kind of equally or maybe not quite equally, but we are benefiting as we talked about some of the product costs have improved and lower promotions as well. So overall gross margins organically are heading in the right direction and then you throw on top of it the benefits we have kind of on the comp from last year. On the SG and A side, yes, we're modeling it up slightly The 2 real big factors in that would just be marketing That's a little higher in Q4. And then again, we still have 1 more quarter of the sort of bonus accruals hitting us this year that didn't really impact us last year.

Very clear, Paul. Thank you very much. Thanks, Laura.

Your next question comes from the line of Adrienne Yih with Barclays. Please go ahead. Hey, Adrienne.

Hey, thank you very much. Hey, congratulations. Great quarter. Nice to see it.

So, Bracken, my question is going to focus on ZANZ. That was the only the only brand that missed sales relative to consensus expectations. You're giving it time. What customer feedback are you getting from the core vans of our broadening it out to more board and action sports. So just how are you targeting kind of a broader audience? And then when is the right time to put some demand creation investment Hi, Matt. And then Paul, I have a quick one for you, which is really you're taking measures throughout the entire infrastructure of the company I'm assuming that supply chain is going to be one of them. Can you remind us kind of where your sourcing base, Vietnam, China is and what measures you're taking to speed up and make that supply chain more efficient. Thanks.

Okay. I'm going to dodge your question, not because I don't have an answer, but I'll give you a little bit of one, but because I really want I want to let Sun answer that. The feedback both the feedback from customers as we continue to think about who we're really targeting and also, you know, demand creation investment. What I will say is we're we're not starving excuse me, we're not starving bands, demand creation. We are experimenting with what kind of domain creation, where we're spending money, especially during the holiday period. We're learning. So I think you'll see us continue to change what we're doing there, although you can't really probably easily see what we did last quarter, what we did the quarter before that. But suffice to say, we're in learning deep learning mode. And action mode. So you'll see us keep adjusting [indiscernible] and the target audience piece, I will absolutely defer and let Sun talk in March. But I feel very, very good about the decisions she's made. And she said, we are going broader into action sports and beyond.

Yes. So on supply chain, I would say, obviously, if we're looking at the whole business, we look at everything. So nothing to really add there specifically other than We're going to continue to look to become as efficient and best in class in everything we do. With respect to kind of the regions, I'm going to read into this a little bit and think maybe this is around tariffs and those types of things. We have very Yeah. Yeah. We have very minimal exposure of things coming out of China, Mexico, Canada. So the impact for us is very, very small.

And then just one clarifying. One clarifying question on to the GM. So just to make sure we don't get ahead of our skis for first half of next year, the last year, the reset actions were about 200 bps for the organic would be anything above 200. That's a gross margin expansion for the 4th quarter? Is that correct?

Yes.

Okay. You very much and really great quarter, great progress. Thank you very much. Thank you.

Your next question comes from the line of Brook Roach with Goldman Sachs. Please go ahead.

Good morning and thank you for taking our question. Paul, we've seen some outperformance for a a couple of quarters in a row on the SG and A line. Can you talk talk a little bit more about where you're outperforming your own expectations on Reinvent cost savings? And as you bridge from the Q4 of this year to your midterm targets, how are you thinking about the opportunity to flow additional savings to the bottom line near term versus additional reinvestments in the brands through marketing or other talent investments that you might think are necessary to drive long term health of the business.

Yes, sure. So I would say, over the last couple of quarters, a lot of it, honestly, is just an execution, right? So we've had plans in place against re Invent. You're not always expecting maybe a full 100% of everything you think you're going to get in a quarter and honestly, the last couple of quarters, we've done really well in terms of hitting All the targets probably at or better than we thought. Which is just a testament to the team and how hard they're working in terms of really putting all the re:Invent actions in place. And so Honestly, it's nothing more than that other than just really great execution from the team on the savings side. And then as we talked about. So all of those that kind of first phase at first $300,000,000 will be fully actionable. We'll have the full run rate by the end of this fiscal year, which will all flow into next year. Then we're starting to see the very early beginnings of the additional benefits we talked about at the Investor Day. So we talked about $500,000,000 to $600,000,000 of incremental operating income benefit that's kind of spread up a little bit up and down the P and L, not just SG and A. But assume half of that's SG and A. And we started to see a little bit of that.

I wouldn't expect too much of that in Q4. But we're starting to see a little bit of that benefit roll through as well.

Great. Thanks so much. I'll pass it on.

Thank you, Brad.

Your next question comes from the line of Jay Sole with UBS. Please go ahead.

Great. Thank you so much. So two questions for me. Number 1, can you just talk us through what you're seeing in China? I think you said sales were up 4%. Think you were up 5% year to date. And then on the balance sheet, given the progress you made in the quarter, reducing debt, what's the outlook from here? How much of a priority is it now? Is it the same level of priority that it's been or feel like maybe free cash can be used for some different [indiscernible] You.

I'll let Paul answer the second one on China. I think we're pricing the same thing everybody else is. The economy itself is pretty soft relative to the past. I mean, the good news we've got a very strong business, especially in the North Face in China. Continue to grow double digits. So really good another good performance there. I have I'm as most people here are probably uncertain about what will happen near term, but really optimistic about the long term in China. So we're going to keep the pedal to the metal and keep investing there and building business there. Want to answer that first?

Yes. On the free cash flow, our focus will continue to be to to pay down debt. It's really the focus 1 and 2 in terms of what cash flow. And Brack and I have talked about the we have the target of 2.5x or better, which we put out there. And I think you can assume unless we were to say otherwise that our real focus is getting there as fast as we can. And then we'll think about other uses of free cash flow.

Exactly. We won't be doing any acquisitions any time soon. We've got so many opportunities to improve this business without doing that. And get growth. We don't need to worry about that for now.

Got it. Thank you so much. Thanks, Jay.

Our last question comes from the line of Bob Drbul with Guggenheim. Please go ahead.

Hi, good morning. Just a couple of questions. The first one is on the wholesale pull forward, can you quantify the dollar number the shift from Q4 into Q3?

You want to take that? Yes, I'm not going to quantify it. I will say that of the number they're not going to answer your question, but I'll answer as best I can, which is wholesale was a little bit more of the outperformance than DTC, although they both outperformed. And within the wholesale, probably say about half of it plus or minus. Was pull forward and the other half was just better reorders given some of strength we saw in Q3.

Yes, I'll give a little more help. I'll probably nervous to give more color because he and I haven't agreed how much we're going to say and not because it's always a little tricky and making sure you have your facts correct. You know, we had reorders, You had better reorders lower cancellations. And you have some orders that were pulled forward from last the future quarter to this quarter. So there's the combination. Then you have cold weather, which drove our DTC business stronger too. So we're just not going to take all those things to the bank. Into Q4. And I think that's the right answer. I think none of those are things you can really count on, especially if you understand order flow, you know we can't count on reorders because way our seasons work, they work in a 2 quarter cycle. So the Q2 of our cycles when you have reorders. So reorders won't happen in Q4, so that number is gone. So it's a little bit noisy. That's why we're not being a little more specific than that. But bottom line is think we've judged us about right.

Got it. And then, Bragg, on Vans, you look at sort of the the regional breakdowns, vans down 31% and APAC. Can you just comment a bit on that result and sort of what drove that and and how you're seeing the business there?

Yes, I would say vans came. Vans got hit a little bit later maybe fundamentally and then pretty hard. If you look at our vans business, in APAC, I think at its peak, it was $600,000,000 something like that. So think about how much potential there is there. So we're not chasing anything short term in Vans right now. And I hope that's obvious to you. It is to me. I'm I just block everything that I hear that sounds like we're trying to do something really short term. Because the potential is so big here. You know, I don't know what our run rate would be right now in that that Q3, but I'll bet it's 250 or something. So we're down that much in APAC and China in particular. So and part of that is really a and I mentioned this in the last couple of calls, I think, you're really resetting our store footprint there. It's a lot of it is partner stores, so they're not our stores. So there's a lot of work going on there and a lot of work on the team, etcetera. So I would say just like the rest of the world.

But you're right. Vans in APAC is a little bit of a special case. That, I'm excited about the whole business. I think APAC is a really interesting case where how long will it take us to get back to $100,000,000 We'll see. But I do think, you know, China and you know that once you get things right, the growth comes fast. So we don't have things right there yet, obviously, but we will.

Great.

Thank you.

Thanks, Bob.

Well, it's only like that was the last call, boy, that went fast. I think Paul is just in a hurry to get the Super Bowl pre party. [indiscernible] Let's start this morning. But thanks to all of you. I just want to I want to close out by saying this was a quarter of really strong progress and we're on track with the turnaround. We're on track with the transformation. We're not doing anything short term here. We're aimed at really creating a new kind of company that that can drive really strong long term sustainable growth and profitability in top line. We continue to advance all those things we talked about in October. So nothing there has changed. You can just imagine we're now 3 months further down the road with very aggressive progress. And there are other things we're doing that you don't know about yet. As I mentioned, we're going to be back in March. You're going to hear from these brand presidents. Each session won't be really, really long, so you won't get a deep hearty strategy from each one of them, but you'll get a good feel for what we're doing. And most importantly, you'll get a good feel for them.

And the bottom line is I'm super excited about business. It's nice to have a good strong quarter behind us. And, but we're already deeply into the future here. So thanks everyone. Look forward to talking to you in person during the meetings in between. Or on the next call a quarter from now. Or sorry, on our March call, March meeting, which will be in New York. Thanks, everyone.