VF Corp

NYSE:VFC

Earnings Call Transcript 2024-Q4

[Operator]

Hello and welcome to the VF Corporation Fourth Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Vice President, Investor Relations, Allegra Perry. Please go ahead, Allegra.

[Allegra Perry, executive]

Good afternoon, and welcome to VF Corporation's Fourth Quarter Fiscal 2024 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've 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.

Joining me on the call will be VF's President and Chief Executive Officer, Bracken Darrell; EVP, Chief Commercial Officer and President, Emerging Brands, Martino Scabbia Guerrini; and EVP and Chief Financial Officer, Matt Puckett. Following our prepared remarks, we'll open the call for questions.

I'll now hand over to Bracken.

[Bracken Darrell, executive]

Thanks so much for joining us. I finished 10 months here, and we've made a lot of progress. I'll begin today with a deep dive on our reinvent program and why I'm confident we'll position VF to return to strong, sustainable growth. Then I'll briefly touch on our financial results before turning it over to Martino and Matt. .

Well, I've discussed Reinvent on our prior calls, I'd like to go a few layers deeper today so you can have a better understanding of how we're approaching this. The progress we've made so far and what's next. Almost everything is playing out as I expected it would when I took the role. We've taken the tough management we needed to return to growth, key organizational changes, leadership changes and strategic moves have largely been executed by the time we get to the end of my first year. And I feel really, really good about them.

Reinvent, which we introduced back in Q2 is fundamentally how we get back to strong growth. Some perceive this as a simple restructuring plan or tactical steps. It wasn't, and it isn't. Reinvent is a blueprint for transforming a company from declining to growing. It has 3 key phases running in parallel, reset, ignite and accelerate. Reset is focused on a reset of the U.S. business, Vans, the cost base and the balance sheet. Ignite is about elevating how we show up in front of the customer. Here, our focus is on product design, innovation and merchandising, on commercial excellence and brand building. Our reset in ignite phases are occurring in parallel and together we'll set the stage for the third phase, which will be accelerating growth.

Before I get into details on the reset phase, let me talk a little bit about people. No turnaround happens without a strong team and have spent an enormous amount of time on this particular area. You have a CEO with a demonstrated turnaround and long-term demonstrated growth experience, and we are adding superstar talent. Our new CHRO is performed CHRO of Salesforce, a company 50x larger than VF who also happens to have deep retail and apparel experience. Our new Head of Strategy in Digital was a managing partner, BCG, and spent time at [indiscernible]. Our new Head of Design was named by McKinsey and others as one of the top creative design leaders in the world. And we announced today, Paul Vogel, our new CFO. Paul brings a wide range of financial, operational and capital markets experience. We plan to announce very soon a new Vans President, and we're promoting strong internal talent, including Martino and our new Timberland President, Nina Flood. By the time I reached my 1-year anniversary at VF in July, we'll have almost completely changed the leadership of this company. I have great confidence that we have the right team in place to successfully drive VF's turnaround and long-term growth.

Now turning to an update on our key priorities under the reset days I spoke about earlier. We're on track to deliver our $300 million cost savings target by the middle of the fiscal year, as previously discussed. We're also making progress on reducing debt and strengthening our balance sheet. In the fourth quarter, we delivered another significant reduction in inventories, bringing the total for the year down 23%, down over $500 million, which in turn enable us to reduce our net debt by another $540 million. We also generated over $1 billion in operating cash flow and more than $800 million in free cash flow, exceeding the only guidance we gave you earlier. Our strategic portfolio review is complete, and we'll provide an update when we have more use to share. We've established the Americas regional platform, which is now fully in place and operational as part of the global commercial organization. Under Martino's strong leadership, we are already seeing signs of progress. We've imported key processor EMEA and APAC. The accuracy of our forecasting has dramatically improved, and Martino will talk through the actions we're taking to improve the Americas performance in more detail.

Let me move to Vans. While overall financial results have not yet improved, we are deep in execution and we are starting to see very early green shoots. I said you'd start to see the brand turn first in one channel or region and it would spread to others. It started to happen with DTC Europe positive in the quarter. The inventory reset actions are helping create a cleaner market in which to introduce new product. Our weeks of supply have come down with our partners in all 3 regions. We're simplifying our product lineup and introducing a sustained level of investment in design and innovation. UltraRange Neo is performing well in the U.S. the new school, which launched when I first got here is gaining strength behind enhanced marketing and has now become our second largest style globally. And the A 2.0, our newest and best [indiscernible], has performed very well in the early months of its launch. You can expect more news to hear soon too. This is part of our icon management strategy, which will also reduce reliance on core outcomes. While the quarter remains in decline, we're seeing strong performance in our new products, and we have a cascaded product launches coming. We're also working to make our marketing efforts more effective. We're simplifying our storytelling. Our marketing has shifted to fewer, deeper campaigns. For example, we used to have 274 stories in month season. When you have 274 stories in 6 months, you're probably not telling any of them well. We've simplified it to a handful of powerful key stories, concentrating our investment. We're also rebalancing our marketing mix to drive higher ROI. These changes are starting to show positive results. Now we're cutting through. Search is a good leading indicator. We're seeing Google search trends move in the right direction for the first time in years. The last 3 months have improved compared to the previous 12. We don't only need to have simplification. We also need brand elevation to build brand equity and drive gross margin. We're leveraging our new OTW line as the pinnacle expression of the brand to drive energy and excitement. We're in the middle of a global series of events to bring together community, culture and fashion that will continue to unfold. That's how we get in the middle of cultural trends. After the teas in June '23 at Men's Paris Fashion Week, we officially launched OTW, at Art freeze in Los Angeles in February of this year with an amazing installation to drive brand elevation. And just last week, we had an exciting event on the Shanghai Bund, that generated huge interest in person and on social media, staying tuned for more. We have a strong and data-driven approach now to improve our in-store execution. You'll see more as we will live across the year. I'm a big believer in testing, learning and scaling in stores with a wonderful place to do it. We're testing a lot of things across regions and areas of visual merchandising for all formats and SKU productivity that will scale across the globe over time. At Vans, we've moved from theory to action.

Now let's talk about The North Face. Our core focus there has been investing in product, design and merchandising. Our key growth drivers include category expansion and a specific focus on trailing hike, women's and footwear. We're starting to elevate the brand through premium performance products. Our pinnacle expression of the brand, Summit Series, is leading the way through brand campaigns and in-store activations across all marketplaces. This is connected to elevating our brand journey through new store designs, which are currently being tested and scaled across the globe. A few select examples of this is the Regent Street store experience, our new store format in Berlin and Singapore and soon we'll have one in Shanghai. Our key global partners are fully involved in this initiative, too. We'll talk more about the final phase, accelerate in the coming quarters, but it's too early to talk about it now. So what can you expect as we move into fiscal '25. While we're not ready to give specific quantitative guidance, I can tell you that you can expect things will be a little bit better sequentially each quarter, except for the first quarter as we complete our channel inventory resets, and Matt will tell you more about that later.

To close my section, I'm more confident than ever about our plans and our execution. We will return the company to long-term profitable and sustainable growth. Now let me hand over to Martino, who will give an update on our go-to-market approach globally.

[Martino Guerrinic, executive]

Thank you, Bracken, and good day, everyone. Nice to speak to you again in my new role of Chief Commercial Officer of VF, where I oversee our newly created global commercial organization and our emerging brands.

Today, I'm going to give you some additional details on our key priorities within this new operating model. These details will be primarily focused on the Americas, the region where we see the biggest incremental opportunities and we stand to benefit the most from leveraging processes and tools that have led to commercial success in Europe and Asia. Three key messages I want to leave you with. One, we're driving our integrated marketplace strategy with speed and agility and clear focus on our best wholesale partners. Two, we are elevating our retail execution in D2C, direct-to-consumer across brick-and-mortar and digital. Three, we're driving commercial excellence through our operating model, scaling new capabilities and best practices across regions. First, integrated marketplace strategy. Integrated Marketplace strategy is a holistic view across the channels to elevate our brand execution and capture consumer engagement at every touch point. We see opportunities to perform better across wholesale and D2C. We're making clear choices and we're executing intensely against those choices in each region and across brands as the macro cycle adjusts and inventories returned to normalized levels, and impactable marketplace as a crucial is critical to take back market share and drive growth across portfolio, starting from our Americas region, even more than anywhere else. We continue to see a strategic place for wholesale in our model, and we believe we can be much stronger with key strategic partners. As we roll out our regional commercial model and transfer best practice across region, our immediate focus is on establishing a robust marketplace management processes in the Americas, supported by more agility in decision-making. These efforts are fairly focused on driving growth in short to medium term, but we expect them to also lead to higher tiers of distribution and less promotional approach to the marketplace and in turn, more elevated brand position. You've heard us talk about our global partnerships. We work with some of the best multi-brand retailers and partners in the business. They love our brands. They want us to work with us to bring them to our consumers in a way which drives a deeper connection and build brand equity in the process. We are intensely focused on making this partnership tighter and more effective. adopting some of the processes that have made our business in Europe and Asia successful such as cross-brand, key account governance execution.

Over the last 8 months, we have invested significant time in the Americas, meeting our partners to create a strategic long-term frame and optimize our common commercial priorities. It is starting to your results. Second, brand elevation and retail execution. We are moving fast across all areas of our new commercial organizations. In our direct-to-consumer environment, we're definitely under-executed in Americas relative to Europe and Asia in terms of commercial performance as well as retail excellence. As an example, we are adopting a more consistent and dynamic regional approach to our retail fleet optimization, a faster pace of retail innovation through new formats and rolling out consumer-facing omni-channel capabilities. As we focus on elevating our brands, we're bringing retail execution and in-store experiences to the forefront. We need great designs and the right merchandising decisions to show up consistently across the retail environment with the right mix of global and local relevance, and we need operational excellence and agile trading capabilities. We are seeing success with some of our new store concepts, for example, The North Face in London, Vans in Shanghai, Timberland in Tokyo. And we've taken a hard look on how e-commerce digital experience connects and expand through the physical expression of our brands. Third and finally, excellent commercial execution. As we ignite growth across business models, direct and partners, digital and physical, we are removing silos and barriers that get in the way of effective commercial execution. Through our commercial platforms, we are integrating trading execution, marketing and demand creation and planning discipline to drive the business and optimize the use of our inventory across all channels. Analytical capabilities and more power in size will also contribute to our ability to be demand driven across the whole marketplace. This improves our ability to predict with more accuracy where the business is added. And in fact, we have now hit our internal forecast in the Americas for 5 consecutive months. We are seeing cleaner inventory positions at our brands following also the select reset actions. And more importantly, we're driving specific VF-wide growth initiatives with our key accounts in all the regions.

Last but not least, we are the proud owners of several emerging brands, delivering substantial total sales and accretive operating margins. There are some real jewels here. And in our new operating model, these are now managing an even more entrepreneurial dynamic way to catch market and category opportunities and create the best version into a bigger future player. So we're making progress at every step, focusing on improving our operations and returning to drive commercial excellence and best brand execution.

Thank you for the time. I'll now hand over to Matt.

[Matt Puckett, executive]

Thanks, Martino, and good afternoon, everyone. My plan today is to give you a high-level overview of fiscal '24, a more in-depth review of Q4 results and highlight some themes for our key areas of focus and some guardrails for fiscal '25.

We closed out our fiscal year having made further progress on the initial phase of Reinvent. And even though our fiscal year '24 P&L results remain difficult with revenue down 11% and adjusted earnings per share of $0.74. We delivered against our near-term balance sheet and cash flow objectives. We exceeded our free cash flow guidance, largely driven by lower working capital, namely inventory, with $804 million generated for the year, which I'll cover in more detail in a minute.

Now turning to our fourth quarter results, which were largely in line with our expectations. Throughout Q4, we continue to take proactive measures to improve our operating performance and strengthen our business and balance sheet, while implementing additional actions as part of the Reinvent transformation program. We advanced the work against the strategic portfolio review, which is now complete and are on track with our plans to continue paying down debt and strengthening our balance sheet. While the underlying financial results from Q4 remain challenging, there was a slight sequential improvement relative to last quarter. And importantly, we've seen some encouraging developments stemming from the recent actions we have taken.

Now let's unpack the performance starting with the areas we guided on, inventory, cash flow and liquidity, where we delivered stronger results than anticipated. First, on inventory, where we made significant progress in the quarter, a direct benefit of our ongoing efforts to clean up the marketplace and operate with a more efficient level of inventories across each of our businesses. Inventory declined by 23% in the quarter versus last year, ahead of our expectations with double-digit declines across each of the 4 largest brands. We're also seeing an improvement in the level and health of our inventories with our wholesale partners.

Turning to the highlight of our financial results, cash flow. As Bracken mentioned, during the fiscal year, we generated over $1 billion in operating cash flow and $800 million of free cash flow, ahead of our $600 million guidance. This result allowed us to continue making progress against one of our biggest priorities, reducing debt as we ended fiscal year '24 with net debt of about $5.3 billion, down approximately $540 million versus last year. The free cash flow beat was largely driven by lower working capital, primarily inventory as we were able to bring those levels down more quickly than projected. Liquidity at the end of the year was approximately $2.65 billion.

Now moving on to a review of the Q4 P&L. During the quarter, revenue was down 13%, including a little more than 2 points of impact from reset actions and right in line with our expectations, largely driven by the U.S. wholesale performance, which as expected, weighed on results across our brand portfolio. This compares with Q3 revenue of minus 17%, which also included a similar impact from reset actions.

Turning to the performance by region. Relative to the Americas, our international business remains more resilient, down 4% for the quarter as the APAC region continued to grow and as anticipated, the run rate in Europe improved relative to Q3. The Americas region was down 23% in the quarter as anticipated, a similar trend to Q3 as a continued cautious posture from our wholesale partners and our actions to further reduce inventories in the channel, particularly in the U.S. weighed heavily on results. The DTC channel, although delivering a better performance to wholesale, was down low double digits in the quarter, driven by Vans, The North Face direct-to-consumer was slightly positive. Performance in the EMEA region sequentially improved to down 5% in the quarter, driven by growth in the DTC channel across most brands, including growth in The North Face, Vans and Timberland, led by our brick-and-mortar channel, which overall grew mid-single digits in the region. While wholesale is still negative, there was an improvement in run rate relative to last quarter, partly reflecting the normalization of the delivery timing, which -- which distorted the year-on-year comparison in Q3. Lastly, the APAC region was up 2% with all brands we distribute in the market growing, except for Vans and Dickies, reflecting their ongoing turnaround. Growth was led by continued strong momentum at The North Face and ongoing growth in Timberland. Importantly as well, direct-to-consumer for the region was up high single digits. While Greater China remained strong, up 10%, declines in Southeast Asia and Korea pulled down the performance of the region overall.

Looking at the performance by brand. The North Face was down 5% in the quarter as expected. Starting with the positives. DTC was up 7% globally for the brand, reflecting positive growth across all 3 regions. And we continue to see outperformance in the APAC region growing 15%, driven by greater China growth of up almost 30% and partly offset by the onetime impact of returns in the Australia and New Zealand market to shift our model from a distributor to a direct business. While the cold weather season had a slow start, outerwear had a good quarter and overall was up mid-single digits for the year as underlying sales through across the business remains solid. The global performance, however, was impacted by the larger wholesale pressure we outlined last quarter, which is primarily contained to the Americas and which will continue to weigh on results over the next couple of quarters.

Vans revenue declined 27% in the quarter, in line with our expectations and reflecting the impact of the previously contemplated inventory reset actions that a 4-point negative impact on the top line, similar to Q3. While both DTC and wholesale were down on a global basis, it's worth noting that DTC in Europe grew in the quarter, reflecting the brand's relatively stronger position in those markets and the benefits it has been deriving from the regional platform. Timber was down 14%, including about a 6-point negative impact from reset actions in the U.S. wholesale marketplace with sequential improvement on last quarter, reflecting growth in both Europe and in Asia, where the brand continues to resonate and where the go-to-market execution has been more consistent and effective. The issues largely rest with the business in the Americas, which continues to be challenged and where the wholesale channel is significantly pressured because of reduced order books and ongoing soft sell-out trends.

Dickies was down 15% of similar drivers and regional trends the last quarter, as we continue to refocus the brand on our core workwear consumer and business. Americas continue to see soft sale up trends across the marketplace. And in APAC, we continue to reposition the business and adjust inventory levels with our partners. Supreme delivered another strong quarter with sales up low -- low double digits in Q4, reflecting a good start to the spring season and further validation of the grow wide strategy with the continued strong performance in Korea, as well as the late quarter store opening in Shanghai.

Moving down the P&L. Adjusted gross margin declined 120 basis points in the quarter to 48.4%, but that's not the full story nor the most important takeaway. The story really is that we were able to more quickly reduce inventories and drive higher free cash flow than anticipated, and as a result, saw a more significant near-term impact on gross margin than expected. To unpack the details explaining the basis point change versus last year, favorable channel and regional mix benefits and lower product costs were more than offset by a number of areas, including negative foreign currency transaction impact and several factors directly connected to the intentional reset actions, namely a continued elevated level of promotion and clearance activity as part of our effort to reduce inventory levels and reset the marketplace to a healthier level and mix as well as higher inventory reserves, most notably at Dickies. Importantly, excluding impacts from reset actions and the associated inventory reserves, which were more than 200 basis points, gross margin would have been up about 100 basis points versus last year, inclusive of the negative foreign currency impact. SG&A was down slightly, reflecting lower volume-related spending and incremental savings from the Reinvent program. which will accelerate as we move into fiscal '25, partly offset by incentive compensation timing versus last year and modest spend increases in our key investment areas along with comping prior year benefits in SG&A, primarily associated with gains on asset sales. As a result of the lower revenue, SG&A deleveraged in the quarter by about 650 basis points. Adjusted operating margin decreased 770 basis points to a negative 2.1% and adjusted earnings per share was minus $0.32.

Now I'd like to provide a brief update on the progress we've made on cost savings connected to Reinvent where I'll build on some of the updates you heard from Bracken earlier in the call. We delivered about $80 million in gross savings this year versus our target, including about $40 million in fiscal Q4, primarily driven by head count reductions and supply chain savings. We remain on track to deliver at least $300 million in annualized savings, which we expect to be fully in place on a forward run rate basis by the middle of fiscal year '25. In Q4, we booked an additional $55 million in charges, of which $16 million were noncash. Including the charges recorded in Q3, the full year total was about $105 million, of which $35 million were noncash. We now expect the total charges associated with Reinvent to be approximately $130 million to $150 million. As previously stated, we intend to reinvest a portion of the savings oriented towards our biggest brands and opportunities and specifically focused on the areas of product design and innovation and brand building. To date, the reinvestment has been limited as expected, and we anticipate this will accelerate as we move into fiscal '25 and beyond.

If I sum up fiscal '24, it can be characterized by a significant amount of transformative actions that we've proactively implemented to adjust the operating model and rationalize and optimize our cost structure, reset the marketplace and begin improving the health and the trajectory of the business. While we're not issuing P&L guidance now, I wanted to provide some guardrails specific to Q1 and context relative to our cash flow outlook for fiscal '25. First, revenue remained challenged in the near term, particularly in Q1. We expect the results to be comparable to Q4 when excluding the impact of reset actions that occurred during that time frame. Specific to gross margins, which across much of the year should benefit from more fundamental tailwinds and headwinds. In Q1, we expect year-over-year margin erosion as we work through the residual excess inventory resulting from the cleanup actions we've taken over the last 2 quarters. This will largely be contained to sell out in the clearance channels, including our own outlets. We expect to generate approximately $600 million in cash available for financing activities from free cash flow plus the proceeds from noncore asset sales. It's worth explaining that the lower level of cash generated as compared to fiscal '24 is a result of less working capital benefit, in particular, when considering this last year included over $500 million benefit from inventory reductions. We expect to end the year with liquidity of at least $2 billion, which contemplates the payment of the $1 billion term loan due in December.

As this was my last earnings call with VF, I wanted to take a minute to close with a thank you. I've truly enjoyed the time I spent getting to know and work with all of you over the years, and in particular, the last 3 in the role of CFO. And I can tell you that I've learned a great deal from our interactions. While the business is not yet where I know it has the potential to be and we'll get to. I'm confident that the priorities we've set and the actions we've implemented, particularly in the last few quarters since Bracken has taken the helm as CEO. We'll position this great company for a very bright future. and I look forward to watching the continued evolution of VF.

With that, I'll hand it over to the operator, and we'll take your questions.

[Operator]

[Operator Instructions] Our first question is coming from Michael Binetti from Evercore ISI.

[Michael Binetti, analyst]

Let me ask, Bracken, you spoke to Vans Europe, DTC turning positive. Can you just help us maybe connect the dots in that market a little bit more? I know you like that as a leading indicator. You said this is happening with the inventory cleaned up the DTC turn positive. Is it safe to say that inventories in the wholesale channel there also had to be clean for that to happen in direct-to-consumer? And if so, are there any signs of improvements in the forward season order books from wholesale that we can look to or thoughts that we can -- anything we can maybe think about as far as order book stabilizing similar to DTC as the -- I'm trying -- I guess, I'm trying to think, are there reasons to think the rebuild there will be more uneven between the channels? Or do you -- do you see some evidence that DTC could be a leading indicator on wholesale?

[Bracken Darrell, executive]

Okay. Yes, just to start. Thank you, Michael, and great to hear from you. Yes, I do think -- as I think I mentioned in the last call, and I mentioned in the opening today, I do think that turnaround start in one channel or one part of the world and then they start to spread not virally but systematically, and I think that's what we're seeing now in Europe. I'm going to let Martino answer the specific question about Europe and DTC versus wholesale. But I think you can generally say that I think we're seeing -- we're going to see wholesale come pretty quickly there, but DTC is already positive. Go ahead, Martino.

[Martino Guerrinic, executive]

Yes. Thank you, Bracken. Michael. Nice to hear from you. I think we can see a direct consumer in Europe has definitely improved, and it's simply driven by focus on experience, a bit of newness starting to get traction and definitely a better assortment mix that allowed a much stronger conversion from consumers. So that was a little bit offset traffic that may remain challenging, but we really see an improved engagement with the brand. At the same time, we have better inventories in the marketplace, as we discussed. And definitely, we see search trends improving, and we see a better opportunity to win with our partners that are really interested in the Vans brand. They love the brand. They want to engage with the brand, and they want to win again together with us. So we've been, I think, creating the conditions to now work against that opportunity.

[Bracken Darrell, executive]

Yes. And if I can just add. I think it is a good leading indicator because we were never as is overloaded in the channels in Europe as we were in the Americas, which meant the cleanup in Americas didn't need to happen in Europe the same way.

[Operator]

Next question is coming from Laurent Vasilescu from BNP Paribas.

[Laurent Vasilescu, analyst]

Bracken, I'd like to ask about The North Face. I know Nicole is not on the call tonight. But in the press release, it says ongoing wholesale weakness in the U.S. Can you maybe just give a little bit of framework around there. How do we think about -- I know you're not guiding by brand or by revenues for the company, but how do we think about North Face overall for this coming year?

[Bracken Darrell, executive]

Yes. The overall -- the ongoing wholesale weakness is especially true in the U.S. and in the kind of winter apparel products. So I think that's very relevant. I'm going to let -- I'm going to start to let Martino take a lot of these regional questions, and I'll buy brand, so I'll let you take this.

[Martino Guerrinic, executive]

Yes. I think one comment about, honestly, our performance overall in the Americas region and specifically in the wholesale channel. I think it's been one of our key challenges. You probably know the number that we lost there. But also, this is our biggest information opportunity and TNF can not face definitely lead into that. The brand specifically has now the opportunity to double down on the stronger partnership that we are really focused to reset and actually strategically frame for the future in the Americas wholesale market. So I would say it's a bit of a common opportunity or issue so far in the Americas region across brands and the opportunity for The North Face to really leverage into their strength, to have a more relevant and more diversified and a more segmented play into the American distribution, including also high materials of the distribution.

[Bracken Darrell, executive]

Not guiding brand, certainly not by brand by region of the world. But I continue to be very bullish about The North Face. I think it's a great brand, great position. We have a lot of awesome products out and coming and we're going to continue to invest at the same kind of rate in both product and brand building.

[Laurent Vasilescu, analyst]

Very helpful. And then, Matt, if I heard correctly, I think you said you expect you're going to pay down the $1 billion tranche in December. Should we assume refinancing of the $750 million that comes due in April? And if so, how should we think about interest expense for fiscal year '25. I don't know if you can kind of give us some guardrails for the audience on that front.

[Matt Puckett, executive]

Yes, you want me to take that one, Bracken?

[Bracken Darrell, executive]

Yes, why don't you go ahead.

[Matt Puckett, executive]

Yes. So yes, what I said in the prepared remarks there was that we can -- we'll end the year with more than $2 billion of liquidity, which contemplates the paydown of $1 billion in December, right? So that's going to come from -- we've got a little bit of excess cash on the balance sheet coming into the year. We're going to generate quite a bit of cash. We kind of talked about what that is. And then -- and then quite honestly, a little bit of an increase in short-term borrowings that we would kind of fund with and pay back pretty quickly, just some cash from the business. So that's the assumptions there. And I think I think you're right. I mean, you start to do the math, it gets pretty difficult to -- to see the $750 million not needing to be refinanced, barring other actions, which obviously, we're aggressively looking at some other things, right? And we talked about the strategic portfolio review is now complete. And -- and obviously, ongoing work there associated with that. So -- but I think you have the math right. The other thing on interest, it will be modestly lower year-over-year, but not dramatically so. .

[Bracken Darrell, executive]

And if I could just add and Matt said it, but we don't have any intention to refinance any of that.

[Operator]

Next question today is coming from Simeon Siegel from BMO Capital Markets.

[Simeon Siegel, analyst]

Matt just want again, which you best luck in the next chapter. Bracken, and just a follow-up on the last one. Nice hear about the positivity around North Face. Just maybe higher level, how do you think about the North Face revenue decline? How do they differ from Vans? Like any thoughts on just diagnosing the depth of any potential declines there would probably be helpful? And then I'm sorry if I missed it, did you give North Face's wholesale sell inverse sell-through. Just trying to think through what the challenge at U.S. wholesale North Face versus its growth tells you about the brand and how people are seeing it.

[Bracken Darrell, executive]

I'm going to take the first one and I'm going to let Matt handle the second one. But I'd say, overall, I feel very good about The North Face. So I think we're in quite a different position from Vans. The growth in The North Face in general is not concentrated in a few styles. It's really broad-based, and we've got a very strong portfolio. We have strong dynamics across the world in The North Face, and we're very strong in China. But I think in general, we're in a -- we have a lot of share gain opportunity over time. The underlying sellout continues to be strong, 7% this quarter, and it's been strong and strong around the world, by the way. So I think we're in a really different position. We had that question last quarter, and we said you'll see DTC continue to be stronger than it has been. Matt, do you want to answer that question about sell-out versus sell-through in The North Face?

[Matt Puckett, executive]

Yes. I think I mean what I would say is still out has generally been pretty good, right? I said in my comments that outerwear overall across the year was good and growing and that was across channels. Another factor here is we've talked a lot about reset, there's really no real reset actions happening in The North Face because inventories at wholesale we're in a pretty good place. And we sold in less this year, right? The fall order books were down. We said that from the very beginning of the year. Some of that is the continued residual kind of challenges we had from disappointing the marketplace a couple of seasons ago, right? And so we need to build back credibility in terms of on-time deliveries and sell-through, et cetera, that is happening. And obviously, as we look forward into future seasons, we'll start to see the benefit of some of those things. .

[Bracken Darrell, executive]

If I could just add one more thing. Also it's just -- it's hard not to bring up the Americas operating model in the past in the context of any of our brands, and that's certainly true in The North Face. So we underperformed in the Americas in general for several years, many years. So as we bring that operating model, and I'm really bullish on that, too. I think over time, it's really going to take hold and we see a pretty dramatic improvement in The North Face and in the Americas. Don't expect it this quarter or next quarter, but it's going to come.

[Operator]

Next question is coming from Brooke Roach from Goldman Sachs.

[Brooke Roach, analyst]

I wanted to follow up on the inventory and marketplace cleanup actions that you've taken, including SKU count reductions in both DTC and wholesale. Will that initiative be complete at the end of the first quarter? And as a result, how are you thinking about the puts and takes to gross margin between promotion, pricing and mix relative to other items that might be driving your gross margin for the year?

[Bracken Darrell, executive]

Thank you, Brooke. And great to hear for you. I'm going to make a high-level comment, but going to hand it off to Matt. Yes, generally speaking, those actions are going to be complete by the end of the first quarter, but not the -- we may or may not be fully complete on selling through the rest of that inventory that we brought back, which is what Matt referenced in his opening remarks. Matt, do you want to finish that?

[Matt Puckett, executive]

Yes, for sure. So I'll just be -- I'll be pretty definitive. We're largely done, Brooke, with the actual reset actions, meaning getting the marketplace, the full-price marketplace clean, right? So getting inventory out of the system, obviously, selling through and clearing through excesses through the season as well. So that's in a pretty good place. We will have a residual impact at a minimum through the first quarter fairly meaningfully, as we sell through some of that inventory that we pulled out of the full-price channels, right? We're going to sell through that in clearance channels, largely in our own outlets, right? And so that's kind of the story there. But looking beyond that and you think about kind of that -- the puts and takes of margin into fiscal '25 and kind of through the year, there are several things to consider. I mean mix benefits will continue. They'll be less than they were in fiscal '24 would be -- would be the expectation as wholesale in the Americas generally improves a bit across time. Product costs are not going to be an issue. If anything, they could be slightly down on a full year basis in fiscal '25. Foreign currency, which has been a meaningful headwind will be less so. It will still be a bit of a headwind, but not to the degree that it has been. And then, of course, you've got the impact of the actions themselves. We're going to be cleaner from an inventory standpoint. Marketplace appears to be cleaner. Hard to know exactly what the marketplace will do and what consumers will do across the year. certainly, we're coming into the year cleaner. So those are the key things, I think, to pay attention to. .

[Bracken Darrell, executive]

Yes. If I could just add one last comment. I think the way to think about it is this chapter -- as Matt said, this chapter on reset, resetting the marketplace for Vans is largely done, if we just got the residual effects of selling through what we brought back through our own outlets.

[Operator]

Your next question is coming from Matthew Boss from JPMorgan.

[Matthew Boss, analyst]

Bracken, I wanted to pick up maybe where you just left off. So on Vans, what actions do remain as part of the reset phase? Or where do you see us today versus the potential bottom at Vans? How do you feel about inventory on hand? And -- and just what's the time line to scale some of the new product innovation that you cited in your remarks?

[Bracken Darrell, executive]

No, I'm really excited about the new product innovation that's happening. We -- going back into in my opening remarks, we launched a new school very early in my tenure at the company. And through really strong marketing and a great product. It's now the #2 style. So I think it shows that we can launch a new style and put it into a strong franchise almost out of the gate. We just recently launched AV 2.0, which is the best case view that's ever made, I believe, certainly our best case view to ever, and it's done very, very well out of the gate. It's a niche product that's really focused on skaters but stay tuned because we're going to have news on that for everybody soon. So I feel good about the steps we're taking, but there's so much more ahead of us and so much more we can do. I feel like we're either at the bottom or super close. I really do believe we're going to -- I can see the turn ahead through the tunnel. I'm not going to sit here and predict a quarter for you, but I can see it coming. I love the fact that we're -- we -- DTC was positive in Europe this quarter. That's a great sign. Google Search trends much better now than they were in the last 3 months versus last 12 months. Again, things can wobble when you're looking at external data, but that feels good. So I think there's some real green shoots here.

[Matthew Boss, analyst]

Great. And then maybe just a follow-up. Across the organization, what holds currently remains in terms of different leadership positions still to sale?

[Bracken Darrell, executive]

I think we talked about my leadership position in the opening, and I'm super excited about that. I have to say, I'm really proud and excited. So we've been able to attract somebody like Brand Hydro came from Salesforce even the CHRO there. The company is 25x larger than ours -- is a unicorn. We had such a strong background in the retail industry that preceded this time at Salesforce. And then we've attracted Abishek Dalmia, who came from Pacific across looking at it, who came from BCG, but been to at [indiscernible] and really has extremely strong background in this industry. His primary focus was the apparel and footwear industry at BCG for 7 or 8 years. So -- and I could go on and on. So I'm really excited about the people we brought in here. We've got -- there's several jobs that we're feeling right now. So the Americas President role, for example, will be an internal promotion, and we're really excited about him and he's going in there. We announced today that we'll have new Vans press coming in. So you're never completely finished and it comes to people because there's always some people coming in and severe going out, and I feel really good about where we are.

[Operator]

Next question is coming from Dana Telsey from Telsey Advisory Group.

[Dana Telsey, analyst]

Bracken, as you think about the portfolio restructuring and how I think, as you mentioned, turning over nothing to sacred cow, so to speak. Where are you in that process? What does it look like? And when do you think we'll have an update on any particular changes?

[Bracken Darrell, executive]

Yes. Thanks for the question. I was hoping I'd get this one. First of all, I just have to say I feel so lucky that we're sitting here with such incredibly rich assortment of brands to deal with, which gives us great optionality. The portfolio review is complete. And so we're acting. We made a decision not to share what we're acting on or what we might be doing publicly, but you can believe completely that we are acting, and we have optionality there. So we're -- we have multiple directions to go. I don't -- I can't give you a time frame when we'll be -- when you'll see those actions come out, but we will -- obviously, we're going to announce them when they do. But I feel very good about where we are and very good about the review.

[Dana Telsey, analyst]

And just following up on that. When you think about the channels of distribution, wholesale, digital and your own physical store base in digital and your physical store base, what are you seeing there? And is the store base going to stay at the same level? What's your view on the capital allocation to it?

[Bracken Darrell, executive]

First, they're all 3 super critical. And I would not prioritize one over the other. They each play a different role. And I think the mistake that's -- that could be made and probably hasn't made in our industry is to swing the pit in one direction or another. I think, boy, you don't know if you're winning, if you're not in wholesale because you might just be winning in a private room. And if you're only in wholesale, you're not taking advantage of the amazing brand strength we have. We're lucky because we have a very balanced distribution model between our own brick-and-mortar bricks-and-mortar and online DTC and of course, wholesale. We have not done as good a job on wholesale. We have not done a good job in our own retail, especially in the Americas as we could have. And we are ending stores. We've probably dropped about 115 stores over the last 2 years in Vans. We'll probably drop another 40 this year. So we're aggressively -- but that's a 20% reduction in total fleet if I've got that right, Matt. So we're pretty aggressively managing the store count there, but I think they're really smart decisions. And do you want to add anything on Martino?

[Martino Guerrinic, executive]

I think what is important is the integrated marketplace view how holistically, we're going to look at the channels and the consumer journey and how we're going to try to be a better version of ourselves anywhere. I think I spoke about a fully integrated approach to wholesale, a stronger partnership with the winners globally and I think a more dynamic elevation in our stores, with new formats, new concepts, testing, adopting and then scale across regions. So when I speak about taxing in Shanghai and then adopted maybe into Europe or elevating our flagships first in Europe and adopted -- sorry, in the future in U.S., that I think the agility and the opportunity that we have more than ever. And to Bracken's point, we have 2 legs in the way we're going to walk and hopefully run and it's really half and half is wholesale and direct to consumer and not the best way that we can innovate within.

[Operator]

Your next question today is coming from Lorraine Hutchinson from Bank of America.

[Lorraine Maikis, analyst]

Wanted to follow up on the $600 million of the cash flow target. What exactly is included in that? Is that the Jets sale of the PACS business? Anything else? Just wondering what noncore assets you had planned when you put that $600 million together.

[Matt Puckett, executive]

Lorraine, the $600 million is free cash flow plus a little bit of benefit from noncore asset sales. It's not brand sales at all. So these are physical assets. We said we were eliminating our aviation program. A little bit of that got done in fiscal '24. Most of that will occur in '25 in terms of the sell-off of those assets, a couple of smaller things of building as part of that. But most of the $600 million in probably 90% range is kind of free cash flow. And there's a little bit coming from sales of assets.

[Bracken Darrell, executive]

If I could double that -- I'll take a comment to say we have been extremely aggressive about consolidating space about, as Matt said, exiting the expensive aircraft program that we had and should not have in the context of a turnaround like this. So you can bet we're going to be out of these planes and the hanger pretty quickly now as we enter the new fiscal year. We've -- even where we could release space, we have pulled our space together. So for example, we've dropped 2 floors in our Denver office to really bring people together, we'll probably release that and get some benefit from that, but the real focus is to get the culture moving in a fast intense urgent way where people are in the office and running into each other so creativity can happen in that sense of urgency can be felt across the company. And we're doing that across all of our sites. We're moving from 2 buildings to 1 building here in Costa Mesa where I am today at Vans. So it's a generalized practice and you can feel the energy returning.

[Lorraine Maikis, analyst]

Great. And then, Bracken, I think you mentioned that you don't have any intention of refinancing the debt. Would that imply brand sales would come ahead of the $750 million maturity?

[Bracken Darrell, executive]

Yes.

[Operator]

Next question today is coming from Bob Drbul from Guggenheimer.

[Robert Drbul, analyst]

Bracken, was wondering if you could just talk a little bit more about your decision to bring in Paul Vogel sort of what attracted you to him as a candidate. And then I guess the other thing is can you just give us an update on what you're seeing with Supreme and sort of the outlook there that you might be willing to share?

[Bracken Darrell, executive]

Yes, I'll start with Supreme. Supreme continues to be a strong performer. We don't report those public -- those numbers transparently publicly, but you can bet they look good. We feel really good about them. The team is executing very well. I'm really proud of their performance. And this quarter, they opened -- we got a little piece of Shanghai in the period and a quarter of soul. So we're up to -- it's a very low store count with very high sales per store, and it's just performing very well. And I have said, I've learned a lot from the Supreme team and what I think that we can do throughout the rest of the year. Paul, we went through a very broad and deep slate of candidates across multiple industries and multiple parts of the world to really get to Paul Vogel, and I feel very good about him. I think the best CFOs are -- have a strong backbone or tough but they also have the EQ and that's super important in the context of the transformation and culture like we're going through here. So I especially like Paul because he does have that. He started in finance. He went through IR. He didn't spend a good solid length of time at a lot of transition and change at Spotify and worked under one of the top and most respected CFOs in Silicon Valley [indiscernible] Spotify bearing McCarthy and Barry had extended Peloton after that, but he really is a super CFO by every account and he really trained fall. So the combination of all those things and then it just pulls it or personal skills really took them straight to the top.

[Operator]

Next question today is coming from Paul Lejuez from Citigroup.

[Paul Lejuez, analyst]

Within that free cash flow guidance, can you talk about how you plan to manage inventory and working capital whether you're assuming a benefit from inventory this year? Or are you just too low at this point? Also, I'm not sure if I missed it, but did you say what the CapEx was? And if you could give that number and just how it breaks down on spend?

[Matt Puckett, executive]

Yes. So we didn't say anything specific about inventory. We made a lot of progress in fiscal '24. Actually, we got further than we thought we would get in terms of bringing those levels down, which is a tribute to across the organization to both on that -- on the kind of the supply side as well as kind of getting it sold through and manage in the marketplace. So kudos to the team. So we end the year in a much better place than when we began the year and probably little better than we thought we would be. I'd be remiss if I said we still didn't have some opportunity, and we expect to continue to bring it down. But it will be pretty modest next year, at least in our in our assumptions. So I'd say kind of low to mid-single-digit decline in inventory is what we're thinking about. So a much more modest impact next year from an overall working capital relative to inventory. We didn't say, but it won't be so different from where we've been.

[Paul Lejuez, analyst]

How about the breakdown on that CapEx stores, new stores, maintenance and in share?

[Matt Puckett, executive]

Yes. So I'm not going to give you numbers, but I will say percentage-wise, it is a little bit more focused toward consumer-facing, right, in terms of stores and both new stores as well as refreshment and remodeling of the current store base.

[Operator]

Next question is coming from Adrienne Yih from Barclays.

[Adrienne Yih-Tennant, analyst]

Great. Matt, thanks for all your help over the years and best of luck. So my first question, Bracken, is for you on inventory. When you -- oftentimes, when you take a kind of big cut at inventory, you kind of take a broad-brush approach. Obviously, TNF was cleaner how much in style or SKU reduction has been done? And how did you strategically kind of go through that the different categories? And then Matt, any notion of forecast for the end of FY '25 a leverage ratio? Or how should we think about net debt, I guess, excluding asset sales?

[Bracken Darrell, executive]

Thank you very much, Amy. I'll start with the inventory one. I would say it was pretty surgical. Our inventory reduction really folks, especially when you talk about the inventory in the channel. We really -- our focus here was to clear out the channel of some of the older icon so we have room for progressive products to flow in -- our newer products to flow in like new school. And so I think that's going to serve us super well over the next coming quarters. Matt, you want to answer the second part of that question?

[Matt Puckett, executive]

Yes. Nothing on leverage. We haven't given a number there and aren't prepared do that. But you could probably do a -- do the math yourself relative to the net debt, but it's going to be down a few hundred million based on, I'll call it, the base plan, which doesn't include any brand asset sales. But as Bracken indicated, ultimately, that's not our plan. Our plan is to ensure that we're positioned to pay off that $750 million, which is due in April and obviously could be paid in March with no penalty as well.

[Operator]

Your next question is coming from Jonathan Komp from Baird.

[Jonathan Komp, analyst]

If I could just follow up on the $600 million cash outlook for the year. I know you've talked about embedding sequential improvement in the top line. Can you ask if that outlook implies getting back to growth at some point for total revenue during the year at some point? And then just separately, one follow-up, Bracken, I don't know if you and Paul have talked or have a view given the discussion about the improving predictability and forecasting ability. Is there a point in the near future you're thinking about as the right timing to reinstill broader financial targets?

[Bracken Darrell, executive]

Okay. Let me answer the first one first. I'm going to effectively dodge your question about it we go positive. We did see sequential improvements. I hope they're sequential and that they're consistent across the year. But I think generally speaking, when you look across the year, you're going to see us get better and better. I will not answer your question about whether we're going to be that's going to show a positive number by the end of the year, but we'll come back to that. I'm pretty optimistic about the business. And generally you can feel it, I hope you can feel it. In terms of reinstating guidance, Paul and I have talked about a lot of things, not that one. We talked about that in his early interviews. I think we all like the idea of reinstating guidance. We've now got 5 consecutive months of predictability relative to where we were in the past. I mean, really, it's a big change. I also feel good about the steps we're taking across the business to really improve the overall performance and make future improvement on top of this predictability a reality. So stay tuned. I don't think we're too far away, but we're not ready to do that.

[Operator]

Next question is coming from Irwin Boruchow from Wells Fargo.

[Irwin Boruchow, analyst]

Matt, just a couple of quick ones. Just like CapEx, I think you said kind of similar as historical or something like that? Is it kind of the same response for D&A as well?

[Matt Puckett, executive]

D&A will be a little bit lower because there were some onetime write-offs in fiscal '24 that probably won't repeat to the same degree. But it will be closer to where we were if you look back to kind of fiscal '23, I would suggest.

[Irwin Boruchow, analyst]

Got it. Okay. And then I know you're not going to give an exact number, but maybe just looking at Q4, Q4's gross margin decline as kind of giving us context. The way you're kind of talking about the clearance activity needed in the first quarter, it sounds like it's going to be a larger erosion sequentially versus 4Q. Is there anybody to put context around how much impact we should expect? However you'd like to answer that? And then my question, just to follow that one up is after the first quarter, like are you "clean", like do you think the gross margins can start to flatten out? Or is there more work to be done even after the first quarter?

[Bracken Darrell, executive]

Matt, before you ask that. I'm going to add another question because they want to get this out and make sure this discussion is there about Q1. Once you give a general overview of Q1, Matt, we set up those guardrail the opening that let's close on.

[Matt Puckett, executive]

Yes. So -- so the 2 things we talked about, right, revenue and margins, let me just give you a little bit more color there. I think that will be helpful for everybody. We said top line similar to Q4, excluding the reset, right? So we reported -- we reported down 13%, reset a couple of points. So that will give you a sense there. I think I would say there's a couple of things to remember as you think about that, it's the smallest quarter of the year, has a little bit more outsized exposure to the Americas region from a penetration standpoint, Americas is kind of 55% of the business in the first quarter and a little less than -- less than 50% even in the most recent quarter, right? So there's that. Remember, the spring '24 wholesale order books, which impacted fiscal Q4 will kind of comparably impact Q1. Order books are written across the season, right? So the implications for Q4 extend into Q1, we'd have a little bit of a different expectation as we look into latter parts of the year and future seasons. And then we're comping a really big growth number in the APAC region last year, which was nearly 20% as kind of post-COVID reopenings were there was some pent-up demand in the marketplace. We're planning a more conservatively. And the 2-year stack for the region will still be double digits, but much more modest in terms of our expectations in the short term. So a little bit of color there to help you, I think, understand why we think the thing why we think overall, it looks the same on the surface for Q1, but there are some factors. Gross margin, I'll just tell you, it will be down relatively similar to what it was in Q4 from a year-over-year point of view. I think that's the simplest way to think about it and probably gives you everything you need.

[Operator]

Our final question today is coming from Sam Poser from Williams Trading.

[Samuel Poser, analyst]

I think we've covered almost everything. I guess you've chosen -- it sounds to me, one, you've chosen the brands you want to potentially sell. The tax issue has been going on for a while. So is there any update there? And two, as far as thinking about how the expenses fall away in the year-over-year expenses in the first quarter just to complete the whole picture there. Can you, Matt, maybe help us with that and -- and sorry to see you go.

[Bracken Darrell, executive]

Let me start with the tax, and then I'll hand it back to Matt on the expenses. On tax, what I would say about -- the update I'll give you on tax is, wow, tax is really a good business. It continues to perform very well at the top and bottom line. And we have made our decisions in the portfolio review and taxes for sale. We have optionality in our review. So that's all I would really say. Matt, you want to add [indiscernible] that you answer the question?

[Matt Puckett, executive]

Yes. So for SG&A, we're starting to see reductions, right? And we saw a little bit in Q4. Actually, fiscal '24 spend was down about 3% on a constant dollar basis. So we're seeing reductions. The benefits of the actions we're taking around cost savings, we've gotten something that's coming in terms of, let's say, an acceleration of that as we move in and through fiscal '25. So I think that's one thing. But remember, some of that is going to hit gross margin, not -- so not all of it's SG&A probably more like 85%, 90% of it will hit SG&A. And we're going to reinvest. We've talked about 1/4 to 1/3 or maybe a little bit higher than that depending on circumstance and our confidence in the places that we're looking to reinvest. So we're going to start seeing that be more meaningful as we look forward and get more kind of more certain in terms of those directions. We've got incentive compensation that is a headwind and other inflationary factors, whether it's compensation, merit, things like that, certainly inflationary factors in our stores and our distribution centers. So there's -- there are several puts and takes, but the underlying cost savings program will accelerate, and we're really focused on rightsizing and driving the SG&A down. The underlying SG&A down to an appropriate level, given where we are from a business standpoint, and at the same time, looking to reinvest. And I think that's the intent of the program as we started it, and that remains exactly where we are.

[Operator]

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Bracken for any further or closing comments.

[Bracken Darrell, executive]

Thank you. Thank you, Sam. I just want to say 3 things or 4 things. I am super excited about the team here. I'm even more excited about the actions because they've already happened, and they're ongoing. And it's great to see green shoes start to come through in some of these areas we've been talking about. So I think those are a good indication of what's to come. I do want to just close on that. This is -- as we said last earnings call, Paul being an excellent, and I would really like to take the opportunity to thank you for your really terrific contributions over 23 years of service to VF, and we will always be great for all the years you've worked here and how dedicated you've been, the positive impact you've had from start to finish. And it will be felt -- that will be felt way beyond your tenure, Matt. So thank you, and thanks to all of you for joining the call.

[Operator]

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