威富公司 (VFC) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the VF Corp. conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require assistance during the conference, please press star, then zero and an operator will assist you.

As a reminder, this conference is being recorded.

I would now like to introduce your host of this conference, Miss Vanessa Schwartz .

Miss Schwartz, you may begin.

Thank you.

Good afternoon, everyone, and thank you for participating in the VF Corp. fourth quarter and 2002 year-end conference call.

You should have all received a copy of the press release issued earlier today.

If you did not, please contact Thomas Walsh (ph) at (inaudible) at 212-445-8459 and he will send one out to you and confirm your name on either the fax or e-mail list.

Starting our call today is Mr. Mackey McDonald, chairman and chief executive officer of VF Corp.

Before we begin, I'd just like to remind everyone that certain statements included in today's remarks and in the question-and-answer session may constitute forward-looking statements within the meaning of the federal securities laws.

Forward looking statements are not guarantees and actual results may differ materially from those expressed or implied in the forward-looking statements.

Important factors that could cause the actual results of operations or financial condition of the company to differ are discussed in the documents, filed by the company with the Securities and Exchange Commission.

Now, I'd like to turn the call over to Mackey - Mackey.

Thank you.

Good afternoon.

Thanks for joining us.

With me today are our chief financial officer, Robert Shearer, and also our coalition chairman John Shamburger (ph),Eric-Wiseman (ph), Terry Lay, and George Derhofer (ph), and also Cindy Knoebel (ph).

It was a good year and certainly a good quarter for VF.

We feel very positive about '03 and the growth prospects we see in most of our major business.

As we look back at '02 the big story of VF is the substantial improvements in our margins which are at levels that we haven't seen in a decade.

In addition, we generated exceptionally strong cash flow from operations of $646 million, reduced debt by more than $318 million and achieved the return on capital goal that we set of 17%.

Looking at some of the highlights of '02, we really wanted to beef up the investments behind our core brands during the year to support our new product initiatives and to fuel top line growth.

The extensive cost reductions that we achieved enabled us to increase our advertising spending by 11 % in '02.

For example, we increased media spending by 64 % in our US jeans brand including Wrangler, Lee, and Riders.

Our intimate brands rose 29 %.

We've seen a payoff from these investments with gains and market share in both our jeans and intimate apparel brands in '02, and sales momentum in many brands throughout VF.

As reflected in our margins we took a lot of cost out of our company.

We made some difficult moves related to changing our manufacturing fix during the year, and our operating units accomplished these moves smoothly and efficiently.

Clearly, we have a strong foundation.

We intend to leverage this foundation with profitable sources of new growth, both internal and acquisitions.

With respect to acquisitions, clearly, we have the financial wherewithal with a cash position of a half billion dollars, low debt, and strong cash flow.

Our focus will be on filling specific voids in our portfolio.

Our top priorities are in our jeans and intimates businesses, particularly in the upper and mid tier channels of distribution, both here and internationally.

Also we'll be on the lookout for new brands to add to our growing outdoor coalition.

Finally we remain interested in adding a lifestyle brand that crosses multiple product categories.

As always we'll be very disciplined in our approach as we have been in the past to ensure that any acquisition we make will provide good growth prospects as well as good returns to our shareholders.

Before I have Bob review the financials in more detail, I'd like to take a few minutes to review the business highlights of our coalitions.

First, domestic jeanswear.

The U.S. jeans market was about flat in '02.

Growth in the juniors category was offset by softness in the men's and women's categories.

We believe the jeans market will be stable in '03.

I'd like to address up front two questions that we've been asked frequently over the last several months.

First, is the impact of Levi's entry into the mass channel which we believe will alter the competitive landscape.

We do see an impact, at least for the short term, but we have many new growth initiatives we'll be launching in the coming weeks and months across our jeans brands.

I'll review those in a moment.

Of course, our primary strength relates to our strategic approach towards managing our brands, using a highly diversified portfolio of brands that are very targeted to clearly define consumer segments and specific retail channels of distribution.

We've had ample time to prepare for this move, and believe our brands, Wrangler, Riders and Rustler in the mass channel as well as Lee in the department stores are as strong as they ever have been.

Wrangler is the number one brand for men 25 plus, while Riders is the number one national brand for women in the mass channel.

At the same time, we've improved our profitability giving us a very strong base from which to compete.

All our brands are competitively priced and offer compelling value to consumers.

Finally, we intend to fully leverage our strengths not only those of our brands but of our low cost, highly efficient supply chain and replenishment capabilities.

We have a long history of profitably managing multiple brands in the mass channel and working in close partnership with our customers to maximize the productivity of their floor space.

Our state-of-the-art retail floor space management capabilities have been honed over many years of use, and we believe that they give us a real competitive advantage.

Let me give you a quick rundown on our jeans market shares and units through November of '02.

In total, VF shares of the jeans market rose to 20.8% in '02 versus 20.2% in '01.

Wranglers brand share was 9.2% in '02 versus 9% in '01.

Lees brand share was 5.2% in '02 versus 4.4%.

We've invested heavily in new products and marketing.

In '02 we introduced a new jeansline for men, Wrangler five star premium denim, which is one of the top selling jeans at Wal-Mart.

This year we'll be extending this program into boys and infant and toddlers.

We're also launching Wrangler black rivet for young men.

Our riders women's business grew strongly in '02 and we'll be building on this momentum with new fashion and plus-size programs.

We see expansion in our legendary goal program for target stores.

In terms of Lee in '02, the Lee brand was the fastest-growing adult male brand, driven by the continued success of the Lee dungarees program.

Lee is also the number one missy brand in the moderate tier of distribution.

Lee expects continued growth in its dungarees line which will be expanded to include new casual, fashionable pants for young men.

Lee has successfully launched a new junior brand named wish and will also be launching a new missy program.

We also have a large healthy Western specialty business.

They, too, expect growth in '03 by leveraging their professional rodeo and professional bull-riders sponsorship programs.

The second question we've heard relates to the impact of Kmart store closings.

Kmart is an important customer to VF and we have many successful programs with them with both jeans and intimate apparels.

We've been anticipating these closings for some time, so any impact is included in our plans.

In terms of the outlook for our domestic jeans business in '03, we indicate in our press release that we expected a sales decline of 3%.

Now, let me break this down a bit more for you.

We're actually expecting healthy mid single digit increases in both our Lee and Western specialty businesses in '03.

Our mass business reflecting the issues just discussed is planned down 9% this year.

I'll point out that despite the slight decline in our U.S. jeans sales in '03, we do expect an additional improvement in profits.

For those of you interested in learning more about our domestics jeans business, our marketing programs and strategies, we encourage you to join John Shamberger and his senior team for our next lunch with VF conference call and webcast.

This is scheduled for noon on Monday, March 3.

A press release containing the details will be released shortly and details will also be posted on our website.

In Europe, our jeans sales, our primary international market rose 8% in '02, 4% on a constant currency basis.

Our Lee brand had an excellent year in '02 with sales up 17%, 11% on a constant currency basis.

Through its Lee originals and Lee 101 lines, Lee is leading the market in the development of new fashion styles, fabrics, and finishes.

We're capitalizing on this strength with a new retail initiative, the opening of our first Lee concept store this summer in London.

For the first time ever, we'll have the opportunity to showcase the entire Lee brand range of European products.

The Wrangler brand is gaining momentum in southern Europe, including Italy, Spain, and France.

We continue to broaden the Wrangler consumer franchise with strong growth and broken quill products and the Wrangler retro line.

We're also expanding in a new market that will introduce the Wrangler brand in China this year.

Our HIS brand remains the number one jeans for women in Germany, our largest market.

The brand is making inroads in Poland where VF brands already have a strong presence.

We've also added a fast growing array of licensed product categories to enhance the HIS brand lifestyle for consumers.

Our brands are also making excellent progress in Eastern Europe and in Turkey, where our new product innovation and retail presentation skills are paying off.

Russia also will be a new market for us in '03.

Our brand portfolio gives us a unique opportunity to partner with our customers to create a more compelling presentation of our brands.

New in-store shops featuring our Lee, Wrangler, and H.I.S. brands will debut in '03 with one of our large customers in Germany.

Turning now to intimate apparel, industry sales of intimate apparel were about flat in '02, and we expect the category to remain stable in '03.

Our department and chain store business grew 3% in '02, with market share gains in the bra, pant, and daywear categories.

Our biggest brand, Vanity Fair, continued its recent trend with strong growth in the bra and pant categories.

Lily of France's performance was particularly strong in the chain stores.

And our Tommy Hilfiger business grew more than 50% behind strong new product introductions.

Our two brands in the mass stores, Bestform (ph) and Vassarette (ph), had mixed results in '02.

The Bestform brand, which features casual cotton-based bras, had a very good year.

On the other hand, our Vassarette brand has faced challenges during the past couple of years.

We've responded on both the product and the marketing fronts.

The Vassarette brands body curves wireless program marked the brand's entry into the seamless padded wireless category.

New packaging and print advertising will put a fresh face on the brand in '03.

We're particularly excited about a new brand launch in the mass market, the curvation brand, featuring beautiful products for curvaceous women.

This is a significant launch for us, and we're in the process of shipping this program to all Wal-Mart stores.

A big accomplishment contributing to improved profitability in'02 was the integration of our Bestform and Vanity Fair businesses.

Product development, operations and finance were consolidated allowing for closer collaboration among our brands and a more efficiently managed organization.

We continue to be very pleased with the performance of our outdoor brands and their prospects for future growth.

The North Face brand continues as the most powerful brand in its category and its strength among consumers continues to be outstanding.

We noted in the release that first quality sales rose 22% in '02, and this momentum is continuing into '03 with strong preseason bookings up 23%.

Our new A-5 line was launched successfully in'02 and is expected to generate good growth in '03.

We'll continue to invest in technology and innovation to maintain the brand's premier status.

For example our new infusion line utilizes a process that reinforces the fabric of outerwear garments in the places where they receive the most wear and tear.

It ensures a water resistance surface while allowing the fabric to remain lightweight and flexible.

We also are selectively expanding distribution with such department stores as Macy's, Nordstrom, and Bloomingdale's.

And we're looking forward to our next full-price retail store opening, taking place on the upper west side of New York City in March.

Our U.S. daypack sales were down in '02 reflecting a particularly tough back to school market for pack sales.

However the Jansport (ph) brand continues to outperform its competitors and remains the number one brand in its category in the U.S.

They are the category leader in innovation and this year we'll be launching the live wire pack which features built-in features for CD-carrying music enthusiasts.

Our international outdoor business had an outstanding year in '02 with sales up 11%, and this trend is expected to continue in '03.

The last couple of years have been a period of restructuring for our image wear coalition but as a result our business today is in excellent shape.

Today we are industry leaders in workwear and uniforms, branded corporate apparel and licensed sports apparel.

We took a big step towards improving the profitability and return on capital in '02 by exiting our private label knitwear business.

This was by no means an easy task, but we worked hard with our associates, customers and others affected to work through this transition.

They've opened up opportunities with new customers and new challenges of distribution hoping to offset the down trend we've experienced in workwear.

For example, in '02, our VF Solutions unit was selected as the sole uniform provider for the Transportation Security Administration, TSA.

In just five months we outfitted over 50,000 airport screeners throughout the U.S.

Another new win is the New York City Transit Authority.

Our primary focus is on providing a one-stop shop for our customers with a broad range of brands and apparel that meets their needs from the board room to the factory floor.

That includes using VF brands, including Lee, Wrangler, Gitano, The North Face, JanSport and Eastpak to increase the assortments for our customers.

Our licensed sports apparel unit enjoyed much higher sales in '02 due primarily to the rollout of products under a new exclusive agreement with the National Football League for licensed NFL apparel products including T-shirts, fleece, and casual products in mid-tier department and mass stores.

In imagewear we believe speed to market is our greatest asset, and there is no better example of this than our execution of locker room apparel.

For example, for the most recent Super Bowl, we shipped nearly one million Tampa Bay Buccaneer championship shirts within 72 hours of the game.

I'm also pleased to announce that we recently closed on the acquisition of a small company that has certain rights to produce apparel under license from Harley-Davidson Motor Company, one of the world's great companies and brands.

Finally, our playwear business had a difficult year with sales and profits both down.

However, they have seen good response to the kid-proof line which recently received an award from "Good Housekeeping."

Now Robert Shearer will review our financial performance in more detail.

Bob?

Thank you, Mackey.

In terms of the quarter, sales were up 6%, helped in part by an additional week in the quarter.

We saw better than expected performance pretty much across the board.

That led to better than expected earnings per share, which was up 55%, excluding net restructuring items, instead of the 50% we had been anticipating.

Looking at fourth-quarter EPS from continuing operations, which includes restructuring, we reported earnings of 63 cents per share versus a loss of 31 cents per share in last year's fourth quarter.

Net restructuring charges totaled 13 cents in the 2002 quarter and 80 cents in the 2001 quarter.

In terms of earnings per share for the full year, let's take a three-step look.

First, EPS excluding unusual items and the write-off of goodwill related to the change in accounting policy was up 27% to $3.38.

This comparison benefited from the elimination of goodwill expense of 30 cents per share.

Second, looking at EPS from continuing operations and including restructuring charges, we increased earnings from $1.89 per share in '01 to $3.24 per share in '02.

Net charges in 2002 came in at 14 cents per share, which was below our estimate of 20 cents per share as a result of a reduction in prior accruals and gains on sales of assets, all related to the restructuring.

In 2001,restructuring charges impacted EPS by 77 cents.

Third, looking at our income statement from an all-end perspective, that is including restructuring charges, discontinued operations, and the effect of the change in accounting policy for goodwill, you'll note that we recorded a loss for the year of $1.38 per share versus earnings per share of $1.19 in '01.

The loss, in fact, relates entirely to the accounting change.

In other words, the charge related to the write-down of goodwill, which negatively impacted 2002 results by $4.69 per share.

Needless to say, with this accounting change and restructuring charges behind us, we are looking forward to much simpler earnings reports in 2003.

I'm sure you all are, too.

Next, let's review the improvements in our margins.

Operating margins from continuing operations rose sharply in '02 from 8.7% to 12.2%.

Excluding restructuring charges in both periods, operating margins expanded from 11.1% in '01 to 12.8%in '02.

We previous stated our goal of increasing operating margins by 150 basis points in '02.

In fact, the improvement was 160 basis points.

The improvement in operating margins was driven by a significant increase in gross margins stemming primarily from our move to more cost-effective sourcing, better inventory management, and cost reductions throughout our businesses.

By the end of the 2003, our U.S. manufacturing will represent only about 5% to 10% of our total.

And we think that level is about right for us in terms of quick response and flexibility.

These weren't easy moves for us requiring a number of plant closings and the ship of manufacturing to other locations.

Also, products shipped from Asia are increasing.

As stated in the release, gross margins increased 300 basis points to 36.0 % from32.9 %.

Again, looking at gross margins on an apples to apples basis, the improvement was 200 basis points with an increase from 33.3 % in '01to 36.3% in '02.

SG&A rose slightly in 2002 to 24.2% from 23.9% and includes an additional $24 million in marketing investments in our core brands.

In terms of other operating income and expense, the swing from an expense of $15 million in '01 to income of $22 million reflects the elimination of goodwill amortization in '02 related to the new accounting rules.

A decline in interest expense was due to low borrowings in year 2002.

As Mackey indicated, our balance sheet is in terrific shape.

Inventories were down 4% and you'll recall this comes on top of a 19 % reduction in inventories in 2001.

We are particularly pleased with the level and condition of our inventories at the end of '02.

We reduced debt by $318 million and still have nearly $500 million in cash on our balance sheet.

VF has historically generated strong cash flow and 2002 was an exceptional year.

We reported very strong cash flow from operations of $646 million, well above our previous target of $500 million.

In addition, cash from discontinued businesses added $70 million in '02.

With regard to our guidance for 2003, we are pleased to see sales momentum in most of our businesses.

As stated in the release, we expect mid single-digit sales increases in our outdoor, international jeans, and intimate apparel businesses.

Imagewear sales are expected to be flat while domestic jeanswear sales are expected to decline by about 3% due to the factors Mackey talked about.

Total sales for VF are expected to be up about 1% in '03.

We expect to see additional benefits from our strategic repositioning program in 2003.

Accordingly, we expect operating margins could reach 13% in '03.

This improvement is particularly gratifying for us as we've been able to offset some significant cost pressures.

In particular we mentioned in our release that we expect our pension expense to rise by $34 million until '03, impacting earnings by 20 cents per share.

We are committed to returning the plan to a fully funded status and recently made a $75 million cash contribution to the plan already covering a substantial portion of the underfunded position.

Accordingly, we expect EPS in '03 could rise by 5% to 10%.

We also provided additional guidance in our release, which I'll review briefly.

First reflecting the higher level of pension contribution, cash flow from operations should proximate $400 million.

This is below the higher levels of the past two years, but it is in line with historical levels.

Interest expense should decline $10 million from the '02 levels and capital expenditures could reach $100 million.

Okay.

Thank you, Bob.

I think it's clear that we have a strong profitable foundation.

We have a management team that's clearly focused on growth.

Our brands are in excellent shape.

We're going into the year with a full pipeline of new products.

We have excellent cash flow that will enable us to add to our great portfolio brands.

And we have a strong dividend payout.

We're looking forward to '03 with this strength behind us.

We'd now like to open it up for any questions that you may have.

+++ q-and-a.

Ladies and gentlemen, if you have a question at this time, please press the digit one on your touch tone telephone.

If you wish to remove yourself from the queue please press the pound key.

If your on a speaker phone, please lift the handset before asking your question.

Our first question comes from Jeff Edelman (ph) from UBS Warburg.

Thank you.

And Mackey and everyone, congratulations.

Nice management in the quarter.

Also creating a nightmare for us with restatements.

Getting to a more serious vain, you've done a great job controlling expenses and bringing costs down, and obviously, that's going to help you in the New Year.

Beyond that, though, what have you got in the pipeline internally either with product line extension to go after some of these additional markets or further tapping the international sector to help drive sales growth?

Jeff, thank you for your comments.

And we tried to summarize some of those.

As you can tell, we invested significantly this past year in marketing our core brands, and it paid off for us.

We see good momentum going into this year.

We are planning our sales to be up in almost every category with the exception of the mass channel jeans.

And I've talked about the issues related to that.

So we've got a lot of momentum in our core businesses.

We also were adding many initiatives to address those gaps in our portfolio, such as the curvation brand with intimate apparel for that curvaceous consumer.

We're adding the wish brand in our jeans category against the junior consumer.

We have many initiatives that are aimed at those gaps in our portfolio, and that's why we have more confidence in top-line growth going into the year.

It's a real focus of ours.

We also have the cash flow and strength to make some good strategic acquisitions.

And we're looking very carefully and aggressively at those as we go into this year.

Just one follow-up.

Where did international end up as a percentage of the total and does this represent an opportunity for you?

Yeah, we certainly believe it does.

We have good momentum going.

I didn't mention all of the things in international, yet you did mention international specifically.

The Lee 101 program that we have in place in the denim 42 program, the Lee brand, has had substantial -- I believe it was an 18% increase in sales.

The Lee brand has not been showing growth in that market until this past year.

But we got very good momentum going there with these new programs that we've launched.

These are for the most part higher priced fashionable product initiatives.

H.I.S. is the largest women's jean in Germany.

We think it has potential in other markets as the women's business is an opportunity for us in Europe as well.

So both Wrangler, Lee, and H.I.S. offer opportunities.

Both our North Face and Eastpak brands are extremely strong and growing in that market, so those are also growth initiatives that we feel very confident in.

Okay.

Thank you.

Thank you, sir.

Our next question comes from Dennis Rosenberg (ph) from CSFB.

Good afternoon.

Hi, Dennis.

A couple questions.

First, as far as the U.S. jeans business is concerned, given the Levi rollout I guess around the beginning of the year, is it going to be a quarterly variance in the -- in your sales because of that?

Dennis, this is John Shamburger.

Basically we see more of an impact in the second half of the year obviously than in the first half of the year.

We will see some impact in June, but a lot of that impact will basically be in the third and fourth quarter.

Okay.

Does that mean that the first and second quarters will be up in that division?

Actually, Dennis, you know, for the year, our sales because of some improvements that Mackey's already talked about in other places will be fairly consistent on a quarter-by-quarter basis.

In the whole company?

Over the company.

That's right.

Okay.

And given the tough retail environment in the fourth quarter, how did you manage to beat expectations so strongly?

Well, one thing was sales -- sales were a bit stronger than we had previously indicated.

Our last guidance that we thought sales might be flat to up slightly and as we just reported sales were up about 6%.

And again, that was across -- I believe we mentioned that was across generally all of our categories, across the board.

Yeah, I understand that, but the question is, given how weak retail loss for the quarter, what caused you to be able to beat numbers by so much?

I think in jeanswear in particular I think we had some great product out there and some great value with the Lee brand and the Wrangler brand in the mass channel, Riders in the mass channel, and also in our Westernwear business -- we saw a nice uptick in our Westernwear business in the fourth quarter.

Okay.

And then -

There was some other pieces, outdoor for example.

The wet and cold weather helped us a lot there.

So the North Face business was very strong in the fourth quarter as well.

Okay.

And finally, the $32 million of restructuring charges, how did that break down between cost of goods and SG&A?

Yeah, it's in the attachments to the release.

Dennis, it's on page 11, 11 or 12.

Okay.

Thank you.

Thank you, sir.

Our next question comes from Caroline Jones (ph) from Goldman Sachs.

Hi, this is Caroline Jones dialing in for Margaret Mager (ph).

I had a couple of questions.

On the sourcing front, what are you seeing from factories in Asia and how do you think about that for 2003 as far as are you getting better pricing from factories?

Is it relatively stable?

On the jeans side I would say it's relatively stable.

Same answer for intimate apparel.

Overall, prices coming out of Asia seem stable, all categories.

Okay.

And then on the retail stores, could you comment on how you've done with some of the North Face stores that you've opened and you know you mentioned opening a Lee store in London.

I'm sorry.

We lost the last part of that.

That's okay.

Just how you think about retail fitting into your strategy going forward in general?

Yes, well, our latest North Face store was opened in Beverly Hills in May.

And we had really exceptionally strong retail the last month of the year and exceeded plan in terms of the sales per square foot.

We are opening a store in New York in March.

That will be our seventh retail store for North Face.

And we haven't announced future plans, but we continue to feel that a retail presence for North Face such as strong lifestyle brand will continue to be a growing part of our sales.

And the Lee London concept store is set to debut in July.

And we feel very good about that.

As Mackey said, the Lee brand is quite hot on the growth track in Europe.

This will be an opportunity using this concept store to really be a little more experimental in product we test with consumers and also display our retail format in more breadth and depth so we're very excited about it.

Are all of your retail stores profitable?

Is that the idea behind it?

And is it comparable profitability to what you make in your wholesale business?

It is.

We certainly feel from a marketing standpoint it's important in terms of how we position and display the brand and feature our products relative to the consumer, but we are profit-minded.

And we expect them to be profitable.

Okay.

And then on the jeans business, how do you -- how does your profit margin compare (inaudible)European business versus your U.S. business?

And is that a -- where do you see the greatest profit potential improvement?

Actually, our net margins are relatively comparable.

We get there a different way.

We have a higher average selling price in Europe.

Europe, of course, is not one market.

So our selling costs and infrastructure costs are also somewhat higher.

Our value proposition is somewhat different.

There are fewer jeans purchased per capita in Europe.

And they are more the premium side of the market is still quite important.

We do see the mass market growing for the long term -- today it represents only about 8% of the European market.

But we have positioned three brands in our portfolio targeting that mass market, and it has been an important part of our growth over the last couple of years.

Okay.

And then final question, could you just comment a little bit more on about what's going on in the kids' market these days? (inaudible).

Market is very, very difficult.

No brand is really a dominant brand in the children's market.

We see that continuing to be that way over the next two years or so.

Again, we've done some good things in the Healthtex (ph) brand with kid proof and kid match, which is coming out for spring where the kids and the moms can actually match up a top and a bottom based on the presentation at retail.

So it is very difficult.

A lot of the people making money with their own retail stores -- we do not have any retail stores at this point and don't plan to have any in the future.

So more people are shopping in the specialty stores?

Is that what's happening or -

Well, they have -- the brands that are out there that are well known, they have their own retail stores, and that's where most of them are making money.

Mm-hmm.

Okay.

Thank you very much.

Sure.

Thank you.

Our next question comes from Noelle Grainger (ph) from J.P. Morgan.

Hi, everyone.

Hello, Noelle.

Thanks for all the detail on the call.

The first, Eric, maybe you can jump in a little bit more detail on intimate apparel.

You're planning that business in the single digits for next year.

Can you go into a little bit more color on exactly the issues with Vassarette, what you're doing there and how you're looking at planning some of the different brands for '03 within that mid-single digit growth?

Sure.

We have I'll call it mid-single-digit growth, Noelle, planned in both our department chain and mass channel businesses next year and the branded part of our business.

And there's different paths for different brands because they're in different places.

You asked specifically about Vassarette and that's a good question, because I think you -- you always ask me about the Vassarette business.

We struggled with that business for the last few years.

We went back in the last 12 months and really worked hard in understanding the positioning that's appropriate for that brand, working hard to make sure our product was right, developing new packaging and new consumer communication.

We've done all that.

The retailers have responded well to it.

We've had a big first month of the year shipping in all of our new products.

Remains to be seen how consumers will respond to it, but we do have that brand planned up in the single digits next year.

Have you changed the positioning for that brand, Eric, or is it just kind of a makeover?

No, I don't think we've changed the position.

I think we improved our execution against the right positioning.

Okay.

Does that make sense to you?

Sure.

And maybe on that front, I know you quoted overall ad spending was up 11%.

Is that right?

Bob?

11%, right.

Right. 11% in '02.

How are you looking at your ad budget for '03 and what do you feel are going to be your priority areas?

Our overall spending in '03 will continue at a similarly high level in our marketing initiatives, and a lot of our marketing expenditures now are -- they're much more geared towards media and that media's much more behind supporting product launches and it's been very successful for us.

So we talked about some of the programs that we launched last year, the Wrangler premium five star denim rang -- Wrangler five-star denim program, the Lee 101 program in Europe, and other programs.

And we'll continue along those lines, curvation and these types of programs will get a lot of our investment this year.

We see that type of marketing trends translating into increased sales in a relatively short period of time.

Okay.

And also does a good job of building our brands.

And on the outdoor side, Terry, congratulations by the way.

Thank you.

In the new responsibilities.

Expecting that business to be up mid single digits, I'm curious, with the success you're having with The North Face, you know, maybe -- I'm not sure what you're thinking for the pack business because it would seem that maybe it should be up more than that.

So can you help me understand why it's mid single digits?

Well, there is a mixture of dynamics.

I will tell you that it's still a little early, but we are prebooking sell at this point, and we're slightly ahead of plan.

We're up on the order of 12% or so in the U.S. and more like 15 in Europe.

We do continue to, as you know, we've done a very good job of selling off our distressed inventory and so on the distressed side, those sales continue to come down.

We only have three outlet stores for The North Face at the end of '03 as opposed to 13 a couple of years ago.

So of course that's drag but actually quite positive.

As Mackey and Bob indicated, pack sales were certainly off in the U.S. and we don't have visibility of that for a while because that clearly is driven by back to school.

We do know we've got an array of innovative products and we think some compelling reasons why that business should rebound.

But it is a mixture of factors.

We certainly see a lot of things that can point to strength.

At the same time we have reasons for caution given the market overall and especially the performance of U.S. packs in the short term.

Fair to say you've planned conservatively, though, for outdoor, given the lack of visibility?

Well, time will tell, Noelle.

My boss probably thinks we have.

Okay.

We'll circle back with you in a couple of quarters.

But my last question would just be for Bob.

The cap ex, I think mentioned $100 million.

Right.

That's a bit of a ramp.

Can you give us a sense of kind of the big components in there or what's getting some incremental investment versus '02?

Noelle, it is a little bit of a ramp up from where we were (inaudible)very, very low.

And we have a few more significant projects primarily in the jeanswear area and mostly related to the moves outside of the U.S.

So -- and related to the restructuring actions and the closure of some of the U.S. plants ramping up some of the offshore plants of ours.

So that's really what the spend is -- what the spend is all about.

Okay.

You said that you expect to have only 5% to 10% in the U.S. by the end of '03.

Where are you at the end of '02?

We're at about -- in the range of 10% to15%.

Okay.

We're about 5 percentage points higher.

We expect to pick up 5 percentage points in terms of lowering the overall U.S. base.

Okay.

Great.

Thank you very much.

Great.

Thank you.

Our next question comes from Bob Drbul (ph) from Lehman Brothers.

Hi.

This is John O'Donnell for Bob Drbul.

I was wondering if you could just talk about given the strategic repositions you've done in your portfolio kind of going forward, are there any businesses you are in now that you are examining or is your portfolio pretty much where you see it for '03 and '04?

And then just in terms of could you talk a little more about the pricing environment of retail right now, kind of how promotional the holiday season was and how much excess inventory you think there is at retail left from the holiday season?

Thank you.

Okay.

I'll start with the second part of your question there.

The holiday season was highly promotional.

So we didn't see anything out of the norm.

It was a normal very promotional holiday season.

We don't see at this point, at least in the categories we're primarily concerned about a difficult retail situation.

Inventories seem to be in pretty good shape.

I think there are some inflated categories, jeans, intimate apparel, outdoor products seem to be in pretty good shape.

We have obviously our replenishment programs, our inventory levels are in good shape both internally and at retail.

We think it will get good response.

I wouldn't say retail performance now is extremely good.

It continues to be erratic and very, very hard to predict.

One of the reasons why the technology we have in place for managing inventories is so important.

We will continue to look at our portfolio.

We are right now focused on building our jeans, our intimate apparel, and our outdoor categories and also filling in some smaller gaps in our imagewear business that we talked about earlier.

We do feel that finding the right lifestyle brand for -- that would cover multiple categories would be an excellent opportunity for us.

So those are the types of areas that we're focusing on currently and building up our portfolio.

Within each one of those portfolios, we think there are gaps that can be filled.

These are through internal initiatives or through acquisitions.

Okay.

Thank you.

You're welcome.

Thank you, sir.

Our final question comes from Michael Thomas (ph) from Citigroup.

Hi.

I wanted to better understand about your advertising.

You said that it was up 11% in '02.

How much do you expect it will be up in '03?

As I said, we're looking at maintaining that higher level of advertising.

So relatively same level of advertising that we had in '03, with the focus on media and on our largest most powerful brands and on new product launches within those brands.

All right.

Do you have a percentage of sales you could say that is your target?

In the year 2002, we were at 4.8% of sales, so we'd expect to stay pretty close it that number.

Okay.

And then about your mass business being down 9% in '03.

Can you say what price you were selling your typical denim product in Wal-Mart at?

What is that SRP right now?

That would change.

Wal-Mart changes their pricing.

I really don't comment on pricing at retail from any of the retailers out there.

We do believe, though, that there is a lot of value out there in the five-star denim.

And going up against Levi there, we will have a price advantage to the consumer, and we think a big value advantage to the consumer.

Right.

Okay.

But 9% decline in mass in '03, that's not then a price change?

No, no.

That's not a price change.

We analyzed that by rack point and by space as well as the value of our product.

Okay.

So the 9% then is mostly calculation based on volume then?

Yes.

Correct.

That's right.

Okay.

Are you giving up any shelf space in Wal-Mart?

Yes, we are.

Okay.

Can you say what percentage you're giving up?

We'd rather not.

Okay.

But we have taken that into our plans, and that's where we come up with that 9%.

Right.

Okay.

And then about the gross margin was up due lower cost sourcing and improved capacity utilization.

Is your cost per unit, is it expected to be down further in '03 versus '02?

We are continuing to move off shore so it would be down somewhat, yes.

Not as much as '02 versus '01?

That's right.

That's correct.

Okay.

All right.

And then lastly, you said that the mass was 8% of the European market in jeans.

What is it in the U.S. roughly?

Of the overall market you're talking about?

Yeah, the denim market.

Oh, the denim market masses is usually around 32 %, 33 %.

Okay.

All right.

Thank you.

Sure.

Sure.

Thank you, sir.

Our next question comes from David Greenberg (ph) from Glen Rock Asset Management.

Thanks.

My question was asked already.

Thank you, sir.

Again if you have a question please press the one on your touch-tone telephone.

There appears to be no further questions at this time.

I would like to turn the program back to you.

Okay.

Thank you very much more for joining us today.

We're very pleased with how '02 turned out, proud of what our people accomplished in a very difficult environment.

We think '03 is going to continue to be a very challenging environment.

We got the brands, the new products, the marketing initiatives, the people and the cost structure in place to do extremely well in this type of environment.

So we're looking forward to the challenges of the year.

Thanks for being with us.

Ladies and gentlemen, thank you for your participation on today's program.

This will conclude the program.

You may now disconnect.

Good day.