威富公司 (VFC) 2003 Q2 法說會逐字稿

Good afternoon ladies and gentlemen.

My name is Paul and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the VF Corporation second quarter earnings conference call.

All lines have been placed on mute to prevent any background noises.

After the speaker's remarks there will be a question and answer period.

If you would like to ask a question during this time simply press star then the number one on your telephone keypad.

If you would like to withdraw your question press the pound key.

Thank you.

I would now like to turn the conference over to Ms. Vanessa Schwartz of FRB Weber Shandwick, please go ahead Ma'am.

Thank you.

Good afternoon everyone and thank you for participating in the VF Corporation second quarter conference call.

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

If you did not please contact Etta Henderson (ph) at FRB Webber Shandwick at 212-445-8474 and she will send one out to you and confirm your name on either our fax or e-mail list.

Starting our call today is Mr. Mackey McDonald, Chairman and CEO of VF Corporation but 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, Vanessa.

Good afternoon.

Thanks for joining us.

With me today are Chief Financial Officer, Bob Shearer and Coalition Chairman John Schamberger, Eric Wiseman, Terry Lay and George Derhofer and also VP of Investor Relations Cindy Knoebel.

Our results were better than the revised guidance that we gave back on June 13th with the sales decline of 2 percent and earnings per share down 11 percent excluding the unusual items in '02.

The primary reason for the improvement from our prior estimate was that some of the new programs that we'd planned for the second half of the year shipped earlier than we had expected.

Of course, the big news for VF is the planned acquisition of Nautica which we announced two weeks ago.

As most of you know, we've been looking for some time for the right brand to add to our portfolio and Nautica gives us a new platform in sportswear, it boosts our Jeanswear presence in department and specialty stores and we're looking forward to completing the transaction early in the fourth quarter of this year.

We've continued to field questions over the past several weeks about the overall retail environment.

We still don't see signs of a recovery in apparel spending and that's supported by the most recent report of retail same store sales which, by and large, were very weak.

With the improvement in weather, sales of seasonal goods have improved but we believe sales are still trending below planned for most of the retail customers and the pressure to reduce inventories continues.

Just as important is the high level of price deflation at retail which is being caused by severe mark downs.

However, we're pleased to report that our inventories are in good shape.

We'd planned for an increase of 10% for this year and the increase over that amount is entirely due to the effects of currency.

We believe we can achieve our union inventory targets and will be taking action in the third quarter to make sure that we do so.

We had held off updating our full year guidance until we completed the second quarter and we do feel comfortable now with our projection of earnings that are 3 to 5% higher than the 3.24 per share that we reported last year and about flat compared to the 3.38 per share figure that excludes restructuring.

This is slightly above the current consensus estimate.

Of course, we are hoping for better times ahead and a move by consumers to begin replenishing their wardrobes but we're not planning on a big turnaround.

Any uptick would be a big benefit to us.

Now, I want to give you a few words about each of our major businesses.

As expected, sales in our domestic jeans business were down in the quarter reflecting inventory reductions by our customers.

K-Mart has been particularly aggressive in this area.

A combination of much lower inventory than we had expected in their stores and the specific stores that they've closed, some of which were their better jeans stores, has been a bigger factor this year than we had expected.

We are adjusting slightly our annual sales expectations for our jeans business.

We'd indicated a 3% decline, now we expect a decline of approximately 6%.

This change is due to softer than expected conditions overall at retail impacting most of our brands and also the K-Mart impact that I referred to earlier.

Now, with respect to the Levi situation, they've only just begun to ship into Wal-Mart and we've seen no surprises yet.

We've not changed any of our assumptions related to this.

We feel very good about the array of new product initiatives that we have underway within Jeanswear.

For example, we've launched the Lee and Lee Dungarees throughout all Lemay (ph) company stores this year.

Our new Lee One True Fit program with products that features a new contoured fit for women is rolling out to 2,000 doors.

Riders continues to be one of the faster growing female brands in addition to being the number one national brand for women in mass stores.

We're also re-launching Riders with new ticketing and products designed specifically for men at K-Mart.

Wrangler is launching a new line of fashion products to drive share gains in the young men's category.

Workwear inspired looks continue to be strong and in response we're also introducing a new line called Riggs Workwear by Wrangler in specialty and sports stores.

Jeans industry unit sales are running about flat to down slightly so far this year in line with what's happening with the apparel industry overall.

However, the men's business is running down close to 7% versus last year and men's represents about two-thirds of our jeans business.

Now, let me give you a quick rundown on our jeans market shares in units for the rolling 12 months through May of '03 and this is according to the NPD data.

In total VF's share of the jeans market rose to 21.1% from 20.5%.

Wrangler's share dipped slightly to 8.9% from 9.3%.

We're pleased that the Wrangler brand remains the number one brand for men 25 plus in the industry.

Lee's share rose to 5.6% from 4.5% and is the fastest growing young men's brand.

Rider's share rose to 2.3% from 2%.

Overall good news on the jeans market share front.

On the international jeans front, we saw tougher market conditions, particularly in May and June.

However, we've seen our brand shares increase in Germany, our largest market, where Wrangler is now the market leader in men's and our HIS brand is the leader in women's.

We're also continuing to gain share in intimate apparel despite overall category weakness.

We also are enthusiastic about the new products we're launching in the second half of this year including Perfect Touch by Lily of France that incorporates a great new fabric innovation.

New stretch back products for Vanity Fair and Bestform.

Additional product extensions for our new Curvation brand which launched very successfully early this year and also a box cut and pant program from Tommy Hilfiger.

We continue to be excited about the performance of our outdoor business.

The North Face continues to outperform its competition with a 14% increase in shipments in the first half of the year.

Fall '03 pre-season bookings are up 35% versus the prior year.

Firm bookings are 75% of forecast versus 65% in '02.

We're putting additional marketing funds behind the North Face brand to support this terrific performance.

Our new A5 line is performing well at retail.

In May the newest - the North Face store opened in London.

The North Face remains the fastest growing outdoor brand in Europe with first half shipments up 32%.

Our packs business is also up in the quarter.

More importantly, early back-to-school reports are positive versus the last year and firm bookings are up 15%.

We're seeing particular strength in Eastpak which was up over 25% in the quarter and a big increase in shipments of our latest Airlift product from JanSport.

As stated in our release, sales in our Imagewear coalition were down, primarily due to continued weakness in the manufacturing and transportation sectors and reduced discretionary spending by corporations.

However, we did see a nice sales increase in our licensed sports apparel business and we expect continued strong growth in this business.

Also, Imagewear's profitability remains strong and in line with our overall financial objectives.

Now, let's hear from Bob Shearer.

Bob...

Thanks Mackey and good afternoon everyone.

Now, let's start with the sales side.

As noted in the release, sales were down slightly but better than we anticipated.

Currency was a positive force although it had less of an impact than we saw in the first quarter.

Excluding the effects of currency, sales would have been down 5%.

We've indicated that full year sales could be down slightly versus our previous guidance for flat sales.

This isn't a huge swing but it does have some implications for margins.

Gross margins in the quarter were down slightly on a reported basis but we're about flat with prior year levels if you exclude the unusual credits we recognized last year.

Gross margins will dip in the third quarter for reasons that I'll discuss in a moment but should recover nicely in the fourth quarter and, as indicated in our release, be up about 100 basis points for the full year.

Operating expenses as a percent of sales were up in the quarter as anticipated.

We expect this ratio to be flat to up slightly for the second half of the year.

Now, early in the year we indicated that we hoped to reach a 13% operating margin.

With the factors discussed above, we believe operating margins will now be slightly below prior year levels.

Now, I should make it clear that I'm basing this comparison on a 2002 operating margin of 12.8% which excludes restructuring.

On a reported basis, operating margins will be relatively flat.

With respect to our outlook for the third quarter, we did indicate that we could see an additional $25 million in expenses.

Most of this is related to actions we'll be taking to keep our inventories, capacity and costs in line.

We also have assumed that the exit of our playwear business, while positive from a cash point of view, could result in a one-time expense of about $7 million.

The combined impact of these would approximate 15 cents per share in the third quarter.

The good news is that we can absorb these expenses and still wrap up the year with earnings per share flat with 2002 levels on an apples to apples basis or up slightly when compared to reported earnings of $3.24 per share.

Net interest expense declined slightly and, excluding the Nautica transaction, we continue to expect that interest expense will be down about $10 million in 2003.

A decline in our tax rate to 34.7% also helped in the quarter.

We did suspend our share repurchase program in the second quarter due to the Nautica transaction.

Year-to-date, we've purchased 1.7 million shares.

Over the next several quarters our focus will be on reducing debt levels and we would hope to resume our share repurchase in the middle part of next year.

Of course, we recognize there's a lot of interest out there about VF, what VF and Nautica will look like combined so I'll reiterate what we've said to date.

We expect about 10 cents accretion in 2004.

And we expect that even with additional borrowings I would expect our debt to capital ratio to be just below 40% at the time of closing and between 30 to 35% at year end.

We believe Nautica can reach our operating margin and return on capital goals of 14% and 17% respectively over a three to five year period.

Once we close the transaction, we'll obviously provide you with more details.

Our balance sheet remains in great shape.

Debt as a percent of total capital was 27.5%.

Net of cash, the percentage was 20.8%.

And the decline in cash flow from operations was largely influenced by the increase in inventories as well as a $75 million contribution we made to our pension plan in February.

To reiterate two other points of guidance, capital expenditure should approximate 100 million this year while depreciation should also be about $100 million.

OK.

Thank you, Bob.

We would like to keep the focus of our comments today on the financial results and our outlook.

But, of course, we are very excited about Nautica.

At this time we don't have a lot to add to what we said on the July 7th call but we would be happy to take your questions on this or any other matter.

So we'll open it up for questions now.

As a reminder, ladies and gentlemen, if you would like to ask a question press star then the number one on your telephone keypad.

Again, that's star then the number one.

Your first question is from Dennis Rosenberg with CSFB.

Hi, guys.

Hey, Dennis.

Hey, Dennis.

The 25 million of expenses, the 25 million includes the 7 million for Playwear; is that correct?

That's correct.

Now, is that 7 million a charge or is that going to be included in SG&A?

How are you treating that?

Well, we'll treat it - and, again, we're not treating it as a charge.

I mean, it'll be actually, most likely, in the line of other.

Other impacts outside of SG&A.

Again, we expect in the third quarter.

OK.

But it would relate to the actual sale so it would be a loss on the sale of the assets.

Loss on the sale.

You're right.

The difference between the assumed purchase price or selling price and the value of the assets.

OK.

And when you talk about earnings for this year being roughly in the 3.38 range, that's including the ...

That's right.

... $7 million loss?

That's right, Dennis.

Yes.

OK.

Could you quantify the early shipments in this quarter?

You indicated that you beat the number ...

No, we can't put a specific value on it.

Mostly in the Jeanswear side, some programs there.

Yes, I think what we've brought (ph) at the end of the month of June, some might flop over into July and basically just about every one came out at the end of June, so we were pretty pleased with it.

OK, and when you do think you'll have a resolution on the playwear?

Well during the third-quarter, we do expect resolution in the third-quarter.

And what does playwear contribute -- or what is it contributing on an annual basis currently?

In terms of ...

Loss or profit?

Yes, profits are -- it's just about neutral.

OK.

And what about sales?

About $170 million.

OK.

Thank you.

Your next question is from Robert Drbul with Lehman Brothers.

Good afternoon.

Hi Bob.

Hi Bob.

Couple questions.

I guess first, on the inventory levels, Mackey, I guess to you first and then maybe we can more segmented comments.

I was wondering if you could help us get an understanding in terms of when you look at the inventories in your categories at retail today in the different channels, can you maybe flush that out a little bit more in terms of where you think they're still work that needs to be done?

And then within your own inventory levels, how your positioned, where you do have more versus less in each category.

Well, as we said, we did increase our own internal levels to about 10% this year in order to service the business, so we felt like we had very low levels at this time last year, so we had planned to do that.

And we're about where we thought if you take out the currency impact which had another 5% impact.

As we look at retail, there's been a consorted effort across the board and you see it everywhere from department stores, chains, through the mass channel of reducing inventories because of how unpredictable this environment is.

We have seen certain customers just get extremely aggressive, particularly those that are having financial problems and that's where you'd see the biggest impact.

But I'd say, other than that, we've seen significant reductions across the board.

We feel at this point in time that levels of inventory are about right for what is a reduced consumer shopping that's going on currently, so any kind of up-tick in consumer shopping should have a positive impact on our shipments.

As compared to what has been a negative impact, we've actually been shipping less than actual sell-throughs at retail.

Just as a follow-up, another question would be, around -- can you maybe talk a little bit more about the new line in target that you have been reading about a little bit?

Yes, this is John Schamberger.

It's very similar to the Riders product that we have out there right now.

It might be a little bit upgraded in fabric and finish.

It's blue jeans from the makers of late.

It's very similar to Riders in the makers of late that we have out there right now.

Again, when you take off the paper patch in the back there, it would be a blue jean brand just like when you take off in Riders, it's a Riders brand.

But that has gone out.

It's in Mens, Womens and Childrens, and we look for that to grow in the next six months.

OK.

Great.

Thanks John.

Thank you.

Sure.

Your next question is from Jeff Edelman with UBS.

Thank you and good afternoon.

John, if I could ask you another follow-up question on jeans.

With the market down about 7% in units, is it your feeling that the jeans' share of total consumption is off a little bit this year.

Yeah, I would look at the total market, it says it's down about 1% or so, our gut, if you talk to some of the presidents of a marketing companies in Jeanswear, they would say, probably the jean business is down a little bit more than that.

So I would say consumption would also be down a touch.

But if you compare it to the overall apparel category, we think apparel consumption is off as well.

Basically what we're seeing, we're not seeing the Jeans business declining more than apparel is, we think it's across the board apparel expending.

And as a result, we aren't concerned about that category, particularly.

When we say apparel spending pickup, we would expect similar pickup on the jeans.

Okay, then secondly, do you think the retailers have permanently brought their inventories down to a much lower faster turn level, so when business does recover you'll probably get the first shot at a pickup in business that will be in line with retail sales rather than rebuilding of inventory?

Well, what we've seen is in order to accomplish this they reduce their model stocks, the amount per size that they had in stock to support the consumer take out and to keep their, in some cases 95 to 99% in stock target, they've reduced the model stocks.

Assuming that they go back to, expecting to stay in stock in the same levels they were before, they'd have to increase the model stocks back up again, and therefore we would see more shipping in and taking out.

Actually, what happens though, I say they'll continue to be very conservative about what they bring in until they really feel that there's a strong turn around in apparel spending.

Okay, but with your ability to deliver quickly, they can keep these model stocks low going forward.

They can keep them low, but at the same time there is a tradeoff with the actual in stock levels.

So these model stocks were created to keep them in stock, particularly in the high volume sizes.

So there would have to be some increase buildup to have the very high levels say, 98-99% in stock.

Okay, thank you.

Sure thing.

Your next question is from Noelle Grainger with JP Morgan.

Good afternoon everyone.

Hi Noelle.

Hi Noelle.

Just back to the early shipments on the Jeanswear side John, do you view that as incremental, or have you kind of taken that out, and is that part of what contributes to, down 2% on the topline for the third quarter?

It would be incremental, I think maybe we were a little conservative saying that the last week the way we feel was going, that, maybe some of those shipments would not go out the last week of June, it would go out the first or second week of July, and we were pleasantly surprised that it all went out the last week of June.

Just about every single one of low end.

And on the, I think, the comment that you made about the jeans market being down 7%.

If I heard correctly, I think that was on menswear.

That's basically, men's 14 plus or men's 25 plus, either one.

What would you attribute, the significantly weaker performance in the men's jeans market relative to the overall jeans market.

Do you see, as you obviously play in some of the twill categories as well, do you see your twill trending up, i.e. no kind of khaki cargo, or what do you think is happening there?

Yeah, we have seen a slight uptick in the cargo and carpenter khaki type of product.

But overall, I'd say just the economy, the service economy, that's not doing so well, so usually there's a basic -- jeans, you do see a little dip, when the economy isn't doing that well.

Okay, are retailers at this point, I'm not clear if you're seeing them still reduce their own inventory on hand and their model stock positions.

Has it kind of stabilized at this point?

I would say they've kind of stabilized.

We haven't, and it depends on the account, some accounts will still be going down a bit, but I think we've seen most of the inventory at the level that it should be right now.

Okay, and then my last question, would this be for Bob, in terms of what your full year guidance would imply for the fourth quarter, it's a pretty significant year over year earnings increase.

Certainly double digit from around 20%.

Can you just give us some better clarity on what you view as the growth drivers there and I'm curious if your assuming, given the comments that you made about the playwear expense in the third quarter, if that has any kind of impact on the elimination of that business, would have a positive earnings impact for the fourth quarter?

Yeah, Noelle, it's really not related to the Playwear side.

What it's related to is primarily in the gross margin area.

Last year we had some downtime in the quarter and this year we expect the quarter to be clean.

So really the biggest impact is in the gross margin area.

There were some other expenses on the SG&A side as well, some bonuses that we granted across the company that were recognized in the fourth quarter last year that we don't expect to see this year.

So there's a couple factors like that but the biggest factor I'd say is up in the gross margin area we expect to see improvement there and it's because of what occurred last year versus what we expect to see this year.

Okay, thanks a lot.

Your next question is from Mary Ann Pavlis with CRT Capital Group.

Just clarify further your perception of Levi competition at Wal Mart, do you have any additional market data?

We don't have any additional data, it's just gone in and we can't really give you specific information on a retailer.

There's obviously a lot of sensitivity from our retail partners about what we say about actual sell throughs at their stores, so we're limited in what we can actually say about.

But the Levi product is in; it's been in a few weeks, it's still early to see it.

And we would say there's no surprises on the product or the pricing that's gone in right now.

Okay, thank you very much.

Again, ladies and gentlemen, press star and then the number one if you do have any questions or comments.

Your next question is from Edward Guinness with Heidman.

Quick question, I'm afraid I missed the first couple of minutes of the call, but just to reiterate, when do you expect the [Inaudible] deal to close.

Right at the end of the third quarter or early fourth quarter.

In other words, right at the end of September or early October is the expectation.

Thank you.

Again, ladies and gentlemen, star, then the number one.

You have a follow up response from Jeff Edelman with UBS.

Thank you.

Bob, when you finally get rid of the Playwear business you will then be reporting on a continuing operations basis.

Actually we don't think the - we'll be able to use that accounting treatment, Jeff, so that will all stay above the line.

OK.

So, for purposes of going forward, we'll just eliminate the sales and then you said zero impact on profits, but ...

Right.

... we should extract out that $7 million cost.

Will there be other cost that would be kind of above the line?

Related to playwear?

Yes.

No.

OK.

Fair enough.

Thanks.

Your next question is from Liz Dunn with Prudential.

Hi.

I just had a question on acquisitions.

Obviously with this Nautica deal, it's taking up a bit of resources.

What is your attitude towards acquisitions going forward and your ability to execute acquisitions both from a, you know, financial capacity and management time?

Well, we will continue to evaluate options.

This does obviously raise the debt ratio, but it's still - we're still well within our range of where we would like to be.

And we'll have a very strong cash flow, so we'll be paying it down fairly quickly this year.

So we'll continue to look at options.

We continue to be very thoughtful and prudent in what we look at, both from a financial impact on our debt levels as well as what kind of returns we're going to get.

We're still looking at acquisitions in the outdoor category.

We did fill very well the lifestyle brand [Inaudible] both on the sportswear category as well as the jeans category, but we still like outdoor brands, intimate apparel brands, and the right kind of Jeanswear brands, particularly if they have global impact on our business.

So, we'll continue to be as prudent as we have been.

We don't think we're shut out currently, but - so we'll continue to look at opportunities.

Is there anything within the agreement with Nautica that precludes you from doing another acquisition in the status denim space?

No.

OK, great.

Thanks.

OK.

Your next question is from Jack Stickler (ph) with Thomson Siegel.

Good afternoon.

Hi, Jack (ph) .

Hi, Jack (ph) .

Bob, have you got a guess on the tax rate - it was down a little bit in the quarter - where it's going to be for the year?

Yes, it'll be pretty close to where you saw it in the quarter, Jack (ph) .

OK.

And is there anything in the receivables being up as much as they were?

Is that tail-end of the quarter shipping or what?

Actually it's mostly currency - almost the - almost the entire increase from a dollar standpoint is related to translating foreign currencies into [Inaudible] dollar.

OK.

And I have a question for John.

John, actually about an hour ago, I was over at a Target store, and quite frankly, I was surprised how much product you guys have in there in addition to the Blue Program.

Is there anything incremental at Target stores besides the Blue Program?

Well, we really try not to comment on individual accounts, but I will tell you we have done great business with Target for many, many years.

And obviously we have the Wrangler brand in there and we have the Legendary Gold by Rustler in there, and we did launch a casual pant program early this year that's doing extremely well for them.

So, we do see, obviously, some incremental business, obviously, with the Blues Program.

Right.

OK, thanks.

Your next question is with Sean Fridekin (ph) with 20/20 Fund.

Yes, hi.

I appreciate your taking my call.

I was hoping to get some assistance on the full-year estimate of 338 (ph) .

How does that play out for the fourth quarter?

On the pre-announcement of a possible 15 to 20% drop in the net, is that putting fourth quarter number at around 95 cents a share?

Yes, it shows - it shows - again, if you do the math, it's somewhere around that.

Yes, and I don't know if you heard some of the comments earlier, but we do expect a stronger quarter than we saw last year.

Number one, we don't expect to see any capacity adjustments like we're seeing in the second and third quarter, and there were those kinds of adjustments in the fourth quarter of last year.

Is that if - I guess that's about a 30% or 33% increase from a year ago on a quarterly number.

That would be something like that.

Somewhere in that ballpark.

Yes.

OK.

One other question - I know you've commented a bit about the Wal-Mart and I don't want to beat it.

But I've done a lot of sightseeing at a lot of different Wal-Marts, and I was a little surprised to see lately it appears that there is some discounting going on on the product lines.

Is that - is that something that you guys are seeing or hearing about at all?

We're not seeing anything abnormal from Wal-Mart.

They do have their regular discount programs that they have in place.

I think obviously all retail is very promotional right now.

Wal-Mart's always, you know, been aggressive in promoting, but nothing unusual.

OK.

And as far as these early shipment programs that ended up going out at the end of the quarter, that - you don't see that having any impact on Q3 or Q4?

That's just special programs you put out?

Or ...

Any impact would be included in the guidance that we've given for the third quarter.

OK.

Terrific, thank you.

You have a follow-up response from Noelle Grainger with J.P. Morgan.

Hi.

Eric, I was hoping maybe you could comment on kind of the weakness in intimate apparel.

Could you give us a sense of what the market's doing as far as what you see at this point?

And has the competitive landscape changed at all or do you just think, you know, it's part of the overall apparel malaise at the moment?

Thanks, Noelle.

I - I'll make a couple comments.

One is the NPD (ph) data that we get suggests that the total market is down about a half a point on last year, and we don't believe that that accurately reflects - and that's from their panel data.

We're not sure that accurately reflects what we hear from our customers in the market, which I can't get into specifically.

We think it's a little bit worse than that.

From the competitive standpoint, there are no real changes.

We - as our release says, we've continued to gain a little bit of share both in department and chain stores, and we're doing a little bit better than the market but not as good as we'd like to be doing.

OK.

Does that answer your question?

Yes, it does.

Thank you.

There are no further questions at this time.

I would like to turn the conference back over to management for any further comments or closing remarks.

OK.

Thank you for joining us today.

We feel good about having some very solid brand share numbers, our inventories are in good shape, the new product we've launched looks good, and we are very hopeful for the second half of the year that the shoppers will be back at retail and selecting our products.

Our costs are in good shape, we're very excited about adding some great new brands and categories to our portfolio, so we feel we're well on track in building shareholder value.

Thanks for being with us.

Thank you, ladies and gentlemen, for your participation.

You may now disconnect at any time.