威富公司 (VFC) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

At this time, I would like to welcome everyone to VF Corporation's third quarter earnings conference call. (OPERATOR INSTRUCTIONS).

I would now turn the call over to Ms. Vanessa Schwartz, Financial Relations Board.

Thank you, very much.

Good afternoon, everyone.

Thank you for participating in the VF Corporation third-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 at Financial Relations Board at 212-445-8474, and she will send one out to you and confirm your name on the fax or e-mail distribution list.

Starting our call today is Mr. Mackey McDonald, Chairman and Chief Executive Officer of VF Corporation.

Before we begin, I would 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.

With that, I'd like to now turn the call over to Mackey.

Mackey.

Good afternoon, and thank you for joining us.

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

I'm pleased to report that we did better in the quarter than the guidance we gave back in August at the time that the Nautica acquisition was completed.

The reasons for this was first, we saw stronger sales in the quarter, particularly in September, reflecting the general better than anticipated September comp store sales that were recently reported.

Second, a higher than anticipated earnings contribution from Nautica.

We'd expected a very minimal contribution from having just one month of results from Nautica in the quarter, but in fact saw a 5 cent contribution in earnings per share.

We've owned Nautica for less than two months, but we continue to feel very positive about the brand and its prospects.

Eric Wiseman, who was named the Chairman of our Sportswear Coalition, will provide an update on Nautica during this call during this call today.

Third, there's a lower than anticipated impact from expenses related to capacity adjustments to control inventories, which Bob will cover in a moment.

This helped earnings per share versus our previous guidance.

We also did not recognize any loss related to the disposal of our playwear business in this quarter.

Because of the improved third-quarter results, we've increased our guidance for the year.

Instead of a 5 to 7 percent increase in earnings per share, we are now looking for an 8 to 10 percent increase.

In sales, we are staying with our expectations for a 3 percent increase.

This implies a very strong fourth quarter with sales up 8 percent, and earnings in a range of 85 to 90 cents per share.

Now I'd like to talk a little bit about each one of our businesses, starting with our jeanswear business.

As mentioned, (indiscernible) domestic jeans business fared better in the quarter than we had anticipated.

This is true for our mass-market -- Lee and Western businesses.

We are very pleased with our performance in back to school.

Earlier in the year, we had indicated that we'd expected about a 9 percent decline in sales in our mass-market business due to the entry of a competitor into the mass-market and a number of store closings by Kmart.

We still expect this to be the case, however, the competitor impact is less than we had anticipated, while the effect of store closings have been greater than expected.

In fact, through the first nine months of the year, our sales with our largest customer, Wal-Mart, are flat to down only slightly.

Our brands continue to outperform overall department sales in the mass channel.

In fact, our August and September '03 shipments in units exceeded those in '02.

Our terms are improving to single to low digit sales increases through back to school.

We believe we are leading the jeans department in sell-throughs with all of our largest mass-market customers.

We're seeing particular success with our Wrangler Five Star Premium denim and fashion programs.

Fashion, which represents about 15 percent of our business, is up 30 to 40 percent in some cases.

Our Riders women's business is also continuing to perform.

The Lee brand continues to hold the number one share position for women 25 plus.

And we're building on this position with the recent launch of our new One through Fit (ph) program, which has gotten off to a very strong start with our top customers.

Our Lee men's business also continues to outperform the competition, recently rolling out to May Company stores.

Normally, we provide an update on our jeans market shares; but we've learned that NPD (ph) is recalibrating their share data, both for jeans and (indiscernible), and we don't at the present time have the data that we can present as accurate.

We're looking within NPD with this and we will have more to say next quarter about this.

On the international jeanswear front, the European jeans market remains challenging.

Exceptionally hot weather conditions in Europe during the summer led to soft sales and has increased retailer caution.

However, we did notice significant pickup in sell-throughs in September.

The premium branded sector, which is where our brands generally compete, continues to outperform relatively well in those markets.

We're pleased to report that our Wrangler brand has now achieved market leadership in men's jeans in Germany, the largest market in Europe.

We're also looking forward to the opening of our new Lee concept store in London in late November.

In addition, we're seeing very strong response to the spring/summer offerings for our mass brands.

In the outdoor sector, the strongest performing coalition during the quarter, was the outdoor coalition, driven by exceptionally strong growth of the North Face brand here in the U.S., and by all of our outdoor businesses in international markets.

Despite generally flat market conditions, the North Face continues to outperform its competitors.

A focus on market-right product innovation has resulted in more than half of the '03 sales being generated by new product margins.

All product categories are growing.

And spring '04 prebookings are 23 percent ahead of last year.

We're seeing a similar order pattern in Europe, and are on track with our plans to expand our presence across Europe.

The back to school season got off to a slow start in our patents business, but has improved in September and we are expecting a better fourth quarter.

JanSport remains the leading brand at retail, and we're seeing particular success in shoulder and swingbags (ph), as well as continued strong performance from our Airlift line of daypacks.

In intimates, our mass and department store businesses are about flat year-to-date with a decline in our smaller private-label business.

We are encouraged by the response to new product introductions in both actions our Vanity Fair and Lily of France brands in department and chain stores.

These successful new product launches delivered 50 percent growth in Lily of France this quarter.

Driven by new products, packaging, point-of-sale and advertising, our biggest mass-market brand, Vassarette, has turned around, with the fall season to date sales up with our biggest customers.

Our newest brand, Curvation, is exceeding its annual sales plan and expanding space, assortments and distribution for '04.

We began to extend the reach of Curvation through licensing agreements in sheer hosiery and socks.

In Imagewear, our licensed sports apparel business, continued its strong momentum, and we expecting a double-digit sales gain again this year, driven by the strong sales of NFL products, big games and our mass-market business, and the addition of the Harley-Davidson license.

Our traditional workwear business continues to be somewhat soft due to weak employment conditions, particularly in manufacturing and the continued vertical expansion by many of our large customers.

Also, our corporate casual business was impacted by tough industry trends and lower channel pricing.

On the other hand, we are continuing to evolve our one-stop shop model to offer a broader portfolio of brands, products and services to an expanded customer list.

Overall, or Imagewear coalition registered higher operating income and continues to deliver strong returns on investment capital.

Now I'll turn it over to Eric Wiseman to talk about our progress with Nautica.

Eric.

Thank you, Mackey.

Let me begin by saying we are extremely excited about the prospects for the Nautica business for all the reasons that we mapped out when we announced this acquisition.

There are tremendous opportunities for the brand.

And Nautica will serve as the foundation for our newly formed sportswear coalition.

While Nautica has only been part of V.F. for two months, we are encouraged by our progress, and I will update you on the comp (ph) initiatives that we have been focusing on during this time.

These can be summed as first, communication; second, identifying leverage across V.F.; and third, building our plans for the future.

In every acquisition, internal and external communication is a top priority in the first few months.

Nautica is no different.

At Nautica, this has included face-to-face meetings with all Nautica employees, sharing with them our game plan for the business, and inviting them to be engaged in our future.

The other critical communication has to do with every licensee and major supply partner as well as with Nautica's department store customers.

Mackey and I have either met with or have been scheduled with every major customer.

These meetings have been very productive, and have given us the opportunity to collect feedback, gain insight on industry dynamics, and share our thoughts and vision for the business.

And we have been building a senior management team, and I'm confident we have very strong leadership in place.

As already know, David Chu is reengaged in the business.

And as CEO, is responsible for the Nautica brand worldwide.

Bob Cordaro, who is currently the Vice President and Controller for the VF Corporation, was recently appointed CFO to the V. F. Sportswear Coalition.

Bob has been with V.F. for 18 years, and has also headed up the integration activity.

The balance of the Nautica executive team remains in place, and is focused on Nautica's future.

We have also been identifying leverage opportunities across V.F., and we think there are many opportunities to capture benefits going forward.

We've already recognized cost savings in areas such as insurance, information technology, and purchasing.

We have identified key areas where we expect to see gross margin improvement.

The first is leveraged sourcing structure in Asia, which will lead to a reduction in product cost.

Another is using V. F. supply chain tools to more accurately plan and forecast the business, which should result in improved inventory control and fewer markdowns.

Furthermore, by partnering with V. F.'s international businesses, who are evaluating growth opportunities for the Nautica brand in jeanswear and sportswear in Europe, and in other markets.

Looking toward the future, stabilizing and rebuilding the Nautica men's sportswear business is our number one job, and we've taken many steps to ensure that this happens quickly, beginning with our focus on product development.

David Chu, who began his active reinvolvement in the business prior to the acquisition, has been working very closely with the design team on product and merchandising changes that better reflect Nautica's heritage.

Our fall 2004 season will be the first collection that incorporate these changes, and our retail partners will be previewing that line this coming January.

We're confident we're making the right improvements, and we are planning to invest in fall 2004 marketing to communicate the new products to our consumers.

Getting Nautica to the next level will be a combination of this new product direction and V.F. skills at consumerization.

By that, I mean developing an in-depth understanding of who the Nautica consumer is, what makes them buy, how they connect with the brand, and what we must do to deliver to their expectations.

This knowledge will be the platform we use to identify the product categories and markets we will target to grow this business.

In conclusion, we have accomplished a lot in a short period of time.

We are thrilled to have Nautica as part of V.F.

The Nautica brand has great equity with consumers, and strength in key areas such as men's jeans, and sleepwear, both of which are trending ahead of last year, and ahead of our expectations.

Looking forward, as we execute our plans, we remain focused our top five priorities.

These are first, stabilizing the Nautica men's sportswear division.

Then growing Nautica men's jeans and developing the Earl Jean brand; addressing the underperformers, which include the Rockefeller Plaza stores and women's jeans, and launching the woman's sportswear business.

With that, I would like to turn the call over to Bob Shearer, who will now cover the financials in more detail.

Thanks, Eric.

Good afternoon, everyone.

As you saw in the release, sales were up 3 percent.

If you'll recall that our earlier guidance had been for flat sales.

In fact, we saw slightly better than anticipated sales across all our core coalitions -- Jeanswear, Global Intimates, International Jeanswear, and Imagewear.

Now there was some shift in sales from the fourth quarter into the third, which is one reason why are holding the line on our fourth-quarter sales expectations.

We also pointed out in the release that currency continues to be a positive for us.

Excluding the effects of currency, sales would have been about flat.

Gross margins dipped in the quarter from the exceptionally strong levels we saw last year.

But this was largely a function of the actions we took to keep inventories in line.

Operating expenses were up in both dollars and as a percent of sales.

Excluding Nautica and foreign currency impacts, SG&A would have been down slightly.

In the second quarter, we noted that expenses related to inventory control actions, plus the loss we expected to recognize from the sale of our playwear business, would total $25 million or 15 cents per share.

In fact, these expenses were $12 million, or 7 cents per share.

There were two reasons for the much lower than expected number.

First, we kept some jeanswear production longer than we had originally anticipated, and therefore, ended up recognizing less severance than planned.

Second, we had expected to recognize a loss in the disposal of our playwear business of about $7 million.

As indicated in the release, we did not complete a transaction in this quarter, so we did not recognize a loss.

We're continuing to consider all alternatives for this business.

But as stated in the release, we now estimate that the loss, if we do exit this business, could be somewhat greater than $7 million.

The actions related to inventory control contributed to a decline in operating margins in the third quarter versus the very strong margins reported last year.

For the full year, we continue to expect that operating margins will be flat with the 12.2 percent reported in 2002.

This implies a strong increase in operating margins in the fourth quarter, driven by improving gross margins.

Interest expense was down in the quarter due to lower debt levels before the acquisition date, and the low rates on the commercial paper we used for the initial financing of the Nautica acquisition.

Also, last year's interest expense included a $5 million call premium related to the early retirement of debt.

We previously indicated that interest expense for the year would be down by about $10 million from prior year levels.

The decrease should be closer to $6 million due to the acquisition.

As you saw in the release, we recently completed a $300 million 30-year debt offering at a 6 percent rate.

Proceeds were used to repay the outstanding commercial paper borrowings incurred as a result of the Nautica acquisition.

We expect to repay the remaining amount of commercial paper during the fourth quarter with cash flow provided by operations.

Accordingly, we expect the ratio of debt to total capital will range between 30 percent and 35 percent at the end of 2003.

In terms of next year, those of you who follow us know that we provide guidance at the time of our fourth quarter and full year earnings release in February.

We've said that Nautica could add at least 10 cents per share to our earnings next year.

This may seem to be at odds with the fact that Nautica should contribute 8 cents to 10 cents per share this year; but it is important to recognize that we picked up Nautica during the strongest part of their year.

In fact, the Nautica acquisition is expected to be breakeven to slightly dilutive in the first half of the year with the accretion occurring in the second half.

Now back to Mackey.

Okay, thank you, Bob.

One final item.

We're also pleased to report our 13th consecutive year of dividend increases.

We are proud that we can offer our shareholders a yield that outprices not only our competitors, but the overall market as well.

Now we will open up to any questions you may have.

(OPERATOR INSTRUCTIONS).

Dennis Rosenberg with First Boston.

Good afternoon.

Congratulations on the good results.

Can you talk about how did Nautica contribute a nickel in this quarter when you had it for only one month?

Yes, Dennis.

We were a little cautious in the estimates at the time of our last guidance; it was obviously upon the date of the acquisition.

And just relative to markdown issues and that type of thing, we just thought it was prudent to be cautious at that point.

So there's no one area that was significantly better necessarily than expectations;

I think we were just being a bit cautious.

In for one month, and you were originally looking at a 5 to 8 cent contribution in the fourth quarter.

So if it's a 5 to 8 cent contribution in the fourth quarter and a nickel in this quarter, it seems like you're still being a little conservative on your estimate for the year?

Well, as we made -- the point we just made was, obviously that month was a very, very strong month.

The timing of the acquisition was very good.

We've indicated for the full year, the 8 to 10 cents.

So that implies a number similar -- 3 to 5 cents for the fourth quarter.

So again, the timing was good.

So 3 to 5 cents in the fourth quarter is lower than you originally said.

It's close.

It's close to what we originally said.

Okay.

Okay.

And how much sales would you say shifted from the fourth quarter to the third quarter?

This is John Schamberger.

In jeanswear, we saw that shift particularly with the Lee Company and a little bit with Wrangler.

Again, it is based on great September sales.

We saw some of our replenishment items picking up.

So there was a shift now.

Was it a little bit more than normal?

Yes, we always had some shifts back and forth.

But I wouldn't quantify it right now.

And it was just in the jeanswear?

Dennis, this is Eric Wiseman.

There was a very small amount in intimates.

Less than one percent of the sales in intimates for the quarter.

Okay.

Because if I look at Nautica contributing $180 million in the fourth quarter, and if I look at an 8 percent increase in sales for the fourth quarter, so that would give you 1414 minus 180 would be 1234 down from 1310 last year, X-Nautica.

Is that what you're looking for?

It will be.

Right.

In the guidance, there's the expectation that there could be -- there would be some reduction in the core businesses during the fourth quarter.

That would represent a 6 percent reduction in the core businesses in the fourth quarter.

And based on the regional guidance you gave before Nautica, the implied reduction would've been about 1 or 2 percent.

And you're saying business conditions are getting better.

So could you reconcile that?

I tell you, Dennis, it is very hard to forecast retail.

We did see weather change; cool weather came in; as it seeded up, it's changed and gotten soft again.

So what we are basing our projections on continues to be where we were, going back earlier this year.

And that is that retail does not have any momentum.

It continues to change month to month and week to week.

So we think this condition, until consumer confidence sees some really significant improvement, is going to continue to be a very spotty situation.

So we were reluctant to build our inventories and our operating forecast up significantly until we are more confident that there is a real strong rebound in sales.

Just two other questions.

You're estimating operating cash flow with 350 million now; at the end of the last quarter, you were estimating it at 350 to 400.

Why down to the lower end of the range?

It just looks like right now, based on what we see, it could be closer to the 350 than the 400.

So we're just trying to refine it somewhat.

Again, there's no significant factor there.

Just a refinement of the estimate.

The other expense -- the other income of 9.4 million; what was that?

Bear with me.

Generally, in the other income area, our royalty -- there is royalty income, Dennis.

Thank you.

Your next question is from Ron Phyllis with Banc of America Securities.

This is Brian Park for Ron Phyllis.

First of all, what is your sense of just the overall denim market right now?

In general, we see the denim market to be flat to down a little bit.

I think we see (indiscernible) up on the men's category, that to be down a little bit more than say the women's category -- women's 25 plus.

We do see a little weakening in the junior's market.

We want to say ages 14 to 20.

That was a hot market for the last two or three years.

We see that coming down a little bit.

So in general, we say flat to down.

Okay.

And also, been hearing stories that Levi might go into other mass retailers with their Signature brand next year.

I was wondering if you guys have heard anything about that, like for example, going to Target and competing with your blue line there?

Just concerned that you guys might have (indiscernible).

Heard anything about that?

We wouldn't comment on what a competitor is going to do or what another retailer might take on as a brand.

But I can tell you that right now, we are very productive in Wal-Mart at the rack points that we have.

In fact, we are more productive than we were last year with our Wrangler Five Star denim and our Riders program in women's wear.

Okay.

And you said that the impact from Levi's was less than you thought.

Is that just the growth of the overall apparel category at Wal-Mart?

Or is that Levi's not doing as well as they are?

Or you guys performing especially well?

I mean, what is the breakdown on that?

Right now, we would just comment that we think we are performing especially well.

We think we have some great quality products out there, especially in our Wrangler Five Star.

And again in women's wear, we are doing extremely strong there.

We are just having a good year, not only at Wal-Mart; but if you look at Target with our Legendary Gold program, our Luster (ph) program there, and our Wrangler program at target.

Okay.

Do you guys feel like the denim -- the apparel business at mass retail is growing with you guys, kind of?

Or are you guys not getting that sense?

Are you guys taking share away from other people?

(Indiscernible).

We can't really judge that.

I would say right now, we think, in some cases, we are taking share in the men's category and the women's category in the mass channels.

We believe that.

Jeffrey Edelman with UBS.

Thank you, and good afternoon.

Really four questions.

One, Bob, were there any purchase accounting adjustments with the Nautica acquisition?

Were there any purchase -- you mean that impacted the quarter?

Correct.

No.

Okay.

Because usually when companies have made acquisitions, they have written the assets up, which have tended to mitigate any gross margin pickup in successive quarters.

That's what I was relating to.

No.

We didn't have any significant impact from purchase -- opening balance sheet adjustments.

Okay.

Secondly, how could Kmart how could the store closings have had more than a negative impact than you thought?

Did you not know all the stores that were going to be closed?

At the beginning of the year, we really didn't know how many stores were going to be closed.

And obviously, the first quarter of this year and going into the second quarter, they did close probably about 100 stores more than we thought they were gong to close.

That's also been a combination too that they're obviously watching their inventory very sharp, which they have to do in their case.

Okay.

And then John, also, I noticed price rollback signs on Wrangler's at Wal-Mart.

And usually when they have done this, it is really through working out a deal with the supplier to cut something off.

Was this the case there?

We wouldn't comment on our relationship to Wal-Mart in a particular category or rollback.

That's obviously between ourselves and Wal-Mart.

Okay.

So that's at least what was out there.

Okay.

Then I guess finally for Mackey.

If I look at the prior guidance, or sort of working back on what we had to the fourth quarter, after the last conference call, and we look at some of the benefits here from a little bit of a pickup from Nautica, it looks like there has been sort of an erosion in fourth quarter guidance of about a nickel.

Are my calculations wrong?

Or is there some extra conservative stance built in here?

Well as I said earlier, we remain very cautious about the overall retail environment.

It's very hard to quantify any kind of movement of sales.

The one thing that happened this year is the weather cooled off earlier; people went in and bought seasonal apparel earlier.

Whether that's going to affect the fourth quarter or not, we don't know at this point.

So I would say yes, we're feeling cautious about it; but we feel like we have plenty of reason, because the retail environment continues to be very erratic, with very strong weeks sometimes and then some extremely weak weeks as well.

So we just feel that we are certainly planning correctly to be cautious as we go into the fourth quarter.

There's nothing that we have any knowledge of anything other than retail sales.

So that is what we are basing it on.

Okay.

Then, are your inventories by group in line with your conservative sales forecast?

Yes, Jeff.

We can tell you that we're making progress in the inventories.

We talked a lot about that in the last quarter and also the release.

As you know, we are working toward getting our inventories about flat by the end of the year.

We made a lot of progress toward that in the third quarter, and we expect to be there by the end of the year.

So yes, we are getting to where we need to be.

Okay.

So we will still see production cuts unless there is a pickup in sales?

Well, I don't know I'd say production.

When you say production cuts, I wouldn't say that.

As we manage the inventories through the fourth quarter, we will have more normalized levels.

Okay.

Fair enough.

Thank you.

Your next question is from Noelle Grainger with J.P. Morgan.

Good afternoon.

A couple of questions.

Bob, on Health-Tex, do you still feel that pursuing a sale is the right strategic decision?

And, what would you kind of put as the likelihood at this point in time of something like that happening in the fourth quarter?

I can't really comment on the likelihood.

You know, we were pursuing the sale; and of course, we continue to believe that that is the right alternative for playwear.

But the point is not at any cost.

That's really what it comes down to.

So it is a little hard to say what the likelihood is in the fourth quarter.

Just as we said in the release, we will continue to look at any and all alternatives.

Is it right for me to think if you are now saying it could have -- once you do sell (indiscernible) happens at some point that you might have a bigger than previous loss -- that the business is continuing to be quite weak?

I will tell you why we said that all, Noelle.

In the last communication we indicated that we expected about a $7 million loss.

With the group that we were negotiating with, that was the indication.

And right at the end of the quarter, it looked like it could've been slightly higher than that -- than the $7 million.

So we felt obliged to make that point.

Your next question is from Bob Drbul with Lehman Brothers.

Definite everybody.

A couple of questions.

The first one is, on the North Face, you guys had talked a little bit before about sort of a lower price point sportswear.

Can you give us maybe an update on that?

Also, you haven't really talked a lot about the stores.

I wanted to see sort of what your experience has been with the North Face full price stores that you have, and sort of your plans going forward with that.

We have launched the A5 (ph) line, and it is performing extremely well.

Actually, the brand is up across all categories.

So it's not just an A5 that is performing well.

But we have created, through A5, a group of more casual apparel -- more for what we call activities off the rock, or same target consumer, but more leisure activity-based.

And it is performing extremely well.

As I said, the North Face across both the U.S. and Europe had a very strong quarter across all product categories.

From a retail store standpoint, we're forecasting to be up at about 7.5 percent for the full year in our retail stores.

They represent less than 10 percent of our total sales.

However, Bob, one reason we're not up nearly as strong as we are with the overall brand is because frankly, at the levels we're shipping, we have favored our regular wholesale business above our stores.

So we're a little late getting there with some of our seasonal product.

We're now very well positioned for the fourth quarter, and we are finding a strong fourth corner.

But that has been a factor in the performance of our full retail stores.

Okay.

And then -- John, can you give us an update on the blue line, and the experience so far with that?

It's been good.

The blue line is similar to our Riders line that we have in other stores.

It has been performing well.

I believe Target and ourselves were very pleased with it.

Then one final question would be for Eric.

In terms of -- a lot of discussion about, you know, any distribution changes for Nautica.

I was just wanted to see if you could comment on your thought process there.

And then, just sort of as you look at and sort of plan looking forward '04 for the Nautica business, in terms of in-store shops -- is there any major change going on with your retail partners around any floor space?

In answer to your first question about distribution change discussion is there hasn't been any.

At this time, we have all our energy focused on building a successful department store business with the Nautica brand.

On the in-store space question, I think it's no secret that the Nautica men's sportswear business has declined for the last few seasons, and is declining this season.

And with that, we have an obligation to our (indiscernible) productive on their floor.

And there will be some space reductions this fall and probably again next spring.

Our effort is to rebuild the Nautica men's sportswear business next fall with better product.

And we would hope that we get some of that space back when we have the right product.

I think our space this fall and next spring is going to be right sized versus where it has been for the last season or two.

The other Nautica businesses at retail, the men's jeans business, the men's and women's sleepwear business, the men's underwear business, those businesses are all on our expectations and up against last year.

And we don't expect to see any space decline in those businesses.

Okay great.

Thank you.

You next question is from Tom Lewis with C.L. King.

Based on looking at point of sale data in September, as business was picking up, what would be your read, the degree to which, any of your customers were still in the mode of managing their inventories down?

I'm trying to get a read on whether that is generally passed, or there might be some exceptions?

I think in general, the first six months of this year, retailers, and also manufactures, are hit pretty hard.

Consumers just weren't buying apparel.

I think in general, if you have to make an overall statement, I think retailers are still very conservative on their inventories going forward, not only for this year but also for spring of '04.

Okay.

But can you maybe make a distinction between being conservative and actually taking in less than they're selling?

Is that pretty much behind us?

Or might there be a few others -- a few retailers that are still in that particular mode?

There's still probably a few retailers in that mode.

I think what it does -- most retailers are putting the pressure on the manufactures that do have the product.

And that's where I think our systems -- V.F.'s systems -- both in intimates and in jeanswear, in particular, where we had that replenishment program -- that really help us out a lot.

And when they need the goods, we have the goods for them.

I think, Tom, what you're hitting on is something that is causing some of the sales -- revenue results -- to be a little more erratic.

They are up a little higher than expected, at times, and down a little more than expected at times.

Because the inventories are so lean and tight across -- as consumer are reacting, it's going through the whole system pretty quickly in both directions.

It explains some of the ups and downs that we ended up talking about in these reviews.

Yes.

I was sort of thinking a few years back that the technology would take the volatility out.

But oh well.

I guess the only other question I have is just a point of clarification on the comment that was made about jeanswear sales units up August and September.

Was that specific to the mass channels?

Or was that the coalition as a whole?

That was specific to the mass channel.

Oh, okay.

Great.

Thank you.

(OPERATOR INSTRUCTIONS).

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

Hi.

Sorry, I guess I paused too long last time.

We're wondering about that.

I did have a couple of other things.

I think there was a comment in talking about denim -- about the fashion denim.

You mentioned some numbers, which first off, unfortunately, I missed, in terms of the magnitude of the uptrend there, and how much of your business was in that, which I think was relatively small.

If you could repeat that.

And then, are you trying to kind of up that percentage?

Is that what is trending?

Yes.

That was basically for the mass channel.

And in particular, in Wrangler and Riders, that is about 15 percent of our business.

And we are seeing some sales increases in the 30 to 40 percent range.

And obviously, as the consumer demands more fashion, we are giving that fashion product to them.

In particular, I would say that we categorize fashion as a Cargo or a Carpenter type jean.

Okay.

So it's a silhouette, really.

Right.

Okay.

Now it could be some finishes too; it takes in a lot.

Okay.

And also, on the denim side, there's been some commentary about your new competitor in Wal-Mart lowering their prices for spring.

How do you feel about your relative competitive positioning and your value relationships, should that happen next year?

Obviously, we feel good about it now.

As I mentioned, our rack points at Wal-Mart, both in the Wrangler Five Star denim and in the Riders category in women's, is doing extremely well, and in fact is more productive this year than was last year.

Again, we think we're putting out a great quality product at a very good value.

Whatever happens in terms of price points, I mean, we are ready to compete with anybody out there.

And we have in the past.

Okay.

Thank you.

My last question would be on the North Face, you have been very consistent in putting up some very nice growth rates.

Can you talk a little bit about where it is coming?

Is there anything you can quote in terms of square footage growth?

Or marketshare?

I'm just trying to get a sense if this is increasing.

I think it's increasing the penetration with your existing accounts; so I would assume you're gaining square footage.

But do you have any data points?

Well, you're right, Noelle, in that it is primarily current distribution base.

And we are gaining square footage in that distribution.

Going back a couple of years, there was latent demand for the brand because the brand was not servicing well.

So that was kind of the first step for the brand.

Along with that, we've been very consistent in brining innovation to the market.

And that is really unlocking not only (indiscernible) based consumer, but we are also seeing more and more aspiration just towards the brand generally.

And so, at the same time, we have been expanding the product categories.

For instance, entering footwear last year, launching the A5, group, which is, as I said, more leisure activity based.

It's been a combination of extending the brand product category wise, servicing better, continuing to bring innovation; and we really are, primarily, it's penetration of our core customer base.

Okay.

Thanks, very much.

(OPERATOR INSTRUCTIONS).

There are no further responses right now.

Okay.

Thank you, very much, for joining us today.

We are, as we said, very pleased with the quarter.

We think it shows that when the consumers are buying our core brands, we are performing extremely well.

We have a great new brand, new sportswear capability, that now goes with our outdoor capabilities to build some great growth opportunities for V.F., and at the same time, we have an extremely strong balance sheet.

We also have a very strong dividend payout.

So we are very confident in our ability to continue to deliver increasing shareholder value.

Thanks for being with us today.

Ladies and gentlemen, thank you for your participation.

This does conclude today's conference.

You may now disconnect.