威富公司 (VFC) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the VF Corporation conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Tuesday, April 27, 2004.

I would now like to turn the conference over to Ms. Cindy Knoebel, Vice President of Corporate Communications and Investor Relations at VF Corporation. Please go ahead.

Good afternoon. With me this afternoon is Mackey McDonald, our Chairman and CEO; Eric Wiseman, Chairman of our Outdoor and Sportswear Coalition; as well as our CFO, Bob Shearer. I am also pleased to announce that we have Gary Schoenfeld, President and CEO of Vans with us today as well.

Before we get started, I would 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.

We're extremely excited about today's announcements, and so we did want to take the opportunity to comment on this morning's press release and provide you with a little bit more color on the strategic nature of acquisition. Then all of us here today from management will be happy to take any questions you might have regarding the transaction.

Having said that, I'd now like to turn the call over to our Chairman and CEO, Mackey McDonald.

Okay, thank you, Cindy. Good afternoon. This is a great day for the shareholders of both VF Corporation and Vans. For some time now, as you know, we've talked about our plans to take a more aggressive approach to growth. And a big step was taken last summer with the acquisition of Nautica, where the performance of the business has continued to exceed our expectations. Two weeks ago, we announced our plans to acquire the Napapijri brand, which we believe is capable of generating double-digit sales growth.

And today, we're talking about Vans. And this represents another big new growth avenue for VF Corporation. Our vision for growth is rapidly becoming reality. We are committed to continuing to generate opportunities for strong, sustainable, profitable growth, both internally and by adding new growth engines to our portfolio.

Vans is clearly on a strong growth track. In its recent fiscal third quarter, Vans sold -- sales rose 10 percent with a healthy increase in gross margins. Both sales and earnings were well above expectations. As we indicated in our release, we believe the Vans brand is capable of generating sales of $0.5 billion over the next three to five years.

Vans is a terrific acquisition for VF for several reasons. First, as all of you know, VF is all about brands -- strong brands in clearly defined market segments across all channels of retail distribution. The Vans brand is one of the strongest brands within the action sports market. In a 2004 survey conducted by Teen Research Unlimited, Vans was voted number one in brand awareness and product ownership among action sports enthusiast. Research conducted in late '03 by foot Footwear News indicated that Vans is the number one teen fashion shoe brand. The brand's strong consumer franchise is driven by its highly innovative products and cutting-edge marketing strategy including the Vans Triple Crown series.

Second, Vans will provide us with an entry into the action sports market, which is a perfect fit with out outdoor coalition. The action sports market is approximately 6 billion in retail, including apparel, footwear, and equipment. The participation is growing by 12 percent annually. The category is highly brand-driven; thus, the acquisition will provide us with a new channel of distribution -- action sports stores and teen lifestyle chains. In addition, Vans operates 97 retail stores and 50 outlet stores.

Third, the acquisition will also give us greater access to a younger, more contemporary consumer -- the 10-to-24 active sports enthusiast. And fourth, Vans will provide us with expertise in a new category -- footwear. They have the expertise, infrastructure, sourcing, process, and systems necessary to help build a new competency for VF. And fifth, we believe the brand has clear opportunities for continued growth, while having the potential to reach our operating margin and return on capital targets. We believe the brand can be extended into additional action sports, accessories, and equipment. And we see a big opportunity to extend into men's and women's lifestyle apparel, which are currently accounts for less than 10 percent of Vans' sales.

Last, and this is particularly important -- we are extremely impressed with the talent and caliber of the Vans people, with whom we really look forward to working.

Now I would like to turn it over to Gary to say a few words before we take your questions. Gary?

Thank you, Mackey. And thanks for the opportunity to participate in this call. I think you said it well in terms of -- it's an exciting day for the shareholders of both companies. When we spoke yesterday, I congratulated you as well, because I think the vision of where you are taking VF is very exciting. And I think we will accomplish the goals that you look to accomplish as a result of this transaction. Similarly, for our shareholders, I think it's great recognition for what we have contributed and the increase that it represents from where we were just a short 12 months ago is obviously quite dramatic and quite gratifying. And have received a number of very happy phone calls already this morning.

Secondly, you touched on the strategic merits, which I think is really critical to any transaction. And the strategic rationale for this is very simple, very straightforward, and it's compelling. Thirdly, I think from our customers' standpoint, it just means more resources available to us, particularly as we tackle the next big opportunity for this brand, which is apparel. And, as you and I and Eric and your team and our team have spoken over the last several weeks -- internally, that is our -- perhaps one of our biggest opportunities, but also, in terms of infrastructure, one of our biggest challenges. And your organization's expertise globally there is very exciting.

And lastly, I just would say from an employee standpoint, it's a great compliment. I think there are a lot of people within this building that are very proud of the fact that a company such as VF has chosen us to be the platform to reach the youth market and to grow the footwear side of the business for you all. And it is a very exciting opportunity for them as well, and I thank you for that.

Very good. Thank you, Gary. I really appreciate those remarks. We have some exciting days ahead of us. Okay, we will be glad now to open this up for questions.

(OPERATOR INSTRUCTIONS). Jeff Edelman.

UBS. Mackey -- or really Gary, I don't know too much about the company. I saw some published information, but it appears as if your sales went up roughly 50 percent between '99 and '01, stalled for a few years, and now you are projecting or saying you've got a potential to reach -- grow that another 50 percent over the next several years.

I guess -- what does VF bring to the table that you were not able to do yourself? And I guess, from VF's point of view, what does this bring to you paying roughly 20 times earnings for this brand?

Mackey, would you like me to take the first part and you take the second part?

Yes.

In terms of sort of the historical context of Vans and going forward for those less familiar, what I will succinctly say is we were able to achieve rather dramatic growth, almost a four-fold growth, over six years from the mid '90s to 2001 largely through the innovation and strength of where we positioned our brand in the youth market. The challenge for us through that period -- and we did hit a roughly two-year period of stagnant growth, was how to become as innovative and effective from a footwear product standpoint. We put a lot of energy toward that over the last 12 to 18 months. We have begun to demonstrate our ability to do that with a very segmented approach to our different customers within our demographic -- and from a footwear standpoint, now have the business on a very exciting growth trajectory, not just in terms of topline, but also from a bottom-line perspective. And that's been reflected in our performance so far in fiscal '04 and also as we look going forward.

So that's kind of the first part. As we now have really built our footwear infrastructure, as I alluded to, the next piece to the puzzle for the Vans brand was to develop the apparel expertise. And I think Mackey can speak to what obviously VF brings to that piece.

Yes, as we've looked at this, Jeff, the Vans group is definitely on the right track for getting product in the right shape, bringing a lot of innovation to market, things that Gary talked about, and getting their core business back on track and recharging the brand that had a lot of momentum several years back, lost a little momentum, but is really back on track now.

They're beginning to improve their margins. As we look at it, we certainly feel like we can bring a lot of things that will help adjust those margins and move the margins up to the levels that we run in our businesses.

An important part of that is also, as Gary said, is getting the apparel initiative on track. It's less than 10 percent of their sales. Apparel really -- for most in the brands in this category, apparel is a larger percentage, and we think we can bring some expertise to it that will really generate significant sales. And also some very strong margins on the apparel side, as well. So we see a lot of opportunity here to change -- to continue to the momentum that is already occurring and keep it going.

Okay, thanks. And Bob, not empty view asked (ph), a lot of the companies that have made acquisitions in the apparel industry have ended up writing up assets -- which, as I gather, minimizes that the net contribution from whatever is in the cost of goods sold until you cycle through that. You have typically not done that. Is there any reason why? Is this less conservative, or what's your approach to that?

We do take a conservative approach, Jeff. And here again, we don't expect to see a significant impact from that requirement on this transaction.

Virginia Genereux.

Merrill Lynch. And I have two quick questions. Congratulations, Gary Schoenfeld -- good job. First, if I may -- for maybe Mackey and Bob --

You have to congratulate me, too.

It's to you, too -- focused on the -- your share hasn't been up 400 percent this year. Why won't this be -- we know Vans and know that they are on track to generate 20 million or so of EBIT in the August quarter and then see some dilution in November. Why won't this be accretive to calendar '04 -- we get to sort of 9 cents -- and a little more in '05?

Well, we're obviously going to take a fairly cautious approach this early on. There could be some small amount of -- you said you would expect some dilution?

I'm sorry, I'm getting to sort of 13 cents or so accretion in your September quarter, and then maybe 4 cents of dilution in the December quarter --

Well, I guess the first point to make is when we talk about accretion or dilution, we include any and all financing costs related to that.

And I'm assuming you financed this at sort of 4 to 5 percent --

Yes. Not quite sure how you get to that number. We don't see -- based on -- you've seen the estimates from -- on the Vans side. Not quite sure how you get there -- get that strong of a number. Again, we will take a cautious approach to be sure. But I'm not sure where you see that kind of momentum.

Okay. We can talk about it offline.

Yes, that is the right thing to do.

And then secondly if I may, can you tell us how this deal came about? Did you talk to other -- we can always read that S-4 I guess, but did you talk to other parties, Gary? Did VF seek you guys out? If you can tell a little bit about the background.

Let me address that, because we sought them out. We have been going through at VF an extensive growth planning process. We've looked at every category in apparel and related to apparel, and footwear is an area we feel is very related to apparel, with a lot of the same capabilities involved. And we had narrowed our targets down to the areas that we feel have good solid growth potential, are driven primarily by brand, have a strong core consumer group that is very much involved in the activities and involved in the brand. We have been looking for lifestyle brands that stretch beyond one single product category. We've looked for opportunities that meet our financial criteria for dilution, accretion, and also for return on capital.

And we have identified the candidates that will meet our criteria, and this became one of our leading candidates as we went through this search. It's in a category that we think it's going to continue to grow at that 12 percent rate for some time. That consumer is very involved in that lifestyle. Vans, as we indicated, has in a number of research projects that we've done and looked at that other people have done has come out as being one of the strongest brands. We think that they have done a great job of delivering the right footwear products. And we think that consumers are interested in that brand for a lot more than footwear, which gives us a tremendous growth opportunity -- not only in the core business, but new business.

The real search and find here was a strategic approach to growing our business. And this fell right into the center of the things we wanted to accomplish at the --

Great. So it wasn't an auction process, Mackey?

No, it was not. And also, I certainly want to add to that, in order to get into the new category, we really have to have people that have the skills and capabilities to help us add that new category. Footwear is something that we do to some extent with North Face, but it's not a core competency. And Vans also has a very strong team of people that really know this category and can bring us a lot of synergies -- not only in the Vans business, but also in other businesses and our ability to grow other brands in the footwear category.

Great. And lastly, do you guys think -- Bob, do you even know at this point whether you will be able to utilize -- I think Vans has sort of substantial NOLs, something like 30 million plus, which -- is at a 15 percent tax rate is their outlook -- you'll be able to utilize those?

Yes, so that will be some benefit to us over a period time.

Great. Thank you so much, and nice work.

David Griffith.

Tradition Asiel. In terms of apparel extensions for Vans, denim seems like a fairly natural category. Could you talk a little bit about the joint venture with the PacSun and how that's going to be impacted going forward?

Sure, why don't I speak to that? It turns out Greg and Tim are both traveling in this morning, so until we have the chance to sit down and talk with them at PacSun and all three organizations get together, there's not a lot more that we could say. Obviously, we have not been able to talk to them about it prior to now.

We have a great relationship with PacSun. They are a phenomenal company. So there isn't a lot of specificity that we can add, because we don't know the answer to that. But I think this is exciting in terms of the potential of our ability to grow the Vans business with PacSun.

And then, Bob, could you talk at all about kind of duplicated public company costs -- or is that much of a factor in terms of as we look at the model going forward?

I had a little trouble understanding that -- did you talk about duplication of costs?

Yes, just in terms of public company and administration?

Yes, obviously, there will be some opportunities there. However, I think as we've stress, the locations of the Company's won't change, those kinds of things. We'll be operating them as separate companies. But whenever you put two public companies together, it obviously offers some opportunities for cost efficiencies.

Noelle Grainger.

JP Morgan. A couple of questions. First, can you talk about any -- really, Vans current distribution mix in terms of channels and whether there are any plans to change those?

And then second, I'm curious, in terms of the team, Gary -- are you planning on joining? And can you talk, Mackey, a little bit about how you expect the structure to fit into VF?

Let me address the distribution -- obviously, Gary, you can get into it more. But it's a third wholesale/retail business; it's a third owned-store distribution; and a third international, to make it simple. And like all of those. That gives us all some real possibilities for growth within VF as well as at Vans.

And as far as getting into the management structure, obviously, this is two public companies coming together. There's a lot of things that can and can't be discussed prior to disclosing a deal. So we have a lot to talk about there. We are very excited about the people at Vans, we are very excited about what they are going to bring to our skill base. But we obviously have not been able to work through everything we really need to get into -- how the structure will fit into VF at this point in time.

Yes, and I'll just add in there -- on the distribution (ph) -- I think we took a lot comfort with the success that VF has had with North Face. While it is a different consumer, there are a lot of things in the market segmentation approach that they have executed at North Face that's very analogous to our approach to our market. So we got pretty comfortable early on that they really do understand the importance of segmented product, segmented channels of distribution, and picking the right retailers. And as Mackey said, I think that's one of the things that is also intriguing I think from VF's perspective is our direct-to-retail business -- and I think see some exciting opportunities to continue to grow that, as well as building the core channels that we are currently in and the other levels of distribution that we are in.

So in short, we don't anticipate, nor does VF, I believe, anything significant change in terms of the profile of our customer mix. And obviously, that is real important to the continued success of the brand.

Great. And Bob, just one last question for you, which is -- could you elaborate a little bit on maybe the main buckets where you see in terms of operating margin opportunity to get those numbers up in line with the VF margins?

Again, I've got to say, it is a little too early to get into much detail there, based on Mackey's comments. But really, two areas is what we see -- and they've both been mentioned. First of all is the continued improvement in the existing business, in the core business. You've seen the improvement that Vans -- the company has realized, and we expect that to continue. And then again, from the apparel contribution -- the margins there as well. I think those are the two biggest factors.

Jeff Van Sinderen.

B. Riley and Company. My question is this -- I wonder if you could --actually, first of all, I want to congratulate both companies on the deal. But my question is this -- could you give us any insight into -- and I don't know VF Corp that well -- but in terms of the process you went through in terms of determining valuation, what you were willing to pay for Vans -- maybe some of the metrics you used there and how you looked at that?

As always, as always, it's obviously based on the assumptions, the financial assumptions. So as we approached the Company and looked at the Company and determined where we could add value, and also, as I mentioned, the improvements that are already being made in the Company, it was all about where we thought the Company could be in a number of years and the implied value based on that.

Other than that, we used the normal types of financial implications that most would use based on discounting cash flows, obviously looking at accretion and dilution, and all of those factors.

Sam Savage (ph).

ST Teleforgado (ph) with Samsobotic Quatro (ph). Are there any earnings targets or performance conditions in the merger agreement that Vans must meet, and is due --

We're not able to hear your call, I'm sorry.

Are there any earnings targets or performance conditions in the merger agreement which Vans must meet? And is due diligence complete?

Due diligence is, in fact, complete. And no, there are no specific targets.

Great. Thank you and congratulations.

Dennis Rosenberg.

Credit Suisse First Boston. Had a few questions on the apparel. When you look to grow the sales to 500 million over the next few years, how much of that is going to be derived from apparel versus internal growth to start with?

We had a couple pieces to the growth formula that we have put together. And actually, about half of it -- now just putting aside where it's sold, because some of it will be sold in the owned stores. About half of it is through growth in the current Vans footwear business, and about half from the launch -- the development of Vans men's and women's apparel.

Okay. And what's the timing of the prospective launch of the apparel?

Is really too early to answer that question right now. We have a lot of work to do to understand what the right apparel is. We would hope that we could do that in the next 12 to 18 months.

They're in the apparel business today -- about 10 percent of their sales are in apparel. So this is just bringing some of the synergies that we have in being the world's largest apparel supplier. Both from a cost standpoint, design standpoint, sourcing standpoint -- there's just a lot of capabilities that we will bring and build off of what they are doing currently. So it's not actually a launch, it's hopefully just bringing new synergies to what is already under development.

To what extent would even Nautica or The North Face management get involved in the apparel operation?

They will be in the outdoor apparel group -- I don't know that we'd want to get into a lot more detail than that.

We can't get into a lot more detail on that today. There are certainly people from within VF that can help interpret the brand with the Vans team. Choose the apparel (ph) -- there's a lot of supply chain stuff based on our significant apparel class from an (technical difficulty) that we plan to leverage.

We're going to have to cut off the questions for this phase of our conference call today to move to our normal earnings report and our quarterly report. And I think that the operator is going to help those of you (ph) transition to that.

(OPERATOR INSTRUCTIONS). At this time, you are now in the VF Corporation conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instruction will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded, Tuesday, April 27, 2004. I would now like to turn the conference over Ms. Cindy Knoebel, Vice President of Corporate Communications and Investor Relations at VF Corporation. Please go ahead.

Good afternoon, again, and welcome to our first-quarter conference call. And once again, before I turn this call over to our CEO, Mackey McDonald, I will again remind everyone that certain statements, including stated (ph) remarks and in the question-and-answer session may constitute for the 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 of the financial condition of the Company to differ are discussed in the documents filed by the Company with the Securities and Exchange Commission. And with that, I would like to turn the call over to Mackey.

Okay, thank you, Cindy. I'm sure many of you are continuing on from our previous call discussing our very exciting new acquisition. We did want to move into our normal call to talk about our first quarter results, and also to continue to talk about the addition of very new brand to our portfolio, the Vans brand.

With me today is our Chief Financial Officer, Bob Shearer, and also our Coalition Chairman. In late February, we announced new responsibilities for our Coalition Chairman, which I will reiterate here. Terry Lay is our Coalition Chairman for global jeanswear; Eric Wiseman is the Coalition Chair for both sportswear and outdoor; George Derhofer now has responsibility for both Imagewear and global intimate apparel; and John Schaumburg, who has been named to new role, heading up cross-coalition brand and customer initiatives for VF.

Several weeks ago, we raised our first quarter guidance, indicating we expected a 5 percent increase in earnings on the sales increase of 8 to 10 percent trade. And I am delighted to report that, in fact, our performance was even stronger in the quarter -- the sales up 15 percent and earnings up 12 percent, both hitting new record levels. We're especially proud of the great work within our brands, which continue to strengthen. And the retail environment has improved certainly over the past several months, which has helped.

Our financial position is stronger than ever. For example, our inventories are down from prior-year levels, even with the addition of Nautica. Cash flow from operations was 43 million, and cash on the balance sheet was 552 million. We're in a great position to fund our growth strategy, including acquisitions and a number of programs designed to leverage our operational capabilities.

Not only are we in great shape financially, delivering record results, but we have good news across most of our businesses. We announced just two weeks ago our plans to acquire the Napapijri brand, which we believe will be a terrific addition to our outdoor coalition. Indoor sales were up, with particular strength in our mass (ph) business in the U.S., where sales rose 7 percent. In fact, we enjoyed double-digit increases with two of our largest customers, Wal-Mart and Target.

Sales also rose in our international jeans business, but on a currency-adjusted basis declined by 9 present, as most international markets continued to be very sluggish. On the positive side, for the first time in two seasons, our forward bookings are running above prior-year levels, which would point to a good second half.

Our intimate apparel business also had a great quarter, with sales up 8 percent. In addition to broad-based strength in our own brands, we also saw a big pickup in our private brands businesses. Overall, momentum is being driven by an improving intimate apparel market, but also by successful, big new product launches.

Our outdoor coalition had another outstanding quarter, with sales up 24 percent. The North Face remain focused on four primary drivers. First is investing in technology and innovation as the primary point of difference, or halo (ph), for the brand. Second is leveraging the development process to deliver market-right product. Third is to limit the distribution to maintain the brand's premium status. And fourth is to continue to invest in marketing to grow brand awareness and performance. We continue to expect strong growth in each category -- outerwear, sportswear, footwear, snow sports, and equipment and retail, with fall bookings trending up about 30 percent.

Our packs businesses is also off to a good start this year, with strong increases in both our U.S. and our European businesses. Already (ph) sellthroughs of Jansport's new hydration packs are very positive, and are allowing us to gain share in outdoor and sporting good retailers. We also launched a new line of packs called Trans (ph) this spring at Target. This is performing very well and generating double-digit sellthroughs.

Earlier, I mentioned our plans to acquire the Napapijri brand, a line of premium casual outdoor apparel. In 2003, the brand generated sales of approximately 76 million, which represented an 18 percent increase over '02 levels. This brand is slated for strong growth in the years ahead, with expansion both in Europe and here in the U.S. We expect to close this acquisition by the end of June.

In terms of sportswear, as stated in the release, the contribution from Nautica was much better than we had anticipated, although this was largely due to a shift in sales from the second quarter to the first, as we initiated our first shipments of summer products in late March.

We are making excellent progress on our brand positioning work and have a new merchandising, sales and marketing teams in place. Our sportswear, jeans, and retail outlet businesses all performed above plan. Total sales at our retail outlet stores increased 8 percent in the first quarter. Our fall men's sportswear product has been well received by retailers, and bookings are on plan.

Imagewear had a more difficult quarter, although our licensed sportswear business continues to shine. Occupational apparel sales were down 9 percent, due in part to timing of large uniform programs that commenced last year. However, over the last six weeks, our core workwear trends have improved considerably. Our Imagewear coalition continues to generate excellent operating returns.

Now I'd like to turn things over to Bob Shearer to comment on the financials.

Thanks, Mackey. Starting at the top, sales were up 15 percent. And as indicated in the release, Nautica contributed $146 million to sales. Our core business sales -- in other words, jeanswear, intimates, outdoor, Imagewear, and playwear -- were up 3 percent in total. The benefit from foreign currency was $42 million. I should note that we hope to the conclude the negotiations for the sale of our playwear and the John Varvatos businesses shortly.

Profitability was strong in the quarter, with improvement in operating margins across most of our core businesses. Overall, operating margins in the quarter reflect the effects of changes in our business mix -- for example, the addition of Nautica, where margins are seasonally lower, in the first half of the year. Gross margins improved by more than 100 basis points in 2004, rising from 38.7 percent -- from (ph) 37.5 percent. Net royalty income more than doubled in the quarter, rising from 6.3 million to $13.2 million, primarily as a result of the royalty income from Nautica. And reflecting higher operating expenses as a percent of sales, operating margins were 12.0 percent in the quarter versus 12.2 percent in 2003.

Net interest expense rose by about $4.7 million, and that reflects the higher debt levels incurred for the Nautica acquisition. The tax rate declined in the first quarter, from 34.0 percent from 34.9 percent, reflecting lower foreign operating losses with no tax benefit. Accordingly, we saw an increase in net income of 13 percent and an increase in earnings per share of 12 percent.

Now turning to the balance sheet and cash flow statements, we ended the quarter with $552 million in cash. We plan to initially fund our acquisitions of the Napapijri brand and Vans using these existing cash balances and commercial paper borrowings. We continue to believe that cash flow from operations will approximate 450 to $500 million for the year.

As noted in the release, we actually saw a decline in inventories in the first quarter, and that's despite the inclusion of Nautica, which added $69 million to inventories in the quarter. Inventory management has long been a strength and focus for VF, and so we are gratified to see our efforts reflected in the positive cash flow from operations generated in the quarter.

Debt as a percent of total capital was 31.8 percent at the end of the quarter. Net of cash, that was 17.2 percent of total capital. Even with the Napapijri and the Vans acquisitions, our long-term debt to capital should remain below our target rate of 40 percent.

In terms of the second quarter, we currently anticipate that sales could be up 10 to 12 percent, primarily due to the addition of Nautica. Earnings per share are expected to be flat to up slightly, due to the dilutive impact expected from Nautica in the quarter. And Nautica added 3 cents to first-quarter results, but it's expected to be dilutive by about 4 cents in the second quarter. Stepping back, the impact for the first half is still about neutral, just as we expected. For the full year, Nautica should contribute at least 16 cents per share to earnings. Mackey?

Okay, looking ahead -- we continue to look forward to a record year. Due to the stronger-than-anticipated sales, we now believe sales for the year could be up 8 percent, with earnings per share up at least 5 percent. Depending on when the acquisitions are finalized, the Vans, the Napapijri brand acquisitions could add 230 million to '04 sales and are currently expected to be neutral to earnings per share this year. As mentioned in the release, we also anticipate funding other initiatives related to fueling topline growth that will occur over the coming weeks and months. Clearly we have momentum, and to support that momentum will require some additional investment in people, in operational capability, in brand research and development, and in advertising.

I will now open to back up to questions about our quarter or continued questions on the Vans acquisition.

(OPERATOR INSTRUCTIONS). Dennis Rosenberg.

Credit Suisse First Boston. Mackey, could you elaborate a little bit on that last statement where you talked about additional investment? Is that something that's additional to what you've been talking about previously, and does that mean the expenses might be higher for the rest the year and into next year?

Dennis, this is what we referred to earlier. And we made a commitment last year to really drive good topline sales in the VF Corporation and convert that into good, strong earnings growth, as well. In order to do that, we are making investments, as I said, at the conclusion of these remarks in people and marketing and new skills and turning new acquisitions into growth engines, as well as really getting some fire burning behind our existing brands.

We're beginning to see the results of that. We like what we see. We're going to keep the momentum going. We're going to continue to invest in this accordingly and still deliver the results that we told you we were going to deliver for the year. So we feel really good about the momentum we have got going now with this growth program that we have got in place.

On your sales guidance, if you have low double-digit growth in the second quarter, that would mean that could be in the low teens or maybe even in the midteens for the first half. So to have an 8 percent growth on the top line for the full year would apply only very low single-digit growth in the back half, and you said that your bookings are looking better for the back half. So it seems to be inconsistent.

Well, we look at this year -- we went into it with a lot of conservatism because the apparel market has been very volatile. It's been stronger than anticipated -- the first of this year. But we're not convinced yet that this year is going to continue to be extremely strong for the apparel market overall. There are still some indicators -- energy pricing going up, taking away disposable income from the mass consumers. Confidence levels, I understand that came out today, were improved. But up until this report, they had been very low.

It's all of those things continue to lead us as we develop our models to be conservative about the year and for the total apparel sales. So we feel very confident in the strength of our brands, our brand positions, the momentum we have going. We're just not as confident about the apparel business overall. So we will continue to play it (ph) conservatively and react aggressively.

Okay. And what happened between March 24 when you gave your latest guidance and March 31st that caused the sales growth to be 15 percent and the earnings growth to be 12 percent versus the guidance of 10 and 5 percent?

The real good news there is that it wasn't one thing. It was across the board. We had a better contribution from Nautica. We had a better contribution from our core businesses. Our outdoor growth was very strong, as anticipated. We had better growth in our core business in both jeans and intimates. So it really helped us.

That would account for the fact that the quarter was better than expected, but the question really is -- you gave guidance with about a week left in the quarter, and then you beat the sales guidance, and the earnings guidance by a lot. And I'm just trying to understand what the difference was between that guidance and what actually occurred.

It's really not a lot different than what Mackey said. I mean, we closed the month out is what it comes down to. And near the end of March, our sales were stronger. So we closed out stronger than anticipated.

Ron Phillis.

Banc of America Securities. You talked about the jeanswear, total jeanswear being up 2 percent for the quarter and then mass (ph) up a healthy 7 percent. Can you tell us what the overall market would be that would compare to that 2 percent and what you think the overall mass jeans market was that would compare to the 7 percent?

Ron, this is Terry Lay. I would say for '03 as a whole, we saw the market flat to slightly up. I think John has previously indicated that from a marketshare standpoint, MTD recalibrated and really the July reporting -- July data before we have a true year-over-year comparison. So we don't really feel we have typical marketshare data to relate to first quarter. However, tracking our major customers, we certainly saw retail up, and we saw our performance up in the first quarter.

Is a fair to say that since you were up 7 percent in the mass channel and that your major competitor was not in the mass channel for the comparative period last year that the category must be up?

We believe the category is up. But we believe we have outperformed the category, Ron. We have very healthy results with our top mass customers, double-digit results with the top two customers -- both shipping and out-the-door performance. We believe that's above the total market.

Did you also -- are you expecting to get any benefit for increased average unit selling prices going forward? In late March, some of the retailers were talking to us about a potential reversal in the trend for apparel deflation. Is that something that you can discuss quickly?

Welcome I think where we really get paid from a price standpoint is innovation, frankly, Ron. And we've a lot of great initiatives built around innovative new products. I think I think we have seen price pressure on core product. I think just generally looking out, we don't expect that to abate. We do see different plans by retailer in terms of how often they are on sale, how promotional they are. But frankly, the key over time to price is going to be innovation.

It is going to the what? I'm sorry.

Innovation. New product. New initiatives. (multiple speakers)

So you don't really see much in terms of abatement in the short-term or over the last couple months at all?

I think we see that the pressure on value is going to continue to be continue to be what it's been the several years. We've got to improve ours going forward.

David Griffith.

Traditional Asiel. Just kind of following up on that, given the strength seen in your top two customers double-digit wise, kind of where were you seeing weakness in the jeans market? And then secondarily, can you talk about cotton costs and whether or not they're impacting your denim costs?

Well, on the first point, I wouldn't say we saw a lot of weakness. Generally, our mid-tier, upper-tier business was relatively flat, as was our specialty business. And we saw growth in our other markets -- North, South America, such as Canada, Latin America, Mexico.

I would say generally the drag is kind of what we've seen over the last several years, and that in total, there are fewer doors to sell into. There's some differentiation strategies. On a branded, nonbranded (ph) basis --

Are you still planning your Kmart business as being pretty difficult?

We are planning it down. Having said that, most of our key initiatives are being supported by Kmart, such as Wrangler Jeans Co., which is a key initiative in the mass market for fall. But we're taking a conservative approach, as I think is prudent.

You asked a question on cotton and denim. And cotton as well (ph), but denim pricing really is more reflective of demand for denim. There still is a tremendous worldwide supply of denim. So while there is certainly some pressure on denim prices, we don't see cotton prices really being translated directly into higher denim prices. It is much more related to the supply of denim worldwide that's now available.

Noelle Grainger.

This is kind of fun to have multiple chances. A couple of things -- just a follow-up on jeanswear. Can we get in a little bit more on understanding kind of the mid- and upper-tier being flat, vis-a-vis a pickup in retail, and a lot of people talking about that particularly happening at the higher end? Terry, I'm just curious what you think is going on there. Obviously, the kind of status denim market, so to speak, has been tough. But you know, Jones this morning talking about their Polo jeans business picking up. So I'm not sure if it's a market issue or it's a competitive issue, or -- what is going on?

Well, Noelle, I think it's a good point. We see the opportunity in the premium piece of the market, even though it's still relatively small -- maybe 5 percent of the overall market is $50 plus. I would also point out that through the Nautica acquisition, Nautica jeans and Earl Jean resides in that space, and is not reported as jeanswear.

But in addition, we've taken some of our European products for both Lee and Wrangler. And we are in our second successful season with Urban Outfitters. We are expanding that program. We have a launch for fall called Wrangler 47, which is premium product being sold into better department stores.

So we're taking our core brands and reaching up with innovation. We are taking our new acquisitions, and I just mention Earl and Nautica, because they are very much in that space -- we intend to be very more important in the premium space. We think it is, to your point, a growing segment of the market.

In the mid-tier -- again, we saw opportunity through new initiatives. We saw some downside. I would say it was the youth port (ph) part of our business that tended to struggle on the adult side, both male and female. But we've had some good success here.

Okay. And then, on the intimate apparel business, up 8 percent -- that's a really great number. Hoping that you can talk a little bit more -- I know the private label has been picking up. Has it that equally strong in your business across your brands? Are there particular callout in terms of the brands that are worth noting?

Noelle, this is George. I would like to thank Eric for a great first quarter. (multiple speakers) We did have a great first quarter. Timing is everything.

I wasn't going to say it.

I think we had strength, Noelle, across the board pretty much. Our private brands, as you suggested, were terrific in the quarter. But our branded business also showed a lot of strength. Our Vassarette business in particular, which had a couple of challenging years, seems to really have some strong momentum right now. Our Lily of France business also was very, very strong. And our Vanity Fair business, we expect good things to look from (ph) as well, this year.

We also continued to expand some new categories, like our Curvation brand, which really has the momentum in the mass channel. So I would say overall that we saw strength pretty much across the board on both the private and branded side of the business.

And on the private side, is there a particular program that you can talk about? I think maybe you (multiple speakers) you've gotten back in with Victoria's Secret in a bigger way. Is it a particular program with them?

I don't think we should get into too many specifics about their individual programs. But yes, there's no question that Victoria's Secret is a part of that momentum that we have. They've had some strong product launches which we are a big part of.

Okay. And then just my last question -- Bob, maybe this is for you. I'm just trying to get my hands around the earnings guidance as it relates to the sale guidance. You know, previously you had said kind of 5 percent sales, 5 percent EPS. Now you're saying maybe EPS is a little bit slower than sales. So it sounds like to me there is incremental investment that you've now kind of slotted in with maybe the stronger top line? And I'm just trying to get -- is that the case? Or am I mistaken?

You are exactly right. That's exactly what it is.

And it's across the board? There's no new big marketing programs or --

It is more across the board. It's in a number various. Mackey mentioned a number of areas -- some additional advertising spend and other investments all related to growth.

Juan Espinoza (ph).

Wellington. I just had a quick question. I don't know if it may have been answered in a different way. But I just wanted to play devil's advocate. Sometimes when acquisitions occur, in the time right before the acquisition, the acquired company has a somewhat suspicious increase in sales. And then afterwards, the buyer complains that the channels were stuffed with product. And I was wondering if in the due diligence process this is a possibility that was ruled out? Thank you.

We saw nothing like that kind of behavior whatsoever in our due diligence, looking at the Vans recent sales departments (ph).

Linda Donnelly (ph).

I am with the Franklin Management Group at Wachovia. Now with the recently announced two new acquisitions, could you give us an update for the year on what you anticipate depreciation being and capital expenditures -- and maybe also, the tax rate?

In terms of the acquisitions, we don't anticipate that they will add considerably to our prior guidance in terms of depreciation and amortization. It will not be a huge impact. It could be as much as $10 million for the year in depreciation and amortization.

All right.

So you also mentioned the tax rate. As we recognized the first quarter, our earlier guidance was 34.5 percent. We did take that down a bit in the first quarter to 34.0 percent.

All right. Do you think it will probably stay at the lower range?

Yes, we do. We do. We think that should be representative of the year.

All right. And then the other thing was an update on the capital expenditures for the year?

Capital expenditures could be up slightly -- maybe 5, 10 percent over what we initially provided, which was about $90 million.

Right, exactly. Okay, and finally, I just wanted to complement you all on the incredible annual report, the beginning. I have to tell you that for some years, I have been seeking the slogan, but now I know some point in my life I looked absolutely super with a tan. That made my day, probably made my year. So thanks again.

You just made Cindy's day, also.

Jeffrey Edelman.

UBS. Mackey, I think it's about a year ago you were saying that your major mass customers were sort of de-inventorying (ph) your products as they were trying to bring their inventory levels down because they were committed for some of their private brand at that time. Obviously, some of the pickup you've seen in the last month or two are rebuilding some of those inventories. Could you, one, by product segment tell us where you think the channels are vis-a-vis your product and current level of sales?

Well, that short-term trend does affect us both ways, negatively when things slow down and positively when they pick up. But it does not affect significantly our inventory that's going in, because we manage our inventory very closely to sales. And that is the reason why we get taken down in sales quicker than theirs will, and also, if they have a shortfall, we're able to pick it up.

But we're still working for the most part against the same models in the store. So we're still shipping pretty much the same amount of inventory in. What does happen when sales pickup is then they are not in the position of trying to curtail inventory, so we're not out of stock. So we do see some bump in sales as a result of that. Those are primarily, though, really short-term events that occur as sales either slow down or heat up, and they even out throughout the year.

Okay, and --

You asked what categories -- pretty much the replenishment categories, which are more the jeanswear and the intimate apparel categories for us.

Okay. I believe replenishment is typically run about half of those product sales. Did that increase much more in the most recent quarter?

No, that's still pretty indicative of where we are, about half --

Okay, then secondly, when you get this pickup in replenishment, or inventory rebuild, however you want to look at it -- is this typically a higher-margin business? Or is it more similar to the whole program?

Once again, it's generally not an inventory build, because -- the only way it would be an inventory build us if they were out of stock on our products previously, and now they're in stock.

Okay, let me to put it a little different then -- reselling or replacing?

Right -- just getting model (ph) stocks up to the right level.

Right.

What was your question?

Is this thoroughly (ph) a similar-margin business or a higher-margin business due to the nature of the product?

It's generally about equal to maybe slightly higher. It's our core products quite often -- with the real cost advantages we have, we do pretty well. So generally, I would say average to slightly higher-than-average margin.

Virginia Genereux.

Thank you. A few questions. I think -- Cindy and Bob, you guys restated some prior period revenue numbers -- it looks like to me, just put some things in different buckets, you know, out of the -- say, the jeans business. Jeans business a year ago was a little lower some other things look higher. Can you tell us maybe what was going on with the restatements? Just a revenue bucket shifting?

No, we haven't done any restatements for the quarter in terms of revenues.

Sorry, I had -- we can take it up off-line. I had numbers which I think are from what was in your Q. Anyway -- and then about playwear, can you tell us -- you might have mentioned that, what the status of that business is?

All we really (ph) said there, Virginia, was just that we expect to hopefully sign an agreement related to sale of playwear within the next few weeks.

Okay, so is there any sort of earnings -- I assume that that was in other revenue -- all other -- this quarter?

I'll tell you, we'll talk more about that when we make the announcement. But what I can tell you is that we don't expect any material impact to the remaining quarters of the year.

Okay. Then we'll see whether there is a loss on the disposal or something -- as far as non-cash -- okay.

And then, maybe, Mackey, if you can talk about -- we've chatted about this a little bit. In terms of your sort of acquisition outlook, it seems between sort of Nautica and Vans today, there were three years when you did not make an acquisition since The North Face. Are you getting more -- it looks like you've become more aggressive in your acquisition posture. I mean, is the fact that interest rates are likely to go up or anything going on in your core businesses that are making you more maybe aggressive in that regard? Or are we misreading that?

No, not in the regards that you just mentioned. We are more aggressive in our growth plans. A lot of that is due to the fact that this management team sat down about a year ago and looked at the opportunities in the apparel business and said, you know, there is more opportunity than we are participating in from a product category standpoint, from the growth of lifestyle brands. We really dominate in a couple of categories -- jeanswear and intimate apparel. But there is an outdoor world and a sportswear world that we're not dominating. I'm saying we should (ph), and we're going to be more aggressive and go on after some of those opportunities.

And also, in looking at our portfolio of jeans and intimates, we said, you know, there are gaps here. And we did extensive study, we had a number of outside groups, including BCG that came in and helped us analyze this. We really liked what we saw. Our management team got very excited about the possibilities to get out of the rut of being a relatively same-sized company. And we put together and extensive plans for going after this. The talent we needed, the new positions, investments, marketing -- and we developed a very detailed strategic plan of what we wanted to go after. And we're beginning to see the results of that. And we're excited at that, and we think we'll continue to see more results as we go through this year and the next two to three years.

Okay. And on the heels of Vans -- to sort of (ph) put the cash in here -- but I would say -- do you feel that you have sort of additional firepower to make other acquisitions this year? As you think about debt to cap, are you willing to let that go above the 40 percent type of target?

40 percent is our target. And we might go slightly above that. But that still would remain our target. We generate a lot of cash flow, as you know. And that doesn't mean it is burning a hole in our pocket. It just means that we do have the ammunition to fill in a good, strong portfolio of brands. We will continue to be in the market looking at the opportunities and what's available. And we will obviously consider our debt to cap position and the strategic advantages that an additional acquisition would bring, and make a decision based on that. But we are committed to our financially conservative approach to the business, as well as developing this growth and strategy. But we are looking at both of those carefully as we move down this road.

Okay. And lastly, Bob, maybe -- you'd referenced previously that you might reinstitute share repurchase plan come Q2 -- after you bought Nautica. But does Vans -- is it fair to say you might keep share repurchase on hold a few quarters?

That's right. It is very fair to say that. Given what Mackey just indicated, we are continue to look for the right opportunities. So no, we do not have any plan to get back in the market at this time.

Let me just comment on one other thing. What you may be comparing is -- sales in 2003 that we've presented in terms of presenting the breakout are on a business segment basis -- in other words, in compliance with the accounting roles and SEC requirements. What we began doing in 2004 was providing sales by the product group breakout. And when we provided those with the release, and they're a little bit different than the segment basis. When you look at the 10-Q, you'll see the segment reporting. I think that may be the difference that you're seeing.

Ah, so jeans and related will be different in the Q. No worries.

Yes, the breakout is just a bit different.

Marie Driscoll.

Standard & Poor's. Most my questions have been answered, but I was wondering if you could comment about sourcing this year with quota and China, that kind of thing?

We feel like we are in a really good position for what's happening worldwide sourcing standpoint. We have a good balance. We have about 6 percent of our production in the U.S. We have about another 50 percent in the Caribbean in a highly engineered, very cost-effective plants. We have another 30 percent in the Far East, which is a significant increase for us over the last three or four years. We have very strong sourcing operation organization in the Far East -- sourcing out of China. And primarily in other Asian areas.

And as a result of that, we have good, low-cost quick response capabilities out of the Caribbean. And we have some good higher needlework type products coming out of the Far East. Should the Far East -- should the cost there change more dramatically than we expect, we would be able to build up that capability there. Should something happen to restrict the changes that are projected, we have a very strong Caribbean base that is very cost-effective. So we are in a great position to be very flexible in adapting and adjusting to whatever happens in this very volatile sourcing environment.

So we feel good about where we are. And we will continue to move our sourcing, but it will be small incremental moves versus having to make large dramatic moves overall.

Can you qualified something on the tax rate -- did I understand that Vans has some tax loss carryforwards? And I did hear someone reiterate that 34 percent would be guidance going forward for the remainder of the year. Is that right?

Right -- we are looking 34 percent for the year. It would not affect our rate this year.

Steve Schofeld (ph).

Cirrus Fund Management (ph). The question is why did you structure that Vans transaction as a merger instead of a tender offer, given the shorter timetable for a tender?

We looked at it with our advisors, and concluded that was the prudent way to go in this particular transaction. We looked at both alternatives.

Was there any particular rationale?

I think you will learn more when you see the S-4. But we're not going to talk about particular parts of the transaction right now other than what we want to disclose.

John Rouleau.

Wachovia Securities. Just along the lines of the sourcing question. I know it's early, and nobody knows really what's going to happen next year, but are you getting a sense at all from your mass channel that they're expecting to flow price reductions immediately through? What's the topic of discussion around price with the mass channel, particularly if quotas do go away on January 1st -- or is it just too early to tell at this point?

Well, the pricing for the mass channel as well as any other channel -- our pricing and the prices they are willing to pay are more dependent on the demand the consumer has for the brands and the products than on the cost and the sourcing. That's always been the case. And the thing we have to be careful of as we look at what's happening is obviously the lower costs, which could be anywhere from 5 to 15 percent -- a lot of different projections. But if that actually translates, there will be some lower cost alternatives. We don't have to match our prices to the lower-cost alternatives. We just have to make sure the value of our offering is still relatively on the same basis.

So we always pay close attention. And we fortunately are in a great cost advantage position to be able to adjust our prices and take advantage of it. Quite often, you know, we're not adjusting our prices maybe as much as the sourcing costs are adjusted. So it doesn't necessarily mean this whole situation is a disadvantage or an advantage.

So in terms of not being able to borrow against quotas for next year, are you in any hot categories that you've had to adjust the sourcing matrix fairly substantially in the back half of the year that would potentially uptick costs a little bit?

Not at this point, no.

And then, finally, there's been a little bit of talk about some modest delays on the West Coast ports in particular, about goods getting through the docks because of increased scrutiny on trans-shipped goods. Is there any truth to that? Are you seeing goods take a little bit longer, and therefore, are you bringing in good earlier in the back half of the year? What is the outlook there?

We're not being impacted by that at that this point.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Virginia Genereux.

Thanks. Was there any impact from -- any sort of pull-forward in orders mass (ph) this quarter, either related to Easter, anything like that, part A?

And part B, the sort of incremental Nautica royalty was a little higher than I would have expected. Was there anything -- any settlement or true-up going on there? Thank you.

This is Eric, Virginia. There wasn't really a pull forward of orders, other than as we closed out the first quarter of Nautica, we had some summer merchandise available for shipment, and retailers had wanted (ph) it, so didn't get shipped until the very end of the first quarter.

On the Nautica royalty piece, I'm really not sure what your question is related to, because Nautica royalties are about as we planned them.

That's right, they were pretty close to where we thought they would be. And we saw a little bit of strength in some of our other royalty income as well, Virginia. But no, there was no true-up or anything unusual that was in there.

Okay. Thanks -- so that (ph) are more than doubled. And Eric, you're still thinking that for the year that Nautica does sort of 550 in revenue? Is that right?

Yes, that's what we're thinking. Yes.

(OPERATOR INSTRUCTIONS). At this time, we have no further questions. I'd like to turn the conference back over for any other remarks.

Okay, well, just to close, I think you can see why we feel good at VF. Our core businesses are moving, our acquisition strategy is bringing us some great new brands and opportunities. Our margins and cash flow are very strong. And we think we're going to deliver some very strong shareholder value. Thank you for joining us today.

Thank you, ladies and gentlemen. And that concludes today's V.F. Corporation first-quarter conference call. If you would like to listen to the replay, please dial 1-800-405-2236 or 303-590-3000, and you will need to enter the passcode of 578390 or 577599, followed by the pound sign. Thank you, and have a great day.