威富公司 (VFC) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to to the VF Corporation 2004 conference call.

At this tim 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, Wednesday, July 21st, 2004.

I would like to now turn the conference over to Mr. John McNamara from Financial Relations Board.

Please go ahead, Sir.

Thank you very much.

Good morning, everyone.

Thank you for participating in the VF Corp. second quarter conference call.

You should have all received a copy of this morning's press release.

If you did not please contact Samantha Alfonzo at Financial Relations Board.

Her number is to 212-445-8474 and she will send you one immediately following the conference call and make sure your name is on the fax or email distributions.

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

Before we begin I'd just like to remind everyone that certain statements included in today's remarks and in the question-and-answer session may constitute toward 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 conditions 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.

Go ahead, Mackey.

Good morning and thanks for joining us today.

With me today are our Chief Financial Officer Bob Shearer, our (indiscernible) Chairman, Eric Weissmann, Terry Lay (ph) and George Deerhoffner (ph) and Cindy Knoebel.

I am going to take a few minutes to review the highlights of the quarter;

Bob Shearer will then provide his usual commentary on the financials and then we're going to have Eric Weissman review our progress with Nautica and some of our plans for our newly acquired brands.

This was a great quarter for us by most any measure.

First looking at growth.

We had very strong topline growth of 12 percent.

Nearly all our core businesses enjoyed healthy sales increases in the quarter with particularly strong performances in our outdoor, intimates, and image wear businesses.

Our total jeans business declined 6 percent in the quarter with a 9 percent decline in our U.S. jeans business, due to some of the challenges faced by our key customers here.

However as indicated in the release, we do expect to see increases in the third and fourth quarter in jeanswear, based on many strong new programs in the pipeline.

We continue to feel very good about the strength of our jeans brands and are increasing brand investment to support future growth.

The acquisitions of Nautica, Vans, Kipling, and Napapijri added a total of 126 million in sales.

In the early stages of executing the long-term growth strategies of this core business growth is extremely gratifying for us.

In terms of acquisitions, I should point out that in the last 12 months, we've added over $1 billion of new sales from acquisitions.

Not only have we added great brands -- Nautica, Vans, Kipling and Napapijri, we have also added new growth engine.

Each and every one these brands has strong global growth potential.

We also saw solid growth on the bottom line with earnings up 20 percent and earnings per share up 18 percent driven by strong profitability gains in each one of our businesses -- jeanswear, intimates, outdoor and imagewear.

In the first quarter we made reference to certain investments that we were making to sustain growth and those investments continued in the second quarter with more plans for the balance of the year.

And I will be talking about these investments in a moment.

Second, our balance sheet.

You will note that inventories were up only slightly from last year's second quarter even with the addition of four acquisitions which added $153 million in inventory.

Inventories in our core businesses actually declined 9 percent in the quarter.

In addition, our debt-to-cap was -- (indiscernible) a level remains well below our long-term target of 40 percent.

Remarkable, considering we've invested $1.2 billion in acquiring new growth brands over the past year.

Third, cash flow from operations.

In the first half of the year, we generated $133 million in cash from operations.

Earlier in the year, we stated a cash flow from operations could range between $450 and $500 million.

Based on the strength we have seen to date we now believe this figure will range from $500 and $550 million.

In terms of our outlook for the rest of the year, we continue to expect another record year in both sales and earnings.

Sales are now expected to rise 12 to 15 percent.

The acquisitions of Vans, Napapijri, and Kipling are expected to add $275 million to sales this year.

And we continue to expect good growth in our core businesses in the second half of the year.

Last quarter we indicated that earnings per share could increase by at least 5 percent in '04 and we're now indicating that earnings could rise by approximately 8 percent.

The third quarter is expected to the particular strong with sales up 20 to 25 percent and earnings per share up 10 percent.

We're very encouraged by the momentum we're seeing this year.

Over the past several years, we have worked to improve our cost position with the result that we have been able to leverage sales increases into very strong bottom-line growth.

This is a great position to be in.

We are going to capitalize on the strong momentum we have and reinvest some of these earnings back into fueling future growth.

In the first quarter, we indicated that we plan to continue to invest in a variety of additional activities related to executing and fueling our growth plan.

These investments are expected to total about $45 million this year.

The good news is that we can make these investments and still deliver a record year to our shareholders with the promise of more to come next year and beyond.

In terms of the nature of these investments, roughly 38 percent is dedicated to brand building, advertising, marketing, brand positioning and research projects.

Another 7 percent is earmarked for our new customer teams initiative.

You may have noted that we recently announced the apartment of Mike Gannaway to the new position of the VP customer teams.

Mike will be spearheading new cross coalition strategies to accelerate growth with our key customers.

We also are spending behind what we call growth enablers, new talent and strategic planning and leadership development, also related to identifying and driving future growth opportunities which is expected to account for an additional 22 percent of our total investment spending.

Finally, we also are taking a very disciplined look at VF's supply chain.

And are engaging in a number of projects to determine ways we can create a more connected, streamlined global supply chain across all of our businesses.

Areas under review include inventory management, procurement, distribution, and technology.

These projects -- which account for about 33 percent of the spending -- are aimed at identifying new areas of cost savings that will enhance profitability and allow us to continue to invest behind our brands.

I would like to emphasize that this 45 million which is 27 cents per share is not related to charges we have to take or are required to take.

We are delighted to have the opportunity to make these investments as a result of the current strength we're seeing across our businesses.

Now, let's hear some additional details behind the numbers from Bob Shearer.

Bob.

I think we pretty well covered the factors relating to the sales growth in the quarter.

So moving down to P&L let me make a couple of comments about margins.

As indicated in the release, gross margins improved sharply in the quarter and we are seeing a positive impact of higher volume in most core businesses and also does businesses that are experiencing the strongest growth -- for example outdoor -- are driving higher overall gross margins.

And you'll recall that last year's margins were impacted by inventory control actions that were resuscitated by retailers adjusting their inventory levels.

SG&A as a percent of sales increased by 2 points in the quarter representing the same shift in the mix of our businesses that are previously mentioned.

The SC&A relationship in our core businesses remain flat in the quarter year-to-year.

Category royalty income and other rose significantly and we indicated in the release that this is largely due to the addition of licensing income from the Nautica brand.

Just below that line is a $10 million benefit that we recorded for the disposition of playwear.

In the second quarter, the net improvement from playwear represented 6 cents per share and a negative impact of 6 cents per share is expected in the third quarter primarily related to the exit of leased facilities.

The increase in interest expense reflects the higher level of borrowings related to our recent acquisitions and Nautica in particular and our tax rate was lower in the quarter -- 32 percent versus 35 percent in the same period last year.

Lower rate reflects the lower rate expected for the year as well as a favorable tax adjustment in Europe.

It is important to note that our expected rate for the year is 33 1/2 percent, which will result in a slightly higher rate in the third and fourth quarters than we saw in quarter 2.

Turning next to the balance sheet Mackey already pointed out that inventories showed only a slight increase due entirely to acquisitions.

Our core businesses did a great job in controlling inventories in the quarter resulting in a 9 percent reduction in these businesses year-over-year.

And as you know, we targeted debt-to-capital ratio below 40 percent.

At the end of the quarter this ratio was just under 36 percent.

Our strong cash generation has enabled us to maintain very good liquidity and, despite our substantial investment and acquisitions.

By year-end, our debt-to-cap ratio barring further acquisition activities, should approximate 30 percent.

In terms of our outlook Mackey talked about the $45 million in investment spending this year and I should point out that we expect most of this to be reflected in SG&A.

So accordingly as you would expect this spending will impact margins in the second half of the year and therefore for the year as a whole.

The additional investment spending will cost us about 75 basis points in our 2004 operating margins.

In terms of our guidance for the fourth quarter it is important to remember that the fourth quarter of 2003 included $35 million of playwear sales that won't repeat in 2004 and also last year's quarter included a favorable tax settlement.

In addition, a major portion of our growth plan spend is expected to take place in the fourth quarter.

Now we'll hear from Eric Weissman.

Thanks Bob.

A busy quarter for us in the acquisition front.

I will start by reiterating some of the points made at our recent Nautica analyst meeting.

First, we recently completed the most extensive brand research consumer positioning project in Nautica's history.

As a result we now have a clear understanding of who our target consumer is, what they expect from the brand, and what we need to do to deliver on those expectations.

We also finalized and implemented a new strategic planning process within Nautica and our entire management team is now working together to implement that plan.

Second, I am pleased to report that the Nautica brand is performing above the expectations we developed at the start of the year.

Now the real over-the-counter improvement began with Father's Day when we implemented our new advertising and had more Nautica brand right product at retail.

We're also making solid progress towards improving profitability.

At the time we acquired Nautica, it was generating operating margins of about 7.3 percent excluding special charges and we stated our intention to meet VF's operating margin target of 14 percent and we expect to make substantial progress towards closing that gap year.

To sustain our momentum we are increasing our Nautica advertising by 60 percent this year, almost all in the fall.

We expect to have even more Nautica brand right product on the retail floors supported by a strong new advertising message.

As stated in the release our fall orders remain on plan.

I should emphasize that we still have much hard work ahead of us to achieve our potential at Nautica.

We've lost about 20 percent of our space at retail and could lose some additional space this fall but even in less space, we've significantly improved our productivity.

For example sales are running flat to up slightly on about 20 percent less space with our two top customers.

As we get the business stabilized we continue to be very excited and optimistic about the growth prospects for the Nautica brand, particularly in Europe and when the time is right, women's sportswear.

That provides a natural segue to our Napapijri position.

We said that one of Nautica's biggest growth opportunities is to launch the brand in Europe.

Two issues that the brand has had in the past were first, the lack of an existing European platform to support expansion into a variety of different countries and markets; and second, we have active design capabilities to translate the brand appropriately to European consumers.

As you know VF has a very well developed and efficient infrastructure in Europe which supports our jeans and outdoor businesses.

And one of the many reasons we like Napapijri is that it gives us a very talented sportswear design team that is capable of interpreting the Nautica brand for European markets.

The integration of Napapijri is on plan, we're currently working to strengthen the sales of marketing organizations in Europe, North America and Asia to support the growth we envision for the brand.

International, fall preseason bookings are 8 percent ahead of last year and the U.S. is up 47 percent.

Now at 76 million of sales the brand is relatively small by VF standards but we're planning double-digit growth for Napapijri.

We also believe the brand has a lot of potential for expansion in the U.S. and we are building a Napapijri U.S. team at the North Face offices in (indiscernible), California.

Now on to Kipling.

The integration of Kipling is made particularly easy -- as if integrations are easy -- by the fact that our European Pax business is headquartered only ten miles from Antwerp where Kipling is based.

Our plan is to establish common offices sharing all operating platforms but keeping dedicated sales marketing and product development with everything integrated in our European Pax office within the next 12 months.

The Kipling brand is a great addition to our Pax portfolio.

JanSport is really positioned as an outdoor brand while Eastpak is more of an urban street brand and Kipling is primarily a women's accessory brand, grounded in a Pax foundation and lets us meet the needs of a new consumer.

We also expect double-digit growth going forward for this brand which had 2003 sales of $69 million.

Based on transversing from new products and continued expansion of Kipling owned stores in Europe we're confident we will achieve our growth plans for Kipling.

Last, Van.

As you know we just completed this acquisition a couple of weeks ago and included a grand total of three day sales in our June resulted.

Absolutely pushed VF over the top.

Vans is clearly the biggest and most complex acquisition we have made this year.

We have been working on an extraordinarily detailed integration plan with comprehensive work plans covering everything from the front end to the back end of the business.

We actually kicked off the integration process several weeks in advance of the closing and I'm delighted to report that we are ahead of schedule in every area.

We have moved quickly to establish a new organization structure.

Steve Murray has been named president and we are delighted at the leadership Steve has provided to the business over the last six years.

He will be reporting to Mike Ejack (ph) who we recently named as president of all our outdoor businesses in North America.

Vans operations, finance, and sourcing now report to the counterparts within our U.S. outdoor coalition.

Now I'll turn it back to Mackey.

Thank you Eric.

To summarize, I'd like to make 4 specific points regarding these acquisitions.

First, all of these brands -- Nautica, Vans, Napapijri and Kipling were attracted to us because they're true lifestyle brands.

Brands that are very clearly targeted to a specific consumer with products that extend across multiple categories.

This gives us a tremendous opportunity not only to apply the brand building skills and technology that has made us so successful in our core categories but to build more of our brands into true lifestyle brands.

Second, Eric made it quite clear that the integration of these businesses is all going extremely well.

We're taking full advantage of the capabilities and infrastructure we have within our coalitions to jump start growth in each brand of sports energy and leverage strengths.

Third, these brands give us strength in areas that in turn should benefit our core businesses -- for example in sportswear, footwear, and accessories.

Lastly, we remain very encouraged by the growth prospects we see for these brands based on their unique brand positioning and distribution which in most cases is still quite limited.

It should be clear by now that it is no longer business as usual at VF.

Based on the kinds of numbers of acquisitions we are adding and the investments we are making in our future, we're well aware that for some time now we have faced a growth challenge.

We've taken this challenge to heart and are doing what is necessary in a very focused and disciplined way to meet our long-term growth targets.

Now I'd like to turn it back for questions that we would be glad to accept.

(OPERATOR INSTRUCTIONS) Ron Phyllis (ph).

I'm not sure we fully understand customer issues that affected your jeans business in the quarter.

Was wondering if you could help us understand that a little bit better?

We definitely saw a weakening, overall, in denim.

We have plans for part of that.

I'm sorry.

I said we have plans for some of that the but definitely (technical difficulty).

So what you're saying is the market in your opinion, the market was down in the quarter?

(technical difficulty)

You seem to be breaking up a little bit.

We didn't get all of that.

Is this better Ron?

Absolutely.

All right, well -- I was commenting more specifically on the channels in mass, excluding Kmart, we were actually up slightly.

Our riders brand on the female side and also our blue program -- blue jeans program in Target continue to perform very well overall.

We actually have additional load-ins in the second half around those programs.

For instance we are expanding to large sizes in Target chainwide.

We're also rolling out a girl's program in Kmart across 1,000 doors.

On the male side, we have a major launch of Wrangler jeans company.

Second half.

And that initiative is both core and basic fashion products.

We have a full integrated marketing campaign which includes sponsorship by Dale Earnhardt Jr.

We have TV prepped in-store.

That program will be in every door of every mass retailer in the second half.

So while the quarter was relatively difficult, particularly June, I think as we look forward in mass we see ammunition.

When we look at the Lee brand, we had loaded in a year ago in the second quarter around shorts, capris, more seasonal goods.

Programs that frankly did not perform that well affected our profitability.

So we went into second quarter more conservative around those items.

As Mackey indicated, our inventory is in very good shape, and, overall across channels we feel very good about not only our internal inventories but our inventories at retail and, again, we have a number of important initiatives geared up for the second half.

Our Lee dungarees program continues to expand, including Buddy Lee Register.

We launched One True Fit that is gaining momentum.

We are planned up in the second half and we've also introduced in our Missy denim category a program called Ultimate (ph) 5.

A product group called Ultimate 5 and the early results on that are encouraging.

In the specialty channel where our core Western business resides, we did see slower traffic in the second quarter.

Again, our forecast enact channels a second half beard we have just introduced a new female program called Aura by women for Wrangler.

Again early results are positive.

We have a number of load ins occurring now.

There will be whole marketing support around that important female initiative.

Our Regs (ph) workwear business is in its second year, continues to grow.

Grow strongly and in addition to our core specialty accounts or in sporting goods accounts such as Dick's in second half.

So again second quarter was tough, no question about it as we indicated -- down 9 percent.

But relative to category in the market and also looking forward at our plans while no doubt the replenishment business will have a lot to say about the second half.

We have a lot of reasons to feel good about our product and our marketing initiatives.

Maybe this was lost in the sort of garbled communication we started out with but are you saying that the market was down?

The jeans market was down and you were down less than the market or more than the market in the quarter?

Well, besides our retail partnerships, Ron, we see not only ourselves through this but we're category captains and have close relationships.

So we have a very good sense of the market and yes the market was down in second quarter.

And you were down more or less than the market?

Which is it?

We say we performed every bit as well as the market overall.

How is July sort of feeling from a market prospective ex pure sale ends?

What with new product initiatives?

I think from a shipping prospective as I said we had several load-ins pushed from June to July.

Right now, we're on track with our July forecast and I would say pretty much the same thing from a sellout standpoint month to date.

On the acquisition, could you comment on whether or not this might be something you would be interested in going forward and if so is there anything you are looking at right now that you're kicking around?

Is that specific to jeans or --?

What was your question -- I didn't.

I'm wondering if the firm is interested in the near future over the next 12 months or less in making acquisitions?

Is that something you feel you could do?

Yes we continue to look for acquisitions and our primary targets, our lifestyle brands that are in the categories that ran which include jeanswear and apparel sportswear but we're primarily looking not for category brands but for lifestyle brands and we continue to be very active in the acquisition market.

Many folks have wondered if you have much interest in the Dockers brand at all?

We've looked at that.

As I said our primary focus is on lifestyle brands that are not a duplication of the businesses that we're already in that but additive to our businesses so we are looking in the acquisition market.

That probably wouldn't be one at the top of our list.

So should I take that to mean that you're still looking at Dockers or that is something that you're just not interested in?

I would say that it's not at the top of our list.

Thank you.

Dennis Rosenberg.

Credit Suisse First Boston.

Good morning.

The 45 million of investment spending -- how much of that is going to be recurring in future years?

We're going to continue to invest in growth.

We have stepped up our investment behind our core brands as well as marketing of the new brands that we've brought in.

We will also continue making investments in cost-cutting initiatives that will help us to fuel the growth.

As a result of that we would expect to see improved profitability in some of the acquisitions and businesses we are buying.

We plan to continue to see the benefit of a growing top line, so -- the best way we look at it is we will be continuing to make a higher investment than we have in the past but we also expect to see the returns from top line growth.

So we are looking at 14 percent operating income as being the target resulting in increased investment vs. the benefit of more top line growth will give us the same target for operating margins.

The other question I had is the recent acquisitions -- could you give us a sense as to what you expect the accretion to be next year?

Yes, no, we're not -- Dennis we won't talk about next year yet.

But we made it clear I hope that this year we are looking at 7 cents a share.

Obviously more to come on next year when we talk about then.

Could you tell us what the historic -- some of these private companies.

Could you give us some historic numbers as to operating income?

From a buying basis?

Yes on a historical basis the Kipling and Napapijri brands have been in the 10 percent area overall and you probably know Vans has been less than that -- probably half of that.

More recently and obviously a couple of years before that were even a little tougher.

Virginia Genereux.

Hey, good morning, two questions if I may.

The first is I think Levis on its call last week talked about the contract manufacturing environment being tighter and sort of higher denim fabric costs impacting their cost of goods sold for the back half.

Can you talk a little bit about and I notice that -- some of this 45 million is going to sort of supply chain investments?

Can you talk a little bit about what you see both on the cost side in the denim business in particular, going into the back half.

And maybe into spring '05 and also if you could talk about the pricing environment given the yada yada quotas being eliminated back half and any insight that you have into spring '05?

That's one.

Well, Virginia, this is Terry.

On the supply chain side in jeanswear I think we have reasons to feel good at the moment about our position.

First of all, our fabric pricing is locked in through the end of '04.

We have not begun negotiating '05 yet.

Right now, cotton prices in relative terms are favorable but on the fabric side which is important to overall costs we are locked in through '04 and that's reflected in our forecast.

And in addition as you may remember, we made substantial investments in Mexico several years ago.

And our efficiencies there are coming online and improving and our capacities are growing and we are getting the benefit of that.

That's one reason we are seeing substantial profitability increases.

Of course, we also have both contract sourcing and we've gotten more aggressive in Asia particularly with fashion projects.

No one can predict the exact outcome of '05; however we are in negotiations right now with our key suppliers in Asia.

And we feel we are in a very good position because we have a balanced strategy both on and off shore.

We have strong partnerships with our key contract providers and, frankly, wherever this market and wherever costs go we think we're pretty well positioned to move with those trends.

Thank you Terry so no discussion so far, no insight on your pricing outlook for early '05?

I think the best time for us to really talk more about that would be as we see fabric pricing come into focus.

That's an important part of our overall cost structure.

So I would say as of this moment nothing to really to talk about for '05.

Okay but you are going to start negotiating that pretty soon, I imagine?

Right?

About pricing?

That's right, we're talking to our suppliers everyday but yes we will.

And secondly if I may how about the European denim business?

It looks like it was still down slightly maybe in constant dollars this quarter.

I know that's been tough for you for a while.

Could you just comment on the outlook of the European -- international jeanswear?

That is right, I would say the European market continues to be sluggish.

We were up about 6 percent and flat to down 1 percent, currency adjusted.

Frankly that was mostly in the HIS brand and the HIS brand 80 percent plus of its sales were in Germany which continues to be a relatively tough market.

Having said that we have some important new initiatives and for instance our Ex-line (ph) initiative in Lee which we expect to be a $50 million program on a four-year basis which really rolls out for fall and is fully supported from a marketing standpoint.

We have a number of new contemporary hits on the Wrangler side, again supported with integrated media under a Wanted campaign -- featuring each of those fits.

But, overall, our Lee and Wrangler brands we think are well positioned in this market.

Having said that the European market has been one of the more difficult markets on a sustained basis.

In relative terms, our performance improved from the prior quarter and we are forecasted on a currency adjusted basis to be up slightly third and fourth quarter.

Great and then, Bob, just one for you real quick -- on the cash flow side did you -- can you comment on share repurchase and our dividends increase or -- and then your dividend outlook or you think you might keep your powder dry for continued acquisitions?

Well on the dividend side to start with, Virginia, we've as you know we've been increasing our dividends somewhat each and every year and we would probably do that.

Because we targeted a 30 percent payout overall.

On the buyback program right now we are not active in terms of buying back shares.

As we said in the past our priority remains on the acquisition -- on the acquisition front as Mackey said earlier, we are obviously still active on that side.

So for now, no change.

Noelle Grainger.

J.P. Morgan.

Good morning.

First just on the jeans business, the decline in the quarter.

Could you discuss the kind of units vs. pricing?

It sounds like it's more of a unit shipment situation, but could you just clarify that?

Well it varies a bit by channel know all.

I would say in the mid tier our average price was up slightly.

Actually, so, a bit more of the unit impact.

In mass, I would say units and dollars were more -- pretty much tracking each other.

I don't really see, overall, when I look at units and I look at pricing what I would call significant shifts from the prior year.

Okay and shifting gears to imagewear.

Curious if you can talk a little bit about your outlook for the category and there's been a lot of talk about license apparel weakening.

It seems like it's maybe more on the fashion side of the business and you guys would be more on the sand more basic side of the business but can you kind of generally discuss what you're hearing from your customers and your outlook for that business for the back half of the year?

This is George.

Our license sports business, as you saw in the quarter, was up very strongly.

And that was led by baseball was off to a terrific start.

We're very very hopeful that these great races that we are seeing continued.

Our Harley-Davidson business also performed very well and we are actually very optimistic about our bookings and sales for the rest of our year for our license sports business.

We think we are going to have another very strong NFL season coming up and so I do think that you're right.

Some of that discussion is more on the fashion side.

As you know we are more fan based so we are enthusiastic about that business.

That business has had very dramatic growth over the last few years as you know and we are encouraged by what we're seeing for the rest of this year.

What about NBA and college?

I mean (indiscernible) specifically said college yesterday in their press release.

Our college business is similar.

Our college and NBA businesses are not as large as for instance our NFL business for us.

We don't do a substantial amount of NBA business but our NBA business is doing okay.

There's been some recent activity going on as you know in terms of players and movements that's been helpful to us in that respect.

In our college business, we're seeing again bookings that are strong for the back half and part of that is what we continued to do from a product innovation side.

Okay and then, Bob, can you give us an update on where you currently stand with respect to how much of your product is sourced vs. your own production and then U.S.

Western Hemisphere, China?

It really hasn't changed a lot since the discussions we have had in the past and we are still about 30 percent Asia-based and of course those are primarily packaged goods that come from Asia.

And also in terms of owned plants we are right at about half, pretty close to half of our total business is made in our own factories which you know are primarily located in Mexico and in the Caribbean Basin.

A very small piece of course exists in the U.S. probably less than 5 percent overall.

So that continues to decline.

Is your Asia -- is that primarily China and Vietnam?

No it's really spread pretty broadly.

Yeah.

Then my last question is on the investment of the 45 million.

Can you give us a sense of what's changed, relative to last quarter, in terms of the magnitude.

I don't think you had previously kind of indicated a specific number so how much has this increased, this kind of -- would it be curious about?

It has expanded a bit from the last quarter and you are right.

We didn't give a specific number but we talked about the idea that we wanted to invest and, obviously, we had a number targeted at that investment and it has increased from the last time we talked.

So we wanted to be more specific about it this time because it is a fairly significant number and has an impact overall on what we reported.

Jeffrey Edelman.

UBS.

Two questions.

One on the intimate apparel, that's sort of a nice bounce in the quarter.

Could you give us a sense of these new line introductions?

Were these more business of existing accounts?

Jeffrey, this is George again.

I would say that it was firing on all cylinders for us in the quarter.

Certainly we benefited by a somewhat improving market and -- but in addition our brands perform very very well.

Our Vasserette business in particular -- which it had a few tough years -- has absolutely rebounded in a very very positive way in the mass channel.

Turning in some early strong numbers.

Our Curvacean business which as you know was just launched last year for curvaceous women -- that's the one that we're backed by Queen Latifah -- continues to have very good momentum in the mass channel as well.

Our Lily of France business and the Department of Chain business had some wonderful numbers and our Vanity Fair business has been repackaged.

And we are going out with a big new launch called Body Sleeps for this fall.

And in addition to that, I should add that our private label business was very, very strong as well.

So, overall, when you look at the market, was somewhat better but there's no question that our brands overall perform better and our private label business was strong in the quarter as well.

Okay thank you.

And realizing most of these divisions are up against very easy comparisons last year, could you put into perspective where jeans and intimate apparel profits rank, relative to two years ago?

For the profitability?

What's the easy comparison in that you make? (MULTIPLE SPEAKERS)

I mean I am just trying to relate to the margins of the two divisions or businesses compared to two years ago.

Yes we were and I think where you stand last year and the second quarter we talked about we had some downtime in the plants and that kind of thing.

So that's absolutely true and, yes, we are clearly more in line with where we were a couple of years ago or even slightly up.

We are seeing strong profitability improvement in our core businesses that you mentioned and it's driven by a number of things.

We continue to move last year's some additional manufacturing outside the U.S. and the lower cost locations and we're just running the businesses very, very efficiently.

When you see in the cash that the inventories are really under great control and the core business inventories are declining all of those things, they're not only balance sheet and cash flow issues but it also is a major contributor to P&L and profitability.

Then, getting up to this 14 percent target.

Is this a function of really getting a good kick out of these acquisitions?

Or is it that a combination of just leveraging corporate overhead?

I tell you it really is a number of things.

And no it's not corporate overhead.

Our corporate overhead is actually below, all right.

But it is, we feel that we have some further opportunities.

As good as we felt about our inventory performance Mackey mentioned that a part of our gross stand is intact related to looking across our Company and leveraging more of the power of VF Corporation rather than a coalition by coalition basis in some cases so that's a piece of it.

Clearly the acquisition performance is a piece we continue to see improvements in our outdoor and our imagewear businesses in terms of overall profitability.

So yes we feel that 14 percent is attainable and will come from a number of different directions.

David Griffith.

Tradition.

Hey, Terry, sorry to keep coming back to the jeanswear side but did you say that mass was up excluding Kmart -- did I hear that right?

Our shipments in second quarter were up excluding Kmart yes.

Slightly up in mass.

So is that an indication that I mean of the magnitude at Kmart or was the weakness in jeans more across the specialty that you talked about?

Well when we look at sellout, overall, across all of our accounts particularly June was a very soft month and, overall, in the quarter as we indicated was soft year on year in terms of denim sales out the door.

I don't know if I'm answering your question exactly but --

I mean was.

It does -- to answer your question, yes, there's some indication it's a significant customer for us.

And they have changed their strategy somewhat.

It's having some impact.

As we said earlier we feel very good about where our jeans business is today and our brands.

We've got some of the strongest new marketing programs we will have.

We are being impacted by some of our customers who are going through some changes in their strategy and number of stores that they operate and the amount of product they are turning through their stores and it's having some impact because they are large customers of ours.

But in each one of our accounts, we feel very good about our marketshares doing vs. those accounts.

For the most part we are doing well in market share within each account.

But we do have some accounts that are going through some changes and we are changing with them and seeing results of that.

But as we go forward the rest of this year as we said we anticipate our business growing on the jeanswear side.

Pleasantly surprised in the trends in occupational apparel.

Could you kind of touch on what drove that for you?

David this is George again.

We were pleased as well.

We were up for the first time in that core business in some time and I would say that overall we are a pretty good proxy for the economy.

We are a large player in that market and certainly the addition of 1 1/2 million jobs in our economy showed up for us.

And I should add in addition to that, I don't think it was just that.

We had some really good success with our large global account business in both the private and the public sectors did very very well in the quarter.

And overall we do think that we've been working for some time as you know to get the business repositioned and we've done our dirty work if you will from a cost point of view.

We have a very profitable model now and we're very focused on the top line in driving those sales and executing our vision of a ones stop shop for corporate image of apparel business and I think all those things are adding up for us.

Robert Drbul.

Lehman Brothers.

Two questions.

The first one I guess Mackey and Bob, both.

Given the sales weakness that we saw in retail in June, I am just curious in terms of have you heard more of a conservative posture come from the retailers in terms of their plans for the back half of the year and I guess in line with that would be when you think about in your core businesses can you just share some your replenishment assumptions in terms of the sales numbers you are going into the third and fourth quarter?

Retail, Bob, as I talked to retailers which I've been doing recently.

Feel fairly good about the fall and the back to school, getting into the fall season.

A little different based on the channel distribution.

Obviously the higher end retailers are enjoying more of the benefit of straightening consumer spending and as you get lower into the mass channel where consumers are probably more affected by impacted energy costs on their disposable income, you are seeing softer spending.

But we are seeing more softness in the mass channel as you move up into the mid tier than you would see in the upper end.

So that's causing a different effect depending on where you are.

But what we do feel is most retailers for mass general all the way up through department stores feel fairly good about back to school.

And as we see some improvement in the energy costs and some improvement in disposable income for that middle to lower end consumer, I think we'll see strengthening there.

So there is some level of confidence.

We haven't seen a tightening up of plans for back to school at any level of distribution at this point.

Your second question, I'm sorry could you repeat that?

The second question just was when you look at the self assumptions for the back half of the year in the third and fourth quarter, what are the assumptions around your replenishment trends and incorporated in those -- in the sales guidance?

Our replenishment plans are basically the status quo.

We don't expect to see a significant change either up or down in those.

It would be relatively stable.

And a lot of our projections that we are talking about are based on a number of new programs that we are launching and have in place and will be loading the second half.

That's particularly on the jeans side.

Really across all of our categories.

We have been seeing that in many of our categories and we expect to see that continue to impact our core business as well as having the new acquisitions on board.

And one final question for Bob.

When you look at the acquisitions that the Company has added, it has added a whole lot of complexity to your business.

Could you give us an update in terms on your systems investments that you made in terms of how you're handling a lot of the complexities in your plans going forward on that?

Each one is a little bit different and has a bit of a different plan.

But we feel we have a very manageable plan in terms of bringing those companies onto our systems.

In other words we will do it when the timing is right considering all of the VF needs.

And there are some opportunities to reduce cost overall, as as you might imagine.

So and I think the other thing related to the acquisitions is that we've commented on this before, that they really impact different groups of people and so none of the acquisitions all fall on like one of our groups of operating folks.

So it's pretty well spread out from that standpoint.

So we think it is very manageable and we have a good plan to get to where we need to get to.

Linda Donnelly.

Franklin management group at Wachovia Securities.

Just a couple of quick things.

I believe that the conclusion of reporting in the first quarter, you gave us an indication for capital expenditures and depreciation of 97 and 129, respectively.

It seems you're running a little below that guidance.

Are those still your projected numbers?

Yes they're still close.

The acquisitions will add a bit to that but the numbers overall aren't so far off.

Again, especially, on the amortization.

The amortization will increase somewhat but not in a material way.

All right and finally you also gave us guidance on interest expense between 70 and 75 million and that looks like you're going to be right on target.

Is that correct?

Yes that's right.

Pretty close to that.

Marie Driscoll.

Standard & Poor's.

I have two questions.

One is, could you give us some insight into the European jeans market?

How it's different from the United States by channel by fragmentation?

Whether it's more fragmented or not?

Well, it clearly is more fragmented.

There are 14 I guess core markets in Europe and then of course markets beyond that.

As you know it's not one common currency seek nor one common culture nor one common seasonality or body types.

So there is quite a bit of fragmentation within the market, market by market if you look at the brand or the retail structure of the market.

Overall it's a more premium market; overall the mass market is 10 percent or slightly less of the total market, mainly due to the legal barriers of mass putting down significant retail space.

So I would say that the structure of the market clearly is somewhat different.

It tends to be a bit younger as a market, a more fashion driven.

And all those of course are things we are dealing with on a local basis.

Having said that -- and it has been a relatively tough market as I commented -- having said that as I also commented we feel in and relatively good shape for the second half.

Who was the big brand (indiscernible) with them?

Do you have the same kind of presence that you have here or is there like a market share opportunities for you there?

Is the market growing or is it basically --?

Well the market strata has some commonalities by brand in terms of Pan-European type players.

It is Wrangler, Lee, Levi.

The premium players that you see in the premium end of U.S. market brands like Diesel, brands like G Star, certainly are a market actor.

There are some brands important in Europe that don't have a significant position in the U.S. or have entered the U.S. more recently like Replay like Miss 60 -- so and I would answer your question yes.

It is a more fragmented market that has its difficulties that also has its opportunities.

Long-term on a share basis.

And frankly as the world globalizes we think that we will benefit us and our strategies and our capabilities.

And it sounds like one of the bigger barriers is the legal barrier.

In the mass retailers expanding and if that barrier were to come down you might get greater penetration just by your ability to operate with a mass channel.

Well I think our outlook for the mass channel will grow in Europe.

To date, the UK and France are the largest mass market markets.

It is very different.

For instance, in Eastern Europe there are many -- fewer barriers and we are seeing much more rapid expansion as Eastern Europe develops.

So it's a bit different by country by market but we clearly -- our outlook overall with the mass market and our key partners there would indicate growth.

My second question is, looking at the recent acquisitions over the last year, year and a half they seem to be very aspirational type brands which to my mind is somewhat different than the position of your core brands here in the U.S.

So could you talk to that and how that might change your strategy?

Well, we have stated the strategy going back a year or so ago of moving more towards lifestyle brands.

Lifestyle brands are brands that we feel are established in the consumers' mind and relate to activities and lifestyle vs. to a product category and obviously gives you more substantial growth opportunities because you have multiple categories underneath the lifestyle and going back to our North Face brand and you can go back to our Wrangler Western brand.

Wrangler Western brand obviously is more about lifestyle and it encompasses all Western wear.

The North Face brand encompasses many different categories and we have seen significant opportunities as a result of that type of brand.

We have been moving in that direction with the acquisitions, but what we think we bring to lifestyle brands which they don't currently have is the ability to manage inventory.

They have basically brought in collections and those collections have had varied levels of success and result to disposition of inventory for many of the sportswear brands is a real challenge.

We think by bringing lifestyle brand concepts but managing the categories within that lifestyle in a much more disciplined way, we can 1., give the consumer what they want but also give a much greater profitability both to ourselves and to the retailers.

So we think it's a great combination.

We will continue to move in this direction in the future.

Do you intend to alter the channel mix of these brands?

For the most part, these brands will stay at the same channel they are currently in.

And almost in every case, the brands we've acquired, we feel like there's tremendous opportunity within their current channels of distribution by really exploiting as I said the categories they are in or could be in, that we bring strength to but that also the ability to manage those brands in a different and better way.

John Roleau (ph).

Wachovia Securities.

Wondering when you think you might be ready to start offering some of the Napapijri product here in the U.S..

It sounds like we're going to see some of that into The North Face near-term but when might we see product at retail?

(MULTIPLE SPEAKERS)

I'm glad you like to the brand.

We just included the Napapijri Acquisition last month and there is a fall order book that we will ship this fall.

We are working right now we just did a collective in New York last weekend to this unit's spring product.

It's a very mall U.S. business as acquired.

And our intent is obviously to build it as quickly as we can.

We are working on spring, but we will have limited ability to do that because most of that product is already in the pipeline.

The first big step, the first big opportunity for us to broaden the brand in the U.S. this fall and that's really what our plans are.

And so you're going to have to wait maybe a little bit or come up to New York City -- there's a store that will have it right now.

Right and then you alluded to maybe housing that with The North Face how will that work?

Will you eventually be creating separate product for the U.S.?

Will it fold into North Face -- how will the structure look like here in the U.S.?

Sure for the short-term the product that is available in the U.S. is coming out of the Napapijri machine in Italy.

That will remain largely the case.

We will have some people at the North Face, a new team that we're building at the North Face interpreting some of that product to make it right for the U.S. market so that -- they've actually made two trips to the Napapijri in Italy and working on fall '06 designs in the early stages to identify what we think the core items will be for the U.S. market and to interpret them to the fit requirements of U.S. market.

And then, lastly, I am just curious.

Have you introduced or I'm not even sure -- does North Face offer a jeans, or Napapijri offer a jeans product?

That seems to be 2 brands where you could position something more at the premium level and put something out that that maybe the market hasn't seen for awhile.

What's happening in jeanswear for those brands and maybe some of the other acquisitions?

Neither.

The North Face brand does not have a denim program at this point, they do have some performance pants, but they mostly build it around the outdoor positioning and they're for hiking and climbing and for water sports.

There is not -- there is no denim program.

The Napapijri business has a large pants business.

That is not really denim focused.

It's more of an Italian fashion business.

Okay, so plans to introduce denim into either one of those or really nothing at the moment?

Nothing in the works.

I'll add to the Vans business has a small denim component to its apparel business.

You have maybe (indiscernible) talk about Van.

The apparel business there is very small to date and it's a very big opportunity we would expect the jeans that watching more band denim would be a part of that growth.

To follow up, John on one of your questions -- was our intent with these acquisitions is to keep the front end separate.

So that we have separate product line that is very distinct for each brand and each brand's positioning.

We will utilize the synergies of having these coalitions and outdoor coalitions to bring a lot of capabilities -- entering new markets, new sales groups.

But they won't all be lumped together and become homogeneous.

They will continue to be very independent as far as their presentation to the consumer and into retail.

Virginia Genereux.

On the North Face the fall booking's up 47 percent.

Can you comment on the strategy there?

I feel like a little maybe sort of expanding the price point offering may be a little lower, do you feel like you're gaining share for maybe some sort of, historically, lower-priced product?

What would you say is the key growth driver there?

It's a fairly robust growth strategy that is not new news there.

They have been working going down this path for a couple of years and they're really right now starting to see the fruits of of the strategies they have been working on for a couple of years.

And it is -- there are three pieces of it I guess are the big picture.

It's complex to describe a 47 percent fall preseason bookings number.

Part of it is a focus -- increased focus on their outerwear business, which is growing double-digit.

And they are better at that, and they're segmenting it more into snow sports vs. climbing so they are getting growth in outerwear just by segmenting their approach and having distinct design teams working on snow sports for example vs. general outdoor outerwear.

Second is getting more into the sportswear business as appropriate for The North Face.

The launch of A5 (ph) a couple of years ago has taken them into kind of apparel that climbers would wear when they are not climbing -- kind of off the wall or off the rock kind of stuff.

And last is new categories.

Footwear was launched two or three years ago.

They have been consistently investing in their footwear business.

We see that as a big opportunity.

That's an example of a new category that is driving growth.

So it's really expanding the line from core outerwear into more sportswear, launching new categories like footwear, and just doing a better job at core outerwear.

We got the whole thing working out there.

Sounds good; thanks a lot.

Ron Phyllis (ph).

I think this (technical difficulty) question got sort of lost in our little telephone problem we were having early on.

You indicated that some of your retailers are going through changes.

We are not exactly sure what that means.

If you could explain it for us?

Say that again, Ron?

You guys had indicated that some of your retailers were going through changes.

This was -- the comment was made in reference to the jeanswear.

Obviously, Ron, we have difficulty in getting into real specifics about how each retailer is performing, because they don't care much for us talking about their results.

So it is hard to get into a lot of specifics with this.

I guess the only thing I can say is, if you look at some of the larger retailers currently, some of them today are going through some challenges as far as comp store sales.

Some of them are selling off some of their stores.

And for the most part we have large positions with those retailers.

So when they go through these changes it has some impact on our sales in the short-term.

We generally do very well over the longer-term, because if they sell some stores to someone else, then we generate or sell into people they sell them to, so we pick up those sales.

But in the short-term it has short-term impact on us.

And that's what happened in the second quarter.

We don't view it as a long-term issue or a long-term problem, because that sorts itself out over time.

But it's hard for me to get into a lot more specifics and go down and talk about each retailer and their results and their strategy.

Understood.

I think you have a fairly significant business, or had a very significant business with Kmart.

Is that correct?

Yes.

At this time, management, there are no further questions.

Do you have any further comments?

Okay, thank you for joining us today.

I think as you can see we are delighted with the quarter.

We think the quarter indicates our feeling about the future of VF.

We've got great new brands; we've got some terrific acquisitions.

They give us new growth opportunities for VF, but more importantly our core businesses are healthy.

As you can see, the bottom line performance of all of our core businesses is very strong.

And we feel as we go through the year we'll see a good momentum in each one of these core businesses.

And they will fuel not only the ability to invest more in our core businesses, but to continue to add the kind of lifestyle brands that open up new growth opportunities for VF, and as a result give our shareholders a great return on their investment.

Thanks for joining us.

Ladies and gentlemen, this concludes the VF Corporation second-quarter 2004 conference call.

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