威富公司 (VFC) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the VF Corporation fourth-quarter 2004 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 call is being recorded today, Tuesday, February 8, 2005.

I would now like to turn the conference ever to Mr. John McNamara with Financial Relations Board.

Please go ahead, sir.

Good afternoon, everyone.

Thank you, again, for participating in the VF Corporation 2004 fourth-quarter and year-end conference call.

By now, you should have all seen a copy of today's press release.

If anyone of you still needs one, please call my office at 212-827-3771, and we'll send you a copy immediately following the conference call and confirm that your name is on the fax or e-mail distribution lists.

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

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

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

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

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

Go ahead, Mackey.

Good afternoon.

Thanks for joining us today.

I'm going to go over a few things, and then Bob Shearer will review our financials, and after that, we'll have an overview from each of our Coalitian Chairmen on their businesses.

This was a quarter and indeed a year when nearly everything went right.

The good news is that the things we accomplished in '04 should make us even stronger in '05 and beyond.

I hope that you're sensing that VF is becoming a very different company than it was just five years ago.

We've always had strong brands that generated strong cash flow and profitability.

We've always been excellent operators.

But today, our momentum is coming from a determined shift in our mix of businesses towards higher-margin lifestyle brands.

It's coming from the investments we're making behind our core businesses that are also stimulating growth.

It's coming from actions we're taking to leverage our supply-chain capabilities across our company.

And it's coming from outstanding leadership within all of our businesses, which we continue to supplement with new talent.

We're as focused on execution today as we ever have been in our company's history.

We've set aggressive growth plans for our businesses, but they're backed by very detailed action plans that give us confidence in our ability to meet our targets. 2005 should be a very interesting and active year for us, and I am looking forward to seeing our performance translated into greater value for our shareholders.

Now, let's hear from Bob Shearer.

Thanks, Mackey.

It really was an outstanding quarter.

Sales were up 12 percent, with about 5 points of the increase coming from organic growth and the remainder from our 2004 acquisitions.

I also should point out that last year, we had about $33 million in fourth-quarter sales from our playwear business, which we sold this year.

And favorable currency exchange rates helped sales by $15 million in the quarter, with no significant impact on earnings per share.

Our net income rose 19 percent, while earnings per share were up 15 percent.

As noted in the release, almost all of that gain was generated by our core businesses.

The 2004 acquisitions contributed 1 cent to earnings per share, which was in line with our expectations and reflects the seasonality of these businesses.

And, as we previously noted, last year's fourth quarter included a 7 cents per share benefit from a favorable tax settlement.

So we were especially pleased with the strong bottom-line performance in this year's quarter.

It reflects the great position of our cost structure to leverage sales gains in our core businesses.

I should also note that the reason our EPS is up less than net income is due to a higher number of shares outstanding in the quarter, due to option exercises in 2004.

In the release, we stated our intention to repurchase about 2 million shares this year to help offset this dilutive effect.

However, acquisitions remain our top priority for our cash flow.

In terms of margins, we saw significant improvement in gross margins, which, like we saw in the previous quarter, was driven by two factors.

First, the mix of our business continues to move toward higher-margin lifestyle businesses, represented by our recent acquisitions and the increases in our outdoor and sportswear businesses.

And secondly, we realize operating improvements in our core businesses, resulting from higher overall efficiencies, leveraging the sales increases and cleaner inventories.

The increase in SG&A as a percent of sales reflects the mix issue as well, which accounts for most of the total increase.

And also during the quarter, the impact from growth plan spending cost us about 90 basis points on the SG&A ratio.

Actually, the SG&A relationship in our core businesses improved slightly.

The increase in interest expense reflects our borrowings to fund the Nautica acquisition.

The 2004 acquisitions were funded from cash, and our tax rate moved from 30.3 percent in last year's fourth quarter to 33.6 percent in the most recent period.

The lower rate last year reflects the favorable tax settlement that I mentioned earlier.

Now, turning to our balance sheet, we are really pleased with how we ended the year.

We had $485 million in cash, despite having spent 655 million on acquisitions during the year, and that's a real testament to the ability of our businesses to generate strong cash flow.

And speaking of cash flow, our cash generated from operations reached 723 million in 2004.

That's the highest in our company's history.

Our debt-to-capital ratio was 28.4 percent at year end.

Taking into account the cash in the balance sheet, that ratio would be 17 percent.

I should note that we are due to pay down $400 million in debt during 2005 -- that's $100 million in June, which is a rate of 6.75 percent, and an additional 300 million in October with a rate of 8.1 percent.

At this point, we intend to use our cash on hand for the debt paydown, which, of course, would further lower our debt ratios.

Now, obviously, that could change, based on acquisition activity.

Those of you who know us know that we place a great deal of emphasis on managing inventories.

At year end, despite our acquisitions and the strengthening euro, our inventories rose only 4 percent.

Inventories in our core businesses actually declined 3 percent in the quarter.

And a comment about a final metric that also means a lot to us at VF, and that is return on capital.

In 2004, we achieved a return on capital of 15.8 percent, which, considering the amount of acquisitions, remains quite healthy.

In terms of our guidance, we indicated that we expect a 6 to 8 percent increase in sales in 2005, reflecting no new acquisitions.

About half of that increase should come from our core businesses, and half from our 2004 acquisitions.

Earnings are currently expected to rise by at least 8 percent, indicating some continued margin expansion.

In fact, our operating margin could cross over the 13 percent mark.

And as we noted, the earnings expansion is before any impact from the new accounting rules related to expensing stock options.

Just to fill in the gaps on a few other items in 2005, including the debt paydown and before any impact from any new acquisition activity, interest expense would be expected to decline by about 10 percent.

The tax rate should approximate 33.5 percent.

That's similar to the 2004 rate.

Depreciation and amortization is estimated at 120 million to 125 million, versus the 140 million reported in 2004.

And finally, capital expenditures are expected to increase over the very low level of 2004, primarily related to distribution and retail investments.

For the first quarter, sales are expected to increase 6 to 8 percent.

Most of that increase is expected to result from the acquisitions.

Earnings per share should increase at a rate that is consistent with our annual guidance or by about 8 percent.

And just one final note -- we will be providing a somewhat different breakout of our businesses in our business segment disclosures this year.

In our 10-K, which we expect to file in early March, we will be breaking out sales, operating income and other financial data in a manner consistent with our coalition structure.

That means that we will be providing this data for our global jeanswear, intimate apparel, outdoor sportswear and imagewear businesses beginning with our 2004 filing.

Now let's hear from Terry Lay on our jeans business.

Overall, we were quite pleased with our jeanswear performance in the fourth quarter.

Looking at mass, we saw solid growth with our largest customer, a result of the success of new programs, including our Wrangler Jeans Company in men's and the new women's contemporary line, Riders Copper Collection.

We also saw a modest growth in our Rustler brand, our opening price point brand at mass.

The reason our mass sales were flat instead of up in the quarter has to do entirely with the continuing impact of Kmart.

And clearly, we're hopeful that the Sears/Kmart merger will bring stabilization and renewed growth opportunities for both of us, although we are not planning any turnaround for 2005.

And speaking of '05, we have an aggressive but very doable plan.

Our goal is to leverage our excellent classification skills and processes into a lifestyle brand approach across multiple product categories.

We're seeing success in our efforts here, and as we look forward this year to an important new launch, a premium shirts program under the Wrangler Jeans Company line.

We will also continue to build on the success of five-star premium denim, with new finishes and a new lead product called Wrangler Ultra-Tough, as well as expansion into our premium khakis program.

Maintaining our momentum on the women's side is also critical, and we will be further extending our Riders brand into the junior category, and supporting our growth with significant investments in media.

Now, as stated in the release, Lee was down in the quarter.

But this decline was entirely due to lower sales of distressed products.

Retail sell-throughs were actually positive for the quarter.

Over the past several years, Lee has seen great success in building its share in the young men's denim market through its Lee Dungarees program, and that is going to continue right into '05.

In '05, we will actually be extending Dungarees to the boys' category.

We were also pleased by consumers' response to our One True Fit and Ultimate 5 lines, which focus on giving young women contemporary styles with a flattering look and great fit.

We will be redoubling our efforts in '05 to grow share with our more traditional missy consumer, to whom we have frankly not been communicating well in recent years.

We will be relaunching a range of products for this consumer in 2005, and we will be directing significantly more of our ad spending to support our women's products.

Now, of course, we also have a very robust business in western specialty, and we were very pleased with our performance in the quarter.

Our summer bookings are trending ahead of '04 levels, and we are particularly pleased with the traction we're seeing on the female side, with Aura from the women at Wrangler.

Across the board, we're finding new ways to tap into the great equity of our flagship brands, and in fact have been successful in securing new placement in premium specialty stores with our Lee Authentics and Wrangler 47 lines.

While this isn't a huge driver of volume, this placement is important to the brands and a testament to their heritage and their authenticity.

Turning to the international side, Europe has been a tough market lately, but our business improved markedly in the quarter, with a solid increase even if you exclude the effects of currency.

Our big brands, Lee and Wrangler, are clearly driving newness and innovation in the denim market there, with our Lee X-line and our Wrangler W rivet programs as examples.

Our first owned European Lee store opened in London in 2004, with performance exceeding our expectations, and we will be adding two additional owned stores, one for Lee and one for Wrangler in '05.

A total of six additional stores will be opened in partnership with one of our retail customers during the year, as well.

And looking at emerging markets, Russia was a new market for our brands in 2004, and we will continue to drive growth there, as well as in other international markets including China, Latin America, Mexico, Canada and Turkey.

Now, I will turn it over to Eric Wiseman.

I'll talk about both our outdoor and sportswear coalitions, beginning with outdoor.

The performance of our outdoor coalition really makes a strong statement about the strength of our brands and the team leading them.

Total sales in the quarter were up 87 percent including acquisitions, with organic growth of 21 percent.

Domestically, sales were up 71 percent and international sales rose 121 percent.

Our North Face brand delivered organic growth of 26 percent domestically and 48 percent internationally.

That brand continues to have great momentum, and showed it in the quarter with sales growth in most product categories.

Spring bookings for the brand are up 25 percent domestically and 22 percent in Europe.

Also during the year, we opened a new retail store for the North Face in Boston, bringing the total number of owned retail stores in the US to eight.

Internationally, we opened North Face partnership stores in Amsterdam, Helsinki and St. Petersburg plus three in Asia, bringing our total number of partnership stores to eight internationally.

Our Vans business -- that continues to outperform our acquisition assumptions and its prior-year results in both sales and profit.

Sales in the quarter grew 6 percent in the US versus last year, and Vans US retail stores grew by 13 percent on a comp-store basis.

Also, Napapijri and Kipling also exceeded our plans.

Our integration activities for these three acquisitions are all proceeding as planned, and we're delighted with the contribution they're making to VF.

Now, our priorities for the outdoor coalition for 2005 are, first, maintaining the momentum we have at the North Face by continuing to develop our footwear and sportswear businesses, while at the same time driving gains in outerwear and equipment with continuous product innovation.

Second is to continue the growth at Vans.

In footwear, we'll be particularly focused on the girls' business and our Vans Classics and Surf Casual lines.

We're also developing our strategy to grow Vans apparel to about 20 percent of total sales within five years from about 10 percent currently.

Retail expansion is also part of our strategy for Vans.

We have developed and refined a new prototype store showing excellent results to date.

We will be refitting many of our existing stores in the new format.

We plan to open 5 to 10 new stores annually.

Third is to grow the Kipling bags and accessories business.

Kipling currently has 16 owned stores, with distributors operating over 70 more in Europe and Asia.

We plan to add five more in 2005, with a goal of adding 50 more partnership stores by 2009.

We're also hoping to open a location in the US later this year.

Next is to capitalize on the growth potential of Napapijri.

This is largely an Italian-based business, so our focus, as we discussed, will be on growth in the other European markets.

The brand momentum is quite strong, with Spring bookings up over 60 percent outside of Italy and over 20 percent overall.

We're planning to open seven partnership stores for the Napapijri brand in Europe, bringing our total to 19.

Napapijri also has three owned stores in Chamonix, Milan and Paris.

The brand has only a small penetration here in the US, and we're looking forward to establishing a store in New York City later this year, as well as building a strong wholesale business in upper-tier department stores.

And last, we will continue to pursue initiatives to expand our packs businesses under the JanSport and Eastpak brands.

We recently announced that our JanSport packs business would be moving to San Leandro, California to take advantage of synergies with the North Face business.

JanSport remains the number one backpack brand in the world, and we intend to continue to leverage that position for growth.

In October we communicated a very robust five-year annual growth target for our outdoor businesses of 17 percent.

Clearly, we have strong brands in our portfolio to help us drive that growth, and we continue to be on the lookout for additional brands.

Now, turning to sportswear, we continue to be extremely pleased with our progress at Nautica.

Sales of Nautica-branded products were up slightly in the quarter versus prior-year levels, despite having approximately 20 percent fewer doors, reflecting much better performance of our products at retail.

Our plans at Nautica have been to improve the business fundamentals and profitability first, develop a consumer-driven brand strategy second, and the last, to direct our product design and in-store presentation for sustainable growth.

The fall 2005 season was our target to see increases in bookings, and I am pleased to report that we're seeing mid-single-digit increases versus last year.

Nautica's profitability improved greatly in 2004, and we're on track to achieve the profitability targets we set for 2005.

Inventory was also an area of focus for us.

In 2004, we achieved a 24 percent decline in inventory days.

During the year, we closed two unprofitable businesses, women's jeans and the Rockefeller Center store.

Our focus on improving profitability enabled us to report double-digit operating margins in the Nautica brand for the year.

Nautica should achieve VF's operating margin target of 14 percent in 2005, several years ahead of our original plan.

Now our priority for Nautica is to generate topline growth by increasing profitable sales with our core retailers.

We're planning for higher sell-throughs at regular price, based on a rebalanced product mix, better quality and a focus on key items.

We will also be making significant investments in updating our in-store presentation by refurbishing our top 150 stores in 2005.

Our second priority is to bring the Nautica vision to life for our consumers.

Our new advertising campaign just hit the streets yesterday, as those of you who read the Wall Street Journal and the New York Times no doubt noticed.

You'll be seeing a lot of Nautica and our "Navigate Life" tagline this year in our ads, in our fixtures and signage and in our sponsored events.

The third priority is to launch new growth businesses.

We're testing four Nautica Kids mall-based stores in the US.

In Europe, we're opening our first owned retail store in Antwerp in the second quarter, and we're looking forward to launching a dual-gender wholesale business with Nautica in 2006.

Our Nautica launch in Europe is on track, and as we have discussed before, we are benefiting by leveraging VF's existing platforms there.

Next, we are working diligently to define our women's sportswear strategy.

It is an important growth opportunity for us, and we're targeting a launch in late 2006.

All these initiatives should help us achieve our long-term sales growth target of 15 percent annually.

However, as we have indicated, several big pieces are not expected to launch until 2006 and beyond, which is why our 2005 growth expectations are more modest.

Now, I'll turn the call over to George Derhofer to discuss our intimates and imagewear coalition.

Thanks, Eric.

Our image group delivered another growth quarter, with sales gain of 4 percent.

A driver in the quarter and indeed for the year as a whole has been our private brands business.

Throughout 2004, we have enjoyed the benefits of a significant launch this year by one of our big private-label customers.

While this channel remains more volatile for us, due to the timing of programs like these, participating in the growing specialty channel is an important element of our overall strategy and our results.

We also have good momentum in the mass channel, with our Vassarette, Curvation and Bestform brands, and we saw a nice sales increase in our international intimates business in the quarter.

This was due in part to the launch of our joint venture in Mexico, which gives us a big new market for our brands.

Our chain and department store business was mixed, and this channel remains promotionally driven, and some customers turn more cautious toward the end of the year.

In terms of our priorities for 2005, first and foremost, we will remain focused on driving growth with our core brands, with an emphasis on our Vanity Fair and Vassarette brands.

There is tremendous equity behind the Vanity Fair brand, and a key initiative for us is to extend its broader potential as a global lifestyle brand.

Second is to aggressively grow our share with our top customers, which is particularly important as retail consolidation trends continue, by focusing on assortments, big idea merchandising and marketing.

Third is to continue to lead the way in the full-figure segment, were our Curvation brand is leading the way by providing sensual and livable solutions in the mass channel.

And lastly, we, too, are focused on geographic expansion by continuing to build our business in Canada, Mexico, Western Europe and other markets including Asia.

Overall, for global image, we expect difficult comparisons, particularly in the first half of the year, given last year's private-label program rollout I mentioned earlier.

Nonetheless, we are working hard to grow both our top and bottom line, as we execute our vision for growth around the world.

In image, where we're entering 2005 with good momentum, fourth-quarter sales were up 16 percent, with strength in both our licensed sports and occupational apparel businesses.

Our licensed sports business was driven by strong baseball playoff and World Series sales, as well as continued strength in sales of our National Football League and licensed Harley-Davidson products.

In our occupational apparel business, we benefited from continued job growth and a successful rollout of large new global uniform programs.

For 2005, we expect continued top- and bottom-line growth for imagewear.

We're off to a good start with the acquisition of Holoubek, which expands our licensed apparel business with Harley-Davidson, one of the world's premier lifestyle brands.

This will add about $40 million to 2005 sales.

We are also expanding our categories, particularly in the fast-growing (inaudible) area.

In our occupational apparel business, we have moved to become even more customer- and consumer-driven, having relaligned our business strategically and organizationally around growing industry sectors.

This approach is already bearing fruit.

We have also recently launched a new workwear initiative in Mexico that we're excited about.

Overall, intimates and imagewear have great business models and, we think, the best people to grow the business and contribute terrific cash flows to VF in 2005 and beyond.

Back to Mackey.

Thank you, George.

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

(OPERATOR INSTRUCTIONS).

Reade Kem.

Banc of America Securities.

In your jeanswear business in the quarter, specifically in mass, if you exclude some of the things going on with the Lee brand, can you tell us what your general pricing and volume trends were there?

Do you mean in mass, or you mean overall for the quarter?

In mass and overall, ideally.

Well, yes.

As we said for the quarter, we were about flat in mass.

However, we did have important growth was some of our key customers, and I think we commented on the fact that Kmart was a negative effect for our business.

Do you have other questions about mass?

No, that's it.

I guess you don't usually comment on your specific customers, but if you -- and generally speaking, and Wal-Mart and Target, any comments that you can share with us there?

Well, we certainly had a positive year with both of those customers, and I think we have very good reasons to feel good about the future.

And I outlined a few of our key initiatives and programs.

And frankly, matching up our brands with consumers across the market, including the mass market -- a lot of reasons to feel very positive.

I did mention Kmart.

I would say that we're very hopeful and looking forward to working with them, as we have for years, to find additional ways to build our brands.

Having said that, given the more recent performance overall, we just continue to feel we need to be cautious.

Virginia Genereux.

Merrill Lynch.

And congratulations to you guys.

I mean all of you; that's great.

You're doing a great job.

Let me ask you, Mackey and Bob, sort of big picture.

It sounds like next year, in terms of your revenue outlook in the core business of kind of up low singles -- it sounds like what you see decelerating from this year is mostly intimates?

Is that right?

Or maybe you can talk about sort of growth by segment next year before acquisitions.

First of all, thank you for your comments; we appreciate that.

We do feel good about the year.

As we look forward to next year, we go into it really feeling pretty good about our core businesses across all of VF.

We obviously have some core businesses that have been growing at a faster rate and will continue to grow, but our more traditional businesses such as jeanswear and intimate apparel -- we still feel very good about it, as we go into the year.

They have many new initiatives, and I think one of the things that is setting our company apart maybe from some others right now is the fact that we do have good strength, both in our core businesses as well as we're getting some great contributions from our acquisitions.

So this has not come easily.

We have invested very heavily in growth.

We've developed a plan, we have got a plan we're executing.

That plan affects our core businesses as well as these new acquisitions.

So we are building the lifestyle brands that we have talked about, but we're also getting the benefits of some solid growth in our cash-generating businesses and our core businesses.

Virginia, I don't know if you had a chance to see the release, but in the release we indicated that pretty much across the board, with the exception of outdoor, we expected to see low to mid-single-digit growth.

And what we also said was that overall in the guidance, about half would come from core and half from acquisitions.

Thanks, Bob.

But if your outlook was kind of -- if the core business in '04 was kind of closer -- it looks like it was closer to sort of 4.5 to 5, it looks like for the core business growth.

And next year, maybe domestic denim and sportswear or some of Eric's areas should be growing a little faster.

It sounds like the difference is that maybe intimates may not grow as strongly as it did in '04.

Is that fair to say?

Yes, that's true.

We had some very strong growth in our private-label business.

George, you may want to comment on that.

Virginia, I think that's true.

We're still expecting, as Bob indicated, growth in the intimate apparel business.

We're real excited about our prospects around the world, but we do have some tough comparisons.

We talked all last year about the volatility in that private-label business.

Our business in that private-label area is going to be up over the two years, but we had a huge spike last year that is non-repeatable in '05.

But notwithstanding that, we still expect to grow the intimate apparel business overall, but at a lower pace, as you suggested.

But these other areas, Bob, it sounds like should pick up, whether it's international denim or Nautica -- some of these businesses are going to grow more quickly, right, than they did in 2004?

Yes, you mean as the year goes -- as the year continues?

Yes.

I'm sorry.

I'm getting to -- can you not sustain the '04 pace of growth in '05?

Yes, and again, as the year continues, we expect the overall solid growth, just as we have indicated, in pretty much all areas -- of course, with the exception of outdoor being even that much stronger.

Maybe another one, Bob.

You said something in your prepared remarks about 13 percent -- operating margins approaching 13 percent?

Right.

Is that for '05?

That's for '05.

In other words, versus the 12.8 percent that we recognized this year, what we're saying is with some improvements in our gross margin essentially driving that improvement, we think that we could cross over the 13 percent mark.

Well, then, if your top line grows 6 to 8 and you are going to get some margin expansion, and by my math, your interest expense is going to be down pretty big if you pay down these two bonds, one of them with a pretty high rate, that you should be into double-digit EPS growth?

Well, again, now, we said 6 to 8 percent on the top line, right?

We didn't jump right to the 8 percent.

Then we did say 8 percent on the bottom line.

But we do expect to see some expansion in the margins.

Congratulations again.

David Griffith.

Tradition.

Eric, in terms of Nautica, could you kind of touch on how it did versus your expectation?

It sounds like it outperformed a little bit, and then also on the North Face, international growth was really, really strong.

Was that coming from newer markets or just better penetration?

Yes, the Nautica situation -- was your question about 2004?

Yes, yes.

Obviously, you had a big project there in front of you; and, I think, given the fewer doors, it sounds like you hit your numbers pretty well -- but just maybe some more color on the men's sportswear side?

As we said before, David, our focus for Nautica in 2004 was getting the business model right, developing a strategy for the future and then creating product and marketing message around that strategy.

And while we did that, we knew we were going to have fewer doors for fall.

We did have fewer doors for fall, but we performed pretty well in those doors.

The product mix that we put in there did perform better than we expected.

On to the North Face in Europe -- we're getting growth for just about every reason you could imagine.

We're going in most countries.

We're adding new retail stores, as I mentioned in my comments, and we're adding new product categories like footwear and sportswear that are really beginning to get traction.

So it's kind of growth on all cylinders over there.

And are there potential new markets forthcoming this year?

Not a lot of brand new markets, no.

We have markets that are in various stages of development, and we're expecting to continue to get good growth from our North Face brand in Europe throughout the year.

And, George, in terms of department and chain intimate apparel business, what do you feel like you need to do to address those areas?

Well, I think it always starts with product, and we see some good opportunities.

We're doing some special things for some of the department stores that we think can fill in pretty nicely.

Some of the designer launches have not been as successful as everyone would have liked, and we see some opportunities for brands like Vanity Fair to come in here and really take some opportunities.

So we've got some exciting new product opportunities to really get that done.

We also continue to work hard to change the balance and the impact of our promotional spending more towards the consumer, and to try to differentiate the retailers and their particular strategy.

So we think we have got the right brands, we've got some great products coming to the market, and we think we can change our marketing mix to really take advantage of some opportunities there.

In terms of Vanity Fair, when should that hit the stores, in terms of some of the new things you are doing there?

They will hit stores in midyear.

Noelle Grainger.

JPMorgan.

Congratulations, really nice job in the quarter, guys.

A couple of things.

First, a lot of mentions in the various segments about retail stores, and so, I'm hoping you might be able to give us a sense of kind of where are you now, in terms of percentage of your business in company-owned retail, and where do you think you'll be kind of end of '05 or end of '06?

And how do you go about making the decision between company-owned versus partner store?

Okay.

Let me first say that we're not a retailer, but we are building lifestyle brands.

And one of the important components of a lifestyle brand is having a retail presentation, a retail presence.

So as we have built and developed more lifestyle concepts, we have also continued to expand our retail presence -- actually, over 10 percent of our business today and a growing component of our business.

And our preference is to form partnerships, and we do it with some of our current retailers as well as new retailers, because then they have the investment in the fixed assets, and we're able to take advantage of presenting our brands the way we want them presented.

So we focus a lot on that.

We have a lot of new concepts of it we have developed both in the US as well as in Europe, to form a new relationship with retailers that allows us to present a total brand concept.

So our preference is to continue to have the ability to show our products and our lines and particularly our lifestyle brands the way they should be shown, but for someone else to be participating from the standpoint of fixed assets.

So we shouldn't really look for that to kind of jump up dramatically in the next couple years to like 20 or 30 percent of your business?

I wouldn't see that at this point.

It's hard to say exactly what percent that will become at some point in time; but, as I said, our preference is to do it in more partnership-type relationships.

But I do know that this will continue to grow as a component of our business.

And then, I'm sorry;

I got on a little late, so I don't know if you addressed this.

But in terms of your outlook for EPS growth, 8 percent for '05, did you indicate how much accretion you expect to be coming from the yet-to-be-anniversaried acquisitions?

We didn't indicate that, but what we are seeing is that this year, as we have indicated, we achieved about 14 cents' worth, and we would expect to add to that by a similar number, maybe just a little bit less.

So in other words, for the first half of the year, again, we would expect to add a number something like that, again just a bit less than the first half of the year.

And then, my last question, which would be maybe back to you, Mackey, or I don't know if some of the coalition presidents might have some input.

But could you tell us how your efforts on working the synergies of your cross-coalition initiatives in terms of working with your customers and growing your brands -- is that starting to kick in yet?

Or kind of where are you in that process?

And are there any results to kind of highlight for us at this point?

Yes.

We have put customer teams in place, a new concept for us.

We have always, obviously, had great sales teams working with our customers, but now we have cross-coalition teams, as you're indicating, with a couple of our major customers.

And it's not only forming the teams, but it's also taking a more holistic view of a customer's apparel business, and working with our key customers to do research on their consumers, understand why they are buying apparel or not buying apparel, how we can improve the whole apparel area for the customer, and then working to implement new plans in our core categories and in some cases expanding into new categories.

We think it's the way of the future.

We think it's going to continue to have an important part in growth, both in our core businesses as well as helping to guide our acquisition activity.

So you would say that is lifting your core growth in '05, that effort?

Say that again?

Would you say that effort is boosting your core growth in '05?

Oh, yes, absolutely, yes.

Because with the retailers that are growing, obviously, if you're not growing with them, then it's difficult to grow in this type market.

And the good news is that we are expanding our business with the retailers that are growing their businesses.

Bob Drbul.

Lehman Brothers.

A couple of questions for you.

On the M&A front, can you talk about just some of the opportunities that you're seeing out there?

Are the opportunities as great as what you have seen over the last 18 months, in terms of maybe putting some more of this cash flow to work as you look through 2005?

Bob, we certainly see a lot of opportunities, but it gets narrowed down a lot as we go through our criteria.

As you know, we're looking for lifestyle brands, primarily.

We're looking for brands that have the opportunity to grow.

We don't want to just bulk up; we want to have growth potential in anything we acquire.

We're looking for brands that have a dominant position with a particular consumer segment, have strong management, meet all of our financial criteria.

So that narrows a lot of the opportunities down.

But we are still finding plenty of opportunities that we have on our list now and that we're working through.

We have added someone heading up our whole M&A effort, building a capability there beyond what we have had in the past.

So we certainly think that we will be able to find the acquisitions to meet our growth plan, which is an aggressive growth plan.

And, I guess, Mackey or Bob, can you talk a little bit more about the efforts that you have in place now to capitalize on the $100 million of cost savings that you think you can extract from the Corporation, in terms of some of the new additions that you have made, and when that should start to really play out in the numbers?

I can speak to that.

There are a number of pieces in place that we're looking at.

Just to give you an example, we're looking at the distribution area, in terms of making sure that we're as efficient as we can possibly be there.

And some of these -- in fact most of these -- are a little bit longer-term efforts.

We don't necessarily see a big impact in the year 2005 from those efforts, but as the years go on, we do expect to see a bigger impact.

And I guess the other point we would say there is that -- just remind everyone that what we have said all along is that those efforts really are geared at making sure that we're as efficient as we can be, the lowest cost structure, and then allowing us to continue to put money, dollars back into our business and put dollars behind our brands.

And on that question, Bob, or on that topic, in terms of the dollars on the marketing side, you guys have talked about investing a little bit more behind some of these brands in the back half of this year.

Can you maybe elaborate a little bit as you look into '05, across your different segments, where you might be spending more money on the advertising and marketing approach of the business, what your plans are from that standpoint?

In year '04, just to give you a little bit of an idea, we spent about 5.2 percent on sales on advertising.

We expect to increase that in the year '05 to a number of about 5.5 percent.

So overall, it's a fairly significant increase; it's about 14 percent in terms of total dollars.

Now -- and actually, the dollars -- it's throughout all of our businesses.

We expect to spend more against our brands really pretty much across the board.

A couple of questions for Eric, if I could.

On the outdoor side, did you see -- the North Face really had a strong quarter, as well.

Did you see the weather at all impact that business on either any cancellations or any inventory that was just put back to you?

And could you just elaborate a little bit more on the sportswear effort at the North Face, and how that is going for you?

Sure.

No, by the end of the season, we did not have any negative impact from the weather.

We were a little concerned in the early days, because it wasn't cold enough, fast enough.

But on the West Coast, and this is a strong West Coast brand, there was a lot of snow relatively early in the season, and we had no issues with that whatsoever.

Our sportswear initiatives there -- we have several different that we are developing.

One is called Flight (ph), another is called Techwear (ph) -- two of them.

And they're really technically designed sportswear to accomplish different things.

Flight is an acronym for fast and light;

Techwear is more for hiking and climbing.

And it's geared towards that customer, the way everything we do at North Face is geared towards an outdoor enthusiast participating in a particular activity, and we design products to them, and it's been a very successful model for us.

And, Eric, one more question for you.

On the space that you have with Nautica, do you think that it's going to stabilize now, with the 20 percent reduction that you talked about?

Do you think that you're at a level at which you should maintain this level, and hope to start maybe getting some more space over the next few years?

Yes, the latter.

I hope it doesn't stabilize;

I hope it goes up.

We've said all along that we were going to take -- our big run at the Nautica business would happen in the fall of 2005.

We think that our marketing message is sound.

We think that our products are the right products.

We have just come out of market.

We have had our first increase in bookings in years and, believe me, we are out there right now trying to get more space.

Nothing to report that is material yet, though.

Congratulations.

Nice job.

Jeffrey Edelman.

UBS.

Again, nice quarter.

Mackey, first question is your fourth-quarter sales substantially exceeded your guidance.

Was this driven by any one particular area -- automatic replenishment, something like that?

Just a little bit of insight as to what happens in the first quarter over and above what your guidance was?

Yes, Jeff, and the news there is, we feel, very good news because it isn't concentrated in any particular big wins or big losses.

It was pretty much across the board, particularly our core businesses.

And it did happen very late in the quarter.

There was some concern throughout much of the quarter.

It started off pretty good, but then there was concern around Thanksgiving, as holiday sales didn't materialize.

But particularly towards the end of the quarter, consumer really came in pretty strong, particularly in our core businesses.

So that generated, very late in the quarter, a big bump in the business.

So a lot of it was in replenishment in core business that we were filling in.

As the sales were generated, then we were replenishing the product back in.

Now, would you say your inventories at retail are pretty much in line with what they should be?

Yes.

We ended up the year in very good shape, a little down from where we had anticipated being because of the late surge.

So they are in good shape.

At the same time, we have sufficient inventory to support the business.

So yes, we're going into the year in very good shape, from an inventory standpoint, and we also feel that the retailers are in very good shape.

We don't really see problems across our categories of surplus inventory.

You mentioned sourcing benefits as well as supply chain.

Will these be ongoing?

Were they tied to specific countries or product categories?

The thing we like about our sourcing position, and one of the strengths we have as a company is that we are not dependent on one area of the world.

We have a good position in Asia, and we also have a very good position in the Caribbean, and we have a very good balance there.

There is some uncertainty about the quotas and what is going to happen and the impact they are going to have on cost and pricing.

The advantage we have, we feel, is we have a very productive, highly engineered capacity in the Caribbean that is very competitive with the Far East.

But also, as I said, we have a strong position in the Far East.

So we will be able to increase or decrease in different areas of the world based on the trends and how they develop.

But we also, if something unusual happens, if some of the quotas are reinstated or issues happen, we can also move our production fairly rapidly to another area.

So we feel like that balanced sourcing approach that we have is going to be a real strength of ours over the next couple years, because of the uncertainty in the sourcing area.

And then, finally, here we are sitting one-third of the way through your first quarter.

You have talked about your targeted earnings growth, but also the acquisitions probably get you maybe 5 cents of that earnings growth.

So are we likely to see any reversal in margin, or is -- really, did the earnings guidance target really more of a starting point than really an earnings estimate?

Jeff, I'm not quite sure I fully understand your question.

But in terms of -- and one of the things you asked was do we expect to see a margin decline?

And no, I think by the guidance, we would not expect to see a decline, if that's what you're getting at.

Let me put it another way, not to nitpick too much -- if you pick up the 5 cents in this quarter from the new businesses, that gets you a large part of your, let's say, 8 percent earnings growth.

So presumably, we can factor in expanding margins on the rest of the business, rather than just taking your bottom-line number?

Yes, I mean, for the year we expect to see some improvement, as we indicated in our overall margins, yes.

And actually --

And the same thing goes for the first quarter, X the acquired businesses?

X the acquired businesses, right.

That's right.

But remember, of course, that the acquired businesses -- obviously, the margins today are lower than our core businesses.

Todd Duvick.

Banc of America Securities.

A couple of quick questions for you on the M&A front.

First of all, I appreciate your comments regarding the two debt maturities that you have coming due this year.

And I guess, just for clarification, it seems that obviously you have got those pre-funded with cash on the balance sheet.

But the real issue is if you're going to be using that cash for acquisitions or if you're going to be using it to repay debt.

And if you do use it for acquisitions, I guess you'll just repay these debt maturities with short-term debt?

And so I guess my question, tying it into the M&A front, is how big of an acquisition do you think that you could do?

And then, at what point would you actually have to tap the capital markets, issue some more long-term debt or intermediate-term debt versus just use your revolver to repay these debt maturities?

Relative to the first point you made, sure.

At this point in time, we would obviously assume that we're going to use our cash on the balance sheet to pay down the debt.

But, of course, that would change, given any given acquisition activity -- and of course, also based on the size, the size of a possible transaction.

Relative to what we could do, our debt ratio -- we talked about our debt ratio net of cash being at the 17 percent level, and you can do the math.

When you assume the debt paydown, obviously we'd have a lot of flexibility on our balance sheet and a lot of ability to lever against the balance sheet.

So we could obviously absorb a significant acquisition, given where we are, and feel very comfortable.

Do you have like a sweet spot, in terms of and acquisition size that you are comfortable looking at, or -- I'm sure there's kind of a scale.

But what would be a typical size acquisition that you would consider?

We really don't have a sweet spot.

We are more concerned that the acquisition would meet our strategic objectives, as well as fit within our financial objectives, obviously.

And strategically, I listed earlier what we're looking for -- lifestyle brands and so forth.

And then, our debt-to-cap ratio target is 40 percent; we would exceed that over a short period of time, but certainly not over a long period of time.

And then, the other criteria we're looking at is hitting the 14 percent operating income and the return on capital targets.

And so the size itself is not the determining factor; it's how it fits within the financial targets and the strategic targets.

And then just one final question, with respect to M&A.

Sara Lee has made it public that they are shopping their European apparel business around, and it's on the block for sale.

And my question is, does that fit within the type of acquisition you are looking for within the lifestyle brands, or does it not?

Well, I wouldn't want to comment on a particular acquisition.

But I would go back and repeat, we are looking for lifestyle brands that have a significant growth potential, that have a dominant position with the consumer segment.

And so I think you could look at their portfolio brands and figure out whether they fit or not.

Marie Driscoll.

It's Marie Driscoll from Standard & Poor's.

My question is just about your operating margin improvement.

I guess, can you quantify -- with the emphasis going to lifestyle branding, I'm thinking that your SG&A expense is going to increase to support marketing for lifestyle branding, and you're going to derive some of the funds from sourcing, and I'm just wondering if you can quantify that.

Well, this is what we can tell you, Marie.

What we expect for '05 -- and that's what you are talking about?

Or are you talking about in '04?

Yes, please.

For '05?

Right.

Okay.

In '05, we would expect -- and you are absolutely right.

As we look at our gross margins, we're going to see a similar pattern that we have seen over the past year or so, and that is obviously an impact from the mix change from investing more in the lifestyle brands with higher margins.

So we see the opportunity, and we believe that our gross margins may increase by about 100 basis points or maybe a bit more, maybe a bit more than 100 basis points.

And from an SG&A standpoint, again, just as we have been seeing relative to that mix shift, there is a higher cost associated with those brands, and that is reflected in the SG&A.

And there again, we may also see about 100 margin points.

I mentioned earlier that we thought we might see the 13 percent mark, implying 20 basis points of improvement.

Again, what we would see is that maybe the gross margins might increase a bit more than the SG&A relationship.

And can you comment at all on China and sourcing and the listing of quota and how that maybe impacting you and some of your competitors?

Yes, we can.

There has obviously been a lot of discussion of that.

I'll just remind you of a few of the facts.

For the most part, those will affect the second half of the year.

The first half of the year was already brought in by most companies.

Some of the categories that we are in don't have quotas today, so they are not impacted.

A lot of the companies that are seeing some -- or projecting some price reductions are also moving toward higher quality products and building up the quality of their product.

This whole thing will be phased in over a relatively long period of time.

So at this point, we're continuing to say that there may be, in some small portions of the apparel segment, a 10 percent reduction of initial pricing, but once it filters through the whole supply chain, we don't expect to see any radical changes in the marketplace, as a result of this quota change.

Jeff Kovelar (ph).

Citigroup.

Can you say what was your experience in average selling price in 2004 across your product lines?

Or if you want to talk about it separately, by coalition, that's fine.

Overall, it's relatively stable.

That's what we have seen.

We just didn't see any big movement in our selling prices one way or the other, not a material impact.

One of the things that did impact our numbers overall is that we we sold less distressed, and that also helped improve our margins.

That was part of the overall improvement, keeping the inventories very clean, which is something that we mentioned earlier.

So that has some impact on average selling prices.

But again, overall, from a stated pricing standpoint, not significant changes.

And your expectation for '05, is that the same?

More of the same.

Not much of a change in ASP?

So it's mostly volume, then, that is driving the revenue growth?

Yes, that's right.

We're not anticipating price increases helping drive the top line.

And the domestic jeanswear -- can you comment about that ASP also, in '04 and '05?

Average selling price?

Yes.

Yes.

I think exactly what Bob said in '04; we definitely ran with less distressed inventory.

Innovation, frankly, is our opportunity to get paid.

And so some of our new programs, we're targeting more premium product and more premium prices going with that.

I would say, for some of our core four- or five-pocket mass ongoing programs over time, one reason we stress being the low-cost producer in the supply chain is because we know in a competitive world we're going to have to continue to offer great value in those core programs.

So it's kind of a combination of innovation and staying very sharp in our core programs.

And you said that you expect your gross margin to be up around 100 basis points in '05.

Is that all from the mix shift to more lifestyle brands?

A lot of it is mix shift.

We still expect to see some margin expansion in our core businesses, as well.

So it's a bit of both.

Virginia Genereux.

Bob, I think you said that you had 14 cents of accretion from acquisitions in '04, and you're expecting another sort of 14 in '05.

Is that correct?

Yes.

I'm saying it could be a bit less than that, because the businesses are very seasonal businesses, so the period of ownership in '04 was clearly during the stronger period.

So we said we expect to see something like that, maybe a bit less.

(OPERATOR INSTRUCTIONS).

And, sir, we have no further questions at this time.

Please continue.

Okay.

Thanks very much for joining us.

As we have talked this past year, we felt like there were two areas we really needed to focus on to get our P/E ratio up to where it should be, and those areas were getting our core businesses moving and also showing that we can integrate this acquisition strategy.

We feel like we are well down the road of doing that, and we look forward to doing more of it this year.

Thanks for being with us.

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

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