威富公司 (VFC) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to VF Corporation first quarter 2005 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.

If anyone needs assistance at any time during the conference, please press the star followed by the 0.

As a reminder, this conference is being recorded today, Tuesday, April 26th, 2005.

I will now turn the conference over to John McNamara with the Financial Relations board.

Please go ahead.

Thank you.

Good afternoon, everyone, and thank you again for participating in the VF Corporation 2005 first quarter conference call.

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

If any one of you still needs one, please call my office at area code 212-827-3771, and we'll get 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.

And before we begin, as usual, we would like to remind everyone that certain statements included in today's remarks and in the question-and-answer session may constitute forward-looking statements within the meaning of the Federal Securities laws.

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

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

At this time, I'd like to turn the call over to Mackey.

Go ahead, Mackey.

Okay, thank you, John, and good afternoon.

Welcome to our first quarter conference call.

We're delighted with the results delivered during the quarter by our operating units and continue to look forward to another record year.

As you know, we've set aggressive growth plans for each of our businesses.

We expect that growth will come from a combination of investment in our core brands, as well as the addition of new brands.

During the quarter, all of our more recent acquisitions from Nautica to Vans, Napapijri, Kipling and Holoubek performed on or better than planned and all are growing versus last year.

We continue to be active in the acquisition area.

Recently, we concluded the acquisition of the Reef brand, a premium surf-inspired footwear brand.

The brand will be a great addition to our expanding outdoor portfolio, and we see tremendous growth opportunities for Reef in the months and the years to come.

We're also delighted with the talent and caliber of the Reef management team, and we're looking forward to working with them to realize our combined vision for the brand.

Having the right strategy for growth is critical, but having the right team to execute that strategy is the ultimate determiner of our success.

We have enormous talent within our Company throughout all our operating units, and I also want to give a nod of recognition to new talent that we've brought on board in the last several months.

Last fall, we appointed a new operations controller, Brad Batten, who came to us from Sara Lee.

Mike Gannaway, also a Sara Lee veteran, has been on board for 10 months now as the VP of Customer Management.

He's leading a tremendously important new cross coalition initiative to go to market with our key customers.

Frank Terkelsen is a veteran of GE's M&A and Business Development teams, and has joined us as our new VP of Mergers and Acquisitions.

And most recently we've named Stephen Dull to our VP-Strategy.

Stephen's focus will be on providing new tools and strategies for strengthening our core brands and new brands.

In terms of the quarter, you've seen the sales and operating income figures for each of our different businesses, so I'll just make a brief comment on each.

Jeanswear, of course, remains our biggest business and a very healthy generator of cash and profits for VF.

The jeans market remains quite stable.

We hear a lot about the buzz in the premium end of the market, but this is a very small piece of the business at retail in total.

We do participate in the high end with our Earl jeans brand, but this area in general tends to be quite volatile.

Our mass channel business is relatively stable, and we're seeing growth with several of our largest customers.

Our Wrangler jeans company program in particular has been quite strong, with first quarter shipments up 18%.

The mid tier is more difficult for us at the present time.

The seasonal shorts and capri business is off to a slow start and likely due to cool spring conditions.

We're also making some inventory adjustments at retail as we prepare for a significant launch of our new Lee Misses Program in the fall.

I know many of you have questions about our take on the Sears-K-Mart and the Federated-May mergers.

At this point, it's simply too early to say what, if any, impact this consolidation will have on our brands and business.

We know we have great brands that consumers want, and are looking forward to developing the right consumer focused strategies in partnership with these customers.

We currently have very strong relationships with all of these retail partners.

Positives for us in the quarter were our western and specialty jeans businesses, as well as our international jeans business, where we saw increases in Canada, Mexico, Latin America and Europe.

Total international jeans sales rose 8.5%, with currency accounting for most of that increase.

Our outdoor business is really on a roll, despite the fact that the overall outdoor action sports market is relatively flat.

The North Face brand remains incredibly strong.

Growth is coming from the brand's constant focus on technical innovation.

We get a lot of questions about our distribution strategy for the brand.

It's important to note the bulk of this growth is coming from our traditional customers -- sport and sport specialty stores, not from aggressive expansion into new channels.

Vans, Napapijri and Kipling are all performing well above plan in both sales and profits.

We saw double-digit retail comp store sales increases for both The North Face and Vans in the quarter.

Fall preseason bookings are also extremely strong.

The North Face bookings are up 27% in the U.S. and 19% in Europe, while Vans bookings are up over 40%, Napapijri is up 23% and Jansport up 33%.

Performance in our intimate apparel business was disappointing in the quarter.

We knew we'd have tough comparisons based on a big launch we had with a specialty store customer last year; but results were still below our expectations.

The intimate apparel industry overall had a soft quarter.

We believe that the market was flat to down overall.

From a retail perspective we believe that our overall branded market share is about the same as a year ago.

In response, we've taken the appropriate capacity, inventory and expense reductions and believe we have the right balance in place for the year.

We expect comparisons to remain difficult throughout the year, but we continue to be very excited about longer term growth prospects we're pursuing across our brands.

Among other things, we're aggressively working on a refreshed Vanity Fair positioning, followed by brand and product extensions, a continued focus on the full figure consumer, led by our work in our Curvation brand, but also in our other brands; geographic expansion, including our joint ventures in Canada and Mexico.

Our European business is also pursuing some exciting new retail formats.

And, continued improvements in speed, value, and innovation, to further enhance what we believe is our best in class supply chain.

Imagewear had a terrific quarter in both sales and profits.

The good news is that both our image or uniform and licensed sports businesses are doing well.

Our licensed sports business continues to fuel our top-line growth.

The acquisition of Holoubek has positioned us as one of Harley-Davidson's key partners, and we're also benefiting from strength in our baseball business.

That brings us to sportswear.

Nautica brand sales were up low single digits, with the remainder of the growth coming from the Kipling U.S. business and growth in our John Varvatos business.

Speaking of John Varvatos, you may have noticed that we finalized a new partnership agreement with John, where he now has 20% ownership stake in his business.

His business is very strong, and there's tremendous growth potential for the brand in the future.

We continue to be very pleased with the progress that we're making at Nautica.

Total department store sales have been pretty sluggish due to cool spring weather and the shift in the timing of Easter; but our fall and holiday lines have been well received, with sportswear booking up approximately 10% over prior year levels.

During the quarter, we launched our new Navigate Life marketing campaign.

Another big push for us this year is the rollout of 150 new department store shops beginning next month.

Nautica retail outlets also are performing well, with comp store sales up 13% in the quarter, reflecting upgraded product quality and a greater emphasis on wear to work apparel.

Launching Nautica in Europe is an important growth initiative for us, and leveraging our outdoor platform there has given us a big leg up.

Our first Nautica store opened in Antwerp on April the 13th, and we're on target to present our collections in June.

We also have a lot going on in the licensing area, with new licenses in place for neckwear and fragrances and a new Nautica luggage launch planned for holiday.

With that, I'll turn it over to Bob to run through the financials, Bob?

Okay, thanks, Mackey.

It really was an outstanding quarter.

Sales were up 9% or $131 million, acquisitions added $156 million -- and this would imply a decrease of $25 million excluding acquisitions; but as we noted in the release, last year's first quarter results included $34 million in sales from Playwear, which we sold last year.

So taking that into account indicates a slight increase in sales on an apples to apples basis, excluding acquisitions.

The favorable currency exchange rates helped sales and earning by $22 million and $0.03 per share, respectively.

Net income increased 18%, with earnings per share up 15%, due to a higher number of average shares outstanding.

During the quarter, we repurchased 1 million shares, and an additional million shares are slated for repurchase in the second quarter as well.

Gross margins continued to advance, moving up nearly three percentage points.

As we've discussed in past calls, the improvements we've seen lately relate primarily to a change in mix, as we've added higher gross margin brands to our portfolio and as those brands have generated strong growth.

We also continue to see gains in gross margins in our core businesses.

SG&A as a percent of sales was up, but by a lesser amount, about two percentage points, leading to an increase in operating margins to 12.7% in the quarter.

Back in our February call, we indicated that operating margins could cross over the 13% mark, and we're continuing to drive towards this goal.

As you can see from the segment breakdown provided with the release, we saw strong increases in operating margins in our sportswear and imagewear businesses.

The big jump in sportswear operating income and margins in the quarter reflects the improved product offerings as well as our strong operating financial disciplines.

We've made huge improvements in profitability since we acquired Nautica by exiting certain businesses, consolidating sourcing, reducing markdowns and allowances and controlling expenses.

In fact, we will be looking to invest more behind Nautica to support our growth plans for the brand.

Imagewear continues to benefit from leveraging its highly efficient operating platform against higher sales.

And the outstanding performance of our outdoor business continues again, providing strong gains in sales and profits in the quarter.

Operating margins in the quarter were stable, and the margins of the newly acquired Vans, Napapijri, and Kipling businesses were consistent with the overall outdoor margins.

I should also point out that the operating margins in outdoor in the first quarter are not indicative of what we expect on an annualized basis, and reflect the seasonality of The North Face and the packs businesses in particular.

Operating margins in our jeanswear business were down just a bit, reflecting the softness Mackey referenced in our mid-tier business.

As you can see, our jeanswear profitability remains quite healthy.

The decline in profitability in our intimates business is a result of the lower volume and the related impact on fixed costs.

Second quarter comparisons are expected to be difficult as well, with some leveling out in the second half of the year.

Our tax rate was down by a full point in the quarter to 33%, reflecting our expected tax rate for the full year.

A couple of points in the balance sheet and cash flow statement -- we ended the quarter with a strong cash balance of over $360 million, a portion of which we used to fund the Reef acquisition.

Inventories are in very good shape, up 13%, with the increase split about evenly between our acquired and core businesses.

Our debt-to-capital ratio remains in line with our target of below 40%.

We continue to expect another strong year of cash flow from operations of approximately $550 million, and we will be repaying $400 million of long-term debt that's coming due through the third quarter.

As indicated in our release, we're confirming our prior guidance of a 6 to 8% increase in sales and an EPS increase of at least 8% through the year.

Despite our strong first quarter, we think it's prudent to maintain our guidance at this time, considering the challenges we've discussed with our intimate apparel business.

And as we've indicated, this guidance does not include any additional acquisitions we might make this year.

And finally, just a few more words regarding the second quarter projections.

Sales and earnings guidance of the Company are changing.

The recent acquisitions are more seasonal in nature, as well as our businesses with the strongest growth.

A significant portion of the sales gain in the second quarter is related to acquisitions.

Due to the highly seasonal nature of the mid-year 2004 acquisitions, little profit contribution is expected from these sales in quarter two.

Now, obviously, that's quite a change from the very profitable first quarter results from these businesses, but it is as anticipated.

From an organic standpoint, we expect about 3% top-line growth in the quarter.

We'll see normal earnings growth on those sales with the exception of intimates.

Relative to our intimates business, the first half of 2004 was quite strong, with new product launches being a big factor.

By not repeating those sales, as in quarter one, we expect lower intimates earnings in the second quarter, and comparisons should improve in the second half for intimates, however.

In addition, we are continuing to invest in growth in terms of brand marketing, new people, research, and even cost efficiency efforts.

And that spending does not stop in a period of lower sales, but benefits our annual results.

You'll remember that our second quarter of 2004 included the gain on the sale of our Playwear business, which represented about $0.04 per share, and that won't repeat this year; but you also remember that the third quarter of last year included other charges related to the Playwear disposition worth $0.08 per share that also won't recur, and obviously will help the third quarter comparisons.

One other point.

The reduction in quarter two was planned, based on all the factors that I've mentioned.

Although the intimates challenge is a bit greater than anticipated, our plan from day one reflected these changes in profit patterns for the year.

So the second quarter projection is not a significant variance to our plan; and accordingly, we're confirming our annual guidance as noted.

Mackey?

Okay.

Thank you, Bob.

That concludes our opening remarks.

I'd now like to open it up for questions.

Thank you.

Ladies and gentlemen, at this time, we will begin the question-and-answer session.

If you have a question, please press the star followed by the 1.

If you would like to decline from the polling process, press the star followed by the 2.

You will hear a three-tone prompt acknowledging your selection.

Your questions will be polled in the order they are received.

And if you are on speakerphone please lift the handset before pressing the numbers.

One moment, please, for the first question.

Our first question comes from Ronald Phillis.

Please state your company name, followed by your question.

Hi, Ron Phillis, Banc of America Securities.

Just two quick questions.

I was wondering if you could tell us -- both pertaining to the jeanswear sector.

Can you tell us how average selling price trends have been moving -- you know, what you expect in the future?

And then are there any, you know, noticeable competitive differences that you guys have experienced recently or expect in the future that in, you know, the jeanswear business generally?

Thanks a lot.

Ron, the first part of your question was average prices at retail, is that correct?

Yes, yes.

You know, for a long time, you know, we were watching prices come down, and they seemed to stabilize, I think.

That's right.

And we've pretty much planned for that on a somewhat, you know, steady rate of decrease.

Actually, we don't see any big moves in price in the market for the quarter from a competitive standpoint or of our own brands.

Prices, especially on fashion items, have held quite strongly, and I don't think it's a significant factor, actually, looking today at the competitive environment.

Are there any -- are there any, you know, folks that have yielded shelf space recently, or do you expect to yield shelf space, or folks that are looking to be more aggressive in acquiring shelf space, or getting shelf space?

You know, either recently or, you know, in the future?

Well, I think we feel very good about our competitive position.

Actually, the long bottom business, and especially the male side of our business, was quite steady and strong through the first quarter; and, you know, we have a lot of seasonal product placed, as Mackey said, that was relatively soft, somewhat weather-related.

We actually saw a real uptick the first couple of weeks of April when the weather changed; and although it's changed back, on the East Coast at least, we have reason to be quite positive about seeing that seasonal business kick in.

So actually, I think our shelf position competitively with our key customers is in very good shape.

Thanks a lot.

Does that answer your question, Mr. Phillis?

Thank you.

Thank you.

Thank you.

Our next question comes from Virginia Genereux.

Please state your company name followed by your question.

Thank you, and good afternoon.

Merrill Lynch.

Mackey and Bob, why would growth in the second half of 5% -- you gave a lot of commentary about -- about bookings, you know, being up pretty strongly, particularly in your acquired businesses, and on the sportswear side as well.

So I'm wondering why --why would growth only be 5%, especially if your intimate comparisons ease?

The intimates number has stabilized, Virginia, that's right; but you know, again, we're not saying that they're going to show strong growth.

Right?

So they do stabilize and level out.

So that is a factor.

And obviously -- you know, obviously, the acquisitions were annualizing in the second half of the year, right?

Right, although I think you'll have -- you'll have Holoubek and you'll have Reef contributing, by my math, you know, almost 2%.

And then if you're -- you said in the second quarter your core business was going to be up 3 you thought in the second quarter, even with tough intimate compares; and then in the back half, with these more seasonal businesses, as you've said, you should have better growth in those, and they're more back-half driven.

I don't really have a lot more to say other than the fact that the intimates component is stable, as we indicated, and that does have some offsetting impact.

You know, otherwise -- otherwise the gains in the core businesses are in line with what we indicated early in the year.

In the low to mid single-digit range.

Okay.

Cindy, how about you?

I'm kidding.

Anyway, how about -- let me ask you about, you know, two years ago, I think you had a -- you know, June of '03 we had this sort of inventory backup dynamic, and I think it -- I want to say it was Wal-Mart -- of course, it was also K-Mart, I guess, too, right, Bob?

I'm trying to think back there.

That's right.

Okay, and, you know, you guys, you still have a sizable Wal-Mart business.

You've done a great job with that business, but their sales trends have been tougher, and you know, you remarked about clearing some -- or just switching over some lead product in the mid-tier.

As you look out, you know, looking at your top five customers, how do you -- how would you say inventories are at retail, and do you view any of those majors as a risk, Bob?

You know what I mean?

Yeah, the inventories overall -- and Mackey may want to comment on this as well -- but the inventories overall from what we see are in pretty good shape generally at retail.

Yes, I would certainly second that.

I think one is, the quantity of inventory at retail is in good shape.

Also our internal inventories are in very good shape.

And even more importantly, from our own internal inventory standpoint, is it's a very high quality of inventory.

And we do believe that the products we have are the products that we need.

We don't have a lot of distressed inventory.

So we feel very bullish about the inventory situation in our categories at retail as well as our own, so we think the real question mark about this second half of the year relates to the consumer take-out of apparel at retail.

It's not only consumer spending these days, but it's how much they're investing in the apparel category, and that has been sporadic, as you know, for some time now and we've achieved the results we have even with sporadic performance, and a lot of the second half of the year is going to depend on what happens from a consumer take-out at retail.

Yes, I mean, you guys have done a great job.

Bob, maybe one more -- or Mackey, on the sportswear side, as you look out, I mean, sportswear profits double this quarter.

I mean, it's going to be -- do you still have -- I know you had some Varvatos pressure a year ago in the first quarter.

I mean, as you look out, is this indicative of sort of the -- the, you know, margin opportunity for the rest of the year or was there -- was the first quarter -- were the first quarter compares on the profitability side in sportswear particularly easy?

It was.

It was a bit easier.

So the comparison that you see in the first quarter, Virginia, was really strong.

And, again, with great performance, but we wouldn't expect to see the same level of improvement for the full year.

We expect to see significant improvement in overall profitability, but not like the doubling effect that we saw in the first quarter.

Okay.

And then last one, I think you mentioned -- I think the press release says you're going to buy back another million shares over the course of this year, and then I think your remarks said you'd buy back a million in the second quarter.

Is that --

Right now we do -- we intend to complete that in the second quarter.

Okay.

Bob, should we -- could we say there might be more in the latter part of the year?

You know, as always, Virginia -- as always, you know, we look at the acquisition opportunities that we see and we'll weigh that against the buyback.

We had some heavy exercises of options last year and we're just looking to offset some of that.

So it may be.

It may be adjusted, you know, which is normal for us.

Okay.

Good stuff.

Thank y'all.

Thank you.

Thank you.

Our next question comes from Jeffrey Edelman.

Please state your company name followed by your question.

UBS.

And good afternoon.

Jeff.

Couple of questions, Mackey.

First of all, could you give us a little more sense of the jeans business?

Because if I understood correctly, you said the Wrangler business was up 18%, and there's a big chunk of business.

What was -- what was down so much, and where do we see a turning point?

You mentioned some of the women's.

But is that the real catalyst?

Jeffrey, this is Terry Lay.

Hi, Terry.

Actually, I wish I could say Wrangler was up 18%.

That was specifically a program we call Wrangler Jeans Company within the overall Wrangler brand.

And our shipments of that program were up 18% in the quarter.

Now, having said that, we have some very strong segments of the Wrangler brand in the U.S. market.

Our Western business was very solid, as are Wrangler Jeans Co., but we don't have those kind of swings by brand in the quarter.

You saw we're relatively flat overall.

And as Mackey indicated, our Lee brand is down a bit in the mid-tier and Wrangler is up a bit.

Okay.

Now that flat includes the international, am I correct?

It does, of which Lee and Wrangler are both important parts.

Right, okay.

Could you give us a sense what happened to the replenishment business, vis-a-vis your orders?

Is that where the big shortfall was?

Was it more broad-based?

No, I would say overall back to the long bottom or the basic Jean business, actually our replenishment business came in right as expected.

It was more some softness in the seasonal products, primarily on the female side -- shorts, capris -- and, of course, weather is a factor.

And I wouldn't say, by the way, that the first quarter or even April is an indication of the full spring season; but relative to shipments in the first quarter and sell-throughs and replenishment of those seasonal items, that's where we saw some softness -- which, as I indicated, when the weather turned in April, Jeffrey, we certainly saw some pickup.

Now, we did, in our traditional Missy business with the Lee brand in the mid-tier, although it was not a big surprise to us coming in to the first quarter in our forecast, we saw some softness on a couple of core products, and Mackey talked about our plans for fall and Missy.

Frankly, our more contemporary Missy business is up strongly, around a segment of the Lee brand called One True Fit, and it's really a more contemporary Missy consumer who isn't shopping the Junior department, but attitudinally is reaching to some of these younger looks.

And frankly, that's having an influence across all of the female market, and actually kick myself and ourselves for not being a bit more aggressive in the traditional segment, but I can tell you that as we've relooked at our product mix and our products for fall and holiday, we have fully addressed that.

Okay, and then just a follow-up on the intimate apparel, how much of your business would you say is tied to one-time deals that you kind of get with some specialty retailers that are in one season, out the next season?

How much of the business would you say is relatively more consistent?

Well, I don't think we want to talk about the specific numbers.

I can tell you, though, the vast majority of our business is, in fact, branded, so it's a relatively low percentage relative to our branded business.

But as we've always said, that part of the business tends to be much more volatile, so while it's not a big percentage in the aggregate, it does move around a great deal, as it did from last year to this year.

Okay.

Thank you.

Thank you.

Our next question comes from Liz Dunn.

Please state your company name followed by your question.

Thank you.

Liz Dunn from Prudential.

First, let me say congratulations on a great quarter.

My first -- my first question is you mentioned the volatility in sort of the high-end jeans business.

Would you ever consider, you know, expanding your business there, either through launches internally or through an acquisition, or you really won't be making any jeans acquisitions going forward?

We are not at this point considering getting rid of any of our jeans brands.

We like to have multiple brands, multiple channels of distribution, and certainly having Earl Jeans at high end.

I think the point is that it's a very small percentage of the overall business, and our business is more of a reflection of what's happening in some of the more large quantity -- large volume areas -- of the jeans business.

But we certainly like the positioning and the margins that are related to that premium end and plan to continue to really market our products there as well.

And we're always on the lookout for good acquisitions.

Our focus is lifestyle brands, and certainly there are lifestyle brands that have a very strong denim component to them.

So I would say that that would certainly be the type thing that would be of interest to us in the future.

Okay.

On the decline in intimates, how much of the decline in Q1 and expected for the year is really related to the lack of anniversarying a big launch versus the general sluggishness in the environment?

Well, I think it's safe to say that the bulk of the decline in the first quarter, or the biggest part of the decline is related to that launch of that private label business from last year that was not repeated this year.

As we indicated, for the year in the aggregate, we expect the intimate apparel sales to be flat to down a little bit; and exclusive of that private label launch comparison, we expect our other sales, which would be our branded sales, to be up for the year.

Okay, that's helpful.

And then finally, are the recent acquisitions expected to be dilutive in Q2 or just about neutral, not really contributing?

Because I was surprised at the magnitude of the decline expected for Q2 EPS.

They will add just a couple cents, so, no, not dilutive but just a couple cents a share.

Okay, thank you.

Thank you, our next question comes from Todd Duvick.

Please state your company name followed by your question.

Yes, Banc of America Securities.

Congratulations on the quarter.

Thank you.

Quick question for you.

I think I understood, Bob, that you said that you plan to repay the $400 million of debt that comes due in June in October.

First of all, did I understand that correctly?

Yes.

Okay.

Yes.

All right.

And so as I calculate it, you know, that's about 40% of your outstanding debt right now.

I guess my question has to do with acquisitions going forward.

Would it be fair to say that, you know, you've got $300 and some million of cash on the balance sheet, so you can almost fully fund that debt with the cash that you have currently; but as you go forward and look at other acquisitions, would -- would you consider issuing debt for some of the larger acquisitions?

Is that how we would look at you possibly levering up going forward?

Yes, that's exactly -- that's right on.

And also remember that based on the cash or the cash that we had on the balance sheet at the end of the quarter, we used a fair piece of that related to the Reef acquisition --

Right.

-- okay, which was completed in April.

So -- you know, so that won't be there at the end of this quarter.

So that's exactly right.

We're looking at all those alternatives.

We'll have strong cash generation, again, for the year, as we indicated.

But we would certainly look at, you know, given the acquisition opportunities that we see, a longer term financing.

Okay.

All right.

And so just to drill down one step further, if, for instance, there was an acquisition that, let's say, closed before the end of this current quarter, you would consider using cash for that, pay off the debt with maybe your revolver, and then pay that off with cash flow as it comes available?

That's exactly right.

Of course, all of this depends on, you know, the size and magnitude of the possible acquisition that you're referring to; but sure, that would be exactly it.

Well, you certainly have plenty of flexibility.

So anyway, congratulations.

Thank you for answering my questions.

Our next question comes from Omar Saad.

Please state your company name followed by your question.

Lehman Brothers, thanks.

A couple quick questions.

I wanted to see if I could get you, Bob, to talk a little bit further about the SG&A line, what you saw there in the quarter and kind of relative to your expectations for the years, at least as a percentage of sales, and then kind of talk about that against the backdrop of your longer term plan.

I think you've discussed in the past targeting 100 million of cost savings over the next five years.

And then I have another quick question after that.

Okay, in the first quarter -- in the first quarter, the SG&A percentage in the relationship to sales was up just a little over two points, right?

And a lot of that is mix driven -- almost all of that is, in fact, mix driven.

So the changes that are occurring within our businesses, higher margin -- higher gross margin businesses, but also carry higher SG&A percentages; and as we said, this was a -- for example, this was a strong first quarter for the new acquisitions, and those would fall in that category.

So again, mix driven.

And what we've said for the full year is that, touching on gross margins first, we said that gross margins might improve -- again, mostly mix driven -- by a point to a point and a half, and we expected that the SG&A relationship would increase by something just slightly less than that.

So that we're -- we continue to target an operating margin of about 13%.

Right, right.

How should we think about kind of long term the opportunity to drive costs out of the system and relative to kind of the change in the evolving mix of your business as well?

Yes -- yes, and you mentioned it.

We're targeting a $100 million cost reduction.

Now, that's not all necessarily in the SG&A area, but a component of it is.

And it's all about leveraging the scale of VF Corporation across VF and not solely within a coalition by coalition basis.

So -- and again, what we'd like to do -- and we've been pretty consistent with this -- is we want to continue to take those dollars and reinvest those dollars back into the business in the form of brand marketing or other areas.

So I mean, it's an area that we continue to put pressure on in terms of hoping to reduce the relationships; but you know, again, it's important to remember that the increases that we're seeing are largely driven by mix.

As a matter of fact, in many cases we're actually seeing some improvement in core businesses.

Great, great.

One other follow-up question, on another topic.

When you -- when you -- when I think about the cash that your business generates and the balance sheet, and you know, the discussion of acquisitions that a number of people have brought up, when you look at your kind of brand matrix, where do you see most of the opportunities, or the bigger need areas, for the firm, and kind of could you talk about your thought process in terms of prioritizing some of those -- some of those potential acquisitions by category or in the brand matrix?

Yes, I'll be glad to address that.

We obviously have two major growth areas that we targeted when we began our growth plan over a year ago.

That was the outdoor category and sportswear categories; and also looking for opportunities within our existing categories to either leverage in brands that fill spaces, consumer opportunities, geographic opportunities we're not currently pursuing, so we would -- and we are still following that same strategy.

It's working well for us, and we're going to continue with it.

In the sportswear category, we have a great brand now, but we would like brands in other channels of distribution and also very strong on the male side; but also could look at some acquisitions that would give us a platform in the women's sportswear side.

So that would be some of the areas we would be currently looking at; but the primary criteria is lifestyle brands, global acquisitions, a strong consumer position from a branded standpoint, and the ability to meet our financial objectives in a relatively short period of time.

Great.

Thanks a lot.

Thank you.

Our next question comes from Matthew Sheffler.

Please state your company name followed by your question.

Yes, High Investment Strategies [PHONETIC].

I have two questions.

One, I'm a little perplexed by the pay down of the debt here.

It seems like you have really positive momentum with your acquisition strategy -- certainly you're seeming to kind of beat general expectations.

I calculate, you know, kind of ten times coverage here and your share repurchase is sort of kind of left as balancing of stock option kind of creation.

Why not be a little more aggressive here?

Particularly it seems like you guys are confident with what you're doing.

That's kind of question one.

And two, a Nautica question, can you put in some perspective how much shelf or maybe retail space, you know, kind of was lost, and certainly prior to your involvement kind of where you are now in terms of some -- you know, some kind of number, and where, if you are successful, you know, with this, what looks like a very exciting introduction here, where this floor space or retail space should be two years from now?

Thank you.

Let me respond first to the debt question.

Again, we'll formulate that plan as the year goes on.

In terms of being more aggressive, are you -- I assume you're talking about, you know, a higher amount of financing.

Is that what you're talking about?

Yes.

In terms of share repurchase or from a financing standpoint?

No, I mean, it seems like with the share repurchase, it seems like you're being -- you're being fairly cautious with what's been a -- proving to be a very successful strategy here.

So I am just kind of perplexed why you're paying down debt.

Well, the debt is due, okay?

So that's why we're going to pay down the debt.

But relative to the buyback program -- again, and we'll adjust that -- our first priority -- priority has been on the acquisition side.

We think that's -- in terms of shareholder value that's the area to go.

But again, with the -- to offset the impact of the options, you know, we will look at the buyback and we might adjust that later in the year to offset any impact from dilution of the option exercises.

You know, liquidity is not an issue that we see relative to our acquisition plan.

We certainly have a very strong balance sheet, and we'll leverage back up for the right kind of acquisition.

We didn't want to indicate that we are trying to reduce the long-term debt.

We just have some that's due that we're going to pay off.

But it doesn't mean we won't be back in the debt market to fund either acquisitions or share repurchases.

Okay.

And if you would, thank you, the Nautica question?

Sure, this is Eric Weissman.

I'll try to tackle the Nautica question for you.

You started by asking the amount of space Nautica has lost over time, I think was how you worded it --

Prior to your involvement, actually, yes.

Yes, and that's a really difficult question to have a precise answer, because we don't know the exact number of fixture points, or whether it's hanging or shelf; but in general, the Nautica brand lost about 30% of its floor space in department stores.

Some of that was from reduction in space indoors, and some was from an outright loss of doors.

Now, the outright loss of doors is something that doesn't concern us.

We're pretty pleased with the doors we're in right now.

There's a few options we'd like to have to improve doors; but by and large, the reason -- one of the reasons driving the margin improvement at Nautica is we are out of doors that were not profitable for us.

In fact, they were a drain on our profitability.

What we're focused on right now with new products and new marketing is making the doors that we're in more productive; and we've talked I think in the release about refurbishing 150 doors between now and the end of the year.

If you look at the number of working days starting in May going through December, that's about one a day that we plan to go in and completely reset new fixturing and new point of sale to make sure that our in-store communication is what it -- that's our short-term objective, is to take our best 150 doors and make them much stronger.

Where we're going to be two years from now is a really challenging question.

There's a lot of change going on in the department store world from an ownership standpoint, and I don't know what the answer to that is going to be.

What we do know is that making our brand perform better in the stores we're in right now is the right approach for us.

Does that help you?

Yes it does.

Thank you very much.

You're very welcome.

Thank you.

Ladies and gentlemen, if there are any additional questions, please press the star followed by the 1 at this time.

And just as a reminder, if you're on speakerphone, please lift the handset before pressing the numbers.

Okay, management, I'm showing we do not have any more audio questions.

I'm going to turn the call back over to you.

Thank you very much for joining us today.

As you've seen, we're very pleased with the first quarter results and we feel good about the year and hitting the objectives that we laid out as we went into the year.

The most positive thing about VF is we laid out a plan over a year ago that would generate new growth, both core growth as well as acquisition growth, and increase significantly our shareholder value.

We have, I think, proven that we're on the right track strategically and also that we are fully capable of executing that strategy; and we're only in year one of a five-year plan, so there's a lot more to come.

Thanks for being with us.

Ladies and gentlemen, that concludes the VF Corporation first quarter 2005 conference call.

If you would like to listen to a replay of today's conference, you may dial in at 303-590-3000, or 1-800-405-2236, followed by the access code of 11028468, and then followed by the pound sign.

Once again, that number is 303-590-3000, or 1-800-405-2236, followed by the access code of 11028468, and then followed by the pound sign.

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