威富公司 (VFC) 2005 Q2 法說會逐字稿

Good morning and welcome to the VF Corporation's second quarter earnings release call.

(OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the floor over to Mr. David Griffith with ICR.

Please go ahead, sir.

Good morning and thanks for participating in the VF Corporation's second-quarter 2005 conference call.

By now, you should have received today's earnings press release.

If not, please call my office at (203) 682-8213 and we'll get you a copy immediately following the call.

Additionally, VF will be hosting an overview with Outdoor Coalition on Monday, August 1st at the New York Showroom in the North Face at 9:30 AM for members of the investment community.

If you're interested in attending, please contact me, again (203) 682-8213.

Hosting our call, this morning, is Mackey McDonald, Chairman and Chief Executive Officer of VF.

Before we again, we'd would like to remind participants that certain statements included in today's remarks and the question-and-answer session may constitute forward-looking statements within the meaning of Federal Securities laws.

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

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

At this time, I'd like to turn it over to Mr. Mackey McDonald.

Okay.

Thank you.

Good morning and welcome to our second-quarter call.

With me today are Eric Wiseman, our Executive Vice President of Global Brands, George Derhofer, Senior Vice President of Global Operations and Bob Shearer, our Senior Vice President and Chief Financial Officer.

As you know, each was named to a new role back in May, and you'll be hearing from them during today's call.

This is turning out to be another banner year for VF.

We are especially pleased by our performance in the quarter, as it comes on top of the record quarter that we had last year.

In most of our businesses, jeanswear, outdoor, sportswear and imagewear, we saw increases in both sales and profits.

Yes, we are having a difficult year in our intimates business, which we anticipated.

But we are confident we will see improving comparisons in the second half of this year.

As I'm sure you are aware, sales of summer products got off to a slow start this year.

But we saw a nice pickup in June, which help drive our results above our previous expectations.

We have a great balance in our portfolio today.

We have strong core businesses with leading brands and stable categories that generate tremendous cash flows.

We also are very pleased with the results of our acquisition strategies.

The businesses themselves, Nautica, Vans, Reef, Napapijri, Kipling and Holoubek, are largely performing above our expectations.

Our focus on identifying lifestyle brands that have a unique and distinct positioning with consumers and a clear path for growth is paying off.

At the same time, by bringing VF's operational and brand management skills to the table, we have been able to successfully and quickly and efficiently integrate our acquisitions, so that we can focus our energies on capturing future opportunities for growth.

I'd now like to turn it over to Eric.

Thanks, Mackey.

Let me fist start with jeanswear.

To reiterate a point Mackey made, in fact, our spring and seasonal business was slow through May.

But once warm weather hit in June, we saw a strong pickup.

On the mass-market side, we're seeing very strong growth in our Wrangler Jeans Company initiative, where shipments are running up about 20% year-to-date.

You'll recall that this line is geared to a slightly younger, more fashionable male consumer, shopping in mass-market stores.

We're benefiting greatly from our associating with Dale Earnhardt, Jr., who appears in our advertising and point of sale materials for the line.

Our western and specialty jeans business also had a good quarter, with positive trends in the western channel and growth in our new women's line, Aura, by the women at Wrangler.

Our Lee business has been softer than expected this year, particularly on the women's side.

However, we are encouraged by the pickup we experienced in our seasonal products in June.

Next, outdoor.

We're really excited about the momentum we continue to have in our outdoor businesses.

As Mackey indicated, we are delighted with the brands we've acquired, their performance since we acquired them and the terrific prospects we see for each and every brand going forward.

The North Face continues to be a real powerhouse at retail.

Seasonally, this is their slowest period.

But demand for the brand remains very healthy, as evidenced by the backlog numbers cited in our first-quarter release, where we indicated that fall bookings were up 27% in the United States and 19% in Europe.

Sales are being driven by growth across all product categories-- outerwear, footwear, snow sports, sportswear and equipment.

An important point to make here-- our growth continues to come from expansion in our core sport and sport specialty customer base, driven by our focus on providing the most technical and innovative products in the market.

Our Vans brand is also on a roll, with a double-digit sales increase this period, compared to their results last year prior to the acquisition.

Demand for their classic shoe line remains very strong, and our new retail format is generating 20% increases on a comp-store basis.

We're also seeing terrific response to our new launches, including our Jeff Riley signature line, the X-L3, and our No School products, both geared to the core skate channel.

Apparel remains a significant growth opportunity and we are launching, right now, our core and boutique apparel lines for spring of 2006.

Backlogs for our European-based Napapijri brand of premium outdoor apparel also are very positive.

We remain focused on our strategy to roll that ran out in major European markets and are preparing for our launch here in North America.

Also based in Europe, our Kipling brand of woman's bags and accessories will continue to grow through new partnership stores with key distributors.

And we have aggressive and very exciting growth plans for the US as well, starting with the opening of four Kipling stores this fall.

Turning to our most recent acquisition, the Reef brand.

Although we have only owned the brand since April, the integration is going very well and the sales are above our plan, driven by a passionate and capable management team that's creating a very innovative products and very innovative marketing.

And last, but certainly not least, JanSport also had a good quarter with sales up 8% due to healthy back to school bookings for the core pack products.

Turning now to our intimates coalition.

As Mackey mentioned, we expect a difficult comparison in 2005, based on a very successful launch we had in 2004 with the large private label customer.

But our performance has been weaker this year than we originally anticipated.

The market itself, although generally stable, has been a bit soft this year.

We also have not seen the lift we expected from recent new-product launches.

So the question is what are we doing about this?

We've made some changes organizationally, naming a new coalition president and a new president of our department and chain business.

And we're aggressively taking costs out of the business by capacity reductions offshore.

Overall, our intimates group remains very focused on and excited about fulfilling their longer- term growth objectives.

We continue to see opportunities for growth in our core Vanity Fair, Vassarette, and Curvation brands.

We're also seeing really good results with our Mexican and Canadian joint ventures.

In our sportswear coalitions, we're delighted with the results posted by that management team.

When you consider that just two years ago, the Nautica brand was in decline and the business was posting mid single-digit operating margins, this team certainly has a lot to celebrate.

During the quarter, we saw strong gains in our men's sportswear, our jeans, our furnishings, and our retail businesses, despite soft results for the men's sportswear category in general retail.

We are also encouraged by our holiday bookings, which are up over our plan at 7% above last year.

Our Nautica retail stores continue to deliver, with a comps store gain of 10% year to date.

The last, our John Varvatos business continues to grow sales rapidly at a double-digit rate.

We're looking forward to opening a our new flagship store in SoHo this fall.

Now I'll turn the call over to George.

Thanks, Eric.

Imagewear had a strong quarter with sales up 4% and operating profits up 16%.

Our occupational apparel business has stabilized, benefiting from a relatively good economy and jobs market as well as our new customer first initiative, which focuses on growing industry segments and a one stop shop, head-to-toe solution for our customers.

Our licensed sports business, which has doubled in size over the last few years, continues to drive our growth.

Our acquisition of the assets of Holoubek, a Harley Davidson licensee, has gone as planned.

And our major league baseball business has been strong.

We look forward to continuing our momentum in the second, half despite some tough comparisons from the Red Sox World Series victory and some very large program rollouts.

Overall, we have two strong operating platforms to leverage, which drive operating margins and returns on capital above our overall VF standards.

Like Eric and George.

Now, Bob Shearer is going to run through the financials, Bob.

Okay.

Well thanks, Mackey.

It really was an outstanding quarter.

Sales were up 13%, or $166 million, which the acquisitions adding 156 million.

Now, you should note that last year's quarter included $22 million in sales from Playwear, which we sold last year.

In other words, organic growth in our go-forward businesses was about 3%.

Our gross margins continue to increase, up two full percentage points to 41.4%.

As we've discussed in past calls, the improvements that we have 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.

Operating expenses, as a percent of sales, were up by 1.7 points to 31%, due in large part to mix as well as investments in our growth plan.

Our acquired brands generally have higher expense ratios.

Operating income rose 6% in the quarter, while margins dipped to 11.1% from 11.8%.

The primary factor behind the operating margin decline was lower profitability in intimates and the non-recurring Playwear gain recognized in last year's quarter.

Our tax rate drop to 29.6% from 32.1%, reflecting the $5.5 million net favorable impact of the income tax settlements and repatriation of foreign earnings.

The tax rate for the second half of the year should be comparable to that of the first quarter, which was about 33%.

As noted in the release, net income increased 11% with earnings per share up 10%.

We did have a number of special items this quarter, which benefited earnings per share by $0.07.

First, related to settlements of income tax matters in foreign jurisdictions, resulting in a reduction of income tax expense of $12.5 million or $0.11 per share.

Second, we made the decision to repatriate foreign earnings, pursuant to the American Jobs Creation Act of 2004, resulting in an additional tax of $7 million, equal to $0.06 per share.

Third, we determined that amounts accrued for post-employment benefits in Mexico were greater than required by local laws.

The excess that accumulated over a number of years was not significant to any prior period.

The adjustment of these accruals benefited the quarter by $9.4 million on an after-tax basis, or $0.08 per share.

And finally, we made decisions to align capacity in other expense levels with the lower sales volume of our intimate apparel businesses.

These decisions resulted in charges totaling $7.2 million after-tax, or $0.06 per share.

The final point on earnings per share, during the quarter we repurchased 1 million shares, bringing the total shares repurchased year-to-date to 2 million.

We expect to repurchase an additional 2 million shares over the balance of the year.

Now just a few points in the balance sheet and cash flow statement.

We ended June with a strong cash balance of $250 million.

Inventories are in good shape overall, up 8%. $23 million of the total increase of $82 million came from acquisitions.

Organic inventory growth was in line with the expected sales growth for the second half.

We targeted debt to capital ratio of below 40%.

We are currently well below that level.

During the quarter, we repaid $100 million in long-term debt.

An additional $300 million becomes due in October.

We continue to expect another strong year of cash flow from operations of about $550 million.

Now back to Mackey for a few words on our guidance.

As we indicated in the release, we continue to expect another record year in '05.

We maintained our sales guidance for the year and continue to expect an increase of about 7%.

We now believe our outdoor coalition sales could be up close to 40% this year, better than our previous expectations.

We expect a slight increase in jeanswear sales and mid single- digit growth in both sportswear and imagewear, with intimates sales showing a mid single digit decline for the year.

We did raise our earnings per share guidance for the year to an increase of about 10% from 8% previously to approximately $4.65.

This reflects continued strong performance across our businesses and as a special items reported in the second quarter.

In terms of the third quarter, we indicated that sales should rise about 4%, as we will have the anniversary of the incremental sales contributions from the '04 acquisitions.

Our sales guidance also anticipates the negative impact of a stronger US dollar and translating foreign currencies versus our prior expectations.

In terms of earnings, where looking for 12% rise in third quarter earnings per share.

I should point out that the comparisons help by the fact that last year's quarter included a negative $0.08 impact from the disposition of our Playwear business.

All in all, we're looking forward to a strong finish this year.

We continue to deliver results to our shareholders above our expectations and above our long-term growth targets.

We remain very focused on identifying and launching new growth initiatives across all our businesses, streamlining our supply chain to add even more speed and flexibility, and looking for additional brands and businesses to add to our portfolio.

I want to personally thank our management team for the tremendous accomplishments.

Now, that is our prepared remarks.

I would now like to open it up for your questions.

Thank you.

(OPERATOR INSTRUCTIONS)

And for our first question, we will go to Liz Dunn with Prudential Equity Group.

Hi.

Good morning.

Can you address the -- I'm sorry, I just had to hop on the call a little bit late and I'm not sure you're interested in your prepared remarks.

But can you address the Chinese currency revaluation to the expense that you didn't address in your prepared remarks?

Is it specifically to what, Liz?

The Chinese currency revaluation that was announced this morning.

Have you sort of evaluated how that will impact your business and what is your...?

Yes.

We really haven't evaluated that at this point in time.

We can't really comment on it and don't expect any material impact at this point.

Do you breakout how much of your sourcing is in China?

Not specifically in China, but what I can tell you it is about 35% or 40% of our total product needs come from Asia.

In China it's about half of that comes from China, so you are talking -- you're not talking significant impact on us, certainly versus many of our competitors because we do have so much outside of China.

Okay.

Great.

Also, again I apologize if I missed it, but as you look -- you sort of maintain your guidance for sportswear to be mid single-digits for the full year.

Based on the strong results that we saw in Q2, that looks a little too conservative.

And then also, I would say with operating margins up 17.7% in the first quarter and 50.1% in the second quarter, are you still targeting a 14% operating margin for the sportswear segment for the full year?

On the revenue side, Liz.

This is Eric Wiseman.

On the revenue side we think we have the right forecast for our sportswear business.

We have the bookings for call.

I did mentioned on the call that our holiday bookings were up 7% on prior year.

And we have that fully reflected in our forecast.

We are pleased with the operating margins we are getting from our sportswear business.

And we plan-- some of that is improved versus our original thinking about the operating margins of sportswear.

Some of that we're investing back and keeping the sportswear business growing.

Okay.

Congratulations on a fabulous quarter.

Thanks, Liz.

And for our next question, we will go to Noelle Grainger with JP Morgan.

Hi.

Good morning.

Hey Noelle.

First, maybe back on Nautica and the profitability.

Eric, can you elaborate a little bit in terms of what, at this point, is driving the profit improvement?

Is it primarily improved sell-through at retail?

Would you seam your markdowns or are you still seeing some significant benefit from infrastructure and operating initiatives?

Well, the quick answer to your question is yes, Noelle, we are seeing all those things.

We talked early on, when we acquired Nautica, that there were several things we are going to work on to improve the profitability of the business.

One was first, getting the product assortment right so that it would sell-through better, giving us reduced markdowns.

And we've made a lot progress on that.

Another was controlling the size of the line so that we put fewer products out there and put more energy and marketing support behind them to also improve our sell-through and we are seeing that.

We also, as you know, last year did take some restructuring actions of the business to get it focused on the growth plan we set.

That resulted in a lower operating cost structure.

And we are seeing the benefits of that.

We said that our target operating margins for a year for Nautica was in the 14% range and we told you that we were optimistic that we were going to get there.

And we're getting there a little bit more quickly than we thought.

That is great news for us.

We're very proud of that.

And would you say in terms of specifically sell-through at retail you're kind of half of the way to your objectives ultimately?

Or farther along in the process in terms of full-price versus off-price goals?

No, I'm not going to send the message to the Nautica team that I think we're past any of those goals.

I know they are listening to this call too.

And we want them to continue to do a better job.

That is a real difficult question.

Obviously, it is a function of the quality of the products that we create and the kind of marketing support that we have through this Navigate Life campaign and how effectively that pulls consumers into the channel.

But we are not at all complacent or content about where we are right now.

We have ambitious goals for that team.

Okay.

Maybe Bob on bigger picture, in terms of the acquisitions broadly.

You obviously highlighted a couple that you were quite pleased with in the quarter.

The $0.09 accretion seems a little bit better than what we were expecting.

How would you compare that to your objectives overall for the contribution of the acquisitions in the quarter?

Does that change how you look at their contribution for the year?

Yes.

Actually you're right Noelle, you're right.

It was a little bit stronger than we anticipated in the quarter to be sure.

And we pointed out -- we pointed a couple of -- site some examples of where for example, in Vans.

We just had a terrific at all-time record high quarter for that organization, both in sales and profitability.

And part of that was driven by retail.

And of course, with some additional stronger sales, with some great product performance.

So, yes, it was stronger than anticipated in the quarter, and yes, we are a bit ahead of our expectations relative to the plans that we laid out for those brands.

Obviously, that's generally true for the acquisition, but yes, a bit ahead of schedule.

But you wouldn't say in terms of relative to your back half, kind of, conservatism at this point that -- did that -- it didn't pull from the third quarter, for example?

No, not in a significant way.

In our couple of businesses and perhaps in bands, because of the strength we're seeing some early ordering, but it's always hard to say what takes place.

So not in a significant way.

Maybe just one last question on intimates.

In terms, I think you made a comment in the press release regarding that you expect some improvement in the second half, and I'm wondering if that bodes on in terms of, kind of, this sales trend as well as the profitability trend or if its more from a profit perspective given some of the restructurings you took in the second quarter?

Yes.

It's a little bit of both and will kind of zero in on that.

In terms of sales, the decline in the other numbers -- the decline overall in the first half was about 7%.

Yes.

And in the second half we expect that gap to narrow to about 2%, again, in terms of sales.

In terms of profitability, operating margins declined by about seven points in the first half and in the second half, once again, we expect that gap to narrow to about three points.

Okay.

Great.

Thanks very much.

Our next question will go to Brad Stephens with Morgan Keegan.

Hi.

Good morning everybody.

Congratulation on a great quarter.

Thanks.

Looking out to the fourth quarter, I guess backing into that that implies earnings guidance of $1.15, am I correct in that assumption?

Yes, that's about right.

I guess I'm just a little bit confused why it's so conservative given that -- the outdoor and sportswear divisions will make up, by my calculations, at least, a higher percentage of the total sales and within those, I think most of the group should be more profitable than they were last year.

I think, Brad, what you're saying is that the third quarter is by far as the strongest quarter for outdoor businesses.

And we expect to see that in the margin comparisons as well in the third quarter.

So the third quarter is much more of a driver from an outdoor standpoint than the fourth quarter.

Okay.

And you can see that improvement based on our outlook.

All right.

And I guess, moving on, the intimate business, long-term, I guess that our recent store checks, it's getting even -- I don't see any easing of the competitor pricing environment.

Do we need to readdress the long-term growth for the intimate business based on that, or you're still confident with the 4% growth rate?

No.

We're confident that in the longer term we can get the growth rate we've established in intimate in the revenue, particularly difficult this year.

As Mackey mentioned, we've struggled in our private brands business.

Our branded business this year has been okay, and just okay.

But overtime, we're confident that, particularly in our branded business, that we can achieve a 4% growth rate, and we expect improvement in also in our private brands business next year.

Okay.

And then back to Nautica for one last question, I'm still seeing a lot of Nautica, while entering (ph) Cosco and other wholesale clubs.

Can you give us an idea of how much -- how long it's going to take to continue to clean out the discount channel?

What we have said is that we plan to reduce overtime our penetration in that channel, and we are actively doing that.

Part of that's coming from growing our business in our department store channel.

Actually, on a year-to-date basis, our business in the club channel is down versus prior year.

Great.

And any comments you want to make this point on Nautica Europe?

Yes.

I was just in Europe two weeks ago for the official launch of that program.

We are really delighted with the team, with the work that's happening over there.

As you know, we're doing that through a cross VF effort.

We have our outdoor guides and the Napapijri design guides customizing some products for Europe, the line that will be launching next year which is about half a straight pull from the US market and half created over there.

But it's very early days.

We just had our launched sales meetings two weeks ago, everybody is energized and we're now officially on the road selling.

We expect some slow-growth for being, replacing it carefully.

We must have success early on, so we're being very cautious on how we place it.

It is a long-term big opportunity and we are approaching it in that way.

All right.

Thank you, very much.

Congratulations on a great quarter.

Our next question will go to Jeffrey Edelman with UBS.

Thank you.

Good morning.

I saw by, I like to readdress the currency question because I think we -- all of us saw the fact that the Chinese currency was revalued.

This probably occurred while you were getting prepared for your conference call.

So, my question is people have been expecting this re-evaluation.

It was 2% to 3 to 5.

People have been looking for it.

As you are looking at your business going forward, would you expect this to be a non-event?

Do you think some gets absorbed by manufacturers there?

Do you think this offsets some of that theoretical pickup from the absence of quotas?

Or is it something that maybe helps offset the ongoing deflation we've seen?

It's Mac.

Let me just say one word on this.

This is one of the reasons why we feel very good about the balance sourcing strategy that we put in place some time ago and continue to execute.

We're not as dependent on Asian sourcing as most of our competitors.

We have a very strong balanced sourcing strategy around the world, so we feel like, to some extent, there is a competitive advantage in not being as dependent on that particular region of the world.

And so, we think that overall the impact of what's happening in China and Asia, with the lifting of the sanctions, has not had the impact up to this point so that people thought it would.

I think there's going to continue to be some uncertainties about these types of things, but I think balance-sourcing strategy is having great cost in the Caribbean is going to be a real advantage for us going forward.

Jeff, this is George Derhofer.

If I could add, I think an example that is when the quarter restrictions came on, I mean we -- our group in Asia did a magnificent job of really moving those out of China into other countries without a substantial impact on the Company or its results.

So I think we've demonstrated that we can move goods when we need to to avoid situations and to move things to other countries as appropriate.

Right.

Okay, good.

And secondly, could you give us some sense of how jeans are?

I'm sorry, how jeans inventory stand at your customer levels?

Did we see some building over the last quarter?

Do you think they're lower than what they should be?

And how should that effect the equation in terms of looking at sales over the next quarter as we head into the back-to-school season?

Hi.

This is Eric.

We think that our -- we know that our jeans inventory of retailer on great shape in every channel.

We work real hard at managing our jeans inventory at retail to make sure that we can avoid - I mean ups and downs from that and our jeans inventory in the mass channel is right in line with sales.

Our jeans inventory in the chain stores is actually certainly down on prior year.

But we have very clean inventory.

We anticipate no issues from that whatsoever.

Okay.

So if the inventories are clean then you actually could have up -- you could sustain the improvement that you had in the second quarter in terms of jeans sales.

Yes.

Our hope is that that's case for the second half of the year.

And we will continue to try to grow our businesses and to do a better job of managing our inventories at retail.

With that combination, we hope it's going to result in just a little bit of growth in our US jeans business in the second half of the year.

Okay.

Thank you.

Very welcome.

And for our next question, we go to Virginia Genereux.

Please go ahead.

Thank you, all and good morning.

Did you say, Bob, what was the currency contribution to revenue and EPS this quarter?

Yes, in the second quarter, Virginia, it was only $13 million and it was neutral.

Okay.

Great.

Thank you.

Not a big effect.

And then, maybe just on China, because I know everybody is getting questions about this.

Can you -- have you been seeing -- just generally on the sourcing side, have you been seeing higher costs sort of out of Asia Pacific, in general, or China specifically related to sort off macro labor movements or raw materials pricing, anything like that?

Virginia.

This is George.

We really haven't -- the pricing, some had predicted that the pricing would come down very dramatically with the elimination of quotas and we haven't seen that either.

So, overall, I think the pricing has been somewhat favorable, but we are not seeing big increases.

And when we have to move goods out of China, China is not necessarily always the lowest cost area some suggest, so we have not seen any big impact either, when we have to move goods out of China into other countries.

Okay.

And George, may I ask, how far out are you contracted with China?

If it's -- we are in July, you are contracted effectively, I know it's not a contract, but you have arrangements, you have agreed to terms with manufacturers through -- is it through spring of '06 or even before or beyond?

Well, our lead times in China, Virginia, would generally be kind of in the four to six months.

So we pretty much were kind of season out, that's the extent of it.

So we are not long out with respect to our obligations or our need to stay in China.

We can be pretty flexible looking ahead to next year if we need to be.

Okay.

Thank you.

And then, Mackey, maybe, if you -- if I look at your sort of what you're saying about the back half, and you guys have done a tremendous job with these new businesses.

Everybody is thinking maybe you could do a little better on the revenue.

If you look out to 2006, I mean you have anniversaried as you said sort of the big piece of some of the acquisitions now.

If you look out to '06, are you guys -- and sort of that 8% target, are you thinking, we need to make additional acquisitions to hit that 8%?

Do you have things in the queue to do that?

Are you comfortable if '06 is, I don't know is 3 to 4% kind of top-line grower?

Can you talk about that?

Yes, I would be glad to.

We set our at guidelines 8% growth overall for VF, with about half of that coming from acquisitions and half coming from organic growth.

And we're sticking with that target.

We have a lot of opportunities we are looking at, and we have had such tremendous success with our strategies of building global lifestyle brands.

We are continuing to look for the kind of brands that would fit in the portfolio.

We have no reason to believe that we won't be able to continue to add some exciting new brands to VF.

And also we are pleased with where we are from an organic growth standpoint.

We're making more investments today in our organic businesses and we certainly will have times when we won't hit that, as we did with intimates.

But that's the apparel business.

So we will continue to make the kind of investments that we feel will allow us to grow those organic businesses well.

We feel good about our plan.

Okay.

And I am sorry, in terms of the sort of the acquisitions in queue or what you're seeing -- do you think the acquisition landscape is getting more competitive-I mean, you guys have been able to find things even with that.

But how would you characterize the acquisition landscape?

Yes, it's -- I would say it's competitive, I don't know, it's any more competitive, it always has been.

Everyone is out looking for the global lifestyle brands and we have had great success with that.

And we have a lot of opportunities we're looking at.

As you know, it's very hard to project when acquisitions are going to happen.

You go through a lot of acquisitions before you find the ones that fit both our strategic objectives, and also hit our financial objectives.

But we are pretty clear on both of those and we are going to find acquisitions that fit both, we feel.

Thank you.

And for our next question, we will go to Marie Driscoll with Standard and Poor's Equity Research.

Good morning.

My question is about intimates.

I'm wondering if you could talk about -- if you could quantify what you're doing in terms of lowering your overhead?

And as you look out, how do you see that business?

Can you talk about the competitive market in that business?

Can you talk about what you see happening with Chico's Soma and Sara Lee?

Thanks.

Well, just may be I'll comment first on the lowering overhead.

What we think we are doing is lowering our overhead and capacity requirements to the current level of business.

So we think that's right sized at this point with the actions.

Eric?

Yes.

The intimates market has been and continues to be very competitive.

There are new formats and brands entering the market today, as there have been consistently over time.

The challenge to our group is to make sure that our brands remain relevant to their consumers and their channels of distribution.

And we are confident that that team, as I said earlier, can deliver the growth that they have signed up for for longer-range plans of 4% organic growth in intimates.

I won't make any specific comment on the Soma initiative at Chico's other than we are watching what they're doing, as we watch all of the competitive changes in the marketplace.

Do you see other opportunities for private label business?

We have a pretty broad -- we participate in private label with several retailers.

And we have a team that's dedicated to doing that.

And this year, we really had a single program that was fantastically successful in 2004 that we are up against the launch of that program and that really drove a lot -- is driving, as we said, a lot of our issues in intimates this year.

We're not going to have that issue as we look at next year.

And we continue to work with all of our customers who buy private label programs and compete for programs in every channel that way.

Okay.

And I guess I am -- like I just need to understand what right sizing is?

What percentage of your intimates are you manufacturing?

Are you getting rid of manufacturing facilities?

I don't know.

Marie, this is George.

We have been at around the 50% level in terms of what we make and what we source, either in Asia or in this part of the world.

That number will come down.

So, although, these moves have been somewhat in reaction, certainly to the challenges that the business has faced this year, I would also like to make sure that you understand that they are strategically the right moves for us.

They give us more flexibility.

We've talked a lot this morning about flexibility.

These moves are in reaction to some extent to the volume challenges, but they are also strategically right and consistent with our long-term direction in terms of providing more flexibility to that business to source goods around the world where it needs to.

Okay.

Thank you.

And once again, if you would like to ask a question, you can do by pressing the "star" key followed by the digit "one" on your touchtone telephone.

We will now go to Jeff Kobylarz with Citigroup.

Good morning.

Just curious about the -- if you exclude the reduction in the benefits in Mexico, the jeans operating income came in at 80 million or so, that's down 100 basis points versus prior year and that's despite sales up around 2%.

Can you describe what -- why is that that you are in?

Yes, Jeff, a couple of points there.

Number one, that includes -- those numbers include, of course, our global Jeanswear businesses, those in the US as well as outside of the US.

And on a US basis, actually the profitability was up somewhat.

However, on an international side, it was down a bit.

So that gets back to flat, it's not flat overall.

And on the international side, it's mostly currency driven in our manufacturing plants where we are located.

All right.

Fine.

And your inventory looks like it's up about 6% excluding acquisitions.

Was that planned?

Yes, it's up about 5, 6%.

I think we stated 5% in the release.

Was it planned?

It's pretty close to, as we indicated, it's very, very close to what we expect to see in terms of growth in the third quarter, which we said was about 4%.

And the cost to align your capacity in intimates, can you say what the -- how much you have invested in the first half of this year?

Well, the unusual item that we identified was 10 to $11 million.

Is that what you're looking for?

Right.

I missed that, okay.

Thanks very much.

You bet.

We will now go to Lou Carl (ph) with Lehman Brothers.

Hi.

I am actually asking this question on the behalf of Bob Drbul.

My first question was, I just wanted to make sure I was clear on your remark, on Asia, you said about 35 or 40% of total product needs were from Asia and about half of that was from China, is that what you said?

30%, approximately30% -- 30 to 35%.

It is the total needs from all of Asia, is that...

That's right.

And then, did you say, half was from China or did...

Yes, in the neighborhood of China.

Okay.

And then my next question was, can you give me a sense in either, I guess, dollars or percentage of sales what your total marketing spend would be for the year?

It will be right at about 5.5%...

Okay.

... which is pretty well above where we have been in both last year and years prior.

Okay.

And, on Nautica, with respect to the strong sales and earnings there, can you give me a sense of what's behind that?

Is it new doors, is it increased selling space, the combination?

It is really better product and better marketing.

We have not had any meaningful new door distribution this year.

Okay.

You know, as I've said in my comments, the Nautica business was in decline two years ago and had been in decline for several years.

And we, kind of, staged 2005 as the year that our new product and new marketing would be seen by consumers for the first time.

And what we are really seeing is growth within the doors that we sell, based on better product execution and what we think is pretty compelling marketing.

Thanks very much.

You're very welcome, Lou.

And gentlemen, at this time, it appears we have no further questions.

I would like to turn the call back over.

Okay.

Thank you for joining us today.

I think, as you can see, our core businesses in aggregate are very stable, generating very strong cash flow, and this is allowing us to invest more in our growth initiatives in our core business initiatives as well as to continue to add exciting, growing lifestyle brands.

I believe that this gives us a new portfolio, overall, gives us a great presence in some of the strongest, most stable categories in apparel, such as the jeans category.

But also give us a strong presence in exciting, new, growing categories.

And we believe this is the way to drive strong increased shareholder value.

Thanks for joining us.

Thank you.

That does conclude today's conference.

You may disconnect at this time.