威富公司 (VFC) 2005 Q3 法說會逐字稿

Good morning and welcome to the VF Corporation third quarter earnings release conference call.

Today's call is being recorded. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to Mr. David Griffith of ICR.

Please go ahead, sir.

Good morning and thanks for participating in VF Corporation's third 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 conference call.

Hosting our call this morning is Mr. Mackey McDonald, Chairman and CEO of VF.

Before we begin we would like to remind participants that certain statements included in today's remarks and in the Q&A 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 condition of the Company to differ are discussed in the documents filed by the Company with the SEC.

At this time, I would like to turn the call over to Mackey McDonald.

Thank you, David.

Good morning.

Thanks for joining us today.

We're very pleased to be able to deliver another record quarter to our shareholders and to confirm that we're looking for record years in both '05 and '06.

Clearly, the changes that we're making in our brand portfolio, the addition of higher growth, higher margin brands, and businesses are paying off.

And we're still in the beginning stages of our growth plan with many of the brand initiatives still in the early execution phase.

As you might expect, given the external factors that I know you're all familiar with, sales came in somewhat softer than we expected.

While sales hit a record in the quarter, we're not satisfied with the current rate of sales growth.

We do not think that it is indicative of the growth potential of this portfolio that we have.

The big news in the quarter was the very healthy increase in earnings and in our margins.

In fact, nearly all VF coalitions posted higher operating income with double digit operating margins in the quarter.

Clearly we have a profitable platform to leverage for our future growth.

As more seasonable weather moves in across the country, we expect to see some pickup in business.

Nevertheless, as we stated in our release, we're planning cautiously for the fourth quarter with a modest increase in sales.

And earnings per share, that are flat to slightly above prior year levels.

Margins will remain healthy but earnings growth will be hampered due to three primary factors.

First, because we want to make sure that we keep our inventories in great shape, we'll be taking some actions during the quarter so that by year end, inventories will be even with '04 levels, excluding acquisitions.

Second, we're continuing to invest behind a number of important future growth initiatives.

Some example of this include our Kipling stores in the U.S., Nautica's European and women's sportswear platforms, our John Varvatos business, the North Face footwear and this is just to name a few.

And third, as has been the case all year, our margins in our intimates business will remain under pressure, impacting total profitability.

In terms of sales for the fourth quarter, we expect the gain to be driven by our outdoor coalition with generally flat sales comparisons across our other coalitions.

We do expect more normal conditions in weather at retail which should put us in good shape as we head into '06.

We look forward to providing more specific guidance related to sales and earnings in mid December in conjunction with an update on our growth plan targets and strategies.

Now, to give us a greater perspective on our jeanswear, outdoor, intimates, and sportswear businesses, let's hear from Eric Wiseman.

Eric?

Thanks, Mackey.

I guess we'll start with jeanswear.

It should be no surprise to anyone that our jeanswear business was not exempt from the challenging external environment during the important back to school season.

Having said that, we have lots of opportunities to improve our performance regardless of external influences.

The biggest issue we have currently is with our Lee brand which we have alluded to previously.

Our NPD data indicates that jeanswear sales in mid tier department stores were down 11% in the June through August period.

Lee sales were down a bit more.

The biggest impact is coming from the effect of retail consolidation involving one of Lee's largest customers where we have lost space and programs.

So the question is what are we doing about it?

Quite frankly, while our Lee men's business remains generally healthy.

We've taken our eye off our women's business where Lee has traditionally had a stronghold.

Our efforts to correct this began this quarter with the launch of our new find your perfect fit print campaign that is specifically targeted to the 30 to 54-year-old female customer who shops in mid tier stores.

Our research confirms that we have a compelling story about fit to tell with our products and we're out there telling it.

Lee is one of the world's great authentic jeans brands and we're doing a tremendous amount of research behind the brand, it's attributes, products, and positioning to ensure that it remains healthy and vital.

Our Wrangler brand remains a powerhouse.

The number one national brand by far in discount store both in units and dollar sales.

Mass Wrangler sales were about flat in the quarter and we're working hard to create programs that provide the additional growth we need in 2006.

On the international front, as stated in the release, we're seeing very good momentum in our -- in many international markets including Latin America, Canada, Mexico, and Asia.

Our European business is running flat with prior year levels.

Turning next to our outdoor coalition, this coalition continues to be a powerful growth engine for VF.

Consistently delivering top and bottom line results above our expectations.

In terms of the North Face, we continue to see growth across all product categories.

Our owned retail stores are also performing very well.

With comp store sales in the U.S. running 17% above prior year levels.

In September, we opened our two newest stores in Portland, Oregon and in Tysons Corner.

Internationally, we added partnerships to Stockholm, Copenhagen, Manchester, and Madrid and through our distributors, two stores in China and a store in the Philippines.

Also as indicated in the release, the outlook for the North Face brand remains very strong with a 30% increase in bookings for spring 2006.

On to Vans.

The Vans team is also making great progress with their business.

We indicated that sales in the quarter were stable with prior year levels.

Total sales would have been up nicely, however, we exited some underperforming retail locations and our snow sports camp both necessary steps to achieve our profitability goals.

More on that in a minute.

Our new retail prototype store continues to show great promise.

Comp store sales year-to-date are running up 22% with the new store model.

We're committed to expanding Vans apparel business and have launched the Vans core and Vault collections for spring 2006.

Snow and performance lines are scheduled to launch in the fall of 2006.

In getting back to profitability, their hard work is paying off.

Vans operating margins increased by 50% in the third quarter versus the '04 period.

The combined sales of our two pack brands, JanSport and Eastpak pack were up slightly over the prior year.

For the year we expect solid growth in JanSport's core day pack and custom apparel businesses.

Our Kipling and Napapijri brands continue to grow nicely internationally and we're excited about the opportunity for both of these brands in North America.

We believe they have wholesale and retail potential here and we plan to pursue both.

We opened three Kipling stores this quarter and plan to open our first Napapijri store in Soho in 2006.

The Napapijri brand just finished another strong booking season in Europe with bookings for spring 2006 up 18%.

The integration of our most recent acquisition, the Reef brand is on plan.

Reef's growing in all channels, core, specialty, and chain, led primarily by their core sandal business but also by new fixturing programs that are driving strong year-around results.

In terms of our intimates business, those who follow us know that this has been a challenging year for our intimates team.

The good news is that we have a great team that's making real progress on a addressing the issues at hand and returning the business back to traditional levels of growth and profitability.

We expect better sales comparisons in the fourth quarter although margins will continue to run below prior year levels.

I won't spend time rehashing the primary reason for the sales decline which relates to lower sales to a large specialty store customer.

This has traditionally been a volatile business for us.

Great for both sales and profits when we have it and difficult to make up for when we don't.

We do expect this part of our business to stabilize next year.

Of greater concern to us is the decline we're seeing in our department and chain store business.

Our new product launches have missed the mark.

And this is an issue that is being addressed and fixed.

We have some additional new product launches hitting the market this fall and expect to see improvement in our product assortment in 2006.

Our mass market business remains healthy.

With very solid growth in our Curvation brand where we recently added a new shapewear program.

Our Vassarette and Bestform brands are both currently performing well.

We're also seeing the benefits of our expansion into new international markets with two joint ventures, one in Mexico and one in Canada, both contributing nicely to intimate sales this year.

In summary, we've made a number of organizational changes throughout our intimates business and are upgrading our talent in such key areas as brand management, design, R&D, and marketing.

We're confident that we have the right team in place to turn this business around.

At the same time, we're working aggressively to reduce costs and capacity.

We won't see the benefits of these actions this year.

But they should begin to kick in next year.

And finally, turning to sportswear, sales were up 2% in the quarter.

We're very pleased with how well the Nautica brand is performing at retail.

While our total Nautica branded business was about flat in the quarter, our first quality sales were up.

Season to date, that is since August 1, our over-the-counter sales are up nearly 6% in Nautica sportswear.

In the first two weeks of October, sales momentum has increased running up at a double digit rate.

Market share data confirms that we're gaining share in men's sportswear in department stores.

The productivity of our retail space is also improving.

In 2005 our sales per square foot should be up about 10% over 2004 levels.

Looking forward our two big initiatives remain launching Nautica Europe and launching women's sportswear, both of which are on track for next year.

Our John Varvatos men's luxury business continues to have great momentum and we're looking forward to the opening of our new John Varvatos flagship store in New York City next month.

Now, let's hear from George Derhofer on image wear's quarterly results.

George?

Thanks, Eric.

Imagewear sales rose 5% in the third quarter with profits up 25% to over 18% of sales.

Sales rose in our licensed sports business due to the acquisition of Holoubek, a Harley-Davidson licensee which has met all of our expectations.

Importantly, our occupational apparel business is stabilized and continues to drive very impressive profitability.

As expected, our fourth quarter will be impacted by last year's remarkable Boston Red Sox World Series victory.

We continue to view imagewear's significant contribute to our overall profitability and cash flow and an important source of sales diversification and future top line growth.

Switching gears for a moment, let me say a few words about how VF's supply chain is driving and will continue to drive the superior margins that we're enjoying today.

Our results are also a testimony to our ability to execute through what we believe is an industry best supply chain.

Our balanced and customized sourcing strategies, devotion to business-driven technology solutions, and a highly-motivated organization will drive a sustained, competitive advantage for VF.

The reorganization we announced in May is focused on connecting to our marketing units.

Developing the best talent.

Integrating acquisitions fast and tight.

Jacking up our speed, partnering with the biggest and best global technology and supply chain partners and fueling growth investment through ambitious cost reduction programs.

We believe this quarter's results demonstrate that we are making good progress.

For example, we recently opened a new America's sourcing office.

Began construction of a new 800,000 square foot distribution center to support our growing outdoor businesses.

Executed a number of cross coalition manufacturing initiatives, continued our move to lower cost manufacturing geographies.

Rolled out additional common systems platforms.

Integrated several new businesses and further leveraged our procurement practices across VF.

At the same time, we have aggressive plans in place tied to our five-year growth plan that we believe will continue to transform how we operate around the world.

Thanks, George and Eric.

Now, Bob Shearer will run through the financials.

Thanks, Mackey.

Considering the external factors that Mackey mentioned at the start of the call, it really was a very solid quarter.

I think it shows the highly profitable base we've built for our businesses so that even in times when sales are a bit tough, we still have the ability to deliver strong, profitable, bottom line performance.

As you saw in the release, sales were up slightly in the quarter with increases in our outdoor, imagewear, international jeanswear, and sportswear businesses.

Partially offsetting these increases were declines in our domestic jeanswear and intimates businesses.

You'll recall that we've now anniversaried the acquisitions of Vans, Napapijri, and Kipling which were contributing to stronger sales comparisons in the first half of the year.

In the current quarter, the contribution from our most recent acquisitions the Reef brand and Holoubek was $29 million.

I also should note that last year's third quarter included $29 million in sales from playwear which we sold last year.

So on an apples to apples basis, total organic sales were about flat.

We continue to be very pleased with the increases we're seeing in our gross margins which were up by more than 1 full percentage point to 41.1%.

This continues to reflect changes in our business mix as we're seeing the benefit of adding higher gross margin brands to our portfolio.

We also saw improved gross margins in a number of our organic businesses.

Total operating expenses as a percent of sales were relatively flat in the most recent quarter.

You'll note that 2004 results include a line item for the $15 million loss we incurred on the disposition of our playwear business.

Continuing down the income statement, you'll note that the item royalty income and other was up 19% and that's due primarily to an increase in net royalty income.

Now, these factors, combined, result in very strong operating margins in the quarter.

We hit over 16% compared to a very healthy 14% in last year's quarter.

Interest expense was down slightly in the quarter while our income tax rate was up a bit.

As noted in the release, this was due to expected settlements of prior year taxes, looking toward the fourth quarter, we expect a tax rate of around 33%.

Accordingly, net income from the quarter was up 17% with net margins exceeding 10%.

Earnings per share were up by a smaller amount, 15% due to slightly higher shares outstanding in the quarter.

As mentioned in the release, we did repurchase 1 million shares in the quarter and plan to repurchase another 1 million shares in the current quarter bringing the total for the year to 4 million shares.

A few points on our balance sheet and cash flow statement.

We ended July with a strong cash balance of over $200 million.

The 11% increase in inventories is a bit higher than we would have liked but not surprising given the weak sales environment, we're very aggressive about managing inventories across our businesses and are taking the appropriate actions to ensure that they're back in line by the end of the year.

By year-end, we expect that inventories will be about flat with 2004 levels, excluding increases from acquired companies.

At the end of the quarter, our debt-to-capital ratio was 27.5%, providing us with a great deal of flexibility to continue to pursue acquisitions, repurchase shares and maintain our long-term dividend payout ratio of 30%.

In fact, this quarter we increased our quarterly dividend by 7%.

We indicated last quarter that we had $300 million of 8.1% long-term debt due in October.

And that, in fact, has been repaid and replaced with commercial paper, having a significantly lower rate.

We expect another strong year of cash flow from operations of about $600 million, better than we had previously anticipated.

Capital expenditures will be about $115 million for the year.

And depreciation and amortization in total will be about 125 million.

Mackey?

Ok.

Thank you.

I think you can certainly see the story of VF now has become a transformation to higher growth lifestyle brands which is allowing us to maintain solid performance even when our high margin core businesses are going through some of the fluctuations that are common to the apparel business.

We now want to open it up to your questions and we'll do that at this point.

Please, operator.

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Liz Dunne of Prudential.

Good morning.

Can you hear me?

Yes, we can, Liz.

Sorry about that.

As we're looking at the fourth quarter, other than the intimates business, and this liquidation of excess inventory, is there anything else driving your conservative margin posture?

Because I'm a little bit surprised given the upside we've seen all year.

I mean is your guidance -- this is kind of a silly question I guess knowing you guys but is your guidance just conservative?

Gee, Liz.

Let me make a couple of comments there.

Liz, it is important to remember that obviously in the first half of the year, when you talk about our gross margins, we were having new sales of higher margin businesses.

Right?

Related to the acquisitions of last year.

So that had a really big impact on the first couple quarters.

Then in the third quarter, it is by far our biggest quarter for our outdoor business.

So with the heavier weighting towards the higher margin businesses and outdoor, that had a very positive effect on the third quarter as well.

In the fourth quarter, outdoors will be a significant piece, but it's not as big a component and won't drive the margins quite as strongly as it did in the third quarter.

Also from a bottom line standpoint, we're making some additional investments.

I think we commented on some of the investments, for example, in the Nautica Women's sportswear, Nautica Overseas and some other areas like that.

So that's having a bit of an impact overall, as well.

So part of it is the mix issues.

Part of it is just some of the changes that have taken place within the mix of VF.

Okay.

My second question relates to the intimates business.

When we had the chance to spend time together in September, you mentioned that you were sort of talking to Victoria's Secret about the possibility of smoothing out the launch business.

My understanding was that they used several partners and it creates challenges for everybody to sort of manage through when you get the business and when you don't.

Can you update us on the status of your talks with Victoria's Secret surrounding that issue?

Surely.

This is Eric.

There's a very brief update.

There is progress but not closure.

Okay.

I'm not trying to be short but we continue to pursue that.

But there's no decision made yet.

Okay.

And then one final question.

As we look at the buybacks, are you -- would you characterize yourself as getting more aggressive on buybacks in light of some of the challenges in the acquisition environment right now?

No.

I really wouldn't.

I'll tell you, Liz, what's taken place is really pretty simple.

With the share price improvements that we've seen, we had fairly significant option exercises.

Actually over the last couple of years.

And our posture has always been more of a maintenance level.

It is still where we are.

So we're just trying to impact -- to offset the impact of those exercises so it is really not necessarily a more aggressive posture relative to the buyback program.

I thought your initial plan for the year was 2 million in buybacks.

It was.

And again, just based on the number of options that were being exercised, we decided to increase it a bit.

Thank you very much.

Congratulations on a great quarter.

Thanks, Liz.

We'll go next to Jeff Edelman of UBS.

Thank you.

Good morning.

I would like to focus on the inventories.

The bulge in inventories is more or less unlike you people, the way you've been running your business in the past.

I was wondering if you would shed a little more light -- are we looking at one, primarily, jeans and was this -- I guess let me just stop there first.

Yes.

I'll make a couple of comments there as well.

There are a couple of areas that contributed to the increase.

First, was jeans.

Jeans was a component to be sure.

Our intimates business, as well.

Still not back to where we would like them and they were still a bit higher than we would like.

And also, the acquisitions alone.

The new acquisitions added to the inventories as well.

So it was pretty much across the board but more so clearly in those businesses that were off a bit in terms of our expectations from a sales standpoint.

I would say though that overall, they are a bit higher from a distressed level, we're still in pretty good shape.

So we don't necessarily -- the quality of inventory is good.

They're just a bit higher than we would like them.

So we will be taking actions in the fourth quarter to work those down as we said in the earlier comments to get them back in line.

Okay.

If we look at the fact that jeans is 40% plus of the business, and obviously X the new businesses inventories were up about 9%, I guess one could infer even the jeans and intimates inventories were up like 15%.

Or am I that far off and would this reflect your larger customers just not taking any inventory in at the end of the quarter, causing this bulge here?

No, I think that's a little stronger than actual.

It wasn't quite that tough.

Again, jeanswear was one of the bigger components.

Again, we were surprised more there from the sales standpoint as we indicated.

But it wasn't quite that far off.

Okay.

Let me just pursue this just a little bit further.

A very large percentage of your jeans business is direct replenishment, am I correct?

Yes.

Okay.

Did we see your customers bring down their inventories at store level further than the sales let's say, decline?

Yes.

We did.

Okay.

Then, Mackey said -- made a comment, hopefully, if we get a little more normal weather and sales get back to a better trend.

Could we assume that those retailers would need to rebuild their inventories or are they just operating with permanently lower inventories looking for you to keep it?

Yes, I mean we feel like that the retailers certainly will be filling back in as sales get back to a more normal level.

And we feel like that is going to happen.

We've built all of that into our plan.

And I don't want you to get the feeling that our inventories -- they're at some level that we feel great alarm over.

As Bob said, our inventories are the right products that we need.

But we react very quickly to kind of conditions when the sales slow down at retail, we just react very quickly to that.

We don't want to get caught later on with the bigger problem.

So we're reacting very quickly to this situation.

We'll be prepared, assuming things continue to be somewhat soft, we think they will rebound somewhat.

But we're still not sure whether the energy cost and other factors that are going on are going to allow the consumer to come back in very strong.

So we're not planning for that at this point.

So we want to get our inventories at a good level.

Okay.

So if you keep the inventories at level would this reflect more cutting back on production on that side, getting variances or would it reflect markdowns to move the product?

No.

What we're talking about, in terms of getting the inventories back in line is reducing some of our production.

Okay.

Yes, that's what we'll be doing.

Okay, fine.

Thank you.

That's a much lower cost way to address this issue.

That's the reason that we react very quickly to this so that we don't get into a heavy markdown situation.

All right.

Okay.

Great.

Thanks.

Thank you.

We'll go next to Omar Saad, Credit Suisse First Boston.

Thanks.

Good morning.

Your profitability improvements in the segments were very encouraging.

Wanted to kind of dig in a little bit on jeanswear.

When you look at the fact that you were able to expand EBIT margins 160 basis points, despite a 3.5% sales decline I just wonder if you can kind of give more color on that?

How you're able to do that and how we should think about that going forward?

One factor there was that last year, actually last year in this quarter, there were some costs related to the exit of a plant and it was related to a move to a lower-cost facility that we're getting the benefits of this year.

So, it is a little bit of a spread going both ways.

We had some costs, again, they weren't significant in last year.

But then we're also seeing a lower cost overall available to us as a result of that move.

So, that's actually a big factor in terms of the improvement in jeanswear.

Okay.

Great.

And then when you look at the SG&A rate, this quarter, you're up 10 basis points as a percent of sales versus the first half.

You were trending up about 200 basis points in the first two quarters.

What's the change?

Are you anniversarying?

Is it something you're anniversarying with the acquisitions?

Is it you're a $100 million targeted cost savings you guys are looking for?

Can you talk a little bit more about that?

And how we should think about it going forward?

Yes, the point you made is a big factor.

What was happening is the acquisitions from 2004, again, they were new sales in the first half of the year.

And those acquisitions carry higher gross margins and higher SG&A costs as well.

To support them.

So, we are seeing somewhat the impact of anniversarying those acquisitions.

So, X, further acquisitions, it is trending now to a more normalized rate going forward?

That's right and you'll see closer comparisons in the fourth quarter as well.

Yes.

And last, I wanted to ask you about -- it seems like it has been -- acquisition activity has kind of slowed down here a little bit for you guys.

I wanted to ask you what you're seeing out there in the market right now?

Given your success, what is holding you back?

Is it prices?

Is it lack of the right opportunities ?

And what would it take for you to get more aggressive?

Well, we've talked about our acquisition strategy where we're focusing, we're looking for lifestyle brands that have a very strong global positioning and we still feel that there are plenty of those acquisitions out there.

This -- acquisition flow tends to be this way.

They tend to happen all at one time and then there seems to be a little lag and a lot of it just has to do with the communications, working together.

We certainly want to match up cultures with any acquisition.

We have very clear strategic objectives and we also have financial hurdles and we have to look at a lot of opportunities before we find the type of acquisition that fits both of those.

We have -- the activity, I can tell you, is robust.

It is just the fact that the results seem to become more over short periods of time and then there's lapses in between.

But we will still be bringing some great new brands into VF, we believe.

Are you seeing any change?

Is there anything with the pricing going on out there?

I know the public -- if you look at public valuation, things have cooled off a little bit but?

I will say that we -- there's plenty of activity out there.

There are a lot of people looking for opportunities.

So we -- and that's one of the reasons why we have to look at a lot of acquisition opportunities before we find one that fits both our strategic objectives and also our financial -- reaches our financial hurdles.

So we have to look at a lot of them.

We've had to in the past.

We'll continue to.

I would say that the competition has heated up a little bit.

But as I said, I think we'll still find the right kind of brands that will meet both of those hurdles for us.

Okay, great, thanks.

Good luck.

Thank you.

Thank you.

We'll go next to Jean Fontana of Lazard Capital Markets.

Good morning.

I have a question about just the retail environment.

You know, there's been talk about retailers becoming more aggressive this holiday season with sales.

More sales and in particular, Wal-Mart is expected to be more aggressive because of last year, they felt like they missed because they weren't aggressive enough on discounting.

I was just wondering, in terms of your Wrangler business and your intimate apparel business at Wal-Mart and such, has there been any sort of increased pressure from Wal-Mart from a pricing perspective?

No.

There has been no material change in our pricing strategy for the holiday period and there's been no change in our dialogue with Wal-Mart from last year.

That's always an element of our discussions but there's no big changes.

Ok, great.

And then just turning to intimate apparel quickly.

In terms of the -- just to clarify on the Victoria's Secret business, there wasn't much business with them in 2005 and I know you're sort of in the midst of planning for 2006.

When you look at 2006, is it a question of how much Victoria's Secret business there will be?

Or is there a possibility that there won't be much in the private label area there in 2006 either?

No.

It is not that there is -- we have a -- an important private label business that includes Victoria's Secret and last year, we caught a really hot trend at Victoria's Secret and the number ran up and this year, it run back down to kind of the level we have been running at for the few years prior to that.

So we're kind of at our stable level right now.

And hoping we can do a little bit better than that.

But not expecting a big run up like we had last year.

Okay.

And then just turning to the Vanity Fair business, you said you had some new fall launches for 2006.

In the fall.

I was just wondering if you could talk a little bit about what the difference is in the new launches versus where you feel like you missed the mark previously where they've been a little softer.

If I could make a general comment about that, I think our intimates product development team would say that our products were kind of, me-too, products.

And we're trying to differentiate ourselves with fabrics that breathe and offer other consumer benefits.

We're doing a better job of testing our products with consumers to make sure that what we bring out -- what we launch is not just a me-too, product but something that has a reason for being in the store.

That's in general our strategy.

I'm afraid I'm not prepared to talk specifically about products that we're launching but that's in general been our strategy.

We're trying to do a better job at making sure when we bring products out, that they've been really carefully consumer tested, not just that they look nice but that they offer something important, too.

So it's turning more to functionality as opposed to just design?

Well, I think it is marrying both.

I think it is having -- making sure there is a design that provokes an emotional reason to buy the product as well as a functionality that provides a rational reason to buy a product.

Okay.

Then just one quick question on Nautica.

So the international women's business, is that supposed to launch in fall 2006?

The launch of the -- the women's launch that I talked -- there are two launches I talked about.

In one sentence, one is launching Nautica Europe.

Which is really a 2006 initiative.

We opened a store in Antwerp this year.

But we're selling for the spring '06 season.

Starting out in a very cautious way to make sure that when we -- that we get the product mix right for the European market.

The second launch is a women's sportswear launch in North America which will be for fall 2006.

As it has been planned, over the last two years since the acquisition.

Okay, great.

Thank you.

You're very welcome.

Thank you.

Thank you.

We'll go next to Bob Drbul of Lehman Brothers.

Good morning.

I have just a couple of questions.

First, as you look to the fourth quarter, the marketing spend, the marketing investment in the brands, have you pulled that back at all with the more tempered outlook for the quarter?

Actually, we haven't.

The marketing spend will be up in the fourth quarter both in terms of dollars and up slightly as a percent of sales.

So we're continuing to spend behind our brands and obviously looking toward the future.

Bob, we really are focused on our growth initiative as we've talked and we made the determination that the best interest of our shareholders is for us to grow our businesses long-term.

So we are going to continue to invest and I mentioned a number of things that we're launching in the fourth quarter that are impacting our fourth quarter expectations from a profitability standpoint but we are going to support those launches.

We think it is the right thing to achieve our long-term growth plans.

Okay, great.

And on Nautica, can you talk a little bit -- are you getting any more floor space at retail and is there any update that you could share with us on some numbers around door count et cetera?

Numbers on door count are going to be a little tricky for me to come up with right here, Bob.

We've had a slight increase, slight, less than 100 door increase off like an 1100 door base in our Nautica men's sportswear business for fall.

Additionally, we are picking up some real estate here and there across the market.

And as I said in my comments, our productivity at retail is going to be up about 10%.

On a sales per square foot basis with the new space.

So we've said for awhile we were going to take our run at Nautica this fall with the new marketing and new products and that's beginning to show some signs of improvement in the business.

We're encouraged but not content.

Okay, great.

And then Eric, just one final question would be can you elaborate a little bit more on the performance that you've seen from Vans and the turnaround that's really underway there?

Well, the turnaround that's underway at Vans has been the result of a lot of effort from that team over a long number of years.

This is not something that I can say that we've -- that VF has waved a magic wand over and done.

That team out there that was there when we bought the business had been working on a turnaround in that business, built around better branding and better product segmentation making sure that they had products that connected with their consumers in each channel of distribution and launching unique lines for each channel of distribution.

And they're executing better products and with the right segmentation and a big part of that business in the U.S. is the 90 full price tours that we run and they've done a great job of coming up with a new prototype for those stores, are beginning to roll that out.

Also, as I said in the comments, that's given us a 22% lift when we convert stores to the new format.

So we're seeing a big improvement there, too.

Great.

Thank you.

Thank you.

Thank you.

We'll go next to Virginia Genereux of Merrill Lynch.

Yes, thank you.

Three questions, if I may.

The first one may be on the e-Business.

Eric, your comments that the -- that the Lee business -- you took your eye off the ball in women's and one retail customer in particular was challenging.

I guess -- this is May?

May I ask?

And I wouldn't think your Lee women's business at May is that big.

That's question one.

Let me just give you some color on the Lee business.

The women's business is a substantial part of the business.

Over the last few years, we've invested a lot in Lee Dungarees and as we go to that we have a pretty healthy men's business..

While we were doing that, we believe we took the eye off the women's business in the mid tier channel.

Not in the department store channel.

In the mid tier channel.

And we've lost share and space in the mid tier channel.

While that was going on, we know that our products are fit and look pretty good.

We particularly know they fit good based on some research we did comparing our products to other products available in the mid tier channel.

And what we're doing right now is making sure consumers know that our products fit as well as they do given the importance of fit in the women's denim equation.

So, I'm sorry.

The customer that you were referencing?

Is a chain store, not a department store.

That's part of this consolidation though?

Yes.

Okay.

So, it is Sears or Kmart?

Yes, that's correct.

Okay, thank you.

We don't like to talk about our customers specifically.

You're making that difficult on me here.

I understand.

I'm sorry.

Sorry about this phone, too.

My second question is SG&A up only 5 million year-over-year.

Did you guys make specific cuts during the quarter or is that sort of where the chips fell?

No, Virginia, it was mostly where the chips fell.

In the -- that's really what it was.

I mean remember that last year had the playwear piece in it as well which we're not repeating.

Right, so last year we had playwear.

And again, the other point is the anniversarying of the acquisitions is a big factor as well.

Thanks, Bob.

And lastly, on the '06 outlook, one, is there -- are you guys doing something internally that -- having some strategy discussions that need to precede your communication of the '06 outlook?

Is that this mid December timing and second part of that is are you still comfortable with sort of $0.20 of options expense for '06?

Which is what I think your recent filings have communicated.

Relative to the timing of that announcement, we certainly are waiting to see what's happening in retail overall with this back to school.

The back to school season is a very important season we feel like because of weather conditions, synergy costs, other things, it's going to happen later than it has happened historically.

We just want a good feel for what's happening in this back to school.

So it is a short term look at our business that we like to have.

And then once we have a better look at that, then we'll have a better feel for next year.

That's the primary reason for the timing.

Virginia, just on the options expense, we're -- on a go-forward basis, we're in the area of $0.15 per share.

Thanks so much, guys.

Okay.

Sorry.

Thank you.

We'll go next to Reade Kem of Banc of America Securities.

Yes, hi, thanks.

You referenced on the Wrangler sales that they were flat in the quarter.

I was just wondering if you could talk to us a little bit more specifically in the mass channel how the men's product performed.

Sure.

At retail, our shipments of Wrangler in the mass channel, to the mass channel were flat.

Our performance at retail was better than that.

And we had decent increases particularly at our largest customer.

We were up at or better than their department in total.

Okay.

And do you think you were just benefiting from decent demand for the category and in some your products or do you think you took some share in that?

I think our share is about flat in the quarter.

Share on a quarterly basis is a tough read for sure, the discount channel, if anyone was affected by things happening with oil prices and weather and all of those things, if it had any impact, it probably came to roost in the mass channel.

I think that channel did struggle some.

I think our share is about flat there both on the year-to-date basis and during the back to school period.

So, it is not like the difficulties that that consumer was experiencing led them to want to spend 3 to $5 less and buy the private label product?

I -- gosh, I wish I knew the answer to that kind of question.

I just don't.

I think in general, the traffic was tough there, as they've said.

Just another jeanswear related question, at the department stores and mid-level stores, do you see any trend where some of your products may be seeing some shelf space reductions because may be more fashion, non-traditional denim product is coming in?

The mid tier channel, as we stated earlier, the mid tier channel was down 11% in denim sales during the June to August period.

And so the channel didn't do particularly well.

Some of that is because one of the big players in that channel is reducing their emphasis on apparel and they're really executing that reduction and emphasis on apparel starting this summer.

And so that drove probably some of the 11% decline.

Are we losing space?

In that channel?

Not in general.

We haven't lost doors with the exception of the one customer that's reducing their emphasis on apparel.

Other than that, our door count is flat.

Space, we go up and down a fixture.

We'll gain a fixture in a program here and lose one there.

Overall, our space is about flat.

With the exception of -- we do have one customer that stated they're going to reduce their emphasis on apparel and that means with us.

Okay.

Then just one other question on the -- real quick on the Reef business.

I was just curious, it's small part for you.

But when you look at the category and you look at surfwear in general, how do you plan and think about that in terms of the fashion risk and in terms of how much you want to produce?

Do you see that category as just continuing to grow very nicely or what kind of volatility do you expect in that category?

Well, the Reef brand has -- several years now, the team out there in San Diego has done a good job in 2003, 4, and 5 of posting nice growth in that brand.

We don't see that slowing down.

What we're changing or adding to is we're helping enable more growth in that business in Europe and also extending the brand to apparel in other categories.

So there may be some volatility in the sandal business though, we have not seen that.

We think with extending the brand to new categories and clearly an authentic surf brand like Reef has permission to extend to new categories.

We think there is a nice growth story there.

Okay.

Thanks for the comments.

Thank you.

Thank you.

We'll go next to Susan Sansbury of Miller Tabak.

Hi, yes, good morning.

Thank you.

Is this customer who's reducing your emphasis on apparel the same customer that Virginia referred to?

Yes.

That would be the same customer.

Okay.

Second question is usually when retailers make sharp shifts in inventory commitments, they're, in addition to specific market share issues by brand and/or what major retailers are doing in the channel with respect to apparel versus other categories, it is usually an indication that traffic volume is slowed or demand for jeans -- demand for the product category has slowed at retail.

Can you parse any of this for me?

And can you also tell me which was more important, the retail consolidation as opposed to the difficulties with respect to the Lee Brand.

I think what you're addressing is a normal situation you would find in retailing overall as they adjust their different categories based on sales results.

But I think what you're seeing now and some of the reasons why we're bringing up some specific accounts is far beyond the normal situation, it is more of a strategic change in the direction of some of these retailers as they're looking at their long-term position in the retailing environment overall and they're making decisions not necessarily reflecting just their short-term results but longer term, how they see them positioned in the market place overall.

So I think we're seeing more substantial moves from one category to another category that's having a more significant short term impact.

Longer term, what we feel out of that is that the demand for the brands will continue to be the same and the customer for the brands will buy those brands where they're being offered and where they're being presented.

But the short term, there's some more significant impacts to these types of strategic moves.

Okay.

So you don't think that gas prices -- the increase in gas prices and all of the saturation TV reporting about home fuel costs has had a marked affect on demand and/or traffic into these -- into this channel of distribution?

These channels of distribution?

No, I do think it has.

I think that's had a significant dampening effect overall.

But in addition to that is the strategic changes that some of the retailers are making that they're moving into hard goods and other areas versus soft goods and so that's had an even more substantial -- we have both of those factors going on.

The overall market place has definitely been softened.

And we see it across all channels of distribution.

And across all of our retail partners.

But particularly in the apparel side which is more discretionary as far as a purchase item than some other items are.

So that's certainly been a factor but then in addition to that, you have these strategic changes as well.

Okay, great.

That's very helpful.

Thank you, Mackey.

Thank you.

We'll go now to Justin Maurer of Lord Abbett.

Just a follow-up on the jeans issue.

The NPD data you cite down 11, June through August, how much of that do you guys think might have been weather influenced just given the heat this year, relative to last year?

Do you have any more recent data that would suggest anything different or?

The -- just to be clear, the 11% number that I gave was for the mid tier channel.

Okay.

It was -- that was a specific comment to that channel.

The reason I used that is because that's point of sale data.

So it is not based on consumer surveys.

It is based on customers sharing their over-the-counter data.

So it is reliable data.

Right.

What combination of weather, strategic shifts from customers moving away from apparel, gas prices, I don't know the answer to that.

Okay.

I think we'll have a better feel for that as we go along through the season.

That's one of the reasons why I mentioned earlier that we're waiting to get a better feel for this back to school as we see weather changes, it will get cold this winter.

We do know that.

So we'll begin to see a more normal seasonal impact.

The energy cost factor is a part that we can't predict at this point in time.

But we'll have a better feel for that once we get into more seasonable weather patterns.

Right.

And just relative to the comments about the Wrangler nonmass business, if you will, what percentage of that business is it?

Just the fact that that's down.

The Wrangler nonmass?

Yes, you said mass was flat.

So I'm just trying to get a sense of what the nonmass business is.

The Wrangler specialty business, I can tell you on a year-to-date business, on a year-to-date basis is up just a bit.

That's on a year-to-date basis.

I don't have the last 90 days in front of me.

Okay.

And just a comments about the retail consolidation.

Is that -- it sounds like it is both Wrangler and Lee that that occurred.

That you maybe lost some shelf there?

Well, there are a couple of consolidations, some of which impacted the Wrangler mass business and some that impacted the Lee business.

So yes, it certainly has had an impact on both the mid tier changes probably being the more significant because the mass consolidations has occurred -- actually have occurred a year ago and some of that is already being repeated.

So it sounds like from what you're saying though, on the moderate consolidation, being vague here, that that is more permanent in nature just in the sense like you said, that they're shrinking their apparel footprint?

Well, we think the fact that that account will have less apparel will certainly be permanent.

But as I said, what happens in those types of transitions is someone else picks up that branded business so we think longer term the strength of the brand overcomes some of these types of decisions.

But short term, certainly, yes, there will be less apparel sold in some of these accounts.

Okay.

Then just lastly, sorry, on the intimates business, you talked about the lack of progress in the new product so far.

But how much of that is a function, too?

I know just given Maidenform and Warren Co. struggles in department stores over the last couple of years as the business generally has shifted to mass.

How much do you guys think is a function of that as opposed to maybe product misses?

Well, we have good businesses in intimates in every channel of distribution.

We have good department store business, good mid tier business, and good mass business.

So when our business in total isn't performing well, it is because of the products that we're developing aren't working well enough.

So the channel strengths differ by customer and over time, year to year.

But as far as I'm concerned, our issue is our issue.

We have to get better at product.

Okay.

Thanks, guys.

Thank you.

That will conclude today's question and answer.

At this time, I would like to turn the call back over to Mr. Mackey McDonald for any additional or closing remarks.

Okay.

Well, thank you very much for joining us.

I think you certainly understand our commitment to our growth plan.

The balance that it is bringing to our results and the increase that we believe it will bring to our shareholder value.

Thanks for being with us.