威富公司 (VFC) 2005 Q4 法說會逐字稿

Good morning, everyone, and welcome to the VF Corporation fourth quarter earnings release conference call. [OPERATOR INSTRUCTIONS]

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. David Griffith of ICR.

Please go ahead, sir.

Good morning and thanks for participating in VF Corporation's fourth 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'd 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 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'd like to turn the call over to Mackey McDonald.

Okay, thank you, David.

Good morning, and welcome to our fourth quarter and year-end conference call.

I'm just going to say a few words, and then we'll have a quick overview of our coalition results by Eric Wiseman and George Derhofer, followed by Bob Shearer reviewing the financials.

I'm very pleased that we achieved our third consecutive year of higher sales and also our third consecutive year of record earnings.

Clearly, we put in place a platform for solid, sustainable growth in both sales and profits.

Over this period, we've transformed our portfolio with the addition of dynamic new lifestyle brands in the Outdoor and Sportswear categories, all of which have tremendous future prospects.

We've improved profitability, with a steady increase in gross margins; and at the same time, we've invested behind our heritage Jeanswear, Intimates and Imagewear business to ensure they stay healthy and stable and strong contributors to total shareholder value.

All the pieces are in place for another excellent year in 2006.

We're looking forward to solid organic revenue growth of 4 to 5%.

This is exactly in line with our long-term targets.

We've stated our target is 6 to 8% annual top-line growth, with half coming from organic growth and half coming from acquisitions.

We've been very successful in our acquisition strategy, but it should be no surprise to anyone that the current acquisition environment is quite competitive and valuations have definitely moved up.

I will again stress that we will only consider those acquisitions that provide a positive, long-term contribution to total sh -- total shareholder return.

We continue to search aggressively for acquisition; but in the meantime, we're very focused on the many internal growth initiatives we currently have underway.

We also see additional opportunities for margin expansion in 2006, particularly in our heritage businesses.

At the same time, we'll be continuing to invest in the many growth initiatives in our Outdoor and Sportswear businesses, which means that margins in those businesses are likely to be down from the extremely strong levels we achieved in 2005.

As you know, many of our more exciting growth initiatives are still in the early stages, such as the launch of Nautica® women's Sportswear and Nautica® in Europe, the expansion of Vans® and Reef® apparel and the U.S. launch of our Kipling® and Napapijri® period brands, to name just a few.

In terms of earnings, the combination of 4 to 5% growth in revenue, combined with a modest expansion in margins should drive an increase in earnings per share of about 6% in '06 to about 4.80 in round numbers.

As we discussed in our December meeting and webcast, we're totally focused on maximizing all of the elements that contribute to total shareholder return: Revenue growth, margin expansion, and free cash flow.

We are cognizant of our dutiti -- of our duty to consistently return cash to shareholders, and are committed to continue to do so through the right combination of dividends and share repurchases.

Now, let's hear from Eric Wiseman.

Thanks, Mackey.

Let's start today with Outdoor.

We couldn't be prouder of what this team accomplished in 2005, and we expect great things from them in 2006, as well.

Total revenues rose 23% in the fourth quarter, and most of that was organic growth, with the Reef® brand, which we acquired in early 2005, contributing $15 million to revenue in the quarter.

The NorthFace® brand continues to experience tremendous momentum, with revenue growth in excess of 25% in the quarter.

Revenues for Vans® brand also continued to rise in the quarter, and we had a very healthy revenue increase in our U.S.

JanSport® business, as well.

Internationally, our brands are on fire, with double-digit revenue increases in The NorthFace®, Vans®, Kipling® and Napapijri® brands.

As you saw in the release, we achieved a big increase in both operating profit and operating margins in the quarter, primarily due to the strong revenue growth of The NorthFace® brand and improved profitability in our Vans® brand.

Turning next to Sportswear.

Now at first glance, the revenue and operating income comparisons in our Sportswear coalition appear less than robust.

Revenue -- reported revenues were about flat.

However, that is primarily due to lower sales of Nautica® off-priced goods.

We're very pleased by the 7% increase in our Nautica® men's regular wholesale Sportswear business in the quarter, further evidence that our products and new marketing are hitting the right chord with both customers and consumers.

The launch of Kipling® here in the U.S. is just getting started, with the opening of our first four stores and initial placements in department stores, and our John Varvatos® business continued to expand in the fourth quarter.

We're seeing a terrific response to our recently opened New York City flagship store.

Sportswear operating margins did decline in the quarter, but remained at very healthy levels.

As explained in the release, there were a variety of factors contributing to the decline in the fourth quarter, including investments to support the launch of women's Sportswear and investments in higher marketing and a lower profitability in our men's denim business.

In fact, for the full year 2005, you'll note that Sportswear operating margins were 15.4%, up from 10.9% in 2004 and exceeding our operating margin target of 14% in just the second full year after the acquisition.

In terms of Jeanswear, as noted in the release, Jeanswear revenues were up slightly in the quarter.

We're especially proud of the terrific quarter achieved by our mass channel business, where sales rose a very healthy 8%.

Our efforts to extend our core Wrangler® and Riders® brands to new consumer segments are paying off.

Successful programs include the Wrangler Jeans Co. to reach younger consumers, the launch of Wrangler® shirts, and the introduction of new fits and finishes from our Riders® Copper Collection line.

Our Western Speciality business also had a terrific quarter, with sales up 7%.

And on the international front, we are very pleased by double-digit revenue increases achieved both in Latin America and Mexico during the quarter.

Revenue in our European jeans business were down very slightly, due primarily to the effects of foreign currency translations.

Economic conditions in Western Europe remain challenging, affecting our business in that market, but we continue to see strong growth in Eastern Europe, Russia and Asia.

Now, as we've previously discussed, the biggest challenge in our jeans business is with our Lee® business here in the U.S., where revenues declined again in the quarter.

We talked extensively about what we're doing to turn this business around during our webcast in mid-December, but let me reiterate three key points: First, we're conducting extensive consumer research with mid-tier jeans shoppers to help us improve our new product success rate with both male and female consumers; second, we're leveraging our strength, the best-fitting women's jeans in the market and are making a big statement in the store and through a new print marketing campaign to really boost Lee's® original position as "the brand that fits"; and third, we're putting new leadership in key positions to drive Lee's® long-term strategy and growth.

I can't promise that the turn-around will be quick, but we do expect better top-line comparisons at Lee® by the second half of 2006.

The situation in our Intimates business is more challenging.

However, total revenues were down only slightly in the quarter, an improvement over the larger declines we've experienced in the last several quarters.

As we have seen all year, the decline continues to be driven primarily by our Private Brands business.

Our Mass Brands business experienced a 13% increase in revenue, and our department store business was down by only a modest amount. 2006 will be a year of stabilization for our Intimates business, as we put in place the elements for renewed growth in 2007.

We have an energized new team in place that is spear-heading an array of new product innovations across all our brands and attacking costs very aggressively.

We feel very good about the long-term prospects for growth for all of our key Intimates brands, including Vanity Fair®, Vassarette®, Bestform® and Curvation.

Now, let's hear a few words from George Derhofer about the great quarter we had in Imagewear.

George?

Thanks, Eric.

We were certainly pleased by the results in the fourth quarter, given the very tough comparisons against last year, when we had a big boost in our Licensed Sports apparel business from the Boston Red Sox World Series win.

Total revenues were up 2%, with the increase due to our acquisition of a licensee of the Harley-Davidson Motor Co. This continues to be a great and profitable business for us, and we're looking forward to continuing to fuel the growth behind this iconic brand.

Our industrial uniform business had a strong year, and we're seeing particularly good response in our protective apparel and services sectors.

Operating margins were a strong 15.2% in the quarter, and we'll continue to leverage our two powerful operating platforms, Image and License Sports, with continued top-line growth.

Thanks, George.

Now let's have Bob run through the financials.

Okay.

Thanks, Mackey.

I'd like to start by discussing two accounting matters that impacted our quarter and the year.

First of all, stock options.

Certainly been a lot of press on this topic, and as we announced last week, we made the decision to early-adopt the new FASB statement, 123(R).

Now as you're well aware, these new rules require the expensing of stock options and also modify the accounting for certain other equity-compensation instruments.

We made the decision to adopt these new rules for 2005 instead of waiting until the first quarter of 2006.

That way, going forward all of our 2006 numbers will be comparable to 2005, with both including stock option expense.

I'd like to walk you through some of the details related to the new rules and the impact on our reported results.

You'll find details of the changes on Pages 9 to 12 of our release.

Looking first at the 2005 fourth quarter using the prior accounting rules that did not require the expensing of stock options, we earned $1.16 per diluted share.

However, including stock option expense and other required statements under 123(R), we recorded an additional $5 million of expense.

That impacted the quarter by $0.03 per share, resulting in earnings of $1.13 per share.

Now, looking at the full year, under the prior accounting rules, we earned $4.69 per share.

Now, that's $0.04 per share better than the guidance we provided in December of $4.65 per share.

So, on an apples-to-apples basis, our 2005 earnings increased 11% compared with the $4.21 we earned in 2004 under the prior GAAP rules.

Now under the new rules, we recorded an incremental $27 million of non-cash expense for stock options and other equity compensation changes, which cost us $0.15 per share for the year 2005.

In addition, we recorded a one-time cumulative-effect adjustment for the accounting change of $0.10 per share, retroactive to the beginning of 2005.

The cumulative effect require to previous years expense for all unvested stock options as of the beginning of 2005.

So, for the full year, the new accounting rules reduced our 2005 earnings by a total of $0.25 per share, and that's $0.15 for the 2005 one-year impact plus $0.10 for the cumulative-effect adjustment.

That left us with reported earnings under our new GAAP rules of $4.44 per share.

Now, once again, I ask you to reference Pages 9 to 12 of our earnings release, where we clearly lay out the P&L impact of this important accounting change.

And we also provided restated income statements and coalition operating results for the first, second, and third quarters of 2005.

Now, as permitted under the rules, we have not restated 2004 or prior periods.

You'll note in the quarterly breakout that stock option expense is much higher in the first quarter than in other quarters.

Our option grants are in the first quarter, and under the new rules, the expense for all retirement-eligible employees must be recognized at the date of grant.

And finally, a word on 2006.

As we stated in our release last week, we expect that the new stock option accounting will impact 2006 earnings by approximately $19 million or $0.17 per share.

Now, under the other accounting topic -- and thankfully, this one is much easier to talk about -- beginning in fourth quarter, we're reporting royalty income as a separate component of total revenues.

Our royalty income has become a bigger factor in our operating results, and this change in presentation is consistent with many of the lifestyle-branded companies in our industry.

We're reporting expenses that are directly related to royalty income within G&A expenses, and we've restated all prior quarters and prior years for comparability.

And, obviously, this change has no effect on our reported operating income or net income.

Now with those accounting topics out of the way, back to the fourth quarter, which really was a great quarter.

Total revenues were up 4%, with most of that increase coming from organic growth.

Sales increased in our Outdoor, Imagewear, and Jeanswear coalitions in the quarter, with essentially flat results in our Sportswear and Intimates businesses.

Now as I said earlier, the adoption of FASB 123(R) impacted 2005 fourth quarter operating income by $5 million.

Operating income, before adopting the statement, would be about flat.

Operating margins dropped 80 basis points to 12.1% from 12.9%, with 30 basis points of that reduction due to Statement 123(R) effects, and the remainder of the decline due, primarily, to depressed margins in Intimates.

Net interest expense declined over $4 million during the quarter, was primarily due to the scheduled repayment of $300 million of 8% debt at the very beginning of the quarter, and the borrowing of approximately $200 million under a new international credit agreement, having an interest cost of only 3%.

A few words about full-year 2005 results.

Both sales and earnings reached record levels in 2005.

Three of our coalitions, Outdoor, Sportswear and Imagewear, reported higher revenues, while Jeanswear was about flat with prior-year levels and Intimates declined.

With the exception of Intimates, operating margins rose in all of our coalitions and are running in excess of 15%.

Gross margins expanded by more than one full percentage point during the year, rising to 41.8% from 40.5%.

Operating margins were flat at 12.7%, due primarily to the impact of Statement 123(R).

Under the prior rules, operating margins would have risen to 13.1%.

Turning next to the balance sheet, we ended the year in very good shape, with tremendous flexibility to fund our investments and acquisitions, dividends, and share repurchases.

We have almost $300 million in cash, and our debt-to-total capital ratio is 23%.

In terms of inventories, they're still a bit higher than we'd like.

About 3/4 of the increase was in our faster growing Outdoor and Sportswear businesses.

Overall, the quality of our inventory is very good.

In terms of cash flow, in 2005 we had cash flow from operations of $561 million, and expect we could hit $600 million in cash from operations in 2006.

We're expecting capital expenditures of approximately $120 million in '06, with more of our capital spending related to new owned retail stores than in prior years.

Appreciation and amortization expense should be about $126 million.

Now you'll note in the release that our board authorized an additional ten million shares for repurchase, as we've just about completed the repurchase of shares under the prior authorization.

Now our current strategy relating to the amount and timing of share repurchases continues to be that we'll use them to offset the dilutive impact of option exercises.

Finally, just a few words about our first quarter guidance on earnings per share, which we currently expect to be flat to up slightly.

The reason is that the earnings growth isn't stronger is due to continued difficult comparisons in our Lee® and Intimates businesses.

We do expect better comparisons in these businesses as the year progresses, and we do expect a very strong second half, reflecting the seasonality and growth of our Outdoor businesses.

To reiterate what Mackey said earlier, we continue to be very excited about the prospect of delivering another full year of record sales and earnings.

The transformation of VF is well underway, as evidence by the results we reported today.

We're confident that we have the right strategy in place to continue this transformation.

We've put in place solid platforms for growth, and we expect to identify and add new platforms.

We'll manage our portfolio businesses actively, to ensure all contribute positively to total shareholder return.

We'll take our branding and marketing skills to new levels, adding tools and processes to maximize our brands potential.

And we'll reach consumers more directly, by aggressively adding retail stores for our strongest lifestyle brands.

I'm very excited by the changes that are underway at VF, and I'm looking forward to a great year in 2006.

Now we'll open it up for your questions.

Thank you, gentlemen. [OPERATOR INSTRUCTIONS] Our first question comes from Liz Dunn of Prudential.

Hi, good morning.

Thank you.

Good morning.

I think you said that, ex the Intimates business, your operating mor -- your operating margin was reaching 15%.

Was that correct?

Did I hear that correctly?

I haven't done the math myself.

But I guess the question is, longer term, you've given guidance that you think the consolidated operating margin could reach 14%.

Sounds to me like, if you get Intimates fixed, it can move higher.

Could you comment on that?

Liz, what we said was -- if I heard you correctly, what we said the 13.1% was taking out the impact of 123(R) for the new accounting change for the year.

That was the indication there.

And relative -- relative to the 14%, sure, I mean, obviously the Intimates area is an area of challenge for us, and with the improvement there, we should get -- or should see the 14% mark.

And as we've said before, in our heritage businesses, as you're well aware, we're already at that level.

We're above in many cases.

You know, the question is always the acquisition activity, and just as we've seen and as we expect, the acquisitions generally pull our margin down a bit from what it would otherwise be from our on-going businesses.

So we take all of those factors into account in looking at the 14% margin.

But as we said, our core or those heritage businesses are already at that level as we've disclosed in the past.

Okay, and then do I get two questions?

Two okay?

Okay.

My second question require to retail.

That was a big part of your strategy articulated last time we spoke, and I was wondering how large you think retail could be as a percentage of your mix ultimately, and could that potentially be accomplished through acquisitions?

This is Eric Wiseman.

We've talked about it in a couple of ways, but first, we'll talk about it by just the businesses that we have today.

In the brands we have today, our owned retail represents about 13% of our revenue.

And we expect by 2009 to add over 400 stores to our current base of 525 and increase that to about 18% of our revenue, and that's excluding any acquisitions.

Most of the growth in stores will be in our Outdoor and Sportswear brands.

And we're doing that globally, so there's a little bit of each brand in many markets around the world.

And again, that'll get us to 18% and more, if we acquire a lifestyle brand that includes a significant retail component.

And that's something you're considering?

Actually, most of the lifestyle brands we have acquired in the last three years did bring with them a strong retail component.

The most obvious examples are Nautica® and Vans®, which both brought over 100 retail stores to VF Corporation.

Okay, thank you.

Congratulations on a good quarter.

Thank you.

Thank you.

Next we'll hear from Bob Drbul of Lehman Brothers.

Hi, good morning.

Good morning, Bob.

Can you talk a little bit about the outlook on the gross margin and sort of what impacted it this quarter, if you could elaborate a little bit on the gross margin this quarter?

Yes, Bob, I can -- I'll take that.

The two pieces in the gross margin in this quarter were obviously Intimates, and which we talked a fair amount about, right?

That was the most significant impact.

And secondly, if you looked at the -- looking at the schedules in the back of the press release, you'll also notice that our Imagewear business, the overall profitability was down a bit in the quarter, and that was primarily driven by changes in gross margins.

But what's taken place there is we had a very, very strong fourth quarter of 2004, and it was related to the world Series.

Frankly, the Boston -- the Boston win was terrific for us.

It has a lot to do with where our products were sold.

The Northeast is a very good area for us.

So again, it's a little bit more about the comparison to '04 in that case.

So both of those factors contributed to the lower gross margin in the fourth quarter.

Okay, great.

And Mackey, can you comment a little bit about the M&A environment and the opportunities that you're seeing or not seeing right now?

Yes, Bob.

As I said earlier, it is a very competitive environment.

A lot of money available, and therefore, a lot of -- a lot of activity in looking at any available properties.

Our focus is lifestyle brands, particularly in the Outdoor and Sportswear categories.

We also look at bolt-ons for our other businesses that would bring new markets, either consumer markets or geographic markets.

And we are -- we're looking at a lot of opportunities currently.

We feel like it's going to be a tougher market, and all that means is we'll be looking at a lot more different properties.

We aren't going to buy something to bulk up.

We've said that a number of times.

We're going to make sure that they meet our strategic criteria and fit into our plans for growing our lifestyle businesses.

And, also, we're looking at opportunities that would help us move to a little bit more control retail space, but underneath this lifestyle concept only.

And we think we'll find the kind of properties that will fit our strategic objectives, as well as meet our financial hurdles.

And we also are going to continue to focus on meeting those financial criteria before we make an acquisition.

Great.

Thanks, Mackey.

And next we'll hear from Brad Stephens of Morgan Keegan.

Hi, good morning.

Morning, Brad.

Question for you on the buyback.

I know that you've talked in the past, and you stated again today, that the buyback will only offset option dilution.

But if the M&A environment is difficult and if you're underleveraged compared to where you want to be mounting cash balance, I guess I don't understand, if you think the stock is really undervalued, why you're not more aggressive with the buyback?

Well, we've continued to talk about our priorities, and strategic acquisitions we feel is our top priority.

And then we look at both buybacks and dividends as being an important part of how we return value to our shareholders, and we will look at all three of those components.

We're giving you currently our current thinking, but as we look at the year and get into the year, we'll continue to give you more information about how we'll use this cash.

We're generating terrific cash, and we're going to make sure our shareholders get a great return on that cash.

Okay.

And then moving back to Intimates real quick, when we look at next year for stabilization of the business, can you give us some idea on how that breaks out between, maybe, the different channels -- be it department store, mass, speciality -- and how we should think about each of those growing or stabilizing?

Sure, well as I -- this is Eric, Brad, how are you?

Good, how are you doing, Eric?

Good.

As I said in my comments, our mass channel business had a pretty good 2005 and a very strong fourth quarter, raising -- increasing their sales 13%.

To give them a little plug, their biggest customer recognized the Bestform® and Curvation team as vendor of the year for 2005, which is quite an honor.

That business we expect to continue to grow in 2006.

We have a little bit of a turn-around to do in our department and chain store business, and we won't see improvement in that until the second half of the year.

Our Private Brands business has been our biggest issue this year.

It's fallen off a ton since 2004, and we expect that to be stable in 2006.

Great.

And then last, the Lee® -- maybe it's Federated.

I know it's been a very -- we've talked to other apparel vendors.

This situation -- Federated's been very fluid in the conversation.

Is there any update on how we're going to run the Lee® business, or is it status quo for now?

Any particular branding?

Maybe a tiered label for them?

We have -- the Lee® business is almost exclusively sold through the mid-tier channel.

Their customers really are JC Penney, Sears, Kohl's and Mervin's; that's where almost all of their business happens.

We have not -- we are not in discussion with Macy's about launching the Lee® line at Macy's.

All right, thanks!

Thank you.

Thank you, Mr. Stevens.

Moving onto Virginia Genereux of Merrill Lynch.

Thank you.

Maybe one for Eric.

How do you think, Eric, about the Outdoor business, about how much longer it can continue this type of top-line growth before you need to worry about sort of saturation and brand positioning?

Because I would bet, is The NorthFace® ba -- it's back beyond its prior peak, probably well beyond its prior peak.

If you could talk a little bit about that.

Sure, I'd be delighted to.

I'm actually not at all anxious about the Outdoor coalition running out of steam.

We have so much more potential.

We have potential in The NorthFace®, in new product categories and in new markets.

The brands we have acquired, Vans® and Reef®, have unbelievable potential to get into the apparel business.

Brands like Napapijri® have new market potential in North America.

That brand is on fire in Europe and we're going to bring it to the United States.

As I look across the coalition and the portfolio of brands we have assembled and the geographic and product category opportunities we have, running that growth engine -- you know, stalling is not at all a concern of mine.

Shouldn't be of yours.

That's good, Eric.

Can you -- just to stay on that for a moment, can you talk about the -- say the Vans® apparel initiative?

Sure.

We decided to create a Vans® apparel program.

We started with a line for our core skate and snowboard business, and we launched that line.

It's a smal -- it was designed to be a small business, but it was designed to be an authentic business.

We actually created it in conjunction with some of The NorthFace® creative -- NorthFace® product people, and that line we've just launched.

In fall 2006, we're going to be testing Vans® apparel line with JC Penney and Kohl's.

It's a small -- small test to rollout to see what potential that offers for us.

We think it's fairly significant.

And Eric, on The NorthFace side, would you say the opportunity there is more geographic?

And can you tell us how that business splits these days, domestic versus international?

Oh, I could probably get to that number while we're talking here.

No, I don't think it's just geographic.

I mean, yes, the brand has geographic opportunities, particularly in Eastern Europe and Russia and in terms of new emerging markets, but the bigger growth we're getting there is -- you know, we've extended the business in women's.

It's much stronger in women's today than it was five years ago. we're building out a Sportswear component to that business that's substantial.

We're also investing heavily in a footwear initiative.

So there's a lot of new product categories that we have to permission to succeed with in that brand.

And as you size that as an opportunity, can you tell -- do you think that business can double, can be up another 50%?

Take us --

Oh, I'm not going to get specific about that because that's -- I don't know how much -- you know, I don't have a specific target for them.

We do think they can continue to grow at the rate that they're growing.

The answer to your earlier question about geographic split, that business is 65% in North America.

Okay.

That's great.

And then maybe one for Mackey.

At the board level, Mackey, I'm sure you guys -- you start to think a little bit about following on somebody's question about the acquisition environment.

Do you think, maybe, that VF is underleveraged?

Do you think about -- you know, for the same reasons that cash is so cheap and acquisitions have become competitive, why not sort of be more aggressive on the share repurchase or on the dividend side, considering your credit rating and the cash generation?

A good question and one we do discuss at our board meetings, as you might imagine.

But I do want to reiterate, the primary focus of the transformation we're going through.

We're having great success today, and a lot of that is due to the fact that we have two components in our business.

One is great heritage brands that generate tremendous cash flow.

They've maintain strength in the market and they give us the opportunity to make strategic decisions.

And the other part is the addition of these many new lifestyle brands that have great growth characteristics.

And we feel like continuing to make this transformation and continuing to add lifestyle brands with strong retail components that have this great growth characteristics combined with our heritage brands.

It's just a very strong story to tell to the market, and generating tremendous returns for our shareholders.

So our primary focus is to continue on that path.

It just means -- and it does not come evenly.

It does come -- it will come, probably, later in the year this year or it will come some time during the year.

We don't know exactly when we'll find the right acquisitions, but we do feel we'll continue to find those.

And at the same time, with the great cash flow, we have the options to do some other things to deliver shareholder return and we'll consider those options, as well.

Thank you, Mackey.

Moving onto Omar Saad of Credit Suisse.

Thanks, good morning.

Wanted to ask a quick question on the inventory levels.

I'd noticed that I think they were up about 10, 11% year-over-year, and wanted to get your thoughts on where some of that build is by business segment?

I don't know how much of that is Lee® and, you know, what your feel is by -- about your inventories at retail by channel?

Actually, the inventory build was not in Lee®, or you might have -- also be referring to Intimates.

The build was -- this is the good news -- the build was in our growing businesses, in our fastest growing businesses.

So the build -- 3/4 of the inventory build was in our Outdoor business, as well as our Sportswear business.

And actually, we did bring a few goods in a little bit earlier than anticipated.

That's why the number was a little bit stronger than we had indicated the last quarter, but again, it's in good shape.

The quality is good.

We just don't see it, it's not an issue for us.

Great.

Thanks.

And wanted to also ask the question -- you know, given some of the recent announcements out of some of the other apparel companies relative to kind of reorganizing corporate structures, streamlining businesses to me -- to match the -- kind of customer base and how retailers are set, I wanted to see if you could comment on where you stand relative to that?

Is there an opportunity at VF to do that?

And looking at the SG&A, is there any sort of significant opportunity to make any sort of big moves like that?

I just wanted to see if you had any comments on that.

We reorganized our Company last year to really focus on the new growth initiatives, lifestyle brands.

We reorganized our supply chain, consolidated that across all of our operating units.

We are now beginning to realize some of the benefits of those, both on the gross side, through our new marketing organization, and also through the great synergies our supply chain is identifying.

We think it's a tremendous strategic weapon that we have in sourcing our products more effectively, managing our inventories more effectively, having lower cost than our competitors.

So, we feel like we've taken the right steps to get organized for the future, and now we have a lot of initiatives.

We're, fortunately, not in the position of just starting that.

We're already beginning to reap a lot of the benefits of what we've been doing.

So we feel good about where we are.

We're going to continue to drive forward with the initiatives in place.

Great, thanks.

Quickly, I was just wondering if you could give us an update on The NorthFace® -- The NorthFace® Mall store in Tyson's Corner?

Sure.

We opened that store last year at the end of the third quarter.

It had an amazing run during the holiday season.

And it was a good time for Outerwear and the whole industry, really.

This fall was strong in the Outerwear market.

It got cold early, and that store performed very, very well.

So we're still watching that store through spring, and we'll announce what, if anything, we learned from that, and what it means to the future rollout strategies later in 2006.

Great, thanks.

Great job.

Thank you.

And Todd Slater of Lazard has our next question.

Thank you.

All my questions were answered, but maybe just a follow-up on the inventory growth, which was up in excess of 10%.

I don't know if you answered the question fully.

I'm wondering if you can give us a little color on the growth in inventory by major segment?

And are you suggesting there are no areas of excess there where you have either earmarked some incremental markdown money to clear it out or is it clean everywhere?

It really is clean.

Again, no, there really weren't any significant increases outside of the areas that we indicated. and we've run our business very cleanly from that standpoint all year long and we've been talking about that, and that's been a big factor in the overall margin improvement that we saw, especially in some of our Heritage businesses.

So it is a significant factor and we rate the focus on it.

But the growth was in those growth areas.

And as a said, we did bring in some goods in a little bit early, but the quality is very good overall.

And does this mean that you're projecting a little slower inventory turn this year?

Is that sort of how the model will probably play out?

Well, we actually expect that by the end of the year -- and as we said earlier, the inventories were a little stronger than we had indicated, and part of that, again, is due to bringing in some goods a little earlier.

But by the end of next year, we think that the inventories -- on stronger sales, of course, we think that the inventories could be relatively flat or even maybe down slightly by the end of the year.

So that would say that, again, just versus this quarter and what we've seen through the latter part of the year, the turn could be a little bit stronger for us.

Got it.

Thank you.

Right.

And moving onto Jim Duffy of Thomas Weisel Partners.

Thank you.

Good morning.

Morning.

Philosophical question here, I suppose.

So you mentioned continuing investment in the lifestyle brands, offsetting some operating income growth.

Just a little bit more detail on where that investment will go, and what is the current thinking on growth versus delivering operating income?

I had trouble hearing you.

I'm sorry.

We had a bad connection.

Oh, okay.

Is this better?

Yes.

Sure is.

I guess it's a philosophical question on your strategy to continue to invest in growth at the expense of operating income in the lifestyle brands, and where the balance is there?

And looking forward, at what point we might see some further acceleration in the operating income in those lifestyle brands?

Okay.

Well, our targets are 14% operating margins for all of our businesses, and our targets for our lifestyle businesses are double-digit growth.

So we feel like -- and we've had stronger margins, but we feel like if we're investing that back in and sustaining our 14% operating margins and generating double-digit growth, we're getting a great return on those businesses.

And obviously, some of our Heritage businesses are growing at very low single-digit, and that's our expectation for them, but generating a little bit higher margins than that.

So we look at the two different contributions that our brands are making to our business, as we evaluate both operating margins and growth rates.

Okay.

Can you speak to the areas where we will see investment?

Maybe some color on the investment -- the forms that investment might take?

The Outdoor businesses, the Sportswear businesses, our -- some of our Wrangler® businesses we consider to be lifestyle businesses, and we're investing heavily behind those.

So those would be the primary bu -- and some of our Imagewear businesses, also.

So those are the areas where we're making investments.

So it's retail, is it marketing, combination of both, personnel?

Owned retail for the lifestyle businesses, particularly marketing behind some of our -- we've stepped up our marketing behind some of our Heritage brands, and also particular our lifestyle brands.

And then we have particularly invested in people behind product and product development.

We feel like one of the reasons that we're winning in a very difficult market is the fact that we not only have strong brands that are top of mind from a consumer standpoint, but they also do a great job of delivering new, innovative product.

So we have significantly increased our investment in product development -- in R&D efforts, as well.

Very good.

Thank you.

Okay.

Thank you, Mr. Duffy.

Next we'll hear from David Glick of Buckingham Research.

Good morning.

Just a quick follow-up for Eric on Lee® jeans.

I was wondering if you could comment on some of the competitive issues you're facing in the Lee® business, and where are those competitive pressures coming from?

It is a revitalized Levi, is it from private brands?

And what are the strategies you have to face into that competition, specifically?

Sure.

In broad terms, Lee's® challenges, I'll call them, in 2005 were from two angles: One, it was a significant consolidation in restructuring of one of their largest customers that resulted in the brand selling a lot fewer doors in a lot less space.

And that was about half of the decline that we experienced in the brand -- actually, a little bit over half of the decline we experienced in the brand on a full-year basis.

We think most of that change is behind us.

The second part, really, comes to us not doing our job well enough.

We didn't launch the right products in the right way.

Not so much that the competition did something particularly well, more that we didn't do our thing well enough.

And we are working very hard right now to make sure that we improve our product hit rate, that we really understand our role in the channel with these customers, and that we execute to that.

And I'm pretty confident that that's going to get better in the fall of '06, and that we can -- we can address that piece of the business, and that's the first challenge we had is stabilized.

Were the execution issues maybe not enough fashion finishes or some fit issues?

What were the specific execution issues?

Or the biggest ones?

Sure.

Well, the biggest one was we didn't pay adequate attention to our strong women's denim business in the mid-tier channel.

We focused more on the men's and boy's business, and that business did okay, but we had a big, strong position in the women's business, and we didn't invest enough in it in product, and we didn't invest enough in it in marketing.

We're going to correct that.

Quick question on The NorthFace®.

How quickly do you plan to expand into the May stores acquired by Federated, and do you plan on rolling out some of the really exciting shop concepts that I've seen in some of the Macy's stores into the newly-acquired May doors?

We don't have aggressive expansion plans in the department store channel.

The department store channel only represents about 10% of the revenue of The NorthFace® brand. 90% comes through sporting goods stores and speciality stores, and that has been and will remain our focus.

We have not really expanded the number of doors in The NorthFace® brand significantly in the last couple of years.

All of our growth is coming from great products and product category extensions.

Okay, great.

Thank you.

Thank you, Mr. Glick.

Reade Kem of Banc of America has our next question.

Good morning.

Had a question on the Jeanswear business in the quarter.

It sounded like operating income was up a little bit more than revenue, and I was just curious, how did the discounting environment work out in the quarter?

It sounds like it might not have been -- there might not have been that much discounting, if that was the case?

I think you're right.

I don't think there was a tremendous amount of discounting in our North American Jeanswear business in the quarter.

Is that the -- so was that your question?

Yes.

Yes.

So, and in the sales gain that you had, did you break that out amongst the areas in North America, for example?

Yes.

I made those in my comments, but I'll repeat them for you.

Our mass channel business was up 8% in the quarter, our Western Speciality business was up 7% in the quarter, and we had really strong gains in our Mexican and Latin-American business -- double-digit gains in our Western -- I'm sorry, in our Mexican and Latin-American business.

The issue really was the Lee® business, which did decline in the quarter.

Okay, and the mass performance, was that related to any sort of new space you're getting, or was it just strong retail buying, or what drove that?

Well, the programs that that team has been launching over the last couple of years continue to have momentum.

The Wrangler® 5-Star business has momentum, the Wrangler® Jeans Company initiative to reach younger consumers has momentum.

Our Tops launch at Wal-Mart this fall has been successful, and we expect that to expand.

So we have a lot of new initiatives in the channel that are doing well.

Okay, great.

And I guess just lastly, your outlook, you're saying that you look -- you have a stable outlook for that part of your business this year, and I guess you said inventories were okay.

So you're feeling fairly confident going into the early part of this year, I take it?

Was that a Jeanswear question or a VF-overall question?

Jeanswear.

Yes, we think the Jeanswear business is going to have a decent year in 2006.

The issue for us is how effective will we be at improving the Lee® business in the second half.

All right.

Thanks a lot.

And Robert Samuels of JP Morgan has our next question.

Thanks.

All my questions have been answered.

And Mr. McDonald, there appears to be no further questions.

We'll turn the conference back to you for any additional or closing remarks.

Okay.

Thank you very much for joining us today.

The transformation of VF continues.

We've got a very solid quarter behind us, and we're now going into what we expect to be another record year in both the sales and earnings.

We're looking forward to tremendous growth in our lifestyle brands and great cash contributions from our Heritage brands.

We had a few issues that affected us in '05 that we expect to get in better shape in '06.

So we're looking forward to a strong year, with good increase in shareholder returns.

Thanks for being with us today.

That does conclude today's conference.

We do thank you for your participation.