威富公司 (VFC) 2006 Q1 法說會逐字稿

Good day, everyone and welcome to the VF Corporation first quarter 2006 earnings release conference call.

This conference is being recorded.

[OPERATOR INSTRUCTIONS]

Now, for opening remarks, I would like to turn the conference over to Mr. David Griffith, please go ahead, sir.

Thank you.

Good afternoon and thanks for participating in VF Corporation's first quarter 2006 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.

Participating in our call this afternoon 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 with the company with the SEC.

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

Thank you, good afternoon and thanks for joining us.

I'm proud of the results achieved by our businesses this quarter.

We delivered earnings that were well ahead of our initial expectations and substantially higher than last year's.

Most important, this top and bottom-line growth is being driven by strong organic growth.

In fact, this year, most of the 6% to 7% growth we expect will be organic.

Above our long-term target of 3% to 4%.

We now expect our full year earnings per share to increase by 9% versus the 6% we had previously anticipated.

With such a strong start to the year, we're taking the opportunity to invest more behind our brands, particularly in jeanswear and outdoor with $20 million of additional spending planned during the remainder of the year.

Our first quarter revenues were in line with our prior guidance up a very healthy 5%.

But our margins came in better than anticipated particularly in jeanswear.

We had fairly conservative expectations for the profitability of our Lee business in the first quarter but we saw a pickup in sales in March which resulted in higher than expected increase in first quality shipments.

Overall, we still have a long way to go to get Lee sales and profitability back to where they should be, but we're certainly encouraged by this progress.

Of course, our other jeans businesses remain quite strong, and we remain committed to keeping this business strong and growing by investing behind our brands, extending them into new categories and pursuing new consumer segments.

In fact, if February, we expected our jeans sales to be stable this year.

And we now anticipate total jeans revenue will grow a couple of percentage points.

It would be even stronger absence the effect of currency.

We are wrapping up a very significant strategic review of our jeanswear businesses given us a more focused vision of how he can exploit the many opportunities we have with our great brands.

I'm looking forward to providing you with more specifics regarding our jeanswear strategy work later this year.

In the meantime, as a result of this work, we feel very good about the additional marketing investments we'll be making behind our jeans brands this year.

Of course, as you saw in the release, our quarterly results also benefited from the continued exceptionally strong revenue and profit performance in our outdoor business, and from ongoing growth in our imagewear business.

I hope it's clear that VF is becoming a very different company than it was just a few years ago.

Through the addition of dynamic new lifestyle brands, we've added growth engines that give us confidence in our ability to consistently generate strong, organic growth.

We've shown that we're disciplined (inaudible) with the skills and capabilities to identify, integrate and grow new brands and businesses.

We've leveraged the economies of scale, technology and operational expertise throughout our businesses to fuel a steady expansion in our margins.

You'll recall that we named Eric Wiseman as our President and Chief Executive Officer.

Now, let's hear more from Eric on our coalition's performance.

Eric?

Thanks, Mackey.

Let's start today with outdoor.

The North Face brand again experienced growth across all product categories resulting in a 40% increase in revenues globally.

The brand's wholesale business remains the primary driver of our top-line growth but our retail stores are also an important contributor.

We saw particular strength in our U.S. retail stores with a 19% increase in comp store sales in the quarter.

Our international business also continues to be very strong in our efforts to expand into new markets such as Russia and eastern Europe are proving to be very successful.

Global fall bookings for the North Face are up over 30%.

Now, to Vans.

Our Vans brand continues to perform above our expectations with strong results in both its wholesale and retail operations.

In fact, Vans enjoyed a robust 42% increase in domestic full-priced comp store sales in the quarter.

Our Napapijri brand is back on track following some supply chain issues last year that impacted our profitability.

Revenues grew at a mid-teen percentage rate and fall bookings are up 23%.

We continue to make great progress in expanding the brand outside its home market of Italy with strong performance in Germany, (inaudible), Spain and France.

We're also looking forward to opening our first two stores in the U.S. in New York and Miami in June.

We're continuing the retail expansion of our Kipling bags and accessories brand with new store openings in Amsterdam, Brussels, Paris and Hamburg.

We'll also continue our strategy of opening retail partnership stores with 13 of those planned for this year.

And our latest acquisition, Reef, acquired in April of last year, is on track to exceed the $100 million mark in revenues this year, up from about $75 million at the time of the acquisition.

Now, turning to sportswear.

We're very pleased to note that all three of our businesses, Nautica, John Varvatos, and Kipling North America grew revenues in the quarter.

Nautica's wholesale business was up about 5% excluding some businesses that we've exited and the sale throughs of our spring products are running above planned.

We've installed new fixturing that communicates our Navigate Life brand positioning in 165 doors and have also seen expansion in our licensed fragrance and men's tailored clothing categories.

We're continuing to invest in the Nautica brand and hopefully you've all noticed Nautica's new advertising campaign featuring the actor Ed Burns which hit fashion publications this month.

Nautica's retail comp store sales were down slightly from last year's quarter but business has improved in April and is running above plan and prior year levels for the month to date.

We're on track for a limited introduction of Nautica women's sportswear this fall.

We have tests in place with our key retailers and are eagerly anticipating consumer's response to the line.

The line should begin to hit the stores in the beginning of August with our national ad campaign kicking off in September.

The size our John Varvatos and Kipling North America businesses are small and modest by VF standards, but they're great brands that are growing and have tremendous potential for growth in the future.

Now in terms of operating income and margins, as we've stated in the past, we expect results this year will be impacted by the investments we're making to grow our sportswear businesses particularly women's sportswear as well as our own Nautica, John Varvatos and Kipling stores.

The good news is that we've built a very profitable platform that allows us to make these important investments in sportswear and still maintain healthy margins.

In terms of jeanswear, Mackey commented on the important factors behind the quarter's performance.

I would like to add a bit more color about our various division's performance.

We're quite, quite pleased to see our Lee brands spring products performing ahead of our expectations.

Revenues and profits are above plan and we're regaining space with a couple of our key retail accounts.

To sustain the momentum we'll be significantly increasing our media spend behind the brands this year with the fresh, relevant message that connects with our target consumers.

We've done an enormous amount of work to better understand Lee's brand equities and our consumers and our customer's needs and we have a clearly defined strategy for revitalizing this brand.

We're in the early stages of executing this strategy, but we're very encouraged by our progress to date.

In terms of our mass business, our Wrangler Hero products continue to do very well at retail and our newly launched shirt business is also quite strong.

The power of this Wrangler brand is truly exceptional.

Our western specialty business is also running well ahead of last year.

Our Wrangler 47 premium wine has opened 175 accounts during the first two months of selling including Barney's, Neiman's, Nordstrom's and other high-profile retailers.

We know there are some concerns out there about retailers focus on reducing inventory levels in the possible impact on our business.

Our brands and products are generally performing above our plans as well as the department averages which, of course is a positive.

In our inventories are at or below plan with major retailers.

So, we're in pretty good shape today but it is difficult to determine if any future moves by retailers will have a meaningful impact on us.

In Europe, both our Lee and Wrangler brands grew revenues on a currency adjusted basis and our fall bookings for Lee and Wrangler are very positive.

The strongest trend we've seen in years.

Our business in emerging markets such as Russia and eastern Europe are also trending positively while our owned business in China continues to have great momentum, up 42% from last year's first quarter.

Turning now to intimates.

We're all very focused on stabilizing this business and regaining the healthy margins we've enjoyed in the past, but as we've indicated previously, this will be a year of stabilization for intimates rather than one of dramatic improvement.

We have a highly energized and motivated team that's committed to building a strategy for long-term success.

We did anticipate the revenue and operating income declines in the quarter.

Both of which were in line with our plan.

Let me quickly review the strategic imperatives for our intimates business.

First, we need to stabilize our private brands business.

Although down as planned in the quarter, we do think this business will be about flat for the year in total.

Second, we need to strengthen our department and chain store business, primarily through a stronger pipeline of winning products.

We're confident that new fall launches by both our Vanity Fair and Lily of France brands will be well received by consumers.

Next, we must continue our momentum in our mass business across our Vassarette, Best Form and Curvation brands.

Each of which are well positioned with differentiated products to meet the needs of women's shopping in the mass channel.

Fourth, we need to continue our successful geographic expansion.

We're pleased that our joint ventures in Mexico and Canada are progressing on plan and we're looking forward to the launch of our Vanity Fair brand in Mexico in July.

And last, this business is all about product and innovation.

So, establishing a stronger innovation organization and a stronger innovation process is an imperative.

We're very excited about our efforts in these areas but the results of which won't bear fruit before 2007.

Now, let's hear from George Derhofer, who will add comments on our imagewear business as well as VF's global operations.

George?

Thanks, Eric.

The aggressive and very talented Imagewear team had another fine quarter with a solid 4% increase in revenues and continued strong profitability.

This is our eighth consecutive up-quarter in sales and we continue to expect returns on invested capital well above VF's 17% target from this business.

We're very pleased with the top-line growth achieved in our occupational apparel business.

Generally healthy employment levels combined with focused initiatives to grow industry sectors contributed to our gains.

Our licensed sports business also did well and contributed higher operating profitability.

We remain in the hunt for brand product and distribution extensions in our existing and potentially new licensed properties.

As for VF's supply chain, our global operating team continues to provide a wonderful platform for growth across multiple channels, geographies, brands and products.

Our $100 million field to growth initiative is on track as evidenced by the expectation of continuing year-over-year improvements in gross profit.

We also continue to achieve notable gains in speed and innovation as we successfully leverage our skills around the globe with both existing and newly-acquired businesses.

Thanks, George.

Now, Bob will make some additional comments regarding our financial results.

Thanks, Mackey.

Starting at the top, as a reminder, we're now including royalty income as a component of total revenues which is comparable to many others in our industry.

Revenues increased a bit over 5% in the quarter with an increase in both sales and royalty income.

Foreign currency translation rates did impact revenues negatively in the quarter by about $30 million or 2%.

The gross margins were stable in the quarter at 42.1%.

This was actually a bit better than we had anticipated, reflecting the upside that we saw in our jeanswear business in the quarter.

Continue to expect improved gross margins for the full year.

Our operating income rose 9% in the quarter with an expansion in operating margins to 12.2% from 11.8% driven by the higher margins in our jeanswear and outdoor businesses.

Operating margins should be up slightly for the year in total, even with the additional $20 million we'll be investing behind our brands.

Expense will be spread fairly evenly throughout the next three quarters with the biggest portion in our jeanswear business to sustain the momentum there.

Pre-tax income grew by an even higher amount, 13%.

Reflecting lower net interest expense.

The tax rate was slightly higher in the quarter at 33.4% versus 32.9%.

So that income in the 2006 quarter increased by 12% over the prior year, excluding the cumulative effect of the change in accounting policy related to stock compensation.

Now, the tax rate for the full year should approximate 34%.

As a reminder, in February, we announced our decision to early adopt the new accounting provisions for stock compensation expense.

We supplied restated quarterly statements and other data for 2005 with our year-end results so that 2006 and 2005 results are on a comparable basis with both reflecting stock compensation expense.

Now, you'll note that last year's first quarter did include a one-time cumulative effect adjustment of $12 million or $0.10 per share on a diluted basis that impacted our earnings per share comparisons.

Earnings per share reached a record $1.14 in the quarter.

That's up 14% over the $1.00 per share reported in 2005 before the cumulative effect adjustment.

Per the announcement we made last week, this was substantially above our initial expectation for earnings per share of being up slightly over 2005 levels.

Foreign currency translation negatively impacted earnings per share by $0.02 in the quarter.

You'll note that shares outstanding are down 2% as we continue our share repurchase program.

During the quarter, we repurchased an additional 1 million shares.

Let's turn to the balance sheet, as indicated in the release, our inventories were up 6% which is in line with the revenue increase we expect from the second quarter. 2% of the increase in inventories is related to the Reef acquisition and most of the remaining 4% of the increase is in our outdoor coalition.

Our days of inventory are actually running below prior year levels and our inventory quality remains very strong.

You might also notice the increase in receivables which was due to our very strong sales in March.

Moving to cash flow, we continue to expect we'll generate approximately $600 million in cash flow from operations this year.

Cash used by operating activities was $107 million in the quarter and that's a bit higher than we've seen in the first quarter of previous years.

The primary swing factor related to the increase in receivables--primary spring factor is the increase in receivables in the quarter which I referred to earlier.

We also funded a $75 million contribution to our pension plan during the quarter.

Our priorities for cash flow utilization have not changed.

Our first priority is for acquisitions of strong, growing lifestyle brands, secondly, we're committed to maintaining a strong dividend payout and thirdly, we'll continue to opportunistically repurchase shares primarily to offset the dilution created by the exercise of stock options.

Thanks, Bob.

As you saw in the release, we did increase our guidance for the year.

To reiterate we're now targeting a 9% increase in earnings per share with revenues expected to rise 6% to 7%.

Almost all of it organic growth.

We're very proud of all of the great work by our VF associates that has contributed to the terrific success of our growth plan.

The positive sales momentum should continue in the second quarter.

The earnings per share comparisons will be impacted by $0.07 and special items that boosted results in last year's quarter.

Accordingly, we indicated in our release that earnings per share in the second quarter will be approximately flat with the $0.85 per share reported in last year's quarter, which included the special items.

Our revenues should continue to show good momentum with an expected increase of 6% to 7% all organic growth.

Now, at this point, we would like to take your questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question, Liz Dunn, Prudential Equity Group.

Hi, first let me say congratulations on a great quarter.

Thanks, Liz.

I guess I wanted to start with Reef.

The sales of Reef were a bit stronger than I had anticipated.

Is it really just the seasonality of the business or what are you seeing with that brand?

Is it growing?

And what are some of the growth opportunities that you're looking forward to and when should we see them?

Surely, this is Eric.

I don't know what seasonality assumptions you made and as you know last year was a partial year of ownership by us.

There is not a substantial change in the seasonality of the business.

There is an improvement in the business.

The team out at Reef in San Diego is doing a great job in the sandal business as well as their footwear business.

We're working on a launch of the apparel business.

As I mentioned in my comments, in 2004, I believe, the business was around a $75 million business.

We expect it to break the $100 million mark this year which we count as substantial progress.

Okay, great.

And then I guess my second question is related to the North Face.

I mean just really phenomenal results and as we look out to the fall bookings, it just seems like it is continuing to accelerate on top of already good numbers.

Can you give us some color in terms of what categories are growing?

Is it apparel versus outer wear versus footwear or is it really everything?

Is there something that's growing at a more exceptional pace?

No, I'm pleased to report that every piece of the business is growing and I'm pleased to report that it is growing in all of the markets we sell and I'm pleased to report that it is growing in both our wholesale and retail businesses so that brand is being exceptionally well managed on all fronts, from products to the country's managers, and we are-- they're getting it done.

Okay, great and then just one more if I may.

Any comment on Eddie Bauer?

Obviously, there was some speculation in Women's Wear Daily that that was something that you were interested in and I think to a lot of us, it sounds a lot like your $300 million to a $1 billion target.

You're interested in retail, you're interested in outdoor and sportswear.

Is there anything--anything you could add to that analysis that I think a lot of us are doing right now?

I don't think it is going to come as a surprise to you that we won't comment specifically on any one acquisition.

I will repeat our acquisition targets and you did mention some of them.

We certainly are looking for additional acquisitions.

We're aggressively in the hunt.

We're look for lifestyle brands.

We do certainly like the outdoor category.

We are interested in retail opportunities, particularly those retail opportunities that are related to outdoor brands.

But also, what we look at carefully are the financial criteria that we have for the returns on our investments.

The amount of time that we would have to absorb dilution.

We take all of those factors into consideration and then make our decisions relative to any particular acquisition.

Ok, thank you, and again, really impressive job.

Our next question, Omar Saad with Credit Suisse First Boston.

Thanks, looking at the expense line, it looks like you got about 40 basis points of leverage on the SG&A versus '05, I think your SG&A rate ended up about 150 basis points higher than '04.

I wanted to see if you could talk about some of the drivers there.

And how we should think about SG&A for the remainder of the year especially given some of the increased marketing initiative that you mentioned?

Omar, this is Bob.

The reduction in the first quarter was primarily in our what I'll call our core, more of our heritage businesses.

Again, saw some sales growth as we just talked about and that helped the SG&A ratios there.

So, it was down.

It was down a bit in the quarter.

And to your point, with the additional--with the additional spend throughout the remainder of the year, for the full year, we would expect our SG&A percentage to be up about 30 basis points.

Okay, great.

So we'll see a bit different comparisons in the--not significantly different but a bit different but higher over the rest of the year.

Okay, that's helpful, thank you.

Just two brand specific questions.

One, can you elaborate on the Nautica retail sales that you mentioned in the release and some of the increased promotional activity there?

And I also wanted to ask about Vans.

I think you mentioned a 40% comp number.

What's driving that sort of increase?

Really impressive and what you think about the opportunity for the brand.

Sure, I'll comment on both.

Nautica, I'll put in a little bit of perspective.

You may recall that last year in the first quarter, the Nautica retail stores had a particularly successful quarter, and we were up against difficult comps.

Up against those comps quite frankly, we missed some on product and we did not get the right products that we needed in the stores in the early part of the quarter.

However, as I said in my statement, in April, the business really did start to pick up.

We don't think we have any fundamental issues there.

We missed a few trends.

The Vans--and we expect to continue to grow our Nautica retail stores.

Vans, as I commented, on the U.S. market on a comp store basis was up 42% in the quarter.

Probably a combination of two things there.

One is the brand and the products behind the brand are very strong.

We're having strong growth everywhere with that brand.

The other comment is--and that team has been working for a few years on a new retail format.

A redo of the stores to make them more appropriate for the consumers.

We've seen consistent improvement in performance whenever we convert a store and we continue to roll that out.

So, it is a combination of hot brand, great products and new retail format driving that performance.

Thanks, great job.

Thank you.

Our next question, Robert Drbul with Lehman Brothers.

Hi, good afternoon.

If I could just start with some macro thoughts from you guys.

First, can you comment a little bit about inventory levels at retail and predominantly in many of your categories, if you may walk us through that and then the second piece is when you look at your expectation for the full year in terms of revenues and profitability, can you maybe just give us your thought process around any impacts, rising gas prices might have on many of your consumers at retail?

Yeah, we'll comment on that.

First of all, inventory levels overall, we feel extremely good about our inventory levels.

We've had very good performance and sale throughs as indicated by our sales results.

Our inventories are in great shape, both internally as well as at retail, exceptionally strong so we feel very good about that.

We do and I'm sure you've seen some indications from different retailers or some of our competitors that their sales have not been as strong so we would certainly see that it may be spotty at retail with some strength in some areas or some brands and some weakness in others.

But overall, we feel extremely good.

We, of course, operate a lot on replenishment programs, so we're filling back in as inventories depleted and without any unusual inventory situations at retail, we would expect to continue to see a good situation with our retail inventories going forward.

And your other question, gas impact of that.

Quite often in the past, we have heard from some particularly the mass retailers that gas prices are something that they watch very closely.

That they are sensitive to that in their overall sales.

The last or most recently reported consumer confidence level was very positive, so that was a good indicator.

Maybe this latest upward movement hadn't taken hold when that research was done.

But just in looking at our inventory levels and our performance, we're certainly not seeing an indication of decreased demand at this point.

We will continue to watch it as I'm sure the retailers will overall.

I had not heard as much from them, to be honest with you, about the impact of this up to this point in time.

It's something we'll continue to watch.

Okay, great.

And just one final question would be I think for Eric, in terms of Nautica's business, can you give us an update in terms of like Nautica in store shops and how many shops you're going to test the women's business this fall?

Maybe overall square footage implications for the brand overall at retail?

Sure, Bob, you've been following the Nautica story pretty closely for years, so you know what our approach was last year which was find the right marketing message which we think we did with Navigate Life.

Find the right product which we think we did in the fall which is when we planned to.

Then following, once you have the right message and the right product, begin to invest in shops.

We have about 165 shops that we've redone with the nAvigate Life theme since we started last fall.

We have about 50 more to get to this year which we will get done.

We think that's the right message and the right way to execute the men's sportswear business.

Your question about women's sportswear business, all along, our plan for women's sportswear was to set up a test for this fall, get the program placed, read consumer reaction and sell through and then respond in 2007.

And we are proceeding down that path.

We have tests in with most of our major retail customers and we expect to read them this fall and talk about that as that test comes to life.

Actually, if--I have one more question, Eric.

On the Intimate business, has there been any progress in terms of--Mackey had alluded to in the past maybe a new program to try and sort of smooth out the ups and downs of the private label business for you guys.

Is there any change to the business structures there that we should know about?

We have been working with a major private label customer to smooth out some of the ups and downs.

We have--that's an ongoing dialogue, but, Bob, we don't have anything substantial to announce on it.

Okay, thanks, nice quarter, congratulations.

Our next question, Robert Samuels, J.P. Morgan.

[OPERATOR INSTRUCTIONS]

Hearing no response, we'll move to Brad Stephens with Morgan Keegan.

Most of my questions have been answered.

Just one quick question.

You referred to Nautica as being a little weak in the outlet channel.

Can you comment on the rest of your outlet businesses?

Was there a pullback in Q1 as well?

No, I don't believe there was a softness.

I think the issue was specifically focused at the Nautica outlet stores and some issues we have there, but across the rest of our outlet business was not soft, no.

Okay, and then the Pack business?

Our Pack business is having a good year this year.

JanSport business in the U.S. and East Pack in Europe are both planning to have good years and they're on track.

All right, great.

Thanks, guys.

Thanks, Brad.

Our next question, Robby Ohmes with Banc of America Securities.

Oh, thanks, a couple of quick questions.

I just wanted to check first, did you guys say you expect the jeanswear business to be up a couple of percent, 6% versus last year?

Is that right?

Yes, that's right.

And you--you were down in this quarter and I think you went into this year with a pretty cautious tone on jeanswear.

That would be, I think, the best growth rate for that division in a (inaudible) several years.

Can you just give us a little more detail on what exactly has changed there?

I know you planned it conservatively but you're back to growth.

Is there one retailer that stepped in with you on one of your brands and then related to that, you're spending this $20 million incremental on advertising.

Can you tell us on the jeanswear side, exactly what type of incremental programs you're talking about that's driving that business.

Then I have a follow-up, thanks.

Sure, our jeanswear team, starting last summer, started a comprehensive review of the North American jeanswear market, the consumers in that market and with every customer, and we have really looked at the North American business top to bottom to identify strategies that were going to help us consistently grow the business.

That was the objective in going down that path.

We've had pretty consistent good performance from pieces of our jeanswear business.

Our specialty business had a good year last year and is having a good year this year and our mass business had a decent year last year and is also having a growth year this year.

We've had an issue with Lee, and it's been a long-term issue.

We've been looking at the total package and the total portfolio.

We think we've got the right plans in place now to deliver the up a couple of percentage points growth that Mackey talked about and that is in our plan.

It really comes down to better understanding of the market and our typical strong execution against those opportunities.

And on the incremental advertising spend?

Because we're so confident in our approach, and we see clear opportunities to stimulate growth where we need it in our jeans business, we've just decided to pull the trigger on some unplanned incremental spends in our jeanswear business.

Then just an exit question, and I apologize if you guys covered this already.

I think you mentioned in the release that you think the fourth quarter is going to be particularly strong.

Can you just walk us through the differences there versus the next couple of quarters?

Thanks.

This is Bob.

One of the factors there was our Intimates business in the fourth quarter of last year.

It was a particularly tough quarter for the Intimates piece.

So, that is a fairly significant factor in terms of the comparison.

So, we do expect the fourth quarter in terms of percentage increase to be somewhat stronger than the third.

Okay, great, thank you very much.

You bet.

Our next question, Jeff Edelman, UBS Securities.

Thank you, good afternoon.

Eric, a question on the outdoor and North Face.

At the analyst's meeting in December, it appears as if you had lowered or little more conservative in the growth outlook there.

Then we saw very strong sales here for North Face.

Did this represent some pulling ahead from orders that you would have shipped in the second quarter or from a planning point of view, if these sales were stronger than you thought, and appeared in heavy demand, how did you get the extra inventory out?

Jeff, it is Eric.

I'm not sure I can comment on the difference in any impression we gave about the North Face brand in December and today.

We have been very confident in the North Face brand and its growth potential all along.

Speaking from what I've been saying about it is I'm very confident in that team.

We have had strong sell throughs and we've had higher price sell throughs meaning our first quality sales have improved.

That of course helps the business.

I don't know how to compare the guidance we're giving today to the guidance we gave in the past but as I said, it was up 40% in the quarter.

The big time for this brand is in the fall.

I've commented that our bookings for fall are up over 30% globally.

And you know, we count that as a huge success.

Okay, so we did not see any pull ahead of shipments from the second quarter.

No, absolutely not.

Okay, if I could follow up with a question on the jeans business.

I know you've had a lot of these programs where you're trying to stimulate sales.

Are we still seeing loss of volume from some of your larger accounts or is that pretty much over at this point?

That's a general jeanswear question, I'll take it as that.

Yeah.

Our jeanswear business right now is performing pretty well.

Our mass business and our specialty business are growing.

They grew in the quarter.

We expect them to grow in the year.

Our Lee business beat our expectations and as Mackey said, we did have conservative expectations based on the trend we were coming out of.

That brand was down single digits in the quarter and it was pretty consistently performed versus plan at all of its retailers.

It was up in March and we expect improved comparisons from Lee in the next quarter.

Okay, great, thank you.

Our next question, Jim Duffy, Thomas Weisel Partners.

Thank you, question for Eric.

Eric, on the North Face, the strength seems to have been broad-based across outer wear, sportswear, etc.

Is there disproportionate growth in the men's business or the women's business?

No, on the North Face is truly a dual gender brand.

We're equally strong with male and female apparel, inner wear and outer wear.

It is becoming strong with both--both men and women.

What is--if you had to do the percentage breakdown between men's and women's in that business, how would it split?

The only--I can't do that for the whole brand including all product categories but in outer wear, I know it is just over 50% female.

Okay, so pretty balanced?

Yeah.

And as you look to your fall backlog and the growth there for the North Face brand, is that within existing channels of distribution or has there been any meaningful expansion of distribution?

There has not been any meaningful expansion of distribution channels, no.

Okay, final question, Bob, did the currency have any meaningful impact to gross margins?

No, not significant.

It wasn't that much.

I mean it was a bit.

It was a bit because particularly in the outdoor side, we buy in dollars but it wasn't a significant factor.

Thanks very much.

Nice quarter.

Ok.

Our next question, Linda Donnelly, Franklin Management Group.

Thank you.

Could you give us some guidance on what you anticipate capital expenditures to be and also DNA for the year?

Yeah, DNA, expect it to be about $130 million.

All right.

Appreciation and amortization.

And CapEx right at about $120 million.

Thank you very much.

Pretty consistent.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll go to Kelly Vaukey (ph.), Eaton Vance Mutual Funds.

Hi, I just wanted to follow up briefly on some of the other callers about the denim business.

I'm just wondering first of all if you're concerned at all about Wal-Mart's private label strategies and secondly, you mentioned that you may be--I believe you mentioned you may be taking share and I am wondering who you think you might be taking share from on the denim side.

Yeah, we'll be glad to comment on that.

Wal-Mart has certainly talked a lot about their private label business and I think they are having success and we seem to be enjoying part of that success as well.

We have worked very closely with Wal-Mart, had a number of sessions as they work on their strategy to increase.

They don't need to increase the number of people coming in their doors but to get more of them into the apparel area.

And they have been successful with some of their marketing and some of their product offering and bringing more people in the apparel area.

And as they've done that, we've benefited in seeing an increase velocity of our brands and our sales of our products.

Our inventories are a much lower level than we expected in Wal-Mart and our sales are higher.

So, we feel that their strategy is benefiting.

We do feel maybe some of our other competitors have not seen the same results that we've seen, but we think at this point, we're certainly benefiting from that.

We feel that basically, as the consumer gets more interested in apparel and as they compare pricing and compare product, they're choosing our brands.

Which has been very beneficial to us.

Okay, great, and just any comment on who you might be taking market share from?

I wouldn't want to speak to any specific competitors.

Okay, thank you.

We'll take our final question from Gabrielle Kivitz from Deutsche Bank.

Hi, good afternoon.

I had another question on the jeanswear business.

I'm just trying to get more comfortable here with the outlook and understanding of what's driving the improvement.

I obviously understand that you have initiatives in place to improve the Lee business.

And that you had conservative expectations for the Lee business in the first quarter.

But I was under the impression that the improvement in the jeanswear business and Lee in particular was more of a second half event.

You obviously saw improvement in the month of March and now you're expecting improvement in the second quarter.

So, I guess, I'm sort of asking a question that was already asked but really, trying to understand what's really changed, why were you able to show the improvement earlier than expected and maybe if you can just clarify some of the changes and what--give more detail about what really drove the improvement in March.

That would be helpful, thank you.

Sure, as I said a minute ago, that we've been working on a total North American jeanswear strategy since last summer.

While we were working on it, we were of course, doing everything we could to turn around a long-term decline in the Lee brand.

As we've done that, we have done a better job of identifying the few growth opportunities that are most important to the brand and investing product and marketing behind those.

It is really--we've been more narrow in our approach and more focused on our customers.

We've also had--Lee took a few body shots in the last few years as major customers restructured and the organization and closed stores.

We have a lot of that behind us.

And our products are doing better.

I don't want you to interpret this as being Lee is out of the woods and we're off to the races.

We are--it is getting to look better earlier than we thought and we do expect improved comps in the second quarter and you're right, our earlier discussions about it, we talked about an improvement in the Lee brand in the second half.

It is getting a little bit better.

A little bit sooner.

We still think we have a lot of work to do, but we are very encouraged.

Okay, thank you, good luck.

Thanks.

With no other questions holding, I would like to turn the conference back to Mr. McDonald for any closing remarks.

Okay, thank you very much for joining us today.

Obviously we're very pleased with the quarter and the prospects for the year.

The plans that we have in place to transform VF in a very different company are working.

The reason they're working is because our people are doing a great job of executing them and they will continue to do so and we will continue to accrue the benefits of that performance.

Thanks for being with us.

Ladies and gentlemen, that will conclude today's teleconference.

We do thank you for your participation and ask that you please disconnect your phone line.