威富公司 (VFC) 2006 Q2 法說會逐字稿

Good day and welcome to the VF Corporation second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Mr. David Griffith of ICR.

Please go ahead, sir.

Good morning and thanks for participating in VF Corporation's second 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.

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 operates -- operations or financial conditions 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, and thanks for joining us today for the second quarter call.

We're obviously very pleased to be able to report our 11th consecutive quarter of record sales and earnings, and another milestone in our on-going transformation.

This transformation is changing VF's business moves to dynamic, higher-growth lifestyle brands and is playing out just as we outlined it over two years ago.

The quarter included a number of positive highlights and I'm going to review those briefly before turning the call over to Eric Wiseman and George Derhofer, who will make a few comments about the coalition's performance, and Bob Shearer, who will touch upon the financials.

Now, touching on the highlights.

We're particularly pleased that we've been able to sustain such strong organic growth.

If you'll recall that our long-term top line target is 6% to 8% annual growth, split about evenly between organic growth and acquisitions.

This year, we've demonstrated our ability to achieve our growth target almost entirely through organic growth.

Even better news is that we're achieving growth across most of our businesses.

Organic growth in the quarter was 6% in Jeanswear, 22% in Outdoor, 5% in Sportswear, and 4% in Imagewear.

We're aggressively pursuing acquisition opportunities.

Acquisitions will continue to be an important part of our growth strategy, but as you know, today's environment is very competitive and we will not compromise our financial and strategic criteria.

It does mean that we need to look at a lot more opportunities, which is exactly what we're doing.

The fact that we have strong organic growth means we can be patient in our acquisition approach.

We're also pleased to be -- by the continued momentum in earnings, which were up on an apples-to-apples basis by 13% in the quarter, excluding special items that boosted earnings by $0.07 in the '05 quarter.

This is especially gratifying, given the heavy investments we're continuing to make in a variety of areas to support future growth.

In the past we've talked about issues in a couple businesses, namely the Lee® brand in the U.S. and Intimates.

You'll note in the release that we saw a strong rebound in Lee® revenues in the quarter, and we'll continue to invest behind the brand as we head into this very important back-to-school and fall seasons.

In Intimates, while we again experienced a decline in revenues during the quarter, the rate of decline has slowed significantly from prior periods, and we see additional improvement coming in the second half of the year, with revenues expected to be about flat and a slight uptick in operating margins.

Important in our transformation strategy is the increase in our owned retail store base.

As a percent of our total revenue base, owned retail is about 13%, and we continue to view it as a growth vehicle, given our stable of powerful lifestyle brands.

We saw very strong comp store growth during the second quarter, for example.

On a comparable store basis, Vans® stores are up over 50%, the North Face® is up 20%, and Nautica® is up 8%.

We have 45 of 50 additional stores in the pipeline for the balance of '06, which should bring us close to the 600 store mark by year-end.

And, finally, for the second time this year, we're increasing our full year earnings guidance.

Earnings per share should be up to about $5 per share this year, which represents a 10% increase over the $4.54 per share reported in '05 and a new milestone for VF.

We'll also be nearing the $7 billion mark this year, another major milestone, with an expected revenue increase of about 7%.

Now, let's hear from Eric and George about our coalitions performance.

Thanks, Mackey, and good morning everyone.

I'll start with Outdoor, where we continue to see tremendous positive momentum.

Revenues continued to grow, up 24%, with double-digit growth both domestically and internationally.

The North Face® brand revenues were up 16%.

Now that's a bit less than what we've seen in prior quarters, but this is their lowest volume quarter, by far, so this is not at all indicative of what we expect for the brand in the coming quarter and for the year in total.

The brand continues to be on fire, both domestically and internationally, and we feel very good about the growth prospects for all categories;

Outerwear, Sportswear, equipment, retail, in particularly footwear.

Speaking of footwear, let's move to Vans®, which had an outstanding quarter, far outperforming our most optimistic assumptions.

Global revenues were up 24%, with double-digit growth in both our wholesale and retail businesses.

We're moving forward with our apparel initiative, both in our owned retail stores and with tests scheduled with several key retailers this fall.

Our retail business is tremendously strong.

As Mackey indicated, full-price comp store sales for Vans® were up over 50% in the quarter.

JanSport® had a particularly strong quarter, with revenues up over 30%, driven in part by strength in the corba -- day-pack business and in part by early shipments of back-to-school merchandise.

Kipling® International also had a strong quarter, with revenue growth in excess of 20%, strong growth in the UK, Spain and Belgium.

We've continued our retail expansion in Kipling® in Europe, with new stores in Amsterdam, Paris and Brussels.

Demand for the Napapijri® brand continues to be very strong in Europe, and we just opened our first store in New York City this week.

It's a unique environment and we're looking forward to hosting a visit there for our friends in the financial community later this year.

A comment about margins.

You'll notice that outdoor margins were down in the quarter.

As stated in the release, this decline is due to the investments we're making to support the future growth of our Outdoor brand.

Because the second quarter is a low-volume quarter for Outdoor, the investments had a disproportion at impact on margins.

We do expect to return to more normal margins in the second half of the year.

Turning now to Jeanswear.

This was a great quarter for our Jeanswear team.

Revenues were up a strong 6%, both domestically and internationally.

We're very pleased with our results across our mass market, Lee®, and international businesses.

Our work to turn around the Lee® brand in the U.S. is beginning to take hold, with revenues up 11% in the quarter, and we expect Lee® to end the year up slightly versus 2005.

We have strong new marketing in place that will hit starting next month, so be on the look-out for both TV and print ads for the new Lee® .

Our mass market team continues to do an outstanding job, leveraging the strength of our core Wrangler® and Riders® brands in both denim and in new categories, such as shirts.

Year-to-date we're seeing double-digit growth in our over-the-counter sales with our largest customer.

Internationally we're delighted to see growth in most major markets. including Europe, Canada, Mexico, Latin America and China, with strength in both the Lee® and Wrangler® brands.

And our early pre-book trend for Lee® , Wrangler® and our mass brands in Europe looks very positive, the strongest we've seen for some time now.

In terms of Jeanswear operating margins, you'll recall that last year operating income and margins were boosted by special items, which are detailed on page nine of the release.

Our Jeanswear margins were a very healthy 13.9% in the quarter.

Looking forward, I should add that Jeanswear revenue comparison's are expected to be quite a bit stronger in the fourth quarter than in the third quarter, due entirely to timing of shipments and new programs, and we do expect increases in both periods.

Now, taking a look at our Sportswear coalition.

Our Nautica® brand continues to grow, up 4% in the quarter, despite the shrinkage in doors created by consolidation among the brand's key customers.

Our core men's Sportswear business continues to perform well, and we're looking forward to the launch of the new women's Sportswear line in 100 key doors this fall.

We're confident in the long term success of this initiative, and we're investing behind it, and those investments are a primary factor behind the decline in Sportswear margins in the quarter.

Revenues of our John Varvatos® and Kipling® business also grew in the quarter.

Now, while still quite small, our newly-launched Kipling® business is doing better than we anticipated.

We've achieved new placement for Kipling® products this fall in key doors, and we'll have a total of nine stores in the U.S. by year-end.

This is a terrific brand, and we see great potential for it in the U.S. market.

Shifting gears now to Intimates.

Following a very difficult 2005 and first quarter in 2006, we're starting to see the first signs of the stabilization that we've talked about for some time now.

While revenues continue to decline in the quarter, the rate of decline is moderated from prior quarters, and we are pleased to see an improvement in our Private Brands business, which has been a major source of our revenue decline.

Our international business is up a bit as well, due to higher revenues in our Mexican and Canadian businesses.

As stated in our release, we do anticipate revenues to be about flat in the second half of the year, together with a slight improvement in margin.

Our Intimates team continues to be very focused on returning this business to traditional levels of profitability and renewing growth in our core brands.

The team has done a lot work to improve product innovation and identify new growth platforms, which should begin to pay dividends in 2007.

Now to discuss the strong performance in our Imagewear coalition, I'll turn things over to George Derhofer.

Thanks, Eric.

Our Imagewear team turned in another terrific quarter.

Not only do we continue to grow the top line at a healthy rate, we are also achieving solid profit and margin performance.

We're very pleased with our results in both our Image and licensed apparel businesses.

Operating income was up 20% in the quarter and operating margins hit 15.4%.

During the quarter we also finalized some important new contract extensions, mainly with FedEx and the Transportation Security Administration, or TSA.

Inventories are also tracking substantially below prior year levels.

All in all, we're looking forward to another record year for Imagewear.

Now let's have a quick recap from Bob on the financials.

Okay, well thanks, Mackey, and let's start at the top.

As you've seen, revenues grew by 8% in the quarter, with sales up 8% and royalty income up a healthy 15%.

Now we're especially pleased with these results, given the strong profit performance that's associated with organic growth.

Now moving to gross margins and operating margins, both comparison's were impacted by the special items in the prior-year's quarter, as detailed in the press release.

Now, excluding the effect of the special items, which benefited the prior quarter, gross margins and operating margins were about flat.

Now, we continue to make investments across our brands and businesses to support future growth, which we've talked about in the past, and I'm going to speak a little bit more about that later in my remarks.

Now, we continue to expect some improvement in both gross margins and operating margins for the year in total.

Most of our businesses have very healthy margins, and we are taking the opportunity this year to put more dollars behind a variety of growth drivers, including marketing, distribution, technology, infrastructure and new product launches.

Now the lifestyle brands that we've acquired, the North Face®, Nautica®, Vans®, Kipling®, Napapijri® and Reef®, have significant opportunities for growth, and now is the time to invest behind their potential.

And we've demonstrated by our recent financial results that these investments not only feed strong organic growth, but that we can make these investments and still report strong profit growth.

Interest expense declined in the quarter, while the tax rate was 33.3% compared to 29.5% in the prior year second quarter.

Now the swing factor in the tax rate again relates to the special items in the '05 quarter, which reduced tax expense by $5.5 million in that period.

For the year, we expect a tax rate of about 34%.

And finally net income, and EPS, both hit record levels.

Reported earnings per share were up 4% and better than our previous guidance of being flat with prior year levels.

Now, once again, it's important to reference the benefit in last year's second quarter of the special items.

Excluding those benefits from last year's numbers, the EPS increase was 13%.

Shares outstanding are down slightly from prior year levels.

During the quarter we repurchased one million shares, bringing the total repurchase for the year-to-date to two million shares.

Now turning to the balance sheet, the primary point I'd like to make here is that our inventories continue to be in very good shape.

In fact, inventories rose 4% in the quarter, which is half the rate of growth in sales in this past period and what we expect in the third quarter.

The only other point I'd like is that our debt to total capital ratio continues to improve and, at 24.7% gives us tremendous flexibility to pursue and fund acquisitions.

Now in terms of cash flow, this continues to be one of VF's primary strengths.

We continue to expect that we will generate approximately $600 million in cash flow from operations this year, so another very strong year expected from a cla -- from a cash flow perspective.

Now Mackey already touched on our revised guidance for this year, but I'll add a comment about the third and fourth quarter.

As we stated in our release that we expect continued strong organic growth in the third quarter, with revenues anticipated to be up about 8%.

And we expect growth across our coalitions, with the exception of Intimates, which is likely to be flat.

Our guidance for earnings per share in the quarter is for an increase of about 6%, which will point to a slight decline in operating margins in the quarter.

The reality is that we have a full plate of investments across our businesses that are falling more heavily into the third quarter than other periods.

For example, we've talked about the increase in marketing.

The third quarter will be an especially heavy period of marketing in our jeans brands, particularly with the launch of Lee's® new campaign.

In addition, we'll be making heavier investments in our Nautica® brand, with the launch of our women's Sportswear initiative.

In terms of distribution we've recently opened a brand new distribution center in California consisting of about one million square feet, to support the growth of our domestic outdoor brands.

This is the largest distribution center in VF, and it will incorporate all the latest technology.

Now, not only does this new DC support the tremendous growth in our outdoor brands but it will yield cost improvements in the years ahead, so this is a big initiative for us and we're doing everything we can to insure as smooth of transition as possible.

Now, another example is in our European outdoor business.

We're ramping up our infrastructure there to make sure we have the people, systems and processes in place to support the ongoing growth of our outdoor brands across Europe and Asia.

So, the combination of these factors will have a disproportion at impact on our third quarter margins, but we're still looking forward to record results on both the top and bottom lines.

Now, the fourth quarter will be particularly strong for us, with an expected EPS increase of approximately 17% and investment spending levels that are more comparable to last year's fourth quarter.

This strong quarter, combined with our third quarter guidance, gets us to our target of $5 per share for the year.

So all in all, we're very proud of what we've accomplished to date this year, and we're really excited about the opportunities of the second half that will deliver a very strong finish to the year.

Thanks, Bob.

Before we take questions, I'd like to address a concern that we've heard pretty consistently in our meetings with investors in the last couple of months; that is the overall health of the consumer, the outlook for consumer spending for the rest of the year, giving rising interest rates and record setting gasoline prices and global unrest.

Naturally, we would not be immune to a significant and sustained downturn in the economy, but by-and-large, we've not seen any softening in our demand for our products.

In short, there are three reasons why I'm optimistic about our prospects for both the near and longer term.

First is the strength of our brands.

Most of our brands are as strong as they've ever been, and we're making the investments necessary to keep them strong.

If consumers become more selective in their purchases, we believe they'll vote for brands they know and trust, that offer outstanding value and quality; in short, VF brands.

Second is the diversity of our distribution.

We're not overly dependent on any one channel of distribution, so wherever consumers choose to shop, we'll have brands for them.

For example, specialty stores, including our own retail stores, account for about a third of our revenues, mass market stores account for another third, chain stores account for 10%, department stores account for about 13%, and the rest is mostly our non-wholesale businesses, such as Imagewear.

Third is the way we manage our business, in terms of inventory management and our financial processes and disciplines.

I'm proud of our ability to react very quickly to changing consumer and economic dynamics.

And now, we'll be glad to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] And our first question today will come from Bob Drbul with Lehman Brothers.

Hi, good morning.

Good morning.

Mackey, if I could just start as a follow-up to your closing comments, when you look at some of the -- your largest customers, sales have been pretty tough to come by for a few of them recently -- I mean very recently -- when you look at your exposure to the low-end consumer in your brand matrix, can you just maybe elaborate a little bit more how you think your product mix goes into the lower-end customer?

Well, as I've said, if you look at the mass channel, it makes up about a little over 30%, 33% of our business.

And as we look at what's been happening with our business, and if you look back over the last several years, we've had a lot of up and down economic trends, we've had gas prices fluctuate quite a bit, and our sales have been consistently rising.

We do feel in many cases we're out-performing the total business with some of our partners, and we feel like that's a result of the product development, the types of products that we're delivering, and the great value we have.

But sometimes, when a consumer gets more gets more selective, if you have the best fashion, you have the best innovation, and you have great prices, you reap the rewards of that.

So, what we're seeing at this point in time is continuing to encourage us.

We haven't seen anything to tell us that changes are coming.

Obviously, if economic or world events change dramatically, that could change, but we feel comfortable with where we are.

And as you look to the back half of the year, Mackey, what's the percentage of the business that you do on a replenishment basis, and what is your assumption for that replenishment sales incorporated in the top line guidance that you've given us today?

We generally are around 40% to 50% in replenishment-type products, and that's the area that we manage extremely well for all of our large partners.

And the thing that we also customize the mix by store in different locations, so we generally have a fast turning mix of products at retail.

It's one of the reasons why, even when the economic conditions are fluctuating and up and down, we're able to reap some of the rewards of having the right type products and the right quantities at retail.

Okay, and just a couple of quick questions for Bob.

For the second quarter and the third quarter, and I guess even for the full year, can you just give us the percentage of sales that you're investing in marketing and the increase, or any data points along that line to -- on a consolidated basis to help us understand that a little bit better?

In terms of the promotional spend, Bob?

Yes, yes.

Yes.

In the second and third quarters, we're increasing our spend in the 12% to 14% area, so that our overall expense for the year, of course, is above the 5% level, as it has been.

I think it might be a five point -- 5.2% or 5.3% for the full year.

So again, significant increases, and as we said, it's one of the impacts when you look at the third quarter, and we mentioned some of the pieces that we're spending behind, so we're driving the third quarter alone.

Our increase in the advertising spend should be about 14%.

So it is one of the factors that's impacting that quarter, and again for the full year, it will be up as well.

Okay, great.

Thank you very much.

Good luck.

Thanks, Bob.

And next we'll move on to Omar Saad with Credit Suisse.

Thanks, good morning.

Good morning.

Wanted to ask -- Mackey, you'd talked a little bit about the big retail opportunity and the importance of making investments in that business and it's growing as a percent of next year sales.

I know you don't separately break it out, but can you talk about the profitability of that business, how it measures up to the rest of your business and if there's a -- if you need to reach a critical mass to get to profitability in that business where you want it to be?

If you could just talk about that a little bit subjectively I'd appreciate it.

Yes, I'll be glad to because that the one of the very encouraging parts of our retail growth.

We've analyzed this carefully over the last few years, and at one point in time we were concerned about profitability retailers as compared to our wholesale business.

But we're very convinced now, based on what we've experienced over the last couple of years that our retail sales can be extremely profitable and coming close to the same profitability of our wholesale businesses.

So that's been the most encouraging part of what we've learned in our own retail experience over the last several years.

As you know, we're not planning on becoming multi-branded retail -- retailers.

We're focused on presenting our lifestyle brands to the consumer and when you have a strong lifestyle brand retail outlet, it performs extremely well and the profitability is extremely good.

Thanks, and as a follow-up, can you talk a little bit about how you manage the brands that have wholesale and their own retail component?

Is there any sort of source of conflict with your customers and how you manage that process?

I'll take that question.

This is Eric Wiseman.

Okay.

As we've stated all along, the primary reason -- there's a lot of reasons we're getting the retail.

One of the important ones is we think it's the right thing to do for our brands.

It gives us the opportunity to set up an environment that really showcases our brand, whether it's the North Face® or Vans®.

That's what our primary objective is.

We're also using owned retail to introduce brands to market.

Kipling's® a great example of that.

Kipling® had a very small presence in the U.S., and 18 months since we launched it in the U.S, we'll open nine stores here in the U.S.

And that lets us show the brand to consumers and show the brand to retailers in the way we think it should be presented.

Our experience has been, as we've opened stores in markets, the brand has gotten stronger.

And not only have our stores done well, but the customers that we sell on a wholesale business.

They've also seen a lift in their performance, and we've seen that consistently as we've opened new stores, so we think it's been good for the brand add good for the business.

Not only our business, but also our customer's business.

Okay, great.

That's really helpful.

And you talked a little bit about effecting the brand, when you look at your returns analysis and investing in retail, do you consider -- is there a certain element of marketing expense that you include in there to kind of -- that maybe that returns are actually higher than they might appear on paper?

Actually this is Bob.

We really don't look at it that way.

We look at retail as profit generators and not as a cost center, not as part of our advertising spend.

So they really need to stand on their own, relative to the returns and they obviously do.

Obviously, there's a big benefit relative to promoting the brand, but that's not how we view it from a financial perspective.

Alright.

Thanks, guys.

Nice work.

Thank you.

Next we'll move on to Jeffrey Edelman with UBS.

Thank you.

Good morning and good quarter.

My first question is a follow-up on the replenishment business.

In the past, your revenues have been somewhat volatile because of the movement of your customers inventories.

Could you give us some assessment as to how you think your inventories are at your big customers today?

Are they above trend, below trend, something like that as we look at the second half?

Yes, we watch that avery -- this is Eric, Jeff.

How are you?

Good, and you?

Good.

We watch that very, very carefully.

And in fact, our shipments performance -- looking at the most recent quarter, while we're very proud of what we accomplished, our shipments performance trailed are over-the-counter performance, meaning that our over-the-counter sales were up more in our replenishment businesses than our shipments were.

So that implies and means that our inventories at retail are better and our trends are faster and there -- our big customers are managing their inventories and we're a partner in that with them, and that's reflected in our performance year-to-date and in our forecast for the year.

Great.

And just as a follow-up to that, was the strength in sales really across all product categories or did it really reflect a product line extensions?

Is there a particular coalition you're asking about?

Well I'm sorry, in the Jeanswear to the mass market.

Our Jeanswear business in the mass market was strong in all categories I guess is a short answer to that question.

Okay.

And then Bob, one question.

As we think and look out to next year, should we be modeling these investment expenses to be continuing at a dollar rate as a percentage of sales?

Could you give us something as to how we could look forward?

Well, I think, Jeff, to answer that you need to look at the -- you need to look at the full year and mix of business and all that kind of thing has some impact.

So for the full year, this year, in 2006, we do expect some modest increase in our total SG&A, and that might be the case next year, as well.

We're not going to comment a lot on next year at this point.

But as we continue to see these lifestyle brands grow, our investment behind those brands has been a little bit higher.

And as a percent of sales they're a bit higher, but also they produce higher gross margins.

So, yes, I'd say as you look out that we might see some modest increase in our SG&A spending as a percent, but primarily driven by the changes in the mix of the business and strengthening of our -- in growth of our lifestyle brands.

Okay, great.

Thank you.

And next we'll move on to Liz Dunn with Prudential.

Hi, good morning.

Good morning, Lis.

Congratulations on a great quarter.

Thank you.

Can I ask about the Wrangler® top initiative, just how is that performing and, you know, just a larger context question regarding that?

Why does Wal-Mart choose to partner with you?

I mean they've certainly been making an investment in their own private brands, but it seems like they've also been increasing their partnership with you,and why does that make sense for them?

That's my first question.

Sure, this is Eric.

I think the reason that Wal-Mart partners with any supplier, including us, is we add value to their stores.

We help them in a lot of ways by understanding our consumers so they could understand our consumers because we're so focused on them.

We add great brands to their stores.

We add great replenishment technology and we bring what we know about consumers across all channels of distribution to all of our customers and really help them pick the right products that should be available in their stores.

So, when you look at why they partner with us in the jeans business -- I assume is what you're referring to -- our Wrangler® business there and our Riders® business, we have great brands and we manage our inventory there very productively for them.

And the reason they're supporting the tops business is -- you know, that started as a test and one of the things we learned from that test was just how powerful the Wrangler® brand is, because our tops business there is growing and they're continuing to expand it to more doors and it's more important in every door that it's in.

So it's a growing business and I think what's driving it, in addition to the products offer great value, is it makes a big statement about the extendibility of the Wrangler® brand.

Okay.

Can you give us an update on Nautica® International initiatives and how that's proceeding?

Sure.

To put it in perspective, it's a relati -- it's a very small piece of business for us.

As I've said all along, Liz, we are very methodically launching the brand in -- and I'm assuming your question is about Europe -- and we're going -- we're proceeding very slowly.

As you know, the brand was launched with much fanfare a couple times, and it did not work and we had to retreat.

So we're trying to learn as we go, make sure we have the right product assortments and executing to a deliverable trend season-after-season-after-season.

And we absolutely need to get this right and that means a lot of learning along the way.

It's running slightly better than our plans, but it's a small plan.

Okay.

And then my final question is your inventory control was exemplary in the quarter.

I would imagine with about 4% increase in inventory that the Outdoor division is up significantly and some other divisions are down pretty significantly?

Can you just give us more color on that?

Yes, that's exactly right as a matter of fact, Liz.

The build that we did have was -- is, of course, in the Outdoor and to support the very strong third quarter that we'll see.

And you're right, we actually made some improvements in terms of days and dollars in most of our other businesses.

But again, servicing the businesses very well at those lower levels.

Okay, great.

Congrats, again.

Thank you.

And next we'll move to Jim Duffy with Thomas Weisel Partners.

Hello, everyone.

Good morning.

Morning.

A follow-up to Liz's last question.

So, typically, adding [those] retail and streamlining inventory work against each other, can you elaborate on some of the things you've done to take inventory out of the model?

How we've been able to reduce inventories?

Yes.

Well, one of the factors is the business -- and we've referred to it earlier, the business is done on a flow replenishment basis.

I mean, that just gives us a very, very good read in terms of what's happening at retail and the product that we need to keep in stock.

And it allows us to overall lower our inventory levels and lower the safety stock levels that we might otherwise have to carry, so -- go ahead.

Is it fair to say that your retailers have made progress in managing their own inventory as well, and the flows are healthier across the supply chain?

Well, again, it comes and goes a bit, as we talked about earlier in terms of the retailers performance.

It's as much driven by their anticipated demand.

But working more closely with the retailers in terms of what's working and what's moving at retail on the replenishment basis has a lot to do with that.

One of the things I'd add to that is -- and it makes us very unique in this industry -- is our heritage as an operating Company and a manufacturing Company.

And as we've moved now to much more of a brand marketing Company, we still have that capability of managing the entire supply chain.

We have one of the most flexible supply chains in the world, and it allows us to do things that at our retail partners, as well as many of our competitors, can't do in this environment, because the main thing about managing inventory is not just how much you have at retail, but how much do you have through the whole pipeline.

And that's where we are extremely well engineered and set up so that we have the right amount of inventory throughout the entire supply chain, and we act very quickly to what's being pulled through.

So it gives us a huge advantage from a margin standpoint in this industry, versus people who just don't have that type of heritage.

Good.

Certainly your cash flow guidance implies strong working capital management.

Right.

On the Lee® jeans front, I'm hoping you can elaborate some on this.

Where are you in terms of the revitalization of this business?

You mentioned intent for a ramp in advertising in Q3.

Was some of the bounce back in that business a function of increased advertising in Q2?

Is it improved product assortments?

Any color you can provide would be great.

Sure.

As most people on the call would understand, we've had some issues with Lee® for quite awhile, and we really have been talking for about a year about things we're doing to address them around new product and new marketing.

And we've been working on that for awhile, and we talked about improving that business this year.

What you saw in the last quarter was retailers loading in inventory based on the strength they think our new products have, and in anticipation of the marketing that launches in August.

So the stores were getting set, and that's why our business was up 11% in the quarter.

We do expect revenue growth in the third and fourth quarter in Lee®, but not at the 11% level, though we do expect Lee® to grow in 2006 and we'll be very pleased if that's the way it works out.

Okay so I guess we should be watching sell-throughs closely to see how the replenishment business might be going?

I can assure you we are.

We will be as well.

Congratulations on a great quarter.

Thank you.

Robert Samuels with JPMorgan will have our next question.

Hi, good morning.

Morning.

When you look at your retail opportunity over the next few years, which brands do you see have the greatest potential for store growth?

And then you commented before on the potential to increase your store base on more than 400 stores over the next couple years, does this include additional acquisitions or do you think the store base can grow through your existing brand?

Sure.

The brand with the greatest store growth in our plans is the Vans® brand.

We started with the largest platform, but most of those stores were California-based.

You've heard me comment that our comp store sales were up 50 % in the quarter.

It was a similar number in the first quarter, so if you got a format and a brand that you're delivering comp store sales of 50%, you'd be wise to get on that and open a lot of stores, and that is our number one branded priority.

The 400 stores that we talked about opening, that's a global number and that's across all of our brands.

So, you do -- for example, Nautica® just opened two stores in India in the last month.

That number does not include acquisitions.

That is our plan for the brands that we own today, and the global expansion over the next four years.

Thank you.

Thank you.

And next we'll move on to Todd Slater with Lazard Capital Markets.

Thanks very much.

Very impressive quarter and first half, actually, really strong.

Thank you.

Just on the Jeanswear side, if some of the upside was from an inventory build, what's sort of the sustainable growth ra -- I mean 6% was a really break out quarter there.

What's a sustainable forward growth rate for that business looking forward?

We've talked about our target for our Jeanswear business is low single-digit growth.

That's the target that we set out, and that's what we expect from our Jeanswear business this year.

And you're right, this is a strong quarter, partially driven by response to the turnaround in Lee®.

Okay and but you still see Lee®, the outlook there more muted for the second half on Lee®?

I'm sorry, I couldn't hear all your question.

If your question was do we see growth in the second half for Lee®, the answer is yes.

But more mu -- a more muted than the second quarter?

Yes, it will not be at that rate.

Okay.

And in Intimates, any insight on sort of the new launches in the departments or some changes of Vanity Fair® and Lily®?

Our objective for this year for Intimates has really been about stabilization, and we've been talking about that pretty consistently.

Our goal for this year for Intimates was to stabilize this business, which had been in pretty big decline, and then focus on new product launches and initiatives for spring 2007n and really work hard on getting that right.

We'll be showing the spring 2007 initiatives to the retailers next month at market and really can't comment on how -- what the response will be at this point, although our team has worked very hard to accomplish the stabilization this year, and we are seeing that stabilization.

As we've commented, we expect the business to be about flat with slightly improved operating margins in the second half of this year, and we're looking for much stronger results next year.

Okay and then lastly, Mackey, you've really got the Company on a great track.

What keeps you up now?

What are the concerns you have looking forward, if any?

What are the major concerns that we have?

Yes.

Well, obviously, we will be affected by the economic trends, global trends, but those are the types of trends that we've been having for the last 11 quarters where we've had 11 consecutive record sales and earnings.

We expect that to continue, and so as a result of that, you will see some ups and downs from month to month in this industry, as we always have.

But what we feel extremely good about is the fact that we are able to help our retail partners manage through those cycles, keep their inventories in good shape, manage it down when you see the consumer spending slowdown a little, and then ramp it back up quickly when it picks back up, as it always does.

So we expect to see some ups and downs over the next 12 months, but we expect to have very strong sales of our brands and products as we go through that period of time.

We are transforming our Company into a very different type of Company, along with any transformation, as there are issues with heavy spending behind marketing at particular times, ramping up new capacities as we're doing with major new distribution centers.

You see short-term impacts of that, but I gotta tell you, overall we feel extremely good about where the Company's positioned and our ability to deal with the environment, and we feel very positive about where we'll be going as we go forward over the next couple years.

That's great.

Thanks, best of luck.

[OPERATOR INSTRUCTIONS]

And next we'll move to [Jisum Park] with Merrill Lynch.

Hi, I'll filling in for Virginia Genereux.

I just a quick question about the Vans® comps, which are up over 50%.

I wanted to ask what was driving those.

Is it higher ASPs or is it something else?

Sure.

The Vans® team has done an all around great job with that brand.

It's work that they've started on several years back to shore up the brand, to differentiate the product categories by channel, and to invest in a new look for the retail stores, which they tested for a couple years.

And we're rolling that out now. so what we have going on in their stores is a bunch of good things going on all at once.

We've got a brand that's strong and relevant in the marketplace.

We have a product team that's delivering superior new product, not only to our own stores but to our wholesale customers, as well.

And we have stores that have been reconfigured -- reformatted and in a more relevant way after a couple years of testing, so new format, great new products, strong brand and that's all coming out to 50% comp store growth.

Great thank you.

And if I could just ask another quick question.

In terms of the 17% EPS growth in Q4, can I ask what the upside is coming from, whether it's primarily revenue or margin driven and if there's specific categories that you see more growth in?

Yes.

This is Bob.

Our gross margins will be stronger in the fourth quarter, and there are a number of Items and our SG&A spending will be more comparable in that fourth quarter to last year's fourth quarter.

In terms of our Intimates business, as we've talked about, we expect to see improved profitability there.

We've talked a little bit about inventories.

Last year at this point in time we were working to bring our inventory levels down a bit and taking some downtime in plans to do that.

We don't have the same piece this year, as well, so there just are a number of factors, but overall we expect to see strength really across the board and again an improved performance in our Intimates business.

Great.

Thank you.

Sure.

And we have no further questions.

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

Okay.

Thank you very much for joining us today.

We feel very good about the transformation of the VF Corporation.

And that will conclude today's call.

Thank you for your participation.