威富公司 (VFC) 2006 Q3 法說會逐字稿

Good day and welcome to the VF Corporation third 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.

Thanks, Laurie.

Good morning and thanks for participating in VF Corporation's third quarter 2006 earnings conference call.

By now you should've received today's press release.

If not, please call my office at 203-682-8200 and we'll get you a copy immediately following the call.

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

Before we begin, we'd like to remind participants that certain 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 from the forward-looking statements.

Important factors that could cause the actual results of operations or financial conditions of the Company to differ are discussed in the documents filed by the Company with the 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 earnings call and webcast.

We're obviously pleased to report another record quarter in both revenues and earnings.

In fact, this marks our 12th consecutive record quarter.

I'm very proud of the accomplishments of the themes across our brands and businesses.

Certainly the retail environment remains as challenging as ever, so our performance this quarter, and indeed this year, is a testament to the excellence of their efforts.

This quarter included a number of positive highlights, which I'll review briefly before turning the call over to Eric Wiseman and George Derhofer, who will provide some perspective on our coalitions performance, and Bob Shearer, who will touch upon the financials.

Now in terms of the highlights, first we're very pleased to see growth coming across all our coalitions and it's all organic.

Our outdoor coalition clearly has the strongest momentum, but a third of the revenue growth achieved during the quarter was generated from our other coalitions.

We've talked in the past about the importance of investing consistently behind our brands to stimulate growth.

And it's very gratifying to see these investments paying off in such strong results across the board, both top and bottom line.

We're also very pleased by the much better than expected increase in earnings per share.

We experienced a strong surge in sales across most of our businesses during September that was well above of what we had anticipated, driving an 11% increase in EPS rather than the 6% that we originally forecast.

In the release, we noted that we opened 21 retail stores during the quarter, bringing our total to 560.

We continue to see very good performance from our stores, with our retail sales up 17% in the quarter.

Our Vans® and The North Face® stores has comp store sales increases of over 20% during the quarter, while Nautica® comp store sales were up about 7%.

We continue to believe that retail stores will be an important component of growth for our lifestyle brands, and look forward to opening an additional 20 to 25 stores in the fourth quarter.

Building off our strong third quarter, we're raising off our guidance for the year, which marks the third increase this year.

Previously we indicated a 7% revenue increase for the year and now we're expecting growth of 8%.

Hitting this goal will bring us above the $7 billion mark in revenues for the first time in our Company's history.

This is particularly noteworthy, when you consider that our last milestone, $6 billion, was reached just two years ago.

Earnings per share were previously expected to be up 10% and we now expect an 11% increase.

Some of you may question why we upped our full-year earnings per share guidance by only $0.05 when we beat our third quarter guidance by $0.09.

The answer is that, in fact, some of the sales and earnings expected in the fourth quarter shifted into the third quarter.

So far in October, our business has moderated to more normal levels from what we experienced in September, and this is also a reflect in our fourth quarter outlook.

We do continue to look forward to a very good fourth quarter and a strong finish to the year.

Now to provide more details about the coalition's performance I'll turn it over to Eric Wiseman.

Thanks, Mackey, and good morning, everyone.

Starting with Outdoor.

You'll note in the release that revenues jumped by 25%.

We're absolutely delighted by the strength we're seeing in our outdoor brands, both domestically and internationally.

And the good news is, we believe there's much more to come.

The North Face® brand continues to show impressive year-over-year revenue growth of more than 30%, with solid double-digit growth in both our wholesale and retail businesses.

Now this is hardly due to easy comps.

The North Face® brand sales were up 23% in last year's third quarter, which, as you know, is a big quarter for the North Face®.

And I'm pleased to say that we expect this momentum to continue.

The North Face® spring 2007 bookings are up over 20% in both North America and Europe.

And we're seeing a similar story of Vans®, where the wholesale and retail businesses were both up more than 20%.

The initial read on Vans® new apparel products and mid-tier stores is excellent.

Our products are clearly hitting the market with our targeted consumers across all levels of distribution.

And the fact that Vans® spring bookings are up 47% in North America and over 20% in Europe certainly gives us confidence that the brand has a lot more room for growth.

We're also feeling very good about the performance of some of our smaller outdoor brands, namely Reef®, Kipling®, Napapijri® and Eastpak®, all of which demonstrated solid growth in the quarter and all of which have excellent prospects for continued growth.

Turning next to Jeanswear.

Another growth story here, both domestically and internationally.

The strength in our domestic jeans business was across the board, with our mass market, specialty and Lee® businesses all growing around 6% to 7%.

Now the total domestic revenue is a bit lower, 5%, reflecting the absence of sales from the Arrow Jean brand, which we sold in the first quarter of this year.

Our mass business benefited from strong September sell-throughs as Mackey discussed earlier, as well as new programs including our new Wrangler® line of shirts.

The turn around in our Lee® business, which we started to see in the second quarter, has continued in the third quarter.

We're seeing strong sell-throughs in our women's programs, due to updated products and a significant marketing investment.

Lee® is one of the world's great authentic denim-based brands and we think we have a great opportunity to build on this momentum.

And we're also seeing strength in our Lee® brand in Europe, where sales were up about 10%.

In Europe, Lee® has introduced the Lee® works of denim line, which is based on the brands work [inaudible] heritage, but reflects contemporary styling.

It's a very strong brand equity of our Lee® and Wrangler® brands in Europe, combined with the premium product offering, gives us a great growth opportunity for retail stores in Europe.

Two new Lee® stores opened in the quarter, one in Paris nd one in Antwerp, with two additional stores slated for the fourth quarter.

One additional Wrangler® store is planned this quarter, which will give us a total of eight Lee® and Wrangler® stores in Europe by the end of the year.

I should also point out that we have a long established base of owned-retain in Lee® and Wrangler® in Latin America.

We currently have 29 stores there.

And as noted in the release, we're seeing very good growth in international markets, such as Mexico, Russia, and Asia where we achieved double-digit growth in the quarter.

Last, we're especially excited for our prospects in the growth of India.

You may recall that during the quarter we announced the formation of a majority-owned joint venture with Arvind Mills in India, which should support 20% plus growth in our jeans business there for many years to come.

In our Sportswear coalition, each of our businesses, Nautica®, John Vavatos® and Kipling North America® achieved higher revenues in the quarter.

We're pleased that our Nautica®-branded business is up 4% in the quarter, particularly given the consolidation that has taken place in the department store channel.

Our Nautica® woman's initiative is moving forward with a limited test this fall.

Our customers' reaction to the spring line has been quite positive, resulted -- resulting in an expanded number of doors next year.

So we do expect the line to gain momentum as we progress through 2007, Our Kipling® brand is just getting off the ground here in the U.S. in both its wholesale and owned-retail business, but it is growing at a double-digit rate.

This is a great brand with distinctive products, that is joying -- enjoying real momentum in Europe, and we think it has great potential here in the U.S.

Turning now to our Intimates coalition.

We were pleased to see a turn-around on the top line this quarter, with a revenue increase of 5%.

We saw particularly strong performance in our department chain store business, led by successful and new product introductions in both our Vanity Fair® and Lily of France® brands.

And our private brands business has strengthened, as well.

Our mass business is stabilized, with very good results in our Bestform® and Curvation brands.

We also achieved growth in our international business, particularly in Mexico, and in our European boutique business.

Now while we're pleased with our performance in the top line, we've had to provide for distressed inventory in the third quarter resulting in depressed margins.

But we feel good about our efforts to revitalize our product development process and are optimistic about our new product offerings for the spring and summer 2007 season.

Now, to say a few words about the impressive performance in our Imagewear coalition, here's George Derhofer.

Thanks, Eric.

This was a terrific quarter for Imagewear, with increases in both our image and our licensed apparel businesses.

During the quarter, we rolled out our new ESPN game day product line in specialty and sporting goods channels.

We also signed a number of national exclusive contracts in the uniform business in both corporate and government accounts, which should provide some very good growth opportunities for the future.

On the global supply chain front, there's a tremendous amount of activity going on.

This is especially true in our growing Outdoor business, where we are putting in place the distribution capacity and systems to help that team execute those growth plans.

In addition, we continue to improve our balance sourcing model through selective moves to better align our capacities in lower cost and category-right geographies.

At the same time, we continue to make progress toward our $100 million fuel-the-growth cost saving, despite some inflationary pressures, as evidenced by the continued rise we see in our gross margins.

Thanks, George.

Now we'll hear from, Bob.

Thanks, Mackey.

Just a few comments.

Starting at the top, as you see revenues grew by 12%.

That's above our prior guidance, with the better than expected results driven by our Outdoor, Jeanswear and our Intimates business.

Our Sportswear and Imagewear businesses both had good quarters, with performance above -- about in line with our expectations.

As Mackey mentioned, almost all of the growth in the quarter was organic.

The gross margins continue to rise, and were 42.3% in the current quarter compared with 42.1% in last year's third quarter.

We're continuing to benefit from a change in our sales mix, the result of a strong growth in our Lifestyle businesses, which typically carry higher gross margins and the benefit of our fuel-the-growth cost reduction programs.

Operating margins declined a bit in the quarter to 15.1% from 15.8%, as we continue to invest in growth.

We're making investments that will benefit future top line, as well as bottom line gains.

These investments cover a wide range of growth initiatives and they include higher advertising spending behind our marquis Jeanswear brands, Wrangler® and Lee®, and also support behind our Nautica® women's sportswear line.

Now also impacting margins in the quarter are expenses related to capacity moves in Jeanswear and the ramp-up of a new Outdoor DC here in the U.S., both of which will benefit margins in future periods.

Now looking at full-year results for 2006, we continue to expect some modest improvement in both gross margins and operating margins.

Interest expense declined in the quarter, reflecting lower borrowings as well as rates, while the tax rate was 32.7% compared to 33.7% in the prior year's third quarter.

Now this quarter's tax rate reflects the favorable impact of NOL utilization.

For the fourth quarter, we expect an effective tax rate of between 33.5% and 34%.

And that brings us to net income and EPS, both of which hit record levels again this quarter.

EPS rose 11%.

It's about in line with the total growth and revenues achieved in the quarter, and well above our previous guidance of 6%.

Weighted average shares outstanding are down a bit from prior year levels, reflecting the share repurchases in prior periods.

Two million shares were repurchased during the first six months of 2006, and no additional shares were purchased during the third quarter.

Turning now to our balance sheet.

You'll note the spike in accounts receivable.

Well, that relates to the very strong sales gain we had in September.

It also helps to explain the lower-than-normal cash flow from operations in the nine month period, which will, of course, improve in the fourth quarter, as these receivables are turned into cash.

As mentioned in the release, we continue to expect to generate approximately $600 million in cash flow from operations this year, another very strong year from a cash flow perspective.

In terms of inventories, you'll note the increase in the period was only 2%.

That was well below the 12% increase in revenues the quarter -- in the quarter, and below our sales projection for the fourth quarter.

And yet, our overall service levels remain quite strong.

And then finally, we continue to have great flexibility in our balance sheet, given our debt to total capital ratio of 24.3%, Clearly we have ample leverage to deploy, should we find an attractive acquisition candidate.

We continue to have a very active pipeline of opportunities that we're exploring, but we'll remain patient for the right opportunity for the right price that meets our strategic and financial criteria.

Mackey?

Okay.

Thank you, Bob.

And thanks to the many VF associates across our business units for another great quarter.

We'll now open it up for your questions.

[OPERATOR INSTRUCTIONS] We'll go first to Liz Dunn with Prudential.

Hi, good morning, can you hear me?

Yes.

Congratulations on a good quarter.

Thank you.

Just a couple of questions.

First, on the Intimates inventory, if sales growth accelerated, you know, what's behind the distressed inventory?

What's that really do?

Hey, Liz, it's Eric.

How are you?

Good, how are you?

Good.

Yes, that's a good question.

The reality is that the inv -- the programs that we were launching earlier this year and into summer were not as successful as we'd hope.

So we came through that period with excess distressed inventory and that's what was provided for in the third quarter.

Okay.

Second question.

Where were the biggest surprises relative to September sales from a coalition standpoint?

You know, which division really exceeded your expectations in September?

Almost all of them did, but particularly in the Outdoor and Jeanswear categories.

Okay.

And then final question, can you share with us how many doors Nautica® women's will be expanding into to for spring '07?

We're an anticipating about a 50% increase in doors, which will take us from around 100 doors to around 150 this spring.

Okay, tremendous.

Once again, congratulations on just a phenomenal quarter.

Thanks, Liz.

Our next question is from Bob Drbul with Lehman Brothers.

Hi, good morning.

Hey, Bob.

The first question that I have is can you talk a little bit about how the retail stores are performing?

I guess the margins and if you're getting a lot more comfortable with the performance and opening up more-accelerated stores?

Bob, I can -- I'll speak to the margin standpoint and maybe Eric wants to speak just to the overall, you know, numbers.

But from a margin standpoint, yes, our margins -- our margins are good.

Overall, our margins are very representative of what we see across VF Corporation.

In some cases, a little higher.

I'll tell you one of the other things that we track very, very closely are the returns and, once again, we're very pleased with the returns.

So, right, we are -- with these strong lifestyle brands and the strength that we're seeing in these retail stores, yes, we are getting more comfortable.

And Bob, this is Eric.

On our the -- on our roll out plans, I've been trying to guide you guys as to what we're doing, but it is complicated.

Because we are obviously more aggressive rolling out concepts that are proving to deliver a good return to our shareholders, to Bob's margin point.

And we have concepts that are in the very early stages of testing.

The best way I can describe that is, the Vans®, which is clearly working.

We're getting strong comps and great profitability.

We're rolling out Vans® stores as quickly as we can find the right real estate.

On the other end of the spectrum, in North America, for example, the Napapijri® stores, where we've just opened two stores in the last 90 days and we don't have, yet, the right product assortment and the right in-store merchandising, and the right promotional case.

We don't have that figured out.

That's why we've opened two stores to test.

In all of that mix, between those two ends of the spectrum, you should expect us to open between 75 and 100 doors a year across VF for the next couple of years.

That's where we're targeting and we're moving faster on the better developed concepts at this stage and investing in some new ones, as well.

Okay, great.

And one question for George.

Can you talk a little bit about the performance of the NFL business as we're entering the season?

You mean the Pittsburgh Steelers, Bob? [LAUGHTER] Specifically?

Don't count us out yet, Bob.

And the NFL business, seriously, is off to a terrific start for us, as is our baseball business.

Our baseball by has been very strong and we're very, very excited about the NFL season.

We're got some great teams in there and we're off to a great start, and we've got some wonderful products we're delivering this fall.

Great, thank you.

Congratulations.

Thanks, Bob.

And we'll go to Omar Saad with Credit Suisse.

Thanks, good morning.

Morning.

Can I -- can I have you follow up, Mackey, on some of the comments you made at the beginning of the call about revenues and some of the business being pulled over in the quarter from the fourth quarter?

What I'm trying to understand is how much of your -- the change in your outlook for the fourth quarter -- I think last quarter you had indicated, you know, expectations for a 17% earnings growth number and today you're talking about a 13% earnings growth number.

How much of that is from pulling by forward to any sort of fundamental change and your kind of -- your feelings for how the businesses are going to be and how strong the consumer's going to be in the holiday season?

This is Bob.

I'll start on that.

One of the things that took place had to do with our Outdoor business.

There is a bit of a mix change in the fourth quarter.

So let me say at the front end, no, there's no fundamental change that's taking place within our business.There is a bit of a mix [inaudible].

As you know, we're starting up a very, very large distribution center in [Vasali] related to our growing Outdoor business.

At the beginning of the quarter, we were a little more cautious about our ability to get the product out. but we did.

You know, we did a great job in terms of getting product through that distribution center, a bit better than we anticipated, frankly.

Now, there were some expenses that were incurred to get that product out, but service to our customers is very, very important and we thought those expenses were obviously well worth it.

So, what took place was we did pull some sales that we anticipated at the beginning of the quarter into the third quarter and out of the fourth quarter.

So, again, there's a bit of -- and though are very profitable sales for us.

Most of it is the North Face® sales.

So there's a bit of a shift in mix going on in that fourth quarter, so nothing other than that.

excellent, thanks.

Also wanted to ask you about the Jeanswear business.

I mean -- you know, I think 6% growth each of the last two quarters, versus -- it's a nice change from the prior trend lines.

Is there any -- can you elaborate on what's changed in that business?

Is it just a Lee® turn around or are you kind of seeing a different way customers are viewing your product across brands?

I think our -- our biggest struggle the last couple of years has been Lee® and our biggest improver this year has been Lee®, so that's numerically into the biggest contributor to the turn around.

But [Ard's] whole Jeanswear team has dialed into a formula for running their business that is very consumer centered.

They really do understand who shops in their channels with their customers for our brands, and they're doing an excellent job of delivering products to them that matter.

And it really comes down to that consistent blocking and tackling.

That's the simple answer.

Okay, great.

And then, one last question to actually follow-up on Bob's question on the retail business.

How are you finding the dynamic of balancing the -- you know, as you really kind of push more and more on the retail side, the dynamic of balancing the owned-retail business and your relationships with your customers and the wholesale channel.

Are you finding that you need to differentiate the product in one channel versus the other, or that you're having any issues with your retail partners?

Our retail strategy is fundamentally about building our brand equity and enhancing our wholesale business.

What we're trying to do is build these brands and make them more relevant to consumers.

Feature them in a way and present them to consumers in a way that our wholesale partners do not and cannot do.

And we're finding that, in general, that improves our business with our wholesale partners, and we do, occasionally, have some differentiated product, but not necessarily all of the time.

Excellent.

Congratulations.

Thank you.

Thank you.

We'll go to Jeffrey Edelman with UBS.

Thank you good morning.

George, I got to ask you, are you stuck with any New York Met t-shirts?

We have a couple left that we'll sell to you, Jeff. [LAUGHTER]

Okay.

On a more serious note.

Eric, as we look at your product mix that you're going to ship in the first -- in the fourth quarter and your orders for first quarter, is it conceivable you could get a similar pull forward of business into the fourth quarter or the product mix is just completely different?

Is that a generic question, Jeff, or a specific coalition question ir --?

I'm sorry, as it related to Outdoor.

No, I wouldn't expect -- there is a seasonal transition there that, you know, as we move towards spring that we generally don't see a big pull forward from the first quarter into the fourth quarter.

Okay.

Secondly, we saw one of your competitors has been struggling in the mass merchants.

Have you been getting additional shelf space on existing items that you've got in the store?

Is that a Jeanswear question?

Yes, I'm sorry.

Yes, we are getting some growth in our space in the channel, partially in our core denim business and also through new initiatives, like the Wrangler® shirts program.

Okay, good.

Thirdly, Bob, could you give us an update on your $100 million expense reduction program and where we stand in terms of offsetting that with some of the other investments?

Well, Jeff, we're on track, As we said previously, we felt for '06 that, you know, we'd be seeing about $20-30 million of benefit.

All along we've been saying that our fuel-the-growth initiatives are more back-end loaded, given the nature of some of those projects; for example distribution and that kind of thing.

So yes, we're right on track and as we indicated in the release, we've -- you know, we took the opportunity in the third quarter to do -- to take a couple actions related to capacity. which are part of that program.

So no, we're right on track.

Okay.

Great.

Thank you.

We'll take our next question from Brad Stephens with Morgan Keegan.

Hey, good morning, congratulations on a very strong quarter.

On the first quarter call you talked about investing another $20 million in Lee® advertising.

Can you talk about where you're at?

Did you ramp that up a little bit? and how has the Lee® business reacted to the increased advertising?

Yes, Brad, that investment, that $20 million was not all Lee®.

It was really across the board; however, we did up the investment behind the lee® brand in the third quarter.

That was -- once again we talked about investments in the release.

That was one of those pieces of the investments.

More heavy against the jeanswear brands and specifically Lee.

And how should we think about that going forward?

Are we kind of in a steady state now with that, or will that continue to ramp?

Well, the reality is, as long as we continue to see the kind of results that we are from those kinds of investments, we'll continue those investments.

If it drives the same type of top line gains that we've been seeing, we think they're the right investments to make.

We've been permitted a new marketing return on investment s that we very carefully analyze these investments to see what kind of return we're getting, and as you [technical difficulty] certainly funding the increased investments and we tend to continue to ramp up some of these [technical difficulty].

Okay.

Second question.

Nautica® Europe, where does that sit at right now?

Very early stages of development still and it is moving forward.

We just restructured our our team over there and identified a leader for our -- what is it, a Sportswear grouping of companies that includes Nautica® and Napapijri® and Kipling®, and that team is moving forward and we expect that business to continue to grow.

Is there any difficulties with positioning the brand over there, as it relates to how it's positioned here?

Or is it pretty much the same positioning?

It's pretty much the same positioning.

We know what we're earning, what the right product assortment is for Europe.

Clearly there are differences, not only between Europe and the U.S. but within Europe.

And that's a learning process that we're going through, but we're learning and moving on.

All right.

Thanks.

Thank you.

We'll go to Virginia Genereux with Merrill Lynch.

Thank you all.

And Eric, congratulations on your appointment to the board.

Thank you.

Maybe for Bob or anyone, Let me ask you, listening to what you said about the flow of sales in the quarter and the strength in September, I'd expected margins to be even a little better in the quarter, understanding that you're making some of these investments.

So, Bob, can you maybe go into a little more detail on what the new Outdoor DC is costing you, and when you say capacity moves in jeans, what do you mean by that?

Yes, Virginia, the -- number one, just to start with and a little bit of ref -- from a reference standpoint, you recall what we said in the quarter, we expected 8% top line and 6% bottom line.

That was our guidance.

And, of course, that included -- that included the investments, excluding the capacity actions.

Those we did because we had the room to do it.

In terms of the impacts, yes, there was a higher spend in terms of distribution.

It costs us about 40 basis points in the quarter. , you know, just to put some perspective around that.

Again some of the other pieces, for example, the capacity actions were similar to that in terms of reconciling the margins.

So, again, when you look at last year's margin and then this year's, those are the kind of pieces -- the advertising spend, as well, was one of those factors.

First is being pressure on the bottom line.

We were able to keep EPS in line with our strong top line growth.

Okay, Bob.

That's very helpful. 40 bips of capacity actions is over $8 million.

What is that, can I ask when you say capacity action?

In terms of the capacity actions?

What does that mean?

What are those?

Well, they were just that.

In terms of our Jeanswear, sourcing and manufacturing area, that's what they related to without being too specific.

They're the kind of things that will give us, as we said in the script, they're the kind of things that will give us the benefit as we look forward in terms of cost reduction.

Yes, sir, I'm sorry, they're offshoring or is this part of the?

Well, it was mostly domestic.

Okay, mostly domestic, and those are expenditures to sort of reduce domestic capacity effectively?

Right, that's correct.

Okay.

Which obviously gives us efficiencies going forward.

Okay.

Thank you.

And then on the -- how about the new DC, Bob, if you -- on the Outdoor side.?

When you say it also costs us more to ship the product, can you give us a sense of magnitude there?

But, you know, you were meeting demand, jakes sense to me.

Well, again, most of the -- in terms of what we just talked about in terms of the 40 basis points, that's really what we're referring to, that is the magnitude.

That was mostly the U,S, DC.

What we're doing right now, Virginia, is again we're in a ramping up situation.

As we're ramp up, that means we're ramping up the technology, as well.

What we did to get the product out was we put more manual effort toward that.

And that was the additional cost.

And again, we obviously did that knowing exactly what we were doing in terms of the additional spend, but meeting our service requirements for our customers.

So that was -- that's exactly how we looked at it.

That makes a lot of sense.

But the capacity actions, 40 bips was both in denim and Outdoor, you're saying?

Well the capacity were primarily denim, the distribution was primarily outdoor?

But that's all in the 40 bips together?

No, sorry the 40 basis points is related to the capacity action and there's another 30 basis points related to the distribution.

Now you're helping me, Bob.

Okay, yes.

Okay, I'm getting it now.

Okay so that's, that's very helpful.

And the DC, the 30 bips on the DC si -- on the outdoor side, that is -- that's in excess of what it would have been previously and that's the kind of thing we could expect would not necessarily be anniversaried?

That's correct.

That will begin to ramp down.

And as a matter of fact, from that distribution center as we go forward, as we talk about fuel-the-growth initiatives, it's one of the areas where we expect to actually to see efficiencies and cost reductions from where we were.

Okay.

Great.

If I were to -- then just stepping back kind of bigger picture.

If you guys are going to be at -- Mackey, to your 14% goal comment, if you're going to be -- yes, you'll be, I don't know, 12.8 or so this year, the way you get to 14 -- or maybe if you guys can just sort of update us on what are the businesses that are still running below that threshold and what's above that might have additional opportunity?

Sorry to go on so long.

Virginia, one piece, of course, is the Intimates business.

That's one of the businesses that's been lower and we've clearly discussed that in the past.

And then in other businesses, as we're -- some of our acquisitions are still in their early stages and we obviously see the ability to improve the profitability of those businesses.

Now as we always say, a new acquisition could impact our progress toward that move toward the 14%.

But all things being equal, those are the kinds of things that will contribute to that movement.

So the stuff that's below that threshold, Bob, is still -- it's Vans® , it's the other -- the Napapijri®, Kipling®.

It's all the Reefs® conceivably, what else is below that?

It's some of the new businesses, and that's why the 14% is our objective as a Company.

But obviously, almost every acquisition we make is far below that one when we make and it's one of the reasons we're able to afford to make of the acquisitions we do [technical difficulty] bring it up.

But as we continue to make additional acquisitions, you would expect to always see some businesses below it that we are increasing [technical difficulty].

But our objective and our plans when we make an acquisition is to target that as an [eventual] within five year goal of accomplishing that.

And we're working towards that with each one these.

Yes, sir.

And then --

We're making good progress with each one.

You're doing a great job.

Mackey, I'm sorry, just one more for you.

How do you feel about the organic?

Is this year's organic growth rate, is that sustainable, you think, through next year?

Our goal continues to be 4% organic and 4% through acquisitions, giving us 8% per year.

That's what we're targeting.

We feel like that is clearly sustainable.

We obviously feel very gratified about what we've accomplished this year.

We've gotten some great results out of the investments we made.

And I mentioned earlier, the marketing return on investment and also our brands in our businesses have done a very in-depth consumer segmentation study and work in understanding how far the consumers of each channel of distribution will go from a fashion standpoint.

We think their product lines are more relevant to the consumers that shop in their particular channels than ever before.

So, as the consumer goes into shop, as they did in waves in September, we benefited very greatly from that increase in consumer spending.

So, we're a little concerned about overall consumer spending and making sure we don't overcommit to that going forward.

But as they spend, we feel like we're really going to get our share.

We're very comfortable with the targets we have for organic growth.

Thank you.

Okay.

Our next question comes from Jim Duffy with Weisel Partners.

Thank you very much.

Most of my questions have been answered.

You guys are doing a great job.

Maybe I'll focus on the international opportunity a little bit.

Which of the coalitions do you see the most opportunity, both near term and from a longer term perspective?

We're having trouble hearing you, it's a little muffled.

The question relates to international.

In which of the coalitions do you see the most opportunity, both near term and over a longer term perspective?

the two coalitions -- Jim, this is Eric -- that have the biggest businesses and are growing the most right now are our Outdoor and Jeanswear business.

In western Europe, you know, we have a big Jeanswear platform and we have an owned Jeanswear business in China and a new joint venture in India.

And we think our Jeanswear has a lot of potential in China and in India and potential in South America, as well.

Outdoor, that portfolio of brands is in different stages of development internationally, and we see great potential there, in the same regions in western Europe as well as China and India.

Eric, what inning do you see yourself in relative to the Jeanswear business in the international market?

I'm sorry, Jim, I'm going to ask you to repeat that.

I couldn't hear it.

What inning do you see yourself in in terms of the Jeanswear business in your international markets, particularly western Europe?

I -- we're really struggling to hear you.

I understand you're asking about Jeanswear in western Europe, but I'm not sure what you're asking.

I'll drop off, sorry.

That's okay, sorry.

Our next question comes from Todd Slater with Lazard Capital Markets.

Thanks very much.

Good morning.

Morning.

Trying to get a sense of the quality of the earnings growth in the quarter.

The EPS is up 11% and it looks like there's $0.03 from lower tax rate, so the operating line was up about 6% from what I can, and some [bunches] of benefits of the shifts and flow through from 4Q to 3Q.

There was some [for-X] benefits.

I'm just wondering if you could give us a sense, excluding some of the capacity issues you mentioned and other costs in investment spending, what's sort of the core -- what should we consider for the core of the business in the quarter?

Todd, I think the best way to look at it is this way.

When you look at -- when you look at the profitability -- in other words the margins within each of the coalitions.

For example, you'll note that the Jeanswear margin was down a bit.

That difference is totally explained by the kinds of things that we talked about.

Number one, the significantly higher advertising spend and also the capacity actions.

When you look at Sportswear and you see the difference there, as well, that difference is fully explained by the investments that we're making in the women's launch.

So the point is that the margins -- and, of course, the outdoor margins were quite strong and were able to absorb the higher spend in distribution.

So in terms of -- when you look across the board in terms of quality of earnings, what we're saying is that those margins were at or above the prior year -- the prior year level, so the quality is high.

You're right, there are a number of items that are taking place within the quarter.

But again, you know, we see those as great investments to make for us looking forward.

But I think that's the best way to look at it.

Comparable at or above where we're at last year without those investments.

Is there any way to sort of quantify the incremental investment spend in the quarter?

Well, again, we did to some extent, just did in terms of -- you know, we looked at it in terms of reconciling the margin in terms of basis points.

It's safe to say that the difference between the 15.8% operating margin last year's quarter and the 15.1 is clearly totally due, and then some, to the -- to these kinds of investments.

Okay, and then how much of the -- you talked about the shift from fourth quarter to third quarter, what was the amount you think shifted into revenue and how much of that do you think shifted into flow through to the operating --?

If you do the math from last -- our guidance from the last quarter to this quarter, you'd see that the top line is down just a bit.

It's not a big change, it's less than 1% in terms of that shift.

In terms of the bottom line, obviously, as Mackey talked about earlier, we picked up $0.09 and increased the year by five, so that would indicate that there's about $0.04 worth of change in the fourth quarter.

Again, though, what I need to point out here is that what we're talking about is a very strong quarter and one that's very much in line with where we've been.

We're talking about a 13% increase in earnings per share for the fourth quarter.

Right.

So yes, it's moved around a little bit, but when you look at the quarter -- the third quarter, the fourth quarter, and the second half, it's a very, very strong picture.

Okay, great.

Thanks, that was helpful.

[OPERATOR INSTRUCTIONS] We'll go to Gabrielle Kivitz with Deutsche Bank.

Morning.

So we're hearing from department stores and even seeing it that they seem to be focusing so much more on improving the intimates area,specifically, which has been an area that seemed to have been undermanaged.

Can you just talk about maybe what you're hearing from them and how that affects you?

I'm sorry, could you repeat the first part of your question, Gabrielle ?

Sure, just that we're hearing and seeing that the department stores, particularly, are going more aggressive after improving the intimates area and that's been so undermanaged for such a long time.

Just wondering if you can comment on what you're hearing from them in terms of their initiatives to go after improving that area?

Okay.

Thank you.

I absolutely think, and it sounds like you agree, that there's an opportunity for the department stores to have a more relevant presentation of intimate apparel to their consumers.

We and others in the industry are certainly encouraging that and are trying to support that, within store investments, as well as with having the right products there for them that speak to their consumers.

So, it is an opportunity and the industry's working on it.

Thank you.

And we have no other questions at this time.

Mr. McDonald, I'll turn it over to you for any additional or closing comments.

Okay.

Well, thank you very much for joining us.

Obviously, we feel very good about the growth drivers that we have in place and how they're increasing our shareholders value.

Thanks for being with us.

This does conclude today's conference.

Thank you for your participation.

You may disconnect at this time.