威富公司 (VFC) 2007 Q1 法說會逐字稿

Good day, and welcome to the VF Corporation first quarter 2007 earnings release conference call.

(OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to David Griffith.

Please go ahead, sir.

Thank you, Gwen.

Good afternoon, and thanks for participating in VF Corporation's first quarter 2007 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 call.

Hosting our call this afternoon is Mr.

Mackey McDonald, Chairman and Chief Executive Office of VF.

Before we begin, we'd like to remind participants that certain statements included in today's remarks and the Q&A session may constitute forward-looking statements within the meaning of Federal Securities Laws.

Forward-looking statements are not guaranteed, and actual results may differ materially from those expressed or implied in the forward-looking statements.

Important factors that could cause the actual results of operations or financial condition of the company to differ are discussed in the documents filed by the company with the SEC.

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

Good afternoon, and thanks for joining us today as we discuss another quarter of record revenues and earnings.

I feel very good about our results and remain focused on continuing the momentum for the balance of the year.

Driving organic growth has been a key theme of VF since we initially launched our growth plan, and I'm pleased that we continue to see the benefits of our brand-building efforts.

As noted in the release, we achieved organic growth of 12% in the quarter.

After taking a slight break from acquisitions last year, we've added two new brands so far this year, Eagle Creek and Majestic -- which, combined with our new joint venture in India, add another 3 percentage points of growth to our first quarter revenues.

We're especially pleased by the top line results we're seeing in both outdoor and jeanswear.

[There is also] the imagewear, which is benefiting from its Majestic acquisition and positive performance in its licensed apparel business.

Sportswear, namely Nautica, is off to a slower start this year for a couple of reasons that Eric will touch on in a moment.

But as indicated in our release, our full-year expectations of midsingle digit growth for our sportswear coalition remain intact.

All in all, we remained very confident about our prospects for this year, which is why we we are increasing our guidance for both revenues and earnings per share.

Previously we were looking for revenue growth of 8%.

We're now targeting 12%.

About half the increase is due to our recent acquisitions and the rest is upside coming from the strong performance we're seeing in our outdoor coalition.

In terms of earnings per share, we're also targeting a 12% increase, up from 10% previously.

We do continue to expect some expansion in our operating margins, but at the same time, our acquired businesses are not yet operating at our target margin rate.

So there's a slight negative impact to operating margins this year from our acquisitions, particularly in the second half of the year.

Clearly we see the potential to improve the profitability of these businesses and based on our experience with previous acquisitions, we're confident we can do so.

Looking forward, as I mentioned before, we're focused on continuing our momentum.

I would summarize the areas of focus for VF for 2007 as follows.

First, we're committed to maintaining the momentum in our organic growth.

Our brands are strong.

We have a full plate of initiatives in place for future growth.

And we're investing behind them to ensure their success.

We're committed to maintaining a healthy level of investment behind our growth initiatives.

We could certainly pull back on these investments and see a pickup in our operating margins, but as long as we're seeing this kind of organic growth, this is a tradeoff we're more than happy to make, particularly given how strong our overall margins are.

Having said that, a second focus of ours is continuing to push for ways to fuel the growth in order to enhance our margins.

We're on plan with our $100 million cost reduction program that we initially announced in 2004 and we're always looking for additional cost reduction opportunities.

A third focus is acquisitions.

We're off to a good start this year, but the environment for deals is still tough.

We remain very active in this area and are confident that we'll continue to find and add more great brands and businesses, provide platforms for future growth.

And last but certainly not least, we're committed to putting our cash to work for our Shareholders.

Acquisitions remain a priority.

But we're also actively repurchasing our shares, using the $386 million in proceeds from the sale of our intimates business.

As the year progresses, we will continually evaluate the best uses of our cash to benefit Shareholder returns.

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

Thanks, Mackey.

Starting with Jeanswear, we are absolutely delighted by the 8% top line growth experienced in the first quarter.

As you saw in the release, our international business had the strongest growth, up 14%.

But we also had a strong 5% increase in our domestic Jeanswear business with both Lee and our mass market business up in the quarter.

Lee and Wrangler are also performing well internationally.

Lee's benefiting from new premium products.

We're seeing good initial sellthroughs on Wrangler's new premium female line called [Glubela].

We continue to selectively open Lee and Wrangler stores in Europe, with stores being added this quarter in Amsterdam, London and Madrid.

Our joint venture business in India is growing rapidly as is our business in Asia.

On the domestic front, our efforts to revitalize Lee are clearly working, particularly on the women's side, where consumers' reception to new products has been quite strong.

On the mass side, strong replenishment business in men's jean was the primary revenue builder in the quarter.

In turning next to to outdoor, our outdoor team's performance, both domestically and internationally, has been amazing.

We're particularly pleased by the fact that our growth is coming from nearly all of our brands, not just one or two.

Let me give you a quick rundown of our global growth rates of our key brands in the quarter.

First, our fastest-growing outdoor brand, Napapijri, up 60%, followed closely by Vans, up 59%.

Both Reef and Eastpak were up 37% and finally, the North Face, up 28%.

These gains are the result of having very clear and globally consistent brand positioning, outstanding product, and passionate teams that are executing the growth plans brilliantly.

Each brand is aggressively and successfully pursuing new avenues for growth including geographic expansion and new product categories.

We are very excited about the continued prospects for growth we see going forward from all of our outdoor brands.

I should also point to the exceptionally strong increase in operating income and margins in the quarter, with operating income up 66% and margins reaching 15.5%, up 240 basis points.

We're very pleased to see such positive leverage from the sales momentum.

In terms of of sportswear, the decline in revenues and operating income relate to our Nautica business and, while planned, they do warrant more explanation.

We noted in our release a change in ship dates by Nautica's primary customers, which move product shipments from the end of March to the beginning of April.

This is the result of fiscal 2006 being a 53-week year for our customers.

And this shift accounted for two-thirds of the decline in revenues.

We also noted lower sales of of distressed inventory which accounted for the balance of the decline.

Absent these two items, our total Nautica branded business would have been about flat in the quarter.

In terms of operating income and margins, the declines were also planned and reflect the lower revenues in the quarter.

I should also point out that sportswear margins will remain under pressure through the second quarter.

Top line comparisons will improve, but margins will remain below prior-year levels.

As we've stated, we do expect much better comparisons in the second half of the year and our full-year expectations for revenue and margins remain intact.

Now, let's have a word on imagewear from George Derhofer.

Thanks, Eric.

Imagewear sales were up nicely in the quarter, reflecting the acquisition of Majestic and the inclusion of their sales for one month in this year's first quarter.

Majestic also contributed nicely to our first quarter operating income.

We're really excited to become the authentic outfitter for major league baseball.

This deal adds great capabilities and a wonderful team of people and fits both strategically and financially with our long-term objectives.

Otherwise our licensed sports business about as with we expected in a seasonally low first quarter.

Our occupational apparel sales and operating profits were lower in the quarter, due to tougher comparisons to a more robust environment and some large program rollouts a year ago.

In addition, our top line will reflect the previously discussed exit of a commodity fleece business, which did about $24 million in business for all of last year.

We remain optimistic about our overall imagewear business, particularly in the second half of year where occupational apparel comparisons eased and the growth in our licensed apparel business accelerates.

As a result, we expect imagewear to deliver our fourth consecutive year of record sales as we approach the $1 billion threshold.

Right, thanks, George.

Now, let's hear from Bob Shearer on the financial performance.

Thanks, Mackey.

Since Mackey's covered a number of of important points regarding our financial performance already, I'll do a brief recap, add a few details not yet covered.

Total revenues rose 15%.

3% of the increase coming from acquisitions, primarily Majestic.

First quarter is Majestic's seasonally strongest period in both sales and profits, so we are seeing more of a benefit from the acquisition in the first quarter, even considering that we owned Majestic for only one month during the quarter.

Then we'll see in subsequent quarters.

Also, revenues benefited from the stronger Euro during the quarter, which contributed about 2 percentage points of growth.

Our gross margin percent improved slightly in the quarter, reflecting the strong outdoor performance.

Operating margins are in line with last year's level.

As I've indicated in the past, I'd caution that you that our changing business mix and other factors like the timing of investments in any given quarter may impact the quarter's comparisons in a way that's not necessarily indicative of what we would expect to see on a full-year basis.

For the full year 2007, we continue to expect operating margin expansion despite some impact from our recent acquisitions that are currently below VF's average margin.

In fact, as we said previously, our core business's operating margins -- in other words, excluding new acquisitions -- will approach our overall 14% margin target.

Now, you'll note that our income tax rate was about a full point higher than last year's quarter.

Last year's rate benefited from a tax credit, whereas this year's rate is more normal and indicative of what we expect for the year as a whole.

Income from continuing operations rose 13%, while EPS from continuing operations rose 11%.

The difference in the growth rate stems from having a higher number of average shares outstanding during the quarter compared to last year, a result of a high level of stock option exercises last year.

So to summarize those factors impacting the EPS increase, foreign currency fluctuations benefited the quarter by $0.05 per share.

However, offsetting that benefit was, one, the increase in the tax rate that I just touched on.

That cost us $0.02 in the quarter.

And then secondly, the higher share count carried into the year impacted the quarter by $0.03 per share.

I already mentioned that the tax rate in the quarter is indicative of what we expect for the full year.

The higher tax rate expected in 2007 reflects the fact that tax credits were realized in 2006 that are not expected to recur in 2007.

Now, in terms of shares outstanding, we expect that by year end 2007 -- not taking into account our intent to use the intimate sales proceeds to buy back shares during the year -- our outstanding share account should be about 1.5% lower than year-end 2006 levels.

Now, regarding that share buyback, 2 million shares were repurchased during the first quarter, representing the initial part of our planned buyback resulting from the intimate sale.

We now expect to repurchase the balance of shares under this buyback commitment by the end of the second quarter.

In terms of our balance sheet related to the cash comparison, keep in mind that we completed the sale of our intimates business the day after our first quarter ended.

So the proceeds of the sale are not reflected in the balance sheet for the most current period.

Total cash receipt from the transaction, as Mackey mentioned, was $386 million.

Related to inventories and accounts receivable, both balances were impacted by the acquisitions that occurred during the quarter.

Excluding balances of newly acquired companies, inventories increased by 11%.

That's comparable to organic revenue growth in the quarter.

Related to accounts receivable, on a similar basis -- that is, excluding the AR of newly acquired businesses -- the increase in the quarter was 15%, reflecting the strong sales growth during the quarter and particularly so in our international businesses where payment terms are substantially longer than those of our U.S.

businesses.

In fact, international sales increased by 30% during the quarter.

Our cash generated from operations was negative for the quarter and that's typical for our first quarter as we build working capital service our strong quarters ahead.

We continue to expect that we will generate about $625 million in cash from operations for the full year, and our debt to capital ratio remains low.

Now, as Mackey mentioned, we're certainly looking at ways to leverage our strong balance sheet and cash flow that will be in the best interest of our Shareholders.

In terms of our guidance for the second quarter, we're looking forward to another very strong quarter of topline growth with revenues expected to be up 14%.

We're also looking for record earnings with EPS expected to rise 8%.

As we plan to support the strong growth of the second half of the year, our SG&A expenses of this seasonally low quarter will represent a higher percent of sales than other quarters of the year.

And that brings us to a very strong year in total for VF.

We expect revenues to reach the $7 billion mark, representing a bit above the 12% increase and an EPS increase for the year of 12%.

These results will be supported by continued strong organic growth, a portfolio that is better positioned for long-term growth, positive contributions from acquisitions, and a balance sheet that gives us tremendous flexibility.

We continue to have very strong momentum at VF.

We'd now like to open it up for your questions.

(OPERATOR INSTRUCTIONS) We'll go first to Omar Saad with Credit Suisse.

Congratulations on a very great quarter.

Thank you.

Wanted to ask you, Mackey and Eric -- are you guys transforming here into a growth company?

I mean, the organic growth you're putting up has been unbelievable and looks like you're looking for another great year even if you back out the acquisitions.

Are you reevaluating the metric you've used historically, 8%, total top line growth, half and half organic versus acquisitions?

Our targets currently are 5% organic growth.

We've increased that a little bit.

And about a 3% increase in our acquisitions.

So we're still shooting for 8%.

As we look out, as you all probably know, there's a little bit spotty performance at retail -- some retailers performing well, some not so well.

We think that it's going to continue.

That's what we built into our plan -- somewhat spotty performance at retail.

But we're basing our numbers on what we think we can achieve through share increase, as well a good solid position with the stronger retailers.

So we feel good about the 8% growth that we're targeting.

Do you feel like it's more in your control as you bolster your own retail business, and how you think about that?

Well, that certainly does increase our control.

But it's still not a major percentage of our business.

We still do a lot of our business through our retail partners and at the same time, we feel like our strategies are matching up with their strategies as they look for better solutions to some of the issues they have.

We feel like we have some opportunities to be a bigger part of their business because we feel like we have developed a number of consumer sciences -- the marketing sciences -- that allow us to analyze consumers and their needs and how much fashion they're looking for in each channel of distribution, each retail outlet.

So we feel like those types of decisionmaking tools are going to help us have the right product at the right place at the right time and increase our sales.

Excellent.

And one last question, if I can switch gears a little bit.

In terms of Vans and the phenomenal numbers it's putting up, is there something happening in the surf/skate market that you're seeing?

Or is it just outperformance relative to the competition?

Our Vans business was strong all -- most of last year.

And it is certainly strong in the first part of this year.

I think we are in a good segment of the apparel industry with Vans in the surf/skate market and those brands tend to be performing well.

Our Vans business -- I think it's outperforming some of the competition.

Also, just in fairness, last year in the first quarter, we struggled to deliver Vans in Europe as we changed our distribution model.

And we're coming up against slightly easier comps in the first quarter last year in Europe.

And the good news is we delivered well this quarter -- caught that up.

Thanks, great job.

Thanks, Omar.

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

Hi, good afternoon.

Hi, Bob.

Eric, a couple of questions for you.

On a Nautica business, can you give us an update in terms of door count, in terms of where you ended the spring?

And also can you just maybe elaborate a little bit about the women's business so far?

Sure.

Our Nautica business at retail -- this is absent the discussion about the timing of shipments and all those administrative technicalities -- we are in with our men's sportswear business a few more doors this spring than we were last doors.

It's not a material number of doors, Bob.

In those doors that we're in, our comp store growth rate in the men's sportswear business was in the midsingle digits for the quarter, which is about what we expected it to be.

So, we're in a few more doors, comp store growth in the midsingle digits.

The performance of the brand in men's sportswear from a consumer takeaway standpoint is right on our expectations for the quarter and for the year.

That's kind of our year outlook.

To women's sportswear, as you know, we introduced it last fall in a very few doors to test the waters with our product assortment that we introduced.

We learned a lot from that.

We knew we did not get it right and our hope for this fall is that we could incorporate our learnings from last fall and get placed in more doors -- take the next step, get placed in more doors for fall of 2007 and that's where we are.

We have increased our door right about to our expectations.

And we're hoping that a more casual traditional oriented women's sportswear line will do better this fall than it did last fall.

Okay.

And another question on Vans, can you talk a little bit about the apparel footwear mix that you're achieving in Vans and the progress that you're making on the apparel side there?

I wish I had those numbers for you, Bob.

I don't have them off the top of my head.

It is still largely a footwear-driven business though we are clearly making progress with our apparel line, both in our core skate channel, as well as in our own stores, and the programs that we've introduced in the midtier have also been successful.

But the vast majority of the revenue of Vans is still footwear oriented.

One final question on the outdoor business.

The North Face -- are the increases that you're seeing there still almost comp door increases or have you increased the distribution of of that brand significantly?

We have not increased the distribution of the brand significantly.

If you look at the 28% increase that we had in the quarter, almost all of of that would come from increases in revenue in the door -- obviously we had slight door increases but not material, Bob.

Okay.

Thank you very much.

We'll go next to Kate McShane with Citigroup.

Hi, good afternoon.

Afternoon.

I was wondering if you were going to talk about winter '07 backlog numbers for the North Face today.

I am not prepared for that question at the moment.

I will tell you that our guidance for the North Face brand for the year has been the kind of growth rate we had in the first quarter.

And our forecast for the year is right on that mark.

So we're expecting a strong fall from North Face.

Okay.

And what is your outlook for the jeanswear business in the mass merchant channel now for the rest of the year?

Can we expect the continued strength in the men's replenishment business or do you see any other upside in specifically the mass merchant channel for jeanswear?

We had a particularly strong first quarter in our mass business.

And some of that was making up for a weak fourth quarter last year, if you recall the last time we were together on a call.

You know, we had a few stumbles in the fourth quarter in our mass business and we said at that time in January that it was picking back up.

And it did in fact pick back up.

Our expectation for the mass channel jeans business is to have low single digit increases and we reforecast our business every month and that's what we expect to see based on our most recent forecast.

Okay.

And then my very last question is -- since the sale of the intimate apparel business, has VF changed its spending yet behind the higher growth higher margin brands?

And if so, how has that changed, or maybe what new initiative could we expect in terms of marketing or advertising of the Vans or Reef brands?

No.

Those aren't linked events.

We have investment plans behind our brands.

And the sale of intimates hasn't affected our investment levels in our brands.

Okay.

Thank you.

You're welcome.

We'll go next to Jeffrey Edelman with UBS.

Thank you, great performance.

Three short questions.

One, did any of the other divisions experience the same request to postpone deliveries that you experienced with Nautica?

It was really a department store-driven event.

And Nautica is the majority of our department store business, particularly in the first quarter.

So it was really a calendar change from our department store customers and it's almost all Nautica, Jeffrey.

Secondly, was much of the Nautica sales growth replenishment or was most of that on an order basis?

A healthy mix of both.

Nautica introduced the Deck Shirt this quarter.

And it is one of our best product introductions in a few seasons.

The team worked very hard to find a brand-appropriate iconic product for the Nautica brand.

And it has been their strongest spring product introduction in years.

So we shipped in a lot of it to begin with and we're getting some replenishment business off of it.

Okay.

Eric, I'm sorry.

I was referring to the North Face.

I'm sorry.

The North Face first quarter is such a small quarter.

Was your question about replenishment, in North Face for the first quarter?

Yes.

There's really not a big replenishment business in the North Face business, period.

And that would be even why that this would be in the first quarter, Jeff.

Okay, great.

And finally, are we looking at any further product line extensions for Wrangler within the mass channel?

I believe that's been helping out your growth a bit.

We are trying to extend the Wrangler brand in the mass channel.

We've done that with tops and this fall, we're introducing the Wrangler outdoor line.

But from a relative standpoint, they're pretty small compared to the size of our jeanswear business at this time.

But it's great that the brand can be extended in that way.

Right.

Okay, thank you.

Thank you.

We'll go next to Brad Stephens with Morgan Keegan.

Congratulations on a great quarter.

Couple of questions for you.

When you talk about your 40 basis points of operating margin expansion, can you tell us in what categories we should see maybe a little bit above that, and what categories are probably not getting up to the 40 basis points of expansion this year?

Yes.

The jeanswear business will see some improvement.

Outdoor will see some improvement.

Sportswear will be relatively flat as well as imagewear overall per year.

This is on a full-year basis.

Okay.

Second question, probably for you as well, Bob.

Some of the European guys talked about in March how their business really improved because of weather, et cetera.

Could you talk about how your business trended throughout the quarter in Europe?

And then second, in addition to that, what are are you looking for the remainder of the year for what's embedded in your guidance?

When you talk about the international business, you're talking about jeans and outdoor?

Everything.

Did business pick up a lot in March or just solid throughout the whole quarter?

Actually, it was solid through the the quarter.

Both our jeanswear businesses as well as our outdoor businesses as you probably know -- and maybe particularly in jeanswear -- has been strengthening quite a bit.

But still, to your question, in the first quarter, we saw strength actually through the the quarter.

Okay.

And relative to the Euro, right now, we're still -- and could be a little bit of upside here to our year as a result of this.

But we're still forecasting at the 130 to 131 level.

Right.

Sorry.

I was just going to say, we understand where the Euro is right now but looking at the year, hard to project, so we're using the 130 number.

Fantastic.

And last but not least, the two businesses you acquired during the quarter -- can you discuss the long-term potential there, and maybe how long it will take for both of them to get up to the operating margins?

To get their operating margins equal to what their divisions are running?

The overall operating margins for those two businesses for the full year will be in the area of 8%.

So again, that's why we talked about the impact on the full-year operating margin maybe being about 20 basis points.

Okay.

And relative to those businesses again, these are the kind of businesses that we are looking to acquire.

We clearly see the gross margin and operating margin improvements.

We think that within a two to three-year period, those businesses will be very close to our overall 14% target.

All right, thanks.

We'll go next to Virginia Genereux with Merrill lynch.

Hello.

And thank you.

Maybe Mackey and Bob and Eric, let me ask you this.

The top line grew 15% this quarter.

And you're actually going to see more help from your acquisitions, particularly in Qs 2 and 3.

Why the slowdown in revenue in these upcoming quarters?

Why just 12% for the year?

What happens, Virginia, is it has a lot to do with the overall size of any given quarter.

So what we're seeing now in the first and second quarter -- and the second quarter, for example, is our seasonally lowest quarter of the year -- and also, particularly in the Majestic case, which is by far the larger acquisition -- it is a much stronger first half.

Now, especially first quarter of the year, but first half business.

So we see that bigger impact on lower overall sales numbers.

And as we get into the second half of the year, again sales aren't quite as strong in those acquisitions as they are in the first half.

And they're against bigger overall sales numbers.

So that's what takes place.

Okay.

But I guess you have offsetting that, you're still talking about a ramp down to 12% for the full year, which means the rate of growth in some of these quarters has got to be slower than that.

And Eric talked about the outerwear, the outdoor coalition rate of growth.

You're still going to have a little bit of help and you had 12% underlying -- you had 12% organic growth this quarter.

So I guess, can you tell me maybe by coalition, what's slower than it was in the quarter?

One other factor, Virginia, was the Euro in the first quarter.

That was strong for us as well.

As we look throughout the year, obviously with the rate increase that occurred throughout last year's latter quarters, we don't get a lot of benefit from the Euro like we did in the first quarter.

So that's also a factor.

Right, but your sportswear business was down.

Sportswear and imagewear were down in the quarters after the acquisitions.

Has the rate of growth versus last time you spoke to us changed in any of the coalitions, may I ask?

As we said, when we looked at the full year and the improvement or the increase to the $7 billion, a good chunk of that comes from acquisitions.

But versus our prior guidance, obviously some of that is coming from organic growth as well.

So we said $180 million, about, that comes from the acquisitions so the remainder is in fact coming from organic growth.

Okay.

But you -- Cindy, I can take this up with you later, too.

Just slows more than I would expect.

Secondly, Bob, may I ask, on the currency side, what's the mechanism whereby currencies are $30 million of revenue help and $0.05 of EPS?

There's so much more -- it's a bigger contributor to EPS than I would expect.

What's happening there, may I ask?

Referring to the first quarter?

Yes, referring to the first quarter.

We forecast the currencies, we know it's going help your top line, but it was more than I would expect on the EPS line.

I don't know of anything that's really unusual relative to that.

What caused the biggest part of the increase was the gap between the Euro last year and this year.

Is it hedge rate, Bob?

No.

It's totally translation.

It's only translation.

It's a pretty high margin on that increment of sales.

And again, these are are in businesses that carry very strong margins.

Okay.

Your pension expense, I think you said in your K, is going to be about $25 million lower.

But you recognize on the income statement.

Where do you guys record that?

It's throughout the coalitions.

Okay.

It's attributed to each coalition, okay.

And then, lastly, Eric, maybe for you, can you tell us Vans and North Face -- can you, without divulging too much, size those businesses for us?

Maybe what percent domestic and international generally speaking, and what do you see?

What do you see as the growth drivers there?

Is it new categories?

Is it retail doors?

If you could prioritize the growth drivers.

I don't think we give guidance on the size of those businesses but I will try to direct you some to the mix of them.

The North Face business is about 70% domestic and 30% international.

And the Vans business, when we acquired it, I know it was about a third in (inaudible) stores, a third domestic and a third international.

And I think we're having relatively consistent growth in the U.S.

and overseas.

The growth of those businesses is coming through slightly different formulas.

Vans, we said at the time of the acquisition, we think has an apparel growth opportunity.

And we're at the early stages of executing that.

And we haven't had any stop signs waved in our face and we're continuing to execute.

We do this up pretty cautiously and we're out.

We built the Vans apparel program first, where we needed to build it first, which is with their core skate customers and then (inaudible) stores recently, last fall, introduced small programs in the midtier channel.

And the Vans footwear business, as I said to an earlier question, has been the primary driver.

Vans also has an existing substantial retail business.

The retail business domestically is about the same size as the wholesale business and has terrific potential to grow, we think.

The North Face, a lot of that growth has come from category extension and just terrific product execution.

They have terribly connected to their core consumers and they continue to develop great outerwear product.

And extending to sportswear and now footwear and also becoming much stronger dual gender than they were five years ago.

So all the way around.

Does that help you?

That's great.

Can you tell me what the gender mix is for North Face?

I know in outerwear and sportswear, it's about 50/50.

That's great.

Thank you all so much.

Thank you.

We'll go next to Brian McGough with Morgan Stanley.

Thanks.

It was a great quarter so I hit to nitpick with a negative.

But a question on the margins in your jeanswear business.

I still think you guys make a fair amount of at least your lower-end Jeans at your own plants and I would think with an 8% sales pop you would get better utilization and higher margins.

I still think you guys make a fair amount of at least your lower-end jeans at your own plants and I would think with an 8% sales pop you would get better utilization and higher margins.

Brian, and the first quarter stands out a bit from that standpoint.

In the first quarter, we still had, and I believe we mentioned this in the last call that this would likely take place.

Some impact from the higher inventories that we brought into the year.

So we talked about the fourth quarter the last time we got together and indicated there could be some carryover effect as we continue to work down those inventory levels.

So that really is the impact that you're seeing in this first quarter.

And as I said earlier, as the year goes on, we expect that to -- it will improve as the year goes on.

We don't expect that to continue into the second quarter.

So the comparison should get better.

And how are your own inventories in your denim business?

Again, much more in line today.

Our inventories are in pretty good shape.

Days are getting down where they need to be.

Great.

Okay.

Thanks a lot.

You bet.

We'll go next to Jim Duffy with Thomas Weisel.

Hi there, guys, congratulations on a great quarter.

It's actually Christian, Jim is traveling right now.

Had a question on sort of the timing of bringing those acquisitions up to the corporate averages for operating margin.

Is that an '08 time frame or an '09 time frame or beyond that?

I'd say '09.

We'll get this year under our belt, we'll get a full year in '08, and by '09 we should see those kinds of numbers.

Okay.

And then I had one other question about sort of the mix at the North Face sportswear versus outerwear.

If you could give a little bit of color on that, I'd appreciate it.

Outerwear by far is a much larger component of the North Face business than the sportswear piece.

Now, the sportswear piece has been a growing piece for sure, but it's still significantly smaller than the overall outerwear business.

Is it okay to think of it in terms of the 20% to 25% range, or --

I'd say that's reasonable.

Yes, that's a reasonable estimate.

Where do you see that going over time?

Well, we do think that it's one of the areas that we have a larger opportunity.

And we've talked about it in the past in terms of share of Duffel and it was one of those areas that we just weren't getting our share, actually.

So we knew we had a big piece of our core consumers' outerwear.

But again as we used the words in the past, when they were off the rock, we weren't getting that share.

So, it continues to be a significant opportunity for us.

All right.

Thank you very much.

We'll go next to Eric Tracy with BB&T Capital Markets.

Good afternoon.

I'll add my congrats as well on a great quarter.

Most of the questions have been asked.

But just a couple, focusing on margins.

Maybe Bob or Eric, if you could talk about particularly the outdoor category now, sort in that midteens, as both the North Face and Vans really come online and accelerating their growth as a percentage of your mix.

Have you changed at all your ultimate target for that business from an operating margin or profitability standpoint?

And what do you view as the ultimate potential goal there?

Eric, we have a couple things moving together here.

We mentioned that our margins in the outdoor group in total were up 240 basis points in the quarter to 15.5%.

We'll get into natural margin growth from our volume.

We're also investing heavily in those businesses and we'll continue to invest heavily in those businesses.

If you look at the growth, at the corporation and Mackey's comment about being delighted to have the opportunity to invest in the engine that they're driving our growth, we see the primary role of the outdoor group today to be a growth driver and we are investing in them wherever we can.

So, their primary role here is not margin expansion.

Okay, fair enough.

But maybe just staying on those, both with Vans and the North Face on the retail component -- again seemingly a great deal of opportunity to continue to sort of control your own distribution, particularly in Europe.

Can you talk just a little bit about that both on a company-wide and specifically to those two businesses where you'd see retail going?

I think it's roughly 10 to 15% of the overall mix right now, retail as a percentage of VF sales -- where that potentially could go?

Sure.

We've stated a goal of getting VF's overall retail mix to 18 or 19% of our total.

We ended the quarter with 533 stores.

But you asked about the North Face and Vans and they're very, very different approaches to retail.

Vans started as a retailer.

When the company was founded and has around 150 stores out there.

The North Face on the other hand has around 20 stores.

So they're very different in terms of the overall impact on the total business.

I mentioned in a comment in answer to an earlier question that the Vans retail business in the United States the about the same size as the wholesale business.

That is absolutely not the case for the North Face.

Way we're trying to do is use those strategies first to create terrific strength in our brands and to help our wholesale business.

And we continue to find that when we put stores in markets, our wholesale business gets better as well as we get the benefit of having the retail business and the growth from that and the closer connectivity to our consumers.

Okay.

And I think typically in the past -- I didn't hear it on this particular one -- did you break out Vans comps?

For the quarter on the retail stores?

We did not break out Vans comps and I do not have that number available.

We can get it to you.

And then just lastly again, back to operating margins -- obviously very strong within the outdoor category, sportswear, you talked about the issues there within Q1.

But on sportswear, how do we think about the balance of the year playing out?

I think you mentioned getting back to more normalized levels?

How does that cadence flow throughout the the year?

I believe we said in our comments that in the second quarter, we still see some pressure on the sportswear margins and then of course in the second half of the year, that's where they really do stabilize.

And, of course, we'll see some improvement in the second half.

So that for the full year of the overall margins year to year will be fairly comparable.

And, Bob, what drives that in the back half of the year -- is it just volume?

Volume is a piece of it, for sure.

It is a significant piece.

But we also, we also expect some better performance, frankly, in our own retail of our product and well as in wholesale.

Okay.

Fair enough.

Thanks, guys.

You bet.

(OPERATOR INSTRUCTIONS) We'll go next to Gabrielle Kivitz with Deutsche Bank.

Good afternoon and I'll add my congratulations as well.

Question on the Nautica business.

If I look at it, even excluding the change in timing of the shipping -- still looks like it was well below where I was expecting it to be.

I heard, Eric, you said the men's business or wholesale business was up midsingle digits.

So I'm assuming it was the retail portion that was pulling it down?

Can you just talk a little bit about some of the components in there?

Well, it's hard for me to comment against what your assumptions are.

I said that the men's sportswear business at retail was up midsingle digits.

That was an at-retail number, not a wholesale number but an at-retail number up midsingle digits.

We also had low single digit comp store growth in our own retail.

Okay.

Our wholesale business was down because of the calendar shift with our retailers and reduction in our distressed sales.

Okay.

That's helpful.

Okay.

And then, can you also just help me reconcile with the Easter calendar shift this year pulling business into March from April for many of the retailers -- can you just help us reconcile that with this decision that retailers made, to take later deliveries?

Well, the retailers' decision to take later deliveries was a function of their 2006 fiscal calendar which was a 53-week year, which meant it went one week into February before 2006 closed.

So their first quarter closed a week later in April.

Our quarter closed around the end of March.

So we're a week out of sync with them from a period closing standpoint.

Okay.

That makes sense, thanks very much for the additional color.

You're welcome.

And there are no further questions at this time.

I'd like to turn the conference back over to Mr.

McDonald for any closing remarks.

Okay, thank you.

We had a great quarter.

We intend for this momentum to continue through the year.

Thanks for joining us.

Thank you, everyone.

That does conclude today's conference.

You may now disconnect.