威富公司 (VFC) 2009 Q2 法說會逐字稿

Good day, and welcome to the VF Corporation second quarter 2009 earnings conference call.

Please be aware that today's conference is being recorded.

At this time, I would like to turn the conference over to Jean Fontana of ICR.

Please go ahead.

Thank you.

Good afternoon.

Thanks for participating in VF Corporation's second quarter 2009 conference call.

By now, you should have received today's earnings press release.

If not, please call 203- 682-8200, and we will you a copy immediately following the call.

Hosting the call this afternoon is Mr.

Eric Wiseman, Chairman and CEO of VF.

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

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

Important factors that could cause actual results, collaborations or financial conditions of the Company to differ are discussed in the documents filed with the Company and the SEC.

At this time, I would like to turn the call over to Eric Wiseman.

Thanks, Jean, and good afternoon, everyone.

Thanks for joining us today.

I'll start the call today with a few opening comments, then we'll have Bob Shearer walk through our financial results.

We also have with us today Karl Heinz Salzburger, who is President of our International business, who will provide a quick update on our Asia business, as well as Aidan O'Meara, who is President of our Asia Pacific business, who is going to speak more specifically about China.

Now there's no question that conditions remain very challenging, and our results this quarter reflect that.

Having said that, we remain confident in our business model and strategies, and we do see signs that conditions have begun to stabilize.

We noted in today's release that we are comfortable with maintaining our full year revenue and earnings guidance.

On our first quarter release, we indicated that our second quarter revenue and earnings comparisons would likely be the most difficult of the year, even more difficult than what we experienced in the first quarter.

Revenues were down more in the second quarter than in the first.

However, our earnings decline was in fact less, which we found encouraging, and it's a testament to our focus on controlling costs and reducing inventories.

There were several items in the quarter that I would like to touch upon, particularly as they relate to our key strategic growth drivers.

Let me talk for a moment about the performance of our four largest brands, Wrangler, The North Face, Lee and Vans.

As combined, they represent about 60% of our total revenue base.

Starting with our two big jeans brands, Wrangler and Lee, the second quarter was clearly more difficult for us than the first.

But in the US market, revenues of our two big brands, Wrangler and Lee, were down 6% and 4%, respectively.

But we indicated in our release that second quarter results were not indicative of what we expect for the second half of the year.

There were a number of factors pointed out in the release that were specific to the second quarter that should be partially mitigated in the second half of the year as we roll-out new programs and roll into our important fall core denim season.

We continue to gain share in our biggest core denim businesses, and those businesses are the most important to us in the upcoming season.

In addition, we are definitely seeing signs of stabilization in our European jeans business, and believe that the most difficult comparisons are behind us there.

We are also looking forward to continued strong growth in Asia.

Our two big outdoor and action sports brands, The North Face and Vans, continue to have solid momentum, and are clearly outperforming the market.

To reiterate a couple of facts cited in the release, during the quarter on a currency adjusted basis, global revenues of the North Face brand were up 4%, while Vans revenues rose 14%, with increases both domestically and internationally.

In this environment, those are results we are proud of, and we are.

We continue to support the growth of these brands with investments in new store openings and international expansion.

Of course, retail and international expansion are two significant growth drivers for us.

Our retail revenues grew 4% in the second quarter and first six months of the year.

While we don't normally comment on comp store performance for our stores, I believe it's worth noting that the Vans stores posted positive comp store gains in the quarter, which is why we are investing in additional Vans stores this year.

You'll recall that in 2008, our direct-to-consumer business accounted for 16% of total revenues.

This year, despite deep recessionary conditions, our direct-to-consumer business will continue to grow, and should approximate 17% of total revenues.

So we continue to make progress toward achieving our long-term goal of 22%.

International revenues were down 4% in the quarter in constant dollars and 5% for the first six months of the year.

However, we did see international revenues increase in our Vans, Seven for All Mankind, The North Face and Kipling brands on a constant dollar basis.

You'll hear much more today about our success in Asia, but we are very pleased with the momentum that we have there.

Now, these successes, while gratifying, do not obscure the fact that we experienced steep revenue and operating income declines in most of our businesses during the quarter.

We anticipated this, but that doesn't make it any easier.

However, with this very difficult quarter behind us, we are now looking forward to easier top and bottom line comparisons in the second half of the year.

I should point out that we do not expect improving market trends.

Indeed, unemployment is expected to continue to increase in the coming months, and consumer spending is likely to remain quite depressed.

There has been much speculation about big inventory reductions by retailers and the possibility of revenue and earnings balance later this year for both retailers and wholesalers, if restocking in response to a pick up in demand becomes necessary.

While we believe retailers are doing everything they can to minimize inventory risk in this environment, we believe it's too early to speculate about the effects of a possible improvement in consumer demand.

We will work closely -- continue to work closely -- with our retail partners to keep inventories lean and to protect our profits.

In summary, we believe we are well prepared to navigate our way through the second half of 2009.

The most difficult comparisons should be behind us, and we remain highly focused on achieving our plans for the balance of the year.

We will remain vigilant on cost and inventories.

We will continue to make prudent investments behind our biggest growth opportunities.

We will continue to explore opportunities to add new brands to our portfolio, and we will maintain and protect our balance sheet.

Now, let's hear from Bob.

Thanks, Eric.

I am going to start with revenues, which were down 11% in the quarter, with foreign currency translation accounting for three percentage points of the decline.

Now, our gross margins this quarter rose ten basis points to 43.9%.

We are benefiting from expanding gross margins in our outdoor and action sports businesses, and that's a testament to the strength of those brands.

In addition, our own retail operations continued to contribute positively to the gross margin comparisons.

We were really pleased with the improvement in this area considering the pressures that this environment places on overall gross margins.

SG&A as a percent of revenues rose 180 basis points.

Of this increase, 140 basis points is related to higher pension expense, with the remainder due to our continued investments in growing our retail store base.

That obviously implies that outside of these factors, our SG&A relationships are remaining stable, despite the revenue decline resulting from this challenging environment.

The aggressive cost reduction actions that we initiated at the end of 2008 are clearly paying off.

The tax rate in the quarter was 25%.

That was right on track with our expectations.

We continue to realize the benefit of substantially lower effective tax rates from our international businesses.

For the full year, we anticipate a tax rate of about 27%, and that brings us to earnings per share.

We said last quarter that we anticipated our second quarter would reflect the toughest comparisons for the year in earnings per share.

That implied, obviously, that a decline in the quarter would exceed the 31% reported in the first quarter.

In fact, the decline was slightly less, at 28%.

The improvement came primarily from: One, the strong results posted by our outdoor and action sports coalition; and secondly, better than anticipated results in jeanswear.

Now, related to coalition results, as we did last quarter, we have included a table with the release that provides revenues and profits on an as-reported and constant currency basis.

As to coalition results, I'll begin with outdoor and action sports, another solid quarter year.

Reported revenues were down 2%.

However, adjusting for currency, revenues actually rose by 2%, with increases in both our Americas and International businesses.

The main drivers of growth were our two big brands, The North Face and Vans, where revenues were up 4% and 14%, respectively, on a constant currency basis.

Also as noted in the release, we experienced strong growth in our Asia and direct-to-consumer businesses where we saw revenue increases of 32% and 19%, respectively, for this coalition.

Operating margins in outdoor and action sports were strong in the quarter, rising by more than one full percentage point despite continuing investments to expand our direct-to-consumer business, reflecting the higher gross margins that I referenced earlier.

And looking forward, we expect stronger second half comparisons for our outdoor and action sports coalition, driven by our growing owned retail business, which is seasonally strongest in the second half, and continued expansion in operating margins.

Now turning next to jeanswear.

Eric made a few comments about our Wrangler and Lee brands at the beginning of the call; but just to reiterate what was in the release, total jeanswear revenues in the quarter were down by 12%.

That's again in constant dollars.

However, we are encouraged by the fact that we continue to gain share in our Wrangler Men's, our Lee Men's and Women's, and our core Riders Women's business, driven by the success of new product innovations and shop and shop investments at retail in these brands.

Now there were several factors that affected revenues that were specific to the second quarter.

First was a reduction in certain non-core Riders brand programs, including seasonal and plus size programs.

Now this reduction has the biggest impact in the second quarter, especially related to the seasonal products, and will be less in subsequent quarters.

We also noted a shift in the timing of product shipments, with our customers continuing to tightly manage the flow of products.

And, finally, all of you are aware of the Goody's and Mervyn's bankruptcies last year, which has resulted in a loss of volume this year.

Our conditions continue to be difficult in Europe, but we are seeing signs of stabilization.

In fact, the sharp declines in the Eastern Europe and Scandinavian markets that we discussed last quarter have moderated, and these markets are now seeing declines more in line with the rest of Europe.

Our international revenues declined 12% in constant dollars in the quarter, reflecting difficult market conditions and, to a lesser degree, the ongoing exit of our mass jeans business.

Now a bright spot in the quarter was China, where jeanswear revenues rose 10%.

Despite the drop in revenues and operating income, we did see our jeanswear operating margins improve a bit in the quarter, a benefit of our cost reduction actions.

We do expect better comparisons in the second half of this year than experienced in the second quarter for our global jeanswear businesses, keeping in mind the factors specific to the quarter.

In the first quarter, revenues in constant dollars were down by only 1%.

For the first half in total, jeanswear revenues in constant dollars declined by about 6%.

So comparing first half to second half revenues, we expect that second half comparisons in constant dollars will be more in line, or even somewhat better than those in the first half, and certainly much better than those reported in the second quarter.

On a reported basis, second half revenues should be down at a high single-digit percentage rate.

Now we remain cautious about the outlook for our European jeans business.

We've seen significant declines in retailers open to buys versus last year; and while market conditions have stabilized, they are expected to remain weak.

Having said all that, our brand and product repositioning efforts for Wrangler and Lee in Europe are nearly complete, and we are gaining new distribution.

Despite challenging market conditions, we are well-positioned in Eastern Europe, which we continue to view as a good market for us longer term.

Asia offers outstanding potential, and our business there enjoys not only extraordinary growth but strong profitability as well.

Now a few words about sportswear.

We continue to feel the effects of a very weakened promotional environment in department stores, which is impacting our Nautica brand.

Our retail partners are focusing heavily on value pricing and holding their open to buy for in-season purchases.

A few other factors contributing to the revenue decline were cited in the release, including a planned decrease in special programs in the off price channel, and our exit of the women's wholesale business in mid-2008.

On the positive side, our launch in all Lord & Taylor doors was a success, and our business there is running above our plan.

It's also worth noting there that our Kipling revenues in the U.S.

rose by 3% in the quarter.

Now looking towards the second half of the year, here again we expect to see improved comparisons on both the top and bottom lines.

Reductions in our special program business and the exit of the women's line accounted for over 60% of the decline in first half revenues for this brand.

While our sales of Nautica products to off price channels will be down for the full year, second half comparisons will include an increase in this business, which is already booked, and a lower impact from the exited women's business, as we closed that business in the first half of last year.

And we continue to anticipate double-digit margins as we benefit from aggressive actions taken to reduce both inventories and cost.

Turning now to our Contemporary Brands business, revenues were up 2% -- or 4% on a constant dollar basis in the quarter -- with the increase due to the acquisition of the Splendid and Ella Moss brands.

The acquisition added $16 million in revenues in the quarter.

While all retail channels of distribution are challenging (inaudible) tier department specialty stores have been particularly weak.

In fact, the number much of specialty stores is declining at an accelerated rate; and then a high number of specialty stores that existed at the beginning of the year have been closed due to the tough economic environment.

In terms of the coalition's largest brand, Seven for All Mankind, global revenues declined 12% in the quarter, or 8% in constant dollars.

As noted in the release, the decline in our US wholesale business was partially offset by significant growth in our direct-to-consumer and international businesses.

In addition, we continue to reduce our sales to the off price channel.

During the quarter, our revenues in this channel declined by 25%, and we expect a similar decline for the year in total.

While this loss of revenue hurts our comparisons, we believe reducing our business in this channel was the right strategy to maintain the high integrity of the Seven for All Mankind brand.

Our global expansion strategy for the Seven for All Mankind brand continues to be relevant and show progress.

For example, international revenues rose 34% in constant dollars in the quarter, and our direct-to-consumer business more than tripled in the quarter.

Globally year-to-date, we've opened six retail stores, with a total of 20 planned for the year.

We've tested Splendid and Ella Moss products in several Seven for All Mankind stores with strong results, and we will be rolling these products out to additional stores during the year.

And we will be opening our first Splendid store in LA in the third quarter, as planned.

Now, it was a particularly challenging quarter for this coalition in terms of operating income and margins.

The second quarter is the coalition's seasonally lowest revenue quarter, magnifying the impact of the volume reduction.

And in terms of the second half of the year, we expect strong revenue growth, driven by the addition of the Ella Moss and Splendid brands.

We will also benefit from additional new store openings and continued growth internationally in our Seven for All Mankind brand.

Margins should return to double-digit levels as our inventories will be much better aligned at retail; and accordingly, we should see a lesser impact from customer inventory adjustments.

And finally, a few comments on our Imagewear business.

There's no question that the second quarter was a challenging one for our Imagewear coalition.

With revenues down 19%, with comparable declines in both our image and license sports businesses.

Now as we discussed in last quarter's call, our image business has been hurt this year by particularly high unemployment rates in sectors that have impacted our industrial uniform and protective apparel businesses.

While unemployment rates continue to rise, the rates of increase have slowed considerably.

Our license sports business also had difficult revenue comparisons in the quarter.

The decline in revenues here reflects the weak retail environment, which has particularly impacted sales of discretionary products like team sports apparel.

And while we don't expect improvement in the employment picture in the second half of the year, we do see easier comparisons in both the image and license sports businesses as we anniversary a difficult second half last year that followed a very strong first time half in 2008.

And now on a broader VF scale, Eric touched on retail and international performance.

I should add that we are on track to open at least our targeted number of 70 stores this year, with 17 stores opened in the second quarter and 36 stores opened year to date.

Our balance sheet, liquidity and cash flow continue to strengthen.

In terms of our balance sheet and cash flow, we noted in the release that we had $385 million in cash and equivalents at the end of June, above the $276 million at the end of June 2008.

Our focus on reducing inventories is really paying off, with inventories down 9% from prior year levels.

Reducing inventories will remain a big focus for us in the second half of the year, and we continue to expect that our year end inventories will be down 10%, or by $100 million from year end 2008 levels.

This reduction in inventories is helping to drive strong cash flow from operations, which should exceed $750 million this year.

It bears repeating, too, that our liquidity remains strong, with $1.1 billion available in lines of credit, and no long-term debt payments due until late 2010 -- and then, only $200 million is due.

In terms of our guidance, as Eric noted, we are still anticipating that revenues will decline 5% to 7%, with currency translation accounting for about 3% of the decline.

Last quarter, we also talked about the transactional effects, (inaudible) translational effects of currency on our results.

Now, as anticipated, the major impact was in the first quarter, and we do not anticipate any material transactional currency impact in the second half.

In terms of earnings per share, we are holding to our current range of $4.70 to $5.

Despite somewhat better than anticipated earnings in the second quarter and upside from currency, as the Euro rate has improved from our prior expectation of 130, we think it's prudent to maintain our guidance at this time given the uncertainty and challenges in global economic conditions.

Now with the first half behind us, this guidance implies that second half comparisons will improve over those of the first half.

As Eric indicated in his opening and in the press release, comparisons are expected to improve as we anniversary a challenging second half last year.

In addition, while currency will be less of an impact in the second half versus first, it will be a significant impact in the third quarter considering, first, that this is the biggest quarter in both revenues and profits for our international business; and, second, currency rate differences.

I would also remind you, as you consider your estimates for the third quarter, last year's third quarter included a net benefit of about $0.07 from favorable tax settlements.

Now recall, too, that our fourth quarter results last year were impacted by $0.30 in cost reduction actions that we won't have this year.

So fourth quarter earnings comparisons should be the strongest of the year.

So that wraps up my comments.

Let's hear an update from Karl Heinz Salzburger on our Asia Pacific business.

Thank you, Bob.

Currently, our own businesses are concentrated in the fastest growing Asian economies, China and India, both of which have very good prospects for sustained future growth.

In more mature markets like Japan and Korea, we have more limited direct exposure and we work predominantly through partners, either distributors or licensees.

Most of our brands have a presence in all countries throughout the region [with these brands].

In terms of our total Asia revenue base, it should approximate $300 million this year.

Approximately half is generated in China.

Our two largest business are jeanswear and The North Face, accounting for 45% and 20%, respectively.

With the remainder coming from our Kipling, Vans and Seven for All Mankind brands.

We move from using licensees to building our own platform in the region starting in '95, when we launched the Lee brand in China.

We followed with the launch of Wrangler in 2003.

2006, we formed a majority owned joint venture in India to enable the growth of our brands there.

In '07, we converted our license to North Face business in China to a (inaudible) model.

We also formed a joint venture with Mitsui, for our Napapijri brand in Japan.

Our Vans brand launched in China just last year, with excellent results to date.

And this year, we formed a new subsidiary in Japan for our contemporary brands, and also converted our Kipling business in China from a distributor to an owned business.

During the past several years, we have focused heavily on building our capabilities in Asia, and our effort has paid off with a 44% compound annual growth rate in revenues from '06 to '09.

In terms of our most recent results, in the second quarter our Asia business rose 13% and is up 18% year to date.

The slower growth in the second quarter versus the first when revenue rose 24% is due to the timing of shipments, and we continue to expect our revenues this year to be up about 25%.

Stronger growth we expect in the second half is due to continued strong brand momentum, particularly in China, as we increase our investments in marking for our (inaudible) The North Face, Lee and Vans brands.

Additional door openings and easier comparisons versus last year's fourth quarter when global market conditions deteriorated.

India is an important opportunity for us, as we are taking a more patient approach there as a more organized redistribution network evolves.

We are prepared to accelerate our efforts there when the time is right.

We will also proactively develop our partnerships in all other markets, and see many growth opportunities with our licensees and distributors, particularly in southeast Asia.

We are well-organized to capture the potential in Asia, with great brands and a talented management team.

We are confident that we can ultimately build a $1 billion business there.

China will be the key to our (inaudible) growth; and I'd like now Aidan O'Meara to speak more about this opportunity.

Thank you, Karl.

Our business in China is up 27% year to date, and is expected to be up 30% this year.

We've been growing organically by expanding the footprint for our established brands there, particularly The North Face and Lee.

2009 will mark the first full year for our Vans brand in China, and are very pleased with the traction that that brand has, with results exceeding our initial expectations.

This year in China, we expect to add about 250 doors across our brands, bringing us to a total of 1,000 doors, including counters, by year end, 20% of which we own and operator all in tier-one cities.

Looking to the future, we are focused on achieving market leadership in three key categories: Action sports, outdoor and jeans, where we have strong brands with proven relevance to Chinese consumers.

Over 80% of the growth we are planning in China over the next five years will come from our Lee, The North Face and Vans brand.

At the same time, we will continue to selectively bring other VF brands onto our platform, as we are with Kipling this year.

Thanks, Aidan.

As you have heard, the second quarter was every bit as challenging as we anticipated.

However, we are confident in the VF model, realistic in our expectations for the second half, and we are confirming our guidance for revenue and earnings for this year.

At this time, we will take any questions that you have.

(Operator Instructions).

And our first question today comes from Kate McShane with Citi Investment Research.

Hi, good afternoon.

Hi, Kate.

I was wondering if you could break down how much of your gross margin improvement was during the quarter from mix, and how much was from the new retail doors you opened?

Kate, this is Bob.

In the quarter -- in the second quarter you asked about, right?

Yes, please.

There was about a 40 basis point improvement from retail.

Okay.

Thank you.

And although sales were a bit weaker than we were expecting, margins were much better than we were expecting.

So can you quantify how much cost saving contributed to margins this quarter?

And how should we think about the impact of cost savings for the rest of the year?

Yes, as we said earlier in the year, related to the $100 million, first of all we are still on track to achieving that.

And as we said, and as we were achieving and as we get throughout the year, we are seeing that we are on track -- not only for $100 million, but also you see that relatively evenly split over the four quarters.

So in the first half, you got about half of that.

The second half we expect to get to about half of it; and again, on a quarter to quarter basis, it's pretty evenly split.

So that's been a significant factor.

Things like the pension -- or the increase in the pension expense -- stand out obviously a little bit more in the second quarter than they do other quarters because it's just a smaller quarter.

And any opportunity to potentially find more cost savings in the second half?

Well, again, as we've -- we always have opportunities to reduce our costs.

And I know that many companies might say the first places they are going to go is in the advertising expense area; but that's just -- that's not where we look.

We look in other spots.

So, yes, we could reduce our expenses, but we are working hard to protect the advertising spend.

Okay.

Thanks very much.

Sure.

And our second question today comes from Bob Drbul with Barclays Capital.

Hi, good afternoon.

Hey, Bob.

Eric, I just got on.

There's like one big picture question, and then I have a couple of sort of finer tuned questions.

First, in the press release and when you talked about it a little bit, you talked about some of the signs of stabilization.

When you look at it from the portfolio of the total business globally, can you maybe just give us one or two of your biggest stabilization data points that gives you the most encouragement as you look to the back half of this year?

Yes -- and I know, Bob, you know VF really well, so you know how complicated it is to make statements about all of our brands on a global basis.

Some data points, though.

The health of the Vans brand and the fact that the Vans brand had a good wholesale business globally and positive comps.

Now, the positive comps aren't as high as they were a year ago, but they are running at about the same kind of positive levels for the first part of this year.

So that tells me that there's some stabilization.

We see it in some of our own stores where we were having -- where our trend line has flattened out a little bit lately.

So those are two indications that we have.

And we obviously have a pretty good look at bookings for the fall.

Now, our business is both bookings and replenishment, but the bookings look like people are planning trends to be about where they are today.

Does that help you, Bob?

Planning where they are in terms of the run rate of the second quarter for their businesses?

Yes, the recent run rate for those businesses, yes.

So when you talk about -- I guess same thing -- when you talk about bookings for the sportswear segment, is that down about the same run rate for the back hatch of the year as what you just saw in the second quarter?

And I guess, can you give us a North Face booking for the fall period?

The answer to the question about Nautica is, yes, the bookings are about the same rate we've seen.

The bookings for fall are at about the same run rate as they have been.

I honestly don't know off the top of my head, Bob, what The North Face bookings are for fall.

Okay, and then just on the -- just one more question for me is on the retail business, the direct-to-consumer, when you do talk about all the positives, what's been the biggest disappointment as you guys have gone through the first half of the year on your own retail business?

I'm struggling to think of the biggest disappointment.

I don't think that any of our retail stores are significantly under performing their space.

That means that -- I can't think of our biggest disappointment, Bob.

I mean, because I have to compare them to other specialty retail, and we are not underperforming our competitors in that area; and in most cases we are doing better.

And Bob, to that point, what we said was that we were going to be opening stores on a more cautious basis this year, and in those formats that have proven themselves very successful.

So that to me means we are not doing a lot of testing with other brands.

We are -- again, we're opening stores where the results and returns have been strong.

So no real disappointments from that standpoint.

Great.

Thank you very much.

Thanks, Bob.

And our next question comes from Todd Slater with Lazard Capital.

Thanks very much, and good job, everybody.

When do you think the retail channels will be clean enough and inventory aligned enough where the demand -- you can actually start to see actual increases in open to buy or in order growth?

And perhaps maybe you could look at it from both the US and sort of the rest of world perspective for us.

Thanks.

I can comment -- I think we can comment best on the US picture.

I think that the -- our retail partners -- most of the suppliers, including us, have done a really good job over the last six to nine months to get inventories in line with plans.

And by that, Todd, I mean that our inventories are in line with what everybody is predicting to have happen in the business.

We don't have any situations that I'm aware of where we have inventories out of line and are hoping to work through them before the fall season happens.

Everybody is pretty much where they want to be.

I think the retailers have done a good job with that; and it's reflected some in our revenue line, because they have purchased from us less than they've been selling for awhile to get in that position.

But it's the right place to be.

Our inventories are also in line.

We mentioned earlier we were going to reduce our inventories this year by $100 million, we are on track to do that.

Right, but in terms -- your inventories are in line.

The retailers are maybe getting aligned -- getting better aligned, but they are not yet increasing orders -- or their open to buys aren't increasing.

When do you think they will be at a comfort level where they can start growing orders again.

I mean, Fall is going to be down.

Do you think spring still will be down, but down less?

Or flattening out, or maybe even up?

I'm just curious, what's your viewpoint?

Well, for Fall, I think we are aligned with whatever -- with each retailer based on their plan.

I don't think anybody is going to bet and get out of in front of that.

I think everybody is going to chase, and look forward to it.

So you wouldn't be surprised if open to buys are still down for spring?

I don't know how -- I think we are going to learn a lot about that in the next 90 to 120 days.

Okay, thanks a lot.

And our next question comes from Omar Saad with Credit Suisse.

Thanks, congratulations on a nice tight quarter there.

Thanks, Omar.

Wanted to ask you about the gross margin line.

Really solid number -- I think you're up a little bit.

I know there's some mix shift going on in there, but still up year over year in this environment.

Inventories down more than they were last quarter.

Talk about the sourcings out of the equation, you have kind of some of these retailers out there talking about huge sourcing opportunities with the deflation year over year and the inflation we were seeing last year in the second half.

What kind of opportunity is that for you?

Or are you guys already so efficient that that's not necessarily as big as an opportunity.

I will make a couple of comments there, Omar.

First of all, we didn't see the big increases like some did in the first half of the year, and I think we probably talked about that in the past.

What we are seeing, and built into our guidance, was some improvement in the second half.

So, yes, our costs were down in the second half of the year.

Clearly built into the numbers in the second half of the year, we do expect to see improvements in our overall margins year over year for sure.

So that it keeps us kind of even on a full year basis, which again in this environment we think is pretty strong.

So going forward, we'll see.

We still have a lot of negotiating yet to be done.

But for us -- again, we just never had the big increases; seeing some improvements in the second half, and we are just going to keep pushing on it.

How much of that gross margin improvement is kind of less promotional environment, or is it -- versus kind of a sourcing opportunity?

In the second half, I would say it's a little more heavily weighted to the promotional environment; and last year, especially in the fourth quarter, we talked about some actions that we took to align inventories, and that always costs us as well in the gross margin.

So I would say it's a little bit more heavily weighted to that than the cost side; but costs are a factor.

Okay.

And then a question on kind of the M&A environment, there is -- the Eddie Bauer transaction that has been in the press recently, what the financing out there looks like, how you feel about that?

What -- to any extent you can provide insight on what your thought process was with Eddie Bauer, would be helpful.

Well, related to the financing, Omar -- again, with our credit rating, we are in good shape.

And we have access to financing for sure, and at better rates than most.

So financing really is not -- financing is not a challenge for us.

It's not holding us back from making the appropriate acquisitions.

As a matter of fact, again, capacity is good, and also the rates where they are today also are more compelling.

Is that what you were looking for?

Yes.

I mean, so what is holding you back?

Are you still seeing the same opportunities?

Do you still want to be aggressive or less aggressive given kind of the uncertainty out there?

Are prices still too high?

I would say that we are aggressive.

There are plenty of opportunities; we are actively involved in many discussions.

We obviously pursued the Eddie Bauer opportunity unsuccessfully.

Okay, one last question.

The announcement of the new Board director -- was there an opening on the board, or was that more of a strategic addition, kind of given changing focus of the Company going more international?

Our Board and our nominated governance committee has kind of an ongoing succession planning process where we are always scanning for new candidates, and we added Rick Carucci to our Board today, recognizing that we have some upcoming retirements on our Board.

Excellent.

Thanks.

Great job.

Thanks a bunch.

And our next question comes from Evren Kopelman with JPMorgan.

Thanks, good afternoon.

A question on the jeanswear coalition.

The margins were a lot better than we expected, especially compared to the first quarter when margins were down 400 basis points.

Can you talk about what drove the up operating margins, especially in light of the weaker topline performance compared to Q1?

Hi, Evren, this is Bob.

Sure, the -- it's evidence of the cost reduction efforts; so that's a big part of it, and running the business very, very cleanly, especially from an inventory standpoint.

As you know, excess inventories can really impact the margins in a big way.

We are always quick to provide for any excess inventories, and our cost reduction efforts that we initiated at the end of last year are, as I said in my comments, are really helping us and really paying off.

Okay.

And then a similar question on the outdoor coalition.

Again, margins were up compared to Q1 when they were down, which also is surprising given, I think, last year you had talked about the seasonality of the retail business for the weakness in the second quarter end margins.

Again, can you talk a little bit about what drove the strength in margins in this quarter?

Yes, it's a -- number one, our gross margin is a little bit different there.

Again, we obviously did take a number of cost reductions and cost control actions there as well.

But in our outdoor business, most of that resulted from improvements in our gross margins.

Okay.

And finally what -- for the Euro, what do you assume for the second half -- what rate?

Yes, right now we are assuming -- in our numbers, we are assuming a rate of 137, and that's compared to the 130 number that we previously put out there.

So obviously, that's improved a bit and helping us a bit.

Great.

Thanks very much.

You bet.

And our next question today comes from Jeff Mintz with Wedbush Morgan.

Thanks very much.

A couple of questions here.

First of all, on CapEx, it looks like CapEx was down to about $20 million this quarter versus $35 million last year Q2.

Can you just talk a little bit about where the delta was on that, and what you are looking at for full year CapEx?

Yes, most of it has to do with stores and the timing of store openings.

For a full year -- on a full year basis -- and we said earlier in the year that it was one of the areas that we would also be careful with, be cautious about.

So we expect our total CapEx on a full year basis to be maybe $10 million or $15 million below last year.

So right around the $110 million mark.

Okay, so there is a little bit of a pick up in the second half, then?

A bit.

Okay, great.

And then, you spoke a few minutes ago in response to a question about advertising and maintaining advertising.

Is it basically the intention to maintain advertising as a percent of sales, or to maintain it on an absolute dollar basis?

Mostly on a percent of sales, and we will probably be down about 50 basis points when the year ends.

So our advertising expense as a percent of sales has been running up over the last several years, and we will just back off a bit from that.

But again, only maybe a 50 basis point reduction.

And, yes, that is as a percent of revenues.

Okay.

Great.

Then, Bob, do you have the pension expense for the quarter in actual dollars?

It's spread pretty evenly.

So the $90 million increase that we talked about earlier in the year is pretty well spread evenly throughout the quarter.

What happens is, only because of the lower revenue, it has a bit more of an impact in our overall SG&A relationships.

Okay.

All right, but it's about a quarter of the $90 million.

That's right.

Okay.

Year over year, that's right.

All right.

Great.

Thanks very much, and good luck.

Thank you.

And our next question comes from Robbie Ohmes of Banc of America.

Oh, thanks.

Afternoon, everybody.

Just a couple of quick follow-ups.

The first question -- I might have missed this -- the Vans -- I may have this wrong, and Eric, I guess maybe this is a question for you -- but I think Vans, if I recall, was flat in the first quarter or flattish in the first quarter, and then grew 14%.

Was it mostly same store sales at your stores that drove that, or did you see a pick up in orders from accounts, or did you actually open a pretty good sized new account?

That's one question.

The second question is on the European jeanswear business.

I know business is tough in Europe, but do you have a sense of whether there are any market share competitive issues for Lee and Wrangler over there?

Those are -- I will just stop at those two.

Thanks.

I'm looking for the Vans number here for the first quarter.

I will tell you that the performance of the Vans brand has been balanced, meaning that we have growth in comp stores.

We also have been opening a fair number of new Vans stores, and our wholesale business has been growing.

So it has been a brand that's working for us; and it grew in the quarter in Europe as well, and we launched it in China, though it's small this year.

So I can't think of off the top of my head of a place where we have Vans declining at all.

And Robbie, to your first quarter point, yes, it was down.

It was down a small amount -- a small percentage in the first quarter.

That was driven on the international side; but we are happy to report on the international side, we are really seeing some strength in that business now and it's much improved in the second quarter.

So as a result of the international piece, the US was up in the first quarter.

The second quarter was strong overall, US as well as the international side.

And I'm just -- more to maybe understand just generally what's going on internationally, what was -- what drove that swing in Vans on the international side?

Karl Heinz here answering.

Well, we had a -- as Eric mentioned before, we had a strong result in Asia.

That was one piece.

And we show a stabilization of a relatively weaker Q1 also in Europe -- in the European businesses.

Okay.

Great.

Okay, and then my second question other jeanswear business in Europe, and competition in market share?

Yes, as you know, I would say we are on track in our repositioning effort of Lee and Wrangler.

That's going on as we had planned.

And especially in Wrangler, we saw good results.

We actually won last month the Grand Prix Award in Cannes for the best advertising campaign.

In Wrangler, we are very confident that we see good momentum.

We are getting into distribution where we have not been before.

So Wrangler, I would say, is ahead of our repositioning plan; while Lee, we are on plan.

Great.

Thanks a lot.

Thanks, Robbie.

Thanks, Robbie.

And our next question comes from Paula Torch with Needham and Company.

Good afternoon.

Thanks for taking my question.

I actually have a couple of questions on the contemporary business.

Was wondering if you could give us a little bit more color on the Seven for All Mankind business in terms of the product?

More specifically, maybe talk about what are the most popular fits or styles, if they are the same in the US as they are in Europe; and if you can maybe talk also about the price points, maybe what price point is your sweet spots for Seven, has that changed significantly and does that vary between distribution channel?

Thank you.

I will try to address some of your questions.

I'm afraid I don't have all the information that you're requesting.

The product line for Seven for All Mankind is largely a global product line.

So there is consistency in the style in how we work the brand around the globe.

It's not 100% true, but largely true.

The next comment I would make is about your question about exact fits and stylings that are working well for us now.

I'm afraid I can't answer that.

I just don't know that at the brand level for all of our brands.

I will comment that the average -- there has been a reduction in the AUR, is the only way I know to think about it, of the prices that -- where consumers are buying many of our brands, including Seven for all Mankind.

In this environment, consumers are spending their dollars a little more cautiously.

So we are selling more jeans today in the $150 to $189 price point as a percentage of our total than we were last year, and less in the $200 to $300 price point.

There's been a slide down.

Fortunately, people are -- our stores that we are opening are working for us, and that's proven out to be a good investment and we intend to continue to invest in those stores.

I think that's about everything I know.

Okay.

And just maybe to follow up on that, what percentage of maybe the Seven business is -- I would assume that it's mostly concentrated in that $150 to $189 as a percentage of your total sales, right?

In terms of, I guess, SKU count?

Would that be fair?

Or --

I can't accurately answer that question.

Okay, thank you very much.

Thank you.

And our next question comes from Chris Svezia with Susquehanna Financial Group.

Good afternoon, everyone.

Just a couple of questions here.

I guess first just on the comp, for your Company-owned stores, if you could give me the overall comp number for that second quarter that would be helpful.

I think -- in the first quarter I think it was down mid-single.

I think your guidance for the year, you are talking about mid-single digit decline.

I was wondering if you have any color about the second quarter, how that performed?

Let me check that.

I think it's -- it's very mid-singles.

It's very similar.

It actually improved a bit from the first quarter.

Okay.

So I think you had mentioned that you saw -- I mean, obviously Vans, I think, comped positively you said; and then, I think you said The North Face -- if I'm not mistaken -- comped positively as well, and you saw improving trends in aggregate as you went through the quarter?

Yes, actually, I don't think we said that.

We don't generally provide comps by a brand basis.

We did point out the Vans piece as being positive.

We really didn't talk about any others.

Okay.

Okay, but in terms of the year, you are still looking for a mid single-digit decline overall for your direct-to-consumer businesses?

We are, we are.

Okay.

And then just switching gears for a second, on the North Face, first quarter constant currency you are up 14%.

You are up 2% here in the second quarter.

I know second quarter is not a big quarter for you, obviously; but in the context of this, you went into the second quarter, your backlogs were up, I believe, double digits for The North Face business.

Is that primarily a level of shipments still for the third quarter, or did you see anything going on in terms of the timing of shipments?

I'm not sure I fully got the question.

We are not seeing any significant changes in terms of timing within the North Face business; and I would also remind you that the retail, especially in the second half of the year -- I'm not sure if this is what you are driving at or not -- but does it have a significant impact, as it does in a number of our brands.

So the second half we do expect -- what I did say was we expected the comparisons to be stronger in the second half, and the seasonality of retail has something to do with that, obviously.

Okay.

And then I guess the last question I have here is for either Karl or Aidan.

Just if I caught you correctly, you said the Asia Pacific business is a $300 million business, and you see over time it could be a $1 billion business?

Could you maybe you put some parameters about when that is?

Maybe I missed that, just a point of clarification.

We expect the business to continue at a growth rate of around 30%.

I think we can use that as a benchmark in terms of our expectations as we look out.

Okay.

(Inaudible).

I'm sorry, say that again?

At an annual rate of 30%.

Okay.

Okay.

Thank you very much.

And our next question comes from Maggie Gilliam with Gilliam & Company.

Yes, good afternoon.

Could you talk a little bit about the go-forward strategy for Nautica?

It seems to be indefinite still.

No, it's not indefinite at all, and we are committed to the department store channel.

We spent a lot of effort this year improving the product styling of our product, and we think we were successful with that.

We are investing more in our shop-in-shops, particularly with Macy's; and we have seen -- the change this year has been consumer shifts in all brands towards more value pricing.

So we've had to react to that, Maggie, as has everyone else.

That was not in our play book when we started year, but it certainly has become part of our play book as the year has unfolded.

We have reacted to that by designing into those more value price points for the time being, whether that's the most relevant place for all these brands to be.

Okay.

And a somewhat related question but more general one, could you talk a little bit about the performance of your outlet stores versus your regular specialty stores?

Is that an across VF question?

Yes, pretty much.

Yes.

I mean, I think like many, our outlook stores are performing consistently well, and it gets back to the same value play, Maggie.

People are looking for value when they are shopping in the outlet centers, and our outlet stores are doing pretty well -- less so than our more premium priced stores where it's a struggle selling -- everybody is struggling in that price segment.

Right.

Okay, thank you.

Thank you.

And our next question comes from Jim Duffy with Thomas Weisel Partners.

Thanks.

I'm hoping you can talk about your comments about stabilization in the European jeanswear business.

That's a very abrupt change in tone from your comments following Q1.

Can you put a little more color on that, please?

Let me just make a couple of comments about that, Jim, and then I will ask Karl Heinz to comments as well.

I talked about the Eastern European business in my commentary, and we do need to be a little bit careful with that.

We anticipated a good year in Eastern Europe.

Even in a tough environment, our business has been very good within Eastern Europe, and we expected that to be an area that was going to be a pretty strong business for us.

So when we had to pull that down it was versus our plans.

As with talked about at the end of the first quarter, we had to pull it down versus our plan.

So what we said now was that it has stabilized somewhat and it's acting more like -- in Eastern Europe it's acting more like the rest of Europe, which is a good thing, and I think the important point there is that it's not deteriorating, not continuing to slide.

So again, that was -- that's -- we wanted to make that point.

That was a -- we had a number of questions on that related to, "Could it get worse, is it going to continue to go down?" So it hasn't, which is the good news.

But it's still a challenge for us versus our original plans, and it's still down from what we originally planned.

Anything else, Karl?

No, I think Bob said at all.

There's not too much to add here on this.

Does that help, Jim?

And our next question comes from David Glick with Buckingham Research Group.

Yes, thank you.

Good afternoon.

Just a follow up on the same topic.

We've talked a lot about your jeans business in Eastern Europe and not as much about Western Europe, which obviously is a bigger market; and your business is really distorted by that concentration of jeans in Eastern Europe.

Can you give us a better sense of what's happening across your brands and what the tone of business is in Western Europe?

I mean, would you consider that region as also having stabilized?

Has it gotten worse as the year has progressed?

Has it gotten better?

Any kind of color, or some specifics on constant currency trends in Western Europe?

And I know it's hard to generalize -- every market is different -- but I would appreciate some color on that.

Yes, as you -- Karl Heinz here -- as you mentioned, it's hard to generalize; but the common point is what we can say, it's certainly a tough environment at the moment.

It's a growing market, and the challenges we see are all there.

I think that the change to Q1 is that we have stabilized this negative growth and we don't expect further deterioration.

That's the big change compared to a couple of months ago.

In Western Europe as well as Eastern Europe?

In Western Europe as well, yes.

Okay, and any -- is Spain still the toughest market there, and how are things?

And if you could give a little bit of commentary on U.K., France and Germany?

Yes, as we know the economy in Spain is probably amongst the most challenging in Europe, so that's reflected in general in our businesses -- not only in jeans, but certainly also in jeans.

We have some issues -- not only we have -- there's certain pressure on key dealers in Germany, you probably have heard about [Kasta], which went into kind of Chapter Eleven -- European version of Chapter Eleven.

So there are certainly challenges.

The European economy is not immune from this major pressure we have.

We see actually (inaudible).

So it's fair to say in Western Europe, then -- just to wrap it up -- that the trends have been consistent Q1 to Q2, but fell off from Q4?

I didn't get the last question.

Did you say -- ?

Just -- I wanted just to confirm that Q1 and Q2 trends in Western Europe are fairly similar, which represent a big fall off from obviously Q4 trends?

Yes, we could say so.

Okay.

Thank you very much.

Thank you.

And we have no more questions at this time.

Okay.

Thank you all for joining us on the call and for your interest in VF.

We've come through our most difficult quarter of the year.

We've gained share in our biggest brands.

We are positioned for the second half, and we look forward to talking to you next quarter.

Thanks.

This concludes today's call.

We thank you for your participation.