威富公司 (VFC) 2009 Q3 法說會逐字稿

Good day and welcome to the VF Corporation's third 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, ma'am.

Thank you.

Good afternoon.

Thanks for participating in VF Corporation's third 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 send 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 in 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.

Thank you for joining us today.

Our third quarter results clearly signal that the worst effects of the recession may be behind us, and they tell us that even during incredibly difficult conditions VF's diversified business model and operating discipline can enable to performance that is superior to many companies both within and outside our industry.

For example, excluding foreign currency effects, our revenues were down only 3%, and excluding the dual impacts of pension expense and currency in this year's quarter, as well as the $0.07 in unusual items in last year's quarter, on an apples to apples basis our earnings per share would actually have been up 4% from last year's third quarter.

I think that speaks volumes about our ability to leverage the strength of our brands while remaining laser-focused on managing costs and remaining liquidity.

To reiterate the high points of the quarter, two of our powerhouse brands, The North Face and Vans, continue to show very good momentum in the face of what is arguably the worst period of consumer spending in recent history in, and this momentum is the result of creative and disciplined brand management and prudent investment, not short-term changes in pricing or distribution.

Two of our other powerhouse brands, Wrangler and Lee, are also continuing to perform well here in the US.

Wrangler continues to be an important mainstay for our big mass market and Western Specialty store customers who rely on the brand's reputation, quality and innovation to drive traffic and repeat purchases, and Lee plays a similar role with its mid-tier customer where it continues to outperform its competitors with consumer-driven product innovation.

It's no secret that Nautica has not performed up to our expectations during the past couple of years, and you have rightly questioned the prospects and timing of a turnaround.

So we're also very pleased to report that our Sportswear operating margins rose nearly 400 basis points in the quarter to 15.8%, driven by higher margins in our Nautica wholesale business.

Revenue comparisons also improved in the quarter, yet we noted that we continue to expect mid-single digit declines for the second half of the year in total.

We don't expect much near-term improvement in the overall retail conditions, but we do believe our work to improve Nautica's products, brand positioning and profitability has significantly strengthened the brand's foundation.

Our retail revenues continued to rise in the quarter, as we continued to selectively add new stores across our strongest brand concepts.

We remain very disciplined in our approach to new store openings, choosing to expand only those concepts that will drive both top and bottom line growth.

And last, our financial position remains extremely strong.

We are beating our inventory reduction targets.

We will end the year with a healthy cash balance, and we are raising our projection for cash flow from operations to near record levels.

But to be sure, challenges remain.

Our European jeans business remains under pressure.

While conditions in Europe have stabilized, the market for higher aimed jeans like Lee and Wrangler remains difficult, as it does here.

Similarly, our contemporary brands business in the US continues to feel the effect of very weak conditions in upper tier department and specialty stores.

However, our 7 For All Mankind brand revenues are likely to be only slightly below prior year levels, and that includes the planned double-digit decrease in their offprice business -- and the brand should continue to enjoy mid-teen operating margins this year.

The growth opportunities we identified at the time we purchased the brand -- international expansion, retail store growth and product line extensions -- remain intact, and we continue to see excellent long-term potential for the brand.

Our Imagewear business is in a tough spot.

Its uniform business is very sensitive to employment conditions, and until those improve this business is likely to remain challenging.

But the team there deserves much credit for keeping customer relationships strong and for aggressively managing costs that have kept the operating margins of that business at healthy double-digit levels.

So we have excellent leverage in place for when conditions do improve.

We're looking forward to ending 2009 on a solid note, with both revenue comparisons and double-digit growth in fourth quarter earnings per share.

For the year, we strengthened our guidance on both the top and bottom lines.

We now anticipate that revenues will be down about 6%, including a 2% currency impact, and we are establishing a new range for earnings per share of $4.85 to $5, which is the high end of our prior guidance.

One other area I'd like to touch on before turning the call over to Bob.

In the last several weeks, there have been a tremendous amount of buzz about the potential for reorders and replenishment, given leaner inventories of retail and improving comp store comparisons.

It's true that inventories at retail are down a lot from prior year levels.

It's also true the comp store comparisons, while still negative, are becoming less bad.

Both of those factors bode well for stronger retail industry margins near-term.

However, we're going to continue to adopt a cautious approach to planning our business as we believe consumer spending will remain challenged as unemployment continues to rise, credit remains tight and saving rates remain above historic levels.

We don't believe the global economy is out of the woods just yet.

Despite these challenges, I have great confidence that we have the right strategies in place to emerge from these very difficult times stronger than ever.

We have great brands with lots of runway for growth still ahead.

Our profitability is strong, with operating margins at double-digit levels, and our balance sheet is in great shape.

Let's hear more on the quarter now from Bob Shearer.

Okay, thanks, Eric.

And I'm going start with revenues, which were down by 5% or 3% in constant dollars, and that's an improvement over the declines reported in both the first and second quarters of this year.

Now moving down the P&L, we're pleased to report another quarter of strong gross margins.

In fact, at 44.3% gross margins are only slightly below the record level of 44.4% that we achieved in last year's third quarter.

This continued strength in gross margins can be attributed to expanding gross margins in our Outdoor and Action Sports and US jeans businesses, as well as the positive impact of our growing full price retail business with its higher margins.

In fact, we expect this momentum in gross margins to continue into the fourth quarter when our margin percentage should exceed 45%.

Once again, our retail growth will play a role in this improvement, but we also expect to see expanded margins across many of our businesses across the globe in the quarter, reflecting operating efficiencies and the strength of our brands.

SG&A as a percent of revenues rose 60 basis points, and that includes the impact of our higher pension expense which represented an increase of 100 basis points to the quarter.

Retail growth with its higher SG&A relationships also increased the overall expense rate to revenues, while our cost management efforts reduced the percentage.

Regarding the fourth quarter, the SG&A relationship to revenues will remain relatively flat to up slightly from the prior year period.

For the quarter the SG&A percent will be helped or lowered by the absence of the restructuring charge in Q4 2008 and the related benefits from those actions.

However, the quarter will also reflect increases from higher pension expense and growth in our retail business.

Now our lower tax rate in the quarter reflects the reduction in our anticipated annual effective tax rate.

In last quarter's call we said we expected a tax rate of about 27% for the year.

We currently expect our annual effective tax rate to approximate 26%.

We expect that our lower tax rate for 2009 will be sustainable going forward.

And that brings us to earnings per share, which were $1.94 in the quarter.

Earnings per share in the quarter included a combined $0.17 per share impact from pension and currency.

In addition, as we disclosed last year, the prior period's quarter included a net $0.07 per share benefit from unusual items, primarily one-time tax benefits and restructuring.

So on a more comparable basis, for excluding these items, earnings per share would have increased by 4% in the quarter.

Now taking a quick look at our coalition results, and I'll start with Outdoor and Action Sports, revenues were about flat with those of the prior year's quarter, but up 3% in constant dollars, driven by strong growth in our North Face and Vans brands.

Our direct to consumer business continues to be an important growth driver for us, with revenues up 17% overall and double-digit growth in our North Face, Vans and (Inaudible) brands.

We were especially pleased to report record operating income and margins for the coalition in the quarter.

It's a real achievement by our Outdoor and Action Sports teams, especially given the challenging environment.

And we expect this strength to continue in the fourth quarter as well, with even higher revenue growth and continued operating margin expansion in the quarter versus prior year levels.

Now in terms of our Jeanswear business, as anticipated, revenue comparisons improved in the third quarter versus the second.

On a constant currency basis, revenues were down 7% in the third quarter compared with the 12% decline in the second quarter.

The improvement is especially evident in our domestic business, which was down 6% in the third quarter compared with a decline of 12% in the second quarter.

In the US, our Lee brand continues to gain share, with revenues down only slightly or by about 1%.

We're also pleased that our Wrangler brand remains in a very strong position in the mass market, with enhanced brand signage now in place with our largest mass market customer.

Our overall mass market revenue comparisons, however, continue to be hurt by the loss of certain non-core Riders brand programs, as we discussed in the second quarter.

But just as we indicated then, our core Riders missy business continues to gain share.

Now as Eric noted, our European jeans business continues to be challenging due to weak market conditions that seem to be impacting most players in the Jeanswear sector.

In fact, industry reports indicate that total European retail sales fell for a 16th consecutive month in September, while unemployment continues to rise.

Our international Jeanswear revenues declined 10% in constant dollars in the quarter, with declines in our European business partially offset by continued strong growth in Asia, where our Jeanswear revenues rose 17%.

Now despite the revenue declines in our Jeanswear businesses, our global Jeanswear organization has done a great job of maintaining operating margins at historically strong levels, and we should see this again in the fourth quarter with margins nearly double those of the prior year's quarter.

Expanding gross margins in our US jeans businesses in both the third and fourth quarters and for our international businesses in the fourth quarter are playing an important role in our overall strength and Jeanswear profitability.

Now to be sure, operating margins last year were impacted by charges related to cost reduction actions.

But on an apples-to-apples basis -- that is, taking out the impact of the charge -- our Jeanswear operating margins will still reflect a healthy increase driven by the stronger gross margin comparisons.

Now no doubt you have all noted the big improvement in our Sportswear coalition results this quarter.

Sportswear revenues rose 4% in the quarter, with a 52% increase in operating income and operating margins reaching nearly 16%.

Now we did note that the revenue increase was helped by a shift in the timing of our product shipments, but we are on track to achieve overall better comparisons in the second half compared with the first and operating margins should remain at double-digit levels in the fourth quarter.

We have made a lot of improvements in the operating model for our Nautica business in particular, as reflected in our second half profit projections.

And I also wanted to add a comment about our Kipling US business during the quarter.

We agreed to distribute Kipling handbags on an exclusive basis to Macy's department stores in the US starting spring, 2010.

We'll roll out Kipling handbags and accessories to about 375 stores by the first quarter, and expect to roll out to all doors within a year's time.

Turning now to our contemporary brands business, revenues rose again this quarter, with the increase due to this year's acquisition of the Splendid and Ella Moss brands.

It should be no surprise that given conditions in upper tier department and special stores, our 7 for All Mankind brand revenues declined in the quarter.

But as we pointed out in the release, despite the challenges presented by this environment, our 7 For All Mankind global teams will achieve strong double-digit operating margins for the year, reflecting the overall strength of this brand and its potential moving forward.

Bright spots for the brand in this environment were our direct-to-consumer and Asia businesses, both of which experienced strong growth in the quarter.

Globally year-to-date, we've opened 13 retail stores and expect a total of 20 new store openings for the year in total.

In the release, we stated that we expect much stronger revenue and operating margin comparisons in the fourth quarter for our contemporary brands coalition as a whole.

Revenues for our 7 for All Mankind brands actually should be up in the quarter as we benefit from new store openings and continued growth internationally.

For the coalition overall, we anticipate a return to double-digit operating margins in the fourth quarter.

And finally, a few words on our Imagewear business.

The story here remains pretty much as it has in the past couple of quarters.

High and rising unemployment levels is affecting our uniform business, while poor attendance at major league sporting events and the highly discretionary nature of sports-related apparel products has dampened sales of our licensed team apparel products.

Eric pointed out in his opening that we've maintained double-digit margins in our image or uniform business, despite the challenged topline.

That means that when conditions improve, our cost structure should provide good leverage for profitability improvements.

For the fourth quarter, coalition operating margins should be relatively stable -- a significant improvement from prior quarter comparisons this year.

Our press release touched on our retail and international performance, and I had a couple of comments here.

On the international side first, revenues declined on a constant currency basis, with a decline of 6% in our European business, which accounted for 70% of total international revenues in the quarter.

Partially offsetting that was an increase of 32% in our Asian business, which accounted for about 12% of total international revenues in the third quarter.

In the fourth quarter, we do expect to see an increase in our international revenues on both a constant currency and reported basis.

And we see continued momentum in our business in Asia, with the revenue increase comparable to that which we achieved in the third quarter.

And in terms of our retail business, our direct-to-consumer revenues rose 6% in the quarter, with 23 new stores opened in the period, primarily full price formats.

We now expect to open over 80 stores this year.

It's a bit more than previously planned, and as Eric noted, we're being selective in our store openings.

We're investing in those concepts that provide strong financial returns and strengthen our brands equity with consumers.

Our focus on inventory management is really paying off for us this year.

Inventories were down 13% in the quarter, and are now expected to be down by this same amount over year-end 2008 levels.

This has contributed to even stronger than anticipated cash flow from operations, and you probably saw that we raised our cash flow guidance, which we now think could approach $800 million -- very close to our prior record of $834 million achieved in 2007.

I also should point out that during the quarter, we put our strong cash flow to work, purchasing 750,000 shares of VF stock.

We expect to purchase a similar amount in the fourth quarter as well, bringing the total to 1.5 million shares for the year.

I think Eric covered our revised guidance pretty well.

But just to reiterate, full year revenues should decline by about 6% versus our prior guidance of 5 to 7% decline.

Foreign currency rates will account for 2% of the decline.

The full year earnings per share are expected to come in between $4.85 and $5, which is at the higher end of our previous range of $4.70 and $5.

We've given ourselves $0.15 worth of flexibility for the fourth quarter, given that there remains much uncertainty regarding consumer spending for the upcoming important holiday season.

In this environment, we believe in staying on the side of caution.

And with that, we'll take questions.

(Operator Instructions).

And our first question is from Robert Drbul from Barclays Capital.

Hi, good afternoon.

Hey, Bob.

A couple of questions.

First on the Nautica business, can you maybe just give us an update year-to-date what you guys have done well, or where your shortfalls are?

And sort of as you think about the business for next year for the Nautica business, any ideas in terms of will both topline and bottom line be high are for next year as well?

And then on the 7 business, can you give us a dollar number around the offprice business and sort of the negative impact that has had on the business being negative right now or down sales, and percentage of sales -- or '09 versus '08, sort of how to think about that business?

I'll start with the Nautica comments and talk to you about what changed this year.

You might remember, Bob, that going back in the first part of this year, we rebooted the Nautica business coming into 2009 with updated products that were more expensive in price point and better built.

They were worth more money, but not in this environment.

And that really affected the first half of this year, because we took our average price points up -- or we tried to --which was the right thing to do going into what we didn't know was going to be a recession.

The change for the back half of the year has been we have adopted more value price points and more value products, and that's working much better for us, as you might imagine in this environment.

I can't comment specifically on 2010 at this point, but we'll do that in February when we cover 2010.

On the 7 For All Mankind question, I don't know if we have that information available.

Bob do, we have that?

Well, not the specific dollars, Bob, but what I can tell you is this, that the reduction in the offprice channel is about 15% of -- from the prior year.

And I know you're looking for a specific number, but it has impacted our year overall, and we think it's absolutely the right thing to do for the brand.

Okay.

And then just a longer-term more philosophical question in terms of looking at the numbers, I guess going forward into 2010 without sort of talking specifically to 2010 guidance, Eric, when you look at the various puts and takes of the business -- pension versus foreign exchange and the benefit of not having the $0.30 issue in the fourth quarter of this year -- when you plan forward in the next few years, how should we think about it from a core operations perspective in terms of long-term VF targets versus the pension or foreign exchange issues that you've had as we look to, let's say, 2010?

How should we think about that?

I'm not quite sure, Bob, what you're looking for.

In terms of FX as we look forward, in the early part of next year, assuming that especially the Euro versus a dollar holds where it is, could be some impact there -- some benefit there, because as you know, our first quarter and our third quarters are by far our largest international quarters.

So it could help the first quarter somewhat.

And the third quarter right now we'd have to say not a big impact one way or the other.

But those are clearly the two largest quarters and where we may see some impact next year.

And what else -- so in terms of other factors, what else is it that you're looking for?

So I guess the question that I'm sort of looking at is when we consider our numbers for 2010 and you look at what you guys have reported thus for for 2009, let's say there's about 0.70 of numbers -- $0.70 of earnings impact from this year.

Is it fair to look at the business and say long-term VF is an 8% -- targeted 8 to 10% grower, and we could get to core operations of 8% plus getting back some of the pension hits or the foreign exchange hits that we had this year?

Well, I'll comment on 2010 related to the pension, because it's obviously been a factor in this year's numbers.

As we look forward, if the market held where it is today -- and as we've explained in the past, the increase in pension expense for this year obviously driven by the value of the assets in our plan -- and right now, if the market stayed where it is right now, that would reduce our overall expense next year by something like 15 or $20 million.

So that would be a favorable impact for us as we look at next year, just like the currency piece that we just talked about.

Great.

Thank you very much.

Okay.

Our next question is from Jim Duffy from Thomas Weisel Partners.

Hi, Jim.

Jim, your line is open.

Oh, sorry.

I was on mute.

Could I ask you to speak to the same store performance of your owned stores as you progress through third quarter and what kind of expectations for comps you have built into the fourth quarter outlook?

Well, as you know, Jim, we don't provide specific comp store data -- haven't.

And as we look into the next quarter, clearly we are expecting an improvement.

We're beginning to see that in our stores.

So overall, I mean ,the one business -- our largest business in terms of retail, which represents about 1/3 of the number of stores that we have from a retail standpoint in the third quarter -- showed comp store increases in the mid-single digits.

So we were really pleased with that overall.

Overall for VF, the comps were flat to down just slightly.

Then in the fourth quarter, we do expect to see some improvement from that.

Okay.

And what are the comparisons you'll be going against in the fourth quarter from last year?

They were positive, correct, if I remember?

Yes.

By a small amount, Jim -- just a few percentage points.

Okay.

And then there's a general expectation in the retail channel that demand could exceed supply of inventory on hand at retail.

Can you guys just speak to your opportunity to chase business?

Which are the business lines, like Jeanswear, where you may be able to capitalize on some of that excess demand, and which are some of the ones where lead times are longer, and if the inventory is gone, there's no business to be done?

Yes.

Jim, I know you appreciate how complicated or how complex VF is.

So there's not an easy answer to that question, but you're right.

Our Jeanswear business is one category where we have lots of capacity in this hemisphere, and it's quick turn capacity.

We have raw materials held on consignment.

We can go from purchase order to the DC in 20 days for the products that we make here.

The other end of that, of course, is long lead time, equipment and sleeping bags and tents that we make in Asia where we could not react if there was an uptick between now and Christmas.

But we do have a meaningful part of our business here in this hemisphere where we are in the position to react.

Eric, are there any categories where you wish you had more inventory?

Jim, our approach this whole year has been we're going to take inventory out and chase sales, if we are blessed with the opportunity to chase sales.

So it looks like that opportunity may be coming true and we'll be thankful to have it, but I'm glad we did not build excess inventory hoping that demand would get better.

That's great.

I'll jump back in the queue.

Thank you.

Thanks, Jim.

The next question is from Kate McShane from Citi Investment Research.

Hi.

Good afternoon.

Hi, Kate.

Could you just help us understand -- Bob's comments at the end addressed this a little bit, but I was wondering if you could go into a little bit more specifics about why there is no increase at the high end of their guidance -- at the high end of your guidance today?

And the reason why I ask is it just sound like things are getting much better both on the currency front and in inventory since sequentially your inventories look so much better than last quarter and first quarter.

So can you just explain what has gotten so much better kind of at the low end of your guidance, or what scenario has disappeared, and why isn't there that confidence to raise the guidance on the higher end today?

Well, Kate, relative to the overall range -- and we've eliminated some of the uncertainty that we had -- that's why we gave ourselves a fair amount of flexibility in the $4.70 to the $5 -- after having the quarter behind us and have a little bit better look at the fourth quarter, we obviously felt better about going to the high end of the range.

We just -- as we look at the holiday season, we -- as I said, you just mentioned it -- in my final comment, just that there's still a fair level of uncertainty relative to overall consumer spending, unemployment levels, all of those factors.

So we are trying to take a cautious approach, and we just think that's the prudent thing to do in this environment.

We think that we're well-positioned in terms of overall profitability.

As Eric said, we're in a position we believe to respond a little faster than most in terms of our ability to catch up or chase business and we'll be very, very happy to do that if we have the opportunity to do it, and that would obviously be great for us in the quarter, but just not planning that way.

Kate, it is true that we saw, like many, an improvement in consumer spending during the back to school period and that carried over into the early part of October.

But all the information that we have on the economy suggests that there is more unemployment to come.

It suggests that the credit problems are severe and not fully recognized.

How that shows up in holiday spending, I don't know.

But it does lead to us say we're not ignoring those hard economic facts, and they're putting us in a position where we're being a little bit cautious about it.

Okay.

That's great.

Thank you.

And then I wondered if you could just comment or give some commentary around The North Face and the backlogs that you're seeing for The North Face for spring?

Yes, the spring order positions are stronger in the mid-single digit area.

Okay, great.

Thank you.

And that's a global number maybe even -- yes, maybe even a little stronger on the international side.

Okay, great.

Thank you.

All right.

The next question is from Omar Saad from Credit Suisse.

Thanks.

Good afternoon.

Hey, Omar.

Hi, Omar.

Can you hear me?

Yes, we can.

Okay, great.

Wanted to ask a follow-up question on the SG&A kind of operating expense line.

I mean, you guys did a great job on the gross margin line this quarter, pretty healthy gross margins.

I know your supply chain is one of the most sophisticated and efficient out there, so congratulations on that.

But I was a little bit surprised at the expense number.

If I look at kind of what you tracked at in the first half, your year-over-year spending was down something on the order of 50, 60, $70 million, whereas in the third quarter it looks like your spending was maybe down a little bit, a few million dollars.

Is there something kind of structurally different about the third quarter?

Is something -- is there some new expenses coming on?

I know you've been focused on expense discipline all year, and kind of given some of the commentary about the overarching environment, I was a little bit surprised to see spending not a little bit tighter in the quarter.

Omar, I look at it obviously in terms of the ratios to revenues, and a couple factors, obviously.

The pension, which I know you're very aware of, represented about 100 basis points, so that's moving the ratio up, and the retail business as well.

And again, we expect to see very strong gross margin improvement in the fourth quarter and really see the retail investments pay off.

But the retail business and the growth in our retail business is pushing the SG&As up as well.

So as we look at the fourth quarter, as I indicated in my comments, we're anticipating very strong gross margin growth in the fourth quarter.

Some of that's due to retail.

Some of that's due to a number of other factors in terms of inventory controls and that kind of thing.

But retail is a factor.

So we've got pension.

We've got the retail piece.

We have the overall cost management efforts as well going the other way in the third quarter, so we net out to a bit up.

Okay.

But it doesn't sound like anything specific.

No.

There's nothing -- no, there's nothing that really stands out in the quarter.

Are you doing anything in the marketing, advertising front?

I mean, you're still maintaining that kind of high level investment that you had been in the past.

We are.

I mean, and that's the point in terms of the advertising spend.

So we were -- as a percent of revenue, we were down 50 or 60 basis points but still spending at a fairly high level, particularly as on a ratio to revenues.

Okay.

All right.

Also wanted to kind of talk about sales, the philosophy of sales versus inventory.

Inventories keep getting cleaner and cleaner for you guys.

Do you feel like -- I mean, is there -- it seems to me at some point you can't grow sales without inventory.

Is anybody out there willing to take a little bit more of a risk on inventory?

It doesn't sound like it's you guys, and there's some ability to chase, of course.

But philosophically, it's hard to grow sales without inventory, and wanted to kind of see how you feel about that.

Well, I think we want to be in the position to react to that.

If you look at our inventory in total, we have around 100 days of inventory -- I'm looking for confirmation on that from Bob, but that's about the number.

So we could supply three months of incremental sales without making another piece of product.

We think that puts us in a reasonable position to chase.

We're going to react to that pretty quickly.

Fortunately, our supply chain engine, as you commented on, is well developed and we are in a position to react very quickly if we need to.

Okay.

And then last question, cold weather?

I mean, it's been freezing the last few weeks.

We've been hearing things about undersupply of coats and jackets.

Anything you're seeing in The North Face business or any of your other businesses that can kind of corroborate that?

Yes.

The cold weather always helps The North Face business, and this year is no exception.

Great, thanks.

Good luck.

Thank you.

Thanks, Omar.

And the next question is from Eric Tracy from FBR Capital Markets.

Good afternoon.

Actually, just wanted to touch on pricing, if I could.

Obviously, a trend towards moving towards lower price point value oriented product.

Can you talk about a little bit about which brands or coalitions are best positioned to possibly capitalize on that and pick up incremental volume, and then in which might be sort of negatively impacted from a margin perspective?

Complicated question, Eric.

The -- all of our brands have reacted to this economic environment by introducing value prices -- value products to their consumer base.

In some cases, that's meant a reduction in prices.

In some cases, we're just seeing the velocity in the brands at a slightly lower price point than it was last year, bringing us to an effectively -- a lower AUR -- not necessarily a lower margin, but a lower AUR on the products that we're selling.

So we can maintain our gross margin rate.

The challenge becomes in maintaining the topline if your AUR is down, which we are seeing.

I don't think we have a brand that's unable to react to that.

They just react to it differently and in different orders of magnitude, because our big mid-tier and mass businesses have less of a need to react to that because in this environment there's been more shopping in those channels.

Okay.

But I would imagine there would be some -- be it The North Face or even 7 For All Mankind -- that sort of the incremental volume play that you can pick up by maybe squeezing out some of those lesser brands within a given channel, may drive some incremental volume.

Is that fair?

Over time.

Over time throughout this recession, we've lost retail customers through this recession, and there are competitors who are weak where our brands are strong, and we do think we're taking share in many of our brands, in many product categories.

Okay.

Fair enough.

And then just turning to retail real quick, the incremental doors that you're now looking through 80 this year, could you, Bob, any breakouts what the difference is full price versus outlet?

Yes.

It's about 80% full price.

So it's clearly -- our expansion in retail right now is clearly driven by full price stores.

The outlets -- any outlet store openings are only driven by our capacity to move excess product.

So the balance -- or I guess I could say the imbalance -- in terms of our overall store count is clearly getting more and more heavily weighted toward the full price stores.

Okay.

And then geographically speaking, domestic versus international?

Yes.

Still by far -- because of the retail formats and also because of the partnership arrangements that we have outside of the US, the US continues to comprise a much higher percentage.

They have this year in terms of new store openings.

And in terms of total store counts, they still represent something like 75% or even a little bit higher of total -- of our total stores.

Okay.

Great.

Thanks, guys.

Best of luck.

All right.

Thanks.

And the next question is from [Sean Naughton] from Piper Jaffray.

Hi.

Thanks for taking my question.

Hi, Sean.

Hi.

First on the Jeanswear business, obviously Asia looks good, up 17%.

US seems to be improving.

But Europe still seems to be a weak spot.

Can you give us any flavor on which particular countries or areas are seeing the impact in Europe?

Sure.

My first comment would that be in general, the European jeans business is -- the European jeans market is tough.

It's not something that's unique to VF.

It is a marketwide challenge in Europe.

Our model in Europe is a little different than some of our competitors.

We invested heavily for growth in Eastern Europe in the last several years, and got that growth and built a nice business there.

That business has been challenged by difficulty in the economies and a collapse of currencies, which has resulted in a reported revenue decline that's disproportionate for us.

So while the market in total is tough, the way our business model was constructed over time was we had a disproportionate share in the markets that got the toughest.

So -- and that's shown up in our numbers.

Okay.

Fair enough.

And then in terms of the order book for next year, I think you talked about The North Face obviously being up mid-single digits globally.

Last year, you had mentioned that you were seeing a little bit of caution for the spring order book.

Can you talk about in relative terms how you're feeling this year versus last year, heritage brands versus lifestyle, or domestic versus international orders?

We don't have the same visibility as we do in our outdoor business relative to those positions, as you know.

A lot of our jeans business -- for example, you mentioned about our more traditional businesses -- are done on a replenishment basis.

So a very different business model.

So we talk about the outdoor business because we can, and we know there's positions elsewhere we really don't have a lot of good data.

Okay.

And then lastly, you're building up obviously a significant amount of cash in the balance sheet.

Anything on the acquisition front that you guys are looking at right now?

Can't comment specifically, but can I tell you we're busy and active.

Would like to make some acquisitions, but don't have anything we can talk about now.

And then last question on -- you recently announced a retail license brand segment.

Any thoughts on moving one of your wholesale brands to a licensing model, or has there been any work on that front that has been completed yet so that you're willing to share?

Yes.

We hired a leader to lead that effort here, and he is in his first 90 days of his assignment, and we're looking at how could we acquire brands to satisfy that need?

Are there brands that are active in our portfolio?

Are there brands that are no longer active in our portfolio?

And how do we bring that to market to make sure that as we work with our large customers we add that to part of the mix that we do with them?

So we're going down that path, but nothing to report quite yet.

Still early days.

Okay.

Best of luck in the fourth quarter.

Thank you.

Our next question is from Michael [Binetti] from UBS.

Hey, guys, just wanted to tell you congrats on a good quarter there.

A couple questions on the gross margin comments you made on the fourth quarter.

Is there any way -- you said that you were looking for 45, which is probably the highest gross margin seen looking back at almost any quarter, and I'm wondering if you could maybe walk us through a bit of the puts and takes that you see drive us above levels of the past there?

Sure.

I'll do that, Mike.

And you're right, it is -- it would be high for us.

Yes, so when you look at last year, first of all I'll point out that the restructuring impacts that we had last year had almost no impact on gross margins.

So last year's number is clean from that standpoint.

We talk a lot about retail.

In term of our retail business, it will move the margins up by about 100 basis points, so that's part of the improvement.

And then the rest of the improvement again to the 45%, or even a little above the 45% level, is primarily driven by operations, and I guess the things that pleased us the most are we're seeing the expansion in gross margins in our largest businesses.

And in my commentary I talked about the Jeanswear businesses both in the US as well as on the international side, and that's very important.

There were some questions earlier about the European business -- challenged to be sure, but we do expect to see a much better quarter in the fourth quarter, and a lot of that driven by stronger gross margins.

So those are the kind of things that we're looking at that are particularly strong, and obviously the kind of things that we're looking for in the fourth quarter.

So about 100 basis points, and then the rest driven by the expansion I just talked about, and then just overall improvements in the efficiencies of running our business with very clean inventories.

And if I could just ask a quick follow-up -- thanks for that -- and just a quick follow-up to that.

I want to ask you maybe a higher level about the supply chain.

I think you guys still own about 25% of your own manufacturing?

That's about right.

Mostly in jeans, I believe.

Is that right?

That's right.

That's right.

And when you think about owning that process with comments we've heard today, with Jeanswear revenues continuing to be down, and your comments, it seems like you expect a relatively slow snapback overall for the economy.

And when you think about the new normal level of purchasing at retail in your markets, do you think that calls for any kind of capacity reduction in those lines that you guys own in your own factories?

We don't see that in our current forecasts.

While we do own that capacity -- and it's mostly organized around our jeans business -- jeans also sources a large amount of what they produce.

I think close to half of the jeans we sell are sourced.

So we have a balanced approach to our total supply chain that includes the owned capacity and sourced goods.

So we're flexible.

Okay.

Thank you.

The next question is from Robbie Ohmes from Banc of America, Merrill Lynch.

Hi, Robbie.

Oh, hey, how are you guys?

Hey, I just had a quick question that maybe you could help us with.

As you look across all your businesses, you look at Jeanswear, and Sportswear, and North Face and Vans, et cetera, can you just talk about what you're seeing the consumers respond to?

Are there any shifts towards lower price points?

Are you seeing your key customers focus more on entry level price point programs with you?

Have you seen any shift in the relative strengths of the channels you deal with?

Is the -- is your mix of business outside of D to C skewing towards Wal-Mart and Kohl's and the moderate channel?

If you could just gives you some color about what's going on in the world out there, that would be terrific.

Sure.

My first reaction to that is innovation.

Every time we launch an innovative product, it works, and consumers are paying a fair price for it.

The key thing that we're working throughout our organization is to be innovative in our products and offer things that consumers haven't seen before and charge them a fair price for it.

In some cases -- in the Lee brand this year, our average unit retail in the mid-tier channel is actually up, and we're taking share there with higher average unit retail because we have innovative new products at both Kohl's and J.C.

Penney and at Sears, and that's really working for us.

The second thing is value and we're seeing across our brands consumers who maybe last year spent $179 for a product, maybe are shopping in the $159 price point this year, and there has been some tradedown to just price value.

But the more important piece, really, is the innovation piece.

That's why I led with that.

In terms of channels of distribution, we're seeing the same thing in our own stores that you see when you read the comp stores that are out there that are published every month.

The higher end of the price spectrum in regular retail -- and by that I mean the Neiman Marcuses and (Inaudible) and Saks -- their comps have been weaker than the comps at the mass and the mid-tier, and that suggests that consumers are either shopping down or the higher end shopper is just flat out shopping for less.

And we're seeing that consistently across our brands, and we're seeing it in our own owned retail as well.

Does that help you?

It does.

So it might be tough to look at it this way, but just collectively, the pressure on your revenues, do you think it's more unit volume or do you think it's more price that's sort of pressured your global revenues?

Well --

FX neutral?

Yes.

Our global revenues for the year we're currently calling to be down FX neutral, right?

And quite frankly, I think we're really pleased with that.

If you look at how deep this recession is and you look at the fact that last year was an all-time record revenue for us, to come up against an all-time record revenue and only have a 4% decline in this recession is something I think we're pretty proud of.

We are seeing, however, a lower AUR, which suggests that there is a price piece on top of the unit reduction in sales.

That's very helpful, Eric.

Thanks so much.

You're very welcome.

And the next question is from Chris Svezia from Susquehanna Financial Group.

Good afternoon, gentlemen.

I guess first just on the inventory, with inventories down 13% at the end of the quarter, just kind of how should we be looking at inventory by year-end?

And any thoughts as to how you might be planning inventory as you head into spring, 2010?

First on the inventories, I should -- just as a follow-up comment.

Where we reduced our inventories the most is where they were the highest.

And that may seem very obvious, but the point is in terms of our ability to service the business, we had some areas that the inventories were higher than they absolutely needed to be.

Some were from newer acquisitions and we knew that that was an opportunity for us all along, so we've been working those inventories down.

And to that same point, as we go forward, we think there's still some opportunity in 2010 to pull the inventories down perhaps somewhat more -- maybe not to the same levels that we're seeing this year, but I can tell you we do that with a very, very close eye on our ability to service the business.

And even though our inventories have been pulled down, our service levels have never been higher.

Okay.

And as you look into -- as you think about that as you move to spring, is there any particular segment of the business where there is more of an opportunity to continue to rationalize that inventory relative to others?

I mean, after you've gone through 2009 and you made those adjustments where necessary as you start to enter into2010, are there other areas or elements of the business where you could just be more efficient, or just opportunity to continue to reduce that inventory piece?

There's just opportunity to reduce it overall.

Again, we went after a lot of the low hanging fruit at this point in time, but always some ability to refine.

Okay.

And then, Eric, just when I think about Europe for a second -- and I know you talked about the Jeanswear business continued to be challenging, specifically obviously in Eastern Europe that continues there, but I guess maybe what gives you the confidence, at least from a -- if at all -- from a topline perspective, if you think about Western Europe -- and not just in the Jeanswear business but across your other businesses as well -- in terms of when we can start to see some improvement?

And I don't know if you can break out that decline of 6% in Europe -- if you can break it out between Eastern and Western and anything like that, that would be helpful, too.

I'm afraid I can't break it out between East and West.

I just don't have the information in front of me.

But the European economy in general is still weak like the US economy is.

It is worse in pockets, the Eastern pocket we talked about.

It's softer in Southern Europe than it is in Northern Europe as well.

So there are -- it's not consistent, but in general the European economy is still having a tough time, and we're hoping as we're hoping for the US economy that it gets better next year.

Okay.

So as we look to that fourth quarter is, it more of an opportunity on the margin, lesser degree really from a top line perspective?

I know it's a smaller piece of the business, but just as we look at that fourth quarter?

Are you talking just on the Jeanswear piece?

No.

I guess overall.

Well, overall we expect -- we do expect gross margin expansion in our international businesses, and I pointed out specifically in the European jeans business -- again, over some tougher numbers last year.

Okay.

All right.

Thank you very much.

Thank you.

And the next question is from Mitch Kummetz from Robert W.

Baird.

Yes, thank you.

Just a follow-up on The North Face spring orders.

You said up to mid-single digits.

Is that in constant dollars or reported dollars?

That's in constant dollars, which will be -- right.

And I would guess you'd expect that to be up more in reported dollars given where currency is and how you would think that would play out in the first half of next year being, correct?

That's what we were talking about, Mitch.

Could be a little bit relative to the spring business and earlier on.

As we have said, the first quarter is a strong quarter for us on the international front, second quarter not so much, third quarter then stronger.

So yes, currency could help us a little bit, especially in that first quarter.

And could you -- I don't know if you said before or if you're willing to say, but how much of that North Face business is done off of pre-book orders versus at-once?

Because I would think it would skew more towards pre-book orders.

Yes, in the US it's 80% or so.

It varies a little bit with each year, but close to the 80% mark -- 80 to 85%.

And it seems like the sales trend at retail is getting better.

The declines are less.

There's a sequential improvement that we've seen in the last couple of months.

So what is the retailer's ability at this point -- assuming they already placed their spring order -- I mean, is there still room for them to take it up, assuming they wanted to take it up?

Depending on what part of the spring season you're talking about, yes, there's still time in most of our product categories to react to spring.

Further into the spring -- probably not on that first delivery?

Correct.

And are you seeing retailers pushing out those spring deliveries?

Compared with other companies, your initial delivery might be December, and now that's getting pushed into January because retailers are trying to buy closer to need, assuming that the consumer is buying closer to need?

I don't think we've seen -- I don't think that's been a big factor for us.

Okay.

Not necessarily pushing out, just caution in the orders.

Okay.

And then, Bob, input costs -- I didn't hear you say anything about that impacting your gross margin in the quarter.

Is that really playing into your gross margin right now, and how do we kind of think about that going into the fourth quarter or even into next year?

The question, Mitch, was on product costs?

Yes.

Okay.

Yes, on product costs in the second half of this year, we are seeing some lowering of product costs, and it's a factor in helping our gross margins, to be sure, in the third quarter and especially in the fourth quarter.

And as we go forward into next year, I mean, we'll talk about that more; but I guess what I'd say right now is we don't see any reasons to say that the product costs would change significantly, especially in the first half of the year, from where we are today.

Okay, and were they -- remind me, were they a drag in the first half of this year?

Yes, in the first half of the year they were, yes -- which were negotiated in the latter part of 2008 when things were a little bit different.

So you -- assuming they don't really change, I guess you're working through that right now for the first half of next year, that should be a benefit then you would think?

Versus the first half of this year, that's right.

It should help some.

Okay, all right.

And then on Asia ,you mentioned up 32%, I think, for the quarter.

How much of that was China?

You've had fairly new businesses with Vans and The North Face in China.

Can you talk a little bit about that?

I don't know the exact percentage, but clearly China is our biggest market.

It's our fastest growing market.

It's where we have -- what we're focused on, particularly behind the Lee, Wrangler, The North Face and Vans brands, and we started building our own platform there in 1995 and that has really turned out to be a good move.

We are in a good position to keep growing there, and we have a great team on the ground there that's moving really nicely in building our brands.

Okay.

And then lastly, Bob, you mentioned you thought you could pick up -- I think you said you thought you could pick up 100 basis points on gross margin in the fourth quarter on retail.

Is that just a function of more stores in the quarter versus a year ago, or are you also anticipating that your stores will be less promotional given that retail in general might be less promotional since there seems -- a lot of retailers seem to be under inventory right now, or at least not in the process of clearing goods from being over inventory last year?

Yes, we are.

Mitch, to your point we're seeing improvements in growth and in driving that overall gross margin from two standpoints, and this was true in the third quarter as well.

It does -- it impacts the overall mix, so our gross margins on the retail side are higher, obviously, than overall averages.

And in addition to that, the profitability of our businesses, driven by higher gross margins, is also impacting the numbers.

Got it.

So we're seeing a benefit from both sides.

Okay, great.

That's helpful.

Thanks, and good luck.

Sure, thanks.

Thanks.

Our next question is from Maggie Gilliam from Gilliam and Company.

Yes, Bob, I've got a mechanical question for you, and that is how do you translate the income statement of your international subs?

Is it done the last day of the quarter?

Is it done progressively throughout, or how do you do it?

Yes.

It's based on averages, Maggie.

So to your point, I guess I'd say progressively throughout, but it's based on average rates.

On the P&L?

The balance sheet obviously is translated at the rate it exists at the end of the quarter.

Okay.

No, but I mean, is it weighted or is it -- do you do it weekly, monthly or something like that?

Actually it's daily.

Daily, okay.

Yes, based on business that's done on a daily basis.

Okay, okay.

That's helpful.

And then on an entirely different subject, you've got a lot of smaller brands that haven't been brought up very much in this call, and sometime smaller brands don't do as well as larger ones during recessions, and I was just wondering if there were any standouts in here one way or the other, and I'm specifically interested in Reef.

Could you comment on it, please?

Sure.

I'll comment on several of our brands haven't been brought up during this call, and our brands like -- I'll call our Kipling and Napapijri -- have had a great run internationally.

They are doing quite well.

They are very profitable -- and Eastpak I'll throw in with that as well.

Reef, you asked about, is a brand that's getting to a much better spot.

We have a different approach to that business right now with the new management team.

And while the business is stable, it has not grown the way we'd like -- has not grown the way we think it can grow, and the team that's there right now is working very hard to enable that.

Okay.

And how is the lucy?

Lucy is in a tough spot right now.

The lucy business is -- when we acquired that business, we knew that we needed to address the business model of a specialty retail concept, and we have made changes to the business model and we've seen some improvement from that.

We've seen several hundred basis points improvement in our gross margin, which tells us that consumers are reacting to the products.

Unfortunately, there's not enough consumers shopping specialty retail right now, and it's small concept for us.

It's a relatively small business.

We still believe that that women's performance active space is a place that we want to be.

We're trying to get that model right, and we're doing it in a recession, which hasn't made it easy.

Okay.

Thank you.

Just one final question, if I may.

The changed arrangement for Kipling with Macy's, could you go into a little bit of the thought process behind that?

Sure.

To be clear, Macy's is going to have an exclusive in the handbag side of the business -- which means there's another side of the business, which is around luggage and specialty, that those customers will still exist.

We've just taken the department store segment and given that to Macy's, and they're interested in building that out on an exclusive basis, and that will begin in the spring.

The other specialty stores that have carried the brand will continue to carry the brand.

Okay, okay.

But I mean, was there any special reason for doing this and excluding other stores?

I mean, like higher end stores?

We were looking for a retailer to help us communicate what the brand is around the United States.

We thought Macy's was a great way to do that, and they're going to make it important in their stores, and that will help expand the awareness of the brand across the United States, and they're one of the few retailers who can do that.

Right.

Okay, thank you.

Thank you.

And the next question is from David Glick from Buckingham Research Group.

Good afternoon.

Hi, Eric.

I certainly appreciate your conservatism on how you're planning your business, but it does seem like this retailer restocking scenario is showing some early signs of playing out, whether it's higher replenishment or retailers advancing orders 30 days, lower clearance levels.

But -- we all hope certainly that that translates into sales increases for the suppliers in 2010.

We're just trying to figure out at what point that happens.

I mean, retailers have been in your showrooms and committed to Q1.

They are probably in your showrooms about now depending on the business in Q2.

I understand your hesitancy to comment specifically on what your order book looks like beyond North Face, but can you give us some insight into what the mindset is of your big customers?

I know it varies by channel, but what are they waiting to see?

Is it continued to improvement into holiday before they start increasing late spring or early fall orders?

But what are the sort of top to top discussions in general you've had, and have they changed over the last 90 days?

David, I'd characterize that this way.

I would say that people are encouraged by what they've seen during back-to-school, but not confident enough to bet big orders, putting big inventory in the stores assuming that the middle and second half of next year is going to be strong.

So while they're encouraged, I think you nailed it.

I think people are waiting to see what this holiday season brings; because while there was a little bit of momentum built up during back-to-school, more important to everyone is how the big holiday season goes.

And I think as we get deeper and deeper into it, people will react appropriately based on what they see playing out.

And at that point, they still could impact, I would imagine, the second quarter, depending on the category.

Yes, depending on the category, with us they can affect next month.

In our Jeanswear business, we can -- if they react on November 1st, by the middle of December we'll have new products in the stores.

That's not true for all of our categories, but that's important for us given the size the Jeanswear is of our total business.

And is it fair to say that the momentum that you said should carry it into October, has that been pretty consistent kind of through the month to date period?

First couple of weeks were pretty good, so yes.

But we're -- you understand our posture on this.

We're waiting to see it play out.

Okay, thanks very much and good luck.

Thanks, David.

And we have a follow-up question from Michael Binetti from UBS.

Hey, guys.

Thanks for taking a follow-up.

I wanted to just ask you about the Vans brand for a second, if you don't mind.

I think that last time we heard from you, that was close to an $800 million business last year.

Does that sound about right?

About right.

Okay.

And I'm wondering your current thinking as to how big that brand can be longer-term.

We haven't had a big analyst day with you guys to get an update on that in a while.

Or maybe put it another way, as you think about building out the global infrastructure for that business, what kind of number do you have in mind as you build the infrastructure for that business over time?

I'm afraid I can't give you a number for what it could be over time.

We're working on new five year plans right now.

What I can tell you is that that brand has momentum.

It hasn't lost momentum during this recession, and we think it has terrific geographic opportunity in Asia in particular.

We've launched the brand in China, as we've talked about, in August of 2008.

That has vastly exceeded our expectations.

The brand is strong and growing in Europe.

It's strong and growing in the United States.

It will clearly pass the billion dollar mark if it stays on this trajectory, which we expect it will.

The question is what happens beyond there, and that's a discussion we're having with the Vans team in this room next week.

And if I could just finalize it with one last question on the jeans business, I think you talked about on your last call that you're still seeing a little bit of an impact from moving some product out of the mass business in Europe in the jeans business, and I was just wondering if you could help us quantify maybe how much of that was in this current quarter and when that rolls off?

No, what I can tell you is that for the full year it's about $45 million.

Not really sure what it was in the quarter.

Again, year-to-year, most of that impact occurs next year, right?

So what we're saying is we still have about 40, $45 million worth of business this year.

Now that was --

Down about 20 million from last year on a full year basis.

It was 65 last year.

Okay.

Thank you.

Thank you.

And that concludes today's question-and-answer session.

At this time, Mr.

Wiseman, I'll turn the conference back over to you for any additional or closing remarks.

Yes.

Thanks for joining us today.

We're very encouraged by our relative strength in this environment.

Step back, and we think about the key dimensions of our business -- holding global constant currency revenue to within 4% of what was an all-time record in 2008 is something we're proud of.

And while our earnings per share is below 2008 levels, almost all of that decline is due to currency and pension.

The operations of our business remain strong.

And last, we're expecting operating cash flows at near record levels, in the range of $800 million.

So in total, we're very pleased with that overall performance.

We're looking forward to getting more than our fair share of consumers' dollars during this holiday season, and we thank you very much for joining us.

Good-bye.

That concludes today's conference.

Thank you for your participation.