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V.F. (NYSE:VFC)

Q4 2012 Earnings Call

February 15, 2013 8:30 am ET

Executives

Lance Allega

Eric C. Wiseman - Chairman, Chief Executive Officer, President and Member of Finance Committee

Robert K. Shearer - Chief Financial Officer and Senior Vice President

Steven E. Rendle - Group President of Outdoor & Action Sports Americas and Vice President

Scott H. Baxter - Group President of Jeanswear Americas & Imagewear and Vice President

Karen Murray - President of Sportswear Coalition

Susan Kellogg - President of Contemporary Brands Coalition

Cindy Knoebel - Vice President of Corporate Relations

Analysts

Robert S. Drbul - Barclays Capital, Research Division

Kate McShane - Citigroup Inc, Research Division

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Michael Binetti - UBS Investment Bank, Research Division

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Omar Saad - ISI Group Inc., Research Division

Operator

Good day, and welcome to the VF Corporation Fourth Quarter Fiscal 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lance Allega, Director, Investor Relations. You may begin, sir.

Lance Allega

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss VF's fiscal 2012 fourth quarter and full year results. Before we begin, I'd like to remind participants that certain commentary included in today's prepared remarks and the Q&A session may constitute forward-looking statements in the definition of the federal securities law. Forward-looking statements include management's current expectations, estimates and other projections about our business, results of operations and the industries in which VF operates. Actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those projected in the forward-looking statements are discussed in the documents filed with the SEC.

Additionally, participants on today's call may discuss non-GAAP financial measures. You'll find the appropriate reconciliations in our press release, which was issued about an hour ago, and on our website at vfc.com.

Joining us on today's call will be VF Chairman and Chief Executive Officer, Eric Wiseman; Bob Shearer, our Chief Financial Officer; 2 of our Group Presidents, Scott Baxter and Steve Rendle; and Karen Murray, President of VF Sportswear; and Susan Kellogg, President of VF Contemporary Brands. Karl Heinz Salzburger made the flight and is here in North Carolina today, however, he is sick and unable to join us on today's call. So Steve, Scott and Karen will be filling in appropriately for his parts.

Following our prepared remarks, we will take your questions. [Operator Instructions] I'll now turn the call over to VF Chairman and CEO, Eric Wiseman. Eric?

Eric C. Wiseman

Thanks, Lance. Good morning, everyone, and thank you for joining us. To set a little context for today's call, we thought it was important to spend a bit more time on our expectations for 2013 and specifically, the strategic initiatives we're concentrating on to drive continued growth across our portfolio. So as a heads-up, today's call will run a bit longer than normal, and as Lance said, we'll allow ample time for questions at the end. Let's get started.

2012 was another year of records for VF: record revenues, record margins, record earnings and record cash flow from operations. It was a year that revealed many strengths of our company and many advantages to our strategy and our business model. In fact, VF has unique strengths in our industry, including a diverse portfolio of more than 30 brands, with innovative and relevant products capable of reaching the broadest array of consumers in every market; deep strategic insights, validated by comprehensive research that yields increasingly greater returns on our marketing investment and ability to attract -- to connect with consumers; an obsessive focus on continuously improving our operational capabilities to drive growth and strong consistent returns to our shareholders; and finally, a highly efficient supply chain that includes owned and sourced manufacturing, which gives us unparalleled structural advantages, including product innovation, speed to market, low cost and outstanding quality. Individually, any one of these strengths would be an enviable asset for any company to have. Yet together, in concert, they're at the center VF's DNA and what allows us to be so successful.

Now let's take a look at how some of these strengths played out for the year just ended. Total revenues grew 15% to $10.9 billion or 17% on a constant dollar basis, including organic growth in every coalition, every geographic region and in both our wholesale and direct-to-consumer businesses. In constant dollars, our Outdoor & Action Sports coalition grew revenues by 31% or 13% on an organic basis. Internationally, constant dollar revenues for the year were up 29% or 11% if you exclude Timberland. And our direct-to-consumer business grew 25%, an increase that now takes our DTC business to 21% of total VF revenues.

Full year gross margin rose by 75 basis points to a record 46.5%, with improvements in nearly every business. And very important to this story is the fact that it's about much more than product cost. Our improvements continue to be impacted most greatly by the shift in our portfolio mix towards higher-growth, higher-margin businesses and geographies.

Our profitability also got stronger this year. In fact, all 5 coalitions ended the year with double-digit operating margins for a combined 13.5%. Excluding Timberland, our operating margin would've reached 14.4%, once again reinforcing our confidence and our ability to reach our 15% goal by 2015.

And finally, our adjusted earnings per share increased 17% to $9.63, well above our long-term expectation for 12% annual EPS growth. And included in that result is $1.12 in earnings per share from Timberland.

Turning to 2013, I'd like to underscore the confidence I have in VF's ability to deliver sustainable profitable growth. All global companies operate in a constantly fluctuating environment, and we have validated time and again our ability to effectively manage our business under a variety of conditions. 2013 is no different. We'll continue to leverage our portfolio and competitive advantages to drive revenue growth, margin expansion and earnings while mitigating risks and most importantly, creating long-term value for our shareholders.

Taking a brief look at a few of our 2013 highlights. First, we expect revenues to increase approximately 6%, which will take us to the $11.5 billion mark. But let me make one thing clear, VF is not a 6% growth company, it's a 10% growth company. In 2013, there were 2 external factors weighing on our growth, both of which are well known to you: First, a second unseasonably warm winter, which is affecting our largest brand, The North Face; and second, weak economic conditions in Europe, which accounts for 22% of VF's revenues. In addition, we have no acquisitions baked into our plan this year. Beyond 2013, our confidence in the power of VF's portfolio to deliver 10% revenue growth remains high.

Below the revenue line, we're expecting substantial margin expansion over the results we just posted in 2012. Gross margins should expand by 100 basis points to 47.5%, and adjusted operating margin is expected to grow by nearly 100 basis points, which puts us very close to our 2015 goal 2 years ahead of schedule. And we expect adjusted earnings per share to grow 11% to $10.70. All of this is expected to yield another record year of cash flow from operations, which should approach $1.4 billion. Clearly, a great year ahead of us, with balanced growth, strong profitability and the leadership you've come to expect from VF.

And with that, I'll now turn the call over to Bob to discuss our fourth quarter financial performance and guidance in greater detail. Bob?

Robert K. Shearer

Thanks, Eric. I'm going to start with a reminder. This is the first quarter where we completely anniversary the Timberland acquisition, so all fourth quarter commentary reflects organic performance. Total revenue growth was 4% in the quarter or 5% in constant dollars. And as in the last 2 quarters, revenue comparisons were negatively impacted by about 1% from the sale of John Varvatos. Excluding the impact of John Varvatos on our Contemporary Brands coalition, every VF coalition worldwide achieved higher revenues in the quarter. Also, we significantly expanded both gross and operating margins in the quarter. Our gross margin increased 220 basis points, reaching 47.4%, an all-time high for any quarter in VF's history. Every coalition achieved a higher gross margin. As you might expect, the biggest increase came in our Jeanswear business, where we continue to move closer to our historically stronger gross margin levels, following the volatility created by rising cotton costs over the past couple years.

And of course, our gross margin increase continues to reflect the shift in our mix toward higher-margin businesses. And that's particularly true in the fourth quarter, given our growing retail store footprint and expanding e-commerce business within our higher-margin lifestyle brands. The positive dynamic of expanding gross margin driven by the faster pace of growth in our higher-margin businesses has been and will continue to be a key component of VF's earnings growth story in both 2013 and in years to come. The increase in adjusted operating margin in the fourth quarter, that is excluding the acquisition-related expenses for Timberland, was even stronger, up 280 basis points and reaching 15.1%.

And a comment on our tax rate, which was right in line with both our expectations and the fourth quarter of the prior year. Our fourth quarter rate is a little lower than our annual rate due to a higher mix of international, with its lower effective rate.

And that brings us to the bottom line and another quarter of record earnings per share. Adjusted fourth quarter earnings per share, again excluding Timberland acquisition-related expenses, increased 32% to $3.07. And as we've seen in prior quarters, the fourth quarter included a combined negative impact from foreign currency and higher pension expense of $0.09 per share. All in all, a great quarter for VF shareholders.

Now a few comments in the fourth quarter financial performance of our coalitions. Our Outdoor & Action Sports business posted a 6% increase in revenues in the quarter. Vans and The North Face continue to exhibit very healthy growth. Timberland declined 4%, which impacted the overall revenue comparison for the coalition in the quarter.

We are particularly pleased by the 11% constant dollar growth in The North Face, given the challenges of another warm winter, difficult conditions in Europe and retailers' carryover of inventory from 2011. Recall too that The North Face faced pretty tough comparisons against last year's fourth quarter, when constant dollar revenues increased 22%. In fact, in the fourth quarter of 2012, The North Face posted healthy growth in all key regions and balanced growth in both its wholesale and direct-to-consumer businesses.

And Vans posted outstanding results. The 22% constant dollar revenue growth in the quarter bears repeating. The brand continues to be on fire in Europe, posting a nearly 60% increase in constant dollar revenues in the fourth quarter. Hereto, we see very balanced growth across geographies and channels. In fact, in the fourth quarter, Vans wholesale business grew over 23%, while its DtoC business increased 18%.

Now for Timberland, the biggest impact in results in the quarter were unseasonably warm weather and difficult conditions in Europe, particularly in Southern Europe, which is Timberland's largest market there. Two bright spots in the quarter were Timberland's direct-to-consumer and Asia businesses, both of which achieved solid growth. We've made a tremendous amount of progress in building the foundation for strong future growth for Timberland in terms of leadership, operations and product development. And we are as convinced as ever that the brand is poised for accelerating growth in the years to come.

The profitability of our Outdoor & Action Sports coalition continues to shine, with an 18% increase in operating income to an operating margin of 18.8%. As you know, Timberland's operating margin is below that of our core Outdoor & Action Sports businesses, which continued to deliver outstanding profitability at the 20% level in the quarter. Given our work with Timberland over the past year, we remain confident that the brand's profitability will approach that of our core Outdoor & Action Sports businesses.

Jeanswear top line results strengthened a bit this quarter, growing by 4% in constant dollars. Our Americas business continues to deliver solid performance, with growth in our Mass, Western and Latin America businesses. On the flip side, Lee's top line continues to experience pressure, both in the U.S. and abroad, with challenging dynamics in mid-tier department stores, weak economic conditions in Europe and a buildup in retailers' inventories in China.

The real story in Jeanswear this quarter is a significant improvement in profitability that I referenced earlier, with operating margin reaching 17.9%, moving closer to our historically stronger levels. Imagewear posted modest top line growth in the quarter, up 2%, but that's against a pretty tough comp for this coalition last year, when fourth quarter revenues grew by a very healthy 10%.

Hereto, the bigger story is the bottom line. In the third quarter, we indicated that the Imagewear operating margin comparison should improve in the fourth quarter, and that's exactly what we saw, operating margin improvement to 13.1%.

In percentage terms, the strongest revenue gain in the quarter was posted by our Sportswear business, where revenues grew by 15%. Both Nautica and Kipling contributed to the quarter's very strong growth. The profitability improvements we started to see last year continued into 2012, with Nautica product performing really well at retail and its DtoC business also showing a lot of improvement. Our Sportswear coalition's momentum on both the top and bottom lines is clearly accelerating and is expected to continue in 2013 as well.

The story in our Contemporary Brands business is also one of both top and bottom line growth. The decline in reported revenues was due entirely to the John Varvatos sale. Otherwise, the businesses, consisting of the 7 For All Mankind, Splendid and Ella Moss brands, saw a 4% gain in revenues in constant dollars. The profit picture in Contemporary Brands also continues to get better, with a substantial improvement posted in 2012 and continued gains expected this year.

And now just a few words on our balance sheet before moving on to our guidance for 2013. VF's balance sheet continues to be in incredible shape. We ended the year with nearly $600 million in cash, and we bought 2 million shares of our stock early in the year. We paid down all outstanding commercial paper borrowings, contributed $100 million to our pension plan and raised our dividend by a very healthy rate. Our strong working capital management was evidenced by a $100 million reduction in inventory year-over-year. And we didn't miss a beat in servicing our businesses' needs. On-time shipping performance was at our highest levels ever. Our strong earnings and working capital management fueled cash flow from operations of nearly $1.3 billion in 2012, another record for VF.

So onto 2013. We entered 2013 with great confidence in our plans for growth. In terms of the top line, we're looking forward to another year of strong balanced growth across our coalitions. In 2013, we expect revenues to increase by about 6%. Our Outdoor & Action Sports coalition should lead the way, with about 10% growth driven by continued strength in both Vans and The North Face brands. Vans is expected to grow nearly 20%; and The North Face, at a high single-digit rate. We're targeting modest growth in Jeanswear, with the continuation of solid performance in our Americas business. Contemporary Brands, excluding John Varvatos, and Sportswear are looking forward to a year of high single-digit growth, while Imagewear is planning for mid-single-digit growth. You'll hear a lot more from our coalition leaders on their brand-specific growth initiatives in just a moment.

International and direct-to-consumer should continue to be key growth drivers for VF in 2013. We're targeting 10% revenue growth in our International business this year. Asia will continue to be our strongest region, growing at a low-teen rate in 2013. And that's below the 17% 5-year target that we presented in September. But as we acknowledged then, and as most of you know, there has been a buildup in inventories in certain categories in China as a result of some moderation in economic growth there last year. That is placing some near-term pressure on our growth, particularly in our Jeans business. We think it will take a couple more quarters for those inventories to clear, at which time we expect to resume growth in Asia closer to our target levels. Our 5-year targets for 17% revenue growth in Asia and 21% in China remain intact. In Europe, our brands continue to expand and gain share, which should help drive a high single-digit increase in our European revenues this year. And on a combined basis, our non-U.S. Americas region is looking forward to a really strong year, with revenues expected to grow at a mid-teen rate.

In 2012, international revenues accounted for 37% of VF's total revenues. And in 2013, we should move to 38% of total revenues as we continue to make progress against our 5-year target of 45%. DtoC will again be a significant growth driver for us in 2013.

We're planning to open about 160 stores this year, up from 141 stores opened in 2012. These stores allow our brands to bring their stories to life and create growth in the face of regional economic and channel pressures while also providing very profitable returns. And speaking of profitable growth, our e-commerce business continues to expand rapidly and should again grow in excess of 30% in 2013. The combination of new stores, comp store growth and e-com increases should drive a mid-teen percentage increase in DtoC revenues this year, resulting in DtoC revenues growing to 23% of total revenues from 21% in 2012.

Now a couple of comments on the expected cadence for revenue growth this year. The quarters that will deviate most from our overall rate for the year are the first and fourth quarters. 2013's first quarter is comping against the first quarter of 2012 that included early shipments of Jeanswear spring/summer product, which isn't likely to repeat this year. And the inventory issue in China that I mentioned earlier will also mute first quarter revenues. On the other hand, fourth quarter revenue and profit comparisons should be the strongest of the year, reflecting the seasonal benefits from our growing DtoC business.

And now onto margins. In today's release, we indicated that we expect a 100-basis-point improvement in gross margin and a nearly 100-basis-point improvement in operating margin this year. And that's on top of the strong margin improvement we reported today for 2012. The components of this year's increase include the continued mix benefit that I spoke to earlier, lower product costs and a variety of supply chain initiatives designed to drive even greater efficiencies. At the same time, we're planning another big year of brand and technology investments. In fact, our marketing spend should expand even further from 5.3% of revenues in 2012 to 5.6% in 2013, with obviously a much higher rate of spend against our more consumer-facing brands.

And our planned capital expenditures this year are $325 million, up from $252 million in 2012, including the higher number of new store openings, new distribution centers, as well as technology upgrades driving another year of significant investment to support our current and future growth.

Okay, so wrapping up with our earnings per share guidance. Our target for adjusted earnings per share in 2013 is approximately $10.70. That represents 11% growth over the adjusted EPS of $9.63 in 2012 and is in line with our long-term EPS target we set in 2011.

Now just to be clear, the adjusted numbers exclude Timberland-related expenses, which are currently anticipated to be about $15 million or $0.10 per share this year. On a GAAP basis, in other words, including the Timberland acquisition-related expenses and the gain on sale of John Varvatos in early 2012, earnings per share are expected to increase 9% to about $10.60 from $9.70 in 2012.

And for those of you who may be wondering, pension expense should be neutral to our comparisons this year. Also, the assumed euro-to-dollar rate is 1.30. And to anticipate a question you might have, the impact of a $0.05 move in the euro against the dollar would be about $90 million in revenues and $0.15 in EPS.

And one other outstanding item, really no news to report on Billabong, just a continuation of our discussions. And as you probably anticipated, we won't have any other commentary at this point related to Billabong.

So in summary, we're really pleased to wrap up another great year for VF and our shareholders, and we have tremendous confidence in the 2013 guidance we provided to you today. The VF-wide focus on innovation as a key growth driver is clearly working as we outperform our competitors and gain share in nearly every category and market. Our focus on TSR, or total shareholder return, has really paid off, with VF generating a TSR CAGR of 30% over the last 3 years. And we're far from done. We're winning, and we intend to keep winning.

I'm really eager for you to hear about what's next for our brands directly from our business leaders, so let's get to it. First up, Steve Rendle.

Steven E. Rendle

Thanks, Bob. Outdoor & Action Sports is VF's largest and most diverse coalition. Our coalition's portfolio of brands is purpose-built to engage the passions of a wide variety of activity-driven consumers around the world.

In 2012, global revenues for The North Face were up 9% or 11% on a constant dollar basis, including a 13% increase in the brand's DtoC business and double-digit growth, both in the U.S. and internationally.

In 2013, we expect The North Face's global revenues to grow at high single-digit rate. Despite customer caution following 2 consecutive warmer-than-normal winters in the U.S. and challenging conditions in Europe, we are confident in our plans to deliver solid growth and reach another year of record revenues for the brand. The North Face brand is stronger than ever. We continue to win against our competition, and we intend to keep winning.

Coping with current market dynamics has revealed the true strength of The North Face brand and its strategies, specifically, our activity-based model and our advanced product platform. A little more than 3 years ago, we introduced the activity-based model, reorganizing our business around 4 categories: action sports, performance, outdoor and youth. We've successfully broadened our product offering and extended our consumer and customer base. Today, The North Face is a brand for all seasons with a growing footprint in brand-relevant category extensions. And honestly, we're just getting started.

Two years ago, we also upped the investment behind our advanced product platform and accelerated our efforts to create next-generation products to drive consumer demand in all categories. You can see the results of this investment in the success of Flash Dry, our moisture management material technology launched last fall that lets the consumer stay drier and warmer in a broad range of environmental conditions. It sold in and sold through very well in 2012 and continues to show solid performance.

In 2013, you will see the introduction of Thermoball, an exclusive, new insulation material that will serve as the foundation for our insulated outerwear product story, an innovation that is very lightweight, as warm as 600 fill down, yet maintains a high level of thermal insulation when wet. Our activity-based model and advanced product platform are examples of winning strategy. Hoping for snow is not. That's why we're constantly ahead of the curve when it comes to anticipating and meeting the demands of our customers and consumers.

In 2013, we will focus on 3 key pillars to continue to grow the franchise of the world's most powerful outdoor brand: Product, direct-to-consumer and marketing. First, product. We are seeing and leading a change in consumer behavior toward more contemporary, athletic styles for the outdoor category. Style and contemporary fit, color, lighter weight and multiuse are what consumers want in apparel while not sacrificing performance. This is exactly what you'll see in our product lineup in 2013, and it's where leading-edge innovations like Thermoball will make a big difference.

Next is direct-to-consumer. Our e-commerce business continues to be fueled by our omni-channel model, which makes it easy for consumers to access our products whenever and however they choose. In-store and online, it's a digital ecosystem that puts them at the center. We're also continuing to open stores where consumers can experience firsthand the breadth and depth of our brand. At year-end, The North Face had 101 stores globally, which points to the opportunity to bring more consumers into our unique environments. And of course, becoming a better retailer helps us become a better wholesaler, as evidenced by the growing number of shop-in-shops we're building with key retail partners.

Third is marketing. With the world's best outdoor athletes pushing the limits of human performance, we have great stories to engage our consumers. In 2013, our investments will be concentrated in-store and online through national and local media and supported by a growing number of grassroots events, which have proven critical to driving traffic and conversion in all channels of distribution.

In terms of international growth, in 2013, we're looking forward to an even stronger mid-teen growth for The North Face, driven primarily by Asia, where we're expecting revenues to grow by over 30%. China presents a unique growth opportunity for The North Face, the opportunity to define and lead the outdoor category in this dynamic and growing market. New door openings are at the heart of our growth strategy in China, with plans to add 200 locations in 2013. This increase uses a new store format adapted from The North Face's global activity-based model and will bring our total door count for The North Face to more than 800 by year-end.

We're also looking for a year of solid revenue growth in Europe. Despite very weak conditions, the health of The North Face brand has never been stronger. Our ongoing investments there are driving significant gains in total brand awareness and share increases in key markets that will result in high single-digit constant dollar growth for us in 2013. That growth should come from aggressive expansion in our direct-to-consumer presence. We'll open a significant number of stores this year, both owned and with partners, in such key markets as the U.K., Germany, France, Italy and Poland. And we're looking for explosive growth in our e-commerce business, given last year's launch in 6 new markets.

Next up, Vans. Global revenues for Vans in 2012 were up 23% or 26% excluding the impact of foreign currency. In 2013, up a much larger base, we expect Vans to deliver another year of outstanding growth, with revenues expected to increase by nearly 20%. Last June in New York, we announced our 5-year plan for Vans, detailing the initiatives that will add $1 billion in new revenues by 2016. In 2013, our focus remains on the 4 key growth strategies we presented at that meeting: geographic expansion, deep consumer connectivity, product innovation and direct-to-consumer expansion.

In the Americas, we'll execute our global geographic expansion strategy to access new markets here in the U.S., as well as in Canada, Mexico and Latin America. Although Vans has been an integral part of the Southern California landscape for nearly 50 years, our presence on the East Coast and other key regions is quite young, representing an incredible long-term growth opportunity.

Here in the Americas, we'll focus our efforts this year in Boston, New York, Philadelphia and Chicago, as well as in key urban markets in Canada and Mexico. Vans expansion outside the Americas continues to be impressive, with revenue growth of more than 30% in constant dollars.

Vans' international performance in 2012 is one of VF's biggest success stories. Europe was actually our fastest-growing market, with revenues rising more than 60% in constant dollars. And in Asia, revenues grew over 20% on a constant dollar basis. We're very focused on maintaining our momentum in both these markets, with total international growth of about 30% planned for Vans in 2013. In Europe, Vans' phenomenal growth should continue, with revenues expected to rise by over 30% this year. In fact, we expect Vans to become VF's second largest brand behind Timberland in Europe. It's a region where we're using our strength to press our advantage. We're expanding owned full-price stores. We're expanding partnership stores. We are prioritizing investments against top markets such as Germany. And we're investing in a new global marketing campaign.

Next, deep consumer connectivity. Vans is a timeless brand that continues to resonate generation after generation because it stays grounded in action sports, art, music and youth culture, creating, inspiring and leading that conversation. In 2013, we plan to amplify our message with a new global brand campaign called "Off the Wall is a state of mind." This new campaign will unify our global message and be heavily incorporated into our digital and interactive platforms, which are essential to reaching today's young consumers.

Our next growth strategy is product innovation. Last year's LXVI launch, a product that blends the features of action sport shoes with traditional athletic shoes, was an important milestone for us, opening up a new channel of distribution we'll continue to build on in this year. In 2013, a prime example is the UltraCush Lite footwear with cushioning system. It's a custom blend of ultrasoft EVA foam that's lightweight, reduces foot fatigue and increases comfort.

DtoC is a big part of Vans' growth story this year. I spoke earlier about expanding our retail footprint into new geographies. Last year, we launched a new global store format. It's been specifically designed to use the brand's heritage to tell locally relevant stories and has shown good results to-date. And like The North Face, Vans continues to be hyper-focused on its omni-channel vision, expanding and evolving our brick-and-mortar and click-and-order retail platforms to let consumers access Vans however they choose.

DtoC is also a critical growth driver for Vans internationally, especially in emerging markets such as China. In fact, the first store to be retrofit with our new global store format was the Vans flagship store in Beijing, a change that drove 20% growth in same-store sales. In 2013, we plan to roll out this new format to more stores in China and use this as the foundation to leverage our newly owned business in South Korea. Our DtoC growth should be -- should support high-teen revenue growth in Asia this year for Vans.

Now switching gears to Timberland. Full year Timberland revenues on a pro forma basis were up slightly in constant dollars. Timberland was also impacted by challenging economic conditions, especially in Europe, unseasonably warm weather and a cautious retail environment, which we expect to continue into this year.

In 2013, we're expecting mid-single-digit revenue growth for Timberland on a global basis. And while things we can't control, like the economy and weather, are expected to temper the top line, we feel confident and in command of the things we can control. Our new product pipeline continues to gain momentum. We've got fantastic stories to tell, and our distribution channels are now well defined and much cleaner than in the past. And their inventories are well managed and appropriate to the environment.

You may have a question about how we're tracking against the 10% CAGR we gave at the time of the Timberland acquisition. In 2013, our Americas and Asia businesses are right in line with this long-term target. But clearly, conditions in Europe, Timberland's largest market, are proving more difficult than we had originally anticipated.

In 2013, we're targeting mid-single-digit growth. Our focus is on 4 key areas: Product innovation, marketing effectiveness, direct-to-consumer and geographic expansion. Starting with product. I'm happy to report that the work that we've done over the last year with our channel segmentation strategy and our go-to-market discipline has successfully returned the Timberland's yellow boot to iconic status, a status recognized by consumers and favored by our dealers. Our Hookset Handcrafted and the leather boat shoe collections continue to help build significant momentum in the important spring season and are exceeding our expectations.

In 2013, we'll launch the Earthkeepers Heritage collection, which is an eco-friendly line of footwear, featuring legacy crafted details straight from the Timberland vault, combined with modern styling and comfort. We also have new additions to the Timberland Boot Company collection, our most premium line of footwear, featuring details like premium leather and hand-painted finishes that are inspired by a time when footwear was a tool built for a purpose.

This fall, we're set to relaunch men's apparel in the U.S. with targeted specialty department stores, as well as with our own Timberland stores and online. This is a great opportunity for us to extend the brand's identity and authenticity. Although the launch will be intentionally small and modestly incremental to revenues, we have great confidence that this will stage -- will set the stage for our ultimate goal of adding $300 million in revenues to our existing $270 million global apparel business. We know you're eager to see it, so we're planning a preview sometime this summer.

Turning to marketing. A new global campaign called "Best then. Better now." will build on the brand's historic strength while delivering a new contemporary look and feel. It's very elegant, aspirational and brand building. Also we're planning to increase our investments in digital and print ads in a very focused manner to strengthen consumers' brand perception and drive wholesale and DtoC traffic.

In terms of DtoC expansion, with new leadership in place and a focus on store-level KPIs, we're expecting high single-digit growth in the Americas, with improved profitability in full-price, outlet and e-commerce channels. And strengthened by digital marketing efforts and an overall site experience, we're expecting a near 50% increase in revenues for Timberland's e-commerce here in the Americas.

On the international front, Timberland's international business is expecting slight revenue growth in 2013, with a mid-single-digit decline in Europe, where conditions in Italy, the brand's largest market, remain challenging. In Asia, we expect a mid-teen increase, a region where the brand continues to post consistently strong results.

A major focus for us in 2013 will be the integration of Timberland into our European operations, a big move but critical to establishing our platform for future growth in Europe and improving profitability. We're also working to expand our successful partnerships to our program in Europe with the addition of 40 doors, bringing total doors to approximately 300 in the region, greatly increasing brand presence and visibility. In terms of our own doors, we're continuing to assess our current footprint with a keen eye towards improved profitability through increased conversion and traffic.

In Asia, you'll recall that we announced a 13% compounded growth rate target over the next 5 years. And despite some softness in Japan, Timberland's largest Asian market, the brand grew double digits there in 2012. And we're expecting similar growth in 2013. And in China, where we're just getting started, revenues are expected to grow 30%. We're also excited to launch 6 new owned stores in Shanghai, an extremely influential city, where in conjunction with The North Face, we're leading the conversation on Outdoor.

Now I'll turn it over to Scott to take a look at Jeanswear.

Scott H. Baxter

Thank you, Steve. Good morning, everyone. In 2012, global revenue for VF's Jeanswear business was up 2% or 4% in constant dollars, a performance that reflects a mid-single-digit increase in the Americas. In addition to the top line story, there is also a story of improving profitability for both Wrangler and Lee in every region of the world. Long-term growth prospects for our Jeanswear business remain strong. Near term, we'll be navigating challenging macro conditions globally. We're expecting modest growth in our global Jeanswear business this year, with our focus, front and center, on consumer-centric product innovation. Our pipeline of new products for 2013 and beyond is designed to bring style, function and performance benefits to consumers in all channels and regions.

Starting with Wrangler, our highest-margin Western Specialty business should continue its momentum in 2013. Product innovation lies at the heart of our success in this business, with a portfolio of products to meet customer needs from Premium Performance Cowboy Cut for authentic cowboys to the Wrangler 20X Competition Jean for the more aspirational western lifestyle consumer. Not only are our key retail partners adding doors, but we're also growing our business outside the Western channel into sporting goods, outdoor and regional mid-tier locations.

2013 should also mark another year of growth for our Mass business, driven by new products like Wrangler advanced comfort, which features denim that is both stronger and more flexible. We're also seeing great success with our Wrangler tops program. We also expect double-digit constant dollar growth in Wrangler Latin America to continue, fueled by retail expansion in Argentina and Chile.

Wrangler's business in Europe remained challenging in 2012, although our profitability continued to improve. In 2013, we expect further improvement of profitability and are looking forward to the launch of a new product innovation, denim performance for men. Denim performance is focused on the functionality of jeans, a core part of the Wrangler's heritage, incorporating extra pockets, better breathability, better durability and water and stain resistance in both jeans and outerwear. Denim performance gives Wrangler a clear, defined, competitive advantage in the market.

Taking a look at Lee. In 2012, global revenues were flat on a constant dollar basis. In 2013, we're expecting slight growth on a global basis, driven by mid-single-digit growth in the Americas. Our Lee Platinum label collection performed well in 2012, including a test with a major department store customer that was very successful. And we're looking forward to the continued expansion of our collection in 2013.

The mid-tier remains challenged, but let me say this, we're not sitting back and waiting for recovery here. We are aggressively pursuing consumers with portfolio of innovative products that offer great fit, fashion and functional benefits. There's Perfect Fit for women and modern series for men as 2 examples of consumer-centric innovation. These new products will also help head the support of a new marketing campaign from a new agency.

Internationally, in 2012, we saw an improvement in profitability in Europe. And in 2013, we expect continued improvement. Our Stretch Deluxe line has been a real bright spot there, delivering 15% growth in women's jeans in 2012. In 2013, we'll continue that momentum by focusing on our bestseller, a fit called Scarlett, which will be available in 25 new combinations of color and fabric, building on the success of Stretch Deluxe. We'll launch a collection for men called Blue Label or Premium by Lee. We've also continued to test Lee's new full-price model with a cluster of owned stores in Benelux. And we'll be launching a new partner store in Germany, Scandinavia and the U.K.

In Asia, we talked about our long-term plans for the region in great detail back in September in Shanghai. In the near term, however, the jeanswear industry has been affected by efforts to right-size inventories, and Lee is not immune. Lee's performance in Asia will be particularly challenging in the first half and begin to normalize in the second half.

In the meantime, our focus is on the innovative product, growing the number of doors, new marketing campaigns and expanding digital and e-commerce platforms.

And now I'd like to take a few minutes to talk about VF's Imagewear business. Imagewear is VF's third largest coalition and a consistent performer, having now delivered 11 consecutive quarters of revenue growth. In 2012, the business grew by 5%, with strength on both sides of the business, Image and Licensed Sports Group. In 2013, we're expecting mid-single-digit growth as well.

Quickly, I'd like to touch on a few highlights of what's made Imagewear a consistent growth engine. Our success with Red Kap's new products in automotive workwear has opened up new channels of distribution, including retail.

We're also partnering with the Wrangler brand to reach new untapped channel, B2B workwear. Wrangler Workwear is a new line of premium shirts, pants and outerwear loaded with innovative features to improve comfort and durability. After successful tests in 2012, we're planning for a much broader rollout.

Finally, the Licensed Sports Group will continue to build its momentum with a new line of products within our Majestic, Authentic MLB collection. In further expansion of our successful lines of NFL apparel for men and women.

And now Karen Murray will take you through the Sportswear coalition. Karen?

Karen Murray

Thank you, Scott. We're expecting revenues for the Sportswear coalition to increase at a high single-digit rate in 2013. Let's look a little deeper at where that growth will come from, starting with VF's sixth largest brand, Nautica.

In 2013, revenues for the Nautica brand are expected to grow at a high single-digit rate. Nautica's key growth initiatives for 2013 are direct-to-consumer expansion and product innovation.

Nautica's direct-to-consumer channel should see double-digit growth in 2013, driven by double-digit comp store growth, new store openings and exceptional e-commerce growth of over 50%. In fact, we plan to launch an entirely new Nautica website this year, a timely event given our 30th anniversary of the brand.

Our next growth initiative is product innovation. We are continuing to develop a performance platform to differentiate the brand and provide new value to consumers. Products that feature water-oriented performance features, such as moisture-wicking, water-repellence and breathability currently make up 35% of our assortment. This will grow with the full 2013 introduction of elevated fashion performance products. In addition, we plan to expand our jeans offering in all doors to gain share in denim and with younger consumers.

One final note on Nautica before I move on. We also expect heavy -- healthy double-digit growth in our licensed international business as we expand into 3 new emerging markets: Turkey, Russia and Brazil.

Although we don't normally talk about Kipling, which is part of the Outdoor & Action Sports coalition internationally and Sportswear in the United States, the brand has become an increasingly larger and more important top and bottom line contributor for VF. Kipling is a fun global handbag and accessories brand with incredible strength. And as excited as we are about its near-term success, we're even more excited about its long-term growth prospects.

In 2013, we expect Kipling to grow global revenues at a low double-digit rate, fueled by strong growth in every region of the world, including more than a 30% increase expected in the United States. Kipling's U.S. direct-to-consumer business, which represents more than half of the brand's U.S. revenues, is expected to see exceptional growth in 2013 fueled on both the retail and e-commerce fronts. We are testing a new full-price retail store concept, and e-commerce will contribute significantly, aided by the launch of a new website and a global digital marketing campaign. Kipling's successful exclusive handbag partnership with Macy's is expected to continue to grow in 2013 as we add new products, expand it to new doors and work to expand our presence with this important partner.

Kipling is famous for its crinkled nylon, and we see plenty of white space for product innovation within and beyond this material. In 2013, we're looking at metallic, patent leather and lacquer materials. And we plan to introduce new product categories, such as backpacks, scarves, hats, umbrellas and jewelry.

In summary, our coalition is in a very different place today than it was just a few short years ago. We're seeing significant acceleration in our top line growth and profitability. Our momentum is set, and we are on a roll.

Now my colleague, Susan Kellogg, will take you through Contemporary Brands.

Susan Kellogg

All right, everyone, rest assured, we're almost done. In 2012, excluding the John Varvatos brand, which we sold in April, Contemporary Brands North America revenue were up 9%, with solid results from 7 For All Mankind, Splendid and the Ella Moss brands. In 2013, we're expecting our high single-digit growth to continue, starting with 7 For All Mankind. The brand's key growth initiatives are similar to what you've heard throughout the call today: Product innovation, direct-to-consumer expansion and deeper engagement with the consumers.

On the product innovation front, in 2013, we plan to introduce 2 new fabric innovations: Slim Illusion second skin for women and lux performance in casual denim for men. Slim Illusion second skin is a proprietary denim with 100% elasticity, which means it will keep its shape, fit and feel throughout the life of the product. Lux performance is stretch distressed denim for men that combines the rugged look men want with unsurpassed comfort while also returning -- retaining its shape for the life of the product.

Next is direct-to-consumer expansion, fueled by high single-digit comp growth and expected 20% increase in e-com revenue. We're also excited about launching our China website later this year and are looking forward to engaging consumers in this important market.

Finally, we're creating deeper engagement with consumers by telling evocative stories in a new way, enabled by digital technology and social media. Building on our success from last year, we're bringing back Oscar-nominated actor and film maker, James Franco, to create our 2012 marketing campaign. But there's a new twist. Instead of making films that you simply watch, we've created a new interactive experience that allows consumers to view the story one part at a time and vote on how they want it to unfold. We'll use this content to surround our millennial consumer and build our brand affinity and fuel our top and bottom line growth.

Next, our Splendid and Ella Moss brands that, on a combined basis, continue to post strong double-digit revenue growth year-after-year. Splendid's growth will be driven by aggressive DTC expansion. In fact, we expect DTC revenues to nearly double for the second consecutive year. We plan to open more than 15 new owned stores in 2013. Every store helps drive healthy brand awareness, which we know helps us win in all of our channels. Splendid and Ella Moss are just getting started, and the pace of their growth is very encouraging. And when you combine the potential of fast growing brands with VF's scale, distribution and operational efficiency, we believe we have a tremendous opportunity for future growth.

In summary, we're looking forward to a great year of combined and continued brand momentum, coupled with game-changing innovation across all of our Contemporary Brands.

And now I'll hand it back over to Eric.

Eric C. Wiseman

Thanks, Susan. That concludes our prepared remarks. But before we open the line for questions, I'd to take a moment to thank a member of our team, who recently announced her decision to retire at the end of March, Cindy Knoebel. Cindy began her career at VF in 1993 to establish our vendor relations function. Over the last 20 years, she's continued to add new responsibilities to her role, including corporate communications, public relations and sustainability. Throughout her career here at VF, Cindy's communication skills and strategic insights have been instrumental in building strong support for VF's strategic transformation by fostering strong relationships with the company's employees and investors and the media. Almost everyone on this call knows Cindy, and many of you know her well, so you know she'll be greatly missed. Please join me in thanking Cindy for everything she's done for us and for you. And we're wishing her the very best as she begins a new chapter in her life.

And of course, you already know Lance Allega, our Director of Investor Relations who joined us last time -- last year at this time. He will now be leading VF's investor relations functions, so also join me in congratulating Lance.

And with that, operator, let's open the line for questions. Cindy will be happy to take all of your questions today.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question, we'll hear from Bob Drbul with Barclays.

Robert S. Drbul - Barclays Capital, Research Division

Cindy, congratulations.

Cindy Knoebel

Thanks, Bob.

Robert S. Drbul - Barclays Capital, Research Division

I guess, Eric, the 2 questions that I have, I guess, relate around the Outdoor business a little bit. When you look at the top line that you've driven, especially at The North Face versus the industry, it's been pretty impressive. And I was just wondering if you guys can comment around inventory levels at retail, mainly around The North Face. But I would also be interested just to understand inventories of Timberland product and especially as it looks to the mid-single-digit growth rate for 2013 that you expect in Timberland.

Eric C. Wiseman

Yes, Bob, Steve will take that question for you.

Steven E. Rendle

Yes, so Bob, inventory, I mean, the channel, we really have 2 stories here, the TNF inventory is higher than we have seen historically. I think the good news is the last 4 or 5 weeks since December, week 5, cold weather has returned to much of the U.S., and we've seen really nice increases in retail sell-through. Timberland really came through, fourth quarter, in a much, much cleaner situation and enters this year with very clean inventories in all of their channels.

Robert K. Shearer

And then what we'd also say there, Bob, is that in Europe, inventories are probably a little cleaner than that, a little better shape.

Operator

And next, we'll move to Kate McShane with Citi.

Kate McShane - Citigroup Inc, Research Division

With regards to The North Face and maybe any potential changes that could be anticipated over the next couple of years, how should we think of your product mix flowing throughout the winter season? Does it impact margins at all? And are you converting or changing your sourcing with regards to The North Face in the near term?

Steven E. Rendle

Yes, Kate, so I'll take that one as well. The product mix stays very similar to what you've seen in the European market. Cold-weather apparel continues to be very important, especially in the northern region and some of the emerging markets. Here in the U.S., and as well as in Europe, we do see an increase in more contemporary athletic silhouettes which will, we believe, with our focus on the activity-based model and the learnings we have from our running, training [ph] business, we're well on the forefront of evolving our collections to meet that new consumer demand. We do see an increase in the lighter weight, what we call transitional weight insulated goods. That's made of synthetic insulations, down insulations, as well as fleeces. And again, we're well on the path of being on the front end of that trend. Margins in these categories remain the same, so there really is no change there. And our sourcing model here in Asia, as well as here in the Americas, remains the same and is well placed to be able to service what we consider will be increasing demand.

Eric C. Wiseman

Kate, I'll add one thing to that. If you think about the short term, the next 12 months for The North Face brand, our fastest growth rate will be in Asia, followed by Europe and followed by the U.S. Another way to slice that is to say our direct-to-consumer business is going to grow faster than our wholesale business. All of those facts point to higher margins for The North Face. The mix in geographies and the mix in channels will -- should expand our gross margins next year -- gross and operating margins next year.

Kate McShane - Citigroup Inc, Research Division

Okay, that's great. And I forgot to say congratulations to Cindy and to Lance.

Lance Allega

Thanks, Kate.

Operator

And we'll move on to Jim Duffy with Stifel, Nicolaus.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Cindy, we'll miss you. A couple questions. First, on The North Face and timing of shipments, are retailers reticent to take inventories as early as they have in the past? Should we expect any shift in revenue from 3Q to 4Q in the U.S. business like we saw in Europe in 2012?

Steven E. Rendle

Yes, so Jim, this is Steve. Timing of shipments, I don't really see a dramatic shift here or in Europe. I think what you'll see is just a more cautious prebook. And consumers -- or our retailers looking to take deliveries closer to demand. But timing should remain the same, and no dramatic shifts quarter-to-quarter.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Shifting gears a bit to Sportswear, great improvement there in the operating margin for the year. Sounds like good momentum in the direct-to-consumer. Should we expect the momentum in the operating margin improvement to continue for that coalition in '13?

Karen Murray

Yes, you should.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Bob, care to elaborate on that?

Eric C. Wiseman

Yes, he should.

Robert K. Shearer

Yes, Jim, actually, I'll expand just a little bit, right? So actually, in both the Sportswear, as well as Contemporary, we've seen really nice improvement. And for 2013, we expect those businesses to improve to the low and even closer to the mid-teen operating margin levels, with a 15% operating margin clearly in our sight. So yes, we're seeing a lot of opportunity there for continued and significant improvement.

Eric C. Wiseman

In both.

Robert K. Shearer

In both.

Operator

And Michael Binetti with UBS will have our next question.

Michael Binetti - UBS Investment Bank, Research Division

Can you give us an idea of the -- what the Timberland operating margins look like in the quarter and what the Timberland operating margins are that are implied in the plus-100-basis-point guidance for the company for 2013, please?

Robert K. Shearer

Yes, I'll handle that. I'll talk about for the year, Michael, for 2012. We started the year saying that we thought our operating margin for Timberland would be in the 10% to 11% area, and that's where we ended up. We were just above 10% actually in 2012. For 2013, what we're looking at is, as you'd expect, where you expect to grow our gross margins in 2013. But Steve mentioned something in his comments that there are a couple areas that we're going to be spending against, and those are in product, in the product development area, as well as we're going to up the marketing spend there as well. So improved gross margin in 2013, exactly what we need to see, but the operating margin will remain relatively flat, maybe up just a little bit from what we saw in 2012 because of the spend.

Michael Binetti - UBS Investment Bank, Research Division

Okay. And just 2 quick follow-ups here. Could you just help us out, the order book you're seeing for the big brands, Vans and North Face, for the spring?

Steven E. Rendle

Sure. So order book for our Vans business is quite strong, which is leading us to the guidance we gave for the brand, both here and in Europe. And order book in The North Face is moderate, as you might expect, with the caution that we see in our dealer base, both in the U.S. and Asia. I mean, in Europe. But our Asia business is quite strong. So just up slightly, right in line with how we've guided the brand.

Michael Binetti - UBS Investment Bank, Research Division

Okay. And one -- just one last one. Eric, is there any opportunity to do -- to start talking about a shop-in-shop with JCPenney this year? We've had the Vans product and the Lee product in there historically, and some of the competitor sales brands has -- look like they've signed up for some distribution there under the new store format. I wanted to see if there was an update there for us.

Eric C. Wiseman

Yes, that's a great question, and we are in active discussions right now with Penneys about what a Lee shop or a Vans shop might look like and when they might appear, but I don't have an update on exactly when that will be.

Michael Binetti - UBS Investment Bank, Research Division

Okay. All right. And congrats to Cindy and Lance as well.

Lance Allega

Thanks, Michael.

Operator

And next, we'll move to Edward Yruma with KeyBanc Capital Markets.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Best of luck, Cindy. Can you talk a little bit about the benefits you saw from the step-up in advertising? And then also, you've indicated that advertising as a percent of sales will also increase in '13. Should we expect that to be back-end weighted?

Eric C. Wiseman

Yes, the -- we measure -- actually, for all of our big brands, we measure the impact of our investments behind those brands. And your question was about advertising. We obviously measure that. We have a pretty good feel. We measure it year-after-year by media type, and each brand knows what their consumer responds to. And because of that, that's why our ad spend has increased consistently over the last 4 or 5 years and why our investment is going up another 30 basis points this year. We think now is a great year to do that because we're expecting consumers to take a little coaxing to get them to engage with brands, and we're in a position to do that. The seasonal mix really varies by brand. For our Jeans business in the U.S., it's really important that we hit back-to-school hard. For our colder weather brands, it's important that we hit the third quarter, and the holiday quarter's important for everyone. I hope that helped.

Operator

And we'll move on to Evren Kopelman with Wells Fargo.

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

I wanted to ask about -- for The North Face, you talked a little bit about the, I guess, merchandising, some of the lighter-weight transitional goods, maybe the activity-based model helping, is -- I'm thinking is kind of this weather is here to stay, the global warming type conversations. How about for the Timberland brand? I think the new apparel that's coming in the U.S. is more outerwear-focused. Maybe you could talk if for that brand, there are conversations on the merchandising side to be kind of more versatile, seasonless maybe as well.

Steven E. Rendle

Sure. So I think it's important to note that our apparel business in Europe is the strongest in any of the regions. And our international business, we're about a $220 million business. Here in the U.S., as we look to relaunch the brand and very thoughtfully through select specialty and department store partners, we'll be placing outerwear but also a very robust collection of sportswear. So I think you can think about a really balanced approach of sportswear and outerwear, natural fibers, cottons and leathers and more of that rugged outdoor feel that you would expect from Timberland.

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

And then second question is on the M&A front. Are you still focused -- I think you've said in the past, the Outdoor & Action Sports area? Or is there any interest in the contemporary areas you've looked into before, even more footwear now that you have the Timberland and the footwear expertise with that?

Eric C. Wiseman

I think the answers to your question are yes, yes and yes. All of those are areas that we're exploring. We clearly have been focused in the Outdoor & Action Sports area, and we've talked about that as being our priority. But in each of our coalitions, we understand where there are opportunities for us to add to the portfolio in a really accretive way to the portfolio. In other words, giving us either a skill set or a product category that reaches the consumer in a different way. That's how each coalition thinks about it. And our focus has been on Outdoor & Action Sports, but that doesn't mean we're only looking at that area.

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

Okay, and congrats to Cindy and Lance as well.

Steven E. Rendle

Thank you very much.

Operator

And we'll move on to Erinn Murphy with Piper Jaffray.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

I wanted to follow up on the Asia growth rate comments, as we've seen that compress over the last quarter and then kind of a little bit more of a tempered guide for next year in the low-teens range. You highlighted the inventory in the channel with respect to the jeans market in China. Can you elaborate a little bit more on what you're seeing in that market in particular there? And then how do you think about the competitive space broadly in China in that Outdoor segment at this point? Have you seen any inventory creepage in that channel there? Are you still pretty pleased with that performance?

Eric C. Wiseman

Sure, great question. We -- in September, when we were in Shanghai, we guided that we thought we could grow Asia 17% compounded over the next 5 years. And now we're talking about a low-teen rate for 2013, and it really is solely -- the sole issue we have is our inventory in our Jeanswear -- in the industry and with our brand as well. If you look at our other businesses in China, The North Face, Timberland, Vans and Kipling, they are all on track to the kind of growth rates we talked about in September. Jeanswear, with the Lee brand in particular, was the first brand we launched there. For example, it's got a 12-year head start on The North Face. One was launched in '95, the other in 2007. So it has much broader distribution than Lee does, much broader distribution, many more touch points with consumers and a lot more inventory in the space. And that's where we have this short-term issue. We expect to work through that issue in the first half of the year, begin to gain growth momentum in the second half of the year and be back on track in 2014 with the kind of growth rates we talked about. U.S., the second question, I forgot it, sorry. Can you repeat it?

Erinn E. Murphy - Piper Jaffray Companies, Research Division

I just -- yes, sorry, I was just asking about...

Eric C. Wiseman

Oh, the outdoor.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

The competitive landscape in the outdoor space and if you've seen any kind of inventory creepage there as well.

Eric C. Wiseman

Yes, we have not seen in our brand with -- that's really -- our focus there has been primarily on The North Face until recently, obviously, when we acquired Timberland. So we now think we have a great -- we're in a great position to shape the conversation about outdoor in China. And we have not seen an inventory issue with either of our brands, and I'm not aware of an inventory build with other brands.

Operator

And we'll move on to Mitch Kummetz with Robert Baird.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Bob, let me start with you. Just you gave a little color on the sales growth by quarter and you mentioned that Q1 is the toughest comparison. So in light of the 6% growth that you're looking for the year, kind of where do you think Q1 falls in? I mean, are you talking sort of low single digits? And then also, I was hoping for a little color on kind of the operating margin cadence. You've got your easiest kind of op margin comparison in the first quarter, with Jeanswear still having been impacted by the input costs. And I was kind of wondering how we should think about that. And I have a follow-up.

Robert K. Shearer

Yes, Mitch, the -- to the first question relative to the first quarter, yes, we could be a few percentage points off the 6%. That's what we expect, a few percentage points below the 6% rate that we talked about for the year. In terms of the cadence of margins, you're absolutely right. Maybe I'll talk about both gross margin, as well as operating margin. We expect to see the strongest comparison in the first quarter from a gross margin standpoint, which is what you'd expect, right? We're up against -- we're comping against the highest costs of the year in -- especially in the denim side of things in 2012 in the first quarter. So that should be the strongest comp from a gross margin standpoint. But at the operating margin line, because of the significant growth, particularly on the direct-to-consumer side in the fourth quarter, that's where we expect to see the strongest expansion in operating margin.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Okay, that's very helpful. And then a follow-up for Steve on Timberland. A couple of things there. One, could you talk a little bit about kind of where would Q4 sales have come in, if there's some way you can adjust for the distribution changes that you've seen? And those distribution changes, do those continue to be a bit of a top line headwind as we go through 2013? And then also, could you talk about the impact of apparel on the business in 2013? I mean, just in terms of relaunching in North America, I mean, is there any way you can sort of assign a dollar value to that in terms of kind of incremental revenues?

Steven E. Rendle

Mitch, I'll do my best to answer this question without really being able to give you dollar values, which I know you're looking for. The distribution changes that we enacted, we started at the beginning of the year, it's hard for me to put a number on it. I can tell you that it absolutely did have an impact in our sales, but so did our store closures, as well as less closeout inventory, which the brand would've shown historically. So it did have an impact, but it wasn't the major driver. Impact from our apparel, as I've mentioned in my comments, will be very minimal. We're being very thoughtful and very selective in how we launch the new product here in the United States. We want to position it with the best specialty and department store players so as to really position the brand and give the product the right theater to be presented and to be supported by the footwear. So sales will be very minimal. The growth next year will come from our footwear, as well as the growth that I mentioned in DtoC and wholesale.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Okay, got it. Good and thanks for everything, Cindy.

Operator

And we'll move on to Matthew Boss with JPMorgan.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

So as we dig deeper overseas, can you speak to your level of enthusiasm in Europe next year and also, in-sale brand or category opportunities as we look forward over there?

Eric C. Wiseman

Sure, I'll take that. This is Eric. Our expectation for next year in Europe is for a high single-digit increase. So I step back from that and say we're really taking share in Europe. We're doing that because of our portfolio of brands and the different -- the number of countries we do business in. We clearly have some countries that are really challenging. We've talked about Italy, it's a tough place to sell apparel and footwear right now. And we have brands, though, that are, on the other end of the spectrum, really delivering in Europe, like Vans did for us in 2012 and will again. So while there are challenges, what we've done is look at which brands are in which markets and where are the opportunities to invest, and we're investing with real focus behind Vans in markets like the U.K., Germany and France, and in other brands where there's an opportunity to grow. And that'll help us navigate through the European challenges right now and deliver high single-digit increases in a really tough space.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

That's great. And then second question, your inventory levels, very tightly managed. We haven't seen levels like this for a couple years. How should we think about how you're managing this across brands? And then what is the game plan looking forward from an inventory perspective?

Robert K. Shearer

Well, we manage our inventories pretty similarly across brands. And obviously, the retail component of any individual business has some bearing in terms of our overall inventory levels. But this was a year -- actually glad you referenced it. This was a year where we are -- I guess, we put some extra focus on our inventories and we saw -- we really saw a great progress. We have very, very frequent face-to-face conversations about inventory. As I see some smiles around the room here from our group folks and presidents. And it's just an area that we just put a lot of focus and have been able to put or make an awful lot of improvements. So for 2013, we will continue to do the same. Actually, in our cash guidance, our assumption is that inventories will generally grow. After the reduction in 2012, we'll pretty much grow with revenues. However, I can tell you that we'll push hard to do a little bit better than that relative to our overall inventory. There is still some room for improvement.

Eric C. Wiseman

Yes, I'm going to weigh in on this because I want to give a shout out to our supply chain and front-end guys. They're working together on a new process that looks at our inventory in a different way, and they're doing that across every business unit in every geography. And part of it is a new process, and that's let us grow our business like we did last year and still take $100 million out of inventory and service at a high level. And kudos to them for coming up with a new process and making it stick.

Operator

And next, we'll hear from Eric Tracy with Janney Capital Markets.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

I'll add my congrats to Cindy. Really appreciate the help throughout the years. And congrats to Lance as well. Eric, I guess, if I could for you, just broader on the domestic front sort of beyond the seasonality issues. So on your macro, you're going to have the various potential sort of tailwinds versus some of the headwinds on the tax front or energy costs, sort of what your expectation here is domestically?

Eric C. Wiseman

Well, we read the same stuff you do, Eric, about how economists see the U.S. economy, and the question is how are people going to react to changes in tax rates and changes in healthcare costs and all that. And clearly, there are going to be pressures on disposable income in America. That seems pretty much laid out. In that environment, we have a mid-single growth -- mid-single-digit growth rate kind of baked into our assumption for this year. We think that's taking share as well, similar to the way I answered the Europe question. We really look across our portfolio of brands and ask, where can we win? And where we think we can, we try to distort our investment to ensure we do. And that's how we think we can deliver a mid-single-digit growth rate in an economy that's clearly not going to grow that quickly. We still have some challenges to get through here. Fortunately, VF is going to get through them pretty well.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Okay. And then maybe, Steve, for you on Timberland, maybe just a little bit more color in terms of the, I guess, sort of soft launch on the apparel side for fall this year. I know it's going to be tight, but sort of the expectations for what that contributes. And I think you said sort of the incremental $300 million, maybe just speak to, again, the timing cadence of that.

Steven E. Rendle

Sure. So just I think to restate, the launch here in the United States is on top of a very robust apparel business internationally. We have a very select number of new specialty and department store partners. We'll place it very thoughtfully with the whole focus of getting strong profitable sell-through with our retail partners so we build a platform for the future. That $300 million that we mentioned at point of acquisition is over a 5-year horizon. That would take you then through 2016, where we look to add that incremental growth across the global apparel business.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Okay. And then maybe last for Bob. Is it possible to quantify the 100 basis points of gross margins in sort of the various buckets? Again, the mix shifts, I get, are driving it. But maybe just between that, lower input costs, just walk us through and quantify for '13.

Robert K. Shearer

Sure, Eric. The -- it's actually going to be a pretty consistent story here over the past several years. And we talked about this a lot, that our mix shift has been providing us 60 to 70 basis points of improvement in our gross margin very consistently every year, and it's exactly what we expect for 2013 as well. The remainder are, in fact, product costs. Some lower product costs, Jeanswear is a component of that, to be sure, so is Imagewear, which had some higher product costs in 2012. So it's 60 to 70 for mix and the remainder coming from product costs.

Operator

And we do have time for one final question. Next, we'll hear from Omar Saad with ISI Group.

Omar Saad - ISI Group Inc., Research Division

Lance, congratulations. And Cindy, definitely a shout out for such an amazing tenure. I think you do go down as a legend in IR, in the sector, not just for the tenure and the duration, but obviously, the excellence as well. So congrats to you both. I wanted to ask you about -- obviously, VF over the years really has been the company that's kind of almost pioneered this idea of the lifestyle brand in the apparel sector. Certainly coming out of North America, done a tremendous job building lifestyle brands over time. Can you talk about -- the area where you've had probably the most success is in the Outdoor & Action Sports. Are you -- how are you thinking about the lifestyle of Outdoor & Action Sports? Are you seeing any changes in how consumers are thinking about that lifestyle? Is it becoming more subtle? Is it becoming more segmented across different types of outdoor sports and action sports? What are you guys seeing in that marketplace from a lifestyle perspective?

Steven E. Rendle

So Omar, I'll take a shot at this, and Eric can fill in if I miss something. I think the outdoor lifestyle, which we've certainly been at the forefront of helping create and certainly benefit from, continues to be on the forefront of consumer minds. We look a lot at macro trends across all of the regions. And healthy lifestyle, fitness and kind of that whole notion of getting back to simplicity really plays into the historical strengths of the outdoor industry. We do see really strong influence of action sports, as well as athletic coming in and speaking to a broad number of our consumers. And I mentioned how we're looking at that athletic trend and what that means to outdoor apparel becoming more lighter weight, more contemporary in its fit while maintaining that core function. But I think the key here also is that action sports, that lifestyle component that, that plays into, that again, our Vans business has been very strong at helping shape and is again at the forefront of being able to maximize that.

Eric C. Wiseman

Yes, Omar, one thing that the Vans guys have done that quite frankly just impresses me beyond speech almost is they have kept that brand relevant to youth for over 40 years. And they've done that by not trying to speak to a customer but by speaking to youth. And they understand youth need to be individually expressive and creative, and they've changed their message and how they do that, customized it to each new generation. And that's why they're still relevant and leading with youth around the world.

Omar Saad - ISI Group Inc., Research Division

Got you. And then maybe on a related topic, it was interesting to hear you're going to accelerate marketing spend and store openings. How are you thinking about that? What gives you the confidence to do that? It's great to hear it, obviously, from a brand standpoint, but any update or thoughts there would be helpful.

Eric C. Wiseman

Sure, Omar. We went back to our thinking in 2010, and you were following us then, and you know that we increased our investment -- our brand investment number by $100 million that year because we thought the economy was going to be a little wobbly and that we had the brands and the products to make a difference and accelerate our performance. And we think this is going to be that kind of year as well. We know our retail formats work. They're tested and proven. And as I mentioned earlier to someone else's question, we measure the effectiveness of our marketing, so we know which messages work and which don't. And we're going to distort our investments behind brands in geographies with proven retail formats and proven marketing communication. And we think that formula is going to help us get through this pretty difficult time in the global economy.

Operator

And that will conclude our question-and-answer session for today. I'd like to turn the call back over to the speakers for any additional or closing remarks.

Eric C. Wiseman

No, just thank you, all, for joining us. We're really excited about 2013. We think we've got all the pieces in motion to deliver another great year, and we're blessed by having a legend in Investor Relations in the room today, and we wish her well as all of you do. Thanks so much for being with us.

Operator

And that will conclude today's call. We thank you for your participation.

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