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Executives

Jean Fontana - ICR

Eric Wiseman - Chairman, President and CEO

Bob Shearer - SVP and CFO

Steve Murray - President of Newly Created Actions Sports Americas Coalition

Karl Heinz Salzburger - President of VF International

Angelo LaGrega - President, Jeanswear Coalition

Mike Egeck - President, Contemporary Brands Coalition

Scott Baxter - President, Imagewear Coalition

Karen Murray - President, Sportswear Coalition

Analysts

Robert Drbul - Barclays Capital

Kate McShane - Citi

Todd Slater - Lazard Capital Markets

Robert Ohmes - Banc of America

Eric Tracy - BB&T Capital Markets

Sam Poser - Stern Agee

Jim Duffy - Thomas Weisel Partners

Paula Torch - Needham & Company

Omar Saad - Credit Suisse

Christina Chang - Susquehanna

Scott Frost - HSBC

Maggie Gilliam - Gilliam and Company

Dana Telsey - Telsey Advisory Group

Mitch Kummetz - Robert W. Baird

VF Corporation (VFC) Q4 2008 Earnings Call February 10, 2009 4:30 PM ET

Operator

Good day, and welcome to the VF Corporation Fourth Quarter 2008 Earnings Conference Call. Please be aware that today call is being recorded. At this time I would like to turn the conference over to Jean Fontana of ICR. Please go ahead, ma’am.

Jean Fontana

Thank you. Good afternoon, and thanks for participating in VF Corporations' fourth quarter and full year 2008 conference call. By now you should have received today's earnings press release. If not, please call 203-682-8200 and we will get 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 that certain statements included in today's remarks and the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees and actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results of operations or financial condition of the company to differ are discussed in the documents filed by the company with the SEC.

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

Eric Wiseman

Thanks, Jean. Good afternoon, everyone, and thank you for joining us. As usual during our year end call we have coalition leaders with us today. So following the opening remarks by me and Bob Shearer we will hear from them about their business in the fourth quarter and their outlook for 2009.

As you saw in this afternoon's release, 2008 marked our sixth consecutive year of record revenues in earnings per share, which in this market underscores what you can do when you have a great team managing a great business model.

Now the past several years we have made a lot of change at VF. We have added growing higher margin lifestyle brands, we have expanded our direct to consumer and international businesses. And we have exited under performing businesses and these changes have resulted in a business model that is strong and resilient.

On January 14th, we provided an update on our expectations for the fourth quarter. Today the reported revenues were down 2% as anticipated, while earnings per share were $1.5 which is at the high end of our guidance.

Cash flow from operations came in stronger then we expected at $679 million versus our prior guidance of $650 million.

We also provided preliminary guidance for 2009 which we are confirming today. Revenues will be down slightly in 2009 at a low to mid single digit rate while earnings per share are expected to be about flat with the $5.42 reported in 2008.

In this environment we think this speaks volume in our confidence in our brand strength, our capacity to control cost to protect our profitability and most importantly the quality of our people.

We enter 2009 with our balance sheet and liquidity in excellent chain. Our brand portfolio was healthy and a highly diversified and I remain very encouraged by our long-term opportunities for growth.

And we remain interested in acquisition however we will be very disciplined as we consider additional acquisitions, never losing our focus on maintaining our strong balance sheet.

We have indicated that we expect 2009 to be a very difficult year. We do not expect any improvement from the conditions we saw on the fourth quarter. No one can predict what the coming months will bring, but I have confidence in our continued ability to navigate through the challenges inherent in such uncertain times.

You will recall that we achieved record results in the first three quarters of 2008. We were up against some pretty tough comparison as we enter 2009. It should be no surprise to you that we will have our difficult most difficult comparison in our first quarter, you will hear more about this from Bob in a moment.

Throughout 2009, we will continue to aggressively manage cost and inventories while at the same time we will invest prudently in the best growth opportunities for our brands both here and abroad.

And in 2009, we should have another year of very strong cash flow currently anticipated to be about $700 million. To hear more about our financial results here is Bob Shearer, Bob?

Bob Shearer

Thanks Eric. I will start with revenues which on a constant currency basis were flat in the quarter of 2007. Our reported revenues were down 2%, for the 2% was $39 million negative impact from foreign currency translations.

Now as point of comparison, the average rate of the euro in 2008 quarter was 133 compared with 144 in last year's fourth quarter.

Moving down to P&L gross margins decreased by 100 basis points, our expending retail business contributed positively to gross margins by about 170 basis points.

Offsetting this positive impact were the following. One, the cost of aggressively managing inventories. Two, the unexpected and unfavorable movement of international currencies against the euro. And three, a highly promotional retail environment.

Operating income declined by $71 million, with $41 million of the decline related to our cost reduction initiatives. Nearly all the $41 million is captured in the SG&A line and relates primarily to our cost reductions. As you are aware we have taken an aggressive approach to reducing cost and we expect that our actions will result in cost savings of $100 million annually beginning this year.

In addition, to the expense of the cost reduction initiatives our SG&A ratios were impacted by an increase in advertising spend and higher volume in our owned retail stores.

Foreign currency translations negatively impacted operating income year-on-year by $4 million. And the tax rate in the quarter was 24.1% versus 27.4% in last year's quarter and you recall that 2007 rate benefited by favorable tax resolution and we had a similar, although smaller benefit in this year's quarter.

Our declining tax rate reflects the benefit of the growth in our highly profitable international businesses where our effective tax rates are substantially lower, this benefit will favorably impact future years as well.

And that brings us to earnings per share. Our EPS was $1.05 in the quarter and that is at the high end of the guidance we gave back in January. The cost reduction actions impacted earnings per share by $0.30 while foreign currency translation cost was $0.02 per share in the quarter.

Now turning to balance sheet, we are obviously very pleased with the strength of our balance sheet at year end, a strong cash position with low debt and substantial liquidity is a pretty good place to be considering the overall economic environment.

Cash at year end was $382 million compared to $322 million at the end of 2007, our debt-to-capital ratio was 25% versus 26% at the end of 2007 and if cash is netted against outstanding debt that ratio will decline to below 20% at the end of 2008.

We had no commercial paper borrowings at year end and of our total debt only 5% is due within one year.

Inventories were only up slightly at year end and this is an area we will continue manage aggressively. In fact we expect some reductions in total inventories by the end of this year.

Cash flow from operations was a very healthy $679 million above our most recent guidance of $650 million. And I should also point out 2008 marked our 36th consecutive year of higher dividend payments. Our dividend continues to be priority for us in providing strong shareholder returns.

And now a few words about our guidance, we are planning for a challenging year, with the continuation of existing economic conditions. On a constant currency basis revenues in 2009 should be flat to down slightly.

We indicated in our release, that reported revenues could be down by a low to mid single digit percentage rate reflecting a negative impact from currency translation of three to four percentage points.

As a point of comparison, our current plan anticipates a euro rate of 133 compared with an average rate of 147 in 2008.

We look forward to another year of record revenue in our outdoor and action sports business given the continued momentum of our brands. Revenues of our contemporary brands businesses are also expected to grow significantly. This reflects strong organic growth as well as the anticipated completion of the acquisition of the remaining two-thirds of Mo Industries Holdings, Inc;Owner of the Splendid and Ella Moss brands in the first half of 2009. Expecting continued challenges in the overall economic environment we anticipate modest revenue decline in jeanswear, sportswear, and image wear businesses.

As you are aware our international business is concentrated in our outdoor and jeanswear businesses and our expectation for a stronger dollar will effect the comparisons in these businesses throughout 2009, with the greatest impact expected in the first and third quarters. Those are the periods when our international businesses are strongest.

On a constant currency basis, we expect our international revenues to grow at mid to high single digit rate in 2009. Given our currency assumptions our international revenues on reported basis could be down slightly.

In terms of our expectations for direct to consumer business this too has been in area of strong and consistent growth for VF. As we leverage the strength of our life style brands to expand our retail store base.

During the year we opened the total of 89 stores that's right in line with our goal of opening 75 to 100 stores annually. For 2009, we are taking a more cautious approach to our store opening plan and currently anticipate opening approximately 70 stores.

These openings will include new stores for our 7 For All Mankind, Vans and The North Face brands on a global basis. Our store expansion should again result in solid growth in our retail revenues and earnings in 2009 with the strongest contribution in second half of the year.

And related to our expectations for margins in 2009 we expect to see a modest improvement in gross margins this year as we benefit from the on going change in our mix to a higher margin lifestyle businesses. And the continued expansion of our direct consumer businesses.

Our expectations also reflect the continuation of a challenging economic environment. Operating margins are expected to improve by about 50 basis points in 2009 over the 12.3% reported in 2008.

Now keep in mind that, that absorbs the impact of the substantially higher pension expense which by itself represents an approximate 120 basis points impact on operating margins.

Now considering its unusual nature the increase of approximately $90 million in pension will be reported as a corporate expense in SG&A. So you will not see that impacting the reported results of our collations. The pension expense will be spread fairly equally across the next four quarters and finally a stronger dollar assumption and translating foreign currencies could impact operating income by $40 million to $45 million again the biggest impacts will be felt in our first and third quarters.

Our tax rate in 2009 should be fairly comparable to the 28.9% reported in 2008, ranging between 28% and 30%. And that brings us to our EPS expectations for 2009.

Earnings per share in 2009 should approximate for $5.42 reported in 2008 as we said in the release that includes the impact of the higher pension expense which will represent about $0.50 per share.

In addition, the unfavorable impact from foreign currency translation included in our plans will be about $0.30.

We also provided an outlook for the first quarter as Eric mentioned we will be up against very tough comparisons. The economic environment has clearly worsened since the first quarter of 2008. Accordingly we indicated in our release that first quarter revenues could be down by 5% to 7% for the 4% impact from foreign currency translations.

Our pension and change in foreign currency translation rates will have significant impact on the comparability of our earnings on a quarterly basis. The pension expense impact earnings per share will approximate $0.11 to $0.12 each quarter.

While the change in foreign currency translation rate will have the greatest impact on earnings in the first quarter and third quarters once again reflecting flow of international profits during the year. Accordingly, we expect that earnings per share in the first quarter will decline significantly reflecting an estimated combined impact of $0.20 per share from these two items.

In addition, the movement of international currencies against the Euro will have a significant negative impact in Q1 versus last year's quarter.

Now that's on top of the translational impact previously mentioned and of course the negative volume will also result in tougher comparisons in our first quarter. Accordingly, we currently expect that earnings per share for the quarter will approximate $0.90 to $0.95 compared with $1.33 per share reported in the first quarter of 2008.

2009 should mark another strong year of cash flow for VF. We expect cash flow from operations of $700 million this year. Cash balances at year end could exceed $600 million.

We have no significant long-term debt payments due until October 2010. In addition, we have $1.3 billion of available in unused lines of credit. We will continue to be very focused on managing our working capital and expect inventories to be down on a year-over-year basis.

We also will be reducing capital expenditures in 2009 which should approximate $110 million compared with $125 million in 2008. All in all, we believe we are very well prepared to face the challenges of 2009.

Eric Wiseman

Thanks a lot Bob, we will begin now here in from the coalition President starting with Angelo LaGrega President of our Jeanswear Americas coalition. Angelo?

Angelo LaGrega

Thank you, Eric. I would like start off by thanking all the VF jeanswear, despite unprecedented market conditions our associates continue to develop and deliver innovative and related products to our consumers.

And thus gaining market share in many key categories and to provide value VF shareholders in the form of meaningful operating profits and cash flow.

Despite our revenues being down in the single digit, we are able to experience virtually flat year-over-year gross margins. Our global supply chain provides us with a strategic advantage as we effectively balance internal production with core sufficient sourcing.

However, due to significant expenses associated with retail bankruptcy during the year and core reduction initiatives during the fourth quarter, operating margins declined in 2008.

We showed number of successes with the Wrangler brand this year. In the mass channel we did see a shift to opening price when products including some private label. However innovative new fits and finishes particularly in our Wrangler Jeans company line, allowed us to gain new racks and floor space as we enter 2009.

We also saw a very positive results from 250 Wrangler shops that will be expanded to over 1000 in 2009. We increased our ad spending during the year, launching successful campaigns with both Brett Favre and Dale Earnhardt, Jr. The introduction of our ultimate riding jeans for women was a huge success on our western channel.

At Lee we faced particularly difficult conditions in the mid tier department store channel. As you know this channel experienced a significant loss of doors with the liquidations of (Inaudible). However working very closely with other key customers in this channel. We gained significant market share in a number of categories. Both males and females and in jeans and casuals.

New products such as Slender Secret, Custom Fit and No-Gap Waist Band, have provided sought after uniqueness for the female consumer. Lee is very well positioned as we entered 2009 continue to take share from its competitors.

Regarding the fourth quarter, we certainly battled the impact of the recession the financial crisis. Revenues were down in mid single digits, operating margins were strained. Reflecting the revenue decline and the impact of our closed reduction actions. But with key to gain share in key product categories and plan great workspace with key retailers at the end of 2009.

We reduced gross inventories. Leaving us with the best inventory position in years.

I am realistic as we enter 2009, but optimistic as I consider our opportunities. There is no doubt this will be a challenging year. And in fact we expect our revenues in 2009 to be down slightly.

We will focus on driving results to new product innovation and new distribution. Fortunately many of these concepts have been fully tested and validated in 2008, and we look leverage our successful flagship brands with existing and new customers.

The decisions we made in 2008 allow us to enter 2009 with a very streamlined cost structure which together with our focus on revenue growth will support our efforts to deliver superior operating profits and cash flow to our shareholders.

I remain very energized about what is happening at jeanswear. With some of the most recognized brands in the world. We have a great team of people in place to execute our strategies that are more focused than ever and understanding and giving consumers what they want. All this set the stage for our platform of long-term growth for our great flagship brands. Thank you.

Eric Wiseman

Thanks, Angelo. And next we will hear from Scott Baxter, President of our Imagewear coalition. Scott?

Scott Baxter

Thank you, Eric. Good afternoon. As you know, the Imagewear coalition is made up of two distinctly different businesses the Activewear division, and the Image division. Revenues were down in 2008 but the biggest decline in our Activewear division where we saw a sharp deceleration in the fourth quarter resulting from the same challenging macro economic factors referred to throughout this call. Our Image business continues to enjoy strong profitability and delivers healthy cash flows to VF.

We started feeling the impact of the slowdown earlier in the year, we took the necessary steps to contain costs early on, during the year we saw continued growth in our fire resistant business both domestically and internationally.

In addition we had two very successful roll offs in our customs reported protection business and in our VF. In terms of our active wear business our basically baseball business performs well throughout the season. The majority of our baseball business end by the end of September so we didn’t feel full impact of the Q4 retail contraction here.

In addition, we have strong co-season business with the Philadelphia Phillies winning the world series. As we look into '09 we are expected our (inaudible) business both domestically and internationally.

In our Active business we have opened a new Baseball manufacturing and distributions facilities in Pennsylvania. It’s a new highly efficient state-of-the-art facility built to better serve our baseball business.

In our NFL business we were please with the outcome of the current Super Bowl as the winning team enjoys national scope and fan base.

We are planning our business very conservatively this year even the current retail environment and unemployment situation. We remain focused on capturing long-term revenue growth opportunities while we continue to be very disciplined on our cost side. Our associates are energized, focused on past and ready to move a distance forward in '09.

Eric Wiseman

Thanks Scott. Next speaker is Karen Murray, President of our Sportswear Coalition, Karen.

Karen Murray

Good afternoon. The fourth quarter was one of the most challenging quarters on record for the Nautica brand and the severe financial crisis created a highly promotional retail environment focused on managing inventory at any cost of profitability.

This affected not only performance in the department stores but also in the outlet channels and it has changed the price value equation across the channels for 2009. The good news is that related important brand work in Nautica in 2008 designed to improve both the top and bottom line as we move forward. With the strong leadership team at helm, Nautica laid the foundation for our new differentiated product direction reclaiming it's authentic water based heritage beginning with Spring 2009.

The collection will feature technically inspired products that is crisp and clean with bold, colors and signature detail as well as items reflecting a more casual, comfortable relax side of the brand.

The retail response to our new product offering; spring, summer and most recently fall '09, has been very strong and has resulted in the reestablishment of the relationship with Lord & Taylor for a full door rollout for Spring '09. There is significant focus on value price product in 2009, and we will compete in this arena as well.

You really must see the new product line to appreciate it. You can see it now at your local Macy's or Lord & Taylor, but if not, Cindy will be working with me to schedule a showroom tour for the investment community at some point in the next couple of months. So please stay tuned.

Nautica will also place a renewed emphasis on delivering a differentiated consumer experience in stores. In department stores, in addition to some new shops and remodels brand will support a key seasonal product introduction with visual enhancement in 400 doors that aid us in speaking to our consumers.

Nautica's outlets will also be updated as well to create a more strongly branded Nautica experience. Nautica's marketing platform beginning for Spring '09 will be focused on reclaiming the brand's water heritage with inventory focused on intensity and actions will increase our focus not just on traditional prints, like out of home and other grassroots package to create a more direct emotional connection with the consumer.

For those of you that pass through Penn Station in New York Nautica is blanketed throughout the station. So we are entering 2009 with a team that is extremely energized and excited. New differentiated products, sharp prices to compete while maintaining our margins and new in-store environment, we feel we are well-positioned with Nautica as we could possibly be in this challenging environment.

Turning now to Kipling, and John Varvatos, both brands enjoyed continued growth in 2008 and we will continue to grow in 2009, albeit at a somewhat slower pace than in recent years.

Kipling ended the year with four full price stores and four outlets, John Varvatos ended the year with eight full price stores and one outlet. So in 2009 total correlation operating income is expected to increase more than 50% with the improvement coming from cost reduction actions that already in place. We expect gross margin expense in all three brands and improved retail performance in, both our wholesale and outlet businesses.

Eric Wiseman

Thanks Karen, our next speaker is Steve Murray, President of our Newly Created Actions Sports Americas Coalition. Steve?

Steve Murray

Thanks Eric, so I am pleased to say that the actions sports sites there is a bright spot for VF throughout 2008. For Vans, which is by far the largest of our two actions sports brand, we are enjoying an extremely positive year, domestic sales were up by 13% for the cost of broad increase within channel and all product categories exceptional equipment which is comparatively small part of our business.

Footwear sales finished the year 11% up, driven mainly by plastics and core product lines while the apparel and accessories grew by almost 40% gaining momentum with both the independent state channel and our two tier department store partners. The launch of our boy's apparel line a mid tier, and the expansion of our signatures skate lines designed in collaboration with key athletes were particularly successful.

2008 was a very good year for our direct-to-consumer business, which grew 20% over the year. Vans retail stores enjoyed full year consequent sales growth of 8% driven mainly by full priced stores. And despite the overall terrible economic environment, we actually saw Q4 comp increase of 9%.

Inline with our five-year, plan we added approximately 20 stores through the year and remodeled a further 30. Our e-commerce business grew by 40%. At wholesale, our fastest growing sector with the influential core channel where it continue to increase our market share and where we finish the year as the clear market leader.

With regards to Q4 specifically, we experienced high volatility in, both wholesale accounts and in our own stores into three or four weeks around thanksgiving, and therefore we remain extremely attentive to shifts in buying trends.

We did see consumer behaviors stabilized towards the mid and end December however, and we describe our current mood as cautiously optimistic. With regard to Reef business, 2008 was a tough year. Sales in the core channel, which accounts for the two-thirds Reef business, were down 4% for the year and 11% for the fourth quarter with sandal market particularly competitive and with a lower than normal rate of reorder experienced through the key summer months.

In December, we took the tough position of realigning the organization to the current climate and decided to move to a license approach for the girls apparel business. This will allow us refocus our efforts on the brands core competencies.

Sandals, T-shirts, headwear and board shorts. We believe these products to resonate most with the Reef consumer and will provide a solid foundation on which to build when the overall sub-climate becomes more positive again.

Looking to 2009, we are excited and committed to our long-term goals. We are encouraged by the momentum the Vans brand is currently enjoying and will continue to invest in both product development and innovative marking program such as the Warp Tour, our world-class athlete roster, and our advanced triple crown series of events.

In addition, we will continue to selectively expand on retail, particularly outside the California where we believe the demand for the brand is greater then our current network of retail products can capture. However long-term size that would do these things simultaneously while aggressively managing our inventory, our product margins and our SG&,A taking advantage of VF's company wide shared resources and supply chain and the more specific sector benefits arising from the creation of the newly formed action sports coloration.

We believe 2009 will be a tougher year that we have experienced in a while, but the fundaments are in place for continued growth in our brands and our market sector. Thank you.

Eric Wiseman

Thanks Steve. Our next speaker will be Steve Randel, who is President of the also newly Created Outdoor American Coalition. Steve?

Steve Randel

Great, thank you Eric. We are extremely gratified by the very good year we had in 2008, and despite the growing economic turmoil, a very good fourth quarter as well. I think that is a real testament to the strength of our brands and to all the talented people behind us.

After fairly healthy start in 2008, trends in this segment did turn negative in Q4 as we saw negative comp store results across our sporting good and department store channel, and unseasonably warm and weather across most of the western United States.

Our North Face brand in the America has continued to show great momentum and posted record sales and profits in the fourth quarter and for the year total. Fourth quarter sales grew 24%, and full year sales were up 20%.

On a total basis, the North Face brand achieved sales of just over $1.1 billion. Our whole sale business for the North Face in the America has grew to double-digit rate, delivering strong retail sales through across all the channels across all channels and with most of it's wholesale partners.

Our direct-to-consumer business saw strong growth as well with five new full price stores added in 2008. We achieved high single-digit comp store sales growth and our new stores are performing better than our initial expectations. Our store's strategy remained focused on being the local market access point for North Face brand. A place where we were able to tell clear and focused brands and product stories centered around our world-class athlete team and the remarkable expeditions.

August marked the successful launch of the North Face brands new marketing and e-commerce website, which provides the dynamic brand environment with powerful content and complete online store.

In Latin America, our business delivered solid performance with growth in Chile and new distribution partner added in Argentina, Brazil and Central America. In terms of our JanSport brand, sharp declines in the mass and mid-tier department store traffic negatively impacted both top and bottom line performance.

However, our Eagle Creek brand had a very good year in, both sales and profits despite downturn in this core travel segment. Despite the challenging times, we are planning another year of continued growth for the North Face. We expect strong market share gains across all credit product categories and our TMG committed to driving our new activity based business model that many of you heard me speak about in our October 2008 analyst meeting.

We feel strongly with this new structure of focus on outdoor, action sports, performance, athletic and youth activities will enable the North Face brand to reach new consumers while expanding sales across new specialty points at distribution.

Direct-to-consumer will be another important contributor to this year's growth. We plan to open eight new full price retails stores and further expand our e-commerce platform. Our marketing efforts in 2009 will be directed to increasing brand awareness, building our activity based platform and driving store traffic with, both our wholesale customers and our own stores with new initiatives to spark outdoor participation at the market level.

In summary, we know our brands are strong, our products are in demand and our mid and long-term initiatives are sound. We have entered 2009 we have a great people focused on all aspects of our businesses most notably building products that meet and in many cases exceed our end users expectation.

Eric Wiseman

Okay. Thanks Steve. Our next speaker is the President of VF International, Karl Heinz Salzburge. Karl Heinz?

Karl Heinz Salzburger

Thanks Eric. 2008 was a good year for our business in Europe and Asia, with strong increases in many of our brands. Nevertheless, in the second half of '08, we did see conditions weaken quite a bit across Europe, our jeanswear business was down slightly in '08 as economic conditions worsened in European countries particularly in the fourth quarter.

Over the past year we have been very focused on positioning the Lee and Wrangler brands with differentiated product and marketing for both. The new line has been extremely well received and initial reactions from our customers have been positive. While the impact of foreign currency translation with the result in lower revenues for both Lee and Wrangler in Europe in '09 on a constant currency basis, we expect revenues to be flat to down only slightly.

Turning now to our Outdoor and Action Sports business, we continue to see great momentum here, our business in Europe continues to grow, with '08 revenues up a double-digit base on both reported and constant currency basis.

Most of our brands are gaining market share and out performing the market. Our largest brand, North Face is stronger than ever and posted record revenues in Europe in '08. For '09, our direct-to-consumer initiatives will continues to be an important growth driver. We continue to selectively add both own and partnership retail stores, new shopping stops will be a major focus for us, with 50 plus planed this year. Vans is our second largest brand and also continues to perform extremely well.

We are looking forward to new store openings in Paris and [Chamonix], France this spring, which should bring out total number of owned stores in Europe to 10. Our Kipling and Napapijri brands each had an outstanding year in '08 with healthy revenue growth in Europe on a constants currency basis.

We ended the year with 10 Napapijri stores and more than 40 partnership stores. Our owned store enjoyed an excellent year in '08 with double-digit comp stores performance. We are also expecting another good year for our Kipling brand on a constant currency basis. We are seeing great success from our fashion renew product which are driving sales to in our own stores. We also recently launched new direct-to-consumer websites in six countries across Europe. At year-end we had 24 own Kipling stores and 179 partnership and distributor stores.

Turning now to our business in Asia. This continues to be a fast growing and strategically important market for us. In '08 revenue for our Asia business grew by more than 50% reaching $230 million. Growth was driven primarily by The North Face and Lee brands in China. China look continues to be a growth market for us in '09 with revenues expected to be up about 25% in a constant currency basis. 2008 also mark the launch of our advance brand in China.

In summary, our businesses in Europe and Asia continue to be in a very good shape and are well positioned to gain share in the difficult market. Foreign currency translation will negatively impact our revenues in '09 but on a constant currency basis we are looking forward to achieving mid single digit growth for our jeanswear, outdoor and actions sports business to combine.

Eric Wiseman

Thank you very much, Karl Heinz. I will ask Coalition leader is Mike Egeck our Contemporary Brands Coalition. Mike?

Mike Egeck

Thank you, Eric. Contemporary industries segment remained a bright spot of retail for the most of the first half of 2008. However, trend in the same turned negative in Q3 and was one of the hardest hit in Q4.

In this environment both segments For All Mankind and lucy finished the year with the challenging fourth quarter. In a quarter, Coalition sales decreased about 5% and adjusted for the exit of a private label program at 7 sales were down 4%.

Our full-year CBC sales grew up about 10% in 2008 and operating income excluding our third quarter charge related to tax and duty matter grew about 3%. We are pleased with results of our 7 For All Mankind direct-to-consumer initiative in 2008. We opened 13 new stores during the year bringing us to total at 15 at year-end and both the stores and our e-commerce business performed according to our expectations.

7 For All Mankind wholesale business performed very will in the first half, but became more challenging as the year progressed and as our major customers experienced significant same-store sales declines.

In product merchandising and store design initiatives for lucy business gain traction during the first half of the year. However, similar to 7, we were impacted by the pervasive promotional environment in the second half of the year and particularly in the fourth quarter. We remain enthusiastic about the lucy brand, but we recognize that the current environment is making our turn-around efforts more difficult.

For 2009 we remain focused on our long-term growth initiatives. Those initiatives are, grow the core 7 For All Mankind denim business with best in class product innovation and a focus on shopping shops. Continue to extend 7 into new products and sportswear accessories, open additional retail stores for both lucy and 7 For All Mankind. Increase product productivity and product margin for the lucy stores utilizing our new activity specific product platform and new store design to create some more energized same-store experience.

And finally, we look to complete the Mo Industries acquisition sometime in the first half of this year. The early mid on 2009 is that the retail environment made very challenging. 7 For All Mankind stores are performing inline with our expectations and we look forward to adding 9 to 15 new stores this year. However, the 7 For All Mankind wholesale business remained difficult to project as the better department store and specialty store customers continue to be very cautious for their future order commitments. So we are playing that part of our business very conservatively this year. As a result of the product, merchandizing and store design initiatives, the lucy stores are showing improvement.

We significantly upgraded the product to incorporate more technical benefits and our remodeled stores are showing good results. 2009 will be a challenging year for the coalition, but our brands are healthy and we remain confident that there are substantial opportunities for future growth.

Eric Wiseman

Thanks Mike. That concludes our prepared comments on our record 2008 and our plans for 2009. At this time we will open the line to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will take our first question from Robert Drbul, Barclays Capital.

Eric Wiseman

Hey, Bob, how are you doing?

Robert Drbul - Barclays Capital

Good. Good afternoon. I guess the first quarter is, is a specific question on cost savings added for the $100 million, is it fair just take $25 million on a quarter or is there any more detail in terms of how to think about that?

Bob Shearer

Bob, it grows throughout the year as you might imagine, so it's a little less in the first quarter and it grows throughout the year, so it will be more of an impact from the fourth quarter than the first.

Robert Drbul - Barclays Capital

Okay. And then on the contemporary businesses, Mike, if you could talk a little bit more in term of I guess when you look at the business performance in the fourth quarter and the assumptions for 2009, I guess the first question is how much of the growth that you are projecting in contemporary comes from the Mo acquisition and the completion of the Mo acquisition. And then I think and then if you could maybe just put in a little bit more in terms of the organic assumptions that you have and perhaps like what you expect the retail business to contribute just to get the growth after seeing the fourth quarter performance in that business.

Mike Egeck

Let me speak to the organic growth question first, it is a very tough environment out there and our plans don’t assume that it gets better, we are also not assuming its gets worse. So, the organic growth for 7 really comes from market share gains, from some very selective new distribution and from our own retail stores and our e-commerce. The timing on the Mo Industries acquisitions is still to be determined. So, we can't speak specifically to the growth from that particular acquisition or we do plan to complete it sometime in the first half of the year.

Robert Drbul - Barclays Capital

Okay. And then on the inventories are there areas of inventories that you guys are concern with either at wholesale or at the retail level in terms of where the system is right now from the orders etcetera any cancellations that you are concerned about as you look at the first half of this year?

Mike Egeck

No, Bob, are you asking a both that retail and what we have internally is that your question, yes, actually our inventories again we have seen improvement throughout the year and something that we thought about actually early in the year, and it really varied by channel of distribution, specific actions we are taking to align inventories.

So, right now we feel pretty good about the inventories at the retail level and as we said our inventories that we are holding were relatively flat in the year. And what I would also add to that is that actually the quality of those inventories or even a little bit better. So in other words when we match up the inventories against anticipated sales on a near end basis, we like what we see relative to the quality. So, we did, we took a lot of steps, it costs us in the fourth quarter to be sure, we took a lot of steps to get those inventories in line and we are very aggressive in doing so and that’s why the quality is there and that’s also how the level got where it is.

Robert Drbul - Barclays Capital

And then, just my last question is on the jeanswear businesses. So when you look at the loss of Mervyn's and Goodies. How much of your revenue base goes away in 2009, has you even begin the year with the loss of those two partners?

Eric Wiseman

We won't talk about that specifically. What we will tell you about is that relative to all of these factors and maybe other retailers that maybe a bit more trouble. We factored all of those pieces into a number.

Robert Drbul - Barclays Capital

Okay, good luck. Thank you very much.

Eric Wiseman

Thanks Bob.

Operator

And we will take our next question from Kate McShane, Citi.

Kate McShane - Citi

Hi, thank you.

Eric Wiseman

Hi, Kate.

Kate McShane - Citi

Hi, you mentioned in your comments that operating income in the contemporary business was negatively impacted by the promotional and markdown related expenses during the quarter, which I assume is more in the wholesale channel. What is your strategy for 2009 for pricing the 7 brands? I know one of your competitors lowered their prices on some of the more higher in jeans, is this something you would consider doing or you planning on cutting the number of styles offered?

Mike Egeck

Hi, this is Mike and I will take that question. We had there some of our competitors drop their price, we do not believe that’s the correct thing to do and based on what we know on the reactions from the retail community that we serve it's not the right thing to do. What we are seeing is we are seeing softness in jeans over $200. We run our product and price range from about $150 to over a $300, what we have done is increased the offering we have between $150 to $200, that seems to be the right answer for matching consumer demand at the moment.

Kate McShane - Citi

Okay, that’s very helpful, thank you. And I was little surprised here that you are still opening 70 stores this year, and although its opening at a slower rate its still just below the low end of, generally where you see opening stores. Are you continuing to open because of the benefit you might get on the leases?

Eric Wiseman

We gave guidance and that’s part of out five-year plan that we are going to open 75 to 100 stores a year, we opened 89 last year. We had the intention of opening 100 this year. Last summer, we are beginning to plan this year. We dialed that fact by about 30%, 70 that’s our target number of stores. We obviously don’t have all of those committed to but its lowering than what we have done has the economy not turned the way it is, its straight situation because there is some terrific lease opportunities out there. And we have to be very thoughtful that when we pulled that trigger with which brands and in which markets, but we will do that and get 70 by the end of the year we think.

Kate McShane - Citi

Okay, thanks very much.

Eric Wiseman

Thanks Kate.

Operator

We will go next to Todd Slater with Lazard Capital.

Todd Slater - Lazard Capital Markets

Thanks very much. Good afternoon everyone.

Eric Wiseman

Hey Todd.

Todd Slater - Lazard Capital Markets

Hey there. Could you guys give us an idea about the size of the actions sports coalition, I don’t think I saw a breakup, you just separated them. And also maybe a little more color on why you restructured the coalitions and what you might be planning for the AS space?

Bob Shearer

Hey Todd I will start on the first piece of that. We actually will continue to report our numbers as outdoor in action sports, so we won’t show the pieces separately. So in our segment reporting you won’t see individual pieces.

Eric Wiseman

Todd I will deal with the second part of your question which is why we did choose to split them and you obviously know that we had terrific success over the last five years with that portfolio of brands. And our portfolio of brands was getting pretty big, and the reality is that the outdoor world and the action sports while they have somethings in common, there is more that they have that our separate terms of kinds of consumer, where they sell and which channels and trade shows they go to. What we think that we can unlock our future growth potential in those actions sports and outdoor by dedicating leadership to each and challenging those leader to accomplish great things.

Todd Slater - Lazard Capital Markets

Okay. What's reason for not providing the breakout?

Eric Wiseman

Yes, there was a specific reason at this point in time or may be at some point we will, but right now obviously helps the comparability year-over-year. So, again maybe at some point in time we might but not now.

Todd Slater - Lazard Capital Markets

Okay. And then just a quick question on the international side. You guys mentioned I think that you expect '09 revenue on a constant currency basis to I think flat to down slightly, I heard that right?

Eric Wiseman

Right.

Todd Slater - Lazard Capital Markets

Could you talk just about where your economic assumptions are in terms of either GDP or employment trends those types of things over the next 12 months, so that flattish type of expectation is based on? Like you said you didn’t expect your assumptions are based on not a further deterioration I don’t know if that was for the whole world for the US or for international deteriorate much more?

Eric Wiseman

Sure. Our assumptions about no improvement in the environment was a global comment as we build our plans, we build the market-by-market and brand-by-brand. In our guidance to the people that are responsible for our businesses in each market look at the second half of last year and project for in that kind of an environment. So we did that pretty consistently around the world.

Todd Slater - Lazard Capital Markets

So that is to say that you, and I just want to reaffirm that you don’t expect the international arena to deteriorate economically?

Eric Wiseman

That’s correct.

Todd Slater - Lazard Capital Markets

Okay.

Eric Wiseman

And that obviously holds true within all of the international businesses, in other words looking at Asia, where Asia is right now as well as Europe.

Todd Slater - Lazard Capital Markets

Got it. Well, thank you very much, and best of luck.

Eric Wiseman

Thank you.

Operator

We go next to Robert Ohmes with Banc of America.

Eric Wiseman

Hi Robby.

Robert Ohmes - Banc of America

Hi, guys. Thanks so much. Actually just a quick question or maybe more of clarification. In the beginning of the call so you are looking for 50 basis points of operating margin improvement in '09 is that net of the 120 basis points of offset from pension expense so you are really looking for 170 is that?

Eric Wiseman

It is net of the pension expense.

Robert Ohmes - Banc of America

So, I am just, I know if I go through the transcript and really try and think it through and add up all the pieces you gave us, but can you reconcile sort of a lack of visibility in '09 for revenues in orders and everything else, with an ability to achieve that type of operating margin expansion. Is it all cost cutting or can you just give me sort of the basis large pieces on the gross margin in SG&A side that get me there and what is supposedly pretty tough environment. Thanks.

Eric Wiseman

Yes, just looking at the individual pieces, again this is full-year '09. In the gross margin area just as we have been seeing our retail business and expansion in retail will help drive the gross margins up there. So, again considering the overall climate and the comparisons of first quarter, second quarter and how that trended throughout the year. We think overall that gross margins might expand 50 basis points to 200 basis points, again with a large piece of that being driven by the retail expansion.

In the SG&A side, again a little bit of a mix bag just as you pointed out. So once again retail we will drive the SG&A percentages up somewhat not as strong as the gross margin obviously. So, we expect some improvement there in retail profitability. And then yeah, the cost reduction as the significant benefit and the pension is an offset to that. So, overall the SG&A will be up to a lesser extent and gross margins maybe flat to 50 basis point, so that’s how we net out to the 50.

Robert Ohmes - Banc of America

Thanks a lot.

Eric Wiseman

You bet.

Operator

We go next to Eric Tracy with BB&T Capital Markets.

Eric Tracy - BB&T Capital Markets

Good afternoon. Thanks. Maybe just a follow-up to that question in terms of the margin. Is it possible to dig a little bit in terms of the coalitions and the expectations there, it seems like at least based on the comments some pretty meaningful improvement both around jeanswear and the sportswear?

Eric Wiseman

Yes, we do expect some meaningful improvement in our operating margins but perhaps to point out again that’s before the pension. So, that’s why we specifically made a comments Eric, we are going to capture the big increase in pension and in corporate expenses because of its nature. And yes we do expect to see some significant improvements in our overall operating margins. I would say the more significant improvements, a little bit stronger in the sportswear area and also on the contemporary brands. But again with improvement pretty much through out.

Eric Tracy - BB&T Capital Markets

Okay. Fair enough. And maybe just on The North Face brand in particular for our outdoor. Talk a little bit about still the growth opportunities domestically on the wholesale side of the business, obviously retail can continue carve out your distribution there, but just in terms of, be it, the sporting goods or department store channels, where you see the opportunities, is it still product category extensions, little bit on that will be great thanks.

Steve Murray

Sure, this is Steve I will take that question. As we look at our overall distribution model between specialty sporting within department stores, we see all three channels of distribution as opportunities to grow.

The activity based model as we look to expand the meaning of our brand outside of just outdoor, focusing also on action sports from a winter perspective, performance athletic and then casting that same model across our youth business, we see great opportunities to access new customers and you specially point for distributions as strategic ways to continue to grow the brand.

Eric Tracy - BB&T Capital Markets

Okay, fair enough. Thanks, guys.

Eric Wiseman

Thank you.

Operator

We will go next to Sam Poser with Stern Agee.

Sam Poser - Stern Agee

Good afternoon. I just have a quick question regarding your business in Europe, and if you could speak to where the strength and weaknesses are within Europe?

Karl Heinz Salzburger

Sam this is Karl Heinz answering. We operate in Europe with several businesses, we have two main categories, the Jeans wear outdoor and action sports and the contemporary business. So each of three have different characteristics.

Clearly as I mentioned in my speech, we have outdoor and action sports still going well, we have the contemporary one going, and we have some issues on the Jeans which we are been positioning.

Sam Poser - Stern Agee

But any issues like Eastern Europe being stronger then Western of Southern Europe begin weaker or in general anything of that nature?

Karl Heinz Salzburger

Well, clearly we see some different dynamics inside Europe. The emerging markets are still doing better then others. It depends by brand and by geographic area, Southern Europe is little bit more challenged. Central Europe and Northern still performs very low.

Sam Poser - Stern Agee

Thank you very much.

Operator

We will go next to Jim Duffy with Thomas Weisel Partners.

Jim Duffy - Thomas Weisel Partners

Thanks everyone.

Eric Wiseman

Hi, Jim.

Jim Duffy - Thomas Weisel Partners

Bob, follow-up to on your earlier responses, I am trying to understand how the guidance contemplate at risk customers and you see the potential with the either closed stores or go belly up. Certainly seems like you taking into consideration some of those that we already know about, what about those we don't necessarily know about?

Bob Shearer

Yes, Jim that's the challenge in this environment, and what I will you tell is that with a lot of careful consideration, and going through the plans and actually looking at each of our retail partners and other than evaluating that and taking a poster in terms of being more conservative with some and than others. And so all that, again it's reflected, we believe it's reflected in properly in the plan based on what we see right now, but you are right it is a challenge.

Jim Duffy - Thomas Weisel Partners

So how is it that you go by handicapping that? Do you take expected volumes and if you believe the customers at risk kind of knock that down?

Bob Shearer

Sure. We look at the level of business that we did in '08. We look at the level of business that we have been doing recently. Preorders are part of the business with the particular retailer , and we will consider that is well and the activity that we have been seeing.

Jim Duffy - Thomas Weisel Partners

Okay. Another question on a tax rate, as we think about currency and the impact on profitability contribution from international is that going to have a negative impact on the tax rate in '09?

Bob Shearer

Well, what happens you are absolutely actually right. Our international business does have substantially lower tax rate than the US piece. But having said that, we believe that all in, the tax rate in 2009 will be very comparable to what we saw in 2008. So despite the currency impacts that we are talking about.

Jim Duffy - Thomas Weisel Partners

That's good to hear. And Steve question for you, can you give us a little flavor on the seasonality we might see from the outdoor coalitions, spring has been kind of a less penetrated season, or should we expect outsized growth there, and more moderate growth in the back half or any help there would be beneficial. Thanks.

Steve Murray

Sure, I think the coming years specifically '09 in 2010, Jim, I wouldn’t see the mix from a seasonin standpoint change. There are the opportunities to grow our spring order books and the offset what is a historically very a strong back half business.

Jim Duffy - Thomas Weisel Partners

Thanks very much.

Eric Wiseman

Okay, Jim.

Operator

We'll go next to Paula Torch with Needham & Company.

Paula Torch - Needham & Company

Good afternoon, thanks for taking my question, I realize in this environment that everyone is really trying conserve cash. However with some really good brands out there struggling currently, are you still considering acquisitions and if so, where do you see your white space in terms of your brand portfolio?

Eric Wiseman

Paula, this is Eric. I will that question. Yes, we are still interested in acquisitions, and we are fortunate to be in the position where we have a strong balance sheet and a good business model that let's us keep active in that space.

The current environment hasn't changed our overall strategy for the kinds of acquisitions that we find attractive and those are primarily in the outdoor and action sports contemporary and sportswear segment. That's what we said our strategy is and we are looking for the kind of lifestyle brands that has the kind of financial and strategic characteristics around global expansion and on the retail that we have talked historically and that's still is our agenda, and yes we are still active.

Paula Torch - Needham & Company

Okay, that’s great. Thank you. Good luck.

Eric Wiseman

Thank you.

Operator

We will go next to Omar Saad with Credit Suisse.

Omar Saad - Credit Suisse

Thanks. We'll like to ask for a little bit more around the costs savings initiatives, $100 million that you talked about. Bob obviously with your margin expectation this is big part of your getting to your goals for 2009.

You are seeing a lot more of these restructuring plans and cost saving plans coming out of the marketplace, that's something Nike just hit the wire. That $100 million, how aggressive are you being to get there?

This is our best shot, worse case scenario, or is this something you feel like you can do pretty comfortably. And if the conditions do worsen over the next couple of year globally, are there more opportunities out there for some of the layers that you built up over the last few years?

Bob Shearer

Yeah, it's always a tough question to answer Omar, but the way we looked at it was we said that we want to be proactive, right. In terms of getting prepared for environment that could toughen and we want to get a little bit ahead of the curve.

So we were aggressive in terms of the cost reduction activities and what we said was if for chance we went little too far, we can always add, but it's very, very difficult to be in a defensive position and be in a spot where we really need to do more and you determine the need to do more.

So that was the stance we took, but I can tell you also that given what our businesses have done and performance of our business, we also said that we want to be very, very careful to not go too far that it injures to the business in any way shape or form. So it's always fine line, it's always a matter of balance in degree, but we think that's we have achieved.

Eric Wiseman

Omar, I will add to that as we went through the which items to cut and which not, we still have brands that have global growth potential. And we did not cut spending in our brands and in the markets where that we think it's important to build for our future growth, so this was not there is no other possible opportunity for cost cutting-type scenario. We think that we took particular right steps to have the business model that we are taking about 2009.

Omar Saad - Credit Suisse

Okay, right. If I read you right, you think you can go deeper later on if you need to.

Eric Wiseman

You can always do that.

Omar Saad - Credit Suisse

All right, that's good to know. And then Eric, it's in a lot of ways, we have this kind of bell whether stock for many parts of the discretionary economy. You are in a lot of different channels, you are in a lot of different marketplaces, categories, geographies etcetera. From where are you sit now talking to your retail customers, what you are hearing from your end-consumers out there across different markets.

What's your view of the world? Can you kind of step back and put on macro hat for a minute. Where do you think we go from here, how does the landscape change for the kind of this new economy that we are entering in and how does VF fit into that?

Bob Shearer

Well, first of all I am not an economist, or I wouldn't be in retail business. So I will start with that, but I think the consensus of our customers and we are very connected to all the big global retailers. And everybody is planning very conservatively, and we think that’s smart.

We think they are planning more conservative consumer spending and then after that planning conservative inventories is a smart way to conduct business. And we think that's what we are doing in our planning, on our balance sheet and P&L and we are supporting our customers to do that. I think most of the consensus would be that no one is expecting the turn around 2009. It might happen but nobody is counting on it and certainly we are not. What happens in 2010, we will be thinking about more in depth and talking about as we get to middle of the year.

Omar Saad - Credit Suisse

Okay. Very helpful. Thank you.

Eric Wiseman

Thanks very much.

Operator

We will go next to Christina Chang with Susquehanna.

Christina Chang - Susquehanna

Hi, thanks for taking my question. One question on the jeanswear division, do you believe it is possible for operating margins to recover by the end of the year for jeanswear?

Eric Wiseman

Well, actually I will start on that. We do expect and again this is I am always careful to say this, we do expect operating margins within jeanswear to improve 2009 versus 2008 and that's a result of number of things and the cost reductions and initiatives that we took are obviously a piece of that. Again remember that our jeans business is a global jeans business. The numbers that we put on jeanswear are globally. So we actually expect improvement on a global basis and not just in US.

Christina Chang - Susquehanna

How much would cost play in margin improvement because I think you mentioned before that you were expecting first half cost to go up by maybe 3%. What is the cost picture looking like for you in the second half?

Eric Wiseman

When you talk about margins or are you talking about gross margins or operating margins?

Christina Chang - Susquehanna

Both, gross margins and operating, is it on the gross margin standpoint. You see on the gross margin standpoint do you see jeanswear costs to be going down substantially as well to help offset some of the promotional pressures you might be seeing?

Eric Wiseman

Well, again from the restructuring initiatives, you know the cost, the cost will go down from a product cost standpoint. We expect cost to be relatively stable.

Christina Chang - Susquehanna

And then do you expect to, how do you expect position your domestic jeanswear brand should given, how consumers are behaving, the fact that, I should say they are shifting towards more opening price point products. Are you thinking of going either lowering over your price point or are you thinking of putting more features product and go down maintain your current price level?

Angelo LaGrega

I will take that this is Angelo, based we have a couple things going on within our business. The good thing that is really helping us is that constumers are responding to trusted brands. So we do see whether it’s our Wrangler brand and our Lee brand that consumers are going too brands they trust.

Specifically on Lee we are seeing a lot of opportunities and a lot of market share gains, the team has done a great job and building new innovative products that are really actually helping us sell jeans at higher prices raising our AUR slightly in '09 from '08 because consumers are responding to the newness and the innovation.

On the mass channel specifically the Wrangler brand actually is our flagship brand there and that’s what we see really significant growth within the mass channel and what's driving that business is that our fashion business is great success in '08 it was the most successful young man’s update collection in the mass channel and many of our retail partners are expanding that into '09.

Christina Chang - Susquehanna

But then the margins for your fashion business have to be a little lower than your core business, is that right?

Angelo LaGrega

We do see a little bit of shift in our margin but we are getting significant growth in overall our units and our dollars are going up significantly. So we see there is an opportunity for us propel our operating profits.

Christina Chang - Susquehanna

Okay. Thank you. And a one last question on Vans how would Vans compensate for the fact that a lot of it stores in that moderate channels are cutting back their store opening plan and are you seeing lot more pricing actions from other competitors and how is Vans responding to that?

Steve Murray

This is Steve Murray I will respond to that. First of all, that mid tier channel is only relatively small part of our overall mix. We have a very balanced distribution base with the core and life style and Mo and our own retail. So, we are not actually exposed to anyone channel becoming particularly promotional. But in any case we have not really seen it with our brand.

So, it's really just not something that we had to concern our selves with yet. Just to borrow little bit of what Angelo has said about jeanswear. We have been same team. The pricing of Vans shoes particularly is really not prohibitive given the great scheme of things within the overall athletic footwear world. And we are actually seeing ourmarket share as well as our overall business go up right now. So, we are largely untouched so far, touch wood, to any aggressive promotional activity that you maybe seeing on other companies in other brands.

Christina Chang - Susquehanna

Thank you.

Operator

We go next to Scott Frost with HSBC.

Scott Frost - HSBC

Hi. I wanted to get some more color on the pension expense. Could you us idea what plan assets were at the end of the year. And whether you are going to be changing any of your discount rate or internal plan assets or service costs or contribution plan costs?

Eric Wiseman

Yeah, the pension plan at the end of the prior year actually was very close to $1.1 billion.

Scott Frost - HSBC

Correct.

Eric Wiseman

So that’s the size of the plan. And so the reduction, the market reductions in value are what are driving the higher expense.

Scott Frost - HSBC

Tell us what that return was, what that negative return was though?

Bob Shearer

It was around 30%, again little better than the overall market. So, in terms of the assumptions around the plan, we have always been kind of in the middle or to lower end. That’s VF and we have taken a fairly conservative past year. So, right now we are seeing that we need to make any significant adjustments to those assumptions.

Scott Frost - HSBC

So, 300 million that’s the loss to the plan that gets amortized I guess back into over again how many years, five or seven?

Bob Shearer

Five years.

Scott Frost - HSBC

And does that represent most of the increase in pension expense.

Bob Shearer

It does, that’s the biggest fees. That’s what it is.

Scott Frost - HSBC

Okay. A little tweaking on the planed cost and service cost.

Bob Shearer

Yes, discount rate, that’s right.

Scott Frost - HSBC

And could you also give us some color on, not necessarily which retailers you think are doing badly but in terms of account activity which once seems to be either steady or better than you thought they would be?

Eric Wiseman

Yes, this is Eric, we traditionally don’t comment on our opinions or tell what our retailers are doing, but we do plan with them based on the information they make public. So I think you know what we know about how they are planning and how they see future in terms of the store openings and trends. No additional color on that I am afraid.

Scott Frost - HSBC

Okay, thank you.

Eric Wiseman

Thank you.

Operator

We go next to Maggie Gilliam with Gilliam and Company.

Maggie Gilliam - Gilliam and Company

Good afternoon.

Eric Wiseman

Hi Maggie.

Maggie Gilliam - Gilliam and Company

Hi. One point of clarification if I could Bob, on the gross margins outside the United States. I gather you are not expecting cost pressures from the weakness in the Euro sourcing in China or elsewhere. I think prices come down commensurately?

Bob Shearer

No, Maggie you are right, are you alluding to the fact that our gross margins are up stronger, internationally they are. One of the challenges that we pointed out in my comments is that, what we are seeing right now is what other companies are experiencing the same thing, is some of the fluctuations and within currencies within Europe or countries that are in and around Europe. So for example, the pound. The pound has valued significantly against euro. We hold inventories in euros and when we sold those products in the UK that does impact our profitability. So that's right now that’s 2the biggest impact that we are seeing in terms of our numbers, a little bigger in the first quarter than other quarters to be sure.

Maggie Gilliam - Gilliam and Company

Okay. Could you also on another subject comment a little bit about how the outlet stores are doing and what are your plans for outlet stores expansion specifically in 2009?

Bob Shearer

Outlet stores have been and continue to be a nice benefit for us and the benefit we measure the benefit in terms of the pricing that we realized through our outlet stores versus what we would realize externally. And I can tell you that those sources that many other companies use externally have a lot of products and aren’t necessarily looking for a lot more products. So the outlet stores continue to be a nice benefit for us. Now the overall pricing in new stores has been a little bit tougher but again that's not the way we measured, we measured the benefit versus the alternatives and that's where the benefit comes in.

Maggie Gilliam - Gilliam and Company

Okay. And how about expansion?

Bob Shearer

We are not expanding, our expansion when we talked about 70 stores nearly all of that is full price stores. So we expand the number of outlet stores only to meet the capacity of moving excess goods. So, as we see that and when revenue grow normally you see our outlet stores also grow, so not a lot of expansion anticipated there.

Maggie Gilliam - Gilliam and Company

One quick question, on lucy, you mentioned that more technical product is going to be added, is that a new direction for the brand or Mike can you elaborate a little bit, please?

Mike Egeck

Yes, this is Mike and I will answer that, t is definitely new direction for the brand. When we acquired the lucy brand it was headed in direction toward more casual women sportswear and we acquired the brand because the Lucy name does have authenticity in the activity base particularly around yoga and gym. So, what we have done is we divided the store into four activity specific zones a yoga zone, a gym zone, a running zone and explorer zone; and in each of those categories we have got new design teams focused very specifically from authentic performance based product for them. It’s a complete turnaround the direction of and it’s been laid by a lot of new people with very high levels of experience and talent in those specific areas.

Operator

We will go next to Dana Telsey with Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Good afternoon everyone. Can you please talk a little bit about, given the current environment, is the timing of product deliveries being adjusted if so by how much and how does it impact your expected inventory levels for the first and second quarters?

Eric Wiseman

No, this is Eric and I am looking around the table and our business leaders and their consensus on their head, heads nodding up and down in the business and seem to be any material change in the timing of product deliveries. We are working with all of our retail partners on lean inventory assumptions as we enter 2009 when we get the right approach.

Dana Telsey - Telsey Advisory Group

Thank you.

Eric Wiseman

Thank you.

Operator

And we will go next to Mitch Kummetz with Robert Baird.

Mitch Kummetz - Robert W. Baird

Yes, thanks. Got a few quick questions, first one being, what was your consolidated Q4 comp? And then what sort of comps assumption is embedded in your Q1 and '09 guidance?

Bob Shearer

Yes, Mitch the overall comps for Q4 were about flat. And as you might imagine that varies. Now that includes our outlet stores as well as our full priced stores. And as I just responded to prior caller, actually our outlet comps were little tougher, so if you take the outlet comps, we were obviously up a bit in the quarter. The overall comps were up a bit, which clearly outpaces what we are seeing from a number of competitors and others. You also asked for '08?

Eric Wiseman

'09?

Bob Shearer

The '09?

Mitch Kummetz - Robert W. Baird

Yeah.

Bob Shearer

The assumption overall is flat comps.

Mitch Kummetz - Robert W. Baird

Okay. And then you provided some parameters on your '09 sales outlook by coalition, can you also just address your '09 sales guidance by domestic versus international and then retail versus wholesale. Obviously retail given your avenue stores and assuming your flat comp, kind of what is your outlook for the wholesale business?

Bob Shearer

On the international side, what we talked about was that currency, obviously has an impact there, so we said the excluding the currency impact, we will be up more in the mid single-digit range and including currency could be down a few percentage points.

Mitch Kummetz - Robert W. Baird

Okay.

Eric Wiseman

Lets say around 30% of our overall total.

Mitch Kummetz - Robert W. Baird

Yeah.

Bob Shearer

And you also asked about retail?

Mitch Kummetz - Robert W. Baird

Yeah, I think you are projecting that to be up given that, you said the flat comp and your adding stores what is your projection on wholesale business for '09?

Bob Shearer

Yeah again, overall in terms of retail growth kind of mid single, maybe a little bit above mid single-digit area. In terms of total growth and we think that will grow the percent of our total retail maybe by a percent or so.

Mitch Kummetz - Robert W. Baird

Okay, and than last question, Eric, made a comment that your customers were planning new businesses conservatively for '09 and you are managing your inventory accordingly. Could we say how much of your overall business is driven off of pre-book orders versus reorders and what is your ability to chase assuming, with the possibility out there that maybe the environment does improve a little bit. What is your ability to chase and maybe gets some incremental reorder business relative to your guidance?

Eric Wiseman

That's a really good question, and it's a really nearly almost impossible one to answer as it differs by business by market, and we think of the number of brands we sell in the number of product categories we sell, the number of countries do we sell it is very different.

Our jeans wear business can change, basic products very, very efficiently and caught up in a very short window of time. On more technical, outer wear goods around the North Face a lot of that stuff is pre-booked in advance, and we purchase to our book to our order book, and it is very tough to chase some of that some of that stuff there, so it's hard to give an answer that will meaningful as the percentage of the answer around the world. It’s also different getting goods into Russia or China versus Italy or the US.

Mitch Kummetz - Robert W. Baird

Okay. That's fare enough. All right that's all I had, thanks and good luck.

Eric Wiseman

Thanks, Mitch.

Operator

It appears there are no more questions at this time.

Eric Wiseman

If there is no more questions, I thank you all for joining us on the call, appreciate your support in 2008, and we are going to get back to making 2009 happen. Thanks a bunch.

Operator

This concludes today's conference. We thank you for your participation. You may now disconnect. Have a wonderful day.

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Source: VF Corporation, Q4 2008 Earnings Call Transcript
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