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V.F. Corporation (NYSE:VFC)

Q1 2009 Earnings Call Transcript

April 28, 2009 4:30 pm ET

Executives

Jean Fontana – IR, ICR

Eric Wiseman – Chairman, President and CEO

Bob Shearer – SVP and CFO

Karl Heinz Salzburger – VP, VF Corporation and President of VF International

Analysts

Todd Slater – Lazard Capital Markets

Kate McShane – Citigroup

Bob Drbul – Barclays Capital

Evren Kopelman – JP Morgan

Omar Saad – Credit Suisse First Boston

Jim Duffy – Thomas Weisel Partners

Paula Torch – Needham & Company

Mitch Kummetz – Robert Baird

Chris Cheng [ph] – Susquehanna Financial Group [ph]

Operator

Good day, and welcome to the VF Corporation First Quarter 2009 Earnings Conference Call. Please be aware that today’s conference is being recorded. At this time, I would like to turn the conference over to Jean Fontana of ICR. Please go ahead, ma’am.

Jean Fontana

Thank you. Good afternoon, and thanks for participating in VF Corporations' first quarter 2009 conference call. By now you should have received today's earnings press release. If not, please call 203-682-8200 and we will 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 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, and thanks for joining us. Following my opening comments, we will have Bob Shearer review our financial results. In addition, we have with us today, Karl Heinz Salzburger, President of our International Businesses who will take a few minutes to talk about our business in our international markets.

We are pleased that we achieved results that were in line with our expectations in the first quarter. However, with revenues and earnings both below those of last year's first quarter, our results do confirm that we continue to face extremely challenging conditions that are affecting all of our businesses to one degree or another. However, there were number of very important bright spots in the quarter.

Our global Outdoor and Action Sports revenues rose on a constant currency basis with The North Face, Vans and our other brands continuing to outperform the competition. Our domestic jeans revenues also increased, a testament to the strength of our Wrangler and Lee brands and the success of their efforts to gain market share with best of class product innovation and marketing. Domestic Wrangler revenues rose 3% in the quarter, while Lee was up 7%.

On a constant currency basis, global revenues of two of our largest brands, Wrangler and The North Face, increased during the quarter. Our retail revenues were up in the quarter with new Vans, The North Face, and 7 For All Mankind stores opened. In total, our comp store performances running down at a mid-single digit rate, which we believe is better than our many other model brand retail concepts are performing.

Our business in Asia continues to grow rapidly with revenues up 24% in the quarter and we completed the acquisition of the Splendid and Ella Moss brands further rounding out our contemporary portfolio. We are testing products in both brands in our 7 For All Mankind stores now and the early results are encouraging. In addition, we are looking forward to the opening of the first Splendid store in Los Angeles in the third quarter.

In total, I am encouraged by the relative strength we've seen in many of our large and important businesses. I believe this performance is a meaningful indicator of how VF will emerge from the recession. Of course while we now like to see close signs at the global recession is easy, we're not planning for any improvement in the macroeconomic conditions this year. When we provided our initial guidance back in February, it was with the expectation that economic conditions would remain largely as they were in the fourth quarter of 2008, which as we all recall, were pretty poor.

While our first quarter results came in largely as we expected, we've seen a few areas where conditions have significantly and unexpectedly deteriorated. And so today, we are resetting the bar for our revenue and earnings guidance at levels that we believe capture these changes and more appropriately reflects the scale and scope of this recession. While the change in our revenue guidance is relatively modest, the change to our earnings guidance is more sizeable.

As mentioned in the release, this is due to the big decline we are now experiencing in our European jeans business and to a lesser degree to the fact that we are expecting shortfalls in two of our higher margin businesses, contemporary brands and the work for our segment of our Imagewear coalition.

So with that as a backdrop, I will turn the call over to Bob.

Bob Shearer

Thanks, Eric. Let me start with a couple of overwriting comments.

First, the effects of changes in foreign currency exchange rates in both translations and transactions were material to our results in the quarter and are expected to be for the full year as well. So obviously, I will be making a number of comments on both of those pieces. And secondly, we are discontinuing our practice of providing specific quarterly guidance and of course the obvious reason is its more difficult than ever I think revenues in particular on a quarter by quarter basis in this environment.

So with that behind us, let's move down to P&L and I'm going to start with revenues which on the constant currency basis declined 2% in the quarter. Reported revenues were down 7% with a 5% impact from foreign currency translation. That was a point higher than the 4% impact we originally expected.

Gross margins were down 290 basis points and about half of this decline is due to the transactional effects of currency movements that I just spoke to. The remainder reflects the challenging retail environment as anticipated, is holding [ph] margin pressure from discounting and other factors, and lower revenues in our higher margin businesses.

SG&A as a percent of revenues was up 1 point, with 90 basis points of the increase related to higher pension expense and a similar impact from our retail growth. So our cost reduction efforts are clearly helping the comparisons. Now these factors combined resulted in operating margins of 9.4%, which was as planned for the quarter versus 13.2% in last year's first quarter.

The tax rate in the quarter was 29% compared with 33.3% last year and as we said in past calls, our decline in tax rate reflects the benefit of substantially lower effective rates in our International businesses. The effective rate of 29% in the first quarter is consistent with the annual rate of 2008. And that brings us to earnings per share.

On a constant currency basis, EPS declined 24% to $1.01 with $0.11 of the decline due to higher pension expense and most of the remaining decline resulting from the transactional impact from fluctuating foreign currency exchange rates. On a reported basis, EPS declined to $0.91. In addition to the pension and transactional currency impacts, foreign currency translation impacted earnings by another $0.10 per share.

In terms of our coalition results, you will note that we included an additional table with the release that provides coalition revenues and profits on an as reported and constant currency basis. We believe the currency adjusted numbers are most representative of our businesses performance, I direct my comments primarily to those comparisons.

Beginning with Outdoor and Action Sports, we were pleased with the performance in the quarter with revenues of 2% in constant currency to our Americas business up 4% and our international business down a bit. The coalition's largest brand, The North Face, had another very good quarter with global revenues up 14% on a currency adjusted basis.

And Vans, our second biggest brand, had global revenues that were about flat on a currency adjusted basis and were up 3% domestically.

Both brands saw a strong growth in their direct to consumer businesses with an increase of 35% at The North Face and 16% at Vans. Operating income in constant currency declined a bit due primarily to transactional currency impacts. Overall, margins remained very strong.

Turning next two jeanswear, global revenues were down slightly on a constant currency basis. As noted in our release, we were really pleased with the growth in domestic revenues of 4% in the quarter with increases in both our mass market and Lee businesses. According to our most recent data, both Wrangler and Lee, two of our largest brands in VF had gained share in their respective channels of distribution.

International jeans declined 8% on a constant currency basis, this is an area where we are clearly experiencing more challenging conditions and expect – started to see the first signs of softening in the Eastern European and Scandinavian economies at the end of the fourth quarter, which accelerated into a sharp contraction during the first quarter. Many believe that the superior challenges in these markets had further reaching impacts across Europe. Karl Heinz will have more to say about these dynamics in just a few minutes.

Jeanswear operating income declined significantly in the first quarter and as noted in the release, the bulk of the decline came from international market conditions that resulted in higher than anticipated discounting, provisions for excess inventories and the impacts of lower absorption on manufacturing related expenses and SG&A. In terms of our sportswear coalition results, I remain you that these results exclude the John Varvatos business, which in 2009 was moved to our contemporary brands coalition.

Prior year results have been restated to reflect this change and the 14% decline in revenues relates primarily to our Nordica brand, which continues to be affected by weak conditions in department stores. We remain very encouraged by the work that has been done to reposition the Nordica brand with upgraded technically inspired products that have been well received by our customers.

However, the channel remains very promotional which is continuing to impact our profitability. Operating income more than doubled over last year's first quarter and this is a seasonally low quarter for this brand and therefore operating margins in this period are always well below full-year results. We continue to expect better comparisons in the second half of the year.

The contemporary brands here to the difficult retail environment is taking its toll with upper tier department and specialty stores especially hard hit as the luxury consumer has scaled back. The 7 For All Mankind brand which has enjoyed strong growth since its launch in 2000 is clearly feeling the impact of the slowdown. While the brands wholesale business will remain challenging through 2009, we continue to see opportunities to expand its reach with additional retail store openings and expansion in both Europe and Asia.

Our retail stores for the brand continue to track on plan. We remain very enthusiastic for the long term growth potential for this powerful brand which remains the clear industry leader in the premium denim category. Revenues of our contemporary brands coalition were down 6% with declines in both our 7 For All Mankind and lucy businesses and strong growth in our John Varvatos business.

And as Eric noted, during the quarter, we completed the acquisition of Mo Industries, owner of the Splendid and Ella Moss brands which contributed $6 million to coalition revenues. And both operating income and margins for our contemporary brands coalition were up on a constant currency basis in the quarter with our new acquisition contributing positively to our results.

Moving to Imagewear, revenues were down 8% with the primary challenge in our uniform business. And due to rising unemployment, uniform demand in all sectors except healthcare and government has declined significantly since December. In fact, unemployment in the petrochemical sector which represents a large component of our protective business had been lower than most, jumped from around 4% near year-end ‘08 to over 12% today.

Manufacturing sector has increased from 6% to 8% range at year-end to over 12% today. No customers are being lost, however, our large vertical laundry customers during these tougher times tend to bring manufacturing in-house to fill their existing capacity, further challenging our top line.

The declines in our economically sensitive industrial and protective businesses are driving disproportionate declines in our Imagewear coalition operating income and margins as these businesses have historically enjoyed strong profitability above the coalition's average. So while our challenge today, we believe the future will present opportunities for this business as our customers feel the pinch according to their own capacity in inventories and smaller players exit the category.

Now a few words about our international and retail businesses as you saw in the release, our international revenues were down 5% on a constant currency basis with the biggest decline in our European jeans business. However, we continue to be very encouraged by the growth we are seeing in Asia, where revenues increased 24% with both jeanswear and Outdoor and Action Sports revenues up double digits.

Our direct to consumer business grew 4% in the quarter with strong increases in our North Face and Vans brands, direct to consumer businesses. During the quarter, we opened 19 stores and we remain on track to open approximately 70 stores this year.

Now a few words about our balance sheet and cash flow, which continue to be areas of focus for us. Our financial position is very strong and gives us the lot of flexibilities in these difficult times. Cash and equivalents at the end of the quarter were $276 million, above the March 2008 levels and should exceed $600 million at year-end, barring any additional acquisitions.

And despite acquisition activity, our debt levels are below last year. By year-end, assuming no additional acquisitions, our debt to cap ratio net of cash is estimated at 12%. And finally, our liquidity remains strong with $1.1 billion available in lines of credit and no long-term debt payments due until 2010.

We stated back in February our intention to reduce inventories throughout 2009 and we made very good progress in the first quarter with inventories down 4%. Year end inventory should be more than 10% below prior year levels as we continue to aggressively manage inventories to protect our profitability and liquidity. In fact, if this continues to be a very high priority for us, we see our inventory management actions leading to a projection of cash generated from operations this year of $750 million which is higher than our prior target of $700 million.

Now, we've been asked about whether we are seeing a rise in delinquent accounts. We are changing our credit terms with any of our customers who are changing theirs. We continue to monitor this very carefully across our businesses and have not experienced any material issues. In fact, our days in AR are down by two from this time last year. And clearly, this environment is particularly difficult for smaller specialty businesses and we've seen a number of smaller accounts closed. With regards to our customers, we have not seen any material changes in credit terms.

In terms of our guidance, I think we pretty well spell out the fact that it cost us to reduce our numbers. We wrote our revenue guidance slightly from a low to mid single digit declines with decline of 5% to 7%. And we continue to anticipate that currency translation will account for about 4% of this decline. As we’ve noted today, the reduction in the European jeans business is the biggest factor behind our change in guidance in both the top and bottom lines.

And obviously we are disappointed that now we are looking at full year EPS that is below 2008, on a reported basis our new guidance points to a decline in EPS to $4.70 to $5 range versus 2008 at $5.42. Now as a reminder, 2009 includes the following impacts

$0.50 per share from higher pension expense, $0.30 per share from foreign currency translation, and a further impact from the transactional side of FX estimated at about $0.20 per share.

Obviously absent these factors, our earnings per share would be above prior year levels.

Now, I would also remind you that last year's results included $0.30 in restructuring cost. In terms of the second quarter, we indicated in our release that our second quarter would mark the low point of the year in our revenue and earnings comparisons given seasonal factors and the cadence of profits from our lifestyle and retail businesses.

So we do expect revenue and EPS comparisons that even more difficult than those of the first quarter. Given the continued volatility and market conditions, we elected not to provide specific revenues or earnings guidance for the second quarter. However, we expect much better comparisons in the second half of the year, particularly in the fourth quarter when we will be up against much easier comparisons given the charge taken in last year's fourth quarter.

Given (inaudible) guidance, the natural question that considers that of further expense reductions and given the magnitude of the cost reductions announced in February, we are comfortable that our cost structure is well aligned with current conditions and we remain on track with the $100 million in cost savings targeted for this year. Certainly, we could take additional reductions in areas like advertising and product development. These investments are crucial to maintaining the strong equity of our brands. The largest brands are gaining share and we think we have a great opportunity to make further share gains in this environment they can remain to invest behind our brands growth strategies. Our intent is to come out of this stronger than ever.

Now, let's hear from Karl Heinz.

Karl Heinz Salzburger

Thank you, Bob. There has been a lot noted already about the rapid change and conditions in key European economies as well as the unprecedented volatility in foreign currency exchange rates that are affecting us this year.

To put some perspective around our total business in Europe and Asia using ‘09 production, jeanswear accounts were 35% of total revenues while Outdoor and Action Sports accounts for 34%, and sportswear and contemporary account for 31%. It has been pointed out Scandinavia and especially Eastern Europe, which is where we have seen the biggest change in economic conditions, account for 40% of our European jeans business and a significantly smaller percentage of our other businesses.

Accordingly, the change in market conditions is impacting our jeans business more significantly than our other businesses. Scandinavia and Eastern Europe has been areas of strong growth for us during the past several years and so this sudden change marks a big reversal (inaudible) for us. I should also note that we took steps to improve the overall profitability of our jeanswear portfolio with the decision to discontinue our European mass-market business.

This business generated over $65 million in revenues in ’08; it has not met our profit targets. We will be phasing out the business during the course of this year. That wraps up my comments about our European jeanswear business, so I move on with a few words about our other businesses.

Our Outdoor and Action Sports business and sportswear and contemporary brands business both had difficult first quarters as well due to previously discussed conditions. However most of our major brands like The North Face, Kipling, Napapijri and 7 For All Mankind continued to perform well. For the full year on a constant currency basis, we expect to see mid to high single digit revenue increases.

Highlights for The North Face, which is our biggest brand, and the quarter included the opening of newer owned retail stores in Glasgow and Bristol. We also continue to roll out new partnership stores and shopping shops. 71 new shopping shops are planned for the North Face this year bringing the total in Europe to over 220. And our next own retail store will open in Copenhagen in the fourth quarter. We remain confident about the performance of The North Face brand, which has a double-digit increase in fall bookings.

Speaking of retail stores, we plan to open two new Vans stores this year both in France and the 7 For All Mankind flagship store openings in Paris next month. Our Napapijri store is continued to post positive comp store gains. Our story in Asia continues to be very positive with double-digit revenue growth in the quarter for Lee, The North Face, Vans, Napapijri and Kipling brands. The North Face brand is expected to grow more than 30% this year in China and we are very encouraged by the response we have seen to the launch of our Vans brand via August.

Overall, we continue to expect our revenues in Asia and to be up 25% this year. Asia continues to be an exciting growth opportunity for us and we plan to provide a more in-depth look at our progress and plans for Asia in the next conference call in July. In summary, while we face significant market challenges, we are focused on maintaining our brand, strong market positions, continuing to selectively open new round retail and partnership stores, and using cost and inventories and ensuring that we have a strong solid foundation in place for all our brands when conditions improve.

Eric Wiseman

Thanks, Karl Heinz. That wraps up our comments for today’s call. The performance of many of our brands, our biggest brands in particular, Wrangler, The North Face, Lee and Vans demonstrate their strength and we will continue to invest in those brands. The performance also demonstrates the strength of VF’s very diverse business model and while there are certainly many challenges in this environment, there is also opportunities for companies that has strong brands and also have great financial strength and flexibility. Because of all of that, I'm very confident that VF will continue to perform well relative to the markets and emerge stronger than ever.

I would now like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question for today will come from Todd Slater – Lazard Capital. Please go ahead.

Todd Slater – Lazard Capital Markets

Thanks very much. Good evening everybody.

Eric Wiseman

Hi, Todd.

Bob Shearer

Hi, Todd.

Todd Slater – Lazard Capital Markets

I appreciate all of the color; it’s really helpful. I was wondering if we could talk a little bit about the premium denim business, it sounded like you said the seven business in your own vertical stores was on plan, if I heard that correct, but overall was weak, so I'm wondering, can you give us a little more color on the concentration of the weakness by channel and the difference between maybe sort of the basic styles and fashion skews just maybe a little bit more color on that category.

Eric Wiseman

Sure, I will give a couple of comments about the business. We have like nine or 10 stores we’ve opened, so that's relatively new for us and it's an important part of the future of the brand, but not a big part of the current performance of the brand, but again important to the future.

The biggest piece of the business is the U.S. wholesale business and you know which accounts they sell and how difficult the challenge has been in those accounts. The total business, Todd, is down around 10% in the quarter and it's because partially a big part of that is driven by the wholesale business in the U.S. as well as the wholesale challenges in Europe. It is absolutely in a piece of the market that has been most challenge in this economy and that's more premium watch receptor. But again, our stores are performing at our expectations, but they are very new stores. Did that help you?

Todd Slater – Lazard Capital Markets

Yes, but even when the wholesale – in the wholesale U.S. which is I guess some of the department stores as well as specialty stores, can you give us a sense of how if there is a differentiation between those two channels.

Eric Wiseman

I am not sure that I am fully prepared to answer that, what I would tell you is that into the wholesale business and the big department stores, because you see their comps, so you know how they are struggling right now to get traffic into the stores. In the specialty store business, we are losing lot of customers, not that they are dropping the brand but the stores are going away and that's a big part of the challenge that we have right now with the brands, so Todd I don't have a number for you on how big that is.

Todd Slater – Lazard Capital Markets

Okay, just lastly what is the ForEx assumption you are using going forward for the rest of the year?

Bob Shearer

Todd, it's again mostly related to the euro and we are using 1.30.

Todd Slater – Lazard Capital Markets

Okay, is that – was it at 1.33 before, now its 1.30

Bob Shearer

It was, that’s exactly right.

Todd Slater – Lazard Capital Markets

Got it. Okay.

Bob Shearer

And the average for the first quarter was right about 1.30, pretty close.

Todd Slater – Lazard Capital Markets

Okay. Thanks, guys.

Bob Shearer

Right.

Operator

Our next question today will come from Kate McShane with Citi Investment Research. Please go ahead.

Kate McShane – Citigroup

Hi, thank you.

Eric Wiseman

Hi, Kate.

Kate McShane – Citigroup

Can you talk a little bit more about what's going on in the mass merchant for jeanswear? I think you mentioned that during the quarter you gained some shares and I know for the last couple of quarters, I think you’ve noted that you were losing shares. So what happened this quarter was different, are you lapping when you start to lose the share, was there another circumstance like lower prices and better product that drove the better growth in the quarter.

Eric Wiseman

Little bit of both case. Our Wrangler brand and that’s – the biggest piece of the brand in the U.S. is the mass channel business, is – it's fair to say it’s up against a weaker comp in the first quarter of last year. It's also accurate to say that it's performing very well based on some product innovations it has in the mass channel at this time. Combination of that is, it's up 3% in the quarter.

Kate McShane – Citigroup

Okay, great. And then in your guidance, I know you are not giving quarterly guidance, but are you assuming the deflation costs in your guidance for the year and if so how much? And with your lower inventory projections down 10%, are you accounting for possible margin improvement in the second half because of these lower inventories and lower list of [ph] mark downs.

Eric Wiseman

Just I will make a couple of points on the inflationary costs. Relative to our product cost which are obviously an important factor, as most companies did, we locked in pretty much in the first half of the year and the cost actually were up a little bit, right. But in the second half of the year, given the renegotiations that took place, our cost were actually down a little bit. So overall for the year, costs are relatively stable on the product side, but with some variation between the first half versus the second half.

In terms of inventories, your question there again, Kate.

Kate McShane – Citigroup

I just wondered if you had expected or if you still (inaudible) guidance possibly better margins year-over-year in terms of less clearance activity from lower inventory?

Bob Shearer

Yes, right and it’s obviously one of the benefits. Obviously we talk a lot about the benefit of reducing inventories and the impact on cash, even included in my comments but the other side of that is and frankly one of the reasons that we are pushing so what on the inventory side is absolutely to reduce the exposure to mark downs and the financial with the P&L impacts that go along with that. So, yes, we actually had a pretty good year last year in 2008, but, yes, we do expect to see that that improves somewhat in many of our businesses.

Kate McShane – Citigroup

Okay, thank you.

Bob Shearer

Right.

Operator

And our next question will be from Bob Drbul with Barclays Capital. Please go ahead.

Bob Drbul – Barclays Capital

Hi, good afternoon to you guys.

Eric Wiseman

Hi, Bob.

Bob Drbul – Barclays Capital

I guess a couple of questions. First, when you look at the expectations on the earnings for the full year now, can you give us an idea in terms of like the three buckets that you talked about, Europe, the shortfall contemporary, I think it’s workwear [ph] or Imagewear, how much of the changes like – can a sort of give us a little more clarity in terms of the impact on each of those three businesses and the new earnings guidance? And I guess when you look at the second-quarter Bob, I know you're not giving specific quarterly guidance, but from modeling perspective, are there any issues that you think that we should be well aware of as we think about how to plan the second-quarter?

Bob Shearer

First of all, Bob, on the – relative to the three impacts that we disclosed, the international jeans piece, the European jeans piece in particular was a little over half of the total reduction, so when you look at our prior guidance versus our current guidance, the jeanswear piece was a little bit over half and then the other two were pretty evenly split relative to the remainder of the reduction. Okay?

Bob Drbul – Barclays Capital

Yes.

Bob Shearer

And the second question?

Bob Drbul – Barclays Capital

So when you – when we look at the second quarter results or second quarter expectations, you haven’t set any guidance but from our modeling perspective, are there any columns [ph] that you would make that we should consider when we look at the comparisons versus last year?

Bob Shearer

Yes, there are a couple of things. First of all, the three factors that we talked about will remain challenging in the second quarter. So they are the bigger factors that will impact the second quarter as well, but I would also like to remind you that in the second quarter, we had this discussion over the last couple of years, the second quarter is by far our smallest quarter overall and its beginning even more so, and a lot of that is driven by the growth that we've seen in our outdoor businesses, which are not second quarter businesses and it puts a little bit more pressure on the profitability in the second quarter. So again I know we’ve talked about that in the past and it absolutely continues to the case today.

And the other factor is retail. Obviously you know that the retail business is – the second quarter is a very small quarter for retail as well. So a lot – we have the fixed cost in the second quarter, not a lot of revenues in retail as well and again we see the benefits of that in the third and then especially in the fourth quarter. So those are some things that do pressure on the overall profitability on top of some of the factors that we've already talked about challenging businesses.

Bob Drbul – Barclays Capital

Okay, great. And then I guess one final question is on the – I'm not sure if you addressed this, but the expectation for flat comps which was the trend in the fourth quarter for the full year, how are you thinking about your own retail business I guess on an annualized basis based on what you have seen so far in the first quarter and the expectation for the rest of the year?

Bob Shearer

Sure. We have – we were still planning to open around 70 stores this year, and got 19 of them opened in the first quarter, that's new stores. Our revised guidance reflects a new assumption about our comp store performance being kind of down with single digit, which was the experience we had in the first quarter.

Bob Drbul – Barclays Capital

Great. Thank you very much.

Bob Shearer

Thanks.

Operator

And our next question will come from Evren Kopelman, please go ahead with JP Morgan.

Evren Kopelman – JP Morgan

Thank you. Good afternoon. The first question just following up on the overall comp being down mid single digits, I believe they were flattish in the first quarter, which it was surprising to us that there was a deterioration. Can you talk about what businesses drove the difference and what surprised you?

Eric Wiseman

I actually think that it was pretty consistent across each of the formats and both was partly driven by a reduction in traffic in every retail place that we do business and then also a reduction in average selling price because of markdowns that had to happen, those two things together drive with single digit decreases in stores. We do have what we believe is pretty consistent across the stores, the one highest spot for us was Vans, which actually had positive mid single digit comps for the quarter.

Evren Kopelman – JP Morgan

Okay. Actually that was going to be my next question about Vans because again the fourth quarter performance was very strong up – can you talk a little bit –

Eric Wiseman

And it continues to be relatively strong.

Evren Kopelman – JP Morgan

So actually on that, can you talk about the international because that was weaker than our expectations, Vans International, can you talk a little bit about what surprised you there or if that was on plan, because I think you said on the constant currency, it was down.

Karl Heinz Salzburger

Yes, this is Karl Heinz answering. We suffer from two elements, one is the currency, the UK is our largest market for Vans. And Bob mentioned that before, we have – we suffered the fact of the weakening of the pound to the euro, so this is the first answer.

We had three years of very solid growth in Vans in Europe and we saw that slowing down a little bit in the first quarter. For the full year, we expect the brand to perform and improve solidly, but we have seen a little bit so far.

Evren Kopelman – JP Morgan

And finally, Karl I think you mentioned that The North Face bookings are up double digits for the fall, can you comment on bookings for other large brands, Wrangler, Lee, and Vans? Thank you.

Karl Heinz Salzburger

Normally we don’t give bookings with exception of The North Face which as you mentioned and as I mentioned is the largest brand.

Evren Kopelman – JP Morgan

Thanks. Good luck.

Eric Wiseman

Thank you.

Operator

Our next question will come from Omar Saad with Credit Suisse. Please go ahead.

Omar Saad – Credit Suisse First Boston

Thanks. Good afternoon.

Eric Wiseman

Hi, Omar.

Omar Saad – Credit Suisse First Boston

Since we have Karl Heinz on the phone, I think I will ask him some questions on the international side as well. Karl Heinz, if you think about this year, what’s happening in the various – with the cost of various brands in the various markets. Where do you feel most comfortable about your business and your ability to generate – to meet the plans and meet your targets, is it North Face and Vans in China, is it – do you think there is a possibility for a rebound in the European jeans business in Eastern Europe, how do you think about the different parts of the world to different brands in parts of the world, where do you think the best opportunities are in the kind of next nine to 12 months?

Karl Heinz Salzburger

We seek to (inaudible) one is to brands and the other one is the geography. Let me start with geography, a bright spot we have is the Asia and particularly China, where we are doing very well, Bob mentioned in MS before. We do well not only on The North Face, but especially on our Lee business and also on Vans and Kipling. These are the four big brands in China.

As far as Europe is concerned, I mentioned before the brands, The North Face is doing well, we see a constant growth which had been happened in the last – constantly in the last year and we are very confident about the performance of that brand across Europe, it’s not only a single market, we are clearly affected by circumstances like the Vans, the pounds the evaluation which is happening in the UK, UK is our largest market for The North Face, but in constant currency we see the brand is very strong.

So to sum up, clearly the performance of The North Face and the performance of Asia, where we see also some good signals is on the increasing of Wrangler in Europe. As you know, we have started our initiative to bring more lifestyle components in our jeans business in Europe and we see signals on Wrangler which are positive.

Omar Saad – Credit Suisse First Boston

Okay. And can you – could you elaborate a little bit on the, new kind of mentioned this, the exiting of the mass business in Europe, what exactly that business was and I know you kind of put it what $60 million, $70 million on (inaudible) what is that business exactly we are getting out and are there other businesses like that out there internationally where the upside is doesn’t there to make it worthwhile keep it they were the –

Karl Heinz Salzburger

Yes, Omar, as you said, it was $65 million business which we did all over – was fragmented in Europe. We worked with three brands, we didn’t see a strategic reason, we didn’t see growth and especially we didn’t see meeting this business our profit targets. So we decided to exit – unfortunately we don’t have a large pan-European account which we put the handle with and we had to build the regional sales forces and approach door by door. So we decided to exit this and focus on our two big brands, where we see the big opportunities which is Lee and Wrangler.

Omar Saad – Credit Suisse First Boston

Okay. And then Eric, one question for you, you are one of the few kind of apparel and footwear portfolios companies now standing in healthy position, it sounds like that you are getting a little more conservative on the cash side, more focus in inventories, reach the cash flow guidance, how you are thinking about the portfolio, not just from an M&A perspective but as you are managing a portfolio for the potential to kind of get out of some of the businesses, but potentially that may not fit with the long term plans.

Eric Wiseman

Sure, Omar. It’s a fair question and will comment – and surprised you that we only give you specific guidance about either end of that spectrum, we absolutely are looking at opportunities to enhance our already strong portfolio and as part of our normal annual drill, we are always looking at our weaker performers and asking about their strategic financial relevance to our company. That's part of how we normally manage the business, I know you know that, but this is a particularly interesting time still to look at through, the world in different place right now.

Omar Saad – Credit Suisse First Boston

Great, great. Appreciate your calendar [ph], best of luck.

Eric Wiseman

Thanks.

Bob Shearer

Thanks.

Operator

And our next question will come from Jim Duffy with Thomas Weisel Partners. Please go ahead.

Jim Duffy – Thomas Weisel Partners

Thank you. Hello everyone.

Eric Wiseman

Hi, Jim.

Jim Duffy – Thomas Weisel Partners

Couple of questions for you. So within the Outdoor and Action Sports portfolio, The North Face and Vans appear to be holding up relatively well. What are the components of the coalition that’s you are on [ph] working and as you look out across the balance of the year, do you expect that coalition to indeed show growth in ’09?

Eric Wiseman

The biggest pieces of those businesses, right, in the Action Sports, it’s really for us – we talked about Vans and Reef. And Vans towards [ph] Reef in size and also in performance and the Vans business continues to do well, so I am – somebody had to help me with the Vans annual number and the Reef business is struggling right now, but its so small compared to the Vans business that the story is really about Vans. And the same is also true in the outdoor space of JanSport, The North Face, and Eagle Creek where The North Face has become so large, it’s the lion share of that business and indeed strong.

The other businesses are doing okay in this envelope as you might imagine for instance Eagle Creek which is in the – has a big travel luggage component to the business, traveled down. Therefore, luggage sales are struggling and that the reality is everything in right now.

Bob Shearer

We expect the Vans brand to grow in a mid single digit rate for the year.

Eric Wiseman

Did you hear Bob’s comments Jim.

Jim Duffy – Thomas Weisel Partners

I did. The coalition as a whole action supports in outer, do you expect that to make forward progress for the year or we likely to see modest decline there?

Eric Wiseman

No, we continue again – I mean in constant dollars, we do expect to see growth over the year.

Jim Duffy – Thomas Weisel Partners

Okay. And then Bob if you mentioned CapEx, I missed it, any update to the guidance there?

Bob Shearer

No change from where we started, Jim, the components there were that we expected the store numbers as Eric has already talked about to be down a little bit from last year, so nothing new from CapEx standpoint.

Jim Duffy – Thomas Weisel Partners

And then you mentioned cash balance is targeted at $600 million at year end, where would you expect total borrowings at year and?

Bob Shearer

Total borrowings at the end of the year would be fairly similar to where they were last year. Now the cash component will be the big news there. Again, we don't have any long-term debt payments due until October of 2010 and then we have about $200 million too.

Jim Duffy – Thomas Weisel Partners

Okay, thanks very much and good luck.

Bob Shearer

Thanks, Jim.

Eric Wiseman

Thanks.

Operator

And our next question will be from Paula Torch with Needham & Company. Please go ahead.

Paula Torch – Needham & Company

Good afternoon. Thanks for taking my question. I just wanted to piggyback on Todd’s earlier question about premium denim and I am wondering if you could give us some little bit of information on what your best selling price point is for severance [ph] and maybe if could tell us if the fashion denim is performing better than the more basic styles, and are you seeing those same trends for both your own stores and wholesale?

Eric Wiseman

Yes, we have a really wide right range of jeans in the contemporary (inaudible) kinds we are talking about,

Paula Torch – Needham & Company

Yes, yes, absolutely.

Eric Wiseman

$150 up to $300. I am not sure how to deal with your question specifically given that that’s a pretty big range, though I will say that the unit volume at the lower end of the range is better than the unit volume at the higher end of the range in this environment.

Paula Torch – Needham & Company

Okay –

Eric Wiseman

Does that help you Paula?

Paula Torch – Needham & Company

Yes, I think we've been hearing a lot from luxury department stores when they come into premium denim that they continue to say that the fashion denim within the premium denim category seems to continue to do well versus your more basic, maybe the more $100 to $150 jean, so I was just wondering if you were seeing the same trend within your retail stores as well as your wholesale account?

Bob Shearer

Well, I think we are seeing the same trend actually, but did the question was how big the business model was at each price point?

Paula Torch – Needham & Company

No, that’s not what I was getting out, but thank you.

Bob Shearer

You are welcome.

Operator

(Operator instructions) We will now go to Mitch Kummetz with Robert Baird. Please go ahead.

Mitch Kummetz – Robert Baird

A few questions. On your sales outlook, your sales were down 6.5% reported dollars in Q1, you're guiding to a 5% to 6% decline for the year, so Q1 sort of within the range for the year. Are you expecting essentially similar coalition performance for the year as you reported in Q1, I think Jim was asking about outdoor and I think your answer there was, yes, but what about the other coalitions?

Bob Shearer

Hi, Mitch, this is Bob. Some changes throughout the year, I mean there always are and we spoke to a couple of those pieces like the Outdoor and Action Sports, actually we expect that to post numbers a little bit stronger than perhaps we saw in the first quarter and in Imagewear again, could be a little bit better on the overall base, but for the most part fairly consistent with what we saw in the first quarter.

Eric Wiseman

Yes, it’s a complicated question because you had things like sportswear business has, the current comps are up against having a women’s sportswear business last year and this – by the end of the year, there won't be so it's a little bit better for that reason, but it's a complicated question for a company to answer.

Bob Shearer

We have some important elements here, Mitch, we really haven't talked about it are the comps. Obviously, the first-half of 2008 were our strongest in 2008 were our strongest quarters. So there is an element build into these numbers of course that assumes that the comps still get somewhat easier as the year goes on.

Mitch Kummetz – Robert Baird

And lead to my next question, is that largely why even though you are assuming a fairly stable environment over the balance of the year that your expectation is stronger resulting the back half and the first half, is it largely due to the comparisons? Are you seeing anything in terms of the order book or what your expectations might be in terms of reorders or anything in terms of cadence of how you are opening your own stores or?

Bob Shearer

It is absolutely a significant factor in the comparisons on a quarter by quarter, first-half versus second half basis. The other factor of course were things like retail, where we are continuing to open new stores and those will help the third and fourth quarters as well. But yes, the comparisons and the results of last year versus this year certainly have a significant impact on the overall comps.

Mitch Kummetz – Robert Baird

And then Bob, help me understand how – I know you are not giving quarterly guidance, but help me understand how FX is likely to play out over the balance of the year given your full-year outlook? I'm guessing that in terms of its impact on sales and operating profit probably a little bit of a bigger hit in Q2 than Q1, but then may be easing over Q3 and four, but then I'm sure there is some hedges that come into play there that may have a different effect in terms of their earnings for the balance of the year.

Bob Shearer

Actually, Mitch, it’s a little bit more about the strength of our quarters relative to our international business, and our first and our third quarters are by far the strongest quarters on the international side. And so therefore while we’ve said there is about $0.30 per share translation impact expected for the year, and we said that $0.10 of that was in the first quarter, most of that – most of the remainder comes in the third quarter, not quite all of it but most of it.

And the same is pretty much true on the transactional side, except that on the transactional side that has a lot to do with our ability to adjust prices to the changing to the rate fluctuations. So obviously by the end of the year, we have a better opportunity and have taken some pricing adjustments clearly to offset the impact of the transactional impacts that we are disclosing. So most of that – more of that falls in the first quarter, then it will in the third quarter. So in my notes I said that about $0.20 for the full year, again a good portion of that was in the first quarter and the remainder would be in the third quarter.

Mitch Kummetz – Robert Baird

And then lastly – and then continuing international, would [ph] you guys said down 5% on constant dollars in Q1, what was it in reported dollars? That's all I have.

Bob Shearer

We are searching for that number. (inaudible) yes, it was in the – it was around 15% range overall.

Mitch Kummetz – Robert Baird

Okay. That’s helpful. Thanks good luck.

Bob Shearer

Thanks.

Operator

We will now go to Chris Cheng [ph] with Susquehanna Financial Group [ph]. Please go ahead.

Chris Cheng – Susquehanna Financial Group

Thanks for taking my call and good afternoon. A couple of questions, I guess first if you cannot comment on your domestic bookings as you look at some of your key brands, in The North Face brands, Lee, Wrangler etc in U.S. aside from your – just trying to get your confidence in the second half aside from just that favorable comparisons given how the fourth quarter look from last year, I guess maybe give a color about what retailers are saying to you about how they are looking at back-to-school plans or even if they are going far out to holiday, any color at on how your key retailers are talking about those key events and how they are looking at the second half based upon your businesses?

Eric Wiseman

I think the best and most comprehensive way to answer the question is that, our – what we know about our fall bookings and we have – lot of our business doesn't have big advance bookings, it's a lot of replenishment oriented business in our big numbers. But our fall bookings since we have them are absolutely accurately reflected in the guidance we gave for the year. So we're saying that the year is going to be down 5% to 7% on a global basis, I think we have given you a lot of color around that and in spite of that is what we know about the bookings across all of our brands for fall. That's how we get to the guidance.

Chris Cheng – Susquehanna Financial Group

Okay. All right. That’s helpful. And then just on The North Face business, very strong here in the quarter, I know you guys have gotten into some new channels of distribution and testing some new retailers, and just wondering if you may be talked about any color between existing channels for the brand and somewhat how these new channels are performing domestically for the brand.

Eric Wiseman

I am not sure which we affirm it to about new channels for the brand.

Chris Cheng – Susquehanna Financial Group

I think you are doing a test with head of sporting drugs and Finish Line on the apparel side.

Eric Wiseman

I can't comment on that not because I am not willing to, but it's because I am unable to.

Chris Cheng – Susquehanna Financial Group

All right. Okay.

Eric Wiseman

Maybe it's for one customer, it could be a small thing in the context of the brand, but I can’t – I just don't know.

Chris Cheng – Susquehanna Financial Group

All right. Fair enough. And then last question I have to you, just on the $100 million in savings for the year, could you just may be update us in terms of how that’s going to flow? Is that still equally spread between each one of the quarters?

Bob Shearer

Yes, it is. Really no change in that and as I pointed out in my commentary, it really helped the first quarter and will continue to help the latter quarters. But yes, it's pretty evenly spread.

Chris Cheng – Susquehanna Financial Group

Okay, all right. Thank you very much gentlemen. I appreciate it.

Bob Shearer

You bet.

Eric Wiseman

Thanks.

Operator

And that does conclude today's question-and-answer session. I would now like to turn the call back over to Mr. Eric Wiseman for any closing remarks.

Eric Wiseman

Sure and quickly thank you very much for sharing the call with us. We appreciate your interest and your questions, and look forward to talking to you again in about 90 days. Thanks so much.

Operator

And that concludes today's conference. Thank you for your participation.

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