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Executives

Eric Wiseman - Chairman & Chief Executive Officer

Bob Shearer - Senior Vice President & Chief Financial Officer

Karl Heinz Salzburger - President of V.F. International Business

Aidan O’Meara - President of VF Asia Pacific

Jean Fontana - Investor Relations ICR

Analysts

Kate McShane - Citi Investment Research

Bob Drbul - Barclays Capital

Todd Slater - Lazard Capital

Omar Saad - Credit Suisse

Evren Kopelman - JP Morgan

Jeff Mintz - Wedbush Morgan

Robbie Owens - Bank of America

Paula Torch - Needham & Company

Chris Svezia - Susquehanna Financial Group

Maggie Gillian - Gillian & Company

Jim Duffy - Thomas Weisel Partners

David Glick - Buckingham Research Group

V.F. Corp. (VFC) Q2 2009 Earnings Call July 21, 2009 4:30 PM ET

Operator

Good day and welcome to the V.F. Corporation second quarter 2009 earnings conference call. Please be aware that today’s conference is being recorded. At this time I would like to turn the conference over to Jean Fontana of ICR. Please go ahead.

Jean Fontana

Good afternoon, thanks for participating in the V.F. Corporation second quarter 2009 conference call. By now you should have received today’s earnings press release, if not please call 203-682-8200 and we will get you a copy immediately following the call. Hosting the call this afternoon is Mr. Eric Wiseman, Chairman and CEO of V.F.

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

Forward-looking statements are not guarantees and actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results, collaborations or financial condition of the company to differ are discussed in the documents filed by the company in the SEC.

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

Eric Wiseman

Thanks and good afternoon everyone. Thanks for joining us today. I’ll start the call today with a few opening comments. Then we’ll have Bob Shearer walk through our financial results. We also have with us today Karl Heinz Salzburger, who is President of our international business, who will provide a quick update on our Asia business; as well as Aidan O’Meara who is President of our Asia Pacific business, who’s going to speak more specifically about China.

Now there’s no question that conditions remain very challenging and our results this quarter reflect that. Having said that we remain confident in our business model and strategies and we do see signs that conditions have begun to stabilize. We noted in today’s release that we are comfortable with maintaining our full year revenue and earnings guidance.

On our first quarter release we indicated that our second quarter revenue and earnings comparisons would likely be the most difficult of the year, even more difficult than what we experienced in the first quarter. Revenues were down more in the second quarter than in the first. However, our earnings decline was in fact less, which we found encouraging as a testament to our focus on controlling costs and reducing inventories.

There were several items in the quarter that I would like to touch upon particularly as they relate to our key strategic growth drivers. Let me talk for a moment about the performance of our four largest brands, Wrangler, The North Face, Lee and Vans. As combined they represent about 60% of our total revenue base.

Starting with our two big Jeans brands Wrangler and Lee the second quarter was clearly more difficult for us than the first, but in the U.S. market revenues of our two big brands, Wrangler and Lee, were down 6% and 4% respectively, but we indicated in our release that second quarter results were not indicative of what we expect for the second half of the year.

There were a number of factors pointed out in the release that were specific to the second quarter, that should be partially mitigated in the second half of the year as we rollout new programs and roll into our important fall core denim season. We continue to gain share on our biggest core denim businesses and those businesses are the most important to us in the upcoming season.

In addition, we are definitely seeing signs of stabilization in our European jeans business and believe that’s the most difficult comparisons are behind us there. We are also looking forward to continued strong growth in Asia. Our two big Outdoor and Action Sports brands, The North Face and Vans continue to have solid momentum and are clearly outperforming the mark.

To reiterate, a couple of facts that is in the release, during the quarter on a currency adjusted basis, global revenues of the North Face brand were up 4%, while Vans revenues rose 14% with increases both domestically and internationally. In this environment, those are results we are proud of and we are. We continue to support the growth of these brands with investment in new store openings and international expansion.

Of course retail and international expansion are two significant growth drivers for us. Our retail revenues grew 4% in the second quarter and first six months of the year. While we don’t normally comment on comp store performance for our stores, I believe it’s worth noting that Vans stores posted positive comp store gains in the quarter, which is why we’re investing in additional Vans stores this year.

If you recall that in 2008, our direct-to-consumer business accounted for 16% of total revenues. This year, with quite deep recessionary conditions, our direct-to-consumer business will continue to grow and should approximate 17% of total revenues. So we continue to make progress toward achieving our long term goal of 22%. International revenues were down 4% in the quarter in constant dollars and 5% for the first six months of the year.

However, we did see international revenues increase in our Vans, 7 For All Mankind, The North Face and Kipling brands on a constant dollar basis. You’ll hear much more today about our success in Asia, but we’re very pleased with the momentum that we have there. Now, these successes while gratifying did not obscure the fact that we experienced steep revenue and operating income declines in most of our businesses during the quarter. We anticipated this, but that doesn’t make it any easier.

However, with this very difficult quarter behind us we’re now looking forward to easier to that and bottom line comparisons in the second half of the year. I should point out that we do not expect improving market trends. Indeed unemployment is expected to continue to increase in the coming months and consumer spending is likely to remain quite depressed.

There is a much speculation about big inventory reductions by retailers and the possibility of revenue and earnings balance later this year for both retailers and wholesalers, if restocking and in response to a pickup in demand becomes necessary. While we believe retailers are doing everything they can to minimize inventory risk in this environment, we believe it’s too early to speculate about the effects of a possible improvement in consumer demand. We will continue to work closely, with our retail partners to keep inventories lien and to protect our profits.

In summary, we believe we’re well prepared to navigate our way through the second half of 2009. The most difficult comparisons should be behind us and we remain highly focused on achieving our plans for the balance of the year.

We will remain vigilant on cost and inventory. We will continue to make prudent investments behind our biggest growth opportunities. We will continue to explore opportunities to add new brands to our portfolio and we will maintain and protect our balance sheet.

Now let’s hear from Bob.

Bob Shearer

Thanks, Eric. On the service revenues which were down 11% in the quarter with foreign currency translation accounting for three percentage points of the decline. Our gross margins this quarter rose 10 basis points to 43.9%. We’re benefiting from expanding gross margins in our Outdoor and Action Sports businesses and that’s a testament to the strength of those brands.

In addition, our own retail operations continued to contribute positively to the gross margin comparisons. We were really pleased with the improvement in this area considering the pressures that this environment places on overall gross margins. SG&A as a percent of revenues rose 180 basis points, of this increase 140 basis points is related to higher pension expense.

With the remainder, do to our continued investments in growing our retail store base that obviously implies that outside of these factors, our SG&A relationships are remaining stable, despite the revenue decline resulting from this challenging environment. The aggressive cost reduction actions that we initiated at the end of 2008 are clearly paying off.

The tax rate in the quarter was 25% that was right on track with our expectation. We continue to realize the benefit of substantially lower effective tax rates from our international businesses. For the full year, we anticipated a tax rate of about 27% and that brings us to earnings per share.

We said last quarter that we anticipated our second quarter would reflect the toughest comparisons for the year in earnings per share. That implied obviously, that a decline in a quarter will exceed the 31% reported in the first quarter. In fact, the decline was slightly less at 28%. Improvement came primarily from one, the strong results posted by our Outdoor and Action Sports coalition and secondly, better than anticipated results in jeans wear.

Related to coalition results, as we did last quarter we concluded a table with the release that provides revenues and profits on an as reported and constant currency basis. As the coalition results, I’ll begin with Outdoor and Action Sports, another solid quarter year. Reported revenues were down 2%, however, adjusting for currencies revenues actually rose by 2% with increase in both American and international businesses.

The main drivers of growth were our two big brands, The North Face and Vans where revenues were up 4% and 14% respectively on a constant currency basis. Also as noted in the release, we experienced strong growth in our Asia and direct-to-consumer businesses where we saw revenue increases of 32% and 19% respectively for this coalition. Operating margins in Outdoor and Action Sports were strong in the quarter arriving by more than one full percentage point despite continuing investments to expand our direct-to-consumer business reflecting the higher gross margins that I referenced earlier.

Looking forward, we expect stronger second half comparisons for our Outdoor and Action Sports coalition, driven by our growing and owned retail business, which is seasonally strongest in the second half and continued expansion in operating margins.

Now, turning next to jeanswear; Eric made a few comments about our Wrangler and Lee brands at the beginning of the call. Just to reiterate what was in the release, total jeanswear revenues in the quarter were down by 12%, that’s again in constant dollars. However, we are encouraged by the fact that we continued to gain share in our Wrangler men’s, Lee men’s and women’s and our core Riders women’s businesses driven by the success of new product innovations and shop and shop investments at retail in these brands.

Now there were several factors that affected revenues that were specific to the second quarter. First was a reduction in certain non-core Riders brand programs including seasonal and plus size programs. Now, this reduction has the biggest impact in the second quarter especially related to the seasonal products and will be less in subsequent quarters. We also noted a shift in the timing of product shipments with our customers continuing to tightly manage the flow of products.

Finally, all of you are aware of the Goody’s and Mervyn’s bankruptcies last year, which has resulted in a loss of volume this year. Our conditions continue to be difficult in Europe, but we are seeing signs of stabilization. In fact the sharp declines in the Eastern Europe and Scandinavia markets that we discussed last quarter have moderated and these markets are now seeing declines more in line with the rest of Europe.

Our international revenues declined 12% in constant dollars in the quarter, reflecting difficult market conditions and to a lesser degree, the ongoing exit of our mass jeans business. Now a bright spot in the quarter, were China where jeanswear revenues rose 10%.

Despite the drop in revenues and operating income, we did see our jeanswear operating margins improved a bit in the quarter a benefit of our cost reduction actions. We do expect better comparisons in the second half of this year and than experienced in the second quarter for our global jeanswear businesses keeping in mine the factors specific to the quarter.

In the first quarter revenues in constant dollars were down by only 1%. For the first half in total, jeanswear revenues in constant dollars declined by about 6%. So, comparing first half to second half revenues, we expect that second half comparisons in constant dollars will be more inline or even somewhat better than those in the first half, and certainly much better than those reported in the second quarter.

On a reported basis second half revenues should be down at high single-digit percentage rate. Now we remain cautious about the outlook for our European jeans business. We’ve seen significant declines in retailers open to buys versus last year and while market conditions have stabilized, they are expected to remain week. Having said all that, our brand and product repositioning efforts for Wrangler and Lee in Europe are nearly complete and we are gaining new distribution.

Despite challenging market conditions, we are well-positioned in Eastern Europe which we continue to view as a good market for us longer term. Asia offers outstanding potential and our business there enjoys not only extraordinary growth but strong profitability as well.

Now a few words about sportswear; we continue to feel the effect of a very weak and promotional environment, department stores, which is impacting our Nautica brand. Our retail partners are focusing heavily on value pricing and holding their open to buy for in season purchases. A few other factors contributing to the revenue decline were said in the release include a planned decrease in special programs in the off price channel and our exit of the women’s wholesale business in mid 2008.

On the positive side our launch and all Lord & Taylor doors is a success and our business there is running above our plan. It’s also worth noting that our Kipling revenues in the US rose by 3% in the quarter.

Now looking towards the second half of the year there again, we expect to see improved comparisons on both to that and bottom lines, reductions in our special program business and the exit of the women’s line accounted for over 60% of the decline in first half revenues for this brand.

While our sales of Nautica products to off price channels will be down for the full year, second half comparisons will include an increase in this business, which is already booked on a lower impact from the exited women’s business as we close that business in the first half of last year and we continue to anticipate double-digit margins as we benefit from aggressive actions taken to reduce both inventories and cost.

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

The acquisition added $16 million in revenues in the quarter while all retail channels of distribution are challenging upper tier department and specialty stores have been particularly weak. In fact the number of specialty stores is declining at an accelerated rate and that a high number of specialty stores that existed at the beginning of the year have been closed due to the tough economic environment.

In terms of the Coalitions largest brand, 7 For All Mankind, global revenues declined 12% in the quarter or 8% in constant dollars. As noted in the release, a decline in our U.S. wholesale business was partially offset by significant growth in our direct-to-consumer and international businesses. In addition we continue to reduce our sales to the off price channel.

During the quarter our revenues in this channel declined by 25% and we expect a similar decline through the year in total. While this loss of revenue hurts our comparisons, we believe reducing our business in this channel was the right strategy to maintain the high integrity of the 7 For All Mankind brand.

Our global expansion strategy for the 7 For All Mankind brand continues to be relevant and shows progress. For example, international revenues rose 34% in constant dollars in the quarter and our direct-to-consumer business more than tripled in the quarter.

Globally year-to-date we’ve opened six retail stores with a total of 20 planned for the year. We’ve tested Splendid and Ella Moss products in several 7 For All Mankind stores with strong results and we’ll be rolling these products out to additional stores during the year, and we’ll be opening our first Splendid store in LA, in the third quarter as planned.

Now, there was a particularly challenging quarter for this Coalition in terms of operating income and margins. The second quarter is the Coalition’s seasonally lowest revenue quarter, magnifying the impact of the volume reduction.

In terms of the second half of the year, we expect strong revenue growth driven by the addition of the Ella Moss and Splendid brand. We’ll also benefit from additional new store opening remarks and continued growth internationally in our 7 For All Mankind brand. Margins should return to double digit levels as our inventories will be much better aligned at retail and accordingly we should see a lesser impact from customer inventory adjustments.

Finally a few commence on our Imagewear business. There’s no question that the second quarter was a challenging one for our Imagewear Coalition, with revenues down 19% and comparable declines in both our Image and Licensed Sports businesses. As we discussed in last quarter’s call, our Image business has been hurt this year by particularly high unemployment rates in sectors that have impacted our industrial uniform and protective apparel businesses.

While unemployment rates continue to rise, the rates of increase have slowed considerably. Our License Sports business also had difficulty revenue comparisons in the quarter. The decline in revenues here reflects the weak retailing environment, which has particularly impacted sales of discretionary products like team sports apparel.

While we don’t expect improvement in the employment picture in the seconds half of the year, we do see easier comparisons in both the Image and License Sports businesses, as we anniversary a difficult seconds half last year that followed very strong first half in 2008.

Now on a broader VF scale, Eric touched on our retail and international performance. I should add that we’re on track to open at least our targeted number of 70 stores this year, with 17 stores opened in the second quarter and 36 stores opened year-to-date. Our balance sheet, liquidity and cash flow continue to strengthen. In terms of our balance sheet and cash flow, we noted in the release that we had $385 million in cash and equivalents at the end of June, above the $276 million at the end of June 2008.

Our focus on reducing inventories is really paying off with inventories down 9% from prior year levels. Reducing inventories will remain a big focus for us in the second half of the year and we continue to expect that our year end inventories will be down 10% or by $100 million from year end 2008 levels.

This reduction in inventories is helping to drive strong cash flow from operations, which should exceed $750 million this year. It bears repeating too, that our liquidity remains strong with $1.1 billion available in lines of credit no long term debt payments due until late 2010 and then only $200 million is due.

In terms of our guidance as Eric noted, we’re still anticipating that revenues will decline 5% to 7%, with currency translation accounting for about 3% of the decline. Last quarter we also talked about the transactional effects. Most of the translational effects of currency on our results nicely anticipated, the major impact was in the first quarter and we do not anticipate any material transactional currency impact in the second half.

In terms of earnings per share, we’re holding to our current rates of $4.70 to $5, despite somewhat better than anticipated earnings in the second quarter and upside from currency as the euro rate has improved from our prior expectation of 130. We think it’s prudent to maintain our guidance at this time given the uncertainty and challenges in global economic conditions.

Now, with the first half behind us, this guidance implies that second half comparisons will improve over those of the first half. As Eric indicated in his opening and in the press release, comparisons are expected to improve as we anniversary a challenging second half last year.

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

I would also remind you as you considered your estimates for the third quarter last year’s third quarter included a net benefit of about $0.07 from favorable tax settlements. Now recall too that our fourth quarter results last year were impacted by $0.30 in cost reduction actions that we won’t have this year. So, fourth quarter earnings comparisons should be the strongest of the year.

So, that wraps up my comments. Let’s hear an update from Karl Heinz Salzburger on our Asia Pacific business.

Karl Heinz Salzburger

Thank you, Bob. Currently, our own businesses are concentrated in the fastest growing Asian economies, China and India, both of which have very good prospects for sustained future growth. The more mature markets like Japan and Korea, we had more limited back exposure and we worked predominantly to partner either distributors or licensees.

Most of our brands have a presence in all countries, throughout the region with this partner. There is a total Asia revenue based which should approximate to $300 million this year, approximately half was generated in China. Our two largest businesses are Jeanswear and [Inaudible] accounting for 45% and 20% respectively, with the remainder coming from our Kipling brands and 7 for All Mankind.

We move from using licensees to building our own platform in the region starting in ‘95 when we launched the Lee brand in China. We followed with a launch of Wrangler in 2003. 2006 we formed a majority owned joint venture in India to enable the growth of our brands there.

In ‘07 we converted our license to North Face business in China to advance model and those have formed a joint venture with Mitsui for our Napapijri Brand in Japan. Our Vans brand launched in China just last year with excellent results to-date and this year we formed a new subsidiary in Japan for our contemporary brands and also converted our Kipling business in China, from a distributor to an owned business.

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

In terms of our most recent results, in the second quarter our Asia business rose 13% and is up 18% year-to-date. The slower growth in the second quarter versus the first and the revenues are 24%. Due to the timing of shipment, we continue to expect our revenues this year to be up about 25%.

Stronger growth we expect in the second half is due to continued strong brand momentum, particularly in China, as we increased our investments and market gain for our Feeder North Face, Lee and Vans brands; additional door openings and easier comparisons versus last year’s fourth quarter, when global market conditions deteriorated.

India is an important opportunity for us, as we’re taking a more patient approach there as a more organized recent distribution network evolves. We are prepared to accelerate our efforts there when the time is right. We will also proactively develop our partnerships in all other markets; we see many growth opportunities with our licensees and distributors, particularly in Southeast Asia.

We are organized to capture potential in Asia, the great brands in the talented management team. We are confident that we can ultimately build a 1 billion business there. China will be the key driver of that door and right now Aidan O’Meara will speak more about the opportunities.

Aidan O'Meara

Thank you, Karl. Our business in China is up 27% Year-to-date is expected to be up 30% this year. We’ve been growing organically by expanding the footprint for our established brands there particularly The North Face and Lee. 2009 will mark the first full year for our Vans brand in China and are very pleased with the traction to that brands has with results exceeding our initial expectations.

This year in China we expect to add about 250 doors across our brand bringing us to a total of 1,000 doors including counters by year end. 20% of which we own and operator all in tier 1 cities. Looking to the future, we are focused on achieving market leadership in three key categories, action sports, outdoor and jeans, where we have strong brands with proven relevance to Chinese consumers.

Over 80% of the growth we are planning in China over the next five years will come from our Lee, The North Face and Vans brand. Same time we will continue to selectively bring other V.F. brands on to our platform as we are with Kipling this year.

Eric Wiseman

Thanks, Aidan. As you heard the second quarter was every bit as challenging as we anticipated. However, we are confident in the V.F. model, realistic in our expectations for the second half and we are confirming our guidance for revenue and earnings for this year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kate McShane - Citi Investment Research.

Kate McShane - Citi Investment Research.

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

Bob Shearer

In the quarter, the second quarter you asked about, right.

Kate McShane - Citi Investment Research.

Yes, please.

Bob Shearer

There was about a 40 basis points improvement from retail.

Kate McShane - Citi Investment Research.

Although sales were a bit weaker than we were expecting margins were much better than we were expecting so can you quantify how much cost saving contributed to margins this quarter and how should we think about the impact of cost savings for the rest of the year.

Bob Shearer

Yes, as we said earlier in the year, related to the $100 million, first of all we are still on track to achieving that and as we said and as we were achieving and as we get throughout the year we’re seeing that we’re on track, not only for $100 million, but also to see that relatively evenly split over the four quarters.

So, in the first half you got about half of that. Second half we expect to get to about half of it and again on a quarter-to-quarter basis it’s pretty evenly split. So, that’s been a significant factor. Things like, things like the pension, the increase in the pension expense, stand out obviously a little bit more in the second quarter than they do other quarters because it’s just a smaller quarter.

Kate McShane - Citi Investment Research

Any opportunities potentially find more cost savings in the second half?

Bob Shearer

Again, we always have opportunities to reduce our costs. I know that many companies might say the first places they’re going to go is in the advertising expense area, but that’s not where we look. We’re looking other spots. So yes, we could reduce our expenses, but we’re working hard to protect the advertising spend.

Operator

Your next question comes from Bob Drbul - Barclays Capital.

Bob Drbul - Barclays Capital

Eric, I just got on just like one big picture question and I have a couple of sort of finer tuned questions. First, in the press release and when you talked about a little bit, you talked about some signs of stabilization. When you look at it from the portfolio of the total business globally, can you maybe just give us one or two of your biggest stabilization data points that gives you the most encouragement as you look to the back half of this year?

Eric Wiseman

I know Bob, VF really well, so you know how complicated it is to make statements about all of our brands on a global basis, some data points, though. The health of the Vans brand and the fact that Vans brand had a good wholesale business globally and positive comps. Now, the positive comps aren’t as high as they were a year ago, but they are running at about the same kind of positive levels for the first part of this year. So, that tells me that there’s some stabilization.

We see it in some of our own stores, where our trend line has flattened out a little bit lately. So, those are two indications that we have. We obviously, have pretty good look at bookings for the fall. Now our business is for bookings and replenishment, but bookings look like people are planning trends to be about where they are today. Does that help you, Bob?

Bob Drbul - Barclays Capital

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

Eric Wiseman

The recent run rate for those businesses is yes.

Bob Drbul - Barclays Capital

When you talk about, I guess same thing and when you talk about bookings for the sportswear segment, is that down about the same run rate for the back half of the year, as what you just saw in the second quarter? I guess can you give us a North Face booking for the fall period?

Eric Wiseman

The answer to the question about Nautica is, yes, since the bookings are about the same rate we’ve seen. The bookings for fall are at about the same run rate as they have been. I honestly don’t know off the top of my head, Bob, what the North Face bookings are for fall.

Bob Drbul - Barclays Capital

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

Eric Wiseman

I’m struggling to think of a biggest disappointment. I don’t think that any of our retail stores are significantly under performing their space. That means that, I can’t think of a biggest disappointment, Bob. I mean, because I have to compare them to other specialty retail and we’re not underperforming our competitors in that area; and in most cases we’re doing better.

Bob Shearer

Bob, to that point, what we said was that we were going to be opening stores on a more cautious basis this year end, and in those formats that have proven themselves a very successful. So, that to me means we are not doing a lot of testing with other brands. We’re again opening stores where the results and returns have been strong, so no real disappointments from that standpoint.

Operator

Your next question comes from Todd Slater - Lazard Capital.

Todd Slater - Lazard Capital

When do you think the retail channels will be clean enough and inventory aligned enough where the demand you can actually start to see actual increases in open to buy or in order growth? Perhaps maybe you could look at it from both the U.S. and sort of the rest of world perspective for us.

Eric Wiseman

I think we can comment best on the U.S. picture. I think that our retail partners, most of the suppliers, including us, have done a really good job over the last six to nine months to get inventories inline with plans and by that, Todd, I mean that our inventories are inline with what everybody is predicting to have happen in the business. We don’t have any situations that I’m aware of where we have inventories out of line and are hoping to work through them before the fall season happens.

Everybody is pretty much where they want to be. I think the retailers have done a good job with that and it’s reflected some in our revenue line, because they have purchased from us less than they’ve been selling for awhile to get in that position, but it’s the right place to be. Our inventories are also inline. We mentioned earlier we were going to reduce our inventories this year by $100 million and we’re on track to do that.

Todd Slater - Lazard Capital

Right, but your inventories are inline. The retailers are maybe getting better aligned, but they’re not yet increasing orders, or their open to buys aren’t increasing. When do you think they will be at a comfort level where they can start growing orders again, fall is going to be down. Do you think spring still will be down, but down less or flattening out, or maybe even up? I’m just curious, what’s your viewpoint?

Eric Wiseman

Well, for Fall I think we are aligned with whatever with each retailer based on their plan. I don’t think anybody is going to bet and get out of in front of that. I think everybody is going to chase and we look forward to it.

Todd Slater - Lazard Capital

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

Eric Wiseman

I don’t know, how I think we’re going to learn a lot about that in the next 90 days to 120 days.

Operator

Your next question comes from Omar Saad - Credit Suisse

Omar Saad - Credit Suisse

I wanted to ask you about the gross margin line. Really solid number and I think you’re up a little bit. I know there’s some mix shift going on in there, but still up year-over-year in this environment. Inventories were down more than they were last quarter.

Talk about the sourcing out of the equation, you have kind of some of these retailers out there talking about huge sourcing opportunities with deflation year-over-year and the inflation we were seeing last year in the second half. What kind of opportunity is that for you or if you guys already so efficient that that’s not necessarily as big as an opportunity.

Bob Shearer

First of all, we didn’t see the big increases like some did in the first half of the year and I think we probably talked about that in the past. What we are seeing and built into our prior guidance was some improvement in the second half. So, yes, our costs were down in the second half of the year.

Clearly built into the numbers in the second half of the year, we do expect to see improvements in our overall margins year-over-year for sure. So, that it keeps us kind of even on a full year basis, which again in this environment we think is pretty strong. So going forward, we’ll see.

We still have a lot of negotiating yet to be done, but for us again, we just never had the big increases; seeing some improvements in the second half, and we are just going to keep pushing on it.

Omar Saad - Credit Suisse

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

Bob Shearer

In the second half, I would say it’s a little more heavily weighted to the promotional environment; and last year, especially in the fourth quarter we talked about some actions that we took to align inventories and that always costs us as well in the gross margin. So I would say it’s a little bit more heavily weighted for that than the cost side; but costs are a factor.

Omar Saad - Credit Suisse

Okay and then a question on kind of the M&A environment, there is the Eddie Bauer transaction that has been in the press recently, what the financing out there looks like, how you feel about that what to any extent you can provide insight on what your thought process was with Eddie Bauer, would be helpful?

Eric Wiseman

Related to the financing, Omar, again with our credit rating, we’re in good shape. We have access to financing for sure and at better rates than most. So, financing is not a challenge for us. It’s not holding us back from making appropriate acquisitions. As a matter of fact, again capacity is good and also the rates where they are today and also are more compelling. Is that what you were looking for?

Omar Saad - Credit Suisse

So, what is holding you back? Are you still seeing the same opportunities? Do you still want to be aggressive or less aggressive given kind of the uncertainty out there? Are prices still too high?

Eric Wiseman

I would say that we’re aggressive. There are plenty of opportunities. We’re actively involved in many discussions. We obviously pursued the Eddie Bauer opportunity unsuccessfully.

Omar Saad - Credit Suisse

One last question, the announcement of the new Board Director, was there an opening on the Board or just more of a strategic addition, kind of given changing focus of the company going more international?

Eric Wiseman

Our Board and our Nominating and Governance Committee has kind of an ongoing succession planning process. We’re always scanning for new candidates and we added Rick Carucci to our Board today, recognizing that we have some upcoming retirements on our Board.

Operator

Your next question comes from Evren Kopelman - JP Morgan.

Evren Kopelman - JP Morgan

Question on the jeanswear coalition, the margins were a lot better than we expected, especially compared to the first quarter when margins were down 400 basis points. Can you talk about, what drove the up operating margins, especially in light of the weaker top line performance compared to Q1?

Bob Shearer

Evren, this is Bob. Sure, it’s evidence of the cost reduction efforts. So, that’s a big part of it and running the business very, very cleanly, especially from an inventory standpoint. As you know, excess inventories can really impact the margins in a big way. We’re always quick to provide for any excess inventories and our cost reduction efforts that we initiated at the end of last year are, as I said in my comments are really helping us and really paying off.

Evren Kopelman - JP Morgan

Then similar question on the Outdoor Coalition; again, margins were up compares to Q1 when they were down, which also is surprising, given I think last year you had talked about the seasonality of the retail business for the weakness in the second quarter end margins? Again, can you talk a little bit about, what drove those strength in margins in this quarter?

Bob Shearer

Number one, our gross margin is a little bit different there. Again, we obviously did take a number of cost reductions and cost control actions there as well, but in our outdoor business, most of that resulted from improvements in our gross margins.

Evren Kopelman - JP Morgan

Finally, what for the Euro, what do you assume for the second half what rate?

Bob Shearer

Yes, right now we are assuming in our numbers, we are assuming a rate of 137 and that’s compared to the 130 number that we previously put out there. So, obviously, that’s improved a bit and helping us a bit.

Operator

Your next question comes from Jeff Mintz - Wedbush Morgan.

Jeff Mintz - Wedbush Morgan

First of all, on CapEx, it looks like CapEx was down to about $20 million this quarter versus 35 last year Q2. Can you just talk a little bit about where the delta was on that, and what you are looking at for full year CapEx?

Bob Shearer

Yes, most of that is it has to do with stores and the timing of store openings. On a full year basis and we said earlier in the year that it was one of the areas that we would also be careful with, be cautious about. So, we expect our total CapEx on a full year basis to be maybe $10 or $15 million below last year, so right around the $110 million mark.

Jeff Mintz - Wedbush Morgan

So, there is a little bit of a pickup in the second half, then?

Bob Shearer

A bit.

Jeff Mintz - Wedbush Morgan

Then you spoke a few minutes ago in response to a question about advertising and maintaining advertising. Is it basically the intention to maintain advertising as a percent of sales, or to maintain it on an absolute dollar basis?

Bob Shearer

Mostly on a percent of sales, and we will probably be down about 50 basis points when the year end. So our advertising expense as a percent of sales has been running up over the last several years and we’ll just back off a bit from that, but again, only maybe a 50 basis points reduction and, yes, that is as a percent of revenues.

Jeff Mintz - Wedbush Morgan

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

Bob Shearer

It’ spread pretty evenly. So, the $90 million increase that we talked about earlier in the year is pretty well spread evenly throughout the quarter. What happens is, only because of the lower revenue, it has a bit more of an impact in our overall SG&A relationships.

Jeff Mintz - Wedbush Morgan

All right, but it’s about a quarter of the $90 million?

Bob Shearer

Year-over-year, that’s right.

Operator

Your next question comes from Robbie Owens - Bank of America.

Robbie Owens - Bank of America

The first question I might have missed the Vans, if I may have this wrong, and Eric, I guess maybe it’s a question for you, but I think Vans, if I recall, was flat in the first quarter or flattish in the first quarter, and then grew 14%. Was it mostly same store sales at your stores that drove that or did you see a pickup in orders from accounts or did you actually open a pretty good sized new account?

That’s one question. The second question is on the European jeanswear business. I know business is tough in Europe, but do you have a sense of whether there are any market share competitive issues for Lee and Wrangler over there? I’ll just stop at those two.

Eric Wiseman

I’m looking for the Vans number here for the first quarter. I will tell you that the performance of the Vans brand has been balanced, meaning that we have growth in comp stores. We also have been opening a fair number of new Vans stores and our wholesale business has been growing.

So, it has been a brand that’s working for us and it grew in the quarter in Europe as well, and we launched it in China, they were small this year. So, I can’t think of top of my head replace, where we have Vans declining at all.

Bob Shearer

Robbie, to your first quarter point, yes it was down. It was down a small amount, a small percentage in the first quarter. That was driven on the international side, but we’re happy to report on the international side. We’re really seeing some strength in that business now and it’s much improved in the second quarter. So, as a result of the international piece, the U.S. was up in the first quarter. The second quarter was strong overall, U.S. as well as the international side.

Robbie Owens - Bank of America

I’m just more to maybe understand just generally what’s going on internationally? What drove that swing in Vans on the international side?

Karl Heinz Salzburger

As Eric mentioned before, we had a strong result in Asia. That was one piece. We show a stabilization of a relatively weaker Q1 also in the European businesses.

Robbie Owens - Bank of America

Then my second question on the jeanswear business in Europe and competition in market share?

Karl Heinz Salzburger

Yes, as you know I would say we are on track in our repositioning effort of Lee and Wrangler. That’s going on as we had planned. Especially in Wrangler, we saw good results. We actually won last month the Grand Prix Awards income for the best advertising campaign. In Wrangler, we’re very confident that we see good momentum. We are getting into distribution, where we have not been before. So Wrangler, I would say, is ahead of our repositioning plan, while Lee we are on plan.

Operator

Your next question comes from Paula Torch - Needham & Company.

Paula Torch - Needham & Company

I actually have a couple of questions on the contemporary business. I was wondering if you could give us a little bit more color on the 7 For All Mankind businesses in terms of the product. More specifically, maybe talk about what is the most popular fits or styles, if they are the same in the U.S. as they are in Europe; and if you can maybe talk also about the price points, maybe what price point is your sweet spot for Seven, has that changed significantly and does that vary between distribution channel? Thank you.

Eric Wiseman

I will try to address some of your questions. I’m afraid, I don’t have all the information that you’re requesting. The product line for 7 for All Mankind is largely a global product line. So there is consistency in the style in how we work the brand around the globe. It’s not 100% true, but largely true.

The next comment I would make is about your question about exact fits and stylings that are working well for us now. I’m afraid, I can’t answer that. I just don’t know that at the brand level for all of our brands. I will comment that there has been a reduction in the AUR, is the only way I know to think about it, of the prices where consumers are buying many of our brands, including 7 for all Mankind.

In this environment, consumers are spending their dollars a little more cautiously. So we’re selling more jeans today in the $150 to $189 price point as a percentage of our total than we were last year, and less in the $200 to $300 price point. There’s been a slight down. Fortunately, people are, our stores that we’re opening are working for us and that’s proven out to be a good investment and we intend to continue to invest in those stores. I think that’s about everything I know.

Paula Torch - Needham & Company

Okay and just maybe to follow up on that, what percentage of maybe the Seven business is. I would assume that it’s mostly concentrated in that $150 to $189 as a percentage of your total sales, right? In terms of, I guess, SKU count? Would that be fair, or…?

Eric Wiseman

I can’t accurately answer that question.

Operator

Your next question comes from Chris Svezia - Susquehanna Financial Group.

Chris Svezia - Susquehanna Financial Group

Just a couple of questions here, I guess. First just on the comp, for your company-owned stores, if you could give me the overall comp number for that second quarter that would be helpful. In the first quarter, I think it was down mid-single. I think your guidance for the year, you’re talking about mid-single digit decline. I was wondering if you have any color about the second quarter, how that performed?

Eric Wiseman

Let me check that. I think its very mid singles.

Bob Shearer

It’s very similar. It actually improved a bit from the first quarter.

Chris Svezia - Susquehanna Financial Group

Okay. So I think you had mentioned that you saw, obviously Vans. I think, come positively you said and then, I think you said The North Face if I’m not mistaken come positively as well and you saw improving trends in aggregate as you went through the quarter?

Bob Shearer

Yes, actually, I don’t think we said that. We don’t generally provide comps by a brand basis. We did point out the Vans piece as being positive. We really didn’t talk about any others.

Chris Svezia - Susquehanna Financial Group

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

Bob Shearer

We are.

Chris Svezia - Susquehanna Financial Group

Then just switching gears for a second, on the North Face, first quarter constant currency you are up 14%. You are up 2% here in the second quarter. I know second quarter is not a big quarter for you, obviously; but in the context of this, you went into the second quarter, your backlogs were up, I believe, double-digits for The North Face business. Is that primarily a level of shipments just still for the third quarter, or did you see anything going on in terms of the timing of shipments?

Bob Shearer

I’m not sure I fully got the question. We are not seeing any significant changes in terms of timing within the North Face business and I would also remind you that the retail, especially in the second half of the year I’m not sure if this is what you are driving at or not but does it have a significant impact, as it does in a number of our brands. So, the second half we do expect what I did say was we expected the comparisons to be stronger in the second half and the seasonality of retail has something to do with that, obviously.

Chris Svezia - Susquehanna Financial Group

I guess the last question I have here is for either Karl or Aidan. Just if I caught you correctly, you said the Asia pacific business is a $300 billion business, and you see overtime it could be a $1 billion business? Could you maybe you put some parameters about when that is maybe I missed that, just a point of clarification.

Karl Heinz Salzburger

We expect the business to continue at a growth rate of around 30%. I think we can use that as a benchmark in terms of our expectations as we look out. At an annual rate of 30%.

Operator

Your next question comes from Maggie Gillian - Gillian & Company.

Maggie Gillian - Gillian & Company

Could you talk a little bit about the go forward strategy for Nautica? It seems to be indefinite still.

Eric Wiseman

No, it’s not indefinite at all and we are committed to the department store channel. We spent a lot of effort this year improving the product styling of our product, and we think we were successful with that. We are investing more in our shop-in-shops, particularly with Macy’s; and we have seen the change this year has been consumer shifts in all brands towards more value pricing.

So, we’ve had to react to that Maggie, as has everyone else. That was not in our playbook when we started the year, but it certainly has become part of our playbook as the year has unfolded. We’ve reacted to that by designing into those more value price points for the time being, whether that’s the most relevant place for all these brands to be.

Maggie Gillian - Gillian & Company

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

Eric Wiseman

Is then an across VF question?

Maggie Gillian - Gillian & Company

Yes, pretty much.

Eric Wiseman

Yes. I think like many, our outlet stores are performing consistently well. It gets back to the same value play, Maggie. People are looking for value, when they’re shopping in the outlet centers and our outlet stores are doing pretty well. Less so than our more premium priced stores where it’s a struggle selling, everybody is struggling at that price effect.

Operator

Your next question comes from Jim Duffy - Thomas Weisel Partners.

Jim Duffy - Thomas Weisel Partners

I’m hoping you can talk about your comments about stabilization in the European jeanswear business. That’s a very abrupt change and telling from your comments following Q1. Can you put a little more color on that, please?

Eric Wiseman

Let me just make a couple of comments about that, Jim. Then I’ll ask Karl Heinz to comment as well. I talked about the Eastern European business in my commentary and we do need to be a little bit careful with that. We anticipated a good year in Eastern Europe. Even in a tough environment, our business has been very good within Eastern Europe and we expected that to be an area that was going to be a pretty strong business for us.

So, when we had to pull that down it was versus our plans. As we talked about at the end of the first quarter, we had to pull it down versus our plan. So, what we said now was that it has stabilized somewhat and it’s acting more like in Eastern Europe, it’s acting more like the rest of Europe, which is a good thing. I think the important point there is that it’s not deteriorating, not continuing to slide.

So again, that’s we wanted to make that point. That we had a number of questions on that related to, “Could it get worse? Is it going to continue to go down?” So it hasn’t, which is the good news, but it’s still a challenge for us versus our original plans and it’s still down from what we originally planned. Anything else, Karl?

Karl Heinz Salzburger

No, I think Bob said at of all. There’s not too much to add here on this.

Operator

Your next question comes from David Glick - Buckingham Research Group.

David Glick - Buckingham Research Group

Just a follow-up on the same topic, we’ve talked a lot about your jeans business in Eastern Europe and not as much about Western Europe, which obvious is a bigger market and your business is really distorted by that concentration of jeans in Eastern Europe.

Can you give a better sense of what’s happen across your brands and what the tone of business is in Western Europe, is it which consider that region as also having stabilized has it gotten worse as the year has progressed has it gotten better? Any kind of color or some specifics on constant currency trends in Western Europe and I know it’s hard to generalize every market is different but if appreciate some color on that.

Karl Heinz Salzburger

As you mentioned, it’s hard to generalize; but the common point is what we can say, it’s certainly a tough environment at the moment. It’s a growing market and the challenges we see are all there. I think that the change to Q1 is that we have stabilized this negative growth and we don’t expect further deterioration. That’s the big change compared to a couple of months ago.

David Glick - Buckingham Research Group

In Western Europe, as well as Eastern Europe?

Karl Heinz Salzburger

In Western Europe as well, yes.

David Glick - Buckingham Research Group

Okay, and any is Spain still the toughest market there and how are things and if you could give a little bit of commentary on UK, France and Germany?

Karl Heinz Salzburger

Yes, as we know the economy in Spain is probably amongst the most challenging in Europe, so that’s reflected in general in our businesses not only in jeans, but certainly also in jeans. We have some issues not only we have, their certain pressure on key dealers in Germany, you probably have heard about, which I went into kind of Chapter 11 European version of Chapter 11. So there are certainly challenges. The European economy is not immune from this major pressure we have. We see actually work rate.

David Glick - Buckingham Research Group

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

Karl Heinz Salzburger

I didn’t get the last question. Did you say?

David Glick - Buckingham Research Group

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

Karl Heinz Salzburger

Yes, we could say so.

Operator

We have no more questions at this time.

Eric Wiseman

Okay. Thank you all for joining us on the call and for your interest in V.F. We’ve come through our most difficult quarter of the year. We’ve gained share in our biggest brands. We are positioned for the second half, and we look forward to talking to you next quarter. Thanks.

Operator

This concludes today’s call. We thank you for your participation.

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Source: V.F. Corporation Q2 2009 Earnings Call Transcript
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