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VF Corporation, (NYSE:VFC)

Q3 2010 Earnings Conference Call

October 21, 2010 08:30 am ET

Executives

Eric Wiseman – Chairman, CEO

Robert K. Shearer – Senior Vice President, CFO

Karl Heinz Salzburger – Vice President of International

Analysts

David Glick – Buckingham Research Group

Todd Slater – Lazard

Eric Tracy – FBR Capital Markets

Omar Saad – Credit Suisse

Jeff Klienfelter – Piper Jaffray

Michael Binetti - UBS

Robert Doll – Barclays Capital

Robbie Ohmes – Bank of America, Merrill Lynch

Kate McShane - Citi

Presentation

Operator

Good day everyone and welcome to the VF Corporation third quarter 2010 earnings conference call. Please be aware that today's conference call is being recorded. At this time I would like to turn things over to Gina (inaudible) of ICR, please go ahead.

Thank you, good morning everyone, thank you for participating in VF Corporations Third Quarter 2010 Conference Call. By now you should have received today's earnings press release. If you have not please call 203-682-8200 and we'll send you a copy immediately following the call. With us on the call today is our Eric Wiseman, Chairman and CEO of VF.

Before we begin I'd 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 in actual results may differ materially from those expressed or implied in the forward-looking statements. Important facts that could cause actual results, collaborations or financial additions to the company to differ are discussed in the documents filed with the company in the SEC. I would now like to turn the call over to Eric Wiseman.

Eric Wisemen

Thanks a lot, Gina, good morning everyone. Thank you for joining us today. Following my opening comments this morning, Bob Shear will review the quarter's results in more detail. We also have with us by phone, Karl Heinz Salzburger, President of our International business who will provide a recap of our impressive results in Europe and Asia.

This was another great quarter for VF. As we entered 2010 we were cautious about the outlook for many economies around the globe and while the economic outlook remains uncertain the outlook for VF couldn't be brighter. That's because even in uncertain times strong companies with strong brands and a broad portfolio of opportunities will continue to succeed. Once again we've raised our guidance for top and bottom line growth.

Our new guidance for revenues if for an increase of over 5% this year versus our previous guidance for a 4% to 5% increase. Our revenue forecast for 2000 has strengthened in each and every quarter of this year. Earnings per share now are expected to increase over 20% to a range of $6.25 to $6.30 versus our prior guidance of $6.10.

This would mark another all-time high for VF in earnings per share and we expressed our confidence today in our ability to deliver another very strong year in 2011. Before turning over to Bob, there are three areas I’d like to make just a few comments on.

The marketing investments we’ve made this year, product cost inflation and the state of the denim market. Now there's some expanded disclosure today in the release about our marketing investments which are clearly benefiting us this year and which we think will continue to drive organic growth next year.

The total incremental investment this year will be close to $100 million which is a bit higher than the $85 million we previously discussed with you. Many of our brands have very good momentum and we’re committed to keeping this momentum going.

We’re fortunate that we have the financial resources to do so and still deliver such strong improvement and profitability in earnings per share. As the year strengthened, we increased our commitment to brand investment with our strongest investments to come in the fourth quarter. In the release, we touched on a few areas without spinning this focus. I’d like to help you understand how we’re thinking about these incremental investments.

For example, this year, our Outdoor and Action Sports Coalition will represent 41% of VF for over $3 billion in revenues. That’s a large apparel company in its own right and that company will have 13% organic growth this year with operating margins approaching 20%. It has strong momentum and a clear path for continued growth in both wholesale and direct-to-consumer channels in the U.S. The same is true for Europe and the outlook for Asia is even stronger.

So we’re investing over half of our incremental marketing spend in outdoor and action sports initiatives alike, expanding the North bases region snow sports by sponsoring new athletes and investing in consumer-directed advertising at the Winter X Games.

Driving both door expansion and increased consumer awareness for the North based and bands in China. We’re heavying up our investment in key European markets to grow our market shares. We’re also introducing new ones to our experiences in both bands and the North based stores and we have a significant increase in spending behind social media.

The balance of this spending increase is strategically allocated to important growth initiatives in our U.S. and our Asian Jeans Wear business and in our Nautica, 7 For All Mankind and other brands. Now, it’s too early for me to comment on what level of brand investment we’ll be making next year, but if we continue to see the payback for our shareholders in the form of strong, profitable growth like what we’re seeing this year, it’s very likely we’ll continue to invest at very healthy levels in 2011.

Next, let me give you an update on the product cost inflation topic. Last quarter, we outlined the major factors of cost inflation for VF and why we believe we’re competitively advantaged to weather this increase is better than most. Three months later, our position has not changed. It’s true the cotton crisis are likely to be at a higher level than we envisioned, however, as result of favorable negotiations are Asian sourcing cost across VF, we’re coming in lower than we previously thought.

With regard to pricing, the current consensus from both retailers and wholesalers is that some price increases are inevitable next year and certainly many of the brands across our diverse portfolio are planning for selective price increases. So the real question on everyone’s mind is, “What’s the outlook for gross margins next year?” Based on what we know today, product cost inflation should be largely offset by price increases, the continued positive impact from the shift in our portfolio to more lifestyle brands, to more international and to more direct-to-consumer business.

So the net result for VF is we expect gross margin in 2011 to be near the record level we will achieve this year. More specifics on our guidance for 2011 will be forthcoming early next year. There’s also been a great deal of discussion out there about the current state of the Jeans Wear Business. I have some very good news for all of you. Consumers are still buying a lot of jeans.

In fact, our domestic jeans revenues grew in both the second and third quarters and will be up again in the fourth quarter and we’ve always loved the Jeans Wear Business because it’s a big, remarkably stable and resilient, highly branded, and for VF, highly profitable business.

There are segments of the jeans business that are more volatile than others. For example, the premium and teen segments, which generally speaking, the jeans business entitled does not tend to experience dramatic swings in volume.

Relative to our 7 For All Mankind brand, the premium denim business is softening from the strength we experienced in the first half when we were up 8% globally. In tough economic times, consumers are more value-conscious than ever; more focused on savings and spending and looking for something new as a trigger defense. Fortunately, while 7 For All Mankind continues to be the brand leader in the category, it’s more than a denim brand.

In fact, a quarter of the brand’s volume in our own store is non-denim currently and that’s going to be increasing to a third of the business next spring. Also, our retail partners are adding more sportswear into their premium denim departments which will add variety to the current offerings and helps spark consumer interest.

The 7 For All Mankind brand continues to resonate strongly with consumers and we’re capitalizing on this by adding new retail stores. We’re investing heavily on marketing, expanding into Europe and Asia, and building our sportswear and accessories business. This brand still has a lot of room to grow but faces some short-term challenges.

Relative to our other jeans brands in our release we highlighted the 5% increase in domestic jeans revenues and noted that our jeans business in Asia grew by 14.4%. Our European business continues to stabilize and profitability there continues to improve. So relative to the jeans question we are confident that our powerful brands will continue to do very well globally regardless of short-term trend in specific segments.

Now to wrap up, acquisitions are another topic that seems to generate a lot of questions and we remain as interested as ever in adding new brands to our portfolio but they have to be the right brands and at the right price for our shareholders. We are, of course, very focused on investing behind our big, powerful and profitable brands to drive organic growth around the world and based on the success we’ve had investing for organic growth in 2010, we’ll continue that focus in 2011.

I’m confident, however, that over time the VF portfolio will continue to grow and evolve. But make no mistake; our future growth is not dependent on making acquisitions. We can and will afford to be patient.

Now let’s hear from Bob Shearer; Bob.

Robert K. Shearer

Thanks, Eric, and I’ll start at the top with revenue. The third quarter marked another period of strong organic growth with revenues up 7%. On a constant currency basis, the increase would have been even stronger, up over 8%. Nearly all coalitions achieved growth in the quarter with the exception of sportswear and we expect mid-teen level growth there in the fourth quarter.

Now we continue to be really pleased with the expansion and gross margins we’ve seen this year. Our gross margins were 46.5% in the quarter with the 220 basis point improvement over last year’s third quarter. About half of the improvement was driven by lower product and the remainder related to the continued expansion and improved gross margins of our retail stores and very clean inventories across our businesses.

All coalitions saw a gross margin expansion in the quarter with the exception of sportswear which was in line with the prior year period. We now expect that our gross margins for the whole year should approximate 46.5% which is slightly ahead of prior expectations. That will mark an all-time high in gross margin percent for VF, actually by a fairly wide margin.

SG&A's percent of revenues rose by 150 basis points. Nearly all of the increase was due to the higher marketing investments we’ve been discussing all year. In the third quarter our marketing spend was $31 million or 35% higher than the prior year period.

Thus planned, these investments had been more concentrated in the second half of the year than in the first and you recall that the first and second quarter increases in marketing spending were 12% and 19% respectively. Due to the timing and nature of our marketing programs, the increase in the fourth quarter is expected to be even higher, up by $45 million or about 50%. You saw at least some of the details related to these programs in the release and Eric covered this topic and his comments as well.

We’re really pleased by the impact these investments are having on our brands global growth. We clearly expect these investments to continue to drive strong comparisons into the coming years as well. Now for the full year, we continue to expect our ratio of SG&A revenues will approximate 33.5% versus 32.4% in 2009. The increase in our marketing spend in 2010 accounts for nearly all of the increase in our SG&A ratio to revenues.

Now there are some other factors like the higher SG&A ratios of our retail business that drive that percentage up which is offset by our lower pension expense in 2010. Marketing spending as a percent of total revenue should approximate 5.6% in 2010, well above last year’s 4.5%.

Now no doubt all of you have questions about marketing spending and SG&A ratios for 2011 and while we’re not providing specific guidance today on 2011 there is clearly more to come on that topic. But I can confirm that we remain committed to investing behind our strongest, most profitable opportunities to drive organic growth. This is clearly paying off for us.

Now despite the significant increase in marketing spending, operating margins continue to increase. During the quarter, operating margins rose by 70 basis points to nearly 16% from 15.2% in 2009. We expect the full-year operating margins will reach 13% which will represent good progress toward our ultimate goal of 14% to 15%. In terms of the bottom line, the third quarter marked another period of double-digit earnings per share growth with EPS rising by 14% and as we’ve seen in the past two quarters, lower pension expense this year helped earning per share by $0.05 but on the other hand, foreign currency translation negatively impacted EPS by $0.06.

And speaking of foreign currency translation, for the year it now appears that foreign currency translation will be relatively neutral to the top and bottom lines. Our Euro rate assumption for the fourth quarter is now 130 but keep in mind that this is a quarter where there is little impact from currency rate fluctuations in translating foreign currencies due to the overall lower levels of international business as a percent of total VF in the quarter.

Now a few comments about our coalition results, we continue to see really strong momentum in our Outdoor and Action Sports Businesses which speaks to the strengths of these brands. In fact, this is the first quarter where this coalition's revenues exceeded $1 billion.

As noted in our release, revenues of The North Face and Vans were up 17% and 19% respectively or 19% and 21% currency-adjusted. The North Face brand experienced equally strong growth domestically, in Europe and in Asia with the brands direct-to-consumer revenues rising by 25% in the quarter.

Vans revenue growth was similarly strong in all geographic areas. Though the growth of these two very important brands continues to be well balanced, not only across geographies, but across these brands wholesale and retail businesses as well.

In fact, spring bookings for The North Face brand in the Americas are up 17% and while we don’t often comment on other brands within this business grouping, I’d also point out that our Lucy and Jansport brands both achieved revenue growth in the high teens in the quarter.

On a constant currency basis, our Kipling and Napapijri brands also experienced healthy growth. Now you’re well aware by now that a large portion of our higher marketing investment, in fact over half, has been directed toward growth in our outdoor and action sports businesses.

However, despite the significance of the spend these investments have not hampered profitability. Operating margins have continued to rise reaching 23.7% in the quarter. The strong profitability of these businesses reflect they're very healthy in expanding gross margins with balanced growth across all geographies.

Jeans wear revenues increased again this quarter. Excluding the impact from foreign currency translation and the exit of our European mass channel business, the revenue increase was 4%. The increase was driven by growth in each of our domestic businesses mass market Lee and Western Specialty.

Growth in our mass-market business which consists primarily of our Wrangler and Riders brands was particularly impressive, up 7% in the quarter. The Wrangler brand in this channel was gain share in men’s long bottoms and shorts as consumers respond to the brand’s strong quality and value proposition. In fact by a powerful in-store presentation and our Riders brand is also gaining share as we’ve gained new programs and space.

Our lead brand in the U.S. is also performing well. The brands Slender Secret and Instantly Slims You platforms continue to drive our women’s business and are fuelling share gains. We’re also seeing strong initial sell-throughs in our new Lee Premium Select program where we’ve been running ads with the new celebrity endorser, Mike Rowe.

And finally our specialty or Western Jeans business grew by 5% in the quarter given by the launch of new cowboy-cut products which continue to out-perform the category at retail.

I know that Eric commented on the strength of our Jeans business. All I’ll say is that looking forward to the fourth quarter, we again expect mid- to single- digit revenue growth in our very significant U.S. Jeans businesses.

Our brands are strong. Our product offering is compelling and we don’t see a change in the status of denim with the consumer shopping the channels where these products are sold. Turning now to image ware; these businesses had a great quarter with revenues and particularly strong profit increases in both our image and licensed sports businesses.

Our competitive advantage from our quick response and replenishment capabilities is benefiting both businesses as demand improves. As we’ve said in the past, our cost structure in this business allows significant leverage of revenue gains to the bottom line and you could clearly see that benefit in this past quarter.

Now in terms of our sportswear business, as explained in the release, the decrease in revenues in the quarter resulted from a shift in timing for special programs from the third quarter to the fourth. We’re very pleased by the response we are seeing to Nautica’s men’s sportswear products as evidence by their 20% growth in sell-throughs at our wholesale partner's season to date versus last year.

We are investing in additional advertising programs in the fourth quarter to keep the brand front and center with consumers and as noted in the release, fourth quarter revenues for Nautica should reflect a mid-teen percentage increase.

We’re also very pleased by the continued success our Kipling brand is having at Macy’s. Now wrapping up with our contemporary brands coalition, as Eric noted, there’s no question that the premium denim category is soft which resulted in a slight decline in 7 For All Mankind revenues in the third quarter.

There are, however, a number of bright spots. European revenues for the brand increased 8% on a constant currency basis and we are on track to open 19 stores this year. As mentioned in the release, we are investing in the 7 For All Mankind Brand and we’ll continue to do so in the upcoming quarter.

Now with still a small part of this coalition’s revenues we are very pleased by the growth that we’re seeing in our Splendid and Ella Moss brands which had high-teen percentage growth in the quarter.

We’ve opened four Splendid stores this year and they are performing very well and our John Varvatos business is also showing substantial improvement both on the top and bottom line. However, given the challenges of the premium denim space, we do expect the top earnings comparisons to continue in the fourth quarter for the coalition.

Well that does it for our coalition results. The release also touched on our international and direct-to-consumer results, so just a few comments here.

Our international revenue strengthened in the third quarter with a 10% increase in constant dollars. Strong growth in our outdoor and action sports businesses in Europe and continued rapid expansion in Asia fuel the increase here.

Currency translation did hurt us by 5 percentage points so the reported increase was 5%. Asia is a billion-dollar opportunity for VF and we’re extremely pleased with how well our brands are performing there particularly in China.

As you saw in the release, revenues in Asia grew 37% in the quarter with exceptionally strong growth in jeans wear in The North Face brands and Kipling brands as well. Our opportunity in China is second to none in the apparel’s face considering our brand and the categories represented by our brand and the opportunity we have to build new categories that attract the Chinese consumer.

We’re on track with our retail store openings this year having opened 62 stores to date out of a total of 85 stores planned for the year. Our direct-to-consumer revenues were up 10% in the quarter and our balance sheet continues to be an exceptional shape. Cash and equivalence were $403 million at end of the quarter, inventories were up slightly but the increase is running well below the expected growth in revenues.

Our cash flow generation continues to point toward cash flow from operations that will approximate $850 million for the year. Year to date, we’ve purchased $4 million shares all in the first half of the year and we will continue to evaluate future stock by batch as we balance our cash needs against acquisition opportunities.

The great news here is that we have the ability to both provide some lift to our shareholders through our buy back activity while having the capability to fund acquisitions.

Eric has pretty well covered our outlook for the year. I’ll just add a couple of other points. Our catch rate, all in, should approximate 25% for the full year. The capital spending for the year should be about $120 million.

And our fourth quarter could be summarized like this, a continuation of our strong organic revenue growth with our international businesses expected to grow at a mid teen rate, currency adjusted. A gross margin percentage that is about equal to the exceptional level of two for 2009.

Significantly higher marketing investments that will continue to fuel growth, not only in the fourth quarter but especially in the following periods and because of the high level of investment span, earnings per share that are about even with our strong fourth quarter last year.

Now we’re looking forward to wrapping up a great year for VF in 2010. And we’re especially excited about moving forward and in 2011 considering the platforms that we put in place and invested behind this year.

Now I’ll pass the call to Karl Heinz Salzburger.

Karl Heinz Salzburger

Thank you, Bob. My comments are such on our international business in Europe, the Middle East and Asia, the markets for which I have responsibility.

We are very pleased with our performance in the third quarter. Taking out the impacts of the mass, jeans were excellent in Europe. Both the revenues were up 10% in constant dollars. The profitability of our international business also continue to improve with operating margins of over 20% in the quarter.

In terms of our EMEA business, the strongest growth was in our outdoor and action sports business where revenues increased by 18% in constant dollar driven by double-digit growth in The North Face and Vans brands.

Common stores sales for most brands were up over 20% in the quarter and (inaudible) for most brands are running up substantially over last year’s level. The strong performance is driving double-digit increases in our spring for season orders for both brands.

The North Face is up about 15% and Vans is up about 25%. So we are confident that our momentum will continue into next year. Our sportswear and contemporary brands business in EMEA region also grew in the quarter.

In constant dollars, our Kipling, Napapijri and 7 For All Mankind businesses all achieved higher revenues and spring bookings are up very strong, most up at double-digit rate.

Bank in our EMEA jeans wear business continue to improve. Our lead brand is experiencing a noticeable turnaround in the Scandinavia, UK, Belarus and Russia regions. Replenishment plans for Wrangler started off slow but were running up more than 10% in September which is very encouraging.

While it’s still not where we want them to be, our jeans per margins continue to improve in the third quarter and this trend is continuing in the fourth quarter as well. Our spring bookings indicate continued improvement with moderate growth compared with last year’s booking.

Our story in Asia continues to be very exciting. As noted in the release, the total revenues in Asia grew by 37% in the quarter with strong double-digit growth in nearly all businesses. Our biggest business, jeans wear, grew by over 40%.

The North Face was up 30%. Vans increased by 44 and our Kipling business doubled. We also gained (inaudible) in India where revenues increased by 40% in a quarter. We have mentioned in the past that our Asia business is quite profitable and third quarter margins were about 25%.

China is our primary market in Asia and revenues there rose by over 50%, helped in part by earlier shipment that follows. Our pump store sales in China rose 30% in the quarter.

During the year, we have substantial increase in marketing investments behind our brands in China particularly in Tier 1 and Tier 2 cities. We’re also placing a greater emphasis on digital marketing.

We have also (inaudible) expanded our distribution in China and that effects for 40% increase in door count by year-end with 1,400 doors. Our spring end bookings are up in a meaningful way in Asia, mostly in double-digits with significant increases in China.

For example, The North Face is up 40% and Vans doubled. We expect to end 2010 on a very strong note and are looking forward to delivering another strong year across our key brands and markets again in 2011.

Eric Wiseman

Thank you Karl Heinz that concludes our comments. At this time, we’d love to open the line to any questions that you have.

Question-and-Answer session

Operator

Thank you, the question and answer session will be conducted electronically today. If you would like to ask a question, please signal by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone please make sure your mute function is turned on to allow your signal to reach our equipment. Once again, star one if you have a question. We'll take our first question from Kate McShane with Citi.

Kate McShane - Citi

Hi, good morning.

Eric Wiseman

Hi, Kate. How are you?

Kate McShane - Citi

Good, thank you. Two quick questions today, thanks for the gross margin commentary for 2011 in relation to cost inflation. I just wondered if you could further comment. Is this commentary based on the current prices of cotton and when do you lock in for the back half of 2011 and is there any chance or any circumstance that has been presented to you that the cotton prices could ease before you get locked in for fall?

Robert K. Shearer

Okay, I’ll start on that. In terms of cotton, it does contemplate the current costs that we’re seeing in cotton. Actually the increase that we’ve just seen wasn’t so unexpected by us. We actually felt that we could see that the kind of level we’re seeing today, that $1.20 or even a little bit above. So not a huge surprise to us and as Eric said in his commentary, actually since the last time we talked since the last quarter, sure the cotton costs have gone up and that’s impacted our overall cost equation as we look at 2011. However, there are other costs that we’ve negotiated that have come down.

So they pretty much offset each other in terms of the overall cost look for 2011. Relative to cotton, we’re locked in for the rest of this year on the cotton side for 2011, it’s kind of interesting, the makers -- the suppliers of denim, for example, really haven’t locked in their buys for the most part at -- around 2011 yet because of the volatility is what’s taking place. So really not locked in to 2011. We have expectations obviously built into the numbers that we’re talking about relative to gross margins and again we’ll have more to say about that in the future.

Kate McShane - Citi

Okay, great. Thank you and then my second question is on 7 For All Mankind. Can you talk a little bit about what gives you the confidence that there still a lot of room to grow for the brand and you can break down what some of the industry specific issues are that’s facing the premium denim market and what are brand specific issues to 7 that you’re addressing?

Robert K. Shearer

I can talk about the first part of your question about the total industry specific and I’m not sure I have all the information you need. Let me give you some color on 7 For All Mankind for us globally. The domestic business year to date is up little single digits due mostly to the success we’re having with our own retail stores. The international business is up high single digits in constant dollars and around the world we’re seeing that driven by the stores that we are opening are working for us and some softness in the wholesale business in general.

The reason I’m confident in our future is we expect to continue the rollout of our own retail stores. We have -- we’re just really getting started in Asia. In Europe we have a lot of runway ahead of us there and we continue to build the brand into new product categories into the sportswear and accessories business where it's very early days for those initiatives. We do expect pressure on the core denim business at least in the short-term but – and I don’t know what that will look like in five years, nor does anyone else.

So that’s -- we look at the total model, we think that we can weather through this because of the strength of the brand and the success we’re having on the initiatives I mentioned. The total premium denim business is soft. That’s really a U.S. comment, Kate. I can’t speak to the Japanese market or many others but in the U.S. the total -- the denim piece of market is soft and that’s why you’re seeing many of the brands expand their businesses into sportswear. Does that help you?

Kate McShane - Citi

Yes, that’s great. Thank you so much.

Robert K. Shearer

Thank you.

Operator

Next we’ll hear from Robbie Ohmes with Bank of America, Merrill Lynch.

Robbie Ohmes – Bank of America, Merrill Lynch

Oh, hey guys, nice quarter. Actually, Eric, I was hoping you can talk more about the domestic jeans for business. So you know great numbers you’re putting up and obviously the mass channel refill helping you, can you help us think about you know you've said you expected up mid- single- digits in the fourth quarter, how should we think about next year in terms of the growth of the U.S. jeans wear business and sort of channel fill versus you know where sale-through rates – maybe you're tracking maybe where they may be tracked in this quarter, say, during back to school and just how you’re feeling about that into next year. And then maybe a similar comment on when you think -- when do we fully cycle through the decline to the mass business in Europe and when could we see return to positive growth in the core jeans wear for business in Europe. Thanks.

Eric Wiseman

Okay. On the domestic jeans business, what we're really pleased about is the fact that for the last couple of quarters, our mass business has grown, our lead business has grown and our specialty western business has grown. So we have all three pieces of business growing in the U.S. market.

The mass business was helped particularly in the last quarter by getting some programs back that we had lost as a big customer. So we had some launch volume in there but even without that, we had growth in the quarter, so it accelerated the growth, but the statement about growth in each piece of the domestic business over the last two quarters remain still weak. As Bob said in his comments, we expect that to continue in the fourth quarter.

As we look to next year, our expectation is that our U.S. jeans business would perform in line with what we expect from it over time, which is low single-digit growth and I think we'll see that across all the pieces of the business. The mass channel business, of course, will benefit by having hopefully new programs in the first half of the year that it didn't have last year in the first half of the year. And to the European business, I'm looking to Bob for some guidance on when we anniversary the exit of the ...

Robert Shearer

The fourth quarter will be the last quarter.

Eric Wiseman

The last quarter?

Robert Shearer

The last quarter that that will impact our numbers and more of an impact in the third quarter, it was about $14 million and what we're referring to here is the exit of the mass channel business in Europe. That was about a $14 million business in last year's third quarter and it will impact us by about $7 million in the fourth quarter and that will be it. There will be anniversary at that point in time and we won't talk about it going into next year.

Eric Wiseman

And about the rest of the brands in Europe, Robbie, we're seeing real softness across Europe in the denim market and that's really at all levels and we've been victim in some of that and we've had some of our own unique challenges. The good news is that we're recovering from our own unique challenges and the business is stabilized, and where we were seeing a continuous decline in the bookings we were getting, that has stabilized and we think we have a platform now that our focus is on improving the profitability of the business there. And as Karl has commented, he's seeing some traction about that. Karl, do you have anything to add on the European jeans wear business?

Karl Heinz Salzburger

Yes, now you're right on it, Eric. I would just mentioned that in my read, the bookings for '11, the spring bookings for the first time in a long time, we see a stabilization and moderate growth, which is a positive sign. Also, the replenishment and the re-order data are very good at the moment. So the momentum seems to start to be positive.

Eric Wiseman

Great, thanks very much.

Robert K. Shearer

Thank you, Robbie.

Operator

Next, we'll hear from Bob Doll with Barclays.

Robert Doll – Barclays Capital

Hi, good morning.

Eric Wiseman

Hey, Bob.

Robert Doll – Barclays Capital

I guess the question – I wanted to go back on the cotton discussion for a second. I think you said you thought cotton would go to $1.20 or above. In your flat gross margin assumptions for next year, what is the assumption that you are using for cotton at this point in time?

Robert K. Shearer

Yes. Yes, Bob, here's the thing, as you can imagine, we're right in the middle of a lot of negotiation, both on the cost side, actually as well as the pricing side for our products for next year, so -- though, actually, we're a little reluctant to speak specifically to that and what I meant was right now. So on the short-term and the rates around the short term, yes, we did. We thought that we could go to the $1.20 mark. That's not necessarily what we're building in to our overall cost for 2011. I can tell you that much, but we'll have more to say about that early next year when we talk about our 2011 numbers, but, again, just a little reluctant to be too specific right now.

Robert Doll – Barclays Capital

All right, and on I think (inaudible) your opening comments, you talked about the ability for select price increases. Are there any examples that you could sort of give us in terms of ones that are resolved right now or the time of when we should see that either hitting the stores and being able to pass that through the consumer?

Eric Wiseman

Yes, Bob, I'm not trying to duck your question, but it's complicated. We looked at every brand in every market and tried to get prices to the right place for what the products within the brands in each market could bear and still deliver value to the consumers. So it is really across our businesses and, obviously, where we are introducing new products that have not been on the market before. We're pricing them appropriately based on the cost structure.

I will tell you that in the U.S., all of our brands, every single brand is -- will take some price increases in their line. And when it comes to cotton based products, particularly cotton based products made in Asia, we're seeing in every channel distribution and in every product category price increases that will be executed next year; not just in VF, but in other brand as well.

Robert Doll – Barclays Capital

Great and then is there a number in terms of when you look at throughout the entire business on the cost of goods line the cotton percentage for you guys as a total of the cost of goods?

Robert K. Shearer

Well, here's what I can tell you, Bob, I mean, there's some math that will be involved around this, but our fabric, right, our fabric in our denim business is about half of the total costs and our total jeans business is about a third of VF. So you can get a number as a result of all that.

Robert Doll – Barclays Capital

Okay and then just one last question, Eric, for you, when you look at the business today and the volatility in retail, can you maybe talk about, like, the week to week volatility versus where you were six months ago and just sort of how you guys are playing the business or seeing the business today?

Eric Wiseman

I would tell you that the week-to-week volatility in the last four weeks has been just about the same as it's been all year. It's really volatile. It's unusually volatile for those of us who have been watching the apparel business for 30 years as we have here, as I have and we're looking to trends.

So the only thing we can do with that is look at trends and we think that we have those trends factored in to the guidance we've given for this year and to our optimism for next year because we think that while the space is clearly facing some challenges and the future is uncertain. Our bands continue to outperform the market and we are confident as we look at our lines for next spring, the programs we have and the investments we're making behind the brands we can continue to outperform.

Robert Doll – Barclays Capital

Great, thank you very much.

Eric Wiseman

Thanks, Bob.

Operator

Next, we'll hear from Jeff Klinefelter with Piper Jaffray

Jeff Klienfelter – Piper Jaffray

Yes, thank you and congratulations everyone on a great quarter, just following up with the sourcing comments, Eric and Bob, I think impressive in terms of the negotiations and being able to at this point anticipate flat margins for next year, given the pressures. I was just curious if you could give us a little bit more specifics on does this involve more shifting around to other countries and diversifying further? Is it hard and fast negotiations on logistics and transportation, that side of it? Could you shed a little bit more light on how you were able to hold, in the face of that inflation, to hold that at that level?

Robert K. Shearer

Yes, Jeff, I can speak to that. A couple of things; number one, as you would imagine, I mean some of the costs, like our denim costs, and with all the focus on cotton, the cost increase they are obviously anticipated to be stronger than some other areas like footwear and outerwear where we're just not seeing the same kinds of increases. Secondly, no, it's really not so much of a shift around; it's just the negotiations, the normal negotiations that we enter into with those that supply us products. So, some of the initial assumptions have eased a little bit. Really, not so much change, actually, in freight. What we assumed and what we talked about the last time when we talked about the few percentage points of increasing cost really hasn't changed so much there. It's really just through negotiations and pushing hard on the negotiations that's resulted in the changes that we referred to.

Jeff Klienfelter – Piper Jaffray

Okay, maybe one more clarification on that point, that you're factoring in some inflation but you're also accounting for some price increase activity, blended together, you think you can hold your gross margin flat. Would that be an accurate summary?

Eric Wiseman

Yes, that, Jeff, combined with the fact that we are going to be investing our money behind our money behind our highest gross margin opportunities as we have this year. So that as -- it's a combination of everything that Bob said, plus, as our business model continues to move more toward international growth and more toward direct to consumer growth and more towards our lifestyle brands, the total VF P&L should have relatively stable gross margins.

Jeff Klienfelter – Piper Jaffray

Okay, that's very helpful. Thank you and one last question on China, agree the opportunity significant. Your brands have great traction already in that market and just curious if you could get a little bit more color on as you've been opening these doors at a pretty rapid cliff what are you seeing in terms of balance? How many of them are going out into -- are you out into the Tier II and Tier III market in any metrics or qualitative description you can give us in terms of the performance as you move into different volume market?

Eric Wiseman

Karl Heinz, do you want to answer that?

Karl Heinz Salzburger

Yes, I can. I can handle that. I did mention, Jeff, before we are targeting 1400 stores this year. Just to give an idea on a benchmark about other competitors without naming them; we're working with five, six, or seven thousand doors. So we still have a long way to go, we're predominantly in Tier I to this which are the big cities and we are starting out Tier II. We still have a long way to go and (inaudible) opportunities.

Jeff Klienfelter – Piper Jaffray

Okay.

Eric Wiseman

I guess another way to think about that also is we have so many brands that don’t – the number of stores we have on a buy brand basis is relatively small. So we see lots of runway and we are obviously measuring the success as we go into different types of cities and so far we have all green lights.

Jeff Klienfelter – Piper Jaffray

Great, thank you very much, good luck.

Eric Wiseman

Thank you.

Operator

Next we'll hear from Michael Binetti with UBS.

Michael Binetti – UBS

Hey guys, congratulations on a great quarter.

Eric Wiseman

Thank you, Michael.

Michael Binetti - UBS

So I just wanted to ask you maybe about a couple of the brands that we don’t talk about as much on the call for a second if I could. I'm wondering from the Lee brand in the U.S. you said you saw 2% growth in the quarter. Last quarter slowed down to about 1% this quarter and last quarter you talked about some new programs like Slender Secret and then some third quarter launch of Premium Select and how those result in stronger comparison to the second half. So I'm wondering if those programs have been disappointing to you or if there is something else holding back in acceleration of the Lee brand versus your stocks in July and then if I can ask a follow up afterwards please.

Eric Wiseman

The – no, what we're also doing at the same time is managing inventory at retails. So when we talk about the – our revenue results it reflects our shipments of course not necessarily the sale-through of our program. Lee has been winning around product innovation and effective communication and they've – their success with that has been largely on the female side of the business and Bob mentioned Slender Secrets and some of the other programs that we have that really are relevant to women shopping in those channels.

And we've just begun the male part of that with the Premium Select business and the new TV advertising that we have. That's beginning to get traction as well. So while the numbers are low single digits that was what we ere expecting our shipments to be and we're hoping that we have a strong sale-through season during the holiday and the Lee's positioned for good growth in the fourth quarter.

Robert K. Shearer

And we – I was just going to say that we will be talking about stronger comparisons in the fourth quarter.

Eric Wiseman

Yeah, our strongest quarter of the year.

Michael Binetti - UBS

Okay and then if I could just turn the – I don’t – we don’t really talk about inventory very much but that’s may be 10% or 12% of business. You guys saw 10% revenue growth there and on the reflection point in the two year range and was just some rough (inaudible) it looks like that coalition added about 30% of your total profit growth in the quarter, I mean is it – maybe – is it time to talk about this business a little more? I mean is this an actual growth driver? Is this just still bouncing back from a ton of deleveraging over the past two years? Are you weighing the business in that coalition or how should we think about that?

Eric Wiseman

I would love to talk about our image wear business, there are two pieces of the business. One is what we call the image business which is more work wear related and the other is our licensed sports group, which is the business we have around Major League Baseball, the Major Football League and other licenses that we have, Harley Davidson and others.

The work wear business is a large – and the business is split half-and-half in terms of revenue. And the work wear business is you know a big profitable business and it's been growing, it clearly, disproportionately effected as the country fell into recession and as unemployment rose. It clearly got effected by that. And its growing right now not because obviously the unemployment numbers aren't getting much better, because they're not, but there's replenishment going on across the industry where people were reluctant to replenish uniforms.

They're now replenishing them. We have we think the best quick response capabilities in the industry so we're a go to supplier when they need things quickly and we think we're winning business from others. So we are gaining market share based on the quality of the products we make and the quality of the service we give and even though unemployment is at high levels and not improving we're gaining business there.

We've also had a successful run in our licensed sports group lately. We've had – we have a great relationship with Major League Baseball and the NFL. They're the two biggest pieces of the business and we just renewed our NFL license; last week it was announced. So that's kind of new news. In case somebody was going to ask we got essentially the same rates we had before and we got everything we were bidding on with that. So we have continuity with the NFL through 2017 now.

And while attendance is down at games in most sports consumers are still buying, particularly, at the lower price points which is where we have a big chunk of business. So that business is all doing pretty well.

Michael Binetti - UBS

If I ask in a different way, I guess. In the work wear side is the governor on that business going to be – are we going to be held up by inflation cycle or are you seeing new customers in that business?

Eric Wiseman

We are getting some new customers in the business. The big catalyst will be as employment comes back. That would be the big catalyst and we have not seen that yet.

Michael Binetti - UBS

Okay, thanks guys.

Eric Wiseman

Thank you.

Operator

Omar Saad with Credit Suisse

Omar Saad – Credit Suisse

Thank you, thanks for taking my call, nice work ...

Eric Wiseman

Hi, Omar.

Omar Saad – Credit Suisse

... on the quarter. I wanted to ask Eric, I was impressed not only the execution in the quarter but also by the confidence that you have and the outlook for the fourth quarter, raising kind of above – raising the full year guidance almost more than where (inaudible) at least approximately (inaudible) of your prior expectations. Anyway we're kind of hearing a lot of – weathering the business at this point, I'm talking about generally retail overall. There's a lot of promtionality going out there.

Think people are worried about order cancelations or too much inventory or retail through the holiday season, can you give us your perspective on some of those concerns that are floating out in the market place?

Eric Wiseman

Sure, it is – well we're early in the big holiday season and weather has not been a help into the first few weeks of October. We have a long way to go so I can't – I don’t know what the weather's going to be. I do know that we've assumed an average weather kind of season. That's how we forecast, so if we have an average weather kind of season we'll be fine.

We're getting a lot of questions about order cancellations. We are not seeing order cancellations at our business. So that's not be an issue for us and the promotional cadence that we're seeing is about as expected. We obviously – we have 775 or so of our own stores out there. So we get daily reads on what consumers are spending across a wide variety of brands and its that knowledge that forms our forecasts and we're confident that we can – obviously we're confident that we can deliver the fourth quarter that we've called out here.

Omar Saad – Credit Suisse

That's very helpful and I know that you guys feel great about your inventory, they obviously look extremely clean from an outside observers perspective but it seems to me you probably feel pretty good generally about inventory levels that retail on the industry.

Eric Wiseman

In our brands, yes we do.

Omar Saad – Credit Suisse

Okay, what about the industry overall? Do you worry about some competitors that are over inventoried and might have to get too aggressive on the promotions?

Eric Wiseman

I don’t have current enough information on competitors. We only – we get to see that on a quarterly basis so I haven’t seen anything recently that could of formed that kind of comment, Omar. I just know how the – I think the retail everybody's trying to buy a little bit cautiously. They've been that – in that cycle for the last couple of years and we've said all along we think that's a smart way to play it but I think we all learn the value of being able to execute our business with winner inventories.

It is a huge driver of profitability and success and we're focused on that as are most of our customers.

Omar Saad – Credit Suisse

Okay, that's helpful to know that the retailers from your perspective are still taking that appropriate mindset to the business.

Eric Wiseman

Yeah.

Omar Saad – Credit Suisse

Okay, very helpful.

Eric Wiseman

At least with us they are.

Omar Saad – Credit Suisse

Sure. Well, yeah, I think that's a pretty good (inaudible) for the whole industry. Just one last quick question, you got a million questions on the cost and the cotton and all this stuff. The price increase, just so I'm clear, this kind of seems like you're going into all of your business and doing some strategic price increases. It's not broad across all products its maybe 10% or 20% or 30% across where we're seeing price increases not some small price increase on everything?

Eric Wiseman

Yeah. I think it's fair to say that we are using all of VF's brands and countries and products to address the significant pricing challenges that we see at a few product areas. We're not – it is not every single product category and every country that has significant cost inflation next year but we are looking at how we cover it and to do that we're using the breadth of VF to help us.

Omar Saad – Credit Suisse

Perfect, thanks. Great work and good luck.

Eric Wiseman

Thank you very much.

Operator

Eric Tracy – FBR Capital Markets

Eric Tracy – FBR Capital Markets

Hey guys, good morning. I'm going to beat this cost inflation cotton thing absolutely in to the ground. Just so I'm clear in terms of – just ...

Eric Wiseman

Then you'll be speaking to Bob, Eric.

Eric Tracy – FBR Capital Markets

... I hear you. I hear you. So just to be clear in terms of again the – how should we think about the denim buys next year and how they're going about that? It sounds like they're not locked in but is there the sort of the assumption that the cotton may reverse so that you get the opportunity to lock in at a lower level or is just – or can you maybe just speak to the timing in which we might get locked into the back half of next year?

Robert K. Shearer

Yeah, yeah, Eric, so you got it all right. And the point here is that you know again because we're in those negotiations we're not being too specific but what I did say was that, yes, we right now we are assuming that the cost, the ultimate cost, that we lock into and will be built into our denim, right that we're buying?

Will not be at the 120 rate, won't stay at that level, over the year. So, yes, that's exactly right. Again just a little reluctant to say right now what we're assuming higher than where it was clearly or what we were thinking about at the last, end of last quarter, but not necessarily at the 120 level. That's the point there.

Go ahead.

Eric Tracy – FBR Capital Markets

(Inaudible) what kind of gives you the confidence as you're seeing something from the supply demand side that, that – on the global market perspective that gives you confidence that that does start to reverse?

Robert K. Shearer

Well, short rates versus longer term rates, yeah its just a lot of knowledge in terms of yes demand, demand over all, the levels that will be coming on board, the economy that will be coming in, all those factors are contemplated in that assumption.

Eric Tracy – FBR Capital Markets

Okay, and then maybe if I could just switch gears a little bit in terms of you spoke to sort of conditions in the market place but maybe just in the outdoor in particular clearly at least the perception of a difficult compare given to your weather last year, but maybe speak to – it seems to me that compare maybe isn’t as difficult you all are pretty conservative from an inventory perspective as were retailers last year.

So maybe even though the weather was difficult you didn’t capture as many of the sales as you possibly could have. Can you maybe just speak to that as the relative sort of trends you are seeing in that space?

Robert K. Shearer

Sure, so, so you captured it exactly right. Last year we had a good weather environment of our outerwear business and we sold through so we missed opportunities last year. We've already commented some on our bookings. We have strong bookings for fall and we have strong bookings for spring so that tells you that, tells us, that the retailers are voting for our brands. Particularly in The North Face, they're voting for that brand and our expectation would be that working with our retailers we have our finger on the pulse of what's realistic to have happen in that business next year and we're looking at double digit increases continue in The North Face not only in this fall but for next spring and that's true in the U.S. That's true in Europe and Asia, of course, I is a much stronger number because the brand is relatively new there.

Operator

Todd Slater with Lazard.

Todd Slater – Lazard

Thank you, impressive quarter everybody. I was curious if you could give us a sense of your average selling prices or wholesale price that we should expect for next year on sort of either like for like products or maybe in the overall portfolio as an offset to some of the sourcing costs you talked about and secondly I'm just wondering how the retailers are reacting to you know select price increases and whether or not they're embracing them or worried about their ability to have [inaudible] inflation?

I'm sure they'd love to be able to do that given 16 years deflation. And lastly, for Karl Heinz, the prices on pretty much everything in Europe and in Asia is much higher. Just wondering if you think this is fair in pricing versus the U.S. is sustainable and as well, especially as the word gets flatter, just what it's thinking is on that? Thanks.

Eric Wiseman

Okay, I'll kind of quarterback this for you Todd. I can't give you an average sales price number for next year. I don’t know it so I can't give it to you and we've only really done pricing for the – where we have done it, its all just for the first part of the year. So I'm afraid I can't help you with that one. On the conversations we're having with retail yeah it's been really an interesting discussion and its evolved since early summer and into one now where there is so much pressure in – from waiver rates in Asia and the cotton prices have gone up so much that there is a robust discussion with the retailers.

But as I said I think in my comments we're having that discussion at every channel of distribution particularly around cotton, products that are heavily cotton oriented, its true in every product category and in every channel of distribution and we're not the first people to have these conversations. So everybody's out there facing the same pressures, our retailers as you know are now at many of their own exclusive, private brands.

So their facing the exact same challenge so there is just an honest discussion about how we can move forward and address some of the cost pressure that we see and what went from a discussion where everybody was pushing back you're now seeing a lot of our big retail customers publically stating that they are seeing the inflation, coming at them and they expect to pass the prices across. So I think that comes to a healthier place right now.

Karl Heinz do you want to talk about the last part of Todd's question?

Karl Heinz Salzburger

Absolutely, yes. We expect to do two measurements, which (inaudible) opposite when we define our pricing. One is to have consistency and brand positioning worldwide. So we decide to position brands and products more or less on the same levels. Then on the other side and that's the opposite one we try to maximize local pricing opportunities (inaudible) consumers are wiling to pay. The channel of distribution, the willingness again of consumers, so there are some [inaudible] as you mentioned. One is (inaudible) short-term strong dollar Euro flexations [inaudible] other currency. That is – especially if it happens short-term like it's happening now. Over time though we have seen consumers [inaudible] what prices are pay in the different areas but so far we have not [inaudible] actions.

Again, because we tried to be consistent in our brands, in our positioning of products and brands, at the same time the reality is like in Europe, where consumers are normally not so price sensitive and they tend to be willing to pay more. Does that help you?

Todd Slater – Lazard

Can I ask you a quick follow up on the wholesale pricing?

Karl Heinz Salzburger

Yes.

Eric Tracy – FBR Capital Markets

Yes, just – I know you obviously can't give us specifics and exact numbers but would you say that the overall average, let's say wholesale, will be up a little bit next year is fair for us to assume that? Up maybe low single digits or is that just still too early to call?

Eric Wiseman

Yeah, Todd, I'll deal with that question across ...

Karl Heinz Salzburger

Yeah.

Eric Wiseman

... again we're going to see on a product for product basis some increases next year. I don’t know how that's going to average out though but your assumption on what would our average price be up next year? Yes, our average wholesale price, yes it will be.

Operator

Next we'll hear from David Glick with Buckingham Research Group.

David Glick – Buckingham Research Group

Good morning and my congratulations on the quarter.

Eric Wiseman

Hi, David, how are you?

David Glick – Buckingham Research Group

The direct consumer counts, I may have missed it, I was wondering we got the total constant currency increased direct consumer. I just wondered what the counts were and how they've flowed through the quarter and then secondly, what is going on with the Nautica business? I mean it's in a very competitive environment, the business was on its back a year ago and you guys have really made a nice rebound. I'm just curious is it sharper price points, obviously better product execution, but some color on exactly how you achieve the turn around and what that means for the business going forward?

Eric Wiseman

Sure there's a reason – I'll deal with both ends of that, David. Retail comps in our own stores for the quarter were up about 3% so that is the comp store growth that we had in the third quarter. We're expecting kind of low single digit comps in the fourth quarter, in case you're interested. Thanks for noticing the progress that the Nautica team has made. I'm just terrifically proud of the progress they've made. You're right the business was in a really tough spot and that's when great management teams rise to the occasion. That team has done that up there and to have season to date sell-throughs with – of over 20% versus prior year across their business is pretty impressive.

And it does come down to the simple things you talked about. It comes down to a much more focused and a product line that is very, very directed at who their core consumer is. They've done that at the right value price and they've done that in partnership with their own retail customers. So we're getting more advertising to (inaudible) more customers because we have momentum. Momentum is a wonderful thing and Nautica has it right now in their wholesale business.

Not true in their outlet store business; that's a challenge for us. But we will get that challenge solved, that's – that was a secondary challenge for us. We knew we had to get the wholesale piece working. We have it working now and by all indication we're going to – we need a good year next year in Nautica wholesale as well.

I know that the team will appreciate you asking the question.

Operator

Our last question today will come from (inaudible).

Unidentified Analyst

Good morning everyone, just a couple of quick questions for you. Just from your experience and I know this goes back 15, 20 years at this point but when we've seen wide wholesale price increases and the retail channel what is the (inaudible) specificity of demand? Do you see units come down accordingly, does it increase overall consumption, what's your experience with that?

Eric Wiseman

That's a really difficult question to answer because it’s a very broad question. Where we have – I'll just give you some generalities and I'm afraid that's all I can do for the U.S. business. The high end of our prices points, where we have innovative new products and brands like The North Face and the brands like Vans where we have innovation consumers will step up and pay for the innovation.

That's true not just in the apparel industry. It's true in most industries. So our – we have a huge focused on driving innovation through everything that we do including our product development and in being paid appropriately for that innovation.

In the more – where the big unit volumes are we absolutely understand what a dollar price change up or down means because we see it all the time through promotional cadence. We know how much volume we can do at each price point and we have that matrix all factored in. At some price point when you go up your business does slow down and we know that and at some point when you go down it really accelerates and we know that as well.

We've taken all that into consideration as we're dialing in our pricing for next year. Does that help you? Because I know that's a difficult conceptual question but (inaudible) your perspective.

Unidentified Analyst

Yeah, as far as kind of versatility on fabrication across your portfolio can you speak to that? I understand you probably have limitations on jeans wear but perhaps in sports wear and contemporary?

Eric Wiseman

I'm not sure I understand the question.

Unidentified Analyst

In essence could you effectively lower cotton content across other coalitions at VF besides jeans wear?

Eric Wiseman

Yes, we could. Obviously cotton is a part of many of our product lines and jeans wear is the biggest part of the product line. But we have that – all kinds of flexibility in terms of the styles that we make and how we make them.

Operator

And we'll take a question from Mitch (inaudible) with Robert Baird.

Unidentified Analyst

Yeah, thank you, which I've actually got a few questions, one, Eric, you're talking about the outlook for the first half of next year sounds pretty good based on where some of the spring orders are coming in, so is it possible to be kind of rank the drivers of that increase in terms of order of magnitude? How much of that is the retailers being more aggressive with open to buy versus maybe you guys taking some share or whether or not they're new products and distribution that they're hitting your business next year on the first half?

Eric Wiseman

Well, a big part of our growth is coming from our outdoor and action sports businesses. As I said earlier that's 41% of our company and we're – that's also a – 21% of our company that has operating margins approaching 20% and as we've been questioned about why are we increasing our investment in marketing behind our brands the answer is we're trying to drive that business very effectively and we're trying to drive our Asian business very effectively.

And that's where we're seeing a lot of growth, we are investing behind those brands and I think the fact that The North Face was up 17%, Vans was up 19%, I don’t think that's true in the outdoor and the action sports businesses in general. So that tells us that we're taking share and if you look at our track record over the last five years with those brands I think we've taken share and that's also true in our outlook for next year is that big section we will take share.

Unidentified Analyst

And then, Bob, on kind of the gross margins fist of all in the third quarter can you maybe quantify – and it was up 226 basis points – can you quantify kind of the key buckets that drove that increase? How much of it was some cost benefits in the quarter versus pricing or mix or fewer close outs and how does that kind of translate into the fourth quarter where your essentially expecting gross margin to be kind of flattish?

Robert K. Shearer

Sure, Mitch, in the third quarter the 220 basis point improvement was pretty evenly split between lower product costs that we've been seeing throughout the year, now, not quite as much as we saw in the first half which was obviously anticipated. Between that and other factors that we've been seeing that have been driving our gross margin for the last couple of years.

In other words the higher mix of retail, the stronger mix of our lifestyle businesses, so – and also just running the businesses that are cleaning with our inventory businesses and lower risk in our inventories so about half-lower product costs and the rest driven by good fundamentals and the changing mix in our business.

For the fourth quarter so what we said is the gross margins would be relatively flat in the fourth quarter and there what we're seeing is – as we've said all along, Mitch, the impact of product cost increases is that 2011 matter, not a 2010 matter, we are seeing of course we're seeing those same kinds of positive influences in the fourth quarter.

So again a bigger mix of our retail, stronger international business is a part of the mix, all those pieces help drive our gross margin up and well into the fourth quarter. We do have a little bit of product costs pressure I'll call it but its not from specifically product cost increases it's actually from chasing some business.

And in terms of chasing business that cost us a little bit, there's a premium to doing that. So it's not specifically the product costs. It is – we're paying a little bit more per product because we're chasing some business because of the strength of our business. I think it says something to your point relative to the first part of 2011.

So as we look at our needs for that and as we build our inventories for that we're paying a little bit of a premium, so over all that balances out to about flat gross margins in the fourth quarter.

Operator

And that is all the time that we do have for questions today, at this time I would like to turn things back over to our presenters for any additional for closing remarks.

Eric Wiseman

I just thank you all for interest in what we're doing here. We're real proud of the quarter we just had and we're looking forward to getting back again in 90 days and talking about the great fourth quarter we're going to have and providing some more details on 2011. Thanks a lot.

Operator

And that does conclude today's tele-conference, thank you all for joining.

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