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V.F. (NYSE:VFC)

Q3 2011 Earnings Call

October 24, 2011 8:30 am ET

Executives

Karl Heinz Salzburger - Vice President, Group President of International and Member of Operating Committee

Jean Fontana - Senior Vice President

Steven E. Rendle - Vice President, Group President of Outdoor & Action Sports Americas and Member of Operating Committee

Scott Baxter - Vice President, Group President of Jeanswear Americas & Imagewear and Member of Operating Committee

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

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

Analysts

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

John D. Kernan - Cowen and Company, LLC, Research Division

Michelle Tan - Goldman Sachs Group Inc., Research Division

Omar Saad - ISI Group Inc., Research Division

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

David J. Glick - Buckingham Research Group, Inc.

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

Robert S. Drbul - Barclays Capital, Research Division

Joseph Parkhill - Morgan Stanley, Research Division

Michael Binetti - UBS Investment Bank, Research Division

Robert F. Ohmes - BofA Merrill Lynch, Research Division

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

Christian Buss - Crédit Suisse AG, Research Division

Operator

Good day, and welcome everyone to the VF Corporation Third Quarter Fiscal 2011 Earnings Conference Call. Please be aware that today's conference is being recorded. At this time, I'd like to turn the conference over to Jean Fontana of ICR. Please go ahead, ma'am.

Jean Fontana

Good morning, everyone. Thank you for participating in VF Corporation's third quarter 2011 conference call. By now, you should have received today's earnings press release. If not, please call (203) 682-8200, and we will send you a copy immediately following the call. Hosting the call today is Eric Wiseman, Chairman and CEO of VF Corp.

Before we begin, I would like to remind participants that certain statements included in today's remarks, and the Q&A session, may constitute forward-looking statements within the meaning of the Federal Securities laws. Forward-looking statements include management's current expectations, estimates and projections about business and results of operations and the industries in which VF operates. Actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those projected in the forward-looking statements are discussed in the documents filed with the company with the Securities and Exchange Commission.

I would now like to turn the call over to Eric Wiseman.

Eric C. Wiseman

Thank you, Jean. Good morning, and thanks, for joining us. With me today are Bob Shearer, our Chief Financial Officer; and our 3 Group Presidents, Karl Heinz Salzburger, Steve Rendle and Scott Baxter. We are thrilled with the strong performance delivered in the third quarter. Across our portfolio, our brands continued to successfully execute the growth strategies while skillfully navigating through the challenges posed by today's uncertain economic conditions. I have more confidence than ever that the VF business model, diversified, global and financially strong, provides us with a competitive advantage to maximize growth while minimizing risk.

Let's quickly review the highlights of the quarter. Strong organic growth of 16% in revenues and 18% in earnings per share, double-digit revenue increases in our Outdoor & Action Sports, Imagewear, Sportswear, and Contemporary Brands coalitions, continued growth in our Jeans business both domestically and internationally despite cost and pricing challenges with Jeanswear margins remaining at very healthy levels. The Timberland acquisition, the largest in VF's history, which added over $160 million to revenues in the quarter and delivered better-than-expected earnings accretion. Robust growth in 2 of our primary growth platforms, direct-to-consumer and international, where we enjoyed organic revenue growth of 15% and 29%, respectively. Continued strength in our business in Europe, despite the challenges there, with European revenues growing by 20% in constant dollars during the quarter. Another quarter of outstanding growth in Asia where revenues rose by 43% and an expansion in operating margin, excluding Timberland, to over 16%.

Of course, the question of the day is, given the softening economic conditions here and the challenges in Europe, what are we currently seeing in our business and what are the implications going forward? Now while we're all hearing and reading about a tougher economic environment, we have seen little evidence of a slowdown in our business. It's true that there are pockets of continued weakness for us. For example, in the U.K. and parts of Southern Europe. Here in the U.S., the upper channels of retail distribution are generally faring better than the lower ones. But across the board, we are very pleased with how well our businesses have held up. We've enjoyed 3 quarters of strong organic growth this year, and in fact, this growth has accelerated since the beginning of the year. Each quarter, we have seen top line organic growth in each of our 5 coalitions, and we're looking forward to another quarter of similarly solid growth in the fourth quarter as well.

Accordingly, you saw this morning that we increased our revenue and earnings guidance for the year. The components of that increase are twofold. The first is stronger-than-anticipated organic growth. The second is the Timberland acquisition, included for the first time in our guidance. And even though it's still in the very early days for our newest brand, we're really encouraged by Timberland's performance this year and have increased our estimate for earnings accretion from Timberland, excluding acquisition expenses, to $0.55 per share from $0.45 per share.

I often get asked by investors, so what keeps you up at night? And actually, I sleep very well because I have tremendous confidence in our leaders and in the strength and long-term potential of our great brands and VF's business model. Now we're very aware of macroeconomic concerns and recognize that we are unlikely to be immune to a significant economic downturn. But our experience has shown that as consumers become more cautious, they gravitate towards brands they know and trust like ours, and they still spend when they see compelling products at a reasonable price. However, there's no question that we're monitoring external conditions very closely and we'll be prepared to act decisively, if need be, to protect our profitability and keep our brands strong and healthy. Now of course, these days no VF earnings call will be complete without some commentary around jeans product cost inflation and pricing.

The good news here is that the year appears to be playing out just as we had planned. Another round of price increases in our U.S. Jeans business went into effect in the third quarter, and as anticipated, we did begin to see a drop in unit volumes. But we're tracking right on our plan for mid- to high-single digit decline in U.S. jeans unit volume in the second half and only about 4% for the full year. Despite the challenges posed by higher cost in pricing, I'm tremendously proud of the fact that our U.S. Jeans business will post 4 quarters of top line growth this year with profitability remaining at very healthy levels.

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

Robert K. Shearer

Okay. Well, thanks, Eric, and I'd like to echo Eric's comments. This was a great quarter for VF and its shareholders, with continuing momentum across our businesses. We're really proud that, based on our guidance today, we'll be delivering record revenues across nearly every coalition this year.

In our full year revenue guidance we're above about 13% organic growth, as well ahead of our long-term target of 10% that we communicated back in March, giving us even greater confidence in the long-term growth potential of our great brands. Now as noted in the release, revenues in the quarter increased 23% with 7 percentage points of the growth coming from the Timberland acquisition which contributed $163 million to revenues. So organic revenues grew a very healthy 16% this quarter. Now you will hear more about the results of our largest coalitions from Steve, Scott, and Karl Heinz, but I would like to point out that both Sportswear and Contemporary Brands had strong quarters with double-digit revenue gains and higher operating margins. The Nautica brand is growing its wholesale department store business and retail comps were up 8%, while Kipling continues to report exceptional growth in the U.S. Our Contemporary Brands business is also showing good growth with total revenues up 11% in the quarter, and growth in the 7 For All Mankind brand, both domestically and internationally.

Okay now on to gross margin. We've talked a lot about our gross margin expectations this year and continue to be right on track, if not slightly ahead of the guidance we provided earlier in the year. You'll recall that we've consistently stated that the tougher comparisons would be in the second and third quarters of this year. And gross margin did decline in the quarter by 120 basis points, which was the same as that in the second quarter, although we noted last quarter that the gross margin benefited from a 65 basis point gain on a facility closure. So on a comparable basis, the third quarter gross margin comparison was actually better than that of the second quarter. The impact from higher product cost, net of price increases on the third quarter, gross margin was 180 basis points. Helping to offset that was a 60 basis point benefit from mix, as our higher margin businesses: Outdoor & Action Sports, International, and Retail, are becoming a bigger piece of total VF. Now in terms of the Timberland impact on the numbers, as you know, Timberland enjoys a very healthy gross margin, and its gross margin was slightly higher than VF's overall percentage for the quarter. Looking forward, in the fourth quarter, we'll see more of a benefit from price increases which will help offset the impact of product cost increases. And the continuously improving mix from our expanding Outdoor & Action Sports retail and international businesses will play an important part in helping fourth quarter comparisons. Also Timberland gross margins are expected to be somewhat higher than overall VF in the fourth quarter. Accordingly, we continue to expect gross margin comparisons in the fourth quarter to improve. Now to be clear, that means the reduction in gross margin from the prior year will be less in the fourth quarter than reported in the second and third quarters. We're really pleased that this is all playing out pretty much as planned. So we continue to expect less than 100 basis points of gross margin decline for the year. As we've noted in past calls, this decline largely results from gross margin reductions within our U.S. Jeans business due to the unprecedented rise in cotton cost and the overall lower cost and selling prices of these products sold in U.S. markets. And one final point here. You're obviously all aware of the dramatic reduction in cotton prices. The December cost related to the new crop now about $1 a pound. What a difference from the $2-plus levels that we saw earlier this year. Of course, this is great news to us. The second quarter of 2012 will be the first quarter when our cost of denim purchased will be below the prior year's quarter. That means it will be late in the second quarter 2012, and into the third quarter, when that lower product cost will hit our P&L. And we'll tell you this. It gives us great confidence that our decisions around pricing, particularly for our U.S. Jeans businesses, have been good ones. Meaning, we never contemplated fully offsetting cost with pricing. These were good long-term decisions have will benefit our brands for years to come.

Moving down to SG&A. Ratio of SG&A to revenues was 29.6% in the quarter, down 100 basis points from the 2010 period. That included a negative 50 basis point impact from Timberland, primarily driven by the inclusion of acquisition-related expenses, which is noted in the release, worth $27 million. In other words, excluding Timberland, the year-over-year decline in the SG&A ratio would have been 150 basis points. With respect to these acquisition-related expenses, the good news here is that we've managed to get most of these expenses for 2011 behind us, in the third quarter. You'll recall our initial guidance for these expenses was $0.20 per share in 2011. We now anticipate a slightly higher level of expenses, equal to $0.25 per share in 2011. To date, $0.20 per share of that has already hit our P&L. That leaves only $0.05 per share falling into the fourth quarter. Despite these higher expenses for 2011, you'll note that we increased our full year 2011 guidance for Timberland by $0.05 per share, implying $0.10 per share worth of stronger operating performance. In other words, before expenses. We do expect some additional acquisition-related expenses in 2012, which we noted at the time when we announced the acquisition in June, and we'll have more to say about those when we provide our 2012 guidance. Specific to the fourth quarter, we expect to see another reduction in the SG&A ratio to revenues despite a now higher planned marketing spend over the elevated level in the fourth quarter of 2010. This will be true in spite of the fact that the fourth quarter will include a full quarter from Timberland where the SG&A ratio is higher than VF's, and especially considering the additional acquisition-related expenses as mentioned previously. And on a full year basis, we're still expecting about a full point reduction in the SG&A ratio from the 33.5% reported in 2010 while maintaining our marketing spend at the elevated 2010 level of 5.5% of revenues.

And that brings us to the operating income line. As you saw in the release, the net benefit to third quarter operating income from Timberland was $13.5 million, which included the $27 million in expenses. Now if you did the math, you'd see that the operating margin for Timberland in the 3-week period, excluding the acquisition expenses, was over 20%. Our timing on the acquisition was good. September is Timberland's biggest month of the year and their most profitable period. On an apples-to-apples or organic basis, that is excluding Timberland, our operating margin would have increased to 16.1% from 15.9%. Given the pressures on our P&L from higher product cost, we're really pleased with our strong operating margin this quarter. And for the full year, we continue to expect our operating margin to be relatively stable with 2010 levels including the acquisition-related expenses.

So moving down to the bottom line. In terms of earnings per share, we were really pleased with the 21% EPS increase. The 18% growth in organic earnings-per-share is particularly impressive when you consider current economic conditions. Again, given our long-term organic EPS growth target of 12%, this performance really points to the earnings power of the VF brand portfolio. And just to make sure that the components of this quarter's EPS are clear, reported earnings were $2.69 per share. The accretion from Timberland in the quarter was $0.07 per share. So the organic growth of 18% is based on an EPS of $2.62. Included in the $0.07 per share accretion was $0.18 per share in acquisition-related expenses. Excluding these nonrecurring expenses, the earnings accretion from Timberland was $0.25 per share. So our EPS, including Timberland but excluding the acquisition-related expenses, would be $2.87 or an increase of 29% over the prior year $2.22 per share. Now related to the impact from foreign currency, in the release, we indicated the benefits to earnings was $0.10 in the third quarter and $0.14 year-to-date. Considering the somewhat volatile environment, we're holding our Euro rate assumption at $1.30 for the remainder of the year. For the full year, we now expect reported earnings per share of approximately $7.90. Again, to be clear on what's included here, the Timberland accretion is now expected to be $0.30 per share, better than the $0.25 per share in our original guidance. So on an organic basis, excluding Timberland, we're now looking at full year earnings of $7.60 per share, up from our prior guidance of $7.50 per share. That represents organic earnings per share growth of 18% from the $6.46 per share reported in 2010 excluding impairment. The $0.30 per share in accretion now includes $0.25 of acquisition-related expenses, as I mentioned previously. Excluding these nonrecurring expenses, the earnings accretion from Timberland would be $0.55 per share compared to our prior guidance of $0.45 per share. So our EPS, including Timberland but excluding the acquisition-related expenses, would be $8.15 or an increase of 26% over last year's $6.46 per share.

And now in closing, a few final points related to our balance sheet and cash flow. We continue to put a lot of focus on inventory management, and to date, are right on plan. Excluding Timberland, inventories rose 19%. Important to point out that product cost in inventory at the end of the third quarter were up 9% over last year. That implies 10% growth in inventory value from unit volume, which pretty well aligns with our projected revenue growth, net of pricing for the fourth quarter. The quality of inventory is high, and at year end, we expect organic inventories to rise by a mid-teen percentage. With regard to the financing of the Timberland acquisition, we should be substantially out of the commercial paper market by year end, given our very strong cash generation expected in the fourth quarter. By year end, we expect our debt-to-capital ratio to be just under 30%. Given our strong cash flow, by year-end 2012, we'll likely be back to a debt-to-total-capital ratio that's comparable to where we were pre- the Timberland acquisition.

And speaking of cash flow, we continue to expect another very strong year of cash generated from operations which should, again, approximate $1 billion. As we stated last quarter, our guidance does not include any share repurchases this year. Consensus estimates anticipate our average share count to remain flat year-over-year. But in fact, our average share count for the year for purposes of calculating diluted earnings per share will likely increase by 1 million shares to 111.3 million shares. Accordingly, you may want to take that into account as you update your models.

So all in all, this was a great quarter for us. We closed on a transformative acquisition that's right in our wheelhouse. And the results to date for Timberland, although for a limited period of time, would support our expectation that this will be an incredible addition to the VF portfolio. And the continued momentum in our core businesses across the board speaks to the payback on our investments behind these brands and the overall strength of our brands with the consumer. I'll look forward to wrapping up the year with you on our February call when we'll speak to our expectations for 2012.

And now you'll hear comments from our 3 Group Presidents. First up, Steve Rendle.

Steven E. Rendle

Good morning. Despite the early hour here in the West Coast, I'm thrilled to be here for 2 reasons: First, because I have the honor of reviewing strong performance delivered this quarter by our outstanding portfolio of Outdoor & Action Sports brands; and second, because this marks the first quarter for Timberland's SmartWool as part of VF, and I have the opportunity to share with you some details of our progress and plans. I'll keep my comments about the third quarter brief, as the performance delivered by our brands in the quarter pretty much speaks for itself and clearly demonstrates our continued strong momentum. Momentum which we have every confidence will continue.

Excluding Timberland, revenues for Outdoor & Action Sports Americas rose a healthy 13% in the quarter, driven by double-digit growth in our 2 largest brands, The North Face and Vans. Including the Timberland and SmartWool brand, revenues in the Americas were up 21% in the quarter. In terms of The North Face, last December, we laid out a comprehensive plan to double the size of the brand over the next 5 years, which we confirmed again in March during VF's Investors Day. We are as confident as ever in the strength of this powerful brand. In the third quarter, growth in the Americas was fueled by double-digit increases across the brands wholesale and direct-to-consumer businesses, including a 61% increase in e-commerce sales. Retail sell-throughs have been strong, and we anticipate a strong finish to the year. And looking forward, spring bookings are up 15% globally with double-digit growth both in the Americas and internationally. The story is much the same for Vans, and I'm looking forward to scheduling an Analyst Day next year to better acquaint all of you with this brand's very special story. Vans also delivered double-digit growth in wholesale and Direct-to-Consumer business. Like The North Face, Vans e-commerce growth was outstanding, up over 41% in the quarter. We're making great progress activating the Vans brand in the key Northeast market. As I noted last quarter, we've opened 9 stores in the New York Metro with results exceeding our expectations. We also opened our first standalone partner store in the meatpacking district of New York City.

A quick word on our lucy brand, where we continue to see positive improvement. Over the 2 years, revenues have begun growing at double-digit rate. Store profitability continues to improve and our e-commerce growth of 20% for this quarter continues to exceed expectations. lucy has great potential in the coming years, and we are now poised to capture that potential.

In summary, a great quarter and we look forward to wrapping up the year on a very strong note. Now a few words about Timberland. We've noted already the top and bottom line contributions to this quarter's results. We are pleased the momentum we've been seen building over the past 2 years is continuing. While today's numbers include only 3 weeks of Timberland results, for the full third quarter period, Timberland revenues increased over 22% over 2010 levels. SmartWool is a small but mighty brand, with lots of untapped potential. On a third quarter basis compared, with 2010's third quarter, SmartWool achieved revenue growth of 21%. The last few months have been busy and very productive, as we worked closely with our Timberland and SmartWool associates on the integration plans for these 2 brands. I'm very pleased to say that, so far, it's been an amazingly productive process with tremendous collaboration across all of our teams. A big step has been taken with the establishment of Timberland's go-forward leadership team. We've been impressed with the breadth and depth of experience within the brand, which we've now surrounded with the addition of key VF leaders, namely in the roles of President, CFO, and VP of Operations. On the front end of the business, we've retained key talent and are building plans, together, to deliver Timberland's growth initiatives both this year and beyond. We feel very good about the product engine in place at Timberland and are impressed with the depth of knowledge and experience that sits within this organization. And we continue to see great potential to improve Timberland's retail operating model, in-store experience and profitability here in the U.S. in large part by leveraging our skills and experience within The North Face. Given VF's strong financial discipline it should be no surprise that we are hedged down, working to align Timberland's financial processes with ours, in order to provide better visibility into the business for planning, forecasting, and an overall business management perspective. On the system side, we're developing a comprehensive and global technology integration plan that will support growth and synergies while minimizing business risk. And relative to SmartWool, the synergies are already starting, with a full SmartWool stock assortment going into the top 23 North Face stores here in the U.S. over the next few weeks. The SmartWool team will also begin working with our North Face peers as we look at how to develop a more comprehensive apparel platform with a strong outdoor specialty brand.

In summary, while we'll still very early days, we're tremendously excited about our progress to date. I look forward to sharing details of further progress with you in the future.

Now I turn it over to Karl Heinz.

Karl Heinz Salzburger

Thank you, Steve. Our international growth accelerated in the third quarter, with strong performance in both Europe and Asia. On an apples-to-apples basis, that is excluding Timberland, revenues in our European business grew 20% in constant dollars. Despite the continued economic challenges here, revenues in Asia grew 43%. And we expect this momentum to continue through the fourth quarter, capping a year of exceptional performance across our EMEA and Asia businesses.

The strength in Europe was broad-based, with growth in all 3 business: Outdoor & Action Sports, Sportswear and Contemporary, and Jeanswear. Our brands continued to achieve outstanding performance in a market facing great uncertainty due to the financial crisis. Our business tend to remain steady throughout the quarter and our reorders and forward bookings are strong. In terms of specific market trends, conditions continue to be particularly weak in the U.K. Having said that, our performance in Europe this year is shaping out to be the strongest I have seen in my 11 years with VF. Our brands are winning, and retailers are placing their confidence in brands with proven strength that's of ours. Of course, as Eric mentioned, we will continue to monitor market conditions very carefully over the coming weeks and months.

We achieved the strongest growth in Outdoor & Action Sports where revenues, excluding Timberland, rose 32% in constant dollars during the quarter. Our largest brand, The North Face, grew revenues by over 25% while our second-largest brand, Vans, achieved revenue growth of over 50%. Both brands are seeing strong reorders, setting up a double-digit base. Our direct-to-consumer initiatives have been a key source of growth for us this year, and we have accelerated our store openings. We expect to open a total of 18 new stores for North Face in Europe this year and 16 for Vans, an increase from our plans earlier in the year. Looking forward, as Steve mentioned, global TNF preseason bookings for spring '12 are up 15% with similar strength in both our Americas and International businesses. For Vans, EMEA pre-spring bookings are strong, up 35%. Our newest brand, Timberland, added about $90 million in revenues here during the partial quarter period. For the full third quarter, Timberland's European revenues increased 30% from 2010 levels. While we have only owned the Timberland brand for a few short weeks, we are quite excited about the opportunities to continue to grow the brand throughout the EMEA region. Timberland has 67 owned and 233 franchise stores across Europe and a very healthy Wholesale business. We are very pleased with what we have seen in Timberland International business today. If anyone want to experience the Timberland brand excellence, I encourage you, visit one of their stores in Southern Europe.

Our Sportswear and Contemporary Brands business in EMEA achieved revenue growth of 14% in constant dollars in the quarter with double-digit growth in our Napa, Kipling and Eastpak brands. Revenues of our 7 For All Mankind brand also grew at a healthy rate in the quarter, with successful new store openings in major European stores such as Berlin, Stockholm and Paris. Most brands are seeing solid order book for the spring '12 season [ph].

We are also very pleased with the performance of our European Jeans business in the quarter, where we posted a second consecutive quarter of growth. In fact, revenue growth accelerated slightly in the quarter, rising nearly 4% compared to just a slight increase in the second quarter, and flat results in the first quarter. Particularly in light of very difficult market conditions across much of Europe, we are very encouraged by the success of our product, marketing, and in-store initiatives in both the Lee and Wrangler brands, and expect our momentum to continue in the fourth quarter. And we are seeing stronger growth in our bookings than we have seen in prior seasons.

Turning now to Asia. We remain very optimistic about our growth prospects in this dynamic and growing market. As I mentioned earlier, total revenues in Asia, excluding Timberland, grew 43% in constant dollars, with our Jeanswear, The North Face, Vans, and Kipling businesses all growing revenues in excess of 35% in constant dollars during the quarter. China remains the cornerstone of our growth story, with revenues up over 50%, stronger than expected due in part to early shipments of fall bookings. Our brands are connecting strongly with consumers, the result of a great deal of consumer insight work that is helping us understand how to tell our brand stories in ways that resonate with China's consumers. In India, another rapidly growing market, revenues increased 58%, fueled by continued growth in our Jeans business there. We have maintained an aggressive store opening plan and are on track to expand our Asia store base by 25% this year with 530 new doors planned in China and 125 in India.

Timberland contributed about $16 million to our revenues in Asia in the quarter. The brand continues to experience strong growth in the region with revenues up over 30% for the full third quarter versus 2010. We have tremendous growth opportunities ahead of us across both the EMEA and Asia. And we continue to invest in the people and infrastructure necessary to exploit these opportunities to their fullest potential. And the Timberland acquisition provides us with an additional and very exciting future growth platform.

With that, I hand it over to Scott Baxter.

Scott Baxter

Thank you, Karl Heinz. Good morning. I will review our Jeanswear America businesses first, which includes our Lee, Wrangler, and Riders by Lee businesses and then discuss our Imagewear results. We continue to be very pleased with how well we are navigating through today's market challenges. Despite the drumbeat of concerns surrounding cost and pricing, the fact is that we have grown our domestic jeans top line every quarter this year, and are on track to do so again in the fourth quarter. The plans and strategies we put in place, and discussed with you at the beginning of the year, are working much as we had envisioned despite some economic weakening in the recent months.

As you saw in the release, domestic Jeanswear revenues rose 2% in the quarter. That growth was fueled by really strong performance in our Wrangler Specialty business where revenues grew by more than 15% in the quarter, driven by strength across our core cowboy cut styles, western tops, and women's fashion bottoms. Our direct-to-consumer platform is picking up speed, with 2 Western Specialty partner stores up and running in a robust e-commerce traffic. We also enjoyed another quarter of solid growth from Lee where revenues grew 5%. Our product innovations, including Lee Classic Fit and Premium Select lines are working and driving continued gains in market share. We did note that our Mass Market business declined slightly in the quarter. Of course, we anticipated that the top line comparisons here would be more challenging in the second half than in the first. Given the sensitivity to price increases by consumer shopping at Mass Market stores, it is true that trends in the channel in general have softened a bit. The good news is that our Wrangler and Riders brand at Mass continue to outperform the competition and gain share. internationally, we enjoyed double-digit revenue growth in all 3 major international geographies: Latin America, Mexico, and Canada.

Now a few additional comments about cost units and pricing. The cost of our denim purchases peaked in the third quarter. As Bob noted, the cost of cotton has declined significantly, but we won't see this flow in to our P&L in the form of lower product costs on a year-over-year basis until the end of the second quarter and the beginning of the third quarter 2012. In terms of units, as a reminder, while we actually saw jean unit volumes increasing in the first half of the year, we indicated that we expected to see unit volumes decreasing in the second half of this year at a mid- to high-single digit rate. As expected, we began to see the unit declines in our U.S. Jeans business this quarter, primarily in the mass channel in conjunction with the most recent round of price increases. This will continue in the fourth quarter as well, again in line with our expectations. For the full year, as Eric noted, unit volumes will be down around 4%. This year has presented many challenges to our U.S. Jeans business, but I'm very proud of how well our teams have met and overcome those challenges.

Now switching gears. I'll focus -- I'll close with a few words on our Imagewear results. Despite economic headwinds, our strategies have positioned Imagewear to surpass the $1 billion mark for the first time this year. Relative to the third quarter, we posted a 14% increase in revenues. Again, the growth was balanced with double-digit growth in both our Image and Licensed Sports Group business. In terms of our Image or Uniform business, the strong growth there is being driven by growth across our protective apparel and industrial sectors. The Bulwark brand of fire protective apparel may not be a household name today, but with the impressive growth we've seen this year, it may be soon. And in our Licensed Sports Group business, we benefited from a rapid recovery in our NFL businesses as the season got underway, as well as from our new college program and rapidly growing women's NFL Apparel business.

All in all, we're extremely pleased with our performance this quarter and look forward to delivering another solid quarter of growth in the fourth quarter as well. Thank you.

Eric C. Wiseman

Thanks, Scott. So as you've all seen, the diverse VF business model that includes many brands, product categories, and geographies, all supported by an amazingly talented team of associates, continues to perform very well. With that, we'll take all your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Robby Ohmes of Bank of America.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Actually 2 quick questions. The first question was -- I just wanted to maybe get a little more color on The North Face's spring bookings of up 15%. It's a little bit of deceleration for what you were seeing for fall of 2011. Is it reflective of all of what you might think the bookings could be like for fall 2012 or -- just some color on that would be great. And then the other question was just, could you remind us Timberland accretion for 2012 and how that looks now that you're further into owning Timberland?

Eric C. Wiseman

Sure. I'll ask Steve Rendle to comment on The North Face 15% bookings increase for spring. Steve, you want to comment on that?

Steven E. Rendle

Sure. Robby, we're still -- we're right at the back end of our spring business season, and the growth that we've seen here in the Americas has been above our expectations. And as we look to fall 2012, the brand branch just finished its sales meeting last week and we'll hit the road this week. And we remain very, very confident that we'll deliver against the type of growth we've seen historically.

Eric C. Wiseman

Before I turn the next question over to Bob, Robby, you know that The North Face is a third and fourth quarter business and, similar to last year, the first part of the -- spring bookings are a much smaller pieces of the business. It's a much smaller part of our product categories and, generally, a lower bookings rate. Bob?

Robert K. Shearer

Sure. And, Robby, on the second point, I think it was to remind what 2012 looks from an accretion standpoint for Timberland. What we said was, before expenses adding $0.90 a share, and net of expenses $0.75 a share. Now what we also said was that we got a little bit more of the expenses than we anticipated in 2012, actually into 2011. So I guess all in, Robby, given the fact that the performance has been a little stronger, right? In terms of our original expectations to date and we have some more of the expenses behind us, we're feeling good about 2012, obviously. And so if the expenses were to change from that, obviously we'd expect more in terms of cost reductions. So once again, relative to what we played out for a 2012, at this point we feel very good about that.

Operator

We'll take our next question from Jeff Klinefelter, Piper Jaffray.

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

A couple of questions, Karl Heinz, on the International business. First of all, for Europe, looking at your constant currency growth in Q3. Could you just remind us again, what that was in Q1 and Q2? And then, just curious on composition of the growth. How much pricing advantage are you getting versus kind of your core unit growth, and wholesale versus retail? A little color on that would be helpful.

Karl Heinz Salzburger

Bob, you have to help me. I don't remember by memory, what our Q1 and Q2 growth number were in constant dollars. So maybe while I answer your question, your second part, maybe Bob can help me out. I don't remember by memory, and eventually I have to come back to you, Jeff, on this one. We had -- primarily we see 2 types of growth. The most important one was unit growth in most of our brands. We were exposed, on the Jeans side, on price increases. So there is also a price component. So what I would say, Jeff, is? As you know, my 11 years with VF this is one of the rare moments where it seemed virtually all brands, which we have in our portfolio, which are literally growing, including Lee and Wrangler. So it's a very unique moment. Some brands are starting faster than others, but the good news is all of them are growing. So that's good. And as I said, most of them actually is units and not so much driven by price. We had some price increases on jeans, but again, the growth was very healthy. Bob, do you remember the Q1 and Q2 numbers?

Robert K. Shearer

I'm sorry, Karl. I don't have it in front of me at this point in time.

Eric C. Wiseman

Why don't you give Cindy a call after we got off this call, and we'll get that information to you.

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

Yes, that's no problem at all. Maybe just one other then, Karl Heinz. In terms of Asia as well, 43% growth. I think you said 25% retail growth or new unit growth this year in terms of doors. Again, outside of that, is the balance of that growth really unit driven or are you seeing any sort of pricing advantages in Asia?

Karl Heinz Salzburger

One thing, which we do very carefully, Jeff, is we do monitor the performance of our comp stores, right? Because, I mean, Asia and China primarily is all our retail markets. So our comp stores are up. So that's the good news. As we said in the past, we have a relatively low penetration, still, in those markets in terms of doors, number of doors. Yes, we do open 25% this year, but if we benchmark ourselves to the 2 big players in China, we are still very, very small and have -- in other words, we still have a good way to go, going forward, in terms of simply more doors. Did that answer you?

Operator

And we'll take our next question from Joseph Parkhill from Morgan Stanley.

Joseph Parkhill - Morgan Stanley, Research Division

I was just wondering if you could talk a little bit more about the pricing in denim and how confident you are that you'll be able to keep your pricing the same throughout the end of the year. And then what's the likelihood of keeping those prices next year? Is there risk that the competition lowers pricing next year?

Scott Baxter

We're going to take it market by market, and I'll answer the latter part of the question first. We'll find out and figure that out as we transfer through rest of the year next year, in the second half. But I think the single thing that's most important here, as you talk about this question, is that we did not, from a cost standpoint, the cost that we saw, the increases that we saw in cost, we did not take our pricing up nearly what our costs were up. So we're really thoughtful in how we thought about that going into 2012, even in the latter half of 2011. We put a lot of time into that thinking that we didn't want to do that. We wanted to make sure that we stay competitive and we're really confident in the pricing strategy that we had for the latter part of '11 and going to '12, and we're very hopeful that we will go ahead and hang on to that. Did I answer the question?

Joseph Parkhill - Morgan Stanley, Research Division

Yes, definitely. And then just quickly, commentary about marketing spend in the fourth quarter was that -- that it's still going to be up year-over-year? Is that correct or -- and if you are, where are you making those investments?

Robert K. Shearer

Yes, it is. It's interesting, when we started the year, I know we talked a lot about that and the reason we did was because our spend was so elevated in the fourth quarter of 2010, you might recall, by $45 million. So just in the fourth quarter alone, of 2010, we spent $45 million more than we did in the prior years and the prior year period. As we entered the year, what we indicated was, for the fourth quarter -- that we though our marketing spend actually be down a little bit in the fourth quarter, given that, given that we're up against that big increase in 2010. But at this point in time, we're spending some more. Again, we've seen such great success relative to our overall marketing spend and the investments that we've been making beyond our brands. We're convinced that at least plays a part in terms of the momentum that we're seeing. So at this point in time, we will spend more in the fourth quarter than we did over the high level of last year. Now our percent to revenue will be down just a little bit, but not as much as originally planned. So our percent to revenue will be down 30 basis points or so from the elevated level from last year.

Operator

And our next question comes from Christian Buss of Credit Suisse.

Christian Buss - Crédit Suisse AG, Research Division

I was wondering if you could provide some color on the Timberland accretion guidance for the fourth quarter. Did that include the incremental debt expense associated with the acquisition?

Robert K. Shearer

It does.

Christian Buss - Crédit Suisse AG, Research Division

Okay. That's very helpful. And then, could you talk a bit about your inventory composition? How you feel about the inventory composition?

Robert K. Shearer

Yes. Relative to inventory, of course, the question is always not only what we're holding, but also how we stand at retail. And as we look at our inventory levels at retail, we feel that we're in good shape. They're right in line with our growth expectations that we expect to see in the quarter, and also relative to those inventories that we hold. As I said earlier, not only are the unit volumes in line with our expectations for the fourth quarter growth in the fourth quarter, but also the quality of that inventory is good as well. So it matches up well with what we'll be selling in the fourth quarter. So all in all, our inventories are in good shape.

Operator

And we'll go next to John Kernan of Cowen.

John D. Kernan - Cowen and Company, LLC, Research Division

When you acquired Timberland, it sounded like the margin recovery baked in the story was largely SG&A related, but it seems like in Q3 the gross margin on the Timberland side of the business was really strong. Can you talk about the margin recovery and margins in Timberland next year as we try to model that business in your P&L? Is it SG&A and gross margins? More of it just to cost cutting?

Robert K. Shearer

Just a couple of points there. Relative to gross margins, the Timberland gross margins have been higher than overall VF. So I mentioned that in my commentary, that in the third quarter and fourth quarter as well that will be the case, a little bit higher than overall VF. Now having said that, we do see opportunities to improve the gross margins over the coming periods, for sure. In terms of SG&A leverage, you're absolutely right, that is a big piece of the overall opportunity that we've seen. And we pointed out for 2012 that we expected to reduce the SG&A level, mostly SG&A, by about $35 million. Still on track to achieve that. So actually, the gross margins have always been strong at Timberland, remain a little bit above our overall level, and we see opportunity for improvement there. And yes, relative to SG&A that is an opportunity for us for sure, and we'll see some reduction there as well. So it really is -- it's both pieces.

John D. Kernan - Cowen and Company, LLC, Research Division

Okay, great. That's helpful. Imagewear and Sportswear, I know there's more pieces in mix but they continue to post upside, at least to our expectations. Is there any reason to believe that top line momentum and the margin momentum that's in those businesses the past -- basically through this year, would flow into Q4 or next year?

Scott Baxter

John, this is Scott. I'll answer the Imagewear question then turn it over to Eric for Sportswear piece. I have no reason to believe that you'll see anything different on the Imagewear, top line and bottom line going forward, for the fourth quarter.

Eric C. Wiseman

Yes, and it's the same-store story for the Nautica business. That business had some model improvements to make in both the wholesale and retail platforms. They've been working hard at that. And we thought, by the end of this year, we'd begin to see kind of growth we expect from the business, both in the top and bottom line. We're seeing it and don't expect that to change.

Operator

Our next question comes from Jim Duffy of Stifel, Nicolaus.

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

A question for Eric or Steve. You've had your eyes on Timberland for some time. Is there anything you're prepared to say about your strategy for positioning the brand going forward? Specifically, what is it you'll be doing differently?

Eric C. Wiseman

Steve, that question is right up your alley.

Steven E. Rendle

All right. Good morning, Jim. As we get to know the Timberland brand, our initial impressions are being confirmed. They stand behind the statement that they are the rugged New England outdoor lifestyle brand. And we see this tremendous opportunity to build behind that vision from a product standpoint, specifically in footwear and apparel. But how do we start to tell that story to the consumer through enhanced marketing messages? But most importantly, how do we start to tell that story to the retail stores? Karl Heinz mentioned, if you want to see really high-quality Timberland story, you should go to the Southern European markets. And we'll look to begin to build those stores -- build against those stores here in the Americas market at some point towards the end of next year, and really tell and expand that story here.

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

Steve, how does that align with where you see the Apparel business for Timberland in the U.S. as you look towards developing that?

Steven E. Rendle

The apparel business is a great opportunity. And initially we said that was about a $300 million opportunity that we would build over the next 5 years. And we see great opportunity in taking that leather and canvas story that the Timberland brand is following so well in their footwear. And how do we bring that into apparel and really define what that rugged New England outdoor lifestyle looks like? They have a very strong Apparel business in Europe, designed in our London design center. And we look to really leverage that and bring that to life here, beginning in fall 2012 in our stores and then do a full scale launch in fall 2013, across wholesale and direct-to-consumer.

Operator

We'll go next to Bob Drbul, Barclays Capital.

Robert S. Drbul - Barclays Capital, Research Division

Couple of questions. First, on the Timberland acquisition, Bob, are the cost synergies still the same? I think you had outlined $35 million. Has that changed at all? And then the second question that I have is around the European businesses. Can you maybe elaborate a little bit more, country-by-country, a little deeper in terms of any of the trends that you're seeing differently within the VF brands and also within the recently acquired Timberland businesses?

Robert K. Shearer

Bob, I'll start on the -- the $35 million, has it changed, was the question and no, it hasn't changed. And as I said earlier, we're confident in our ability to get at $35 million for next year. Again, that's a 2012 number and that number will increase with time. So there are further opportunities beyond that but that's the number that we identified for 2012.

Eric C. Wiseman

And Bob, I'll ask Karl Heinz to think some about your question in Europe. As you know, it's a complex question because of the number of brands that we have and how those brand strengths appear in different markets in Europe. Karl Heinz, could you make some general comments about what you're seeing there?

Karl Heinz Salzburger

Yes, absolutely. Absolutely, Bob. The good news is that we are growing, actually in most of the countries. Even in the one which have a little bit more pressure from the economic situation. I guess the good -- we have a great and a winning business model. We have a portfolio of brands and geographies which we can play with. Not only in Asia and Europe, but even inside Europe. We have Northern, Center, Southern Europe, and then the emerging markets, which are the markets of former communist markets. We do see sometimes, Bob, some specific brands which might decline. What we do then, we accelerate the introduction of others. I'll give you an example, Greece. Everybody talks about Greece. Greece is a very small market in our portfolio of markets here. But even here, year-to-date, we are growing. We are down on one jeans brand, but we just launched these -- to grow The North Face. So it's growing from a small base but it's growing, and we launched last year in Napa, that's growing. That's the way we do. We play to sum up with the portfolio of brands and the geographies inside Europe.

Robert S. Drbul - Barclays Capital, Research Division

And, Eric, I just have one question for you. From the owner of Majestic, any predictions on the World Series from where we are today?

Eric C. Wiseman

Yes, yes. happy to deal with that question. We are predicting a really engaged competitive 7-game series during which we sell a whole lot of apparel.

Operator

We'll go next to Omar Saad, ISI Group.

Omar Saad - ISI Group Inc., Research Division

A couple of questions. During the market volatility a month or so ago, I mean, did you guys see any change in your business trends at retail? Especially in the higher end brands where you're may be touching more affluent consumer, and we saw some of those people watching their personal portfolios? And then to follow up on Europe too, I mean, plus 20% constant currency is obviously an amazing result, given all the headline news that we're seeing out there. Could you talk about -- if you look at how Europe played out for you guys in '08, '09, there was a little bit more weakness there, especially on denim side. Is the business structured differently today? Are North Face and Vans a bigger piece? How should we think about that business differently than what happened a few years ago, in Europe, for you guys?

Eric C. Wiseman

Sure. Karl Heinz, I'll let you think about Omar's second question while I deal with the first. Yes, Omar. In the first couple of weeks, in August, when there was only a lot of negative press out there. We saw a slight decline in our growth rates. And I answered that with those specific words because we didn't see a decline in our business, we saw a business that had been growing. In some of our brands as much as 20%, and comps store business slowed down a little bit. And then it recovered in the end of August and then we had a very strong September in those brands. So I don't know if there were any long-term decision changes made by those shoppers, but there was a slight reaction to that. It recovered very, very quickly. And that was our experience this time around. And Karl Heinz, can you talk about the status in Europe?

Karl Heinz Salzburger

Yes, absolutely, Omar. You asked the question whether the business is structured differently. So we had 3 legs in the past '08, '09, which is Jeanswear, Sportswear, and Outdoor & Action, and we still have 3 legs now. Well, Timberland is new. So apples-to-apples, what is very different now is the weight. Clearly, outdoor is growing much faster than the others. So the weight inside this portfolio is different now compared to the past. From a geography point of view, clearly in our business the biggest markets are the big 5 businesses: Germany, U.K., Spain, France and Italy. That has not changed. The penetration into this market is bigger. But the big change is that our portfolio has changed compared to 4 years ago, you mentioned. Jeans is lower and Outdoor & Action Sports is now the dominant piece.

Eric C. Wiseman

And, Omar, the only thing I would add to Karl Heinz's is, in the last 24 months, we put a much heightened emphasis on the emerging markets of Eastern Europe and Russia. And we think there's a much bigger opportunity there, we're now structured and organized to capture that opportunity.

Karl Heinz Salzburger

And now that I recall, the other of that which is different is our retail presence, right? We started to push retail initiatives, especially in Vans and The North Face, and Napa where we had much more than we had in the past.

Operator

And we'll go next to Michael Binetti of UBS.

Michael Binetti - UBS Investment Bank, Research Division

So a couple of questions here. Could you tell us what the margins would have been for the Outdoor & Action Sports business if we stripped out Timberland in the quarter? I'm assuming that Timberland's lower 4-wall margins in the direct-to-consumer business shifts the mix in there a little bit. So I'm curious what it looked like excluding Timberland.

Robert K. Shearer

Excluding Timberland, Michael, the margin was 23.5% in the third quarter.

Michael Binetti - UBS Investment Bank, Research Division

Okay. So actually improving on a year-over-year trend?

Robert K. Shearer

So yes, really close to last year.

Michael Binetti - UBS Investment Bank, Research Division

I think in the past, you've told us that about 85% of your fall business for North Face was done on pre-order and the rest is pull from retailers. I think you plan for that. Can you give a comment on how that's tracking versus planned right now? Are you seeing, early in the season, the retailers pulling above the planned amounts?

Eric C. Wiseman

I'll ask Steve to deal with that question from a U.S. perspective because I'm sure that, that comment was made in the context of the U.S. market.

Steven E. Rendle

Yes. So we are, our fall business is trending as planned. We've seen very solid sell-throughs, both in our own stores and in our major wholesale channels. And those rates that we've talked about historically, we actually have a slightly higher preseason to total shipment. And that stays in line this year, and we're seeing good tracking into -- moving those preseason orders into the market place, and we're now coming near that time of season where you start to see the reorders kick in.

Michael Binetti - UBS Investment Bank, Research Division

And you're seeing some of the reorders start to pick up in line with the plan or above the plan?

Steven E. Rendle

We're tracking right as we thought we would be at this time of year.

Michael Binetti - UBS Investment Bank, Research Division

Okay, and if I could just -- maybe, Bob, 1 question, really quickly. If I'm not mistaken, I think Timberland does some of their own manufacturing. Is that right?

Robert K. Shearer

That's correct.

Michael Binetti - UBS Investment Bank, Research Division

And I don't think, in the past, you have acquired brands that do much of their own manufacturing. obviously, as a legacy manufacturer, you guys have some core competencies there. As you look through the manufacturing operations, is that something may be where you think yourself -- and this is an area where we could add more -- we could take more costs out for this brand relative to brands we have in the past?

Robert K. Shearer

Actually, it's kind of interesting, Michael, in terms of the opportunities that we see from a gross margins standpoint. From everything we see, the Timberland group, they are very, very good at the manufacturing side. Once again, from everything we've seen in the limited amount of time is very efficient within the plants. What we do see is an opportunity more around what we'll refer to as the operations side. In other words, managing inventories, how much we make, when we make it, how far we get ahead or not. Those are the kind of things where we think we can bring some real disciplines and improve the overall margins.

Eric C. Wiseman

Michael, actually the question for us, about the owned Timberland manufacturing plant is, how can we leverage that to enable our footwear business in some of our other brands like The North Face or Vans. I mean, is there an opportunity to leverage that expertise, because it's in the Caribbean basin, and improve our business model in our own business. And that may be the big opportunity.

Michael Binetti - UBS Investment Bank, Research Division

That's a great question. Do you have an answer to that?

Eric C. Wiseman

No. But you get 4 shots a year at asking me. So we'll talk sometime later.

Operator

And we'll go next to Michelle Tan of Goldman Saks.

Michelle Tan - Goldman Sachs Group Inc., Research Division

I was wondering, Karl Heinz made the comment earlier, about this being kind of a unique period for VF and that all of the businesses, even those that have historically not been high-growth businesses, are putting up these great numbers. The color at the individual business level was helpful. But I was wondering if there's anything that you guys are doing differently at a high level, across the portfolio, that's driving some of the accelerated growth in some of these businesses that haven't been growth business before.

Eric C. Wiseman

We're investing more and as you know one of the things, as we look back over the last couple of years is, in 2010, we made the decision to increase our brand investments by about $100 million and then we were keeping at this rate, this year. And we think that's been incredibly important, across our portfolio and across our geographies, to our growth. The other thing -- the reason it's been important is it's been effective. And the reason it's been effective is because we've done terrific consumer insight work to understand exactly how to reach our consumers. Kind of what they're looking for, for us, how our brands and messages differentiate. And it's easy to spend more money. It's harder to spend it effectively, and I think consumer insight work has really guided us.

Michelle Tan - Goldman Sachs Group Inc., Research Division

Great. And that's something that you're even doing in the Imagewear business and with NFL license across the board, in terms of the consumer work and some of the efficiencies that you guys have been able to uncover from a branding perspective?

Robert K. Shearer

Sure, Michelle. A couple of things that we've done is we've really taken advantage of the fact that we've got a terrific merchandising team there and have done a really nice job with the male consumer in the past. And over the last 2 seasons, we've really done a very nice job with the team and the female consumer. And we've seen the portion of our Female Consumer business grow dramatically over the last 2 seasons and we have that plan to continue in the future. So we're fortunate to have that NFL license and very fortunate to have re-signed that license going forward, too.

Operator

And we'll go next to Evren Kopelman of Wells Fargo.

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

Two questions. First on the Timberland, can you tell us a little bit more about their European business? Maybe what are the largest countries, maybe percent of sales from the U.K. or Southern Europe that are more at risk to see a potential slowdown. And then the second question is on the U.S. Jeanswear business. As you look into next year and your cost come down, how do you think about the retailers’ reaction knowing that they know your costs are coming down in terms of them asking for a lower cost to them as well? Kind of how do you think some of those dynamics will play out?

Eric C. Wiseman

Karl Heinz, do you want to provide a little bit of color on the Timberland business in Europe?

Karl Heinz Salzburger

Yes, I can, of course. Timberland has 3 main areas in Europe. What they call Central Europe, which is basically Germany, Austria, Switzerland, the German spoken part. The northern part, which is U.K. and Scandinavia and the southern part, which is Italy, France, Spain, Greece. The largest market, historically has been Italy, for a long, long time. Actually, it's the second-largest market after the U.S. So in a head and head with Japan. So they always had a historical international presence. The second-largest market in Europe is the U.K. So you might answer, you might think the 2 most double markets. But I can tell you the spring bookings Timberland had for spring of '12, Italy and Southern Europe were still growing. So they show good growth. We also monitor, very carefully, the presence of the stores that they have. And, especially in Southern Europe, they have a priority of franchisee stores over owned stores. Big number of franchisee stores. And we monitor that very carefully. So to sum up, 3 big areas. Largest market is Italy. Second-largest is U.K.

Eric C. Wiseman

And Scott, the second question?

Scott Baxter

Yes, specifically, as I mentioned a little bit earlier, we're really -- in 2011 as we saw the cost increasing and when we saw what was happening with cotton, and denim, and fabric, we were really very thoughtful in our approach as to how we were going to going to go ahead and position the brands going forward. And what we did is we did not pass along all those cost to our retailers. And we ate a lot of that going forward. And we had a strategy that we thought would help position our brands going forward with all of our retailers. So we think and we feel very comfortable we're going to hold onto a lot of that pricing going forward in 2012.

Operator

And we'll go next to Mitch Kummetz of Robert Baird.

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

Let's see, First question for Bob. On the gross margin you're saying, for the year, down less than 100 basis points. The big puts and takes there have been product cost and mix. When it's all said and done for the year, what do you think the impact from those 2 items will be? I mean, are you looking at mix? Kind of the benefit of 100 bps and maybe product cost down by 200? And then as we start to think about next year, any reason to think you won't get the same benefit from mix in 2012 as 2011? And then on the cost side, I mean, it sounds like the way cotton is going to flow through the P&L, I mean, is that sort of a net neutral cost in 2012?

Robert K. Shearer

Well, that was a lot. I'm going to try to touch all those points, Mitch. So relative to the full year, yes. What we said was, beginning of the year a little less than 100 basis points. Actually like now, it looks a little better than that. In other words, we were kind of guiding to something like 90 basis point, and looks like the comparison, the reduction could be a little bit less than that. So relative to mix, your question on mix, yes, it's about 100 basis points. That's what it is, and that's -- we started the year, and we said that's been pretty consistent. That's where we've been seeing. And for 2011, it looks like yes, there's going to be about 100 basis points of improvement coming from mix. Let's see. You also talked about product cost, I believe going into next year, was that...

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

Let me ask you this. So if mix is plus 100 bps this year, any reason it couldn't be something similar next year, especially with the Timberland full year?

Robert K. Shearer

Well, as we said when we laid out our 5-year plans we indicated that mix would be a significant factor as we went forward in the overall improvement that we projected, in terms of gross margin. So these large businesses continue to get larger and continue to grow at a faster pace. So we do expect that there will be some -- that the mix benefit will continue whether it's 100 basis points or not, it's a little hard to say. But it will be significant. Retailer's a big component of that as well. So it will continue to be a significant factor as we go forward.

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

Got it. And then if mix is about 100 basis point benefit this year, then cost would probably be something 150 or so drag on this year and then that should dramatically improve next year I would assume, right?

Robert K. Shearer

Yes. And we always talk about this cost net of pricing or it's cost net of price this year looks to be something like 170 basis points, right? So the overall gross margin is down by 70, once again, that's 170 cost net of price, about 100 from mix and that's to the 70.

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

Okay. And then tax and interest expense in the fourth quarter?

Robert K. Shearer

Yes, cash and interest expense. Overall...

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

Tax.

Robert K. Shearer

Oh, tax. Tax in the fourth quarter, let me answer the interest first. The interest in the fourth quarter will be up about $9 million. Obviously, it's related to the financing for Timberland. And by the way, just in terms of throwing out the models, as we look to next year, on a quarter-by-quarter basis, it looks like interest will be up $7 million to $8 million per quarter. So hopefully that helps a bit. In terms of our overall tax rate, in the fourth quarter, looks like just below 26%.

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

And then last question. Karl Heinz, consolidated spring backlog for Europe or pre-books. However you want to talk about it.

Karl Heinz Salzburger

Well, I mentioned we don't really look at that way, Mitch. We look at brand-by-brand. But I can say there, as I mentioned in my press release, most of them are actually up. Both in Europe and Asia.

Operator

And we'll go next to David Glick of Buckingham Research.

David J. Glick - Buckingham Research Group, Inc.

Eric, just a question on price elasticity. You gave us some good color on the mass channel. And I was just wondering, as you look at your business across your brands -- and this is really more of a North American question than globally. Do you see a correlation as you kind of move up the price point ladder and distribution channels where price elasticity -- certainly have you seen the reaction to price increases more muted as you move up your brand ladder and distribution channels?

Eric C. Wiseman

Yes, David. In essence, we have. Clearly, the shopper who shops primarily in the lower channels of distribution is the one who has the smallest amount of discretionary income and they're the most cautious and react the most to price increases. And the other comment I'll make, as a general rule, where we have new products coming out, with no pricing history, those products are just judged based on the value they deliver. And a big part of our business across our channels has that. Differentiated products tend to be able to get higher value. Where everyone I think is struggling the most is in carryover products where prices need to go up. We're seeing the biggest pushback, and that's true on all channels. So there's 3 core dynamics or 2 in our channels. Does that answer your question?

David J. Glick - Buckingham Research Group, Inc.

Mid-tier though, where it is -- maybe not quite as price-sensitive as the mass channel, but it looks like where you've taken a more gradual or moderate price increase strategy relative to your competition, it looks like you're gaining share. I just wonder if that's a fairly accurate observation.

Eric C. Wiseman

Yes. We've said, all throughout the course of the year, that looking at our U.S. Jeans business, we were going to have over 350 basis points of gross margin erosion. And we approached our pricing decisions strategically. We asked ourselves what's the right price point for this product to be at so that it's successful in the channel of distribution that it's in and how does it relate to the other styles that it sits next to. And as Bob said in his comments, he thinks we've been pretty effective and smart about how we did that this year. Which puts us in the path to next year, where we have to make the same kinds of decisions as we approach the back half of the year where no denim prices will be down. And the question there, as Scott mentioned earlier, is how much of the 350 basis points of gross margin erosion do we recover and how much do we reinvest strategically in our brands to continue the success. And I have no doubt that our Jeanswear team will be just as effective as that next year as they were in the past year.

Operator

And that does conclude the question-and-answer session for today. I'd like to turn the conference back over to Eric Wiseman for any additional or closing remarks.

Eric C. Wiseman

No, I just thank you all for your time and interest in our company. We think we have a lot of interesting things going on, and our team is really executing well. See you next quarter.

Operator

And that concludes today's conference, ladies and gentlemen. We appreciate everyone's participation today.

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