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VF Corp. (NYSE:VFC)

Q2 2007 Earnings Call

July 19, 2007, 8:30 AM ET

Executives

David E. Griffith - VP, Integrated Corporate Relations

Mackey J. McDonald - Chairman and CEO

Eric C. Wiseman - President and COO

Robert K. Shearer - Sr. VP and CFO

Analysts

Robert S. Drbul - Lehman Brothers

Brian McGough - Morgan Stanley

Jeffery Edelman - UBS Warburg L.L.C.

Omar Saad - Credit Suisse First Boston

Kate McShane - Citigroup

Rick Patel - Merrill Lynch

Jim Duffy - Thomas Weisel Partners LLC

Angelique Dab - Nollenberger Capital Partners

Robert Samuels - J. P. Morgan

Presentation

Operator

Please standby, we are about to begin. Good day and welcome to the VF Corporation Second Quarter 2007 Earnings Release Conference Call. At this time, all participants have been placed into a listen-only mode and the floor will be open for your questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. David Griffith. Please go ahead, sir.

David E. Griffith - Vice President, Integrated Corporate Relations

Good morning and thank you for participating in VF Corporation's second quarter 2007 conference call. By now you should have received today's earnings press release. If not, please call my office at 203-682-8213 and we'll get you a copy immediately following the call.

Hosting our call this morning is Mr. Mackey McDonald, Chairman and Chief Executive Officer of VF.

Before we begin, we would like to remind participants that certain statements included in today's remarks and in the Q&A session may constitute forward-looking statements within the meaning of federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause the actual results of operations or financial condition of the company to differ are discussed in the documents filed by the company with the SEC.

At this time, I would like to turn the call over to Mackey McDonald.

Mackey J. McDonald - Chairman and Chief Executive Officer

Thank you. Good morning and thanks for joining us. We are very pleased to again report strong results ahead of our prior guidance. With entire industry, it does appear to be a fair amount of restructuring and positioning underway, fortunately the strategy that we initially launched in 2004 has proven to be exactly the right one for these changing times.

In terms of our brand portfolio, we've successfully transformed much of our mix away from lower-growth businesses to higher growth ones. And there's more to come. We've invested in our strongest heritage businesses; Jeanswear and Imagewear to keep them healthy and rolling. And we've had hesitated to exit underperforming businesses such as Intimate Apparel, which we sold in April. And perhaps most importantly, we have demonstrated our ability to successfully identify, acquire, integrate and grow new brands and businesses, including the North Face, Nautica, Vans, Reef, Napapijri, Kipling and Majestic.

We've addressed the changing dynamics in the retail landscape by diversifying our portfolio into powerful authentic lifestyle brands that has substantially strengthened our presence in specialty and owned retail. We put in place the foundation for future growth in such growing and dynamic markets such as China, India and Russia, by leveraging our well established infrastructure in Europe and Asia. Given the strength and diversity of our brand portfolio and our expertise in managing across complex geographies, we are very well positioned to capture significant growth in emerging as well as established international markets.

Our portfolio is in excellent shape today. As we look across our Jeanswear, Outdoor, Sportswear and Imagewear businesses, we see the strongest brands in the industry. We see tremendous opportunities for continued growth in new geographies and product extensions in owned retail stores and in e-commerce. And we see opportunities to round out our portfolio with additional brands and businesses to give us access to new consumers and markets. So we're quite confident about our future.

We continue to look forward to another record year in '07. In terms of our guidance for the second half of the year, some of you might be wondering what changed. We really don't see any specific changes in any of our businesses, but we are simply adopting a cautious approach which we certainly think is prudent, given the cost currents that are pressuring consumer spending. Regardless of how retail and consumer spending trend play out for the balance of the year, it has been proven time and again that authentic brands that are strongly connected to consumers will continue to be in demand.

Our excitement about the quarter was clearly dampened by the loss of one of our great and loved leaders in a tragic automobile accident on Saturday. Mike Corvino, President of JanSport will be missed.

Now let's hear from Eric about the coalition's performance.

Eric C. Wiseman - President and Chief Operating Officer

Thanks Mackey. I'll start today with Jeanswear and we are very pleased to post another quarter of top line growth with total revenues up 3%. That growth was fueled by our international business, which excluding the effects of currency grew by 7%.

Our re-brand in Europe is performing strongly, a result of positive reaction to new products including Lee, works of Denim premium line. We've further expanded Lee's retail footprint with six stores in Europe and now more to come.

In India, we operate store vendor partnership rather than owned model and we expect to double our total Jeanswear store count in India from around 70 at the beginning of the year to around a 140 by year-end. We are also delighted with the continued strong growth we are seeing in China. While still a relatively small business for us, our Jeanswear business there continues to grow at an annual rate of more than 40%.

We recently made some very important leadership changes in both our European Jeans and Asia Pacific businesses. We named Aidan O'Meara who previously headed our International Jeans business as President of VF Asia Pacific, a new position, where he will spearhead the expansion of all VF brands in the region. Aidan is responsible for developing and executing a comprehensive growth strategy for our entire portfolio of brands in the region. In addition, Giorgio Presca was named as President of International Jeanswear succeeding Aidan. Giorgio joins VF from Diesel, where he was the General Manager and was throughout they have him on Board and that will be a key driver of our future success in these important markets.

I also should note, we sold our H.I.S. brand in the quarter, which resulted in the $0.04 per share gain noted in the press release. This brand was still having a good position in Germany, had been underperforming for us over the last couple of years. Total annual revenues of the brand were $34 million last year and the transition of that business should be completed by the end of the year.

On the domestic front, our three primary businesses; Lee, Mass Market and Western Specialty had sales that were essentially flat with prior year levels. In terms of Lee, we continue to see healthy growth in our women's business which has been offset by lower sales in men's, as we've seen a move away from Carpenter style of jeans where we were strong. However, we are expecting an improvement in our men's business in the back half of this year as we introduce new programs and styles.

On the Mass Market side, our men's business is performing very strongly, up in the single-digits. There our female business is weaker. Some of our key customers have been... seen a slowdown in their traffic in their overall women's business. All in all, we are quite pleased with the performance of our domestic jeans business and are looking forward to a year that's inline with our target of low single-digit growth.

Jeanswear operating margins improved by more than 150 basis points to 15.5%, driven by a substantial improvement in the profitability of our International Jeanswear business.

Turning next to Outdoor, this business continues to have great momentum. As evidenced by the 20% revenue increase in the quarter and as we have seen in past quarters, the growth is taking place across most of our brands. North Face and Vans aren't the only strong growth businesses within Outdoor; in fact the North Face, Reef, Eastpak and Napapijri are growing in excess of 30% in the quarter.

Our domestic growth is tempered by lower revenues in JanSport, due to a shift in the timing of product shipments from the second to the third quarter. Internationally, our Outdoor business continued to achieve exceptional growth, both top and bottom line. We remain very, very positive about all the key growth initiatives underway in our Outdoor brands. The North Face remains focused on growing within its current limited distribution base with specific initiatives in place in footwear, owned retail stores, sportswear and emerging markets.

Vans is growing its core footwear business through wholesale, retail store expansion and e-commerce. We are also encouraged by the performance of Vans Apparel, which is a key growth driver for the brand. Reef is driving growth through innovation within its sandal business.

We recently introduced our girls sportswear and swim apparel line of the trade, positive reviews and are looking forward to launching a retail next spring. And internationally, the Reef brand was just getting started but we think there is great growth potential and our initial results are phenomenal.

Napapijri continues to be the hot brand in Europe and we think it has strong potential in Asia, particularly Japan. Whereas to Kipling, our growth is accelerating with very positive reaction to our newest product launches and comp store sales running over 20%.

Outdoor operating income was 25% in the quarter, with about a half point improvement in margin.

Now in terms our sportswear business, revenues grew a very healthy 9% in the quarter. On a year-to-date basis, our Nautica men sportswear business is up low single-digits on a comp store basis across its U.S. department store customers. We had a solid Father's Day driven by the Deck shirt launch. The Nautica retail business in our owned stores and upscale outlet centers grew at a high single-digit rate with comp store sales growing at a mid single-digit rate. We have placed women sportswear in 31 outlet doors and that business is on plan.

Our women's business remains a work-in-progress and performance continues to improve. We are committed to getting the model right and we will continue to take a slow and steady approach to building this business overtime.

Our Kipling business in the U.S. was still very modest, is gaining great traction. We are bidding outdoor expansion targets and expect to be in 260 department store doors the following holiday. We are seeing great enthusiasm for our Fergie for Kipling line. Yes, that is Fergie, a black-eyed peas name, which we've recently launched. And finally, our John Varvatos brand continues to expand rapidly with sales up approximately 50% in the quarter. The performance of the John Varvatos Star USA line has been very strong at retail. And the performance of our six owned stores has also been strong, with our newest store in East Hampton running well ahead of plan. Sportswear operating income increased 3% in the quarter, with operating margins remaining above 12%.

And I will conclude with Imagewear, revenues also grew in the quarter, up 22%. The gain resulted from a February acquisition of Majestic Athletic, and we are very pleased with Majestic's performance. We finalized our extension with Major League baseball to 2014, giving a solid platform for continued growth. The integration is proceeding ahead of schedule, there is no hiccups there.

Excluding Majestic, Imagewear revenues were down slightly in the quarter. Some of the decline is due to the exit of the commodity food business and in addition, we experienced the timing of some stores sets being moved back due to the cautious retail environment. On the positive side, our protective and government business is growing strongly. We do expect positive organic growth to resume in the third quarter.

Operating income declined 10% with margins down 400 basis points from very robust levels last year, reflecting a less favorable business mix. But as noted in the release, operating margins are expected to show substantial improvement in the second half of the year.

That wraps up our discussion about coalition results and now I'll turn the call over to Bob Shearer, who will take us through the financials for the quarter.

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

Okay, thanks Eric. Okay, let's start at the top, total revenues grew bit over 12% in the quarter with growth across all coalitions, as Eric just discussed. Majestic and Eagle Creek acquisitions contributed a total of $54 million to revenues in the quarter. If you exclude acquisitions, our organic growth rate for the quarter was quite strong at 8%.

Now, you'll recall that our previous guidance for revenue growth in the quarter was 14%, and a variety of factors, no one single large issue account for the difference. Part of the difference is represented by a shift in timing of shipments, particularly in our Outdoor and active wear businesses. Also, our life and sports apparel replenishment business was slower than anticipated. This business is expected to show stronger comparisons in the second half of the year.

Gross margins were down slightly to 42.9% from 43.3%, partly due to the H.I.S. sale. A small charge worth 20 basis points related to the sale was recorded in the cost of goods sold. Also, Imagewear gross margins were lower than those of their unusually strong prior year second quarter.

Operating income rose 16%, operating margins up 30 basis points to 11.1%. Now, as noted in the release, the increase includes the benefit of the H.I.S. gain. On a most comparable basis, where excluding this gain, operating margins would have been 20 basis points lower, reflecting the lower Imagewear operating margins.

Now I'd remind everyone that this is our seasonally smallest quarter and so the margins are not indicative of what we expect for the full year. For the full year, we continue to expect an approximate 40 basis point improvement in operating margins, nearing 14% level. For the third quarter, we expect our operating margins to be comparable to the prior year quarter, which was 15.9%.

After interest and taxes, income from continuing operations for the quarter was up 18%, with EPS from continuing operations up slightly less or 16%, due to higher average shares outstanding and a slightly higher tax rate. Now reflecting the impact of discontinued operations resulting from the sale our Intimates business, net income was $81.7 million or $0.72 per share. Now, related to discontinued operations, not all assets related to the sale of our Intimates business have been sold through the end of the second quarter. And considering the anticipated gain of approximately $0.10 per share, related to assets to be sold during the second half of the year, the net impact on the full year from this discontinued business is estimated to be a loss of $0.07 per share.

In terms of shares outstanding, we repurchased 2.1 million shares in the quarter, thereby concluding the buyback related to utilization of proceeds and the sale of our Intimates business. The total number of shares repurchased in the second quarter was 4.1 million.

Now, in terms of our balance sheet and cash flow, accounts receivable were up 20%, the higher increase in AR versus our sales gain during the second quarter was due to the strong sales in our European businesses, where payment terms are substantially longer than our other businesses. In fact, our sales in Europe during the quarter increased by 33%.

The inventories rose 17%, it's a bit higher than our guidance for the third quarter sales increase of 12%. The difference is explained by higher levels in certain businesses to better service our customers during our upcoming heavier shipping periods. By year-end we expect inventory days to be in line or below prior year levels.

Our balance sheet remains very strong. Debt as a percent of total capital was 20% at the end of June compared to 25% at this time last year. Obviously, our balance sheet presents us with opportunities for sales and earnings growth. And we continue to expect a very healthy year of cash flow from operations which should approximate $625 million.

In terms of our guidance for the rest of the year, as Mackey mentioned, we are being cautious in our outlook, we've chosen to keep our full year guidance of 12% increase in both revenues and earnings intact. Looking forward to a record third quarter with revenues and EPS expected to increase 12% and 10% respectively. And the reason EPS will grow to slightly lower rate than revenue relates to our tax rate, which will be higher in the third quarter. Last year's rate reflected some tax credits that pulled the rate down a bit. In fact, operating margin should be strong and stable in the quarter nearing the 16% level as I previously mentioned. Mackey?

Mackey J. McDonald - Chairman and Chief Executive Officer

Okay, thank you Bob. That summarizes our very positive results and our very confident outlook. We will now open it up for your questions.

Question And Answer

Operator

[Operator Instructions]. And our first question comes from Bob Drbul of Lehman Brothers.

Robert S. Drbul - Lehman Brothers

Hi, good morning.

Mackey J. McDonald - Chairman and Chief Executive Officer

Good morning, Bob.

Robert S. Drbul - Lehman Brothers

A couple of questions for you. First, overall when you look at the SG&A expenses for the quarter, can you just may be discuss, how the numbers played out versus the differences in last year versus planned. And it just seems like it came in a little bit better than expected and sort of where that performance really came from and aggregate... was it marketing? Was there a change in marketing spends or anything like that that is worth noting?

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

And...those kinds of changes Bob, the most important thing in the quarter was the gain on the H.I.S. transaction, had a fairly significant impact on the quarter alone. In fact it reduced the expenses by about 60 basis points, okay. So that was applied, that was a big factor.

Robert S. Drbul - Lehman Brothers

Okay. And can you elaborate little more on the inventory levels up 17%, you've talked about just heavy shipping and some of your customers trying to maintain it that way. Can you just maybe give us a little but more color around the products that are in there? Is it basic product, is there more of any of the fashion element product in that as well?

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

Yes, no it is more basic product. And what we did was, we just peeped up the levels a bit to make sure that we were servicing the needs. Last year we could have used a bit more frankly, so again to assure service, more of that is in Outdoor as well. It's a bigger piece, so again yes, we're very comfortable. There is no issue relative to the inventories. They remain very, very clean. We just increased the levels a bit. And as I said, by the end of the year in other words, after these heavier shipping periods, by the end of the year, our days you will see better comparisons on that point in time, after these part of shipping periods.

Robert S. Drbul - Lehman Brothers

Okay, great. Thank you very much.

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

You bet.

Operator

And we now have a question from Brian McGough of Morgan Stanley.

Brian McGough - Morgan Stanley

Thanks a lot. I guess just... I would say that I encourage you to have Fergie in your next analyst meetings. One thing I wanted to ask about is that over the past quarter, I guess Wal-Mart has cut their U.S. square footage growth from 8% down to 4%. And it sounds like, you guys now in your business are really starting to buy bit a lot of infrastructure investments over there and it's helping margins. But as you look out over another year or two years, as it relates to the U.S. Jeans space specifically, what do you think and as far as how the overall market dynamics might change?

Eric C. Wiseman - President and Chief Operating Officer

In the Mass channel, Brian?

Brian McGough - Morgan Stanley

Yes, yes.

Eric C. Wiseman - President and Chief Operating Officer

Yes. I mean we... our target for growth in the Mass channel as well as for our domestic denim business is kind of low single-digits. And we are confident that with the team we have in place and the brands that we have in place and the opportunities we have to extend our brands to new categories that we can accomplish that, while there are market changes. And we have been doing that pretty consistently as the markets has changed and our customers have changed strategy over the last two or three years. And there have been substantial changes in the last two or three years and we have delivered that. We think we can continue to deliver that going forward.

Brian McGough - Morgan Stanley

And then I guess just another question is that on the European business, I guess not only Jeanswear which is doing great, but also Outdoor. There is a currency benefit there and I guess a lot of people might think that you are just going to flow all that right through the P&L in printed and I am wondering how much of that you are doing versus how much you are going to take and actually reinvest back into the business in order to fuel growth in the outer years?

Eric C. Wiseman - President and Chief Operating Officer

I don't know, I'll let Bob think about it if there is a specific number. I would tell you that our emphasis in our international business is to have them be a key growth driver for us going forward and we were making substantial investments in our brands there and in owned retail to continue our growth and that is our number one priority. And as part of the international team over there, they are also responsible for Asia where we are also making substantial investments. We make healthy operating margins from our international business and... already, and as we are getting gains we are trying to pile them back and secure our future.

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

The only thing that I'll add to that is just a little slightly around that, the currency benefit in the quarter was about a penny a share.

Brian McGough - Morgan Stanley

Okay. And then I guess lastly Bob, on the balance sheet I mean it just looks exceptional. We are starting to see a lot of companies now however, last year companies those are the world who from purely increasing their debt leverage even if they sacrifice rating and they are returning their capital back to shareholders and you guys are starting to go the other way I guess as your leverage comes down and down. Can you talk just about how you guys have been... if you have been thinking about that whether it be at the Board level or amongst yourselves and whether that might change at all over the upcoming 6 to 12 months?

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

Brianright now, as we've been very, very consistent with this, we continue to see a number of opportunities related to investing our dollars against acquisitions, again which has been what we've been saying and we continue to look at those kinds of opportunities. So at this point in time, we aim to continue our shareholders are best served, we think that our track record related to the acquisitions has proven that. So we are not, that's the way we would like to put our balance sheet to work for us against the kinds of investments that will provide us with long term top line and bottom line growth.

Brian McGough - Morgan Stanley

Okay. Okay guys, thanks a lot

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

You bet Brian.

Operator

Our next question comes from Jeffery Edelman of UBS.

Jeffery Edelman - UBS Warburg L.L.C.

Thank you. Good morning. Two areas of questions; one, Eric, you've talked about the good performance in retail overall. Could you give us some sense how your recent store openings have been performing kind of on an overall basis; in line, a little better and what your are learning from some of the opening of some of the newer types of stores?

Eric C. Wiseman - President and Chief Operating Officer

That they got to... Jeff, that's a broad-based question, we are opening stores in lots of places. I will say that in total, our owned retail stores get to our targeted operating margins, that's one of your questions very quickly. So from a profitability standpoint, the stores that VF has been opening over the last few years, by and large have been successful and collectively are achieving our corporate targets for operating margins. When it comes to our performance basis, because of the kind of stores we are investing in primarily and our biggest investments have been in Jeanswear in Europe and Asia and Vans in the U.S. and in the North Face, that's where the... that's the biggest investments in stores at comp. Those stores are achieving comp store growth rates in the mid single-digits, I am sorry, mid double-digits.

Jeffery Edelman - UBS Warburg L.L.C.

Okay, great, thank you. And Bob, I believe at one time you had said you were comfortable with a longer term target of long term debt to capital ratio of around 40%. As you look at your businesses and cash flow now, what do you think would be an appropriate target and then just a follow up to that, would you expect to be maintaining the current dividends payout ratio? Thank you.

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

Yes. Yes, Jeff you are right on the 40% and we actually will continue to believe that the 40% is the right target for us, that's how we look at it internally, but what we have also said is given our very, very strong cash generation that's for the right opportunities, we could and have, not often but have in the past levered up a bit over the 40% ratio. So we still overall think that's the right opportunity to the prior question, we are well below that at this point in time and that's obviously what creates the opportunity for us today.

Related to the... related to the dividend, what we've indicated there is that we will maintain our payout ratio above the 40% level. At the time of the increase, it was represented by about 44% was the payout. That was the payout level, so again committed to keeping it above 40%, so the increase should be proportionate to do that, yes.

Jeffery Edelman - UBS Warburg L.L.C.

Okay thank you.

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

You bet.

Operator

Our next question is from Omar Saad of Credit Suisse.

Omar Saad - Credit Suisse First Boston

Thank you. Good morning.

Mackey J. McDonald - Chairman and Chief Executive Officer

Good morning.

Omar Saad - Credit Suisse First Boston

I wanted to ask about the environment you kind of referred to some of your expectations or at least what you are baking in your outlook for the rest of the year, some more cautious expectations about kind of the consumer retail spending environment. What do you seeing out there, I mean you guys are such a big company with that there are such a so many different channels and markets? Can you kind of elaborate where you are seeing strength and where you seeing weakness and what your biggest areas of turn off from an environmental perspective in terms of the spending environment?

Mackey J. McDonald - Chairman and Chief Executive Officer

I think I got your question, you kind of faded in and out but just addressing the environment overall, we really are seeing no change in our... specific changes in our existing businesses, existing brands. We are certainly seeing and hearing as you are about the consumer confidence levels or some of their discretionary spending issues, pressures on their spending and we are hearing about retailers being cautious about inventories going into the bad schools. So those are the things that lead us to be a little more cautious, nothing really specific with our business. So as we said, very healthy so far this year and healthy as we look out for the rest of the year, feel very good about the year actually.

Omar Saad - Credit Suisse First Boston

So you are not seeing it but kind of baking it in from a conservative... conservatism standpoint on in terms of your outlook?

Mackey J. McDonald - Chairman and Chief Executive Officer

Exactly.

Omar Saad - Credit Suisse First Boston

Okay. And then one follow up question on earlier question on the SG&A spend, even if you add back kind of the one-time gain on the gain on sale this quarter, it looks like you still got a bit of leverage in the SG&A and kind of in past quarters you've made comments like we are really taking this opportunity to strengthen our business to invest behind our key growth vehicles. And if you kind of look over the several quarters, you have been... that's been one of the reasons why you have not been getting leverage on your sales growth, which is great investment behind those growth areas. But just want to kind of wanted to reconcile what we saw this quarter even after you add back the gain and are you looking to get a little bit more leverage on the spend going forward?

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

Well, we did in this quarter and again this is a little bit of an unusual quarter. As you know, it's our lowest revenue quarter for the year. But I can tell you in the... we actually drove by a higher percent in those areas that are experiencing higher growth rates. So from a mix standpoint, there was actually about an 80 basis point increase in the SG&A relationship, just caused by the mix. So we are continuing to invest heavily in those opportunities. But I can't tell you those just that our rate in the quarter in other words more on heritage business was down a bit.

Omar Saad - Credit Suisse First Boston

Perfect thanks.

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

You bet.

Operator

And we now have a question form Kate McShane of Citigroup.

Kate McShane - Citigroup

Good morning. Thank you. Is the H.I.S. divestiture sign that you're looking for other opportunities to divest brands?

Mackey J. McDonald - Chairman and Chief Executive Officer

Other opportunities for what, I'm sorry.

Kate McShane - Citigroup

I am sorry, to divest brands. Should we read any thing into the H.I.S. divestiture as maybe a slight change in strategy to look as divesting more brands out of your portfolio?

Mackey J. McDonald - Chairman and Chief Executive Officer

It was getting a lot bit of a broken transmission here, but as far as divestitures we continue to look across our businesses. We certainly don't see any large pieces of our business now that aren't performing. As we've talked about all of our businesses are performing, but within those businesses we look such as the H.I.S. brand that we recently talked about. We continue to look at smaller pieces of the business that aren't performing and if the return on investment required to get them up to our performance levels, we will continue to have some divestitures, but nothing that we see major at this point.

Kate McShane - Citigroup

Okay, thank you.

Operator

Our next question comes from Virginia Genereux of Merrill Lynch.

Rick Patel - Merrill Lynch

Hi this is Rick Patel in for Virginia. Thanks for taking my question. So, for EPS in the third quarter, I know you're expecting an increase of 10% over last year but, if I recall correctly, last year you're opening up some distribution centers for North Face. So I would have thought that there would have been an easy compare there so, taking into account there is a tax rate issue, are there any other investments going on in any particularly areas?

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

So you are speaking specifically related to the margin or to the EPS increase. The EPS increase, just to speak to that, is being held down by some tax credits that we had in last year's third quarter, okay. So otherwise, you'd see a stronger comparison on EPS line, just $0.03 or $0.04 worth. So again these were credits realized and recognized in the last year's quarter that don't repeat in this year's third quarter.

Rick Patel - Merrill Lynch

Okay great. And can you talk a little bit about idle capacity, your manufacturing centers, does your outlook take into account any idle capacity as retail may be pushes back some orders or changes some of their buying patterns?

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

Yes, what happens relative to our own manufacturing, we actually use... we use other pieces of our total sourcing scheme to balance out our needs. So we keep our plants running full, so if we see any reduction that will come out from somewhere else, not in our own plants.

Rick Patel - Merrill Lynch

Okay great. And just lastly, can you just give us an update on the door count specifically Vans and North Face?

Eric C. Wiseman - President and Chief Operating Officer

On the numbers of doors that we have?

Rick Patel - Merrill Lynch

Yes.

Eric C. Wiseman - President and Chief Operating Officer

I will tell you that for this year, I am not sure I have a total door count here in front of me. I know that for this year, we are opening 19 Vans doors this year and we are going to open an additional 6 North Face doors, bringing that total count to around 24. For the full year, we are going to grow about 600 doors.

Rick Patel - Merrill Lynch

Okay, great. Thank you very much.

Operator

We have a question now from Jim Duffy of Thomas Weisel Partners.

Jim Duffy - Thomas Weisel Partners LLC

Thank you, good morning.

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

Good morning Jim.

Jim Duffy - Thomas Weisel Partners LLC

Couple of questions on the Jeanswear business. Can you speak specific to the inventories in the Jeanswear business, Bob?

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

Yes, the inventories overall in Jeanswear actually are in pretty good shape and relatively consistent with where they have been. So again, no... really not an issue there, and no issues relative to quality of the inventories or any thing like that.

Jim Duffy - Thomas Weisel Partners LLC

Okay. And then relative to your Jeanswear sourcing, there was a recent report that you are closing a Malta plant. Can you speak of the geographic mix of your sourcing as it stands now and any opportunities for the consolidation of sourcing going forward?

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

Yes. That the Malta plant was totally producing for our international jeans business. So, that production will shift to some lower cost locations actually around the globe. We try to spread that out pretty well.

Jim Duffy - Thomas Weisel Partners LLC

Is there a lot of opportunity remaining for that to continue to happen with other plants around the world?

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

Not so much actually, not so much from that standpoint relative to our owned manufacturing. At this point in time, we are pretty pleased with what we have in our... our owned plants continue to give us a benefit over opportunities or cost that are available elsewhere.

Jim Duffy - Thomas Weisel Partners LLC

Okay. And then Bob, you mentioned some thing that was interesting, the impact of your international growth on the working capital metrics, particularly their receivables?

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

Right.

Jim Duffy - Thomas Weisel Partners LLC

As this international continues to grow as a percent in the mix, would you expect that to continue to have an inflationary impact on DSOs or is there some offset there that can help you work down receivables?

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

Yes, it was a particularly strong quarter in terms of our European growth, so we had an unusually strong impact overall. As our European business grows, however it would push the days up a bit. But again, the difference that we saw in this quarter, given the 33% growth in Europe was unusual, it was stronger than we'd expect to see on a go forward basis. But yes, overall the days as our European business does growing, becomes bigger for the overall mix and we have said that we expect our international businesses could represent 30% of our total in just a couple of days or days could expand a bit.

Jim Duffy - Thomas Weisel Partners LLC

Very good. Thanks very much.

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

You bet.

Operator

We have a question now from Angelique Dab of Nollenberger Capital Partners.

Angelique Dab - Nollenberger Capital Partners

Good morning.

Mackey J. McDonald - Chairman and Chief Executive Officer

Good morning.

Angelique Dab - Nollenberger Capital Partners

As you look to the back half of the year, what's the percentage of the business that you expect to do on a replenishment basis and what is your assumption for that replenishment sales incorporated in the top line guidance that we received today?

Mackey J. McDonald - Chairman and Chief Executive Officer

As we look at replenishment overall, we are somewhere in the 50% area with our replenishment in our heritage businesses and then a lot of our lifestyle businesses are much less from a replenishment standpoint, more a one-time order basis.

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

But not a significant change anticipated over the second half of the year versus what we are seeing.

Angelique Dab - Nollenberger Capital Partners

Okay. Thank you.

Operator

[Operator Instructions]. We'll take our next question from Robert Samuels from J. P. Morgan

Robert Samuels - J. P. Morgan

Hi, good morning. Can you just talk quickly about the current acquisition environment and sort of how you guys view things going forward? Are you still looking to increase your exposure in the direct business?

Mackey J. McDonald - Chairman and Chief Executive Officer

Yes, as far as the environment continuation of the same would be the way I would describe it, still very competitive, still lot of private equity money out there, at the same time we do feel that there are opportunities that fit us extremely well. Our focus continues to be lifestyle brands, particularly brands that are targeted in the areas that we don't currently have a strong position in either categories, in the Outdoor or Sportswear area. We also are looking for global brands, we are looking for brands that have growth potential, we are not just bulking it up, but we are looking for brands that can grow at half single to low double-digit rates after the acquisition. And direct... either direct capabilities or the potential to be a direct to consumer brand is another criteria we look at.

Robert Samuels - J. P. Morgan

Okay. Thanks very much.

Operator

And at this time we have no further questions from the phone line. I will turn the conference back over to Mr. Mackey McDonald, for any closing or final remarks.

Mackey J. McDonald - Chairman and Chief Executive Officer

Okay. Thanks for joining us today. As I said, we are very pleased with the results and very confident about the future of the VF Corporation. Thanks for joining us.

Operator

That does conclude today's conference. We thank you for your participation. Please have a good day.

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Source: V.F. Corporation Q2 2007 Earnings Call Transcript
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