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VF Corporation (NYSE:VFC)

Q2 2008 Earnings Call

July 15, 2008 4:30 pm ET

Executives

Jean Fontana

Eric C. Wiseman - President and Chief Executive Officer

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

Mackey McDonald - Chairman

Analysts

Robert Drbul – Lehman Brothers

John Shanley – Susquehanna Investment Group

Mitch Kummetz – Robert Baird

Omar Saad – Credit Suisse First Boston

Todd Slater – Lazard Capital Markets

Robert Ohmes – Merrill Lynch

Jared Orr – Morgan, Keegan

Christian [Blue] – Thomas Weisel

Operator

Good day everyone and welcome to the VF Corporation’s second quarter 2008 earnings conference call. (Operator Instructions) At this time I will turn the conference over to Jean Fontana.

Jean Fontana

Thanks for participating in VF Corporation’s second quarter 2008 conference call. By now you should have received today’s press release. If not please call (203) 682-8200 and we’ll get you a copy immediately following this call. Hosting the call this afternoon is Eric Wiseman, President and CEO of VF.

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

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

Eric Wiseman

I am delighted to be here to discuss another record quarter in both revenues and earnings per share for VF Corporation. As I have done in the past I will keep my comments confined to those areas we think are of the greatest interest to our audience today and then I’ll turn the call over to Bob who will provide his comments on the financial results.

My first comment relates to the overall environment and VF’s performance within that environment. There continues to be a huge amount of concern out there about how the rest of the year will play out, speculation about conditions deteriorating even further and skepticism about companies’ ability to meet let alone beat their numbers.

Now all along we have shared this concern. From the beginning of the year we have talked about how we expect the difficult conditions to persist throughout the year and yes conditions have been even more difficult than we could have foreseen and we are affected by this environment. We have areas of our business that have not performed as strongly as we had planned, as all of you are aware.

Adding to the picture is rising cost inflation. In response we have had to tighten our belts and cut costs, buckle down on inventory and focus in an even more disciplined way on our execution in every area. Make no mistake, it is tough out there but it is in times like these that the VF business model really proves itself. No, we are not immune to what is going on in the market but we did deliver 11% top line growth and much better than expected earnings in the second quarter. After carefully reviewing our plans for the back half of the year we are confident in our ability to achieve 2008 revenues of approximately $7.8 billion, an increase just over 9% and we have increased our earnings per share growth target from 10% to 12%.

Now there are several reasons why we continue to perform well in today’s environment. It starts with having the right brands. We have been truly fortunate to have made some great acquisitions and to make these acquisitions pay off for us. Brands like the North Face which chalked up a 40% increase in revenues this quarter or brands like Vans up 14%. We also have great heritage brands like Wrangler that continue to generate strong profit and cash flow.

We continue to invest in new brands that have a very bright future like Seven for All Mankind, Lucy, Kipling and John Varvatos. Most recently we purchased 1/3 of the shares of Mo Industries which owns the Splendid and Ella Moss brands. We have an option to acquire the remainder of the business early next year which would allow us to bring two more great brands into our company.

The second strength of VF’s model is our diversity. We embrace diversity. Diversity in brands, diversity in channel distribution and perspectives and geographies and we have demonstrated we can successfully manage all the complexity that comes with it. Two important elements of our diversity that are proving particularly beneficial to us this year are international and owned retail. As you saw in the release our international revenues rose 23% in the quarter with 29% growth in our international outdoor business and 14% growth in our international jeans business.

Even excluding the benefit of foreign currency translation our international revenues were up a solid 8%. A question I expect many of you have relates to what we are seeing today in our international markets. There is no question that there are pockets of weaknesses overseas and that conditions are more difficult now than they were at the beginning of the year.

Again, we are fortunate that we have such strong brands that continue to attract consumers and we are fortunate that our investments to build businesses in emerging markets such as Asia, Russia and South America are paying off helping to offset more challenging conditions in parts of Europe.

We expect these soft conditions to persist. We also believe our international business can grow 17% in the second half of the year and will be up 19% for the full year. Also noted in the release was the fact our retail revenues were up 15% in the quarter. We continue to be extremely pleased by how strongly many of our store retail concepts are performing. The North Face and Vans stores in particular are experiencing strong retail sales growth driven by both new store openings and healthy comp store increases.

We also noted we are seeing double-digit retail revenue growth in our Kipling, Napapijri, John Varvatos and Lee brand retail stores. The first half of 2008 we opened 38 stores across our brands and we anticipate opening over 90 stores in the full year. For the second half of the year we anticipate continued strong growth in our retail revenues of over 20%.

Brands and diversity are important components of our model. Another is execution. I will quote our Chairman, Mackey McDonald, who has repeatedly said, “While brilliant ideas are not uncommon, brilliant execution is rare.” I’m extremely proud of our associates’ success in executing our growth strategy. The VF of today bears little resemblance to the VF of a decade ago because we not only laid out a plan to transform our business model, we executed it. Today in extremely difficult business conditions we continue to execute.

As I look at the balance of the year I am cautious and know it will be far from easy. I also remain confident about our company’s prospects not only for this year but the years to come as well.

Now let’s hear from Bob Shearer on the quarter’s financials.

Robert Shearer

We included a fair amount of detail in today’s release so I’ll keep my comments to just the highlights. Starting at the top we achieved an 11% increase in revenues in the quarter which was actually a bit better than our guidance of 10%. Once again, outdoor momentum provided us with upside in the quarter and image wear also contributed to the better than expected performance.

We indicated we expected a 100 basis point improvement in gross margins in the quarter and that is pretty much where we came out. In terms of operating margins we did achieve better than expected operating margins in the quarter which contributed to the better than expected earnings per share gain.

Now you will recall last quarter we talked about our expectations for operating margins around 9% and that outdoor margins in particular were going to be down from the prior year’s quarter due to spending in a variety of areas. Outdoor margins in fact declined only slightly in the quarter with a decline due mostly to the seasonality of our growing retail business. We did proceed with most of the investments we had planned.

Fortunately higher than expected revenues and strong gross margins translated to additional profits that largely offset the spending. As we indicated last quarter outdoor margins should increase for the full year 2008 driven by solid improvement in the second half with particularly strong comparisons in the fourth quarter which is the seasonally most important quarter for our retail business.

While we are on the subject of margins I’ll make a comment about margins in our other coalitions. Jeans wear margins were down 340 basis points in the quarter. As explained in the release, 110 basis points of the decline can be attributed to the absence of the gain that we had in last year’s second quarter related to the sale of a business. Another 50 basis points of the decline relates to the cost saving actions we referred to in the release which primarily resulted from the closure of a higher cost manufacturing plant.

These actions, the cost of which in the quarter was $3 million will benefit future profitability by nearly $6 million per year. In addition the jeans wear margins were impacted by a disproportionate effect of foreign currency translation in revenues versus profits considering the seasonally lower second quarter for international jeans operations.

As indicated in the release we do expect strong and stable jeans wear margins in the mid teens for the full year. I should note the jeans wear margin comparisons will be particularly strong in the fourth quarter as you recall that last year’s fourth quarter operating income reflected unusual operating expenses amounting to $8 million which we do not expect to repeat in this year’s fourth quarter.

Now in terms of sportswear margins, as anticipated they were down in the quarter. Most of the decline was related to the Nautica volume decline which came from two sources; the loss of a men’s sportswear customer last year and the exit of our women’s wholesale business. Otherwise Nautica revenues would have been about flat with the prior year’s quarter.

We indicated in the release that sportswear margins should improve to double-digit margins in the quarter. Coalition’s margins should be just below 10% in the third quarter and we expect margins recovering in the low to mid teen levels in the fourth quarter. Now you will recall that in last year’s fourth quarter sportswear margins were depressed primarily due to very high levels of promotional activity in our Nautica outlet stores. We are very confident the issues we had last year have been corrected.

In addition, last year’s margins were impacted by the losses from our women’s sportswear business which won’t be a factor in this year’s fourth quarter considering our exit from the women’s wholesale business earlier this year. As a point of reference our core Nautica men’s wholesale sportswear business has consistently been generating margins in the mid teens and we look forward to finally getting back to more normal operating margins for our sportswear coalition.

The contemporary brands margins were quite strong at 16%. In fact margins were better than we had anticipated another reason for the stronger than expected second quarter earnings. Image wear too had margins that were a bit stronger than we had anticipated due to higher volume and cost control initiatives.

Just to summarize second quarter operating margins they declined in the quarter from prior year levels due primarily to changes in our business. Specifically the seasonality impact of our growing retail business, lower sportswear profitability and the aforementioned items impacting the comparisons within jeans wear but were much better than anticipated due to stronger performance in outdoor, contemporary brands and image wear as well as tight management of costs throughout our businesses.

Looking at the full year we continue to target an increase of operating margins of approximately 30 basis points. We expect relatively stable margins in the third quarter and then a substantial improvement in operating margins in the fourth quarter. I’ve touched on some of the items which will benefit fourth quarter margins but just to summarize, first, fourth quarter is seasonally the most important period for our fast growing retail business which enjoys operating margins that are well above our corporate average in the fourth quarter.

Our retail business will represent a bigger percent of our total business compared to last year’s fourth quarter. Second, we are looking for substantial improvement in sportswear margins. Third, you’ll recall that last year’s fourth quarter jeans wear operating income and margins reflected unusual expenses that totaled $8 million so our jeans wear margins will have much more favorable comparisons this year.

Turning to our tax rate in the quarter at 28.5% it was well below that of the first quarter reflecting the favorable tax resolutions noted in the release. This related to the outcome of audits every several tax years particularly in international jurisdictions.

Which brings us to the bottom line. We originally anticipated the decline in our second quarter earnings per share so we are very pleased that we in fact beat last year’s number by $0.01. To be sure the tax resolutions helped us by $0.07 per share but the quarter also included $0.04 worth of expense reduction activities.

Earlier in the year we indicated our intent to repurchase 2 million shares in 2008 which we completed in the second quarter. We have 3.2 million shares remaining in our current authorization. In terms of our balance sheet to reiterate what we said in the release inventories rose by 10% in the quarter but more than half of the increase was due to the company’s acquired in the second half of 2007 where days are considerably higher than VF averages.

Our inventories are in very good shape throughout all of our coalitions as this has been and will continue to be an area of intense focus for us. As Eric indicated earlier, we feel very good about the balance of the year. Despite the headwinds our brands are performing and our top line is solid. We have confidence in the growth we expect in our retail and international businesses and in our ability to manage costs and inventories to maintain our strong profitability, drive high cash generation and fuel future earnings growth.

Eric Wiseman

Before we turn the call over to Q&A I’d like to give Mackey the opportunity to say a few words in closing. Mackey is retiring effective August 1 after 25 years with the VF Corporation including the last 12 as CEO and the last 10 as Chairman of our Board of Directors. He is a tough act to follow for sure. Because of his leadership we are in a very strong position to both competitively and financially succeed in the years to come.

Mackey McDonald

I would like to add my congratulations to our VF associates for an outstanding performance in such a challenging environment. My thanks to Eric and the VF management team for building a diversified business model and brand portfolio that continues to grow consumer demand and margins even with these headwinds.

Also my thanks to the many friends we have in the financial community whose analysis and challenges for these many years have inspired us to constantly work to transform our business model and we are proud of the results. I will miss the exchange of ideas but the process will continue and the confidence in the VF business model will continue to grow.

Eric Wiseman

At this time we will open it up to your questions. If any of you have lots of questions for Mackey I know he’d love to take them.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Robert Drbul – Lehman Brothers.

Robert Drbul – Lehman Brothers

Eric, when you look at the rest of the year and the assumptions and you really did a good job laying out your comfort level in terms of your assumptions for the second half of the year, can you elaborate a little bit more on your assumptions around the retail business in terms of comp trends in the different formats and your assumptions especially in the fourth quarter and your comfort level around the comp trends by each format of your retail establishments?

Eric Wiseman

It is a very complicated question because of the number of retail formats we have at VF Corporation and the number of countries we have stores in worldwide. So when you look at any of our….just looking at one brand you could be looking at a brand that has stores in 20 countries so that makes it very difficult to answer that question.

I will tell you that in general our comp store growth assumptions in the back half of the year aren’t as high as the comp store growth we achieved in the first half of the year. So we are a little bit more conservative than our run rate in terms of growth assumptions. We are still planning comp store growth but not at as high a rate as we did achieve in the first part of the year. The dollar growth will be bigger of course because of the importance of the fourth quarter to all of our retail stores.

Robert Drbul – Lehman Brothers

The other question I have is just on the sportswear business. Especially your assumptions in the fourth quarter. Around the Nautica business when you think about the trends we have seen in the department store business similar question just in terms of how you are comfortable with your assumptions in the sportswear business as you look at the department store channel or the primary channel for the Nautica business as you go into your assumptions in terms of that segment?

Eric Wiseman

The Nautica business as we all know has been challenged with both internal execution issues as well as environmental issues or external issues. The biggest issue that affects its profit contribution is in the fourth quarter of last year the Nautica business had a really tough fourth quarter. A lot of that was driven around mark down money both in our own retail stores and through our wholesale customers.

We think we have got our arms around that and know we have a chance to do dramatically better from an earnings standpoint from Nautica in the fourth quarter and we are pretty confident based on the trends we have. We are not expecting a big turnaround this year in the revenue part of the business. We are expecting improvement in profitability in the back half of the year.

Was your question profit related Bob?

Robert Drbul – Lehman Brothers

Yes.

Operator

Your next question comes from John Shanley – Susquehanna Investment Group.

John Shanley – Susquehanna Investment Group

Eric are the pockets of weakness that you mentioned in the international markets primarily related to Europe or do they involve other markets as well?

Eric Wiseman

Primarily Europe. I commented on the last quarterly call that unlike what we experienced in 2007 we were beginning to see some weakness in the UK and Italy and Spain. That hasn’t improved at all. We don’t expect it to improve with the forecast we have been given but it is really a Western European softness that we talked about in the first quarter call and we acknowledge again today.

John Shanley – Susquehanna Investment Group

Are sales in the Eastern European market as well as emerging markets, not only Russia but China and perhaps even India starting to show some traction in terms of sales momentum?

Eric Wiseman

We have had great momentum over the last year or so in the markets you mentioned. China, Russia, India and certain parts of Mexico and Latin America. We have got traction in those markets and are getting strong growth in those markets.

John Shanley – Susquehanna Investment Group

Are the operating margins in those markets as strong as they are in both the U.S. and Western Europe?

Eric Wiseman

No they are not. We are investing for growth there and we are getting the growth but we are making the investments to build our brands at this time.

John Shanley – Susquehanna Investment Group

Can you give us an idea of what the currency benefit in the quarter was in terms of foreign sales?

Robert Shearer

On the bottom line it was, the EPS line it was just a couple of pennies and the top line it was 3 percentage points.

Operator

Your next question comes from Mitch Kummetz – Robert Baird.

Mitch Kummetz – Robert Baird

I was hoping to get a little more color on the operating margins for the quarter. Outdoor obviously came in a little bit better than expected. I think you said on your last call the plan there was for about 50-100 basis point improvement over last year. I’m guessing you are more positive on that now given where Q2 came in?

Eric Wiseman

You are talking about for the full year?

Mitch Kummetz – Robert Baird

For the full year, yes.

Eric Wiseman

We continue to expect that improvement. Remember that the second quarter is a smaller quarter so it doesn’t have quite the impact you might imagine so we still expect to see the same level of improvement that we talked about in the quarter.

Mitch Kummetz – Robert Baird

On jeans wear margin down there about half of that was for the reasons you mentioned. What was the other half? Was it just a function of volume? Can you maybe speak to the volume being down there? Is this for the same reasons you saw in the first quarter?

Eric Wiseman

It was. After you sort through the unusuals it was down about a point. Taking into consideration the unusual items. There is one other thing that does stand out. That is we did recognize a $4 million provision in our U.S. businesses associated with some troubled retailers.

Mitch Kummetz – Robert Baird

Are you still seeing trading down at Wal-Mart? You spoke to that in the last call.

Eric Wiseman

Yes I spoke to that in the last call and I think in general in every channel of distribution customers are experiencing some trade down. That helps us in some places because if there are people who didn’t used to shop at Wal-Mart that are shopping there we have great brands for them there. But the people within Wal-Mart who are trading down to the lowest price point that is not where we are.

Mitch Kummetz – Robert Baird

Lastly on the margins. Obviously your international retail businesses performed very well for the quarter. Can you just speak to the profitability of those businesses and how that profitability compares to a year ago?

Robert Shearer

Just on the international retailers?

Mitch Kummetz – Robert Baird

Both international and retail, not international retail.

Robert Shearer

In any given quarter profitability is obviously impacted by the number of new stores opening. So on the quarter retail businesses overall in the second quarter actually reduced the overall profitability, reduced our overall margins and again it has a lot to do with the number of store openings that took place in the quarter. Again, the exact thing that we see and of course the businesses grow. So in the second quarter as we talked about the seasonality of those businesses has impacted any given quarter with the second quarter being the lowest quarter of revenues had that impact.

So it grows and we would expect to see more of that kind of thing as we go forward. Now in the fourth quarter however that situation reverses itself with the fourth quarter being a very strong quarter and profitability of our retail businesses being quite strong in the fourth quarter with the improvement in retail driving up the fourth quarter margins.

Mitch Kummetz – Robert Baird

How about the international side?

Robert Shearer

Relative to retail?

Mitch Kummetz – Robert Baird

No. Just relative to a year ago in terms of the profitability of that business.

Robert Shearer

The thing, once again, keep in mind on the international side that particularly in jeans once again it is the seasonality issue. The second quarter for our international jeans business is the lowest quarter for that business. So what happens is the currency impact drives the revenues up somewhat but there is just not a lot of profits so it doesn’t have the same impact on the overall profitability. So, the profitability overall was pretty much comparable to last year but again because of seasonality it is low in the second quarter.

Mitch Kummetz – Robert Baird

On the tax rate obviously you saw a benefit in the quarter. Are you still looking at for the balance of the year 33.3% in terms of the tax rate?

Robert Shearer

Right about 33% for the last two quarters.

Operator

Your next question comes from Omar Saad – Credit Suisse First Boston.

Omar Saad – Credit Suisse First Boston

I thought I’d take this opportunity Eric given that it is Mackey’s last call to have you perhaps prioritize your view on the opportunities and the opportunities of the highest importance or the highest return on opportunities whether it is retail, emerging markets, acquisitions if you look to take this company to the next level if you will in the coming years. How do you think about the growth opportunities for this company and where do you think are the best, easiest high return opportunities are that you are going to pursue most aggressively as the CEO?

Eric Wiseman

I’ll try to do in 60 seconds what we laid out in early January in four hours about what our growth plans are for the next five years because that is what our agenda is today. This corporation hasn’t really changed and certainly hasn’t changed since January.

We see terrific opportunities in lifestyle brands. We are winning where we have strong lifestyle brands. We’ll continue to invest in those brands and continue to get growth particularly right now in the outdoor space. We talked about terrific outdoor growth contributing in our path from $7 billion to $11 billion.

We have also talked about increasing our international business from 28% of $7 billion to 33% of $11 billion over the next five years and increasing our owned retail business from 14% of our business to 22% of our business. So international growth in total and owned retail are big, big drivers of growth.

At the same time we have really large businesses and big U.S. customers. In our growth plan we have those business relationships baked in $600 million worth of growth. We will continue to make acquisitions along the same path we have talked about. Our priorities right now are in outdoor and in our contemporary brand space. We have made a commitment to get into the contemporary business. When we talked about it in January we had just Seven for All Mankind and Lucy and now we have added the 1/3 ownership of Mo Industries to that opportunity and are still looking at that space.

I tried to be quick. It is a long subject but those are our priorities.

Omar Saad – Credit Suisse First Boston

If you think about a fixed resource environment at least hypothetically do you see emerging markets international as a greater priority than retail or acquisitions or do you see all three being equally important?

Eric Wiseman

I think part of our success is we are able to invest in and get growth from many different agendas. I think for us to be sitting here five years from now as successful as we are today we’re going to invest in all of those in a balanced way that we laid out in that plan because we want to be strong in all those areas. We think that is what will keep us strong five years from now.

Operator

Your next question comes from Todd Slater – Lazard Capital Markets.

Todd Slater – Lazard Capital Markets

I was wondering if you could give a little color on how the bookings are shaping up across the coalitions, not specific numbers but maybe just a little bit more color.

Eric Wiseman

We’re having trouble hearing you. Could you speak up?

Todd Slater – Lazard Capital Markets

Is this any better? So, I have three questions. The first one if you could give us just a little bit of color on how the bookings are shaping up across all the coalitions. Secondly, if you can give us any sense of why the reason behind the reduction in new store growth. I think there was maybe a fall out in some stores there.

Lastly just in terms of the mid teen margin expectations in the back half it sounds like if I understand you correctly you are expecting some positive comp in the retail doors but at a lower level than you experienced in the first half. That seems a little more conservative. What do you assume will occur in the department mass channel wholesale side of the business? What trends are you expecting there in order to hit your projections?

Eric Wiseman

Let me deal with the bookings piece because some of our businesses have bookings and some don’t. Probably the best way to answer that is our revenue guidance for the year got moved up a tick to $7.9 billion. In this environment and I’m sure you will appreciate this Todd but in this environment we have good indication of bookings or we would not be that aggressive with our revenue outlook as tough as it is out there. So where we have bookings they are strong and strong enough to support increasing our revenue guidance just a little bit.

In terms of reduction in new store expectations I think our guidance at the beginning of the year was 75-100. So the guidance we have put in this draft is over 90. So while we haven’t really reduced that there is some execution lease….we haven’t changed our strategy as much as the opportunities are actually falling into the high end of the range of what we thought was possible.

The last question on margins I’m going to turn over to Bob.

Robert Shearer

Unfortunately I couldn’t hear. What was the question?

Eric Wiseman

The last question had to do with mid teen operating margins in the second half of the year, is that right Todd?

Todd Slater – Lazard Capital Markets

Yes, and I was curious about what your expectations were on the wholesale side of the business and the department store, mass merchant area. What trends are you expecting? You said you expected a little bit of a deceleration in the comp store sales trend in your own stores so I was curious what you were expecting on the department, mass channel?

Robert Shearer

Specifically in the mass channel, Todd, our margins should hold with where they have been historically. So we are not anticipating any significant decline relative to…you talk about margins I assume you are talking about the operating margin level?

Todd Slater – Lazard Capital Markets

I’m just talking about business activity. Do you expect those partners to continue to lets say, outside of the discount, the mass, the mid tier, the Penney’s, the Kohl’s to Macy’s to the better stores do you expect those comps to still be negative if they continue to have down comps are you still comfortable with your assumptions?

Robert Shearer

We are comfortable with our assumptions and we think we factored in conditions at retail in terms of the numbers we put out there in our margins.

Operator

Your next question comes from Robert Ohmes – Merrill Lynch.

Robert Ohmes – Merrill Lynch

First, can you give us a sense on your retail stores how the outlet comps were versus the full line store comps and if there was any change in the relative performance between those two? Secondly, I just wanted to clarify for the fourth quarter on your own retail is it still primarily North Face and Vans as the key driver or is there something else you are expecting to kick in this fourth quarter as well? Finally, I might have missed it but if you haven’t given an update on sourcing costs I’d love to hear it.

Eric Wiseman

I’ll take a shot at the first two of those and let Bob swing into gear on the sourcing costs. I do not have, Robbie, specifics for all the outlet stores we have worldwide versus full price stores we have worldwide and what the comps are for those. I will tell you as a general rule and this is going to be a statement of the obvious but our strongest brands that have retail formats, those stores have really strong comps. Stores like our John Varvatos stores, our Napapijri stores, our North Face stores and our Vans stores are having very, very strong comps in this environment.

Our pure outlet stores aren’t faring as well. So in the range of performance at the high end you have our strongest, best performing brands overall and at the low end you have some of our outlet operations. I hope that is helpful to some degree because that is as good as I can do with what I have.

I’m not sure I understood your fourth quarter retail question.

Robert Ohmes – Merrill Lynch

My question was you hold out the North Face and Vans in particular, I believe, this quarter in the outdoor coalition so as I’m looking at retail and the strength you are expecting for the fourth quarter this year by brand is it North Face and Vans primarily that is the driver to the growth or are there some other brands that I should be thinking about on the retail side that helped with that profit mix shift you are expecting?

Eric Wiseman

Fore sure our owned, full price retail execution at The North Face and Vans are performing very strongly for those brands and are a big contributor to the growth numbers we gave you for both The North Face and Vans. In fact in the North American part of the Vans business the retail business, the owned retail business is over 50% of the business. They are very successful and they are performing well.

Then I’d have to go back to my earlier comment that all of our strong brands have a good holiday business and we expect that to continue.

Robert Shearer

You were talking about profitability, right, in terms of margins in particular as well?

Robert Ohmes – Merrill Lynch

I understand the retail mix shift. I’m just trying to conceptualize how much is this really you are expecting very strong comps at North Face and Vans in particular to drive that retail mix shift in the U.S. to support the fourth quarter earnings growth.

Robert Shearer

Of course Nautica is a piece of that as well particularly from the profitability side. As we have talked about we had a particularly tough quarter last year in the fourth quarter. We do expect to see some significant improvement there.

Robert Ohmes – Merrill Lynch

Just on the sourcing costs?

Robert Shearer

We have been working hard at getting in front of cost increases that have been anticipated by us and others. Net of cost reductions that we see and again are working very diligently against we think that our overall product costs right now look like they would increase in the low single-digit area.

Operator

Your next question comes from Jared Orr – Morgan, Keegan.

Jared Orr – Morgan, Keegan

I see your corporate expenses came down $10 million year-over-year from the first half of 2007 to the first half of 2008. I was just wondering how that was accomplished and what the outlook for the remainder of the year was for the corporate expenses?

Robert Shearer

Corporate expenses have been running down. We indicated and again it is a little bit of a catch all so we just have to be a little bit careful with that because some miscellaneous items flow through there. We have been cautious about our spending. In this environment we felt it was the prudent thing to do and for VF Corporation we’d like to see those dollars against promotional activity within our businesses.

Jared Orr – Morgan, Keegan

You got a $0.02 dilution for contemporary brands in Q2. Our math it looks like it is a [inaudible]. Are we doing this correctly or is there any accretion better than the guidance?

Robert Shearer

The accretion related to the acquisitions was better than we anticipated by a few pennies. The Seven for All Mankind Business, the contemporary brands coalition really had a strong quarter particularly from a profitability side so it was about $0.02 or $0.03 stronger than we had anticipated.

Jared Orr – Morgan, Keegan

What level of accretion do you have embedded for the whole year?

Robert Shearer

That number was around $0.10 I believe and we are still on track or maybe even a little bit better. Our plan is, again we are running a little bit stronger than our plans had indicated.

Jared Orr – Morgan, Keegan

Your OpEx do you know what assumption or Euro rate you are using for the third quarter and fourth quarter?

Robert Shearer

Four the third quarter we use 155, again just a little bit below where it is today and for the fourth quarter 150. That is what is built into our expectations.

Operator

Your next question comes from Christian [Blue] – Thomas Weisel.

Christian [Blue] – Thomas Weisel

I just wanted to ask about some of the SG&A and investment in the outdoor coalition. Did some of that get shifted into 3Q?

Robert Shearer

No there really wasn’t any shift. There were a couple things that took place there. One the volume was higher so some of that spending we felt would stand out more in the second quarter didn’t so much because of the increase in volume. That is a way to absorb expenses.

Another factor was that we pointed out when we laid out the second quarter and provided the guidance we also talked about an area like distribution. Once again with just taking an awfully close look at our costs we were able to actually reduce our distribution spend by being more efficient on the distribution side. So again really addressing those areas we felt represented a higher expense to us and really getting on them and we had better performance overall so we were really pleased with that.

So no it is not a shift into the third quarter. It is just better absorption and a little bit lower spending overall than anticipated.

Christian [Blue] – Thomas Weisel

[Audio breaks up]

Robert Shearer

Areas that will drive future growth and will drive revenue growth in areas and other areas.

Operator

We have no further questions in the queue at this time.

Eric Wiseman

Thank you. I appreciate you all joining us. We are quite proud of what we accomplished in the second quarter. It has been a long time since we had to work in this difficult of an environment and I am very, very pleased that we have the business model we have and proud of the management team and associates at VF that are so focused on executing and making this environment be as good as it can be for our shareholders. We appreciate you joining us and we’ll talk to you next quarter.

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Source: VF Corporation Q2 2008 Earnings Call Transcript
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