V.F. (VFC)

Q4 2010 Earnings Call

February 22, 2011 8:30 am ET


Jean Fontana - Integrated Corporate Relations

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

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

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

Robert Shearer - Chief Financial Officer and Senior Vice President

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


Eric Tracy - FBR Capital Markets & Co.

Robert Drbul - Barclays Capital

Michelle Tan - Goldman Sachs Group Inc.

Kate McShane - Citigroup Inc

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

Michael Binetti - UBS Investment Bank

Jeffrey Klinefelter - Piper Jaffray Companies

Robert Ohmes - BofA Merrill Lynch

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

Todd Slater - Lazard Capital Markets LLC

Evren Kopelman - Wells Fargo Securities, LLC

David Glick - Buckingham Research Group, Inc.



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Good day, and welcome to the VF Corporation Fourth Quarter Fiscal 2010 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Jean Fontana. Please go ahead.

Jean Fontana

Thank you. Good morning, everyone. Thank you for participating in VF Corporation's Fourth Quarter and Full Year 2010 Conference Call. By now, you should have received today's earnings press release. If you have not, please call (203) 682-8200, and we will send you a copy immediately following the call.

Hosting the call today is Eric Wiseman, Chairman and CEO of VF.

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 are not guarantees and actual results may differ materially from those expressed or implied in the forward-looking statements.

Important factors that could cause actual results, collaborations or financial conditions of the company to differ are discussed in the documents filed with the company and the SEC. I would like to now turn the call over to Eric Wiseman.

Eric Wiseman

Thanks, Jean. Good morning, everyone. Thank you for joining us. With me today are Bob Shearer, our Chief Financial Officer, and our three Group Presidents, Scott Baxter; Karl Heinz Salzburger, who is joining us from Lugano, Switzerland; and Steve Rendle, who is joining us on the line from California.

I'm delighted to share with you today the record results achieved by VF in 2010 and our expectations for even stronger performance this year. A year ago at this time, with the world struggling to emerge from the recession, we view the outlook for 2010 cautiously and we planned accordingly. The plans we put in place and build upon as the year progressed yielded results far surpassing our expectations.

Consider the highlights of VF's performance in the fourth quarter and for 2010, organic revenue growth of 11% in the quarter and 6% for the year; double-digit growth in adjusted earnings per share of 10% and 15%, respectively; record gross margins in both periods; growth in international revenues in constant dollars of 22% in the fourth quarter and 8% for the year, closing Asia, which has been a strategic priority for us of 31% in both the quarter and the year; growth in our direct-to-consumer revenues of 13% for both periods; cash from operations of $1 billion, another record; and additional brand building investment of $100 million in 2010 with nearly half taking place in the fourth quarter. So we enter 2011 with strong momentum, confident in the power of our brands' ability to generate substantial growth and well positioned to deliver another outstanding year of results for our shareholders.

As noted in our release in 2011, revenues are expected to grow by 8% to 9%, with growth across all coalitions. Earnings per share are expected to reach a new high in the $7 to $7.10 range. Operating margins should remain stable despite industry-wide cost inflation. Our highly profitable international and direct-to-consumer businesses should grow at mid-teen rates. And cash from operations will again be at the $1 billion level. And based on the momentum created by our brand investments in 2010, 2011 will be another year of very healthy brand spending.

Before I turn it over to Bob, who will provide more commentary on the subject, I'll share a few words on the question of product cost and gross margins. We indicated in our release that gross margin should be down by less than 1 percentage point, reflecting higher product cost that are expected to primarily impact our domestic Jeanswear business, which accounts for slightly more than 20% of VF's revenues. Our Jeanswear operating margins will be down this year, but margins in the other nearly 80% of our business are expected to be flat to up slightly.

As we noted during the past few months, select price increases will be taken across our brand portfolio to help offset product cost inflation. We're aware that we are entering a new environment here in terms of consumer reaction to broadly higher apparel prices and that some trade-off in unit volumes is likely. I'm confident that our plans for 2011 take that into account.

In closing, we believe we have the most competitive business model in the industry, giving us confidence in our ability to continue the momentum established in the latter part of 2010 and navigating through the challenges and uncertainties created by cost inflation. On the one hand, we have our internal manufacturing capabilities largely in this hemisphere where we enjoy a decades-long history of manufacturing and engineering expertise and many cost and service advantages. And on the other hand, we enjoy a highly diversified and balanced base of contractors managed from one of the largest sourcing offices in Hong Kong, which provides us with tremendous scale and expertise. We can adjust our sourcing strategies fairly quickly given the strength of our global supply chain to ensure we're taking advantage of the best value in the market at any point in time.

So with that as a backdrop, let's hear more details from Bob Shearer.

Robert Shearer

All right. Well, thanks, Eric. First, I'll highlight a couple of points related to 2010. Our changing business mix helped drive gross margins in 2010 and will continue to benefit 2011 as well. Gross margins in 2010 expanded by 240 basis points. Now, of that total, 130 basis points of improvement resulted from first, a higher percentage of our revenues coming from businesses that provide us with higher gross margins, and secondly, other areas of operational improvements, including retail and inventory efficiencies. The remainder of our gross margin expansion, or 110 basis points, resulted from product cost reductions.

SG&A in both dollars and as a percent of revenues increased in the fourth quarter and for the year, driven largely by significant increases in brand investments. As noted in the release, the fourth quarter marked the highest period of brand investment for us during the year, with $45 million out of a total $100 million in additional spending occurring in the quarter. This increase, being so heavily weighted to the fourth quarter, reflects the momentum we saw as our year progressed. That impacted the timing of decisions related to the higher spend. Going forward, our marketing investments will be more balanced throughout the year.

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