V.F. (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

Presentation

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 experiences 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 and 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.

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