V.F. Corporation (VFC)

VFC 
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VF Corporation, (VFC)

Q3 2010 Earnings Conference Call

October 21, 2010 08:30 am ET

Executives

Eric Wiseman – Chairman, CEO

Robert K. Shearer – Senior Vice President, CFO

Karl Heinz Salzburger – Vice President of International

Analysts

David Glick – Buckingham Research Group

Todd Slater – Lazard

Eric Tracy – FBR Capital Markets

Omar Saad – Credit Suisse

Jeff Klienfelter – Piper Jaffray

Michael Binetti - UBS

Robert Doll – Barclays Capital

Robbie Ohmes – Bank of America, Merrill Lynch

Kate McShane - Citi

Presentation

Operator

Good day everyone and welcome to the VF Corporation third quarter 2010 earnings conference call. Please be aware that today's conference call is being recorded. At this time I would like to turn things over to Gina (inaudible) of ICR, please go ahead.

Thank you, good morning everyone, thank you for participating in VF Corporations Third Quarter 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'll send you a copy immediately following the call. With us on the call today is our Eric Wiseman, Chairman and CEO of VF.

Before we begin I'd like to remind participants 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 in actual results may differ materially from those expressed or implied in the forward-looking statements. Important facts that could cause actual results, collaborations or financial additions to the company to differ are discussed in the documents filed with the company in the SEC. I would now like to turn the call over to Eric Wiseman.

Eric Wisemen

Thanks a lot, Gina, good morning everyone. Thank you for joining us today. Following my opening comments this morning, Bob Shear will review the quarter's results in more detail. We also have with us by phone, Karl Heinz Salzburger, President of our International business who will provide a recap of our impressive results in Europe and Asia.

This was another great quarter for VF. As we entered 2010 we were cautious about the outlook for many economies around the globe and while the economic outlook remains uncertain the outlook for VF couldn't be brighter. That's because even in uncertain times strong companies with strong brands and a broad portfolio of opportunities will continue to succeed. Once again we've raised our guidance for top and bottom line growth.

Our new guidance for revenues if for an increase of over 5% this year versus our previous guidance for a 4% to 5% increase. Our revenue forecast for 2000 has strengthened in each and every quarter of this year. Earnings per share now are expected to increase over 20% to a range of $6.25 to $6.30 versus our prior guidance of $6.10.

This would mark another all-time high for VF in earnings per share and we expressed our confidence today in our ability to deliver another very strong year in 2011. Before turning over to Bob, there are three areas I’d like to make just a few comments on.

The marketing investments we’ve made this year, product cost inflation and the state of the denim market. Now there's some expanded disclosure today in the release about our marketing investments which are clearly benefiting us this year and which we think will continue to drive organic growth next year.

The total incremental investment this year will be close to $100 million which is a bit higher than the $85 million we previously discussed with you. Many of our brands have very good momentum and we’re committed to keeping this momentum going.

We’re fortunate that we have the financial resources to do so and still deliver such strong improvement and profitability in earnings per share. As the year strengthened, we increased our commitment to brand investment with our strongest investments to come in the fourth quarter. In the release, we touched on a few areas without spinning this focus. I’d like to help you understand how we’re thinking about these incremental investments.

For example, this year, our Outdoor and Action Sports Coalition will represent 41% of VF for over $3 billion in revenues. That’s a large apparel company in its own right and that company will have 13% organic growth this year with operating margins approaching 20%. It has strong momentum and a clear path for continued growth in both wholesale and direct-to-consumer channels in the U.S. The same is true for Europe and the outlook for Asia is even stronger.

So we’re investing over half of our incremental marketing spend in outdoor and action sports initiatives alike, expanding the North bases region snow sports by sponsoring new athletes and investing in consumer-directed advertising at the Winter X Games.

Driving both door expansion and increased consumer awareness for the North based and bands in China. We’re heavying up our investment in key European markets to grow our market shares. We’re also introducing new ones to our experiences in both bands and the North based stores and we have a significant increase in spending behind social media.

The balance of this spending increase is strategically allocated to important growth initiatives in our U.S. and our Asian Jeans Wear business and in our Nautica, 7 For All Mankind and other brands. Now, it’s too early for me to comment on what level of brand investment we’ll be making next year, but if we continue to see the payback for our shareholders in the form of strong, profitable growth like what we’re seeing this year, it’s very likely we’ll continue to invest at very healthy levels in 2011.

Next, let me give you an update on the product cost inflation topic. Last quarter, we outlined the major factors of cost inflation for VF and why we believe we’re competitively advantaged to weather this increase is better than most. Three months later, our position has not changed. It’s true the cotton crisis are likely to be at a higher level than we envisioned, however, as result of favorable negotiations are Asian sourcing cost across VF, we’re coming in lower than we previously thought.

With regard to pricing, the current consensus from both retailers and wholesalers is that some price increases are inevitable next year and certainly many of the brands across our diverse portfolio are planning for selective price increases. So the real question on everyone’s mind is, “What’s the outlook for gross margins next year?” Based on what we know today, product cost inflation should be largely offset by price increases, the continued positive impact from the shift in our portfolio to more lifestyle brands, to more international and to more direct-to-consumer business.

So the net result for VF is we expect gross margin in 2011 to be near the record level we will achieve this year. More specifics on our guidance for 2011 will be forthcoming early next year. There’s also been a great deal of discussion out there about the current state of the Jeans Wear Business. I have some very good news for all of you. Consumers are still buying a lot of jeans.

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