V.F. Corporation (VFC)

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V.F. (VFC)

Q3 2013 Earnings Call

October 21, 2013 8:30 am ET


Lance Allega - Director of Investor Relations

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

Steven E. Rendle - Group President of Outdoor & Action Sports Americas and Vice President

Karl Heinz Salzburger - Group President of International and Vice President

Scott H. Baxter - Group President of Jeanswear Americas & Imagewear and Vice President

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


Michael Binetti - UBS Investment Bank, Research Division

Matthew R. Boss - JP Morgan Chase & Co, Research Division

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

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Christian Buss - Crédit Suisse AG, Research Division

Kate McShane - Citigroup Inc, Research Division

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

John D. Kernan - Cowen and Company, LLC, Research Division

Erinn E. Murphy - Piper Jaffray Companies, Research Division



Good day, and welcome to the VF Corporation Third Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Lance Allega, Director of Investor Relations. Please go ahead, sir.

Lance Allega

Thank you, operator. Hello, everyone, and thanks for joining us today to discuss VF's third quarter 2013 results.

Before we begin, I'd like to remind participants that certain commentary included in today's prepared remarks and the Q&A session may constitute forward-looking statements under definition of federal securities law. Forward-looking statements include management's current expectations, estimates and other projections about our business, results of operations and the industries in which VF operates. Actual results may differ materially from those projected in these forward-looking statements. Important factors that could cause actual results to differ materially from these projected statements in the forward-looking statements are discussed in the documents filed with the SEC.

Additionally, participants on today's call may discuss non-GAAP financial measures, and you'll find an appropriate reconciliation in our press release, which was issued about an hour ago, and at our website that vfc.com.

Joining us on today's call will be VF's Chairman and CEO, Eric Wiseman; Bob Shearer, our CFO; and our Group Presidents, Scott Baxter, Steve Rendle and Karl Heinz Salzburger. Following our prepared remarks, we'll take your questions, and we'll ask that you limit your initial questions to 2. [Operator Instructions]

I'll now turn the call over to VF's Chairman and CEO, Eric Wiseman. Eric?

Eric C. Wiseman

Thanks, Lance. Good morning, everyone, and thank you for joining us today. Let me begin by saying that we're very proud of the solid results we achieved in our third quarter, especially earnings that far exceeded our expectations. While we faced some headwinds associated with the challenging economic environment and consumer buying behavior that was a little inconsistent market to market, I have great confidence that we'll finish 2013 strong and post another record year for VF.

I'm more excited now than I've ever been by the long-term growth prospects for VF. In June, we laid out a detailed 5-year growth plan supported by a sharp focus on 4 powerful strategic actions: leading through innovation, connecting with consumers, serving those consumers directly and expanding geographically. We're already making meaningful progress that's consistent with and sometimes ahead of our expectations. Our powerful ecosystem of brands and platforms, combined with proven strategies and great execution, enable us to consistently deliver on our growth objectives.

Every day at VF, every brand at VF works tirelessly to deliver innovative products, to find better and more creative ways to connect with and inspire our consumers, and we're always working to engineer new ways to be even more efficient and effective across our operations. In the third quarter, we grew revenues by 5% to $3.3 billion, reflecting strength in all global regions and across both our wholesale and direct-to-consumer businesses. The retailer calendar shift negatively impacted these growth rates by 2 percentage points. At the brand level, 14 of our 15 largest brands grew revenues on a global basis, and the one that missed was due to that retail calendar shift. So I'd say that's a pretty good success rate.

Gross margin once again exceeded our expectations, reaching 47.6%, a 90-basis-point improvement that we've seen across nearly every business. This improvement was primarily driven by our favorable mix shift toward higher-margin businesses with some contribution from lower product costs. In fact, taking a look at mix in our higher-margin businesses, the Outdoor & Action Sports coalition reached 60% of total VF revenues in the quarter. International reached 40%, and Direct-to-Consumer reached 19%, all trending up and tracking well against our 5-year goals.

Operating margin expanded 50 basis points to 17.6%, driven by gross margin expansion and underlying cost control. And speaking of costs, on the last call, you heard me say that if we were to see further gross margin expansion in the second half of the year, we'd remain opportunistic and consider investing those dollars to support our 5-year commitment to our shareholders, and that's exactly what we're doing. In fact, we think a challenging environment is the ideal time to upshift and hit the gas pedal a bit harder on marketing and product initiatives, supporting and helping to drive traffic to our wholesale partners, and of course, our own Direct-to-Consumer business by strengthening our connection with consumers, and creating even more meaningful engagement with our brands is key to our long-term success. Of course, this is not a new strategy for us. We did it at the same time last year and 3 years ago, exactly on this same day, we announced nearly $50 million of additional investments in The North Face, Vans and our business in China. And based on our strong results, particularly in those 3 areas during the past 3 years, we know this is a strategy that works and works quite well at VF.

Since the last time we spoke, we've committed to an additional $40 million of marketing investments in the second half of the year. In the third quarter, we spent $10 million. And in the fourth quarter, we'll spend another $30 million to help drive our business into 2014 and beyond. On an EPS basis, this is about $0.25 per share in the second half.

Looking at the balance of the year, I'm particularly proud of the fact that even with these additional investments, our $10.85 adjusted earnings per share guidance is unchanged. And the 13% growth over 2012, this result is directly in line with our long-term earnings growth target.

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