V.F. Corporation (VFC)

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V.F. (VFC)

Q2 2011 Earnings Call

July 21, 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.

Taposh Bari - Jefferies & Company, Inc.

Robert Drbul - Barclays Capital

Kate McShane - Citigroup Inc

Omar Saad - ISI Group Inc.

Kenneth Stumphauzer - Sterne Agee & Leach Inc.

Robert Ohmes - BofA Merrill Lynch

Michael Binetti - UBS Investment Bank

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

Evren Kopelman - Wells Fargo Securities, LLC



Good day, everyone, and welcome to the VF Corporation's Second Quarter Fiscal 2011 Earnings Conference Call. Please be aware that today's conference is being recorded. At this time, I would like to turn the conference to Jean Fontana from ICR. Please go ahead, ma'am.

Jean Fontana

Thank you. Good morning, everyone. Thank you for participating in VF Corporation's second 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 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 now like to turn the call over to Eric Wiseman.

Eric Wiseman

Thanks, Jean. Good morning, everyone, and thank you 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've reached the halfway point of our 2011 earnings cycle, and our momentum is building. VF's performance, delivered by outstanding people who manage outstanding brand, continues to be appropriately outstanding. And it confirms that our business model and our execution of that model is consistently strong, especially in challenging and uncertain times. In fact, our second quarter results beat our expectations and yours.

To recap some of the highlights. Revenues were up 15% with double-digit revenue growth achieved by every coalition. This marks VF's third consecutive quarter of double-digit top line growth in an economic environment marked by rampant product cost inflation, weak consumer spending and fiscal uncertainty around the world. But instead of broadening [ph] back, we have continued to fuel our brands expansion with increased levels of investment spending. And those investments are clearly paying off, as demonstrated by today's results. In fact, VF is firing on all cylinders.

Domestic revenues up. International revenues up. Wholesale revenues up. Direct-to-consumer revenues, up. All up, and all at double-digit rates. Our strong revenue growth is translated into even stronger earnings growth. The second quarter earnings per share rising by 17% from first half earnings increasing by 21%.

For each of the last 4 conference calls, we've addressed the challenges and uncertainties presented by the unprecedented increases in product costs. We've talked about how these costs would impact our profitability, and what we're doing to minimize that impact. Halfway through the year, we're feeling increasingly confident that we've got it right. Operating margins are holding up very well, down only 30 basis points in the second quarter and up 50 basis points in the first half. Our price increases taken to date, carefully considered in sequence, have shown little impact on our unit volumes. Those 2 words to date are important.

Like everyone else, we're waiting to see how the second half unfolds as consumers come face-to-face with even higher prices in apparel and footwear. We don't know, no one knows how they will respond. But the evidence we do have is the strong brand, those that consistently deliver innovative products and experiences to consumers, brands like The North Face, and Vans and Lee and Wrangler, too many. So we're approaching the second half cautiously and controlling those things we can, including spending, pricing and inventories. However, we're confident that we've taken the right actions, and we're anticipating strong second half performance.

A quick comment on inventories. You recall that inventories rose 24% in the first quarter. We explained then that the increase was due to the combined effects of higher product costs, foreign currency exchange, buying some goods earlier to secure lower costs and strong increases in unit volume. And we noted that in terms of forward inventory days, we were up only slightly.

At the end of the second quarter, our inventories were up by a lesser amount, 17%, and we see comparisons improving as we progress throughout the year. In terms of our full year outlook, based on our very strong first half performance, we're raising our 2011 guidance for both revenues and earnings per share.

Now some perspective here. When we began the year surrounded by great economic uncertainty, our revenue guidance was for an increase of 89%. Five months later, still surrounded by great economic uncertainty, we now expect revenues to increase 12% to 13%. First half revenues rose 14%. And based on today's guidance, second half revenues are expected to rise by about 12%. We're approaching the second half with some caution as we face tougher comparisons and as we wait for consumers' response to higher prices across the board.

International revenues, which have been helping to fuel our growth, should increase by more than 20% in 2011, and that's up from the 15% we originally anticipated. Growth in our direct-to-consumer business, another revenue driver, should rise by about 15%, better than the 10% to 15% growth we envisioned at the start of the year.

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