V.F. Corporation (VFC)

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V.F. (VFC)

Q3 2012 Earnings Call

October 22, 2012 8:30 am ET

Executives

Jean Fontana - Senior Vice President

Eric C. Wiseman - Chairman, Chief Executive Officer, President and 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

Analysts

Joseph Parkhill - Morgan Stanley, Research Division

Kate McShane - Citigroup Inc, Research Division

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

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

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

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Omar Saad - ISI Group Inc., Research Division

Christian Buss - Crédit Suisse AG, Research Division

David J. Glick - The Buckingham Research Group Incorporated

Michael Binetti - UBS Investment Bank, Research Division

Presentation

Operator

Good day, and welcome to the VF Corporation Third Quarter Fiscal 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jean Fontana. Please go ahead.

Jean Fontana

Thank you. Good morning, everyone. Thank you for joining us today for VF Corporation's Third Quarter 2012 Conference Call. By now you should have received today's earnings press release. If not, please call (203) 682-8200, and we'll send you a copy immediately following the call. Hosting today's call 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 SEC.

I would now like to turn the call over to Eric Wiseman.

Eric C. Wiseman

Thanks, Jean. Good morning, everyone, and thanks for joining us. With me today are Bob Shearer, our Chief Financial Officer; and our 3 group Presidents: Scott Baxter, Steve Rendle and Karl Heinz Salzburger. We are now 3 quarters through the year, and I can say with confidence that 2012 will mark another year of outstanding performance for our shareholders. However, the economic news is decidedly mixed. We're seeing some slowing in the U.S. economy, increasingly challenging conditions in Europe and slowing growth in China.

Against this backdrop, VF delivered another quarter of record revenues, margins and earnings. We raised our earnings guidance, increased our dividend payments for the 40th consecutive year and confirmed our expectation for all-time highs in revenues, earnings and cash flow. And we're looking forward to wrapping up the year on a very strong note with fourth quarter constant dollar revenue growth of 7% in the first fully comparable quarter with Timberland under VF's ownership and an increase in adjusted earnings per share of just over 30%.

I'll take just a minute to comment on a few items I think are of most interest to all of you. First is VF's margin recovery story, which is playing out even better than we envisioned at the beginning of the year, and it's not all about product cost. We're seeing the continued benefit of the transformation of VF's portfolio toward higher-growth, higher-margin businesses and geographies. Our profitability is strong and getting stronger, reinforcing our confidence in reaching the 15% long-term operating margin target we set last year.

Our international performance story also remains healthy with solid growth in the quarter. In China with 23% growth this quarter and growth across all major brands, I think you will agree that our performance there has been exceptional. Having announced last month our new 5-year growth rate target of 21% through 2017 in China, we continue to be very bullish on our prospects in this dynamic and increasingly important market for VF.

In terms of Europe, no doubt that you noted the 3% constant dollar growth in our European revenues, which follows a long string of consistent double-digit growth. We said repeatedly that we're not immune to conditions there and that we expected our growth in Europe to moderate in the second half from what we saw in the first, so no real surprise to us here. The diversification provided by our brand portfolio continues to pay off with results that continue to trend above those of many of our competitors. In fact, we're looking at about 10% revenue growth in constant dollars in the fourth quarter, and we're again confirming today our expectations that our revenues in Europe will grow at a double-digit rate in constant dollars this year.

With much of 2012 behind us, our attention and yours naturally turns to next year. The work we've done this year to build our brands, manage costs and inventories and expand internationally should pay off in the form of another strong year for VF. In fact, we've made the decision to increase our fourth quarter marketing investments over levels previously planned to ensure we continue to grow our market share and to build momentum for 2013.

Uncertainty around world economic conditions will persist, but we've demonstrated that the VF model, build around diversity in brands, products, channels and geographies, is ideally suited to succeed regardless of the environment. Our portfolio of brands is as strong as it's ever been. We have many opportunities to grow around the world. We're investing to strengthen our core capabilities across the board, including product innovation, technology, supply chain, direct to consumer and sustainability, among others, to support an even bigger and more profitable VF in the future.

And with that, I'm very pleased to turn the call over to Steve Rendle. Steve?

Steven E. Rendle

Thank you, Eric. Third global revenues for the North Face were up 5% or 8% on a constant dollar basis, including a 10% increase in the brand's DtoC business. As a reminder, we had tough comps this quarter given the 22% growth rate in last year's third quarter. In addition, comparisons also reflect some movement in our order book from the third quarter into the fourth quarter. And as we've noted in past calls, wholesale orders moved closer to need based on last year's warm winter. And coupled with challenging conditions in Europe, we're actually quite pleased with our results. As we noted last quarter, the fall order book is up low double digits on a global basis and is driven primarily by North America and Asia. We have great confidence that the business will accelerate in the fourth quarter to a mid-teen constant dollar revenue growth rate, positioning us to end the year strongly.

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