V.F. Corporation (VFC) Q2 2011 Earnings Report, Transcript and Summary

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.

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.

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 both 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 throttling 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…

Thanks, Eric. Well, as you can tell, we're really proud of the top line momentum that we're experiencing this year. All of our coalitions are achieving solid growth, and all that growth is organic. When you consider the 5-year annual revenue target of 10% organic growth that we established back in March, it's clear that our brands have the bandwidth to deliver on that and possibly more. Related to our key growth drivers, our international business grew by 30% in the quarter. It was 20% in constant dollars. Now a few specifics here. Europe revenues were up 30%. Latin America was up 40%, and Mexico was up 26%. And as we've seen in prior quarters, our growth in Asia continues to be outstanding, up 30% in the quarter. In terms of our coalition results, our 2 largest international coalitions, Outdoor & Action Sports and Jeanswear, achieved revenue growth of 42% and 20%, respectively. In constant dollars, those numbers were 29% and 11%. As you know, international growth is a key component of our 5-year plan. And it looks like these businesses are clearly on the right track to hit our goal of 40% of revenues from international. In fact, it looks like our international revenues could grow from 30% to nearly 33% of total revenues in just this year. Our direct-to-consumer revenue growth accelerated in the quarter growing by 17%, including new store and exceptional comp store growth, as well as an expanding e-commerce platform. Direct-to-consumer growth in each of our Outdoor & Action Sports, Jeanswear and contemporary coalitions exceeded 20% in the quarter. Direct-to-consumer growth in our sportswear coalition was 10%. So far this year, we've opened 44 owned retail stores, and we're on track for a total of around 100 new store openings in 2011. And maybe most…

Thank you, Bob. We're very proud of our brands' performance this quarter. We've continued to maintain very healthy levels of marketing spend behind our strongest brands and our most profitable growth initiatives, and those investments are clearly paying big dividends. As noted in the press release, revenues in our Outdoor & Action Sports Americas business increased 14% in the second quarter, with nearly all brands delivering double-digit revenue growth. As we saw in the first quarter, we saw some decline in our operating margin, resulting from a higher level of brand investments but even more importantly, investments to support not only second half growth but long-term growth as well. Those investments are being made in such areas as product merchandising, upstream innovation, direct-to-consumer and operations. And the impact from these investments have a more significant impact on this, our seasonally smallest quarter. We noted in the release that we continue to expect a full year operating margin of around 20%. Our direct-to-consumer revenues were especially strong in the quarter, with The North Face, Vans and lucy, all growing their direct-to-consumer businesses at double-digit rates. We're continuing to activate The North Face brand activity-based model with very positive results across our outdoor, performance, action sports and youth segments. We're seeing particular strength in outerwear, running, training and yoga apparel, as well as specialty mountain biking apparel. And our e-commerce business continues on a roll with revenues up a remarkable 54%. With fall bookings up 16%, we're looking for another spectacular year of growth for The North Face brand in North America. The 2011 growth rate is forecast to be greater than what we achieved in 2010. And we're on track, ahead of our 5-year plan we shared with you in March, as is our global Vans business. Vans' growth was fueled…

Thank you, Steve. The second quarter marks another period of very strong performance internationally with double-digit growth in both Europe and Asia. In fact, revenues in Europe grew by 16% in constant dollars, with Asia revenues rising by 25%. Operating income grew at an even faster rate over 30% with an expansion in operating margin. In Europe, each of our businesses, Outdoor & Action Sports, Sportswear, and Contemporary and Jeanswear, saw higher revenues in the quarter. By far, the strongest growth was within Outdoor & Action Sports, with revenues rising by 34% in constant dollars and very strong growth in our 2 biggest brands: The North Face and Vans. And we expect continued strong performance from both brands in Europe. For The North Face, fall bookings are up over 25% and for Vans, over 50%. To support this brand's momentum, we have stepped up our store opening plans, in North Face, opened 5 new stores in the first half with 7 stores confirmed to open in the second half. Vans opened 5 stores in the first half, and we have 12 stores planned for the second half. Revenues in our Sportswear and Contemporary Brands business in Europe, which includes Napapijri, Kipling, 7 For All Mankind and Eastpak brands, grew 13% in constant dollars in the quarter. And based on our fall bookings, we look forward to a strong second half as well. Our European jeans business posted a slight increase in revenues in the quarter. Recent activity has slowed a bit since Easter, particularly in the U.K., a large market for us where economic conditions are particularly difficult right now. However, fall bookings in both Lee and Wrangler are up for the prior year level. Better product offerings, upgrades in our own stores and in factory marketing programs are clearly…

Thank you, Karl Heinz. I will review our Jeanswear Americas business first, which includes our Lee, Wrangler and Riders by Lee businesses and then discuss our Imagewear results. We are very pleased by the strong growth achieved in our Jeanswear Americas business. Our brands are bucking market trends, winning in their respective marketplaces and gaining share. Domestic revenue rose 7% with growth across our mass market, Lee and western specialty businesses, and shared gains in both our Lee and Wrangler brands. We also saw growth across all 3 major international geographies, Latin America, Mexico and Canada, with revenue growth in excess of 25% in Latin America and Mexico. Growth in our Lee brand was particularly strong in the quarter, up 17%. Lee women's has been the brand leader in mid-tier stores for the past 12 months and continues to gain momentum based on an outstanding product innovation, combined with a clear value proposition to consumers. On the mass market side, revenues were up 5% with both Wrangler and Riders by Lee outperforming the competition, gaining floor space and taking share. Of course, we do have our challenges in the form of higher product costs that are impacting margins significantly this year. The third quarter will mark our highest fabric cost of the year beginning to temper in the fourth quarter. Our initial price increases in both the mid-tier and mass channels have been successfully executed. And as Eric noted earlier, we're encouraged by the results to date, with first and second half unit volumes above last year's levels. We believe this is a testament to the tremendous brand equity we have built in our brands and in our efforts to connect consumers with the outstanding quality, value and product innovation they offer. In terms of the second half, we are…

Thanks, Scott. As you've heard from the team, we're thrilled with what VF has accomplished in the first half of 2011, confident in our outlook for the balance of the year and very proud of the people at VF who drive our performance. Now let's open the call for questions.

[Operator Instructions] Our first question comes from Jim Duffy of Stifel, Nicolaus. Jim Duffy - Stifel, Nicolaus & Co., Inc.: I have a couple of questions. It seems you've gained very good yield on the advertising spend. Do you think you're seeing immediate return on that, those efforts? And if so, are there particular campaigns, Eric, maybe that you could point to that are driving good results for you?

Jim, that's a great question because it gets to our philosophy about investing in our brands. As you know, last year, we pulled the trigger on $100 million of incremental brand investment. And we think, we saw some short-term reaction to that and has built momentum for the brand. A part of our brand building is around creating awareness and equity around our brands, people's passion for what we have in our brand. So there's a big part of it that is a long-term investment. And that's why this year, we didn't back off on that $100 million increase. In fact, we've invested a little bit more. The types of things -- obviously, we were measuring the effectiveness of each, and there are lots of examples in all of our brands about what's working. It gets down to everything from the Lee brand work, talking about their men's business in the mid-tier, which was our opportunity there. We have a very well-developed women's business. And last year, we've launched a campaign around the men's business to improve awareness and equity in that. We've got some tactical things in cities in Germany where we've plastered the city with advertising around some of our brands, like Vans and The North Face, that have helped drive traffic into stores. Our North Face campaign last year included tagging certain retailers and markets around certain products. The consumers know what to buy in our new products and where to go buy them. So it's hard for me to get -- I could go on and on about the second part of your question. But we're thrilled with where we are and that we have -- we're in a situation where we'll continue to invest in our brands, and we will do that. Jim Duffy - Stifel, Nicolaus & Co., Inc.: That was great, and those are good examples. Bob or Scott, I understand that your peak material costs will flow through the income statement in the third quarter perhaps with some moderation on the Jeanswear business in the fourth quarter. Can you speak a little bit more about your current inventory position in jeans, and as we look into 2012, how lower cotton costs might flow through the income statement?

I'll make a couple of comments there first, Jim. You always have to be careful relative to the commentary around our costs. So what we said was that actually we're seeing in our fourth quarter buys, which we're just completing of denim. Now this is what we're buying for the fourth quarter, which will flow through cost of sales in the first quarter of 2012. So what we're seeing is that already we're seeing some reduction in our fourth quarter denim buys, versus our costs in the third quarter. So that means in the first quarter of 2012, our costs -- our denim costs will actually begin to come down and what actually flows through our P&L. Relative to 2012 and denim costs going beyond that, obviously, we like what we see right now, it's a very different environment then we saw, of course, throughout the first part here of 2011, given what's taken place with cotton, so we have a lot more to -- a lot more to say about that. But as you said, costs increasing, what runs through our P&L costs increasing to the latter part of this year. But then particularly in denim, we will start to see that ease in the first part of 2012.

Our next question comes from Michael Binetti of UBS.

So I'm just curious really quickly on the outdoor coalition, I was looking at the profitability there. On the outdoor margin, those are down over 100 basis points in the first half, but I'd like to ask about the 20% guidance for the year, if I could. And obviously, that includes an improvement in the back half, so how much of that improvement do you think comes from your assumption that some price increases that you're taking will stick in the back half?

Michael, I'm going to start on that. It's really not based on pricing increases at all. It's more based on the seasonal flows of our business. For example, in the second quarter, more than half of that reduction was due to the higher marketing investments. And again, I know that you understand that in the latter part of last year, that's when most of the higher spend fell. This year, it gets spread evenly, so then in the second quarter, it absorbs more of the increased marketing for this year than normal. So that was part of it. So it accounted for over half of the basis point reduction in our Outdoor & Action Sports operating margins. In addition to that, we are, we have -- our fall business, our second half business is always considerably stronger than our earlier part of the year, so obviously we have a big second half plan for those businesses. And we have some expenses that we're building today to support those higher revenues of the second half. That's also a factor in terms of what you see earlier in the year, and particularly in the second quarter because it's by far our lowest quarter of the year. So the marketing spend is a piece of that, and then the seasonality of that business in particular -- particularly within Outdoor & Action Sports, is the other side of it, so it's really not, it's not based on pricing, that's really not a factor. It's much more driven by the seasonality.

And then if I could follow that, in the second -- if I look at the jeans commentary you guys gave that you're happy you never took price up to fully offset the costs that you're seeing. I think you're probably starting to talk to the retailers now about planning for periods when they'll be looking at a cotton charge lower year-over-year, and you're prices are up. Do you -- I mean, are your early conversations -- do you anticipate being able to hold the price increases that you've put through this year, or will you have to step up promotions? Or people -- are you working with retailers and say maybe we can bring prices back down at this point, or maybe you can help us think ahead a little bit on that?

Michael, this is Scott. Again, bear in mind that we did not take our increases up all the way to cover our production costs. So we think that was the prudent approach for all of the year. And then going into next year, we think that puts us in a good spot with our retailer community.

Michael, I'll add to that. We've talked about gross margin erosion on our Jeanswear business of over 350 basis points. So we're not whole with where we were to coming into this. So if cotton prices come down, the big assumption that is, as they come down, do we get whole -- and that we're honest and open with that with you guys and with our retailers that we didn't offset all these prices. So as they come down, we hope to get back to the kind of margins we had in the past in our Jeanswear business.

Okay, and if I could just add one closing question. It's been a while since you saw a big acquisition, if you could remind us. Will you continue to give us updates on EPS, excluding the acquisition, as we get through the rest of the year to kind of track the non-Timberland business?

Yes, right. Yes, we would do that, Michael, for sure.

Our next question comes from Ken Stumphauzer of Sterne Agee. Kenneth Stumphauzer - Sterne Agee & Leach Inc.: Just a couple of things quickly. I was wondering if you guys could touch on growth in Europe. It was obviously exceptionally strong, and we see all the headlines day to day that would suggest that maybe there's a little bit of a -- there'd be challenging consumption trends, that you guys are seem to be doing an exceptional job. I'm just curious to know what you think in particular is driving that. And also, if you could speak to any kind of geographic strength.

Karl Heinz, do you want to take that question?

Yes, of course. I would say it's a combination of elements. And we clearly have a great organization. We have great brands. You've heard about our marketing initiatives, the product differentiations. And also, what I would add to that is our geographic expansion, we don't have one country. We are very strong. We are very well spread in the big European countries and the good news where there's a lot of noise going on in southern Europe, for instance, Greece. Greece is a very marginal market for us. So that's why I think we continue to do pretty well and have great results so far.

Ken, this is Eric. Let me add to that. We've talked for awhile. As good as our business is in Europe, we have relatively low market share and with many of our brands there. So some of what we're doing is -- we're clearly improving the level of our performance. We're investing more in our brand. And importantly, our European team has assembled a world-class retail group that didn't exist there a few years ago, and you're seeing a disproportionate number of our own retail openings happening there. So all of those things are coming together in markets where we, in many cases, had low market share, and we're capturing share that puts us to a much better, much stronger place and more normal on a global level. Kenneth Stumphauzer - Sterne Agee & Leach Inc.: And then, Bob, my favorite question, can you give us some clarity on kind of the decomposition of gross margin? How much was related to product versus mix?

Yes. Actually, the mix component, Ken, was held pretty steady from the first quarter. At that point in time, I think, it was 70 basis points is what we said and it was about 80 basis points this time. So yes, the cost net of pricing was about 260 basis points. The mix then helped us. As I said by about 80, and then the gain, the gain that we've talked about on the sale of the plant helped us about 70 basis points as well. Those are the components of the 120 basis point decline. Kenneth Stumphauzer - Sterne Agee & Leach Inc.: And then just one last question, if I could. Obviously, at the beginning of the quarter, the distribution center in Alabama was destroyed. I'm just curious to know whether you felt that had any impact on your ability to meet demand in the quarter, perhaps it hit top line. It might have even been stronger otherwise?

We talk a lot about the competitive advantage that we have with our supply chain group. And I think the disaster we had in Alabama is just a great example of our ability to respond to something like that and respond very quickly. Actually, Ken, the net loss in terms of revenues was only -- was actually a little bit less than $10 million, and it obviously could have been a lot tougher than that without the kind of people that we have onboard and their ability to respond. So we've got another DC opened up, and had it racked up and ready to go in pretty short order, and we're getting products in because we have -- because we're able to make our own products. We could shift some from our plants to the products that we needed and were destroyed in the tornado. So it was a terrific -- just a job terrific done by our supply chain group, so it had not a -- lot of impact in the quarter.

Yes. Ken, I'll pile along. We were shipping 30 days after the tornado that took down our Hackleburg distribution center. We had an operation up, and we were back to servicing our customers, not at full capacity, but we were operational again very, very quickly and very proud of that team.

Our next question comes from Kate McShane of Citi.

With your increased guidance for the top line, I was wondering if there was a coalition where you saw more upside than where you had originally anticipated? And then my second follow-up question to that is, based on the commentary on your inventory levels going to the back half, can you talk about your ability to chase demand for the outdoor coalition in particular, if demand in the fourth quarter is higher than anticipated?

I'll start on that. In terms of the first part of your question, I think was there one coalition that really stood out in terms of the increase in the guidance and that kind of thing. And not really -- actually, as Eric went through the -- what we're expecting for the rest of the year on a bi-coalition basis, we would have noted that pretty much across the board, we're seeing strength across our businesses. And it really does, it runs from top to bottom and in terms of our coalitions. So again, we're just really happy to see that. That's why you hear us talking a lot about momentum that we have across our businesses and just really proud of that. So no, it doesn't really stand out in any one coalition that was across-the-board strength.

Yes. You have to call out the Outdoor & Action Sports group for growing 23% globally, and Imagewear is growing 16% globally, really, really strong performance. And our guess is that those coalitions will drive disproportionate growth in the second half as well, but that's all in our forecast. And Steve, any comments on...

So our Outdoor & Action Sports businesses were primarily on a pre-season booking model. There's a tremendous amount of work that goes into building merchandise assortment and flow plans with our key dealers. We lay in our inventory prior to the season and work through those well thought through plans as we move to the end of that shipping season. So there's not a tremendous ability to chase, but it's really mitigated with the exceptional amount of planning that goes in well in advance based on historical performance.

Okay, great. And then my last question is just about the pricing environment. As we get into the fall, I think we're going to start seeing the floors be set here in the next week or two. Have you have been hearing or have there been any surprises in the pricing environment where maybe you're not seeing some of your competition take as much price as maybe was anticipated or is actually taking more?

No, Kate. No surprises yet, really early in the fall season as you rightly called out. Things are just getting set now, and we're not aware of any changes to anything that we've assumed going into this quarter. So far, the price increases that we expected to see we're seeing. And as I said in my comment, the big unknown is how consumers react to the inflation that they're going to see. It's not just apparel and footwear inflation, it's gas, it's food, everything is going up for them, and it's going to be very interesting to watch how that plays out. But we're confident we've made great assumptions around that.

We'll go next to Bob Drbul of Barclays Capital.

I was wondering if you could maybe, clarify a little bit more on the gross margin commentary around the European Jeanswear facility, the impact in the second quarter versus exactly how you think the third quarter plays versus the second quarter.

Sure, Bob. Number one, I'll take this opportunity to state that, yes, the pickup on the gain of the exit relates to actually a charge that was taken in the first quarter of last year of 2010. And it was about the same amount, by the way, about the same effect, so it was like $0.07 a share then in terms of a charge. And actually what this relates to is deferred FX impact related to that charge. And it's kind of a complicated accounting thing, but just to clarify that. And again, I'm glad you asked the question for clarification. Because in my commentary, the point that I said that -- the point that I made relative to the third quarter gross margins I said would be more like the -- more like the second quarter. What I meant by that was, I said adjusted. What I meant by adjusted was taking the benefit of the plant gain out of the numbers. So in other words, I said that the gross margins without that would have been down by about 180 basis points. So we expect the third quarter to be more similar to that in terms of reduction. And in the fourth quarter, and then in the fourth quarter, the reduction should improve from there.

Okay. And I think you also said that on -- you're finishing some of your buys for denim in the fourth quarter now. With the recent pullback in cotton, I know you don't buy cotton, you buy denim. But with the recent pullback in cotton, does that provide an opportunity for you to exceed the prior domestic Jeanswear gross margin guidance of minus 350 basis points?

For this year?

Yes.

So you're saying for this year, no. No, because then again, that's the point relative to -- relative to what we're buying right now for the fourth quarter. But those goods, and we said yes, the costs are down a little bit in terms of our buy for the fourth quarter, those goods will flow through 2012. So we'll begin to see the benefit of that, of the lower cost in 2012 but really not until that. Our third quarter buys -- our third quarter buys will flow through the fourth quarter 2011.

Okay. Then just one last question. On the pricing increases, can you talk about the magnitude of the price increases you've passed through already, and sort of the magnitude of the future price increases and sort of the delta? And you seemed to be very pleased with some of the unit volumes actually increasing. How do you -- when I think about the magnitude or the higher costs coming into the third quarter, do you feel like the unit volumes can be positive still with the higher prices going in, or do you think units will actually end up falling as expected?

I'll make a couple of points around pricing. First, just to put a little bit of perspective around overall pricing for the year, it's worth about 3 to 3.5 percentage points of our total revenue gain. If you do some math around that, if you do some math around that, it implies about $300 million worth of pricing. It's very interesting to note that 2/3 of that, 2/3 of that is in our U.S. jeans business. And so if you wonder why we talk so much about our U.S. jeans business in terms of cost and pricing is because it captures such a big piece of that overall pricing impact on our year. So relative to -- can we still be -- so that also says that for the rest of our businesses and our other businesses, the impact of pricing is just not nearly as significant. It's just not so large. So in other words, across the rest of the other 80% of our business. It's the other, it's just the remaining 1/3 of the total pricing impact. So it's fairly small. So it really is more of a jeans, the U.S. jeans challenge for us or issue. Could we be positive in terms of units? We're not anticipating that. As we said very early in the year, that particularly in the second half, even though first half units and as we've said, it's been very positive for us, first half units in our U.S. jeans business are up a couple of percentage points over the first half of 2010, so again really like to see that, and that's great news. But we still have the second half plan down in terms of units. And we said, overall for the year, we were looking at a mid-single digit percentage decline in our U.S. jeans business on those ongoing programs. And we're still planning something more like that. If the consumer responds a little differently, could it be a little better than that? Sure. But that's not how we have the numbers forecasted.

Next question comes from Omar Saad with ISI Group.

Among the many things to be impressed with today, one thing that we haven't discussed and maybe is in detail in the Q&A portion, is the inventories. It's been kind of a growing concern across the sector, inventory growth outpacing sales growth. And your guys' inventory seems to be going nicely in a right direction, maybe any more detail around that, especially in the domestic market? And then what your sense is out there at retail and in the channels and some of the competitive level, are you worried about an overinventory situation kind of taking some the steam out of all the positive momentum you have going?

I'll start on that. In terms of the inventories, Omar, I don't know if you heard the commentary or not. But so the 17% increase, the way we look at that and again, it was a big improvement over what we saw in the first quarter. And I guess, I'd step back and say, you know that inventory and inventory controls and disciplines is just is a very, very important part of how we manage our business here in VF. So it is an area we've put on an incredible amount of focus on. And so relative to the 17%, the first piece you really need to look at is, what's the cost impact of that? To get down to the volume impact, you really need to look at what's the cost impact. And our costs in the inventories as of the end of the second quarter are up about 9%. So in other words, of the 17% increase, 9% alone is driven by --it's just driven by cost increases. So that leads to 8% related to unit volume increases and that matches up really well with what we're looking at through the rest of the year in terms of unit volume increases in our revenue numbers. So the point is we're really, really well aligned right now and very consistent with what we've seen in the past in terms of our overall inventory levels.

And Omar, to the second part of your question about, I guess, what you really reference to is, what if the overall apparel industry is overinventoried will that clog up our opportunities? I don't think so. Clearly, that creates a risk, but we've been through that risk before. Just during the recession, you recall during the recession, our revenues held up pretty strong, and that was a time when clearly demand was not adequate for the amount of supply that was out there. And what we did then, is as you know, last year, we invested a lot behind our brand. We have a strong brand. We increased our investment behind them, and we have innovative products. And consumers found a way to those products and not to the stuff that was out there real cheap on sales that there was too much of it. So we're confident -- today, we have stronger brands, a bigger marketing investment and more innovation in our products. So we're pretty confident. There's some risks, sure, but we're pretty confident.

Eric, do you feel like the industry is overinventoried? Do you think it's maybe not as bad as people think?

I'm not -- as I talked to the retailer community, I'm not hearing that as a concern.

Okay, that's helpful. And then one quick question, if I may, on Timberland. I know you guys did a conference call on it already. But as I've been thinking about the apparel opportunity and the category expansion opportunity, given a lot of VF's core competencies overlaying on the strong existing footwear business, can you talk a little bit in the context to what you guys did with the Vans, which is primarily a footwear brand? And what you've learned from that, that really could help you to help apply to what were you going to do with Timberland?

Sure. We have talked a lot about our experience at Vans, which had a small apparel business when we acquired it and has grown substantially. Now my comment about Timberland's apparel business would be about the U.S. opportunity. We have a very successful European apparel business that's doing quite nicely. So we hope to support that group as they continue to do it nicely. There is an opportunity here in the U.S. We have -- we were just in the process since we do not own Timberland at this point of talking with the current management team about how we leverage VF's considerable apparel skills to -- and knowledge of the U.S. consumers and the channels of distribution what Timberland sells we have experienced with those consumers. And we're marrying that with their brand knowledge and then maybe some execution capabilities that we have around fit in those kinds of things. We can really help them get that right. It's too early to talk about what the outcome of that is. But we are approaching it with at least as much rigor as we approached the Vans opportunity, and we think it's an important opportunity for the future.

Our next question will come from Evren Kopelman of Wells Fargo.

I had a question on -- on the U.S. jeans business, you just said 2/3 of that pricing, the $300 million is from that business. And I think you said if you could clarify that, that is in the mid-single digit decline in units for the year. Can you talk about what kind of scenarios for that is modeled into your guidance? Because like you said, no one knows what's going to happen in the second half. But how far can that number change before you could miss guidance, for example? If you could talk about that, that would be great.

I'll certainly try to -- I'm not quite sure I understand the question, however. That is what's built into our guidance. So in other words, the unit decline and the impact of pricing or all the factors that are reflected into our remainder of the year 2011 guidance.

And to frame that up in Jeanswear, we're having -- we have a unit increase in the first 6 months of the year, a little bit better than we hoped, given the price increases that we took. And for the year, we're calling for a mid-single digit decrease in units. So we have a lot of erosion to happen in the back half of the year to get to a mid-single digit unit decrease from where we started -- from where we're starting with a positive trend coming in. We have a lot of experience in price changing in all of our channels of distribution and have a pretty good feel for what it might be like. We have been conservative in our planning of that to date, as evidenced by the unit growth we had in the first half. Hoping that's true in the second half, our cautionary comments around that are just because, as I said in my comments, we don't know. No one really knows how this is going to play out. But we think we've got the right assumption. Does that help you?

Our next question comes from Robert Ohmes of Bank of America Merrill Lynch.

A couple of quick follow-ups. The first, I was hoping that Karl Heinz Salzburger could give a little more color on Europe. I don't get to Europe as much as I would like to. So I'm trying to get a picture in my head as the types of customers that you're building these big backlogs in North Face and Vans, are these a lot of partnered stores concentrated in any certain regions? Or just maybe a little more flavor on that amazing fall backlog that you guys reported for both those brands, that would be my first question. And second one maybe for Scott, just some more commentary on the flavor, the Jeanswear business in the U.S. specifically who you guys are taking share from. Because it sounds like you are doing a great job with Lee and Wrangler from taking share. Is it private label, is it Levi's? Just some picture on what's going on there. And then the final one for you, Bob, is, I just want to clarify, are you guys actually -- are you guys seeing costs down year-over-year for the first quarter of '12 in Jeanswear? Has the cotton come down enough where you're seeing a year-over-year decline? Is that what we should see from the buying you're doing right now?

Karl Heinz here. Maybe, yes, I'll start with the first one, Robert. We said it before, we're doing very well in Europe at the moment. There are a couple of reasons. The big picture is we have a pan-European organization. That means there's none of the big countries like Germany, U.K. where our brands, we're the number one. So that means we have a still big opportunity in terms of penetration with our accounts. That's one of the reasons why we're doing so well on our bookings. Our retail model at the moment has 2 types of models. One is owned stores, which we run, and primarily, on The North Face brands in the outdoor coalition and Napapijri and Kipling, 7 on the sportswear coalition. And then we have a second leg which is department stores, which are basically from a consumer perspective, the same look, the same feel, but the stores are managed by typically a customer of us, and those we have primarily on The North Face and Napapijri. Now the total number is still very slow, very modest, we talk about 50 stores at the moment. And we have a lot of room to grow to grow, that's the good news. So to sum up again, with our brands, The North Face, we still have a relatively modest penetration with our customers and still have a room to grow.

The next question comes from Eric Tracy of FBR Capital Markets. Eric Tracy - FBR Capital Markets & Co.: Eric, if we could -- if we could. I'm not quite sure what their place there. But there were 2 other questions that Robbie, we'll clearly get to your questions. So next, Scott Baxter would respond to the second question that Robbie asked.

Robbie, we've seen that we're taking share in the mid-tier market are Lee products that really, really going with an innovation platform that's been very successful, both in female and male but extremely successful in female a little bit less in the last 18 months to 24 months. So we're really pleased with that, and we'll continue to go ahead and push on that going forward. In addition to that, we've done a really nice job with our share in the mass channel in men's, and we've had some very nice success over the past 18 months with our Western specialty products with Wrangler with new products and new innovations coming out there.

And then the final question that Robbie had was related to, would costs actually be down year-over-year, I think it was specifically around Jeanswear. And no, they wouldn't be. So the first quarter of 2012 will still be matched up against, of course, the first quarter of 2011 when we brought some fairly low costs into the year, right? So we were buying denim at a much, much lower cost at the end of 2010, which was then sold, made into products and sold in the first quarter of 2011. So no, year-over-year costs will not be lower. What will be lower is the first quarter cost. It was lower than they were in the fourth quarter. So we'll just start to see some easing there. But in terms of quarter-to-quarter, no, costs will not be down. So now, Eric, sorry about that. Eric Tracy - FBR Capital Markets & Co.: Real quick, just a couple of ones here. Eric, as we think about going into the back half, the price increases coming through, your sense of the retailer pricing strategy. I know, it's going to be dependent on channel and certainly the unit brands. But what -- how are they pricing, is it relatively consistent? Do you feel like there's going to be some dislocation about how they -- some eating margins, some fully passing through, just a little bit of color on your sense as to how they're planning.

Yes. That's a really broad-reaching question, given all the retailers we deal with and all the product categories they sell. I think that everybody is sensitive though to the pressure on the consumers in their channel. And there's different pressures by channel. There's much more pressure on the mass channel consumer than there is on the luxury consumer right now at this environment and for all the obvious economic reasons. And so I think the retailers have been really thoughtful about having, offering the right value for their consumers' shopping in their channel under their circumstances right now. And we're aligned with that, we believe. Will something change as we get into the second half? Could, we're not anticipating, but there's a lot of dialogue around this. And everybody is obviously want to be watching this very carefully as we get into fall. And as we've said a couple of times in the call, so far this year, we have been a little too conservative in the unit volume erosion that we had anticipated. And I would calibrate our conservatism -- is the back half equal to the first half? But it's a bigger deal on the back half. I'm not sure if I adequately answered your question, Eric, but that's the best I've got. Eric Tracy - FBR Capital Markets & Co.: And really just a housekeeping here, Bob, tax rate back half, how should we be thinking about that?

Yes. The tax rate will be right around, I believe, it's right around the 20%, 26% in the back half. So that's on a full year basis, Eric, would be really close to 25%, maybe just a little under 25%.

That will come from Taposh Bari of Jefferies. Taposh Bari - Jefferies & Company, Inc.: I wanted to ask a follow-up on Europe, particularly on the Jeanswear business from Karl Heinz. It sounds like that business has been, I guess, really the only business in your portfolio that's not performing maybe as well as some of the -- or hoping. So I was just trying to get an idea what it's going to take for that business to improve, and if you could talk about any kind of geographic disparity on the continent.

Of course. Yes. Well, first of all, we are a little bit victim of amazing net growth numbers on outdoor and sports, right, where we have 25%, you heard it, 30%, which is not easy to repeat. So it looks like if you grow a little bit less but still in a single digits, that's a poor job. So I would say, we had a couple of difficult seasons with jeans. We have reacted. We have improved our product offering. We improved the sweet spot where the brand is meeting their customer demand. We are acting on the advertising side. And we see the results. We see the outcome. We have seen our fall bookings were up. They were up in mid-single digits on Lee, close to double-digits on Wrangler, which is a great result. And we're pretty confident that we can -- we have seen -- we start to see momentum now in our jeans business. But again, we do not expect that very high growth rate we have on Outdoor & Action Sports. Taposh Bari - Jefferies & Company, Inc.: And then just a quick follow-up on SG&A guidance for the year. Can you kind of clarify, are you reiterating the, I guess, 100 basis points of leverage for the year? And if so, I'm just trying to understand, why not, I guess, raise that line item, given the fact that in the second quarter as leverage came in a little above where you're looking, and then it sounds like your sales guidance for the back half is a little bit stronger, so I would expect some stronger leverage opportunity there, if you can just touch on that point?

Yes, we did, we are confirming is the answer to your question, the 100 basis points on the SG&A line. Yes, relative to why isn't it a little better, I think, is what you're saying. And yes, any revenue increase should help us a little bit. We'll also look at our spending levels and in terms of investments that we might make in the marketing side as well. So we're still really comfortable with the 100 basis point reduction that we've set out to achieve.

Thanks, everyone, for participating in our call today. You'll be hearing from us again soon, we hope, about the Timberland acquisition and then, of course, in 90 days with the third quarter results. Thanks a lot. Have a great day.

That does conclude today's conference. Thank you, all, for your participation.