V.F. Corporation (VFC) Q1 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the VF Corporation First Quarter Fiscal 2012 Earnings Conference Call. Please be aware that today's conference is being recorded. At this time, I'd like to turn the conference over to Jean Fontana of ICR. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us today for VF Corporation's First 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 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 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 company and the SEC. I would now like to turn the call over to Eric Wiseman.

Thanks, Jean. Good morning, everyone. Thank you 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. In the midst of continued economic challenges and uncertainty both here and abroad, VF's record revenues and earnings demonstrate the strength of our highly diversified business model, the power of our brand portfolio and the ability of our people to succeed in any environment. Total revenue growth of 31% in the quarter with organic growth of 12% continues to outpace our long-term annual revenue growth target of 10% and gives us complete confidence in our ability to achieve our goal of 15% growth in total revenues for the full year. During the quarter, each VF coalition achieved strong revenue gains with double-digit growth on a constant currency basis in every coalition. And with the exception of Jeanswear, where we expect to continue facing higher product costs in the first half of 2012, our coalitions posted double-digit gains in operating income and solid operating margin expansion. So with 1 quarter behind us and 3 to go, thought I'd take a minute to recap our key strategic priorities for 2012, which are obviously aligned to VF's fixed growth drivers. First and foremost, building lifestyle brands. In 2012, this means maintaining the momentum in our fastest-growing business, Outdoor & Action Sports and continuing to empower our other brands to grow and reach their full potential globally. We'll leverage our consumer insight, marketing and product development capabilities to strengthen consumer loyalty for all our brands. And this year, making Timberland work for our shareholders by growing revenues and improving profitability is a particularly important focus. We're really excited about the progress we're making there, which you'll hear more about from Steve…

Thank you, Eric. Starting with VF's largest brand, The North Face. Global revenues were up 14% or 15% if you exclude the impact of foreign currency, including a 20% plus increase in the brand's DtoC business. In our Americas geography, The North Face brand's revenues were up mid-teens, which along with solid international growth, puts us on track to meet our full-year goal of mid-teens revenue growth. So a great start to the year. To proactively address a couple of anticipated questions, I'd like to take a moment and comment on The North Face's inventory and backlog. On inventory, even though the balance of the winter selling season remained challenging and spring arrived earlier with warmer and drier conditions than normal, we have seen solid sell-through of seasonal products across the majority of our regions and channels. Looking out towards the fall, we are encouraged by our current global fall order book, which is up low double-digits to last year. And while we're certainly not immune to overall market dynamics, we are confident that The North Face is the best-positioned brand in the outdoor industry to manage through any environment. Okay. Now back to strategy. 2012 will be an exciting year for The North Face. With sales approaching $2 billion, we're hard at work executing a number of strategies designed not only to realize short-term growth, but also strengthen the brand's foundation and empower it to generate consistent growth for years to come. Taking a cue from Eric's list, The North Face key strategy in 2012 include delivering the most important, innovative outdoor products in the industry, leveraging our brand authenticity to connect more deeply with active consumers, providing a premium retail experience both in our owned stores and wholesale partners' locations and growing our international business. Let's start with…

Thank you, Steve. Following a very strong performance in 2011, The North Face international business, which represents about 1/3 of global revenues, has continued its momentum in the quarter with high single-digit constant dollar growth in Europe and tremendous growth continuing in Asia. On the DtoC side, we launched The North Face websites in Italy and Spain, which now, along with the U.K., Sweden and France, brings our European e-commerce presence to 5 countries. We expect to launch a site for Ireland during the second quarter and Germany, Austria and the Netherlands in the second half of 2012. The North Face European e-commerce sites continue to outperform our expectations on all key performance indicators. We're truly excited to watch this business grow and to have country-specific vehicles to better connect and communicate with our consumers. On the wholesale side, we are pleased with our growth amidst an increasingly difficult environment. In Europe, winter arrived later than expected, and we saw concentrated sales in a short period of time in the first quarter. Looking at fall, as we anticipated, retailers are being cautious and are committing later to fall orders. That being said, we continue to gain market share and we keep a keen eye on market dynamics so that we can react as needed to future changes. For The North Face in Asia, our momentum is strong with a double-digit increase in the quarter. We have had very positive results from a new advertising campaign that launched there a few months ago. We're also testing a new retail concept that has great promise, have begun implementing an integrated digital communication plan. All of this continues to build the foundation for tremendous future growth. Now we move on to Vans. Steve?

Thank you, Karl Heinz. Coming off a terrific year in 2011, where we passed $1 billion in sales, Vans had yet another strong quarter with global revenues up 25% or 27% excluding the impact of foreign currency. In the Americas, revenues increased at a low double-digit rate in constant dollars. We are in very good shape to reach our full year goal of mid-teens growth. Our 4 main strategies for Vans in 2012 are similar to those at The North Face. Starting with innovation, our Vans product team, working with 4 of their top skate athletes, took 2 existing outsole technologies and combined them into a single patented WAFFLECUP outsole technology platform. Our new Stage 4 skate shoe is being debuted in stores and online this spring. This new innovation has reinforced that our Vans organization continues to be the leader in breakthrough technologies that exceed the expectations of their core skate consumer across the globe. In 2012, we will continue to elevate our connection with consumers by investing heavily in grassroots events like South by Southwest, numerous skate events and this summer's iconic Warped Tour. For all of these events, we're using social media in new and creative ways to link consumers back to the brand and interactively telling our story. In fact, our efforts have yielded a nearly 60% increase in Facebook fans and Twitter subscribers since the beginning of the year. Our Americas DtoC business continues to perform solidly. In the first quarter, Vans DtoC was up 13% including a nearly 40% increase in our e-commerce business. In both our wholesale and DtoC businesses, we continue to aggressively build the brand outside of the Western U.S., in Canada, Mexico and up and down the East Coast of the United States. To this end, we have opened 7 new stores since the beginning of the year, all primarily on the East Coast of the United States. We've scheduled an investor meeting in New York on June 14, where we'll go into much greater detail about Vans' overall business and long-term growth strategy. So now I'll pass it over to Karl Heinz, who will take us through some brief international highlights before we move onto Timberland.

In the first quarter, Vans saw tremendous growth of greater than 50% in Europe and high-teen revenue growth in Asia. We are clearly benefiting from higher brand investments, focusing on new products, strong emotional storytelling and focused skate culture events to connect deeply with our consumers. During the quarter, we opened 3 new owned retail locations, including a store on Camden Street in London, which showcases Vans' new retail concept, in 3 short weeks, become our second-best performing store in Europe. We're also excited about the simultaneous launch next month of 7 new e-commerce sites in the U.K., Germany, Netherlands, France, Ireland, Austria and Sweden. We're clearly at the beginning stages with e-commerce in Europe, so you can understand why we are very bullish on our long-term growth opportunities in Europe with the Vans brand. And now let's take a look at Timberland. Steve?

On a constant dollar basis, global revenues for Timberland were up modestly in the first quarter. In North America, revenues declined slightly due to unusually warm weather that dampened demand for Timberland's core winter boot business, as well as lower royalty income from the brand's former apparel licensee. The license was terminated last year. As Eric indicated, we are intensely focused this year on realizing the tremendous opportunities presented by the Timberland brand, growing revenues and improving profitability. Building on the strategies we laid out on our last call, we're focused on accelerating Timberland's product engine for maximum innovation, activating the brand to create a deeper consumer connection, assessing Timberland's wholesale distribution and DtoC and growing the business internationally. Timberland has a long-standing history of building quality footwear and we're looking to leverage this competency to develop a corporate innovation center that will serve both the Timberland and other footwear brands in the VF portfolio. Simultaneously, we're putting in place the team and infrastructure to support next year's apparel launch. We recently placed a leader from our North Face apparel business in Europe at Timberland to head up this important effort. We're fast developing a very clear vision of how to translate Timberland's unique heritage into apparel with special fabrics and features, which we look forward to sharing with you. We're also in the process of evaluating Timberland's DtoC strategy and operating model. We're making good progress in terms of rightsizing the cost structure and as well as in specific initiatives designed to drive traffic, improve conversion and improve margins. These efforts will better align Timberland's DtoC model with that of our Outdoor & Action Sports coalition. Now I'll turn it over to Karl Heinz to take you through what's going on internationally with Timberland.

Timberland's international business, which makes up more than 50% of total sales, saw low single-digit growth in Europe and strong double-digit growth in Asia on a constant dollar basis. Italy is Timberland's largest European market, and the challenging market conditions there are weighting on our overall results in Europe. But the overall strength of the Timberland brand makes us confident that we will weather these conditions and continue to grow and gain share in this important geography. To highlight a few strategic initiatives, on the product side, we are seeing excellent growth with our Earthkeepers and women's footwear. Both categories are starting to hit their stride, and we are confident that with continued marketing investments, they will establish themselves as even greater contributors to our overall performance this fall. In Asia, our strategic initiatives for Timberland are similar. Within this geography, we see opportunity for Timberland in multiple markets and are particularly excited about the upside in China, where we can leverage VF's existing infrastructure. Keeping our focus on our international business for the moment, let's now switch gears to Wrangler. On a global basis, first quarter revenues for the Wrangler brand were up 8% or 10% if you exclude the impact of foreign currency. International highlights for the quarter was continued very strong growth in Asia, where revenues grew at a mid-teen rate in constant dollars. Perhaps not surprisingly, our business in Europe softened in the first quarter, leading to lower revenues there. Positive performance in Northern and Eastern Europe were not enough to offset challenging conditions in Southern Europe, especially in Spain, Greece and Italy. We were pleased, however, to achieve a nice improvement in gross margin and operating income. So in summary, a slightly lower top line for Wrangler in Europe with improved profitability. Strategically, we have a number of initiatives underway to position the Wrangler brand for long-term growth. This includes accelerating our efforts around product innovation, more powerful storytelling and new tools to help our wholesale partners communicate the brand's authenticity and heritage. With that, Scott will take you through Wrangler's performance in the Americas.

Thanks, Karl Heinz. In our Americas geography, Wrangler grew at a low double-digit rate in constant dollars, driven by strong performance in our Mass Market and Western businesses, pointing again to the success of new products and helped by the healthy sales of spring seasonal products. Product innovation tops the list of key strategic initiatives this year for Wrangler. On the mass side, we're seeing great results in our performance polo shirt and are looking forward to new fleece and easy-care shirt launches later this year. We're also very excited about the expansion of our Wrangler Five Star Premium line, and although early on, the Wrangler brand's extension into footwear. In our Western business, our product innovation efforts are targeted squarely at Western lifestyle consumers in both men's and women's. Examples include expanding our Premium Performance Cowboy Cut platform with shirts and a new Retro jean that will retail between $40 and $50 a pair in Western Specialty stores. DtoC is also an important growth engine for this business. In fact, our e-commerce business grew by 50% plus in the first quarter, and we're looking to develop a Wrangler Western partner store model. With 2 locations already opened, early reads are quite positive. And finally, let's take a look at the Lee brand. On a global basis, first quarter revenues were up 6% or 7% on a constant dollar basis. In the Americas, the Lee brand achieved low-teen revenue growth helped by strong seasonal sales. This performance contributed to market share gains in both jeans and total bottoms in the mid-tier department stores. Our ability to keep our products new and relevant, keeping the consumer at the center of everything we do by combining their feedback with our design expertise, is clearly working. On the men's side of the Lee business, new fit innovations like modern straight fit and motion comfort khaki are selling through strongly, and we're excited about the potential of our worry-free casual pants. Like Wrangler, we're also looking into opportunities to increase Lee's Premium offering to expand our brand's reach. On the women's side, we are seeing great momentum for our Shapetastic Perfect Fit [ph], an amazing slimming technology, and are very excited about the new product launches from Riders by Lee in mass stores later this year. All in all, a great start to the year with a tremendous amount of excitement and energy around the momentum we've built, the innovation that's coming and the opportunity to continue to grow this business. Karl Heinz?

Similar to Wrangler, Lee saw lower revenue in the first quarter in Europe while also improving profitability. In Asia, growth was at the high single-digit rate, which is lower than we have recently, due to entirely to the timing of shipments. We're looking forward to strong Q2 performance. On the product innovation front, Lee's women's stretch deluxe initiative continues to show promising results with high sell-through. We look forward to building on this initial success with a strengthening pipeline of innovative products to drive future growth. In the near term, we are very focused on execution of a variety of action plans to stimulate sell-through by managing inventories and expenses tightly to ensure we are in the best position possible relevant to the environment. Now I'll turn it over to Bob, who will take you through our financial highlights.

All right. Well, thanks, all, for the terrific overview. Now I'd like to wrap up today's call with some commentary around our first quarter financial performance and our strengthened full year guidance. Revenues were up a strong 31% or 32% in constant dollars. Similarly, our healthy organic revenue growth momentum continued in the quarter at 12% reported and 14% in constant dollars. In 2 of our very important growth drivers, international and direct-to-consumer, organic revenues grew by 15% and 16%, respectively, so we're tracking really well against the 2012 targets set in February for these businesses. Our revenue growth in the quarter was somewhat stronger than anticipated due in part to the unusually warm weather, which drove earlier shipments and stronger sales of seasonal products. Now a quick comment on 3 businesses that we haven't touched on: Imagewear, Sportswear and Contemporary Brands. All had very good quarters, with each double-digit top line growth and a healthy expansion in operating margins. A couple of details. Imagewear posted yet another quarter of double-digit revenue and operating income growth. And as we've seen in past quarters, the momentum continues in the Image or the uniform side of the business, driven by 20% plus growth in both our Bulwark Protective Apparel and Red Kap uniform brands. And we also achieved another quarter of growth in the Licensed Sports Apparel business with particular strength in our Major League Baseball and NFL businesses. Regarding Sportswear, we really feel good about the strength we're seeing in both the Nautica and Kipling brands. Nautica's focus on differentiated products, supported by a powerful brand message, is clearly resonating with consumers with healthy increases in both its wholesale and retail businesses. Kipling in the U.S. also delivered exceptional retail growth in the quarter, over 50% in fact, with very strong…

Thanks, Bob. Operator, we're now going to open the line for questions.

[Operator Instructions] And we'll take our first question from Robert Drbul with Barclays.

First question that I have is on the outlook for the full year. Can you elaborate a little bit more in terms of the way that you guys are positioned around the orders and open to buy throughout Europe? And just sort of are there any stretches to what you're assuming in that? Or where is there any risk that you see around the plans for the European business, specifically Vans and The North Face?

Karl Heinz, do you want to take a shot at that?

Yes, yes, I do. As we had said in the release before, we had expected a little bit softer bookings, fall bookings, which is what actually happened. Having said still that, we still expect The North Face to grow in the full year. I mean, this is a firm statement. On Vans, Vans operates a little bit on a different business model than The North Face. We have multiple collections, so we had to work on 4, rather than 2. And so we don't have the full visibility yet on the full fall and back-to-school looks. But what we have at the moment, we said, we experienced a 50% growth in the first quarter makes us very confident that we'll have again, after last year, a very strong year on Vans. Did I answer you?

Yes, that's helpful, yes. And I think you said The North Face, the global fall bookings were up low double. Is there a big discrepancy? Can you just give us any numbers around the U.S. versus the international order book on that one?

Karl Heinz, do we want to split this one?

Yes, yes, I can start maybe with my part, which is Europe and Asia. We saw very strong numbers in Asia, which were -- they mirror historical numbers. So we mentioned double-digit up, very strong numbers. Europe was a little bit softer and we had a few exceptional items, not only the economy, which everybody knows about, and the bad weather, which really didn't help the business. But we also saw, particularly in the U.K., we had some major customers who had some bankruptcies, which affected us. Now this has been resolved. And if you neutralize these extraordinary events, we also pulled out from distribution which we didn't believe was good short-term and long-term for the brand. So if you neutralize these extraordinary factors, we still see a few percent of growth also in Europe.

And so, Bob, in the Americas, we don't -- we're actually seeing fall bookings comparable to prior seasons. So we're really on a nice trend. And in fact, as you heard, there's no change to our full year expectations of mid-teen growth for the brand on a global basis. I think it really speaks to the brand's diversified strategy, both from a region standpoint as well as the activities-based model that was deployed 3, 3.5 years ago, as well as the different categories of business that we sell into retail.

And, Bob, the other piece is Asia, where the brand is really strong in Asia and also very new in Asia. So we've got nothing but opportunity there. And our teams are capitalizing on the opportunity.

And next, we'll go to Michael Binetti with UBS.

So I'm just -- I'm curious about your comments that there was a bit of a gross margin tail -- sorry, headwind due to Timberland inventories being a bit of a challenge. But you didn't see a similar thing materialize for The North Face, yet we have -- yet it sounds like you're planning on doing some clearing of low-productivity SKUs for The North Face at the same time. So I was just hoping you could help us reconcile that as far as how we're thinking about -- it sounds like you have a lot of confidence in the second half earnings. That's usually very closely tied to The North Face. We're trying to think about a little bit -- how much -- how conservative we are or how much risk there is to the back half potentially from inventories for North Face in the channel still that might show up from last year from the warm winter.

Sure. So this is Steve. So on The North Face, I'll deal with that first. We saw a really strong close to 2011, where we moved through the standard seasonal inventories at that point. And as we came into the first quarter, we saw solid growth of the seasonal categories as well. We -- I think from a brand standpoint, we've seen really good sell-through. Inventories at retail are in good positions. There are some retailers that are sitting on slightly higher but from our standpoint, we've seen such good sell-through here that we feel we're in the best position as we move into the second half. And our fall bookings would give us that confidence. And I think it's important to say that retailers book sales for coming seasons based on prior season sales, not necessarily prior season bookings or receipts, but on what they sold through. And our future bookings in fall really reinforce how well we've done in the first quarter and how we expect to enter into the second half. In the case of Timberland, we are still learning what it means to own a business that's primarily a winter boot brand. The impacts of the warm, dry winter were somewhat greater than we expected. That has left us with a slightly higher inventory position now. But as Bob mentioned, we will work our way through that by the end of the second quarter. But I think it also is important to say that this really reinforces our long-term strategy to accelerate innovation in both footwear and apparel, to build a business that has a more diversified assortment, not only in the fall but year around.

And Michael, I'd just add to that, that obviously right now we're instilling a lot of discipline, especially in the inventory management area at Timberland, and we're seeing a little bit of short-term impact from that. But we're going to see big benefits going forward as we get the inventory levels down, which are quite high right now, and as we work those down by mid-year and then move forward in the second half of the year.

And, Michael, it's Eric. Just to make sure there's clarity about the situation in North America with The North Face, yes, we did have a few retailers that put some inventory back to hold onto it to sell until fall. All of that is reflected in their bookings. They obviously wrote their bookings knowing exactly what they had. And so our outlook for the fall, we have pretty clear visibility to the outlook, and we're really encouraged.

Okay. And then just since we're going to be -- I think the next time we'll chat with you guys will be at a Vans Analyst Day, maybe a Vans question. I think we heard that you guys are -- you have the e-commerce platform set up in Europe now. And I think it becomes quite leveragable that you have the back-of-house supply chain and order fulfillment set up. And I think you're going to be turning on quite a few markets for Vans now that you have North Face on in the near term. Can you tell us a little about the plans for Vans as you roll that out across Europe on e-commerce and perhaps what you're seeing early on with North Face, so we could think about, as you do that for Vans?

Go ahead, Karl Heinz.

Yes. Michael, you said it all, right? We do work and we have a leverage on our, what we call the backend on e-comm. We started about 15 months ago with the first trial market on The North Face. And what we do now, we are rolling out other markets and brands. We use the backend, which includes not only the system part but also the order fulfillment and the deliveries, the supply chain. It's all backed and it's leveraged. Well, what we do keep in focus though is the brand part. So every site has its relevant part, so it could speak to their relevant consumers. We don't know yet what is going to happen on Vans because we mentioned we are rolling it out next month. But I did mention that in my script, the experience we had on The North Face. Once we improved the first initial difficulties, it's great. And it's much over what we had planned and what our expectations were. It's a very fast, rapidly growing channel.

For us, that's all upside in Europe around the e-commerce thing. This will not come as a surprise to you: we've been pretty conservative in our expectations this year as we start launching the Vans e-commerce sites in Europe. But it's all upside and the right thing for us to be doing.

All right. And just one last question, and I'll let you guys run. But since we're on the topic of field trips, we're going to China. You guys are taking investors to China in September. Why now? Why is now the right time? You guys have been there for decades. It's a single-digit part of the revenues. But I'm just curious, is there an inflection point ahead? Or why is now the time to showcase what you -- the work you guys have done in China?

Well, we've been thinking about when was the right time to go to Asia and talk about our Asian business and our focus on China in particular. And Timberland was actually an inflection point because they're so successful in that region that we thought now was the right time to go over and talk about our Asia-Pacific business and share with you just how much progress we're making. We're getting very close to that $1 billion mark in the region. And we thought that was something to talk about and show you how we're doing that, centered, of course, our biggest market is China, but wanted to share all that with you. So looking forward to that trip in September.

And next, we'll go to Jim Duffy with Stifel, Nicolaus. Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division: A couple of questions. If you mentioned what you're seeing from Timberland orders for fall, I missed it. Can you share some perspective on this? And is the 10% annual growth objective for Timberland still a reasonable expectation for '12?

Yes, Jim, this is Steve. Timberland, similar to Vans in Karl Heinz's earlier answer, operates on a different model than The North Face, so we don't currently have a full season visibility into what that fall season looks like. But we are confident that our expectations of Timberland adding $1 billion in revenue to 2012 is well on track to come together.

And Jim, Eric. When we talked last quarter about the 2012 outlook for Timberland, we mentioned that it would be low single-digit revenue growth. As we cleaned up some distribution, closed some underproductive owned stores and we exited the apparel business in the United States, we're positioning long term. 10% annual growth is still our target. But our specific reference to this year's Timberland organic revenue growth number was in the low single-digit range.

And Jim, the other -- yes, the other reconciling item there is currency, right? So from the 10% currency as well as the exiting of some business, that's how we got down to the single digits. Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division: Got you. That's helpful clarification. And then a question on the Jeanswear business for Scott. So competitors have made some pricing adjustments recently. Has that had any detectable influence on Lee or Wrangler's sell-through share in recent months?

No, Jim, it hasn't. And our intention is try to hold pricing and keep it where it's at. Now if you remember, our last couple of calls, Jim, we've talked a lot about the fact that we didn't go up as far as the pricing went up and as far as the cost went up. We stayed fairly neutral, only went up about half. But as we look at the business and we look with our customers to work with them, we'll be fair and we'll work with our customers to make sure we maximize the business going forward. But right now, our intention is to stay pat. Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division: Got it. And a quick follow-up to Mike Binetti's question. When you talk about the 15% SKU rationalization, that isn't liquidation but it's assortment planning for future seasons, correct?

Exactly, Jim. That's all about rightsizing our collections to really maximize our output and our creativity and also improve margins from that exercise.

And next, we'll go to Kate McShane with Citi.

I just wondered if we could have a little bit more detail around the outlook for the year and where the $0.15 is coming from. Obviously, there was some contribution from better-than-expected currency. But I wondered if you could help us understand the additional $0.10 upside since revenue guidance is staying the same.

Sure. I'll start on that one. So Kate, it is important to factor in the John Varvatos piece. So what happens is we had John Varvatos business obviously built into our initial projections. We'll lose about $70 million of revenues by the sale, but not a lot profit, right? So there's not a big impact there. So what that means is if we're taking $70 million out of revenues, it means that we're feeling more comfortable with the rest of our businesses, some increase in the rest of our businesses and seeing some pickup there in terms of the additional or the incremental EPS contribution.

Okay, great. And then with regards to margin contribution then for the rest of the year, are there any areas for where there could be more upside with regards to gross margin than maybe -- than you were originally expecting, either on the cost side or on -- from pricing?

Yes. We're pretty well locked in right now. Based on prior conversations, we're in a very different place today than we've been in the past and particularly on -- or at least last year, and particularly on the denim side, right? So we're pretty well locked in right now on the cost side. And that is true both from a sourced goods standpoint, as well as our denim buys. So we're covering at this point in time at least through the end of the third quarter and about half of the fourth quarter. So we have a very, very good picture in terms of what those costs will be. And on the revenue side, I think you mentioned pricing. I mean, pricing as well, I think the question has been around the Jeanswear side, particularly here in the U.S. And as Scott just said, our intent is to hold our pricing there. But it's really important to keep in mind that our pricing increases only covered half of the cost increases. So once again, we feel very confident about our assumptions there.

Next, we'll go to Eric Tracy with Janney Capital Markets.

I guess, if I could follow up on the Jeanswear business. Clearly, the combination of pricing and product costs rolling over are going to help domestically. Maybe, Karl Heinz, a little bit more color on the European business. Remind us what Jeanswear represents for that region and sort of the visibility as you go forward through the balance of the year, what top line trends looks like there.

Sure. Let me just do some math in my head. Jeanswear, our largest business in Europe as well as the Outdoor business. I think Jeanswear represents about 20% of our total business in Europe. And we said it before. We had expected a little bit slower bookings for fall, which actually happened. Where we see some pressure is on the replenishment. Jeanswear operates a little bit different business model than Outdoor, where the replenishment side is higher than in Outdoor. And we basically see the same trend. Our customers, primarily the department stores, are suffering from lower traffic. And we see that reflected in the replenishment then. So the bookings came in as we had expected. They were slightly up in spring, and they were a little bit lower -- I mean, they are a few percent down versus last year in fall. But what we have worked on very highly was the improvement in gross margin and in the profitability of our Jeanswear business. And that's what's happening at the moment.

And, Eric, it's the other Eric here. I'll add to Karl Heinz's comment and remind you that when you look at the international business for Jeanswear, you have to look at China and India. Our biggest business in China is our jeans business and our biggest business in India is our jeans business. And our jeans business in China is more profitable than any jeans business we have anywhere in the world. So our Asian growth in Jeanswear is a really important part of our story. And I'm sure we'll be talking about that in September. Hope you can join us.

Okay, no, that's great. And then really just quick follow-up. I realize it's a smaller piece of the business, but certainly the opportunity for growth, and it sounds like turning contemporary, be it 7 For All Mankind or the Ella and Splendid businesses. Maybe just touch on, what are the kind of key drivers there? Is it wholesale versus direct for 7 For All Mankind? Sort of what's driving that? And where do you see the opportunities over the next 12 months?

Sure. I'll start with talking about the Splendid and Ella Moss business, which we don't often talk about. And Bob commented, I think, in his comments, it was up 20% in the quarter. That's not new news for us. Actually, it's been kind of growing that way for the last couple of years. That is a very -- those are very strong brands, very relevant to their consumers, mostly a U.S. business for us now with international opportunity. Mostly U.S. business, and that kind of growth is not new. They've been very disciplined there about delivering strong double-digit growth quarter after quarter after quarter. 7, as you know, was a business where we went backwards during -- particularly during the recession, when the premium business in general slowed down. And that team has been working very hard to make sure they have the right product and the right mix in their wholesale and retail business. And both grew. Both the wholesale and retail business were up. And as Bob said, I think, in his comments, the brand in the U.S. was up 18% in the quarter. And we're thrilled to see that kind of traction. It began in the middle of last year, and it seems to be accelerating.

And is that primarily a wholesale function of picking up share? Or was this kind of greater driving from direct-to-consumer?

I can't -- well, it's both. Both were up double digits, right at around the 18% range in both. I can't comment on the share piece at wholesale because that space, the premium denim space, has been a good space for the last 6 or 9 months. But I don't know that we're gaining or losing share there, but we are having that kind of strong double-digit growth. I don't know what the total space is.

And next, we'll go to John Kernan with Cowen.

I wanted to go back to Timberland again. You talked a lot about long-term margin recovery in this business. Is there any way to improve the seasonality potentially in Timberland? Maybe looking out into next year, do you see any long-term leverage to kind of improve that seasonality from a profitability standpoint?

Yes, I think -- John, this is Steve. Our opportunities at Timberland are to certainly strengthen the core footwear collection that Timberland's known for. But it's also to diversify that collection and look at growing the spring assortment, growing the men's and women's assortment. And it really is apparel, which we talked a lot about at the point of acquisition, the $300 million in incremental opportunity we see over the next 5 years. As we bring that online beginning fall 2013, we believe that we'll start to see that seasonality start to diversify similar to what we saw going on with The North Face back when we acquired it in the 2000.

Okay. That's helpful. And then revenue growth in 2013, and kind of an inflection back towards that 10% growth. Aside from apparel, what other drivers do you have to kind of produce that growth? Is there DTC growth? Is there going to be new wholesale partner doors? Or what really gives us and you guys confidence in that 10% growth rate?

Our confidence on that 10% growth rate over the 5-year period is improving the assortments and the sell-through of the brand in our key wholesale partners. It's also the improvement of DtoC as we look to improve the contribution of our current stores, as we achieve that, adding new stores, and certainly the e-commerce component where we see such great significance in our North Face and Vans businesses, leveraging those learnings in that platform to help Timberland scale in that area as well.

John, Karl Heinz here. I would add also geography, and I mentioned that in my section. We just started in China with Timberland, and where we can leverage the success story we're having with VF. And also Europe, the penetration in Europe, while it's a big, important market, there are still areas where we believe we can cover.

Okay, great. If you don't mind me asking one more kind of macro-related question, there's been some cautiousness recently out of some other footwear and apparel companies regarding Europe. Have you seen any change in confidence in your consumers and retail partners there since the fourth quarter towards -- to more of a cautious outlook, I guess?

Well, we read a lot of about Europe. I guess, what we have seen or what we see is more and more a polarization between the southern part of Europe and the central and the northern part, which we all know about and read about the difficulties of the southern part, the 3 big large markets, without even touching Greece, but Spain, Italy. What we have seen though lately is a little bit of stabilization. We haven't seen these trends deteriorating. So I guess that's the good news. We have to see how it will evolve. But so far, the good news, even at the weaker market, we haven't seen a deterioration.

And what I find particularly encouraging about our European situation, last year, we grew 16% on a constant currency basis. And there was economic turmoil then. Would we expect to be a little bit below that this year? But part of that is because our brands are -- we have brands that are relatively underpenetrated in a lot of countries. And Karl Heinz and his team have managed to identify a path that will still give us double-digit growth in Western Europe. Despite all the changes and swings and roundabouts across our brand portfolio, the breadth of our portfolio and the differences in how each brand has penetrated in each market is really an advantage for us. It gives us a lot more opportunity.

And next, we'll go to Taposh Bari with Jefferies. Taposh Bari - Jefferies & Company, Inc., Research Division: Wanted to ask you, I guess, Eric, on a follow-up to that last point. So it seems like you're doing a really good job of challenging -- or managing the macro challenges in Europe, and your brands are fairly underpenetrated there. I was hoping -- we got a glimpse of this at The North Face Analyst Day, I guess, last year. But I was hoping to get some more color on where you're seeing growth: if it's distribution, if it's door growth, or if it's just increased relevance amongst your brands.

Karl, you want...

Yes, it's multiple things, and some you touched on. Certainly, I mentioned about the e-comm initiatives, right? We are rolling out, as we speak, a new market. So that's one big initiative. The second one, still falling under direct-to-consumer, we are opening stores in The North Face, as we have mentioned before. And our number of stores today, a grand total of 40 stores, it's still significantly lower than even a sister company like Timberland. So that is an opportunity. If we benchmark the number of stores we have to some local competitors, we have a long way to go. So that's the second. The third one is simply geographies, right? The North Face had always had a pan-European strategy, and we are very rarely the #1 in the market. We have local competitors, but we are growing. So we are going on a pan-European basis, not just primarily in 1 or 2 markets. I guess, these 3 factors are helping us to see this continuous success we're having since many, many quarters. Taposh Bari - Jefferies & Company, Inc., Research Division: Great. Can you just -- would you be able to just talk to the -- or the countries specifically? Like which countries do you feel like you're most underpenetrated in, in Europe today?

Well, we still have, compared to some other competitors, what we call the emerging market, which is that area from Russia, which is a big important market for Outdoor. Russia, going down to Turkey, covering Poland and the Czech Republic. But primarily these 3 big, large -- relatively large and healthy markets, that's important. They are growing. They are doing well. We are going also very nicely, higher than the average in the Scandinavian area, while on the other big markets like Germany, Italy, France, we still have people ahead of us. There's a German player which has nearly 150 doors, and we have probably 10 in Germany. So we still have, even in the big markets, some room to grow. Taposh Bari - Jefferies & Company, Inc., Research Division: Great. And then just a final quick follow-up question for Bob. I don't know if I missed this, but can you tell us what Timberland's gross margins were in the first quarter?

Yes. We don't provide specific gross margins by brand. But what we can tell you is that for Timberland, the gross margin was right on the average. It was right on overall VF's average. Now again, we did expect it to be a little bit stronger than that, and we talked about why that was the case. But it was right on VF's overall average.

And next, we'll go to Omar Saad with ISI Group.

Eric, as you think about the portfolio management strategy for VF Corp., obviously with the addition of Timberland, the strong growth in the Outdoor & Action Sports segment, the increasing shift to a little bit more retail mix than wholesale mix, the business has become much -- is becoming much more seasonal, back-half-weighted. Are you comfortable with that? Do you feel like -- especially as you look out in the future and look to manage the portfolio, add brands, do you look to fill in kind of seasonally strong brands that would be -- that would offset kind of some of the way it's weighted now? Or are you comfortable with that, kind of building a really strong Outdoor business? If it's back half-weighted, it's back half-weighted. It's what we're good at. It's what we really know. Just your thoughts on the portfolio management and the seasonality of the business would be great.

Yes. Seasonality has not been a primary filter that we use as we look at the portfolio. We obviously are aware of it. And I would say that from an acquisition standpoint, which I think is the point of your question. We do look at, are there seasonal opportunities for us to strengthen businesses as we did with The North Face? And it's interesting to us that 12 years ago, we were talking about really difficult second quarters because The North Face was not a good business to be in, in the second quarter. But we've rounded out the product portfolio. We've rounded out the countries we sell the brand in. We've rounded out -- we have really good spring, summer products in The North Face. And that -- we weren't having that discussion for the last 2 or 3 years. And we have the exact same opportunity with Timberland. And as Steve said in his comments or the answer to one of his questions, apparel is really an important part of that solution for Timberland. And we won't be begin to -- we won't have a spring apparel line until the spring of 2014, so it's in our sights and we will get at it, but it will take us a while. But we haven't said, "Well, let's go acquire a business that will make us stronger in the second quarter." We are very comfortable with -- if we're leading in these cold-weather brands, if we have the strongest cold-weather brands, we will continue to have good third and fourth quarters as we have for the last 5 or 6 years in a row.

And Omar, just I guess, I'd just add to that, that one of the challenges with businesses that have that highly seasonal nature is from an operational standpoint and managing inventories. And we've demonstrated that we can do that pretty well with brands like The North Face. It's exactly what we're working on right now in Timberland. And again, we'll make a lot of progress there.

Great, great. And then one follow-up. On the kind of cost-inflation side, obviously, the cotton bubble seems to be behind us, so to speak. How are you guys thinking about inflation long-term? Yes, the material side may be getting easier, but we kind of all know about the structural wage story in China and emerging markets, where a lot of the manufacturing is done. How do you see VF in maybe a structurally inflationary environment, kind of especially once we get past the back half of this year? And how do you see that impacting the kind of overall marketplace if we really are going from 20 years of deflation to some extended period of inflation?

Yes. And we, of course, enjoyed that period of time from a cost perspective. But right now, in a more stable environment, I guess, you might say, it feels to us like there's a few percentage points of inflationary cost that will come our way probably over some period of time here. That's what we're seeing this year. And as we look forward, we expect something more like that. And as you pointed out, with the cotton bubble, it appears to be behind us, a lot more stable environment. But a few percentage points of inflation on an annual basis could be expected.

And that's one of the reasons, Omar, that we are investing so heavily behind our brands and why we're so focused on our innovation strategy because we believe that if we build these brands to be the leaders in their space and if we have incredibly innovative products, that we can get paid for the products with the leading brands. And seeing this wave of inflation coming at us for years to come, we think that's critical to our solution. Fortunately, we think we're well positioned with both the brand and the product innovation fronts.

And with that being our last question, I'll turn the call back over to Eric Wiseman for any additional comments or closing remarks.

Sure. Thanks for being with us today. As you've heard, the momentum of VF continues despite external economic challenges. We're really confident in our ability to deliver our increased 2012 guidance, and we look forward to giving you another update in July. Thanks so much.

And that does conclude today's conference. And we thank you for participating.