V.F. Corporation (VFC) Q2 2014 Earnings Report, Transcript and Summary

Good day and welcome to the VF Corporation Second Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Lance Allega, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone, and thanks for joining us today to discuss V.F.'s second quarter 2014 results. Before I begin, I'd like to remind everybody that participants on this call will make forward-looking statements. These statements are based on current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in documents filed regularly with the SEC. Participants may also reference non-GAAP financial measures. Where applicable, you can find presentations with comparable GAAP measures in our press release, which was issued at 7 a.m. Eastern Time and on our website at vfc.com. Joining us on today's call will be Chairman, President and CEO, Eric Wiseman; Bob Shearer, our CFO; and V.F. executives, Scott Baxter, Steve Rendle and Karl Heinz Salzburger. Following our prepared remarks, we'll open the call for questions and ask that you please limit your questions to two questions per caller. Thanks. Now, I'll turn the call over to Eric Wiseman. Eric?

Thanks, Lance. Good morning, everyone, and thank you for joining us today. We are very pleased with our second quarter and with our year-to-date results not just because they're consistent with our outlook, but also because we're winning where and how we said we would. Although V.F. second quarter is the smallest revenue and earnings quarter of our fiscal year, our strong top and bottomline results are a great example of our ability to create and build sustainable momentum. And momentum is the key theme you'll hear throughout today's call. Momentum isn't luck and it's not random. It's earned through focused strategies that come together to consistently generate multiple growth opportunities across our diverse portfolio. We never stopped creating great products. We never stopped elevating our relevant to in connection with our consumers and we never stopped strengthening our balance sheet to enhance long-term shareholder value. The V.F. revenues in the second quarter were up 8%, which is right in line with the organic growth component of our 2017 plan. This is acceleration also of the 6.5% growth we achieved in the first quarter. Our Outdoor & Action Sports coalition delivered the biggest gain in the quarter, with revenues up 16%. This is also acceleration off of the first quarter with notable performances from the big three brands. The North Face was up 11%. Vans was up 21%. And Timberland was up 19%. Our direct-to-consumer business delivered 18% revenue growth with double-digit gains in every region around the world and nearly every single brand in the portfolio. Looking towards the second half of 2014, which is the biggest period for a D2C business, we're well positioned to leverage both our brick and mortar and e-commerce channels to strengthen our brands and drive revenue growth. Our international business also showed accelerated momentum with revenues up 14%, reflecting double-digit increases in both our European and Asia-Pacific regions and strength across both the D2C and wholesale channels. Our gross margin at 48.4% was about in line with our expectations and at 48.9% for the first half of 2014. We're squarely on track to meet our full year outlook for 49%. Second quarter operating margin reached 9.2%, a 10 basis point improvement over last year, reflecting slight SG&A leverage and our earnings per share increased 16% to $0.36 per share. Since we announced our 2017 targets more than a year ago, V.F. has shown considerable resilience and exceptional results in the face of the challenging global economic environment, a highly competitive retail landscape and inconsistent consumer trends. When I look at the solid execution of our strategic growth drivers combined with our unrelenting focus on operational excellence, I am extremely confident about our ability to deliver consistent long-term value to our consumers and our shareholders. With that, I'm going to turn this call over to Steve, Karl Heinz and Scott to take you through our five largest brands. And then Bob will go through our financial results. Steve, it's over to you.

Thanks, Eric. The key growth strategy of The North Face brand success has been our ability to create products with industry leading innovation that equip and inspire consumers to get outdoors, push the boundaries of their own personal journey. This journey of course is a year round exploration. And because of that, over the past couple of years, you've heard us detail our strategies to evolve The North Face into a four season brand for our consumers. While I'm happy to report that these efforts are really paying off with strong results in our second quarter, with global revenues up 11%, including 37% growth in our D2C business and healthy increase in our wholesale sales. This was The North Face's strongest second quarter ever. In the Americas, revenues were up at a mid-teen percentage rate with double-digit increases in both wholesale and D2C. Our transitional products, led by Thermoball, continued to perform at extremely high levels, validating our ability to bring outerwear solutions to consumers across multiple seasons. We're also particularly proud of the launch of our Mountain Athletics apparel and Ultra Protection footwear collections. Both of these collections, which saw a great sell-through across all channels, significantly amplify our ability to serve the core outdoor consumer on a year round basis. Of course, great products are only a part of the equation. We continue to strengthen our strategies to connect our brand and products to consumers, looking for even more meaningful ways to engage and inspire them. This fall, you'll see the launch of a new US TV campaign designed to inspire the explorer in everyone and to drive an emotional connection to his/her own personal adventure. This effort of course will be connected to the in-store experience and new store openings to increase customer engagement across our D2C business and wholesale partners. Definitely a very exciting fall ahead of us. To sum it up, we had a great second quarter in the Americas. Now let me turn it over to Karl Heinz to walk you through TNF's result in Europe and Asia.

Thanks, Steve, and good morning, everyone. In Europe, The North Face saw a high single-digit increase in revenues in the second quarter with our D2C business up nearly 40%, including very strong online sales. We are especially pleased with these results and believe we are all well positioned for the third quarter, generally the banks' biggest quarter of the year in Europe. On the product side, we saw strong results in our running and training categories with several running pieces receiving accolades in respected industry publication. Also, the Ultra series footwear collection successfully launched in Europe. We're also making great progress in advancing The North Face towards the four season brand. To support this strategy, we executed our biggest ever marketing campaign in 10 countries focusing on key spring/summer categories like running, training and hiking. These efforts are driving significant sales to add brand awareness across Europe. Turning to Asia, sales were down at the mid single-digit rate in the quarter as we held back shipments to proactively manage channel inventory. We expect a strong finish to the year, returning to double-digit growth in the second half. We will see some positive momentum as we continue to build brand awareness to events like the TNF 100 and (inaudible) race in China, which affected over 3,000 participants and extensive media coverage across three events. We also resumed our TV campaign in China to build on the momentum we gained from our efforts last fall. Globally, The North Face remains on track to achieve 12% revenue growth in 2014. Now turning to Vans.

Global revenues for the Vans brand in the second quarter were up 21%, including strong double-digit revenue growth across all regions and channels. This marks the 19th consecutive quarter of double-digit revenue growth for Vans, which is an incredibly impressive accomplishment. In the Americas, revenue grew at a high-teen rate, including a similar growth rate in both our D2C and wholesale channels. It was truly a great quarter for the brand, both strategically and tactically, with strong product launches and targeted efforts to further connect Vans directly to our consumers through our own content platforms and events. On the product front, we had a very successful launch of our unique Star Wars collaboration with Boutique and Lifestyle retailers. And to kick off back-to-school and rethinking what a future classic might be for Vans, we've just launched our classic light footwear, which combines the newer silhouettes like Authentic, Old Skool and SK8-HI with our super-comfortable and light weight ultra-cushion sole. Our apparel efforts also continue to be a focus with the launch of our summer collection, the very first time Vans has had a four season offering. Utilizing our four brand pillars, action sports, art, music and street culture, the Vans team is hard at work creating platforms and encourage creative expression. First up, June marked the launch of the 20th edition of the Vans (inaudible). We're already halfway through the more than 40 dates and 30 states scheduled in the US and Canada. And once again, it's an epic summer celebrating music, youth culture and the Vans brand. And two weeks from now, more than 750,000 people will immerse themselves in the unique Vans culture as they attend the 2014 Vans US Open of Surfing, the industry's largest surf event. And finally, our Fifth Annual Custom Culture Art Competition garnered 2,000 entries from high schools in every state across the US. Great product connected through authentic relative relevant events, while keeping youth culture at the center of everything we do combined for yet another stellar quarter for Vans. Karl Heinz?

Vans had another great quarter in Europe, with revenues growing at high-teen rate, including more than 40% D2C growth and a low double-digit increase in wholesale sales. As in Americas, the Star Wars collection performed extremely well. In fact, before we launched the main product, we released a limited number of special edition products that sold out in 24 hours. The broader Star Wars release also has seen tremendous success. We're also proud to announce that our first European House of Vans opens on August 9th. Located in one of London's most iconic spaces beneath Waterloo station, House of Vans launch represents our commitment to creativity from art and music to skateboarding and fashion. This represents an amazing vehicle to engage and inspire youth culture in this extremely important market. In Asia, men's revenue grew more than 40%, including more than a sixth increase in China. Especially exciting here is the meaningful acceleration of our apparel and accessories category, which saw strong results during the quarter. And at the start of the year, our Artist program saw great sell-through. Further evidence to our ability to go local and address regionally specific consumer preference is key to long-term success. Additionally, our Van Doren and Star Wars footwear collections were very successful. We also brought our House of Vans concept for the third time to Beijing Music Festival, which generated a lot of great buzz online and engaged more than 750,000 consumers in the Vans band. What a great finish to the first half of 2014. The Vans brand remains on track to deliver a mid-teen increase in global revenues for the full year and become V.F.'s second $2 billion brand. Now let's turn to Timberland.

Globally, Timberland posted outstanding results for the second quarter, with revenues up 19%, driven by more than 25% growth in wholesale revenues and a 10% growth in its D2C business. And although it's the smallest revenue and earnings quarter of the year, we couldn't be more pleased with the continued progress this powerful brand is making. In the Americas, revenues were up nearly 25%, driven by more than 35% growth in our wholesale business, a definitively clear indicator that our product, consumer connectivity and channel distribution strategies are working quite well. With great results across every footwear category from boat and casual shoes to hiking and boots to Timberland PRO's new Boondock family, the success is broad based and balanced. Throw in continued success and momentum of apparel in the Americas with strong spring sell-through and fall sell-in were positioned were strongly going into the second half of the year. We're also working hard to drive brand visibility and consumer demand for the brand. Our Best Then Better Now brand campaign has been successful in helping us to reposition Timberland with consumers as a lifestyle brand. And we're starting to see very positive data that indicates consumers in the Americas are starting to recognize the brand as much more than a boot company. Now I'll turn it over to Karl Heinz to discuss Timberland's business internationally.

Timberland's revenues in Europe were up at the mid-teen rate in the second quarter. Similar to the Americas, we also saw balanced and broad-based positive trends across our products. From a channel perspective, we had double-digit growth in both D2C and wholesale, so very balanced. Continuing to take advantage of the huge e-commerce opportunity in the region, we've now added The Netherlands and Spain to the roster. This is in addition to the first quarter launches into France, Germany and Italy, a huge leap forward in our platform that enables us to better reach consumers, tell stories and connect them every even more deeply with the brand. In Asia, second quarter revenues increased at the mid-teen rate, with strength across all channels in the business. Growth in the region was highlighted by strong sales of our classic boots and boot shows in men's. In addition, apparel, which is about half the business in Asia, is tracking in line with our plan. Overall, we're very pleased with the momentum we've earned at Timberland. And we have great confidence moving into the second half of the year as we work towards our goal of 12% global growth. And now let's move to Jeanswear. Scott?

Thank you, Karl Heinz. Global revenues for the Jeanswear coalition were down 1%, reflecting improvement over the first quarter, the result of a slightly better than our expectations. In the quarter, global revenues for the Wrangler brand were up 4%, while revenues for the Lee brand were down 7%. In the Americas, the Jeanswear business was down to a low single-digit rate due to continued challenges in the US mid-tier channel and the ongoing unfavorable women's denim trend. These factors had the biggest impact on the Lee brand with its 60-to-40 ratio of women-to-men sales and a high degree of exposure to the mid-tier channel. This resulted in a mid-teen decline in Lee's Americas business. Wrangler on the other hand, with only 20% of revenues from the women's category and a depth of three different channel weighting saw a mid-single digit increase in the Americas. In fact, both the mass and western specialty businesses grew in the quarter. All of this is pretty much what we expected coming into the quarter and we continue to expect slight growth in the global business for the full year due to an accelerated second half. So why the confidence in the second why? The same reasons I outlined on last call, new product introductions, expanded distribution and enhanced demand creation strategies. For example, in Wrangler, we're set to launch our Advanced Comfort line, the brand's more comfortable jeans yet. And to celebrate this launch, we're hosting a major kick-off event with Drew Brees in Comfort, Texas, a small town that embodies everything the brand stands for, hard work, integrity and an appreciation for the small things in life. On the Lee side, Heavenly Touch and Easy Fit, which have stretch fabrication that combines the comfort of leggings with the structural benefits of denim are on track to launch in the mid-tier in mass channels. And as I mentioned on last call, the mid-tier will also see the launch of Modern series Curvy Fit. And to support these launches, you will see a new fall campaign supporting active comfort for men and curvy fit for women. So all in all, a tough environment in the Americas, but our brands and products are well positioned and our inventories are in very good shape as we move into the second half. Karl Heinz?

Our international Jeanswear business had done exceptional quarter. In Europe, revenues increased at the mid-teen percentage rate, led by 25% growth in the Lee business and high single-digit growth in Wrangler. And in Asia, Lee continued its growth in the second quarter with a low single-digit increase with considerably stronger expectations in the second half. Similar to the first quarter, key accounts and consumers in both regions continued to respond strongly to the evolution of our collections. Our products are resonating well. Our connection with consumers is getting deeper and our geographic expansion strategy is working. So 2014 is shaping up to be one of the strongest years in quite some time with significant topline growth and margin expansion. In closing, in the second half, we expect global Jeanswear revenues to grow at the low to mid single-digit rate, with some growth in the third quarter and substantially stronger results in the fourth quarter. Now Bob will take you through our financial highlights.

Well, thanks, Karl Heinz. Well, as Eric mentioned, the second quarter represents the smallest revenue and by far the smallest earnings quarter in the context of V.F.'s fiscal year. Now that said, we couldn't be more proud of our results. Strong contributions from our largest coalition and our biggest brands help us to deliver industry leading results. And with the first half behind us, we've got great confidence in our ability to achieve our full year outlook. Now taking a look at our second quarter, total V.F. revenues were up 8%, driven by accelerated results in our key growth drivers, including Outdoor & Action Sports, which was up 16%; international revenues, which grew by 14%; and our D2C business, which was up 18% in the quarter. These have been our core growth drivers over the past few years. They will be for the remainder of 2014 and will be for years to come. In so many ways, we're just scratching the surface related to these powerful growth engines. Our gross margin of 48.4% was about in line with our expectations. To look at a few of the parts, on the positive side, we saw another quarter of predictable mix benefit from the shift of our revenues toward higher margin businesses. There were however two main offsets that tempered this benefit. First was foreign currency impact, which we spoke about on our last call. The good news here is this was isolated to the second quarter. The currency impact should be relatively neutral in the second half of this year. The second offset came from our efforts to aggressively manage inventories mainly related to our Jeanswear business, which continues to be challenged, especially in the mid-tier channel that Scott talked about earlier. To avoid taking markdowns, we took downtime in our own jeans factories, something V.F. is uniquely positioned to do to reduce markdown risk going forward. What was a result of our disciplined approach to inventory management? Well, inventories were up only 6% in front of the second half of the year when we expect revenues to grow close to 9%. All in, our first half gross margin sits at 48.9%, which puts us right on track to reach our outlook of 49% for the full year. Without a doubt, we're very pleased with the continued evolution of our gross margin story. Now turning to SG&A, our SG&A ratio to revenues was down slightly despite our continued investments focused in D2C and marketing. We're operating 140 more stores now than we did at the same time last year. Given that significantly larger base and as you all know, D2C carries a higher SG&A ratio to revenues and that our marketing expense as a percent of revenues also grew slightly in the quarter, well, that means we realized significant leverage in other parts of our cost structure. And that's our model. We make investments to drive topline. We find leverage elsewhere in our expense structure and improve our profitability. Taking all of this to the bottomline, our operating margin was up by 10 basis points to 9.2% and earnings per share were up 16% to $0.36 for the quarter. That's right in line with our expectations and definitely a quarter we're really pleased with. Now let me touch on our coalition results for the second quarter. As I mentioned, revenues for our Outdoor & Action Sports coalition were up 16%, but perhaps equally impressive was the channel balance that drove that. We had more than a 20% increase in D2C sales and a low-teen increase in wholesale revenues. We also had great balance on a regional basis. Our Americas and international businesses, both experienced about the same percentage increases. Given the results Steve and Karl Heinz went over earlier for The North Face, Vans and Timberland, along with other brands that are smaller today like Napapijri, Kipling, EASTPAK and SmartWool, all of which grew by more than 20% in the quarter, well, needless to say, we are extremely pleased with performance of this coalition. Operating income for Outdoor & Action Sports was up 31% in the quarter and operating margin expanded 120 basis points to 10.3%. We're hitting on all cylinders here. We improved gross margin. We increased the marketing ratio of revenues and improved our profitability. The focus of continuing investments that we're making behind these brands is truly paying off. For the full year, in Outdoor & Action Sports, we're now confident we'll grow at the upper end of our range of 12% to 13%. Now turning to Jeanswear, we did see the sequential improvement we expected, with revenues down 1% compared to a 4% decline in the first quarter. And actually Jeanswear revenues were up slightly on a constant dollar basis. In the Americas region, revenues were down in the low single-digit percentage range, reflecting the ongoing challenges in the US mid-tier channel and shifting consumers trends in the women's denim. And as you heard earlier, this environment had the biggest impact on the Lee brand in the US. In Europe, our Jeanswear business saw continued strength with revenues up at a mid-teen percentage rate, while revenues in the Asia-Pacific region rose in the low single-digit range. Second half revenues in Asia are expected to grow at a high-teen percentage rate. Operating margin for the coalition in the quarter was down 130 basis points due to the proactive efforts to ensure inventories stay in line that I mentioned earlier. As we look toward the back half of the year, we expect Jeanswear revenues to turn positive, with the strongest growth coming in the fourth quarter when the benefit of expanded distribution kicks in and several new product innovations are launched. Imagewear revenues grew 3%, driven by mid single-digit growth in the Image or Workwear business. And our [ph] LSG business was up at a low single-digit rate. As you recall, we talked about our decision to license the youth business for Major League Baseball. This negatively impacted Imagewear second quarter topline by 2 percentage points, but will lead to better profitability in the long term. Operating margin was down 20 basis points compared to last year due to a shift in product mix isolated to the second quarter. We continue to expect this coalition's full year operating margin to expand. Sportswear coalition revenues were up 5% during the second quarter. Nautica revenues were up 2%, which is lower than what we had anticipated. In Nautica, a low double-digit increase in D2C was tempered by a mid single-digit decline in the wholesale business due to the same department store challenges that you're all aware of. Kipling's US business delivered another outstanding performance with 18% growth in the quarter, a brand that on a global basis was up 27%. Operating margin in our Sportswear coalition was 7.3%. We expect the coalition's full year operating margin to be about flat with last year. In our Contemporary brands business, revenues declined 2% with similar decreases in both the Americas and European businesses. Our D2C business was up 10%, but this was offset by a high single-digit decline in the wholesale business, reflecting the challenging consumer trends in the women's premium denim. As we said last quarter and similar to Imagewear, we decided to move part of our kids business to a license model. That negatively impacted revenues for this coalition in the quarter by 3 percentage points. And finally related to our balance sheet, we did purchase an additional 2.9 million shares for $173 million in the second quarter, which concluded our planned share buyback anticipated for 2014. We continue to expect another really strong year from a cash generation standpoint, which should exceed $1.65 billion, allowing us to completely repay our commercial paper balance by yearend and providing us great flexibility to invest in future growth. Now with respect to our outlook for the full year, as you've heard throughout the day, we believe we're right on track to achieve our targets. We expect annual revenues to be up 8%, which is directly in line with the organic growth expectation of our 2017 plan. Full year gross margin and operating margin should reach 49% and 15% respectively, which would be ahead of the pace anticipated for reaching our 2017 goals. Earnings per share in 2014 is expected to reach $3.06 per share, which is up 13% over 2013, right in line with our 2017 plan. And finally, we will keep an opportunistic view and looking for areas to invest in our brands, products and marketing to provide further momentum going into 2015 and beyond. And now I'll give a little bit of color on how we see growth trending in the second half. Third quarter revenue should increase at a rate similar to that of the second quarter, driven primarily by strength within our Outdoor & Action Sports coalition, our international operations and continued strength in our direct-to-consumer businesses. Investments in the third quarter, driven by a record number of store openings, will pay off significantly in the fourth quarter. That means of course that the strongest growth and profitability comparisons of the year will be in the fourth quarter when our direct-to-consumer business has its most significant contribution of the year. So in closing, we've had a great first half of 2014, growing revenues by 7% and earnings per share by 13%. We're set up well for an even stronger second half of the year. Our portfolio is strong. We have many opportunities to create even greater separation from the competition. 2014 will be a year when we'll make significant gains in improving our profitability and enhancing long-term shareholder value. In summary, we're very confident in our ability to deliver on our full year outlook. With that, I'll turn it back to the operator and we can open up the line for questions.

(Operator Instructions) We'll take our first question from Matthew Boss with JPMorgan.

So, Eric, on the consumer, curious how you described the overall environment out there today. Any changes in ordering trends that you've seen and expectation for the promotional environment in the second half versus what we're seeing out there today?

Sure. On the US front, it's pretty obvious. By the promotional activity that you're seeing at retail today that consumers are tough to get at. We're seeing that in our wholesale business, not so much in our direct-to-consumer business where our business was up in single digit in our own stores in the quarter. But in our departments that we sell to have adopted a more promotional environment and we see that affect us primarily in our Sportswear and in our Jeanswear business, particularly in the mid-tier, not so much an issue anywhere else in the corporation though and not an issue for us international at all. So where that affects us is in a very small sliver of our business and we're finding consumers are coming to our brands in other channels of distribution, including our own.

And then as you think about the promotional environment in the second half, I mean are you kind of planning for it to be as it is today or do you think that things will actually calm down a little bit here?

I wish I knew the answer to that. But we're prepared for it to be as it is today.

And then on the balance sheet, you leveraged in about levels when you acquired Timberland. Buyback is now complete. It doesn't sound like there is an acquisition eminent. Can you just talk about capital allocation priorities going forward here?

Our capital allocation, the way we look at it is it's pretty much exactly where we've been. Our first priority is in the M&A front. It's been very, very successful for us. Our buyback program will remain pretty much the same. You said the program is complete is for the year, just to clarify that, where we said was for 2014 we weren't anticipating buying back any further shares. But going forward, we will. And we'll use that to offset the impact of stock option exercises. So yeah, our priorities are very clear. And that is on the M&A front, the buyback program is more of a maintenance level spend. And actually from a dividend standpoint, in 2014, we'll expect to increase our dividend substantially, once again just as we have over the past couple of years, is likely by more than 20%, just like we did last year, moving toward that ultimate goal of 40% payout level.

And we'll take our next question from Robbie Ohmes with Bank of America.

Hey, just two questions. The first was just on that Jeanswear business. Maybe, Karl Heinz, you could tell us how did Lee do the 25% growth in the second quarter, and is that sort of a trend that we should expect to continue? And then maybe in aggregate, could you give us a little more help on what the Jeanswear margin outlook is? I understand how you protected the margin downside in the second quarter. But how should we think about Jeanswear gross margins? And maybe some color on just the third quarter versus fourth quarter gross margins to get to your full year guidance. And my second question is just on the Timberland business. Maybe some comment on how that operating margin in that business is tracking versus your plan of the revenue look great, but is the margin also doing what you guys are hoping it's going to do?

So, Robbie, let me start with your first question. The 25%, as we mentioned, it's an exception number. It's not a number which normally the jeans sector is delivering going forward. What I would say though is we have done a great work. We had a good Q1. We expect a good year and we do expect finally our jeans business in Europe going back to growth again.

And, Robbie, relative to the jeans gross margin percentage in the second half of the year, and this is a global view, the gross margins will return back pretty close to where we've been. So actually on a full year basis, our gross margins will be relatively flat year-over-year. Just to clarify, in the second quarter, I mentioned in my comments that we took some proactive actions to control inventory and we took some downtime in our plans. And again, we're in a unique position to do that and we could really see it in our inventories. And our inventories are really under good control. We just didn't want to go into the second half of the year with any kind of inventory positions that were in excess. So that was the biggest on the gross margins in jeans. So yeah, that'll improve in the second half of the year, so the overall on an annual basis will be pretty close year-over-year.

And just on the cadence of the third quarter overall gross margin versus the fourth quarter, we should assume gross margin improvement in the third and fourth quarter?

Absolutely. But obviously stronger in the fourth quarter, given the mix of D2C.

I'll go back to the acquisition assumptions. Obviously when we talked about Timberland acquired, we talked about a 10% annual growth rate. We're running ahead of that this year. Certainly ahead of it in the second quarter, but the guidance we've given for Timberland is for 12% global growth this year. From an operating margin standpoint, we're on track to hit the targets we set when we acquired the business. And we're going to give an awful lot of color about that to you guys in a few months.

And we'll take our next question from Laurent Vasilescu from Macquarie.

I have a few questions with regards to the anticipated September Investor Day, which will focus on the Timberland brand. With the brand growing at a high-teen rate now, could we expect revised 2017 targets for the brand? Could we see gross margin operating margin goals as well? And lastly, does the success around the Timberland acquisition give you more confidence to make another potential acquisition revolving around the footwear line?

We were going to go into details about where we are with Timberland and where we see it going when we're together in September. And that story needs to be put in the context of the total picture around the world is the only way to really tell that story. And in about eight weeks, we'll be going through that. We are very confident in our acquisition model. If you go back a decade ago, we bought Vans and 15 years ago we bought The North Face. And you go through the brands and in Bob's script, he mentioned that Napapijri, Kipling, EASTPAK and SmartWool all grew greater than 20% this past quarter. We think we're pretty capable acquirers and integrators and enablers of businesses in any category. Our interest in footwear is obviously growing. That really started for us with Vans and then followed by Reef and now Timberland. And we have other brands that are in the footwear business, but those two are really footwear acquisitions. We're a pretty big player in the space now and we have a lot of momentum in our footwear businesses. So yeah, that would lead us to believe that we could do another footwear acquisition. I'm not going to say that's our top priority, but we could do one, yes.

And can you talk a little bit about the lucy brand, how it has performed over the last couple quarters? And then maybe bigger picture, if you could share your general thoughts on the yoga market, as we see some existing players struggle with new brands entering the space, any general insights would be greatly appreciated.

So our lucy business, a business we're very proud of, had a strong first half. We're up mid single-digit. Second quarter was off plan a little bit, primarily due to retail traffic trends in our own stores, which remain a significant part, about 75% of our total business. What we're really proud of with our lucy business is the partnership that they're forming with the exporting goods. As of the end of May, we had set a little over 300 doors in the new exporting goods women's studio pad and are seeing really strong results. That partnership is building on additional partnership we've had for just about two years with REI where we're an all-door provider and seeing really strong results there as well. So we're able to take our Outdoor & Action Sports model of a balanced wholesale and D2C strategy, bring that to lucy, extend the reach of our brand, touching consumers where they're shopping. As we look at this space, the women's athletic and yoga space, absolutely something we're interested in. We think it's in a sector that's here to stay and one that we can do very, very well with, with our unique ability to understand the consumer and bring products and emotional marketing to drive our success.

And we'll take our next question from Michael Binetti with UBS.

Could you help us put some numbers or some magnitude around the two impacts you mentioned on gross margin as far as factory downtime versus FX, Bob?

Yeah, maybe what I'll do is just run through the gross margin and the components of the gross margin in the quarter. So as we've very, very consistently said and as we've been saying and realizing the mix benefit was absolutely intact and will be for the year and will be going forward. That was about 70 basis points on the plus side. You might also remember the concession accounting change helped us by about 30 points and that increases SG&A as well by about the same. That's about 100 basis points. So offsetting those two in about equal amounts, number one was the FX impact. We talked about that in our last quarter and we could see that coming. By the way for the second half of the year, that won't be an issue. It's really isolated to the second quarter. That was about half of the offset. And then the other half was related to the inventory actions that we took. And a big piece of that was the downtime in the jeans plants that we talked about.

So as far as second half goes, the jeans guidance, maybe you can help us think about how much of it is reflecting your expectation for improved sell-throughs or they're just new programs?

Yeah, it's particularly in the fourth quarter. I think Scott mentioned this in his comments. In the fourth quarter, it will be the strongest comparison as we gain some distribution and also the new product launches. So that will be the strongest quarter. From a gross margin standpoint, no, we don't expect to see the same impact that we saw in the second quarter. We feel that we have that clean-up behind us and we enter the year with really clean inventories going into the second half of the year.

Yeah, Michael, we feel real good about our core business going into the second half of the year, especially with where we are in the inventory position. But I think the big thing for us is the innovation that we've had in our pipeline that's now starting to come to life. You're going to see it in the mass channels as it rolls out right now with our Advanced Comfort. The best test that we've ever had in the history of Wrangler for a new product, we just nailed with that and it's gotten full distribution within the mass channel. And that's hitting right now. So we couldn't be more excited about that product and for when folks finally get a chance to buy it and wear it and the word of mouth. And then in the mid-tier, we're also doing the same with new products, Curvy Fit and Easy Fit. So that's really going to take hold as we move through the third quarter and it's really going to help us in the fourth quarter and going forward.

Last winter, obviously there was a lot of media around how cold the winter was and certainly we were all looking at the temperatures in the US. But you guys were pretty consistently commenting that it wasn't universal and that there were some areas, I think Lance called out California, but certainly Europe was an area where the winter wasn't as favorable as those of us watching the news in the US were saying. Could you just comment on how order trends are looking for The North Face or what the retailers are thinking about as they are sitting on inventory in Europe that you think might be holding them back from ordering stronger for the back half?

We had a very strange winter in Europe. We had tons of snow in the Southern part of the Alps and we had no snow on the Northern side. So a pretty strange thing. I would say now the situation has normalized. And as we anticipated, we look forward on The North Face for a mid-single growth for the year. As you know, we don't announce fall orders anymore because of the strong D2C component we have. But we are looking forward to a good year. Now we have assumed a normal winter to come. So no spectacular at the same time hopefully not a bad one like this year. But we don't see the promotional activity as strong as what's happening here in the US at the moment. So I would say all in all, thanks God, we went over well and we look forward to a normal year.

And we'll move along to our next question from Bob Drbul with Nomura Securities.

This is actually Maddie Steiner on for Bob. I just have two quick ones. Firstly, can you talk about any visibility you have into the fall holiday pre-booking for the outdoor brand?

We're not giving our forward-looking booking with The North Face for a couple of reasons. Probably most importantly is our D2C business is now about a third of our total revenue and trying to contrast our wholesale order book really isn't accurate depiction of what our business looks like. What I can tell you is our orders in hand support the outlook of a 12% global growth rate that Karl Heinz mentioned in his script. And here in the US, we're feeling very good about the momentum that we've carried out of '13 into '14 first half has been very strong. Our order trends for fall are in line with our guidance here in that low-teens growth rate for the US business.

And then lastly, with regard to the Jeanswear inventory issues, was any of that related to Lee overhang in China that you've mentioned previously or has that been resolved?

That has been resolved. In fact, we did announce a positive quarter for Lee this quarter. What I did mention in my script was the situation on outdoor. We see a similar situation happening in the outer channel, but this time we have proactively acted. And the fact what we have done, we have not delivered the entire order book we had, the spring order book to the market in order to avoid a similar situation.

And the inventory situation that we discussed was really around the Lee brand domestically. If you step back 10 feet and look at the Lee business, it is almost entirely in the mid-tier channel and it's tilted heavily towards women's, which is the weaker part of the jeans business. The channel choice we've made and who the brand resonates with women, you put those together and that's the softest part of our Jeanswear business in the world right now.

We don't think the fundamental brand problem, it's more structural around it.

And we'll move along to our next question from Dana Telsey with Telsey Advisory.

Can you talk a little bit about the marketing investment plans going forward and what you see the cost as this year versus last year, how you're planning? And then anything on product cost and West Coast port strike, how you're planning? And just lastly, Europe strength, was it particular regions that you saw the strength?

What we indicated early in the year and we're right on track for the spend is that last year we spent just below 6% of our total revenues on marketing, spent close to $680 million or so. In the current year, we expect to keep our ratio about flat with what it was last year, again right under the 6% level, so if we're just well above $700 million mark, closer to $720 million or $730 million or up about $50 million over 2013. That's our plans right now. As I indicated in my commentary, if we see some opportunity to make some additional investments in marketing or other areas, just as we have in the past which have been very, very effective for us, we may do that. But our plan right now is to hold the ratio to revenues pretty flat and again close to the 6% mark.

On the product cost side, Dana, I think the best way for you to think about that is we have complete visibility of our product cost for the balance of this year and we expect to deliver 40% gross margin for the company this year. So we've contemplated all the pluses and minuses in product cost into that 49% gross margin number. On the West Coast port strike, the good or whatever the situation is out there right now, we obviously saw that coming well in advance. Our supply chain reacted in a really strong way and we got inventory into our warehouses much earlier than we would otherwise have. And remember, our inventories were only up 6% at the end of the quarter. So they would have been even better than that had we not accelerated receipt of goods. So we're prepared to fill orders here in the third quarter. I can't predict what might happen out in the West Coast, but we have the inventory in our warehouses right now and hopefully that situation will get resolved.

The fourth question, I guess, was on the stressed situation in Europe. So as I mentioned it before, we did not see, thanks God, what's happening here in North America. We have some markets, some countries, Europe is a conglomeration of markets, but overall I would say it's business as usual.

And now we'll move along to our next question from Omar Saad with ISI Group.

My first question, following up on the jeans commentary, how do you think about this kind of divergence, especially with the Lee brand, how it's doing domestically versus international in this era of globalization and information availability and digital, just how do you think about the sustainability of those kind of diverging brand positions for the international versus domestic?

I think there is a big opportunity here for Lee. If you think about the brand, it's got permission to play in this space as far as comfort goes, and that's really where folks are going right now. And we're getting at it with a lot of new products in our innovation pipeline. You heard me talk about a few of them earlier. But they're starting to roll out now. And our team thinks of it as additional wearer occasions. We're the leading brand with our brands that we have in Lee and Wrangler. So the permission to plan that space and the footprint from a distribution standpoint that we have put us in a really strong position. And then the work that we can do globally together will really help us drive that around the globe. And it's part of the thing that makes V.F. great in that we work and communicate together as brands globally. We talk and communicate and we understand the trends that are happening globally and we share those together and we can work together to make sure that those brands are healthy and growing in the future.

Omar, as we discussed and as you know, we have pretty aligned on Lee and on Wrangler between Europe and Asia. So we're there. And globally, we're working closer and closer. Stretch fabric is a good come on that team on Lee, which we're using in US and in Asia and in Europe of course. So we're getting there to have common brand positioning.

Omar, the challenge for us obviously is how do we recognizing that the brand was a pioneer internationally, just celebrated its 50th anniversary of doing business in Europe. And back when it was launched in Europe, it didn't have to look consistent globally, because there wasn't global communication, but today there is. And we're undergoing a lot of efforts to gradually, but deliberately find common ground for this brand around the world. That will take time, but we're on it and it's going to take time. There're a lot of little steps. We're moving closer. And the strange thing about that to me is here in the United States, the Lee brand in Europe looks like it has a premium positioning. But sitting in Europe, it does not have a premium position. It's just relative to American price points. In Europe, it's really more of a mid-tier positioning, which is right where it is in the United States from a price point standpoint.

And, Omar, I think one of the things that's really going to help us do that is we're opening up and we're in the process right now of opening up our denim innovation center and it's a global denim innovation center. And Karl Heinz and I are very aligned on what we need to do and what we need to accomplish there. And we're going to work on joint projects around denim and around our products going forward. So there is a lot of excitement around that and you'll hear more of that in future too.

I also wanted to ask about Timberland, kind of a follow-up. I mean this was the biggest acquisition you've done. The margin opportunity you guys have obviously executed really well. But now this thing is growing in the teens, high-teens even. And it was already such a big brand when you bought it. Like how much confidence does the topline success you're having with this brand, a few years removed from the deal, to do other even larger acquisitions in the future? Is that something you think about?

We obviously are in a different place than we were 10 years ago when we talked about having a sweet spot for acquisitions of $300 million or $400 million. We are a much bigger company now. We were $4 billion or $5 billion company then. We're a $12 billion company now. We need to be looking at larger opportunities for acquisitions to move the needle. Does it mean we wouldn't do a smaller deal if it was a really smart business that we thought that if we bought we could do with that, like we've done with a lot of the other smaller businesses we bought and grow them and expand their profitability and deliver great shareholder value. But given our current size, we're capable of doing bigger deals. Given our current annual cash flow, we're capable of doing bigger deals. And something like Timberland gives us confidence that we could do it well too, that's fair.

And we'll move along to our next question from Barbara Wyckoff with CLSA.

Can you talk about the China opportunity, where are you versus your projected trajectory? And then second, could you comment on the acceptance of the re-launched Timberland apparel that we saw I think about a year ago? What have you learned, what have you changed, et cetera?

Yeah. The big picture on our China trajectory is that we are essentially on track. There've been some puts and takes and there always are going to be in a business that has a diverse portfolio. But in terms of our aiming and the China targets we've talked about, we're still aiming and we're making progress.

So the limited re-launch of the Timberland apparel was here in the United States. Our most significant apparel business is sitting in Europe and Asia. We brought the apparel back here to the US last year. It was a strategic limited launch with a small number of specialty retailers as well as Nordstrom. We saw very good results, very good sell-through. That momentum carried into spring, as I mentioned in my comments. And our order book for fall '14 reflects that success, as we've seen in expansion of our specialty doors and expansion of the number of doors that we'll participating with Nordstrom on. And we're very happy. We are on track with what we believe this brand can do from a head-to-toe standpoint and we'll continue to drive apparel as part of that balanced portfolio of products that we're bringing to the outdoor lifestyle consumer.

And we'll move along to our next question from Erinn Murphy with Piper Jaffray.

I just wanted you guys to maybe think a little bit more about your direct-to-consumer business, very strong in the quarter, up 18%. Could you just help us parse out the growth between e-commerce and then your brick and mortar stores? And then as you take a step back and think about the e-commerce goal you've provided for the longer-term plan of $750 million, where are you in achieving that, and then how are you seeing the role of mobile kind of impact the pathway to get there?

We had a really nice quarter in our direct-to-consumer business. Let's keep in mind that the second quarter is not the biggest quarter for an Outdoor & Action Sports type business to have in our D2C world. But we have a consistent string here of really strong quarters. We're up 18%. We have double-digit growth in every region and growth in nearly every brand. What makes that up is a mid single-digit comp store growth, which we're proud of, over 30% growth in our e-commerce. And we are on track to open 150 new stores this year. So there is a new store component, we've said all along. And we are very early in our journey of opening up our own stores. Because we have so many brands and so many geographies that we're in, we have a lot of runway to open new stores and we said we're going to open 150 this year and less than half of them are opened as we sit here today, but they'll be opened by the end of the year. And that's part of what gives us confidence about the strength we're going to have in the second half of the year. On mobile, we are beginning to activate our brands, so the consumers can relate to our brands through their mobile devices. We're not where we want to be. I think in general, the industry didn't see mobile coming on as big as we could. I'm going to ask Steve to make a comment on that, about where we are.

So, Erinn, this last March, our Vans business launched a new V.F. platform for our web businesses going forward. It has a very powerful adaptive responsive mobile component to that. We certainly see our consumers interacting with us on mobile, searching out our products and our content. But we also see mobile as a very critical tool of how we interact with our consumers in-store, and we're making investments in that part of our digital platform as well as bringing service and efficiency to that in-store component. So a very, very important and an area that our big brands are driving very aggressively and will benefit all of the V.F. platform in the future.

And, Erinn, just one other point relative to D2C, our profitability as well has been very, very strong and our returns are high in our D2C businesses in total. And they're even improving. Some of that's coming from improvement on the international side, where our business was less mature and is now maturing, it's improving and also the fact that on the e-comm side of the business, which is highly profitable, becomes a little bit bigger piece of the overall mix. So a good news there as well.

And I guess it just the last question just for Karl Heinz, just a follow-up for you. You responded to an earlier question just speaking about the inventory starting to build in the channel for outdoor brands in Asia and that kind of led to you proactively pulling back on The North Face orders there. Can you just speak to when did you start kind of seeing this inventory build in the space there, and then how should we think about kind of the next few quarters in terms of rightsizing where you want to be? And the inventory there, seeing the channel, I guess just the last question is, are you seeing that more from global brands that are expanding in Asia or from some of the local brands?

Well, we mentioned we had a similar situation with Lee a while ago, as you might well recall. And we're kind of [ph] cocked by that and we suffered then. We had a few quarter where we had negative growth. This time, we changed our strategy. We saw it coming. And as I mentioned before, we did not deliver our full order book, the order book we had, for spring into the market to avoid exactly a similar situation. In fact, I also mentioned we do expect the second half to grow on The North Face in China, probably stronger in Q4 than Q3. So the situation normalizing. China, I always mention China is a marathon. There will up and down, but we have great opportunities in that market. We are acting only with four brands at the moment directly and we have relatively low penetration in terms of distribution. We are engaged in the higher tiers. So there's still a long runway to cover. I'm not sure I've covered all your requests. Do you have other questions or did I give you an answer?

Yes, just in terms of kind of where you are seeing that inventory build. Is it really across more of the global brands that are expanding in China in the outdoor market, or is it some of the local brands that you are seeing that pressure?

Well, it's kind of both. Everybody has an appetite to succeed in China. As you know, the market is very fragmented. There're a couple of hundreds of outdoor brands, global brands, local brands, regional brands. So it might change over time, but I would say it's coming from every side at the moment.

And we'll move along to our next question from Mitch Kummetz with Robert Baird

A few questions. One, I just was hoping you could reconcile a few things on the sales side. I know in the quarter, going into it you were expecting sales to be up around 6.5% like the first quarter. They definitely came in better than that. So I was just kind of curious where you saw the upside. I would guess it was on the Outdoor & Action Sports side, but I think Scott also said that jeans were also a little bit better. And then two, with sales coming in better in Q2, I'm a little surprised you didn't take up the sales guidance for the year. So I was hoping you could address that. Are you just being conservative on the back half? And then three, on sales. It looks like your Outdoor & Action Sports guidance is now at the high end of 12% to 13%. I think previously you were just saying 12% to 13%. So I'm just wondering what's changed there. It didn't sound like you adjusted any of your expectations for your three main brands there.

Yeah, where we've seen the strength is primarily in Outdoor & Action Sports. I don't think that's any surprise to any of you. And those three big brands, you're absolutely right, in The North Face, Vans and Timberland, all performed really, really strongly. And in the first half, actually a little bit better than we expected. So it has been a little bit stronger. In the second quarter, it was particularly strong. And we also have a very, very strong growth plan for the second half for those businesses in total for Outdoor & Action Sports. And our plans there at this point in time are right in line with our initial plans and our initial guidance around the strength of our Outdoor & Action Sports business. And yes, to your point, with the current trends that we're seeing, with the growth rates of the first half, it would indicate that it could be a little bit better in Outdoor & Action Sports. But we have two very big quarter ahead of us, particularly on the outdoor brands. And North Face and Timberland, as you know, are very much heavily weighted to the second half of the year. So yeah, it could be a little bit better. But I think the bottomline here is we're looking forward to a very, very strong second half, just as we saw in the first half. And the 12% to 13%, yeah, what we're seeing is that is where the strength has been. The strength of our business clearly has been in the Outdoor & Action Sports base. And as we saw the results of the first half of the year, we have strengthened our expectations around that to the 13% level. So it does continue to strengthen somewhat.

Yeah, Mitch, I'm just going to weigh in on this one too, because it's an interesting question, one that we've talked a lot about in the last several weeks, because clearly we have momentum. I used the word momentum early in my prepared comments, because we have it. And we have it in abundance in Outdoor & Action Sports across a whole bunch of our brands. So sitting with that momentum and that trend and the confidence we have about fall, the questions are two. How are our consumers going to shop this holiday season? And what kind of weather are we going to get? And that's why we're sticking with the guidance we have. No one knows the answers to the second two questions. But we're confident we can hit the guidance we've given for the year on the revenue basis. And as Bob said, it might be a little bit better if those two unknowns bless us with the positive positioning. But we don't know that, so we're going to stick to right to where we are for now.

And then just a quick follow up. Eric, you mentioned 150 stores this year. Bob talked about record store openings in the fourth quarter. I'm just wondering from a square footage standpoint, I don't know if you can talk about this, but how much square footage do you think you could pick up in the fourth quarter on your stores? I mean is it somewhere in the 10% range? I'm just wondering how much of a driver of D2C growth square footage is expected to be.

We don't look at square footage, but the only way you might think about that is we ended last year with around 1,250 stores. We expect to end this year with around 150 more. So you could do some rough math, assuming they are of the same size as average. But that's the only way I can guide you on how you might think about that.

Mitch, our overall store openings for the year will probably be maybe 30 higher on that basis versus last year. But we have such differences in the size of the stores with our individual brands, it's really hard to talk about the square footage.

But what is different this year is about half of our openings are international. We've really got momentum in our direct-to-consumer capabilities around the world, stronger than it has ever been. Karl Heinz and his team have been working for a long time to really improve our capabilities there. And those stores tend to be a little bit smaller than domestic stores, particularly in Asia. So they're probably going to be smaller than average, half of it.

And we'll move on to our next question from Kate McShane with Citi.

I had a question on The North Face and the supply chain. I know over a year ago that you had changed over two lines, I think, in some of your owned manufacturing towards The North face. I wondered if there had been any other changes made to the supply chain with regards to this brand this year and can we anticipate any change in terms of deliveries or how you are approaching retail in winter 2014?

We saw really good results last year when we moved some of our fleece production into our jeans facilities in Central America. We saw an improvement in speed for sure, but also we were able to really see some positive product cost improvements. That success and the assurance of continued quality will continue to move those types of items into our jeans production when those lines become available, really looking to leverage the expertise and strength of our supply chain and do that very strategically where we have needs and opportunities to really drive speed for The North Face business here domestically.

And then my second question was on the Lee introduction into Macy's in the fall. Can you tell us a little bit about the presentation of the brand at that retailer and how it might look different?

It certainly does. So, Kate, we took the Lee brand into Macy's and it's actually been in the department store channel for a little while with Belk and it's called Lee Platinum and it's a little bit more upscale with a little bit more decoration, some different washes, some different fabrics, a little bit high end on the fabrics. And we are expanding our store base in the department store channel right now, and it continues to go very well. We're pleased with how we're doing. We think there's really a big upside here going forward with the Lee Platinum label. And all plans are tracking on progress right now.

Is there a lot of distinct fixturing associated with Lee Platinum? Can you find it in its own section or is it just amongst denim within Macy's?

It is amongst denim in Macy's and there's some distinct fixturing and some call out, but obviously we have to work with our partners on the in-store fixturing, as you know.

And we'll move along to our final question from Jim Duffy with Stifel.

A couple questions from me, Bob, first for you. I just want to make sure I am clear on the gross margins. Was the pressure on constant currency gross margins confined to the Jeanswear and Sportswear business or is there promotional activity you are seeing across the other coalitions as well?

Are you talking about the FX impact?

No, I am talking about constant currency gross margins. You called out some promotional activity. You also spoke to downtime in the factories. If we were looking at the P&L for the coalitions, was the gross margin pressure that you saw relative to your expectations confined to Jeanswear and Sportswear?

Right, from the standpoint of the proactive inventory adjustments and that kind of thing, it was mostly Jeanswear and some Sportswear. It's mentioned the constant currency. What I said was that half of the offset to the mix benefit was related to FX and of course it is the transaction side and the hedging activity, that kind of thing, which was isolated to the quarter. And that extended obviously pretty much throughout the international business. But yes, the remainder of the other half is mostly Jeanswear and some Sportswear.

Second question I guess for Eric, maybe Steve relating to Vans. Momentum tremendous. What's the strategy to keep the Vans brand from overheating and perhaps being a transient fashion phenomenon?

I would tell you what I think the Vans team is the primary driver of that sustainable growth pack. They're very, very mindful about their product segmentations, the partners that they work with and how they sell in seasonal initiatives. Here in the US, which I can speak to directly, through their go-to-market process, looking at these really creative collaborations coupled with just normal seasonal product releases, they stay very on top of who they partner with, what they're selling in and really managing that growth on a long-term view.

I mentioned that in my quote, it's very important point you touched. I think what gives us confidence, I mentioned that in China, not only the footwear growth, but also apparel and also accessories. And the same we are very careful in Europe. We had a peak and a heated situation in the UK, but we immediately managed the brand and invested in the brand in different European markets. And we see the brand now very strong in most of the European markets actually. So we're very careful and prudent.

Jim, at the risk of piling on, Steve's comment about how thoughtful the Vans team is about making sure the quality of our growth is strong is absolutely spot on. You might be interested in knowing that most of the conversations we have about the Vans brand are about how underdeveloped we are geographically, underdeveloped on the East Coast, underdeveloped in Midwest, underdeveloped in the Southeast of this country, underdeveloped in Europe, just getting started in Asia, launched in Korea two years ago. So when we look at the future of the Vans brand, most of our discussions are about at what pace do we continue our march around the world with this brand. We see a lot of runway.

And that concludes today's question-and-answer session. I'll turn things back over to our speakers for any closing or additional remarks.

Again, thanks for your time today. As many of you said, we had a really strong second quarter and I hope you understand that we're really confident about the end of this year. The back half is shaping up quite nicely and we'll all confident that we can deliver what's in our guidance and hope to see you in September. Take care.

That concludes today's conference call. We appreciate your participation.