V.F. Corporation
Q2 2012 Earnings Call Transcript

Published: 19 Jul 2012

[Operator:]

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

[Jean Fontana:]

Thank you. Good morning, everyone. Thank you for joining us today for VF Corporation's Second Quarter 2012 Conference Call. By now, you should have received today's earnings press release. If not, please call [phone], and we'll send you a copy immediately following the call. Hosting today's call is Eric Wiseman, Chairman and CEO of VF Corp. Before we begin, I would like to remind participants that certain statements included in today's remarks and the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include management's current expectations, estimates and projections about business and results of operations and the industries in which VF operates. Actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those projected in the forward-looking statements are discussed in the documents filed by the company in the SEC. I would now like to turn the call over to Eric Wiseman.

[Eric C. Wiseman:]

Thanks, Jean. Good morning, everyone, and thanks for joining us. With me today are Bob Shearer, our Chief Financial Officer; and our 3 group Presidents

[Steven E. Rendle:]

Thank you, Eric. Second quarter global revenues for The North Face were up 14% or 16% on a constant dollar basis, including a 9% increase in the brand's DtoC business. We've seen solid sell-through of seasonal products across the majority of our regions and channels, and consistent with what we said 90 days ago, global fall order books for The North Face are up low-double digits against same period last year. In the Americas region, The North Face brand's second quarter revenues were up mid-teens, driven by strong spring and early fall wholesale shipments, new product introductions and in-store support at key accounts. On our last call, I detailed the key growth strategies for The North Face in 2012, so I wanted to take a minute or 2 to highlight a few of these strategies in action. Job one is delivering the most innovative outdoor products in the industry, and we're hard at work doing just that. Following strong fall sell-in around 3 product initiatives

[Karl Heinz Salzburger:]

Thanks, Steve, and good morning, everyone. Following very strong performance in the first quarter, The North Face international business continued its momentum in the second quarter, with mid-teen constant dollar growth in Europe and high-teen growth in Asia. We are continuing to expand our DtoC presence in Europe, with the launch of new websites in Italy and Spain, bringing our total e-commerce presence to 8 countries and driving a 75% increase in online revenues. These sites, along with Ireland, Germany, Austria and The Netherlands, which I expect to go live in the second half of the year, position us well for the coming fall and winter seasons. In the quarter, we opened our first store in Warsaw, which represents a great opportunity to expand the brand in Eastern Europe. Conditions on the wholesale side of the business are consistent with what we discussed in the first quarter, with retailers remaining cautious, committing to orders later than usual. The North Face continues to gain market share in Europe. We are confident that we are extremely well positioned to compete successfully even in today's difficult environment. As in the U.S., we are using high-profile events to tell our brand story and engage consumers across each pillar of the brand's activity-based model. Examples include the famous Ultra-Trail du Mont-Blanc race where runners tackle a 166 kilometer route around Mont-Blanc, with over 9,600 meters of altitude gain. And in September, The North Face is sponsoring the Kalymnos Climbing Festival in Greece, where an estimated 700 to 800 climbers will participate alongside our athletes, the athletic types of events and experiences you'd expect from The North Face brand. North Face in Asia also continues to see great momentum. During the quarter, we established a cross-functional digital team to implement a new e-commerce test in China this fall, expanding our DtoC reach. We are also focusing significant efforts around brand building to increase consumer awareness, a great example being a newly launched GO Outdoors video series, which, so far, has been viewed more than 12 million times online. Certainly, there's concern around slower economic trends in China, but great brands like The North Face have plenty of opportunities to continue to grow. Now let's move on to Vans. Steve?

[Steven E. Rendle:]

Last month, in New York, we held an investor day, highlighting Vans 2016 plan, which set the goal of adding $1 billion in revenues to our 2011 base of $1.2 billion. At the meeting, we ran through 4 key growth drivers

[Karl Heinz Salzburger:]

In the second quarter, Vans continued its outstanding moment in Europe, more than doubling revenues on a constant dollar basis versus the same period of 2011 and grew revenues by more than 20% in Asia. In Europe, we continue to use the successes we have realized in the U.K. as a catalyst to drive momentum and brand awareness into existing and new markets around the region. All markets and categories were up significantly in the quarter, with exceptional strength in the northern and central Europe. Now DtoC business. We opened 2 new retail stones in Rome and Warsaw, which showcase our new Vans retail concept. And very exciting for us is the simultaneous launch of 7 new e-commerce sites in the U.K, Germany, The Netherlands, France, Ireland, Austria and Sweden on July 16. It's important to note that this is the first time that Vans products are available directly from Vans in Europe, so this represents an excellent opportunity for us to enhance our ability to connect with our consumers through stories that are locally relevant to them and drive additional revenue growth. Vans Asian business also posted great results in the second quarter. Of course, product is king, and so we are investing behind strengthening our regional product team. We're also excited about the test of a new retail store format in Shanghai. We have seen encouraging initial results. This global format adds a number of additional regional elements, which resonate well with local consumers. Vans has also shown tremendous growth in a number of key distributor markets in Asia, most notably Australia, which further validates the regional growth opportunity we have in addition to the Chinese market. Clearly, our global strategy is working, and we're excited about our next chapter of growth. If you are unable to attend the Investors Day, I'd encourage you to check out vansisgrowth.com for a deeper dive into our 5-year strategy. And now let's take a look at Timberland.

[Steven E. Rendle:]

Global revenues for Timberland were up slightly on a constant dollar basis in the second quarter. In North America, revenues declined modestly as planned. Strategically, we remain focused on accelerating Timberland's product engine for maximum innovation, strengthening consumer connections, optimizing wholesale distribution and DtoC and growing business internationally. As we work to integrate the brand into VF organizationally, we're creating the necessary framework to enable better collaboration and communication while maintaining Timberland's strong global operating culture. On the product front, we've made great strides in finalizing the Timberland apparel team and have begun constructing the infrastructure necessary to support next year's apparel launch. Simultaneously, we've activated an extensive consumer segmentation study to help us better understand the unique identity of the Timberland consumer. This will enable us to design and develop product that really resonates with the brand's global consumer. An example of this work is our spring 2012 Hookset footwear collection, built in accordance with Timberland's unique SPG formula, which stands for great style, performance and green. Constructed from only 4 materials, all either organic or recycled, it is part of the growing Earthkeepers collection, the largest eco-conscious collection of footwear in the world. At the halfway point in the year, we're slightly ahead of our cost synergies target, driven by supply-chain leverage, inventory discipline and organizational initiatives designed to bring Timberland's cost structure into better alignment with our overall Outdoor & Action Sports portfolio. We remain tremendously excited about the global potential of this powerful brand, with much, much more to come. Now I'll turn it over to Karl Heinz to take you through what's going on internationally with Timberland.

[Karl Heinz Salzburger:]

Revenues for Timberland's international business, consisting of Asia and Europe, was up 5% in constant dollars, driven by a mid-teen growth rate in Asia and a low single-digit increase in our European business. In Europe, we have seen great results from our very successful Earthkeepers line, building our women's business and accelerating our online selling across all countries. And for the second half, we have planned to open 20 stores to our distributor network and 10 stores with our franchisees. Asia continues to experience stronger growth than the rest of the world, with positive results across all categories in men's and women's product. We are very pleased with the progress we have made with several markets, including China, where we are working to leverage with existing infrastructure. We have also completed the successful move of our headquarters from Singapore to Hong Kong, integrating Timberland onto VF's Asian platform. And with that, let's switch gears to the Wrangler brand.

[Scott H. Baxter:]

Thanks, Karl Heinz. On a global basis, second quarter revenues for the Wrangler brand were down 1% or up 1% if you exclude the impact of foreign currency. The story here is one of timing. Recall that we had low double-digit constant dollar growth in the first quarter due to the shift of seasonal product from the second quarter due to the warm weather. That said, first half growth for Wrangler is right on track with our full year expectations. In our Americas region, second quarter Wrangler revenues grew at a low mid-single digit rate in constant dollars, driven by strong performances in our Western Specialty and Latin America businesses, offset by a slight decline in our Mass Market business in the U.S. As you know, continuous product innovation has been the key driver of growth in our Jeanswear Americas business, and nowhere more so than our western businesses. Here, we're happy to report that great momentum is building for our Wrangler 20X retro and premium performance Cowboy Cut styles, which continue to gain space. In terms of Wrangler's Mass Market business, results in the quarter reflect the seasonal shift in sales I referenced earlier. In fact, in the first half, revenues in our mass business rose 3%. Importantly, Wrangler continued to gain market share in the second quarter, driven by strong performance in both seasonal and denim products. The Wrangler product innovation engine continues to deliver, with significant growth in men's tops and our Wrangler Five Star Premium denim line. We're positioned to win at retail this fall and winter with powerful in-store branding and an expanded floor space designed to showcase our product strength. Outside the U.S. in the Americas region, Wrangler's Canadian business saw strong growth in its mass business, including strong comp store sales increases. And in Latin America, we're encouraged to see solid growth in Mexico, Argentina and Brazil, where the brand continues to gain traction. In the Americas DtoC business, while still small, our e-commerce revenues grew by more than 70% in the second quarter, driven by the launch of a brand-new platform for wrangler.com. And with 60%-plus conversion rate, we're very pleased that the new online experience is resonating well with our loyal consumers. Turning to Wrangler's international business. Karl Heinz?

[Karl Heinz Salzburger:]

Wrangler's international business, consisting of Europe and Asia, was down 10% in constant dollars against last year's same period, reflecting the combination of continued growth in Asia, where the brand is relatively small, offset by a decline in Europe. Our business in Europe remains difficult due to the macroeconomic environment, though, generally, we are performing in line with our peers. Positive performances, particularly in Russia, Turkey and Scandinavia, were not enough to offset challenging conditions in western and southern Europe. Looking at the second half in Europe, we have action plans in place to stimulate sell-through and manage inventory relevant to market conditions. And finally, let's take a look to Lee.

[Scott H. Baxter:]

Thanks, Karl Heinz. Lee's business, on a global basis, was unusually challenging this quarter, with global revenues down 11% or 8% on a constant dollar basis. In the U.S., following several quarters of strong growth, the brand is navigating through near-term difficulties created by changing dynamics in the mid-tier channel. In addition, Lee revenue comparisons reflect the shift of some seasonal products into the first quarter from the second. So despite a double-digit revenue decline in the second quarter, Lee brand revenues in the U.S. are down only 4% in the first half. The good news is that Lee continues to gain share in both the men's and women's categories, and outperformed the jeans department averages of its key customers. Karl Heinz?

[Karl Heinz Salzburger:]

Lee's international business, consisting of Europe and Asia, was up 15% in constant dollars, driven by strong momentum in Asia, where Lee is our largest brand and where revenues rose more than 50%, offset by a slight decline in sales in Europe. Strength in Asia was due to ongoing investments to increase brand visibility, including a new marketing campaign in both China and India. We also focused on improving our distribution by optimizing store locations, including placing a greater emphasis on mall locations, which are taking share from traditional department stores. In Europe, soft conditions contributed to lower revenues in the quarter. Weakness is concentrated in western and southern European markets, but bright spots include Russia, France and Scandinavia, where revenues are showing strong growth year-to-date. Lee's woman initiative in Europe, led by the Stretch Deluxe concept, are continuing to outperform expectations with bottoms up 15% year-to-date. Now I'll turn it over to Bob, who will take you through our financial highlights.

[Robert K. Shearer:]

All right. Well, thanks, all, for the terrific overview. Now I'd like to conclude today's call with commentary around our second quarter financial performance and our updated guidance. First, I'll start at the top with revenues, which were up 16% or 19% in constant dollars. We achieved another quarter of strong organic growth, up 6% in constant dollars. And that's lower than the exceptionally strong 14% organic growth achieved in the first quarter. You'll recall that the quarter benefited from earlier shipments and stronger sales of seasonal products, that is, some sales shifted from the second quarter into the first due to the unseasonably warm weather. In addition, our organic revenue growth was negatively impacted by the sale of John Varvatos, reducing the growth rate by about 1%. The first half organic revenue growth was 10% in constant dollars, giving us confidence in our ability to achieve our 8% organic revenue growth guidance for the year. Our international and direct-to-consumer businesses remain important drivers of VF's current and future growth, and both are on track to achieve the 15% organic revenue growth targets we established at the start of the year. Eric touched on the strength we're continuing to see in our international businesses, Europe and Asia in particular, where our strong brands and marketing investments continue to drive superior performance. In terms of our direct-to-consumer business, we're halfway through the year, and we have opened 58 new stores. The second half will be a heavier period of additional store openings and strong direct-to-consumer revenue growth, as we work toward a total of approximately 130 new stores by year-end. Now a quick comment on the 3 businesses we haven't touched on

[Eric C. Wiseman:]

All right. Thanks, Bob. Let's open the line for questions.

[Operator:]

[Operator Instructions] Our first question will come from Michael Binetti with UBS.

[Michael Binetti:]

Just a little housekeeping quickly. How much of a drag was reduced distribution for Timberland in the quarter? I know you guys said you're going to be cleaning that up.

[Steven E. Rendle:]

Yes, Michael, this is Steve. There was a minimal impact. As we look to rightsize that business, we are closing some of the distribution. Simultaneously, we're rightsizing the product segmentation strategy, getting the right products in the right channels. So some impact, but not 100%.

[Michael Binetti:]

Okay. And then I think, if I have the numbers right that you guys gave, I think you said China revenues grew by, I think, 19% in the first half but up 20% in the second quarter, so somewhat of an acceleration there. And then I think the guidance you gave for the year, 20% growth in Asia overall, was an acceleration from the 19% in the quarter. So if I'm right, you're looking forward to an acceleration in the back half, which would be continuation of acceleration in the second quarter. Can you just talk a little bit about what would be driving those solid trends? Just because we're hearing such volatile comments out of the macro environment over there.

[Eric C. Wiseman:]

Yes, let me -- I know that we've thrown -- this is Eric, Michael. I know we've thrown a lot of numbers out there today. Our China business in the second quarter was up 34%, driven by our jeans business that was up 50% in the second quarter. Our full year expectation for China, on a constant currency basis, is up 24%. So with that fact reset, it suggests that we're not expecting the same overall growth rate. We've had a phenomenal first quarter, particularly in our jeans business, but we are expecting kind of growth in above 20% for the year out of our China business.

[Michael Binetti:]

Okay. And then could you just tell us what...

[Eric C. Wiseman:]

Does that help?

[Michael Binetti:]

Yes, it does. And could you just tell us what same-store sales were for the DtoC business in the second quarter, please, for our models?

[Eric C. Wiseman:]

Yes. Worldwide, the stores that we own and operate were up mid-single digit in the second quarter. That's about where they were in the first quarter, and that's our outlook for the full year.

[Operator:]

Our next question will come from Kate McShane with Citi.

[Kate McShane:]

I just had a clarification question on the guidance you gave today of $9.50. Bob, did we hear you say that the tax rate benefit that you experienced in Q2 is not included in this new guidance? Could you just reconcile that for us?

[Robert K. Shearer:]

Sure. Yes, what we're seeing there, Kate, is that that tax benefit that was associated with the John Varvatos gain, all of that gets excluded, right? The gain itself and also, that additional tax benefit that was worth $0.10 a share gets excluded in our adjusted earnings per share numbers. So yes, that incremental $0.10 is not in the $9.50. And just to, I guess, to carry through there, just the other point is -- what we said was, that our overall tax rate for the year looks to be pretty close to the 25% level.

[Kate McShane:]

Okay, fantastic. And then, my second question has to do with the product cost timing for Jeanswear versus Imagewear. Can you just walk us through a little bit why Jeanswear was a little bit better than expected and the timing of the higher product cost for Imagewear and how we should look at those 2 businesses from a gross margin standpoint for the rest of the year?

[Scott H. Baxter:]

Kate, it's Scott. I'll take you through that. It's pretty simple. The Jeanswear and Imagewear businesses are different in that we carry a higher inventory in the Imagewear businesses because of the differentiation in the models. The models are a little bit different, so therefore, we carry the higher inventory. And you're going to see the product costs flow quicker in the Jeanswear business as you did in this quarter and lag a little bit in the Imagewear business simply because of the model differentiation. And then, we'll be back to, I think, by the fourth quarter, for both of the businesses, historical levels and plan and what we have talked about in the past.

[Eric C. Wiseman:]

And Kate, maybe just a little follow-up on that. In the Jeanswear piece, as we've said in the past, we -- we're really locked in, in terms of our denim costs. So the improvement, a little sooner than expected, was more due to manufacturing efficiencies. Our folks there are just doing a great job in terms of running the plants very, very efficiently, also keeping inventories under great control. So that improvement, that faster-than-anticipated improvement, came from a couple of factors like that.

[Operator:]

We'll go next to Omar Saad with ISI Group.

[Omar Saad:]

I wanted to talk about Vans. The brand has been so strong. Obviously, it's really catching quite a bit at the consumer level globally, especially in Europe. I wondered if I could talk to you about how you think about kind of the canvass shoe, that classic canvass shoe look that Vans is so well known for. And how do you think about that -- is that really driven by kind of the life -- adoption of the brand as a lifestyle brand by consumers? Is it a fashion trend that's really hot right now? Is it sustainable? Or how do you turn it from a fashion trend at the consumer level and to a sustainable kind of brand adoption? Just any thoughts around that, I know, would be really helpful.

[Steven E. Rendle:]

Sure, Omar. Omar, this is Steve, and perhaps Karl Heinz can fill in from a European standpoint. I mean, clearly, the classics portion of the Vans business is what ties it to its historical, cultural element of that skate consumer. As we talked about in New York, that really is the nucleus of how we take our brand to market. And then, we move away from that center really to that youth culture connectivity using the classics as the anchor, but also moving into a number of the other product categories, including the new LXVI launch, to continue to expand ourselves from that core consumer into the youth lifestyle component driven from music and that street culture component.

[Karl Heinz Salzburger:]

Yes, Omar, this is Karl Heinz. I can add, Vans is doing particularly well in Europe, as you've seen also. And good news is, we're clearly seeing a lot of goods sales on the classics family, but in addition, also, we monitor and we see great results on the other families as well, including the LXVI. That's the first point. The second one, we have strong sales in the U.K. At the same time, we see also very good performance across Europe. And all our marketing initiatives, we are making sure that we established this as a brand and not just a fashion pick.

[Eric C. Wiseman:]

Omar, if I could pile on -- it's Eric -- on the Vans subject, at our event in New York City last month, as Steve mentioned in the call, we think we can add $1 billion to this brand over the next 5 years. And when we think we can do that -- and we don't come out and talk about those things until we have some proven concepts and some demonstrated performance internally. And Steve talked about 4 things

[Omar Saad:]

Okay, great. And then Eric, while I have you, as we think about maybe some your more cyclical businesses slowing a little bit, still maintaining very healthy margins, and I'm talking about the business maybe with -- those with less global opportunities. Is it a good time to start thinking about portfolio management and take advantage of how strong those businesses have been and maybe consider a divestiture or 2?

[Eric C. Wiseman:]

Well, as you know, we consistently say that we're active portfolio managers. And it's tough to time acquisitions and divestitures, that's for sure. But we are always looking across our portfolio at what do we want to look like 3 or 4 years from now and how do we get there. That includes building in brands and markets to invest and to grow, and it includes buying and selling. Within the last 12 months, we've acquired Timberland. And we have acquired Smartwool, and we've divested John Varvatos. And we continue to try to reshape our portfolio, but I can't comment specifically about what our next step might be.

[Operator:]

We'll take our next question from Mitch Kummetz of Robert Baird.

[Mitchel J. Kummetz:]

Bob, I just want to drill down on the gross margin a little bit. Now let me start -- I think your comment on the Jeanswear business for the second quarter is that gross margin was up 100 basis points. Did I hear that right?

[Robert K. Shearer:]

Yes, that's right.

[Mitchel J. Kummetz:]

So how are you thinking -- and I think you said that, that gross margin improves over the balance of the year and it kind of, for this year, at least, it peaks in Q4. So how shall we be thinking about Jeanswear gross margin over Qs 3 and 4?

[Robert K. Shearer:]

Yes. It continues to improve substantially over that period of time. So again, 100 basis points in the second quarter, and that grows to -- I think the best way to maybe put perspective around that is that by the end of the year, we expect our gross margins to be back to more historical levels, the levels that we saw in years prior to 2011. So the expansion just continues to accelerate throughout the year, and a lot of it is based on as costs continue to come down.

[Mitchel J. Kummetz:]

Can you get even better than historical levels in Jeanswear going into next year based on cotton prices?

[Robert K. Shearer:]

We don't see that right now, okay, based on what we've acquired. And we'll have more to say about next year and -- as we lock in the costs for next year. But for 2012, we're not seeing that. But we are seeing a return, which is a big statement, right? We're seeing that return to those more normalized levels that we enjoyed historically.

[Mitchel J. Kummetz:]

Okay. And then, your gross margin guidance on the year is now slightly better than the 70 basis points of improvement that you highlighted, I think, on the last call. Is there any way you can -- when you think about the year on a gross margin, can you kind of break out or quantify the puts and takes on your expectations for gross margin? Can you kind of give us a sense as to where do you think mix comes in for the year, where do you think actual input prices, that impact is for the year?

[Robert K. Shearer:]

Yes. So a little perspective around that. Initially, we indicated that we expected 70 basis points of gross margin improvement, and we said that most of that was mix. And now said it should be a little bit better. And what we're talking about there is maybe 10 basis points of additional improvement, which isn't a huge number, but it's clearly moving in the right direction. So just a couple of factors on a full year basis. As we look at that now implied 80 basis points, we still expect about 70 basis points coming from mix, and that's really been pretty consistent. So we've been running right around 70 basis points over the past several years. And that's been pretty consistent and will be a key driver going forward as well. On top of that, we have, in terms of price and costs, it looks like we'll improve by an additional 30 basis points. We're -- we expect to see gross margin expansion, actually, across nearly every single one of our businesses for the year 2012. So we're really, obviously, pleased with that. So that nets to about 30 basis points on a full year basis. And then, keep in mind that in the last year, we had a few credits. We had a couple of credits. One was from us from the facility exit and also, from a LIFO change. And that helped last year by about 20 basis points. We don't have that this year. So the 80 points is essentially 100 basis points of improvement from mix and our pricing costs ratio, and then net of that 20 basis points that helped last year, not in this year.

[Mitchel J. Kummetz:]

Okay, that's helpful. Thanks for walking me through that. Last question, just on Timberland in the back half. I know your comments, in general, Bob, were that you expect stronger revenue growth in Q4 than Q3. How should we be thinking about the Timberland business on an organic basis? I recognize that Q3 is a little screwed because of the timing of the acquisition. But from an organic standpoint, how should we be thinking about Timberland's growth in the back half, Q3, Q4? Higher growth in Q4, I would assume, organically?

[Steven E. Rendle:]

Yes, I'll go ahead and take that question for you. We're looking at the Timberland growth, as we've said, as to just a gradual improvement year-over-year. In the U.S., we've got a very difficult winter to comp off of. We're planning growth because of that -- what we saw in 2011. But on a year-over-year basis, we're planning the business really, really slight growth overall.

[Operator:]

We'll take our next question from Joseph Parkhill with Morgan Stanley.

[Joseph Parkhill:]

My first question is about Jeanswear. While you explained some of the weakness in the quarter due to mid-tier and demand pull-forward to 1Q, I was wondering if you could talk a little bit what you're expecting from a revenue growth perspective in the second half. Would you expect it to normalize a little bit? And then also, your expectations around the European Jeanswear business.

[Scott H. Baxter:]

Joseph, this is Scott. I'll take the first part of the question. I think the key component of your question is, if you think back to February, the last 2 weeks of February and all of March, the really unseasonably warm weather, we pulled a lot of our seasonals forward in the first quarter. And that helped us to have low double-digit increases in the first quarter. And so we're a little less, from a revenue standpoint, in the second quarter. But if you take a look at the first half, we're really comfortable with where we landed relative to that. And then if you look forward and take a look at the full year, stand by our guidance that we've talked about as far as mid-single digit growth for the Jeanswear business for the full year combined. As far as the turbulence or whatever you commented on the mid-tier, no comments on any of our individual customers, and we'll just continue to work our way through it and do the best we can.

[Karl Heinz Salzburger:]

Joseph, this is Karl Heinz for the international side. In Europe, you probably know that in addition to the challenging economic situation, the jeans market is not in the best health. And we act in this market like many of our peers do. So we expect our revenues to be down in the high-single digit for the year. What we are doing, we are improving our gross margin and working on the SG&A side so that profitability continues to improve. On Asia, on the other side, you have heard we have strong performance on Lee, and we expect Asia to be as strong as it has been last year.

[Joseph Parkhill:]

Okay, that's helpful. And then just on Timberland, I mean, I think that was maybe the area where inventories were a little bit higher than sales growth. How comfortable are you with the current inventory levels, and when would you expect that growth would start to match your sales growth for the brand?

[Robert K. Shearer:]

Joseph, I'll start on that one. Our inventories, by the end of the second quarter, were in much better condition. So as you know, and what you're referring to is that we've been aggressively moving some excess inventory through -- we've been moving it over the first half of the year. So a lot better -- a little bit -- still a little bit to move in the third quarter, but not like we've seen in the first half. So at this point in time, we're getting to a position where we're in a lot better shape than we were early in the year.

[Operator:]

We'll take our next question from Robbie Ohmes with Bank of America Merrill Lynch.

[Robert F. Ohmes:]

I was hoping, Eric -- and actually any of you who want to chime in, can you walk us through what you're doing different in China? And sort of break out for us, "This is what we're doing in Jeanswear and Lee to keep that momentum going, even though others around us are seeing a slowdown"? And then, similarly, if you could tell us on Vans and North Face how much of the growth that you're continuing to see in China is new door and whether you've seen any slowdown in same-store sales over there? Just maybe help us understand, in general, what's going on in that market broadly.

[Karl Heinz Salzburger:]

Robbie, this is Karl Heinz, here. I will try to give you the answers. We operate in China in a different model than many of our competitors. We don't have just a single brand. We act with a portfolio of brands. So we have our 5 large brands

[Eric C. Wiseman:]

Robbie, we still have comp store growth happening in all of our brands right now in China. And Karl Heinz said, we've got -- we're only in 2,200 points of distribution across those brands. That's not in each brand, that's across all of them. So if you look at what some other brands' businesses have in China on doors per brand, we have a long way to go. We're thrilled by that because we have a team in place so they can get that done.

[Robert F. Ohmes:]

And just a quick follow-up on the U.S. mass channel business for Jeanswear. Is it a unit volume problem? Is it programs being canceled? Or is it average selling prices coming down? Can you just give us more flavor what all the pressure is you guys are working through there?

[Scott H. Baxter:]

Robbie, this is Scott. We feel pretty good about our mass channel business and still stand by the fact that we're going to have a good year and had a good first half. And we pulled some seasonals, significant seasonals, into the first quarter and as you remember in the first quarter release, when I talked about the low-single digit -- excuse me, double-digit increases for the first quarter. So again, I go back to the fact that it's the picture of the first half versus just looking at it at 1 quarter. But I think we feel good about...

[Robert F. Ohmes:]

Sorry, Scott, maybe -- Scott, I maybe meant the moderate channel.

[Scott H. Baxter:]

Okay, then...

[Robert F. Ohmes:]

Sorry, sorry. I meant the moderate channel.

[Eric C. Wiseman:]

You got the answer on the mass channel, all about mass.

[Scott H. Baxter:]

As far as the moderate channel, we don't comment on specific customers, and we're hopeful that-- and feel optimistic that the future is a little bit better than the second quarter. But again, we had a very strong first quarter. Second quarter, as we commented in the Lee business specifically, was a little bit slower. But again, we did pull some seasonals forward in the first quarter. But I think the key for us is new product. We have -- in the moderate channel, we have all kinds of new products, both in our male and our female business, that are really resonating with the consumer. And that's going to help us win in the long term in the moderate channel.

[Eric C. Wiseman:]

It's an interesting time in that mid-tier channel, Robbie. There's a lot of change going on. And so we always look at our businesses 2 ways

[Operator:]

We'll take our next question from Christian Buss with Crédit Suisse.

[Christian Buss:]

I was wondering if you could let me know what's embedded in your guidance when it comes to the competitive pricing environment as commodity costs are coming down.

[Robert K. Shearer:]

Yes, basically, the answer to that, Christian, is that our pricing remains relatively stable. So a couple of pieces. Relative to Jeanswear, where the bigger pricing increases occurred in 2011, generally, we anticipate -- with some -- a few exceptions, generally, we anticipate that pricing there will hold throughout the year. And you mentioned costs coming down, that's true from a cotton standpoint. But other costs in other of our businesses, for example synthetics, are up to some extent. Nothing at all like what we saw in cotton last year, but there have been some increases in other parts of the business. And what we've done, of course, is we've had some pricing increases to match that. So actually, across the board overall for VF, there are a few percentage points worth of pricing included in our numbers, in our revenue numbers, again, offset by some cost increases as well, coming down to that gross margin expansion on a net basis.

[Operator:]

We'll take our next question from David Glick with Buckingham Research Group.

[David J. Glick:]

Eric, I was wondering if you could give us some early thoughts on how you're thinking about the Timberland apparel opportunity, how you're strategizing that rollout -- the pace of the rollout, the distribution strategy and maybe men's versus women's.

[Eric C. Wiseman:]

Not quite ready, David, to disclose that, because we're still developing those plans. What we know is we intend to launch apparel -- we're really talking about the U.S. market here, right, because we have a very successful Timberland apparel business in Europe and Asia. In Asia, in fact, about half our revenue -- the revenue's split about 50-50 between revenue -- I'm sorry, between apparel and footwear. So it's a U.S. question. That line is -- the products are taking shape, but it's too early to comment on that. We have not sorted out the channels, the pricing. All that is in process. And we're going to launch -- when I say launch, I'll temper that with the size of the launch. We're going to kind of ease into that program, walk a bit before we run and get moving, but start moving in the fall of next year.

[David J. Glick:]

Is it fair to say...

[Eric C. Wiseman:]

We'll give you more details as we have them.

[Operator:]

We'll take our next question from John Kernan with Cowen and Company.

[John D. Kernan:]

Eric, you talked about being slightly ahead of your synergies plan for Timberland. And then, you talked about potentially more synergies going into next year. Where are those synergies coming from? And can you quantify any of that?

[Eric C. Wiseman:]

Sure. As you know, John, we've -- last year, in 2011, we exceeded our initial expectation for synergies. We're running slightly ahead again this year. What's changed the most is the leverage in our supply chain to help Timberland execute their apparel sourcing that's largely current, as I just said, in Europe and Asia. And also, we're taking our significant manufacturing expertise and bringing some of those skills to bear in the factory that Timberland and we now own in the Dominican Republic. And then we have terrific manufacturing engineering expertise, and that's helping us reduce the cost in that factory. So the short answer to your question is supply chain synergies in kind of every way. We've touched on it every way.

[Steven E. Rendle:]

And in addition to that, I guess, I'd also just say just managing inventories as well. So when you look at the risk created by having higher inventories versus lower, we think there's an opportunity there as well that we've seen once we've owned the business. And behind some of the practices, we've seen a little bigger opportunity there.

[John D. Kernan:]

Great. And then one longer-term question. The world is a lot different than it was when you held your analyst day last year. And you talked about a 10% organic growth rate going forward. Are you any less confident in that long-term growth profile of your portfolio?

[Eric C. Wiseman:]

No.

[Operator:]

We'll take our last question from Jim Duffy with Stifel, Nicolaus.

[Jim Duffy:]

Most of my questions have been asked and answered. A question on the e-commerce, however. Seemingly, a driver across multiple brands, particularly international, launching a lot of sites in new geographies. What type of growth are you seeing in the e-commerce business at the corporate level? And where do you see yourselves sitting relative to the global e-commerce opportunity?

[Steven E. Rendle:]

Jim, this is Steve, I'll take that because, I think that the bulk of the e-commerce sales sits in the Americas Outdoor & Action Sports space. We've seen really good historical performance there. Based really on the platform that we've been able to establish both from the commerce, but more importantly, the content. And it's how we marry content to commerce and drive really strong conversion. But we have been seeing high 20%, low 30% growth rates, and we continue to see that into this year.

[Karl Heinz Salzburger:]

And Jim, on the international side -- you asked international, Karl Heinz here. We are behind you, as you heard me saying. We're just launching our e-comm initiatives in Europe. We started with The North Face last year. We are adding countries this year, and Vans literally went live, as I said, on July 16 in 7 countries. So we're at a very, very early stage. And clearly, the growth numbers at this moment are extremely high, but we're starting from a low number.

[Operator:]

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

[Eric C. Wiseman:]

Sure. This is Eric. We're thrilled with where we are halfway through this year. We're right exactly where we thought we would be on the revenue front. The economy is playing out as we thought. We're a little bit ahead from where we thought we would be in earnings for the year, and we're looking forward to the next 6 months and keeping you guys posted. Thanks a lot for being with us this morning.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's presentation, and you may now disconnect.