V.F. Corporation (VFC)

Earnings Call: Q4 2014

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Feb 13, 2015

Good day, and welcome to the VF Corporation 4th Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lance Allego, Vice President of Investor Relations. Please go ahead, sir. Thank you, operator, and good morning to everyone, and thanks for joining us today on our Q4 and full year 2014 results earnings call. Before we begin, I'd like to remind everybody that participants on the 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 of comparable GAAP measures in our press release, which was issued at 7 am Eastern Time today and at our website at bfc.com. Joining us on today's call will be Chairman, President and CEO, Eric Weissman Bob Scheer, our CFO and BF Executive, Scott Baxter, Steve Rendell and Carl Heinz Salzberger. Following our prepared remarks, we'll open the call for questions and ask that you please limit yourself to 2 questions per caller. Now I'll turn the call over to Eric. Thanks Lance. Good morning, everyone. Thank you for joining us. Our Q4 and full year results demonstrate the strength of VF's business model, our powerful brands and the powerful platforms that support those brands to consistently deliver strong returns to our shareholders. Consistency is in VF's DNA. It's part of how we manage our business. It's what we expect from our people and it's consistency that our shareholders have come to expect from us. We take pride in it. 1 year ago, we laid out expectations for 7% to 8% revenue growth 11% to 13% EPS growth for 2014. And while this past year has presented plenty of challenges, we achieved our top line target and actually exceeded our bottom line goal, delivering record returns to our shareholders. Last year, we spoke about momentum. And 12 months later, it's the same story outstanding performances from our 4 largest brands as well as some notable up and comers and powerful platforms that became demonstrably stronger during the year. And before we dive into a few highlights of the quarter and the year, let's first touch on a non cash accounting manner. During the past few years, our contemporary brands business, which represents about 3% of Versus Total revenues has operated in a challenging environment. In this morning's release, you saw that we concluded that the carrying value of our 7 From Mankind, Splendid and Ellen Moss brands has declined. As a result, in the 4th quarter, we took an after tax impairment charge of $307,000,000 which is about $0.70 of EPS to reduce the carrying value of those brands' assets on our books. Bob will take you through more detail on this in a few minutes. With that said, on an adjusted or underlying operating performance basis, our 4th quarter results were quite strong and contributed to another fantastic year for VF. For the full year, total revenue grew 8% and reached 12 point $3,000,000,000 led by 13% growth in our Outdoor and Action Sports Coalition or up 14% if you exclude the impact of foreign currency. Our international business grew 9% or 11% if you adjust for currency. Our direct to consumer business grew 19% and included high single digit comps. Our full year gross margin improved by 70 basis points to reach 48.8%, all of which led to an adjusted earnings per share of $3.08 which is up 14% over last year's $2.71 and it's ahead of our annual long term earnings growth target. And finally, share buybacks during the year when combined with a 22% increase in our quarterly dividend rate returned more than $1,200,000,000 to our shareholders. Looking forward to 2015, foreign currency, currency adjusted, currency neutral, these are terms you're going to hear us and many U. S. Companies with sizable international businesses talk about likely for many quarters to come. And while the rapid strengthening of the U. S. Dollar may continue to cause reported results to shift depending on how the euro, the pound, the peso and yen move throughout the year, the important news is our fundamental business is incredibly strong and the momentum we've established will continue. In 2015, we're teed up to deliver another year of record financial results for shareholders. For the full year again on a constant on a currency neutral basis, we expect revenues to be up 8%, which is in line with our 2017 organic growth rate target. That growth rate is of course an even stronger rate if you factor in the 53rd week we had in 2014. And similar to last year, we expect outdoor and action sports, international and our DTC business to remain the most significant drivers of growth. We expect gross margin to improve by at least 40 basis points to reach 49.2%, including some negative FX headwinds. This puts us just 30 basis points shy of our 5 year 2017 goal at the end of only the 3rd year of our 5 year plan. Operating margin should reach 15% versus the adjusted operating margin of 2014 once again despite negative currency influences. We expect our currency neutral earnings per share to grow 12% versus the adjusted EPS of $3.08 in 2014. We're also pleased to report that we expect once again to return more than $1,200,000,000 to shareholders through share repurchases and dividends this year. That sounds like a lot to deliver and it is, But we're confident we will achieve these goals. Let me summarize what has driven and will continue to drive our strong performance. First, we will lead in innovation by increasing our pipeline of compelling new products and technologies. 2nd, we will deepen connections with consumers by creating consistent and compelling engagements. 3rd, we will serve consumers directly reaching them across multiple channels wherever and whenever they shop. And finally, we will expand geographically taking advantage of our scale in every region and channel that we operate in. So in closing, with year 2 of our 5 year plan in the books and year 3 looking quite strong ahead of us, I'm happy to say that the performance of our underlying operations is on track with our long term targets. We have never been more bullish about VF's business. Our company theme is consistent, powerful brands, powerful platforms, 1 VF. And one last thing before I pass the call over to Bob. I'd like to offer a few words about my experience with him on this, his last earnings call before his retirement. It has truly been an honor to work with this man. He is my friend and my thought partner and my counsel. He possesses extraordinary talent, intelligence, discipline and unique leadership capabilities. During his nearly 30 year tenure at Versus, he has been undeniably instrumental in the success and complete transformation of our company. He's been an invaluable author of our business playbook and our operational principles, an enforcer of financial discipline and honestly he's just a good person. He's a person with a head for success and the heart to succeed and he will truly be missed. I can attest that Scott Rowe has some big shoes to fill. Now I've worked with Scott for almost 2 decades at VF. Scott knows VF. He's battle tested and an extraordinary leader. I have every confidence in him and his ability to make significant contribution as Versus Next Chief Financial Officer. And with that, I'll turn the call over for the last time to our great friend and the Chief Financial Officer of The Wall Street Journal ranked as number 8 in the universe, ladies and gentlemen, Mr. Bob Scheer. Oh, wow. Well, thanks, Eric, for the kind words and also the unique opportunity to serve alongside you throughout much of my time at VF. I just have way, way, way too many good things to say about VF and my experience here during an earnings call. But I will say that I couldn't be more proud of being part of the incredible transformation this company has successfully put in place. What an honor it's been for me. And I've also enjoyed working with all of you on this call over the years and I'll miss that for sure. But first, I am still the CFO, so back to the business at hand. Our 4th quarter results and overall performance in 2014 once again illustrate the strength of the VF business model and how our operational excellence enables us to deliver on our growth objectives year after year. 4th quarter revenue increased 9% led by exceptional results from our Outdoor and Action Sports Coalition as well as our international and direct to consumer businesses. For the quarter, foreign currency fluctuations hurt the revenue comparison by about 3 percentage points, while the incremental week that Eric referenced helped by about that same amount. Our gross margin reached a record 49% in the 4th quarter with an 80 basis point improvement driven mostly by the continued shift of revenues toward our higher margin businesses and a small lift from an accounting change made earlier in the year related to retail concession fees. SG and A as a percent of revenues in the 4th quarter increased 20 basis points. This increase was primarily due to that same accounting change as retail concession fees are now included in the SG and A line rather than netted against revenues. And now a bit more in the Q4 impairment charge we recorded for the 7 for all mankind Splendid and Elemoz brands in our contemporary coalition. As you know, the contemporary space has certainly been a challenged one of late because of and related to that we determined that the fair values of these brands were below their respective carrying values. As a result, we recorded a $396,000,000 pre tax non cash impairment charge to reduce the carrying value of the goodwill and intangible assets related to these brands, which equates to $307,000,000 after tax or $0.70 of diluted earnings per share. So while we continue to view 7, Splendid and LMOS as vehicles for growth from today's levels, our projections did not support balance sheet carrying values, hence the charge. Now getting back to the P and L. And as discussed in the press release, I'll refer to amounts that exclude the impairment charge I just discussed as adjusted amounts. So adjusted operating income grew 14% and adjusted operating margin was 16.2% compared with 15.5% in the Q4 of 2013, which brings us to the bottom line and adjusted earnings per share of $0.98 which is up 20% over last year's quarter. Including the impairment charge, 4th quarter earnings per share was $0.28 Recapping now on a full year basis. Revenue growth for the year was 8 percent, which included about 1 percentage point of negative impact from FX and about 1 percentage point of benefit from the 53rd week in 2014. This growth was primarily driven by exceptional strength in our Outdoor and Action Sports Coalition, which was up 13% for the full year, were 14% currency neutral. Our International business, which was up 9%, 11% currency neutral. And our D. C. Business, which was up 19% included high single digit comps and more than 30% growth in e commerce revenues. Gross margin improved by 70 basis points. Our gross margin expansion story continues reflecting the continued revenue mix shift toward higher margin businesses and our intense focus on this critical measure of our brand's strength. Gross margin expansion has and will continue to be an important part of our financial story. Our highest margin businesses are our fastest growing. In 2014, Outdoor and Action Sports represented nearly 60% of total revenue, international 38% and D2C 26%. SG and A as a percentage of total revenue was up 30 basis points, an increase to almost completely to the change in concession accounting. In fact, if you look at our underlying operations, we were able to continue to increase the investment in our expanding D2C business and marketing investments, while leveraging and maintaining strong cost controls across other areas of the organization. As we've said in the past, expanding gross margins, investing in growth in D2C and marketing and cost leverage in other areas of SG and A, well that's our model today and looking forward. That will continue to serve us and our shareholders well. We also ended the year with our capital structure providing great flexibility. In 2014, we generated nearly $1,700,000,000 in cash from operations and returned more than $1,200,000,000 to shareholders through dividends and share repurchases and that's almost twice the cash return we delivered in 2013. Inventory levels are in great shape, up just 6% at year end and well below the rate of revenue growth. And finally, our return on invested capital improved to 18.6%, up 100 basis points, which we're pleased to report is tracking ahead of our 2017 target. So with 2014 behind us, let's talk about the year ahead. And I'll start with the fact that we're positioned for another year of outstanding performance across the globe. As you've heard, given the size and importance of our expanding international businesses, there is some noise in our 2015 outlook related to foreign currency fluctuations, mostly related to translating foreign currencies into dollars for reporting. So I'll do my best to sort through the operational side of our business versus expected reported results including the currency implications. First in terms of definitions, I'll refer to currency neutral amounts which assumes that there will be no foreign currency rate changes from 2014 to 2015. That way you can understand the true operational growth in our businesses and brands. Now as in the past, by far the majority of the currency impacts actually more than 80% results simply from translating foreign currencies into U. S. Dollars for reporting purposes. However, in 2015 given the recent and rapid strengthening of the U. S. Dollar against nearly all currencies outside of the U. S. There are some although limited transactional impact as well. For example, most of the impact on the transactional side results from the recent decision of the Swiss government to move away from pegging their currency to the euro. Because our European businesses are headquartered in Switzerland, that means in U. S. Dollars, our reported headquarter expenses increase. The reason these transactional impacts are not more significant is that we have a strong and efficient hedging program that offsets nearly all of these influences. But when currencies move so quickly and or unexpectedly, well, we still covered nearly all, but not quite all of the risk. And of course, in a more normal currency environment, like we've had over the past number of years, those transactional impacts are just not significant. Our European business is by far the most significant of our international operations, so our exposure to the euro represents our biggest currency challenge. In our outlook for 2015, we have used an assumption of a 1.13 euro to dollar relationship. And as you know, the euro relationship to the dollar has been quite volatile, as have most foreign currencies of late. With perspective around what additional movements of the euro to dollar relationship would mean to our P and L, a $0.05 move in the euro on a full year basis and that's important would mean an impact of revenues of about $125,000,000 0.05 per share on our EPS. And that works both ways, in other words, for strengthening and weakening of the dollar. Of course, as we go through the year, that impact declines as the total exposure lessens. And keep in mind that other currencies have also devalued against the U. S. Dollar similarly to the euro. However, the euro remains our biggest exposure. Okay. Now with that out of the way, move on to 2015. And I'll start at the top with revenues, which we expect to grow 8% on a currency neutral basis, up 3% reported. On a currency neutral basis, our plans include growth in every region as well as our wholesale and B2C channels. Now keep in mind that the additional week in 2014 holds back the comparison by about 1 percentage point. All of that implies another strong year of revenue growth for our brands. And importantly, we're looking for another year that stays right on track on a currency adjusted basis with our long term targets as outlined in our 2017 objectives. So leading the way will be our Outdoor and Action Sports Coalition, which is expected to deliver another great year led by continued strength in VF's biggest brands The North Face, Vans and Timberland. Actually, we expect strong growth for most brands within this coalition. We anticipate low double digit currency neutral growth for the coalition up at a mid single digit rate reported. On a currency neutral basis, we expect low double digit growth from The North Face, a mid teen increase at Vans and a low teen increase at Timberland, all of which are in line with the annual growth targets we set in our 2017 plan. So another great year in store for outdoor and action sports. In Jeanswear, we expect a low single digit revenue increase on a currency neutral basis, an improvement over 2014. Reported growth for Jeanswear should show a low single digit percentage increase. We are looking for mid single digit growth in both our ImageWare and Sportswear Coalitions for the full year. And finally, we're expecting revenues for the contemporary brands coalition to be nearly flat, not anticipating any significant trend changes in the contemporary category. We expect the strong momentum in our international and direct to consumer businesses to continue in 2015 as well with international revenues expected to be up at a low double digit percentage rate currency neutral or low single digit growth on a reported basis. And by region, in Europe, our largest international market, we expect high single digit percentage growth on a currency neutral basis. Reported results in Europe are expected to show a decline by a mid single digit percentage rate for the full year. In our Asia Pacific region, on both the currency neutral and reported basis, we expect revenues to increase at a mid to high teen rate. And lastly, we expect our Americas, and that's the non U. S. Business, to be up at a mid teen percentage rate, currency neutral or up at a mid single digit reported rate. Our D2C business, which finished 2014 with $3,200,000,000 in revenues is expected to be up at a mid teen percentage rate currency neutral or up at a low double digit reported rate. Growth in D2C is expected to be driven by approximately 150 store openings or 125 net of closures and high single digit comp sales growth including a 30% increase in e commerce revenues. Now turning to margins. In 2015, we expect our gross margin rate to improve by 40 basis points to reach 49.2%. That would bring us to just 30 basis points shy of our 2017 gross margin target with 2 years to go. And in fact, our 49.2 percent expectation for 2015 includes about 30 basis points of headwinds due to foreign currency rate changes. So from an operational standpoint, it says we expect to be on our 2017 numbers a couple of years ahead of target. Independent of foreign currency, the expansion in gross margin of 60 to 70 basis points from the favorable mix shift that we've seen for many years remains intact. And as always, there is no reason that should change going forward. Now staying on the gross margin topic for just a minute, I'm pretty sure you have at least a few questions on input costs for 2015. Now let me start by saying that overall, the impact of pricing versus product costs on gross margin is about neutral and the impact of each is relatively small. That is the impact of pricing increases and product cost increases are both minimal. Given our ability to improve our gross margins through a favorable mix, we view that as good news. There are many components to our gross margin story related to product costs. 1st, you've all been reading about the cost of cotton coming down. As a reminder, we buy finished fabrics like denim. We don't buy cotton. However, the cost of cotton will ultimately impact our cost of cotton based fabrics. Because of the lag time of cotton flowing through our production cycle, it will be the second half of the year when we see a benefit of the cotton cost reduction, primarily in our Jeans business. Next up, leather. We generally find it advantageous to lock in our leather buys over a longer term. Right now, we're locked down through the Q3 of 2015. Because of this timing, we locked in costs for leather in 2015 as higher than our costs in 2014 even though today's costs have declined somewhat from those higher levels. Regarding oil, we don't buy oil directly, but the cost of oil does impact some of our synthetics and other production costs. We lock in our synthetic costs over an even longer period about a year in advance. Accordingly, our cost for synthetics were locked in prior to the recent cost reduction in oil, so the costs in 2015 are about flat with 2014. So from a materials cost standpoint, all of that nets to about flat costs in 2015 versus 2014. And finally, it won't surprise you that labor costs are on the rise. We estimate in our own plants by as much as 3% to 5% and on sourced products by an average of 10% to 15%. Generally, we're able to mitigate much of the higher labor costs in our plants, but not so with external costs. The increase in labor costs is generally the reason for the limited overall product cost increase that I mentioned earlier. So there are a lot of puts and takes on product costs for us this year. Our input costs are diverse like our business. Our supply chain folks do a great job of finding the lowest cost with high quality around the globe. That's a competitive advantage for us for sure as we continue to look for gross margin expansion and 2015 will be no exception. All right. So taking a look at SG and A, overall, our model should remain intact. We will continue to invest in our brands and product innovation as well as our growing D2C businesses and leverage our growth against other costs. Foreign currency rate changes will put some pressure on our reported SG and A ratio to revenues like the change in the Swiss franc that I mentioned earlier. However, despite that, our SG and A ratio will remain relatively flat with 2014, bringing us to operating margin, which we anticipate to reach 15% in 2015 on a reported basis, held back by about 30 basis points related to currency changes in both the gross margin and SG and A areas. Taking this to the bottom line, we expect our earnings per share on a currency neutral basis to increase 12%, up 4% on a reported basis. And keep in mind that the inclusion of the additional week in 2014 holds back this comparison by a couple of percentage points. And a few other housekeeping items, we're assuming a 24% to 24.5% effective tax rate and capital expenditures of approximately 2 $25,000,000 Now in terms of revenue comparisons throughout the year in 2015, on a currency neutral basis, we're expecting relatively consistent growth comparisons. Revenue comparisons on a reported basis in the second half 2015 will be slightly stronger than the first due to 1, the bigger negative currency impacts expected in the first half of twenty fifteen versus the second, meaning foreign currencies were stronger against the U. S. Dollar in the first half of twenty fourteen than the second and 2, the seasonality of our overall business weighting to the second half, including our expanding B2C businesses. With respect to earnings cadence in 2015 and this is on a reported basis, that same negative impact from the timing of currency movements of 2015 versus 2014 will mean tougher earnings comparisons in the first half versus the second and especially in the Q1 when foreign currencies in 2014 were at their strongest levels against the U. S. Dollar and our international business mix is particularly high. Our outlook for cash from operations deserves some discussion. Our outlook of $1,300,000,000 of cash from ops in 2015 includes 2 significant factors. First, in early January of 2015, we contributed $250,000,000 to our pension plan versus only $50,000,000 in 2014. Our pension plan is now fully funded and this is a very efficient use of our cash based on the assumption of earnings on those funds impacting our pension expense. And the additional week or the 53rd week in 2014 was a big week for cash receipts considering that many retailers make their payments on account right after their month end, which meant we received their cash in our year 2014. That represented over $200,000,000 of incremental cash that would not be expected in 2015. And related to how we'll put that cash to use for our shareholders, well, our priorities are unchanged. Our first priority, of course, remains on the acquisition front. Regarding share repurchases in 2015, we expect to mirror our 2014 spend and buyback about $700,000,000 worth of our stock early in the year. That combined with our annual dividend, which was increased by 22% in the Q4 of 2014, will return more than $1,200,000,000 of cash to our shareholders in 2015. So now with year 2 behind us and year 3 underway, I'll underscore just how very confident we are in our ability to achieve our 2017 goals. And with that, I'll turn it over to our coalition leaders to provide more detail on 2014 and what to expect in 2015. Let's kick it off with Steve Rendle. Starting with Outdoor and Action Sports Coalition. 4th quarter revenue was up 13% or 16% on a currency neutral basis. This strength was broad based with strong growth in wholesale and D2C as well as double digit growth in nearly every brand including The North Face, Vans, Timberland, Kipling, Napa Prairie, Reef, Lucy and Eagle Creek. What a portfolio and what an engine it is, firing on all cylinders and housing VF's next $1,000,000,000 brands. Now let's take a look at VF's 3 largest businesses. Starting with The North Face, 4th quarter global revenues were up 12% or 14% on a currency neutral basis. Global D2C revenues were up 30% and included double digit comps, so continued fantastic strength in that business. In the Americas, which represents about 70% of TNF's full year sales, 4th quarter revenues were up at a mid teen rate with D2C growth of more than 25% and a high single digit wholesale growth. 2014 had one of the strongest product offerings in T and F's history, innovations that defined new subsets of the outdoor performance category, products that expanded our reach into all four seasons of the year attracting new consumers and a precursor to what we believe is one of the most revolutionary fabrication technologies in more than a decade. Let me give you some highlights. Our ThermoBall line has continued on its incredible growth trajectory. At the end of only its 2nd year, ThermoBall has clearly established itself as the consumer choice for transitional weight outerwear. The line was a top seller throughout the year and ended 2014 with global revenue exceeding $100,000,000 2015 will see an even more robust expansion of this high performance innovation and we really feel like we're just getting started. Launched last spring, our mountain athletics training collection continued to drive growth throughout the year giving consumers an increasingly broader offering to stay in The North Face brand when they're training to be on the trail, rock, ice and snow. The collection increased momentum throughout the year in both our own retail stores and with wholesale partners and we expect this momentum to increase even more in 2015 when we extend the product line to include a women's collection. 1 of the biggest innovation stories for 2014 although available only in a limited release was Fuseform. Fuseform is a revolutionary technology that allows us to weave 2 fiber types into a single fabric. By being able to simplify manufacturing, reduce weight and deliver a consistent aesthetic that maximizes breathability and durability, we can engineer garments to perform where and how an athlete needs it. The Fuseform Brigadier Jacket as part of our steep series range showed great results in the Q4 and won Outside Magazine's 2015 Gear of the Year. This along with the launch of the Dot Matrix jacket this spring gives us great confidence that we've just raised the bar once again. The evolution of our ability to connect with consumers also took a significant leap forward in 2014 through a number of print, digital and TV initiatives, creating meaningful and emotional engagements with the brand. In November, we launched the amazing Yourland campaign, which highlights the inspirational and emotional reasons to explore the outdoors. Since then, we've received more than 7,400,000 YouTube views and driven more than 2,100,000,000 impressions. And more than just a marketing campaign, this effort has raised over $250,000 that goes directly to help conserve our national parks, right to the very heart of the brand's DNA. In 2014, The North Face passed $2,200,000,000 in revenues, up 11% on a reported basis or 12% currency neutral. We're truly seeing great momentum in this brand around the world and are well positioned to realize another strong year. Looking at 2015, we expect The North Face's global revenues to see low double digit currency neutral growth right in line with our 2017 plan. On a reported basis, revenue should be at a mid single digit growth. Now let me turn it over to Karl Heinz Salzberger to walk you through T and S results in Europe and Asia. Thank you and good morning everyone. The North Face International business was up at the high single digit rate on a currency neutral basis in the 4th quarter. In Europe, which is about 20% of the brand's full year sales, 4th quarter revenues were up at low single digit rate currency neutral. For the full year, revenues were also up at low single digit currency neutral rate, affecting a tough macro environment and a general weakness in the outdoor market. In 2015, we are expecting a slight improvement in currency neutral revenues due to our strongest ever product offering and successful go to market strategies. In Asia, revenues were up more than 25% in the quarter, where we continue to make good progress building brand awareness. This is evidenced by the incredibly strong launch of our ThermoBoard product during the year and great initial response that retailers are showing for Fuseform. Our online business also remains a key driver of growth, with sales up more than 80% for the quarter. We saw very strong results in Hong Kong for the year, great momentum with our Taiwan distributor and great momentum in China where sales were up nearly 20%. We are pleased that we are creating deeper lasting connections with the Asian consumer and look forward to building on this momentum. Taken together, The North Face is in a leading position as we wrap up year 2 of our 5 year plan and remain on track with our financial targets. Now let's turn to Vans. Vans showed strong performance in the 4th quarter with revenues up 17% or 20% on a currency neutral basis. This marks the brand's 25th consecutive quarter of double digit growth, a big result that helped Vans become the 2nd $2,000,000,000 brand in VF's portfolio. In the Americas, which is about 60% of the brand's full year sales, 4th quarter revenues increased 20%, slightly ahead of our expectations. Connecting with consumers through the creative expression in action sports, music, art and street culture is something the Vans team does extremely well and the Q4 was no exception. A great example was the 32nd annual Vans Triple Crown of Surfing, which took place on the North Shore of Oahu. Surfers from around the world ended their year on Hawaii's iconic waves and this year 10,000,000 people who couldn't make the trip viewed the action live online. We also garnered more than 100,000,000 social media impressions and press coverage in more than 50 countries worldwide. This is a clear indication that a lot of people choose the Vans brand as the epicenter of youth culture. In 2015, there's no slowdown as we'll continue to build on this momentum with events such as Custom Culture, the Vans Warped Tour and House of Vans to drive home Vans unique off the wall culture. And of course, a few product highlights. We recently introduced Weatherize Footwear, designed to keep you warm and dry in the outdoor elements. So just like The North Face moving forward toward a 4 season offering, so is Vans. And that's important because consumers shouldn't have to step out of their Vans because of weather. It's their flag. It expresses their creativity and now they have more choices for different climates. And really exciting, the response thus far has been incredible and we have plans to significantly expand this collection in the back half of twenty fifteen. We're also introducing a new footwear concept Classic Plus that will feature restructured trend focused product. We're really excited about this concept and can't wait to talk more about it in the coming months. Global revenues for the Vans brand in 2014 were up 17% on both the reported and currency neutral basis. This increase is ahead of our 2017 plan and clear evidence that as the world's largest youth culture brand, we are firing on all cylinders globally and our momentum is strong. In 2015, we expect Vans global currency neutral revenues to be up at a mid teen rate consistent with our 2017 plan. On a reported basis, revenue should be at a high single digit growth rate. Strong brand, strong plan and a fun year ahead. Caj? Banc International revenues were up at high teen percentage rate on a currency neutral basis in the 4th quarter. In Europe, which is about 30% of the brand's full year sales, currency neutral revenues were up at high single digit rate in the quarter. Vans continued to deliver amazing consumer experiences with many events and interaction to London's House of Vans. This venue has quickly become a fantastic destination for youth culture to experience the brand. We look forward to using this showcase in an even greater way in 2015. And just like in the Americas, we are also focused on growing our relevant innovative products such as weatherized footwear and apparel as well as updating classics to reflect current trends and getting very strong response from our efforts. For our e commerce business, also has been a great success story for Vans as we reach even more consumers. In Asia, we are seeing strength across the board. The Cordless revenues were up more than 50% with particular strength in China and Korea. Like Europe, we are seeing strength in our weatherized lines and continue to get traction against our localized product, specifically apparel. In terms of brand activation, we completed an incredibly successful House of Vans tour across 3 countries, a Vans China Retail Roadshow across several cities and an Asia Pacific Skate Tour. We also opened up an experimental retail store in Seoul, Korea that brought the House of Bands elements of live music, local artist galleries and special edition product into a retail environment. Definitely been busy making some great connections with our consumers in 2014 and look forward to building on this momentum in 2015. And now on to Timberland. 4th quarter global revenues for Timberland were up 11%, up 15% on a currency neutral basis. In the Americas, which represents about 40% of the brand's annual sales, revenues were up nearly 25% in the 4th quarter, driven by incredibly strong growth in our wholesale business. This represents the 5th consecutive quarter of double digit growth in the Americas with momentum we look forward to building on in 2015. This is a testament to great brand strength driven by strong consumer reception for our products, high customer demand for future collections and our intense focus on amplifying our connection with the outdoor lifestyle consumer. On the product front, growth continues to be really well balanced across all footwear and apparel categories with particular strength in casual and outdoor footwear for men and women. Our pro Boondock family of footwear also continued its solid momentum. On the apparel side, sales were driven primarily by outerwear from shirt jackets to insulated product to beautiful leather bombers, really strong and balanced growth. In marketing, we continue to build brand heat and relevance with our core target, the outdoor lifestyle or consumer. In Q4 alone, Timberland created a shared more than 350 pieces of engaging style rich content anchored by the highly successful Mark Makers influencer program. We gained extensive coverage of our new fall collections and influential print and digital outlets garnering some $800,000,000 media impressions. In 2014, full year global revenues were up 13%, up 15% on a currency neutral basis, which is actually ahead of the 2019 plan we set in September. With $1,800,000,000 on the top line in 2014, this marks the brand's highest ever revenues, something the team is very proud of and they should be. Looking at 2015, we expect Timberland's global revenues to see low teen currency neutral growth rate, right in line with our 2017 plan. On a reported basis, revenue should be up at a mid single digit growth rate. Now back to K. H. Timberland's international revenues were up at the high single digit percentage rate on a currency neutral basis in the 4th quarter. In Europe, which is about 40% of the brand's full year sales, 4th quarter revenues were up at the mid single digit rate, currency neutral. The quarter was driven by strong sales of Sensoflex, our newest technology platform, as well as cups sold for men, while casual boots were strong on the women's side. During the quarter, we continued to grow our footprint in the region, opening 2 new stores and 20 franchise locations. We also rolled out our new e commerce site design, which drove a big jump in conversion and an increase in sales. We expect growth in the region to continue in 2015. In Asia, 4th quarter revenues increased at the low double digit rate currency neutral. In this region, the classic yellow boot performed well in all markets and we saw great early success with the launch of the Britton Hill line. Additionally, apparel had a particularly strong quarter with great results from our men's outerwear including rainwear and jackets. We are more confident than ever about the Timberland brand. The global team and efforts to significantly move this brand forward are working well and we are just getting started. Before we move forward, I'd like to talk about 2 brands that are based in Europe and continue to perform exceptionally well, Kipling and Napapiri. Kipling's global business posted an 18% increase in 2014 global revenues, which is on top of the 29% growth they posted in 2013. This marks the 2nd year in a row that Kipling has been VF's fastest growing brand. Now, Papiri finished strong in 2014 with 4th quarter revenues up nearly 30% or more than 40% currently neutral, handily winning the as fastest growing brand of the quarter award. For the full year, the FAPIRI was up at low double digit rate. Both of these brands have fantastic long term potential and might one day join the $1,000,000,000 brand category. And now back to Steve. Turning to our sportswear and contemporary businesses. Sportswear's 4th quarter revenues were up 4% driven by growth in the D2C channel. Nautica's revenues were flat with low teen growth in D2C including significant e commerce strength, partially offset by a mid single digit decline in its wholesale business. Kipling's North America business continued its run of double digit gains posting 25% growth including a 35% increase in D2C sales and a mid single digit growth in wholesale during the Q4. We continue to expect Kipling to achieve strong double digit growth throughout the year. Revenue in our contemporary brands, Coalition was down slightly in the quarter or up slightly on a currency neutral basis due to as we've already discussed category and channel challenges. Where we control the brand ourselves in other words, in our own D2C businesses, we did see a double digit currency neutral revenue increase. Our data shows that we're not only maintaining, but also gaining market share from our competitors in a pressured category. Now I'll pass it to Scott to discuss our ImageWare business. Thanks, Steve. Our ImageWare Coalition posted revenue growth of 4% in the 4th quarter, up 5% currency neutral, consistently solid top and bottom line growth from our ImageWare group all year long. Both our Workwear and Licensed Sports Group businesses contributed to the growth. Our Workwear business was driven by new product introductions at Redcap and Bulwark, for example, the iQ product at Bulwark as well as strength in the core business. LSG saw double digit gains in the quarter from its MLB business due to strong And now on to the Jeanswear business. 4th quarter global revenues for the Jeanswear Coalition were up 3% or up 5% on a currency neutral basis. For the full year 2014 global Jeanswear revenues were flat at 2,800,000,000 dollars on a currency neutral basis. Revenues were up 1%. In the Americas region, revenues were up at a similar rate as the global results and were driven by particular strength from the Wrangler brand and its Western specialty business. Revenues for the Wrangler in the 4th quarter were up at a low single digit rate or up at a mid single digit rate currency neutral. Customers have responded very well to our recent new product introductions, including the Advanced Comfort and Heavenly touch lines, as well as our no iron khaki pants. Our Western Specialty business had a very strong quarter with revenues up 13% driven by strong holiday sales in Western retail and mid tier accounts, as well as the successful launch of men's Rock 47 Jeans targeting fashion conscious Western consumers. We have also elevated the brand with our expansion into the mid tier department store channel and are planning to add more doors in 2015. Our marketing campaigns during the quarter were a big success, including great response to our TV and print strategies. We launched a premium performance advanced comfort campaign featuring rodeo champion Trevor Brazil at the Wrangler National Finals Rodeo Competition in December, where Trevor won his 12th all around world championship. On the digital front, the Wrangler Network app had its best quarter yet with fans connecting with the Western lifestyle wherever they are. During the Q4, revenues for the Lee brand were up slightly. A result we're pleased with given ongoing channel and category challenges. We continue to see success with our modern series products and expect this momentum to build in 2015. We are also working to reinvent some of our more traditional products, such as our core and premium select men's jeans and are excited to bring new finishes to the marketplace in 2015. Department store expansion also continued during the quarter and will continue well into 2015. In 2015, we expect low single digit growth for our jeanswear coalition on both a reported and currency neutral basis. And while it's clear that we'll continue to face difficult conditions in our Americas business, particularly in the U. S. Mid tier and department store channel, we believe that we are weathering the storm well. Authentic and trend right product along with an intense focus on making sure our demand creation is industry leading puts us in a great position to win in 2015. Ron? Our international jeanswear business, which is about a quarter of The Coalition's global revenues was up 9% on a currency neutral basis in the Q4. By region, European revenues for jeanswear are up 10% currency neutral. And in Asia, revenues were up at high single digit rate on a currency neutral basis. Our international Wrangler business was up at mid single digit rate on a currency neutral basis in the 4th quarter. Innovative products continue to lead the way, including great response in Europe from our denim performance programs and outerwear category supported by the latest campaign featuring Formula 1 champion Kimi Raikkonen. In Asia, the largest growth driver was also denim performance, which was up 26% over last year, including a standout performance from our SilverShield antibacterial denim product. Lease international revenues were up at low double digit rate in the quarter with strong growth in both Europe and Asia, particularly in the U. K, Scandinavia and China. In Europe, Leigh's 125th anniversary collection featuring guest designers is generating a tremendous buzz around the brand with all of our key accounts showing double digit gains. In Asia, we also saw really strong performance from our 125th anniversary product along with strong sell through of our 101 plus collection, great testament to the work we have been doing in the brand and the strong products that we are producing that resonate well with consumers. In summary, we are making great progress in our global jeanswear business. And with that, we've concluded our prepared remarks and we're about turn it over to the operator to open the line for questions. But before I do that, I just want to share with you all that as Bob Shearer and I have discussed his departure from our company over the last 6 months, the one thing he said he's going to miss most is taking your questions. So I would ask you to load up and direct a lot of questions for Bob because it will just make his day. Operator, we'll take questions now. We'll take our first from Michael Binetti with UBS. Hey, guys. Good morning. Congrats on a great quarter. Thanks, Michael. And Bob, first of all, it's obviously been a great pleasure working with you all these years. Thanks so much, Michael. Regarding the comments on gross margins, I know you guys obviously went into it a bit in the prepared remarks, but you're going to be 30 basis points shy of your 2017 target. I know you don't want to update your guidance with us here during Q and A, but maybe just a few thoughts on how you think about that after you pulled forward that expansion in your 5 year window. I don't think you want us to assume that the gross margins flat now in our models here quickly after that. Yes. Michael, you didn't have to take Eric seriously on that about it. Thank you, Michael. Michael, the way to think about this going forward is pretty much what we've seen. I said in my in the comments that we just don't see any change in terms of that mix benefit being any different going forward. So that 60 basis points or 70 basis points of benefit that we've seen from mix consistently year after year over the past number of years, we'd expect to see that kind of expansion going forward as well. So barring any other unforeseen changes in product costs or pricing or something like that, which we wouldn't expect at this point, we expect to see that continued expansion pretty much related to the mix just like we've been seeing. Okay. And then maybe a follow-up, if you could tell us a little bit about the backlogs for the big brands as we think about the organic revenue growth here. And it looks like you expect it to accelerate a little bit in a tough global macro here. And maybe also your long term guidance, I know it includes a little of SG and A deleverage every year is probably related towards the shift towards more retail. But I think you said most of the SG and A in 2014 was due to an accounting change. So as you lap that maybe there that could be a little more room to step up marketing to drive the top line in 2015 or maybe just a few thoughts on marketing spend year over year? Thanks. So Michael, your question is mostly around what we see in terms of SG and A going forward. Is that Well, I'm trying to figure out what you're seeing maybe in the backlog to help the organic revenue rate accelerate into 2015, it's a tough world. And then as a corollary maybe there's some incremental marketing spend that helps drive that, get you comfortable with it? Well, I'll speak to the I can speak to the marketing spend and what's planned. We are looking obviously for another increase. And as we said, what we've been really, really successful in doing in the SG and A area is we've been able to spend against D2C. And as you know that would naturally lift our SG and A ratio. We've also been spending more particularly on the dollar side. And you also know that we've incrementally been increasing our marketing spend as a percent of revenue as well. So as we look at 2015, yes, we expect to spend another $50,000,000 or so against marketing. We'll keep the ratio relatively flat at just around the 6% mark, maybe just a little below the 6% mark. So it will give us some additional dollars. And we have been spending those additional dollars. And all the analysis that we've done and the analytics say that we've been getting a great payback from that and is giving us that momentum that you mentioned. Anything more from that? Yes. So Michael, I'll add a little bit on our big brands. Our we stopped giving really information or guidance on our backlogs a few quarters ago. What I can tell you is the backlog information that we have to date is baked into our guidance for 2015. But as we think about how to drive additional organic growth, I would tell you 2 things and you referenced marketing. I think we continue to get better and better as marketers of these brands as we become more and more knowledgeable of our consumers. And I think the TV campaign that The North Face put out this fall, this land is your land, what you see vans do with events to the in store experience that we're bringing across all of these big brands really helps drive awareness and builds that loyalty. But I think probably one of the largest factors that we feel really strong about is our improving digital capability and what we're able to do online through communicating, but also transacting through our expanding VF e commerce platform and all of these big brands have access and are growing in that capability. Thanks a lot guys. Thanks Michael. We'll go next to Bob Drbul with Nomura. Hi. Good morning. Good morning Bob. Bob Sheer congratulations. Best of luck. Thanks for your ride my friend. It's very helpful. Great job. Great job very much. Thank you. I guess just following Eric's lead on the questions Bob. Can you talk a little bit about the expenses in Europe and sort of the European headquarters sort of how that's running through the P and L and how we should think about positioning maybe in Switzerland specifically? Yes. Yes, Bob, so the back to the some of the comments on currency. Just to reiterate, nearly all of the currency impact that we're talking about is related to translation, which we don't hedge. We do hedge the transactional side. And it's very seldom that you ever hear us talking about the transactional side and that's because we have a really effective and efficient hedging program that covers those risks. To your point relative to the Swiss franc that was one that we kind of couldn't see coming, right, which had always been pegged to the euro. And so the change the move by the Swiss government caught us with some increase in our reported expenses. So what happens is the Swiss franc strengthened actually. We had to record higher dollars as expenses. So it's just an expense item, not revenues, just expenses went up just because of that move. And that's pretty much what we were talking about on the transactional side. It's almost all related to that. Now going forward and related to our headquarters in Switzerland, we don't see that changing at all. We'll see what happens with the Swiss franc. But in terms of any operational changes or anything like that, we wouldn't contemplate any changes. Great. Thanks. Just a question on Timberland. How much of the success has been the yellow boot? And sort of how broad has the business really increased throughout the world? Yes. Bob, I'll take that. This is Steve. Certainly, the yellow boot has played a part in Timberland's growth, but it is a high single digit contributor from a revenue standpoint. It is not the primary driver. Our growth has been balanced across all categories both footwear and apparel, across wholesale and D2C, across men's and women's and really balanced across all of our regions. So the boot though important really just informs the best then better now mentality that Timberland is putting against this brand as they expand the reach and accessibility of this brand. Thank you very much. Good luck. Thanks, Bob. We'll go next to Omar Saad with Evercore ISI. Thanks. Good morning. Great job on the core guys. Bob, congratulations on a great career and thanks for all your help over the years. Thank you, Omar. I wanted to ask another question on FX. And Bob, you did a great job helping us understand the transactional impact and how you guys hedge it. But how long are those hedges? And how should we think about what happens to those dollar denominated costs, whether it's on the SG and A side or on the cost of goods side when those hedges roll off in, I don't know, 6, 9, 12 months? Just kind of help me understand how the gross margin might look in 2016? Yes. So what we do is we our hedging actually covers us for a 12 to 18 month period. So we go fairly long on that. Now over time, however, over a longer period of time, we have to look at leverage points for us like pricing. So if currency rates stay where they are today, we look at we'll look at pricing our goods to offset those I'll call them cost increases. So we do have those that kind of flexibility, but that's a longer term view. So we take a fairly long approach in terms of our hedging practices. So it covers us exactly to your point over the next 12 to 18 months. And then on a longer term basis, we look at pricing, for example, to hold our margins improve. So over the longer term, if you look back over time, that's worked really, really well for us. What it gives us is certainty for the upcoming year and then it gives us the ability to make pricing adjustments over a longer period of time to hold and continue to grow our margins. Over a longer period of time to hold and continue to grow our margins. Thanks. It's super helpful. And then Eric, a question for you. We know that VF is always kind of looking for other brands to acquire. And with the news around the write off today on Splendid and Savin and L. M. Os, maybe take the opportunity to talk about kind of some of the learnings from those acquisitions and how it pertains to how you think about future brands that you may acquire? Sure. You're right. We are an acquisition minded company and we are probably as frustrated as those of you who want us to make acquisitions, we're probably as frustrated as you are about our lack of getting anything done recently. However, we remain very disciplined. And when we find the right opportunity that makes strategic and value creation sense for us, we are in a great position to pull the trigger and go. We have a lot of capacity to acquire. One of the things that we do a post mortem on a decade's worth of acquisitions every year with our Board of Directors. We review everything we've acquired in the last 10 years and look at their performance and there's always ups and downs. The truth is about what happened with these contemporary businesses is the impairment charge we took was mostly a reflection of the difference between our current assumptions and the assumptions that we made when we acquired and purchased these businesses. We bought 7 for all mankind in the summer of 2007. And our outlook for it didn't anticipate a lot of the environment that we've seen since then. That means we're standing today not where we thought we'd be and that's resulted in the accounting charge. It doesn't mean we're not committed to that space. We talk about our overall strategy is meeting the needs of apparel shoppers whenever and wherever they shop. There is an important segment that shops in the contemporary space worldwide and we have great brands to meet their needs. We do expect as Bob said in his comments I think from this standpoint growth and profitability improvement in those businesses. Does the strong dollar at all make the potential for maybe European acquisition look a little bit more attractive with the dollar up so much against the euro? Of course. Yes, it does. Thanks, guys. Thanks. Thanks. We'll go next to Kate McShane with Citi Research. Thanks. Good morning. Hi Kate. Hi Kate. Just following up on the question on the acquisition side. Eric you had mentioned to that a little frustrating getting something done. Could you elaborate on that at all? Is it more to do with willing sellers? Is it valuation? Is it the competition for assets in the market? We are there's a series of things going on there. We have certainly been involved in discussions with companies as we always have been. If I look back over the last 15 years that I've been involved in that process, we always have a bunch of businesses that we're actively engaged in. But we can never anticipate when those discussions will result in an acquisition. Using Timberland is a great example. We were in discussion with them for decades and finally found the right moment for that one to activate. We have very clear internally. We know where we're hunting. We've talked externally that it's primarily in the outdoor and action sports space. I said primarily not exclusively. To the last question, yes, international is looking more and more attractive to us because of the strength of the U. S. Dollar. And we're continuing to have discussions with people. We just don't have anything we can talk about today. Okay. That's helpful. Thank you. I wondered if I could ask a question about denim on denim with the lower gas prices. Are you seeing any positive impact from that? And how should we think about the cadence of denim growth? Have you got some of your innovation initiative this year? Hey, Kate. This is Scott. How are you? Good. Thank you. Well, from you asked about the gas prices. And absolutely, when you see gas prices contract like they have in the economy that is absolutely helpful for us, especially when you think about the channels that we trade in mid tier and mass. That frees up a lot of income for the folks that are in those channels and we have really big franchises with our Lee and Wrangler brand in those channels. So we saw some really nice momentum in both our Wrangler and our Lee brands in the Q4. That's carried over here after the 1st of the year. And it's not just the gas. I think there's a little bit of a confidence that's going on in addition to the gas and also there's a little bit of a job recovery that's going on. So all those factors combined have really helped our business and we've seen some momentum and we're pretty happy with it. And I think if you just couple that Kate with the fact that our new products are really working. So we've had a series of new product introductions and some really innovative ones whether it's advanced comfort, a no iron khaki, an easy fit or a comfort fit in the mid tier channel. Those things have really worked and that's really helped us. So the consumer that's coming in that has a little bit more income right now, they're seeing some new products. They really like the new products like a Heavenly Touch and they're purchasing those as new products. So it's been a nice combination for us here in the last 5, 6 months. Okay. Thank you. And if I can just squeak out my congratulations to Bob as well and thank you for all the help. Thank you. Thank you, Kate. We'll go next to Laurent Vasilescu with Macquarie. Congrats on a strong finish to the year. I believe during the 2013 Investor Day, it was noted that the international gross margin was 700 bps higher than the overall company gross margin. I was curious to know where it stands today? What is the potential FX impact to the 700 basis points delta for 2015? And are you raising prices in Europe to offset U. S. COGS? Yes. The international gross margins are similarly as strong as they were, if not a little bit stronger. One of the things that we're seeing in 2015, what happens is from a gross margin standpoint is as we translate international or international currencies into dollars and results in fewer dollars, it's a little bit more of a mix impact than anything else. So what we're not seeing, we're not seeing any decline on a euro basis for example in our gross margin rates. What we're seeing overall for VF Corporation is we have fewer converted dollars, translated dollars right which impacts the overall mix. So our margins, our profitability on our international businesses is quite strong. We've made the point in the past that the ratio of our overall revenues to international and our earnings contribution from international is very, very strong. It's the highest within the company. So again, it's a little bit more of a mix issue than anything else, not a rate issue. So just wanted to that's I'm glad you asked the question because we want to make sure that's really clear. That's where our hedging programs really help protect us against gross margin rates on a euro basis for example. Okay, great. And then on Timberland, Timberland Americas continues to be reporting very strong numbers up 25%. Last quarter it was 22%. I was curious to know how we should think about the guide of 14% growth in the Americas? And then I think during the Investor Day it was noted that the operating margin at that point was around projected to be 13% for 2014. I was hoping to know how that panned out and how should we think about the long term guide on the operating margin? So I'll take this question for you Lauren. So how should you think about the long term growth rate? We've guided on a global basis up low teens that certainly would hold true with our Americas businesses and we see it to be very balanced. Wholesale has been a significant driver as the brand is really focused on placing the right products in the right channels, segmenting their product and allocating their product and supporting that with really, really strong marketing. Our DUC business will continue to grow. We're now at a place where we're comfortable opening new stores as we've right sized our model and we'll look to start building up full price to really balance out with our current outlet mix. And then Timberland will be coming on to the VF e commerce platform here in the United States in the second quarter. And we're really looking for accelerated growth in the back half based on that enhanced content and commerce capability. Operating margin, Bob will go ahead and take you there. Sure. On the operating margin, you've obviously seen and we talked about it in our comments as well that our operating margins in outdoor and action sports continues to expand. And while most of our businesses are growing particularly gross margins as well as operating margins, the Timberland component of that is a big factor. We said early in the acquisition that we saw that as a significant opportunity. At the time of the acquisition, operating margins were in the 8% or 9% range and that's improved dramatically over time and we're just continuing to improve. So we're getting back close to that 20% operating margin that we enjoyed prior to the Timberland acquisition. We're moving back closer and closer to that. And we'll continue to see expansion in the operating margin in Timberlin. Okay, great. Best of luck. Thank you. We'll go next to Robbie Ohmes with Bank of America Merrill Lynch. Thanks. And Bob you will be missed and best of luck to what you're doing next. Thanks very much, Ravi. Just a few follow-up questions. The first one I was wondering if you could give us any color on how the sort of a follow-up how the outlet store business is relative to full line some others that commented have seen more difficult outlet business? And then second question would just be, I think sportswear, I think you guys in the release kind of highlighted the challenging U. S. Department store channel. Was that primarily Nautica or was that across brands? And sort of how do you think about that channel for 2015? And then the third one, and I'm sorry if I missed it, but did you guys comment on Lucy? And if not sort of an update on how that brand is doing? Thanks. Steve, why don't you start with the part in store? I'll take the sportswear and Lucy question, Ravi, and then we'll catch you on the outlets on the backside. So the comments you saw in sportswear related to the department store was primarily Nautica. They are most heavily penetrated in that channel. And certainly, we compete for our consumers in that space and some of that sits on us with the better and better product that we put into that product and how we're able to represent that. But I think it's been pretty well documented that that channel through this year has seen some opportunities for improvement and we certainly work very diligent with our partners to help drive our brands through those channels of distribution. Our Lucy business, we could not be more proud of and excited. We've seen really consistent growth. We expect that business to grow in the mid single digits coming into this year with more than 20% growth in our wholesale business. And that's coming with our relationship that started with Dick's Sporting Goods at the end of 2013. We're now in 365 Dick's Sporting Goods stores in their women's performance or studio area and have seen really good growth as our team learns how to operate with a large dynamic retailer such as Dick's Sporting Goods. We're seeing improvements in our own stores as we look to really improve our traffic and conversion through really growing our awareness within those markets where we have stores. So Lucy continues to get better and better and we think this push into the wholesale channel is certainly helping it gain more and more traction. So Robbie from go ahead. Yes, sorry. Just the outlets versus full line and any color you can give us across your brands? So Robbie, I'll make a couple of quick comments. This is Scott. On the VFO outlet stores, as you know, we have roughly 80 of those stores and we've seen some nice momentum in the Q4 moving into the Q1 from an outlet standpoint. That channel is very vibrant. The shoppers are actually moving to that channel and have really seen that there's value in that channel for our brands and value for the consumer there. So we've seen some momentum that's carried forward this year and we're really happy and pleased with where our business is positioned there right now. Robbie, it's Eric. I'm going to try to peel this back a little bit about the outdoor and full price. It's a complicated question because we have outlet and full price stores around the world. In the United States, most of our business other than the VFO business that Scott referred to is full price retail. We have we certainly do have outlet stores, but most of our brands use them as a place to manage their distressed inventory. The exceptions to that actually are Nautica and Kipling both of which have primarily outlet store businesses and they're working really hard to make those stores work. Nautica has no full price stores. I'm going to guess that 80% of the Timberland stores are outlet versus full price. So their whole business model is making the outlet model work for them. They don't have a full price comparison. Where we have full price stores, which is primarily around our Vans and The North Face brands, we have really strong full price business. We bring our very best stuff to those stores and that's where we see those as our way to develop the digital our digital it's an omni channel strategy, right? We want to go into cities and have people be able to come into a Vans or The North Face store and really see everything that's true about the brand. Europe in general is a full price retail store market for us. We do have some outlet stores there, but they're almost exclusively for excess inventory sell off. So it's a different strategy than some people use for their outlet stores. Does that help you? Yes, that does. That's really helpful. Thanks, Eric. Okay, Robbie. We'll go next to Matthew Boss with JPMorgan. Good morning, guys. Eric, can you just can you talk about the global consumer backdrop? I guess specifically, have you seen any fundamental trend change at all in Europe? And just promotional levels post holiday, how you're thinking about things? I'm actually going to ask Carl Hynes to speak about the Europe consumer and what we're seeing with our brands. He spends more time there than I do. I do spend more time at the moment I'm here in the U. S. So I think matter there's a lot going on in Europe as you read, right? It's widely reported in the press from an economical point of view so and political which I'm not touching. Having said that, it's not really helping consumer sentiment and making consumer spend. But having said that, as you heard from the release, we do spend. But having said that, as you heard from the release, we do pretty well. And we see some comeback from consumers surprisingly, especially from the Southern European part, where we see our orders coming in pretty nicely and strong. So all in all, we are pretty positive about the performance of Europe and the outcome for the year, so which we expect as we said to be up. So all in all, I guess it's a better picture than last year. Great. And then just any disruption that you've seen so far from the West Coast port strikes? And Eric, I guess, more importantly, just how this process works in terms of late orders, kind of who's on the hook between the vendor and wholesale partners? Just any color you can provide. Sure. As a backdrop, the West Coast port situation really began last summer. Our team has been navigating through that incredibly effectively, so much so that we haven't had any material misdeliveries or incremental cost. Have we had some misdeliveries? Yes. Have we had some incremental cost? Yes. But nothing that we need to call to anybody's attention. We've used we've diverted stuff to other ports. We've moved part of our truck fleet out there to get us through the docks and off the platforms. There's a lot of things we've done that just haven't been material enough to talk about, but it is a complicated situation. If it does go to a full on strike and shutdown, it will be material to everybody. Now the question is how material and the answer to that is you tell me how long the strike will be and I'll tell you how material. If it's one weekend, we'll get through it. If it's 3 months, I don't think that's even possible for it to be 3 months, it would be really important. Most of the cost associated with that sit with us. If our orders are late getting to customers, our customers don't have to take them. So that's we bear the risk. But I would tell you we've had that risk now for 8 months and we've managed it really, really well. Is that helpful? Yeah. That's very helpful. Congrats on a great quarter. And Bob, sorry to see you go. Thanks a lot, Matt. Thanks. We'll go next to Jim Duffy with Stifel. Good morning, everyone. Hope you're all well. Bob, a sincere thanks for all your time and help over the years, much appreciated. Thank you, Jim. My retirement gift, I'm going to direct my question to your colleagues. Thank you, Jim. My retirement gift, I'm going to direct my question I'm sorry, Jim, we can't hear you. You're breaking up. It's not worth talking. Couple of questions. 1 on vans and then a question for Carl Hines on the outdoor category in Europe. The Vans growth has been phenomenal domestic in particular. As you look to build on this, can I ask that you elaborate some on some of the specific drivers and geographies to watch for looking into 2015 with the Vans brand? Help there would be appreciated. Thanks. Sure. I'll go ahead and start that Jim and K. H. Can feed in for what's going on internationally. So I think what we see currently driving Vans growth and what we see continuing to drive Vans growth is really broad based against all the tools that they have. From a product standpoint, just continuing to be the expert in the footwear category specific to their consumer, Bringing weatherized footwear this last year really showed us the opportunity to expand our offering to 4 seasons across the year and being able to complement that with apparel and accessories. So continue just dialed focus on the appropriate products on a year round basis in footwear and apparel. Really the partnerships that we have in wholesale here in the North America business are second to none and how these how our teams work with our partners to bring our brands to life and assort this expanded set of products. How we're able to bring that to life in our own stores to really set that experiential tone for our consumers is a great strength and we've been very systematic in how our retail footprint has expanded geographically throughout the United States into Canada and most recently into Mexico. And then you just think about our ability to connect digitally with our consumer. Vans is our most powerful social and digital brand and has been a big part of helping bring our VF e commerce platform to life and how they use that to not only communicate and connect, but also transact will be another powerful tool that they have to drive growth. Yes. Jim and maybe starting with Asia, the outer market, you heard us saying we did pretty well, up double digit both on The North Face and Timbaland. So I would say that market is good. We had a few issues in there were some issues in China a few maybe 2 years ago with inventories, but that is sorted out. So that is pretty healthy market. Europe is a little bit more complicated. It's a very fragmented market, as you know. Many brands don't do well. Some do okay. We had been consistent growth in the past. We have growth rates now where we're not really happy about, but we are confident we can improve our growth rates specifically on the north phase in the future. There's a lot going on you heard us saying with product innovation. We have great market go to market strategies. We saw we just did a show actually the largest show in the sporting goods in Munich last weekend. There was a lot of noise and excitement about The North Face. With our new approach, we're doing better storytelling, a lot of product innovation. So going forward, I think even in a complicated market, we are pretty confident. And Karl Hans, the challenges in Europe for the category, is that a weather dynamic? Or are there larger issues in that? I would say both. The weather was so slow. You heard it was widely in the press, right? We had no winter up to December. We got thanks some snow in January. So it's normalizing now. But the last 2 years were not so good from a weather point of view. Plus the economy, I think it's widely in the press. There's a lot of noise going on in Europe at the moment, so that's not helping. But it can't be an excuse and we have to react and we are reacting. Product innovation is a strong answer to stimulate consumption and probably better and more digitalized approaches and storytelling which to make consumers spend on our brands. Very good. Thank you. Thank you. We'll go next to Erinn Murphy with Piper Jaffray. Great. Thanks. Good morning and thank you for sneaking me in. Bob, and I wish you all the best on your future endeavors. Thanks so much, Erinn. Eric. Maybe you guys could talk a little bit more about the 3 innovation centers that you're developing. When is the first time that we should start to see some of the benefit across the various product lines? And then just secondly, a quick follow-up for Karl Heinz in Europe. Can you just speak to any volatility that you're seeing from a tourist flow perspective into the region? Thank you. So Aaron, I'll start and then Scott can jump in. We are standing up 3 innovation centers this year. You've certainly heard and seen us right about this. From a technical apparel and footwear standpoint, those teams are in place and we're adding capabilities as we speak. And the pipeline that they're working on with the brands has in many ways already been in motion over the last 12 to 18 months and you see some small things coming into the product mix like a fuse form is an area where we're bringing that capability to life near term, but it really is a longer term play as we add the skill and capability to complement our business teams. It will be about a 12 to 18 month push till you see some of the real new ideas that have been percolating and this team is able to work on. So just a few quick comments on the Jeanswear Innovation Center. We hired a leader last year and we've taken some time and really worked with the outdoor and the footwear group and we've got a cohesive strategy now between the 3 centers that will be working real closely together going forward because we want to share ideas, we want to share innovations and we want to go ahead and work together on platforms. And our leader has gotten us to the point where we've hired some folks and we have a few more to go, but we've really focused on capabilities that are important for us going forward to ensure our success. So getting the right people in place has been the key thing for us in the jeanswear innovation center. And I would say we're about 50% of the way there and we should be finalized here by early spring as far as having our key senior team all in place. We move into a physical location here this spring and then we're going to work on some short term stuff to get the momentum going as we get in there. And that's just taking some ideation stuff that's actually happening right now within our jeans wear group having that team that's really capable working with those 2 groups to help them bring that to the goal line a little faster. And then that team will come into a cadence and they'll start working on things that are a little bit more long term. Hi, Aaron. And on the last question, I tried to answer it. It's I'm not sure I can, but so much happened just in the last 30 days with all the currency, the euro, the Swiss franc, the dollar, the ruble and pound. So it's it's really early to say what's going to happen. For sure, I mean, it has the country has become cheaper for you, so you're welcome to come to Europe and spend your money. You've got to take your bait. So I guess I would say it's early to say what's going to happen. And I'd like to build I'd be remiss if our Timberland teams are listening. When we acquired Timberland, they came with an innovation capability. And in fact, it's that capability that we're adding to. And products like our Antique Fatigue footbed that you see across our Pro and Tree business, the SensorFlex that we've spoken about this last year, that those technologies have come out of that team's skill and capability and that is exactly what we're building behind and building so all of our footwear businesses are able to tap into that skill. Great. Thank you guys and best of luck. Thanks, Aaron. We'll go next to Mitch Kummetz with Robert Baird. Yes. Thanks. And Bob, congrats. Good luck. I've got a question for you. If you don't want to answer, you can always give it to Scott. So, how should we think about kind of quarterly cadence of gross margin expansion this year? From your remarks, it sounds like maybe the cost outlooks a little better in the back half, particularly on denim. But if I recall correctly, I think jeanswear has got a pretty easy Q2 compare. So how should we think about that kind of what was it 40 bps over the course of the year? Yes. So Mitch, it has a lot to do with currency moves. So our bigger quarters for our international businesses are 1st and third quarters. So those will be the tougher comparisons when it comes to gross margin expansion. Not so in other words, the second and fourth quarters, that's where we'll see the biggest gross margin expansion for the year. And again, it's as I said earlier, that's mostly because of mix, right? Our international businesses are the profitability, including the gross margin rates are really strong. And when there's fewer dollars of those strong gross margins, it just it impacts the overall gross margin rate. So it's not a rate within the international side of the business. It's really a mix overall for Versus. Right. And then just quick follow-up. On vans in Asia Pac, it looks like up 40% plus this year still growing off of a relatively small base. But talk about kind of the outlook for that business in 2015. I mean can we expect to see continued sort of momentum of that magnitude going forward or? Amit, I'll try to answer here. We as you said correctly, we had really great numbers in the last quarters in Asia 40%, 50%. We just reported 50%. For sure, we have great momentum. Going forward, we see the brand is really strong. It connects well with consumers. There's a lot of storytelling. So we're pretty confident the momentum will continue. Will it be always 40%, 50% that's probably hard, but we are confident that we will look forward to very nice growth rates in the next quarters and probably years to come in Asia. Okay. All right. Thanks guys. Thanks, Mitch. Due to time constraints, we'll take our final question from Lindsey Druckerman with Goldman Sachs. Great. Thanks for taking the question. So starting with the first one. Bob, it was really helpful all of the detail on currency and costs. I was hoping that if we were to fast forward to when your hedges and forward purchases roll off and we're just sort of marking to market, whether you could dimensionalize how much the current the foreign currency transactional pressure on your cost of goods would be relative to the cost savings that you are likely to see from lower cotton and maybe some lower energy prices in your factory, whether one is much bigger than the other? Are they net neutral? Or how we should think about that? And on that topic also, whether you will be able to divert some of your sourcing to non U. S. Dollar denominated factories to help sort of offset the pressure? Yes. On the gross margin side, as we talked about earlier, the puts and takes from a material cost standpoint and labor all inclusive kind of nets out with pricing. So that's true whether it's in the U. S. Also on the international side as well. Again, it's just really important that our rates, our gross margin rates on the international front are holding and actually growing somewhat in our international business. It's just the conversion of those into U. S. Dollars that are impacting us overall and even the gross margin rate. So the commentary holds true that we talked about earlier relative to the input costs related to the international side as well as the U. S. Side and that's because of hedging. So we lock in those costs in essence over that 12 to 18 month period. We know what those costs are going to be. We lock it in through our currency hedges and we don't get surprised. In terms of changing relative to the dollars, not so likely, frankly, given where we are, again, we'll just continue to hedge and our hedging practices will offset that. I think the question is more about if the rates stay where they are, what kind of actions do we take relative to our international businesses. And again, we discussed that earlier as well that we'll have to look at pricing and some other levers, but that's a discussion relative more to 2016 than 2015. Great. And just a quick follow on. I was hoping you guys could talk a little bit about your strategy in accessories. It's been a really high quality category and you've had some great momentum with Napopurian and Kipling. Can you maybe just expand a little bit on what your plan is for accessories as a broad product category across your portfolio? Yes. Lindsay thanks for the question. What we're doing right now is we're focused on the accessories businesses we have. We think Kipling is an enormous growth opportunity for our company. And to put some context around that, it was less than a $70,000,000 business when we bought it and it's bigger than a $300,000,000 business today. And it's VF's fastest growing business in 2013 2014 and it's planned to be our fastest growing business this year, because we have very capable people working on that business and we're investing in them disproportionately. Beyond that, we don't have any other big strategy to announce. We're focused on making that strategy continue to work for us. And Bob Shear would add, it's a very profitable business for us as well. Great. Thanks so much. All right. Thanks, everybody. I'm sorry that we have to cut this call off. I know there were a few of you still waiting with questions. Several of us have media interviews that begin in 60 seconds. So we need to run from this room and go handle those. Appreciate your interest in our company and your support. Thanks. Bye bye. This concludes today's conference. Thank you for your participation.

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