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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good afternoon. Thank you for joining us for our last presentation of the day. I'm very pleased to welcome VF Corporation to our conference. We have with us Bob Shearer, Chief Financial Officer, as well as Cindy Knoebel, VP Financial and Corporate Communications.
There will be no breakout session. The q-and-a session will just stay in here. And so no breakout session on the 13th floor.
With that, I'll turn it over to Bob. Thank you.
ROBERT SHEARER, CFO, SVP, VF CORPORATION: All right. Thank you and good afternoon, everyone. I always look forward to having a chance to update all of you on the progress that we've been making at VF Corporation against our growth objectives. I'm going to make a few key points first in our story, and then we'll open it up for questions, as we just said.
First of all, this, too. Our customary FD Statement. Please take a minute to take a look at that. I know you may have seen 1 or 2 of these today -- recognizing that, we'll move on.
Enhancing shareholder value. Absolutely our Number 1 focus at VF Corporation. We launched our growth strategy back early in the year 2004. It is clearly working. I think the best evidence of that is a lot of momentum, and the proof of the success, of course, is the fact that reflected in the record years that we're having -- both in terms of sales and earnings -- and once again, expect another record year in the year 2007.
Now the second point, there. Through a series of acquisitions -- and also very strong growth within those or from those acquisitions -- from the time of acquisition -- we are successfully transforming the Corporation to a more lifestyle brand-driven, higher-margin, higher-growth model.
As a matter of fact, by the year 2009, we expect these lifestyle brands to represent 60% of our total revenues at VF. And also very, very importantly, our financial strength. That allows us to not only continue to invest in our current brands, and also in new brands, but also allows us to fund a very, very significant dividend, which we nearly doubled just this past May.
Now in VF, we look at our brands in 2 categories -- the Lifestyle as well as the Heritage. And our strength clearly has been built around these very, very strong dominant brands. Brands that have the authentic position within a product category. And you'll hear me use -- and us use -- "authenticity," and the word "authentic," quite a bit. It's very, very important in our strategy.
So, as I said, we segregate our brands into these 2 categories. Both play a very, very important role in our success -- starting with the Lifestyle brands. Clearly, the bigger growth drivers. That's what we're looking for, here.
We expect high single-digit to double-digit growth from these businesses. They also give us significantly higher gross margins, as well. As a matter of fact, because of the growth within these businesses, a big contributor to a nearly 400 basis point improvement in our gross margin over just the last few years.
Now, also very, very important, however are these Heritage businesses. Now from a top-line standpoint, we expect something more like single-digit top-line growth. But very, very strong. The continuation of very strong operating margins, and also, these are our big cash flow generators, as well -- which, of course, helps fund future investments actually across all of our businesses.
I wanted to touch on just a few of the highlights in the year 2006. Our achievements in the year -- as I indicated -- another record year of revenues and earnings. I mentioned we nearly doubled our dividend back in May of 2006. We did secure a buyer for our intimate apparel business. I'm going to talk a little bit more about that in just a minute.
On the international side -- growing, there. We established an Indian joint venture. A joint venture in India. And also, we continue to see very strong growth in areas like China, Russia and Eastern Europe, as well.
Retail continues to be a bigger component of our overall business at VF Corp. We opened 62 retail stores. And this is during the year 2006. Our retail revenues increased by about 17% during the year.
Also, to support our very strong growth in our outdoor businesses, we implemented our common system, which has a lot of benefits attached to it. Also, opened the largest distribution system in VF Corp during the year '06, as well. Again, to support the growth in outdoor.
And also, very importantly, it added a lot of new talent and strengthened our leadership within the Company. All of these factors contributing to actually it's a bit just over a 50% total shareholder return during the year '06. We're quite pleased with that.
Now I mentioned just -- I talked a little bit more about the sale of our intimates business. We disclosed it last month. The sale is to Fruit Of The Loom. Just a little bit about the business. Sales in our intimates business have averaged about $800 million over the past few years. The business generated about $50 million in pretax earnings. The sale price was $350 million. And as we indicated in the announcement, we expect to use that in terms of the buyback of shares.
We'll complete the buyback by the end of '07. Should be more heavily weighted towards the first half of the year. And at today's share price, the buyback will substantially offset the EPS impact from the loss of the intimates earnings.
I know some of you have the question, "Well, why? You guys are pretty good at fixing businesses that have tougher profit projections in any regard." We do have a pretty good track record at that.
Our intimates business is a category-driven business. I think you've seen that we clearly are on the track of growing these lifestyle brands. And also, for our Heritage businesses, what we're looking for there -- there's really 2 strong criteria. Number 1 -- profitability. So they need to be strong profit generators, as we saw in the other chart. And also, strong cash generators.
And over the past several years, our intimates business just hasn't met -- hasn't met that criteria. And also, maybe even more importantly, we were faced with a significant investment, and actually over a number of years -- over a multi-year period -- as we looked forward to fix the challenges within intimates. So in the end, we just felt that those kinds of investments and charges that our P&L would have to absorb would be better placed there -- particularly in the investment side -- would be better placed elsewhere in our business.
Now a little bit of history here, in terms of revenues and EPS. The summary of the results that we've seen -- actually since launching -- the Company's transformation. Now of course, this is given the sale of intimates. This is from continuing businesses -- represented by continuing businesses, only.
So we've achieved a compounded top-line growth rate -- 12% over this period. Now that's the period ended in 2006. Obviously representing a combination of strategic acquisitions, and especially more recently, very strong organic growth.
And an even stronger picture from the earnings standpoint. The compounded growth rate there is about 15%. Obviously, that does importantly some margin expansion. And that is -- I might say -- despite the fact that we have been investing very, very strongly against our powerful brands.
Okay. And on a longer-term basis. This is what we see. We're targeting continued strong top-line performance, coming from both organic growth, as well as acquisitions on a longer-term basis. We expect 8% revenue growth -- more heavily weighted from organic, but with acquisitions continuing to play a very important role, as we look at our overall growth picture.
In fact, just this afternoon at around 2.00, I believe it was, we announced the acquisition of Majestic Athletic, which is the supplier to -- I'll say the supplier to and of -- Major League Baseball. And what I mean by "to," is that this is really our entry into on-the-flood products within the professional leagues.
In other words, we'll supply all of the players their uniforms, and we'll also have the rights, of course, to the replica jerseys, as well, within Major League Baseball. So we're very, very excited about that.
And I also point out that this is the second acquisition that we have announced. So we're back on track. More on track from an acquisitions standpoint. I haven't done one for a couple of years, here. About a year and a half. So, more on track in terms of meeting our goals.
Those 2 acquisitions will add about $200 million in …