SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended January 3, 2009

 

Commission file number: 1-5256

 

V. F. CORPORATION

(Exact name of registrant as specified in its charter)

 

105 Corporate Center Boulevard

Greensboro, North Carolina 27408

(Address of principal executive offices)

 

(336) 424-6000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES þ     NO o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o     NO þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934).  YES o     NO þ

 

The aggregate market value of Common Stock held by non-affiliates (i.e., persons other than officers, directors and 5% stockholders) of V.F. Corporation on June 28, 2008, the last day of the registrant’s second fiscal quarter, was approximately $5,172,000,000, based on the closing price of the shares on the New York Stock Exchange.

 

As of January 31, 2009, there were 110,155,581 shares of Common Stock of the registrant outstanding.

 

Documents Incorporated By Reference

 

Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 2009 (Item 1 in Part I and Items 10, 11, 12, 13 and 14 in Part III), which definitive Proxy Statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

 

This document (excluding exhibits) contains 92 pages.

The exhibit index begins on page 45.

 

 

PART I

 

 

V.F. Corporation, organized in 1899, is a worldwide leader in branded lifestyle apparel and related products. Unless the context indicates otherwise, the terms “VF,” “we,” “us” and “our” used herein refer to V.F. Corporation and its consolidated subsidiaries. Our stated vision is: VF will grow by building lifestyle brands that excite consumers around the world.

 

For over 100 years, VF has grown by offering consumers high quality, high value branded apparel and related products. Since 2004, we have been implementing a growth plan that is transforming VF’s mix of business to include more lifestyle brands. Lifestyle brands are those brands that connect closely with consumers because they are aspirational and inspirational; they reflect consumers’ specific activities and interests. Lifestyle brands generally extend across multiple product categories and have higher than average gross margins. Accordingly, this transformation has included the acquisitions of several growing lifestyle brands, such as Vans^®, Reef^®, Kipling^®, Napapijri^®, 7 For All Mankind^® and lucy^®. At the same time, we have continued to invest in our other businesses, including extending The North Face^® brand to new product categories and new markets, enhancing product development and marketing strategy in our Nautica^® men’s sportswear business, and expanding Lee^®, Wrangler^®, The North Face^® and several other brands into Asian and Eastern European markets.

 

An important step in VF’s transformation was the sale in 2007 of our women’s intimate apparel business, which had over $800 million in revenues but lower profit and growth prospects. This business is separately reported as discontinued operations in this Annual Report. The remaining discussion of VF’s business, unless otherwise stated, is focused on VF’s continuing operations. See additional discussion regarding our discontinued operations in Note C to the Consolidated Financial Statements, included at Item 8 of this Annual Report.

 

VF is a highly diversified apparel company — across brands, product categories, channels of distribution and geographies. VF owns a broad portfolio of brands in the jeanswear, outerwear, packs, footwear, sportswear and occupational apparel categories. These products are marketed to consumers shopping in specialty stores, upscale and traditional department stores, national chains and mass merchants. A growing portion of our revenues, currently 16%, are derived from sales directly to consumers through VF-operated retail stores and internet sites. A global company, VF derives 30% of its revenues from outside the United States, primarily in Europe, Asia, Canada and Latin America. VF products are also sold in some countries through licensees and distributors. To provide many types of products across numerous channels of distribution in different geographic areas, we balance efficient and flexible internally-owned manufacturing with sourcing of finished goods from independent contractors. An array of state-of-the-art technologies provide us with, among other things, sophisticated inventory replenishment capabilities that enable us to get consumer-right products, on time, to our customers’ shelves.

 

VF’s businesses are organized primarily into product categories, and by brands within those categories, for both management and internal financial reporting purposes. These groupings of businesses are called “coalitions” and consist of the following: Outdoor and Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands. These coalitions are treated as reportable segments for financial reporting purposes. Coalition management has responsibility to build their brands, with certain financial, administrative and systems support and disciplines provided by consolidated functions within VF.

 

We consider our Outdoor and Action Sports, Sportswear and Contemporary Brands coalitions to be our lifestyle coalitions. These are VF’s growth engines, where we expect long-term revenue and profit growth at a mid-single digit to low-double digit rate. Our Jeanswear and Imagewear coalitions are our heritage businesses where our focus is on strong profitability and cash flows, with long-term revenue growth expectations at a low-single digit rate.

The following table summarizes VF’s primary owned and licensed brands by coalition:

 

 

Financial information regarding VF’s coalitions, as well as geographic information and sales by product category, are included in Note R to the Consolidated Financial Statements, which are included at Item 8 of this report.

 

Outdoor and Action Sports Coalition

 

Our Outdoor and Action Sports Coalition, VF’s fastest growing business, is a group of outdoor and activity-based businesses that represent a collection of lifestyle brands. Product offerings include outerwear, sportswear, footwear, equipment, backpacks, daypacks, luggage and accessories.

 

The North Face^® is our largest Outdoor and Action Sports Coalition brand. Its high performance outdoor apparel, equipment and footwear is sold across North and South America, Europe and Asia. (In Japan and South Korea, The North Face^® trademarks are owned by a third party.) The North Face^® apparel lines consist of outerwear, snow sports gear and functional sportswear and footwear for men, women and children. Its equipment line consists of tents, sleeping bags, backpacks, daypacks and accessories. Many of The North Face^® products are designed for extreme applications, such as high altitude mountaineering and ice and rock climbing, although many consumers also purchase these products because they represent a lifestyle to which they aspire. The North Face^® products are marketed through specialty outdoor and premium sporting goods stores in the United States, Canada, Europe and

Asia and select department stores in the United States. In addition, these products are sold through approximately 40 VF-operated full price retail and outlet stores in the United States and Europe and online at www.thenorthface.com, as well as over 180 The North Face^® retail stores operated by independent third parties dedicated to selling The North Face^® products in Europe and Asia.

 

VF manufactures and markets Vans^® performance and casual footwear and apparel for skateboard, bicycle motocross (“BMX”), surf and snow sports participants and enthusiasts. Products are sold on a wholesale basis through national chain stores in the United States and through skate and surf shops and specialty stores in the United States and Europe. The brand’s products are also sold through approximately 200 owned full-price Vans^® retail and outlet stores in the United States, primarily on the West Coast, and in key European markets. These retail stores carry a wide variety of Vans^® footwear, along with a growing assortment of apparel and accessory items, most of which bear the Vans^® trademarks. The Vans^® brand is marketed through a 50%-owned joint venture in Mexico. VF is the 70% owner of the Vans Warped Tour^® music festival, which presents over 50 alternative rock and heavy metal bands in performances in over 40 cities across North America each summer.

 

JanSport^® backpacks, duffel bags, luggage and accessories are sold through department, office supply and national chain stores, as well as sports specialty stores and college bookstores in the United States. JanSport^® daypacks have a leading market share in the United States. A technical line of JanSport^® backpacks is sold through outdoor and sporting goods stores. JanSport^® fleece and T-shirts imprinted with college logos are sold through college bookstores and department stores in the United States. In Europe, Eastpak^® and JanSport^® backpacks, and a line of Eastpak^® clothing, are sold primarily through department and specialty stores, where the Eastpak^® brand is the leading backpack brand. The JanSport^® and Eastpak^® brands are also marketed throughout Asia by licensees and distributors. In 2007, VF acquired the maker of Eagle Creek^® adventure travel gear. Eagle Creek^® products include luggage, daypacks and accessories sold through specialty luggage stores, outdoor stores and department stores throughout the United States and Europe.

 

Derived from the Finnish word for Arctic Circle, Napapijri^® is a premium-priced brand of performance skiwear and outdoor-inspired casual outerwear, sportswear and accessories for men, women and children. The Napapijri^® brand enjoys especially strong consumer awareness in Italy, where it was created, and is expanding across Europe. Products are sold on a wholesale basis primarily to European specialty shops, such as sport stores and fashion boutiques, and through VF-operated and independently-operated retail stores in several countries in Europe. In 2007, VF entered into a majority-owned joint venture to market Napapijri^® brand products in Japan.

 

Kipling^® handbags, shoulder bags, backpacks, luggage and accessories are stylish, colorful and fun products that are both practical and durable. The brand name comes from the author of The Jungle Book, Rudyard Kipling, and that provides the connection to the Kipling^® monkey mascot, which symbolizes fun and adventure. A colorful monkey key ring is attached to every bag, with a different monkey design for each product collection. Products are sold through specialty stores in Europe, Asia and South America, as well as through approximately 30 VF-operated and over 170 independently-operated retail stores. The Kipling^® business in North America is managed as part of the Sportswear Coalition.

 

The Reef^® brand of surf-inspired products includes sandals, shoes, apparel and accessories marketed primarily to surf shops and department and specialty chain stores. Since its acquisition in 2005, we have significantly expanded the Reef^® brand’s presence by adding Reef^® men’s swimwear and other apparel in the United States and by acquiring rights previously held by independent distributors to market Reef^® products in other geographic areas, particularly in Europe.

 

We expect continued long-term growth in our Outdoor and Action Sports Coalition as we expand into new product categories, open additional retail stores, expand geographically and acquire additional outdoor or activity-based lifestyle brands.

 

Jeanswear Coalition

 

Our Jeanswear Coalition markets jeanswear and related casual products in the United States and in many international markets. The largest of these brands, the Lee^® and Wrangler^® brands, have long-standing traditions as authentic American jeans brands as they were established in 1889 and 1947, respectively, and have strong market

positions. Lee^® and Wrangler^® products are sold in nearly every developed country. Products also include shorts, casual pants, knit and woven tops and outerwear, which are designed to complement the jeanswear products and have helped to extend our brands.

 

In domestic markets, Lee^® products are sold primarily through national chain stores and specialty stores. Wrangler^® westernwear is marketed through western specialty stores. The Wrangler Hero^®, Rustler^® and Riders^® brands are marketed to mass merchant and regional discount stores. Despite significant competitive activity, VF’s domestic jeanswear revenues have been stable in recent years. Including all of its jeanswear brands, we believe that VF has the largest unit market share of jeans in the United States and is one of the largest marketers of jeans in the world. We also market cotton casual pants under the Lee Casuals^®, Timber Creek by Wrangler^® and Wrangler^® Khakis brands.

 

We believe our vendor-managed inventory and retail floor space management programs with several of our major retailer customers give us a competitive advantage in our domestic jeanswear business. We receive point-of-sale information from these customers on a daily basis, on an individual store and style-size-color stockkeeping unit (“SKU”) level. We then ship products based on customer data to ensure their selling floors are appropriately stocked with products that match their shoppers’ needs. Our systems capabilities allow us to analyze our retail customer’s sales, demographic and geographic data to develop product assortment recommendations that maximize the productivity of their jeanswear selling space and minimize their investment in inventory.

 

Jeanswear in most international markets is more fashion-oriented and has a higher selling price than similar products in the United States. The jeans market internationally is also more fragmented than in the United States, with competitors ranging from global brands to a number of smaller national or regional brands.

 

VF’s largest international jeanswear business is located in Western Europe. During 2008, we acquired the remaining portion of our former 50%-owned joint venture that markets Lee^® branded products in Spain and Portugal; this business is being integrated with our existing European jeanswear business. Lee^® and Wrangler^® jeanswear products are sold through department stores and specialty stores where we employ some of the same retail floor space management programs described above. We also market Lee^® and Wrangler^® products to mass market and specialty stores in Canada and Mexico, as well as to department stores and specialty stores in Asia and South America. In many international markets, we are expanding our reach through VF-operated retail stores, an increasingly important vehicle for presenting our brands’ image and marketing message directly to consumers. We are continuing to expand our jeanswear brands in emerging markets, such as China and Russia, and through our majority-owned joint venture in India. In foreign markets where VF does not have owned operations, Lee^® and Wrangler^® jeanswear and related products are marketed through distributors, agents or licensees. Lee^® and Wrangler^® products are sold in over 500 independently operated single brand retail stores, primarily in Eastern Europe and South America.

 

In the United States, we believe our Jeanswear Coalition can grow its jeans market share in the mass market and national chain channels of distribution through superior consumer insight and marketing strategies and continuous product innovation. In our international businesses, growth will be driven by (i) product innovation, positioning and marketing in Europe and Latin America, (ii) expansion of our existing businesses in Asia, particularly in China, Russia and India, and (iii) the continued rollout of new retail stores.

 

Imagewear Coalition

 

Our Imagewear Coalition consists of the Image division (occupational apparel and uniforms) and the Activewear division (owned and licensed high profile sports and lifestyle apparel). Each division represents approximately one-half of Coalition revenues.

 

The Image division provides occupational apparel for workers around the world. Uniform and career apparel are sold in North America and internationally, primarily in Europe, under the Red Kap^® brand (a premium workwear brand with more than 75 years of history), the Bulwark^® brand (flame resistant and protective apparel), the The Force^® brand (apparel for law enforcement and public safety personnel) and the Chef Designs^tm brand (restaurant and food service apparel). Products include work pants, slacks, work and dress shirts, overalls, jackets

and smocks. In 2009, the Image division will launch a new services apparel line featuring high-end tailored apparel marketed under the licensed Joseph Abboud^® brand. Approximately two-thirds of Image division sales are to industrial laundries, resellers and distributors that in turn supply customized workwear to employers, primarily on a rental basis, for on-the-job wear by production, service and white-collar personnel. Since industrial laundries maintain minimal inventories of work clothes, a supplier’s ability to offer rapid delivery of products in a broad range of sizes is an important factor in this market. Our commitment to customer service, supported by an automated central distribution center with several satellite locations, has enabled customer orders to be filled within 24 hours of receipt and has helped the Red Kap^® and Bulwark^® brands obtain a significant share of the industrial laundry rental business.

 

The Image division also develops and manages uniform programs through custom-designed websites for major business customers (e.g., FedEx Corporation, Air Canada, Continental Airlines and American Airlines) and governmental organizations (e.g., U.S. Customs and Border Protection, Transportation Security Administration, National Park Service, Fire Department of New York City and New York City Transit Authority). These websites give employees of these customers the convenience of shopping for their work and career apparel via the internet.

 

In the Activewear division, we design and market sports apparel and fanwear under licenses granted by the major sports leagues, individual athletes and related organizations, including Major League Baseball, the National Football League, the National Basketball Association, the National Hockey League, NASCAR, ESPN, Inc. and many major colleges and universities. Under license from Major League Baseball, Majestic^® brand uniforms are worn exclusively on-field by all 30 major league teams. Majestic^® brand adult and youth-size authentic, replica jersey and casual fanwear are sold through department, sporting goods and athletic specialty stores. Adult and youth sports apparel products marketed under other licensed labels are distributed through department, mass market, sporting goods and athletic specialty stores. In addition, the Activewear division is a major supplier of licensed Harley-Davidson^® apparel marketed to Harley-Davidson dealerships. With the exception of the Major League Baseball license, loss of any license would not have a material effect on the Imagewear Coalition.

 

The opportunities to grow our Imagewear Coalition revenues include (i) the extension of its product and service capabilities into new markets, such as hospitality/services, (ii) growth of its Majestic^® brand through expansion to new domestic and international customers, updates to key authentic and replica products and e-commerce, (iii) growth of the National Football League business through recently acquired rights to additional apparel categories, (iv) market share gains in key licensed categories and (v) the extension of VF’s floor space management and replenishment capabilities to more retail doors, placing the product-right assortments on the sales floor in each geographic market. Looking forward we intend to drive Image and Activewear growth by leveraging the Coalition’s ability to manage a complex mix of products where speed-to-market, product customization and superior service give us a competitive advantage.

 

Sportswear Coalition

 

The Nautica^® brand is the principal lifestyle brand of the Sportswear Coalition. Nautica^® sportswear is marketed in the department store and specialty store channels of distribution in the United States. The department store channel has undergone significant consolidation in the last few years, resulting in numerous store closings and negatively impacting sales of Nautica^® brand products. The principal Nautica^® product line is men’s sportswear, noted for its classic styling. We believe Nautica^® is the number two men’s collection sportswear brand in national department stores. The Nautica Jeans Company^® line features fashionable jeanswear and related tops for younger male consumers. Other Nautica^® product lines include men’s outerwear, underwear and swimwear and men’s and women’s sleepwear. Nautica^® women’s sportswear, initially launched in the department store channel in late 2006, did not meet our expectations and was discontinued in that channel of distribution in 2008. Women’s sportswear continues to be marketed at www.nautica.com and in select Nautica^® outlet stores.

 

The Sportswear Coalition operates approximately 110 Nautica^® retail outlet stores in better outlet malls across the United States. These stores carry Nautica^® merchandise for men, women, boys, girls and infants. The product styles sold in the outlet stores are different from the Nautica^® styles sold to department and specialty store wholesale customers. These outlet stores also carry Nautica^® merchandise from licensees to complete their product assortment. In addition, independent licensees operate over 200 Nautica^® brand retail stores across the world.

The Nautica^® brand is licensed to independent parties in the United States for apparel categories not produced by VF (e.g., tailored clothing, dress shirts, neckwear, women’s swimwear, accessories such as fragrances, watches and eyewear) and for nonapparel categories (e.g., bed and bath linens and accessories). Nautica^® products are licensed for sale in over 60 countries outside the United States. Wholesale sales of Nautica^® licensed products total approximately $470 million on an annual basis.

 

The John Varvatos^® brand is a rapidly growing luxury apparel and accessories collection for men, including tailored clothing, sportswear, footwear and accessories. The John Varvatos * USA^® line of tailored clothing, sportswear and accessories is designed to appeal to a younger consumer at somewhat more accessible price points. A John Varvatos * USA^® line of footwear will be launched in 2009. Products are sold through upscale department and specialty stores primarily in the United States, as well as through eight showcase John Varvatos^® retail locations. This business is 80% owned by VF, with the balance owned by Mr. John Varvatos.

 

The Sportswear Coalition also includes the Kipling^® business in North America. Kipling^® handbags, backpacks, totes, luggage and accessories are sold in the United States through specialty stores, department stores, VF-operated retail stores and at www.kipling.com. About two-thirds of products are the same as those sold in Europe, with the remainder designed specifically for the U.S. market.

 

We believe there is revenue and profit growth potential in each of our Sportswear brands through the expansion of owned retail stores, the expansion in the number of individual retailers offering our products and improved product offerings at accessible price points.

 

Contemporary Brands Coalition

 

Contemporary Brands, our newest coalition, is focused on upscale lifestyle brands. Formed in August 2007, it is currently composed of the 7 For All Mankind^® and lucy^® brands. In addition, in May 2008 we acquired one-third of the outstanding equity of Mo Industries Holdings, Inc. (“Mo Industries”), a Los Angeles-based company that owns the Splendid^® and Ella Moss^® brands of premium knitwear marketed to better department and specialty stores. VF expects to acquire the remaining two-thirds of the outstanding equity of Mo Industries in the first half of 2009.

 

7 For All Mankind^® is a Los Angeles-based brand of contemporary denim jeans and related products — knit and woven tops, sweaters, jackets and accessories — for women and men. Products are noted for their fit and for innovation in design, fabric and finish. We believe the 7 For All Mankind^® brand is the leading premium jeans brand in the United States, with the premium segment defined as jeans retailing for $150 or more. Retail price points for the brand’s core jeans range from $155 — $199 for basics, with higher price points for more fashion-forward products. With approximately three-fourths of its sales in the United States, the brand is marketed through department stores, such as Bloomingdale’s, Macy’s, Neiman Marcus, Nordstrom and Saks, and through specialty stores. In addition, the brand is sold in VF-operated retail locations. We opened 13 retail stores in prime street fronts or malls in the United States during 2008, bringing the total to 15. Internationally, sales are through department stores, such as Harrods, and specialty stores. We are pursuing growth opportunities in several areas — additional direct-to-consumer expansion through company-operated retail stores and e-commerce, additional sportswear product offerings, further geographic expansion in the Eastern European and Asian markets, and licensing.

 

Based in Portland, Oregon, the lucy^® brand of women’s lifestyle apparel is marketed through approximately 60 lucy^® branded retail stores across the United States and via the internet. lucy^® is an activewear brand designed for versatility, comfort and fit for today’s active woman. lucy^® is an authentic activewear brand with functional product that women can wear from workout to weekend. The lucy^® retail stores are currently being remodeled to emphasize the brand’s four core types of activity-based apparel — yoga, gym, running and outdoor adventure. Approximately 90% of the products in the lucy^® retail stores are lucy^® branded, with the balance of the offerings being complementary lines, including Splendid^® knitwear. We expect that substantially all of the products in the stores will continue to be lucy^® branded.

 

We expect to grow the 7 For All Mankind^® brand through retail and international expansion and new product lines and the lucy^® brand through opening stores in new markets. We will pursue further opportunities to leverage VF’s supply chain capabilities for both brands for future profitability improvement.

 

Direct-To-Consumer Operations

 

VF-operated retail stores are an integral part of our strategy for growing VF’s brands, particularly our lifestyle brands. Our full price retail stores allow us to showcase a brand’s full line of current season products, with fixtures

and imagery that support the brand’s positioning. These stores provide high visibility for our brands and products and enable us to stay close to the needs and preferences of consumers. The proper presentation of products in our retail stores also helps to increase consumer purchases of VF products at our wholesale customers. VF-operated retail stores generally provide operating margins that are equal to or above VF averages and a return on investment above VF averages. In addition, VF operates outlet stores in both upscale outlet malls and in more traditional value-based locations. These outlet stores serve an important role in our overall inventory management by allowing VF to effectively sell a significant portion of excess discontinued and out-of-season products at better prices than are otherwise available from outside parties, while maintaining the integrity of our brands.

 

Our growing global retail operations include 698 stores at the end of 2008. Of that total, there are 624 monobrand stores, (i.e., with only one brand’s products offered in each store), that sell The North Face^®, Vans^®, Napapijri^®, Kipling^®, John Varvatos^®, 7 For All Mankind^®, lucy^®, Nautica^®, Lee^® or Wrangler^® products. Approximately three-fourths of these stores offer products at full price, with the remainder being outlet locations offering products at discounted prices. In addition to the monobrand retail and outlet stores, we operate 74 VF Outlet stores across the United States that sell a broad selection of excess quantities of VF-branded products as well as women’s intimate apparel and childrenswear products under brands that are not VF-owned. Approximately three-fourths of the VF-operated retail stores are located in the United States. The remaining stores are primarily located in Europe.

 

Across the globe, internet sales (i.e., e-commerce) comprise a small but growing portion of total retail sales of apparel, footwear and accessories. E-commerce sales of apparel and footwear have become the second largest category of e-commerce purchases in the United States (behind travel purchases). At VF, e-commerce is a growing portion of our revenues as we currently market the Lee^®, The North Face^®, Vans^®, 7 For All Mankind^®, lucy^®, Nautica^® and Kipling^® brands online. Additional e-commerce sites will be rolled out for consumers in 2009.

 

Total retail store and e-commerce sales accounted for 16% of VF’s consolidated Total Revenues in 2008 and 14% in 2007. We expect our direct-to-consumer business to continue to grow at a faster pace than VF’s overall growth rate as we continue opening retail stores for our lifestyle brands. During 2008, we opened 89 retail stores. For 2009, capital investments of approximately $30 million are planned for leasehold improvements, fixtures and equipment for approximately 70 new retail locations.

 

In addition to the direct-to-consumer venues operated by VF, our licensees, distributors and other independent parties operate over 1,200 retail stores dedicated to our brands. These stores are located primarily in Eastern Europe and Asia.

 

Licensing Arrangements

 

As part of our business strategy of expanding market penetration of VF-owned brands, we enter into licensing agreements for our brands for specific apparel and complementary product categories in identified geographic regions if such arrangements with independent parties can provide more effective manufacturing, distribution and marketing of such products than could be achieved internally. These licensing arrangements relate to a broad range of VF brands and are for fixed terms of generally five years, with conditional renewal options. Each licensee pays royalties to VF based on its sales of licensed products, with most agreements providing for a minimum royalty requirement. Royalties generally range from 5% to 7% of the licensing partners’ net sales of licensed products. Gross Royalty Income was $81.0 million in 2008, with the largest contribution from the Nautica^® brand.

 

In addition, licensees of our brands are generally required to spend a specified amount to advertise VF’s products ranging from 1% to 5% of their net licensed product sales. In some cases, these advertising amounts are remitted to VF for advertising on behalf of the licensees. We provide support to these business partners and ensure the integrity of our brand names by taking an active role in the design, quality control, advertising, marketing and distribution of each licensed product.

 

VF has also entered into license agreements to use third-party trademarks. We market apparel under licenses granted by Major League Baseball, the National Football League, the National Basketball Association, the National Hockey League, Harley-Davidson Motor Company, Inc., NASCAR, ESPN, Inc. and major colleges, most of which contain minimum annual licensing and advertising requirements.

 

Manufacturing, Sourcing and Distribution

 

Product design, fit, fabric, finish and quality are important in all of our businesses. These functions are performed by employees located within each of our branded businesses across the globe.

VF’s centralized global supply chain organization sources product and ultimately bears the responsibility to deliver product to our customers. VF is highly skilled in managing the complexity associated with the supply chain. VF’s revenues are comprised of approximately 500 million units representing 500,000 SKUs spread over 30 brands. VF operates 30 manufacturing facilities and utilizes over 1,600 contractor manufacturing facilities. We manage over 30 distribution centers and nearly 700 retail stores. Managing this complexity is made possible by our use of information systems technologies — with best-of-breed systems for product development, forecasting, order management, warehouse management, etc. attached to our core enterprise resource management platform.

 

Today, 23% of our global Net Sales are of products manufactured in VF-owned facilities in Mexico, Europe and Central America and 77% are of products obtained from contractors, primarily in Asia. We believe a combination of VF-owned and contracted production from different geographic regions provides flexibility and a competitive advantage in our product sourcing. We will continue to manage our supply chain from a global perspective and adjust as needed to changes in the global production environment.

 

Our domestic Jeanswear and Imagewear businesses operate owned manufacturing facilities (primarily cutting, sewing and finishing) located in Mexico and Central America. Our international jeanswear businesses operate manufacturing facilities located in Poland and Turkey. A significant percentage of our denim bottoms are manufactured in these plants. For these owned production plants, we purchase raw materials from numerous domestic and international suppliers to meet scheduled production needs. Raw materials include fabrics made from cotton, synthetics and blends of cotton and synthetic yarn, as well as thread and trim (product identification, buttons, zippers and snaps). In some instances, we contract the sewing of VF-owned raw materials into finished product with independent contractors in the United States, Mexico and Central America. While we obtain fixed price commitments for denim and certain supplies for up to one year in advance, specific purchase obligations with suppliers are typically limited to the succeeding two to six months. Our only long-term contract for the purchase of raw materials or finished products is a commitment in connection with the sale of VF’s childrenswear business in 2004. This agreement requires VF to purchase a remaining total of approximately $77.5 million of finished product for sale through our VF Outlet stores, with a minimum of $15 million per year. No single supplier represents more than approximately 3% of our total cost of sales.

 

For the U.S. market, our current sourcing strategy includes a balance of VF-owned production and contracted production in the Western Hemisphere and contracted production from Asia. Owned production generally has a lower cost than contracted production. Product obtained from contractors in the Western Hemisphere generally has a higher cost compared with production obtained from contractors in the Far East but gives us greater flexibility and shorter lead times and allows for lower inventory levels. Approximately 33% of units sold in the United States and 27% of the dollar value of domestic Net Sales in 2008 were manufactured in VF-owned facilities, primarily in Mexico and Central America, with the balance obtained from contractors, primarily in Asia. This combination of VF-owned and contracted production, along with different geographic regions and cost structures, provides a balanced approach to product sourcing.

 

To an increasing extent, we are using independent contractors who own the raw materials and ship only finished, ready-for-sale products to VF. These contractors are engaged through VF sourcing hubs in Hong Kong (with several satellite offices across Asia) and Miami. These hubs are responsible for product procurement, product quality assurance, supplier management, transportation and shipping functions in the Eastern and Western Hemispheres, respectively. Substantially all products in the Outdoor and Action Sports and Sportswear Coalitions, as well as a growing portion of product requirements for our Jeanswear and Imagewear Coalitions, are obtained through these sourcing hubs. For most products in our Contemporary Brands Coalition, we currently contract the majority of sewing and finishing of VF-owned raw materials through a network of independent domestic and international contractors. Some of this volume is being shifted to the VF sourcing hubs. VF does not directly or indirectly source any products from suppliers in countries that are identified by the State Department as state sponsors of terrorism and are subject to U.S. economic sanctions and export controls.

 

Management continually monitors political risks and developments related to duties, tariffs and quotas. We limit VF’s sourcing exposure through, among other measures, (i) extensive geographic diversification with a mix of VF-operated and contracted production, (ii) shifts of production among countries and contractors, (iii) allocation of production to merchandise categories where the free flow of product is available and (iv) sourcing from countries with tariff preference and free trade agreements.

Through its contractor monitoring program, VF oversees the activities of the many independent businesses and contractors that produce VF-branded goods at locations across the globe. Each of the over 1,600 independent contractor facilities that manufacture VF-branded products must be pre-certified prior to performance of any production on behalf of VF, including contractors of our independent licensees. This pre-certification includes passing a factory inspection and signing a VF Terms of Engagement agreement. These requirements provide strict standards covering age of workers, hours of work, health and safety conditions and conformity with local laws. We maintain an ongoing audit program to ensure compliance with these requirements by using dedicated internal and outsourced staff. Additional information about VF’s Global Compliance Principles, Terms of Engagement, Factory Audit Procedure and Factory Compliance Guidelines, along with a Global Compliance Report, are available on the VF website at www.vfc.com.

 

VF did not experience difficulty in filling its raw material and contracting production needs during 2008, and we do not anticipate difficulties in meeting our raw materials and contracting production requirements during 2009. The loss of any one supplier or contractor would not have a significant adverse effect on our business.

 

Product is shipped from our independent suppliers and VF-operated manufacturing plants to many distribution centers in the United States and international markets. In limited instances, product is shipped directly to our customers. Product is inspected, sorted and stored in our distribution centers until needed for packing and shipping to our wholesale customers or our retail stores. Most distribution centers are operated by VF. Some support multiple brands. A small portion of our distribution needs are met by contract distribution centers. Our distribution centers use computer-controlled inventory management technology for efficient tracking and movement of products.

 

Seasonality

 

With its diversified product offerings, VF’s operating results are somewhat seasonal. On a quarterly basis and excluding the effect of timing of businesses acquired during 2008, consolidated Total Revenues for 2008 ranged from a low of approximately 22% of full year revenues in the second quarter to a high of 29% in the third quarter. This disparity results primarily from the seasonal influences on revenues of our Outdoor and Action Sports Coalition, where only 19% of Outdoor and Action Sports Coalition revenues occurred in the second quarter and 33% in the third quarter of 2008. With changes in our mix of business along with growth of our retail operations, historical quarterly revenue and profit trends may not be indicative of future trends. We expect the portion of annual revenues and profits occurring in the second half of the year to increase.

 

Working capital requirements vary throughout the year. Working capital increases during the first half of the year as inventory builds to support peak shipping periods and then decreases during the second half of the year as those inventories are sold and accounts receivable are collected. Cash provided by operating activities is substantially higher in the second half of the year due to higher net income during that period and reduced working capital requirements, particularly during the fourth quarter.

 

Advertising and Customer Support

 

We support VF’s brands through extensive advertising and promotional programs that convey a lifestyle image for a specific brand or focus on specific product features. We advertise in consumer and trade publications, on national and local radio and television and on the internet. We also participate in cooperative advertising on a shared cost basis with major retailers in print media, radio and television. We sponsor various sporting, music and other special events and sponsor a number of athletes and other personalities. In addition, we provide point-of-sale fixtures and signage to our wholesale customers to enhance the presentation and brand image of our products in their retail locations. This includes shop-in-shops, which are separate retail sales areas within a department store or other retail customer location that are dedicated to a specific VF brand.

 

We also participate in various retail customer incentive programs. These incentive programs with retailers include discounts, cooperative advertising funds and margin support funds. We also offer sales incentive programs directly to consumers in the form of rebate and coupon offers. Sales incentive offers with retailers and with consumers are recognized as sales discounts in arriving at reported Net Sales (except that cooperative advertising reimbursements of retailer advertising costs are reported as Advertising Expense, and free product with purchase offers are reported in Cost of Goods Sold).

 

During 2008, we spent $399.1 million on advertising and promoting our brands, a 10% increase from the 2007 level. We employ marketing sciences to optimize both the level and impact of advertising and promotional spending and to identify the types of spending that provide the greatest return on our marketing investments.

Internet websites are maintained for most of our brands. Some of them are business-to-consumer e-commerce sites where consumers can order VF products. Other consumer websites provide information about our brands and products and, in many cases, direct consumers to our wholesale customers where they can purchase our products. We also operate several business-to-business sites where our retail customers can order VF products.

 

Our Jeanswear, Outdoor and Action Sports, Sportswear and Contemporary Brands Coalitions employ a staff of in-store marketing and merchandising coordinators located in major cities across the United States. These individuals visit our customers’ retail locations to inform the customers’ sales force about our products and related promotions and to ensure that our products, and those of our licensees, are properly presented on the merchandise sales floor.

 

Other Matters

 

Competitive Factors

 

Our business depends on our ability to stimulate consumer demand for VF’s brands and products. VF is well-positioned to compete in the apparel industry by developing consumer-connected and innovative products at competitive prices, producing high quality merchandise, providing high levels of service, ensuring product availability to the retail sales floor and enhancing recognition of its brands. We continually strive to improve on each of these areas. Many of VF’s brands have long histories and enjoy high recognition within their respective consumer segments.

 

Trademarks

 

Trademarks, patents and domain names, as well as their related logos, designs and graphics, have substantial value in the marketing of VF’s products and are important to our continued success. We have registered this intellectual property in the United States and in other countries where our products are manufactured and/or sold. We vigorously monitor and enforce VF’s intellectual property against counterfeiting, infringement and violations of other rights where and to the extent legal, feasible and appropriate. In addition, we grant licenses to other parties to manufacture and sell products utilizing our intellectual property in product categories and geographic areas in which VF does not operate.

 

Customers

 

VF products are primarily sold through our sales force and independent sales agents and distributors. VF’s customers are specialty stores, department stores, national chains and mass merchants in the United States and in international markets. Of our Total Revenues, 30% are in international markets, primarily in Europe, and 16% are through VF-operated retail stores (which includes international stores).

 

Sales to VF’s ten largest customers, all of which are retailers based in the United States, amounted to 26% of Total Revenues in 2008, 27% in 2007 and 30% in 2006. These larger customers included (in alphabetical order) Kohl’s Corporation, Macy’s, Inc., J.C. Penney Company, Inc., Sears Holding Corporation, Target Corporation and Wal-Mart Stores, Inc. Sales to the five largest customers amounted to approximately 21% of Total Revenues in 2008, 22% in 2007 and 24% in 2006. Sales to VF’s largest customer, Wal-Mart Stores, Inc., totaled 11% of Total Revenues in 2008, 12% in 2007 and 13% in 2006, substantially all of which were in the Jeanswear Coalition. Generally sales to our ten largest and five largest customer groups have increased in the last two years but are a smaller percentage of Total Revenues in 2008 and 2007 due to higher growth rates in our lifestyle businesses, which have a greater portion of their sales to other customers.

 

Employees

 

VF employed approximately 46,600 men and women at the end of 2008, of which approximately 19,900 were located in the United States. Approximately 900 employees in the United States are covered by collective bargaining agreements. In international markets, a significant percentage of employees are covered by trade- sponsored or governmental bargaining arrangements. Employee relations are considered to be good.

 

Backlog

 

The dollar amount of VF’s order backlog as of any date is not meaningful, may not be indicative of actual future shipments and, accordingly, is not material for an understanding of the business of VF taken as a whole.

Executive Officers of VF

 

The following are the executive officers of VF Corporation as of February 14, 2009. The executive officers are generally elected annually and serve at the pleasure of the Board of Directors. There is no family relationship among any of the VF Corporation executive officers.

 

 

Mr. Wiseman was named President and Chief Operating Officer of VF in March 2006, Director of VF in October 2006, Chief Executive Officer in January 2008 and Chairman of the Board in August 2008. He has held a progression of leadership roles within and across VF’s Coalitions since 1995. Additional information is included under the caption “Election of Directors” in VF’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 28, 2009 (“2009 Proxy Statement”) that will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended January 3, 2009, which information is incorporated herein by reference.

 

Mr. Shearer joined VF in 1986 as Assistant Controller and was elected Controller in 1989 and Vice President — Controller in 1994. He has served as Vice President — Finance and Chief Financial Officer since 1998. He served as Chairman — Outdoor Coalition from June 2000 to January 2003. Mr. Shearer was also elected as Vice President — Global Processes in January 2003. In May 2005, he became Senior Vice President and Chief Financial Officer.

 

Mr. Batten rejoined VF as Vice President — Controller in September 2004. Mr. Batten had previously served as Vice President & Chief Financial Officer of VF’s former intimate apparel business from 1998 to July 2000.

 

Mrs. Cummings joined VF as Vice President — General Counsel in 1995 and became Vice President — Administration and General Counsel in 1996 and Secretary in 1997.

 

Mr. Gannaway joined VF in July 2004 as Vice President — Customer Management. In January 2008, his responsibilities were broadened to Vice President — VF Direct/Customer Teams.

 

Mr. Pickard joined VF in 1976 and was elected Assistant Controller in 1982, Assistant Treasurer in 1985, Treasurer in 1987 and Vice President — Treasurer in 1994.

 

Mr. Rogers joined VF in 1971 and served in a number of positions until his appointment as Vice President — Operations in 1994. He was appointed Vice President — Process Development Supply Chain in 2000 and Vice President — Process and Technology in 2002. In March 2004, he served as Vice President — Global Supply Chain and Technology until his appointment in June 2005 as Vice President of VF and President — Supply Chain.

 

Mr. Salzburger joined The North Face in 1997 as Chief Executive Officer of European operations and was appointed President of The North Face in 1999. Following the VF acquisition of The North Face in 2000, Mr. Salzburger served as President of VF’s International Outdoor Coalition from 2001 until his appointment as

President of VF’s European, Middle East, Africa and Asian operations in September 2006. In January 2009, Mr. Salzburger was appointed Vice President of VF and President — VF International.

 

Available Information

 

All periodic and current reports, registration statements and other filings that VF has filed or furnished to the Securities and Exchange Commission (“SEC”), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, are available free of charge from the SEC’s website (www.sec.gov) and public reference room at 100 F Street, NE, Washington, DC 20549 and on VF’s website at www.vfc.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Copies of these reports (excluding exhibits) may also be obtained free of charge upon written request to the Secretary of VF Corporation, P.O. Box 21488, Greensboro, NC 27420.

 

The following corporate governance documents can be accessed on VF’s website: VF’s Corporate Governance Principles, Code of Business Conduct, and the charters of our Audit Committee, Compensation Committee, Finance Committee and Nominating and Governance Committee. Copies of these documents also may be obtained by any shareholder free of charge upon written request to: Secretary of VF Corporation, P.O. Box 21488, Greensboro, NC 27420.

 

After VF’s 2009 Annual Meeting of Shareholders, VF intends to file with the New York Stock Exchange (“NYSE”) the certification regarding VF’s compliance with the NYSE’s corporate governance listing standards as required by NYSE Rule 303A.12. Last year, VF filed this certification with the NYSE on May 2, 2008.

 

 

The following risk factors should be read carefully in connection with evaluating VF’s business and the forward-looking statements contained in this Form 10-K. Any of the following risks could materially adversely affect VF’s business, its operating results and its financial condition.

 

RISKS SPECIFIC TO VF CORPORATION

 

VF’s business could be adversely affected by reduced consumer spending and consumer confidence.

 

The global credit crisis that began in 2008 is having a negative impact on retail sales of apparel and other consumer products. Reduced sales by our wholesale customers may lead to lower retail inventory levels, reduced orders from suppliers like VF, or order cancelations. Reduced sales by some of our wholesale customers, along with the possibility of their reduced access to, or inability to access, the credit markets, may result in various retailers experiencing significant financial difficulties. Financial difficulties of customers could result in reduced sales to those customers or could result in store closures, bankruptcies or liquidations. Higher credit risk relating to receivables from customers experiencing financial difficulty may result. If these developments occur, our inability to shift sales to other customers or to collect on VF’s trade accounts receivable could have a material adverse effect on VF’s financial condition and results of operations.

 

A growing portion of our revenues are direct-to-consumer through VF-operated retail stores and websites. It is possible that reduced consumer confidence, along with a reduction in availability of consumer credit and increasing unemployment, may lead to reduced purchases of VF’s products through VF-operated retail stores and websites. This could have a material adverse effect on VF’s financial condition and results of operations.

 

A substantial portion of VF’s revenues and gross profit is derived from a small number of large customers. The loss of any of these customers could substantially reduce VF’s profits.

 

A few of VF’s customers account for a significant portion of revenues. Sales to VF’s ten largest customers were 26% of Total Revenues in fiscal 2008, with Wal-Mart Stores, Inc. accounting for 11% of revenues. Sales are generally on a purchase order basis, and we do not have long-term agreements with any of our customers. A decision by any of VF’s major customers to decrease significantly the number of products purchased from VF could substantially reduce revenues and have a material adverse effect on VF’s financial condition and results of operations. Moreover, in recent years, the retail industry has experienced consolidation and other ownership changes. In the future, retailers may further consolidate, undergo restructurings or reorganizations, realign their affiliations or reposition their stores’ target market. These developments could result in a reduction in the number of stores that carry VF’s products, increased ownership concentration within the retail industry, increased credit

exposure or increased retailer leverage over their suppliers. These changes could both impact VF’s opportunities in the market and increase VF’s reliance on a smaller number of large customers.

 

The apparel industry is highly competitive, and VF’s success depends on its ability to respond to constantly changing fashion trends and consumer demand. Reduced sales or prices resulting from competition could have a material adverse effect on VF.

 

VF competes with numerous brands and manufacturers of apparel. Some of our competitors may be larger and have more resources than VF in certain product categories. In addition, VF competes directly with the private label brands of its wholesale customers. VF’s ability to compete within the apparel and footwear industries depends on its ability to:

 

 

The failure to compete effectively or to keep pace with rapidly changing markets and trends could have a material adverse effect on VF’s business, financial condition and results of operations. In addition, if we misjudge fashion trends and market conditions, we could be faced with significant excess inventories for some products that we may have to sell at a loss or missed opportunities that may result in lost sales.

 

VF’s business is exposed to foreign currency fluctuations.

 

Approximately 30% of VF’s Total Revenues is derived from international markets. VF’s foreign businesses operate in functional currencies other than the U.S. dollar. Assets, liabilities, revenues and expenses in these foreign businesses are subject to fluctuations in foreign currency exchange rates. In addition, VF sources and manufactures most of its products overseas. As a result, the cost of these products may be affected by changes in the value of the relevant currencies. Changes in currency exchange rates may also affect the U.S. dollar value of the foreign currency denominated amounts at which VF’s international businesses purchase products, incur costs or sell products. Furthermore, much of VF’s licensing revenue is derived from sales in foreign currencies. Although we hedge some exposures to changes in foreign currency exchange rates arising in the ordinary course of business, foreign currency fluctuations could have a material adverse impact on VF’s financial condition and results of operations.

 

VF’s profitability may decline as a result of increasing pressure on margins.

 

The apparel industry is subject to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products and changes in consumer demand. These factors may cause us to reduce our sales prices to retailers and consumers, which could cause VF’s gross margin to decline if we are unable to offset price reductions with comparable reductions in operating costs. If VF’s sales prices decline and we fail to sufficiently reduce our product costs or operating expenses, VF’s profitability will decline. This could have a material adverse effect on VF’s results of operations, liquidity and financial condition.

 

Fluctuations in the price, availability and quality of raw materials could increase costs and cause service delays.

 

Fluctuations in the price, availability and quality of fabrics or other raw materials used by VF in its manufactured apparel could have a material adverse effect on VF’s cost of sales or its ability to meet its customers’ demands. The prices for such fabrics depend on demand and market prices for the raw materials used to produce them, particularly cotton. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields and weather patterns. In the future, VF may not be able to pass all or a portion of such higher raw materials prices on to its customers.

VF has entered into license agreements to use the trademarks of others. Loss of a license could have an adverse effect on VF’s operating results.

 

VF has entered into agreements to market products under licenses granted by third parties, including Major League Baseball, the National Football League and Harley-Davidson Motor Company, Inc. Some of these licenses are for a short term and do not contain renewal options. Loss of a license, which in certain cases could result in an impairment charge for related intangible assets, could have an adverse effect on VF’s operating results.

 

VF may not succeed in implementing its growth strategy.

 

One of our key strategic objectives is growth. We seek to grow through both organic growth and acquisitions, building new growing lifestyle brands, expanding our share with winning customers, stretching VF’s brands and customers to new geographies, fueling the growth by leveraging our supply chain and information technology capabilities across VF, expanding our direct-to-consumer business and building new growth enablers by identifying and developing high potential employees. We may not be able to grow our existing businesses or achieve planned cost savings from ongoing businesses. We may have difficulty identifying acquisition targets, and we may not be able to successfully integrate a newly acquired business or achieve expected cost savings or synergies from such integration. We may not be able to expand our market share with winning customers, expand our brands geographically or achieve the expected results from our supply chain initiatives. We may also have difficulty recruiting or developing qualified managers. Failure to implement our growth strategy may have a material adverse effect on VF’s business.

 

VF borrows funds on a short-term basis, primarily to support seasonal working capital requirements. Long-term debt is part of VF’s total capital structure. Because of recent conditions in global credit markets, VF may have difficulty accessing the capital markets for short or long-term financing.

 

During the last several months, the global capital and credit markets have been experiencing extreme levels of volatility and disruption, with government intervention, mergers or bankruptcies of several major financial institutions, and a general decline in global liquidity. Many corporate issuers have been unable to access credit markets.

 

VF uses short-term commercial paper borrowings primarily to support seasonal working capital requirements, with amounts generally repaid by the end of each year from strong cash flows from operations. VF was able to continue to borrow in the commercial paper markets during 2008, and all commercial paper borrowings were repaid by the end of the year. In addition, VF may access the long-term capital markets to replace maturing debt obligations or to fund acquisition or other growth opportunities. There is no assurance that the commercial paper markets or the long-term capital markets will continue to be a reliable source of financing for VF.

 

VF has committed domestic and international bank credit facilities. Because of the continued distress in the global capital markets, one or more of the participating banks may not be able to honor their commitments, which could have an adverse effect on VF’s business.

 

If we were to have difficulty in accessing the short or long-term capital markets, VF has $1.3 billion of committed domestic and international bank credit facilities that expire in October 2012. Continued distress in the financial markets could impair the ability of one or more of the banks participating in our credit agreements from honoring their commitments. This could have an adverse effect on our business if we were not able to replace those commitments or to locate other sources of liquidity on acceptable terms.

 

If VF encounters problems with its distribution system, VF’s ability to deliver its products to the market would be adversely affected.

 

VF relies on its distribution facilities to warehouse and, using its own employees or in some cases independent contractors, to ship product to its customers. VF’s distribution system includes computer-controlled and automated equipment, which means its operations are complicated and may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, electronic or power interruptions or other system failures. Because substantially all of VF’s products are distributed from a relatively small number of locations, VF’s operations could also be interrupted by earthquakes, floods, fires or other natural disasters near its distribution centers. We maintain business interruption insurance, but it may not adequately protect VF from the adverse effects that could be caused by significant disruptions in VF’s distribution facilities, such as the long-term loss of customers or an erosion of brand image. In addition, VF’s distribution capacity is dependent on the timely performance of services by third parties, including the transportation of product to and from its distribution

facilities. If we encounter problems with our distribution system, our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be materially adversely affected.

 

VF relies significantly on information technology. Any inadequacy, interruption, integration failure or security failure of that technology could harm VF’s ability to effectively operate its business.

 

Our ability to effectively manage and operate our business depends significantly on its information technology systems. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, difficulty in integrating new systems or systems of acquired businesses or a breach in security of these systems could adversely impact the operations of VF’s business. Moreover, VF and its customers could suffer harm if customer information were accessed by third parties due to a security failure in VF’s systems. It could also require significant expenditures to remediate any such failure, problem or breach.

 

VF uses foreign suppliers and manufacturing facilities for a substantial portion of its raw materials and finished products, which poses risks to VF’s business operations.

 

During fiscal 2008, approximately 77% of VF’s products sold were produced by and purchased or procured from independent manufacturers primarily located in Asia, with substantially all of the remainder produced by VF-owned and operated manufacturing facilities located in Eastern Europe, Mexico and Central America. Although no single supplier and no one country is critical to VF’s production needs, any of the following could materially and adversely affect our ability to produce or deliver VF products and, as a result, have a material adverse effect on VF’s business, financial condition and results of operations:

 

 

If VF’s suppliers fail to use acceptable ethical business practices, VF’s business could suffer.

 

We require third party suppliers to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices and environmental compliance. Additionally, we require all suppliers making VF-branded apparel, whether directly for VF or for its licensees, to comply with VF’s Terms of Engagement and Global Compliance Principles. Our staff and third parties retained for such purposes periodically visit and audit the operations of VF’s owned and operated facilities and those of independent contractors manufacturing product for VF to determine compliance. However, we do not control independent manufacturers or their labor and other business practices. If one of our independent contractors violates labor or other laws or implements labor or other business practices that are generally regarded as unethical in the United States, the shipment of finished products to VF could be interrupted, orders could be cancelled, relationships could be terminated, and VF’s reputation could be damaged. Any of these events could have a material adverse effect on VF’s revenues and, consequently, its results of operations.

 

VF’s results of operations could be materially harmed if VF is unable to accurately forecast demand for its products.

 

We often schedule internal production and place orders for products with independent manufacturers before our customers’ orders are firm. Therefore, if we fail to accurately forecast customer demand, we may experience

excess inventory levels or a shortage of product to deliver to our customers. Factors that could affect our ability to accurately forecast demand for our products include:

 

 

Inventory levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on VF’s results of operations and financial condition. In addition, if we underestimate demand for our products, our manufacturing facilities or third party manufacturers may not be able to produce products to meet customer requirements, and this could result in delays in the shipment of products and lost revenues, as well as damage to VF’s reputation and customer relationships. There can be no assurance that we will be able to successfully manage inventory demand to meet future order and reorder requirements.

 

The loss of members of VF’s executive management and other key employees could have a material adverse effect on its business.

 

VF depends on the services and management experience of its executive officers and business leaders who have substantial experience and expertise in VF’s business. VF also depends on other key employees involved in the operation of its business. Competition for qualified personnel in the apparel industry is intense. The unexpected loss of services of one or more of these individuals could have a material adverse effect on VF.

 

VF may be unable to protect its trademarks and other intellectual property rights.

 

VF’s trademarks and other intellectual property rights are important to its success and its competitive position. VF is susceptible to others imitating its products and infringing its intellectual property rights. With the shift in product mix to higher priced brands, VF is more susceptible to infringement of its intellectual property rights. Some of VF’s brands, such as The North Face^®, Vans^®, JanSport^®, Nautica^®, Wrangler^® and Lee^® brands, enjoy significant worldwide consumer recognition, and the generally higher pricing of such products creates additional risk of counterfeiting and infringement.

 

Infringement or counterfeiting of VF’s products or its other intellectual property rights could diminish the value of our brands or otherwise adversely affect VF revenues. Actions we have taken to establish and protect VF’s intellectual property rights may not be adequate to prevent imitation of its products by others or to prevent others from seeking to invalidate its trademarks or block sales of VF’s products as a violation of the trademarks and intellectual property rights of others. In addition, unilateral actions in the United States or other countries, such as changes to or the repeal of laws recognizing trademark or other intellectual property rights, could have an impact on VF’s ability to enforce those rights.

 

The value of VF’s intellectual property could diminish if others assert rights in, or ownership of, trademarks and other intellectual property rights of VF, or in trademarks that are similar to VF’s trademarks, or trademarks that VF licenses and/or markets. We may be unable to successfully resolve these types of conflicts to our satisfaction. In some cases, there may be trademark owners who have prior rights to VF’s trademarks because the laws of certain foreign countries may not protect intellectual property rights to the same extent as do the laws of the United States. In other cases, there may be holders who have prior rights to similar trademarks. VF is from time to time involved in opposition and cancelation proceedings with respect to some items of its intellectual property.

 

VF obtains licensing royalties and relies on its licensees to maintain the value of its brands.

 

Only a relatively small portion of VF’s revenues, $81.0 million or 1.1%, was derived from licensing royalties in 2008. Although VF generally has significant control over its licensee products and advertising, we rely on them for, among other things, operational and financial controls over their businesses. Failure of our licensees to successfully market licensed products or our inability to replace existing licensees could adversely affect VF’s revenues, both

directly from reduced royalties received and indirectly from reduced sales of our other products. Risks are also associated with a licensee’s ability to:

 

 

In addition, VF relies on its licensees to help preserve the value of its brands. Although we make every attempt to protect VF’s brands through, among other things, approval rights over design, production processes and quality, packaging, merchandising, distribution, advertising and promotion of its products, we cannot completely control the use of licensed VF brands by our licensees. The misuse of a brand by a licensee could have a material adverse effect on that brand and on VF.

 

VF’s balance sheet includes a significant amount of intangible assets and goodwill. A decline in the estimated fair value of an intangible asset or of a business unit could result in an asset impairment charge, which would be recorded as an operating expense in VF’s Consolidated Statement of Income.

 

Under current accounting standards, we estimate the fair value of acquired assets, including intangible assets, and assumed liabilities arising from a business acquisition. The excess, if any, of the cost of the acquired business over the fair value of net tangible assets acquired is goodwill. The goodwill is then assigned to a business unit or “reporting unit” within VF, which depends on whether the acquired business will be operated as a separate business unit or integrated into an existing VF business unit.

 

At December 2008, VF had approximately $0.9 billion of trademark intangible assets and $1.3 billion of goodwill on its balance sheet. These assets are not required to be amortized under current accounting rules. In addition, VF had approximately $0.4 billion of intangible assets that are being amortized under current accounting rules. The combined amounts represent 42% of VF’s Total Assets and 75% of Common Stockholders’ Equity.

 

Trademark intangible assets that are not amortized and goodwill must be tested for impairment at least annually. The impairment test requires us to estimate the fair value of VF’s business units and related intangible assets, primarily using discounted cash flow methodologies based on forecasted revenues and cash flows that will be derived from a business unit or trademark. Intangible assets that are being amortized must be tested for impairment whenever events or circumstances indicate that their carrying value might not be recoverable.

 

The fair value of a business unit could decline if forecasted revenues or cash flows were to be lower in the future due to effects of the global recession or other causes. If the carrying value of intangible assets or of goodwill were to exceed its fair value, the asset would be written down to its fair value, with the impairment loss recognized as a noncash charge in the Consolidated Statement of Income. We have not had any impairment charges in the last three years, other than the 2006 loss on disposal of our intimate apparel business (accounted for as discontinued operations). However, changes in the future outlook of a business unit could result in an impairment loss, which could have a material adverse effect on VF’s results of operations and financial condition.

 

VF’s defined benefit pension plans were underfunded at the end of 2008 due primarily to the effects of the global financial and credit market crisis that began in 2008. This resulted in a charge to Common Stockholders’ Equity in our Consolidated Balance Sheet and a significant increase in our 2009 pension expense. If the pension plan investments were to decline in value, or if the level of interest rates were to decline from the current level, the pension plans would be further underfunded, resulting in an additional charge to Common Stockholders’ Equity and higher pension expense in future years.

 

VF’s qualified defined benefit pension plan swung from being overfunded at the end of 2007 to significantly underfunded at the end of 2008. This underfunded status was due primarily to the decline in the value of pension plan assets with the general turmoil in the global securities markets in 2008. The underfunded status resulted in recognition of $414.9 million of liabilities and a $291.0 million after-tax charge to Common Stockholders’ Equity at the end of 2008. For financial accounting, differences between actual investment returns and the actuarially assumed investment return are deferred and amortized to future years’ pension cost. Our pension cost will increase from $10.8 million in 2008 to approximately $98 million in 2009 primarily due to amortization of these deferred actuarial losses.

The level of interest rates drives the discount rate used to value the plans’ projected benefit obligations. In general, a decrease in interest rates would result in a greater present value of future benefit obligations, while an increase in interest rates would result in a smaller present value of future benefit obligations.

 

A further decrease in the value of pension plan assets or a decrease in interest rates could result in a further decline in the plans’ funded status. In that case, VF would recognize additional liabilities and additional charges to Common Stockholders’ Equity in our Consolidated Balance Sheet and higher pension expense in future years.

 

If current market conditions persist, VF would be required to make substantial cash funding contributions to the plan, beginning in 2010, to return the plan to a fully funded status over the next few years.

 

RISKS APPLICABLE TO THE APPAREL INDUSTRY

 

VF’s revenues and profits depend on the level of consumer spending for apparel, which is sensitive to general economic conditions and other factors affecting consumer confidence.

 

The apparel industry has historically been subject to cyclical variations and is particularly affected by adverse trends in the general economy. The success of VF’s business depends on consumer spending. Consumer spending is influenced by a number of factors, including actual and perceived economic conditions affecting disposable consumer income (such as unemployment and wages), business conditions, interest rates, housing costs, energy prices, availability of credit and tax rates in the international, national, regional and local markets where VF’s products are sold. Any significant deterioration in general economic conditions, recession or increases in interest rates could reduce the level of consumer spending and inhibit consumers’ use of credit. A significant decline in the securities markets could materially affect consumer confidence, the financial condition of VF’s customers and VF’s operating costs through higher contributions to its pension plan. In addition, natural disasters, war, terrorist activity or the threat of war or terrorist activity could adversely affect consumer spending and thereby have a material adverse effect on VF’s financial condition and results of operations.

 

VF’s ability to sell products in international markets may be affected by legal, regulatory, political and economic risks.

 

Our ability to maintain the current level of operations in our existing international markets and to capitalize on growth in new international markets is subject to risks associated with international operations. These include the burdens of complying with a variety of foreign laws and regulations, unexpected changes in regulatory requirements, new tariffs or other barriers to some international markets.

 

We cannot predict whether quotas, duties, taxes or other similar restrictions will be imposed by the United States, the European Union or other countries upon the import or export of our products in the future, or what effect any of these actions would have on VF’s business, financial condition or results of operations. Changes in regulatory, geopolitical policies and other factors may adversely affect VF’s business or may require us to modify our current business practices.

 

 

None

 

 

VF owns certain facilities used in manufacturing and distribution activities and leases a distribution center under a capital lease. Other facilities are leased under operating leases that generally contain renewal options. We believe all facilities and machinery and equipment are in good condition and are suitable for VF’s needs.

Manufacturing, distribution and administrative facilities being utilized at the end of 2008 are summarized below by reportable segment:

 

 

 

 

Approximately 70% of the owned and leased space represents manufacturing (cutting, sewing and finishing) and distribution facilities. The remainder represents administrative and showroom facilities.

 

In addition to the above, VF owns or leases retail or outlet locations totaling 5,900,000 square feet. VF also leases 500,000 square feet of space that was formerly used in its operations but is now subleased to a third party through the end of the lease term.

 

 

There are no pending material legal proceedings, other than ordinary, routine litigation incidental to the business, to which VF or any of its subsidiaries is a party or to which any of their property is the subject.

 

 

Not applicable.

 

PART II

 

 

VF’s Common Stock is listed on the New York Stock Exchange under the symbol “VFC”. The high and low sale prices of VF Common Stock, as reported on the NYSE Composite Tape in each calendar quarter of 2008, 2007 and 2006, along with dividends declared, are as follows:

 

 

As of January 31, 2009, there were 4,706 shareholders of record. Quarterly dividends on VF Common Stock, when declared, are paid on or about the 20th day of March, June, September and December.

Performance graph:

 

The following graph compares the cumulative total shareholder return on VF Common Stock with that of the Standard & Poor’s (“S&P”) 500 Index and the S&P Apparel, Accessories & Luxury Goods Subindustry Index (“S&P Apparel Index”) for the five calendar years ended December 31, 2008. The S&P Apparel Index at the end of 2008 consisted of Carter’s, Inc., Coach, Inc., Perry Ellis International, Inc., Fossil, Inc., Hanesbrands Inc., Jones Apparel Group, Inc., Liz Claiborne, Inc., Maidenform Brands, Inc., Movado Group, Inc., Oxford Industries, Inc., Phillips-Van Heusen Corporation, Polo Ralph Lauren Corporation, Quiksilver, Inc., True Religion Apparel, Inc., Under Armour, Inc., Unifirst Corporation, VF Corporation, Volcom, Inc. and The Warnaco Group, Inc. The graph assumes that $100 was invested on December 31, 2003, in each of VF Common Stock, the S&P 500 Stock Index and the S&P Apparel Index, and that all dividends were reinvested. The graph plots the respective values on the last trading day of calendar years 2003 through 2008. Past performance is not necessarily indicative of future performance.

 

Comparison of Five Year Total Return of
VF Common Stock, S&P 500 Index and S&P Apparel Index
VF Common Stock closing price on December 31, 2008 was $54.77

 

TOTAL SHAREHOLDER RETURNS

 

 

Issuer purchases of equity securities:

 

 

 

 

 

The following table sets forth selected consolidated financial data for the five years ended January 3, 2009. This selected financial data, derived from financial statements examined by VF’s independent registered public accounting firm, should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Consolidated Financial Statements and Notes” included in this report. Historical results presented herein may not be indicative of future results.

 

 

 

 

Overview

 

VF Corporation is a leading global marketer of branded lifestyle and other apparel products. Management’s vision is to grow VF by building leading lifestyle brands that excite consumers around the world. Lifestyle brands, representative of the activities that consumers aspire to, will generally extend across multiple geographic markets and product categories and therefore have greater opportunities for growth.

 

VF owns a diverse portfolio of brands with strong market positions in several consumer product categories. In addition, we market occupational apparel to resellers and major corporate and government customers. VF has a broad customer base, with products distributed through leading specialty stores, upscale and traditional department stores, national chains and mass merchants, plus VF-operated retail stores and internet websites.

 

VF is organized around our principal product categories and major brands within those categories. These groupings of businesses, referred to as “coalitions,” are summarized as follows:

 

 

Discontinued Operations

 

VF sold its women’s intimate apparel business in April 2007. The decision to exit this business was representative of our strategic plan to shift VF’s portfolio mix to higher growth, higher margin lifestyle brands. Because VF has sold this business, the operating results, assets, liabilities and cash flows of the global intimate apparel business have been separately presented as discontinued operations in the Consolidated Financial Statements.

 

See Note C to the Consolidated Financial Statements for further details about the discontinued operations. Unless otherwise stated, the remaining sections of this discussion and analysis of results of operations and financial condition relate only to continuing operations.

 

Impact of the Current Global Economic Environment

 

The global economy reflected significant volatility and change during 2008 — declines in residential and commercial real estate values that spread across the globe, rapid and extreme changes in commodity prices and currency markets, sharp declines in global securities markets, rising unemployment, and a credit and liquidity crisis — leading to the current global recession. VF reported record revenues and earnings per share in each of its first three quarters and full year of 2008. However, our fourth quarter performance was negatively impacted by the deteriorating global economic environment and its impact on consumer spending. There is every indication that these difficult economic conditions will continue through 2009.

In response to these market conditions and the expectation that they would continue, we took an aggressive approach to reducing costs, resulting in a charge of $41.0 million in the fourth quarter of 2008. These cost reduction initiatives are expected to result in cost savings of approximately $100 million beginning in 2009. See Note K to the Consolidated Financial Statements.

 

Long-term Financial Targets

 

In January 2008, we revised two of our long-term financial targets and added a new earnings per share growth target. We expect attainment of these targets to drive increases in total shareholder return (“TSR”), which is the total of stock price appreciation and dividends received by our shareholders. While the revenue and earnings growth targets are not expected to be achieved in 2009, we have not revised our longer-term outlook. These targets are summarized below:

 

 

In addition to the revised and new targets discussed above, we maintained the following long-term targets:

 

 

Income from continuing operations before net interest expense, after income taxes
  Average common stockholders’ equity, plus average short and long-term debt

 

VF earned a 13.5% return on invested capital in 2008 and a 14.8% return in 2007. Our returns in these years were impacted by our 2008 cost reduction initiatives and by acquisitions in 2007. Newly acquired businesses generally have a lower than average return on invested capital in their earliest years of ownership.

 

 

 

We evaluate our existing businesses to ensure that they meet our strategic and financial objectives and may in the future decide to exit a business that does not meet those objectives, as demonstrated by the sale of the global intimate apparel business in 2007.

 

Strategic Objectives

 

We have developed a growth plan that we believe will enable VF to achieve its long-term revenue and earnings targets. Our growth strategy consists of six drivers:

 

 

Highlights of 2008

 

There were several notable actions and achievements in 2008:

 

 

Analysis of Results of Continuing Operations

 

Consolidated Statements of Income

 

The following table presents a summary of the changes in our Total Revenues during the last two years:

 

 

Total Revenues consist of Net Sales of products and Royalty Income from licensees. Revenues increased in 2008 due to overall unit volume increases and organic growth in our outdoor and action sports businesses and the benefit of a full year of operations of our contemporary brands businesses acquired in 2007. The impact of the 53rd week in 2008 was not significant to VF’s operating results. Revenues in most of our businesses increased in 2007, with the largest growth in our outdoor and action sports and jeanswear businesses. Additional details on revenues are provided in the section titled “Information by Business Segment.”

 

In translating foreign currencies into the U.S. dollar, the weaker U.S. dollar in relation to the functional currencies where VF conducts the majority of its business (primarily the European euro countries) benefited revenue by $109 million in 2008 relative to 2007, and $130 million in 2007 relative to 2006. The weighted average translation rate for the euro was $1.47 per euro during 2008 compared with $1.36 during 2007. With the strengthening of the U.S. dollar in recent months to $1.39 per euro at December 2008, reported revenues in 2009 are expected to be negatively impacted compared with 2008.

 

The following table presents the percentage relationship to Total Revenues for components of our Consolidated Statements of Income:

 

 

Gross margins increased to 43.9% of revenues in 2008, compared with 43.5% in 2007 and 43.4% in 2006. Gross margins increased 0.5% in 2008 from the impact of our lifestyle businesses, which have gross margin percentages higher than VF averages, representing a higher percentage of Total Revenues. The slight increase in the gross margin percentage in 2007 over 2006 was also due to our higher margin lifestyle businesses representing a higher percentage of Total Revenues.

 

In 2008, 77% of our total Net Sales related to products sourced from contractors, primarily in Asia, and 23% related to products manufactured in VF-owned facilities in Mexico, Europe and Central and South America. We believe a combination of VF-owned and contracted production from different geographic regions provides flexibility and a competitive advantage in our product sourcing.

 

Marketing, Administrative and General Expenses as a percent of revenues were 31.7% of revenues in 2008 and 30.1% in both 2007 and 2006. This ratio increased 1.4% in 2008 due to the growth in our direct-to-consumer business, which has a higher expense ratio. Our direct-to-consumer business represented 16% of total VF revenues in 2008 and 14% in 2007. In addition, the specific cost reduction actions discussed in the “Highlights of 2008” section of the “Overview” above increased this ratio by 0.6% in 2008. These increases were partially offset by lower incentive compensation and other spending reductions. While the 2007 ratio was flat compared with 2006, the 2007 ratio reflected the net impact of the higher expense ratios of our 2007 acquisitions and the cost reduction actions taken in 2007, offset by the beneficial impact of revenue growth in many of our businesses, resulting in improved leverage of operating expenses.

We include costs of cooperative advertising, licensing, retail stores and shipping and handling in Marketing, Administrative and General Expenses, as stated in our significant accounting policies in Note A to the Consolidated Financial Statements. Some apparel companies classify cooperative advertising costs as a reduction of Net Sales and licensing costs as a reduction to Royalty Income. Further, some classify retail store costs and shipping and handling costs in Cost of Goods Sold. Accordingly, our gross margins and operating expenses may not be directly comparable with other apparel companies.

 

Interest income decreased $3.2 million in 2008 primarily due to lower interest rates. Interest expense (including bank fees and amortization of deferred costs and a hedging gain) increased $21.9 million in 2008 due to an increase in debt balances related to the issuance of $600.0 million of senior long-term notes in October 2007 to fund our 2007 acquisitions. This increase was partially offset by lower short-term borrowing rates. Interest expense increased $14.9 million in 2007 due to (i) higher borrowings needed to fund acquisition activity and (ii) higher interest rates on short-term debt. Average interest-bearing debt outstanding totaled approximately $1,454 million for 2008, $1,080 million for 2007 and $900 million for 2006. The weighted average interest rate on outstanding debt was 6.3% for 2008, 6.4% for 2007 and 6.1% for 2006.

 

The effective income tax rate was 28.9% in 2008, compared with 32.3% in 2007 and 31.2% in 2006. During 2008, 2007 and 2006, we recorded tax benefits of $24.6 million, $12.0 million and $16.9 million, respectively, for the favorable tax outcomes upon audits in several international locations and from expirations of statutes of limitations in locations where tax contingencies were recorded for open tax years. These benefits lowered our annual tax rates by 2.9%, 1.3% and 2.2%, respectively, for 2008, 2007 and 2006. During 2008, we also recorded tax benefits of $11.5 million due to updated assessments of previously accrued amounts. These benefits lowered our 2008 annual tax rate by 1.4%. The remainder of the decline in the effective income tax rate in 2008 from 2007 was attributed to growth in our international businesses in jurisdictions having effective tax rates that are substantially lower than the United States as well as VF average effective rates.

 

Income from Continuing Operations decreased 2% to $602.7 million in 2008 from $613.2 million in 2007, while earnings per share increased to $5.42 in 2008 from $5.41 in 2007. Cost reduction actions taken during 2008 lowered earnings per share by $0.41. Cost reduction actions completed in 2007, partially offset by the gain on exiting the H.I.S^® business, reduced 2007 earnings per share by $0.06. In translating foreign currencies into the U.S. dollar, the weaker U.S. dollar had a $0.15 favorable impact on earnings per share in 2008 compared with 2007. Discrete tax items accounted for an incremental benefit of $0.16 in 2008 earnings per share over 2007. Earnings per share increased slightly in 2008 on lower Income from Continuing Operations due to the reduced number of diluted shares outstanding in 2008.

 

After considering the effects of discontinued operations, VF reported net income of $591.6 million ($5.22 per share) in 2007 and $533.5 million ($4.72 per share) in 2006. In translating foreign currencies into the U.S. dollar, the weaker U.S. dollar had a $0.11 per share favorable impact in 2007 compared with 2006. Net income for 2007 also benefited by $0.09 per share from the acquisitions made in 2007.

 

Information by Business Segment

 

VF’s businesses are grouped into five product categories, and by brands within those product categories, for management and internal financial reporting purposes. These groupings of businesses are referred to as “coalitions.” Both management and VF’s Board of Directors evaluate operating performance at the coalition level. These coalitions represent VF’s reportable segments.

 

We have recently realigned our management structure within our former Outdoor Coalition to better capture future opportunities in the outdoor and action sports industries. As a result, we have renamed that coalition the Outdoor and Action Sports Coalition.

 

For business segment reporting purposes, Coalition Revenues and Coalition Profit represent net sales, royalty income and operating expenses under the direct control of an individual coalition, along with amortization of acquisition-related intangible assets and its share of centralized corporate expenses directly related to the coalition. Corporate expenses not apportioned to the coalitions and net interest expense are excluded from Coalition Profit. Importantly, this basis of performance evaluation is consistent with that used for management incentive compensation.

 

See Note R to the Consolidated Financial Statements for a summary of our results of operations and other information by coalition, along with a reconciliation of Coalition Profit to Income from Continuing Operations

Before Income Taxes. To leverage the scale of VF, there are a number of functions that are shared across all coalitions. Accordingly, coalition results are not necessarily indicative of operating results that would have been reported had each business coalition been an independent, stand-alone entity during the periods presented. Further, VF’s presentation of Coalition Profit may not be comparable with similar measures used by other companies.

 

The following table presents a summary of the changes in our Total Revenues by coalition during the last two years:

 

 

Outdoor and Action Sports:

 

The Outdoor and Action Sports Coalition consists of VF’s outdoor and action sports-related businesses including The North Face^® brand apparel, footwear and equipment, Vans^® performance and casual footwear and apparel, JanSport^® and Eastpak^® daypacks and apparel, Kipling^® bags and accessories, Napapijri^® outdoor-based sportswear, Reef^® beach-inspired footwear and apparel and Eagle Creek^® adventure travel gear.

 

Outdoor and Action Sports Coalition Revenues increased 15% in 2008 led by global unit gains from strong consumer demand for our The North Face^®, Vans^®, Kipling^®, Napapijri^® and Eastpak^® brands. The growth in these brands, particularly The North Face^® and Vans^®, included geographic expansion and the opening of additional owned retail locations. Domestic revenues for our outdoor and action sports businesses increased 11%, while international revenues increased 21%, with the favorable effects of foreign currency accounting for $57 million or 6% of this increase.

 

Revenues increased 28% in 2007, with 25% organic growth and the remainder resulting from the Eagle Creek and The North Face — China acquisitions in 2007. The organic growth was led by global unit volume increases in our The North Face^®, Vans^®, Kipling^® and Napapijri^® brands. Domestic revenues for our outdoor and action sports businesses increased 24% in 2007, while international revenues increased 35%, with the favorable effects of foreign currency accounting for $73 million or 11% of this increase.

 

Coalition Profit increased 16% in 2008, with operating margins increasing to 16.6% from 16.4% in 2007. The increase was driven by higher revenues, resulting in improved leverage of operating expenses, and growth in our international and retail operations, where operating margins are higher. These improvements were partially offset by an $8.3 million charge related to cost reduction actions that negatively impacted operating margins by 0.3%.

 

Coalition Profit increased 31% in 2007, with operating margins increasing to 16.4% in 2007 from 16.0% in 2006. The increase was also driven by strong revenue growth and the improved leverage of operating expenses and higher revenues in our international and retail operations. These improvements were partially offset by the negative impact of higher levels of distressed sales and additional investments in our retail operations.

 

Jeanswear:

 

The Jeanswear Coalition consists of our global jeanswear businesses, led by the Wrangler^® and Lee^® brands. Overall jeanswear revenues were down 5% in 2008 and up 4% in 2007.

 

Domestic jeanswear revenues decreased 8% in 2008 and were flat in 2007 compared with 2006. The decline in 2008 resulted from a very difficult retail environment caused by the deteriorating global economy that impacted the

Lee, mass market and western specialty businesses. In 2007, a 3% increase in our mass market business over 2006 was offset by slight declines in our Lee and specialty businesses.

 

Jeanswear revenues in international markets, including Europe, Canada, Mexico, Latin America and Asia, increased 2% in 2008 over 2007 and 13% in 2007 over 2006. Foreign currency translation positively impacted international jeanswear 2008 revenues by $50 million, or 5%, and 2007 revenues by $57 million, or 6%. Revenues on a constant-currency basis were down in 2008, reflecting difficult economic conditions in key European countries and the sale of the H.I.S^® business in 2007, which accounted for $25 million of revenues in that year. These declines were partially offset by revenue growth in our Asia businesses. Revenues increased in all geographic areas in 2007 over 2006 with the exception of our Latin America operations, where revenues were flat.

 

Jeanswear Coalition operating margins were 13.7% in 2008 and 16.6% in 2007. Jeanswear operating results included expenses of $27.3 million in 2008 and $8.0 million in 2007 related to capacity reduction and other cost saving actions, which negatively impacted operating margins in those years by 1.0% and 0.3%, respectively. Operating margins in 2008 were also impacted by lower revenues without comparable expense reduction, increased promotional activities and higher product costs. The 2007 operating margin was favorably impacted by 0.2% related to the gain on the sale of H.I.S^® trademarks and related intellectual property during that year.

 

Jeanswear Coalition operating margins were 16.6% in 2007 and 15.5% in 2006. The increase in 2007 operating margins resulted from (i) growth in our international jeans businesses, where gross margins are higher than our domestic businesses, (ii) improved operating efficiencies, (iii) a 0.2% increase in 2007 due to the gain on the H.I.S^® sale and (iv) capacity and other cost reduction actions that negatively impacted margins by 0.3% in 2007 vs. 0.5% in 2006.

 

Imagewear:

 

The Imagewear Coalition includes VF’s occupational (industrial, career and safety) apparel business, as well as our licensed sports apparel business. Imagewear Coalition Revenues were flat in both our occupational and licensed sports apparel businesses in 2008 compared with 2007. Imagewear Coalition Revenues increased in 2007 compared with 2006 due to the Majestic acquisition.

 

Occupational apparel revenues declined 3% in 2007 from 2006. This reduction included the impact of exiting our underperforming commodity fleece and T-shirt business. Excluding this business, revenues in our occupational apparel business increased slightly in 2007 over 2006.

 

Revenues in the licensed apparel business increased 59% in 2007 over 2006 due to the acquisition of Majestic. This acquisition added $156 million to revenues in 2007. Excluding the impact of the Majestic acquisition, licensed apparel revenues increased 6% in 2007 led by growth in the licensed National Football League and Major League Baseball businesses.

 

Imagewear Coalition operating margins declined in 2008 to 13.3% from 14.4% in 2007, reflecting difficult market conditions in the fourth quarter of 2008 that especially affected consumer spending in our licensed sports apparel businesses. In addition, the 2008 operating results included a $2.0 million charge for cost reduction activities that negatively impacted the operating margin by 0.2% and additional investments in advertising that accounted for 0.4% of the margin decline.

 

Operating margins for the Imagewear Coalition declined to 14.4% in 2007 from 16.2% in 2006, resulting from competitive factors impacting the pricing of new programs within the occupational apparel businesses and the impact of the 2007 Majestic acquisition, which had lower operating margins than Imagewear Coalition averages.

 

Sportswear:

 

The Sportswear Coalition consists of our Nautica^® lifestyle brand, the John Varvatos^® luxury collection for men and the Kipling^® brand business in North America (whereas the Kipling^® brand is managed as part of the Outdoor and Action Sports Coalition internationally).

 

Coalition Revenues were down 7% in 2008 compared with 2007, with an 11% decrease in our Nautica^® brand revenues partially offset by double-digit revenue gains in our John Varvatos^® and Kipling^® brand businesses. The decline in the Nautica business resulted from difficult market conditions in the department store channel, lower volumes in our retail outlet stores and the exit in early 2008 of our women’s wholesale business.

 

Coalition Revenues were flat in 2007 compared with 2006, with a 4% decrease in our Nautica^® brand revenues offset by double-digit revenue gains in our John Varvatos^® and Kipling^® brand businesses. The overall decline in

Nautica revenues resulted from lower menswear business due to challenging conditions in department stores and higher promotional activity in our Nautica retail stores in the second half of 2007.

 

Sportswear Coalition operating margins declined to 6.3% in 2008 from 9.6% in 2007 due to lower Nautica^® brand revenues without comparable expense reduction and increased markdown activity related to a highly promotional retail environment. In addition, the 2008 operating results included $5.8 million in charges for cost reduction activities, including the exit of the Nautica^® women’s wholesale sportswear business that negatively impacted the operating margin by 0.9%.

 

Sportswear Coalition operating margins declined to 9.6% in 2007 from 13.3% in 2006 due to the impact of revenue decreases in the Nautica^® brand without comparable expense reduction and increased promotional activity in our owned outlet stores and the department store channel in 2007.

 

Contemporary Brands:

 

This coalition was formed in August 2007 with two newly acquired businesses — Seven For All Mankind (7 For All Mankind^® brand of premium denim jeanswear and related apparel) and lucy activewear (lucy^® brand of women’s activewear). This coalition in 2008 also includes the earnings since June 2008 from our one-third equity investment in Mo Industries, the owner and marketer of the Splendid^® and Ella Moss^® brands. VF expects to acquire the remaining two-thirds equity interest in Mo Industries in the first half of 2009.

 

The increase in Coalition Revenues in 2008 was due to a full year of ownership of the 7 For All Mankind^® and lucy^® brands and additional VF-operated retail store openings.

 

The Contemporary Brands Coalition operating margin decreased from 17.5% in 2007 to 13.9% in 2008, reflecting high levels of promotion and markdown-related expenses as a result of the significant impact of the economic downturn on the more upscale department stores. In addition, the 2008 operating results included the impact of 1.7% for charges for an unremitted value-added tax and duty matter and cost reduction initiatives.

 

Other:

 

The Other business segment includes the VF Outlet business, which is a group of company-operated retail outlet stores in the United States that sell a broad selection of excess quantities of VF products and other branded products. Revenues and profits of VF products are reported as part of the operating results of the applicable coalitions, while revenues and profits of non-VF products (primarily women’s intimate apparel, childrenswear, hosiery, underwear and accessories, which provide a broader selection of merchandise to attract consumer traffic) are reported in this business segment. Revenues in 2008 for the Other business segment were flat with 2007. The increase in revenues in 2007 over 2006 was due to VF Outlets’ sales of women’s intimate apparel products obtained from independent suppliers following VF’s exit of its intimate apparel business in April 2007 (whereas such revenues prior to April 2007 were reported as part of discontinued operations).

 

Reconciliation of Coalition Profit to Consolidated Income from Continuing Operations Before Income Taxes:

 

There are two types of costs necessary to reconcile total Coalition Profit, as discussed in the preceding paragraphs, to Income from Continuing Operations Before Income Taxes. These costs, discussed below, are Interest and Corporate and Other Expenses. See also Note R to the Consolidated Financial Statements.

 

Interest Expense, Net was discussed in the previous “Consolidated Statements of Income” section. Interest is excluded from Coalition Profit because substantially all of our financing costs are managed at the corporate office and are not under the control of coalition management.

Corporate and Other Expenses consists of corporate headquarters’ and similar costs that are not apportioned to the operating coalitions. These expenses are summarized as follows:

 

 

Information Systems and Shared Services — Included are costs of our management information systems and our centralized shared services center, which includes common financial, supply chain, human resources and customer management services that support our worldwide operations. Operating costs of information systems and shared services are charged to the coalitions based on utilization of those services, such as minutes of computer processing time, number of transactions or number of users. Costs to develop new computer applications that will be used across VF are not allocated to the coalitions. The decrease in information systems and shared services costs in 2008 resulted primarily from information systems costs incurred in 2007 for transition services provided to the acquirer of our intimate apparel business that did not recur in 2008. The reimbursement of these costs from the acquirer in 2007 is separately presented above.

 

Corporate Headquarters’ Costs — Headquarters’ costs include compensation and benefits of corporate management and staff, certain legal and professional fees, and administrative and general expenses, which are not apportioned to the coalitions. The decrease in corporate headquarters’ costs in 2008 from 2007 resulted primarily from lower management incentive compensation. The increase in these costs from 2006 to 2007 was driven by higher incentive compensation and other costs.

 

Trademark Maintenance and Enforcement — Legal and other costs of registering, maintaining and enforcing the majority of VF’s trademarks, plus related costs of licensing administration, are controlled by a centralized trademark and licensing staff and are not allocated to the coalitions.

 

Other — This category includes (i) adjustments to convert the earnings of certain business units using the FIFO inventory valuation method for internal reporting to the LIFO method for consolidated financial reporting, (ii) miscellaneous costs that result from corporate programs or corporate-managed decisions that are not allocated to the business units for internal management reporting and (iii) other consolidating adjustments.

 

Analysis of Financial Condition

 

Balance Sheets

 

Accounts Receivable decreased 12% in 2008 due, in part, to a 5% decrease in fourth quarter wholesale revenues compared with 2007. In addition, collections on accounts receivable were higher in 2008 because that year included 53 weeks; that is, collections in the 53rd week ended January 3, 2009 sharply exceeded credit sales during that week.

 

Inventories increased 1% in 2008, reflecting our aggressive management of inventory levels during the economic downturn.

 

Other Current Assets increased at December 2008 over 2007 due primarily to an increase in prepaid income taxes at the end of 2008.

 

Property, Plant and Equipment remained flat at the end of 2008 compared with 2007, with additions from 2008 capital spending being offset by depreciation and the effects of foreign currency translation. Capital spending in 2008 supported the growth of our businesses and specifically included an increased level of spending to support new retail stores.

Total Intangible Assets and Goodwill decreased in 2008 due to the amortization of intangible assets and the impact of a stronger U.S. dollar in translating balances of international businesses, partially offset by the acquired Lee Spain balances.

 

Other Assets increased in 2008 as a result of our investment in Mo Industries and higher deferred income taxes. The increase in deferred income taxes primarily related to the underfunded status of our defined benefit pension plans as discussed below. These increases were partially offset by a decline in the value of our assets held for deferred compensation plans.

 

In October 2007, VF entered into a $1.0 billion domestic senior unsecured committed revolving bank credit agreement that supports issuance of up to $1.0 billion in commercial paper. Also in October 2007, certain international subsidiaries, with VF as guarantor, entered into a €250.0 million (U.S. dollar equivalent of $347.2 million) senior unsecured committed revolving bank credit agreement. There were no Short-term Borrowings under these domestic or international credit agreements at December 2008. Short-term Borrowings at December 2007 included $92.7 million outstanding under the international credit agreement. Short-term Borrowings under other international borrowing agreements were $53.6 million at December 2008 and $38.8 million at December 2007.

 

Accounts Payable decreased in 2008 compared with 2007 due to the timing of inventory purchases and the related vendor payments at our fiscal year-end. Accrued Liabilities increased in 2008 due to the fourth quarter 2008 charge for cost reduction actions and increased income and other tax accruals, partially offset by lower incentive compensation liabilities.

 

Other Liabilities increased due to the underfunded status of our defined benefit pension plans at the end of 2008, as discussed in the following paragraph. This increase is partially offset by lower deferred compensation liabilities and deferred income taxes.

 

The global credit crisis and the related significant declines in global securities markets during 2008 resulted in a significant decline in the value of our defined benefit pension plan’s investment portfolio. As a result, our projected pension benefit obligations now exceed the value of our plan’s investment assets. In accordance with FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, the underfunded status of our pension plans was recognized as a $414.9 million liability at December 2008 and a $291.0 million after-tax charge in Accumulated Other Comprehensive Income (Loss). Net deferred actuarial losses in Accumulated Other Comprehensive Income (Loss) will be amortized to pension expense over the next five years. See Note N to the Consolidated Financial Statements for a discussion of asset, liability and equity balances related to defined benefit pension plans.

 

Liquidity and Cash Flows

 

The financial condition of VF is reflected in the following:

 

 

For the ratio of debt to total capital, debt is defined as short-term and long-term borrowings, and total capital is defined as debt plus common stockholders’ equity. Our ratio of net debt to total capital, with net debt defined as debt less cash and equivalents, was 18.7% at the end of 2008.

 

VF’s primary source of liquidity is its strong cash flow provided by operating activities. Cash flow from operating activities of continuing operations, which was $679.5 million in 2008, $833.6 million in 2007 and $454.1 million in 2006, is primarily dependent on the level of Income from Continuing Operations and changes in investments in inventories and other working capital components. Income from Continuing Operations was $602.7 million, $613.2 million and $535.1 million in 2008, 2007 and 2006, respectively. Income from Continuing Operations in each year included noncash stock-based compensation expense of $31.6 million, $62.4 million and $46.4 million in 2008, 2007 and 2006, respectively. Also, we did not make a discretionary contribution to our qualified defined benefit pension plan in 2007 or 2008 because of the plan’s funded status at the beginning of each of those years. Operating cash flows in 2006 included a discretionary contribution to the pension plan of $75.0 million.

The net change in operating asset and liability components was a cash usage of $152.3 million in 2008, $4.2 million in 2007 and $200.6 million in 2006. Cash flow in 2008 benefited from collections on accounts receivable in the 53rd week of the year; that is, collections in the 53rd week ended January 3, 2009 sharply exceeded credit sales during that week. Cash flow in 2007 benefited because the timing of year-end payments resulted in an unusually large accounts payable balance at the end of 2007, which resulted in higher accounts payable disbursements in 2008. Cash generated from operations was lower in 2006 due to (i) higher than normal accounts receivable at the end of 2006, resulting from very strong international sales near the end of the year to customers with longer payment terms, (ii) unusually low accounts payable at the end of 2006 due to the timing of inventory receipts and (iii) unusually high accrued income taxes at the beginning of 2006 due to required tax payments for the prior year.

 

To finance ongoing operations and most unusual circumstances that may arise, VF anticipates relying on continued future strong cash generation. In addition, VF has significant existing liquidity from its available cash balances and debt capacity, supported by its strong credit rating. At the end of 2008, $988.4 million was available for borrowing under VF’s $1.0 billion senior unsecured committed revolving bank credit facility, with $11.6 million of standby letters of credit issued under the agreement. This credit facility is used primarily to support our seasonal commercial paper borrowings. Also at the end of 2008, €250.0 million (U.S. dollar equivalent of $347.2 million) was available for borrowing under VF’s senior unsecured committed international revolving bank credit facility.

 

As discussed in the previous Balance Sheets section, our defined benefit pension plans were significantly underfunded at the end of 2008. VF is not required and does not intend to make a funding contribution to the plan during 2009. VF has adequate liquidity to meet future funding requirements. We will continue to evaluate the funded status of our retirement plans and to evaluate future funding levels.

 

We paid cash of $93.4 million, $1,060.6 million and $39.3 million for acquisitions in 2008, 2007 and 2006, respectively, net of cash balances in the acquired companies. These acquisitions were funded with existing VF cash balances, short-term commercial paper borrowings and bank borrowings. In addition, we received $348.7 million in proceeds from the sale of our intimate apparel business in 2007.

 

Capital expenditures were $124.2 million in 2008, compared with $113.9 million and $127.2 million in 2007 and 2006, respectively. Capital expenditures in each of these years primarily related to retail, distribution and information systems, as well as maintenance spending across our global manufacturing network. We expect that capital spending could reach $110 million in 2009. Capital spending will be funded by cash flow from operations.

 

During 2007, VF received $592.8 million in proceeds from the issuance of $600.0 million principal amount of 5.95% senior notes due in 2017 and 6.45% senior notes due in 2037. VF paid $78.1 million under the international bank credit agreement in 2007 and paid $33.0 million notes in each of 2007 and 2006 related to the Nautica acquisition. See Notes J and L to the Consolidated Financial Statements.

 

In October 2007, Standard & Poor’s Ratings Services affirmed its ‘A minus’ corporate credit rating, ‘A-2’ commercial paper rating and ‘stable’ outlook for VF. Standard & Poor’s also assigned its ‘A minus’ senior unsecured debt rating to VF’s $600.0 million unsecured senior notes issued in October 2007. In August 2007, Moody’s Investors Service affirmed VF’s long-term debt rating of ‘A3’, commercial paper rating of ’Prime-2’ and ‘stable’ outlook. Existing long-term debt agreements do not contain acceleration of maturity clauses based solely on changes in credit ratings. However, for the $600.0 million of senior notes issued in 2007, if there were a change in control of VF and, as a result of the change in control, the notes were rated below investment grade by recognized rating agencies, then VF would be obligated to repurchase the notes at 101% of the aggregate principal amount of notes repurchased, plus any accrued and unpaid interest.

 

During 2008, VF purchased 2.0 million shares of its Common Stock in open market transactions at a cost of $149.7 million (average price of $74.86). During 2007, VF purchased 4.1 million shares of its Common Stock at a cost of $350.0 million (average price of $85.03), using the proceeds from the sale of our intimate apparel business. In addition, VF purchased 2.0 million shares of its Common Stock in 2006 at a cost of $118.6 million (average price of $59.29 per share). The primary objective of our share repurchase program is to offset, on a long-term basis, dilution caused by awards under equity compensation plans. Under its current authorization from the Board of Directors, VF may purchase an additional 3.2 million shares. We do not currently intend to repurchase any shares in 2009. We will continue to evaluate future share repurchases considering funding required for business acquisitions, our common stock price and levels of stock option exercises.

Cash dividends totaled $2.33 per common share in 2008, compared with $2.23 in 2007 and $1.94 in 2006. Our dividend payout rate was 43.0% in 2008, compared with payout rates of 42.7% in 2007 and 41.1% in 2006. Going forward, we expect to pay dividends of approximately 40% of our diluted earnings per share. The current indicated annual dividend rate for 2009 is $2.36 per share.

 

Following is a summary of VF’s contractual obligations and commercial commitments at the end of 2008 that will require the use of funds:

 

 

 

 

We have other financial commitments at the end of 2008 that are not included in the above table but may require the use of funds under certain circumstances:

 

 

 

During 2008 VF met its obligations when due from (i) cash flows from operations, (ii) issuance of commercial paper and (iii) on a limited basis, short-term borrowings under international bank facilities. Credit market conditions and the general contraction of liquidity in the United States and global capital markets during 2008, particularly during the last half of the year, had a significant impact on the ability of many companies to access the commercial paper and other capital markets. VF was able to issue commercial paper for seasonal working capital needs during this period, although for generally shorter maturities and at higher spreads over U.S. Treasury interest rates than in prior years. If the commercial paper markets were not available, VF has $1.3 billion of liquidity available under its domestic and international committed revolving bank credit agreements. These agreements expire in 2012. Management believes that VF’s cash balances and funds provided by operating activities, as well as unused committed bank credit lines, additional borrowing capacity and access to equity markets, taken as a whole, provide (i) adequate liquidity to meet all of its current and long-term obligations when due, (ii) adequate liquidity to fund capital expenditures and to maintain our dividend payout policy and (iii) flexibility to meet investment opportunities that may arise.

 

We do not participate in transactions with unconsolidated entities or financial partnerships established to facilitate off-balance sheet arrangements or other limited purposes.

 

Risk Management

 

VF is exposed to a variety of market risks in the ordinary course of business, and we regularly assess these potential risks. We manage our exposures to these risks through our operating and financing activities and, when appropriate, by taking advantage of naturally offsetting exposures within VF or by creating offsetting positions through the use of derivative financial instruments. Derivative financial instruments are contracts whose value is based on, or “derived” from, changes in the value of an underlying currency exchange rate, interest rate or other financial asset or index. We do not use derivative financial instruments for trading or speculative purposes.

 

VF had $381.8 million of cash and equivalents at the end of 2008. Cash equivalents are highly liquid investments that mature within three months of their purchase. These investments consist of deposits in highly rated U.S. and foreign commercial banks and investments in institutional money market funds that invest only in obligations issued or guaranteed by the U.S. government. Considering recent credit market conditions and the weakened financial condition of many banks and other financial institutions, we continually monitor VF’s cash equivalents and the credit ratings of VF’s financial institutions. Similarly, we monitor the credit quality of investments in our defined benefit pension plan to ensure that the plan’s exposure to investments affected, or likely to be affected, by the credit market crisis is not significant.

 

We limit the risk of interest rate fluctuations on net income and cash flows by managing our mix of fixed and variable interest rate debt. In addition, we may also use derivative financial instruments to minimize our interest rate risk. Since all of our long-term debt has fixed interest rates, our primary interest rate exposure relates to changes in interest rates on variable rate short-term borrowings, which averaged approximately $308 million during 2008. However, any change in interest rates would also affect interest income earned on VF’s cash equivalents. Based on average amounts of borrowings having variable interest rates and cash equivalents during 2008, the effect of a hypothetical 1.0% change in interest rates on reported net income would not be significant.

 

VF is a global enterprise subject to the risk of foreign currency fluctuations. Approximately 30% of our revenues in 2008 were generated in international markets. Substantially all of our foreign businesses operate in functional currencies other than the U.S. dollar. Assets and liabilities in these foreign businesses are subject to fluctuations in foreign currency exchange rates. During 2007, we entered into an international bank credit agreement that provides for euro-denominated borrowings. Although there were no borrowings under this agreement at the end of 2008, borrowings under the agreement could be used to reduce the exposure to currency rate changes for our euro-denominated net assets. Net advances to and investments in our foreign businesses, primarily in Europe, Latin American and Asia, are considered to be long-term, and accordingly, foreign currency translation effects on those net assets are deferred as a component of Accumulated Other Comprehensive Income

(Loss) in Common Stockholders’ Equity. We do not hedge these net investments and do not hedge the translation of foreign currency operating results into the U.S. dollar.

 

We monitor net foreign currency market exposures and may in the ordinary course of business enter into foreign currency forward exchange contracts to hedge the effects of exchange rate fluctuations for specific foreign currency transactions or a portion of our anticipated foreign currency cash flows. Use of these financial instruments allows us to reduce the overall exposure to exchange rate movements on VF’s cash flows, since gains and losses on these contracts will offset losses and gains on the transactions or cash flows being hedged. Our practice is to hedge a portion of our net foreign currency cash flows anticipated during the following 12 months (relating to cross-border inventory purchases, production costs, product sales and intercompany royalty payments) by buying or selling primarily U.S. dollar contracts against various currencies. Although VF is exposed to risk of loss in the event of nonperformance by the counterparties to these foreign exchange contracts, we believe these counterparties are creditworthy financial institutions. We continually monitor our hedging positions with each counterparty and the credit ratings of the counterparties. We will adjust our positions if necessary.

 

If there were a hypothetical adverse change in foreign currency exchange rates of 10% compared with rates at the end of 2008, the expected effect on the change in fair value of the hedging contracts outstanding would result in an unrealized loss of approximately $45 million. Based on changes in the timing and amount of foreign currency exchange rate movements, the actual unrealized loss could differ. However, any such change in the fair value of the hedging contracts would also result in an offsetting change in the value of the underlying transactions or anticipated cash flows being hedged.

 

VF is exposed to market risks for the pricing of cotton and other fibers, which indirectly impacts fabric prices. We manage our fabric prices by obtaining fixed price commitments for denim and other fabrics in some cases for up to one year in advance. VF has not historically managed, nor do we currently intend to manage, commodity price exposures by using derivative instruments.

 

VF has nonqualified deferred compensation plans in which liabilities accrued for the plans’ participants are based on market values of investment funds that are selected by the participants. The risk of changes in the market values of the participants’ investment selections is hedged by VF’s investment in a portfolio of securities that substantially mirrors the investment selections underlying the deferred compensation liabilities. Increases and decreases in deferred compensation liabilities are substantially offset by corresponding increases and decreases in the market value of VF’s investments, resulting in a negligible net exposure to our operating results and financial position.

 

Critical Accounting Policies and Estimates

 

We have chosen accounting policies that we believe are appropriate to accurately and fairly report VF’s operating results and financial position in conformity with accounting principles generally accepted in the United States. We apply these accounting policies in a consistent manner. Our significant accounting policies are summarized in Note A to the Consolidated Financial Statements.

 

The application of these accounting policies requires that we make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, contingent assets and liabilities, and related disclosures. These estimates, assumptions and judgments are based on historical experience, current trends and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside specialists to assist in our evaluation in areas such as determining the fair value of acquired assets and assumed liabilities in a business acquisition, impairment testing for goodwill and intangible assets, equity compensation, pension benefits and self-insured liabilities. Because our business cycle is relatively short (i.e., from the date that we place an order to manufacture or purchase inventory until that inventory is sold and the trade receivable is collected), actual results related to most of these estimates are known within a few months after any balance sheet date. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known.

 

We believe the following accounting policies involve the most significant estimates, assumptions and management judgments used in preparation of our Consolidated Financial Statements or are the most sensitive to change from outside factors. We have discussed the application of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

Inventories

 

Our inventories are stated at the lower of cost or market value. Cost includes all material, labor and overhead costs incurred to manufacture or purchase the finished goods. Overhead allocated to manufactured product is based on the normal capacity of our plants and does not include amounts related to idle capacity or abnormal production inefficiencies. Market value is based on a detailed review in each business unit, at least quarterly, of all inventories on the basis of individual styles or individual style-size-color stockkeeping units (“SKUs”) to identify slow moving or excess products, discontinued and to-be-discontinued products, and off-quality merchandise. This review matches inventory on hand, plus current production and purchase commitments, with current and expected future sales orders. For those units in inventory that are identified as slow-moving or excess quantities, we estimate their market value based on historical experience and current realization trends. This evaluation, performed using a systematic and consistent methodology, requires forecasts of future demand, market conditions and selling prices. If the forecasted market value, on an individual style or SKU basis, is less than cost, we provide an allowance to reflect the lower value of that inventory. This methodology recognizes inventory exposures, on an individual style or SKU basis, at the time such losses are evident rather than at the time goods are actually sold. Historically, these estimates of future demand and selling prices have not varied significantly from actual results due to our timely identification and rapid disposal of these reduced value inventories.

 

Physical inventory counts are taken on a regular basis. We provide for estimated inventory losses that have likely occurred since the last physical inventory date. Historically, our physical inventory shrinkage has not been significant.

 

Long-lived Assets

 

We allocate the purchase price of an acquired business to the underlying tangible and intangible assets acquired, and liabilities assumed, based on their respective fair values, with any excess purchase price recorded as goodwill. The process of assigning fair values, particularly to acquired intangible assets, is highly subjective, as the fair value assessments are based on forecasts of future cash flows. We use the same assumptions of future cash flows for assigning fair values to these assets that we used for evaluation of the business acquisition.

 

Our depreciation policies for property, plant and equipment and our amortization policies for definite-lived intangible assets reflect judgments on the estimated economic lives of these assets. In evaluating the useful lives and expected benefits to be received for customer-related intangible assets, we review historical attrition patterns for various groups of customers. For license-related intangible assets, we review historical trends and anticipated license renewal periods and attrition rates. We review these assets for possible impairment whenever events or circumstances indicate that the carrying amount of an asset or asset group may not be fully recoverable. In those circumstances, we measure recoverability of the carrying value of these assets by comparison with estimated undiscounted cash flows expected to be generated by the asset. This review requires estimates and assumptions about the forecasted amount and duration of future cash flows and residual value, if any, attributable to the assets being tested.

 

We evaluate indefinite-lived trademark intangible assets and goodwill in all business units at least annually, or more frequently if there is an indication of possible impairment. We measure recoverability of an indefinite-lived trademark intangible asset by comparing its fair value, estimated using the “relief-from-royalty” method, with its carrying value. Under the “relief-from-royalty” method, forecasted global revenues for a trademark are assigned a royalty rate that would be charged to license the trademark from an independent party. Those forecasted royalties are discounted to a present value, and the discounted fair value is compared with the carrying value of the trademark intangible asset.

 

The recoverability of the carrying value of goodwill of an acquired business is assessed by comparing the carrying value of the business unit, including recorded goodwill, to the fair value of the business unit. Fair value is estimated using forecasted cash flows of a business unit, discounted to a present value. These assessments of intangible asset and goodwill fair values require management’s assumptions and judgment regarding business strategies, future revenues and profitability, working capital changes, capital spending, income tax rates and a discount rate that reflects the risks inherent in the forecasted cash flows.

 

Based on our evaluations, other than the charges in 2006 and 2007 in connection with the sale of our intimate apparel businesses, the indicated fair values of our amortized assets, indefinite-lived trademark assets and goodwill exceeded the respective carrying amounts of those assets in each of the last three years, and accordingly no

impairment charges were recognized. If the estimated fair value of an acquired business were to decline due to changes in forecasted business operations, or if we were to decide to discontinue use of its trademark or otherwise exit the business, we may be exposed to an impairment charge, which could be material.

 

Stock Options

 

We use a lattice option-pricing model to estimate the fair value of stock options granted to employees and nonemployee members of the Board of Directors. We believe that a lattice model provides a refined estimate of the fair value of options because it can incorporate (i) historical option exercise patterns and multiple assumptions about future option exercise patterns for each of several groups of option holders and (ii) inputs that vary over time, such as assumptions for interest rates and volatility. We performed a rigorous review of all assumptions and believe that the assumptions employed in each valuation are reflective of our outstanding options and underlying Common Stock and of our groups of option participants. Our lattice valuation is based on the assumptions listed in Note P to the Consolidated Financial Statements.

 

One of the critical assumptions in the valuation process is estimating the expected average life of the options before exercise. In each year, we based our estimates on evaluations of the historical and expected option exercise patterns for each of several groups of option holders that have historically exhibited different option exercise patterns. These evaluations included (i) voluntary stock option exercise patterns based on a combination of changes in the price of VF Common Stock and periods of time that options are outstanding before exercise and (ii) involuntary exercise patterns resulting from turnover, retirement and mortality.

 

Volatility is another critical assumption requiring judgment. In each year, we based our estimate of future volatility on a combination of implied and historical volatility. Implied volatility was based on short-term (6 to 9 months) publicly traded near-the-money options on VF Common Stock. We measured historical volatility over a ten year period, corresponding to the contractual term of the options, using daily stock price observations. Our assumption for valuation purposes was that expected volatility starts at a level equal to the implied volatility and then transitions to the historical volatility over the remainder of the ten year option term.

 

Pension Obligations

 

VF sponsors a qualified defined benefit pension plan as a key retirement benefit for most domestic employees employed on or before December 31, 2004. For employees covered by this plan, VF also sponsors an unfunded supplemental defined benefit plan that provides benefits that exceed limitations imposed by income tax regulations. The selection of appropriate actuarial assumptions for determination of our projected pension benefit liabilities and of our annual pension expense is significant due to the long time period over which benefits are accrued and paid. We annually update participant demographics and the expected amount and timing of benefit payments. We review annually the principal economic actuarial assumptions, summarized in Note N to the Consolidated Financial Statements, and modify them based on current rates and trends. We also periodically review and modify as necessary other plan assumptions such as rates of retirement, termination, disability and mortality. We believe our assumptions are reflective of the participants in and benefits provided by the plans and result in the best estimate of the plans’ future experience. Actual results may vary from the actuarial assumptions used.

 

One of the critical assumptions used in the actuarial model is the discount rate. The discount rate is used to estimate the present value of future cash outflows required to meet our projected benefit obligations at each measurement date. The discount rate reflects the interest rate inherent in the price that VF could settle its projected benefit obligations at the valuation date. Our discount rate assumption at each year-end is based on current market interest rates. We select our discount rate based on matching high quality corporate bond yields to the timing of projected benefit payments to be made to participants in our pension plans. We use the population of U.S. corporate bonds rated ‘Aa’ by Moody’s Investors Service (over 300 such bonds with at least $50 million outstanding that are noncallable/nonputtable unless with make-whole provisions) and exclude the highest and lowest yielding bonds. The plans’ projected benefit payments are matched to current market interest rates over the expected payment period, and a present value is developed that produces a single equivalent discount rate that recognizes our plans’ distinct liability characteristics. Despite the unusual conditions prevailing in the corporate bond markets in late 2008, we concluded that those ‘Aa’ rated issues meet the “high quality” intent of the applicable accounting standards. We believe our 2008 discount rate of 6.50% appropriately reflects current market conditions and the long-term nature of projected benefit payments to participants in our pension plans. The discount rate for our plans may be higher than rates used for plans at some other companies because of our plans’ longer duration of expected

benefit payments due to (i) a higher percentage of female participants with a longer life expectancy and (ii) a higher percentage of inactive participants who will not begin receiving vested benefits for many years.

 

Another critical assumption of the actuarial model is the expected long-term rate of return on investment assets in our qualified plan’s pension trust. Our investment objective is to maximize the long-term return on a diversified portfolio of assets at an acceptable level of risk. Plan assets are comprised of a diversified portfolio of domestic and international equity, corporate and governmental fixed income and real estate securities. We develop a projected rate of return for each of our investment asset classes based on several factors, including the estimated inflation rate, the premium to be earned in excess of a risk-free return, the premium for equity risk and the premium for longer duration fixed income securities. The weighted average of the projected long-term rate of return for the various classes of assets held by the plan provides the basis for the expected long-term rate of return actuarial assumption. Our rate of return assumption was 8.00% in 2008 and 8.25% in 2007 and 2006. Our actual compounded annual rate of return since 1981 has exceeded 9%, although our actual rate of return was lower than the 8.00% assumption for the trailing 10 and 15 year periods and was negative in 2008. We will constantly challenge the plan’s asset allocation, giving consideration to changes that will appropriately balance anticipated investment returns with risk.

 

The sensitivity of changes in actuarial assumptions on our annual pension expense and on our plans’ projected benefit obligations, all other factors being equal, is illustrated by the following:

 

 

During 2007 and 2006, actual pension plan investment returns varied favorably compared with their respective actuarial assumptions. In 2008, however, there was a significant decline in the market value of our pension plan investment assets due to the global credit and financial market crisis, resulting in over $450 million of accumulated net unrecognized actuarial losses at the end of 2008. Accordingly, our qualified defined benefit pension plan was significantly underfunded at the end of 2008. The underfunded status of our pension plans at the end of 2008 resulted in recognition of a $291.0 million after-tax charge in Accumulated Other Comprehensive Income (Loss), along with recognition of related current and noncurrent liabilities of $9.4 million and $405.5 million, respectively. The funded status of our plans recognized in our Consolidated Balance Sheets could change significantly in future years depending on investment portfolio performance, changes in interest rates and the level of VF contributions to the qualified plan.

 

Differences between actual results and the respective actuarial assumptions (i.e., actuarial gains and losses related to investment returns, discount rates and other assumptions) do not affect the current year’s pension expense but instead are deferred and amortized to pension expense over future periods. Our policy is to amortize unrecognized actuarial gains and losses to pension expense as follows: amounts totaling less than 10% of the lower of investment assets or projected benefit obligations at the beginning of the year are not amortized; amounts totaling 10% to 20% of projected benefit obligations are amortized over the expected average remaining service of active participants; and amounts in excess of 20% of projected benefit obligations at the beginning of the year are amortized over five years.

 

The cost of pension benefits earned by our covered employees (commonly called “service cost”) was $16.5 million in 2008 and has averaged $20.1 million per year over the last three years. Pension expense recognized in our financial statements was $10.8 million in 2008, $13.1 million in 2007 and $37.5 million in 2006. Expense in 2006 was significantly higher than the average annual service cost because that year included a significant cost component for amortization of accumulated unrecognized actuarial losses (as discussed in the preceding paragraph). Our pension expense for 2008 and 2007 decreased significantly from 2006 due to reduced amortization of unrecognized actuarial losses, higher investment returns on a larger amount of plan assets (arising from discretionary funding contributions totaling $260.0 million over the period 2003 — 2006) and an increase in the discount

rate used to value our projected benefit liabilities. Because of the significant investment losses incurred in the plan’s investment portfolio in 2008, pension expense for 2009 will include a significant cost component for amortization of unrecognized actuarial losses. This significant amortization cost component, plus expected reduced investment portfolio earnings due to a lower amount of plan assets, will cause our pension expense to increase to approximately $98 million for 2009 from $10.8 million in 2008.

 

VF is not required under applicable regulations, and does not currently intend, to make a contribution to the qualified pension plan during 2009 but does intend to make contributions totaling $9.4 million during 2009 to fund payments under the supplemental pension plan. We believe that VF has sufficient liquidity to make contributions to the qualified plan, as necessary, in future years to return the plan to a fully or substantially fully funded status.

 

Effective December 31, 2004, VF’s domestic defined benefit plans were amended to close the plans to new entrants. The amendments did not affect the benefits of plan participants at that date or their accrual of future benefits. Domestic employees hired after that date, plus employees at certain acquired businesses not covered by those plans, now participate in a new defined contribution arrangement with VF contributing amounts based on a percentage of eligible compensation. Funds contributed under this new benefit arrangement are invested as directed by the participants. This defined contribution feature did not have a significant effect on our total retirement benefit expense over the last three years. However, on a longer-term basis, the service cost component of our defined benefit plans’ expense is expected to decline as a percentage of our total retirement benefit expense, and the year-to-year variability of our retirement benefit expense should decrease.

 

Income Taxes

 

As a global company, VF is subject to income tax and files income tax returns in over 100 domestic and foreign jurisdictions each year. The calculation of our income tax liabilities involves uncertainties in the application of complex tax laws and regulations, which are subject to legal and factual interpretation and significant management judgment.

 

VF’s income tax returns are regularly examined by federal, state and foreign tax authorities, and those audits may result in proposed adjustments. We have reviewed all issues raised upon examination, as well as any exposure for issues that may be raised in future examinations. We have evaluated these potential issues under the “more-likely-than-not” standard of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. A tax position is recognized if it meets this standard and is measured at the largest amount of benefit that is greater than 50% likely of being realized. Such judgments and estimates may change based on audit settlements, court cases and interpretation of tax laws and regulations. Our income tax expense could be materially affected to the extent we prevail in a tax position or when the statute of limitations expires for a tax position for which accruals have been established, or to the extent we are required to pay amounts greater than established accruals. We do not currently anticipate any material impact on earnings from the ultimate resolution of income tax uncertainties. There are no accruals for general or unknown tax expenses.

 

We have recorded $133.2 million of deferred income tax assets related to operating loss and capital loss carryforwards, and we have recorded $93.4 million of valuation allowances against those assets. Realization of deferred tax assets is dependent on future taxable income in specific jurisdictions, the amount and timing of which are uncertain, possible changes in tax laws and tax planning strategies. If in our judgment it appears that we will not be able to generate sufficient taxable income or capital gains to offset losses during the carryforward periods, we have recorded valuation allowances to reduce those deferred tax assets to amounts expected to be ultimately realized. If in a future period we determine that the amount of deferred tax assets to be realized differs from the net recorded amount, we would record an adjustment to income tax expense in that future period.

 

We have not provided U.S. income taxes on a portion of our foreign subsidiaries’ undistributed earnings because we intend to invest those earnings indefinitely. If we were to decide to remit those earnings to the United States in a future period, our provision for income taxes could increase in that period.

 

Cautionary Statement on Forward-Looking Statements

 

From time to time, we may make oral or written statements, including statements in this Annual Report that constitute “forward-looking statements” within the meaning of the federal securities laws. These include statements concerning plans, objectives, projections and expectations relating to VF’s operations or economic performance, and assumptions related thereto. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting VF and therefore involve a number of risks and uncertainties. We caution that

forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements.

 

Known or unknown risks, uncertainties and other factors that could cause the actual results of operations or financial condition of VF to differ materially from those expressed or implied by such forward-looking statements are summarized in Item 1.A of this Annual Report.

 

 

A discussion of VF’s market risks is incorporated by reference to “Risk Management” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.

 

 

See “Index to Consolidated Financial Statements and Financial Statement Schedule” at the end of this Annual Report on page F-1 for information required by this Item 8.

 

 

Not applicable.

 

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

Under the supervision of the Chief Executive Officer and the Chief Financial Officer, VF conducted an evaluation of the effectiveness of the design and operation of VF’s “disclosure controls and procedures” as defined in Rules 13a-15(e) or 15d-15(e) of the Securities and Exchange Act of 1934 (the “Exchange Act”) as of January 3, 2009. These require that VF ensure that information required to be disclosed by VF in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to VF’s management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Based on VF’s evaluation, the principal executive officer and the principal financial officer concluded that VF’s disclosure controls and procedures are effective.

 

Management’s Report on Internal Control Over Financial Reporting

 

VF’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). VF’s management conducted an assessment of VF’s internal control over financial reporting based on the framework described in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, VF’s management has determined that VF’s internal control over financial reporting was effective as of January 3, 2009. The effectiveness of VF’s internal control over financial reporting as of January 3, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

 

See “Index to Consolidated Financial Statements and Financial Statement Schedule” at the end of this annual report on page F-1 for “Management’s Report on Internal Control Over Financial Reporting.”

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in VF’s internal control over financial reporting that occurred during its last fiscal quarter that have materially affected, or are reasonably likely to materially affect, VF’s internal control over financial reporting.

 

 

Not applicable.

 

PART III

 

 

Information regarding VF’s Executive Officers required by Item 10 of this Part III is set forth in Item 1 of Part I under the caption “Executive Officers of VF.” Information required by Item 10 of Part III regarding VF’s Directors is included under the caption “Election of Directors” in VF’s 2009 Proxy Statement that will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended January 3, 2009, which information is incorporated herein by reference.

 

Information regarding compliance with Section 16(a) of the Exchange Act of 1934 is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in VF’s 2009 Proxy Statement that will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended January 3, 2009, which information is incorporated herein by reference.

 

VF has adopted a written code of ethics, “VF Corporation Code of Business Conduct,” that is applicable to all VF directors, officers and employees, including VF’s chief executive officer, chief financial officer, chief accounting officer and other executive officers identified pursuant to this Item 10 (collectively, the “Selected Officers”). In accordance with the Securities and Exchange Commission’s rules and regulations, a copy of the code is filed as Exhibit 14 to this report. The code is also posted on VF’s website, www.vfc.com. VF will disclose any changes in or waivers from its code of ethics applicable to any Selected Officer or director on its website at www.vfc.com.

 

The Board of Directors’ Corporate Governance Principles, the Audit Committee, Nominating and Governance Committee, Compensation Committee and Finance Committee charters and other corporate governance information, including the method for interested parties to communicate directly with nonmanagement members of the Board of Directors, are available on VF’s website. These documents, as well as the VF Corporation Code of Business Conduct, will be provided free of charge to any shareholder upon request directed to the Secretary of VF Corporation at P.O. Box 21488, Greensboro, NC 27420.

 

 

Information required by Item 11 of this Part III is included under the caption “Executive Compensation” (excluding the Compensation Committee Report) in VF’s 2009 Proxy Statement that will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended January 3, 2009, which information is incorporated herein by reference.

 

 

Information required by Item 12 of this Part III is included under the caption “Security Ownership of Certain Beneficial Owners and Management” in VF’s 2009 Proxy Statement that will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended January 3, 2009, which information is incorporated herein by reference.

 

 

Information required by Item 13 of this Part III is included under the caption “Election of Directors” in VF’s 2009 Proxy Statement that will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended January 3, 2009, which information is incorporated herein by reference.

 

 

Information required by Item 14 of this Part III is included under the caption “Professional Fees of PricewaterhouseCoopers LLP” in VF’s 2009 Proxy Statement that will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended January 3, 2009, which information is incorporated herein by reference.

PART IV

 

 

(a) The following documents are filed as a part of this report:

 

1. Financial Statements — The following consolidated financial statements, management’s report on internal control over financial reporting and report of independent registered public accounting firm are included herein (*):

 

 

 

 

2. Financial statement schedules — The following consolidated financial statement schedule and the report of independent registered public accounting firm with respect to that schedule are included herein:

 

 

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

 

3. Exhibits

 

All other exhibits for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, VF has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

V.F. CORPORATION

 

Eric C. Wiseman

Chairman and Chief Executive Officer

(Chief Executive Officer)

 

Robert K. Shearer

Senior Vice President and Chief Financial Officer

(Chief Financial Officer)

 

Bradley W. Batten

Vice President — Controller

(Chief Accounting Officer)

 

March 3, 2009

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of VF and in the capacities and on the dates indicated:

 

 

VF Corporation

 

Index to Consolidated Financial Statements

and Financial Statement Schedule

 

VF Corporation

 

Management of VF Corporation (“VF”) is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). VF’s management conducted an assessment of VF’s internal control over financial reporting based on the framework described in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, VF’s management has determined that VF’s internal control over financial reporting was effective as of January 3, 2009.

 

Management’s assessment of the effectiveness of VF’s internal control over financial reporting as of January 3, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included herein.

 

To the Board of Directors and Stockholders of V.F. Corporation:

 

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of V.F. Corporation and its subsidiaries (the “Company”) at January 3, 2009 and December 29, 2007, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 3, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

As more fully described in Note A to the consolidated financial statements, the Company changed the manner in which it accounts for (i) uncertain tax positions effective December 31, 2006; and (ii) defined benefit pension and other postretirement plans effective December 30, 2006 as well as the measurement date for the related plan assets and benefit obligations effective December 31, 2006.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

Greensboro, North Carolina

March 3, 2009

VF CORPORATION

 

Consolidated Balance Sheets