V.F. Corporation (VFC) - Description of business

Company Description
" -->Item 1. BusinessVF Corporation, organized in 1899, is a worldwide leader in branded lifestyle apparel and related products. Unless the context indicates otherwise, the terms “we,” “us,” “our” and “VF” used herein refer to VF Corporation and its consolidated subsidiaries.For over 100 years, VF has grown by offering consumers high quality, high value branded apparel and other products. Our stated vision is: VF will grow by building lifestyle brands that excite consumers around the world. 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 greater potential for growth. For several years, VF has been implementing a growth plan designed to transform its mix of business to include more higher growth, higher margin lifestyle brands. As part of its growth plan, VF has acquired such lifestyle brands as Nautica Ò , Vans Ò , Reef Ò , Kipling Ò and Napapijri Ò and has also invested heavily behind several other brands to maximize their growth potential.We generally target a VF brand to specific groups of consumers within specific channels of distribution. VF’s diverse portfolio of brands and products serves consumers shopping in specialty stores, department stores, national chains and mass merchants. In addition, many products are sold directly to consumers through VF-operated retail stores, as well as monobrand retail stores operated by independent parties. A global company,VF derives 26% of its revenues from outside the United States, primarily in Europe, Canada, Latin America and the Far East, with VF products sold in certain geographic areas through our licensees and distributors. To provide these products across numerous channels of distribution in different geographic areas, we have implemented a strategy that combines efficient and flexible internally-owned manufacturing with sourcing of finished goods from independent contractors.As part of our strategic plan to shift VF’s portfolio mix to higher growth, higher margin lifestyle brands, management and the Board of Directors decided in late 2006 to dispose of the women’s intimate apparel business. On January 22, 2007, VF entered into a definitive agreement to sell the business. This business included all of VF’s domestic and international women’s intimate apparel business units, which are being separately reported as discontinued operations in this Annual Report. Intimate apparel products include bras, panties, daywear, shapewear and sleepwear. In the United States, intimate apparel products are sold in department and mid-tier stores under the Vanity Fair Ò and Lily of France Ò brands and in discount stores under the Vassarette Ò , Bestform Ò , Curvation Ò and licensed Ilusion Ò brands. Certain of these brands are marketed in Mexico and Canada through joint ventures in which VF maintains a controlling interest. In the European market, women’s intimate apparel is marketed to department and specialty stores under the Lou â , Bolero â , Gemma â , Intima Cherry â , Vanity Fair â and Belcor â brands and in discount stores under the Variance â , Vassarette â and Bestform â brands.The remaining discussion of VF’s business, unless otherwise stated, is focused on VF’s continuing operations. See additional discussion in Note C to the Consolidated Financial Statements included at Item 8 of this report regarding our discontinued operations. VF’s continuing businesses are organized into four product categories, and by brands within those product categories, for both management and internal financial reporting purposes. These groupings of businesses are called “coalitions” and consist of the following: Jeanswear, Outdoor, Imagewear and Sportswear. These coalitions are treated as reportable segments for financial reporting purposes. Coalition management has the responsibility to build and develop brands, with certain financial and administrative support and disciplines provided by VF corporate management.The following table summarizes VF’s primary owned and licensed brands by coalition:               Primary   Primary Coalition   Brands   Product(s) Jeanswear   Wrangler®   denim and casual bottoms, tops     Wrangler Hero®   denim bottoms     Lee®   denim and casual bottoms, tops     Riders®   denim and casual bottoms, tops     Rustler®   denim and casual bottoms, tops     Timber Creek by Wrangler®   casual bottoms and tops           Outdoor   The North Face®   performance-oriented apparel, footwear, outdoor gear     Vans®   skateboard-inspired footwear and apparel     JanSport®   backpacks, luggage, apparel     Eastpak®   backpacks, apparel     Kipling®   luggage, travel bags, backpacks, accessories     Napapijri®   premium outdoor apparel products     Reef®   surf-inspired footwear and apparel     Eagle Creek®   luggage, packs, travel accessories           Imagewear   Red Kap®   occupational apparel     Bulwark®   occupational apparel     Lee Sport®   licensed sports apparel     NFL® (licensed)   licensed athletic apparel     MLB® (licensed)   licensed athletic apparel     Harley-Davidson® (licensed)   licensed apparel           Sportswear   Nautica ®   fashion sportswear and accessories     John Varvatos ®   luxury men’s apparel and accessories 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 as part of Item 8 of this report.Jeanswear CoalitionJeanswear and related shirts and casual products are marketed in the United States and in many international markets. The largest of these brands, the Lee â and Wrangler â 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 â and Wrangler â products are sold in nearly every developed country. In fact, including all of its jeanswear brands, VF sells more jeans than any other company in the world.In addition to these brands, VF markets the Wrangler Hero â , Rustler â and Riders â brands in the United States. These brands have continued to grow despite significant competitive activity and retail consolidation in the discount channel of distribution. Knit and woven tops have helped to extend these brands. We also market cotton casual pants under the Lee Casuals â , Timber Creek by Wrangler â and Wrangler â Khakis brands.In domestic markets, Lee â products are sold through department stores, mid-tier stores and specialty stores. Wrangler â westernwear is marketed through western specialty stores. The Wrangler Hero â , Rustler â and Riders â brands are marketed to mass merchant and regional discount stores. Overall, VF’s jeans brands are positioned in the U.S. marketplace where there is significant volume and less fashion risk.We believe our vendor managed inventory and retail floor space management initiatives 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 replenish their retail selling space based on that data to ensure their selling floors are well stocked. Our systems capabilities allow us to analyze sales data and work with our customers to maximize the assortment and stock inventory levels of our products on their selling floor. For our retail customers, this leads to higher sales of our products, along with lower inventory levels and fewer out-of-stock SKUs.Jeanswear in most international markets is more fashion-oriented and has a higher relative price than similar products in the United States. The jeans market internationally is also more fragmented than in the U.S., with competitors ranging from global brands to a number of smaller brands sold in single country or regional markets.VF’s largest international jeanswear business is located in Western Europe. Lee â , Wrangler â and H.I.S â jeanswear products are sold through department stores and specialty stores, while the Hero by Wrangler â , Maverick â and Old Axe â products are sold to hypermarket and discount stores. We also market the Lee â and Wrangler â products to mass market and specialty stores in Canada and Mexico, as well as to department stores and specialty stores in South America through businesses based in Chile, Brazil, Argentina and Peru. In many international markets, we are expanding our marketing of jeans products through VF-operated retail stores, an increasingly important vehicle for presenting our brands’ image and marketing story directly to consumers. Lee â products are also manufactured and marketed in Spain and Portugal through a 50%-owned joint venture. We are continuing to expand our jeanswear brands into emerging markets, such as China and Russia, and in 2006 entered into a majority-owned joint venture to design and market VF-branded products in India, including the Lee â and Wrangler â brands. In foreign markets where VF does not have owned operations, Lee â and Wrangler â jeanswear and related products are marketed through distributors, agents or licensees.We believe our jeanswear brands can continue to grow by extending into additional categories and geographies and by investing more heavily in marketing programs that enhance the brands’ equity and stimulate consumer buying.Outdoor CoalitionThe Outdoor Coalition, VF’s fastest growing business, is a group of outdoor activity-based businesses that represent a collection of lifestyle brands. Product offerings include outerwear, sportswear, footwear, equipment, backpacks, daypacks and luggage. The North Face â high performance outdoor apparel, equipment and footwear is sold across the United States, Canada, Europe and Asia. The North Face â apparel products consist of outerwear, snow sports gear and functional sportswear for men, women and children. Equipment consists of tents, sleeping bags, backpacks, daypacks and accessories. The North Face â products are designed for extreme applications, such as high altitude mountaineering and ice and rock climbing, although many consumers purchase those products because they represent a lifestyle to which they aspire. The North Face â products are marketed through specialty outdoor and premium sporting goods stores in the United States, Canada and Europe and select department stores in the United States. In addition, these products are sold through 25 VF-operated full price retail and outlet stores in the United States and Europe, as well as monobrand stores operated by independent third partiesdedicated to selling The North Face â products in Europe and Asia, except in Japan and South Korea where The North Face â trademarks and patent rights are owned by a third party. JanSport â backpacks and luggage are sold through department and mid-tier stores, as well as sports specialty stores and college bookstores in the United States. JanSport â daypacks have a leading market share in the United States. Eastpak â and JanSport â backpacks are sold primarily through department and specialty stores in Europe, where the Eastpak Ò brand is the leading backpack brand. A technical line of JanSport â backpacks is sold through outdoor and sporting goods stores. JanSport â fleece and T-shirts imprinted with college logos are sold through college bookstores and department stores in the United States. In addition, we launched a JanSport â apparel line in the United States and a limited Eastpak â branded apparel collection in Europe in 2005. The JanSport â and Eastpak â brands are also marketed throughout Asia by licensees and distributors.VF Outdoor, Inc. manufactures and markets Vans â 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 mid-tier stores in the United States and through skate and surf shops, specialty stores and VF-operated retail stores in the United States and Europe. The brand’s retail strategy includes over 150 full price retail stores and outlet stores. These retail stores carry a wide variety of Vans â footwear, along with a growing assortment of apparel and accessory items, most of which bear the Vans â trademarks. Vans â full-price retail stores currently operate in the United States, primarily on the West Coast, and in key European markets, and are located in a mix of mall and freestanding locations. There are also Vans â outlet stores in the United States, the United Kingdom, Austria, Spain, France and Puerto Rico. The Vans â brand is the sponsor and majority owner of the Vans Warped Tour Ò , a traveling music festival, which presents over 50 alternative rock and heavy metal bands in performances in over 40 cities across North America each summer. Napapijri â premium casual outdoor apparel products are primarily positioned in the mid-to-high price range and sold on a wholesale basis, primarily to European specialty shops such as sport stores and fashion boutiques. In addition, these products are sold in Europe through VF-operated stores in Italy, France and Germany, as well as stores operated by licensees and distributors. The Napapijri â brand enjoys especially strong consumer awareness in Italy, where it was created, and is well known across Europe. The brand was recently voted “Cool Brand of the Year” in Italy by the Superbrands Organization, which identifies and recognizes apparel brands, particularly lifestyle and fashion brands that have become highly desirable among style leaders and influencers, in 55 countries. In addition to continued growth overseas, the Napapijri â brand is being introduced in the United States through upper-tier department stores and VF-operated retail stores. Asia, particularly Japan, is targeted for growth in 2007. The sportswear design talent for the Napapijri â brand was utilized to develop Nautica â apparel in Europe, which was launched in 2006. Kipling Ò luggage, shoulder bags, backpacks, handbags and accessories are stylish, colorful and fun products designed for women and girls, yet the products are practical and durable. The brand name comes from the author of The Jungle Book , Rudyard Kipling, and that provides the connection to the Kipling Ò 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 VF-operated and independently-operated retail stores. The Kipling Ò business in North America is managed as part of the Sportswear Coalition.In 2005, VF acquired the Reef Ò brand, comprising surf-inspired products, including sandals, apparel, shoes and accessories that are marketed primarily to sporting goods and specialty stores and surf shops. This acquisition was consistent with our strategy of acquiring strong lifestyle brands with superior growth potential. Reef Ò branded apparel is expected to be expanded in 2007.We expect continued healthy growth in our Outdoor business as we acquire additional activity-based lifestyle brands, acquire certain of our international licensees and distributors, launch new product categories, open additional retail stores and expand geographically.Imagewear CoalitionVF produces workwear, career and safety apparel sold under the Red Kap â , Bulwark â , The Force™ and Chef Designs™ brands. Over one-half of these sales are to industrial laundries that in turn supply work clothes to employers, primarily on a rental basis, for on-the-job wear by production, service and white-collar personnel. Products include work pants, slacks, work and dress shirts, overalls, jackets and smocks. Since industrial laundries maintain minimal inventories of work clothes, a supplier’s ability to offer rapid delivery is an important factor in this market. Our commitment to customer service, supported by an automated central distribution center with satellite locations, has enabled customer orders to be filled within 24 hours of receipt and has helped the Red Kap â brand obtain a significant share of the industrial laundry rental business.The Imagewear Coalition also markets corporate image uniforms and casual apparel to selected national accounts through the internet. We operate over 30 catalog web sites 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, New York City Fire Department and New York City Transit Authority). These secure web sites give more than 600,000 employees of these customers the convenience of shopping and paying for their work and career apparel via the internet.The Imagewear Coalition also includes VF’s activewear apparel businesses. We design and market decorated sports apparel under licenses granted by the National Football League, Major League Baseball, National Hockey League, Harley-Davidson Motor Company, Inc., NASCAR and most major colleges and universities. These adult and youth-sized sports apparel products are distributed through department, sporting goods, athletic specialty and discount stores primarily under the Lee Sport â label. Growth in recent years has been driven by acquisitions of two businesses that marketed Harley-Davidson â licensed apparel and by a five year contract signed in 2002 with the National Football League, which was subsequently extended to 2008 for adult men’s and women’s apparel. Outerwear was added to the National Football League contract in 2006. Under the agreement, VF is the exclusive supplier for selected men’s and women’s tops and bottoms bearing NFL team logos marketed to mid-tier department stores, specialty stores and discount stores. We also entered into a five year contract with Major League Baseball in 2004.In the third quarter of 2006, Imagewear announced a new agreement with ESPN, Inc. to manufacture and market a line of College GameDay Ò apparel, including tees, fleece crews and hoods. The line launched in September at leading sports specialty and sporting goods stores, department stores and college campus retailers and online at www.espnshop.com.We believe that Imagewear’s ability to manage a complex mix of products with very short lead times and at superior service levels can be leveraged to support continued growth in both existing and new businesses.Sportswear CoalitionThe Nautica â brand is the principal lifestyle brand of the Sportswear Coalition. Nautica â sportswear is marketed in the department store and specialty store channels of distribution, with approximately one-half of wholesale sales to Federated Department Stores, Inc.The principal Nautica â product line is men’s sportswear, noted for its classic styling. The Nautica Jeans Company â line features fashionable jeanswear and related tops for younger male consumers. Other product lines sold under the Nautica â brand include men’s outerwear, underwear, swimwear and sleepwear and women’s sleepwear and panties. A collection of women’s sportswear was launched in a limited number of department store doors in Fall 2006, with an expanded rollout planned for 2007.VF Sportswear operates more than 125 Nautica â retail outlet stores in better outlet malls across the United States. These stores carry Nautica â merchandise for men, boys and girls. The product styles sold in the outlet stores are different from the Nautica â styles sold to department and specialty store wholesale customers. In addition, these outlet stores carry Nautica â merchandise from licensees to complete their product assortment.The John Varvatos â brand is a luxury apparel and accessories collection for men, including tailored clothing, sportswear, leather accessories and footwear. These products are sold through upscale department and specialty stores, as well as through five showcase John Varvatos â retail locations. This business is 80% owned by VF, with the balance owned by Mr. John Varvatos.The Sportswear Coalition also includes the Kipling â business in North America. Kipling â bags and accessories are marketed to department stores and through VF-operated retail stores.We believe there is growth potential in the Nautica Ò brand, particularly in the women’s sportswear category and in retail expansion, and significant growth potential in the John Varvatos Ò and Kipling Ò brands.Direct-To-Consumer OperationsVF-operated retail stores are an integral part of our strategy for building VF’s brands. Our full price retail stores allow us to showcase a brand’s full line of current season products, with fixturing 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. We believe the proper presentation of these products in our retail stores enhances our business with our wholesale customers. In addition, outlet stores serve an important role in our overall inventory management by allowing VF to effectively sell a significant portion of discontinued and out-of-season products at better prices than are otherwise available from outside parties, while maintaining the integrity of our brands.Our global retail operations comprise approximately 460 stores that sell specific brands such as The North Face â , Vans â , Napapijri â , Kipling â , Nautica â , Lee â or Wrangler â . Some of these retail stores offer products at full price, with the remainder being outlets offering products at discounted prices. We plan to open 75 - 100 new retail stores during 2007. In addition to these monobrand retail and outlet operations, we operate 78 VF Outlet stores across the United States that sell a broad selection of VF products. Sales and profits of VF products sold through VF Outlet stores are reported as part of the operating results of the respective coalitions.Certain of our brands such as Lee â jeanswear and Vans â footwear are sold directly to consumers via the internet. In many of our other web sites, we provide information about our brands and products, and visitors are directed to VF’s wholesale customers for purchase of our products. In addition, our Imagewear Coalition operates a number of catalog web sites where employees of several national corporate and governmental accounts can purchase their uniforms and other casual apparel. These internet sales represented approximately 2% of consolidated Total Revenues in 2006. Total retail and internet sales directly to consumers accounted for approximately 16% and 14% of VF’s consolidated Total Revenues in 2006 and 2005, respectively. We expect our retail business to continue to grow and are planning a capital investment of approximately $45 million for improvements, fixtures and equipment in new retail space during 2007In addition to our direct to consumer venues, we have granted the right to sell several of our brands through over 200 independently-operated monobrand retail stores located primarily in Europe and Asia. Our products are also sold through concession stores or shops in Europe and Asia, where dedicated retail space is owned or leased by a department store or other independent party but the inventory is owned by VF.Licensing ArrangementsAs part of our business strategy of expanding market penetration of owned brands, we enter into licensing agreements for certain apparel and complementary product categories in specific 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 that may include renewal options. In addition, certain licensees and distributors have been granted the right to open retail stores under the licensed brand name and sell only licensed branded products in these stores. Each licensee pays royalties to VF based on its sales of branded products, with most agreements providing for a minimum royalty. These payments generally range from 5% to 7% of the licensing partners’ net sales of the licensed products. Gross Royalty Income was $78 million and $72 million in 2006 and 2005, respectively.In addition, licensees are generally required to spend a specified amount ranging from 1% to 5% of their sales to advertise VF’s products. 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 seek to preserve the integrity of brand names by taking an active role in the design, quality control, advertising, marketing and distribution of each licensed product, most of which are subject to our prior approval and continuing oversight.Licensing activities exist in all coalitions. The Nautica Ò brand is the largest contributor to licensing revenue, representing approximately 45% of gross Royalty Income. The Nautica â brand is licensed 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, eyewear) and for nonapparel categories (e.g., furniture, bedroom and bathroom linens). In addition, Nautica â apparel and certain nonapparel products are licensed for sale in over 60 countries outside the U.S. Wholesale sales of such Nautica â licensed products total approximately $475 million annually.VF has also entered into license agreements to use third-party trademarks. Apparel is marketed under licenses granted by the National Football League, Major League Baseball, the National Hockey League, NASCAR and Harley-Davidson Motor Company, Inc. Some of these license arrangements contain minimum annual licensing and advertising requirements. Some are for a short term and may not contain specific renewal options.We believe that the loss of any license, with VF as either licensor or licensee, would not have a material adverse affect on VF.Manufacturing and SourcingProduct design and merchandising functions are carried out by a skilled staff located at each of the operating coalitions.Our domestic jeanswear and imagewear businesses operate owned manufacturing facilities (primarily cutting, sewing and finishing) principally located in Mexico and Central America. Our international jeanswear businesses operate manufacturing facilities located in Poland, Turkey and Malta. For these owned production plants, we purchase raw materials from numerous domestic and international suppliers for scheduled production. 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 most cases, purchased fabric is cut and sewn into finished apparel, and in limited cases we contract the sewing of VF-owned raw materials into finished product to independent contractors in Mexico and Central America. While in some cases we have obtained fixed price commitments for up to one year, specific purchase obligations with suppliers are typically limited to the succeeding two to six months. We do not have any long-term supplier contracts for the purchase of raw materials or finished products, except for a commitment in connection with the sale of VF’s childrenswear business in 2004 to purchase a remaining total of approximately $111 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 4% of our total cost of sales.Over the last several years, VF has shifted production from the United States to lower cost locations. As a result of this shift in sourcing, approximately 32% of our domestic Net Sales in 2006 were manufactured in VF-owned facilities, primarily in Mexico and Central America, and 67% were obtained from contractors, primarily in Asia. Similarly, European jeanswear sourcing has been shifting from owned plants in Western Europe to lower cost owned production outside of Western Europe and contracted production in the Middle East, Africa and Asia.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 and Miami. These hubs are responsible for product procurement, product quality assurance and supplier management and handling functions in the Eastern and Western Hemispheres, respectively. All products in the Outdoor and Sportswear Coalitions, as well as a growing portion of product requirements for our other coalitions, are obtained through these sourcing hubs.All contracted production must meet VF’s high quality standards. Further, each of the over 1,500 independent contractors that manufacture apparel products for VF must be pre-certified and sign a Terms of Engagement agreement prior to performance of any production on VF’s behalf. These requirements provide strict standards covering hours of work, age of workers, health and safety conditions and conformity with local laws. We also require our independent licensees and their contractors to comply with these standards. We maintain an ongoing audit program to ensure compliance with these requirements by using dedicated internal and outsourced staff.The current sourcing strategy for products sold in the United States allows us to balance our needs with a mix of VF-owned and contracted production in the Western Hemisphere, combined with contracted production primarily from Asia. Owned production generally has a lower cost than contracted production. Overall, product obtained from the Western Hemisphere has somewhat higher cost but gives us greater flexibility, shorter lead times and lower inventory levels as compared with production obtained from the Far East and other more distant resources. This combination of VF-owned and contracted production, along with different geographic regions and cost structures, provides a balanced approach to product sourcing.VF did not experience difficulty in filling its raw material and contracting production needs during 2006. Management does not anticipate difficulties in obtaining its raw materials and contracting production requirements during 2007. The loss of any one supplier or contractor would not have a significant adverse effect on our business.Imports and Import RestrictionsVF is exposed to certain risks of doing business outside of the United States. We import goods from VF-owned manufacturing facilities in Mexico and Central America and from suppliers in those areas, as well as suppliers in Asia, Europe, Africa and the Middle East. These import transactions had been subject to the constraints imposed by bilateral agreements between the United States and a number of governments. These agreements were negotiated either under the framework established by the World Trade Organization (“WTO”) or other applicable statutes, which imposed quotas that limited the amount of certain categories of merchandise from these countries that could be imported into the United States and the European Union. All restrictions under these agreements had ended as of December 31, 2004.Pursuant to a 1995 Agreement on Textiles and Clothing under the WTO, effective January 1, 2005 the United States and other WTO member countries were required, with few exceptions, to remove quotas on goods from WTO member countries. The complete removal of quotas may benefit VF, as well as other apparel companies, in the long run by allowing them to source products, without quantitative limitation, from any country. Theonly significant exceptions to the removal of quota that could affect VF are Vietnam and China. Vietnam is a WTO member as of January 11, 2007 but with restraints on Vietnam production that would allow the United States to impose antidumping duties in certain circumstances. Safeguard quotas pursuant to the terms of China’s Accession Agreement to the WTO have been imposed against Chinese exports and will last through 2008. These new restraints include products that VF imports and sells. However, we are well aware of developments with regards to safeguards and have made sourcing decisions accordingly. Any effect of the imposition of safeguards is not expected to be material to VF.Management continually monitors new developments and risks related to duties, tariffs and quotas. In response to the changing import environment resulting from the elimination of quotas, management has chosen to continue its balanced approach to manufacturing and sourcing. 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. We will continue to manage our supply chain from a global perspective and adjust as needed to changes in the global production environment.SeasonalityThe apparel industry in the United States has four primary retail selling seasons — Spring, Summer, Back-to-School and Holiday, while international markets typically have Spring and Fall selling seasons. Sales to retail customers generally precede the retail selling seasons, although demand peaks have been reduced as more products are being sold to retailers on a replenishment basis.Overall, with its diversified product offerings, VF’s operating results are somewhat seasonal. On a quarterly basis, consolidated Total Revenues for 2006 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 revenues of the Outdoor Coalition, which are more seasonal in nature. Approximately 20% of Outdoor Coalition revenues occurred in the second quarter and 35% in the third quarter.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, accordingly, decreases during the second half. Cash provided by operating activities is substantially higher in the second half of the year due to higher net income and reduced working capital requirements during that period.Advertising and Customer SupportWe support VF’s brands through extensive advertising and promotional programs. We advertise on national and local radio and television and in consumer and trade publications, and participate in cooperative advertising on a shared cost basis with major retailers in radio, television and print media. 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 of our products at retail locations. We spent $322 million advertising and promoting our products in 2006, an increase of 6% from the 2005 level.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. These 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 documented and independently verified retailer costs are reported as Advertising Expense). Internet web sites are maintained for most of our brands. The web sites provide information about our products and, in many cases, direct consumers to our wholesale customers where they can purchase our products.Our Jeanswear, Outdoor and Sportswear 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 and trade names, and their related logos, designs and graphics, have substantial value in the marketing of VF’s products. We have registered these trademarks in the United States and with governmental agencies in other countries where our products are manufactured and/or sold. We vigorously monitor and protect these trademarks against infringement and dilution where legally feasible and appropriate. In addition, we grant licenses to other parties to manufacture and sell products using our trademarks in product categories and in 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, primarily in Europe. Sales to VF’s ten largest customers, all of which are retailers based in the United States, amounted to 30% of Total Revenues in 2006, 31% in 2005 and 35% in 2004. These larger customers included (in alphabetical order) Federated Department Stores, Inc., Kohl’s Corporation, J.C. Penney Company, Inc., Sears Holding Corporation, Target Corporation and Wal-Mart Stores, Inc. Sales to the five largest customers amounted to approximately 24% of Total Revenues in 2006, 25% in 2005 and 28% in 2004. Sales to VF’s largest customer, Wal-Mart Stores, Inc., totaled 13.2% of Total Revenues in 2006, 14.0% in 2005 and 13.5% in 2004, substantially all of which were in the Jeanswear Coalition.      Employees VF employed approximately 45,500 men and women in its continuing operations at the end of 2006, of which 17,300 were located in the United States. (Excluded are approximately 8,700 employees of the intimate apparel businesses accounted for as discontinued operations at the end of 2006.) Approximately 300 employees in the United States are covered by a collective bargaining agreement. 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 and 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 VFThe following are the executive officers of VF Corporation as of February 9, 2007. The 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.                                   Period Served Name   Position   Age   In Such Office(s) Mackey J. McDonald   Chairman of the Board Chief Executive Officer Director     60     October 1998 to date January 1996 to date October 1993 to date                   Eric C. Wiseman   President and Chief Operating Officer Director     51     March 2006 to date October 2006 to date                   George N. Derhofer   Senior Vice President – Global Operations     53     May 2005 to date                   Robert K. Shearer   Senior Vice President and Chief Financial Officer     55     May 2005 to date                   Bradley W. Batten   Vice President – Controller and Chief Accounting Officer     51     September 2004 to date                   Candace S. Cummings   Vice President – Administration,    General Counsel Secretary     59     March 1996 to date October 1997 to date                   Frank C. Pickard III   Vice President – Treasurer     62     April 1994 to date Mr. McDonald joined VF’s Lee division in 1983, serving in various management positions until he was named Group Vice President of VF in 1991, President and Director of VF in 1993, Chief Executive Officer in 1996 and Chairman of the Board in 1998. Subsequent to the election of Mr. Wiseman as President and Chief Operating Officer in March 2006, as mentioned below, Mr. McDonald continues to serve as Chairman and Chief Executive Officer. 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 24, 2007 (“2007 Proxy Statement”) that will be filed with the Securities and Exchange Commission within 120 days after the close of our fiscal year ended December 30, 2006, which information is incorporated herein by reference.Mr. Wiseman joined VF in 1995 as Executive Vice President of Finance, Operations and Manufacturing at the JanSport division. In 1998 he became President of the Bestform division and was elected Vice President of VF and Chairman – Global Intimate Apparel Coalition in 2000, serving in this role until February 2004. He was elected as Vice President – Sportswear Coalition in August 2003. Mr. Wiseman was also elected as Vice President and Chairman – Outdoor and Sportswear Coalitions in February 2004. In May 2005, he became Executive Vice President – Global Brands. Mr. Wiseman was named President and Chief Operating Officer of VF in March 2006 and Director of VF in October 2006.Mr. Derhofer joined Nutmeg Industries, Inc. in 1989 as Senior Vice President, Chief Financial Officer and Treasurer. When Nutmeg was acquired by VF in 1994, he was named Executive Vice President and Chief Financial Officer of the Nutmeg division. From 1996 to September 2000, he was President of the Knitwear division and was elected Vice President of VF and Chairman – Imagewear Coalition in October 2000. He was elected as Vice President and Chairman – Intimate Apparel and Imagewear Coalitions in February 2004. In May 2005, Mr. Derhofer became Senior Vice President – Global Operations.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. He served at Sara Lee Corporation as Vice President Operations for the Intimates and Hosiery Group from November 2002 to August 2003 as well as Vice President & Chief Operating Officer and Vice President – Finance & Chief Financial Officer for the Intimates Group from May 2002 to November 2002 and August 2000 to May 2002, respectively.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. 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.Available InformationAll periodic and current reports, registration statements and other filings that VF is required to file or furnish to the Securities and Exchange Commission (“SEC”), including our annual report 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 (http://www.sec.gov) or public reference room at 100 F Street, NE, Washington, DC 20549 or through VF’s primary internet website at http://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, Nominating and Governance Committee and Finance Committee. Copies of these corporate governance 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 2007 Annual Meeting of Shareholders, VF intends to file with the New York Stock Exchange the certification regarding VF’s compliance with the NYSE’s corporate governance listing standards as required by NYSE Rule 303A.12. Last year, the Company filed this certification with the NYSE on May 4, 2006.Item 1A. Risk FactorsThe 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 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 30% of Total Revenues in fiscal 2006, with Wal-Mart Stores, Inc. accounting for 13.2% 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, the retail industry has experienced consolidation and other ownership changes, such as the merger of Federated Department Stores, Inc. and The May Department Stores Company in 2005 and the merger of Sears, Roebuck and Company and Kmart Holding Corporation in 2005. In the future, retailers may further consolidate, undergo restructurings or reorganizations, realign their affiliations or reposition their stores’ target market. These developments could decrease the number of stores that carry VF’s products or increase the ownership concentration within the retail industry. These changes could both impact VF’s opportunities in the market and increase VF’s reliance on a smaller number of large customers. VF’s business could be adversely affected by financial instability experienced by its customers. During the past several years, various retailers have experienced significant financial difficulties, which in some cases have resulted in bankruptcies, liquidations and store closings. VF sells a large portion of its products on open account to national and regional department, mid-tier and mass market stores in the United States. The financial difficulties of a customer could result in reduced business with that customer. VF may also assume higher credit risk relating to receivables of a customer experiencing financial difficulty. If these developments occur, our inability to shift sales to other customers or to collect on VF’s trade accounts receivable from a major customer could substantially reduce VF’s income and have a material adverse effect on its financial condition and results of operations. 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 domestic and foreign brands and manufacturers of apparel. 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: •   Anticipate and respond to changing consumer trends in a timely manner;   •   Develop attractive, quality products;   •   Maintain favorable brand recognition;   •   Price products appropriately;   •   Provide effective marketing support;   •   Ensure product availability and optimize supply chain efficiencies; and   •   Obtain sufficient retail floor space and effectively present its products at retail. We attempt to minimize risks associated with competition, including risks related to changing style trends and product acceptance, by studying consumer and retail sales trends. The failure, however, 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 with other products that may result in lost sales. 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 comparablereductions in its 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. 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, fue