VF Corp. Sees Higher Margin Business Growth Offsetting Higher Input Cost Pressure

“That means that were tracking against our full year guidance, which is for a reduction of less than 100 basis points in gross margin on a full year basis,” he said.

He did note that the most difficult comparisons come in the second and third quarter before easing in the fourth due to more favorable pricing benefits and mix impact.  “Our product costs at this point in time in the year are fully locked in, so we really dont see any kind of significant pressure or unknowns coming from the product cost area as we look throughout the rest of the year,” said Shearer.

Margins are benefiting because VF’s fastest growing businesses-the Outdoor & Action Sports Coalition, International and Retail-carry higher margins. Said Shearer, “The mix shift alone has been adding about 100 basis points of gross margin improvement over the years. And once again, in 2011, we expect that kind of improvement, pretty close to that.”

The most price sensitive category for the company is its U.S. jeans business, given the cost of cotton and its focus on selling at mass and  mid-tier channels. The unit, which includes Wrangler and Lee, accounts for about 20 percent of companywide sales. Pricing increases are being implemented in jeans with more coming in the back half of 2011 but overall units are being planned down.

Asked how the consumer is reacting to price increases overall, Shearer noted that retailers have responded in a variety of way to higher product prices, especially in this first quarter. Some are not passing the pricing onto consumers while others are passing those prices on a select basis. More encouragingly, VF’s management recently probed pricing elasticity, including looking outside the sector, and feels encouraged by the measured steps it has taken to raise prices so far.

“What we saw, at least in the first quarter, and what were seeing today obviously gives us a lot of confidence that weve taken a very prudent approach,” said Shearer.