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:

        Coalition                          Principal VF-owned Brands

Outdoor and Action Sports   The North Face®, Vans®, JanSport®, Eastpak®, Kipling®
                            (except in North America), Napapijri®, Reef®, Eagle
                            Creek®
Jeanswear                   Wrangler®, Wrangler Hero®, Lee®, Riders®, Rustler®,
                            Timber Creek by Wrangler®
Imagewear                   Red Kap®, Bulwark®, Majestic®
Sportswear                  Nautica®, John Varvatos®, Kipling® (in North America)
Contemporary Brands         7 For All Mankind®, lucy®

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:

• Revenue growth of 8% to 10% per year - At the beginning of 2008, we increased our long-term revenue growth target from 6% to 8% per year to 8% to 10% per year, with approximately 6% to 7% coming from organic growth and 2% to 3% from acquisitions. We had exceeded the prior target by achieving revenue growth of 16% in 2007 and 10% in 2006. In 2008, our revenues increased by 6%. Key drivers of future growth consistent with the 8% to 10% target include a continuation of the strong momentum we have experienced in our outdoor and action sports businesses, growth in our contemporary brands and sportswear businesses, acquisitions of key lifestyle brands, international expansion and continued growth in our direct-to-consumer business. We expect our international revenues to expand approximately 13% annually and account for 33% of our total revenues by 2012, compared with 30% in 2008. Revenues in our direct-to-consumer business are also expected to grow by approximately 18% annually and represent 22% of revenues by 2012, compared with 16% in 2008. We have many programs in place to continue to drive organic growth across our brands and will continue to aggressively search for opportunities to acquire branded lifestyle businesses that meet our strategic and financial goals.

• Operating income of 15% of revenues - We increased our long-term targeted operating margin from 14% to 15%. Our operating margins had approached the original 14% target in 2007 and 2006. However, operating margins declined to 12.3% in 2008, reflecting the negative impact from cost saving actions of 0.8% primarily related to workforce reductions and the current difficult global economic conditions, particularly in the fourth quarter of the year. We expect future improvement in our operating margin as we (i) leverage our costs across an expanded revenue base, (ii) grow our international and retail businesses, which have higher than VF average operating margins,
(iii) continue our relentless focus on cost reduction and (iv) grow existing lifestyle brands that report higher than VF average operating margins.

• Earnings per share growth of 10% to 11% per year - We established a new target of 10% to 11% annual growth in diluted earnings per share and believe that earnings per share can grow at a faster rate than revenues, reflecting expansion in our operating margin. We had exceeded this growth rate in recent years. With the impact of the cost reduction actions and global economic events mentioned above, earnings per share were flat in 2008. On a long-term basis, we expect our growth rate of earnings per share to be in line with the new target.

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

• Return on invested capital of 17% - We believe that a high return on capital is closely correlated with enhancing TSR. We calculate return on invested capital as follows:

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.

• Debt to capital of less than 40% - We have established a goal of keeping our debt to less than 40% of our total capitalization, with capitalization defined as our common stockholders' equity, plus combined short and long-term debt. This ratio was 25.2% at the end of 2008. This low debt to capital ratio demonstrates VF's ability to generate strong cash flow considering the level of dividend, share repurchase and acquisition spending over the last several years.

• Dividend payout ratio of 40% - Our target is to return approximately 40% of earnings to our stockholders through a consistent dividend policy. The 2008 dividend payout ratio was 43.0% of Net Income. VF has increased its dividends paid per share each year for the past 36 years.

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:

1. Build more global, growing lifestyle brands. Focus on building more growing, global lifestyle brands with an emphasis on younger consumers and on female consumers.

2. Expand our share with winning customers. Develop brand and product strategies that will enable us to gain market share with successful, growing retail partners.

3. Stretch brands to new geographies. Grow our international presence, particularly in expanding economies such as those in China, India and Russia.

4. Expand our direct-to-consumer business. Increase the portion of revenues obtained from VF-operated monobrand retail stores and e-commerce.

5. Fuel the growth. Leverage our supply chain and information technology capabilities across VF to drive lower costs and inventory levels, increase productivity and integrate acquisitions efficiently to generate savings that can be reinvested in our brands.

6. Build new growth enablers. Support our growth plans by identifying and developing high potential employees and by building a diverse team of talented leaders.

Highlights of 2008

There were several notable actions and achievements in 2008:

• Revenues and earnings per share were both at record levels.

• Total Revenues increased 6% to $7,642.6 million, driven by higher revenues in our outdoor and action sports, international and direct-to-consumer businesses and the benefit of a full year of ownership of the contemporary brands businesses.

• With $679.5 million of cash flow from operating activities, VF had adequate liquidity to cover all of its current needs, as well as fund $217.6 million of investments in capital expenditures and acquisitions, $255.2 million of dividends paid and $149.7 million of repurchases of our Common Stock. We ended the year with $381.8 million of cash and equivalents. And with our investment grade credit rating, we continue to have access to the capital markets, despite the credit crisis in late 2008. At the end of 2008, we had the ability to borrow over $1.3 billion under committed bank credit agreements.

• We took aggressive actions to address the uncertainty posed by current economic conditions and to protect our future profitability. These cost reduction actions should bring about annualized savings of approximately $100 million, beginning in 2009. The actions resulted in a $41.0 million charge in the fourth quarter.

• In May 2008, VF acquired one-third of the outstanding equity of Mo Industries, which owns the Splendid® and Ella Moss® brands of premium sportswear marketed to better department and specialty stores. VF expects to acquire the remaining two-thirds equity in the first half of 2009. Mo Industries had total revenues of $95 million for the full year 2008. See Note B to the Consolidated Financial Statements.

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:


                                                                2008                 2007
                                                            Compared with        Compared with
                                                                2007                 2006
                                                                       In millions

Total revenues - prior year                                $         7,219      $         6,216
Organic growth                                                         120                  631
Acquisitions in prior year (to anniversary dates)                      291                   25
Acquisitions in current year                                            13                  347

Total revenues - current year                              $         7,643      $         7,219

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:

                                                            2008       2007       2006

   Gross margin (total revenues less cost of goods sold)     43.9 %     43.5 %     43.4 %
   Marketing, administrative and general expenses            31.7       30.1       30.1

   Operating income                                          12.3 %     13.4 %     13.3 %

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                                                           Contemporary
                                          Sports          Jeanswear        Imagewear        Sportswear          Brands          Other
                                                                                 In millions

Total revenues - 2006                  $      1,868      $     2,780      $       828      $        686      $           -      $   54
Organic growth                                  470               92                4                (2 )                -          67
Acquisition in prior year                         -               25                -                 -                  -           -
Acquisitions in current year                     49                -              156                 -                142           -

Total revenues - 2007                         2,387            2,897              988               684                142         121
Organic growth                                  341             (145 )            (30 )             (50 )                2           2
Acquisitions in prior year                       14                -               33                 -                244           -
Acquisition in current year                       -               13                -                 -                  -           -

Total revenues - 2008                  $      2,742      $     2,765      $       991      $        634      $         388      $  123

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 . . .