Levi Strauss & Co (LEVI) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and w Welcome to the Levi Strauss & Co.'s fourth quarter and fiscal-year 2007 earnings conference call. All parties will be in a listen-only mode until the question-and-answer session, at which time instructions will follow. This conference is being recorded and may not be reproduced in whole or in part without written permission from the Company. (OPERATOR INSTRUCTIONS)

I would now like the turn the call over to Roger Fleischman, Vice President and treasurer of Levi Strauss & Co.. Please go ahead, sir.

Good afternoon and welcome to our conference call. I'm pleased to introduce the Levi Strauss & Co. management team. With us here today are John Anderson, our President and Chief Executive Officer; Hans Ploos van Amstel, our Chief Financial Officer; and Robert Hanson, President of North America. Before we begin, let me briefly remind you of a few items. Our Chief Financial Officer will speak to several slides posted in the financial section of our website, levistrauss.com as he goes through the Company's results. We encourage you to review them. Also available on our website is information about how we compile various measures used to describe our business performance. Finally, today we filed our annual report on Form 10-K with SEC. You can link to our SEC filings from our website.

Now I'd like the turn the call over to John Anderson.

Thanks for joining us this afternoon to discuss our fourth quarter and fiscal 2007 results, as well as the challenges and opportunities we see heading into 2008. With me today are Hans Ploos van Amstel, our Chief Financial Officer, who will take you through the numbers, Robert Hanson will review our results in North America, and I'll provide an update on Europe and Asia-Pacific. First I'll discuss our results for the year.

Overall we are pleased with our progress for fiscal 2007. Our Levi's® brand grew around the world. We've continued to upgrade our products, expand our retail network, and optimize our global presence, and though we faced challenges as the economy weakened, we improved our financial strength. We posted net revenue gains in both the fourth quarter and the year. Without the benefit of currency exchange we were up for the year, but net revenues in the fourth quarter were slightly down. Fourth quarter results reflect the weakening U.S. retail environment at the end of the year.

We continue to focus on growing the Levi's® brand worldwide. We believe consumers are responding positively to our efforts to better position the brand by introducing upgraded and more premium styling and design. Europe posted a solid year, benefiting from its premium positioning and enhanced retail store network. Although Asia-Pacific grew in 2007 it was a mixed picture. We continued to see strong growth in the emerging markets, such as India and China, and we invested in those markets. Nonetheless, the bulk of our Asia-Pacific is in our more mature, such as Japan and Korea. These markets proved to be more challenging in 2007. Our teams there are focused on improving the product offering and rebalancing inventory at retail.

In North America, revenue growth in the first half of the year was offset by declines in the second half. In the U.S., the Levi's® and Dockers® brands posted growth for the year, though are revenues were down for Dockers® business in the second half of the year. We were encouraged by the strong growth of the Dockers® women's business in 2007. Our signature brand continues to face challenges in the North America region. We've been working closely with our customers to overhaul the product range of merchandising. These changes will roll into stores for the 2008 back-to-school season.

In summary, we had a solid year. We generated strong operating cash flow and improved our financial strength, resulting in upgrades to our credit ratings. We reduced our debt, lowered our interest expense and made strategic investments, such as expanding our global network of stores, and continued to roll out SAP around the world. Despite the uncertain environment in 2008 we are confident our strategies will allow us to build our brands and further capitalize on our large global footprint.

Now, Hans Ploos van Amstel, our Chief Financial Officer, will talk about the fourth quarter and fiscal 2007 financial results.

Thanks, John. Net revenues on a reported basis were up 4% for the year and up 2% for the quarter, a slower growth rate than earlier in the year. In both periods net revenues benefited from favorable exchange [hedge]. The weaker result at the end of the year reflects the slowing retail environment, especially in North America. Without the help of currencies, net revenue were up 1% for the fiscal year and down 2% in the fourth quarter. We ended 2007 with a strong gross margin of 47% for the year. In Europe, gross margin benefited from lower sourcing costs and higher sales from Company-operated stores. Higher sales allowances and discounts in North America and higher inventory markdowns and (inaudible) close outs in Asia-Pacific offset the benefit in Europe.

SG&A for 2007 increased 3%. Excluding the effect of changes in exchange hedge, SG&A would have decreased slightly for the year. Additional investment in our retail stores worldwide was more than offset by lower advertising in North America, lower incentive compensation expense, and a higher benefit plan curtailment gain in 2007. Operating income in the fourth quarter was up 12% and up 4% for the fiscal year. We continued to deliver a healthy operating margin of 15%. Net income was up almost 79% for quarter and up 93% for the fiscal year, with full-year net income at $460 million. This was mostly driven by a noncash, nonreoccurring tax benefit of $250 million in the fourth quarter.

This tax benefit reflects the reversal of deferred tax valuation allowances stemming from several items, including the improvements in our business performance. Our income before income -- before income taxes for the year increased 9% to $376 million, reflecting the continued profitability of our operations and the benefits of lower interest expenses. We delivered solid operating cash flow in the fourth quarter and fiscal year and continue to use our cash to further pay down our debt. In 2007 we restructured our debt, cut debt by more than $250 million, and reduced interest expenses by $55 million, or 14%.

Now, I'll review some highlights for the regions. For North America, net revenues were essentially flat for the year and were down in the second half of the year, with fourth quarter revenues down 3%. For the full year, growth in our U.S. Levi's® and Dockers® brand was offset by the decline in Signature®. North America operating margins improved in the fourth quarter due to lower SG&A but were down slight for the year. Although North America benefited from Levi's® brand growth, full-year margins were reduced by higher allowances and discounts to clear out seasonal inventories, as well as the continued weak Signature® brand performance in the United States. Turning to Europe, net revenues were up 5%, excluding currency impact, and up 16% on a reported basis in the fourth quarter. The regions full-year reported revenues were up 13%. Europe's operating margin remained strong at 22% for the year, despite expenses associated with supporting a retail expansion and additional advertising to build on sales momentum.

Now turning to Asia-Pacific. Revenue and operating income in the region slowed in the fourth quarter, impacted by our mature markets, as Joe mentioned. Net revenues for the quarter were up 3% on a reported basis and down 4% on a constant currency basis. As we have discussed in previous quarters, we had high retail inventories in our largest mature markets in Asia. Operating margins in Asia-Pacific for the year decreased to 15% from 19%, reflecting higher inventory markdowns and closeouts in mature markets. Our corporate costs were down 23% for the fiscal year, mostly driven by a $24 million higher benefit plan curtailment gain and lower long-term incentive compensation expense in 2007.

Turning to cash flow. Cash flow from operations improved due to continued focus on working capital resulting in ending inventories lower than last year, as well as lower tax and pension payments. Solid cash flow from operations this year allowed us to refinance and reduce our debt and invest in retail expansion and IT systems. To summarize, we continued to improve our financial health in 2007, delivering solid operating margins and reducing debt by more than $250 million. We restructured our debt, which reduced interest expense in 2007 by $55 million. Our improved credit ratings helped us secure lower interest rates. We continued to deliver solar profitability and invest in building our brands and upgrading our systems. Although the economic outlook for 2008 is uncertain, we'll continue to focus on cash flow and building our brands.

Now, over to Hanson, who'll discuss our performance in North America.

Thanks, Hans. Good afternoon, everyone. In the North American we showed solid revenue growth in the first half and ended the year essentially flat, as the business environment became more difficult in the second half. For the fourth quarter net revenues were down 3% from the same quarter last year. Our results in the second half, and in particular in the fourth quarter, were effected by the difficult retail environment in the United States. Our U.S. Levi's® and Dockers® brands both posted year-over-year net revenue growth, though net revenue growth in the Levi's® brand slowed and the Dockers® brand net revenues declined in the second half of the year. As we expected, the U.S. Signature® brand posted lower net revenues in the quarter and the year compared with last year. Operating income was up in the fourth quarter by 8%, reflecting lower SG&A. For the year, operating income was down 2%, mostly due to higher sales allowances and discounts to clear some seasonal inventories and the decrease in net sales of the U.S. Signature® brand.

Now let me talk in more detail about our brands and operations. The U.S. Levi's® brand, our largest business, had a solid year overall. The brand was supported by strong performance in men's and boy's products, which represent the majority of U.S. Levi's® sales. The much-smaller Levi's® women's business had a disappointing performance for the year, though we did see signs of improvement in the second half. Net revenues in our U.S. Dockers® brand were up slightly for the year. The men's business grew in the first half, despite the effects of retail consolidation and the loss of a key account, the decline in the second half as the market tightened, Our much-smaller women's Dockers® business delivered strong performance for the year, driven by the success of seasonal and fashion products.

In 2007 we continued to expand our retail presence in the United States, which is providing new sources of net revenue. At the end of 2007 we had 72 Company-operated stores in the United States. We plan to continue our retail expansion in 2008, including a new Levi's® store in Manhattan's Times Square that we expect to open this summer. While still a small contributor overall, net revenues from the U.S. Company-operated stores grew 54% in 2007, reflecting additional store locations and net revenue growth in our existing stores. In Canada net revenues were up slightly on a reported basis for the year, while Mexico reported strong net revenue growth for the year.

Finally, as we have mentioned, the U.S. Signature® brand continued to deliver disappointing results in 2007, largely due to retailer strategy changes that deemphasized our product. As we've discussed on previous calls, we're working with our customers to realign the brand and product to address our needs. We plan to implement these changes in the second half of the year. For 2008 we're facing a challenging economic environment. We expect a slowing U.S. economy and inflationary pricing to put additional el pressure on the business in the upcoming year. We do believe, however, that we have the right strategies in place as we move into 2008. We will continue to work collaboratively with our customers to optimize assortments, tightly manage inventory, and react aggressively to the commercial environment.

Now over to John to review the results for Europe and Asia.

We saw improvements in income revenues and operating income in nearly every country across our Europe region in both the quarter and the full year. Net revenues in Europe grew 16% in the fourth quarter and 13% for the year compared to last year. These reported results reflect the substantial benefit of foreign currency exchange. On a constant currency basis, net revenues were up 5% if the quarter and 4% for the year. Europe's operating income was up 24% in the fourth quarter and 15% for the full year. This reflects higher sales and strong gross margins and the benefit of currency exchange, partially offset by additional advertising support.

There were several key drivers of Europe's growth throughout the year. First, we had incremental revenues from the new Levi's® stores we added across Europe in 2007. Second, we saw benefits from better positioning of the Levi's® in the premium segment of the market. And third, we had strong performance in men's and women's Levi's® Red Tab, driven by the success of new fits, including updated straight, standard and skinny fits. Looking ahead we'll focus on introducing new products, expanding our retail network, and further strengthening our premium position in the region to build on our improvements last year.

Now I'll discuss our Asia-Pacific results. We continue to post net revenue growth in the Asia-Pacific division. Revenues were up 3% for the fourth quarter and 6% for the fiscal year compared to last year. Currency exchange accounted for a large portion of the revenue growth. Without the currency effect, net revenues increased 4% in the quarter and grew 3% for the year. Results in both the quarter and fiscal year benefited from growth in our Levi's® brand and our expanded retail presence. Our business also benefited from strong growth in emerging markets, such as India and China. This was offset by weaker performance in some of our mature markets in the region. Operating income was down 42% in the fourth quarter and fell in fiscal 2007 by 14% from the previous year. This was mostly the result of lower net sales and margins in certain mature markets, where we had higher markdowns and closeout sales.

We are committed to improving the performance of our mature markets in Asia. We are working closely with these markets, including a new management team in Japan, to continue upgrading the product lines, better manage inventories, and improve systems. Asia Pacific completed the roll out of SAP for the first 12 countries in December, which is an important operational milestone for the region. Looking ahead we continue to anticipate strong growth opportunities in the emerging markets in Asia-Pacific. We remain focused on delivering exceptional premium and super-premium products across the region, expanding our retail presence in emerging markets, and working to improve our business in our mature markets.

Before we close let me summarize today's comments. Overall we believe it was a solid year. We grew revenues and profits. We generated solid operating cash flow., continued to reduce debt, lowered our interest expense, and added to our global retail network. Although the economic outlook for 2008 is uncertain, we continue to innovate our products, expand our retail network, improve our operating efficiency, and take advantage of our global presence, especially in emerging markets around the world.

Now we'll be happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Carla Casella with JPMorgan. Please go ahead with your question.

Thank you for taking my question. I'm wondering if you could talk a bit about the trends within the quarter. Did you see a weakening of the market or in the consumer later in the quarter or was it fairly steady?

We would -- I assume you are talking about the U.S. business here?

Yes, mostly.

I would say we saw the -- the drop-off as the quarter progressed.

Okay. Have you seen it stabilize since?

We are starting to see some stabilization as we look forward into Q1 off the trend we experienced toward the end of the year.

And when you say any of this, have you seen any trend that a certain channel has been better or worse than others, meaning chain department stores versus JC Penney, Kohl's, Wal-Mart, any of the key areas where the retailer's doing -- gaining back business or doing something innovative to get traffic back to the stores?

Well, I think we see trends that are very -- very consistent with what's been reported publicly by most of our customers over the past three months. As John said, the trends started to accelerate toward holiday, We know how holiday performed and we've seen comps reported for January now, so I think we've seen a fairly consistent level of performance across both the department store and the chain channel, as well as the specialty store channel. Where the customers that have reported positive comps in the month of January we've done well with those customers. And generally speaking, we're -- we're doing -- we're doing well in delivering to our plan expectations with our customers. We plan with every single customer month by month, season by season, year by year, and so we're focused on really delivering to plan expectation and being in the position to respond to the shift in commercial demand that they're experiencing in these uncertain times.

Okay, great. And then one question on the product cost side, can you just discuss trends in raw material costs and if there's anything you can, or have hedged, and also include comments on transportation costs?

In terms of product costs, we -- we plan our business out 12 months, so we pretty much locked in our cost as we look through 2008 and we are comfortable where we are with that, so we think we've delinked a lot of risk from cost pressures in terms of product costs in 2008. Similar situation as to our distribution costs, as well.

Okay. But are the -- are cotton and other raw material costs up in '08 versus '07?

Well, they are, but we don't buy cotton, so we have to be care -- we buy fabric and we're not directly impacted by the cost of cotton. So clearly, there has been some increase in the price of cotton, but when you work with fabric suppliers some of that can be mitigated from sourcing and efficiencies.

Okay, great. Thanks a lot.

Your next question comes from [Kevin Sites] with Goldman Sachs.

Just wanted to ask a question on Asia and the -- it seemed like after last quarter you were somewhat encouraged with Japan had maybe turned the corner, and now maybe it seems like they're back to being year-over-year negative, so just wanted to understand if they're -- what's going on, if you can give us more color on that market?

Yes. Well, I think in Japan we saw a similar situation take place toward the end of the fourth quarter we saw in the U.S., where they're retail sell-through started to slow down somewhat, so we're been very conservative in Japan. We took some very quick actions to make sure we got our inventory back in line. We think the Japan business will remain challenging through 2008, mainly because we're seeing the economy there is quite difficult, as well. So we've the right plans in place. We're not being optimistic but we think we're addressing the business challenges as they today.

And are inventories better in line in Japan and also Korea, which I think had been a problem for most of the year?

We would say that we have improved the inventory situations at the end of the year, yes.

So I guess are you -- have you done all you need to do or do you think there's still more -- more markdown activity that needs to occur into the beginning half of the year?

Well, we feel pretty comfortable as we started the year. We just have to see how the year unfolds.

Fair enough. And then, given all of the uncertainty around the world, I was wondering if you intend to open the same amount of stores, I guess either Company-owned or franchised, as you had in this year -- this past year?

Our strategy toward opening stores is first of all to make sure they're in the right location and that they can be successful for both us or the franchisee. We respond according to how each market is performing and on a country-and-country basis. We will open more stores. We don't have a fixed target in mind, but we evaluate every opportunity that comes through, but it will remain a key platform of our brand-building activities.

Okay, great. And then on the advertising and promotion being down in the quarter, I guess, is that just planned in light of seeing what's going on at retail and deciding to take it down? And I guess if you could just give a little bit outlook for trends going forward.

I'll address that first on the international business. In fact, in our international business we increased our advertising last year, recognizing that our Europe business was getting good results. For the U.S. I'll ask Robert to answer that.

Yes, we just made a decision decision in the fourth quarter relative to our overall advertising investment. We'd invested quite consistently with our prior period performance in A&P up to the fourth quarter, but it's not a trend that we would recommend that you would forecast forward, because we have had a really consistent advertising-to-sales ratio for a number of years and expect to be investing at the same level moving forward.

Okay. And then, I guess just going into this past year you talked about being comfortable with the year of growth. Your competitor, or one of your largest competitors, talked about taking market share. Just wondering if you were in a position to comment about a full-year forecast knowing the near term's going to be obviously challenged, but it sounds like you have some opportunities in the back half of the year. And if so, or if not, if you could also comment on strategic and cash priorities for the year?

Well, I'll talk about the European trend and I'll ask Hans to talk about the cash. We're confident with your European business. It performed well in 2007 and we believe the plans we have in place for 2008 are viable plans. We do think there'll be a degree of market share we'll capture. We've got better products out in the marketplace. We feel comfortable with the strength of the Levi's® brand. So we feel comfortable with our plans of 2008 building on the success of 2007 for Europe.

If you look for -- you've noticed by now we're obviously not giving guidance for 2008. We have never done that and we're not doing it. If you look at what we're doing, we will continue to focus on the elements we always have been focused on. One is to continue to provide cash flow to reduce our debt. That remains our key objective is reducing our debt. You have seen us doing that in '07 and we will continue to work on cash flow in 2008. The second priority we'll have is to continue to build our brands and our systems. So, we'll deliver solid cash flow while we continue to invest in the business. You have seen a little bit of slowdown in North America on the advertising in Q4, but if you look across the business, we continue to invest in our retail expansion, we continue to invest, as John said, in Europe and Asia, and you continue to see us focusing on cash flow, but really making sure we build the business at the same time. But we're not giving specific guidance, as we never have done, for 2008.

Thanks for taking the questions.

You're welcome.

Your next question comes from the line of Clark Orsky with KDP Investment Advisors.

Yes, I think you mentioned a loss of a key account in North America, could you just circle back on that.?

Sure, and when I mentioned that I was referring specifically to the Dockers® brand. Dillard's department stores made the decision in the second and third quarter of 2007 to discontinue that business, as they were focusing predominantly on private label and more collection brands. We remain in conversation with them and will continue to focus on how we can develop a strategy for Dockers® that would meet their business requirements, so we can reengage with them. If you look at the Dockers® results, as I mentioned, the results, especially on the men's pants business, were impacted by further retail consolidation that we experienced in 2007, but a considerable level from the decision that Dillard's decided to discontinue the business, so that's what I was referring to specifically.

Okay. Then the emphasis by your customers of Signature®, is that in favor of their own private label?

The -- it really varies by customer in terms of what has been driving the Signature® brand performance, but what you can say in terms of two macro-level trends, there has been a fairly strong shift in strategy from fashion to more core replenishables among the mass channel customers, as well as an emphasis pretty strongly on private label, particularly in the women's business. So we've been working with all of our larger customers in the mass channel business to define how Signature® can be a successful part of their strategy moving forward. And as John mentioned, we've looked at product pricing, promotion and presentation strategies, which we will implementing in the back half of 2008 based on our work to align our strategies with our customers.

Okay. I guess the other question I had was are you -- what are the trends in allowances and that sort of thing as you're moving into '08? Is that improved, stabilized? What are the chances you think your retail customers are going to come to you for wholesale price reductions like they did a couple of years ago?

I can refer specifically to the United States on this one. Let me take your question about pricing up front. We plan our business, as I mentioned earlier, on an annual, seasonal and monthly basis with all of our customers, our large customers in particular. And so we have a product pricing placement presentation and profit plan in place that has been agreed to and aligned to. What I can share with you, consistent with what we said in the past we're focused on premiumizing our brands and driving further product innovations. And what we've seen as a result of that is contrary to your question about price reduction requests we're actually seeing that our customers are getting more confidence in elevating the average unit retail prices on our brands as a part of their overall assortment.

As it relates to the allowances, we did enter the year with excess inventory, both in seasonals as well as in core, which we spoke about in several conference calls last year. It took us through about the third quarter to work down to a level of acceptable inventories from our perspective. The holiday season was tougher than we had all hoped, but we entered the fourth quarter with a really strong focus on managing inventory very tightly, and as a result of that we're entering the year, as John said, not only as a Company but in the United States with a strong inventory position. So allowances were higher than we would have wanted in 2007 and our focus will be on operationally managing the business very tightly and pretty conservatively in the face of the environment we're looking into.

Okay, appreciate the answers. Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from Karru Martinson with Deutsche Bank.

If I heard correctly these collaborative plans that you're doing will launch for back to school, so the first half of the year we're not really going to see any major benefit; correct?

Yes, the comment that I made around the back half of the year was specifically related to the Signature® business. We've been disappointed with the results on Signature® and have been working with our customers in the mass channel to get our strategies aligned, and based on that, the efforts that we put forward with our key customers are going to be on floor starting with the back-to-school season. On Levi's® and Dockers® we have an on-going collaborative planning process with all of our large customers where we plan annually, seasonally and monthly, so we feel very confident in the planning process that we have in place for those two brands. We've implemented a similar planning process in the Signature® business, but it will be starting with July on floor that we are able to implement the work that we've been doing on the Signature® brand.

Okay. In terms of the women's brands being softer here in North America, was that more of a function of the overall market or do you feel that that was something specific to the brand on the denim side?

Sure. There's two answers to that question. I would say we did see the market -- the denim market decline in the back half of 2007, so you did see a slowing down of the market and that had an impact on our business. That said, we would say that we have implemented a pretty aggressive strategy to upgrade the product innovation, premiumize the product offer, get a strong foundation of fit, fabric and finish offer in both our misses and our juniors businesses in place within the Levi's® brand, as well as, frankly, in the Signature® business, which is part of the strategies we'll implement this year. We did see an improving trend line in the back half of the year on the Levi's® women's business, and if you look at how we faired competitively, we actually did better in the second half on a competitive basis and even in the face of a declining market. It was a combination of both and we've been strongly focused on getting to a leadership position in fit, fabric and finish, which has been what has been driving the strong performance on the Levi's® brands in our men's and boy's businesses for a number of quarters now.

In terms of when you guys look out, every year it seems like we hear the "We're having a denim blowout, we're having a denim blowout, nobody's going to buy jeans" and then it fades. How is that outlook on that for 2008?

We -- I think we also shared this in the last conference call is that we have seen the market slow down certainly. But we are seeing some important growth in certain price segment, which are the price segments we're focusing on, so we see an opportunity for a focus on product innovation and premiumization. We're seeing a strong opportunity, as we mentioned last time, in the$35 to $80 retail price segments, those are the segments that have tended to grow. We are seeing a slow down at the moderate end of the market and at the super-premium end of the market in the United States only, but we wouldn't necessarily refer to it as a denim glut. I do think that our customers are looking at consolidation their business among the leading in every price segment and certainly Levi's® is the leading brand in the category. So we see opportunity regardless of the slow down in the market and frankly, as we focus on product innovation and premiumization, we see the opportunity to really drive a competitive leadership moving forward.

Just lastly in terms of the retail roll outs, is there anything that would cause you to pause and perhaps you'd pay down more debt in the year, or how are you approaching it and what are the lead times for rolling out your retail strategy here?

Well, as Hans said, our focus is clearly on cash flow and paying down debt, so the only thing that would make us review our retail strategy is, as I said earlier on, if we are not getting a number of profitable opportunities to put in front of us, we won't pursue them, so it really on a store-by-store basis. We remain committed to retail as an ongoing growth strategy, but it will purely be driven by a situation or opportunity based on the performance and the return we expect. So I can't be anymore specific than that because that's [field] we use.

Thank you very much, guys. Appreciate it.

Your next question comes from the line of Mary Gilbert with Imperial Capital.

Yes, I just wanted to get a clarification on the Signature® brand. Did you say that in the mass channel with the Signature® brand that there's a trend now toward basics and you need to alter the line to meet that demand, so it's basically a consumer demand shifting away from fashion. Is that what's occurring there or could you clarify that?

Sure, what I said was -- and I think this has been fairly well reported on -- that our customers had put a strong emphasis in the past number of seasons on fashion and private label merchandise, particularly in women's. And what we have been working with our customers on is the role that the Signature® brand play in being a core part of their replenishment five-pocket jeans business. And so executing that fit, fabric, finish strategy across men's, women's and kid's in the Signature® brand is the foundation of the strategy that we've talking about for quite some time. Our customers have looked at their core replenishables business with a close eye, especially in light of these more uncertain times, and although they did have an emphasis on fashion and private label, what we're executing starting this back to school is to obviously position the Signature® brand as a leader in offering premium fit, fabric and finish and five-pocket jeans within the mass channel available to the consumer that's shopping in the channel. So that's really the strategy we're deploying, I can't speak about their broader merchandising strategies, because clearly they have make choices about balancing the fashion in their basic offer.

Okay. So I'm sorry, I just wanted to make sure I clarified. So you guys are really adding more fashion options to the consumer, so it's contrary to what I was thinking?

No, what we're focusing on really delivering a five-pocket jeans core fit, fabric and finish strategy. Leadership in fit, fabric and finish is paramount to the success of any great jeans brand, and so that's our focus. Our customers had had a focus for a number of seasons on fashion, especially in private label and especially in women's, and what we're doing is demonstrating the role that Signature® can play as a foundation of their five-pocket jeans offer, with a really strong focus on fit, fabric and finish.

Got it, got it, I understand. Thank you. Thank you for that clarification.

No problem.

Your next question comes from the line of Andrew Burke with [First Advisory Group].

In the past you guys had a number of restructuring charges and as we're now years down the road, what's left in terms of cash payments that we'll see on those, and I show about $8.4 million in current liabilities, are there any other long-tailed amounts that are buried in long term versus current liabilities?

Based on the current restructuring that was basically all in the short term, but that doesn't mean on a continuous basis we will continue to optimize our cost structure.

Okay.

Going forward we should [continue] opportunities to restructure our cost.

And in terms of potential pension and post-retirement payment that'll be made this year?

We have disclosed those in the 10-K and those are actually very predictable, They're in that schedule on page 37 and basically if you look through that there are no major in our cash pension costs.

Okay, thanks, I --

One key benefit you will see in '08 that's going to really help us is the lower interest expenses. That will really help our cash flow. So we'll see because of the refinancing and the restructuring of our debt, a significant reduction in our interest expenses in 2008, which helps us to deliver on our [objective, which we said is] reduce our debt while we continue to invest in our brands and our retail.

And how should we think about CapEx for this year?

CapEx for 2008, we also disclosed that. You will see an increase in our projection in 2008 because of the SAP investment going live into the U.S., and our European expansion of SAP, plus a continued roll out on our retail network. The numbers we're providing are normally a little bit on the conservative side because we're (inaudible) to deliver against our cash flow objective.

When do you go live on the SAP?

We go live in March in the U.S. and now we're going to roll it out further in Europe the following year.

Great, thank you.

Your next question comes from the line of [Ellen Escovez] with Lord Abbott.

Could you discuss the order lead time for your customers by geography?

I'm not sure we can be as specific as you want on that.

Just an idea.

We tend to book our products out on a season-by-season basis, so we're in the situation now of in Europe and Asia resolving the second half of 2008.

Okay.

In the United States we typically are now operating with about a six month, what I would call planning lead time with our key customers on our core replenishment businesses. But as we mentioned many times in the past, we've been working on reducing our lead times as a key strategy to improve the responsiveness of the Company, and we are now in the position to sell on a -- our total cycle time for the Levi's® and the Dockers® brands is typically about seven to eight months. On a start to finish with a new product we sell with a -- typically around a five-month lead time for core replenishables, but we have the capability to respond in both a 90-day and a 45-day cycle when we have positioned raw materials and fabric, and that'll be a key part of our strategy moving into 2008 so that we're in the position to respond to the variances in commercial performance that's experienced by our customers. We will be in the position to manage our inventories in real time and to be able to respond to either upticks or downticks in consumer demand to deliver a performance in 2008.

Well, it sounds like your flexibility will be much more in the U.S. than it will be Europe and Asia?

No, I -- that's why I had to get clear on your question. Our replenishment business exists all around the world. We plan our business out over six months, but our replenishment business are pretty much in line with what Robert in the U.S. around the world.

Okay. The replenishment business then you can respon -- you're hoping to be able to respond in 90 to 45 days.

That's correct.

Okay, and that's what you're working on, but at this stage you're not quite there?

No, we're there, and by that we plan the business out first on a six-month basis at the macro level and then we can replenish, if there's any uptick in the market, between 45 and 90 days.

Okay. Thank you very much.

Your next question comes from the line of Brian Bloom with Hartford Investment.

Yes, good afternoon. I just wanted to get a sense on -- in terms of moving price, would you say largely that price movement is coming from just the uptick or the movement up in your premium brands, or is there some pure price inflation that's is involved as well? And then, you may have mentioned this prior in prior meetings, but I just wanted to get a handle on what type of returns you were looking at in your retail stores in order to fully develop a retail chain?

Let me start with the retail question, because we have an economic model, obviously, on the retail expansion model. We benchmark that with the retail industry to make sure that we're delivering returns in line with the industry on our model. We do a five-year pay back MPD analysis on all our stores and we have an annual review on that. We're obviously still in the early stage of that model, but if you look at the sales in the stores and our Company-operated stores, they are performing in line or above expectations and that's obviously one of the key things in the model is to deliver that sales per square feet because that's one of the key characteristics of a retail economic model. If you look where we are in the U.S. and Europe and in Asia on our retail stores, they're showing strong sales performance. so we're on the right track to building that up.

From a pricing point of view, as Robert mentioned earlier on, our strategy is to premiumize our product offering, so we continue to bring out better products, which are more innovative, higher quality that can command a higher price, so that's a significant focus for us. There is a degree of some pricing increases we're taking on a few of our core products, but predominantly it's all about premiumizing our line, bringing out better products that the consumer can price value equation and we can sell those at higher prices.

And then just lastly, did you disclose the same -- you said your growth was -- given off a small base was very substantial, but could you break it down for the retail open what the same-store sales was?

We're not disclosing same-store sales. Our store network's still relatively small proportion of our business, it's about 6% of revenue. You asked the question do we have an economic model and what I would add to that that just gives you an indication that we feel comfortable where we are on our retail expansion, that we're delivering on the key performance indicators, which we're using to run that business, and we also believe it has a good additional impact on building our brands and (inaudible)

Okay.

But we're not disclosing same-store sales.

There are no further questions at this time. I'd like to turn the floor back over to the presenters for any closing remarks.

As I mentioned earlier on, we're comf -- we believe we've had a solid year, our focus on cash flow, paying down debt, improving the equity in our brands has been successful, but we remain to those strategies as we move into 2008. Thank you.

Thank you. This does conclude today's teleconference. You may now disconnect your lines.