Levi Strauss & Co (LEVI) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company's second quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS) This conference is being recorded and may not be reproduced in whole or in part without written permission from the company. A telephone replay will be available through July 15, 2008, by calling 800-642-1687 in the United States or Canada. From outside these countries, call 706-645-9291. For either number, please input the ID code of 53415870 followed by the pound key. As a reminder, the slide presentation that accompanies the company's comments is available in the earnings webcast section of the corporate website, levistrauss.com. This conference call is also being broadcast over the Internet and a replay of the webcast will be accessible for one month on the company's website, levistrauss.com. I would now like to turn the call over to Roger Fleischmann, Vice President and Treasurer with Levi Strauss & Company.

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

Good afternoon and thanks for joining us today. Our Q2 results reflect a challenging quarter. During our last call we said we expected the operating environment to remain tough for the balance of the year, and that has certainly proven to be the case so far. A number of factors are putting pressure on our business this year, including a weak economy, the difficult retail environment, and the transition of our U.S. business operations to a new enterprise resource planning system. The process of integrating and stabilizing a new U.S. ERP system had a substantial impact on our results in the Americas for the quarter. We expect this work to continue through the balance of the year. Robert Hanson will talk more about this in a few minutes.

Europe and Asia Pacific reported higher net revenues this quarter due to favorable currency exchange rates. We are now seeing slowing momentum in some key markets in Europe and Asia driven by higher fuel and food costs. One of the benefits of our global footprint and strong presence in emerging markets is to provide sources of revenue growth even as some mature markets struggle. A growing global network of branded retail stores continues to perform well, delivering incremental sales and growing on a comparable store basis. Within the context of the weakened retail environment, our Levis brand is doing well and should be well positioned when market conditions improve. Our U.S. Dockers brand reported the biggest decline. Although the economy had a significant impact on this business, we also have more work to do to improve our core product assortments and get the brand back on track.

Our teams are moving aggressively to bring new products and fits to market. We expect the operating environment to remain challenging for the balance of the year. However, we have category leading brands and our teams are focused on capitalizing on every opportunity to take advantage of the brand strength in this difficult environment. We are looking forward to the launch of the global 501marketing campaign this summer. This multidimensional integrated marketing campaign will spotlight our flagship product through a consistent creative thing around the world. Now, Robert Hanson will discuss our performance in the Americas.

Thanks, John, and good afternoon everybody. A number of issues impacted our performance in the United States for this quarter, including the challenging economic and retail environment, our transition to a new enterprise resource planning system, and Goody's Chapter 11 bankruptcy filing. Along with these issues the U.S. Dockers business also contributed to the region's net revenue decline this quarter. We are pleased with the solid revenue gains across the balance of the Americas region, which include Canada, Mexico, and Latin America. Let me first talk about the impact of our ERP transition in the United States. As we mentioned last quarter, in preparation for our ERP conversion we shipped products in Q1 that we ordinarily would have shipped in Q2. This shift impacted our second quarter revenue and operating profit but did not affect our year-to-date results. During our ERP implementation we experienced issues that caused to us temporarily stop U.S. customer shipments in the second quarter. This disruption led to delays in filling customer orders and customer order cancellations that accounted for a substantial portion of our Q2 net revenue decline in the region. Stabilizing and optimizing the ERP system as quickly as possible is a top priority for us. We've put considerable resources behind these efforts and are making progress. We expect this work to continue through the end of the year and impact the region's operating income for the balance of the year.

Now looking at our brand, we continued to invest in our product, marketing, and store enhancement. The U.S. Levi's brand performed well and our ERP challenges. Our men's products in particular did well this quarter. Although our women's business was down in total, we improved the product mix, fit range, and saw better first quality sell-in as a result of these efforts. The performance of the U.S. Dockers brand reflects a combination of the challenging retail environment and the weaker than anticipated performance of our core product range. We moved aggressively to upgrade our core assortment and roll out a new fit strategy that is similar to the focus on fit that helped revitalize the U.S. Levi's business. We are seeing solid performance from the new products that have already hit the floor, but it will take some time to get all the new products rolled out. We expect the remainder of the year to be challenging for the Dockers brand.

As you know, we changed the signature brand business model and we're pleased with the progress the brand has made and we're beginning to see the benefits of the strategic overhaul of this brand at retail. We are also pleased with the performance of our U.S. retail stores. They delivered strong comp store performance again this quarter and the new stores we've added since Q2 last year are giving us solid incremental revenues. While these stores are a small contributor to the overall region's sales, they are a strategic component of our growth plans and provide with us the opportunity to target a new consumer segment with trend right product and the ultimate expression of our brands. In May we opened a new Levis store in New York's Time Square which is performing above our expectations. Operating income for the region was down substantially. This was mostly driven by the region's lower revenues, expenses associated with the ERP implementation and stabilization, and higher selling costs related to retail expansion also impact operating income. Given what we've seen through the first half of the year, we expect U.S. retail conditions to remain difficult for the rest of the year. Nonetheless, we'll continue to work very close well our customers to make sure their assortments are right and to optimize the potential of our strong brands in the tough environment. Now over to John for Europe and Asia Pacific.

Thanks, Robert. European net revenues were up on a reported basis driven by currency exchange. The region is beginning to experience the difficult market conditions that have affected the U.S. business this year. Consumer confidence has dropped with rising energy and food prices, and we're seeing the biggest impact on our wholesale business. Despite these market conditions, our retail network continues to perform well and delivered comp store sales growth. In addition, our continued retail expansion is generating incremental sales. The Levis men's red tab offering was the strongest performer and grew this quarter. While the women's business was down due to a weaker consumer response to our products in certain market, the much smaller European Dockers business also grew slightly. Operating income for the region was flat as a benefit of currency was offset by higher inventory mark downs as well as higher selling costs related to our retail expansion. While we expect several of our key markets in Europe to be challenging for the balance of the year, we remain confident in the progress we're making with our European business, especially in certain areas such as eastern Europe. We will continue to focus on delivering relevant new products and innovation into the market and tightly managing our inventory.

Now some highlights from our Asia Pacific business. Second quarter net revenue was up on a reported basis. Japan, our largest market in Asia, remained our biggest challenge in the region. The management team in Japan is well aware of the issues they face, and they're taking a number of strategic actions to strengthen the business. However, we expect this to remain a challenging market for the balance of the year. Our emerging markets, particularly China and India, continue to give us solid revenue growth. The economies and consumer spending trends in these markets remain strong. New brand dedicated stores were the key contributors to revenue growth in our emerging markets. Operating income in Asia Pacific was down this quarter, reflecting a lower operating margin due to higher expenses related to the region's expanding retail network. Looking ahead, there are signs that the macroeconomic environment in the region is weakening as the issues that are pressuring the United States, including rising fuel and food prices, are beginning to impact Asia. Still, we remain optimistic about the continued growth potential of our emerging markets and are upgrading products and working to improve performance in our mature markets, particularly Japan. Now, Hans will go through the first quarter numbers.

Thanks, John, and good afternoon everyone. Second quarter net revenues declined 8% relative to last year, 13% without the impact of currencies. This brings net revenues for the first half of the year 2% below last year and down 6% excluding the impact of currencies. The decline in revenues was driven by U.S. performance where we faced several issues in the second quarter, including disruption and delays in shipping related to our ERP transition and 18 million of early shipments in the first quarter. As Robert said, we're pleased with the performance of our Levis brand in light of the economy. For the first half of the year, net revenues for our combined European and Asia Pacific business were up 10% in reported dollars and stable in constant currency. Our gross margin structure remains strong at 47% for the quarter. Operating income was 52 million versus 118 million for the second quarter of 2007. The decrease was driven by additional costs related to our ERP stabilization and lower revenue. SG&A expenses also reflects our continued investment in our brands, including new marketing programs and retail expansion. Net income of 1 million in the second quarter was 45 million lower than last year driven by lower operating income which was partly offset by a 26% reduction in interest expense. During the quarter we paid a cash dividend to stockholders and further reduced our debt.

Now I will review some highlights from the regions. In our Americas region, revenues were down 19% for the quarter, reflecting the impact of implementing the U.S. ERP system and the weakening retail environment. Results were also impacted by the Goody's Chapter 11 filing. Operating income in the region declined lower net revenues and additional ERP expenses. Europe's net revenues were up 10% on a reported basis, and down 4% in constant currency for the quarter. Revenues were up 13% reported and stable in constant currency for the first half of the year. Europe's operating income remained flat for the quarter and up 10% for the first half. The region continues to deliver strong operating margins. In Asia Pacific, net revenues were up 6% on a reported basis and essentially flat in constant currency for the quarter and the first half of the year, reflecting the impact of Japan. Operating income in Asia Pacific was down 13%, lower margins during the second quarter reflecting cost to support continued retail expansion specifically in emerging markets.

Turning to cash flow. In the first half of 2008 we delivered solid operating cash flow of $121 million, in line with last year. We reduced debt in line with last year in addition to paying 50 million cash dividend. We have an appropriate level of cash and available liquidity at quarter end. To summarize, we had a difficult quarter. We expect the remainder of 2008 to be challenging around the world. Revenue and profit were impacted this quarter by the ERP implementation and the economy. Our Levis brand continues to resonate well with consumers and our business continues to deliver strong gross margins. Our balance sheet and capital structure allow us the flexibility to continue to invest in the business and reduce debt. We will remain focused on building our brands, expanding our retail network, and stabilizing our ERP system.

So, to summarize, it was a difficult quarter, as we expected. We're closely managing the business during these challenging times with strong brands and continued to invest in building it. We are upgrading our products and our global 501 marketing campaign launches later this month. We continue to expand our global retail network. We believe we're well positioned for when market conditions start to improve. Now we'll take your questions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Carla Casella, JPMorgan.

Hi. My question is related to the U.S. business. I'm wondering if you could give us a sense for how you think the inventory levels are in the trade.

Sure, Carla. We obviously, because of the ERP issues that we addressed in the second quarter, were unable to fulfill all the customer demand that we had in the quarter, and so our inventory levels were weaker in the second quarter than we anticipated. We have been able to get our inventory level to an acceptable level coming into the third quarter, as we've been working to stabilize the performance of the ERP system. At this stage, we would say that we feel comfortable with the inventory levels that we have. We're aware of any gaps that we have that we need to fill, and we also are aware of any gaps that we need to fill and we are also aware of any seasonal merchandise because of the disruption in our flow that we need to resolve and are working aggressively with our customers to resolve that. We plan our inventories daily, weekly, monthly with our customers, and manage our inventories to the plan that we have with our customers, so we feel comfortable we'll be able to stay on top of that even in a tough environment.

Do you think any retailers are using the slow down from ERP to cancel orders just given the tough environment?

What we feel has happened obviously is where the ERP difficulties impacted order flow. Some of our customers did obviously take advantage of the disruption in order flow to adjust their open to buy and to try to focus on inventory turns. These are issues that we face on an ongoing basis, so I think the short answer would be yes, but what we clearly are focused on is what inventory we need at retail to deliver the plans that we have by customer for the balance of the year, and so we're getting back to a more normalized level of inventory to support sales plans for the balance of the year.

Great. Thank you.

Your next question comes from the line of Kevin with Goldman Sachs.

Just wanted to follow on Carla's question. Did I hear you say there was some, I guess, catch-up after the end of the quarter or was that during the second quarter?

We were -- we obviously faced the disruption in the second quarter, and we saw an improvement in our ability to ship and to deal with any inventory disruption through the second quarter. So we did get back into an inventory position to support our sales in the latter half of the second quarter and feel good about the inventory position that we're carrying into the third quarter.

Okay. And I guess just kind of broadly speaking, what kind of challenges are you facing that is different here than you experienced in Asia? Didn't seem like there were this magnitude of issues. Obviously it's a smaller market, but if you could talk about that.

Well, I think it's a matter of timing. Clearly the challenges in the economy impacting us globally have started in the U.S. and I think we're all pretty familiar how long that's been the case here. There is no doubt now that we're starting to see some of those impacts, higher fuel costs, higher energy costs, starting to roll out across the world. We believe with the combination of the strong growth markets we've got in Asia, India, and China, that's going to offset some of that, but there's no doubt that we're getting no help from the economy in any of our markets around the world.

I appreciate that. I guess I was thinking more along the SAP lines when you rolled out SAP.

Well, SAP we've already introduced and completed throughout Asia Pacific.

Right. I guess I was wondering why it's been, I guess, more of a challenge in the U.S. than it was in Asia.

I think because the U.S. is a much bigger, more complex business. In Asia, we're able to roll it out on a country by country basis, and the reality is we've had more interface challenges within the U.S., and it's much bigger, more complex business.

That's fair. I guess, how long do you think it will take to stabilize so you're feeling good about where your inventory levels are now, but it sounds like your costs are still going to be elevated to get the implementation complete? For how many quarters should we see this sort of level of elevated SG&A expense at least?

Let me try to answer the first question that you asked. When we say stabilization, it refers to the work that's being done to address the issues as they arise and the work being done to optimize the system as it was designed. We are shipping, and the most significant issues that drove the shutdown at that time beginning of the second quarter have been addressed. Other issues do remain. They are related to the interface issues that John just referred to but have less impact op our operations than what we experienced in the second quarter.

Okay. That's very helpful. Moving on to the cost side, margins were pretty strong. Obviously some of that is retail, but also you cite some sourcing gains. I guess is that true -- and some mix shifts. Is that true in all regions, or in most regions?

If you look at our margin structure, it is clear for us to say that it was a difficult quarter, so I think it's good to look at the total first half performance of the year. If you look at our first overall performance, we have a 12% operating margin for the second -- for the first half of the year. So if you take the first half, 12% operating margin which is supported by a very strong gross margin, which we continue to have. In there we have highlighted three specific things. One, in those results are the stabilization and the cost for the ERP system. We had the Goody's Chapter 11 in the first half, and then last year we benefited from a curtailment gain. So we continue the first half of this year to deliver strong operating margin, and if you look also -- in the first half our international businesses continue to provide strong gross margins and strong operations.

Okay. That's helpful. On the 501 launch that you mentioned, just wondering, should we expect increased advertising costs in the back half of the year associated with this?

We are not giving any forward-looking guidance, but obviously we will appropriately support the 501 initiative because that's an important initiative to us, and that's not just advertising. There is a product, a retail component so it will probably go beyond just looking at (inaudible).

Okay. Would you expect to -- I guess would your priorities be to pay down debt or to build cash in this environment?

Our priority is very consistent, and I think we have -- while we had a difficult quarter consistently delivered against that, we're here to drive cash flow but also invest in our brands. I think we have proven that we can do both. We're supporting our retail network. We're supporting the ERP implementation while we're delivering strong operating cash flow in a difficult environment. It has allowed us to both pay a dividend in the first half of this year as well as to reduce our debt. So I think that is evidence with the fact that even in this difficult environment, we are staying true to our objective of building our business around the world and building cash flow to reduce our debt.

Okay. Thanks very much.

Thank you. Your next question comes from the line of [Kelly] (inaudible) with [Eaton Vance].

Hi. Thanks for taking the question. On the U.S. wholesale side are there any particular channels of distribution that are more challenging, or is the weakness pretty widespread?

We're obviously, as I think both John and I have said, as well as Hans, we're pleased with the performance of the Levis brand. Our view is that we're performing at or better than the category and the majority of our customers, but the economic impact of what's going on in the states at this stage is having a pretty widespread impact. There are buckets of performance by channel. For example, multibrand specialty that is tending to fair slightly better but, in general, the tough economic environment is pretty widespread across channels. The Dockers brand and the category of casual pants was hit much more aggressively by the economic downturn, and that's pretty consistent across all channels.

Okay. Great. That's helpful. How significant was Goody's for you?

I think it's been obviously publicly reported what we're owed as an unsecured creditor of Goody's, but as Hans pointed out it had a material impact on our operating income for the second quarter.

Okay. Then in general, I think you've mentioned, and with some of the past questions -- but in general what's been your experience with retailers open to buy?

Let me refer to open to buy within the United States. Obviously -- and if John wants to answer the question more broadly, he can. Within the United States we are, as I mentioned, the Levis brand is performing well, the Dockers brand continues to be the number one brand in the category despite the challenging performance we face. Our customers are supporting our brands with the appropriate open to buy to deliver the plan that we have with them for the balance of the year. So I think we feel satisfied that we can secure the open to buy that we need. Clearly, most of our customers have said they're focused on maintaining control of costs and improving their own cash flow, so they're looking at inventory turn very aggressively and we're looking at it with them as well. But, as I mentioned earlier, we feel confident in the inventory plans that we have across our customers domestically.

It's similar situation globally. Brands are performing well, retailers are concentrating on keeping inventories as low as they can, but we're not seeing any resistance to carrying our production at an appropriate sell-through level.

Okay, great, thank you.

Thanks.

Your next question comes from the line of Bill Reuter with Banc of America.

Good afternoon, guys.

How are you doing, Bill?

I'm sorry if I might have missed this, but did you guys say for how many days you guys stopped shipping during the quarter?

We didn't, but I'll answer the question. We were shut down for approximately a week, but the issues continued with respect to fulfilling customer orders in a timely manner, and this did result in some order cancellations during the quarter, as I mentioned.

So would it be fair to say that the 18 million that you guys shipped in the first quarter, it was significantly larger negative effect in the second quarter?

Yes.

Okay. You guys mentioned your strong comp sale performance in your retail stores. Were these sales positive in the quarter?

Within the U.S. business, I'll talk about that first, again, John can comment on sales outside of the U.S. We had very strong comp store sales performance across the Levis brand, in particular within the U.S., and they were positive year on year. We feel really good about that performance, as I mentioned. We see this -- it's a small overall component of our revenue and we see it, though, as a really important strategic priority for us because it gives us access to a new consumer base, it gives us a chance to put more innovative product into the market and to express our brands in a controlled manner in their best possible light.

Similar situation globally. Our owned stores deny comp growth on prior year.

That's good. Getting back one more time to the ER P issues during the quarter, were there any significant one-time costs that you didn't add back due to -- maybe you guys were spending more than you expected or something that you may have expensed? Anything in operating expenses there?

Saw into our second quarter -- what you saw in our second quarter earnings performance is that we experienced additional costs in SG&A through ERP stabilization so our Q2 is impacted with that. And as I said in the beginning, probably good to look at the first quarter and the second quarter together because while we're experiencing additional costs, we're still delivering that 12% operating margin while we're having additional ERP costs the Goody situation and last year we got the benefit of a curtailment.

One last one. Is there any way to quantify what those costs would have been in the quarter? Could it have been $5 or $10 million?

We're not disclosing it. I think it's good to just say I think what I said. I apologize I can't say more. At 12% operating margin was delivered despite additional ERP costs, despite the Goody's bankruptcy and curtailment gain. The curtailment gain itself is disclosed. That is 21 million versus last year.

Okay. Then just one last one. In terms of the general repositioning that's been going on in Europe can you talk about what you guys have been doing there and how that's going?

Yes, it's basically focusing on product. If you look at that time product range we now offer for both men's and women's, it's dramatically improved. We also continue to invest in our own stores, and the retail format within those stores has been upgraded, and we're seeing positive benefits for the Levis brand and also the Dockers brand. We're getting some growth from that as well. It's really just doing the fundamentals very well. Great product, upgrading the retail presence and, as we mentioned earlier on, that will be supported by the global 501campaign which will start later this month.

Great. Thanks for taking the questions.

Thanks.

Thank you. Your next question comes from the line of Karru Martinson with Deutsche bark.

Good afternoon. Sorry to harp on the ERP so much. In terms of as we go forward, these kind of interface issues and less operational impact, should we expect a similar magnitude of costs over the next couple quarters or is the bulk of this behind us?

While we can't give you the specific, what we can talk about is over the quarter we made meaningful progress on basically the learning curve on working with SAP, some of the issues we experienced. We have more work, but it will have lasting impact going forward than it had in the quarter. From that perspective, looking at the first half is a better representation of where we are at than looking at the second quarter.

Okay. In terms of the worsening market conditions around the globe here and your comments here that you're appropriately cash and liquidity position, what is going to be your outlook that gives you the confidence on that position?

It it's -- what it is, I think, a few things. Obviously as we said, we're not giving any forward-looking guidance on the second half, but a few things, we were very pleased with the brand performance on Levis. We're doing a lot of good work on the Dockers brand. We have our retail stores and we have the 501 campaign, and we continue, as we said, to advance in the strength of our brands. We are focused on cash flow.

And our gross margins are holding up while we're doing all this. So the combination of all of that is delivering on solid cash flow.

And just in terms of the -- kind of the shift in bonuses and long-term comp reversals, what was the impact versus the year-ago period?

We are not disclosing that specifically. There has been some impact of that. I think if you lack it at our SG&A expense in total, what you basically see from a trend line is the continuation of the retail expansion that is impacting our cost structure but also helping our gross margin structure and the ERP system and the continued expansion of Asia. Those are the three buckets. There are some other elements in there, include some changes in bonuses, but there are some puts and takes both directions, the key trend line is retail expansion in Asia and ERP system.

Just lastly, as your brand continues to resonate, obviously you've become more of a target for the competition. Are you seeing a competitive response here as we start to come into the back-to-school period, perhaps more private label as the consumer trading down? What's kind of keeping you guys moving forward here?

Yes, what I would say about the Levis brand in particular in the Americas region is we're focused on implementing strategies, and they're having the result -- they're having the impact that Hans and John and I have referred to earlier. We've been focused for quite some time on upgrading our fabric and finish offer, making sure that we have a category leading innovation across price points, including premium and super premium price points. We've seen an increase in average unit retail prices across all channels of distribution. We're focused on improving our on-floor presentation to match the quality of the product execution we're delivering now, and critically our marketing investment behind our flagship 501 product for the back half of this year is major competitive advantage that we have. So we're focused on that. Relative to specific competition, obviously we're doing well and, as I mentioned earlier, doing better in most cases in the category and in our channels. So people are paying attention to what we're doing, but we're not distracted by that. We're really focused on the execution of our own strategies. As I mentioned on Dockers, we're in the process of upgrading, especially our core product offer, to implement a similar fit strategy across both mens and womens that resulted in the revitalization of the Levis brand and feel good about where we're on track there.

Thank you very much, guys.

Your next question comes from the line of Emily Shanks with Lehman Brothers.

Good afternoon. You had mentioned that you feel as though the ERP system has sort of stabilized. Will you look to roll this out outside of the U.S. in the Americas segment and, if so, what's the cadence of that?

Yes, we aim to roll out this ERP solution globally. As mentioned earlier on, we've completed Asia Pacific. We're in the stabilization of the U.S. We're taking a pause at the moment, settling everything down in the U.S., learning our lessons from that, but over the next few years we will roll it out across every market around the world.

Great. Thank you for the detail in the Q around the SG&A increase and saying $40 million year over year and 20 of that is due to FX. You indicated the remaining portion was due to both the ERP implementation and retail expansion. How can we assume that split? Is that more of a 50/50 between ERP and retail expansion or is it something completely different than that?

It's a good question. Obviously we are not disclosing the details of that, but both are key drivers to the increase.

Okay. Great. Just two more. Around the ERP issues, I know that you had indicated that it was attributable -- excuse me, the decline in Americas sales was attributable on a substantial decrease to the ERP issues. About what percent of the decline in the American sales is substantial, like 90%? Can you give us a sense of that?

That is also a good question. I think we are not disclosing our sell-through performance (inaudible) which obviously we track. As Robert said, we're very pleased with the Levis brand. We are working to further strengthen the Dockers brand, which is the number one khaki brand. We have good resonation with our brands, both with our customers and our consumers, but the second quarter must be clear was meaningfully impacted by the ERP implementation. Therefore, looking at the first half gives you a better indication, although our first half revenue was obviously also impacted by the ERP implementation in the U.S.

Okay. And then -- sorry, go ahead.

And the second quarter, as Robert said, the things we disclosed without quantifying, 18 million of revenue moved from quarter two in quarter one because we did some early deliveries. Robert said we had seven days of interruption on shipping and we have some follow-up on that so that just gives some color that that had an impact to the quarter.

Great. Thank you. Just my final question is around the Levis jeans performance. Do you feel that overall there's a back to basics trend by consumers, and perhaps do you think that you're benefiting from that?

It's a good question in terms of what's going on in the consumer marketplace. We can't speculate to know exactly what's in the minds of consumers, but what we do see is an emphasis in most of our qualitative research and some of our quantitative research on brands that represent values of authenticity, quality, an emphasis on quality that never goes out of style, all of which are hallmarks of the Levis brand. One of the things that we think has driven the resonance of the Levis brand is the focus we put on product innovation leadership. Fit, fabric, and finish, and then executing that strategy across price points and channels in a way which is more effective than competition. So I think it's a combination of both really. There is a momentum to the kind of brands positioning in the moment, but I think the majority of our success with Levis is driven by the effective execution of our strategy. Great. Thanks very much for the time.

Your next question comes from the liner of Jeff Kobylarz with Stone Harbor Investment.

Hi. Good afternoon. Can you comment about the inventory level? It's up year-over-year by 34 million, 542 million last year to 576. Is that just kind of catch-up inventory level as you try to fulfill your customers for the third quarter or what?

Hi, Jeff this is Hans here. It's a combination of two impacts. You might have picked up in Wall Street yesterday it is like back to school starts a little earlier, so it is a build up behind the back to school season, but it is also as we disclosed, we have a little bit more inventory in the system because we didn't ship as much because of the ERP incident, so it's a combination of those two.

Okay. So it's -- the inventory then is current? There's -- the mark down risk is --

It is current and on the mark down risk we always at the end of the quarter set up the appropriate provisions for that so we have a very clean inventory from that perspective and we're well provided if there would be certain products we have to sell at a discount it would be excess inventory.

Okay. And then about the Goody's situation, I would think you are a critical vendor since you are the largest creditor to them, so shouldn't you be recovering all of your liability?

We obviously have written off the receivable into the quarter. We are a substantial character. We are in constant negotiation with (inaudible) and obviously depending on where the excess liquidity will be once secured that, that will tell us that story, but obviously we continue to be committed to getting that money back.

Right. Okay. And, Robert, I was a little bit confused about that you did -- you said in the Americas, men's Levis did well, but -- it sounds like your customers were out of stock for a bit of the quarter and I think you said you were -- you ginned market share, you did you better than your peers. I'm just curious how all those things line up that way.

As we mentioned, we did pre ship about $18 million worth of goods in the first quarter to -- in anticipation of the ERP implementation. So coming into the second quarter our retailers were in a really solid inventory position to support the sales plans for the second quarter. When we faced the weak disruption that we faced, we obviously saw order cancellations and disruptions at customer order fulfillment, and that put us in a stock-out position in certain core high turning products, but we worked very quickly and very hard during the quarter to try to rebalance inventory where we could, and despite all of those issues, as John has mentioned and Hans has mentioned, we're pleased with the performance of the Levis brand. It shows the resonance of the strategy with our consumers and we worked very hard to get our inventories back in line to support our plans and strategies for the balance of the year.

Okay. Can you say -- do you know for the industry alone, was denim industry, was it up in your second quarter?

We actually saw a slight decline. It varied by consumer segment. Womens was tougher than mens. A slight decline in total in the category. It varied by channel. The mass channel and vertical tended to perform better than the department store channel than the chains did.

All right. And again, just to try to summarize, I think you said the ERP situation, the problem was the greatest in the second quarter, now issue to variance is going to be less in the third quarter, I would take it even less in the fourth quarter. Is that correct?

What we said, we're working to stabilize the system and address the issues as they arise and really optimize the ERP system as it was designed. We are shipping with the most significant issues that drove the shut down at that time beginning of the second quarter being addressed. Other issues with an implementation of this magnitude will remain but they'll have less impact than what we experienced in the second quarter.

Okay. All right. Then lastly, you said that U.S. retail stores had positive comps. Was the profitability of the U.S. retail stores, was that up year-over-year?

We are not disclosing the profitability, but just the color a little bit where we are. We're very pleased with the sales performance there, which is a key driver of the economic mole at retail, sales per square feet, and we feel that we're moving the profitability of our retail network in line with where we would like it to be from delivering on our profit model.

Okay. Thanks very much.

Thanks.

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

Hi, thanks. I think you said in your opening comments that Dockers was kind of the biggest impact on the quarter. Can you talk about -- a little more color about what's going on with Dockers and why you think the core product was weak?

Sure, Clark. Clark, what I mentioned in our comments was that we saw the Dockers brand impacted by two things. First, the category of casual pants has been impacted by the weakening U.S. economy much more greatly than the jeans category has. Those are facts that are in the numbers and so obvious Dockers has been impacted by that. But, in addition, we did see a slower than anticipated sell-out in our core product offer. That we've been working to address pretty aggressively. What it involves is obviously transitioning some of the products that are more legacy products that have been in the line for quite some time to a more innovative product offer. Our focus is on putting out in both men's and women's, a market leading fit offer and then upgrading our fabrics, our pattern work and our color as we work to premiumize the Dockers brand. That's the primary focus that we have on improving our product offer and then implementing an improved on-floor presentation of that product offer as we work to revitalize the core product sales.

Okay. I mean, I was under the impression that a lot of work had already been done in that regard on Dockers, sort of post the previous evaluation to potentially sell the brand. Just wondering kind of why sort of now there's this focus on changing the product.

In the past calls, we have referred to the growth that we've been driving on the Dockers brand, predominantly in new product segments, so women's tops and in some seasonal categories and that was, in fact, true. We were seeing growth at the rate of the category in our men's bottoms business. Where we need to focus more is in driving the innovation strategy that I just referred to in our core pant long bottoms business in both men's and women's, and that's our focus moving forward.

Okay. Thanks. And then in the -- I guess the forecast you give for CapEx for the rest of the year it looks like it's down. It says you're shifting some global information resources into '09. Can you talk about that?

Yes. The capital expenditure line, from a cash point of view, you see this we moved a bit of the ERP implementation in Europe a little further out than the original plan because our focus is on stabilizing the U.S. implementation. So we've put Europe a little later and that defers some capital expenditure into next year.

Okay. As you said today, do you think you're going to have the ERP situation in North America solved by the end of this year or are you sort of unsure at this point?

Well, I'll repeat, I think what I've said already, I'll say slightly differently, our shipping volumes are very close to our shipping forecast now, which is based on customer demand and we're not experiencing the restrictions imposed by the system that occurred during the second quarter. So we feel we're delivering to the plan that we have in place to stabilize the performance and, as I said earlier, we expect the issues that remain to have less impact on our operations than what we experienced in the second quarter.

Okay. Good enough. Thank you.

Thanks.

Your next question comes from the line of [A.J. Guido] with Golden Tree.

Thanks. Most of my questions are answered, but just given what you said on the ERP in North America your shipping volumes are close to what you have forecasted for shipping. Is that just a factor because you're spending that much more money on the system? Or, I mean, I guess where are you in terms of where you think you'll be as far as getting completely implemented?

If you look, the impact on the quarter, the ERP system has impacted at the cost line but also in the quarter at the revenue line because we had some early deliveries into the first quarter in anticipation of going live. Secondly, as Robert has mentioned, we lost seven days of shipping and we had some shipping issues linked to the ERP issue into the first start-up. If you take a step back and look at our first half results, we're delivering 12% operating margin. While we're experiencing some additional costs, some lost revenue, one could debate, and that we also had last year the curtailment gain. So 12% operating margin in the current environment with those things gives you some indication what we have been able to deliver while we have experienced some difficulty.

So given where you are now in the revenue you had lost in Q2, the Q3 and Q4, do you expect, I mean, given that you're shipping to budget or forecast, do you expect to lose any more revenue due to the ERP?

It's just -- it's part of the stabilization process. We're doing everything we can to optimize the shipping potential, and we'll just see how it goes as we settle everything down.

Yes, so what we're seeing is, obviously, as Robert said, we're shipping, but -- we're not giving any forward-looking guidance. We're making good progress on where we're at on shipping. And while we have continued to work ahead of us, and we're not giving forward-looking guidance going forward, I think the impact in the second quarter was more than our run rate from that perspective because we're making good progress.

I guess what I'm reading into then is just the comment that your shipping volumes are to forecasted demands so that would imply to me that you really wouldn't be missing out on any revenue opportunities. Is that the right way to look at it or given what what you --

Yes. Subject to what we know today, that is correct. That's our goal, and then --

I'm sorry?

That will be the goal. That will be the goal, obviously. But as we said, we still need to get everything --

It's a complex implementation. It takes time to settle all down.

So what type of things actually could come up here that haven't already come up just as an example for somebody that might not be familiar with it?

If I knew that, I wouldn't be as concerned, or wouldn't be paying attention. We think we've got everything covered, but when you move from a system you've had in place for 15 years to a new system, you've got to live through some anniversary periods, and we're starting to do that now.

Okay.

Thank you. Your next question comes from the line of [Phyllis Kamara] with [Pax World Funds].

Hi, thank you. About the only thing left for me to ask about is the signature brand at the mass merchant. Was that impacted at all during the quarter? It seems like -- I know you've had issues just in general sell-through there before, but what do you -- what are your expectations for that for the back to school time frame?

[Phyllis] to address your question about signature, as I mentioned up-front we're making good progress on the plan that we've laid out to he revitalize the performance of the signature business. Signature was impact by the ERP system's implementation in the second quarter, like all of our brands, but we are now, as we are with Levis and Dockers, shipping to forecast based on customer demand so we feel that we're back into a rhythm on that business. And we, as I mentioned in my comments earlier, feel positive about the impact of our strategies on the performance of the brand right now. The market data would show that there clearly is an opportunity in the mass channel in this tough economic environment. There are consumers who are buying jeans in the mass market, possibly some slight growth opportunities in the total category, and signature can certainly take advantage of that. We'll keep a close watch on that and plan our business accordingly with our major customers in the mass channel.

But you don't expect to see any issues, at least as far as you can tell today with the back to school getting the product in the stores?

No, as I said, we're shipping -- our shipping volumes are very close to our shipping forecasts which is based on customers' demand. We're not experiencing the restrictions that were imposed by the system in the second quarter. As John mentioned, we don't after crystal ball into the future but we're shipping to our forecast at this moment.

Okay. Thank you.

Your last question comes from the line of [Janet Clay] with Liberty Mutual.

Yes. II was wondering, what week during the quarter were you shut down for shipment?

We were shut down in the middle of March. I think it was probably the third week in March.

Early in the quarter.

All right. Then was there any customers that were not impacted or was it across the board?

The system, obviously when you're shut down, you're shipping for a week, that means that you're impacting the entire customer base. So every customer base was impacted during the second quarter.

Okay. And then did you quantify of the 20% of revenues that were down for the Americas, what amount of that was from cancellations?

It's hard to obviously always look back to that. What we are seeing is that we're pleased with the Levis brand performance, and that we had a significant impact in the quarter from the ERP system. We did some early deliveries which we did disclose of 18 million last year. That's one part of it. We lost seven days of shipment when we had some shipment issues. That gives some color to what that could be but we're not disclosing that.

Some of those shipments I assume that you just did by air or something a little faster to make up after that week?

We obviously drove a number of manual work around to be able to deliver the shipping volume that we needed to deliver to recover the business. So there was a myriad of things that I can say that we did manually to recover the business in the second quarter. The shipping issues had a larger impact and substantially contributed to our net revenue decline in the Americas in the second quarter, as we've mentioned earlier, although it's really difficult, as Hans has said, to discern between the economy and the ERP implementation to determine what caused the order cancellations.

Okay. I mean, I guess what I'm trying to get at is sort of what a normalized EBITDA would be for the quarter, and it's kind of hard because --

So that is hard. That's why I think what I could give you, look at the first half year where we delivered an operating margin of 12%, which is inclusive of some lost revenue which is inclusive of the ERP additional cost. It is inclusive of the Goody's Chapter 11 and not that having that curtailment gain. So a 12% operating margin over the first half while we experienced some difficulties confirms that we deliver our cash flow objectives while we're investing in strengthening the ERP stabilization into our business.

Okay. Just because your slides say that you expect things to be weak for the rest of the year but the call seems more that you see more -- seem more confident that the worse is behind you. I'm just trying to figure out how to reconcile those two things.

Yes, that is a very good question. What we're saying is we're giving a lot of color to the first half by looking at the total first half operating margins. What we're saying is that we're not giving forward-looking guidance. At the remainder of the year, around the world will be challenging. Challenging in view of an economy which is, I think, more uncertain from a consumer spending point of view, what we see in the newspapers. I think that's different than weak. It's a challenging outlook on the economy. I wanted to clarify that.

Okay. Thank you very much.

You're welcome.

Thank you. We do have one more question from the line of Reade Kim with Merrill Lynch.

Thanks. Just one question. I wanted to follow up on the Goody's topic. I was curious on your North American wholesale business. Roughly what mix of your customers maintaining similar credit terms or tightening and how that's evolving in light of the environment?

Sure, Reade. We closely monitor the credit conditions of all of our customers and we monitor developments in the credit markets and their impact on the consumer, our customers, and our own business. We remain pretty confident that we've got to right credit and collection policies and procedures in place. By customer, we don't disclose what those are by customer. Obviously this is particularly important in the current environment.

Got it, thanks.

Thank you. At this time, I would like to turn the floor back over to the presenters for any closing remarks.

Thank you. Appreciate your time, and we'll talk to you next quarter.

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