Levi Strauss & Co (LEVI) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. third-quarter 2008 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. A telephone replay will be available through October 9, 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 65542257 followed by the pound key. 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 of Levi's (technical difficulty).

Good afternoon and welcome to our conference call. I am pleased to introduce members of the Levi Strauss & Co. management team. With us here today are John Anderson, our President and CEO; Heidi Manes, our Interim Chief Financial Officer; and Robert Hanson, President of the Americas.

Before we begin, let me briefly remind you of a few items. Our discussion today may include forward-looking statements that are based on our current assumptions, expectations and projections about future events. Although these statements reflect the best judgment of our senior management, they involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the statements, as more fully described in our annual report on Form 10-K, our registration statements and other filings with the Securities and Exchange Commission. Other unknown or unpredictable factors also could have a material adverse effect on our future results, performance or achievements. We provide information on our website about how we compile various measures used 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, everybody, and thanks for joining us today. Our third-quarter results show a solid performance for the period. Net revenues grew in all three of our regions, contributing to the increase in net income.

The results give us confidence that our global strategies are working, even in the face of weak economic conditions in major markets around the world, particularly the United States. These strategies include upgrading our products, capitalizing on our global footprint and improving our operations worldwide. In the midst of a global economic downturn, the Levi's brand is performing well around the world. We have rolled out the Company's first global marketing campaign, called "Live Unbuttoned." The campaign, which has integrated across traditional and online media, spotlights our iconic Levi's 501 jeans. The global scale of the campaign demonstrates our leadership as the number-one jeans company in the world.

Although the Americas business continues to navigate the tough retail environment in the United States, the region's performance was substantially better than last quarter, underscoring the progress we made stabilizing the US enterprise resource planning system and fulfilling customer orders. We have addressed many of our ERP problems, but still have more work to do through the end of the year.

We are pleased to have our new CIO, Tom Peck, onboard. Tom joined us last month from MGM Mirage, where he was the CIO. He was also CIO for two divisions of General Electric and has tremendous global ERP experience.

Revenue growth in Europe and Asia Pacific show that our strategies to expand our retail network and capitalize on growth in emerging markets are delivering solid results. Based on what we've seen so far this year, we expect the economics conditions in most of our mature markets to remain challenging for the foreseeable future. This will continue to make the operating environment tough heading into 2009. But we have strong brands and a global business that is proving its resilience during these tough times. We will continue to invest in our brands to make sure that we are well-positioned when the market improves.

Now, Robert Hanson will discuss our performance in the Americas.

Thanks, John. Good afternoon, everybody. During the third quarter, the Americas region continued to focus on executing our core strategies of offering the best product in our categories, presenting them in a compelling store environment and supporting our brands with effective marketing. Our focus on these fundamentals helped the Americas deliver strong financial results this quarter, despite the tough retail conditions and customer bankruptcies in the United States.

The region's net revenues grew slightly in the third quarter compared to last year. Operating income was up because of better gross margins driven by a stronger mix of higher-margin product. Our improved revenue performance reflects the progress we've made with the ERP system, as John mentioned.

To give you a little more detail on ERP, we are pleased that many of the issues we faced in the second quarter were resolved faster than we expected as we moved through the third quarter. Although we still have more work to do through the end of the year, our shipping performance continues to improve. In fact, during Q3 we successfully shipped our highest volume week of the year so far. With shipments for the peak holiday season beginning soon, we remain focused on improving our ability to fulfill customer demand.

Looking at our brands, consumer demand for the Levi's brand continues to be strong in both our wholesale channel and our company-operated stores, even in a tough retail environment in the US. We have now rolled out the integrated 501 program across the Americas. The campaign is generating strong visibility for our flagship product and, we believe, redefining the relevance of 501 jeans for a new generation of consumers. We are also pleased that our 501 sales performance for the quarter met our expectations.

US Dockers revenue also improved this quarter. The revenue gains were largely driven by sales of excess inventory following delivery issues in the second quarter. In fact, the Dockers performance this year has been disappointing. Looking back, the brand's revenue growth during 2006 and the first half of 2007, which produced topline improvements at the expense of earnings, was not sustainable. We've taken a hard look at what it will take to turn around the Dockers business over the long term. We are overhauling the products and making sure we have the best fits in the market and we are transforming the way khakis are sold at retail by segmenting the presentation by fit to make the brand more relevant. This will take us some time. We have a lot of work to do over the next year to get the brand back to consistently delivering profitable growth.

The Signature brand continues to make progress with its new business model that focuses on great core fits. This strategy is driving better profitability. New products, branding and in-store presentations were rolled out in stores during the quarter for the fall and holiday season.

We are pleased with the performance of our businesses outside of the United States also, particularly Mexico and Latin America, which both had strong results this quarter. Our company-operated retail stores in the Americas continued to perform well. Our stores are an important strategic growth initiative for the region. They represent the ultimate expression of our brands and help us improve the way we execute our strategies with our wholesale customers. We are pleased with the progress of our stores this year. We will continue to expand our retail network and work on improving store performance as a part of our long-range plan for retail.

Looking ahead to the rest of the year, you know, we recognize that the retail environment will remain very difficult. As you know, many of our US wholesale customers have reported disappointing back-to-school results. We remain focused on being the best at jeans and khakis across our brands and in this environment we are working very closely with our customers to make sure our inventories are in balance.

Now, John will cover US and Asia Pacific.

Thanks, Robert. European net revenues were up, reflecting the continued strength of the Levi's brand. Economic conditions remain tough in several of the major markets, pressuring our European wholesale business, particularly in Spain and Germany. Wholesale weakness was more than offset by the strength of our retail network, which continued to perform well across the region, delivering double-digit revenue growth this quarter. The Levi's men's Red Tab product line performed the best again this quarter and continues to perform well in the market. The women's business remained challenging. We are currently bringing new women's products to market to help boost consumer response to our women's range in certain markets. The new 501 campaign launched across the region a couple of weeks ago, and is generating buzz in the news media and among consumers.

The smaller European Dockers business also grew again. The region's operating income also increased, driven by higher revenue performance and stronger gross margins. Europe will remain challenging for the balance of this year, as economic conditions continue to erode in many mature markets. Nonetheless, we're making progress with our growing retail network and we see opportunities for continued growth in Eastern Europe. We will stay focused on executing our product strategies and tightly managing costs across Europe.

Now, I will review some highlights from our Asia-Pacific business. Third-quarter net revenue was up for the region. Revenue growth in the Levi's brand, which accounts for 95% of the regional sales, was complemented by strong growth in the much smaller Signature brand. The new 501 campaign began to roll out in Asia in August. We are encouraged by the early consumer response to our 501 products in the region.

During the third quarter, market conditions remained relatively strong in our emerging markets, where consumer spending continued to fuel revenue growth. Revenue also benefited from additional brand dedicated stores, especially in India and China. In Japan, the weakening economic conditions and a downturn in the denim category contributed to disappointing sales. Some of the initiatives underway in Japan include launching new men's core fits, upgrading and expanding our super premium products for men and women, revitalizing 501 and improving our in-store presentations.

Operating income in Asia Pacific was down this quarter. This was driven mostly by our continued investment in the region's expanding retail network. Like the rest of our regional business, however, the market conditions in several mature markets in Asia are getting tougher. However, we still see growth opportunities in our emerging markets. We believe they will continue to be the growth engines for the region through the end of the year.

Now, Heidi Manes will take you through the third-quarter numbers. As you know, Heidi became our interim CFO in late August. She is an experienced leader who is steeped in the financial details of our global enterprise. Heidi?

Thanks, John, and good afternoon, everyone. Our third-quarter results reflect revenue growth and improved gross margin across all three regions. Operating cash flow remains strong as well. Consolidated third-quarter net revenues increased 6% compared to last year or 2% without the impact of currencies. This brings reported year-to-date net revenues of 1% compared to last year.

Consolidated gross margin improved to 48% in the third quarter from 46% in the same period last year. This quarterly margin is consistent with our year-to-date performance. Gross margin across all three regions benefited from a favorable sales mix, more sales from company-operated stores and lower sourcing costs.

Operating income of $144 million was essentially flat compared to Q3 last year. Operating income was solid, considering we didn't have the benefit this year of the $14 million curtailment gain in Q3 last year.

Our operating margin for the quarter was 13% compared to 14% last year. This was substantially better than our 6% operating margin for Q2 this year, reflecting the lower ERP stabilization costs in the third quarter compared to the second quarter. We expect these costs to continue to decline through the end of the year. Our year-to-date operating margin was 12%.

Higher SG&A expense reflects our continued investment in retail stores. During the past 12 months, we have opened 63 net additional company-operated retail stores worldwide. Although these stores are an important part of our growth strategy, they represent less than 10% of our net revenue. Lower advertising expense was due to a shift in some ad spending from Q3 to Q4 related to the timing of our global 501 campaign.

Looking below operating income, we continue to benefit from our 2007 refinancing activities and lower interest rates. These contributed to a 30% reduction in interest expense in Q3 compared to last year. Net income also benefited from a $14 million gain primarily related to foreign exchange hedging activities.

Now, I will review some highlights from the regions. In a weak US economic environment, America's revenues grew 1% on both a reported and constant currency basis during the quarter, primarily driven by growth in company-operated stores. The Americas revenues were substantially impacted by the Mervyns Chapter 11 filing and the continued impact of the Goody's filing in the second quarter. Year to date, Americas revenues were down 6% as reported and down 7% on a constant currency basis, reflecting the region's tough second quarter. Despite higher SG&A expenses, operating income in the Americas region increased $13 million or 15% compared to the prior year. The improved operating income is attributable to higher gross profit in Q3. Higher SG&A reflected higher selling expense due to our retail expansion and our continued ERP stabilization efforts.

Now, I will cover our Europe and Asia-Pacific regions. Europe's 16% reported net revenue increase mostly reflects the impact of currencies. the region's revenues were up 3% in constant currency for the quarter, reflecting the impact of new company-operated and franchised retail locations opened since Q3 of last year. This brings year-to-date revenue up 14% as reported and up 1% in constant currency. Europe's operating income increased 29% during the third quarter compared to the same quarter last year. Operating income was up 15% for the year to date period.

In Asia-Pacific, Q3 net revenues were up 6% on a reported basis or up 3% on a constant currency basis. Continued solid growth in our emerging markets was partly offset by revenue declines in some of our mature markets. For the year-to-date period, net revenues were up 7% or 2% in constant currency. Operating income in Asia-Pacific was down 16% on lower margins during the third quarter. The decline was primarily driven by higher investment in retail and infrastructure, particularly in our emerging markets.

Turning to cash flow, operating cash flow of $29 million in the quarter and $151 million for the last nine months improved over the prior year, mostly due to lower interest payments. Capital expenditures were $16 million in the third quarter and $57 million over the nine-month period. Year-to-date capital expenditures were primarily related to the company-operated retail expansion and our ERP implementation.

We have reduced long-term debt by $22 million in the third quarter. Year to date, we have reduced long-term debt by $77 million, excluding the effect of currency. As you know, credit markets have become extremely tight recently. However, we restructured our debt over the last few years. As a result, we have no immediate requirements to access the credit markets. Our nearest bond maturity is in 2013, and we have a committed to revolving credit facility in place to supplement our cash balance and cash flow from operations. At the end of the third quarter, our availability under this facility was approximately $300 million, complementing our $125 million cash balance.

To summarize, we reported solid results this quarter, but the economic climate is turbulent around the world, making the outlook uncertain. We will continue to focus on controlling costs and generating strong operating cash flows during these challenging times.

Now, we would like to take your questions.

(OPERATOR INSTRUCTIONS). Carla Casella, JPMorgan.

Hi. I have a couple of questions, one on the US sales. They were much stronger than we had expected, and it sounds like Dockers is probably still down year over year but Signature and Canada and Mexico are up. Was the Levi brand itself up as well?

I think as John reflected in his comments, the Levi's brand had a really solid performance in the third quarter and we are seeing its performance be robust in the face of a pretty difficult economic environment in the United States. So yes, it was a solid performance.

Okay, great. Then on Signature, I think you had a new line that we saw in Wal-Mart. Can you say how much, or was there any one-time sell-in for that product that could have boosted third quarter?

Yes, Carla. We have launched our back-to-school and fall lines with Signature across a number of customers. As we mentioned in the quarter, we were setting new product lines, new branding and a new presentation program. That is all now in place. We did have some fixture fill in the third quarter, but that would not have materially impacted the Signature results that we were able to deliver. So we feel good about the performance that Signature is driving in the market.

That's great. Then, switching to the high end, how is Capital E doing and is there any differentiation across channel, where it's selling?

Sure. Levi's Capital E is performing well. We are expanding the number of doors and we are seeing the consumer choose the brand in a pretty tough environment and we are really happy about that. But it remains still a very small piece of our overall business and we are not commenting on the share that it's driving, but again, it is growing. We have been able to expand it, to answer your specific question about channel. It's being sold in premium departments and specialty stores. Because of its success in current customer bases like Barney's, like American Rag, we have been able to expand to other customers, and as we get those programs placed we will be able to talk about them in future quarters.

So would any of that be in this quarter or the be coming?

We have had door expansion in this quarter and it's coming.

Okay, great. Then, looking back, in past years -- this could go back a few years back -- you've talked about problems that you used to have in sales planning and forecasting. I'm wondering, can you talk a little bit how things are done today on this front and if this is -- if any of the strong margin impact is coming from better sales planning or forecasting?

I think the way we would respond to that question is we have much stronger relationships with our customers today. So we really do spend a lot of time working with them on setting the floor, getting clear on what our business plans are going forward. So the biggest change, I think, would be that our relationship -- and credit to Robert and the team in the Americas and globally -- is much, much stronger with our key customers. So that, I think, is the big benefit now of our planning and our forecasting. It's based on sell-through and really good, strong partnerships with our key customers.

Carla, I think I would just add that the evidence of the progress we've made, I think, is reflected in our ability to be in a good position in the US after we faced the issues that we did encounter in the second quarter with the ERP implementation. So that validates John's point.

That's great. Then one more and I'll hop off. Looking across your retail customers, can you say how you're performing versus plan and if it varies much dramatically by retailer or by channel?

Yes. As we've said, and I'm sure you've heard from everybody else, it's a tough environment out there and our customers obviously had really tough back-to-school selling periods. We've seen varying results across customers, and frankly across the brands in our portfolio. But what we would say in general is that we've been able to meet our expectations, with the exception of the impact of the ERP implementation in the second quarter, particularly on the Levi's and the Signature businesses. The Dockers business has been disappointing for us, as we've articulated, and we have really felt that those were the results we were able to drive in the third quarter as well. We're working very collaboratively, as John mentioned, with our customers, moving into the balance of the year because it is a very volatile environment. Our goal is to leverage our planning and forecasting capability that John just referenced to make sure that we have the right inventory in the right place at the right time, not too much, not too little, so that we can respond to consumer demand.

Okay, great. I'll let someone else get in the queue. Thanks.

Bill Reuter, Banc of America.

Good afternoon, guys. You guys noted in your 10-Q that gross margins were favorably impacted by currency and your gross margins were a lot better than I was expecting. I was wondering if you could comment what your margins would have been in constant currency or if you can try and back out the currency effects.

So we generally don't -- in terms of gross margin, we don't back up the currency effect there. We definitely benefited from currencies at the top line as well as from SG&A -- or excuse me, SG&A was unfavorable.

So, right, but -- okay, so on the gross margin line, you guys don't source any goods in US dollars and that doesn't benefit your margin in any way?

Well, it's a consistent sourcing. I mean, we've got a consistent pattern now of our gross margins being in the mid-40s and we feel comfortable that will be our go-forward position.

Right, but to be clear, you [vouch] gross margin so you're going to have currency impact in revenue as well as cost of goods sold.

That's right.

It hasn't impacted from a gross profit perspective.

Okay. In terms of -- I think in your notes there, you note that you guys have shifted some ad spend related to the 501 launch from the third quarter into the fourth quarter. Can you guys comment on how much this might have been?

No, we can't, but it's a timing issue with us and we just believe that the fourth quarter will be more aligned to when the consumer is prepared to respond to our advertising. But we don't share the absolute amounts, but we are committed to continue supporting our brands.

Okay. So if I looked at the third and fourth quarters together on a year-over-year basis, do you think they might be kind of flattish?

I think that's a good way to look at it. I think you'll find it will be flattish to slightly up.

Okay. Then I think it looked like in the quarter you guys reduced your 9.75% notes. Did you guys repurchase these or -- I assume?

Yes, we did. We repurchased about $4 million.

Okay, and I guess, do you guys have plans to repurchase more of these going forward or was this kind of a one-time opportunistic purchase?

Well, certainly I think we -- it's fairly dynamic in that we're going to look at our liquidity needs and we're going to look at our liquidity forecast and we'll make decisions from there.

Okay, then lastly, I was wondering if you guys missed any shipments in the quarter due to ERP?

No, we did not.

Great. All right, good quarter, guys. Thank you very much.

Karru Martinson, Deutsche Bank.

Good afternoon, guys. Just staying on the ERP issue, was there any sales that were kind of pushed forward from the second quarter into the third quarter, just because of the timing of getting the systems back online?

No, there were not. As Robert said, the only situation we had is we -- some of our seasonal products which we couldn't deliver in Q2 we had to mark down and clear out in Q3. But in terms of our core replenishment programs, no.

Okay, and then last quarter, we talked about kind of embarking on a fit and finish upgrade for Dockers as part of improving that brand. What is the timeframe for getting the new Dockers back out there?

As I mentioned in my opening comments, it's going to take us some time to get the strategy fully implemented. What I can share is that we are in the process of working with all of our customers right now to gain their support and collaboration and alignment on the strategy. We are going to be piloting the new program in about 100 stores across the country in October and November, so that we can learn from that pilot and help it inform our implementation, which will occur beginning in the second quarter and commencing through probably the fourth quarter of next year.

Okay, so we're probably about 12 months away from really kind of seeing that fully rolled out in the US?

Complete implementation, absolutely.

In terms of your retailers, could you comment on the health of the retail base? I mean, we've obviously seen an uptick in some bankruptcies. What are you guys seeing and what are you guys doing in terms of terms for your retailers?

We don't comment on any of the specific relationships or credit terms we have for individual customers. What I can tell you is we are keeping a very close eye on the credit conditions of all of our customers. We have developed really strong relationships, as John has mentioned, with each of our customers -- and, frankly, their financial departments -- and are working closely with them. We are monitoring the developments in the market, given what Heidi said, especially to the effect that it is having on the consumer, our customers and our own business.

You know as well as we do that the environment is tough out there. I think what we have done is gotten to a point of working one on one with our customers in a pretty aggressive manner and we have identified the customers we see as high-risk and have shortened credit terms and limits accordingly. But again, we aren't going to discuss the individual names or terms and we will continue to monitor the situation really closely.

Understood. Just in terms of the environment -- and we all know it's challenging -- how has it changed from, say, in the summer when you were looking at the holiday season to now? Are you seeing that deterioration show up in your orders and in your forecast? Obviously, I recognize you don't want to provide guidance here, but just in terms of how you are looking at the consumer going forward?

Well, I think our overall approach would be there's even more uncertainty now than there was before. We're just working very closely with our customers to make sure that we keep these inventory balance. To my way of thinking, I think it reinforces the concerns we had earlier in the year and they have come to reality. It's tough, it's challenging, these are uncertain times.

Thank you very much, guys.

Jeff Kobylarz, Stone Harbor.

Good afternoon. I was just curious about your inventory. Your inventory levels are up 7% year over year. Is there a timing issue of when you ship product at the end of the quarter, or is there product inflation that's causing inventory levels to be higher, or what?

Yes, there is a combination of both. It reflects the mix of our inventories is weighted towards our international business. I mean, clearly, the value of those inventories are higher than they were a year ago. So that really is the only sign to read from that.

Okay. So there wasn't any shift in the timing of shipments compared to last year in your wholesale side?

Not at all. It's more the reflection of our businesses in Asia strong and businesses in Europe have been performing, and it's the mix of the inventories as our company becomes slightly more international than US.

Okay, fine. Can you go over the timing of your 501 advertising? You said in Asia it was launched, I think, a couple of weeks ago and in the Americas, when was it -- when did that go out?

I'll answer the question on the Americas and then John can talk about Asia and Europe. We actually began -- as we've talked about in previous calls, we began the seeding effort for the program all the way back in the beginning of Q2. But the major programs really began to come fully aligned -- meaning the product on the floor, the new presentations on the floor and the full-out marketing began to run around mid-August. So it would be too early for us to respond with any more comprehensive view of the success of the program, except to say that we're happy with the results because it's met our expectations and plans to date.

Similar on a global basis, the viral campaigns, the seeding we've been doing about six months. And apropos to the earlier question asked, you can see that [as our] A&P mix moving into the fourth quarter, our campaign or advertising is more taking place September/October.

Okay. Thanks very much.

Kevin Ziets, Pali Capital.

(technical difficulty) something about lower sourcing costs and I was just wondering -- I think earlier in there we talked about cotton going up and just inflation in general starting to work into your costs, and sort of how you're achieving that?

Yes, that's right, we are seeing some inflationary effects but we believe mainly that will impact us next year because our contracts were locked and loaded for this year. So we are seeing some of the benefits of that. That's what you're seeing, the remnant of the benefits of our early sourcing decisions just going through into Q3.

Okay, great. Then in terms of -- I think your comments sort of suggested that same-store sales were positive again this quarter. Could you talk -- I don't expect you to give me the number, but you could use say sort of directionally whether you saw improvement versus prior quarters or how it trended during the quarter?

Sure, Kevin. We've been talking about the fact that we've been pleased with the results of our owned-and-operated or company-operated stores in the United States for a number of quarters now. They have been performing well. They have, in fact, been meeting or beating our expectations on a month-to-month basis. So for the quarter, we didn't see any variance in the trendlines of what we've been experiencing over the past several calls that we've had.

And the same for our European and Asian businesses. We have seen growth in our owned-and-operated retail network.

Great. I guess, just generally, do you think you're taking market share and is there some sort of trade-down that's coming in out of superpremium jeans into maybe your sort of upper midtier?

Yes, I think overall that's a fair comment. We would say that some of the superpremium -- the strength in that area now is starting to moderate somewhat and we believe the positioning of our Levi's brand is such that we could start to see some benefit from that. But overall, the whole market is quite challenging at the moment. So we aren't expecting it to migration in the absolute numbers.

Okay. On the SAP front, I guess it looks like your admin costs were up, I think, around $16 million year-over-year. Is that a permanent increase in the level of admin expense or will some of this go away as you sort of get SAP under your belt?

Well, I think from SAP, we have seen our costs decline in the third quarter versus the second quarter and we do expect that will continue, as it applies to the US. Remember, we've just started the journey in rolling SAP out globally.

Sure. But it will continue to decline, you're saying?

In the US.

In the US, got it. Then lastly, I was wondering if you could talk about the -- a little bit more detail on the hedging gain and what that's related to?

So the hedging gain that you see of $14 million in the period really relates to the impact of the US dollar relative to our hedging contracts on the euro.

Okay, thank you.

[A.J. Guido], GoldenTree.

Hey, guys. Thanks for taking my question. Just a quick question on the balance sheet. The other current assets went to about $120 million versus $75 million. What's in that number?

Other current assets tends to be a bit of a catchall here. I mean, we've got various factors in here, including our hardware/software maintenance contracts. We've got our investments in our Rabbi Trust. We have our fair value of our hedging instruments. I wouldn't say that any one of these drove the increase. It's really more of an accumulation of all those items.

I know the last analyst touched on it, but in the SG&A expense line you had $385 million versus $343 million last year, and I don't know if you mentioned it but how much of that was related to, I guess, the SAP in the US?

So we're not breaking that number out individually, but let's consider a couple of things going on here. If you think about last year, we had a benefit plan curtailment gain that was offsetting that prior period number and that was about $14 million. We also have the unfavorable impact of currency that we are disclosing at about $15 million. Looking beyond the incremental ERP costs, we also have incremental costs associated with our retail expansion.

Then one last one. On your cash flow statement for the nine months, you have this employee benefits plan amortization of like $26 million. When did that occur? Did that occur this quarter or in one of the previous quarters? I'm just not sure.

So what's important to think about here is this is the amortization of our off-balance -- or what was previously off-balance sheet gains resulting from our retiree medical plans, and as we'd amended those plans in prior periods. From an income statement perspective, there's no change. We've had this benefit amortizing in last year as well as this year. There were new accounting rules that were adopted at the end of fiscal year 2007 that really yielded this presentation change. So consider this to be a presentation change more than anything else, and that is the amortization that we have received over the full nine months.

I guess as far as the -- are you guys commenting on the CFO search?

Well, yes. We have the search underway. We are going to take our time to get it right, because clearly we feel very comfortable with Heidi in the position in the interim role at the moment, but a search is under way.

Then I guess just one question. I looked at your "Unbutton Your Beast" campaign, which I think you released yesterday, and it's very racy, I guess. Who are you aiming at with that campaign, and just what kind of feedback have you gotten?

Sure. We have been targeting -- with the "Live Unbuttoned" campaigns all along we have been targeting basically 15 to 30-year-old men. We would say that the campaign that you're referring to is really targeted at the younger end of that age range. We have been doing a lot of -- an entirely viral Internet-based advertising campaign, and it's targeted to 15 -- we'd say probably about a 15 to 25-year-old male. We've had responses on both sides of the discussion. Generally, the target is pretty excited about it, sees it as funny and very lighthearted and silly, and understands it for the intent that it was meant to deliver. But we've had some consumers who obviously don't see this sense of humor in it and we are just managing that, but we think it's delivering positive results to the target.

It's interesting how quickly it spread around the world. So we're getting huge reaction in real time. Very, very far spread.

When did you release it?

Yesterday.

Yesterday.

That's what I thought. Okay. Thanks, guys.

You're doing well to be on top of this one.

Reade Kem, Merrill Lynch.

(technical difficulty) 63 net store adds. Does that bring you to about 245 stores at quarter end?

That brings us roughly to that, yes.

That's right.

Is there typically much of a noticeable one-time impact in cost when you open a store? Is that anything you can call out on a per-store basis? I'm sure it varies, but --

No, but it does take us a while to get these stories profitable. It doesn't happen from day one and there is an investment to set them up initially.

Also, on the store front, obviously your average selling price is much higher in your own stores and I was just curious if you could comment around maybe the contribution to growth from that, as well as just pricing within your US wholesale customer base. Just anecdotally from checking stores, it doesn't look like it's under a lot of pressure, but if -- I mean, it is a tough environment. If you could just comment on pricing?

(multiple speakers). Yes, you are right that we are able to get a higher retail selling price out of those stores, but it's a very -- it's product that you find that is exclusive to those stores. But let's put it in context. The number of stores we have is still a very small part of our business. Our focus still is really driving our business through the wholesale channel as well. So to us, it's a brand-building opportunity. We are getting new and more expensive products through there, but wholesale still remains the major focus for us. So in terms of the rest, I'll let Robert answer.

In terms of our pricing situation with our wholesale customers, we've been talking for a number of quarters now about the fact that our strategies are to be the best at jeans and khakis. By being the best at jeans and khakis, we are getting putting better product out there and our customers are able to command a more premium selling price for the product that we put out. So we have seen an increase in the average unit retails for Levi's and Dockers, as we've been discussing for the past number of months, on the newer products and we are seeing a higher proportion of those products selling through. So we are pleased with the market position relative to pricing that we have been able to achieve and at this stage, even in a tough environment, our customers are committed to the strategy.

Okay. That sounds good. Then just one other one was on the Dockers commentary earlier. Given that you had some clearance activity, does that mean that even though you may not be really relaunching the brand until next year, maybe you'll have some better margin performance in the next couple of quarters?

As I think I mentioned, it's going to take some time to get that strategy fully implemented. We have a number of programs to transition from their current role in the assortments to bring new product in and we would expect, over the next several quarters, that we would be driving the same degree of product transition that we have been experiencing. We just had a little bit more seasonal excess in the quarter on the Dockers brand, given its performance, because of a little bit of the ERP situation we faced in the second quarter on seasonal merchandise than we did with the balance of the brand. But this is going to take us some time and we will keep you posted as we make the progress quarter by quarter.

Okay, thanks.

Emily Shanks, Barclays Capital.

Good afternoon. Thank you for taking the question. By way of just explanation, it is Barclays Capital now, but clearly I'm from the legacy Lehman team here.

If I could just start with a follow-up to Bill Reuter's question around the gross profit margin, I wanted to be sure I understood because I, too, saw the comment in the Q stating that FX was a significant contributor to gross profit. Are we to think about that as it's a larger contributor than the sales and exchange, the company-operated stores and the lower sourcing costs?

No.

Okay. Is it less than all three, then?

Well, all three played a role, but I think we would say that the impact of our stores and the higher selling price of the mix of our products was probably the major component of that.

Okay, great. Then in terms of the open market repurchases that you executed on the 9.73%, are you prohibited by any of your existing credit facility covenants by doing more of those, and if so, how large is your carveout under your basket?

So we are not prohibited to doing those. With respect to the basket --?

No.

No.

Are is that true under all of your bonds, as well? You have unlimited ability to buy back bonds in the open market?

Yes, I believe that's true.

Okay, great. Then just one last question, if I could. As you look at your accounts receivables from your retailers, do you utilize factoring at all?

No, we do not.

No.

Okay. Have you in the past, like in the early 90s at all? Or have you just never used that?

No, the Company has in its history, but it's been several years since we've approached that at any scale.

Okay. Then, away from factoring, do you have to utilize any type of insurance product with any of your accounts receivable?

So, not domestically, we don't. There are places in the world -- certain locations in the world where we do utilize insurance.

Okay, and is that required by your banks, or --?

No, that is not required.

Okay, and have you -- can you think at all about what the pricing trends on those insurance policies have done?

It's insignificant, if any.

Okay, great. That is it. Thank you very much.

Thanks a lot.

Thank you.

Thank you. At this time, there are no further questions and I would like to turn the floor back over to the presenters for any closing remarks.

Well, thanks again for joining us on the call today. As we said, it was a solid performance this quarter. Looking ahead, we recognize that economic conditions are more volatile around the world, particularly with the developments in the financial markets in the recent weeks. This makes the outlook even more uncertain. We're watching to see how these changing conditions impact consumer behavior. In the meantime, we continue to invest in building our brand, so we will be in a strong position when conditions improve. We look forward to talking with you again next quarter. Thank you, everybody.

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