Levi Strauss & Co (LEVI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. fourth quarter and fiscal year 2008 earnings conference call. (Operator Instructions). A telephone replay will be available through February 17th, 2009, 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 83152686, 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 at www.levistrauss.com. I would now like to turn the call over to Roger Fleischmann, Vice President and Treasurer of Levi Strauss & Co.

Good afternoon, and welcome to our conference call. I'm pleased to introduce members of the Levi Strauss & Co. management team. With us here today are John Anderson, our President and Chief Executive Officer, 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 materially adverse effects 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 annual report on Form 10-K with the SEC, which is available from our Website. Now I'd like to turn the call over to John Anderson.

Thanks for joining us this afternoon to discuss our fourth quarter and fiscal 2008 results. As you know, 2008 was a very challenging year for the apparel industry. Economic conditions, already weak at the beginning of the year, deteriorated substantially around the world in the last few months of the year. In the context of this extraordinary economic downturn, Levi Strauss & Co. delivered a solid financial performance for 2008. Levi's brand performed well around the world, outperforming many of our competitors. The Company's reported net revenues were up slightly for the year. The Company's gross margin also showed improvement during the year and during the fourth quarter.

Net income was down for the year, mostly reflecting increased income tax as a result of a non-recurring $215 million tax benefit in the fourth quarter of 2007. Earnings before tax in 2008 were comparable to 2007. As well, operating income was offset by lower interest and debt refinancing charges. Our strong operating cash flow during the year allowed us to invest in the business and reduce debt. At year-end, net debt was $1.6 billion, our lowest level since 1996. 2008 was a good year for the Levi's brand overall. The brand's revenues grew in each of our regions, showing its enduring strength, even in tough economic times.

During the second half of the year, we rolled out the Company's first global marketing campaign across all three of our regions. The campaign supports our flagship product, Levi's 501 jeans. Since launching the program, worldwide sales of 501 jeans have increased substantially. So, a solid year, overall, in light of a very challenging market conditions around the world. Nonetheless, we expect the year ahead to be difficult as the outlook will remain uncertain and we face stiff headwind. In an unpredictable environment like this, our teams will focus on building market share and aggressively seizing opportunities when they arise. We recognize how tough 2009 will be, and are focused on protecting our earnings and liquidity. We will tightly manage expenses and inventories while we continue to strategically invest in our brands and retail network. Now Robert will provide more details about the fourth quarter and fiscal 2008 financial results for the Americas.

Thanks, John. Good afternoon, everyone. In the Americas region, we finished the year on a positive note with 1% revenue growth in the fourth quarter, reflecting the continued solid performance of the Levi's brand. The region's full year revenues were down 4% due to lower sales of US Dockers, US customer bankruptcies including the liquidation of Mervyns, and the impact of our US ERP implementation in the second quarter. Growth in both the third and fourth quarters followed a difficult second quarter that was substantially impacted by the challenges of the ERP implementation. We have now completed ERP stabilization. Americas operating income was down 4% for the quarter due to higher advertising and promotion to support the 501 campaign, and investment in our retail stores. Operating income was down 14% for the year as a result of lower sales for the reasons I have already described as well as the costs associated with ERP stabilization, our retail expansion and the 501 campaign.

Now turning our our brands. The Levi's brand had a solid year across the region overall. The core Red Tab business did well in the face of tough retail conditions. We saw improved sales of 501 jeans following the launch of the global marketing campaign in late summer. The Levi's brand drove the straight and skinny trend throughout the year and has done a good job of weathering the economic slowdown. US Docker sales were down for the quarter and the year, and Dockers' performance has been disappointing. As we said last quarter, we're transforming the business with new products and more focus in relevant assortment, and in new in-store merchandising presented around an expanded range of fits.

I'm also excited to announce that we have a new Dockers leader to direct this work. Jim Calhoun joined us in December as President of the Dockers business, and is responsible for Dockers globally. Jim has a proven track record in apparel, both wholesale and retail, and has strong working relationships with many of our current customers. In addition to a global apparel role at Disney, Jim has leadership experiences at other global brands such Nautica, Nike and Wilson.

The US Signature brand posted improved sales for the fourth quarter, reflecting the improved products and merchandising we rolled out for the back to school season. Although we saw growth in Q4, Signature sales for the full year were down compared to last year, as we expected. We continued to expand our retail store network in the United States in 2008. These stores performed very well overall, last year. As part of our ongoing store portfolio review, we took an impairment charge of $16 million in the fourth quarter related to certain underperforming stores. This is reflected in corporate expense. We plan to continue our strategic approach to opening additional stores in 2009. We'll focus on the right stores in the right locations while taking into consideration the changing economic environment.

Looking outside of the US to our remaining LSA businesses, they performed well. Despite the challenging conditions in Canada, the business delivered improved profitability, and Latin America's revenue and operating income showed strong improvement even as the market began to weaken there. To wrap up, we expect 2009 to remain a challenging year for the Americas. We believe the low consumer confidence and tough retail environment in the United States will continue for the foreseeable future. As John mentioned, in this environment we're fighting for market share. We'll work relentlessly in 2009 to tightly manage inventory and capture every sale possible. Now, back to John to review the results for Europe and Asia-Pacific.

Europe's fourth quarter revenues improved slightly on a constant currency basis, but were down 4% on a reported basis compared to the prior year. The US dollar appreciated against the Euro during the quarter, reversing the directional impact of currencies compared to previous quarters. The retail economy slowed in the final months of the year as the global economic downturn spread across many of Europe's material markets. This was offset by new stores in our brand dedicated retail network. Europe posted a solid 9% revenue gain for the year, primarily due to the benefit of foreign currency exchange. Beyond currency, our new retail stores added incremental sales.

Europe's operating income decreased 13% for the fourth quarter, on the revenue decline and higher SG&A. Incremental SG&A reflects higher costs to support our expanding retail network and higher bad debt expense associated with overall market conditions in some countries. Operating income was up 9% for the fiscal year as a result of currency. Lower net revenue and operating income in the fourth quarter kept an unpredictable fiscal year in which market conditions weakened significantly by year-end. We expect retail conditions to remain difficult in Europe for the foreseeable future. Our brand dedicated retail network helped drive Europe's revenue growth for the year and offset weaker wholesale performance. Levi's Guys Red Tab and engineered jeans business were the strongest performers for the year, helping compensate for weaker performance in our women's business. Levi's 501 jean sales grew in the fourth quarter driven by the global marketing campaign.

In December, we established a business venture in Russia with our long time distributor there. The business unit will allow us to invest directly in growing the Levi's brand and expand our retail network. With a dedicated Levi Strauss & Co. team on the ground, we're better positioned to respond to opportunities in the Russian marketplace. Looking ahead, we expect the difficult conditions to continue in our mature European markets. We'll continue to focus on upgrading and improving our product, expanding our retail network and taking advantage of growth opportunities in Eastern Europe and Russia.

Now I'll discuss our Asia-Pacific results. Our Asia-Pacific region continues to be a source of revenue growth for the Company, with an 8% revenue increase in the fourth quarter, and a 7% increase in the fiscal year, compared with last year. For the fiscal year, the Levi's brand delivered solid revenue growth and a much lower Signature brand finished the year with very strong growth. Signature's increased sales in the region more than offset decline in the Dockers brand. Sales in both the quarter and fiscal year benefited from our retail store expansion in India and China. Also, the 501 marketing campaign helped drive strong Levi brand sales across the region during the fourth quarter. Revenues in Japan, our largest market in the region, grew during the fourth quarter, largely the result of increased 501 sales during the period. Japan revenues were down for the year, and we still have a tough road ahead there as economic conditions remain difficult.

The Asia-Pacific operating income was up 52% for the fourth quarter due to higher revenue and higher gross margins. Operating income was up 4% for the fiscal year, mostly result of higher sales combined with favorable impact of currency. The year ahead won't be easy in Asia-Pacific either. Retail sales are slowing in most of the Asian markets. We will focus on fortifying our mature business and expanding our retail presence in the emerging markets. Now Heidi Manes, our interim CFO, will further discuss the Q4 and fiscal 2008 results.

Thanks, John. Good afternoon, everyone. Our results for 2008 reflect stable revenues and improved gross margin. Solid cash flow enabled us to invest in our business, including retail stores and systems, and to further reduce long term debt. We finished the year with a solid liquidity position which is particularly important in today's uncertain environment. Our annual gross margin improved to 49% from 47% in 2007, driven by a more profitable sales mix, an increase in sales from company operated stores and lower sourcing costs. As a result, gross profit increased 5% to $2.1 billion. Total SG&A expense for the year increased $220 million compared to 2007. $47 million of the increase for the year was due to a higher post retirement benefit plan curtailment gain in 2007 compared to 2008. Currencies contributed $32 million to this increase. Beyond these two factors, higher expense reflects the growth of our retail network and our global technology investment, including the costs of our US ERP stabilization efforts.

During the past 12 months, we've opened 60 net additional company operated retail stores worldwide, bringing the total number of stores to 260. Although these stores are an important part of our growth strategy, they represent less than 10% of our net revenues. Operating income for the year decreased 18% to $525 million. Higher SG&A expense was offset below the operating line by $124 million decrease and interest expense and debt extinguishment costs relative to 2007. As a result, earnings before taxes were comparable between 2008 and 2007.

Now, I'd like to focus on the fourth quarter in greater detail. Fourth quarter net revenues were up 1% over the prior period on a reported basis, and 4% without the impact of currencies. The US dollar appreciated relative to several currencies during the quarter, generating this reversal in direction of recent trends in currency impact. As with the year, gross margin for the quarter increased from 47% to 49%. Improved gross margin helped drive gross profit to $625 million for the quarter, a 5% increase. Fourth quarter SG&A was up $76 million relative to the same period in the prior year, reflecting our continued investment in the business through advertising and promotion, and expanding our retail store network, including the $16 million impairment charge that Robert mentioned. In addition, in the fourth quarter of 2007, we had lower incentive compensation accruals and a $13 million benefit plan curtailment gain. Income tax expense in 2007 was significantly lower than in 2008, primarily due to a $215 million non-recurring tax benefit recognized during the fourth quarter of 2007.

Now turning to cash flow and the balance sheet. We generated cash flow of $55 million during 2008 after reducing debt, funding capital expenditures and paying a $50 million dividend. We ended the year with strong liquidity, reflected in our cash position of $211 million, complemented by availability of $316 million under our revolving credit facility. Despite challenges in the economy and slower sales in our wholesale channel, we are comfortable with trends in customer collections and are focused on managing terms to appropriate levels. We ended the year with slightly higher inventory levels to meet customer expectations, building off a relatively low base from the beginning of the year. We continue to closely monitor our inventories. Capital expenditures in 2008 were $80 million for the year, primarily related to Company operated retail expansion and our ERP implementation. We reduced long term debt by $24 million during the year in addition to our scheduled maturities of $71 million. We ended the year with net debt of $1.6 billion, $163 million lower than the end of 2007.

To summarize our results for 2008, we reported solid top line results and gross margin improvement. We continue to expand our Company operated retail network around the world, invest in systems, and are pleased with the global Levi's 501 campaign. Looking forward, we face a weakening global economy and a strengthening US dollar relative to many currencies. 2009 top line performance will be negatively impacted to the extent this currency trend continues. We also expect our pension expense to increase by more than $30 million in 2009, due to the impact of the financial market downturn on pension plan assets. Our committed credit facility augments cash and future cash flow to provide liquidity, and we have no immediate requirements to access the credit markets to refinance existing debt. Now, we'll take your questions.

(Operator Instructions). Your first question comes from the line of Carla Casella.

Hi, Carla Casella, JPMorgan. I have a couple questions. One, the fourth quarter impairment charge, did you see how much that amount was?

$16 million.

$16 million. Okay, great. And then, it looks like you changed the way you account for the employee benefit plan amortization. There is a $36 million use of cash in '08 on the cash flow statement, and I think if I remember correctly from earlier conversations that it used to just run through SG&A, and I'm wondering if we could get what the amount was for last year?

Okay. So just to help clarify, this is not a change in terms of the income statement. We have deferred credits, if you will, that are running through the income statement and have been over the course of several years and they're a result of prior changes we've made to our retiree medical plans themselves, and the pension accounting rules require that you amortize these in over a period of time, so that amortization has occurred. Now in 2008, after we adopted the new pension rules, we essentially changed our presentation, our cash flow statement. So in 2008, you see that amount which is non-cash being broken out separately in the reconciliation at the top of the operating statement of cash flow. In 2007, that number appears down in the, still in the operating statement, but down in the long term employee related liability line.

Okay. Do you know what the amount was for last year?

The number was about, in terms of the piece that's been amortized, it was $45 million last year.

Okay. So the 45 would be comparable to the 36 this year.

It's comparable to 41, offset by the pension piece. So it's 45 is comparable to 41.

Okay. And the 41 is just the 36 plus the 5.9 of the curtailment gain for the pension?

Yes.

Okay. Great. And then could you just talk about the performance throughout the quarter. Do you see, month to month, did things deteriorate or improve in any specifics market by market?

It's John here. We would say, during the quarter, we did continue to see things deteriorate so there is a trend, no surprise there, that as the fourth quarter unfolded that the market conditions got more challenging, and that was more so in the US and Europe, less so in Asia at that stage.

And then did that vary much by channel, department store versus mass versus your own retail stores?

We would say our department store channel was probably more impacted than our own retail stores and mass.

Okay. I'll let someone else get in the queue. Thank you.

The next question comes from the line of Todd Harkrider.

Yes. Thanks for taking my questions. In regards to the impairment charge for underperforming stores, can you talk briefly about some of the things you've learned by running your own stores other than getting higher selling prices and a broader selection, like if you think you're too skewed towards women's products in the stores, or the size of the stores currently open are optimal size, and if you just think you've been able to work out the kinks? I appreciate it.

Sure, and obviously, this is a US based question. In terms of our strategy for the Americas and specifically in the states, I think the two things that are most impacting our go forward strategy are size of store and location. We've been working on the product mix for some time and have a fairly balanced mix now between men's and women's, bottoms and tops, and have been able to elevate our price points, even in this current economic environment. The majority of the impairment charge were related to stores that were opened either quite some time ago under a different strategy. They were generally large in size and didn't hit the financial metrics that we have on a go forward basis, or were in locations that we did not see as viable long term profitable locations and are not consistent with our go forward strategy. So, that's what led to the impairment charges, and we will, like any good retailer moving forward, consistently look at and vett our full network to make sure that the stores that we continue to operate have the ability to deliver to our very structured financial metrics.

Okay. Sounds good. And in more general terms, for the merchandise that has to be discounted to move, could you give us a ballpark estimate on the margin pickup you might achieve from selling a discounted product through your own dedicated channel as opposed to the wholesale channel, when allowances are factored in?

I'll speak for the owner operated stores in the Americas. We have been very careful, actually, in terms of the strategy we took on discounting. If you were in our stores through the quarter and you noticed our strategy, we maintained price on our core denim long bottoms and our trend core and fashion denim long bottoms. Where we did take price adjustments, it was solely on seasonal merchandise and on especially seasonal tops merchandise, and that was done in a very careful way to drive foot traffic as we saw the slowing foot traffic that John referred to earlier in his comments, and we were actually able to execute that strategy in a way that maintained our overall gross margin targets for our own stores, so we didn't see any margin lift or margin erosion. We were able to maintain our current performance.

I was actually in several of your stores and saw you were in line with outerwear, like 50% discounts, like most of the places, but like you were saying, the bottoms definitely had a lot less sales. Congratulations on that.

Thank you.

And then lastly, if I may, I know you just changed your Signature business model, but can you give us some of the advantage of keeping that as a priority versus making even higher investments in your core Levi brand and premium jeans, since you're probably in a better position today from a balance sheet perspective than you've been in a long time, and it would probably fit with your longer term strategy better? Thanks.

Sure. I think, John has consistently said that the number one priority for the Company is to grow the Levi's brand worldwide, and that remains our primary focus, and we have been working to adjust our strategies with the Signature brand and to engage more effectively within the mass channel targeted to consumers who shop for jeans or product at a price point that's sold predominantly only through the mass channel. We're pleased with the results we've been able to deliver. We did see growth in the fourth quarter on Signature, and obviously, are seeing the benefits of the strategy we've been talking about for a number of quarters now, but our primary focus will remain on growing the Levi's brand on a worldwide basis and that's where the majority of our investments are going to be focused moving forward.

Okay. Appreciate that. Congratulations on the great quarter and good luck in 2009. Thank you.

Thanks.

The next question comes from the line of Emily Shanks.

Hi. Good evening. Thanks for taking the questions. Around the asset impairment charge that fell into SG&A, can you comment on how many of the 260 stores were incorporated in that charge?

The stores were located in the United States, and Robert mentioned that, and it's less than 10% of our stores.

Okay, great. And then apologies if I missed this, Heidi, in your comments around gross profit margin. Can you give us a sense of what drove that improvement, just specifically in the fourth quarter?

In the gross profit, we saw more profitable sales mix as John mentioned, we had great success with the 501 campaign that drove that. We also have higher sales from Company operated stores and lower sourcing costs.

Okay. That is very helpful. Thank you. And then, as you look at discussions right now with your customers, have you seen your retailers come in and ask for further concessions or support in the month of December and January?

We are always in discussions with our customers. I think I mentioned a number of times in the past, that we plan quite collaboratively with our customers. We agree annual, seasonal and then monthly plans, and we're generally in a position where we're moving and modifying our plans with our customers based on the results as they materialize each day, each week, each month throughout the quarter and the year. So what I can say is, that we did not have any surprises coming into closing the fourth quarter that were unanticipated because we've been tracking and running the business that way, pretty consistently throughout the year. And obviously, our customers are focused on managing their inventories extremely leanly, and given the economic environment they faced coming into the November time frame, and we know from a lot of their commentary their margins have been challenged, but in general, we've been able to work to deliver against the collaborative plans we've agreed with them.

Okay. That is helpful. And then if I could, just one last one. It looks like accounts payable leverage came down a little bit on a year-over-year basis. Can you speak to if any of your terms with your suppliers have changed at all?

No. Our terms have remained consistent over the year.

Great. Thank you.

Thanks.

Your next question comes from line of Mary Gilbert.

Yes. Yes. I wondered if you could speak to the trends in the current period. So in other words, you sort of noted that in the fourth quarter, you saw the trends, particularly in the department store channel weakening as the quarter progressed. Did that continue? Did that trend sort of continue through January and now in February?

We would say that everyone is quite aware of what's happening in the marketplace at the moment and we are aligned with those types of trends. It's very difficult out there. There's lots of challenges, and we would say that we are very much aligned with the trends that are taking place in the industry. We're seeing the same things happening that everyone else is.

Okay. Fair enough. And then as you were talking about working collaboratively with your customer base in addressing markdowns and that sort of thing, is it fair that when we look at margins that it will be more challenging to show continued improvement in margin, or that even maintaining margins may be challenging in 2009?

We've always targeted our margins in the mid-40s, and that's the way we've set the business up, and we believe that those targets will be appropriate during 2009.

Okay, great. That's very helpful. You're focused on maintaining or reducing costs. Are there any cost reduction initiatives that you've identified that you could share with us?

Well, I think we're looking at it, as you can imagine, every component of the business at the moment, so nothing specific other than the ongoing basis of looking at more effective, more efficient ways to operate, and that's something we pay attention to every day, every week.

Okay. That was helpful, thank you. Finally, could you give us an idea of how we should look at changes in working capital with the tightening of inventories? Should we look to that to be a source of cash in 2009? And also, what can we expect for CapEx?

With respect to 2009 as you can imagine, working capital will clearly be a focus for us, and will be looked to optimizing cash flow and maintaining as much flexibility in our liquidity as we can. I think we end the year, we feel very comfortable with the balance sheet and how we end the year. With respect to CapEx, you will note in our 10-K, that we do have our disclosure of about I believe, $88 million in cash flow for 2009 in the 10-K.

Oh, for CapEx, 88.

Yes.

Okay, perfect. Thank you very much.

Thank you.

Your next question come from the line of Karru Martinson.

In terms of that CapEx spend for next year, is this still pretty much focused on store growth, and are you seeing opportunities as retail space becomes available?

It is. It's focused on opportunistic retail locations. There's also some SAP ongoing CapEx, but it's something we look at very closely and yes, a lot of it will be focused on retail, but we can cut back if needed, if the suitable locations don't come available.

That leads right into the follow-up. What do you see as maintenance CapEx, if needed and to be flexible here?

We don't disclose the specifics of that, but you can see at the time we have a fairly consistent CapEx number we spend to.

In terms of the raw material outlook, as demand has come off and cotton has come up, how should we look at your cost of goods line here, going forward?

Well, we aren't directly impacted by cotton because we don't buy fabric and we buy finished product, and really, cotton is not always the biggest component of a pair of jeans or a pair of pants. So, we believe that the situation is pretty steady as we look forward based on what we saw in 2008.

Okay. Now in terms of the advertising as the market remains uncertain, do you see or envision any kind of broad shifts in terms of the spend, not focused on the campaigns themselves and what you're emphasizing, but just in terms of the spend levels?

Well, we were very happy with the performance of our global 501campaign in 2008, and we were one of the few companies that still were advertising and pushing our brands, and we saw the benefit of that. This stage, we remain committed to support our brands in 2009, but it is one of the variable triggers we can implement if needed, if things become very challenging, but we're still committed to spend at out traditional advertising levels.

Okay. Just in term of the Dockers, and now with the new president, I think last call we talked about improving fit and finish. When do we kind of start to see the early signs of traction with that program?

We've been piloting the new program in about 100 stores around the country in the fourth quarter, and the results of those pilots met our expectations, so we're in the process of rolling out the strategy as I articulated it last quarter and reinforced it a bit this time, throughout the period and kind of extending from April through August of 2009. So, I think we'll be able to more firmly comment on the success and adjustments we may need to make to that program in the third and fourth quarter calls.

Thank you very much.

Your next question comes from line of Jeff Kobylarz.

Hi. Your inventory is up a little bit year-over-year. Can you comment about the quality of the inventory or the aging of the inventory, please?

Sure. I think that it's up slightly year-over-year. As I mentioned in my comments, we're building off a relatively low base, comparably, at the end of 2007. I think from a quality perspective, we feel pretty good. I think from a valuation perspective, clearly took a hard look at that with our year-end close and feel we've got things appropriately valued.

Okay. Was there any timing of shipments that pushed sales from the fourth quarter to the first quarter?

No, traditional patterns for us.

Okay. All right. Congratulations on your 501 global marketing campaign, and I'm just curious how you can build on top of this to drive sales for next year?

Well, thank you. We were pleased, too. Well, we think 501 is a good base to do it, so we will stay committed to supporting the 501 next year and believe the halo effect of that should impact the brand overall.

Right. You should annualize that marketing campaign sometime in the middle of calendar 2009, but to build on top of it for the second half of this year, are there any major changes that are going to go on with this campaign?

Well, once again we'll refreshen the campaign, but the commitment will be to 501s.

Okay. And then, is there any general rule of thumb you could say about the impact of the stronger dollar on your operating income? It was noted in the MD&A about how gross margin was improved in Europe by the FX impact and in improved in Europe by the FX impact and in calendar 2008. So, I'm curious if there's any rule of thumb you could explain about how, with the dollar being stronger now versus last year, just what the impact could be on operating income?

It's probably best if we look at it in terms of components, right? So on a full year basis, we certainly got a help from currency, and as we look through the regions, the greatest benefit was in Europe, but in total, it's about $104 million for the Company, and a portion of that certainly does follow through to the gross profit line of about, maybe, $50 million on a full year basis. Now SG&A, certainly looking the other direction, we were hurt to the tune of about $32 million from currency.

Right, all right. Thanks. That's helpful. And then the ERP implementation in the Americas, did you have to run any dual record keeping in the fourth quarter or were you past that point going into the fourth quarter?

We were past that point.

Okay. All right. And lastly, just the next step of the ERP, what will that be?

Well, we continue to be committed to rolling SAP out globally. We've now rolled it out in Asia. We've finished the work in terms of stabilization in the US, and our next step is we'll be looking to roll it out to Europe, but we've got about five more years of work ahead of us till we complete the rollout of SAP.

All right. Thanks very much.

Thanks, John.

Your next question comes from the line of Reade Kem.

Thanks. Following up on Karru's question about Dockers, does the timing of the rollout mean that some of your customers will be in a little bit of a lower inventory position during the first quarter of '09, and then will see some sell-in benefit to your second quarter?

I would not say that's going to be the case. We obviously have a big program that we're exiting, our wrinkle free program, to create room for the Signature Khaki program and the fit strategy that I mentioned earlier. So we're planning with our customers, very carefully, to manage that transition leading into the Father's Day time frame, and then setting up the back half of the year with the new product range. You can imagine, these are big programs to transition, so we've got very specific plans by customer. We wouldn't expect to see a significant reduction on what would be typical inventory carrying by customer. If anything, we obviously will see an inventory build as we go into setting the new program, starting in the April time frame.

Okay. And I guess Penney's on their recent sales call said denim was particularly strong and they called Levi's out as well, and I was just wondering, as you look or talk with some of your department store customers, what sorts of value shifts are you seeing the customer make and do you think you're benefiting from that as sales overall are down, but perhaps customers are coming more to your brands?

Yes. I think the only thing I can reflect is what John said and what you've heard from some of the customers. Obviously, it's a pretty tough and unpredictable environment out there. We've worked hard to invest in better product with better features and benefits. We took a lead position in denim, in both men's and women's, on straight and skinny fits. We put a strong emphasis behind our global 501 initiative and it delivered the results that both John and Heidi referenced in their comments. I think our customers are generally pleased with that performance, but obviously very concerned about the broader economic environment in which we're competing, and so we're going to be planning our business with them very collaboratively as we go through these pretty unprecedented times, and as I said earlier, we'll be planning our inventories very carefully but really focused on gaining market share and focused on getting every possible sale that's out there for us to get, and that's how we're working with our customers today.

Okay. And then, another department store channel question. The recent announcements out of Macy's, which is certainly a big customer for you, is that going to affect you positively or negatively, or will it be neutral? Any kind of comments you could make about that?

Well, obviously I can't comment on any specific customer's strategies or shifts in how they're running their business. We obviously have a good relationship with Macy's. We've built an important business with them on both the Levi's and the Dockers side of the business, and we've been in contact with all of their management both at the corporate level and at the divisional level, and we're working very hard to help them through this transition so that we can be a part of the solution as they go through what will clearly be a significant organizational change.

Okay. And then, a couple just more housekeeping questions. The additional week you had in this fourth quarter here, what kind of a week is that for your business, and if you could quantify what sort of a revenue and operating income boost that gave you relative to last year?

We would say that it didn't have a dramatic impact on the business relative to last year.

Okay. And then I see in your K, the rental expense that you accrued for last year, and if you take out the stores that you're closing down and you looked at your current store base and facilities on a run rate basis, would we be looking at something higher than $140 million for FY '09? Just looking for a general ballpark there.

I would say you'd trend that saying number four for 2009.

I'm sorry?

I'd say that would be about the base to look at 2009.

Okay. Thank you very much.

Thanks.

Your next question comes from the line of Shannon Ward.

Hi. Can you just tell me if the comp store sales trends at your own stores, are they materially different than what you're seeing at your retailers?

We would say that they're pretty much in line, and remember, our stores represent less than 10% of our business. So it's not a big component to our business, but we would say that we are pretty much in line with what we're seeing with our department stores.

Okay. And you mentioned that pension expense will be higher in '09, but what about cash? Will there actually be a cash payment in '09 on the pension?

Sure. There will be a cash payment on the pension and that is disclosed in the 10-K. We have a cash payment every year.

Okay. So the number is in the 10-K, as well how much will be in '09?

Yes, it is, and we expect in '09, that number to be about $16 million for our consolidated pension plans.

Okay, thanks. And what about the price, any price changes or plans to alter the price at which you sell your product to retailers? Is that something that's been contemplated for '09?

In general, we took some price increases towards the end of '08, and we'll keep looking at the state of our business through '09, but at this stage, we believe our pricing strategies are relevant.

Okay. What was the magnitude of the price changes you took at the end of '08?

It was predominantly in the US. It was not significant.

Okay. And so, we shouldn't expect that that's going to be a source of growth in '09?

Well, we haven't made any decisions on '09. We're just looking at the marketplace as it stands today.

Okay. And the advertising and promotion expense that obviously looks like it was a good ROI in the second half of '08, when does that spending start to go down? Will you continue with this at this elevated level for the next few quarters?

Well, on an annualized basis, we're looking to invest a similar number for 2009 as we did for 2008.

Okay, so continuing at the similar pace. Okay, thank you so much.

Your next question comes from the line of Lance Vitanza.

Thank you for taking the call. I had a couple questions. The first is, could you just go through on the liquidity in a little bit more detail? I couldn't tell, did you say $360 million, 360 or was it $316 million, of availability?

316.

316, okay. And how much was drawn on the revolver at the end of the quarter?

So, we had no draw downs against the revolver, other than what was already outstanding under the trademark traunch of the revolver.

And some stand-by letters of credit that are outstanding, that get you to the 316 availability.

So if I take the 500 less the LCs, that's going to get me to the 316?

It's rough. It's detailed in the K, but it's closer to 400 less the LCs gets you to 316.

Okay, great. And then the borrowing base, is that disclosed in the 10-K as well?

Yes. In terms of quantifying that 400 number for you.

Okay, great. Okay. On the inventory, earlier I think, the comment had been made that you're sort of dealing with the same trends as everyone else, yet it seems like everybody else is working to reduce inventories. Your inventory is a little bit higher. Is that just reflective of the fact, then, that you are optimistic that you will be able to increase market share?

No. I think at a point in time it reflects how low our inventories were in the previous year. So what we've done is to bring them back into normal levels.

Okay. And lastly, can you comment a little bit on your plans for dividend payments? And I apologize if I missed this earlier during the call, but dividends throughout the course of '09?

We did pay a $50 million dividend as we've disclosed previously. There are no plans at present for a dividend, and to do so, we'd be looking for our Board of Directors and we'd be looking for all of our covenant compliance in our debt agreements.

Okay. Thank you.

Thanks.

Next question comes from line of Grant Jordan.

Good afternoon. Thanks for taking the question. Most of mine have been taken, but just a little more color on Q4, the administration line within the SG&A was up a good bit. I think the K referenced higher ERP implementation, as well as some bad debt expense. Maybe you could just give us a breakout of what the $25 million increase in Q4 was?

I think that the big pieces there are going to be the bad debt, as you had mentioned, was probably the largest piece that I can recall.

Okay. So some of that, theoretically, should go away at some point, that increase?

Yes, at some point.

But just to be clear, I mean from an administration perspective yes, we disclosed that number on the full year basis. For Q4, my comments have really been with regard to SG&A and the corporate piece. The corporate piece did increase. As to Robert's point, it bore the charge of the $16 million impairment charge in the fourth quarter.

How much additional expense in terms of ERP was in the fourth quarter?

We have not disclosed that amount in detail.

Okay.

But certainly, the spending trends there did decrease as we moved away from the implementation date in quarter two.

Okay. And then, my last question. On the cash flow statement, down in investment activities, there's a $53 million gain on a settlement of FX contracts that aren't hedge accounting. Can you just give us some color on that and how to think about that going forward?

That's essentially the FX contracts that we had in place with respect to the Euro, and did realize a gain on that. In term of the cash flow, it's really backed out of the operating section and put back into investing.

Right. So it boosted your free cash flow for the year by that amount. Is that right?

Yes.

So, how are you hedged going forward, I guess is my question?

We're basically hedging anticipated cash flows for the '09 sourcing and other exposures as well.

So based on the dollar move we've seen so far, would you expect to see some continued gains in that line?

Well, as Heidi mentioned, we realized some gains relative to those exposures already, so that will mitigate movements going forward.

Okay. All right. Thank you.

The next question comes from Carla Casella.

I think this is answered, but I'll ask it just in case. We had some conversations with retailers, and it sounds like in this type of an economy, they are consolidating their vendors as well. Are you finding that as we go into '09, you are gaining shelf space or floor space in some of the either department stores or mass?

Yes. I think we answered that question a little bit earlier, but fundamentally, I think what we're in a position where we've got collaborative plans in place for most of our customers. You're right that we are hearing that they are obviously taking a very firm look at their inventories and are looking at rationalizing of their supplier base. Given that we've got collaborative plans in place, and as I mentioned, we're generally meeting the expectations of those plans, even in the face of a tough environment, we will be focused on looking to gain any market share that we can across all three of our brands in this environment, and focusing on attacking any sales opportunity that is presented. So we'll own the inventory required to go after market share and sales opportunities as they materialize. I think it would be too early to call whether or not, given the shakeout that's occurring, whether there's going to just be floor space market share gains, but we'll be able to comment on that at some point in the future.

And then,at what point are they going to be placing back-to-school type orders?

We've already had discussions with most of our customers on back-to-school. We're in the process of gaining preliminary orders as we speak, but we don't actually finalize orders in production until we move into the late February and early March time frame, and we're trying to, as all other competitors are, delay our decisions to the latest possible moment just in the ability to be able to respond to the current economic environment.

Okay, great. Thank you.

Your next question comes from the line of Mary Gilbert.

Yes. I just wanted to clarify that. So with the consolidation that you're seeing working with your customers, is it fair to say definitively then, that you do see opportunities where you are picking up share?

What I would say is, we're absolutely focused on gaining market shares. As John mentioned and as I've mentioned, and we will own the inventory required to go after any profitable sales opportunity that exists out there, but it's too early to say what the impact of our customers' actions regarding rationalizing their supplier base and their approach to inventory strategy will result in for us.

Okay. And so therefore and like you said, what you're doing is you're investing in inventory to be able to be ready to gain share if need be. Is that fair to say?

What I said was that we work collaboratively with our customers and we're building our plans based on what we've agreed to own with our customers to service our sales plans. We obviously are going to position raw materials and source base opportunities to pursue any shifts in demand that occur, but in this environment, we're obviously very focused on managing our inventories smartly and being, though, in the position to go after market share and any profitable sales gains possible.

We had built some more flexibility into our sourcing, so we've got some more short lead time sourcing availability, if needed.

Okay. What kind of lead times were you able to build in there?

Six to eight weeks.

Six to eight weeks, okay. And then just kind of balancing all of this, it was my sense, given the environment that we're looking at, that really we would be seeing overall inventories coming down, but it sounds like, and it may not necessarily be the case, because it depends on your ability to pick up share. How are you seeing that?

I think it's just too early to determine. As we said, we're staying close to things at the moment. We're going to know more about this in the next few months.

I think it's obviously important to keep in mind there's a lot of moving parts here because we've had customer bankruptcies, and we're obviously very interested in transferring the sales that we had with those bankrupt customers to our existing customer base, and that requires the appropriate inventory build to gain those sales back into a new customer. So I think in general, as John said, it's too early to call, but if you're seeing any inventory build, it's really in an effort to transition sales from our bankrupt or liquidated customers into our existing ongoing customer base.

Okay, great. Thank you. Oh, one last thing. Now you said that you're going to build on the 501. Does that mean that you're going to have a new ad campaign building on that, and is there anything else that you're coming out with new, in terms of an ad campaign?

Well, we'll be coming up with new campaigns around 501. We're still working on what that creative execution would look like, but we are committed to using 501 as our lead communication vehicle.

Okay. Perfect. Thank you so much.

Thanks.

Your next question comes from line of A.J. Guido.

Hi, thanks. Actually, everything I wanted to ask has been asked already, so thank you.

Thank you

Casandra, do we have another question?

Your next question comes from the line of Shawn Fowler. I believe Mr. Fowler disconnected. Your next question comes from the line of Rosemary Sisson.

Yes, good afternoon, just a couple quick ones. The $88 million in CapEx, how many new stores will that encompass?

We haven't determined that and we don't break that out because we look at it on an opportunistic basis.

Okay. Can you tell me how many you already have leases for at this point?

Well, we have about 260 stores around the world.

No, I know that, but I mean in terms of new ones to open?

No. We haven't got any indications of that as of yet.

Okay. And then I just wondered, everyone has been asking questions about your inventory. If you could characterize your inventory in kind of three buckets, being the Signature product, Dockers, and then everything else. Is it one-third, one-third, one-third? Is this any way to characterize that, so that I could understand what you have in inventory right now?

Well, I think the way we look at our inventory is it aligns with the share of the business we have. So I mean clearly, it is predominantly behind the Levi's brand, then followed by the Dockers, and then the Signature brand, representing the size of those businesses.

Okay. Thank you very much.

You're welcome.

There are no further questions.

Well, thank you for your questions. In summary, we had a solid year under very challenging conditions. We generated strong cash flow, invested in the business, paid a dividend to our shareholders and reduced debt. We begin 2009 with a comfortable liquidity position in today's uncertain times. We look forward to talking with you next quarter. Thank you.

This concludes today's conference call.