Levi Strauss & Co (LEVI) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. second-quarter 2009 earnings conference call. (Operator Instructions). This conference is being recorded and may not be reproduced, in whole or in part, without written permission from the Company. A telephone replay will be available through July 21, 2009, by calling 1-800-642-1687 in the United States or Canada. From outside these countries, call 1-706-645-9291. For either number, please input the ID code of 16477579, followed by the pound key. This conference call also is 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 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; Robert Hanson, President of the Americas; Heidi Manes, our Controller; and Blake Jorgensen, our Chief Financial Officer.

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 these 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 material 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 Quarterly Report on Form 10-Q with the SEC. You can link to our filings from our website.

Now I would like to turn the call over to John Anderson.

Good afternoon. Thanks for joining us today. We continued to face a very challenging global economy during the second quarter. In this environment, we are focusing on the fundamentals and operating our business with discipline and rigor. We are investing in the business to ensure a strong position when the economy improves.

The effect of currency hurt our net revenues in the quarter, but we were up 5% in constant currency. Remember, we are anniversarying the ERP issues of second quarter last year in the United States. Still, we posted solid global results in an environment that became increasingly difficult during the quarter. For example, mature markets in Asia-Pacific, particularly Japan, continued to struggle with very weak retail conditions. And we saw the effect of the slow economy spreading in our developed markets throughout the region.

In Europe, wholesale channels declined, although we partially balanced this through sales from new Company-operated stores. This highlights the strategic importance of expanding our retail network.

We continued to invest in our businesses during the second quarter, opening more than 30 new retail stores worldwide. Additionally, last month we created a superpremium division called Levi's XX that will develop the Company's premium collections around the world. We brought in Maurizio Donadi to lead this business. He is an industry veteran who has held positions with Ralph Lauren, Armani and Diesel.

However, there is no question it remains tough out there. But we are addressing these challenging conditions with our strong operational performance. We continue to take costs out of the business, our investment and working capital is down, and we delivered strong cash flows, enabling us to continue to invest in our brands.

Now Robert will provide more details about the second-quarter results for the Americas.

Thanks, John. Good afternoon, everybody. Net revenues for the Americas region increased 8% on a reported basis and 12% on a constant currency basis during the quarter. However, as John mentioned, these increases primarily reflect the negative impact of the ERP-related shipping issues we encountered last year. Further helping the comparison this period, we shipped units in the first quarter of 2008 that would have ordinarily shipped in the second. The weak economy and the loss of customers to bankruptcy last year continued to impact our business this year.

The region's operating income increased $57 million in the quarter relative to last year. This increase was due to an improvement in operating margin, again reflecting a reduction in ERP costs compared to those incurred during the second quarter of 2008. We've also reduced our distribution costs through the actions we've taken in recent years to restructure our operations, and we are seeing the results of other cost-containment initiatives.

We are investing behind our brands with our advertising efforts in the United States. In July, we launched the Go Forth campaign for Levi's, a campaign that celebrates America's pioneering spirit. We also acquired 73 US Levi's and Dockers outlet stores yesterday that were operated by Anchor Blue Retail Group under a license agreement. This complements our retail store portfolio in the United States and is a natural next step in our long-term growth strategy. The acquisition strengthens our ability to effectively manage our brands' positioning in the outlet channel and enables us to provide compelling product assortments to consumers who shop this channel.

2009 will continue to be a very challenging year for the Americas, but we feel our investment in our brands and our retail store network will help us weather the tough market conditions.

Now back to John to review the results for Europe and Asia-Pacific.

Revenues in Europe for the second quarter were down 17% on a reported basis, but stable in constant currency. Wholesale performance in mature markets continued to be soft, reflecting the declining retail environment and weak performance in our women's business. Revenues from new Company-operated stores partially offset declines in our wholesale channel. We have more than 60 new Company-operated stores in the region than last year.

Europe's operating income decreased 48% during the quarter due to unfavorable impact of currency and a decline in operating margin. SG&A expenses increased as a percentage of revenues, primarily reflecting our continued investment in the retail channel.

Looking ahead, we expect our performance in Europe to continue to feel the effects of the global recession. As always, we continue to evaluate opportunities to expand our retail network and grow our business in Europe.

Now turning to our Asia-Pacific region, net revenues in the region declined 13% on a reported basis and 6% on a constant-currency basis during the quarter. Retail conditions drove lower wholesale revenues in our mature markets, particularly Japan. Japan has also seen a shift in retail channel towards lower price points and fast fashion offerings, which are resonating with the consumer in this tough economy. We continue to expand our dedicated store base in our developing markets within the region.

Operating income in the region was down 34% in the quarter, reflecting the impact of currencies and lower margin on weaker topline performance, and higher advertising and promotion expenses.

Before we turn the call over to Heidi to discuss the quarter's financial results, I would like to introduce our new Chief Financial Officer, Blake Jorgensen. Blake joined us two weeks ago from Yahoo!, where he was the Chief Financial Officer. He is a seasoned finance executive with tremendous operational and strategic experience working with global consumer product companies. I'm looking forward to working closely with Blake to continue to build the financial strength of the Company. Blake?

Thanks, John. It's great to be on board, and I'm honored to be part of this iconic Company. I'm quickly getting up to speed, and Heidi has helped make this a very smooth transition.

As John said, these are difficult economic times, but I'm very excited about the Company's strategic direction and playing a role in its future success. I look forward to reporting our financial results next quarter.

Now, Heidi will provide more detail on the second-quarter financials.

Thanks, Blake, and good afternoon, everyone. We continued to face tough market conditions in the second quarter. And the fluctuation of the US dollar relative to many foreign currencies, particularly the euro, has had a material impact on both our operating and nonoperating results.

Net revenues were down 3% in the quarter on a reported basis, but were up 5% on a constant-currency basis. This puts reported year-to-date net revenues down 8% compared to last year, but only down 1% on a constant-currency basis. The bottom line reflected a loss of $4 million in the quarter, with net income for the six-month period at $44 million.

Gross profit for both the quarter and year-to-date periods declined primarily due to the currency impact during the quarter. We saw no adverse impacts from product costs, and inventory markdowns have declined.

Total SG&A expense decreased $26 million in the quarter and $46 million in the first half of the year. Excluding the favorable impact of currency, SG&A did increase slightly. For both periods, selling costs increased compared to the prior year due to the expansion of our retail network. And as expected, our pension expense has gone up.

Offsetting these increases, we didn't repeat last year's ERP stabilization costs and we spent less on advertising year to date. Both periods also benefited from lower organization and distribution expenses, demonstrating our continued cost containment efforts and the benefits of past cost reduction initiatives.

Looking below operating income, other expense increased $11 million, primarily reflecting losses on derivatives, which hedge future cash flow obligations of our foreign operations. The recent depreciation of the US dollar negatively impacted the value of these derivatives in the quarter.

We have continued to invest in our retail store strategy, adding 31 net new Company-operated stores during the quarter. This brings the total number of Company-operated stores to 323, and these stores represent roughly 11% of our year-to-date net revenues.

Now, turning to cash flow and the balance sheet, cash flow generated from operating activities was $159 million during the six-month period. The $38 million improvement relative to last year is principally due to lower payments for incentive compensation, interest and taxes. Our focus on inventory management and cost control led to less cash paid for inventory and operating expenses this year, offsetting the decrease in our cash collections driven by our lower revenues.

We finished the quarter with lower inventories than at year-end 2008, demonstrating our continued focus on inventory levels. We also remain comfortable with our customer collection trends.

Capital expenditures were $12 million in the second quarter and $27 million in the first half of the year, down from last year, reflecting reduced ERP costs and lower spending on store openings this year.

Our liquidity position at quarter end of $270 million in cash and $233 million available under our credit facility remains strong and will support the business. Cash flow and liquidity were sufficient to fund a $20 million dividend in the quarter and provide for our strategic investments, such as our acquisition of Levi's and Dockers outlets this week. We ended the second quarter with net debt of $1.6 billion compared to $1.8 billion at this time last year.

To summarize, our operating performance reflects strong cash flow in a challenging economic environment. As we invest in strategic initiatives, we will continue to focus on controlling costs and managing inventories.

Now we will take your questions.

(Operator Instructions). Todd Harkrider, Goldman Sachs.

First off, I want to congratulate Blake and you all for filling the CFO spot. It seems like a good win, especially with an already strong team with Heidi and Roger in place.

Thank you.

Thanks.

Yes, we feel good, too.

But I wanted to talk a little bit about the US outlets, if possible. Can you provide some color on sales and EBITDA contribution, what the stores are currently generating?

We are not providing any more detail about the transaction than what we've already disclosed. Obviously, we see the outlet spaces as a very attractive space in the US consumer marketplace, and it's a profitable channel of distribution. And we are pleased with the transaction we've been able to conduct. And obviously, in future earnings calls, we will be able to discuss the performance of the network more thoroughly.

Okay. I guess in regards to the upgrading the product assortment there, can you maybe clarify in regards to what that might mean?

We have already -- we are already running a number of owned and operated outlets ourselves within our retail network. We are running more of a made-for-outlet product assortment strategy rather than using the outlets as a distribution channel for excess and obsolete inventory, which is consistent with standard best practices within the outlet channel of distribution within the United States. So that's the predominant shift.

We would also say that our emphasis is on delivering the best jeanswear- and khakiwear-buying experience in the outlet channel of distribution. So we'll be putting a greater emphasis on assortments to include more jeans longbottoms as well as khaki longbottoms in the stores than is currently in the assortment.

Got you. Then to follow up on a press article citing Blake as saying that an IPO is certainly an option down the road, I know the Haas family has kicked around bringing Levi public in the past. But would you say the odds of going public have increased over the past four or five years, of course assuming that the economy is better and so forth?

No. We're still focused on cash flow and paying down debt, building up our retail channel, and we've got nothing further to announce. Blake is coming on board. He brings us a lot of experience. And I wouldn't read anything more into that, other than that he is just a terrific addition to the team.

Yes, and to be clear, I did not make the statement that we were planning on it. We wouldn't provide any forward-looking guidance associated with the financing at all. It's something that's always been an option for the Company and I'm sure will continue to be an option for the Company down the road as part of the general financing strategy.

I had to give the question a shot. Appreciate it, and good luck for the rest of 2009.

Carla Casella, JPMorgan.

A couple questions. One, you've commented in your 10-Q on the potential for the tax reduction and the unrecognized tax benefit. Can you just tell us when you expect that to be resolved? And it doesn't look like there would be a cash flow impact, but could you verify that?

Listen, I think that's probably some forward-looking information here that we wouldn't be disclosing at this point. So I can't really give you some insights into when that would resolve itself.

Okay. But it's a tax refund claim related to California?

That's correct.

And should it be a noncash item?

No, that would be a cash item.

Okay. And then, just in light of all the CIT news lately, can you just talk about your view on factoring and how you protect yourself versus retailers, and if you do it on a regular basis or more of a seasonal basis?

We don't factor actively here in the United States at all. And as I sort of span our international markets, we really don't factor much internationally as well. So don't really expect much impact there for us as it relates to our receivables.

Okay, great. And then in terms of back-to-school, have you shipped back-to-school already, and can you say how shipments compared to a year ago?

I can make comments about back-to-school for the Americas division, and then, John, if you would like, you can comment for the Company. Our start shipment for back-to-school is at the beginning of June, so we've just begun shipping the season. Of course, we're not providing any guidance in terms of performance versus plan or expectations at this point.

What I can say is, obviously our customers are very focused on open to buy, very focused on managing their inventories extremely leanly and are expecting us to be in a position to respond to any fluctuations in planned sales volume so that we can either capitalize on an improving sales trend or manage our inventories extremely carefully should business remain challenging. So that's how we are set up to execute, and we'll keep you posted.

And are you changing the way -- or where you produce from in order to be able to ship later if you need to, meaning are you doing more in Mexico versus the Far East to be closer to the market or anything like that?

For the United States, on our more -- on our newer products, products that have less than a six-month lifecycle trend that are more unpredictable to forecast, we have definitely moved production closer to this country. We've got much more production in Mexico, for example on our young men's and our young women's businesses that tend to move faster and transition in terms of lifecycle more aggressively. So we believe we've got the right sourcing strategy in place to respond to the demand as it comes.

Okay, great. And just one last question, the status of the ERP system, and have you started the next market? Are you far enough along on the US to move on to the next market? And where would that be?

Well, the US business is now stable, and we're comfortable where that is. It's meeting our expectations. Our next rollout is to Europe, and we will start looking at that next year.

Grant Jordan, Wells Fargo.

My first question -- as you look at your inventory levels, down 11% year over year, what was it down on a constant-currency basis?

I don't have the balance sheet for you in constant currency here at my fingertips. But I think what's most important here is we manage inventory; we are managing units, not necessarily dollars. And when we look at our units, we are absolutely down relative to our year-end balances across the world.

Okay. And as you think about kind of current demand for your product, do you feel like there's more room to take inventory out, or are you in a pretty good position relative to where you think you should be?

I think we're pretty close to where we need to be. There is a little bit more work we could probably do in Europe and in Asia. But by and large, we are focusing on keeping our inventories lean. So we are pretty pleased with the progress we've made there.

Okay. And then another question on working capital. It looks like your days receivable continues to trend down pretty well. Is that something that you are focused on as a strategy to try to manage your credit risk, or what's kind of the story behind that?

So we're absolutely down. We feel really good about that. Obviously, a lot of heightened attention and focus on that over the course of the past few quarters in light of the greater economic concerns. And so it has been very much a focus for us, and we'll continue to stay focused on that.

Okay. Just trying to get a feel for -- looking at the revenue number, obviously currency is a big driver here. And there's also been a number of one-time things. If you had to say, year to date, the reported revenue number is down like 8%, kind of on an actual -- stripping out all of the external stuff, what would you say revenue is down year to date?

I think that's a fair indication. I think there's been a few puts and takes through that, and we would say that generally represents where the business is.

Okay, so kind of a run rate of down 8%. And then you talked a bit about the open to buy and really working with your customers on their lean inventory. At this point, have you seen Levi's pick up market share with any significant customers? And do you expect that will be a driver of the business going forward?

So you know, I can comment on this for the US or the Americas business, and John may want to comment outside of the United States. But as -- we don't provide specific market share data or an analysis of our floor space position relative to our competitors. However, we are the top player in our categories, in jeans and khakis and men's, and are among the top players pretty consistently on the women's side.

And our ability to grow floor space is really dependent on our ability to bring new, relevant products to market and have them properly displayed and marketed with our customers. We certainly have a market share focus as an organization. And with the bankruptcies that have occurred over the past year, we're looking to gain market share in our continuing customer base. But we don't report that data specifically.

That's very helpful. Just big picture, do you think there's been much of a move in terms of market share? Not looking for specific info.

Yes. As I said, we don't report the market share results broadly. What I can say is we certainly have a focus in our continuing customers to transition the business that we gave up with the bankruptcies we faced last year by building our businesses with our continuing customers. We have a very specific marketing strategy identified by customer to transition that unit volume. And we would hope, obviously, that we would be able to gain some momentum and replace the volume that we've lost at the bankrupt customers, in those customers where we plan to transition the business to. But we'll have to keep you updated in the future.

Karru Martinson, Deutsche Bank.

In terms of the mature Japan market, as the consumer shifts to fast fashion and lower price points, what is the response that we are seeing? And is there kind of a timing or a lag here as we get our inventories more focused to that consumer demand?

Well, a couple of things. That trend has happened very quickly, just over the last couple of months. It's not necessarily impacting us directly yet at a significant level with inventories. It just means we have to recalibrate our response to that.

We're still working on that. But it's a fundamental change to see the Japan consumer trade down, where that was a consumer previously that used to trade up, as you know. So, early days, but it's certainly something that's happened very quickly. And we are, as you can imagine, looking very closely at how we respond to that.

Okay. And with corporate expense, pension rose $9 million for the quarter. What's the outlook for the year? How should we look at that going forward?

Well, I think we've disclosed previously that we do expect pension expense to go up on the year, and we expect that to be at about $9 million for the quarter and the balance of the year -- each quarter in the balance of the year.

Okay, for the -- each quarter in the year.

Yes.

Okay. We've anniversaried Goody's now and we're going to anniversary Mervyn (sic) here in the third quarter. Are there any other kind of major retailers that we should be looking at or should be aware of in terms of your shipment schedules for year-over-year comparisons?

Nothing of that magnitude. We've obviously had -- because we are watching our customers' financial conditions very carefully, we've obviously -- we're managing our credit terms with our customers very carefully. So there are some small nuances in terms that we've negotiated with each one of our customers that we are implementing this year. So that's having a slight impact, but nothing material. And we've had some smaller bankruptcies that we will be coming up against in future quarters, but nothing of the magnitude of the Mervyns or Goody's bankruptcies.

Okay. And in terms of the 73 outlet locations, does this represent a change in the retail expansion program, or if this was a one-off opportunity that arose? And how should -- will this affect kind of your plans going forward for the rest of the year?

As I said earlier, we are excited about the acquisition because the outlet space has become a very attractive proposition in the marketplace in the United States and more broadly than the US and is a profitable channel of distribution. We're going to continue to be very strategic and very selective about new stores, which means focusing on the right cities and locations while taking into account the current economic environment that we are operating in.

Retail continues to be an important part of our growth strategy, as John said many times, because they're offering incremental distribution and sales opportunities to the Company and our brands. And it really allows us to showcase our product offering more thoroughly. So this continues to be the strategy that we are focused on, and we feel we will be in a strong position when the market turns around. But we are going to be very prudent and very demanding of any new real estate as we move forward.

Mary Gilbert, Imperial Capital.

Could you talk about the status in the mass channel, what you're seeing in Wal-Mart, and how the trends are there vis-a-vis private label and that sort of thing?

Sure. What I can comment on in general is what's been reported kind of broadly in the market by our customers that compete in this segment of business. The business was more robust earlier in the year. I think we spoke about that in the last earnings call. We did see business soften in the apparel categories within the mass channel in the second quarter. And that had an impact on our performance as well.

So we, like we are with the balance of our customers, just managing our inventories extremely carefully and being in the position to respond to sales as they materialize either way on our current trendline. And we'll keep you posted as things evolve over future quarters.

Okay. So overall, the apparel category was down. Do you know how Levi's is performing relative to the private label there?

Are you asking the question about Wal-Mart specifically?

Yes, Wal-Mart specifically, and then also generally in the mass channel.

Sure. And again, as we commented in the first quarter, we felt that we were holding our own and performing relative to the market performance through the first quarter. And we've seen our business soften as the market has softened in the second quarter as well. It varies, and I think you probably can get the information from our customers' earnings call reports, but it varies between private label and branded goods. We are focused on being the best jeanswear brand at the price points we compete at in the mass channel, and we are focused on competing for share leadership in those segments of business with our customers. And so we are poised to execute strategies to do so for the balance of the year.

Okay. The other thing is, I wondered if you could talk about innovation -- any new trends there. And overall, characterized by market, what you're seeing with the consumer -- going back toward more basic looks, focused on lower price points, like you're starting to see the shift in Japan. How would you characterize that in the US and in Europe as well?

Well, let me give you a global feel for what's happening. We're still seeing skinny fits, straight-leg fits as the predominant fits working around the world. And there's a couple of looks happening in terms of finish. There is the clean, darker look, and there is a distressed look. So the consumer is, depending on their usage occasion, their wearing occasion, either wearing a clean, more polished finish, or then going to the opposite extreme. And we've seen this trend for a while.

So no dramatic change. The interesting thing, though, is if you have got a finish within that menu, we are finding our price points are holding up quite well. Clearly, there has been some movement of the plus-$300 level, but not impacting us. But, yes, lowrise for women, skinny fits, men's still about skinny fits, straight-leg. 501 for both men and women very strong. We continue to support that, as Robert mentioned, behind his new Go Forth campaign in the US. 501 is the driver behind that.

So I think consumers are going back to brands they trust, brands they know, brands they can rely on to looks, and we're clearly aligned with those consumer expectations.

Okay. But you said with regard to the market share question that was brought up earlier, it wasn't clear to me, but would you say you are picking up market share? Is it flat? How should we look at market share?

Well, we think it's a work in progress with us. It's a strong focus from us as we launch our advertising campaigns. We will keep you informed as the year unfolds, as Robert said.

Okay. And then can you talk about margin? Because we saw margin erosion. Sort of stripping out the currency impact, what's going on the margin side? Is it because of the mix of merchandise toward lower price points with lower margin, or could you give us some better clarification on what's going on there?

I think as you probably noted, appropriately noted, currency is one of the biggest drivers there. I think particularly in the quarter, when we look underneath currency, one of the things that we have benefited from is lower inventory markdown activity. And frankly, I think that speaks to the proactive inventory management that we've been talking about in the last few quarters.

Right. But overall, though, didn't we see -- we still saw gross margin drop, even adjusting for currency -- is that correct, or am I reading that wrong?

No, about flat for currency. And we've always given the guidance in the mid-40s. That's where we are, and that's what we're comfortable with.

Okay, great. That's very helpful. Thank you.

Jeff Kobylarz, Stone Harbor.

I just wanted to ask a couple questions. Can you first talk about the new Dockers product that you were pushing out around Father's Day? Can you say how the customers responded to that?

Yes. As we've been talking about, we've been focused on reinvigorating our Dockers business around predominantly a really strong khakis offering. It's really still too early to tell. We obviously expect positive results, and we'll be able to talk about those in the future seasons that we will talk to you about.

We did mention in the last call, and we put an emphasis on in recent press, the launch of the new range of khakis we are offering from our most premium product, the signature khaki, through to a super-soft twill. And we are just getting those strategies on the floor now, and we'll keep you updated as the product performance evolves.

Okay, fine. Your corporate expense in your segment footnote, it was up from $32 million to $53 million. Can you explain why it was up? I thought currency was helping a bit there. I don't know if the pension expense is included in that line item, but currency I thought was helping to reduce some of those expenses.

So currency is, overall, but recognize the preponderance of our corporate expenses are here in the US and US dollar flows. The significant driver there is the pension expense. That's exactly where it lands. And as we said earlier, that's contributing to about $9 million a quarter.

Okay, but then it's up another 20% on top of that?

We've had other -- we've had higher severance costs associated with some of the accruals for the headcount reductions we've taken. But by and large, when we look at the nature of the spending, it's really the pension expense that's the key standout there.

Right, okay. And as far as the demand on the wholesale side from your customers, can you say -- are they pushing more of a destocking to you, or are their weeks of inventory, are they continuing to go lower or have they kind of stayed at this lower level for a while? Any general color there?

As we've said for the past couple of quarters, our customers have come into this year with a fairly conservative approach to open to buy. They are looking to manage their working capital and their inventories carefully, but also be able to capture every possible sale. So the expectations that they have align with ours, which is that we will have the right product, the right marketing support behind the product, and the right sourcing strategies in place to be able to respond to any fluctuations in demand.

We obviously, as both Heidi and John have mentioned, are also managing our working capital with a very sharp eye. So we are not taking on any additional inventory risk. What we try to have is responsive strategies to be able to respond to any fluctuations in demand.

Okay, fine. Then lastly, can you just give a general comment about the product costs, just what the trends are like out there with your sourcing partners.

Yes, there's no changes there, actually. We are seeing things being quite consistent after last year. You remember the huge run-up in electricity costs, cotton oil costs. That's settled down. So really there hasn't been any cost pressures coming through our sourcing base.

Emily Shanks, Barclays Capital.

I had a couple of follow-up questions. The first one is, I did not see CIT on the original $750 million credit facility lender list. Can you confirm that CIT in fact did not obtain revolver commitments in the secondary market thereafter?

That's correct.

Okay, great. And then, as I look at the acquisition that was announced, I just want to make sure that I'm thinking about this the correct way. Where prior to the acquisition, were you simply clipping, say, like a licensing fee and now you're going to have the assets as well as the attributable EBITDA?

Yes, we had a licensed business, which essentially translated into a wholesale business. We sold our product to Anchor Blue Retail Group, as we would any other wholesale customer, and then Anchor Blue sold Levi's and Dockers products, as well as Levi's- and Dockers-licensed products within their stores. And obviously, we've acquired this business, which is acquiring the store leases, the inventory and the fixed assets related to the Levi's and Dockers outlet stores, which were previously licensed. And we'll be running it as a part of our owned and operated retail business moving forward. So those wholesale sales obviously will not be reflected in our performance moving forward.

Okay. That's helpful. And you did not disclose the amount of sales attributable to those stores, correct?

No, we did not.

And you're not going to, right?

No, we're not.

Okay, I just thought I'd make sure. And then just my very last question is around the state of California tax refund claim. Is it fair to assume that you are either not going to get -- it's either going to be zero or you will get some type of cash tax refund? Are those the two options?

Listen, I think it's early days. And with everything going on with the state of California and the status of our claim here, it's too early to speculate whether this is going to be zero or the full refund claim that we've put in. There are many steps here yet to complete themselves before we can provide you the resolution.

Okay. So is there a chance, then, that you may owe them more taxes?

This is a refund claim that we've put upon them.

Christina Boni, RBC.

Many of my questions were answered, and I just have a few. One, you said that Company-operated stores are approximately, I believe, 11% of net revenues year to date. Do you have a target that you're looking at in terms of your overall business proposition of what that number ultimately you would like it to be?

No, no, we don't. We look at it as an opportunistic basis where it makes sense to open the stores. But quite frankly, the wholesale channel is always going to remain our dominant channel, and that's our focus going forward. But retail plays a role. So we don't have a -- we do not have a definitive answer there.

And beyond the 73 stores that you've committed to in the acquisition, what stores do you have committed in the pipeline at this point? And are you comfortable, given the change in the environment, of what you have in the pipeline?

Well, we constantly look. And I think, as you can imagine, we are being far more aggressive in terms of meeting expectations. So we don't have anything significant in the pipeline at the moment.

Okay, that's helpful. And then with respect to the dividend that was paid in the quarter, maybe you can give us just a recap of your dividend philosophy and maybe what your ability to pay dividends are post that dividend (multiple speakers) payments basket?

It's something we look at each year. I think it's reflective of the strong situation we are in cash-wise, that we are able to make a return to the shareholders. So it will depend on a year-by-year basis, and we feel that we are doing a pretty good job managing cash, and our shareholders should get some of the benefit of that.

Sure. Is that -- could you tell us what your restricted payment capability is at this point?

We're not going to quantify the restricted payments basket specifically because it's nothing you can calculate down to the dollar on your own. What we have typically said is if you took [the formerly in the indentures] and added up 50% of net income beginning in fiscal year '95, I believe, you would come close, and it's a sizable basket, from which you would deduct the $70 million paid so far.

Tom Whitley, Shenkman Capital.

Most of my questions have been answered. I was just wondering, on the CapEx line, do you expect it to run at this rate kind of going forward, or are you going to have to invest more in the second half of the year?

In our 10-K, we disclosed that we expected that amount to be about $88 million for the full year, and that's current with our -- or that is reflective of our current thinking today.

Okay. And is there any significant amount you would have to invest in the new most store acquisitions outside the purchase price?

We've factored, obviously, a modest capital improvement investment in the acquisition price and transaction of the deal. And we plan to make rolling changes to the network based on the most important stores being touched first. And this will be a process that will happen over several quarters. So as that becomes clear, it will materialize in the financial numbers, and we'll talk to you about it at that point.

Janet Clay, Liberty Mutual.

Just a couple questions. One was regarding your headquarters, the new lease renewal. Did you have any material savings on rent with that renewal?

You know, it's early days to determine what that is. We've just signed a letter of intent. We'll still be working through the negotiations, and we'll be clear on that in a couple of months' time. But we don't have the actual details finalized yet.

Okay. And then I wanted to follow up on your dividend policy. Last time when we had the call, you paid a dividend just a few days after the call. And I just don't understand why there's sort of like this secrecy around if you're going to pay it or not. I mean, I'd much prefer that you address it on the call than doing it like right after the call. Is there a reason why you feel like you can't share that on the call?

I think what's required every time is we've talked a little bit about some of the debt covenant considerations, but we also need Board approval. And so the reason that we didn't make any statements in our last earnings call is that the management hadn't received Board approval to make the dividend. And when we receive their approval, then we communicate it.

Carla Casella, JPMorgan.

A follow-up. In your 10-Q, you comment that the cash uses for 2009 should be substantially similar to what you had predicted in the 2008 10-K. And in that, I think you had talked about postretirement spending of $21 million and pension of $16 million. Do those numbers still hold? I think you had commented today about $9 million a quarter on pension, and that didn't -- I wonder if you are combining those two items?

So the $9 million is the pension expense, not the cash number. And the disclosures that we do have in the 10-K are reflective of our current thinking.

Okay, great. So $21 million for postretirement and $16 million for pension.

For '09.

Phyllis Camara, Pax World Funds.

Just a couple of quick questions, please. Can you talk about the premium brand that you're going to be introducing? Is now really the right time to introduce a premium brand? And will it be in your stores, or will it be in other stores, or both, of your retailers? And that's the first question.

Well, clearly we believe it is the right time to launch a premium brand. But it's a combination of two things in this new business unit. It's our current vintage collection of products, which we sell around the world. We are just consolidating that into a global collection, because we think we can be far more consistent in how we market it and where we sell it and how we develop it.

The other side of the business is we think there is a great opportunity out there between the $150 and $250 price point, an area which we have played in around the world, but not within a consistent approach. So this is a way for us to develop product globally, launch product globally and market it globally. And we think that will have more impact, more effectiveness, and we have set up an organization accordingly to address that.

And will it be primarily in your stores, or will you (multiple speakers)?

No. It will not be in all of our stores. It will be in selected stores, and it will be in the right boutique specialty stores around the world. So it's not an exclusive Levi Store collection.

One thing I was looking at on the -- it looks like your allowance for doubtful accounts was up 16% so far this year. Is there anything -- should we expect that kind of growth to continue or just stay the same for the rest of the year? Do you have anything you could tell us about that?

I'm not going to necessarily speculate about bad debt expense in these challenging and turbulent times, about what it's going to do. I think it's important to note that it is slightly higher in constant dollars relative to last year. We do have some FX impact running through there that brings that balance up as well.

Okay, thanks. And then last question has to do with the new stores you bought. And I apologize for asking this, but is there any way you can give us a multiple on what you bought the store leases and the inventories and that type of thing for?

Like I said, we are not disclosing anything more than has already been disclosed. We believe we've paid an appropriate price for the value of the assets. We are excited about the transaction for the reasons that I've mentioned prior, and we'll keep you posted on results as they evolve.

Jeff Stewart, Babson.

Most of my questions have been answered. But I did want to ask about the stores that you've purchased. I did go back and dig through the filings, and it does look like, while there probably is some seasonality, there's some statements in the 13-week cash flows that suggest kind of $120 million or $130 million for those Levi/Dockers stores, which looks like they're doing a little more per unit than you are on your regular stores. Are the outlet stores, are they -- do they have a higher per unit revenue number than your regular stores?

And when you're referring to our regular store, you're talking about our mainline first-quality stores?

I guess that's -- I'm just backing -- I know we don't know what the Internet component of those, because you report them together, but if we do that it comes out to kind of $1.2 million or $1.3 million per unit. And it looks like these outlet stores are a little bit higher than that.

Yes. So, again, as I said, we aren't going to disclose any specifics about what our expectations are in terms of financial performance for those stores. What I can tell you is, if you're really looking at it down to the value per unit transaction, our mainline stores are a different strategy. They run at a mainline first-quality price, and they tend to run slightly lower units per transaction. And that has an impact on the overall financial performance of the stores in terms of overall dollar volume per store.

So I'm not sure that the conclusion you've drawn is really a fair one, but we will keep you posted. As we get a hold of the stores and we start to generate performance from them, we will talk to you about that in the future.

And you said a couple of times already that they are profitable. Yet if I look at that 13-week cash flow statement and look at the -- they break it down individually, the attribution for payroll and others, along with the overhead -- it doesn't appear to be generating any operating profit. Is that -- when you say they are profitable, are you adding back the licensing component that you are collecting at Levi's and rolling it back into the income statement?

We assume that you're looking at the Anchor Blue Retail Group filing. And I can't comment on the profitability of our customers, because when we were in business with Anchor Blue Retail Group, we were selling our product to them under a license agreement and they were obviously running those stores as a freestanding business separate from our Company. What we do see as a company is that the outlet channel is a profitable channel of distribution. We are excited about the acquisition and believe that we can run it profitably as we build our strategies out into the future. And we will keep you posted as things evolve.

Okay. And one last question is that when you charge -- I think it says a licensing arrangement, is that something similar to the way you would license some of the product, is you would charge them a percent of their revenue off of the Levi's brand?

Yes. We licensed our outlet business to Anchor Blue Retail Group and its predecessors in the early '90s. And the deals were composed kind of differently, and it's a different arrangement by product category. We sell our wholesale business to them, and it's a regular wholesale transaction, and there are some licensing revenues that we gain off of the licensed products that are sold directly to them. But I would look at it more as our wholesale business relationship very similarly to how we sell the balance of our other customer base.

Okay, thanks. That's helpful. And then I guess on the dividend side, I guess I'm searching for a relative comment about how you manage the cash flows. And in terms of feeling comfortable in paying a dividend, is there any metric or anything that you could point to as to how we might quantify this on a go-forward basis, just for our S-lenders for -- sort of for modeling purposes? How do you determine how much free cash flow makes you feel comfortable during the year to pay a dividend?

No, we look at the strength of the business. We look at the uses of cash that we have. And we weigh those all up together, and that determines our comfort level on whether we do or don't, and how much, if we did, the dividend would be.

And so there is no metric or formula base to that?

No.

[Ania Wock, Syfe Advisors].

Following on the questions relating to gross margins, can you tell us what the gross margin was on a constant-currency basis?

No. We've disclosed for you, I think, the currency impact. You can go ahead and try and calculate that, but we haven't disclosed what the constant-currency margins are.

Okay. And then within the SG&A, there were some preopening expenses and severance costs, whatnot. Can you tell us what those are? I'm just trying to see what the normalized margin might have been.

Just to make sure I understand, are you asking me what the amount of the severance costs were that were in the corporate expense bucket?

Right.

Okay. No, we're not going to disclose that level of detail. As we've mentioned before, in our cost containment efforts we're taking a hard look at headcount, refining headcount, rightsizing headcount, and have taken incremental reductions for several quarters now. And that's what is giving rise to these charges. But we're not going to disclose the specifics of those charges.

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

Well, in summary, 2009 has thrown a few challenges our way, as it has for most of our customers and industry peers. And I expect these conditions will continue. The Asia-Pacific region is now being significantly impacted by the global downturn.

Despite these challenges, we've taken decisive actions to control costs and manage our inventories down from prior levels, contributing to improved cash flow and strong liquidity. We've made strategic investments in the business and continue to support all three brands through investment in our retail channel and marketing programs. We will stay focused on the fundamentals, operate with excellence, and strengthen the business during these challenging times.

We look forward to talking with you in the next quarter. Thank you for your attendance.

This does conclude today's conference call. You may now disconnect.