Levi Strauss & Co (LEVI) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company's third quarter 2009 earnings conference call. All parties will be in a listen-only mode until the question-and-answer session, at which time instructions will follow. This conference is being recorded and may not be reproduced in whole or part without written permission from the Company. A telephone replay will be available through October 15th, 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 32536181 followed by the pound key. This conference call is also being broadcast over the Internet and a replay of the Webcast will be accessible for one month on the Company's website, LeviStrauss.com. I would now like to turn the call over to Roger Fleischmann, Vice President and Treasurer of Levi Strauss & Company.

Good afternoon and welcome to our conference call. I'm pleased to introduce members of the Levi Strauss & Company management team. With us here today are John Anderson, our President and Chief Executive Officer, Robert Hanson, President of the Americas, 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 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 could also have a material adverse effect on our future results, performance or achievements. We provide information on our website about how we compile various measures used to describe our business performance.

Finally, today we filed our quarterly report on Form 10-Q with the SEC. You can link to our SEC filings from our website. Now, I'd like to turn the call over to John Anderson.

Good afternoon everyone and thanks for joining our third quarter earnings call. The economic environment remained very challenging around the world during the quarter. There's no question, we're in tough times. Despite these conditions, our Levi's brand performed well globally, particularly in the Americas, our biggest region, where the brand is showing solid growth. Levi's brand sales also improved in Asia, and we've seen a positive response to our new products and market-leading fits, including the updated 501 we introduced next year. The brand's performance is encouraging.

While we are pleased with the improving performance of the Levi's brand, we remain cautious about the upcoming holiday season, in light of continued slow consumer spending. We also recognize that retailers are managing their business with leaner inventories, and we don't expect this to change significantly when consumer spending recovers. In the meantime, we're managing our balance sheet and controlling costs even as we invest in the business. Overall, it was a productive quarter in light of the tough market conditions. We remain focused on building our brands and have taken advantage of opportunities to strengthen the business. Our solid operating cash flow this year enabled us to make strategic investments. In July, we purchased 73 US Levi's and Dockers outlet stores and the DC Company, our main footwear and accessories licensee for Europe and parts of Asia. Both acquisitions signify our commitment to invest in our brands and our retail business. I'm very pleased with the rapid seamless integration of both businesses during the quarter.

Our teams around the world are intensely focused on strategies that we believe will build our brands, strengthen our competitiveness, and drive future growth. As we navigate the remainder of the year and beyond, we look to continue our expansion of retail operations, and further leverage the efficiencies and diversity of our global footprint. We'll focus on investments in the geographic markets that offer the greatest potential for return, and on developing market leading innovations that will create great new products.

Robert will provide more details about the third quarter results for the Americas.

Thanks, John. We're pleased with the strength of the Levi's brand across the Americas, especially in the context of the economy and given the loss of two significant customers last year. Our innovation leadership is evidenced through the positive response to our Levi's product line, particularly men's 501s and straight and skinny fits. And three major customers have rolled out our junior's line across their respective footprints. Sales of both men's and women's products of the Levi's brand were up for the quarter over last year, partially offsetting low demand for our US Dockers products And lower volume in Signature products. As a result, net revenues for the Americas region decreased 5% on a reported basis, excluding the impact of currency net revenues decreased 3%.

The region's operating income decreased 2% in the quarter compared to last year, mainly due to the effects of currency. The net revenue decline was offset by higher gross margins in all of our US businesses, and additional operating costs associated with the new outlet stores were offset by lower ERP costs compared to those incurred in the third quarter of 2008. We continue to invest in our brands, launching our Levi's Go forth advertising campaign in the United States in July. We also acquired the 73 US Levi's and Dockers outlet stores, allowing us to gain control over a business we know well.

We brought these stores and their staff fully on to our own systems in less than a week. We already begun upgrading the consumer experience in these stores. We feel our investment in our brands and our retail store network position us well for future growth, though 2009 continues to be a challenging year for the Americas. Now back to John to review the results for Europe and Asia-Pacific.

Market conditions remain tough across Europe. Revenues in Europe were down 13% on a reported basis, and 2% in constant currency. Wholesale channel revenue in our key markets declined from last year, particularly related to our women's Red Tab products, reflecting the region's declining retail environment. Revenues from Company-operated stores opened in the last 12 months helped offset this decline.

Europe's operating income decreased 55% during the quarter on lower regional sales, continued investment in retail expansion, and the unfavorable impact of currency. However, we continued to invest in our European business. In July, we announced the acquisition of DC Company. Bringing this business in house gives us direct control to better integrate key branded accessories into our Levi's range. This will expand our head to toe offering for women and men and our own retail stores and at our wholesale customers.

During the quarter, we also opened our largest European store located in Rome, and last month, we bought the remaining portion of our joint venture in Russia. The buyout gives us full control in this important growth market. Looking ahead, we expect our performance in Europe to continue to reflect the effects of the market conditions in the region. As always, we will evaluate opportunities to expand our retail network and strengthen our business in Europe.

Now turning to our Asia-Pacific region. Net revenues in the region were up 2% on a reported basis, and 4% in constant currency. On the strength of the Levi's brand. The main drivers of this increase were product promotional activity, and an expansion of our brand dedicated store network. The increase in revenues versus last year was partially offset by our performance in the wholesale channel in some mature markets. This was particularly true in Japan, where weak consumer spending and a consumer shift to lower priced retail channels continued.

Operating income in the region was up 23% in the quarter, driven by lower planned advertising expenses across all markets as compared to last year, which primarily related to our global 501 campaign. Now Blake will provide more detail on the third quarter financials.

Thanks, John and good afternoon to everyone.

Before I walk through the numbers I would like to give you my reflexes on the quarter as a new member of the team. This quarter, we clearly demonstrated our flexibility and operational capabilities in taking decisive actions to enhance the business and control costs during a challenging consumer economy. Our ability to quickly integrate the US outlet store business and DC Company contributed to our solid operating cash flow. As has been the case all year, we continue to face a tough market in the third quarter in both wholesale and retail channels. Our overall results were negatively impacted by the depreciation of the US dollar against foreign currencies, especially the Euro.

On a positive note, we took advantage of strategic investment opportunities, accomplishing this through operating cash flow, while finishing the quarter with a strong liquidity position. Throughout today's call, I will reference performance comparisons on a year-over-year basis unless I otherwise note. Total reported net revenues for the quarter were down 6% or $70 million. These results reflect a $51 million unfavorable currency impact, particularly in Europe. Year-to-date reported net revenues were down 7%, but only down 1% on a constant currency basis. Net income was $41 million for the quarter, and $81 million year-to-date.

Gross profit declined by $38 million for the quarter due to the impact of currency and inventory markdowns. The decline in gross profit was partially offset by the impact of increased sales from our Company-operated stores, including the recently acquired outlet stores in the US market. Reported gross margins remain within our target range of the mid-40s. Total SG&A expense increased $7 million in the quarter, but improved $39 million year-to-date. Excluding the favorable impact of currency, SG&A increases were due to our additional Company-operated stores, including higher costs associated with our recent acquisition.

Pension expense remained higher than last year for both the quarter and year-to-date periods. Offsetting these increases were lower costs related to our US ERP implementation, and advertising across most markets. SG&A also benefited from lower distribution costs, and other actions we have taken to restructure our operations and manage our cost base. Our operating income was $98 million in the quarter, down from $144 million last year. Interest expense during the quarter was $38 million, and other expense were $6 million, primarily reflecting a loss on derivatives, which hedged future cash flow obligations of our foreign operations. Third quarter net income was down $28 million to $41 million.

Now, turning to cash flow and the balance sheet. Operating cash flow during the nine-month period was $174 million, compared to $151 million last year. Our focus on inventory management and cost control substantially offset the cash impact of lower revenues. We finished the quarter with lower inventories than at year-end 2008, and remain comfortable with our customer collection trends. Capital expenditures were $19 million in the third quarter, and $46 million year-to-date. Year-to-date CapEx is down on reduced spending on ERP and store openings. We do not anticipate that CapEx will change significantly from the $88 million we estimated -- the estimate that we provided you with at the beginning of the year.

We continue to invest in our retail store strategy and have added 77 net new Company operated stores during the quarter, including the 73 US outlet stores we acquired. This brings the total number of Company operated stores to approximately 400 worldwide. We generated roughly 11% of our year-to-date net revenues through our own stores. Our liquidity position remains strong. We ended the quarter with total cash of $172 million, and had $214 million available under our credit facility. Operating cash flow and liquidity were sufficient to fund our strategic investments during the quarter.

After buying the US outlets and the DC Company in Europe, we ended the period in a stronger cash position compared to the same quarter last year. Net debt was $1.7 billion, compared to $1.8 billion a year ago. To summarize, our performance reflects strong operating cash flow on a very challenging economic environment. As we invest in strategic initiatives, we'll continue to focus on controlling costs and managing inventories. With that, we'll now take your questions.

Thank you. The floor is now open for questions. (Operator Instructions). Your first question comes from Karru Martinson with Deutsche Bank. Go ahead with your question.

Good afternoon. Looking at the SG&A line, what was the magnitude of the acquisition costs that were included in that number?

Thanks for the question. This is Blake. We don't break out the costs associated with the actual acquisitions. It's safe to say that the cost to bring on 73 new stores is -- there is a cost there and to operate those new stores will continue to bring our SG&A up. But remember, we'll also be getting the retail revenues from those stores, not just the wholesale revenues for those stores. And that obviously adds to our revenue line.

Okay. Would you be willing to give a magnitude, 3 to 5, 5 to 10 ballpark, just in terms of modeling purposes for next year.

I think it's immaterial in the grand scheme of things.

This should be kind of the run rate for SG&A going forward for the time being as you get those stores ramped up.

We're not providing outlook but for purposes of your model that's probably a fine assumption.

Okay. And we saw same store sales kind of come in ahead of expectations today from many retailers and you guys mentioned your inventories are still very low at retail. What are you seeing? Are you seeing some signs, some areas of growth, kind of starting to pick up or is it still pretty much across the board doom and gloom?

Why don't I let Robert talk a little bit about what we're seeing in both the wholesalers that we sell to as well as the retailers and then if there's a financial component I can come back.

Okay. I think as we said earlier, we saw traction in the Levi's brand and we're pleased with the brand's results in today's economy in particular. Consumers are responding positively to legitimate brands that offer good value at an attractive price but we are seeing wholesale customers continue to manage their inventories pretty tightly, regardless of market conditions, and regardless of brand performance. And we don't expect to see this change in the near term. It seems as if our customers are getting used to running their results off of lower inventory levels and we don't expect that to change.

And I think you can assume for -- on the financial side of the equation, we'll continue to manage our inventories in response to what's going on in the retail economy and we're happy that our inventory balance as I said in the call earlier were below year-end levels. We're extremely comfortable with that position and our goal is going to be to continue to optimize our cash flow and stay very focused on the inventory levels.

Then just lastly, if I may. In terms of Asia-Pacific, last quarter you talked of pressures from fast fashion, Asia certainly improved this quarter. What are you seeing there in response to the trends?

Well, I think in Asia the most challenging market for us and I suspect most people at the moment is Japan, where we've seen a fundamental recalibration of consumers probably moving more in line to what we've seen happening in the US and seen happening in Europe where this more fast disposable fashion has become a bigger component of the business. Outside of Japan we're not seeing that. So I would -- if we look at our business, we'd say the rest of Asia is performing well and Japan, with that complete recalibration and channel dynamics is where we're seeing the most challenges at the moment.

Thank you very much, guys.

Thanks.

Next question.

Your next question comes from the line of Carla Casella with JPMorgan.

Hi. I also had a question just on the expense side. Selling expense and admin expense both up $20 million sequentially which is a surprise the to us. Can you give us the baskets, what would be the key items driving that up sequentially and should we expect that to be the new run rate level?

I think the key is the expansion of our retail store network over the past 12 months. We've added 77 net stores and that takes the store count up to over 400. Clearly, that's going to drive the SG&A line as the model begins to shift. Also, pension expense was higher during the quarter. The counter balance to those two expenses on the upside were reductions in marketing expense, organizational expense and distribution expense. I think it's early to say exactly what the settled in retail expense model looks like and we're going to continue to stay very focused on minimizing SG&A expense going forward. But for purposes of not giving outlook, I think your models are probably reflective of where the expense line will be, at least in the near term.

And of the 77 new stores, weren't the 73 just brought in end of the quarter, so their full expense wouldn't have been in there for the quarter; is that correct?

Yes, we actually made the acquisition in early July and immediately brought those stores online and so the stores were in place for the bulk of the quarter.

Okay.

I caution as I said earlier, though, that the actual operating costs of 73 stores on a cost base of an organization of our size is pretty immaterial still.

Okay. And then on the inventory side, you mentioned that your inventories are lower, the trade is lower, do you think the trade still needs to bring down inventories? Are you worried about continued destocking or do you think they're at a low base now and you'll be working towards replenishment for the holiday?

As I think we've said before, and this is particularly I think true of US retailers and maybe John can comment on retailers outside of the Americas region, you can imagine they're concentrating on keeping their inventories as low as they can and are getting used to driving performance off of lower inventories. We're continuing to focus on just making sure that we have the right inventory available to meet the consumer demand that we have in our customers and to take action where we need to. What I can tell you is open to buy is flowing when the sales are there. It's just that obviously in this economic environment, inventories have been reset to a lower level, improved our customers' cash flow and they're comfortable with that model and they're asking us to be in a position to service the sales as they come.

With your inventories relatively low as well, if holiday ends up being better than expected how quickly would you be able to replenish? What's your lead time I guess on some of the your core items.

We have got sourcing in Mexico quite close by. So our sourcing mix would change, fine tune somewhat over the last six months. So we believe we will be able to respond to a move in consumer demand. And we changed our sourcing mix accordingly. But I think we've got to be pragmatic and that wild fluctuations will be a challenge but if there's a steady increase we'll be in good shape.

And I think we feel comfortable where we are in our core inventories and obviously in the more fashion driven products that we believe in, that I mentioned earlier that are selling well, we took an appropriate level of inventory investment behind those so that we can be in a position to service demand.

One last question. When we've been out in the stores, most of the department stores and JCPenney the men's presence looks good as always. The women's looks a lot better than we've seen in the past. Are you getting additional shelf space or floor space from retailers or do you think you're being more prominently displayed or is it a complete misperception on my part?

Carla, you do your homework, and we appreciate it. We're actually having some nice traction as I mentioned on the Levi's brand across the board now. We're seeing growth in sales in both men's and women's. We've always had in the United States customers fairly strong and well-distributed, misses business. We've had our customers across the board really but our top customers, and you mentioned JCPenney as well, roll out a much more national footprint on the junior's side and invest behind both the product assortments as well as the presentation strategies to bolster their presentation of their Levi's women's business and we're as I mentioned earlier pleased with the results thus far.

Great. I'll get back in queue. Thank you.

Thanks.

Next question.

Your next question comes from the line of Jeff Kobylarz with Stone Harbor investments.

Hi, yes, wanted to ask a little bit more about the US Levi's business. Was there with the sales of jeans up in the quarter, was there any timing issues of shipments at quarter end that caused more sales to show up in this third quarter?

The only issue that we face that was a bit of a one-time event is obviously you're aware of the fact that in September, Kohl's opened 35 stores in the California market and there was some sell-in that occurred in the month of August to position those stores for opening. But it was relatively immaterial to the quarter's total performance. Otherwise, what we're saying is that as I mentioned earlier, we're pleased with the traction that the brand's getting in the market across both men's and women's and continue to hope to see that performance moving forward.

Okay. All right. And then your MD&A says that the Americas' gross margin was up, and can you explain just what were the drivers behind that?

Well, we've got a couple of pieces as drivers. Obviously, retail expansion is a positive driver of gross margin worldwide and that clearly helped in the Americas with the acquisition of the outlet stores that we've discussed today. Globally and as part of the Americas, obviously, currency was a negative impact on gross margin. And any adjustments in inventory globally were a negative. But I think what you're seeing primarily driven in the Americas is the shift to a greater retail presence.

Okay. All right. And then it was mentioned in the MD&A about you how in Europe, the Levi's Red Tab products for women, that they were especially soft and what was the reason behind that?

We think it's just a general category trend that's happening in Europe at the moment and we're being impacted by that. Men's business seems to be holding up on a stronger basis.

Okay. And any general comment you can make about how many retail stores you intend to open over, say, the next 12 months?

No, we have no fixed number in mind. We continue to look at store locations that make sense. But we don't manage to any fixed number at all. I think you'd appreciate that today it's very much on the viability of each location as it becomes available.

Okay. All right. Fine. And then lastly, it's been mentioned that Levi's has done well in the US because it's providing a good value for its consumers but Signature, can you explain why Signature is underperforming the Levi's brand given Signature's lower price point?

Well, I think in this economy, obviously we are seeing customers focusing on value. We've been refocused and John's been mentioning this for a number of quarters now, on our more profitable core businesses. We remain committed to offering products that are a great value to our consumer base. As I mentioned, we're seeing really strong traction on the Levi's business in this economy and we're pleased with the results that we're getting through customers who are selling our Red Tab business and continue to see opportunities to provide really solid value to consumers in the US market.

We also do see that consumers are trading down from a super premium or more premium price point businesses to the Levi's brand. As it relates to the Signature business, we have seen some impact of Wal-Mart's project impact which we've talked about in prior calls, and it's no different than any other apparel vendor at Wal-Mart as they look to emphasize food and hard lines over apparel. Wal-Mart's new strategy coincides with our renewed emphasis on customer profitability and this core profitable business, as I mentioned a moment ago. And those represent the best bottom line opportunity for us so that's really what we're focused on rights now.

Okay. Thanks very much.

Thank you.

Next question, please.

Your next question comes from the line of Bill Reuter with Banc of America Securities. Please go ahead with your question.

Good afternoon. This is Robert speaking on behalf of Bill. I just had a couple quick questions. One in particular regarding Dockers. I was wondering when you plan or hope to start seeing some of the results here of your revitalization program there?

Sure. We did introduce new product for Father's Day and we put some pretty exciting new product on the floor in August and in September as well, including our new signature khaki which is anchor of our product line, is our new replenishment program of refined fits and finishes and this is being well-received from our perspective. Unfortunately, the overall product category is down and we're the largest brand in the segment so that impacts us and we won't have the full roll-out of the product line that you've been reading about in the press recently implemented on floor until really the spring of 2010. So that's the cadence of the strategy that we're rolling out.

Okay. And then do you have any idea for what kind of market share you have in the khaki category?

We don't provide specific market share data or any analysis on our kind of on-floor position typically.

Okay. And that's all I had. Thanks.

Thank you.

I will add, though, that if you try the new pants on, they're wonderful.

Your next question comes from the line of Emily Shanks with Barclays Capital.

Good afternoon. I have a few questions. Thank you for the details in the Q around the Company-owned stores and how much of revenue they represent, I believe the number was around 11% for the prior nine months. Can you tell us how much EBIT that represents?

We don't break out the profit on the Company-owned stores and I don't think our intention will be to in the future. So I think you'll have to look to industry trends and industry retailers to try to come to that in your own models.

Okay. Can you let us know how much of SG&A in total the Company-owned stores represent at this point?

No, I can't help you in that respect either.

Okay. And just my one last question around the Company-owned stores, I know that you had indicated that the -- within the selling costs specifically, that the additional Company-owned stores were partially offset by favorable impact in FX of $7 million. Can we assume that those incremental costs were a couple more million than the $7 million or what's the magnitude that we can think of in that regard?

I would consider it to be relatively small. So you're probably not that far off in the numbers you're talking about.

Okay. Perfect. Thank you so much. And then as we look at your cash balance, what do you guys view as really the minimum cash balance that you need to run your business?

You know, I would hesitate to discuss a minimum balance. We're feeling very comfortable now, obviously having more cash is always better than less cash. And we would like to continue to build that cash balance over time, continue to pay down debt and continue to stay very lean when it comes to inventory, but not impact the ability to service our customer base or our own stores. And so we're going to continue to maintain focus on cash flow and that may mean that that cash balance obviously builds over time. Clearly, we would like to maintain the ability to continue to pay dividends as we have in the last couple of years and that's part of that is our overall cash flow strategy.

Great. That's helpful. And then just my last one is are there any other tuck-in acquisitions that you see on the horizon for you all?

No, we have no short-term plans but we'll continue to evaluate opportunities as they come up. I think you've -- we've proven that when there is a good opportunity, we can act and we can also integrate it quite successfully and keep our cash situation nice and strong, but we don't have anything on mind in the short term.

Great. Best of luck during the holidays. Thanks.

Thank you.

Next question.

Your next question comes from the line of Colleen Burns with Oppenheimer. Go ahead with your question.

Good afternoon. Just on the 73 outlet stores that you acquired in the quarter, were those stores opened in the third quarter in July and August?

Yes, they were.

They were. And then just on Europe, have you seen trends in Europe getting worse or how would you characterize the business there?

We would say in Europe we probably believe it's bottomed out. We think there's going to be a lag impact on Europe as compared to the US. As you'll remember, they got impacted slightly later than the US did on this recession but we're not seeing any signs of improvement in Europe at all and we think it will remain challenging there certainly for the next 12 months.

Okay. And then just on the -- your kind of store expansion plans, can you give us a sense of where you are focusing future store expansion? Is it mostly in the US or in Europe?

No, there is no clear answer to that. I think as we mentioned earlier on, we just look at what's the best return on the investment and we look at it at a global basis but we don't have any set number by region or by country at all.

How many stores are you committed to open as of today either for the rest of this year or -- ?

We're not committed to any number. We'll just wait and see what opportunities come up that fit our financial model.

Do you have any stores that are unprofitable at this point?

We don't break that out. But we're pleased with our overall performance of our retail store network.

Okay. And then just on the premium, how are the premium price points holding you up for you guys. I know you're placing greater emphasis on developing some of the brands in the premium division.

Well, I think we need to be clear. We don't set pricing in the marketplace but we're not seeing any pressure on our brands from a pricing point of view from consumers at this stage because we believe as Robert said earlier on that the amount of quality we build into our products, the way we're marketing them at the marketplace, that the consumer is responding to legitimate, authentic brands and we'll stay focused on making sure that we continue to innovate and we've done that with the 501s. We've done that with our skinny leg jeans and as long as we keep bringing newness to the marketplace, we're not feeling any pressure at this stage from consumers.

So you haven't really seen any trading down from some of your premium price points to your mid-tier price points?

Not as it's impacting us, no.

Then, just lastly, any update on the ERP roll-out in Europe? Is that still planned for next year and do you have any estimate of what those costs will be?

No estimate on the cost. It is still planned for next year and rolling into 2011. We're just starting the blueprinting process on that and as you know, that takes a substantial amount of time just to design the system before rolling out and we're not breaking out the costs of that or wouldn't plan to at this point.

Okay. And then just are you expecting CapEx to be kind of next year similarly in this $88 million range?

I'm not going to give a CapEx outlook at this point. We will as we have in the past give a CapEx outlook early in the year as part of both our filings and our call, so I'll reserve that until that time.

Okay. Thanks a lot. That's it from me.

Thank you. Next question.

Your next question comes from the line of Christina Boni with RBC. Go ahead with your question.

Yes, good afternoon everyone. First question was just with respect to market share with two of your major customers, Goodies and Mervyn's, going out of business. Do you see the flow into other major customers of yours, do you see those customers picking up that business? Is that how you would depict what's going on with respect to the situation? What do you generally think has happened to those sales?

Well, as I said a bit earlier, we don't provide market share data. What I can remind you of though is we saw traction with the Levi's brand and we're pleased with the brand's performance in the end market overall. We clearly did lose two large customers last year and we have been working with the balance of our customers to map the Mervyn's and Goodies businesses to their doors where it made sense. And we are beginning to see traction behind that strategy, obviously, if you think about the results that we talked about, the Levi's brand in total growing in the quarter in the United States as well as across the region. You have to assume some success in mapping the business we lost last year to our existing customer base so overall we're pleased with the results and we'll continue to drive that level of account by account planning to execute our strategies moving forward.

Okay. That's helpful. And then second, just with respect to the European business, I mean, I know you said that there is a lag there. I mean, do you see that there's still significant opportunity on the retail side as the retail side seems to be driving that business at this point?

Well, we'll continue looking at as I mentioned retail opportunities. But wholesale is still a major component of our business in Europe and we still are focused on driving more efficiency out of that channel. It really is opportunistic in terms of where retail comes along the line but I think it's fair to say in Europe, we have more of a controlled retail mix of our business but I will remind you, most of our stores in Europe are on a franchise basis, not an owned and operated basis which is the model we use in the US.

That's helpful. Finally, you spoke a little bit about ERP. Can you talk if there's any other major projects that you see on the horizon from an IT standpoint? I know you don't want to give CapEx guidance at this point but maybe you can just tell us if there's any other major projects on the horizon. Thanks.

No, as -- no, there are not. I think the major challenges for us going forward is we've rolled out SAP in Asia and the US, are planning Europe. I think next major challenge is really making all three systems connect and really getting the value out of the power of that opportunity. That's less of a CapEx story and more of a management story.

Right.

And that's what our focus I think will be on over the next couple of years.

Okay. That's helpful. Thank you very much.

Thank you. Next question.

Your final question comes from the line of Grant Jordan with Wells Fargo Securities. Go ahead with your question.

Thanks for taking the question. My only question is on the payables, looks like your days payables and leverage to inventory levels is coming down. Is there anything driving that or just a little more color there.

I think as we've talked about, there's a focus that we've taken associated with managing cash flow and I think the major driver there is clearly inventories. I think we watch our accounts receivable very closely, particularly to make sure we have a strong healthy customer base. And like everybody else, we're being very prudent with how we manage our payables. There's no explicit change there. Obviously, as the business mix changes into retail and a larger portion of our revenues coming from retail, you're going to see some minor movements around all three of those measures but at the end of the day, I think it's good, healthy cost control that we're trying to put in place to make sure that we're treating our suppliers well but we're also being very conscious as to the terms and the ways we're paying them.

Great. That's very helpful. Thank you.

Thank you. One more question?

Your next question comes from the line of [Phyllis Gamara] with Pax.

Just a couple questions real quick. I see the allowance for doubtful accounts is down. Do you have any more companies similar to the acquisition that happened in July that you're worried about, any more stores that would be another 50 or 60 stores of companies that you're worried about at all?

We watch that very closely and we don't see anything on the horizon. Obviously we're conscious of the fact that the economy is still fairly weak. So there may be something out there that we're not you aware of but right now we don't see anything on the scale of the Mervyn's or Goodies of last year.

Would you be willing to do another -- if something like the anchor happened again, would you be willing to do something like that with 30 or 40 more stores?

Let me take a stab at this and then Robert may want to add to it. I think that was a unique opportunity where we had known that Company for a very long time. We were essentially the business partner with them since we provided a huge amount of their inventory. There may not be another opportunity like that, certainly of that scale, maybe a smaller scale.

I would agree. I think the unique thing about that acquisition was it's a business we know well. They were selling our brands. We had a wholesale relationship with them. If there were opportunities like that moving forward, of course, but there are very few that remain in the Company of that nature and they would be much smaller in scale.

And last question, corporate expenses seemed to have been moving up quite a bit in the last couple of quarters compared to the previous years. Could you -- what's going on with that?

I think almost all -- everything you're seeing is pension expense related, which is basically been what we've told people would occur on a quarterly basis during the year. And our view is is that what we filed in our 10-K around 2010 has also not materially changed but I think that's probably what is really driving the corporate level expenses. Nothing else that at least that I'm aware of is of that scale.

Okay. So that's up 21%, corporate expenses are up 21% so pension expense would be that large, is that from -- and I apologize. Would that be from basically the fact that the market was down so much last year or just the fact that you've laid off more -- you've had more -- ?

Purely the pension expense driven by the reduction in plan assets and half of that obviously comes through amortization of the deficit which resulted in the decline of the marketplace and the other half comes in the expected returns that are required to pension as you compare last year versus this year. We reset that on a yearly basis and so it's a relatively smooth expense but clearly the large jump-up that you're seeing is due to the underfunding and there's a lot of detail we provide around that. We try to be pretty transparent. I think in the footnotes, footnote six in our filings you can get into some more detail if you'd like.

Great. Thanks so much.

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

Thank you. In summary, we're pleased that our initiatives to build the Levi's brand are producing good results. We've invested in our business while continuing to manage a strong balance sheet. The retail outlook remains uncertain for the foreseeable future but we are confident in the strategies we're pursuing to build our brands and strengthen our business for the future. We look forward to talking with you following the close of our financial year. Thank you, everyone, for your attendance.

Thank you. This concludes today's conference call. Please disconnect your lines at this time.