Levi Strauss & Co (LEVI) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss and Company's fourth 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 in part, without written permission from the Company. A telephone replay will be available through February 16, 2010, 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 52331217 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 and Company management team. With us here today are John Anderson, our President and CEO; 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 discussions 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 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 annual financial report on Form 10-K with the SEC. You can link to our SEC filings from our website, www.levistrauss.com.

Now I'd like to turn the call over to John Anderson.

Good afternoon, everybody, and thanks for joining us today to discuss our results. We made good progress in 2009, strengthening our business in a very difficult global economic environment. Our net revenues and net income were down for the year; however, we delivered strong overall performance, given the global economic conditions, and made good progress in positioning our Company for future growth. In particular, the Levis brand grew on a global basis in 2009.

Before we review our regional results, I'd like to spend some time discussing progress we've made against our team business objectives. As I've been telling you in our past few calls, we have been addressing the challenges in the global marketplace in an effort to strengthen our performance and drive sustained, profitable growth in future years. We have been pursuing a number of focused long-term growth initiatives that are tied to the business strategies which we've had in place for the last few years. We invested in these growth platforms during 2009 and plan to invest even more aggressively in 2010.

Our overarching strategic focus is to capitalize on our global presence and realize efficiencies across our businesses. We will prioritize resources in markets that offer us the best opportunities of profitable growth. Our broad local market presence and expertise across our global footprint is critical to our future growth. You will see this global focus reflected throughout our business strategies.

One of our key strategies is to build upon our brand leadership in jeans and khakis. Levis and Dockers brands are two of the largest and most powerful brands in the apparel industry, and we will further expand the reach and appeal of these brands globally.

In 2009, we invested behind our men's jeans leadership with enhanced fits, high-quality fabrics, and more innovative finishes around the world. We significantly increased our advertising investment during the back half of 2009 behind the US Levis brand.

On the product side, we are working on another new global fit for men that will be introduced later in 2010, similar to the global 501 offering we launched in the second half of 2008.

In addition, the Levis brand plans to reengage with women as we launch a new fit range, and we have a new global organization developing the Levis Most Premium collections, Levis Made and Crafted, and Levis Vintage clothing. Although it remains a small business for us, the Premium lines will create buzz among denim aficionados and cast a positive highlight across the brand globally.

Our focus extends beyond jeans wear. As you already know, we've been reinventing our Dockers brand with new product, new marketing, and increased on-floor investment with our key retail partners. Our goal is to reinvigorate the entire khaki category. The recent Dockers Wear the Pants campaign will represent a significant increase in advertising behind the brand.

We're also developing new products for the emerging middle-class consumers in markets offering potential for growth, such as India and China. We'll share more about our brand-building efforts as we make more progress in coming quarters.

Another great key strategy is to diversify and transform our wholesale business. Wholesale remains the core of our business. We are supporting this channel through new vendor-managed inventory programs at key wholesalers. We continue to invest in new fixtures and marketing to support our brands and showcase new products in our wholesale customers' stores. We've expanded or established new relationships with several wholesale customers, including Dillard's, J. Crew, and Urban Outfitters.

Accelerating growth through dedicated retail stores is another key strategy. We ended the year with 154 additional stores around the world, including our purchase of the Levis and Dockers outlet stores in the United States. We've strengthened our head-to-toe product offering within our stores in Europe and Asia through the purchase of our Levis brand footwear and accessories licensing in Europe. Our brand of retail stores provides the fullest expression of our brands to consumers.

One final key strategy is to drive productivity to fund our investment in the business. This includes not only the cost-saving initiatives and focus on working capital that we've been telling you about, but also includes projects to transform our supply chain and information systems.

For example, we opened a global product development and finishing center in Turkey. This center is a state-of-the-art R&D and product innovation facility, where designers around the world work together to develop new jeans styles and proprietary finishes for all of our markets.

We continue to roll out SAP and to drive efficiencies from that critical investment. We are currently preparing for the 2011 rollout of SAP across Europe.

Looking ahead, we believe these efforts will begin driving top line growth in 2010. Or by the associated levels of spending will result in a lower operating margin compared to 2009. However, we expect these investments to drive bottom line growth in the future. We'll spend more time talking about further progress on these and other initiatives in future quarters.

In short, the theme of investing in the business will continue in 2010, despite the expectation that economic conditions will be slow to improve in mature markets around the world during the year. While we've seen some improvement in the Americas and parts of Asia, we expect conditions to continue to be challenging in Europe. We've already seen a cautious approach to Q1 from our wholesale customers, and they continue to manage their inventories conservatively.

We also will continue to tightly manage expenses and inventories. And, of course, we will strive to bring the most relevant, innovative, and appealing products to market every season as a leader in jeans wear and khakis.

Before we turn to the results for each of our regions, I want to mention that last week our Board officially appointed Richard Kauffman as the Chairman. Richard, who is CEO and President of Good Energies, a global clean energy investment firm, stepped in as interim chair two months ago after our former chairman retired. We all look forward to Richard's leadership and guidance as we execute our strategies.

Now Robert will provide more details about the financial results for the Americas.

Thanks, John. Hello, everybody. Net revenues for the Americas region decreased 6% on a reported and constant currency basis during the quarter. Keep in mind that we had an extra week during the fourth quarter of 2008, which had an impact on our year-over-year growth comparison. Adjusting for this, revenues in the region would have been flat in the fourth quarter of 2009 compared to prior year.

The Levis brand performed well across the Americas during the fourth quarter, with the brand's strengths supporting the top line, despite challenges in the retail environment. We invested heavily in the Levis brand during the quarter. We continue to invest in upgrading fits, fabrics, and finishes, particularly in trend-leading fits like skinny, straight, super-skinny, and leggings, and in elevating our tops offering.

We also invested in our successful Go Forth advertising campaign, as well as CapEx associated with investment in retail store expansion and improvement.

Our outlet store acquisition has continued to meet expectations and has been effectively integrated. We're pleased with the outlet store performance and have seen positive contribution to gross margin from this business. Our investment in upgrading the in-store experience for outlet shoppers has also proven effective and will continue beyond the fourth quarter.

This strength in the Levis brand and increased revenues driven by the acquired outlet stores helped to offset declines elsewhere in the region, and in declining performance in Dockers and the Signature brands.

2009 was a tough year for the Dockers business, as we initiated a major brand revitalization effort to reinvigorate the entire khakis category. We focused on enhancing the consumer experience in our wholesale channel with investments in fixtures and branding.

In the fall, we launched the khaki shopping experience with the rollout of our new Signature khaki line. This was at the core of our product update and created the platform for our new range of fits, from slim to relaxed, upon which fabric and style variations will be built. In December Dockers also launched soft khakis in a broad range of colors at more than 2,000 doors across the United States. This range brings new life into the khaki category and gives a whole new look, with colors that stand out and really demand attention. Major retailers are using the soft khaki range to revitalize a category that has been in decline.

We are also successfully placing new premium Dockers products into image retailers. For example, American Rag in Los Angeles is featuring the K-1, the authentic khaki made from the original military fabric, the Cramerton cloth. In addition, trend retailers such as Urban Outfitters are launching our leading styles, like the tapered single-pleat, in 2010.

We're also pleased to be expanding distribution of the rest of the Dockers line. We re-entered Dillard's in December and are expanding from the traditional department store channel to include multi-brand specialty stores.

We launched the Dockers Wear the Pants campaign in December. You may have seen our commercial which aired during the Super Bowl. Later this year, we'll be focusing our marketing behind gift-giving for Father's Day. Our goal as the leader in this category is to ignite a turnaround of the entire khakis market.

Our Signature brand sales were down this year, reflecting lower sales to Wal-Mart, as that customer has shifted its strategic focus to grocery and hard goods over apparel. We continue to work with other mass channel retailers, including Target, to offer a robust range of products to the value consumer.

The region's operating income decreased approximately 12% in the quarter compared to last year on both a reported and constant currency basis. This decrease was driven by lower revenues, which were impacted by the loss of one week of sales compared to 2008, and investments in the business, which included additional operating costs associated with the acquired outlet stores and the Go Forth advertising expenses I mentioned before. These higher operating costs were partially offset by expense reduction efforts across a variety of disciplines, including distribution and IT. Cost controls will continue going forward.

In summary, we focused on engaging with consumers and customers in new ways. We upgraded our products, improved our fits and washes, launched great new marketing, and purchased and integrated the outlet stores. We're excited about the new product on the shelves today and in the pipeline for fall 2010, and our new marketing and retail initiatives. Now back to John to review the results for Europe and Asia-Pacific.

As I mentioned earlier, the European market continues to be challenging. But we were pleased to have seen growth in a few markets. Revenues in Europe for the fourth quarter were down 2% on a reported basis and down 6% in constant currency. Wholesale channel revenue in our key markets, including sales to franchisees, declined from last year. The region's weak retail environment impacted results for both the Levis and Dockers brands.

Revenues from Company-operated stores opened during the year helped offset this decline, as did revenues from our business in Turkey and our stores in Russia, which we acquired through the joint venture formed earlier in the year. You may recall we now wholly own the Russian business, and the footwear and accessory business acquired in the third quarter is fully integrated into our operations. The addition of these new businesses will be beneficial to our wholesale and retail channels going forward.

Operating income declined 7% during the quarter on a reported basis, but excluding currencies, operating income increased 6% to the higher gross margins, which more than offset the revenue declines. Operating expenses were flat as our cost controls and reduced advertising spend countered increased expenses associated with the expansion of our Company-owned retail network.

Now, turning to our Asia-Pacific region. Net revenues in the region declined 3% on a reported basis and 8% in constant currency on the continued sales decline in Japan, our largest market in the region, where economic conditions have not improved. Weakness in the wholesale channel in Japan resulted in a low sell-in to major customers, who continued to significantly reduce retail inventory levels in response to shifting consumer demand.

Our business continues to grow in many markets, particularly China and India, and we continue to invest in support of this growth. Excluding Japan, net revenues across the region grew 12% in the quarter, driven by the continuing expansion of our controlled retail network.

Operating income in the region was down 12% in the quarter on a reported basis and 23% in constant currency, driven by the lower sales in Japan, which was partially offset by lower planned advertising, particularly in mature markets, as we shifted emphasis to developing markets. We also continued to control operating costs in the region.

Now Blake will provide more detail on the financial results.

Thanks, John and Robert, and good afternoon, everyone. 2009 was a challenging year for the Company, dealing with a global economic crisis that has impacted consumers, retailers, and wholesalers around the world. During the year we were very focused on managing our costs and capital spending, while at the same time investing in a number of long-term growth platforms, as John discussed.

We are pleased to say that we exited 2009 on a strong position. Improved cash flow enabled us to purchase our outlet business, the footwear licensing in Europe, and our Russian distributor. We have enhanced the in-store experience at our key wholesale partners and in our own retail stores. We also opened 81 Company-operated stores during the year. We increased our A&P spending in the United States to support the Levis brand, continued to upgrade our information systems, and added new talent to the organization around the world.

With these investments in the business, we continued to maintain a very focused approach to managing invested capital, ending the year with a healthy cash balance of $271 million, up from $211 million at year end 2008.

In reviewing our performance, I would like to first touch on full year 2009, and then I will discuss the fourth quarter in more detail. Throughout today's call, I will reference performance comparisons on a year-over-year basis unless I indicate otherwise.

Total reported net revenues for 2009 were $4.1 billion, down 7%. Our revenues were negatively impacted by the global economic crisis and unfavorable currency movements. On a constant currency basis, revenues were down only 3%.

Our annual gross margin was essentially flat at 48%. Gross profit for the year was $2 billion, down 8% from 2008, reflecting the unfavorable effects of currency. Total SG&A expense for the year was $1.6 billion, a decrease of 1% from 2008. SG&A was impacted during the year by an increase in costs associated with our additional Company-operated stores.

In addition, SG&A was impacted by a $38 million increase in pension expense. We also had costs associated with our business acquisitions during the year, which partially offset a $32 million reduction in advertising expense. Currency further reduced SG&A expense by $62 million for the full year.

The combined effects of lower gross profit, partially offset by a reduction in SG&A expense, resulted in operating income for the year of $378 million, down 28% from 2008.

Interest expense declined for the year by $5 million. Our tax rate for the full year was 21%, and net income was $152 million.

Our operating cash flow for the year increased $164 million relative to 2008 as our lower cash operating expenses and effective inventory management more than offset the cash impact of our lower revenues. Our operating cash flow of $389 million in 2009 funded our investments in new business initiatives, CapEx, scheduled debt reduction, and a $20 million dividend, while leaving our cash position $60 million higher than last year.

When you consider the global economic headwinds, our substantial investment in new businesses, and our continued investments supporting our brands, we are proud of our accomplishments during the year.

Now I'd like to discuss the results of the fourth quarter in detail.

Total reported revenues for the fourth quarter were $1.2 billion, down 5% from fourth quarter 2008. These results include a $21 million favorable impact from currency, which reversed the trend of the previous three quarters. We did have an extra week in the fourth quarter of 2008, which is impacting this comparison, particularly in the US.

Net income was $67 million for the quarter, up 8%. Gross profit was $618 million, relatively flat quarter over quarter despite the decline in net sales. Gross margin increased to 51% during the fourth quarter from 49% last year due to the impact of increased sales from our growing retail network as well as due to the strong performance of the Levis brand in America.

Fourth quarter SG&A expenses were $501 million, up 4%. Excluding a $12 million increase in SG&A expenses due to the impact of currency, SG&A increases during the quarter were due to our additional Company-operated stores. In addition, we recorded higher pension expense during the quarter.

Offsetting these cost increases were lower operating costs around the world due to actions we have taken to restructure our operations and manage our cost base. In addition, we spent less on advertising in many international markets. For the quarter, operating income was $118 million, down 18% from last year.

Interest expense during the quarter was $36 million, and other expense was $14 million, primarily associated with derivatives and hedged cash flow obligations from our foreign operations.

During the fourth quarter, we had a tax benefit of $33 million associated with the planned distribution of earnings of some of our foreign subsidiaries, boosting fourth quarter net income up by 8% to $67 million.

Now I'd like to turn to the balance sheet and cash flow. We finished the quarter with lower inventories than at year end 2008, a result of our continued focus on working capital while still expanding our retail footprint. We remain comfortable with our customer collection trends.

Capital expenditures were $37 million in the fourth quarter and $83 million for the full year. Total capital expenditures were down on reduced spending on our ERP systems and new store openings, though we did invest in upgrading the newly acquired outlet stores in the United States during the fourth quarter. We also added 14 net new Company-operated stores during the quarter, bringing our worldwide total to 414.

Our liquidity position continues to be very strong. We ended the quarter with total cash of $271 million, and we had $244 million available on our credit facility. Our cash position increased $60 million over 2008. This increase is after scheduled debt payments, which reduced our debt by $71 million during the year, and a $20 million cash dividend, in addition to over $100 million paid for acquisitions. We ended the year with net debt of $1.58 billion, down from $1.64 billion in 2008.

I want to follow up on some of the points John made at the beginning of the call about our ongoing initiatives, specifically to illuminate their effect on 2010 performance. As John mentioned, we are focused on executing these initiatives in order to reach our strategic objectives. That means we will continue to invest behind these growth platforms throughout 2010. You will see the impact of these investments in our revenue, operating margin, and capital expenditures this year.

On revenues, I would like to remind everyone that 2010 will benefit from a full year of revenues from our 2009 store additions and the footwear licensing business that we purchased. We are planning for these investments to contribute approximately $200 million in incremental revenues this year.

While the other initiatives John discussed will not add meaningful amounts of new revenue this year, they will be very important to our growth beyond 2010.

Our gross margin will benefit from higher retail sales, similar to the trends you observed during the fourth quarter. As such, we expect gross margins to improve from our traditional expected range of the mid-40s to the high 40s. On the expense side, you will see increase in A&P expenses associated with our new campaigns for both the Levis and Dockers brands. In addition, we will ramp up our expenditures on new fixtures supporting some of the new product and enhancing the in-store experience at both our wholesale customers and our own retail locations.

We will continue to expand our retail operations around the world through franchisees, shop-in-shops, and Company-operated stores. The addition of Company-operated stores will continue to drive higher selling expenses in the future.

Beyond the operating expenses we have discussed, we also expect higher expenses associated with our benefits plans in 2010 due to the value of plan assets relative to obligations. We are planning to use approximately $166 million in cash for capital expenditures in 2010. These expenditures will be associated with the initiatives we have discussed, including continued retail buildout, the European SAP implementation, as well as the remodeling of our San Francisco headquarters building.

We are comfortable that the business activities that we have just discussed can be covered by our current liquidity and cash flow. We will continue to focus on generating greater levels of cash flow to reduce our debt over time and to be in a position to pay a consistent dividend to our stockholders where financial conditions and debt covenants allow.

To summarize, we have continued to deliver strong operating performance and cash flow in a very challenging economic environment. As we invest behind our strategic initiatives, we'll continue to focus on controlling costs and managing inventories.

With that, we'll now take your questions.

Thank you. (OPERATOR INSTRUCTIONS.) Your first question comes from Todd Harkrider with Goldman Sachs. Please go ahead with your question.

Appreciate it and congratulations on a good quarter, especially on the cash generation front, and I think you were much higher than I was expecting.

Thank you.

Just to start it off, since fourth quarter, you have additional line items. I'm coming up with around $170 million EBITDA since the asset impairments and reversal of the employee benefits curtailment gain. Is that in the right context. or is there any clarity you can give on that?

Yes, Todd, this is Blake. Thanks for the comments. You are in the right area. We did take an impairment that's part of our regular process for impairing assets during the year, primarily around retail stores that we've decided or will decide to close at some point in the future. And then, clearly, the pension expense, which we mentioned and called out, those expenses will continue to grow in future periods.

Okay. And thanks for giving us some high-level clarity into the regional breakout of Asia-Pacific. And just glad to hear that China and India are still growing at a fast rate. But can you give us some guidance on where they stand today? Are they maybe approximately half the size of Japan right now? Or smaller? Any color around them would be helpful. Thanks.

Well, certainly, they're becoming more and more important every day, and they really are a growth engine of the future. But in comparison, Japan's still an important business for us. But I think over time you will see the role of China and India start to be the more dominant. But I'm pleased with their progress, but all three are very important.

Okay. And we talked about your outlet stores last quarter and see how attractive they are to own them and briefly touched on them this year. How much of the $166 million of planned CapEx this year is directed toward them?

It's a relatively small portion of the overall CapEx. We don't break out CapEx by store. We spent the bulk of the capital during the fourth quarter around refurbishing those stores. That will continue, and then, obviously, refurbishing some of the non-outlet stores worldwide that we operate. But we have found that the early refurbishment of the building and the fixtures in the outlet stores have proven to very much improve the consumer experience. That, in combination with the addition of our own, 100% of the, essentially, the product in the store now is coming through us versus though our partner, and not just improving the quality of the product, but also just the consumer experience associated with the product, is proving out to be very strong in that marketplace for us.

Got you. And then, regarding your cap structure. Since you have a couple of bonds that are callable, do we expect you to come to market and refinance one or two of those this year?

I don't think we would comment on any future financings. I think, as we said, we're extremely comfortable with our liquidity and our position. Our nearest bond maturity is in 2013, and we have a very strongly committed revolver in place to supplement any cash balances or cash flow from operations that we need.

And so our focus continues to remain on generating more cash flow and improving profitability and managing those debt balances going forward.

I know, I'm trying. Good luck with 2010.

Thank you.

Your next question comes from Carla Casella with JPMorgan. Please go ahead.

Hi. Can you hear me?

Hi, Carla. We can.

Okay, great. I have a couple of questions around Dockers. Can you just talk about the timing of the rollout so we can get a sense for how to model it into our numbers, when you'll be rolling out which outlets in 2010, and how much of the rollout was in 2009?

Sure. Hi, Carla, it's Robert. Let me talk product first, and then I'll talk marketing. We began the rollout of the product platform that I spoke of in my comments in the fall with the launch of the Signature khaki, which is our new core program, which offers a fit range from slim to relaxed, and that, we started to set really cleanly in the September to October time frame. We launched the soft khaki, which is our color vehicle for spring, in that 2,000-door rollout I referred to in December, with some slight early launches in the November timeframe. So we're just really getting the product content in place right before Christmas, and then, obviously, we'll be rolling it out through the balance of 2010.

We had, the majority of our marketing investment in fiscal 2010, was really limited to digital social media engagement strategies and publicity. It was quite effective, but it was a relatively small spend. It culminated in the launch of the advertising that you saw, or might have seen, on the Super Bowl. And we've had a positive consumer response to the effort thus far.

It's too early to tell results, obviously. We measure performance in consumer takeout and not in sell-in. Our customers are obviously very supportive of the comprehensive strategy that we're putting behind turning the Dockers brand around, but we will not be able to call the consumer response for a couple of quarters.

And the Super Bowl ad spend, that actually fell in '09, then, or is it spending as it gets spent in 2010?

No, that's 2010.

Okay. And any, and I assume it's all, the free khakis are all baked into that marketing expense?

They are indeed.

Okay. And I hear that's done well.

Yes, we actually, just so you know, we were really pleased with the results of the promotion. I think we've had mixed reviews in the traditional advertising tracking, but all of the consumer response, particularly in the blogosphere that's on YouTube, has been very positive. Our website increased to a level which is 15 times higher than the highest day we had website traffic for 2009. And we actually used a third-party service provider to run the promotion for us. And this campaign actually pulled 10 times the response of any comparable Super Bowl advertising promotion that they had run in the past.

So from a consumer response factor, we're enthused, but again, the results will really be based, our measurement of performance will be based on consumer sellout over the next couple of quarters.

Okay, great. Can you discuss commodity costs and what you're seeing there in terms of cost pressures, when we might start to see that in the numbers in 2010? And then any impact from, I guess, what's going on over in China?

Yes, there has been some pressure on commodity costs. We've had a little bit of pressure on some of our shipping costs due to the concentration in shipping lanes. But not significant, and we've already factored that in.

In terms of China, that's not an issue for us. We source across approximately about 45 countries around the world, so we've got a very broad footprint, and we're not seeing any cost increases coming out of China. I think if you associated your sourcing more on the coastal regions around China, that's where some of the pressure has been. But we have a broader footprint in that, more inland and, as I said, in other countries. So Carla, we really don't see any significant impact through 2010.

Okay. And then you talked a lot about your growth opportunities. I guess I'm trying to get a sense for which are the greatest, if you could rank in terms of either just adding new doors versus adding retail stores of your own or getting additional space in existing retailers with new lines like the Dockers line. Is there any way to gauge what the magnitude of which would be highest ranking versus lowest?

I think, first of all, earlier the comment I made earlier on, Carla, was that most of our businesses and our practices are wholesale channel. That's our biggest channel, and that's our most important channel. So, clearly, as you heard both Blake and myself and Robert say, our focus is increasing productivity through that channel and building on the very strong relationships we have there.

We will continue to open up stores, but it's not going to be a significant driver of revenue in the short term. As you know, there's a lag associated with that. And even with existing doors, trying to just get new product in there. Robert talked about trying to push the Dockers product into more of our existing doors.

So really, it's all of the things you talked about, but the real focus for us is still our wholesale channel. That's where we do most of our business.

Do you think you're pretty well penetrated across wholesale, or are there still a lot of doors where you just feel like you could gain some new doors?

I think there are opportunities to gain new doors and new accounts, and we'll continue to pursue those in 2010. I think it's indicative that we've been able to get into J. Crew, expanded our presence in Urban Outfitters, get the Dockers brand back into Dillard's. We're expanding our footprint with the Levis brand in Nordstrom's, so there's still opportunity within the existing account profile.

And, Carla, just to add, I think the thing to keep in mind is where we have the highest penetration and share is in our traditional men's businesses in both the Levis and the Dockers brands. If you look at the success that is occurring behind the Levis brand now, it's because we've gotten consumption up, not only with our traditional, more classic consumer, but also by attracting the young male consumer. We're expanding the brand to appeal to women. We're also putting out a tops range and a kids' range, which is much more successful.

All of those are wholesale real estate opportunities. And on the Dockers side, in addition to revitalizing the core business to the traditional men's consumer, we are putting out product which is much more appealing to a younger consumer--let's call it a guy around 30 or younger who hasn't traditionally found Dockers appealing. And those are also real estate, wholesale real estate expansion opportunities.

Okay. And then just one last question. I'll get back in queue after that. But Wal-Mart, mostly on a consumer staples basis, has been cutting out some brands and focusing more on private label. Have you heard them doing anything like that in the apparel space? Is there any concern for Signature?

Clearly, as I said in my comments, we have seen through Project Impact, Wal-Mart putting an emphasis behind their hard goods and their grocery business. They are reducing, from what we understand, their allocation of square footage to the apparel sector. And as I mentioned, it has had an impact on our business with Wal-Mart. We continue in business with them, particularly on the women's side, where we're having strong success, and have put an emphasis on trying to grow our business with the Signature brand in other mass channel retailers like Target, where we're having some really strong success.

Okay. So you haven't heard of them completely exiting Signature?

Not at this stage, no.

Okay. Great. Thank you.

Next question.

Your next question comes from the line of Bill Reuter with Bank of America-Merrill Lynch.

Good afternoon, guys. In terms of the incremental CapEx year over year, you guys highlighted three different areas--the retail buildout, ERP, and then the San Francisco building. I guess it's safe to say that the lion's share of that's going to be in ERP. Is that right?

It's balanced, Bill. It's Blake. The IT investment is really general IT as well as the SAP buildout in Europe that, say, two major footprints as part of our CapEx plan. Retail expansion, just general retail expansion, will continue to drive CapEx, and then refurbishment of our older existing retail stores and, as I mentioned before, to Todd's question, some leftover expansion or refurbishment of the outlet business that we purchased, as well as the San Francisco headquarters, which, while that's not dominating the CapEx budget, we do have a large square footage here, and this building hasn't been refurbished since the '60s. And so we're essentially consolidating efforts into one location here. Substantial rent savings associated with that and substantial support from our very supportive landlord here. And so all four of those components really will make up the CapEx spending for next year.

Okay. In terms of the incremental CapEx on the ERP, will there be a lot of costs in SG&A as well that will be expensed? Or will there be costs in SG&A that will be expensed as well? Or will most of it be capitalized?

Some of it will be expensed in SG&A. But the bulk of the SAP rollout in Europe will be capitalized. Some of the ongoing IT upgrades and work in the expanded retail network will obviously be expensed as it goes along.

Okay. And then in terms of your advertising expenditures, I think they were down $20 million or so in '09. I was wondering if you could describe where you guys decreased spending and how you're going to think about those expenditures in 2010.

I'll touch on some of it, and then John and Robert can add to that. I think some of it is global, the geographic spend. We moved advertising around the globe, away from markets where the economies were very, very hurt--southern Europe, for example, some parts of Asia--where it just wasn't profitable to be spending ad dollars, and moved that dollars to places where we felt we could build better brands. Obviously, you saw the impact of that in the back half of 2009 relative to Levis in the Americas, and we also did some specific spending in places in Asia such as China.

I think, going forward, you'll tend to see more of that movement, and maybe Robert can touch on that, or John can touch on some of the plans for 2010.

Yes, for the Americas region, we're putting a pretty strong emphasis on attacking the competitive opportunities we see. As John mentioned, I think, we're still expecting 2010 to be a challenging year. You saw mixed sales results coming out of the holiday for the majority of our customers. But we feel very strong about the success we're having behind the Levis brand and anticipate investing at a high level, comparable to 2009, for the Levis brand.

And then we're obviously increasing our investments behind the Dockers new brand strategy that I took you through. That will be occurring, obviously, as a lead-up into Father's Day, as I mentioned, between Super Bowl and Father's Day as we start to emphasize gift-giving for that important selling season for Dockers.

I think the one thing that's safe to say is that John mentioned a few key initiatives that we'll build during the year--women's initiative, additional Levis product initiatives--and we'll have selective investments both in the tail end of 2010 and into 2011 to support the growth of those new products.

Okay. That's it for me, guys. Appreciate it.

Thanks. Next question.

Your next question comes from the line of Karru Martinson with Deutsche Bank.

Good evening. Is there something generating more cash flow that you were talking about earlier, what's going to be the use of that cash flow going forward? Do you see additional acquisitions, tuck-ins, licensees, and so forth going forward?

Yes. So clearly, we did three acquisitions during 2009. That's rare for us. I wouldn't expect to see that level going forward. At this point, most of the cash flow focuses on funding our CapEx balance, continuing to fund our business expenses, including pension expenses, and be in a position, when it is appropriate, to be able to pay a dividend.

But at this point we don't have explicit plans for acquisitions. We'll always keep our eyes open. Clearly, we want to stay very core to what we're focused on now. The three acquisitions that we had are great examples of that--extensions of current businesses, purchasing of licensees where we know the business well and can help control that product in the end market, or purchases of joint venture partners that we've operated with and we know the marketplace. I think we want to stay close to home, as all of those three have demonstrated. But also look for opportunities to continue to expand our footprint and our revenue growth.

Okay. And when we look at the Dockers side of the portfolio, you talked about growing the entire category, reinvigorating that. Where has that category gone? Where has that core customer, where are they shopping today, and how do we get them back?

We don't think they're actually wearing any pants right now, that's kind of our message.

Oh, we did see the ad.

Our answer to that. Okay, we're glad you were watching. So the khakis category has been in decline for a number of years now, and our brand revitalization effort is really a direct focus on trying to turn that decline around and generate some excitement and growth within the category. If you look at, broadly, where growth has been coming from in the apparel market, the apparel market's been relatively flat. Growth has come on and off in the denim business, obviously, over a longer-term period of time. The denim business has been quite effectively trending.

We don't see denim softening. What we actually see is an opportunity to get, particularly in the case of Dockers, men back interested in the category of apparel that they tend to consume at a higher level among the core target consumer groups that I was talking about earlier. So we need to keep our denim business robust and really focus on revitalizing the khaki category so we can get growth out of both of our iconic brands. And that's really the strong focus that we have in bringing product innovation to the forefront in the khakis category, which we have not done in the past couple of years.

Okay. Just lastly, in terms of the trends that you saw over the holiday season at your stores versus the broader wholesale-retail market that you had, how would you categorize what you saw in terms of similarities and differences there?

What I can do is respond for the stores in the Americas region, and then if John wants to make a comment about the Company more broadly, he can. In terms of the Americas, we were pleased with our performance. We saw our store performance comparable to its competitive set. As I mentioned earlier, I think we saw mixed performance across our wholesale customers through the holiday season, if you look at the holiday season in total. But in general, I would say you could say that we performed at a comparable level to the direct competitive set within the Levis stores.

And so Europe, as I mentioned, our wholesale business is where it's been under pressure. Our retail stores performed well, so they met our expectations. In Asia, our two biggest growth markets, which are China and India, which predominantly we do drive through our controlled distribution, we were at or slightly ahead of the market in those two areas.

Thank you very much, guys.

Thanks. Next question?

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

Good afternoon. I was curious about the European wholesale situation, and what do you think needs to be done to turn revenues around there?

I think there's a couple of things. Number one, the wholesale channel in Europe is under pressure because, clearly, people aren't shopping, and then they're having issues just trying to survive. So for us, it's picking nice wholesalers that we think are strong. Those wholesalers are aligned to display the brand we wanted. And then it's just a matter of bringing great product into that channel. I'm not underestimating that channel. It's extremely difficult, they're multi-brand, so the role we can play, while it's a significant role, we can't do it by ourselves there. So we're committed to that channel, but it's still going to be a very challenging one for the next 12 months.

Okay, so it's more, I guess, of a macro situation and not as much of a competitive situation? It's not necessarily the consumer trading down, I guess, is that--?

Not so much there. I think it is just the consumer not trading so much. Unemployment, as you know, is very high. If you look at our markets like Spain, where we're up into the 30% level. You've probably all read about Greece, and the Italians continue to keep us entertained. So it's quite a challenging market in general. It's just getting consumer confidence back.

Okay. And it was mentioned earlier--I think you mentioned it, John--about how you expect revenues to be better in this calendar year, but operating income to be down. And your operating income was down in '09 from '08. It was down from 11.9% to 9.2%. Is there any magnitude you could talk about, about how much the decline is going to be?

No, I can't. But I think you've got that our intent is we're taking advantage of the situation. We want to drive the brands when other brands are struggling. Our cash flow is strong, as Blake mentioned. We believe we've got two great brands, and we've got a couple of very good advertising vehicles working for us at the moment. So we're in this for the long haul, and we believe there will be revenue growth in 2010. And when things do turn around, we think we'll see the benefit, top line and bottom line.

Okay. And the investment in some these initiatives, are some of these investments, are they one-time, will just occur in 2010? Or are these--seem to be more as ongoing investments?

I think we'll continue to evaluate it. But clearly, as Blake mentioned, we're getting behind some women's initiatives in the second half of the year. That will be a heavier spend to launch that. We're bringing out our second (inaudible) global product. I'll ask them to do what we did with 501 as we look to support that.

It really is for us a chance to make a strong statement and really dominate the marketplace. And we feel financially strong enough to do that. So we'll continue to invest where we believe we'll get the long-term returns.

I think part of the way to think about it is that these are investments that are in effect in startup mode. So building out the retail footprint, for example, it takes multiple years to get a retail store to a point in which it is driving the right profitability and sales levels that we like to see. And starting a new brand from scratch, or an extension of a brand, requires some upfront spending.

And so our intention is not to spend forever around those brands, but to spend heavily in the early days, either on the brand or in the retail stores, and then to taper that off over time, with the goal of driving the longer-term improvement in profitability as well as top line growth.

Okay, fine. And then just lastly, along these lines about your capital expenditures being roughly double this current year, I'm also curious about the capital expenditures, if this is just the higher cost of doing business, that you have to spend more money to redo your fixtures or your signage more often, or is this just a higher one-time capital expenditure year?

Yes, I would think about it as a higher capital expenditure year in 2010, driven by both SAP, both refurbishment of businesses we've acquired at the tail end of that, bringing on new businesses as part of the acquisitions, including building out stores in Russia, for example, and the San Francisco headquarters.

The headquarters expense should be mostly completed in 2010. We plan to move into our new space at the end of the year. And SAP, as John mentioned, we'll plan on rolling that out in the first half of 2011 in Europe. And so, while some of the expenses may drift into 2011, essentially think about this as a more outsized year than what you would have seen, say, in 2009 or in previous years.

Okay. All right, thank you.

Your next question comes from the line of Grant Jordan with Wells Fargo.

Great. Thanks for taking the questions. I appreciate all the additional detail on the call as well. You guys have obviously taken a lot of cash out of the business in terms of working capital, particularly on the inventory line. Do you see more opportunity for that going forward, or do you think we've reached an equilibrium relative to the seasonal adjustments?

Yes, I think clearly we were able to extract a substantial amount during the year with a more focused approach around individual product metrics and demand planning and trying to make sure that we build into the process a way to maintain those levels. Obviously, our wholesale customers have also been extremely focused on taking inventory out of their own system, and so everybody's brought inventory levels down.

I don't see a substantial, another step down per se, that we would see a similar type of cash flow generation going forward, but we believe that the factors that we've put in place will help us maintain low inventory levels as we move forward. And that's really, I think, our key, is how can we grow the top line without letting inventories climb back up as the economy improves? And that's what our focus will really be on.

Great. Well, that's helpful. And then along those lines as it relates to your wholesale customers, particularly on the domestic side, have you seen any wholesale customers domestically that are maybe willing to put a little bit more inventory in their stores at this point?

Really, it comes down to how the brand or the product is performing. So clearly, where we're having strong success, our customers have been there with us and are investing the appropriate inventory to support the sales lines. But, as Blake mentioned, it's very true that our customers in general responded in 2009 as most businesses did, by controlling their working capital investments. And that had an impact on them pulling their inventories down to a pretty tight level.

We would probably refer to that as the new norm, as our customers are looking to increase their inventory turns, and we're all working to really optimize the full cost of supply chain to take as many days out of the process as we can to make sure we've got the right inventory at the right time to support the consumer demand, but not by carrying too much excess inventory, either in our system or our customer's system.

Great. That's very helpful. Thank you.

Yes.

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

Yes. Good afternoon, everyone. Just first, maybe a follow-up to Grant's question. Are you, and I think you mentioned Nordstrom, but maybe you can give us a sense of with your clients, if you're getting more square footage, and if you see a bigger commitment to the brand, to Levis, as you work through all of your initiatives? Maybe you can (inaudible) give us a sense of what's happening in the whole subchannel? Thanks.

Yes. As John mentioned, we've had some really good expansion in our customer base at the Levis brand over the past about 18 months or so, particularly in the multi-brand specialty store environment. We've seen our business expand with image retailers such as American Rag. We have had a terrific partnership with Urban Outfitters and have seen our business expand quite handily there. And we've engaged with J. Crew, as John mentioned, having recently launched a new Premium Red Tab offering of selvage products at J. Crew, which we're quite pleased with in terms of the initial sell-through results.

And, as John mentioned, we're looking at penetrating the department store channel on Levis as well, with an expanded offering in our men's and our boys' businesses at Nordstrom, and we're looking at other categories of business with Nordstrom as well.

On the Dockers side, we're following a similar pathway. As John mentioned, we've expanded with Dillard's. We're talking to and having some early successes in looking at broadening Dockers' penetration into American Rag. Urban Outfitters, with some leading products like our tapered single-pleat and also looking at highlighting some programs in Nordstrom as well.

I think the key real estate play, though, really, is expanding our real estate that's dedicated to younger men's products in both Levis and Dockers. And then, as John and Blake have both mentioned, we've got a strong emphasis behind our women's business on the Levis brand in the back half of 2010, which will be a focus for real estate expansion as well.

Okay, great. And then just one follow-up on SAP. You talked about the rollout in fiscal 2011. Will you do any testing before 2011? Will you do parallel systems at the beginning of 2011? Maybe just give us a sense of how that will evolve.

As you know, we've been on the SAP journey now for approximately six or seven years. We've got Asia up, we've got the US up. So we've got a pretty good process in place. But yes, we will be doing all of the things you've mentioned. We'll be testing, we'll be auditing the whole process so that when we go live in the first half of next year, we'll feel pretty confident.

But we've all been through SAP before. You have to pay a lot of attention, but it's our third one. We've got a great team behind it. We feel confident, but yes, it's still a big initiative.

Okay. And one final question. I think you projected $20 million in dividends for fiscal, for this fiscal year. Is that just your stated dividend policy at this point--$20 million per annum, and the Board will reevaluate that over time? Is that the best way to think about it?

Yes, I think the best way is, at least our current expectations reflect that. Obviously, that's being controlled by the Board of Directors and it's at their sole discretion. We need to make sure that we're at the appropriate financial strength and, clearly, be in compliance with the terms of our debt agreements before we make those decisions. But our intention is to at least signal to the investment community that we would like to continue to be in a position to pay a dividend over time.

Great. Well, congratulations on the quarter. Thanks.

Thank you.

(OPERATOR INSTRUCTIONS.) Your next question comes from the line of Emily Shanks with Barclays Capital.

Good afternoon. This is actually Gordon McKemie in for Emily. Thanks for the call. Just two quick questions at this point. The first is around how sales were trending at your Company-owned stores. If I heard correctly, you mentioned that they were trending in line, maybe slightly better than some of the competitors. So I wonder if you could give us any sense of the drivers during the holidays or 4Q? Any color around traffic or ticket would be helpful.

We don't talk the specifics that you're asking for, Gordon, but what I would say, as we talked about throughout all of the back half of last fiscal year, we put an emphasis behind product innovation on the Levis brand. We put a particular emphasis behind trends leading fit, such as skinny, super-skinny, straight, on the women's side, skinny and leggings. We've seen strong uptake against those product categories.

We did see traffic down, as most of our customers on wholesale side did. But what our operations team was very focused on was making sure that when we had people in the store, that we had our product innovations front and center, and they were focused on converting that traffic into sales.

So broadly, our performance metrics were up, and we were driving better operational performance in the stores, but traffic was still a challenge.

And I think similar to what other retailers have reported, clearly, the outlet channel has been stronger for us than mainline stores. I think that's consistent with many of the other US-based retailers. But I think that whole channel continues to evolve, and we feel like we're well positioned to be able to take advantage of that continuing strength in that channel going forward.

Perfect. Thanks for that color. The second, I just wanted to ask you around your new store plans for fiscal year '10, I was wondering if you could give any specifics on the number of new stores you're planning on opening this year?

No, we can't do that, but we continue to look at opportunities. And rather than a firm number, it's more about what sites and what's the financials to make one a principal opportunity for us? But we will continue to open stores, but we don't have a firm number in mind.

And I would just add to John's comment that remember, our expanding footprint will include our own Company-operated mainline stores and outlets, but also, an important part of that strategy is the franchise growth, particularly outside of the US, and shop-in-shop growth, either Company-operated or franchise, also outside the US, in Europe and in Asia.

Great. Thanks, guys. Best of luck.

Thank you.

Thanks. So, with that, then I'll turn it back to John.

To summarize what plays with our progress towards strengthening our business in the context of a very challenging global economy, Levis brand is performing well in the Americas and in most markets in Asia, and we have completely overhauled our Dockers business. We've made a number of investments to position the Company for revenue growth in 2010, and we expect to invest even more aggressively this year as we pursue our strategies to return the Company to sustained profitable growth.

We look forward to talking with you again next quarter. Thank you, everyone.

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