Levi Strauss & Co (LEVI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Levi Strauss & Company first quarter 2010 earnings conference call.

(Operator Instructions).

A telephone replay will be available through April 30, 2010 by calling 800-642-1687 in the United States or Canada. For outside these countries, call 706-645-9219. For either number, please input the ID code of 66026948 followed by the pound key. This conference also is being broadcast over the internet, and a replay of the webcast will be accessible for one month on the Company's website, levistrauss.com. I would now like to turn the call over to Mr. Roger Fleischmann, Vice President and Treasurer of Levi Strauss & Company. Please go ahead, sir.

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 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 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 disclosed, described in our annual report on Form 10-K, our registration statements and other filings with the Securities and Exchange Commission. Other unknown or unpredictable factors also could have a material adverse effect on our future results, performance or achievements. We provide information on our website about how we compile various measures used to describe our business performance. Finally, today we filed our quarterly report on Form 10-Q with the SEC. You can link to our SEC filings from our website. Now I'd like to turn the call over to John Anderson.

Good afternoon, everybody and thank you for joining us. Our first quarter results reflect the positive revenue impact of some of the strategic growth initiatives we've been telling you about in the past few quarters, as well as the associated investments. Our reported net revenues were up 9%, and our net income was up 17%. Quarterly net revenues were up 4%, excluding the positive effects of currency, which also drove the increase in net income. Reported revenues improved in each of our three regions. Our margins were strong, and we continued to generate solid cash flow. The Levi's brand continues to grow around the world, and the acquisitions we made in 2009 are performing well, contributing to our revenue performance.

We've made progress on the strategic growth initiatives we talked about last quarter. One of our key strategies is to build upon our brand leadership in jeans and khakis. Our investments in leading fits, fabrics and finishes have driven improved performance for the Levi brand worldwide. In December, we launched the global "Wear the Pants" marketing campaign to promote our new range of Dockers Men's khakis. It's still early days, but initial indications from our wholesale customers are positive. We know it will take time to reenergize the Dockers brand and the casual pant category.

We're also focused on strengthening our wholesale business, which generates a majority of our revenues. We've made great progress in upgrading and expanding our product presentation at many key wholesale customers. We've rolled out new fixtures, and brought a fresh look and feel to how our products are merchandised on the floor. Specifically, we've added doors and fixtures for our Levis Junior's business at key accounts such as Macy's. If you haven't been to the Levis or Dockers section of a major department store lately, I encourage you to go take a look. Working closely with our key customers, we're improving the Levis and Dockers shopping experience. And we'll continue to introduce new products, and broaden our relationships throughout the year.

Another key strategy that we've discussed is accelerating our growth through brand dedicated retail stores, both Company-operated and franchisees. As we said, we're taking opportunistic approach to retail expansion given the uncertain economic climate in many markets, securing prime retail locations at favorable lease rates. Our goal is to have a significant retail presence in the major consumer markets around the world. We continue to add a number of stores throughout our retail network, particularly in India and China.

In February, we signed a lease for a new Levi's store in New York's meat packing district, a fast growing retail zone that has become home to some of the world's most prestigious brands. We also opened our refurbished London flagship store on Regent Street, in the heart of London's premier shopping district less than two weeks ago. We've remodeled most of the US outlet stores we acquired last year to reflect a more brand relevant look and feel, and upgraded the product assortment which helped drive sales improvements for the quarter. The outlets continue to be a profitable channel, and we're in the process of opening a number of additional outlets this year.

As we pursue our growth strategies, we remain focused on productivity to enable us to fund these investments. We're taking a disciplined approach to expenses, and are implementing cost saving initiatives throughout our business. One of our key productivity initiatives, our global SAP rollout continues in 2010, including prepping for the launch of SAP in Europe in 2011. So, we're off to a good start in 2010. The hard work we've done over the past couple of years is beginning to drive revenue growth for the Company. Our brands are performing well for our wholesale customers, as well as in our retail stores. Although the economy still remains tough, and our customers remain cautious with their inventory levels, we are growing revenues and investing in the business. Now, Robert will provide more details about the first quarter results for the Americas.

Thanks, John. Good afternoon, everybody. We had a good first quarter in the Americas. The Levis brand performed well across the region in both our wholesale accounts as well as in our own retail stores, boosting our net revenues for the region 8% on a reported basis, and 7% on a constant currency basis. The investments we made in upgrading our Levis products are clearly resonating with consumers. Our sales were up in all segments, Men's, Women's and Boy's, and across the region which includes Canada and Latin America. Levi's Men's and Boy's businesses continued to drive strong results, based on product leadership and trending fits such as straight, slim, and skinny, as well as in better crafted finishes across all price points. Our Women's business benefited from our improved Junior's range, which resulted in customers adding new doors and additional fixtures last year, as well as strengthening trends in skinny, super skinny, leggings, better crafted finishing, and also improved color assortments.

Our increased revenues were driven by both our wholesale and retail channels, with a large portion of the incremental sales coming from our outlet stores we bought last year. We also feel confident that the consumers response to our "Go Forth" marketing helped strengthen sales going into holiday, a trend which lasted throughout the quarter. As John mentioned, we're still in the early stages of our efforts to reenergize the khaki category, and grow the Dockers brand. Although sales in Dockers overall were down, we saw several positive indicators during the quarter. We added new customers during the quarter, and sales of first quality Men's products stabilized in the United States. Also, we saw a significant increase in sales at our online Dockers store following the launch of the "Wear the Pants" campaign.

Our Signature brand sales were down, primarily impacted by Wal-Mart's decision to emphasize non-apparel categories, and their focus on lower price brands in the Men's segment. We're satisfied with our results at other Signature customers. In summary, we're seeing consumers respond to our more innovative and relevant range of products and marketing. And we are presenting these -- those new products in a compelling way in both in our own stores, and at our wholesale customers stores. Our strategies are working, and we will continue to execute them across the Americas to build momentum throughout 2010. Now back to John to review the results for Europe and Asia Pacific.

Market conditions remain challenging in Europe, especially in Southern European countries. Nonetheless, our revenues are up 15% in the region on a reported basis, and 6% in constant currency, mostly driven by overall growth in the Levis brand. Levis brand revenues benefited from the acquisition of our footwear and accessories licensee in 2009. Incremental sales from new Company-operated stores opened since the first quarter last year, also contributed to higher revenues for the quarter. These more than compensated for continued declines in the wholesale channel across Europe.

The Dockers brand delivered a double digit sales increase this quarter, reflecting retail customers positive reaction to the new product range. While still a small business in Europe, this is a good sign that the work we're doing to reignite the Dockers brand is beginning to gain traction. Although we expect the economic environment to remain challenging in Europe this year, we continue to invest in the business so we'll be in a solid position when conditions improve. These investments include our ongoing retail expansion and infrastructure improvements.

Now, turning to the Asia Pacific region. Net revenues in the region were up 2% on a reported basis, and down 5% in constant currency. Results reflect growth through our continued brand dedicated store expansion, including new stores in India and China, and improved sales in our Company-operated stores, offset by slower performance in several of our more mature markets. India and China remain the growth engines for the region, and both countries delivered double digit sale increases during the quarter. China's results benefited from strong Chinese New Year sales, and an uplift related to increased advertising and promotion support at year-end. We will continue to pursue our global growth strategies in Asia Pacific to deliver appealing, relevant products to a wide range of consumers across this diverse region. I look forward to reporting our progress in future quarters. Now, Blake will provide more detail on the first quarter financials.

Thanks, John and Robert, and good afternoon to everyone. Despite continued challenges in key markets around the world, we demonstrated strong performance in the first quarter of 2010, with reported revenues up in all three regions and improved gross margins. We also delivered strong cash flow and continued to build our liquidity position during the quarter, while making progress on several of the growth initiatives called out last quarter. Throughout today's call, I will reference performance comparisons on a year-over-year basis, unless I otherwise indicate. Total reported net revenues for the first quarter were $1 billion, up 9%. In addition to continued growth in Levis brand revenues, results benefited from the acquisitions we made during 2009, and from the positive impact of currencies. On a constant currency basis, revenues were up 4%. We are on track to deliver what we describe last quarter in terms of incremental revenue from the acquisitions made during 2009.

Our gross margin improved to 51% from 47%. Gross profit for the quarter was $533 million, up 20% due to improved gross margins in each of our regions, and increased constant currency net revenues. Higher gross margin was driven by strong performance in the Levis brand, lower inventory markdowns in the quarter, and increased contribution from Company-operated stores. Gross profit also benefited from a $29 million favorable effect of currency. Total SG&A expense for the quarter was $426 million, an increase of 26% from last year. SG&A increased during the quarter due to costs associated with our additional Company-operated stores, which will continue to drive higher selling expenses in the future.

Advertising and promotion activities were up in all three regions, most notably in the Americas regions supporting our Levis and Dockers brands. We launched the "Wear the Pants" campaign on Super Bowl Sunday, and have started to see positive results. You can already see the increased A&P expenses in Q1 associated with the new campaigns for both the Levis and Dockers brands. To compliment A&P spending and the introduction of new products, we've introduced new on-floor Dockers displays in many of our key wholesale accounts supporting the Father's Day buying season.

As we discussed at year-end, higher costs associated with our benefits plans, including pension and retiree, medical, continue to impact SG&A expenses during the quarter. Currency further increased SG&A expense by $14 million in the quarter as well. The net effect of higher gross profit, partially offset by higher SG&A expenses resulted in operating income of $107 million in the quarter, flat to prior year. Interest expense was $34 million in the quarter, and other income was $12 million. This reflects the appreciation of the US dollar on our foreign currency denominated balances. Our tax rate for the quarter was 35%, and net income was $56 million, up from $48 million last year.

Now I would like to turn to the balance sheet and cash flow. We continue to focus on improving working capital, building on our strong progress from last year. Our inventories at year-end -- or end of Q1 were lower than at the same period last year, and comparable to the year-end levels. While we expanded our retail footprint, we remain comfortable with our customer collections trend. Cash provided by operating activities was $76 million for the three-month period in 2010, as compared to $10 million for the same period in 2009.

As compared to the prior year, the increase in cash provided by operating activities was primarily due to our operating results, and our focus on inventory management. Capital expenditures were $36 million in the first quarter, up from $15 million a year ago. Total capital expenditures were up on investments in our Company-operated store expansion, and information technology systems, as well as our headquarters remodeling. We added 12 net new Company-operated stores during the quarter, bringing our worldwide total to 426. We have secured leases in a number of outlet malls in the US where we'll open stores this year.

Our liquidity position continues to be very strong. We ended the quarter with total cash of $315 million, and we have had $193 million available under our credit facility. Our cash position increased $45 million over year-end 2009. We ended the quarter with net debt of $1.51 billion, down from $1.58 billion at year-end 2009. We are comfortable with our current liquidity, and cash flow will be sufficient to fund the business activities underway to achieve our strategic objectives. To augment long term profitability and cash flow, we are investing in productivity initiatives. And we 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 dividend to our stockholders where financial conditions and debt covenants allow.

To summarize, we have continued to deliver strong operating performance and cash flow, by facing challenging economic environments in key markets around the globe. And as we've said, we will invest behind strategic initiatives that we believe will deliver long term growth, but will put near term pressure on our bottom line. As we make these investments, 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 the line of Bill Reuter with Banc of America, Merrill Lynch.

Good afternoon guys.

Hi.

On your last call, your fourth quarter call, you guys kind of increased your long term guidance for gross margins to the high 40s. But in the quarter, you guys came in above 50%. And I was wondering if you could talk about how we should think about that going forward, and what might have contributed to the outperformance.

Thanks, Bill. It's Blake. Our gross margins did benefit in the quarter from higher retail sales, as we indicated that they would for the full-year. Clearly, the first quarter tends to show higher net sales and gross margins than the rest of the year, due primarily to some of the year-end inventory movements. We expect gross margins to continue to improve from what we originally forecasted in prior years as the mid 40s to, as we said at year-end to the high 40s. And while you're seeing above that trend in the first part of the year, we'll probably see more of an average towards the high 40s during the rest of the year.

Okay, so was the biggest contributor to the margin increase was the mix of retail versus wholesale?

That clearly was the biggest driver, but clearly year-end inventories will also impact that in the first quarter of every year.

Okay, and then you guys talked about new fixtures for wholesale customers, it sounds like you might have put in during the first quarter. I guess are these in your selling expenses and were a lot of these one-time in nature, and are they not going to be -- we won't see those going forward?

You'll see some going forward. I'll have Robert comment on where the fixtures were in the store so you can see some of these in person. But we'll see some of that throughout the full-year, as we introduce, continue to introduce new products. And that will be not just in the US, but also globally.

Yes, and as John has mentioned, we're very much focused on improving the way that we execute our brand strategies at our wholesale customers doors. And that includes upgrading our branding presentations, the imagery associated with the brand. As well as bringing a more consumer relevant fixturing presentation, which we've invested a lot in upgrading our fabric finish wash and color offer in both Levis and Dockers. So we're investing with our customers to upgrade how we display those products, and make sure the consumers can see the innovation we're putting into the products, so we can continue to drive solid performance.

Okay, and then just one last one for me. In terms of the sales increase in the North American division due to the acquired outlet stores. Can you tell me how much this might have contributed and whether it was meaningful to the increase we saw?

It clearly was meaningful to the increase we saw. We don't break out our store level sales beyond just the regular geographic segments. So I'll resist going beyond that other than to say, it definitely made an impact and is consistent with the guidance we provided during our fourth quarter call. around the full-year impact of both the outlet acquisition, as well as the footwear licensee acquisition that we made last year.

And the only thing I would add is it's important to note that we've said, John said and I said as well, that although we obviously have the benefit Blake just articulated, our wholesale business is growing consistently across the region, as it has been for a number of quarters which John reflected in a majority of the comments.

Okay, that's it for me. Thanks.

Thanks, Bill.

Thank you. Our next question is from the line of Carla Casella with JPMorgan.

Hi. I'm wondering if you could break out the amount of the pension and post retirement that was in the first quarter?

Hi, Carla. How are you?

Good.

So we are showing increases as we filed in our full quarter. But for the first quarter, you're seeing essentially $12 million of pension benefits, and 3.4 -- pardon, $3.7 million essentially a benefit or a reduction in post retirement benefits costs in the quarter. So $12.4 million of expenses, that's up from $10.6 million in the same period last year. That's -- you can see that in detail in Note 6 in our Q that we filed.

Okay, I just haven't gotten there yet. That's great. And then if I look at the domestic business, you mentioned that Dockers is down, Signature is down. To get to the numbers, it sounds like Levi must have been up at least in the midteens. Does that sound right? In the high teens even?

Yes. We will resist, on giving guidance on the individual brand level. But I think you can assume that the Levis brand product as Robert mentioned, in all areas Men's, Women's and Boys, did well in the wholesale channel in the US. And that, we did also well internationally along those lines. But you are clearly seeing the strength in the wholesale channel start to come back, particularly around the core Levis product.

Okay.

And Carla, I would just add, that -- as John has mentioned, and we've seen solid performance on the Levis brand in the wholesale business for a number of quarters now. And that trend continues, and we'll continue to execute the strategies articulated in terms of our product innovation platform improving, how we show up in retail, and the investment we're making behind the "Go Forth" marketing campaign, which we're encouraged is driving some of the results. And the one thing to keep in mind though, as well as on Dockers I mentioned, is that we are seeing some promising signs in the quarter relative to the stabilization of the US Men's business. We are seeing some solid performance of the new product lines that we've been talking about for the past couple of quarters, so that maybe will help you understand that we're feeling good about where we are.

Right. It sounds like this -- we could pretty soon maybe see this flattening out or even growth in Dockers with the rollout of the Father's Day?

Well, I think as John mentioned, it's going to take some time for the full effect of the strategies on the Dockers brand to take effect. We have talked about obviously putting the right fit, fabric finish, color assortment in place. We've launched the "Wear the Pants" campaign. We're making the investments in upgrading our on-floor displays with new branding, imagery and fixturing programs at our wholesale customers. We feel good about where we are. And we're seeing some early signs of success as I mentioned, particularly in the US Men's pants business, but it will take some time.

Okay, great. and then one question, there is a story out that China may be raising costs on diesel and gas about 6% to help it's refiners. Are you hearing anything on the supply chain front about cost increases?

No, we haven't seen dramatic changes. We do know that cotton prices have been rising. We have heard discussions around transportation cost increases, due to the factors that you just mentioned not just in China but worldwide. Some of those are slower to move through the supply chain. But we're assuming that we'll continue to see pressure as the economy starts to build some momentum back around the world.

Okay, and then did you, you mentioned you've got adequate funds to run the business and pay any dividends. Have you forecast for how much we should expect in dividends for the year?

I'd say that you should consider the historical pattern of last year to be a good model for going forward. I don't want to predict exactly dividends, but I think that's a good proxy for where we would end up on a yearly basis.

Okay, great. Thanks.

And we have spelled that out I think in most of our comments that we made recently.

Okay, thanks.

Thank you. Our next question is from the line of Grant Jordan with Wells Fargo.

Good afternoon. Whenever you look at the inventory, it's still showing a big year-over-year decline almost 19%, how much of that is driven by moves in foreign currency? Just trying to get a handle on, apples-to-apples, how much inventory is down year-over-year.

Yes, so I think you can assume that our aggressive approach to managing inventory across all distribution channels has really driven the majority of the impact versus from currency. We've made some fundamental changes internally as to how we manage inventory. And I think our core customers are also being very aggressive at how they've managed their inventory. So the combination of those two impacts continue to help us on the inventory side of the equation. You probably would actually see some increases associated with the currency balances in the inventory. And so our benefits are somewhat dampened by the fact, that currencies have worked against us in terms of the inventory benefits that we've seen.

Right. So given kind of your updated outlook for the business, do you feel like inventories are at a good level, or do you think you'll start to see that creep back up as we see business improve?

Well. we're doing everything possible to make sure it doesn't creep back up. Clearly as business improves there will be some pressure on that. But we're working very carefully to make sure we have inventory in the fastest moving product available. As John spoken about in the past, we are also working on shortening our supply chain for some of our fastest moving product, for example, producing in Mexico for the US markets, where we're able to move product in relatively quickly to respond to changes in the demand. But I think we're trying to maintain very low inventory levels around the world without missing any sales, and I think so far we've been successful at that.

Great. Thank you, that's all I had.

Thank you. Our next question is from the line of Jeff Kobylarz with Stone Harbor Investments.

Hi, good afternoon. Curious about the advertising expenditure. It was up 4.1% of sales last year, and this quarter it's 5.8%, and is there a timing issue here with the advertising?

Well, Jeff, this is Blake. Clearly, we have rolled out the Dockers advertising, you're seeing some of that in the quarter. The bulk of that started around the Super Bowl. And we're going to continue to see that up through Father's Day. We're also seeing continued, a continuation of the Go Forth campaign here in the US. But other campaigns around the world to continue to support the business, consistent with a strategy that John, and the rest of us laid out in the fourth quarter. We are, as we've said, going to spend behind the brands to try to continue to support our strategic approach. And I think you'll continue to see relatively aggressive A&P spending during the coming year to support those growth strategies.

Okay, and then your inventory, the companies inventory is down a good amount, and can you comment about the inventory at your wholesale customers, how does that look? How healthy is that relative to last year at this time?

Yes, I can't make specific comments around our wholesalers, other than to say that we have not seen the return to loosening up the ties on inventory in any way. Robert can probably speak about some of the key wholesale customers here in the US, but our sense is that everyone is continuing to maintain very tight control over inventory.

Yes, I would just reiterate what Blake said that I think you could imagine all of our retailers are concentrating on keeping their inventories as low as possible. And we think they are getting used to driving performance off of leaner inventories in general. So we're obviously focused on making sure we've got the right inventory to meet consumer demand. And at this stage we feel comfortable that we're balanced.

Okay, it was also mentioned about how you're working on investing in the infrastructure in Europe. Can you elaborate on that point?

Well, we're clearly focused -- the major investment there is focused on building out the next stage of our global SAP instance. I think as you know, we've rolled out SAP in Asia and in Europe, or in the US, and Europe is the next step. We still have some parts of our business around the world that are not on a single instance of SAP. And so we're going to continue that investment during this year and into next year, and that's driving a substantial increase in the CapEx. Most of that falls into the CapEx category, because the software costs are capitalized. But we think it's critical to the success of the Company, and to the success of managing the brands around the world. And we're going to keep that investment going as part of our focus.

Okay, and then lastly, about in the US, the Women's product. It was mentioned how that's done well, whether it's Women's or Junior's, I'm not really sure which. But can you contrast what's gone on in this first quarter with the rollout of the Women's new initiative later on this year? Can you tie them together somehow?

Sure. I mean, I think we commented as we were reporting 2009 performance that we were particularly happy with the performance of our Junior's business. That is our youngest Women's consumer segment, and that's the segment that we're really referring to. It's a really fast turning business that's very trend driven. And if you look at the trends as skinny, super skinny, leggings, jeggings, the fashion trends that are driving consumption right now. And women's are most apparent in the Junior's area, as well as the contemporary Misses area in our traditional department store customers. So we're excited about the Junior's program.

We benefited from rollouts nationally, as I mentioned during the call last quarter, closing out the year at some of our larger customers throughout the United States. That's what's really driving the results this quarter, because we just had a tremendous amount of fixture expansion, as well as getting really positive consumer reaction to the products that I mentioned. We're obviously focused on executing the Women's initiative that John and Blake had talked to you about. And we'll be able to cover that, as we get into talking about third and fourth quarter.

Okay, great. Thanks.

Thanks.

Thank you. Our next question is from the line of Karru Martinson with Deutsche Bank.

Just to clarify, the $200 million of incremental revenue that you talked about last quarter, that was for the additional stores and the footwear license combined; correct?

Correct. Okay, so $200 million? Yes, on an annualized basis.

Okay. Now, in terms of Japan, is it still just kind of the sluggish economy there, or are you kind of catching up to the fast fashion trends?

It's a combination of both. You've been reading the results about how Department Stores continue to struggle in Japan and I think it is further being exacerbated by this fashion trend driven by this fast fashion trend driven by unit growth which is really causing a recalibration of the marketplace.

Okay, and in terms of the SAP, just to follow-up on Jeff's question, should we expect kind of like we saw in the US, an inventory build before you guys go live and kind of what's the timetable for when that gets plugged in?

Yes, so the timetable will be mid year 2011, and I won't forecast any changes in inventory policy ahead of that. Clearly the market in Europe is very different than the market in the US, where we have multiple countries in different patterns, where in the US, you tended to have really dominated by four or five major wholesale accounts. And so I can't anticipate yet as to how that might look. We'll certainly give people some heads up, if we believe there to be a big change early next year. But for now, we still got a lot of work before that time comes.

Okay. You guys are almost out of your revolver, the markets are certainly robust shall we say. Kind of what's your thoughts on the capital structure going forward here?

Well, I think it's safe to say we routinely explore alternatives for capital to continue to support our business, the growth of our business, and maintain a strong liquidity position. Our nearest term bond maturity is 2013. And we have a large credit facility in place to supplement any of our needs and a strong cash balance. So our focus really remains on profitability and cash flow, and managing our debt. We want to maintain a very safe capital structure, which means a safe liquidities with quite a bit of room to operate between those liquidities. And we'll just continue to monitor it. and look at alternatives as the markets move forward.

Thank you very much guys.

Thanks.

Thank you. Our next question is from the line of Shannon Ward with Oaktree Capital Management.

Hi. Just wanting to get a little bit more clarity on the investments that you're talking about making in 2010, and you talk about them putting pressure on the bottom line. Just do you mean pressuring margins, but actually ending up with still growth? Or are you talking about declines -- is it you're expecting declines in the absolute levels of profit?

Yes, so I think as the fourth quarter call, we indicated that we expected to see top line revenue growth. But we would moderate the growth of the operating income or EBIT level, primarily due to continued investments in SG&A. And those investments are both A&P investments, as well as headcount and associated costs with building out around some of those key growth initiatives. I won't predict the ultimate bottom line, but I think you can start to see in Q1 the type of financials that we'll continue to see during the year.

Okay, and then can you prioritize, in terms of magnitude those investments? So it sounds like A&P is the one that comes up time and again, so is that the biggest of the investments? Or maybe I don't want to put words in your mouth. Yes, I think what you should take into account ,is that when we talk about A&P, we're referring to not just pure advertising, but also on-floor promotions, fixtures, often times helping our customers graduate to new products. And so you're going to see a substantial amount of investments along those lines. As well as investments in SG&A associated with new product development moving to global fits, finishes, product fabrics, and really moving away from some of the regional products to more global products, which allow us to take advantage and gain longer term benefits to the financial statement. Okay, thanks for that. And then are these predominantly 2010 influences, or will they continue into 2011?

I don't want to predict yet for 2011, but we're on a journey that will be multiple years for us, in making some major changes that John outlined and much of that will occur in 2010, but some of it could move into 2011.

Okay, and then where do you hope they will take you in terms of revenue growth and margin expansion? When you get to the end of these investments what do you hope you look like?

Yes, so I won't predict what we ultimately look like from a financial perspective. I think our focus is primarily to continue to grow the Levis brand, both in terms of market share in key markets. But also grow in areas where the branded product is not as strong today, such as China, India, and some of the very fast growth markets we want to make sure we're participating in.

Great. Thanks very much for that.

Thank you. Our next question is from the line of Christina Boni with RBC Capital Markets.

Yes, good afternoon. Thanks for taking the questions. My first question was with respect to the Signature brand. It sounded as such, that it stabilized in areas other than Wal-Mart. And I guess one, do you see Wal-Mart going back to an emphasis on apparel as the economy improves, or do you think this is just ultimately going to be their strategy? And what's your thoughts in terms of where you'd like to take the Signature business?

We've talked pretty consistently about the fact that Wal-Mart has looked to emphasize kind of food and hard lines over apparel, and we've experienced the impact of that. As a result, our fixtures are down. We are obviously continuing to focus on supporting the Signature business, and the balance of our customers that carry the brand. We're committed to the consumer segment. And we're pretty satisfied with the performance in the United States relative to the value consumer segment. And we'll continue to focus on it, and the balance of our customers.

And with respect to your customers kind of managing as you've talked about with less inventory, maybe you can talk a little bit about what you've done to meet your customer needs quicker? Have there been successes in improving your supply chain as many of the retailers have gone through this crisis? Would you say you're better at avoiding stock outs at your retailers, maybe give us some insight on that?

Well, as Blake mentioned to you earlier on what we've done is moved some of our long lead time sourcing in closer. We're pretty good at doing this. We've got a good global footprint on where we manufacture. And we feel comfortable based on the business plans that we have set up with our retailers, that we can respond to some of the near market responses. But it predominantly is about rebalancing your lead time and where you source your product.

And then just with respect to cash flow from operating activities, if we look at this year versus last year, it's up significantly, and there was a big change in accrued liabilities. And I was just curious what that change was, maybe you can give us some insight if there's something material there/

Yes, so I think a lot of it has to do with timing of operating expense and payments that would go on. So we've had freight payables that have been lower than previous prior year-ends, and so much of that is a timing-related issue versus permanent reduction. I think we're seeing reductions clearly on the inventory side, but you are going to see natural movements that occur on things like payables and receivables, that were tending to get the benefit of this quarter. And that's what's really driving the overall change.

Okay, so some of that is timing? And that will come back in the subsequent quarter?

Correct.

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

Thank you. Our next question is from the line of Emily Shanks with Barclays Capital.

Good afternoon. I wanted to ask a couple of questions around the retail component of the sales. I know in the 10-K you guys indicated that the online and the Company- operated stores were around 11%. Given your comments that the contribution level of retail stores really pushed gross profit margins, what percent of the top line does it represent now?

Yes, so if you look in the Q, you'll see that roughly retail stores generated 16% of our net revenue in the quarter. And that will -- obviously that's grown obviously because of the outlet stores that we acquired last year. And we think that's the level roughly that we'll continue to see during the year going forward.

Okay, sorry, I missed that. And then does that include, that includes your online and your Company-operated, right?

Yes.

Is online a significant portion of that?

It's still relatively small. I think remember that we participate in online sales for some of our major, or many of our major customers, Macy's online, Penny's online, etc., as well as Amazon and some of the general merchants. Most of those people do well with our product, and so we maintain our own online stores, but also sell product through them. That would be booked simply as a wholesale sale for us to one of those customers.

Okay, perfect. And then in terms of your comment that you are locked into a number of leases in the US, what's the store count for that for this year?

So in terms of the actual store count, we don't break out the individual countries. Our total store count for the end of Q1 is 426 worldwide, and that's fairly well balanced across all the regions. And as a reminder, some of those stores have been around a long time, and some of them are relatively new. So we have a full range of lease lives, and those lease lives also change very dramatically depending on what country you're operating in around the world.

Okay, and apologies maybe I misunderstood your opening comments. I thought you said that you had -- you were locked into leases for new store openings this coming year.

So, no, what I actually said is we've actually executed some new leases on new outlet stores. As part of our acquisition last year of the outlet stores from Anchor Blue, we also were able to acquire the option to enter some new outlet malls. And so we have been able to go out and negotiate those outlet malls new leases. And we're very excited about the opportunity to enter what we see as the remaining high quality outlet malls out there. And we've already started the process of entering those leases, and you'll see those stores over the next couple of quarters.

Okay, and then just in terms of the dividend disclosure, I think it was $20 ish million that you guys indicated you were expecting to pay in 2010, should we assume that that's going to be a Q2 event has it has been historically?

I think that's a good assumption, yes.

Okay, and can you comment if that's actually been paid yet to date?

It has not been paid. And if we make a payment in the future we would clearly make an announcement about that, so you'd hear about it.

Okay, thank you.

Thank you. Our next question is from the line of Colleen Burns with Oppenheimer.

Hi, thanks. To follow-up on inventory at retail, it sounds as though the wholesale channel is still managing inventory conservatively. But are you starting to see order trends more closely aligned with sales trends, or some pick up in orders given the better sales performance at retail in general?

I'll let Robert comment on that.

Yes. I think what we've seen actually pretty consistent inventory to sales matching over the past couple quarters. I think that what we've been consistently saying is that, our customers as we discussed last year, had a very difficult first half of 2009. We and they spent time making sure that we got our inventories back in line after a very difficult holiday in 2008. Once we were back, we had inventories back in line, they were at a lower level, because obviously everyone is trying to manage their cash flow, And I think what we think is that our customers have gotten comfortable with the ability to deliver to the consumer demand, with lower inventory levels improving their turns. And as John mentioned as a result we've adjusted our supply chain strategy to have more close to market production, to be able to respond to fluctuations, especially as Blake has mentioned in our faster turning products in particular.

Okay, thanks. And is there any color around how sell-through trends progressed throughout the quarter, or did you see improvement as the quarter progressed, was it fairly consistent?

We don't talk about sell-through trends specifically either on our wholesale ore resale businesses. I think we felt good about our retail business being in line with the trends that you're typically seeing in the market, relative to other vertical players. And our wholesale sell-throughs were very much in line with the comments, I think that John and I have made overall in terms of how the businesses performed across the regions.

Okay, and then would you say that are you starting to see positive comp store sales trends in your retail stores?

As I mentioned, we don't break out sell-through specifically. And but we do generally comment, if our trends are in line with what you're seeing generally across the industry, we would confirm that, and we did in my comments.

Okay, thanks. And then just lastly, of the 12 stores that you opened in the first quarter, were those mostly in Europe?

They were actually all over, I think pretty evenly spread. We clearly have more franchise stores in Asia, than we do in Europe, and both of those more than in the US. But I think we're seeing consistent growth around the world.

All right, is your store expansion plans this year generally across-the-board, or are you expecting greater expansion in Europe versus the US?

Greater expansion in Asia through franchises, greater expansion in Europe and the US through owned and operated, but still with some franchises in Europe.

Okay, thanks a lot.

Thank you. Our next question is a follow-up from the line of Carla Casella with JPMorgan.

Hi. You talked in your 10-Q about a $12 million tax, or sorry, $14 million tax charge you needed to take in the second quarter for the Patient Protection and Affordable Care Act. Is that any of that cash, and or when does the cash get disbursed for that?

Carla, I knew you wouldn't miss that. So you're pointing out that like many other companies who have reported or recently filed 8-K's on this issue, anyone that has a substantial population of retirees is most likely taking a charge, or highlighting that they will take a charge in the coming quarter because of the change in the Patient Protection Act that was just passed in Congress. In our case, it's $14 million non-cash charge to income tax expense. And it's primarily from the focus on retiree drug subsidies going away. Essentially the corresponding reduction is a reduction in the deferred tax assets that will get recorded through the P&L as the law is enacted. It's obviously a cash impact in the future, and essentially we're taking the non-cash charge today as that cash impact will occur over the coming years.

Okay, great. Thanks. That's all I had.

Thanks, Carla.

Thank you. There are no further questions at this time. I'd like to turn the call back over to the presenters for closing remarks.

Well, thank you, everyone. In summary, we're off to a good start for 2010. We drove improvements in our key financial measures of revenue, margin, cash flow and liquidity. Our balance sheet is strong, and we continue to invest in our business. The retail outlook remains uncertain, as jobs have not rebounded in mature markets, but we're confident in our strategy. Our goal is to return the Company to sustained profitable growth, and we will not be satisfied until we perform consistently against this goal. We look forward to talking with you next quarter. Thanks, everyone.

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