Levi Strauss & Co (LEVI) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Levi Strauss & Company's second quarter 2010 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 July 20, 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 83693533 followed by the pound key. This conference call also is being broadcast over the Internet, and a replay of the webcast will be accessible for one month on the company's website, LeviStrauss.com.

I would now like turn the call over to Roger Fleischmann, Vice President and Treasurer of Levi Strauss & Co.

Good afternoon, and welcome to our second quarter earnings call. I'm pleased to introduce members of the Levi Strauss & Co. management team. With us here today are John Anderson, our President and Chief Executive Officer; Robert Hanson, President of the Americas; and Blake Jorgensen, our Chief Financial Officer.

Before we begin let me briefly remind you of a few items. Our discussion today may include forward-looking statements that are based on our current assumptions, expectations and projections about future events. Although these statements reflect the best judgment of our senior management, they involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the statements, as more fully described in our Annual Report on Form 10-K, our Registration Statements, and other filings with the Securities and Exchange Commission.

Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements. We provide information on our website about how we compile various measures used to describe our business performance.

Finally, today we filed our Quarterly Report on Form 10-Q with the SEC. You can link to our SEC filings from our website.

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

Good afternoon everyone, and thanks for joining us. We are pleased to report strong topline growth and improved operating profitability in the second quarter. Our focus on the strategic growth initiatives we have been discussing with you the past few quarters continue to drive positive results for our business globally. We achieved these results despite continued economic uncertainty and weak consumer spending in certain key markets.

As a reminder, our long-term growth strategies include -- capitalizing on our global presence, diversifying and transforming our wholesale business, accelerating growth through dedicated retail stores, driving productivity to fund our investment and realize efficiencies across our businesses, and building upon our brand's leadership in jeans and khakis. This includes re-engaging with women to renew fit range, introducing a new aspirational brand for emerging markets, and developing the Levi's brand premium collection.

We saw solid gains in net revenues and operating income in the quarter. Our reported net revenues were up 8%, and operating income was up 23%.

The global performance of our Levi's brand continues to improve. Our balance sheet remains healthy, cash flows are strong, and we are tightly managing our working capital with lean but appropriate inventory levels.

Our refinancing activities in May, as well as some noncash tax charges, contributed to a net loss in the quarter, which Blake will discuss in more detail. Even with these charges, our net income for the first half of the year is tracking to last year.

As discussed in recent quarters, we are investing in our business, our brands, and our products. Strengthening our wholesale business remains a priority as we continue to expand doors, fixtures, and add wholesale customers.

In addition, our retail expansion is contributing to the topline margins, and the acquisitions we made last year are driving improved revenue performance. We have invested additional marketing dollars behind our brands to drive higher sales. And we've focused on improving the quality and relevance of our products around the world.

As Blake will discuss, these actions are reflected in our operating results and higher capital expenditures in the first half, and you'll see these investment trends continue for at least the balance of the year.

So a good second quarter and a good first half of the year. Our investments in the business are yielding solid results. Although the economic recovery remains slow, we're seeing our sales improve and our consumers respond to our more innovative and relevant products.

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

Thanks John. We continued to make strong progress in the Americas during the second quarter. The Levi's brand delivered solid growth in wholesale accounts and our own retail stores, driving Americas revenues up 8% on a reported basis and 6% on a constant currency basis.

We've been telling you about improvements in our Levi's products for some time now, and we are seeing the impact of these improvements in the marketplace. Consumers are embracing our better quality and improved aesthetics, which are driving higher Levi's brand sales.

We saw particularly strong performance across our mens, juniors and boys segments, demonstrating our focus on targeting younger, progressive teen and young adult consumers.

We continue to be the market leader in trending sets such as straight, slim and skinny, and to see success with the boyfriend collection in womens.

We are delivering better finishing craftsmanship across a broad range of price points.

Our juniors segment benefited this quarter from new wholesale doors, additional fixtures, and improved presentations, as that business continues to build momentum.

We just launched the second phase of our successful Go Forth marketing campaign this month with a focus on our work wear products, drawn from the heritage of jeanswear worn by the men and women who helped build the American West. We are integrating multiple consumer touch points such as traditional advertising, social media, and consumer engagement as a part of this campaign, which is now in full swing. The new campaign focuses on the real citizens of Braddock, Pennsylvania, a town that has been affected by the economic downturn and is working to revitalize its community.

Our efforts to re-energize the khaki category continued this quarter. Although US Dockers sales were down overall, the profitability of the business improved on lower close-out sales. We continued to expand our distribution, including test programs with Nordstrom, Men's Warehouse, and Barneys. We are pleased with the sales performance of our new mens products, which are benefiting from our recent marketing activities.

Signature brand sales continued to reflect lower volume, carried by Wal-Mart, that we've previously discussed. Signature remains a very small contributor to the overall business in the Americas region.

In summary, our focus on bringing superior quality, craftsmanship and innovation to our products is working. We are pleased with the outcomes of our efforts to engage the consumer, and our marketing and improved on-floor presentations. We will continue to execute our strategies in the Americas to build upon this growth momentum.

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

Despite the challenging economic environment in Europe, we drove higher revenues for the second quarter, up 9% on a reported basis and 7% in constant currency.

We continue to benefit from the footwear and accessories acquisition we made last year, as well as a strong performance of our growing company operated retail network. Both contributed to a strong overall Levi's brand performance for the quarter.

Our core Red Tab business was up from the quarter.

The wholesale channel remained weak across Europe but was more than offset by higher sales in our company operated stores.

Last quarter we mentioned our newly refurbished flagship store in London, which celebrates the heritage of our brand. It is doing very well. Flagship stores such as this continue to benefit our broader retail network as we adapt what works there to other stores.

Although the European marketplace remains challenging, our investments in retail expansion and in strengthening our brands are helping us to grow revenue and weather the economic instability in the region.

Now turning to Asia Pacific -- net revenues for Asia Pacific were up 8% on a reported basis, down 2% on a constant currency basis.

Japan continued to detract from our overall performance in the region, but we are pleased with strong growth in the emerging markets.

We are benefiting from our brand dedicated store expansion across the region and are investing in advertising, particularly in India and China. These two countries continue to be our growth engine, with double-digit sale increases during the quarter.

Our planned investment in the region includes launching a new aspirational brand for consumers in our emerging markets for fall. We will continue to invest in Asia Pacific where appropriate to capitalize on its potential and to remain the leader with relevant, innovative products.

Now Blake will discuss the details behind our second-quarter financial results.

Thanks John, and good afternoon to everyone.

We delivered strong performance in the second quarter of 2010 despite global concerns regarding high unemployment and continued economic headwinds. Weak consumer spending continued in key markets around the world, particularly in Europe and Japan. All three regions, though, reported increased net revenues and improved gross margin, reflecting the strength of the Levi's brand, as well as the investments we've made over the past year. We delivered strong cash flow, continued to build our liquidity position, and successfully completed the refinancing of our 2013 and 2015 debt maturities in what proved to be an advantageous financing market. And we took an opportunity to retire a portion of our 2016 yen/euro bonds at an attractive discount to par.

Throughout today's call I will reference performance comparisons on a year-over-year basis unless I indicate otherwise.

Total reported net revenues for the second quarter were $977 million, up 8%, reflecting acquisitions made in 2009 and continued growth in the Levi's brand in the Americas, offset by declining wholesale revenues in certain markets. We are on-track to deliver on our objectives for incremental revenue from these acquisitions, and the results from these profitable businesses are flowing through to operating income, particularly as we improve the operating model of both our mainline and outlet stores.

Results also benefited from the positive impact of currencies during the quarter. On a constant currency basis revenues were up 5%.

Gross profit was up 20% due to improved gross margins in each of our regions. Our gross margin improved to 51% from 46%, driven by the increased contribution from company operated stores. Gross profit also benefited from a $24 million favorable impact of currency in the quarter.

Total SG&A expense for the quarter was $430 million, an increase of 20% from last year. SG&A increased primarily due to the 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, continuing the trend we called out at the beginning of the year, most notably in the Americas region supporting our Levi's and Dockers brands.

We also continued to see higher costs associated with our benefits plans.

The net effect of higher gross profit, partially offset by higher SG&A expense, resulted in operating income of $69 million in the quarter, an increase of 23%.

Higher operating expense will continue in the second half of 2010. As we previously discussed, our selling expense will increase due to our growing company operated retail network, and we will continue to spend on A&P in support of our brands.

Below operating income, interest expense was $34 million in the quarter, and other income was $7 million, primarily reflecting the appreciation of the US dollar against the euro and yen.

Additionally, our financing activities and two discrete tax charges significantly impacted our quarterly results.

In May we successfully refinanced our 2013 and 2015 bonds, improving our capital structure by extending debt maturities and reducing the interest rates on our debt. Expenses associated with this transaction were approximately $38 million, including a noncash charge of $8 million.

Investor demand for the new bonds was strong, so we increased the issuance size by $100 million. This allowed us to retire a portion of our 2016 yen/euro bonds at an attractive price, which resulted in a gain of $21 million. The net impact of these refinancing activities during the quarter was a $17 million loss on early extinguishment of debt.

We also recorded two significant tax items during the quarter. The first was a $14 million deferred tax charge related to our Japanese subsidiary. Over time we had accumulated a deferred tax asset related to this business. Based on the continued economic challenges in Japan, we determined during the second quarter that it was unlikely we would be able to utilize our deferred tax asset there, resulting in the charge.

Second, as we mentioned during our last call, we booked a $14 million tax provision related to the impact of the Health Care Act, reflecting the elimination of the tax deductibility of retiree healthcare costs.

Both these provisions were noncash in the current period.

These significant and discrete financing and tax charges drove our net loss of $14 million.

Now I would like to turn to the balance sheet and cash flow.

We continued our focus on working capital during the quarter. Customer collections remained strong, and our inventories at the end of Q2 were lower than the same period last year. As part of our approach to inventory management, we continue to maintain an appropriate level of core replenishment product to meet customer needs.

Cash provided by operating activities was $146 million for the first six months of the year, as compared to $159 million for the same period in 2009. Higher cash collections from customers on higher net revenues were offset by higher payments to vendors, reflecting the increase in SG&A expense and the acceleration in interest payments associated with our refinancing activities.

Capital expenditures were $42 million in the second quarter, up $12 million from last year, and on-track with the forecast we provided at the beginning of the year. The increase in the current quarter was primarily due to investments in our systems, our company operated store expansion, and our headquarters remodeling, which is on-time and on-budget.

We added 27 net new company operated stores during the quarter, bringing our total worldwide to 453. We have been executing on our plans to open new stores and outlet malls in the US, as well as new mainline stores around the world.

Our liquidity continues to be very strong. We ended the quarter with cash of $353 million, and we had $180 million under our credit facility available. Our cash position increased $82 million over year end. We ended the quarter with net debt of $1.46 billion, down from $1.58 billion at the end of 2009.

We also paid a $20 million dividend to shareholders during the quarter, consistent with last year.

We are comfortable that our current liquidity and cash flow are sufficient to fund our strategic objectives. While our focus on managing inventory levels has contributed to our current cash position, I'd like to remind you that the third quarter typically represents a period of inventory build, in connection with our natural business cycle.

In addition, CapEx will begin to reflect investment in our European SAP implementation during the third quarter. Ultimately we believe that investments such as this will support long-term profitability and cash flow.

We will continue to focus on reducing our debt over time, even as we reinvest in the business, and we aspire to be in a position to pay a dividend to our shareholders, where financial conditions and debt covenants allow.

To summarize, the second-quarter results demonstrated our focus on delivering strong operating performance and cash flow in the face of a challenging economic environment around the world. We are delivering on our commitments to invest behind strategic initiatives that we believe will deliver long-term growth but that will put near-term pressure on the bottom line. As we make these investments, we will continue to focus on controlling costs and managing inventories.

With that, we will now take your questions.

(Operator Instructions). Bill Reuter, Bank of America Merrill Lynch.

Most recently you have guided us that gross margins should be in the high 40s, and then for the second consecutive quarter we saw gross margins above 50%. I guess, do you have any change to your outlook for gross margins for the remainder of the year, or kind of looking forward past that?

Good question, Bill. I think we are going to maintain the outlook that we discussed at the start of the year, that we would be in the high 40s. We continue to see benefits from lower inventory markdowns as we managed our inventory levels very aggressively. We don't know if that will continue to -- we'll continue to see those benefits going forward, but I would keep your models probably in the high 40s, even though we have two quarters in a row in the low 50s.

Okay. And in the first quarter your advertising and promo expenses were up about $20 million. They were about $10 million in the second quarter on a year-over-year basis. I am not looking for absolute numbers, but broadly, do you think you guys are going to back off on your ad and promo spend? Or it sounds like with the new rollout of the second phase of Go Forth that maybe they will continue to be up? Anything you can help us with there would be great.

Let me answer that in two ways. Why don't I give you just a little bit of financial view, and then I'll have Robert talk a little bit about the game plan for advertising. Both of those, we'll be conscious of not providing you with forward-looking guidance.

I think we've been pretty consistent that we will invest behind the brands locally. You saw that early in the first quarter associated with Dockers. You'll see it now starting in what is the third quarter, the new advertising program, second phase of Go Forth program for Levi's. You're seeing similar activities around the globe associated with the Levi's brand. And we will continue to maintain that as we go forward during the year.

Robert, you may want to comment on just the second phase of Go Forth.

Yes. I think, consistent with what John and Blake have shared with you in the past, we are pleased with the results of Go Forth. We are in the second year of it. We just launched the mens Ready to Work collection, which is featured in the Go Forth campaign. It will run throughout the third and the fourth quarter.

In addition to that, as John has mentioned in the past, we are looking to invest more thoroughly behind our womens business, which will start as well in the back half of this year.

It's all rooted in the idea that we intend to come out of the recession with an investment behind our brands and really attack with product innovation, creating a more compelling consumer experience both outside of the store as well as in the store. And some of that investment does have to do with improving our on-floor presentation and the service with our own merchandise coordinator organization.

We obviously had a strong investment in Dockers in the first half of the year, and we are going to be continuing to invest behind what we believe to be a solid performance in our mens long bottoms business on the Dockers side.

Then just one more, if I can. Your performance in Europe, it sounds like you guys did better in the retail portion of that than in the wholesale. Can you talk about -- a little bit about that, and then maybe how the performance was sequentially throughout the quarter, as the region had challenges?

It's true. Our retail business continues to perform stronger relative to our wholesale business. I think you're all aware of the challenges that Europe faces at the moment. It's the small accounts that are suffering the most. So we are seeing a lot of pressure on the smaller traditional wholesalers. So we are offsetting that as we continue to invest in our own retail channel. We believe that pressure will remain through to the balance of this year.

That's it for me, thanks guys.

Grant Jordan, Wells Fargo.

Just to follow up on those comments on Europe, just trying to get a better read for really what's going on with the consumer in Europe. Have you seen any dramatic change in buying patterns by the end consumer in Europe?

No, we have not. It still remains challenging out of there. I guess if there's any good news, we haven't seen a further deterioration. But clearly traffic pattern across wholesale accounts and even around retail accounts is the biggest challenge we've got taking place in Europe at the moment. So it's still very challenging.

And in terms of the business that you're generating in the retail stores in Europe, why do you think the consumer is responding well to that? Is it the value proposition? Is it kind of the brand message that is new to them?

Well, I think when they look at the product, they are truly are seeing good value in the product. Our Tops business is performing well over there. So we think we offer the best value proposition to the consumer of any of the jean brands in Europe at the moment. And the consumer is responding to that.

Okay, thank you. (multiple speakers)

And Dockers [that you have] also continues to perform very well. That's -- that -- this trend to non-denim that's starting to take place to a small degree in Europe is really benefiting our Dockers business, particularly in Spain and France.

Okay. And I may have missed this, but Blake, I think you said that FX added about $24 million to the gross profit line in the quarter. How much did foreign currency add to SG&A expenses in the quarter?

Roughly $9 million. So you've got a $15 million impact at the operating income line.

And then in terms of your expectations for how the FX will affect Levi's, is it safe to assume it will be more of a headwind as we move into Q3 and Q4?

Yes, definitely. Remember, we are a March/April/May quarter, so we didn't really see the major impact of FX until the middle of May as the euro declined. Now, there's been a little bit of strengthening off the bottom, but I will resist predicting where exchange rates are going to go. I think everybody's got their own forecast these days.

But clearly going into the third quarter we are seeing more headwind, and we expect, based on some of the comments John made earlier, that the economy there is going to take some time to get out of a difficult situation, and exchange rates may impact some -- or reflect some of that.

And then my last question really is just trying to get a handle around how the business performed relative to your expectations. It seemed like last quarter you guys were somewhat cautious, just talking about how you're investing behind the brands and you really expect to spend more to invest this year in preparation for next year. But you still got a really nice increase on the bottom line. Was it better than what you expected in Q2?

No, it was pretty aligned on where we expect it to be. We continued to invest behind the brands. As Robert said, we believe we've got a compelling consumer proposition. We selectively look to continue to invest in retail.

But it's a battle. We are right where we thought we would be.

I appreciate it, thank you.

Carla Casella, JPMorgan.

One question -- you mentioned there was some lease termination expense in the second quarter. Can you just give us an idea of the magnitude and how many stores that was related to?

Yes. Most of that fell in Q1. And so a very minor amount in Q2. In Q1 it was really stores that we closed at the tail end of last year. So it -- a fairly small number for Q2.

Okay. And then on the Dockers side, is that business -- you talk about -- you mentioned it was down. How [do] units versus pricing move? How do units versus pricing move? And is that moving EBIT as well? Operating income loss?

I'll have Robert give you some guidance there, or some response there. But remember that as we transition the Dockers business from the old-line Dockers business to the new line, we are seeing some of the transition costs dragging down -- or the transition dragging down the near-term performance. Robert can talk a little -- we don't break out the unit's numbers, but Robert can talk a little bit about some of the details.

Yes. I think we've been talking for some time now about the fact that we are in a fairly long-term revitalization effort on the khakis category in Dockers leadership, and it included basically fundamentally reworking our mens and womens khakis or long bottoms offer. We started that about a year ago, really transitioned the assortments through third and fourth quarter of last year and into first quarter of this year.

So we had a lot of excess and obsolete inventory to work through, as well as product transitions to work through. And that's reflected in why we are still seeing declines.

If you really look at the performance, we are pleased, as I said in my opening comments, about the performance we are getting out of the new products that we put into the market that are the continuing product platforms, especially on our mens long bottoms business.

We saw the benefit of sales in that segment of the business from the marketing effort of the Wear the Pants campaign. If you've been out to retail recently, I think you'll see a clear product proposition being presented to our consumers and our key wholesale customers, and that's not only being rolled out across the region, but as John mentioned, across the globe.

So I think we feel like we are in a good place, but the reality is that we are coming up against a lot of transitions of inventory in the prior year period, excess and obsolete in particular, but also the fact that we were transitioning the inventory.

The good news for us of course as we move forward is that we are getting into a cleaner continuing business, and we feel that we are where we want to be in the effort of turning around that business.

When do you cycle through that? Would it be this coming quarter? Would it be fourth quarter when you're comparing more apples to apples?

It's going to continue throughout the year because obviously transitioning a business of this magnitude, the size of the Dockers business, it -- to do it responsibly and to do it financially carefully for both ourselves and our customers, it takes some time. So I think we will be clean as we move into 2011 in terms of the inventory transitions, but we'll still be working through some floor sets and inventory transition in the third and fourth quarter of this year.

And then Roger, did you give the approximate RP basket in your opening remarks? I may have missed it.

We didn't. As of the beginning of the quarter, it was at $500 million, and then we paid a $20 million dividend. And not a whole lot of impact on the quarterly earnings.

Thank you.

Just to clarify my earlier statement on the store closure expenses, what you may have picked up was that we did not close any stores in the quarter, those were in Q1, but we did have a store lost due to the flood in Nashville -- if you remember last month. And so that store is currently closed. And we may ultimately not be able to reopen that.

Okay. Thank you.

Todd Harkrider, Goldman Sachs.

Congratulations on a good quarter. Going back to Grant's question on the foreign currency -- with that reversing and should be a headwind and with you having some hedges in place, should we see the impact in the third quarter? Or is that going to be pushed out some?

Remember, we don't hedge the translation of our operating results denominated in foreign currency. We hedge certain anticipated cash flows, primarily those associated with our sourcing exposure. And so you will most likely, if the euro continues to be in a low 1.20 range, you will most likely start to see impact of that at the top line as we move forward.

I'll hesitate to provide any guidance on what that could be, primarily driven by the fact that we don't give guidance, as well as I hate to predict currencies because it usually goes the other way.

I was going to put you into a corner then on regards to the guidance. (laughter) And are you still being conservative in sticking to operating margin being down year-over-year? Since you have like two quarters in the belt and it coming in a little bit better than expected, do you think operating margin could actually be up at the end of the year on -- for the annual basis?

We'll stick to what we said at the start of the year, primarily driven by the fact that we have a very robust investment plan that will continue on for the back half of the year, as Robert mentioned, the major investment around the Levi's brand, as well as continuing the Dockers investment. And then as John mentioned, you will hear quite a bit around our womens product and around our aspirational product in the emerging market that comes through the back half of the year. All of that will continue to drive both A&P spending and SG&A in total. And so I think we are pretty consistent with what we started -- where we started the year and on-plan with that.

And then regards to the new products, it sounds like that's separate then the curve that you have in Europe. But are you levered on that aspirational project -- or product? Are you leveraging the Signature infrastructure? Or is that a totally different group running that? And do you have a goal on where you would like to see that in the next five to seven years?

Wow. We'll talk to you next quarter about -- when we get closer to launching what that brand proposition looks like, and we'll have a better feel for what the early performance indicators are.

Then lastly, just on cotton costs, I know you don't buy it directly and you also don't give out really what percentage cost on the goods it is, but do you have just a rough estimate on what kind of margin hit? Or have you just communicated to the retailers that you're thinking of taking pricing? How should we look at cotton costs?

Well, clearly cotton costs have gone up, as you state. We've already taken some price increases for the second half of this year. And we've been in discussion with our retail partners about the implications for next year, so we're looking at a selective basis on how we can work our way through these increased costs. But it's a pressure on the business.

I appreciate it. Good luck with the rest of the year.

Jeff Kobylarz, Stone Harbor Investment.

Congrats on the good numbers also. About these cotton costs, so you -- given that they are up about 30% year-over-year now, have you seen any pressure at all on -- and in the gross margin from these hard cotton costs yet?

As I mentioned in that earlier question, we were not impacted through the first half of the year. To some degree we are impacted a little bit in the second half, which we've covered with the selected price increases. And as we look into next year, we will wait and see what the impact will be. But it hasn't been significant as of yet. But clearly it is causing us to look at our pricing.

Right. Sure. It was mentioned in the Americas, the mens, boys, the juniors product line, it's all doing very well. Better quality product I guess. And can you elaborate on just how it got so much better than the competition?

Well, we've been talking for a number of quarters now about the fact that we have taken advantage of the difficult economic times to go back and really look at how to elevate our product innovation, really focus on improving the quality and the aesthetics of our product. And so I think we've tried to attack improving our products at every price level, from good, better to best.

But at the same time, across both mens and boys and also the juniors business, we were -- we took an early and strong position on trending fits and long bottoms. So if you look at mens, for example, straight, skinny, and super skinny are trending really aggressively, as are really premium looking washs at all price points, everything from rigid indigo washes to rigid color, all the way through to much more finished goods.

And on the womens side of the business, we took a really strong position on skinny and on legging. We are very early in pushing those trends, as well as launching a comprehensive boyfriend collection.

So it's the combination of improving the overall aesthetic and quality of our five pocket jeans offer, putting innovation at the forefront, consumer relevant innovation at the forefront of everything we do with those trending spends, and then taking a position on fashion collection such as the boyfriend collection in womens.

The other thing that's helping of course is the fact that we are executing aggressively with the investments that both John and Blake have talked about. We are investing behind our brands and our advertising outside of the store. But importantly, if you've been at retail recently, both in our own stores and our wholesale customers, we are putting a strong emphasis on improving the consumers' shopping experience and even maintaining it with a bigger investment in our merchandise coordinator organization to support our wholesale customers.

Thanks for that rundown. Do you think that given these changes to the fits and to the finishes that it has much more as far as legs to it? No pun intended. But just is there more mileage to it do you think for the near term? Or have you kind of annualized you think these good product quality improvements relative to the market?

Good question. As John said earlier, I think it's a battle out there, and it's our intention to stay sort of positively paranoid, if you will, about our competition and to make sure that we are the brand that is staying on top of what is relevant consumer innovation in the core categories we run in both our jeanswear business and our khaki business.

We feel that there is still room for growth on those trending product categories, such as straight skinny, super skinny, and leggings, and also on the boyfriend collection. But as you know from the launch of the Go Forth campaign, we're putting an emphasis on a broader collection of work wear inspired product on the mens and boys side, and we are going to be launching a more aggressive program behind our womens jeans collection starting a little bit later this year, which we are excited to talk to you about in the next quarter's call.

Do you have any general comment about the outlook for back-to-school as far as the industry order situation for the jeans industry in the Americas?

Sure. I think we would say it's too early to call. We are -- as John and Blake have said, I think we are pleased with our performance to date. It's meeting our expectations. We feel that our inventories are well-balanced. We were probably a little short of inventory in some of the spring seasonal goods such as shorts. So we look a little light out there right now, but that was intentional to manage the cash flow performance that Blake mentioned earlier.

So I think we feel good. We have great plans in place to execute well and match consumer demand as it comes with all of our top customers. And we are well-poised to execute our strategies in our own stores. We just need to maintain that operational rigor and respond to demand, because it is unpredictable out there. I think you know Father's Day as reported was a little bit more difficult for the industry than the whole industry had hoped. And we saw our performance consistent with that. But in general we are poised to respond to consumer demand.

Then lastly, I'm curious about this aspirational product in the emerging market. When will that be launched? And can you give any -- do you have any description about it, like an average selling price, how it compares to the US average selling price?

It will be launched early fourth quarter, and we will keep you informed.

Thanks and good luck.

Emily Shanks, Barclays Capital.

I want to ask a follow-up around the European conversation that kicked off Q&A. Just want to be clear in terms of the outperformance of your retail shops versus wholesale. It sounds like, if I understand you correctly, a lot of the smaller wholesale guys are having issues as it relates to traffic. But do you think it has anything to do with location? And/or are you seeing any cannibalization at your retail stores versus your wholesale locations?

Number one, we are not seeing any cannibalization. Our own retail footprint is not broad enough to cause that. I think you're aware of the economic challenges that Spain has, that Italy has, and some of the ongoing challenges in some of the other countries. It's just very difficult. And I think for a lot of the smaller stores in the secondary cities this is where most of the pressure is being felt.

And as you look at those European wholesales in terms of the fall orders, how are those trending? Are you seeing that they are bringing orders down in line with demand? Or what are you seeing there?

I think their orders are holding up, it's just pressure on the number of doors that are still viable. Remember, Europe is a very different distribution profile to the US, where Europe doesn't have these big department stores. They're made up of many small stores. So those that are viable are holding up well. There's just lots of pressure on the more marginal ones in the secondary locations.

That's very helpful, thank you. And then finally, I just wanted to ask around the comment in the prepared remarks around paying down debt to position yourself to pay a dividend. Does that mean something incremental above the $20 million that will be paid -- well, it was supposed to be paid June 18, I guess? For this fiscal year? Or are you talking about next fiscal year?

Yes, no, next year. We want to be I think in a position where we are paying dividends annually when we are able to, that we are highlighting that to both the Street as well as to our investor base so people can plan accordingly. We've been very clear that we want to make sure that that's part of our overall use of cash, as well as the ability to continue to pay down debt over time, which we believe is important for the financial health of the company.

Great. Thank you and good luck.

Carla Casella, JPMorgan.

Two quick follow-ups. One, on the Board member that just resigned, do you intend to replace him?

The Board member that just resigned was Peter Georgescu, who has been a long and valued Board member for many years. And we do intend to replace him.

And then on the I guess the time frame of that?

Pretty soon, in the foreseeable future.

Then on the Japanese business, I know that's been a bit of a problem for a while. I'm wondering, do you think we are near the bottom on the Japanese? Has that business bottomed out, or could we continue to see declines there? Are [there] (technical difficulty) like (technical difficulty) Dockers where it's just still a matter of clearing through merchandise? Or is there something greater there?

It's just a very difficult market (inaudible - microphone inaccessible) even seeing the [Uniclo] numbers suffer in the last few months. So to me, I think until we start to see some economic improvements in Japan and some confidence come back from consumers, it's going to prove a challenging market.

Of course I hope we've seen the worst, but I'm not sure. I'm just not sure. There is nothing to suggest even in the last couple of days that the ruling political party has got a majority to make the hard decision. So it remains challenging.

Great. Thank you.

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

So good second quarter and first half of the year. We are making progress on returning the company to sustained profitable growth. Our balance sheet remains very healthy, and we drove improvements in revenue, margin, cash flow, and liquidity. We're seeing the benefits in our results this year of the investments we've made. We will stay focused on our growth strategies and continue to invest behind them as we move forward.

We look forward to talking with you next quarter. Thank you, everyone, for your attendance.

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