Levi Strauss & Co (LEVI) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Levi Strauss & Company's fourth quarter 2010 earnings conference call. (Operator Instructions). This conference call is also being broadcast over the internet and the replay of the webcast will be accessible for one month on the company's website Levi Strauss.com. I would now like to turn the call over to Kris Marubio, Director of Corporate Affairs at Levi Strauss & Company.

Good afternoon and welcome to our conference call. I'm pleased to introduce the members of the Levi Strauss & Company management team. With us here today are John Anderson our President and CEO, Robert Hanson, President Levi's Global Brand and Blake Jorgenson 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 a 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 annual financial form report on Form 10-K 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 and thank you for joining us. 2010 was a good year for our company. We finished the year strong, delivering top and bottom line improvement even as we invest in our business for future sustainable growth. And we achieved this growth in the face of significant economic challenges around the globe. I'm pleased to report that our full year net revenues grew 7% and 4th quarter net revenues also grew 7%.

Revenues are up in all three regions for both the year and the quarter. Net income also improved 3% for the year and 28% for the quarter. Before we review the regional results I would like to take a moment to review the goals we set for 2010, show the progress we made and discuss how that will impact our business in 2011. Last year I told you that we would be investing in our business for long-term growth with an overarching strategic focus on capitalizing on our global presence and realizing efficiencies across our businesses.

Our first growth strategy is to build upon our brand's leadership in jeans and khakis. We invested in product and advertising for our brands throughout the year. We believe the new slimmer fits, better quality fabrics and modern finishes in men's and juniors have continued to drive sales for our Levi's brand. And our innovative advertising campaign such as Go Forth have engaged consumers in new ways.

We told you that we worked to reengage our female consumer. And we did, with the launch of our first global product for women, Levi's Curve ID. We will share more details about Levi's Curve ID as we go through the regional results. Our Dockers team worked hard to reposition the brand and return it to growth. We believe our strategies and investments to return the brand to its true heritage, men's pants, are beginning to pay off.

I'm pleased to report that we saw positive response to the new Dockers Brand Men Pants in the United States and our performance in the fourth quarter improved over last year. Our second growth strategy is to diversify and transform our (inaudible). During this year we invested in the on floor presentation for our Levi's men's and junior lines at key customers. We also expanded our wholesale customer roster to include retailers such as Nordstrom, Urban Outfitters, Men's Warehouse and J. Crew. The third growth strategy is to seek opportunities to accelerate growth throughout dedicated retail stores. Our 2009 outlet acquisition continues to deliver results. And in 2010 we opened additional outlet stores. These new outlets, as well as additions to our mainline company operated store portfolio, helped drive sales improvements.

Our fourth growth strategy is to capitalize on our global presence. In our Asia Pacific region we launched a new global brand, dENiZEN, to address the emerging middle path, consumers in growing markets, and we are pleased with the customer response to that. In addition, we have appointed global brand presidents to drive long-term brand health, increase efficiency and help create a consistent global consumer experience.

Our fifth growth strategy is to drive productivity to fund investments in our business. We continue to invest in our infrastructure including our IT systems and we are on schedule to roll out our SAP implementation in Europe in the second half of this year. Looking ahead our leadership team is committed to delivering long-term sustainable growth. This is a journey that will take several years. We are pleased by our 2010 results and we will continue to invest in 2011.

We recognize that the economic environment continues to be difficult, particularly in Europe. As such we are sill focusing on the parts we can control, but we're putting a strong foundation in place so that as consumer confidence returns we will be ready. We are also highly aware of rising cotton costs and the risk of other cost increases such as labor and energy.

As you know, cotton is a major component of our product and we face an unpredictable market in the coming years. We have taken selective price increases for 2011 but the uncertainty around the cotton markets could impact longer term pricing and supply as well as our financial results. Now Robert will provide more details about the results for the Americas.

Thanks John. 2010 was a year of positive change for our business in the Americas. I'm happy to report that our efforts to upgrade our products, engage with new consumers and drive the business forward have paid off. Our net revenues grew again this quarter. We are up 7% due to stronger performance in both our retail and wholesale channels.

Looking at the wholesale business in the Americas, we delivered another quarter of growth based on the strength of the Levi's brand supported by our continued investment in innovative product and marketing campaigns. Denim is our birth right and we are giving consumers a reason to wear it in their own modern way. In particular the men's and boy's business with the right mix of finishes and on trend skinnier fits resonated well with consumers.

The retail side of our business benefited from the outlet store acquisition in 2009 as well as the roll out of our great fitting category changing Levi's Curve ID collection for women. After conducting extensive consumer research our team designed jeans to fit different body types because not all women have the same shape. We are reengaging female consumers because they appreciate our innovative approach to shape, not size. It is more than product.

We are connecting with female consumers through unique programs that celebrate women such as our Shape What's To Come campaign with Millennial ambassadors in the United States, the United Kingdom and Japan and through social media like our friends store on Facebook. Please remember that in the United States we took a phased approach to rolling out Levi's Curve ID. Starting first in our retail stores. You will start to see a limited wholesale distribution for spring and we expect to have a full roll out in the fall.

And as John mentioned, Dockers finished the year on a good note. Our fourth quarter performance improved over last year. We worked hard to transition the brand expanding our product assortment with updated cuts such at the slim and boot, and a wider color palette including strong reds and vibrant yellows. We are starting to see positive results in our Dockers men's business even though the overall khaki category remains challenged. Across our brands we continue to work with customers to improve the in store experience.

To summarize, we are entering 2011 with good momentum. Our efforts to upgrade our products with improved fits and finishes, creating engaging advertising campaigns, and integrate our outlet stores are working. We are expanding our presence not just in our stores and wholesale channel but also through social networks to reach consumers where they are spending their time online. We will stay the course and continue focusing on creating compelling products and great brand experiences. Now, I would like to hand it back to John who will talk about our performance in Europe and Asia.

Thanks Robert. I will start out with our business in Europe, where we finished the year on a good note. Despite the challenging economic environment, fourth quarter net revenues were up 4% on a reported basis. Excluding the currency impact net revenue grew 11% over the last year. Our growth was due to the expansion of our retail network and our commitment to revitalize the wholesale channel.

In addition, we had a successful Levi's Curve ID launch. By the end of the year, Levi's Curve ID was in retail and wholesale locations from the UK to Russia and the consumer response exceeded our expectations. Dockers brand performance also improved in the quarter with growth in key markets primarily driven by our new fits, fabrics and craftsmanship. We continue to invest in our Company operated stores and franchise stores as well as the wholesale channel similar to what we have done in the United States.

Now, turning to Asia Pacific. Fourth quarter net revenues in the region increased 8% on a reported basis and 3% on a constant currency basis. Strong growth in India and China and other markets helped offset Japan's declining sales. And like Europe and the America's we saw a positive consumer response to our Levi's Curve ID products. As I mentioned at the beginning of the call we have been very pleased with the early response to dENiZEN and US Brand.

dENiZEN is an inspirational brand targeting 18 to 28-year-olds who seek high quality and fashion at affordable prices. With our franchising partners we have opened dENiZEN stores in China, Singapore and Korea and we have converted signature stores in Singapore and India supplying the brand to consumers in some of the fastest growing markets. We are still in the very early days for dENiZEN and we plan to continue with our roll out and our (inaudible) this year. Now, Blake will provide more detail on our financial performance.

Thanks, John and Robert. And good afternoon to everyone. Our results for the fourth quarter and the full year 2010 represent another year of growth. Despite continued global economic challenges impacting consumers, retailers and wholesalers around the world all three of our regions grew net revenue.

As John mentioned, our 2010 performance also reflects our investment in long-term growth platforms that we announced last year at this time. These actions impacted our operating income due to several factors. First, we continued enhancing the in store experience at our key wholesale partners and in our own retail stores.

As of the end of the year we had 470 company operated stores worldwide. 56 more than at the end of last year. These stores complement our nearly 2,000 franchise stores around the world. Second we increased our advertising and promotion spending globally to support our brands including the launch of Curve ID and dENiZEN. And third, we continue to upgrade our information systems and infrastructure including preparing for the launch of our SAP system in Europe.

We continue to maintain a very focused approach to managing invested capital and ended the year with a healthy cash balance of $270 million, flat to year end 2009. And during the second quarter of 2010, we successfully refinanced our 2013 and 2015 debt extending maturities and locking in lower interest rates and retired a portion of our 2,016 Yen Euro bonds. In reviewing our performance I will first touch on full year 2010 and then I will discuss the fourth quarter in more details.

Throughout today's call I will reference performance comparisons on a year-over-year basis unless I indicate otherwise. Total reported net revenues for 2010 were $4.4 billion, up 7%, reflecting the strength of our Levi's brand, our acquisitions in 2009, and the expansion of our dedicated store network worldwide. Our revenues were helped by favorable currency movements. On a constant currency basis revenues were up 6%. Our annual gross margin improved to 50%, reflecting increased retail sales from our company operated stores and improved product mix.

Gross profit was $2.2 billion, up 13% from 2009, reflecting our higher net revenues, improved margin and the favorable effects of currency. Total SG&A expense was $1.8 billion, a 15% increase from 2009. As we have discussed, the increase in SG&A costs associated with our additional retail stores, advertising and promotion activities and ongoing transition to a brand led organization is part of our strategic long-term growth plan. Additionally, expenses related to our pension and post retirement plan also increased.

Our higher gross profit was partially offset by the increase in SG&A expense resulting in operating income of $381 million, up 1% from 2009. Our net income for the full year was $157 million, up $5 million from 2009. As part of that net income, we recorded a charge of $17 million related to our second quarter refinancing activities. And our interest expense was $136 million, down $13 million from last year. Additionally exchange rate movements drove other income of $7 million this year compared to an expense of $39 million last year.

Our tax rate increased to 37% in 2010. You will recall two significant tax items that we discussed with you previously. The first is the ongoing consequence of inability to benefit from losses in Japan and the write-off of the deferred tax asset related to this business which we took during the second quarter. The other item was the increase to our tax provision related to the impact of the healthcare act reflecting the elimination of the tax deductibility of retiree healthcare costs. Both of these provisions were non-cash in the current year. Our tax rate for 2010 was 22%.

Now I would like to discuss the fourth quarter in more detail. Total revenues for the fourth quarter were $1.3 billion, up 7% from the fourth quarter 2009 on both reported and constant currency basis. Net income was $86 million for the quarter, up 28%. Gross profit was $647 million, up $28 million from prior year reflecting our increased net revenue. Gross margin declined slightly to 50% during the fourth quarter from 51% last year due to an increase in discounted sales partially offset by the margin benefit from our growing retail network.

Fourth quarter SG&A expense was $528 million, up 5%. SG&A increased during the quarter that were primarily driven due to our additional Company operated stores. Operating income for the quarter was $119 million, up 1% from last year. Interest expense during the quarter was consistent with prior year and other expense was down $11 million. Taxes for the fourth quarter were driven by the recognition of a discrete benefit of a $34 million associated with the planned distribution of earnings from some of our foreign subsidiaries. These factors combined with our higher operating income boosted fourth quarter net income to $86 million, a 28% improvement over 2009.

Now, I would like to turn to the balance sheet and cash flow. Operating cash flow for the year was $146 million, down from $389 million in prior year. Increased cash collections from customers was more than offset by our increase in SG&A spend as well as an increase in our inventory build. As compared to last year our higher inventory in 2010 reflects both the lower 2009 inventory levels we previously discussed with you as well as our current expectations for ongoing business improvements. We continue to focus on maintaining an appropriate level of core replenishment product to meet customer needs.

Capital expenditures were $155 million for the full year 2010, up from $83 million last year. Consisting of our SAP implementation in Europe, our Company operated store expansion and our headquarters remodeling. I'm pleased to report that we have finished our headquarters remodel on time and on budget and it now includes a beautiful retail store for the first time. Our liquidity position remains strong at the end of 2010. We ended the year with total cash of $270 million, and we had $369 million available under our credit facility. Net debt was $1.59 billion.

I would now like to add to the points John made about our ongoing initiatives and the impact they will have on the 2011 results. We will continue to (inaudible) in the upcoming year. And the impact of these investments will be reflected in our revenue, operating margin and capital expenditures in 2011. Our gross margin will continue to benefit from anticipated higher retail sales and we expect our gross margin percentages will remain in the range of the high 40s to the low 50s.

We expect that the increased price of cotton will begin to work its way into our costs and we have already begun to take price increases where necessary to protect margin and mitigate the impact of these higher costs. However, further increase in cotton prices could negatively impact our margins and working capital, especially later in the year.

Below gross profit higher A and P expenses will continue as will our spending on fixtures, supporting new products, and enhancing the in store experience both at our wholesale customers at well as our own retail Locations. We will continue to expand our retail presence around the world through franchisee and Company operated stores and the addition of Company operated stores will continue to drive higher selling expenses in the future. Capital expenditures will be approximately $140 million, associated with our SAP implementation in Europe. Scheduled to go live in the second half of the year as well as our continued retail buildout.

Additionally, as you know from our 2009 Form 10-K, we will likely be required to make significant funding contributions to our pension plans this year due to the value of plan assets relative to obligations. This funding will occur between now and the end of our fiscal 2011 third quarter And at the end of fiscal 2010 the estimate of the amount was approximately $135 million. As a reminder, the funding amount is determined when we test our US pension plans in June. And any fluctuation in the variables that drive the funding calculation will impact this year's funding amount.

For example, holding all other variables constant, the amount would be reduced by an upward movement in interest rates. And as you know, interest rates have moved up since our fiscal year end. We are also looking at variables that we can control such as exploring alternative methods available to us for measuring our pension liabilities and assets. These alternatives could provide opportunities to significantly lower the funding required amount. We will keep you updated via our quarterly filings and earnings calls.

We are comfortable that our ongoing investments and pension funding requirements can be covered by our current liquidity and cash flow. In the first quarter of 2011 we paid a dividend of $20 million consistent with 2010. To summarize, we continue to be in a strong liquidity position and are delivering on our commitments to invest behind strategic initiatives that we believe will deliver long term growth. And these actions will continue to put [near term] pressure on our bottom line.

Now we will take your questions.

Thank you. (Operator Instructions). Your first question comes from the line of Carla Casella with JPMorgan .

Question, on the payment basket can you give us how much it was after paying the dividends?

Hi, Carla. It's Blake. The restricted payment basket has not actually changed. The baskets as you remember are based on 50% of cumulative net income beginning with the first quarter of fiscal 2005 and gets adjusted over time for various items. Following the dividend paid in 2010, that was the dividend in the second quarter of 2010, the basket was roughly $500 million. The payment that was made in December 2010 for our 2011 dividend did not impact the basket and is still roughly $500 million.

Okay. Great. And then can you talk a little bit more about dENiZEN. What is the timing of the roll out there? How much of it was fourth quarter and is there a timing, I guess a seasonality to the roll out of it?

Hi, Carla, it's John here. Yes, we launched in the fourth quarter predominantly in China. It's very early yet. We have got 50 doors open at this stage so we are just evaluating the success and as I mentioned we have also transitioned some stores in India and Singapore. But many are early indications, but very, very early. We are only a couple of months into this journey.

Okay. And that is all wholesale business that you are selling, correct?

Yes, it is.

Okay.

We have some franchise stores but it is predominantly a wholesale business.

Okay. And then one question. The voting trust for the family expires April 15, 2011. What does that mean? Is there a trigger, is there something that could happen that date? How should we look at that?

Yes, so, and we have disclosed all of this in the 10-K for those who aren't familiar with the voting trust. But as Carla mentioned it is scheduled to expire in April. That means that the voting powers currently held by the voting trustees will shift to the hands of all of the stock holders who will be able to engage in a voting procedure directly on voting matters. This will not in any way change what we do as a business nor does it impact management decisions or options available for us to run the business. And I think typically the question that always flows on after that is does that mean you are any closer to an IPO and the answer is the expiration of the voting trust does not change our goals or act as a trigger event in any way for capital raising.

Could they come back and just, and re-establish, on April 15, re-establish this as it is now where the trustees hold the power?

They certainly could but I'm not going to speculate as to what the shareholders may or may not do.

Okay. I'll get back in queue if I have more questions. Thanks a lot.

Great, thanks.

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

Good afternoon. Thanks for taking the questions.

Hey, Grant.

My first question, I appreciate that you guys gave a little bit of color on the increase in inventory and kind of a cotton price. Can you give us maybe a little bit more as to when and what the magnitude of the price increase was. And whenever you talked about if cotton prices go higher than they currently are that could be an issue. Are you talking about today's price or kind of where you're hedged?

Let's talk about future cotton prices. We're pretty much covered for the first half of the year. And we've taken some price increases accordingly, but I'll remind you, we don't get retail prices. So we pass that on. Where we are still now looking at he cotton market as to see what the prices will be in the second half of the year, which will impact more 2012 than 2011. So it's, we are just paying very close attention to what's at the marketplace but clearly it is a focus of our attention.

And Grant as a reminder we actually don't hedge cotton, we buy finished product from our third party manufacturers. Those manufacturers are buying denim from denim manufacturers who are essentially buying raw cotton. So we're three steps or two steps removed from the actual purchase of cotton and the ability to hedge that. And so our real controls are essentially through pricing as well as cost controls that run through our supply chain that we manage which is primarily the third party manufacturers.

Okay. So I guess to repeat, you purchase, or you have in place agreements to purchase for the first half of this year.

We are covered through at least the first half of this year, that's right.

Okay. And then as you talk to your suppliers about the second half, it sounds like there is still a bit of uncertainty as to where prices are going to be. Have you gotten any insight into that?

We have not. It's a moving target at the moment.

Okay. As you think about demand elasticity with your customer base, do you feel like you are going to have much of an issue there passing along price increases? Ultimately it's at the retail level but.

It's just to early to judge. All of this is just taking place as we speak so we'll have a better feel when we talk to you at the next call.

Okay. My last question. Whenever I look at SG&A expenses, correct me if I am wrong, if this is the right way to look at it, but it looks like last year in the fourth quarter in the year there was like a $17 million impairment charge in SG&A so if you back that out it looks like SG&A dollars are up a bit more in fourth quarter of this year. Is that correct?

That is correct. Primarily driven by the continued buildout of our owned and operated retail network.

Okay. So that is largely related there. Okay. And then maybe one more on the European gross margins it looks like they are, in the European operating margins, it looks like they got hurt more than the others in Q4. What was the driver behind that?

I think it is still the European economy. If you look at particularly the southern markets, Italy, Spain, that have been in the press relative to their general economic views and outlooks the consumers just resisted buying and thus higher discounting in some of those markets to drive revenue.

All right. Well, thank you very much.

The next question comes from the line of William Reuter with Bank of America.

Good afternoon, guys.

Hi.

I don't want to harp on cotton too much, but you guys did note that you are looking forward in 2011 to some higher gross margins due to mix more retail relative to your wholesale business. I'm wondering whether you think that this mix shift can offset the higher cotton prices or if the cotton prices will probably have a greater impact?

William, it just depends what those prices go in the second half the year and that is why I think we highlighted the uncertainty we had. So it's a tough (inaudible). Until we figure out what the impact of cotton is we won't know for another few months yet.

When you said you are covered through the first half of the year, does that mean you have made those purchases or does that mean you have made those purchases and passed along price increases that would cover any increase that you saw?

We've made the purchases and we passed on a combination of product mix and price increases that we feel comfortable will probably balance out subject to consumer response because those prices are, the consumer hasn't had a chance to respond to those yet.

Okay. And the you note for the pension fund contribution that it is going to be determined in June. When will that payment be made and I guess is it made all at one time?

So the test falls in June and then we have essentially June, July, August to fund any shortfalls. So we may choose to fund some of it before the test as a regular process which we have done in the past. And/or fund all of it between the June and the end of August time frame.

Okay. And then just one last one from me. Given than you guys, it sounds like have communicated some price increases, I was wondering whether you saw your retail customers trying to purchase ahead of that increase their volumes and if so how you responded to that?

No, we have not seen our customers purchase ahead.

Okay. I'll leave it at that. Thank you.

Thanks.

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

Good afternoon. In terms of the discounting that we saw here in the fourth quarter, was that kind of in response to the competitive environment or was that an over inventory supply? What was driving that?

Yeah, this is Robert. In terms of how we, and I have mentioned this a number of times in the past calls, how we manage our inventory situation is very much in real time. We are trying to constantly balance keeping our (inaudible) to buy fresh and dedicated to first quality goods that we want to ship to our customer base and into our own stores. But at the same time manage any liabilities we have on our in books as well as with our customers to push through any excess inventory, especially during a high volume period like holiday.

So there was a combination of things going on. We were slightly higher given the slower third quarter that we mentioned in the last call than we wanted to be coming into the fourth quarter. We looked at our inventory very carefully in our own stores and with our customers in the fourth quarter. As you know the holiday sales period proved pretty unpredictable. And as a result we were just moving our inventory as we thought best in real time week by week. That did result in a slightly higher level of discounting than we had hoped for but we are feeling good about where our channel inventories are now as well as the inventories that we are going to be moving forward with.

Okay. I was pleasantly surprised by the European performance recognizing that the southern Europe is weak. What were, if we could get a little more color on it, what were some of the drivers of the strength in that market?

Well, remember, we launched our Levi's Curve ID for women and we had a tremendous response to that. We found that drove a lot of new customers into our stores and we were able to sell additional product to them. That was our big marketing push as we shared with you before in the fourth quarter and certainly resonated well with customers.

And from geographic standpoint we are continuing to see strength in the Benelux countries, France, Germany and weaknesses in the UK, as I mentioned earlier, Spain and Italy. Pretty consistent with general economic views that you are seeing around Europe and our view is that that is going to continue for the next 12 to 18 months as the economy starts to strengthen there.

Okay. And then the kind of challenges that we faced in Japan. I mean I know it has been a topic on multiple calls and where do we stand and what are our expectations in terms of turning that market around?

Well, we have put a new leadership team in place in Japan. We have got we think more realistic plans there. We were probably a little too aggressive on our expectations in Japan in the past. We think the worst is probably behind us. And now it is just stabilizing and just getting this new team in place.

Okay. And just lastly on the inventory just so I'm clear here. You mentioned that you are comfortable with your retail inventory but in your overall inventory you are up significantly year-over-year. Are you, do you feel that your positioned going forward here where you want to be on inventory?

I think that we are. A couple of things to remember. First and foremost is 2009 was a dramatically lower inventory year for us. Just to give you the facts here. 2008 we finished with $543 million in inventory. 2009, $451 million. 2010, $579 million. So essentially we have come back up to the 2008 levels.

And remember, business went from roughly $4.1 billion in 2009 to $4.4 billion in 2010. So when you layer on business growth, low inventory levels in 2009, we feel we are back to a reasonable inventory level. And then when you add on top of that expansion of our retail store network, new business roll out in the form of dENiZEN and new product roll out in the form of Curve ID, all of that plus the cotton risks associated with future costs going up we feel the current inventory position to be exactly where we want it to be.

Thank you very much. That was very helpful. Appreciate it.

(Operator Instructions). Your next question comes from the line of Jeff Kobylarz with Stone Harbor Investments.

Good afternoon. Just curious about a couple things. Can you say about the price increase you mentioned. When did you seek to get that price increase?

For our spring deliveries which is starting on the floor at the moment.

Great. And can you say, did your peers also seek this similar kind of price increase?

You know I don't know. We'll have to go out and have a look.

Okay. And about your owned and operated stores can you say how they performed in the fourth quarter? Do any count positive? Any general color there.

Jeff as you know, we don't break out store comps but we are very pleased with the overall retail around the world and extremely pleased with the outlet stores here in the United States which are doing well beyond what our original expectations were. So in general great comps. Robert may have more to add to that.

Yes, I think as I think we consistently say we are performing in our mainline doors at expectation consistent with how the category has performed but outlets have been accelerating since acquisition. I think most importantly there we have taken a very paced cadence to upgrading the highest volume most profitable stores and we're moving through the network kind of quarter by quarter, so we are feeling really good about the momentum we have on that business moving forward.

Okay. Thanks. And then just you mentioned Robert, the category. Can you say just how the category did overall in 2010?

Well, I mean I think you saw how all of our competitive vertical competitors performed, so we felt comfortable with our performance in our mainline stores relative to the vertical competition. It was a volatile year as we said I think every quarter with fairly unpredictable traffic patterns. We, like everyone else, were impacted by lower traffic rates but we really focused on better product, better service and really focused on trying to convert sales, the people walking through the doors. We were pleased with our performance and we will continue to focus on conversion in particular.

Okay. Then lastly about the ERP system. Can you say, have you put through any changes yet to just how you operate your supply chain or are those all coming in the next quarters?

Well, we won't go live until the third quarter and then we have to sort of let down which usually takes two or three months. Any of the benefits of that you won't start to see until 2012 onwards.

All right, thank you.

Thanks.

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

Good afternoon. It's Mike Perez on behalf of Emily. It looks like the bulk of your inventory increases came in the form of finished goods. Is there anyway that you can quantify how much of that is new product you are rolling out versus how much that increase is just increased replenishment of higher velocity goods?

It is a combination of what we would call relevant product and as Blake said we feel comfortable. We have got the right inventory levels and the right product. I don't think you need to break it down any more than that. We are just very comfortable with the mix we have got.

Okay, thanks.

Our next question comes from the line of Phyllis Camara with Pax World Funds.

You talked a little bit about Dockers. I know you mentioned that you were pleased with the Dockers, that you saw some improvement for this year. Can you say anything more about it?

Sure. As we mentioned over the past couple of quarters, we have been spending a lot of time and effort investing behind Dockers to bring the right fits and finishes to the market. We have supported the brand with the Wear the Pants innovative marketing campaign. It has taken time to work through the new products to our customers' inventory and to upgrade our on floor displays particularly in the environment we faced during the past year which as John and Blake have both mentioned was pretty volatile.

So we believe the combination of just much better product as well as really strong marketing execution and an improved on floor display is beginning to demonstrate performance. We are pleased in sales performance particularly in men's long bottoms that were demonstrated in the fourth quarter.

Have you lost any doors over the course of the last few years?

We have been focusing as John has mentioned in the past number of calls on revitalizing our business particularly in men's long bottom within the United States so that is where our focus has been and relative to our US wholesale business we have not lost customers. If anything, we are beginning to engage, as we've mentioned, in the expansion of our distribution on the Dockers side of the discussion. Similar to the approach we have been taking on Levi's over the past couple of years. Looking at elevating our distribution and department and specialty stores and expanding our shelf space at existing customers with our new fit platform and some of the more innovative product that we are putting out with the brand.

Can you break out how much of your business is Dockers?

Yes, it is in the 10-K.

Okay

So we separate out, actually right up front of the 10-K on page four we go through each of the brands. And Dockers brand accounted for approximately 15% of our total net sales in 2010. We also show the 2009 and 2008 splits. And Dockers are sold around the world but the predominant amount of sales are in the Americas region and then in Europe.

Okay, here it is, thank you. And one last question, too, about the dividend. You paid it early this year. I assume that we won't see that any more of that for the rest of the year or --

We don't maintain an annual dividend policy so we will continue to review our ability to pay dividends annually and they may be declared at the discretion of our board of directors depending on factors around our financial condition, compliance with our debt agreements and tax impacts for our dividend recipients. And that was the reason we chose to pay the 2011 dividend early was to potentially get ahead of a tax law change. And we like to stay with a consistent dividend policy that is pay on an annual basis and a normal time frame this year was early purely because of the tax issue.

Thanks so much.

Thank you.

Your final question comes from the line of Ginny [Hume] with Pimco.

HI. Just to follow-up on the dividend. You are saying you could pay another dividend in 2011 even though you just paid the 2011 one in 2010? Is that what you are saying?

We are saying that we don't have a dividend policy. Our intention is to pay a consistent dividend and thus to pay it on an annual basis. The 2011 dividend was effectively paid in December of 2010 which really falls into the first month of our Q1 or our full fiscal year.

We chose to do it early because the potential tax law change. Obviously the tax law didn't change but it takes time to let the dividend payment roll through the system so we chose to do that in case the tax law did indeed change. It is our intention that that is the 2011 dividend. But I will state that because we don't have a dividend policy it is up to the board of directors to choose if there is a future dividend paid.

Okay. I see. Then just the last question from me is can you remind me why Japan is so weak? Is it just the economy there or is it just your strategy has changed? Can you explain what is going on there again?

It is a combination of a number of things. As you know, that economy has struggled for a number of years. They also a huge amount of unemployment that's associated with that, and that is hitting our target group of between 18 to 35 year olds. The total denim category in Japan has declined by 40% over the last few years and that has been the fundamental challenge for us within Japan.

What are they purchasing if they are not purchasing jeans?

I don't think they are purchasing much of anything else at all. I think that has been exactly the situation in Japan. As you know, they are traditionally high sellers. Population declined. Category shrinkage. I think people are just reacting with a lot of caution to an economy that has been struggling for a number of years.

Got it, okay. Thank you.

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

To summarize, this was a good year for the Company and other strategies are working. We delivered top line growth followed through on our plans to invest in our business and refinanced our debt. The strength of the Levis brand is winning consumers around the world. We committed to driving long-term sustainable growth and we will continue to invest behind our strategies. Thank you for joining us and we look forward to talking with you again next quarter.

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