Levi Strauss & Co (LEVI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. second-quarter 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 call is also being recorded and may not be produced in whole or in part without written permission from the Company. A telephone replay will be available through July 18, 2011 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 78749254 followed by the pound key.

This conference call is also being broadcast over the Internet and a replay of this webcast will be accessible for one month on the Company's website levistrauss.com. I would now like to turn the conference over to Kris Marubio, Director of Corporate Affairs at Levi Strauss & Co.

Good afternoon and welcome to our conference call. I'm pleased to introduce members of the Levi Strauss & Co. management team. With us here today are John Anderson, our President and CEO; Robert Hanson, President, Levi's Global Brand; 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. Thanks for joining us today. We're here to discuss our second-quarter performance but before we get started, I would like to say a few words about the leadership transition we announced last month.

After 32 years with the Company, I am retiring and handing the reins over to Chip Bergh on September 1. Levi Strauss & Co. has made solid progress during my time at the helm and we have established good momentum in the marketplace.

I'm happy with the pace of growth and expansion we have achieved. During my remaining tenure, I'm committed to working closely with our leaders as we continue executing against our strategies for long-term growth. With that said, let's turn to our business results and initiatives.

We're pleased to report that the second quarter net revenues and net income improved over the prior year. Net revenues were up 12% on a reported basis with sales growth in each of our geographic regions. Net income increased to $21 million from the $14 million loss in the second quarter of last year.

Our topline improvement demonstrates that our global strategies are working. Around the world, the Levi's brand is performing well as consumers are responding to our focus on craftsmanship and compelling products.

The khaki category remains a challenge and the US Dockers business has slowed down. However, outside outside the United States, our Dockers business is doing well.

We have a new global head of the Dockers brand, Anne Rohosy with more than 20 years of US and international apparel experience and has strong expertise in brand management, sales, consumer line growth strategies and strategic distribution. And she knows our customer base well, having led our Levi's commercial operations in the Americas.

The global rollout of our newest brand, Denizen, is on track. This aspirational brand is gaining consumer attention in Asia with its great fitting affordable jeans and we've been pleased with the results to date.

Nearly one year in, we have more than 250 franchise stores open in China, India, Singapore and South Korea and we're looking forward to the launch this month in Target stores across the United States as well as other retail locations in Mexico. Turning to our retail business, our network of branded retail stores continued to perform well in the second quarter, delivering sales and growing on a comparable store basis.

We continue to invest behind our retail network. With that, I would like to turn it over to Robert Hanson, Global President of the Levi's brand. Robert will provide details on the second-quarter results for the Americas.

Thanks, John, and good afternoon, everybody. The Americas delivered topline growth in the second quarter with net revenues up 7% on both a reported and constant currency basis.

The region's increased sales were primarily driven by the Levi's brand in both our retail stores and the wholesale channel through a combination of higher unit volume and price increases. We believe our strategy to take price increases earlier this year on select men's Levi's products was the right course of action and as we said on our last call, we will extend price increases across additional product lines for the fall.

I would like to share a few highlights from the quarter. We engaged women with a highly effective and integrated marketing campaign for our Levi's Curve ID collection.

Our marketing mix included print ads and foldouts displaying the range of different fits, a digital component targeted toward women where they are spending their time online and the consumer engagement events allowing for hands-on experience of the product line. In our Company-operated stores, we focused on service, in particular training our store associates on our Levi's Curve ID fit system.

We expanded our Water(Less jeans for men and women by adding new styles and seasonally focused fabrics and washes. In partnership with water.org we supported the product line with an interactive water tank game on Facebook that drove our focus on sustainability and more specifically provided fresh drinking water to communities in need across the globe.

We enhanced men's jeans with on-trend slim and tapered styles and announced the Levi's Commuter series offering innovative jeans and jackets with details such as reflective salvage stitching for consumers who bike. We entered the back half of the year with good momentum.

This fall we're launching the Levi's brand's first global marketing campaign and we will continue to put consumers at the center of our thinking and focus on creating a consistent global experience for them. The Dockers brand saw a decrease in revenue in the quarter.

We're committed to our strategy of revitalizing the category and offering khakis with modern fits and washes such as launching our Alpha khaki this fall while also highlighting core products for traditional consumers. We are also committed to bringing high-quality jeanswear to value shoppers and this summer Wal-Mart will expand its Signature offering by adding men's and kids to the women's line in time for back-to-school shopping.

We're excited about Denizen coming to the United States and Mexico. Denizen offers fit and fashion for the entire family.

The brand is available exclusively at Target in the United States and began rolling out this week. We believe Denizen's affordable fashion is going to resonate well with consumers. Now back to John to review the results for Europe and Asia.

Thanks Robert. Turning to Europe, our second-quarter net revenues were up 17% on a reported basis and 9% on a cost and currency basis.

Revenue growth was driven by expansion in our retail stores as well as higher sales from our wholesale business including the success of our Levi's Curve ID collection.

With its enhanced product offering, slim fits and fresh colors, the Dockers brand also grew in the quarter. During the second quarter we began rolling out our Levi's Water(Less collection in Europe with a successful launch in London. Men and women have appreciated the rich washes we have created using up to 96% less water.

While we expect several of our key markets in Europe will be challenging for the rest of the year, we remain confident in the progress we're making with our European business. We will continue to focus on delivering relevant new products and innovation into the market.

Now turning to Asia Pacific, our second-quarter net revenues were up 19% on a reported basis and 12% on a constant currency basis. The region's strong performance was particularly seen in the emerging markets of China and India where we continue to expand our brand dedicated retail network.

While Levi's is the predominant brand in the region, our Dockers business grew during the quarter. Additionally we were pleased with Denizen's performance.

The new brand's reach is growing including its national rollout across India. With our franchisee partners, we transitioned Signature stores into Denizen stores and opened a beautiful new flagship store in Mumbai.

Now I would like to turn it over to our CFO Blake Jorgensen for a more detailed review of our financial performance.

Thanks, John and Robert; and good afternoon, everyone. Throughout today's call, I will reference performance comparisons on a year-over-year basis unless I indicate otherwise.

Total net revenues for the quarter were $1.1 billion, up 12% on a reported basis and 8% on a constant currency basis. Revenues grew in each of our regions primarily in the Levi's brand including the performance and expansion of our dedicated store network, the success of our new women's products and higher wholesale revenues.

Higher net revenues also reflect the selected price increases we took late in the first quarter of 2011 in response to rising cotton costs. We believe it is still too early to predict what consumer reactions will be as this extends into the marketplace and it could impact our volumes as we move through the remainder of the year.

Second-quarter gross profit was $541 million, up $42 million from prior year, reflecting our higher net revenues partially offset by a decline in gross margin. Margin remained in our expected range but was 49% as compared to 51% last year due to the higher cost of cotton and ongoing increased discounted sales to manage inventory. The higher cost of cotton will continue to negatively impact our margins and working capital as we move through the remainder of 2011.

Due to our sourcing leadtimes, the effect of recent declines in cotton prices on our gross margin would not show up in our results until the second half of fiscal 2012. First-quarter SG&A expense was $476 million, up 11%, in line with our revenue growth and primarily due to our additional Company-operated stores. We continue to invest heavily in our advertising and promotional activities including campaigns for our Levi's, Dockers and Denizen brands while maintaining our focus on managing our other operating expenses.

Operating income for the quarter was $65 million, down from $69 million last year. Our operating margin was 6%, a decline from last year's operating margin of 7% due to our lower gross margin.

Below operating income, interest expense was consistent with prior year and we returned to a more normalized tax rate yielding net income of $21 million for the second quarter of 2011. This compares to the net loss of $14 million we reported last year which included two significant tax charges and the charge associated with our debt refinancing.

Now I will turn to cash flow and the balance sheet. Operating cash flow for the first half of 2011 was $85 million, a decline of $61 million as compared to last year driven by our investments in inventory, an increase in pension funding and our higher expenses. Inventory increased during the second quarter of 2011 reflecting both the higher cost of cotton and an increase in product consistent with our expectations for business growth.

We're monitoring this area of invested capital closely as we move into the fall season. And based on the June test of our US pension plans, we now expect the total 2011 pension contribution will be $70 million, the majority of which we have already funded.

Year-to-date capital expenditures of $76 million reflected our ongoing retail expansion as well as our investment in SAP which went live in Europe earlier this week. We're still in the early stages of deployment and everything is going as planned.

In anticipation, we've provided advanced shipments in June to wholesale customers in Europe and our retail stores as well to ensure business continuity during the system implementation. We ended the quarter with total cash of $258 million and we had $295 million available under our credit facility. Net debt remained at $1.6 billion.

To summarize, we continue to make progress on our strategic initiatives to deliver long-term growth and the results thus far in 2011 have been positive. We are comfortable that our ongoing investments can be covered by our current liquidity and cash flow.

However we remain cautious as the impact of higher cost in the supply chain and our pricing strategies have not yet been fully absorbed by the market which may lead to volatility in our operating results. With that, we will now take your questions.

(Operator Instructions) William Reuter, B of A Merrill Lynch.

In terms of the 8% increase in sales in the quarter, can you tell us what percentage of that was due to price increases relative to an increase in units?

Yeah, we're not breaking out the difference between the two, but obviously price helped us particularly here in the US. Internationally we did not move prices quite as much as we did here in the US, and so more of the input obviously was from unit growth.

But you've got really three mixes to remember. First is price, second is units and third is mix itself. And we're continuing to benefit from a better or more profitable mix over time through our own retail stores as well as through some of the higher priced channels in our wholesale customer base.

Okay. I don't know if you might be willing to comment at all, this is kind of the same question asked a different way, but in terms of your current inventory, can you break out at all what percentage of that increase would be due to price or maybe which one was bigger whether it was more price or units?

So I would assume that greater than 50% of the increase in finished goods inventory -- and if you look at the balance sheet from year-end, that's about $55 million total increase in finished goods inventory. About half of that is due to the average unit value increase.

The other parts of the increase remember are driven obviously by units, but some of the units are due to our rollout of the Denizen product in Target here in the US, so building inventory for that. Some of it is driven by building inventory for the Signature expansion of product in Wal-Mart and then the last is simply to support the overall growth of the business. I think because we are seeing year-over-year growth now two years in a row, we're continuing to see inventory move up just to support that overall growth in the business.

Okay and then just one last one for me. Can you remind us with the Target rollout of Denizen, I see that those products are now on your website, when that launched and whether it was launched in all Target stores so far?

Our launch took place last week. If you go into Target stores today, you will find men's, women's, boys and girls products in the stores. So just starting to roll out this week. I was in some of the stores yesterday, the product looks good.

Okay. It should be in pretty much all of them at this point?

I would give it another week or so to get fully established, but it's certainly by the end of next week, it should be in all of the stores.

That is all for me. Thank you.

Karru Martinson, Deutsche Bank.

Good afternoon. Just to follow up a little bit on Denizen and the Target launch, was any of the sell-in for that brand here in the quarter? And if so, about how much?

The sell-in was during the quarter but it is not a significant number yet in terms of the [broader mix]. It's just to get some product on the floor.

Okay. And when you guys talked about gross margin last quarter, you kind of laid out an expected range, kind of high 40s, low 50s. Is that still kind of your view for the year?

Yes, I think that is. We're at 49.5 today down from 51.1 this time last year.

And I think we have always said high 40s to low 50s. I think we're very comfortable with that going forward.

That being said, we haven't seen the full impact of the apparel prices on the consumer in general as well as the full impact of some of our price increases on the consumer. And when you combine them with some of the continued pressure with the consumer on general products, food, gas, commodities that they are experiencing and no job growth, we're still cautious here in the US.

Internationally less so, but clearly here in the US. But I do think our target is going to continue to stay in the same range and we're going to continually try to be aggressive at managing both the inventory side of that equation as well as the margin side of that equation.

Okay. And if I remember correctly, Signature was not a huge brand for you guys here in the US. How much larger is that or how do you guys look at that at Wal-Mart as you expand into men's and kids? What is that opportunity for you?

Well, we think it is a good opportunity but it is with Wal-Mart and it is in the US only. So, certainly having the full product offering out in the store we think we will give us a stronger consumer proposition. But it's still not going to be a significant part of the business but it is clearly an area of growth and opportunity.

Okay, and just housekeeping for last, what is the rent expense right now for your store base if you were to annualize that?

So, we don't break that out, Bill. You can see some of that if you are looking at the balance sheet. But we don't break it out directly for all the stores.

But we can follow up with you in a little more detail if you want on how to make sure you see that. Did I say Bill? I meant Karru, sorry.

That's quite all right. Not a problem at all. And thank you, John, for your leadership over the years.

Thank you.

Colleen Burns, Oppenheimer.

I guess first just to clarify on the inventory increase, did I hear you correctly that 50% of that increase is kind of value and the other 50 was other factors (multiple speakers)

That's correct. So value simply in the unit value going up due to the price increase in cotton and then the other you can assume is unit increase.

Right, okay and then just on Dockers, I think you said that internationally you actually saw Dockers sales increase. Is that correct (multiple speakers) the US you saw some weakness there?

That is correct.

And what do you think -- do you think it's the overall category still in the US? I know you saw a little bit of growth in the first quarter there. Kind of can you talk about how you are planning that business in the back half?

Yes, Colleen, you are right. We did see some positive momentum in the first half or the first quarter. It dropped off again and then more recently just in June it's picked up again.

So I think we would say it remains volatile and there's not a lot of positive momentum happening for the total category. As we mentioned, we're putting a lot of innovation out there. We are gaining new distribution, better colors, better fits; the new Alpha launch coming up later in the year. It's just something we're watching closely.

I think you should expect to see volatility in the category and in the underlying Dockers business. Some of that is driven by individual wholesale partners when they either have strong or weak months or quarters, and some of it is driven by product availability inside some of those wholesale customers.

So we've been trying to manage the right mix of the traditional product; stain-free, wrinkle-free, loser fits with the newer product, tighter fits or slimmer fits, colors and so forth and trying to get that balance right by wholesale customers, been a continued challenge. And so you'll see some of that creating some volatility going forward. But as John said, our focus is to remain on investing in the category and to try to grow the category and really grow the Dockers brand with that.

And as you mentioned, we're pleased with our business outside of the US. It is performing well.

And then just what have you seen recently with your wholesale customers? Have you started to see more cautious buying patterns or is it just continuing the trend?

I think if you look at the Levi's brand, obviously as we mentioned in the last call, coming into the year, our wholesale customers worldwide were very cautious because of the inflationary environment we're facing on cotton. And as a result, we're very cautious with our open to buy commitments.

I think they remain cautious. As we have said in the past, our intent is to fulfill to consumer demand. And as Blake said in his comments, I think it is too early to call the impact of cotton economics on consumer demand.

So we're responding in real time. As we mentioned, the Levi's brand grew globally across all three regions. We're pleased with the performance. We're watching it quite closely.

We plan our business customer by customer, week by week, month by month. And we're in the position to be able to respond to consumer demand but at the same time to be able to manage our inventories to a responsible level moving forward. That is our focus and that is how we're going to execute the plan for the balance of the year.

Great. Thanks for the color.

Emily Shanks, Barclays Capital.

I had a follow-up around some of your opening comments around the hit to gross profit margin. I was hoping you could give us a sense of what the year-over-year contraction -- it looks like FX is pretty much the same in the quarters. What the year-over-year hit was specific to cotton in gross margin?

So it is hard to give you good year-over-year exact data but what I would remind you is that much of the product that we saw coming into the first part of the year was lower-priced cotton and now that cotton price is starting to move up. Obviously we work anywhere between six and 18 months in advance of a cycle and so you are starting to see the impact of cotton come into the second quarter from last year and you will continue to see that through the back half of this year and into the first half of next year.

So the gross margin, you are really getting two components there. One component is the pure impact of the cotton prices and how they -- how we have been able to put through price increases to match all that. As Robert mentioned and I think I mentioned, we put price increases in through on our men's product, and so we captured some of that, but not obviously all.

But since we have a substantial amount of women's and teens and kids product as well. The other piece of the puzzle is that we are trying to maintain healthy levels of inventory to support our growth but also keep our inventory under control, no different than our key wholesale customers are.

So some discounting is going on to try to keep inventory moving and keep the clean levels of inventory in our own warehouses as well as within our customer base. And so both of those are impacting gross margin during the timeframe and the reason you are seeing it come off of the high of this time last year.

Okay, so is there any way to give us directionally which one is contributing to a larger hit to gross margin?

Cotton but it's less precise only because of the product mix nature to be able to split out exactly how that impact at the product level is more difficult. But clearly seeing cotten prices go from a low of $0.50 a pound last summer to a high of $2.20 to $2.30 a pound by end of the year. You're clearly seeing much of that filter through the gross margin in the quarter and you will see that also in the back half of the year.

Okay, that's very helpful. Thank you for the detail.

And just my follow-up question would be and I know you've been asked this a couple of times around the inventories, as I look at the year-over-year growth in finished goods of 41-ish percent based off the answers in the prior questioners, is it fair to say literally 20% of that growth is from unit growth?

Yeah, so year-over-year or year-end inventory over current is up about $58 million.

Right.

Or 10% -- the numbers I have in front of me. I don't have the year-over-year numbers in front of me, I apologize. But about half of that is due to cotton price increases, so the math probably works pretty close to what you've got on the year-over-year numbers.

Okay.

And a little bit complicated because we didn't see cotton price increases in the second or third quarter of last year. They really didn't come into the market until the fourth quarter of last year, so I'd caution you a little bit on those numbers based on the timing differences.

Okay. Around the growth that is attributable to unit growth, you, just to summarize, are comfortable that that's simply to meet your expansion whether it be retail or more some of the new lines that you are launching?

Definitely.

Thanks and good luck.

(inaudible) Sterne Agee.

With regards to the price increases that you're looking to institute in the second half, are you still negotiating these increases or have you already implemented these price increases?

No, we've as we said, we did take some select price increases on our men's products on the Levi's brand earlier in the year and we are taking select price increases on our women's and our kids products. We have already begun the implementation of those and are tracking the impact to consumer demand as we speak. So those have been fully negotiated and are in the process of being implemented.

And sorry, are you expecting any further price increases for the second half that you are you going to negotiate or is that already done?

Not -- on the Levi's brand, we have implemented the pricing strategy that we're going to deploy for the balance of big year.

That applies to the Dockers, Signature and Denizen brands as well.

Can you just give us an idea or quantify what type of price increases you're seeing on Levi's versus say Dockers?

You know in the end, our wholesale customers obviously determine their own pricing strategies and on-floor pricing. We don't disclose our pricing, wholesale pricing or average selling prices on our products.

But generally speaking, we expect pricing to reflect the impact of cotton economics as well as the fact that we're actually upgrading our products in terms of style, innovation and technical features. The increased price of cotton is having an effect on prices, but as Blake has noted a number of times, it's pretty complicated.

There's a number of factors that have impacted pricing. They all have haven't hit at one time and we have said before and we reiterate here, our response to the current economic environment with cotton was to make sure that we're building the best value we possibly can in our products by innovating both in terms of fit, style, wash and technical features. That combined with the impact of cotton economics is what has driven the price increases on Levi's.

Okay, and when you look at your cotton exposure for the second quarter, can you just give us an idea of what it was? Was it at $1.30, $1.40, $1.80 during the second quarter? And I assume it's just the ramp up from there for the second half?

Yes. It is too hard for us to quantify exactly what the exposure was. It was most likely higher than the number that you are talking about but in that range.

And obviously you will see for us and everybody else in the industry, exposure in the back half of big year that is greater particularly if we were putting product into factories in the late part of the 2010 timeframe when cotton prices were at an all-time high.

And I'm not sure this is going to impact you, but when you look at your back-to-school order book, on a unit basis, can you quantify how much orders are up year over year or is it still too early?

Yeah, the -- Like we said, we're pleased with the Levi's brand performance globally and we are seeing our orders up against our planned expectations. We tend not to provide forward-looking commentary, so I will leave it at that.

But we're positive about our ability to implement our plan for the balance of the year and as I mentioned earlier, we're focused on implementing our plan week by week, month by month right now because we're just getting the full impact of the pricing increases across all consumer segments and we need to track it carefully and respond to consumer demand.

Sorry, last question; with one of the I guess areas of concern earlier this year was basically supply disruption with the increase in cotton pricing, have you seen any abatement on that side or is that still a big concern for the second half?

For us, we feel very good. We made a commitment that we would not run out of product with supporting our key customers. We watch that closely but we believe we have sufficient inventories to respond to consumer demand.

Thank you.

Carla Casella, JPMorgan

On the Curve ID side, where did you say you stand in terms of that worldwide? Is there still a lot of opportunity to add that to new doors or is it pretty well rolled out at this point?

So on Levi's Curve ID, I think we explained in prior calls we launched it last August in our store network globally. It was launched also in select wholesale doors across Europe and Asia.

We did not launch it in our wholesale doors in the United States until this year. And since around February, we have been in a staged rollout in our wholesale customers here starting with a targeted set of the highest volume and most profitable doors.

As you know from the idea, we are selling jeans based on shape, not size; promoting the fit, the shape collection from slight to demi to bold to supreme and it requires a service model to support the customer's understanding. It's had a really positive impact on our women's business.

As Blake mentioned, sales are up year on year. We're pleased with the results up to this point.

There is more opportunity to roll it out at wholesale particularly within the Americas region where we've had a [staged] rollout. But we want to do so carefully because it does require a service model support by our wholesale customers.

That is easier to accomplish in their top volume doors than it is in their total door network. But we will pace that rollout consistently to make sure we can achieve both the consumer experience from a product standpoint but also a service standpoint.

And how has the growth of Curve ID moved the needle on women's? Like has women's increased as a percentage of their total sales?

It has in fact moved the needle, yes is the answer to the question. Importantly though as Blake mentioned, our total women's business is up year on year. For the quarter, we're pleased with our results.

We're meeting our plan expectations on Curve ID and importantly growing our total women's businesses which has been a strong focus of the breakthrough plan that John put in place a couple of years ago.

Okay, and then two quick margin questions. One the gross margin -- I know you don't break gross margin by region but (inaudible) the US operating margin was down by 140 basis points. I'm wondering how much of that was gross margin decline and if it was a greater decline in the US than in other markets.

You can pretty much assume it was all gross margin or almost all gross margin decline with a few one-time expenses built in. We had a small curtailment loss during the quarter associated with one of the pension funds merging. But in general, most of the margin decline has been driven by gross margin. And I think that's fairly consistent around the world, but obviously the most impact has been here in the US.

Okay, great. And then as you roll out Denizen, will that pressure US gross margins or have you reversed engineered that product to carry a similar margin?

We have reversed engineered the product. But, Carla, it's still too early to tell. It's still a very small business. We don't anticipate it having any dramatic impact for a couple of years here.

Okay, great, thanks for taking the questions.

Grant Jordan, Wells Fargo.

Good afternoon, thanks for taking the questions. First question, in the SG&A, you called out in the 10-Q that there was some increase due to severance. What was that amount?

If you look at the financial statements, you'll see in the selling expenses -- excuse me, administrative expenses and other expenses, the delta in the other expenses is largely associated with the severance. We don't break out the actual number but if you are just looking period over period or as a percentage of revenue, you can get pretty close to what that number should be.

Okay and do you expect any more severance going into the third quarter?

We will see some in the third quarter and the fourth quarter. As we continue to try to drive down the cost of operating the business, you're going to see obviously one-time expenses associated with doing that. And as a note, any transitional expenses between new CEO and old CEO are obviously not in this quarter and those would show up in the third or the fourth quarter.

I appreciate the comments about lower cotton prices wouldn't impact your numbers until the second half of 2012 as you have had conversations with your wholesale customers. Have you had any pushback to maybe not take the full price increases as we move into the fall?

I will talk about Levi's and then John can reference any impact on Dockers and Denizen. On Levi's, we have been very transparent and collaborative with our customers as we have faced this unusual cotton economic environment.

Our customers were supportive of us, taking an early position on selective price increases on men's. Up to this point, we have met our expectations and we're in the early days on women's and boys, but we have collaboratively aligned on the pricing strategies for the balance of this year and we will have to look at the consumer's response to our current pricing strategies as we plan 2012 together.

But at this point, we built our plans collaboratively, we're working them. Everyone is aligned, we're comfortable. We now just need to read the consumer demand and then respond accordingly.

That would apply to all brands and I will remind everyone that cotton is still quite volatile. We've got weather situations happening everywhere. So we're not fully convinced yet the cotton market has settled down.

Okay. And then my last question, appreciate all the color on the higher inventory level. It seems like your payables leverage has decreased as you've moved the inventory levels up which has affected working capital. Is there -- do you expect you will get additional leverage going forward or that's just kind of the way it is?

I think we might get a little bit but it's probably settled at least in the near-term while inventories are running where they are at the appropriate level. It's a balance of managing the supplier network and obviously managing our inventories together.

As we've mentioned in the past, we're trying to be supportive of our product suppliers during some difficult times with raw material costs. And I think you will see that settle out a little bit more over time but it is still over a year a way.

Okay, great, thank you. That is all I had.

Shabad Thadani, Claren Road Management.

On your last call, you mentioned that you were taking price increases towards the end of your first fiscal quarter and you said you were trying to just gauge what customer response to that would be. Can you just give us a little bit of color on how that was and then whether you took any specific price increases in the second quarter as well?

Again on the Levi's brands, what we indicated is that we're taking selected price increases on our men's product and we were not taking price increases on our women's or kids products until later in the year. We have now taken those price increases on women's and kids.

As I mentioned I think earlier, our expectations have been met in terms of the plans that we have built, but we are watching the consumer environment very carefully. We are tracking sales week by week, month by month with our customers and in our own stores and responding to consumer demand.

This is an unusual time because we have not faced this cotton economic environment before, and so we have to just be very cautious to track what the consumer demand is and then respond accordingly with the appropriate inventory investments. That is how we're working with all of our customers and up to this point, we're working our plan. We're satisfied with our current performance and we are tracking it carefully moving forward.

Okay, great. And just one last thing, I know on the last call obviously you guys mentioned that you are not as exposed directly to cotton because you're buying finished denim and so on.

But cotton prices are off about 55% off of the high. So how should we think about that flowing through further down the road?

Is the fact that you were saying that cotton prices will continue to affect your income statement for the rest of the year means that you have kind of bought forward inventory more than you thought you would?

Think about it as the production channel or the production timetable is such that you are putting into place production on current prices of cotton, that you won't actually see the product in your own distribution centers or in your wholesale customers' distribution centers until next spring at the earliest and in some cases all the way until next fall; the design, design cycle and then the production cycle.

Okay, great, thanks.

Ken Monaghan, Rogge Global Partners.

With regards to the rollout of the Denizen brand, you talked about what was going on in Asia and conversion of some of the stores, was there any meaningful portion of the sales increase during the quarter in Asia Pacific that was related to Denizen per se or are we still not really seeing that in the numbers?

You are still really not seeing it in the numbers. Remember two things.

We replaced the Signature business in India with Denizen. So we've converted all the Signature stores to now Denizen stores.

While we have experienced some incremental sales, that is incremental only versus what was already in Denizen. And then all the stores in China are new, so that is all new revenue.

But it's still a very small base on a business that is very large there. It's helping clearly in terms of drive some growth, but still really small numbers.

Great, thank you. John, good luck on your retirement. We will miss you on calls and conferences as I'm sure the Haas family will as well.

Appreciate it.

And I think last question to Todd.

I appreciate it. With John retiring here, I don't want to miss out on getting his last take on some of the longer-term trends with the Company and the industry.

But I guess I would start off with Levi's, they had a good run with the earnings streak from 2004 to 2008 and EBITDA even topped 700 but now it stands around 500 with opening up a lot of dedicated stores and acquired in your US outlet business. Just wanted to see if some of the larger contributors to the actual base business declined.

Are you seeing margin pressure at the wholesalers or do you really contribute it mainly to just to the sluggishness in the economy? And then, John, what do you think are some of the bigger issues you think Chip will need to address in the future that you might not have not needed to like cotton inflation and so forth? And if there's any others out there that you can think of? Thanks.

Well, I think we have got a very clear strategic path and place and we've shared that with you. Retail will remain an important part of our future.

We have just launched the new Denizen brand. We've got the Signature brand going in with Wal-Mart. As Robert shared, the success of the women's Curve ID and the general upgrading of all of our products with craftsmanship, quality, innovation.

Those momentums are underway. I think we have dealt with the cotton situation. We feel pleased with the response to consumers to the product we're putting out in the marketplace.

We're about to launch a global marketing campaign for the Levi's brand, first time we have done that. And we will also in the second half have global campaigns for Denizen brand and for the Dockers brand.

So, good momentum. I think there's a very experienced Levi's team and Dockers Signature team deep in apparel expertise in place. Our customers are pleased with our performance and where we are with them.

So I think it is just dealing with some of the bigger macro situations which predominately we all know a lot about. But I think the strength of our brands puts us in a very good situation to continue the growth path we're on.

I know we all respect the very iconic nature of the brand. I know you have great opportunities to grow the business going forward especially overseas.

To follow up on that, I was a little bit surprised I think it was on the last conference call that you all talked about the denim category in Japan being down 40% over the last several years which is a pretty big number. And then recently [cotton ink] came out and said that the number of pairs of denim jeans a consumer owns in the US, that's declined every year the last several which isn't a huge number, but incrementally it's negative and I think it just surprised us or at least me because we were thinking it was probably flat to up a little bit. I was wondering if you can actually add a little but of color there? Thanks.

I think clearly for all the reasons we know, the economic situation we faced the last couple of years, huge unemployment in many markets around the world, our response to that is the innovation we've brought out. And while the category is under pressure, we've been growing our business for the last two years.

So we believe we're doing a good job. We're giving consumers a reason to buy the product. But it all comes down to this price value equation.

I think consumers are now focusing on brands they know and trust. They're looking very closely at the price value equation and we think we're responding to that and giving consumers a reason to buy our brand.

You've seen some shakeouts in the marketplace and perhaps that may continue. But we feel good where we are.

I appreciate it and wish you the best of luck in retirement. Thanks.

Thank you.

With that, let me turn it back to John for closing remarks.

To close, this is a remarkable company with iconic brands, a rich history and talented leaders; a true American original. I am honored to have been a part of the Company's journey and to have worked with such inspired, dedicated and creative colleagues throughout my tenure.

To the financial community, I have enjoyed our dialogue over the years. I wish you and Levi Strauss & Co. the very best success. Thank you, everyone.

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