Levi Strauss & Co (LEVI) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company's Fourth Quarter 2011 Earnings Conference Call. All parties will be in a listen-only mode until the question-and-answer session, at which time instructions will follow. This conference is being recorded, and may not be reproduced in whole or in part without written permission from the Company. A telephone replay will be available through February 14, 2012, by calling 800-585-8367. Please input the ID code of 45715814 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 to turn the call 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 Chip Bergh, our President and CEO, 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. And now, I would like to turn the call over to Chip Bergh.

Good afternoon and thank you for joining us today. I'll start our call by providing some color on the year, and then Blake will take you through our fiscal year and fourth quarter results in greater detail. In what has to be marked as a very difficult year for consumers, retailers, and manufacturers, Levi Strauss & Company's results were mixed. Our fiscal year 2011 net revenues were up 8%. The growth was broad-based geographically, and particularly strong in key emerging markets such as China and India. Our dedicated retail stores performance was up year-over-year, and we continued to strengthen our wholesale business. Though we delivered top-line growth, our margins were pressured by higher cotton costs and increased operating expenses. As a result, net income declined 12%.

I'd now like to take you through a review of how our brands performed in 2011. Revenue growth was driven by our leadership in denim. The Levi's brand built momentum with its global marketing campaign. The market responded positively to our products, including Levi's Curve ID collection for women, and our on-trend modern slim fits, such as the 511 for men. Our passion for innovation was reflected in product lines such as our waterless assortment and our commuter series, which will expand globally this spring.

The Dockers brand struggled, with revenues below year-ago. While the roll-out of our Alpha Khaki, with its modern fit and color was well received, we lost traction with our more price-sensitive traditional consumer. We're addressing these issues by adjusting our pricing and product mix to appeal to a broader consumer base. For example we've received recently re-introduced the Dockers Wearever series, which offers a comfortable wrinkle-resistant option in a variety of classic styles and colors.

We're committed to offering great-fitting jeans at affordable prices throughout the world. In August, the Denizen brand celebrated its first-year anniversary, and we now have a substantial number of Denizen stores in the key growth markets of China and India. In the United States we launched the Denizen brand at Target, and we continue to sell our Signature brand products at Wal-Mart.

In the five months since I've been here, I've been impressed by the Company's engagement with consumers, brand momentum, and commitment to win with key wholesale customers. However, while investment behind our brands and businesses helped drive revenue growth, it's also resulted in increased costs, which in combination with higher cotton prices have a slight to lower profitability.

It's clear that we need to balance our growth agenda with discipline. Grow the top line while moving profitability and cash flow. To this end, I'd like to talk about our strategies and direction moving forward. First, we will continue to grow our brands by putting the consumer at the forefront of everything we do. We're building on the Levi's brand heritage to provide great choices today. We will continue to drive innovation to meet the needs of today's consumers. For example, we're working on our next performance apparel collections, and the Dockers spring assortment features both classic and modern styles, offering comfort, construction, and great fits for all consumers.

Second, we must get a competitive cost structure in place. This will help us deliver profitable growth over the coming years. We're focused on improving the costs we can control by driving productivity and leveraging our scale. For example, we're working to make our supply chain more efficient by streamlining fabric development and sourcing across our brands. In addition, we'll continue for to find ways to capitalize on our worldwide footprint. We are refining our global operating model and organization structure to build greater synergies between our brands, be closer to consumers and market, and deliver products that meet local demands.

We will also continue to accelerate growth through dedicated retail stores. This includes our own mainline and outlet stores, as well as our partners' franchise stores, and shopping shops around the world. Retail has, and will continue to be, important to our growth strategy in Asia, and we expect Levi's brand shopping shops and department stores to continue to expand. We're also focused on enhancing and leveraging our e-commerce platform. And finally, maintaining strong relationships with our key wholesale customers is critical to our business, as they drive a significant part of our revenues. We will continue to work closely with them to offer rewarding brand and service experience. Now I'll hand it over to Blake to discuss our financial results in more detail.

Thanks Chip, and good afternoon to everyone. If I sound a bit different, it's wrestling with a winter cold here, so bear with me. In reviewing our performance, In reviewing our performance, I will first touch on full-year 2011, and then I will discuss the fourth quarter in more detail. Throughout today's call, I will reference performance comparisons on a year-over-year basis unless I indicate otherwise. Total reported net income -- net revenue for 2011, we're at four $4.8 billion, up 8%, reflecting the strength of our Levi's brand and the expansion of our dedicated store network worldwide, as well as the price increases we took in response to higher cotton costs.

Our revenues were helped by favorable currency movements. On a constant currency basis, revenues were up 6%. Each of our regions grew net revenues on both reported and cost of currency basis. Our annual gross margin was 48%, reflecting the higher cost of cotton, which our price increases only partially offset, and increased sales to the discount channel to manage inventory. Gross profit was $2.3 billion, up 3% from 2010, reflecting our higher net revenues and the favorable effects of currency.

Total SG&A expense was $2 billion, a 6% increase from 2010, primarily reflecting costs associated with our additional retail stores and global IT investments. Expenses related to the departure of senior executives and other organizational changes also drove up SG&A, although as a percentage of revenue SG&A declined. Our higher net revenues were offset by the decline in gross margin, and the increase in SG&A expense, resulting in operating income of $336 million, down 12% from 2010. Our net income for the full year was $138 million, also down 12%. Our cash tax rate for the year was 28%.

Now I'd like to discuss the fourth quarter in more detail. Total consolidated net revenues for the fourth quarter of 2011 were $1.3 billion, up 4% on reported and constant-currency basis. Higher net revenues resulted from our price increases and the performance and expansion of our global store network. Wholesale volumes continued to be impacted by the price increases and the challenging economic environment.

Fourth-quarter consolidated gross profit was $624 million, down $23 million from prior year. Our higher net revenues and favorable effects of currency were offset by our lower gross margin, which declined to 46% as compared to 50% last year in the same quarter, again reflecting the higher cost of cotton and our inventory management. Fourth-quarter SG&A expense increased slightly from prior year to $532 million, reflecting our organizational changes and global IT investments, although as a percentage of revenues, SG&A declined.

Operating income for the quarter was $92 million, down from $119 million last year. Our operating margin was 7%, a decline from 9% last year due to our gross margin compression. Fourth-quarter net income of $44 million reflected lower gross margin and a more normalized tax rate, as compared to last year's net income of $86 million, which included an income tax benefit of $34 million.

Now I'll share more detail on the fourth-quarter revenue results for our regions. For the Americas region, fourth-quarter revenues were up 4%, primarily driven by the Levi's brand, due to price increases at both wholesale and retail, as well as higher volume of sales in our retail stores. Higher net revenues also reflected the launch of our Denizen brand at target. However, our Dockers business was down, impacted by price increases.

In Europe, net revenues were up 2%, reflecting the ongoing slow economic conditions, although northern markets generally performed better than southern markets. Throughout Europe, our Levi's Curve ID product for women continued to perform well. In our Asia-Pacific region net revenues increased 6%, led by the Levi brand through our price increases, the expansion of our brand-dedication retail network in China and India, and the Denizen brand, all which contributed incremental revenues, and helped offset the decline from our business in Japan.

Now turning to cash flow and the balance sheet. The operating cash flow for 2011 was $2 million, as compared to $146 million in 2010. The higher cost of inventory due to cotton eroded our operating cash flow as compared to the prior year. The inventory dollars on our balance sheet still reflect the higher cost of cotton, but we finished the year with unit level appropriate to support our business, and consistent with where we were and where we ended 2010.

Year-to-date capital expenditures of $131 million reflected our retail expansion and our investment in SAP. Core ERP system is fully operational, and we are now focused on the build-out of the supply and demand planning module, which we expect to complete in the first half of 2012. At the end of our end-of-year cash balance was $205 million. We had $495 million available under our new $850 million credit facility and net debt was $1.8 billion. Subsequent to year-end closing, we repaid $100 million of our credit facility borrowings.

I would now like to add to the points Chip made about our strategies, and the impact they will have on our future results. Our first step in the strategies we announced two years ago was to re-energize the business and grow the top line. Revenues have improved, but costs have grown as well. As we begin the next phase of our journey, our strategies remain consistent, but with an increased focus on delivering improved operating margins, along with the revenue growth. Appropriate management of inventory and our SG&A costs will be critical components of accomplishing this goal.

We expect that our 2012 gross margins will be in the high 40s. As a reminder, due to our sourcing lead times, we will continue to be pressured by the high cost of cotton through at least the second quarter. As those costs abate, we anticipate gross margin improvement. Additionally, gross margin will continue to benefit as our retail sales grow. Below gross profit, ongoing expansion of our retail presence around the world will continue to drive higher selling expenses, and we will incur some additional organizational transition costs as we position the Company for long-term profitable growth. This will put pressure on our operating margins, especially during the first half of the year.

Our capital expenditures for 2012 will be approximately $100 million, comprised of the build-out of our retail network and investments in systems, and we estimate pension contributions for the year of $65 million. We have paid a $20 million dividend in each of the past two years, and we expect to be in a position to do so again during 2012 in our second fiscal quarter. We are comfortable that our operations in the coming year will be covered by our liquidity and cash flow.

To summarize, while we're pleased with our revenue growth during the fourth quarter and full year, our operating results for 2011 clearly reflected the impact of cotton prices and a difficult economic environment. Now will take your questions.

(Operator Instructions)

William Reuter, Bank of America/Merrill Lynch.

Good afternoon, guys. So your inventory levels were in a lot better shape than I was expecting, but your gross margins may have been down a little more. I'm wondering specifically what you guys were doing to get your inventories in good shape, and whether those actions were the predominant cause of the gross margin decline, or if it was really the cadence of the price increases that you pushed through relative to the higher cotton?

I think you've got -- Bill, this is Chip. I think you've probably pieced the picture together pretty well. Gross margins were pressured really by a combination of two things, the higher cotton costs that we experienced in our costs of goods sold, and the higher inventories that we were trying to flush to get our inventory levels back down to normal by the end of the fiscal year, which required us to kind of rely on discount channels and allowances. That's fundamentally -- the two were interconnected.

I think it's important to go way back to when cotton started running up. It was a very uncertain time. You have to remember if you go back even before the cotton run-up the Company actually was chasing inventory, and we ran out of product in 2008 and 2009. As cotton started running up, there was a lot of concern about would our suppliers stay in business, would we be able to get material, would we be able to -- ship enough product? It was a very uncertain environment, because we hadn't had to take this kind of price increase before.

We were very committed to making sure that we would stay in supply, and as a result we took prices up, consumer demand slowed as a result of that, and we wound up with a lot more inventory than it turned out that we needed. We were very committed to try to get our inventories back down to a normal level at the end of the fiscal year, and we flushed a lot of inventory in the fourth quarter. And you see it in the gross margins.

So, also Bill just to note. If you think about inventories at the year end, the dollar levels are still up because of higher-price cotton, but the units are back down to what we expected, or what we saw at the year-end 2010. As we know, cotton prices have already come back down, and we'll see cotton dissipate as a pressure on us after the second quarter. We'll then be able to, we hope, better match our supply and demand, and have less sales through the discount channels, and thus better gross margin longer term.

So if I was to think about where we are as we leave the fourth quarter, it would seem like the impacts your gross margins in the first quarter will just be based upon the dynamics of how much you guys pushed through in terms of price increases, not so much based upon an inventory level that's out of balance, meaning your inventory levels are in-line with where you want them to be. Is that fair?

That's fair assuming that consumer demand is there. Obviously, we've sold into many of our major wholesale customers already, but the replenishment business obviously is driven by consumer demand, and then our own retail stores are clearly driven by consumer demand. Assuming they are willing to continue buy higher-priced products, and continuing that the economy holds up or gets stronger, I think all those will -- your point will be true, and thus less pressure on the gross margin.

Okay, and one last one. Your ad spending was down in the fourth quarter. I'm wondering whether this was planned, how you guys were thinking about it, whether it's just a timing issue? Anything you could provide around that decision?

Yes, most of it's timing, and some decisions late in the year, or later in the year to not advertise as much in markets that are more impacted by very strong, or bad economies. Some of the southern European markets, for example, or even in the US, and spending more of our time focused on general brand building, and less of it on specific advertising and key geographic regions.

Okay, that's all for me. Thank you.

Next question.

Colleen Burns, Oppenheimer & Co.

Good afternoon. I guess just going back to the gross margin decline in the fourth quarter, how much of that decline was driven by the increased sales to the discount channel?

We don't break out the difference between cotton cost increases versus sales into discount channels, but we did move a substantial amount of inventory through the discount channels or varying versions of the discount channels. That's a broad statement as you talk about channels, because there's many different versions of discounts. But we moved more product than we normally would or certainly planned to during the quarter, and thus impacting it.

I think as Chip said earlier the key here is trying to make sure we maintain inventory balances and a strong cash position, and making the decision to take lower gross margins to keep that position low, because we know we still have substantial amount of product coming through our channels because of our long lead times, and in our sourcing base, and thus we don't want to sit on inventory if we don't have to.

Right, now that makes sense. Do you think if that gross margin decline was more than 50% of that total basis point move?

I don't want to speculate on the percentage.

Okay. Given the aggressive promotional environment in the fourth quarter that we saw the department store space, have you witnessed retailers asking for increased support our increase in vendor allowances?

Well, we haven't. I think all retailers decide their own pricing, and they've all had fairly aggressive positions to try to entice customers into the store, but we haven't seen any change in that behavior.

Okay, great. Then just the Europe sales improvement that you saw in the fourth quarter versus the third-quarter trends. Are you seeing better consumer trends in Europe in general?

Well, we're seeing better consumer trends in the northern parts of Europe. But southern Europe, obviously Spain, Portugal, Italy, Greece, all still impacted by the economic situation. We also may have had some timing issues as we rolled out SAP that may have fed our fourth quarter on the revenue side in Europe a little bit, but not substantially.

Okay great, and then just lastly on the inventory, I guess. Is it safe to assume that as you planned out 2012 you talked about having a little bit more conservative inventory that you are not -- are you planning units flat on a comparable basis? Or how are you thinking about unit growth in 2012?

Yes, I won't speculate since we don't give guidance on revenue, but you should assume that we're building inventory to support our revenue growth around the world. Clearly in markets that are growing faster, we're building more inventory for those markets. But we're a little more -- I think we're in better shape this year because we know cotton prices are coming down, thus it's a little easier to plan the supply and demand match, where last year we did not know what the response to consumer -- by consumers would be to price increases.

So it was much more difficult to match supply and demand not knowing that consumer response. We know now what the consumer response has been. As Chip said, obviously in the more discount channels and the chain store channels, it's been more severe to higher-priced product. We have a better sense of that for our product and have planned our inventory accordingly.

Okay great. Thanks for the color.

Thanks. Next question.

Todd Harkrider, UBS.

Yes, sorry to keep on the inventory question. Are you comfortable with the inventory on a skew-level basis now, and do you think you will have increased sales in the discount channel in the first quarter as well, or you're pretty comfortable with where inventory stands overall today?

I think we're fairly comfortable with where it stands, but we manage it aggressively and if we see that we have higher products that need to move, we will move them through the discount channels. But I think in general, we ended the year in a good position. Remember our year-end is the end of November, and so as we came through the holiday period, we had all that in mind around managing inventory relative to driving our sales through the last couple of months.

Okay. Then regards to your fiscal year ending in November. One of the large department stores here in the US actually changed their pricing strategy in some of their vendors recently. I think you picked up some added space in their store in Manhattan, which looks very nice. Can you talk about some comments in regards to the re-positioning there? Thanks, and how it might impact you?

Are you talking JCPenney specifically?

Yes, exactly, thanks.

Well here's what I would say. JCPenney is one of our top customers, and certainly a very valued customer. I've met with both Ron Johnson and Michael Francis and have talked the talk of two new CEOs getting together and talking about how do we work together and collaborate to build our respective businesses with each other. It's still very early days. They are clearly on a path to completely transform JCPenney, and doing that trying to transform the department store channel, and we're collaborating with them on how do our brands fit into that. It's still early days.

I would say Todd as a reminder, Kohl's, Sears and Macy's are all very important customers, as well, and you should assume that we've had similar meetings with those customers. They've all helped grow our business dramatically over the last couple of years, and we try to treat them all extremely well, and work very closely with them on their strategies. So assume that we'll continue to do that with everyone, as well as help new retailers or transforming retailers drive their business.

Okay, thanks for the clarity. Then lastly, in regards to SG&A. You did a great job of actually managing it this year despite rolling out additional stores. Do you have any guidance on where you think you can keep SG&A as maybe a percentage of sales on absolute basis this next year?

We don't give guidance on SG&A, but I think both Chip and my formal comments were really around we're going to focus on more actively managing SG&A than we have in the past. Not that we haven't done it, but we believe that building a greater cushion in SG&A helps us weather some of the gross margin compressions. But also is really the key driver to our long-term improvement in profitability that we believe we need to put in place.

I would just pile on there. There are things that are beyond our control. We can't control cotton. To some extent we can't control the external environment, the economy, what the consumer does, whether they're hunkering down or not. But there's a lot that is within our control which we can really get our arms around. to begin rebuilding our profit margin, and we need to do that. We're looking at the things that are within our control, and we're going to take control of the things that are within our control, because we've got to improve the profitability and the cash flow on the business.

Okay, appreciate it. Thanks for taking my question and good luck with 2012.

Next question.

Kevin Coyne, Goldman Sachs

Good afternoon, thanks for taking my questions. Just a question on some of the charges related to the turnover in the executive offices, whether it be severance or retirement. Can you give us a number of what that charge was in the fourth quarter of this year?

Yes, we don't breakout the charged directly, but you could assume there was some in the third quarter and some in the fourth quarter. And there are also charges anticipating moves around the Company as we go into the start of 2012. So it wasn't just purely executive charges, it was charges in all of our businesses. But the major drivers are clearly the CEO and senior executive turnover.

Okay great, thanks. I think you get this question almost every quarter, so I will ask it. The store count keeps going up. Do you have any target in terms of percentage of revenue you want through that channel, or a targeted number of stores you are thinking about?

We don't, for a couple of reasons. One is, it's dramatically different around the world, so the store count here in the US is also Company-operated, where in Asia and Europe it's a mix of franchise, shop-in-shop and Company-operated. It's a little misleading if we start to give people guidance, because in many ways, in many places, we're growing our business based on a franchisee partnership versus our own.

We were up year-over-year 28 stores for the full year globally, and that brings our total store count over 2.2 or 2,200 stores -- over 2,200 stores when you include the franchisees and shop-in-shops. We'll continue to see growth there. I would say we have moderated the growth for two reasons. One, we're in saturation in some of our key markets, and others were just trying to make sure that we're growing a very profitable retail footprint. So we're going to control that by trying to drive the profitability in the stores, as well as the number of store counts.

Great, and then just one question on the balance sheet. It seems like when I look at allowance for doubtful accounts it's down year-over-year, and on a percentage basis down, it seems like a low of 3.3% of gross receivables, but with gross receivables up substantially year-over-year, how do you feel comfortable that that's the right number?

Yes, I think we try to build that up based on our customer history, and our franchisee history. Some of the increase is due primarily because of the price increases that were taken, so receivables jumped up. In the same way, inventories jumped up because the average unit cost was higher, as well as we had some slower receivable payments in Europe, as we were implementing our SAP system, which is natural in a regular ERP implementation.

I would not try to connect too closely the trade receivable and then the doubtful account balance. I think in general, we're comfortable with where our account balance is. I know there's been a lot of noise in the market about Sears, and their CIT partnership. We do not factor through CIT, and we work directly with Sears, and we monitor that closely the same way we monitor every other account, and we're very comfortable with this position.

Great, thank you.

Carla Casella, JPMorgan Chase & Co.

Hi, one basic one on is Target fully rolled out with Denizen now, or was that completed -- when was that completed?

Yes, they are complete. It was completed -- we rolled out I think starting in August, it was probably completed by the end of September.

Okay great. Then you have a trademark --

We're in all, basically all 1,900 stores of Target.

Okay, sorry to cut you off. You have the trademark sub-facility of your credit facility coming due next year. Any thoughts of whether you want to actually refinance that, or use that as a net debt reducing transaction and pay it down with cash?

Yes Carla, what we did was we actually pulled that into our new ABL, so you'll see it sitting as short-term or as debt as part of the new ABL. We actually don't have to refinance it next year, and we'll probably leave it there for some period of time, and use the ABL on top of it. If we do choose to refinance it or pay it down, that would probably be in combination with some future debt restructuring down the road. I don't think I would just call that out specifically, because it's focus is not that big. It's not that big.

Okay, great. And then two just quick follow-ups on the inventory. The SAP -- you had commented that second half of 2011 had some order fulfillment and excess inventory left from that. How much in the fourth quarter, the reduction in inventory and gross margins was Europe versus America?

We don't break it out, but I would say if you looked at the size of the two businesses it probably matches fairly well to those sizes. The Americas, obviously a bigger market than Europe. I think because of the slower economy in Europe, we were watching inventory there in some of those markets in the South more carefully early on, so we may not have had as much excess. Assuming that both markets, or all three markets worked hard at bringing the inventory levels down.

Okay, and you mentioned on a unit basis you're happy with where it is now? I'm assuming it's up just because you've added the number of stores and some wholesale accounts. What does the actual inflation you're seeing, that would be in the inventory numbers for just raw materials?

Yes, think about quarter-over-quarter I couldn't tell you off the top of my head, but think about if you were looking at early 2010, we still had sub-$1 a pound cotton. If we're going into the fourth quarter of this past year, or even the first half of this coming year, you're looking at $2-plus cotton per pound. So 100% inflation on the cotton side of that equation, and I know you and I have talked in the past about how much cotton is as part of overall production. It's a fairly -- it's 20% to 40% of the overall cost of putting a jean together. A major increase in the cotton cost really drove a huge dollar increase in the inventory.

Okay, then just one general question and I'll pass it on. Just about the holidays. Can you give us any thoughts of what you're seeing in terms of just consumer spending trends over the holidays?

We obviously don't want to comment on our own business since it's outside this quarter, but I think what you saw in the marketplace was pretty consistent with what we saw -- heavy levels of discounting to drive traffic, and quite a few stores staying open late, keeping hours to make sure customers are in the store, I think that stayed pretty consistent.

Okay great thank you.

Grant Jordan, Wells Fargo.

Grant, you have to ask Chip a question since my voice is going out.

Okay. I'll let him try this one.

Pick a tough one on the balance sheet.

Exactly.

I think most of those have been hit. You guys have talked about it a little bit, but just remind us if there's been any change to your thought in terms of how retail prices for jeans are going to roll through this year as apparel prices peak and then come down?

I'll try to help you out here, Boyd, since your voice is leaving you. We expect to see higher cotton costs through the first half of this fiscal year. In some geographies across some product lines, we have already taken price increases as of this month in most places of the world. Obviously the retailer sets the pricing on the floor, so when and how that gets executed will vary from customer to customer around the world. But there's more pricing hitting the market as we speak. Cotton costs should start abating, and we'll see it in our cost of goods sold in the second half of our fiscal year.

Okay so there is a price increase that recently or is in process of going in that will take it above where it was -- on a sequential basis, it will be up.

That's right.

Okay. In terms of your experience, both with your own retail stores and targeted retail partners, do you think there's a real ability to be able to hold price against consumers, or do you think we'll see some promotional activity?

Well, it's still a challenging environment out there. The one thing I would say is that what we saw with the first round of increases last fiscal year is on a more-differentiated, higher, more premium-priced products, particularly in more premium-priced retailers, there was much less price resistance. The consumer that can kind of afford a more premium pair of jeans, and was willing to pay for it, they were paying for it.

You see that also who are the retailers that are winning right now. You see the more premium price retailers are the ones that are growing their sales. The consumer that's struggling is the consumer that is living paycheck to paycheck right now. That tends to affect the lower part of our price tiers. We're going to take a wait-and-see, and be ready to respond if we have to, to what happens to price increases that we've rolled out here recently.

I think one thing to remember, as well, is that we've been on a journey over the last four or five years to move our average product prices up. Not by just simply moving the price up, by improving the quality and the look and feel of the product. In doing so, we've attracted new consumers and higher-end consumer because of the excitement around the product, and the newness and the innovation.

We're going to continue that journey, which should mean our average retail prices continue to go up. But as Chip said, there may be segments where price pressure is too great. As we saw Dockers, for example, this past year, where we've actually worked to keep our prices down, or even lower our prices in some cases to make sure we haven't left key consumer segments open or exposed.

That's helpful. I just had one kind of follow-up. On the segment profitability, it looks like Europe profitability on a reported basis was up. Was that driven somewhat by FX?

Yes it was. Clearly, I mean you may ask the following question, but we're certainly cautious about this you're going forward, because FX is moving in the wrong direction relative to what it did last year. We don't want to speculate on where that could land out, but we could see some pressure going forward as that euro continues to stay low or drops off of where it is.

Okay great thank you very much.

Thank you.

Karru Martinson, Deutsche Bank.

Looking at Dockers, when do you feel that you will be re-positioned on that, and can you just remind us how much of your total sales Dockers is comprised of today?

Well, Dockers -- shortly after I got here, we made a number of decisions kind of immediately to stop the rapid erosion that we were experiencing. Dockers took a price increase, given the higher cotton costs, and it wasn't working. So we rolled back that price increase back in -- I want to say early November. The other thing that we did was, as we were watching some new items in the line, we had discontinued some of the core SKUs, some of the core products in our line, and that hurt us. We quickly re-launched a number of those items -- I talked about them in my opening comments. Very quickly, one of the fits is already back to 12% of our business.

My perspective on Dockers is on -- this is a brand that at one point in time was well over $1 billion in sales. It is a brand. It had struggled over the last couple of years, but I am very committed to rebuilding this business and this brand, because we need more than a one-brand portfolio, and this brand's got a lot of potential. It's about -- it's a little bit more than 10% of our total business. It's got more than enough opportunity to get back to that $1.2 billion in sales, and I think and then some. The proof point I would give you is, go to Europe and look at what Dockers looks like in Europe. It is a very different brand than what you see here, it is a true lifestyle brand. It is, from a margin standpoint, it's actually more profitable than it is here in the US, and it demonstrates what's possible on this business. So we'll get it there.

Right. You touched on you needing to build out the brands, and certainly with the strong brand background that you have. When you look at the portfolio, where is kind of the investment going? Are we going to continue to develop new brands like Denizen, or is it more about reinforcing in-line extensions off of our existing?

It's a great question. We've got our work cut out for us, and we've got plenty of brands to work on here right now. First and foremost, we've got to capitalize on the strongest assets that we've got and that is our brands. Investing behind the Levi's, the Dockers, the Denizen business is a top priority. It's investing not just in marketing support, but it's in innovation, it's in design, it's in product, it's in fabric, and everything that we do. So that's really our focus, and we've got to focus against the big horse first. Levi's has to continue to grow. We've got it on a good tear, and we need to continue to keep that momentum going.

Karru, I'd say that we are probably more focused, as Chip said, on the existing brand than on the geographic opportunities. Because as we look at Asia, particularly China, India, Eastern Europe, particularly Russia, and even the Middle East and into Africa, there's a huge amount of the world we haven't really penetrated as deeply as we have certainly in the US and in Europe. We feel we have a huge opportunity to continue to expand, both through our franchise partners, as well as our owned and operated stores and wholesale partners. We'll just keep the gas pedal on that down fairly heavily, along with the product component that Chip mentioned. We think there's a lot of room left in both of those before even worrying about new brands.

When we look at Japan, it's been now three, four years of challenges in that market. Has there been a fundamental shift there where you guys need to take another look and see whether -- what you need to do to right-size that business, or is that something that you feel that can be fixed here over time?

I'll take that one first, and then Blake can pile on. I'm actually -- I'm on my way to Japan for the first time in this job later this month, to kind of look at it with my own eyes. Clearly we have struggled in Japan over the last five years or so. There are a lot of dynamics. I think we're not the only ones who are struggling in Japan. I know we're not the only ones who are struggling in Japan. The retail environment has changed. It's a very different demographic there than the rest of Asia, and the landscape has changed there.

The fundamental question that I've got about Japan is, what is a reasonable expectation for this business over the next 3-5 years, and how do we think about it in our geographic portfolio? What role should it play, how much investment should it attract, and how does it fit in to the total Asia puzzle, if you will. The good news is that while Japan has slipped over the last couple of years, it's been more than offset by the strong growth in other parts of Asia. One of the choices I need to make, we need to make as a Company is, where do we place our bets in Asia, because it clearly will be a key growth driver for us long-term. Within that map, we need to figure out what is Japan's role?

I think, just to add to that, I think historically it was such a large portion of our business that there's always been a focus on will it go back? I think our expectations are it will never go back to that level, because the market dynamics have changed so much. The demographics have changed, it's a much -- it's an aging population. There's very few younger people like there were years ago, and then the shopping habits have changed, and the channels have changed.

The jeans resellers there are no longer in the power position that they were in historically. The tastes have changed amongst the consumer base to a more fashion and trend-line or trendy fashion. We've studied all of that. We're very conscious of it. We're working closely with our partners over there. It's always going to be an important market to us, but we don't think it'll look like it ever did at its peak 10 years ago.

Okay. Just lastly on your kind of outlook here on gross margin in the high 40s. Obviously, the fourth quarter here was a significant drop. Is it a reasonable assumption that we should kind of carry that forward sequentially here, based on cotton costs in the first half, and then kind of reverse that in the second?

I think if I was building a model that's exactly how I would do it. We hope to see improvements, obviously, by the back half of the year, and still stay in that high 40s range for the full year.

Thank you very much guys, I appreciate it.

Thanks, Karru. Next question.

Ryan Bloom, Hartford Investment Management.

Good afternoon. Blake, I just want to get into Europe a little bit more. Can you give any granularity as far as how wholesale was versus retailing -- I know retail drove growth, but any color on the wholesale side would be helpful?

We don't break out the two specifically, but what I would say is they were both about the same. We saw a strong wholesale, as well as retail. As a reminder, our retail business there is about 50/50 franchise/Company-operated. Our wholesale revenues pick up franchise in our reporting. We sell to our franchisees the same way we would sell to a wholesale customer, so that revenue is all grouped the same. But If you looked at the dynamics from the franchisee standpoint, the traditional department store standpoint, or our Company-operated stores, they were all about the same. They tracked fairly tightly with the geographies that you're seeing that are having the harder time with the economy. Both our wholesale and our owned and operated stores in the south had a harder time than certainly in the north.

Okay. Can I ask, is it generalization, is it fair to say that the store growth was pretty uniform across geographies? If you had 11% store growth, I think about 2% growth -11%, give or take a couple of percentage points?

Yes. We generally had more franchise growth in Asia, because that's where the bulk of that operates, and the US and Europe were roughly around the same levels, a little more in the US during the year because we were continuing to build that outlet, the outlet business. In Europe we were continuing to weed out some more under-performing stores. So it's probably net a little better growth in store count in the US over Europe. Then AP, our Asian region, obviously a lot of store growth through franchisees, particularly as we were building out the Denizen brand in that marketplace.

Okay. Can I ask away from the discount channels, what has been the demand elasticity that you're experiencing? I think at one point you said one-to-one seemed to be a good number in the first half of the year? At this stage, what has it been?

Yes, so one-to-one was really more at the lower end of the consumer pricing, or the chain business. So those chains that were typically servicing the average consumer, we were seeing a fairly heavy trade-off with pricing, where at the higher end we saw virtually no impact of pricing in some situations, including our own retail stores, where we were primarily selling the premium-priced product.

Okay I'm sorry it just got cut off a little bit, but you're saying it was a heavier trade-off relative to pricing in the second half?

Yes, clearly because we really moved prices up the back half of last year. Some of the pricing increases started as early as the first quarter, but the bulk of it didn't hit the consumer in the stores until second or even third quarter for us.

Okay. Can we throw out a number, greater than 2 to 1?

No. I wish I could. I probably -- it's just too hard to tell. You've got differences inside chains, and geographies, and everything.

Okay. Then I'd like to ask, do you find in your discussions with the department stores, particularly with factoring being a lesser component, that they are asking for a greater discounts up front in order to move product? I mean, is that mutually beneficial, is that something you're looking for? How do you view that, or are the dynamics still pretty much the same as they've always been?

The dynamics are really the same as they've always been. Part of that is, remember we have -- we're a very large supplier to most of the major department stores or chain stores. Our treatment may be very different than what some of the smaller suppliers are, and I can't speculate on what they're hearing. For us, we've maintained a pretty consistent path over the recent history.

Okay. Last thing, strategic-wise I'd like to know, following up. With respect to the changes at JCPenney, to the extent that the store-within-a-store model does develop across the industry. Is that something you view favorably to control your own destiny, to be able to distinguish value within those department stores and control pricing? If you could just comment on general about that model and its implications for you.

I'll start and Blake you can feel free to jump in. The store-in-store concept is not something new for us. That's pretty much how we are executed, admittedly through franchisees, but if you walk department stores in China or across most of Asia, that's pretty much how the Levi's brand shows up in those stores. It's not really an entirely new -- and Europe for that matter, too. Not really an entirely new concept. It will be new here, to some extent, particularly in our categories. It does give the brand an opportunity to better define how it shows up.

I think in the end, I think it could be good for the brand. But as Blake said, we've got a lot of major retailers, and my hope is that as we continue to evolve what we look like in-store, whether it's JCPenney or anybody else, we can continue to elevate the brand experience, and show up as the kind of leadership brand that we are across each one of the categories where we compete.

A perfect example would be our Company-operated retail stores where we have continued to improve the performance and profitability of those stores. It's attracted more and more attention from the wholesale partners that we have to understand how we can show up inside their stores, and really present the entire brand, not just the pants, or the men's pants for that matter. We'll see more of that improving as our own retail footprint improves. We work really closely with those partners to make sure they understand the potential, and they can see the potential. We hope to continue to do that around the globe, not just here in the US.

Thank you.

Jeff Kobylarz, Stone Harbor Investment Partners

Curious about a couple of things. Can you comment about any newness of products in the first half of this year versus last year's first half?

Okay. The spring collection is kind of hitting the floor now. We're continuing to evolve on Levi's. (inaudible) brand, we're continue to evolve on the women's side, the women's Curve ID, with a skinny ankle cut which is new. We have taken the very successful commuter series, which we launched about a year ago, which really is kind of a real performance denim-type of product. We're evolving that into other fits here in the US, but we're also rolling it out globally. It was very successful for us here as we launched it here in the US. Limited number of SKUs or PC9s. We're building on its success here, and then launching it globally.

The other thing that you'll see in stores, if you walk into one of our stores now, you'll see it actually in the window, I hope, is color. We've introduced Stay-Pressed on the Levi's brand, which is an innovative product in multiple colors. Pretty exciting.

We feel pretty good about our spring collection, and the feedback that we've gotten from retailers is also really positive. Everyone's being really cautious around the inventory, a thing as we've talked pretty extensively, but we feel pretty good about where we are there. On Dockers, I also -- I mentioned earlier that we re-introduced a couple of our core fits. That hit the floor back in the November time frame. It's definitely helped stabilize that business to some extent.

We're continuing to put a lot of attention on the Alpha sub brand, which is a more contemporary fit, and colors. We feel really good about that. If you haven't tried the Alpha product, I really encourage you to go out and try it. It's a great product, it really is. We're working with retailers on where is the right place in the store to have that? Does it go with Dockers? Does it go on a different pad? Lots of potential there.

Jeff, knowing you're from New York, when we talk about the commuter series, that's not necessarily a pant that's designed to wear on the subway, but you could do that. It's essentially a product that came out of an interaction with a group of cyclists who actually like to wear -- bike messengers who like to wear Levi's. It was done through a series of focus groups in Colorado, San Francisco, and other places around the country.

It's using a material that wicks off water more effectively. It avoids collecting stains on the pants, also odors. It has things like a lining that has a reflective tape in it, so if you rolled up your pants, or a hook for a lock. It's amazing how many people here on the West Coast are wearing these. But it's turned into a very effective pant all the way around for bicycle riders or not. I'm sure in the New York subway you would hope that more people were wearing those odor-protecting pants when you're there.

As Chip said, we're going to try to take that concept and then broaden it across a wide set of products. Another product that we're trying to continue to evolve is we just brought out a pant that is essentially the 511 or 501 in a stay-pressed fabric, which is something we developed in the 1970s. It's a technology that allows for better color, crisp look, tailored look, and it's a great-looking product. I expect to see you wearing one of those next time I see you in New York.

We obviously must be getting close to the end of the call because Blake's humor is starting to show.

Yes, when a finance guy starts talking about product, you know you're in trouble.

All right, I have a lot to try on, then. Just to ask lastly about the Curve ID, can you say how far expanded our you with the Curve ID product, or penetrated, I should say, out there in the US and in Europe?

It is global. If you travel the world as I have, you will find Curve ID everywhere. It is -- my take on Curve ID, new kid in town here, but my take on Curve ID is it is a revolutionary innovation. To have a jean that is designed for a woman's curves, as opposed to her size. I've watched women get fit for Curve ID, and I've watched their reaction when they try on a pair, and it's one of those -- oh my God, finally a pair of jeans that fit. It is really breakthrough.

We are committed to it, we are continuing to invest behind it, as I said. We're launching some new styles in Curve ID. It's in all channels here in the US, and it's doing particularly well in our stores. I would say in general, slightly less well in wholesale customers, in part because it is somewhat dependent on a higher-touch model. It needs some service. The women really needs to be fit for it to get the right type of experience. But we stay committed to it. We're looking for how do we continue to innovate along this vector of designing for a woman's real fit.

All right, thanks very much.

Thanks Jeff.

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

Thank you very much. Well, in closing, 2011 was a year of both challenges and success, but we made progress connecting with consumers and growing sales. It's clear, as we have talked, we have more work to do in order to grow our business profitably. In 2012, we're applying the lessons we learned. We're working on getting to a competitive cost structure as we continue to offer consumers compelling products and brand experiences. We look forward to speaking with you again when we announce our first-quarter results in April. Thanks very much.

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