Levi Strauss & Co (LEVI) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Levi Strauss & Co. fourth-quarter FY13 earnings conference call.

(Operator Instructions)

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 two hours after the completion of this call, through February 17, 2014, by calling 800-585-8367, please use conference ID, 54175329. 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 will now like to turn the call over to Chris Ogle, Vice President, Investor Relations, and Assistant Treasurer at Levi Strauss & Co.

Good afternoon, and welcome to our conference call. I am pleased to introduce members of the of the Levi Strauss & Co. management team. With us, here, today are Chip Bergh, our President and CEO; and Harmit Singh, our Executive Vice President and Chief Financial Officer.

Before we begin, I will remind you of a few items. Our discussion today may include forward-looking statements based on our current assumptions, expectations, and projections about future events. Although these statements reflect the best judgement 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 materials used to describe our business performance.

Participants on today's call may discuss non-GAAP financial measures. You will find the appropriate reconciliations at the Earnings Webcast page in the Investors section of our website.

Finally, today we filed our Annual Financial Report on Form 10-K with the SEC. You can link to our SEC filings from our website. Now, I would like to turn the call over to Chip Bergh.

Thanks, Chris, and good afternoon, everyone. Thank you for joining us today.

Overall, FY13 was a good year in terms of sales, profitability, and cash flow. We achieved top- and bottom-line growth, with net revenues up 2% and net income up 59%. The Company generated significant cash and further strengthened the balance sheet.

We are particularly pleased to have accomplished these results amid a challenging second half. The holiday season was highly promotional, with soft traffic, and due to the timing of our fiscal year, Black Friday sales week occurred after our fourth quarter closed.

Before I discuss overall performance for the year and our 2014 focus, I would like to turn it over to Harmit, who will walk you through the fourth-quarter financial results. Harmit?

Thank you, Chip. Welcome to everyone joining our call. My comments today will first focus on the results of the fourth quarter, followed by the full year, and will reference comparisons on a year over year basis in US dollars, unless I indicate otherwise.

Total consolidated net revenues for the fourth quarter of 2013 were $1.3 billion, flat to prior year, as higher wholesale revenues in our core men's business in the Americas offset lower revenues in Europe. On a global basis, wholesale was nearly flat to 2012, while company-operated retail revenues grew 4%.

As we noted on our last earnings call, we anticipated a soft fourth quarter, owing to the sluggish traffic trends of retail and the lack of Black Friday week in our fiscal year. The change in Black Friday timing impacted our fourth-quarter revenues by approximately 1%.

Gross profit for the quarter was $637 million, down 2% from $649 million last year. Fourth-quarter gross margins decreased 80 basis points to 49.2%. This was primarily due to higher discounted sales and inventory markdowns, mainly in the Americas, reflecting a slower-than-anticipated holiday season and a decline in the Levi's women's business at wholesale in the United States.

SG&A expense increased 3% to $571 million, mainly due to A&P and retail. A&P grew 8%, reflecting brand campaigns and products we launched in the third and fourth quarters, such as the Levi's Modern Frontier campaign and the launch of Levi's Revel for women. Expenses related to retail also increased, reflecting the ongoing expansion of our retail store network.

Fourth-quarter operating income of $66 million was $25 million lower than last year, and operating margin was 5%, compared to 7% last year, due to the decline in gross margin and higher SG&A. And, taxes were higher this year, owing to the tax benefit we recorded in 2012 from reaching agreement with the State of California on refund claims for past tax years. Due to these factors, fourth-quarter net income declined to $17 million, as compared to $53 million last year.

Now, I will share more detail on the fourth-quarter results of our three regions. Net revenues in the Americas of $828 million were up from $818 million in the prior year.

The Levi's men and Dockers brand revenues grew again at key wholesale accounts. These gains were partially offset by declines in the Levi's Misses' and Junior's business at wholesale. A slight decline in our retail revenues was attributable to the timing of our fiscal year end, which preceded the Black Friday sales week in November.

In Europe, net revenue declined 5% on a reported basis, and without the impact or benefit of currency, revenues were down 8%. Sales to traditional wholesale customers declined across the region, reflecting difficult market conditions in the south and some execution issues in the north, which we have diagnosed and are addressing. Retail revenue was up, however, driven by higher productivity of our existing stores throughout the region and the expansion of our store network, especially in Russia.

In Asia Pacific, revenues were up 2% on a reported basis and were 9% higher without the impact of currency. Revenues were driven primarily by price promotion, and we are pleased with our initial launch of the Levi's brand Revel collection in the region. While we had a relatively good quarter in Asia, we recognize that we still have work to do in several markets, including China.

So, a challenging quarter to conclude the year, but we are pleased with our full-year 2013 results. We grew revenues 2%; posted a 250-basis-point improvement in gross margin, which posted to over 50%; reduced our overall SG&A rate, while investing behind our brands with advertising; and grew operating margin to 10%, up from 7% last year. Additionally, we continue to strengthen our balance sheet, as reflected in our overall liquidated position, a better credit rating, lower net debt, and reduced leverage.

Free cash flow for 2013 was a solid $291 million. Collection trends and payables also improved. Inventory balances were $85 million higher than a year ago.

As you discussed in prior calls, our inventory base at the end of 2012 was low, and the increase substantially reflects the return of inventory to more normal levels. The majority of the increase at the end of 2013 is consistent with our needs to support our business in 2014.

That being said, we do have a few pockets of inventory that we need to address, new business challenges we have discussed, such as in some parts of Asia and in the Junior's and Misses' business in the United States. Proactively managing our inventory levels in line with changing volume expectation is a critical objective of 2014.

Capital expenditures in 2013 were $92 million, as compared to $84 million last year, reflecting facilities upgrades and increase in technology investment in our distribution center retrofit project. At the end of the year, we had $489 million in cash in hand, and $635 million available under our credit facility, yielding total available liquidity of more than $1.1 billion.

Net debt was less than $1.1 billion, as compared to more than $1.3 billion a year ago, primarily reflecting our second-quarter 2013 refinancing activities, when we paid down nearly $200 million in debt. Our leverage has significantly improved in 2013 due to the combination of our lower debt and a higher fully operating results.

With that, I will turn it back over to Chip to discuss our progress against our strategies and our vision for 2014.

Thanks, Harmit. Before I take you through 2013, let's remember the four key strategies that we're executing against. Our focus is to deliver profitable growth in order to generate strong cash flow.

We're committed to these strategies but know it's going to take time for them to gain traction. We introduced them in 2012 and continue to pursue them in 2013. Our four keys strategic choices are, first, to grow the profitable core; second, build a more balanced portfolio; third, become a leading world-class omni-channel retailer; and finally, fourth, leveraging our global scale to develop a competitive cost structure.

Let me walk you through what worked in 2013. Most importantly, despite the challenges we faced in the fourth quarter, in 2013, we grew both the top and bottom line and made meaningful progress in strengthening the Company's financial position, largely driven by the strategic choices we made. Our focus on the profitable core drove our results, specifically Levi's men's and Dockers US men's businesses grew in 2013. One of our main focal points was upgrading our brand expression at key wholesale customers with new fixtures, displays, and expanded assortments to show consumers how to put whole looks together.

Within the Levi's brand, core products performed well, driven by sales to our key customers, particularly in North America. The Dockers brand grew 3%, driven by the strength of the US men's business and an expanded product offering for both traditional and modern consumers. Throughout the year, Alpha Khaki and Signature Khaki gained traction with consumers, and the brand sales grew each quarter this year.

We made some progress in building a more balanced portfolio. Men's and women's tops grew in 2013. Our Levi's Revel launch performed well in our retail stores globally, and the emerging markets of Russia and India increased double digits.

And against our retail strategy, our focus on improving productivity and conversion in our store network, as well as the expansion of our eCommerce business, drove full-year retail sales growth of 9%. The outlet format was particularly strong in the Americas and Europe.

ECommerce sales grew in every region in 2013. In Europe, we launched a new platform to connect with consumers. While we're pleased with our eCommerce performance overall, it still represents an enormous opportunity, as it remains just 10% of our retail sales.

But, we didn't fire on all cylinders in 2013. As previously mentioned, our Junior's and Misses' business at wholesale in the Americas declined in the second half of the year. These categories shrank in department stores, which hurt us, but execution issues on our part, including some product misses, exacerbated the problem.

Additionally, as Harmit noted, performance in northern Europe lagged the industry as we exited the year. And, China remains a work in progress, where brick-and-mortar retail is challenged.

With that, I'd like to turn to the year ahead. In 2014, we'll build on what worked in 2013, while at the same time, addressing our challenges. This coming year is all about execution. To drive our profitable core in 2014, the Levi's and Dockers' teams will continue to focus on growing the share of closet, putting the consumer front and center, as they develop innovative products and shopping experiences.

The Levi's team is building on the successes from 2013. The 501, 505, 511, and our Commuter series innovating in way that matters to consumers through fabric, fits, and finishes. Our attention to iconic pieces has never been stronger, and we're backing it across channels. When you walk in the stores or shop online, you will see our iconic items prominently displayed.

We're also making our advertising working harder, with a higher level of attention to ROI to drive traffic and sales. You will see a shift this year with new creative direction and a campaign anchored in product. The full campaign will roll out in the second half to support our fall season.

We're advancing the success we have had this year at key wholesale accounts in the Americas through elevating the consumer experience on floor and in our account marketing. We'll prioritize investment behind the on-floor presence, making it easier for consumers to discover and shop our brands.

Dockers will build on the momentum gained in 2013 by working closely with some of our wholesale customers in the Americas, where we are able to present Dockers as a lifestyle brand, reaching consumers in new ways, testing the experience through new environments to elevate the perception of the brand. We'll leverage the progress we have made in retail. Our Denim Leadership Program and the team's commitment to improving the consumer experience is driving gains in the brick-and-mortar businesses in the Americas and Europe, despite ongoing declining traffic trends.

We are investing in retail systems and technology to support multi-channel shopping experiences that drive brand loyalty and profitable retail growth. By the end of the year, you'll see an upgraded eCommerce presence in the United States. We're aiming to deliver a flagship worthy online experience with better functionality and more exclusive products.

We have also recently appointed a new retail leader, Craig Nomura, who brings 25 years of experience working in every area of retail. He's got deep operational and global expertise. Craig and the team will continue to focus on driving productivity and converting foot traffic into sales through outstanding service.

Now, let's look at the opportunities for improvement. We're focused on several priorities this year: our Women's business, Europe, China, and cost management. Some of these efforts will take time, but longer term, we believe these will improve our structural economics.

First is our US Levi's Women's business at wholesale. We're addressing the product issues as quickly as possible, and we have had positive response from customers who have had a chance to preview the new product. But, it won't land on floor until about the second half of the year.

We also need to make it easier to find the perfect-fitting Levi's jeans when women are shopping in department stores. We'll do so by improving our in-store presentation and navigation. And, we're building marketing campaigns that specifically target women and feature product-specific benefits.

And at retail, we'll emphasize our innovative approach to providing the best-fitting jeans, and we'll build on the positive Revel launch by adding new colors and styles for spring. Revel was especially well received internationally.

In Europe, we're reversing the slide we have experienced in the north. With the right leadership now in place, we are getting back on track and addressing the execution issues we have had at wholesale.

And, we're working to improve the business in China. Remember, Asia represents just 15% of sales, and China, only a portion of that. The long-term outlook for the region remains strong.

Our Asia Pacific leaders are focused on delivering the right product assortments and deploying more effective marketing campaigns. We're also rationalizing the franchisee base and working with them to increase store productivity and experience, as well as continuing to build out our eCommerce presence in the market.

Finally, execution against our fourth strategy, improving our cost structure, will be particularly visible in 2014. We have looked at our cost structure, including external benchmarks, and we recognize that we're uncompetitive.

As we speak, we're identifying opportunities to streamline processes, eliminate redundant work, take advantage of lower-cost service-delivery options, and overhaul our procurement practices. We're concentrating on what's within our control as we drive our business forward.

Harmit will now share the financial implications of our objectives.

Thank you, Chip. As we pursue our 2014 objectives, we will retain our emphasis on profitability, both by growing revenue and reducing cost, building a stronger balance sheet, and creating value for our stakeholders. While we remain committed to driving the top and bottom line annually, we are taking a cautious approach to 2014. As Chip mentioned, the first half of the 2014 will be especially challenging, particularly in light of our strong first-half 2013 results and the softer retail environment in the United States.

Our objective in 2014 is to, once again, profitably grow full-year revenue. We will be aided by the fact that due to the timing of our fiscal year, as I discussed earlier, 2014 will contain two Black Friday weeks. Full-year gross margin in 2014 will likely be in the 50% range, dependent upon our ability to work through the inventory risks I discussed a moment ago.

In SG&A, ongoing expansion of our retail presence around the world will continue to drive higher selling expenses. We are planning our A&P investment to be similar to 2013, as a percentage of revenue.

As Chip mentioned a moment ago, we need to get more cost competitive and are working on identifying opportunities to simplify our organization and improve agility. This global initiative has been activated recently, and it is our intent to begin executing this as we move through 2014 and beyond. This will result in some non-recurring up-front charges that provide sustainable benefits over the long term. We will share more on these efforts as they are finalized.

Strengthening our balance sheet with a clear capital-deployment strategy continues to be a top priority. Our capital expenditures in 2014 is projected to be in the range of $90 million to $110 million, increasing from 2013, driven primarily by our investments in retail systems to drive productivity, eCommerce, and carry forward our projects from 2013. We estimate pension contributions of about $20 million during 2014. Debt reduction remains a key objective going forward.

The Board of Directors also recently approved a dividend payout of [$30 million] to our shareholders. This reflects a $5 million increase from our most recent dividend, and it will be paid in April 2014.

To summarize, we are pleased with our full-year 2013 results, but we are cautious as we move into 2014 for the reasons we have shared today. We will now take your questions.

(Operator Instructions)

Your first question comes from William Reuter, Bank of America Merrill Lynch. Go ahead with your question.

Good afternoon, guys.

Hi, Bill.

I was wondering if you could quantify for us the impact of the shift in Black Friday out of 2013, from both a sales and/or EBITDA perspective?

From a sales perspective, the impact in quarter four, when you compare quarter four of 2013 to 2012, is about a percentage in revenue terms. We haven't disclosed the EBIT impact, but I would encourage you to look at gross margin, and use that as a way to flow through the profit number.

Now, talking a little bit about 2014 because in 2014 we'll have two Black Fridays, and the other thing is we're going to have an extra week, a 53rd week. We're thinking about it on a projected basis, the revenue impact in 2014, which will be positive, will be about 1 point, relative to 2013 for the year.

Okay. That's helpful. And then, maybe with regard to your inventories, I would imagine that some of the timing of Black Friday impacted that. Can you give us a sense for maybe how much lower your inventory levels would have been had your quarter ended a week later, or five or six days later?

Yes, it's difficult to quantify, Bill, that position. Let me give you a little bit of color on our inventory position. I understand your interest, and yes, the inventory levels are higher versus a year ago.

A few things to keep in mind, first, we're be recovering this year from a lower base in 2012, the same time. If you look at inventory levels, 2013 versus 2011, at the same time, we're probably flat in total inventory level. In terms of how the inventory -- if I look at the excess and absolute, 2013 versus 2011, excess and absolute is actually down, which is a good thing.

You are right, part of the increases reflects earlier timing of all receipts and things like that Black Friday, and part of the growth really reflects our perspective on a business that's growing over the long term. That said, we continue to manage inventory levels carefully, particularly in light of the current retail environment, as well as the issues that Chip highlighted relative to the Women's business. So, it's an area of focus as we begin the year and will continue to be an area of focus through 2014.

Okay. And then just one last one for me. You have a lot of cash in your balance sheet. I'm curious what you might be thinking there, particularly in light of the fact that you noted debt reduction as one of your key initiatives? So, I guess uses of cash, and whether you have a goal for debt reduction in 2014? Thanks.

Sure, having cash and a solid cash flow is a good thing. For a minute, we'll celebrate that, and I think it's largely contributed by successful business results in 2013.

The way we are thinking about cash and capital deployment is, our prime area of focus is debt reduction, which given our maturity cycle, is going to be opportunistic. We're going to looking at reducing debt as when opportunities provide us, and we'll balances the economic impact of that, versus the longer-term impact of holding the debt.

The way we're thinking about capital deployment beside debt, I mentioned anywhere between $90 million to $110 million towards CapEx requirements, and the CapEx requirements are largely initiated to grow the business. So, capital deployed against eCommerce initiatives, capital deployment against retail systems, and the like.

The last piece is the projection of a dividend payout in 2014. Longer term, strengthening the balance sheet continues to be a priority of Chip and I and the Board, and I think, over time, we intend to reduce leverage levels to the extent we can.

Okay. Thanks a lot.

Your next question comes from Carla Casella from JPMorgan. Go ahead with your question.

Hi, I'm wondering if you can give a little more color on the Women's miss -- what was it? When did you start to notice it?

You mentioned we should start to see an improvement by the second half. Do you think any of it was just a slow down in women's shopping behavior or change in behavior, or was it a product, certain product that was off?

It's really the latter, and it's fundamentally our Junior's and Misses' business in US wholesale, here. If you look at the rest of our Women's business around the world, we're generally okay. It's the US wholesale, Junior's and Misses' business where we are most challenged.

We started seeing this, I guess, sometime around mid-to-late third quarter, it started to show itself. And fundamentally what's happened out there, Carla, is the market has moved to super stretchy, super soft fabric, and we're out there with more rigid fabric.

We missed from a product standpoint is kind of the real quick and dirty. It's like, let's call it like it is.

And so we're now, we're scrambling. We've got new product. We have shown it to customers, as I referred to in the prepared remarks. They're excited about it. It takes a while to get the pig through the python, and it will be about another half a year or so before it shows up on customer floors.

So, it's really isolated to just this one part of our Women's business, where we had a product miss, and we're scrambling to recover from it. It's also it's part of a dilution effect that you saw in the fourth quarter. We were marking it down and trying to burn off some inventory as we saw this issue coming.

Okay. And then, did you lose any space as you go into fall 2014 because of this?

No. One thing I will say is, we've got great relationships with all of our key customers, and the fact that we responded quickly, here, on this issue and have put product in front of them that they feel confident in, and it includes some innovation, they have protected our space. So, hopefully, we'll make a kick save and a beauty, here, over the next couple of months.

Okay. Great. I guess a little -- maybe a little more focused on the Men's side, the denim bars that were so successful and seem to be spreading to other retailers, were those rolled out in fourth quarter? Or, is that something that's going to be a 2014 event? Or, I guess not the denim bars, but the parts that looked like a denim bar at Macy's and I think you mentioned Kohl's and Nordstrom?

Let's not call them denim bars, but let's call it enhanced consumer experiences in our key retailers, and every retailer's got their approach to doing that. We have been working quite collaboratively with them.

Macy's, we started the roll out, I think, third quarter last year. We're continuing to refine the program with Macy's, working with them, kind of identifying what's working, what's not working, and we're kind of improving as we go along. So, we're expanding stores kind of on an as-we-go basis. That will continue through this fiscal year.

Same thing with Kohl's, we're working with Kohl's -- we're working with all the big customers on how do we enhance the shopper, the consumer experience, improve navigation, improve the findability of our product. Each approach is a little bit different, and we're making investments in that through 2014.

Okay. And then, just one question on cotton, what's the timing of -- or is the cotton benefit from last year, versus last year, when should you start to have more difficult comps, and when will the current prices start rolling through?

Carla, the benefit on cotton was really a 2013 versus a 2012 factor. And, it was really the first half of 2013 versus 2012. So, as we think about 2014 relative to 2013, yes, we had strong results in the first half of last year.

It was driven by a couple of things. There was cotton, obviously, year over year; and the second was, we really managed our cost structure beautifully. And, there was the impact of a Denizen shut down in Asia, which happened toward the second half of 2012 or so.

So, I think those are the factors that helped the first half of 2013. The only other thing I would say relative to 2014 is, the retail environment, as we begin the year, is a little tougher in 2014 than it was at this time a year ago.

Okay. Great. I will let someone else in. Thank you.

You're welcome, Carla.

Your next question comes from Drew Martinson with Deutsche Bank. Go ahead with your question.

Thank you. In terms of the Revel product, it certainly sounds like it's getting better traction internationally. Is the issue, here, in the US that we didn't have that super stretchy, super soft fabric, or is there something else you feel is not being communicated with the target audience?

The issue, here, in the US is not really an issue. The structure of our business in the US is fundamentally different than it is in Europe and Asia. It's driven by the large wholesale business that we have, here, in the US, which is not Revel.

In general, it's selling at price points is kind of in the $50-and-south range, whereas overseas in Europe and Asia, the market is more premium. Our product sells at premium prices. Revel is priced around $100. So, we're able to get wholesale distribution, as well as retail distribution, in Europe and Asia.

Whereas, here, in the US, Revel is available in our 30 main-line stores and online. It's a relatively narrow distribution, in part because of the price point, and because of the structure of our business, here, in the US.

Okay. And, when you guys look at the cash balance that you have and the stronger balance sheet, what do you feel about M&A opportunities to perhaps fill out the portfolio when you look at the product offering that you bring to the table?

It begins with our base business, what I call, the organic business. We're pretty optimistic about growing our base business at this point. And, given the strategic choices that Chip talked about, we feel there's enough growth left in our organic-base business for a while. That's how we're thinking about it.

The question of M&A and a portfolio build, I think, again, is more of an opportunistic question, and depending on opportunities available, we'll take a look at it. At this point, we feel good about growing our business organically over the long term.

Okay. And, we had a modest step up in the dividend for the family. What's the big-picture thinking from the family in terms of the Company, both as a private entity and the dividend policy, if you would?

Yes, sure. The first, as a reminder, we don't have a dividend policy. The decision of capital deployment of cash used towards returning capital to the shareholders is a decision that's taken by the Board, taking into consideration growth expectations for the year, as well as capital needs for the year by the Company. So, from that perspective, this was a decision, as we viewed 2014, that the Board took a couple of weeks ago, and that's why we're talking about.

In terms of the capital structure decisions by the family, those are discussions that happen on an ongoing basis, and as when something changes, we'll come back to you. But, I think our job number one is to grow this business against the choices that Chip laid out.

I would just add one other thing, and that is what we're focused on, in the end, ultimately will benefit the shareholders. We're focused on driving profitable business growth, creating shareholder value by doing that. And in the end, that will create value for the shareholders.

And so, our job, as a management team, doesn't really change because we're privately held and the family owns most of the shares of stock. We're doing what I think any shareholder would want, which is to drive shareholder value.

Thank you very much, guys. Appreciate it.

Thanks, Drew.

Your next question comes from Grant Jordan with Wells Fargo. Go ahead with your question.

Good afternoon. Most of mine have been taken. On the inventory, when do you expect that will be more in line with sales trends?

Yes, we expect they will be in line with sales trends. We also, depending on the promotional environment and what's happening around us, in terms of products that are being marketed, we look at dilution and markdown levels on a regular basis.

So, do you think you'll get it where you want it to be by the end of Q1, or do you think it will be further out in the year?

I think towards the end of the first half of the year.

Okay. And then, you mentioned that one of the challenges facing the Company is the more -- or the less favorable retail environment, today, that you're seeing from customers. Any insights you can share with us in terms of what you're seeing out of your retail stores, or conversations with your wholesalers, in terms of what you're thinking for the consumer this year?

I guess everything you read in the public environment about the traffic challenges, particularly here in the US, we're seeing the same thing. Traffic has been a challenge.

And, even though we're only commenting on the fourth quarter, which only goes through the Sunday before Black Friday, it's a tough environment out there. And, we've been traffic challenged for at least the last three quarters.

The good news is, in our retail stores, we've done a good job with conversion. That's how we were able to drive retail growth for the year, but it's hard. And, the environment, because of the declining-traffic situation, the environment has become incredibly promotional, and that's kind of carried on.

Okay. Great. That's helpful. Thanks.

Thanks, Grant.

Your next question comes from Karen Eltrich with Goldman Sachs. Go ahead with your question.

Can you maybe break out for the decline in Europe, what the -- obviously, you listed the different factors, but what was the key problems in terms of, was it sales driven, was the advertising, or was it the new stores? What was the largest contributor to that decline? And, when can we expect some of those investments to taper off?

I'll take that. First of all, we have to think about Europe, north and south, okay? And I think, generally, everybody is seeing relative softness in the south, and that's been a phenomenon that's been going on now for the last [two] years or so. We've experienced some softness in the north, most recently, over the last quarter or two quarters.

And, that's a combination of really two things. One is, we have lost some wholesale doors through a combination of some executional issues, let's call it service and delivery issues, fundamentally. And, we have also had some leadership vacancies in the north, which we have now fixed.

So, we've kind of isolated what the issues were. We've addressed those issues. And, the north has historically been a pretty good performing part of the business for us. We expect to get that business back on track pretty quickly.

Great. Thank you. And sorry, I should clarify, it's Karen Eltrich, Mitsubishi Bank. Second, could you give out store count for next year with regards to how many opening you expect to have, and how it breaks out domestically and international?

Unfortunately, we don't disclose that. Philosophically and principally, I would say that we have a couple of retail markets that are doing really well, example being Russia. We just talked Euro Russia is clearly an outlier, relative to the performance, and we continue to expand our retail footprint in markets like that.

Just by way of color, Karen, we have broadly about 2,800 retail stores. I'd say between, anywhere between 600 or 700 are stores we own, the rest are franchisees. As we look at our retail footprint, I think the aerial focus right now is to drive more dollars per square foot, and wherever we think we can expand our footprint, in markets like Russia, for example, or China or India, we are investing behind the expansion.

Great. And final question is you mentioned with the fashion miss, how quickly can you right something like that? What is the production pipeline? And, at what point in the year should we expect to see that product in the store?

On the Misses' and Junior's product, it's -- I refer to it as the pig in the python. The supply chain, if you're chasing something, it's kind of 6 to 8 months, and that's what we're operating against to address this product miss that we had in Misses and Juniors.

We started chasing it kind of late last calendar year. It should hit customers' floors sometime this summer, call it June, July, sometime around that time frame, and that's working really fast.

Great. Then, basically, we should expect the same kind of margin pressure as you clear out some of this inventory until that time? Yes. Okay. Great. Thank you.

Your next question from Hale Holden with Barclays. Go ahead with your question.

Thanks for taking the call. I had two quick ones. You mentioned benchmarking on getting your cost levels down to more competitive rates. I was wondering what the benchmark levels were, or where -- or over a longer time you wanted to drive some of the ratios?

Yes, sure. I won't get into the specifics on the names, but the way we are benchmarking is we are looking at SG&A as a percentage of revenue, and we are also looking at profit per employee. And, we're benchmarking against key players in the industry, so similar like-sized businesses.

And then, we're also looking at our cost structures, the way they were a couple of years ago. And I think, as we think through this, because we do believe, going into this, that any costs that we take out need to be sustained over time.

But importantly, build an organization that's agile and nimble to react to what's happening around the marketplace. The areas we're looking at, as we mentioned earlier, we're looking at streamlining processes, making them simpler, eliminating redundant work, taking advantage of lower-cost delivery options, and reviewing our procurement practices.

And, this is a company-wide review, as against one area or one particular area, et cetera. While we can't get into the details right now, Hale, the idea is as we are able to finalize the specifics, whether it be magnitude of the sustainable savings or the one-time charges or the time associated with this initiative, we will talk about it at the relevant time. So, just stay tuned, and we'll give the details when they're final.

Great. Thank you. And then, I guess, just as a quick high-level follow on to Grant's question on traffic declines, as you think about operating the Company, do you think there's been any long-term shift here in the last 6 or 9 months? Or, we're just kind of operating through two or three bad quarters and traffic may get more stable at current rates or even improve? Has there been a fundamental shift, or --?

You mean from an industry or a consumer standpoint, is that what you mean?

Yes.

I do think we're starting to see more of a fundamental consumer shift to the whole digital experience and eCommerce. Go around and ask 30 people how many people did all of their holiday shopping online, and you'll be amazed at the number. I look at my street, the number of FedEx and UPS trucks coming up and down the street, especially over the holidays.

So, I do think we're seeing a shift there, and I also think the consumer has been really impacted by the recession and kind of the lingering malaise in the economy. They have been trained to buy on deal.

That's, I think, part of the reason why we saw the holiday season get so incredibly promotional is the consumers, they're not -- give them credit. They're smart and they know when the deals are coming, and they're waiting. They're keeping them -- they're keeping their powder dry until the deals start coming, and the deals keep coming earlier and earlier and earlier.

So, I think you've got those two dynamics going on that does signal a different world, today, than the world we were in a couple of years ago.

Does that argue that over time you and the industry should have fewer doors?

I think the big thing that we're working on, as are a lot of other people, it's building that omni-channel experience for the consumer. One of the good things about apparel is people like to feel the product and they want to try it on before they buy it. And, that's why you saw, even in the industry publications, apparel traffic was down less than the overall traffic over the holidays. Why? Because people still want to touch it, feel it, try it on, see what they look like in it.

So, I don't think a day will come where we won't have stores anymore. But, what we do need to do is build the capability where a consumer can shop online, reserve product, and it's waiting for them in the store when they show up and build those kind of omni-channel, digitally enabled capabilities.

Great. Thank you very much. I appreciate it, guys.

Yes.

Your next question comes from Kevin Coyne with Goldman Sachs. Go ahead with your question.

This is Celeste Everett on for Kevin, how are you?

Hello, Celeste.

Just on that note, going more into your eCommerce and mobile strategy, can you give us some more details on what your plans are for this year and beyond? What regions are you building out more? And, how many countries do you currently reach? And, how much opportunity do you think there is from your 10% retail sales mix.

First of all, I think the opportunity is quite significant. You can do the math. Our total eCommerce business was about $120 million last year. That's owned-and-operated eCommerce, and most of it's in the United States, so we have big opportunities internationally.

We are really just getting going with eCommerce in Asia. Up until four or five months ago, the only site we were on in China was Tmall, which I call China's largest flea market. We're now building out sites in China and across Asia.

Last fiscal year, we launched our own platform in Europe, around the February time frame, had a shakedown cruise in Europe. The plan is to bring that platform to the United States, which will launch later this year.

That platform has more functionality and capabilities built into it, which will enhance the consumer experience and the shoppability and the navigation online. And, the plan is to roll that into the critical markets that matter most, internationally, over the next couple of years. So, we're very focused on it.

I'll put a plug in -- maybe you guys know somebody, but we're out looking for a head of eCommerce right now, as well. The role has been -- the Board has basically said, we want the role to be a member of the executive committee reporting directly to me. Even though it's a $120 million business, we believe the upside potential is so big that we're going to staff it with an executive-level position reporting directly to the CEO, and that search is on. So, if anybody knows anybody, drop me a line.

I'll see who we can identify --

If that answers your question.

It does. And then, just a separate item, given some of the misses that you had for the Junior's and Misses' side, which sounds like it's more fabric, I'm curious about some of the early fashion trends that we see are pointing to this sort of rebirth of high-waisted bottoms and jeans. Are you planning to offer some of these high-waisted options? And, what are your thoughts on this trend and potential pick up? I think we did notice a few options on your website.

The higher waist is definitely in, and we have product in our current line with that, and we have got more coming. So, it's definitely a trend, and we're on it. That one we didn't miss.

All right. That's it for us. Thank you.

Thank you.

Your next question comes from Jenna Giannelli with Citigroup. Go ahead with your question.

This is Jenna from Citi. Most of my questions have been answered. Can you talk a little bit more about some of the product miss that you saw in Women's and in Misses. Particularly in Misses, how much do you think of that was purely the product miss, or just a really competitive environment in some of the junior and teen apparel space?

It's kind of hard to say. It is, in both of those categories, it's intensely competitive. And, the price points that we're selling at in some of the retailers, it's kind of like, you look at it, and you do the math, and you go, how can you make money at this? So, it is challenging for us.

I would say most of our issues, right now, are product related. The product miss, it was big. There's a big difference between the product that we've got on the floor, today, and what the consumer is looking for. And, we just flat out missed it. I mean, call it like it is. I think that's the majority of the issue.

We need to figure out how we begin creating value in that space and getting the consumer willing to pay a little bit more money for product in those two categories. And, bring back some innovation. We, frankly, have not been innovating there the way we need to.

Great. Thanks. And then, just also, with respect to Men's, are you seeing any sort of product trends there, styles, fabrics, that are a little bit more popular? Things that are performing well or better or worse than others?

As I said in the prepared remarks, one of the great things about this business is we have one of the of the most iconic items in the fashion industry with the 501. The 501 has performed pretty well this past year, and we're putting a lot of energy and attention against rebuilding, if you will, and driving the success of our most iconic items -- 501, trucker jacket, western shirt, so a lot of energy going there.

One of the other products that has done very, very well over the last two years has been our Commuter series, which we're now rolling out into wholesale. And, that has got a little bit of stretch and some high technology built into the fibers of the product. That's resonated with consumers, and we're continuing to focus on driving that franchise.

Great. And then, just actually one more from me back on the international front. When -- I think you mentioned that you're talking about China that bricks and mortar have been particularly more challenging. Is that kind of a shift in anything versus what you have seen in the past couple of quarters? And, is that changing how you are thinking about growth in China, overall?

We're very focused on growing in China. It's a big market, and it's only going to get bigger. What's happened over the last couple of years in China is the market's evolving.

Most of the companies that have been in business, or most of the brands that have been doing business in China over the last 10 or 15 years, started with this notion of shop in shop. So, it's a small little retail space inside of a large department store, and that's really how a number of brands, including ours, got started. And that still is a majority of our stores in China.

What's happening is, China is becoming more like the west, in terms of shopping malls with standalone stores. So, the retail environment is changing there to more standalone stores, and the location, and the position, whether it's on a street or in a mall, becomes even more important and more expensive, too. So, we're working through that.

We're committed to growing our brand in China. It's a market that really matters for us. We call it out, strategically, as a market that we have to grow, and we're investing to build capabilities there, including building retail capabilities.

Great. Thanks so much. I appreciate the time.

You're welcome. Thank you.

Your next question comes from Carla Casella with JPMorgan. Go ahead with your question.

Hi, you can probably guess what it is, but I forgot to follow up with the RP basket -- where it stands today?

It's [$0.7 billion] -- (laughter).

Wait, what?

It's $0.7 billion.

Okay, $0.7 billion, so $700 million. Okay, thank you.

No worries. We were waiting for you, Carla.

I won't let you down.

Okay, we're going to wrap it there. Thank you all very much for joining us, and we look forward to talking with you, again, in just a couple of months in April, with our first-quarter results. Thanks a lot. Good evening, everyone.

Thank you.

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