Earnings Call: Q4 2016

Feb 9, 2017

Good day, ladies and gentlemen, and welcome to the Levi Strauss and Company 4th Quarter and Fiscal Year Earnings Conference Call for the period ending November 27, 2016. All parties will be in 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 2 hours after the completion of this call through February 16, 2017, by calling 855-859-2056 in the United States and Canada and 404-537-3406 for all other locations. Please use conference ID 50968,087. This conference call is also being broadcast over the Internet and a replay of the webcast will be accessible for 2 months on the company's website, levistrauss.com. I would now like to turn the call over to Edelita Tychep Co, Investor Relations at Levi Strauss and Company. Good afternoon, and welcome to our quarterly conference call. I'm pleased to introduce members of the Levi Strauss and Company management team. With us here today are Chip Berg, President and CEO and Harmit Singh, Executive Vice President and CFO. Before we begin, let me briefly remind you of a few items. Our discussion today may include forward looking statements, including statements regarding our strategies and expected financial and operating performance. Although these statements reflect the best judgments 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 ks, our registration statements, today's earnings press release and our other filings with the SEC, all of which are available on our website at levistrauss.com. We expressly disclaim any responsibility to update our forward looking statements. 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. Participants on today's call may discuss non GAAP financial measures. Reconciliations and descriptions of our non GAAP financial measures are available in the Investors section of our website as well as in today's earnings press release. Finally, today, we filed our annual financial report on Form 10 ks with the SEC, which is available on our website. Now I'll turn the call over to Chip Berg. Thanks, Edelita. Good afternoon, everyone, and thank you for joining us today. Despite a tough environment globally, I'm pleased to report that we delivered a 4th consecutive year of profitable constant currency revenue growth. Full year constant currency revenue grew 3% and net income grew 40%. Performance in our retail channel was strong despite continued declines in overall retail traffic. Full year constant currency revenue from our global direct to consumer business was up 12% compared to last year. 5 years ago, we established our key strategic priorities and have remained focused on consistent execution. Despite the ongoing challenges in our sector, we continue to focus on what is within our control. Our strong performance for fiscal 2016 reflects that our strategies are working and have led to a more diversified business. We've grown our presence internationally. We expanded women's, which now represents approximately 22% of our total business and is nearly $1,000,000,000 in sales. We've continued to diversify our product portfolio, including driving 22% growth in our tops business. And we've diversified our distribution with the direct to consumer channel now representing more than a quarter of our business. I'll now turn it over to Harmit to walk you through the Q4 and full year financial results, and then I'll share more detail on our progress in 2016 and our objectives for 2017. Harmit? Thanks, Chip. Welcome to everyone joining our call. My comments today will reference comparisons on a year over year basis in U. S. Dollars unless I indicate otherwise. I will first discuss the results of the Q4 and follow with comments on the full year. While we are pleased with the full year results overall, the Q4 was weaker than recent quarters. This was primarily driven by several factors: softness in U. S. Wholesale, franchisee support provided to strengthen our business in China and the weakening of the British pound resulting in unfavorable transactional impact to revenue and adjusted EBIT. We expect that some of the headwinds we faced in the Q4 will continue. As demonstrated in the past, we are focused on running our business for the long term and remain committed to our strategies to increase our competitiveness and drive sustainable, consistent profitable growth. 4th quarter net revenues of $1,300,000,000 grew 1% on a reported basis and 2% in constant currency. Global revenues from our direct to consumer channel grew 11% on a constant currency basis, reflecting store expansion, strong conversion and e commerce growth. In our wholesale channel, global revenues declined 1% on a constant currency basis. Gross profit for the quarter remained relatively flat at $659,000,000 Gross margin of 50.7% was down 50 basis points. Unfavorable transactional currency of approximately 100 basis points was partially offset by direct to consumer sales growth. 4th quarter SG and A as a percentage of revenue was up 130 basis points from last year. This increase was driven primarily by investments in our direct to consumer business. On a gross basis, we opened 30 new stores during the 4th quarter, almost half of the 70 stores we opened during this year. While leverage from our direct to consumer business improved year over year, total company SG and A leverage was unfavorably impacted by lower U. S. Wholesales revenue. 4th quarter adjusted EBIT of $146,000,000 declined 13% as compared to last year on a reported and constant currency basis, reflecting the unfavorable transactional impact of the British pound of approximately $8,000,000 and our higher SG and A investment. Our hedging gains within other income this quarter were $12,000,000 higher as compared to prior year. These hedging gains help to mitigate the impact of transaction losses in adjusted EBIT. As a reminder, we do not apply hedge accounting and therefore these related gains are reported below adjusted EBIT. 4th quarter net income of $96,000,000 declined $5,000,000 from last year due to higher SG and A. Now I'll share more detail on the 4th quarter results of our 3 regions. Net revenues in the Americas declined 2% on a reported basis and 1% in constant currency, primarily driven by a decline in our U. S. Wholesale business, reflecting ongoing softness in the channel overall. Our direct to consumer business grew high single digit as strong conversion helped to mitigate soft traffic. Adjusted EBIT was down reflecting lower wholesale revenues. In Europe, net revenues grew 13% on a reported and constant currency basis, driven by strong double digit growth across both wholesale and direct to consumer. Strong momentum in the women's business continued, which in total grew 40% this quarter. For the 2nd consecutive quarter, all markets grew with the exception of Turkey. Performance was particularly strong in Germany, Russia, Spain and the UK. As mentioned earlier, the British pound unfavorably impacted revenues and adjusted EBIT for the region by approximately $8,000,000 Adjusted EBIT in Europe was down 2% due to the unfavorable transactional impact of the British pound. In Asia, net revenues were flat on a reported basis, but declined 1% without the effect of currency. Double digit direct to consumer growth was offset by a decline in the franchise channel in Mainland China. During the quarter, we bought back excess inventory from our franchisees in order to get fresh product on their flows and to re energize the channel. We plan to sell the inventory through our owned and operated outlet stores. In contrast, both company operated stores and e commerce in China grew double digits, with single day revenues up over 70% compared to last year. Excluding China, Asia grew low single digits. Adjusted EBIT was down for the quarter due to lower gross margins driven by investment in company operated retail and franchise support. Now switching gears to our full year results in 2016. We are pleased to have achieved the financial objectives we shared with you at the beginning of the year. Excluding $77,000,000 in unfavorable currency translation effects, fiscal 2016 revenues grew 3%. Global direct to consumer sales grew 12%, while global wholesale revenues were flat. The strong direct to consumer sales reflect expansion and growth from our brick and mortar stores as well as double digit growth in e commerce. Even with the challenges of working through elevated inventory levels through the year, our full year gross margin grew 70 basis points to 51.2% compared to prior year despite unfavorable currency transaction effects of approximately 100 basis points. SG and A as a percentage of sales was 41%, up 40% from prior year, primarily driven by investments to expand our direct to consumer business, including the net addition of 41 stores to our company operated retail network. And finally, fully adjusted EBIT margin grew 20 basis points to 10.5% on a constant currency basis. Over the past 5 years, we have significantly improved and strengthened our balance sheet by reducing debt nearly $1,000,000,000 decreasing leverage from over 3 to lower than 2 and lowering the cost of capital while still continuing to generate strong cash flows. And efforts to profitably grow our business have also led to multiple credit rating upgrades, including S and P's most recent upgrade in December. With respect to where we ended 2016, net debt declined to $670,000,000 from $834,000,000 in the prior year and leverage declined from 2.0 to 1.8. Our business delivered strong free cash flow of $161,000,000 nearly double prior year. The increase was primarily due to lower restructuring and related payments, lower cash interest and taxes. Capital expenditures were $103,000,000 and the 2016 dividend payment of $60,000,000 was $10,000,000 higher than prior year. At year end, inventory was 18% higher than last year, though was down 16% from 3rd quarter and in line with the guidance we provided in our last earnings call. Ending inventory primarily reflects higher balances in Europe driven by the region's growth, higher than desired inventory levels in Asia, which we will continue to manage down and modestly higher balances in Americas, including Dockers. Total available liquidity at the end of the year was $1,200,000,000 comprised of $376,000,000 cash $784,000,000 available under our credit facility. Finally, we wanted to provide some color on holiday results. For us, holiday is the combination of November December results. Please keep in mind that our holiday results are comprised of months that fall into 2 separate fiscal reporting periods and are not necessarily indicative of our Q1 2017 results. On a constant currency basis for our holiday period this year, global direct to consumer revenues were up high single digits and global wholesale revenues were up low single digits, primarily driven by wholesale growth in Europe. In the U. S. Specifically, similar to what has been reported by other companies so far, wholesale continue to decline low single digits. With that, I'll turn it back over to Chip to discuss progress against our strategies. Thanks, Harmit. Our strategies have enabled us to focus on what we can control to drive long term growth, and our strategic priorities are to grow the profitable core business, expand the reach of our brands and build a more balanced portfolio, become a world class omnichannel retailer and continued focus on cost and productivity to free up capital for reinvestment. We've remained focused and disciplined in executing against these strategies, and I believe we are well positioned for the long term. Walking through each of our strategic priorities. Our core businesses are comprised of Levi's men's bottoms globally, the Dockers brand in the U. S, our key wholesale accounts and our 5 largest mature markets, the U. S, France, Germany, Mexico and the UK. Collectively, these markets represent almost 70% of total company revenues and they grew 4% this year. The continued softness in the U. S. Wholesale environment contributed to lower than expected results for our Levi's men's bottoms and U. S. Dockers businesses. Offsetting this was the strong performance of the other 4 mature markets, which collectively grew 10% compared to prior year. With respect to Dockers specifically, despite the business being down low single digits for the year, we transitioned our Signature Khaki product to stretch as planned. Looking ahead, we continue to recognize we have more work to do and remain committed to strengthening our Dockers brand and business. From a product standpoint, we We drove innovation in the 501 family to include Stretch. We drove innovation in the 501 family to include Stretch. About 2 thirds of our Levi's bottoms now include Stretch, reflecting our focus on comfort, fit and performance. We also launched the 501 skinny, introduced a new selection of Trucker and Sherpa jackets and expanded on our sports collection with the introduction of our limited edition Major League Baseball collection. During 2016, we made great progress on building a more balanced portfolio and expanding the reach of our brands. Our women's business grew 11% in 2016. Building momentum on the successful relaunch of our women's business almost 2 years ago, we continue to make rebuy as a go to brand for women. Our women's retail business in Europe has been exceptionally strong, up 28% over last year, and we believe there is even more opportunity ahead. Last spring, we introduced a new fit for women called the Wedgie, which built on the heritage of the iconic 505 gene. And due to positive consumer response, we're offering it again this year. We also opened our 1st women's only Levi's store in France as part of our goal to offer women the very best expression of the Levi's brand. We continue to expand beyond bottoms, building a thriving tops business. Tops grew 22% with double digit growth in both men's and women's. And despite the challenges we discussed earlier, our key growth markets of China, India and Russia collectively grew 4%. We continued to make significant progress towards becoming a world class omnichannel retailer by building a leading direct to consumer business, which is strengthening our connection and accessibility to our customers. In 2016, our brand dedicated network grew by more than 100 stores, including the 41 net new company operated stores we opened as well as more than 60 net new franchise stores. Globally, we now have approximately 2,900 retail stores dedicated to our brands. Our direct to consumer business delivered 12% growth despite traffic in our brick and mortar stores being down in the high single digits. Conversion was up as we focused on elevating the consumer experience in our stores and improving our retail capabilities. And e commerce traffic and sales continue to be strong, both up double digits this year. These strong results are reflection of the way we show up as a lifestyle brand in our stores and online and the way we're able to optimize the assortment, price ranges and promotions within the channel. Looking ahead to 2017, we expect the apparel sector to remain challenging as consumer buying behaviors and business models continue to evolve for our industry. Despite these challenges, we are committed to delivering another year of top line growth in 2017. We'll continue to focus on leveraging our brand portfolio to accelerate growth in our international and direct to consumer businesses in addition to building capabilities that will enable us to optimize inventory over the long term, while delivering best in class service. A key priority in the U. S. Will be navigating what has become an increasingly volatile U. S. Wholesale channel. In 2017, we see opportunity to increase share within our wholesale customers as we expand beyond a classification business into a true lifestyle brand. Our wholesale customers need strong national brands. This represents the opportunity to expand our business within each account into more space, more tops and more women's. Within our value segment, we'll continue to leverage the momentum we've seen in our Denizen and Signature brands, both of which grew double digits in 2016. As we enter 2017, we recognize that we're in an unequal moment in time where there are significant questions about what's in front of us. There is a great deal of uncertainty about the implications of changes in policy, particularly free trade and border taxes and what that means for our business. As always, our focus will be on what we can control, including proactively working to influence the policymakers to do what's right for the consumers and the apparel industry. Harmit will now outline the financial outlook for 2017. Thanks, Chip. As we plan to the year ahead, our enthusiasm is tempered by several factors that we believe will continue into 2017. We expect the headwinds in U. S. Wholesale will continue for some time as our customers work through addressing the challenges in consumer traffic, buying behaviors and store closures. The actions we've put in place to improve the franchise channel in China are expected to take several quarters to yield positive results. And finally, the weaker British pound is expected to continue to have an impact on revenue and adjusted EBIT, especially in the first half of the year. Despite the challenges, we expect profitable constant currency full year revenue growth of between 1% 3%. And we expect that currencies will again unfavorably impact revenues and adjusted EBIT given the strengthening of the U. S. Dollar. Our expectation for margin and expenses are as follows: We expect to maintain a modestly improved gross margin at around 51%, despite the unfavorable transactional impact from a strengthening U. S. Dollar. Going forward, incremental sourcing savings will taper off. However, we are confident in our ability to offset the pressures this will place in margins with other opportunities. We have planned A and P investment at 6% of sales. SG and A will be slightly up as a percentage of revenue, reflecting our direct to consumer investments. These factors will result in pressure on adjusted margins for EBIT. We expect approximately $30,000,000 in unfavorable transaction impact to adjusted EBIT due to the British pound and other impacts of a strong U. S. Dollar, particularly the Mexican peso. Adjusted EBIT will be weaker in the first half, reflecting the impact from the British pound, timing of advertising spend, higher e commerce investments and the gain we recorded last year related to the sale of our UK distribution center. Inventory balances are projected to remain elevated at least through the first half of the year with balances approximately flat year over year by the end of 2017. We expect to generate strong free cash flow once again in 2017. CapEx is expected to be approximately $120,000,000 with investments focused on fueling long term growth. We expect to open approximately 80 new company operated stores. And we have announced a dividend of $70,000,000 a $10,000,000 increase from last year, payable in 2 35,000,000 installments in the 1st Q4 of 2017. With that, we'll take your questions. Thank you. The floor is now open for your Your first question will come from the line of William Reuter, Bank of America Merrill Lynch. Good afternoon, guys. Hi, William. You guys were talking about retail traffic being down in the high single digits. I guess, was that just in the U. S? Or was that your global company owned or operated stores? It's we're seeing the traffic declines build across the globe. And as we mentioned, we are more than offsetting that through better conversion. As we build the lifestyle orientation of the brand, folks are buying other categories like tops and obviously the growth in our women's business. So that's helping offset. And then the other piece is the growth in e commerce. Okay. And then you talked about opening 80 stores this year. I guess I'm curious, as you think over the next handful of years, how the softer traffic will change your strategy with regard to opening stores in the context of the fact that your wholesale customers are obviously having some challenges as well? Yes. So the being a global company and as I've mentioned earlier, outside the U. S, our presence in retail is far higher and stronger. So most of the store openings are largely outside the U. S, largely in markets in Germany and core markets in Asia. So Chip talked about our large markets in Europe being Germany, UK, France. So that's where we will open stores. In terms of the store portfolio, again, a good balance between mainline and outlets. Okay. And then just lastly for me, you've had strong free cash flow this year, you've guided to strong next year. The dividend went up a little bit, but how will you guys think about the uses of that free cash flow, given that your leverage metrics have already improved substantially? Yes. So in terms of uses of cash, when leverage was high, we were using a large chunk of the cash to pay down debt. As we have demonstrated this year, debt pay down is going to be smaller going forward. A larger piece of the cash is being used to grow this business. And it's really focused on we talked about opening new stores. We talked about going on investing in our e commerce business as the as that piece of the business takes off. So that's how we're thinking about it. If your other question was what do you think about our leverage situation, we think we're in a good spot. I think leverage longer term reduces not by paying down debt as much as it reduces by growing EBITDA. Okay. All right. That's all for me. I'll pass to others. Thank you. Thanks, Bill. Our next question will come from the line of Grant Jordan with Wells Fargo. Good afternoon. Thanks for taking the questions. I think in the past, you've given us a little bit more color about the growth in inventory domestic versus in Europe or international. Is that still part of the driver for the higher inventory at the end of the quarter? Yes, it was. It was a smaller part. So as we began 2016, the growth of inventory in the U. S. Was the primary driver of the inflated inventory relative to a year ago. So this was 2016 to 2015. As we end the year, it's a smaller piece, but there is a piece. And the bigger piece is inventory that we're building or we have brought on for our growing European business. There is a piece of inventory that's inflated in Asia, largely in China, but we're working to managing that down. Okay. And then you mentioned something about the inventory with the franchisees. Can you repeat that? Yes, sure. So our business in China Mainland China is basically all three channels are present, which is our brick and mortar. We own and operate our franchise business, which the franchisees operate, and then there is the wholesale business. And in terms of revenue split, I'd say, broadly, our own portfolio generates about 40% of the business. Franchise business generates a little less than 30% and 30% wholesale. So as we looked at the franchisees channel, we determined that the franchisees had some the older inventory. We run most of the outlets that actually flush out excess and obsolete inventory as well as they have made for products. So as we close the year, we decided we'd buy back some of the inventory that allowed the franchisees to buy the inventory for the 2017 season. And then over the year, we'll flush out some of the older inventory through our outlets. And in terms of the impact financially, Grant, probably, I would say, dollars 4,000,000 to adjusted EBIT, about 20 basis points on our EBIT margins for the quarter. Okay. That's very helpful. Thank you. Thanks, Robert. Our next question will come from the line of Carla Casella with JPMorgan. Hi. You mentioned that your DTC is now over 25% of the business. Is that just the stores? Is that stores and online? And can you give us a sense of how much of that is stores versus online? Yes. It's both, Carla. The we don't break it up, but what I'd say to you is e commerce in total represents about 3% of our total business. Yes. Or another way, e commerce is about 10% of our total DTC. So Okay, that's great. And then on the China question, why does it take a few quarters if you've now brought back the inventory? Is it just that they haven't bought the newer lines? Or why does it take a few quarters for that to turn? And would you consider shutting down or buying back some franchisees, like buying them out over entirely? Yes. No, it's a fair question. So it takes a few quarters because while we bought back, it's going to take us a little while to flush it out. The franchisees have started buying the new line for the 2017 season. We are working with them to upgrade basic foundational capability, and all that takes a little time. In fact, Chip, I want to jump in. Chip and the team are actually headed there next week to work with the Chinese team to really think about how do we take this business from being close to 5% of our total revenue to upwards of 10%, above the size of the business longer term. I think that's an important point. Just I mean, the one thing I would say is China today is still less than 5% of our total company business, but it represents a huge upside for us. Our franchise network is important. We have over 600 stores in China and they're mostly franchise stores. We've worked really hard over the last couple of years in China and also in India to strengthen our franchise capability to really we've actually shifted to some new franchisees that have much better capabilities and working with them to be in the right place, to open the right number of doors and to grow their business. What we discovered kind of late last fiscal year is they were stuffed and some franchisees had 2 year old product on the floor and that's just not going to work. So we made the decision late in the fiscal year to buy back some of the inventory and flush it through our own outlet channels that we could get kind of season appropriate product on the shelf in their doors. Okay. And you mentioned that was some of the reason for the kind of heavy inventories at the quarter end. Did you quantify that by chance? No, we haven't quantified it, Carla. Okay. And then the U. S. Wholesale, I understand the channel remains challenging. Two questions around it. 1, would you say you're generally gaining space in the stores that you're in? And then also, when do you see the most impact from, I guess, Macy's closures would have the biggest impact on you in terms of your presentation, because I don't think you're really in the Sears that they'll be closing. So when would that impact mostly hit? Yes. So first of all, to answer your question, our shares are still pretty healthy and strong in the wholesale channel overall. We are still the leading denim brand. And we have begun to pick up space. I mean, if you go to Macy's today, on the women's pads in the top 600 doors now, we are selling our women's tops. And that's an expansion from next to nothing about a year ago. And that's definitely contributing to some vitality in our women's business. We grew our women's business at Macy's during the year. We still believe and I think the best proof point is our own retail stores also facing the same kind of declining traffic trends in the U. S, but our retail business grew in the U. S. Because when we show up as a lifestyle brand with the right assortment, merchandise the right kind of way, and that's everything from bottoms to tops to outerwear accessories that we can grow our business. And that's basically our proposition with our wholesale customers is give us more of an opportunity to become more of the lifestyle brand that this especially the Levi's brand really is and we can grow our mutual business together. So that's work in progress. I think we're making some pretty good headway with some of the key customers. With respect to the store closures, Macy's has announced 68 doors to be closed this year. Obviously, those are going to be the smaller, less impactful doors for the most part. We've quantified it as a relatively small part of our overall business, and our objective is to pick that business up. The consumer is going to go find their Levi's somewhere if that Macy's door closes and we want them to find it in the right place. So that's the work that we're doing. And Sears, we do still have a business at Sears and whatever happens to Sears could have an impact to us this year. Sears has been in decline for the last couple of years for us and we're expecting it's going to continue to decline this year. Okay, great. Thanks. Our next question will come from the line of Karru Martinson with Jefferies. Good afternoon. When you guys look at the conversions in your direct to consumer channel, what are you doing differently now versus, let's say, a year ago or so? So, that's a good question, Drew. We've really been focused on just doing a better job of executing. Probably the best example is actually Europe, where our direct to consumer business is really on fire. I mean, we grew Europe double digits this past year, largely driven by the strength of our DTC business. And I think fundamentally, it comes down to having the right assortment on the floor, managing our inventory really well, not being out of stock on the stuff that's selling really well and having a good mix of bottoms, tops, outerwear. And as I said in response to Carla's, when we show up as a lifestyle brand, we've got great product. I think our product has gotten better. We've got great messaging to the consumer. Liv and Levi's is really resonating. And when you show up and properly merchandise it and you're in stock on the stuff that's selling, it kind of works. We've been really focused over the past 2 years on T shirts. The T shirt program has worked. That shows up in our tops results, plus 22% for the year, double digit growth across men's and women's. And when a consumer comes into our store to buy a pair of jeans and they walk out with a pair of jeans and 2 T shirts, that kind of at the end of the day, it adds up, and that's kind of what's happening. Okay. And when we look at that direct to consumer channel, you said it was 25% of sales today. I mean, with the store openings and the growth that you see there, I mean, where do you feel that, that should be as a percentage of sales for the business overall? So, Karru, we don't necessarily strategically go off their target. What I would say to you is it should be higher, and it's going to be higher for a couple of reasons. 1, international is growing at a very fast clip, and that's largely a retail business. We are underpenetrated in a lot of markets overseas, so that's a good news. And as the shift happens in the U. S, where wholesale continues to be soft, you're going to see that natural fit. The good news is and I think what we realized is that our retail offer is important to us, whether it's through our stores or through e commerce because we're able to offer exactly the products we want, the consumer believes is important. So it's relevant. It's out there. We're able to build the lifestyle brands are growing. Our brick and mortar and retail is important. We also now have the balance sheet to start investing in this part of the business. So I just want to add 1 or 2 things. I don't want you to I want you to take away that we're being very, very disciplined about our growth of retail or direct to consumer in total. It is strategic. It's our 3rd where to play choice to become a leading world class omnichannel retailer. And one of the things that Harmit and I have really been trying to drive is to be financially very disciplined about the addition of stores. And we have a very rigorous ROI process, very rigorous capital deployment process, if you will, and we go back and we evaluate with our Board of Directors how our retail business is performing. It is gross margin accretive. It's good from a financial standpoint. And as I think we've demonstrated, it is delivering really good results for us. Having said that, I will also say that the wholesale business and especially the U. S. Wholesale business remains really important to us. It is a third of our total business roughly and it's a very it may not be gross margin accretive, but it is EBIT margin very positive and it's an important business for us. So we've got a good portfolio, if you will, of distribution channels that gives us some balance. We can weather some U. S. Wholesale shocks by growing our DTC business. And we will continue to play our portfolio of channels and brands and markets and countries so that we can successfully grow the business for the long term and do that profitably. Okay. And just lastly, you guys referenced the strengthened balance sheet and having that flexibility. As you look forward to bringing down leverage through the growth of EBITDA and investing in your business, what's the long term objective here? I mean, is it to get to investment grade? The no, I mean, there's no strategic objective towards that. I think if that happens, it's great. I mean, the way I look at leverage is you've got to have a situation where or a position where we have access to capital at reasonable rates at any point of time, in the good days and the bad days. And I think we are at that wonderful point at this stage. If leverage has to be built because you're going after growth, we will take a look at it. But the business generates pretty damn good cash flow that allows us to mesh back in the business and grow this for the longer term. Thank you very much guys. Appreciate it. Thanks, Cove. Our next question will come from the line of Hale Holden with Barclays. Thank you for taking the call. I just had two questions. The 30 stores you added in the Q4 that negatively impacted SG and A, how many quarters until they kind of get the full run rate and don't represent a drag go forward? It varies by region, but it takes about 3 to 4 quarters for a ramp up. So it takes a little time. So I'd say you start seeing the benefits too in the second half of next year of this year, 2017. Yes. And then the 80 stores in 2017, are those overly weighted to 1 quarter? Or are they kind of spread throughout the year in terms of openings? We're working, and we just hired a Global Head of Real Estate. And as we build retail and build a lot more discipline, we're working to smoothen that out. But my sense is it's probably going to be skewed towards the second half of this year and unfortunately towards quarter 4 of this year. Understood. And then I was wondering if you guys could give us an update on specific to what you're seeing through your U. S. Outlet channels and how you felt about the number of stores you have in the outlet channel now and whether you were getting the return from the outlet stores that you expected? Yes. I mean, outlet stores, generally speaking, across the world are probably our most profitable and highest returning asset. Specifically to your question about the U. S, very similar trends relative to our mainline stores. We don't have too many mainline stores. If you look at our US portfolio, approximately 200 plus stores, I'd say, a large percentage is outlets, and they generally perform well. Our U. S. Brick and mortar business in 2016 was actually positive. It grew. And again, for all the reasons we talked about, despite a weakening traffic, it is largely we're converting better, we're selling more units per transaction and the products are a lot more relevant. I'm sorry, I just had one final one. On the Chip, on the U. S. Wholesale outlook with the store closures versus the potential for more space gains, there's Macy's, but there's other potential store closures that kind of are out there for this year. You think you kind of absorb those from pickup in other channels and you kind of work at a net flat basis and then if you get space gains that's additive And then obviously conversion on top of that, is that the way to think about it? Yes. I mean, it's definitely a very challenging environment. I mean, and our U. S. Wholesale business has declined at least the last 2 years, maybe 3, because of this challenging environment. There will be store closures. We know the Macy's ones. There could be others. I think you guys all know the facts on how over stored the U. S. Is in terms of retail footage per capita relative to other countries. So I wouldn't be surprised if there's more. We are I guess, my attitude is you plan for the worst and hope for the best. And so we're being aggressive. As I said, U. S. Wholesale and these customers, they're really important to us. We have great relationships with them. And we're partnering with each one of them to try to figure out how can we partner together where our brands help them drive more traffic and help them build their business. So more square footage for the brands that are really working. I really do believe that part of the key to success for these customers is to have strong national brands because the consumer understands what the value proposition is of a national brand. And as we've demonstrated in our own retail stores for us to show up much more as a head to toe lifestyle brand on both of our main wholesale businesses, both Levi's and Dockers. We've had really good success. We didn't really talk about it a whole lot, but Denizen and Signature grew double digit last year. And there could be an opportunity to potentially expand 1 or both of those brands into some of the other kind of mid tier department store chains as a way for them to give a value proposition to their consumer. So we've got a lot of things we're working. I mean, I would characterize it though as we're fighting an uphill battle to just try to keep even with a year ago. And if I mean, if we could grow U. S. Wholesale in this environment, it would be amazing. But we're really trying to strengthen our business. And I keep saying the real test is going to be do we come out of this year stronger in those customers than where we are going in? Is our share stronger? I think the teams are doing a really good job. Then I think the teams are doing a really good job. Perfect. Thank you for the answer. I appreciate it. You bet. Our next question will come from the line of Michelle Domenico with Shankman Capital. Hi, thanks for taking my questions. My first question was just on the M and A landscape and whether you would consider adding another brand to the portfolio, especially as we see a lot of weakness in retail apparel in the U. S. Specifically, which may offer up some opportunities, which the company might not have seen 5 years ago? So good question, Michelle. The I'd start by saying, at the outset, we believe we have a long runway for growth for existing brands. And we run this diversified business model where one channel is soft, where other channels are doing well. And one piece of the geography is soft, the other geographies are doing well. So there's long runway to growth. Having said that and given where our balance sheet is today, if there is an opportunity to acquire a brand or a competency that allows us to accelerate profitable growth and complement the build out of a lifestyle portfolio, it's something we'll take a look at. But it's not something we wake up every morning. We wake up every morning saying, how do we build and profit and grow a sustainable business? Okay. Yes, that's helpful. And then can you just remind us what percent of the total business is U. S. Wholesale specifically, not global? U. S. Wholesale, I'd say we haven't publicly talked about it, but approximately a third. It's a third, basically. A third of our total business. Okay. And then my last question was just on the capital structure. We've seen some other companies take advantage of what they think is maybe a low point of rate, which may be going up. And you have a bond that's becoming callable this year. I was just wondering how you think about the trade off of calling that early versus for lower coupon versus potentially keeping outstanding? We think of it like you do. We look at it we take an economic look at it, and if there is an opportunity, which is positive from a net present value, it's something we consider. You are right. The environment is very attractive, especially to put on or refinance a note that's for decent long term tenure. Okay, great. Thank you. Thank you. And at this time, I'll turn the conference call back over to the company for any closing remarks. Okay. Well, thank you all very much for dialing in. Happy New Year to everyone. And we look forward to speaking with you again very shortly, again in April. Thanks very much. Thank you. This concludes today's conference call. Please disconnect your lines at this time.