Earnings Call: Q1 2016

Apr 12, 2016

Ending February 28, 2016. 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 2 hours after the completion of this call through April 18, 2016 by calling 855 859-2056 in the United States and Canada and 404-537-3406 for all other locations. Please use conference ID 81204,858. This conference call also is being broadcast over the Internet and a replay of the webcast will be accessible for 1 month on the company's website, levistrauss.com. I would now like to turn the call over to Chris Ogle, Vice President, Treasury and Investor Relations at Levi Strauss and Company. Thank you. Good afternoon, everyone, 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, our President and CEO and Harmit Singh, our Executive Vice President and Chief Financial Officer. 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 quarterly report on Form 10 Q, our registration statements, today's earnings press release and our other filings with the Securities and Exchange Commission, 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 a material adverse effect 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. You'll find the appropriate reconciliations and descriptions of our non GAAP financial measures at the earnings webcast page in the Investors section of our website as well as in today's earnings press release. Finally, today we filed our quarterly financial report on Form 10 Q with the SEC and it's available on our website. Now I'll turn the call over to Chip Berg. Thanks, Chris, and good afternoon, everyone. Thank you for joining us today. We got off to a good start in our Q1 of 2016. Revenues were flat and gross and adjusted EBIT margins grew on a reported basis despite notable currency headwinds. On a constant currency basis revenue grew 5% and profits were up double digits. We continued to execute on our long term strategies to drive sustainable profitable growth. The Levi's brand grew men's and women's tops and bottoms, key international markets grew revenues and our expanding direct to consumer channel continued to perform well. Harmit will now walk us through the financial details for the quarter. Harmit? Thank you, Chip. Welcome to everyone joining our call. My comments today will reference 1st quarter comparisons on a year over year basis in U. S. Dollars unless I indicate otherwise. 1st quarter net revenues of $1,100,000,000 were flat on a reported basis and grew 5% excluding $46,000,000 in unfavorable currency translation effects. Global revenues from our direct to consumer channel grew low double digit on a constant currency basis, driven both by improved performance of existing stores as well as ongoing expansion of the network internationally. In our wholesale channel, global revenues grew 1% on a constant currency basis. Global men's revenues grew low single digits and global women's revenue grew in the mid teens. Gross profit for the quarter grew 4% on a reported basis to $560,000,000 as compared to $537,000,000 last year. Despite unfavorable currency translation effects of approximately $24,000,000 Reported gross margin grew more than 200 basis points to 53%. The improvement primarily reflected lower negotiated sourcing costs and growth in our higher margin international and retail businesses. The strong margin improvement was despite increased sales of discounted Levi's units in the U. S. As we began to manage higher inventory levels of inventory we've seen in the quarter and the impact this quarter incorporated off the Dockers transition. 1st quarter SG and A expense of $441,000,000 was up from 4.25 $1,000,000 on a reported basis. Currency favorably impacted SG and A by $15,000,000 Excluding currency, higher SG and A reflected the ongoing expansion of our retail network and e commerce business. We had 86 more company operated stores at the end of the Q1 than we did a year ago. Higher SG and A in the Q1 also included higher advertising investment primarily associated with the activation of Super Bowl as Chip discussed on our last earnings call. Of the 150 basis points increase in SG and A as a percentage of revenues, 130 basis points related to direct to consumer and advertising investments. Adjusted EBIT of $124,000,000 grew 4% from the prior year on a reported basis and grew 12% without $9,000,000 in unfavorable currency effects. As a percentage of net revenues, adjusted EBIT improved to 12% as compared to 11% last year as the higher gross margin more than offset our increased direct to consumer and advertising investments. A detailed reconciliation of adjusted EBIT is attached to our press release. 1st quarter net income grew to $66,000,000 as compared to $38,000,000 last year. Higher adjusted EBIT, lower foreign currency transaction losses and lower interest expense drove the increase. Now I'll share more detail on the Q1 results of our 3 regions. Net revenues in the Americas declined 1% on a reported basis, but grew 2%, excluding $11,000,000 in unfavorable currency effects. For the region, direct to consumer and wholesale revenues grew, primarily in Mexico. Traffic in our company operated stores continue to decline, but we more than offset the impact through strong conversion and modest growth in e commerce. Our U. S. Wholesale business declined, primarily reflecting the Dockers transition. Adjusted EBIT for the Americas declined 18%, excluding $2,000,000 in negative currency impacts, mainly reflecting Dockers transition costs and higher advertising expenses as we expected. In Europe, net revenues grew 8% without $22,000,000 in unfavorable currency effects and on a reported basis were roughly flat to last year. Growth was driven by direct to consumer expansion and performance concentrated in the UK, Germany and France. Adjusted EBIT in Europe grew 15% excluding $4,000,000 in negative currency impacts, reflecting the revenue growth and a higher gross margin. In Asia, net revenues were up 10% without $13,000,000 in unfavorable currency effects and were up 3% on a reported basis, primarily in our direct to consumer and traditional wholesale channels. China, India and Japan comprised the majority of the region's growth in the quarter. Adjusted EBIT in Asia grew 6%, excluding $4,000,000 in negative currency impacts, reflecting the region's higher net revenues. Turning to the balance sheet and cash flows. Inventory dollars and units are up, both from November and from a year ago. Nearly half the increase during the quarter relates to earlier timing of receipts, normal seasonal build and expansion of our direct to consumer channel. We anticipated some inventory build given the tepid retail environment in our wholesale channel in the U. S. The increase in inventory is largely comprised of core products that will continue into future seasons. We are proactively managing inventory down. It will take some time and we expect to return to normal levels by year end. While this will pressure gross margin, we still expect to achieve our full year margin target of 51%. First quarter free cash flow was $28,000,000 up from $12,000,000 last year and despite $8,000,000 more CapEx this year. Total available liquidity at quarter end exceeded $1,000,000,000 comprised of cash of $271,000,000 $740,000,000 available under our credit facility. Net debt was $810,000,000 a modest decrease from $834,000,000 at year end and our leverage declined slightly to 1.9 from 2.0 a year ago. Additionally, during the Q2, we paid the $60,000,000 dividend that we announced in February. With that, I'll turn it back over to Chip. Thanks, Harmeet. So as you heard, a very solid start to the year. And while it won't be easy in light of the fragile macroeconomic factors globally, we remain optimistic to deliver our full year constant currency financial objectives of profitably growing revenues and gross margins. Meanwhile we remain focused on our fiscal 2016 priorities to return the U. S. Business and the Dockers brand to growth and to sustain growth in direct to consumer and our international businesses. In the Q1 beyond the impact of the Dockers transition our U. S. Business trended somewhat better than we anticipated. Levi's brand revenues grew in men's and women's, our direct to consumer channel offset lower foot traffic with conversion, expansion and e commerce. Consumer reception to our Levi's women's denim collection in our stores remain strong and our Denizen and Signature products continue to perform well. Our biggest challenge remains our U. S. Wholesale business which we expect will decline in the Q2 reflecting the continuing soft conditions in this channel. Timing of some seasonal shipments as compared to last year and the Dockers transition that we have referenced will also contribute to a softer second quarter. The Dockers turnaround is underway as we position for growth in the second half of this year. As I mentioned last quarter, we're taking the opportunity during this 30th anniversary year to begin to reposition the brand and migrate the product assortment toward more casual styles while simplifying the consumer shopping experience. During the Q1 of 2016 the decline in Dockers revenue from the transitioning product lines was partially offset by revenue growth in the brand's on trend casual pants segment. Toward the end of the Q2 you will start to see on floors our revamped signature khakis in a stretch fabrication. In fact the product is now online and based on early results we are optimistic that as we move into the Q3 we will pivot the brand to growth and deliver overall growth for the full year. And as Harmit outlined international direct to consumer momentum continued in the Q1 through our investment in stores and improved execution at retail. Several international markets were key to our growth and we grew direct to consumer revenues through improved performance of our existing store base as well as from the stores we've added since last year. Our retail footprint expansion continued in the Q1 and we remain committed to opening more than 70 company operated stores in 2016. Looking forward, we expect the 2nd quarter to be much softer than the Q1 performance suggests. Revenue growth is expected to be more muted driven by the performance in U. S. Wholesale. Adjusted EBIT is projected to decline year over year as we reduce inventory and spend more on advertising. In addition, we will also lap last year's gain on selling the facility in Turkey. With that operator, we can open up the lines and we'll take your questions. Thank you. The floor is now open for questions. And your first question comes from the line of Jenna Giannelli with Citigroup. Just first question, just on the gross margin expansion in the quarter. I think it was a little bit better what we were expecting, but you seem to have a little bit more of a cautious tone for the rest of the year. Is that just kind of related to the elevated inventory levels? Or is there anything else that you're seeing that makes us the reasons why we shouldn't be bullish post the Q1? Yes, Jenna. Thanks for the question. Gross margins have grown over the last couple of quarters. Approximately so let's talk about the drivers of gross margin relative to a year ago for the quarter. I'd say close to 75%, 80% of gross margin increases, thanks largely to us negotiating lower costs with our vendors combined with the fact that we've been able to largely thanks to the global productivity initiative that we initiated in 2014, do things like simplify fabrics, etcetera. The other piece is structural and as we grow our international and retail businesses that helps grow gross margin and to offset some of the currency issues we also take in pricing. So those factors are the key contributors. The reason we are the other piece is as you model gross margins in our business, quarter 2 seasonally is probably our softest quarter. So as we project the year, the fact that we will be promoting a little bit more to manage our inventory down as well as just the seasonal effect is what drives us to project getting close to the 51% gross margin number that we reflected. Okay, great. Thanks. And then and just a follow-up back on kind of going back to the inventories being up about, I guess, 25% year over year. Can you give us a sense of kind of where that is, is kind of more Americas, international men's versus women's? And how much of that was sort of planned versus just maybe more leftover product that we should think about you working through the rest of the year? Sure. Basically, I'd say half of the increase during the quarter relates to 3 things. The earlier timing of receipts during the Q1, planned seasonal build and an expansion of our direct to consumer channel as well as the international businesses. The other half is largely driven by the tepid retail environment in our U. S. Wholesale channel. Now just something for you to be aware of that in our business the lead times are slightly longer. So for example, as the environment slowed down, we were building inventory based on demand signals we received in the front half of twenty fifteen. So as the demand signal slowed down, inventory built up. We've all begun to proactively manage it down. And in quarter 1, for example, we sold more incentive units than we originally planned for. So it will take some time. We're doing a couple of things. We are reducing orders for core products. As I mentioned earlier, when I talk margins, we're promoting a little bit more and then we're clearing inventory through off price channels. So in terms of geographic mix and in terms of the health of the inventory, the inventory is largely our core products, largely driven by men's. So that's where we think we can manage it down and over time it had a dramatic impact to margins is largely based in the U. S. There's been some build internationally, but that's largely driven by the fact we're growing at a very fast pace and adding a whole bunch of stores. So hopefully this response to your question. No, it's very helpful. Thank you. Thank you. And then just one final one if I may. The mid teens growth that we're seeing in women's, how long can we expect that type of growth to continue? And is there anything kind of new or incremental from a product pipeline standpoint that we should think about for the rest of the year on top of what you guys have already done? Thanks. Well, I'd like to be able to say that we can continue to grow double digit for a long, long time. We'll soon be lapping the relaunch of the women's line. If you recall that hit the floors kind of the end of the summer last year. So we've got about another quarter or 2 of lower base and then pretty soon we're going to be up against the launch. Obviously, we've thought about that and planned it and we're continuing to innovate on our women's business and we'll continue to bring some excitement to that business as we do begin to lap it. I don't know if we'll continue to grow at double digit. I don't want to promise that, but we're really focused on accelerating the growth on our women's business both tops and bottoms and feel very confident based on the 1st 3 quarters since we relaunched it. Excellent. Thanks so much. Your next question comes from the line of William Reuter with Bank of America Merrill Lynch. Hi Bill. Good afternoon guys. The changes in negotiated sourcing levels which it sounded like contributed a lot to the gross margin expansion, when did those kind of changes get made or when were those contracts or agreements or lower prices? When did those start? We negotiate annually. So you're seeing the impact of negotiations that took place last year for 20 constant process. We've been able to leverage our scale a lot better than we have in the past. And that's largely thanks to the fact that we're really focused on the products we're introducing as well as we're simplifying things like fabrics that I talked to you earlier. Okay. And then with regard to the commentary about the Q2 getting softer, did you guys see a material change in the cadence of, I guess, the number of shoppers or the traffic in your stores, I guess, in the beginning of March relative to what you'd seen in the previous quarter? No. Nothing significant in our stores. It's the revenue being a little muted is a combination of, I would say, the continuation of softer traffic trends we've seen in the wholesale channel, as well as some timing. Some spring shipments were shipped in Q1 as compared to Q2, as well as we see the orders for the second half of the year, we expect probably a lower replenishment of orders in anticipation of our fall products. So that's really driving the what we're signaling a revenue change in trends for quarter 2, plus there's the darkest transition. Okay. And then just lastly for me, you talked about weak traffic and then you also talked about better conversion. I don't know if you can give us any context to like what types of declines in traffic and what types of improvements in conversion we're seeing and kind of related to that, what you are doing such that your conversion rate is improving? Thanks. In terms of, Bill, traffic declines, going back a year, thanks to the currency pressures, we probably saw in our tourist locations traffic declines starting in quarter 2. So we'll probably start lapping that. We've been driving conversion now for a long, long time. Despite a traffic decline, our sales have largely been positive. And a couple of things that are really driving that, We've been focusing on pushing the products that are really working. We've got better execution happening at the store level and that is a combination of product training, selling training, etcetera. And as well as, as we're focused on building Levi's into more of a lifestyle brand and the focus on introducing the teas and growing the top business, our unit per transaction has also improved. So that's why conversion overall followed by UPT are big drivers of it. Okay. Thank you very much. Thank you. Your next question comes from the line of Carla Casella with JPMorgan. Hi. I have a question about advertising spending. It was a little bit higher than we expected this quarter. I'm wondering, should the cadence of advertising spend be similar to the last year for the rest of the year? Or is there any more shift as it goes with the quarters? So we spent, Karl, about 5.4% in quarter 1. As we mentioned in our last call, we expect to be spending on a full year basis, probably 50 basis points more advertising. It's driven by a couple on a full year basis, driven by the fact that we did activate the Super Bowl this year as well as our businesses, especially in international expand, we're spending a little bit more in businesses overseas. Going back to quarter 2, and I'll just try and help you with the bridge for quarter 2. We expect quarter 2 advertising to also pick up relative to last year and that's largely driven by the fact we're spending more money on TV advertising for example in the U. S. As well as some more money in international. So most of the 50 basis points increase for the full year is projected to happen in the first half. Okay. And then on the inventory side, you mentioned that you'll be able to manage down inventory. Should that be done by 2Q? Or do you think some of that could be carryover into 3 or 4? I think a large part of it is actually happened in the second half in Q3 and 4. I think you'll see modest improvement in quarter 2, but a lot more happening in quarter 3. And then as we close the year, getting to year over year levels, which are a lot more modest in terms of increase than you've seen so far. Okay. I would have thought with this cold April and the snow we've had, this might have helped some of the genes over the spring merchandise. But another question on the docker side of the business. Can you just give us a little more commentary on the wholesale when you talked about wholesale weakness, can you talk about your dockers relative to Levi and how we should look at that as we go forward in the next couple of quarters? Sure. I guess the way to think about they're interconnected obviously, right? Dockers is predominantly a U. S. Business and almost exclusively a wholesale business here in the U. S. And Dockers have struggled over the last 18 months or so in wholesale and that has brought our wholesale numbers down. Relatively speaking, Levi's is performing better in wholesale than Dockers. Dockers, we're trying to reposition this business for growth, which will begin happening kind of in the second half as we bring in new product that's really more market relevant. I talked about the Signature Stretch product which is now available online. That makes up a big part of the Dockers business here in the U. S, 40% of the business roughly. That will be hitting wholesale floors kind of late second quarter. So as we've been trying to get ready to bring in this new product, we've been working with our wholesale partners to flush the old product. Obviously, investing in discounting that product to move it out of the stores to make room for the new product as it comes in. So we invested a fair amount of money in that this past quarter and it has negatively impacted our sales. But it's all to set us up for what's to come in the second half and not too different than what we did on the women's business honestly a year ago where we had to get rid of old product on the floor in order to position us to launch more exciting market relevant product, which in the case of Dockers will come in the second half of this fiscal year. Okay, great. And then one housekeeping item, Of your cash balance, how much of that is tied up overseas versus accessible in the U. S? Yes, I'd say the way to think about it, Carla, is a third is tied up, a third is permanently invested. So it's a third is tied up, but we can bring it back in through treasury and tax strategy we do. A third is permanently invested and about a third is in the U. S. Broadly speaking, that's how you should think about our cash at any point of time. Okay. So no change. Okay, thanks. Your next question comes from the line of Grant Jordan with Wells Fargo. Hey, good afternoon. This is David Eller on for Grant. You talked a couple of times about performance in Europe and Asia with the store growth helping out there, but then you also called out strong performance. Could you maybe dive into kind of what exactly went well, whether it be products or men's versus women's? So yes, I think you're referring to the fact that we've said that our direct to consumer business was driven both by strong performance of existing stores and strong performance of our in terms of opening new stores and that is fact our business outside the U. S. Is primarily retail. So the way to think about is Europe is 50% wholesale, 50% retail. Asia is 70%, I would say, majority retail with the growing wholesale business. So both factors did contribute. In terms of what drove it, clearly, the women's products have had a major factor internationally, largely because we are seeing good growth in our businesses that we run, which is our retail doors and that's across the world, including the U. S. But internationally is the retail business is a stronger component. The other fact that's driving our direct to consumer business overseas is also e commerce. We've seen good e commerce growth both in Europe as well as Asia. And we talked about execution at retail stores conversion as well as UPT across our retail businesses internationally has also been fairly strong. I guess I would just add one other thing Grant. I mean execution has been really, really important. Harmit mentioned a minute ago that we're investing a little bit more money in marketing support both in Europe and Asia because we've got pretty compelling evidence that it's working. And if you were to talk to Seth Ellison, our President of the European business, he would say the Levi's brand is really strong right now and on a roll. We're growing share. We feel really, really good about the growth that we're seeing on our business. The women's business in both Europe and in Asia since we've relaunched it has been growing really strongly in both regions. And we're just trying to go from success to success and we are investing behind that given the really strong results that we're seeing and what you guys know is a very difficult environment. Great. And then turning to just kind of the depth of the M and A market, the number of deals that maybe you've seen or looked at over the last couple of years, how does that compare to kind of the pipeline you're looking at right now? And if you could update us on your appetite for either kind of bolt on M and A or more transformational deals? Yes, David, typical comment on the pipeline, but I'd say that our balance sheet is a lot stronger. I'd also say that given the growth we have seen over the last couple of quarters and what we think about our business long term, we believe we can grow this business organically at a steady clip. In terms of M and A activity, it's probably going to be opportunistic if at all. And if something comes along that we think complements our brands and the strategic direction of the company, we'll take a look at it. Okay. And then last question from us on the Dockers transition, if you could I think you said maybe in Q2 you'll kind of be phasing out of the discounting and clearing the old product, is that correct? And you said you expect to grow for the full year, I'm guessing that was kind of the sales number not kind of the profit number, is that accurate? Yes, that's accurate. I don't want to promise that all discounting will be done by the Q2. I mean a lot is going to be based on what's still left in the doors, but by the end of the Q2, we will have the new Signature stretch. Signature is 40 plus percent of the Dockers business at wholesale here in the U. S. That new product will be on the floor along with some new signage. We'll probably still have some carryover product trickling into the 3rd Q4, but the casual part of our business is growing right now as we speak. A lot of that product has stretch in it already. So by resetting this other 40%, we do expect the second half will grow and that we will grow for the year. So said differently, the growth in the second half is going to offset the decline in the first half. That's the expectation. Okay, great. Thanks for taking the questions. Yes, good talking to you. Thank you. Your next question comes from the line of Hale Holden with Barclays. Hi, thank you for taking the call. Just a couple of questions. I'm wondering what is the conversation like between you and your retail customer? And do you see sort of retail buying less from you as a function of them being a little bit more cautious than we expected? Well, I guess probably the best way to answer that is to say that we view our relationship with every single one of our customers as a real partnership and that we're focused on each other's best interest. And some of the customers are growing and it's working and our business is working inside their stores and in a couple of other instances we're a little bit more challenged and they're a little bit more challenged. But that's just an opportunity to kind of continue to work on getting things right. I really don't want to comment on whether they're cutting back orders or they're open to buy budgets, you can ask them that question. But we're focused on partnering with each one of our customers to try to build our business and build our brands in their stores. Got it. So given the recent outperformance, I guess, from your women's line, are you seeing a little bit more floor space wholesale floor space from your customer? At this point, no. Got it. So another one just quickly on SG and A. So can you maybe break down the incremental investment in SG and A? Is it related to maybe a spike in store opening in 2Q or is some other major project you're working on our DTC department and can you just comment on that? Sure. Let me try and break it up because I heard SG and A and also heard a reference to quarter 2. So let me try and help you on board. Let's start with quarter 1. SG and A was up SG and A was as a percent of revenue was 41.8% and it was 150 basis points higher than a year ago. 70 basis points was largely driven by higher selling expenses, which is primarily our investments in e commerce. And to the question you asked, the 86 store increase that we've seen year over year. So that's one piece of it. The 60 basis points increase was driven by higher advertising investments and that's again primarily associated with the Super Bowl activation. So that's the first piece of it, which means our organic SG and A is largely in check and in fact in control and is largely driven by the fact that we are focused on managing our costs, especially as we implement our global productivity initiatives. Now talking about quarter 2, because we did say that in quarter 2, besides the revenue being muted, EBIT will also decline year over year and that's really driven by a couple of factors. 1 is the higher spending in advertising and that's if you heard my comments to Carla, we are spending 50 basis points more advertising for the year. A large part of that is in the first half. And the second piece is last year in quarter 2, we actually recorded $8,000,000 gain through the sale of our finishing and distribution facility in Turkey and that's something that will not be offset this year. The other piece is with revenues a little bit more muted than quarter 1 and expenses a little higher, the percentage as you know, the percentage will be higher and that's why EBIT adjusted EBIT as a percentage in quarter 2 will be we expect will be lower. Great, thank you very much. That's all my questions. Thanks, Hale. Your next question comes from the line of Karru Martinson with Deutsche Bank. Just following up on Carlo's advertising question, I mean, you have a high 6% of sales range? Yes, that's right. So a year ago it was 6%, with a 50% increase in basis points, we're talking 6.5%. Okay. And then when we think about repositioning Dockers, I mean, once we kind of get through the older inventory, will we see this kind of rollout uniformly? Will this be more to your stores at first and then wholesale? And kind of what's going to be really different about Dockers today versus Dockers when it's repositioned? Well, it's really fundamentally a wholesale business here in the U. S. So it's going to be what you see in wholesale. I think what you're going to see that's different and I should say that we've obviously shared this with all of our key customers and they're genuinely excited about it too is a dramatic simplification of shopping experience for the consumer. We're moving to essentially 4 pillars and which really reflects the casualization that casualization trend that's happening along with a move towards more stretch fabrication. So you'll see different in store signage and the way the brand shows up, different way it's merchandised, much more focus on casual looks and more focus on more innovative stretch fabrics. Okay. So when you guys It's pretty significant, I mean it's a pretty significant change versus what you would see in the store today which is a little bit of a collection of multiple years of trying different things on this business that makes the shopping experience more challenging for the consumer. It cleans it all up, it simplifies it dramatically and it moves towards looks and silhouettes that the consumers are looking for today with fabrications that they want. Okay. And when we look at your kind of you mentioned annually renegotiating sourcing costs. When we look at cotton costs out in the market today at long term lows, is that something that we can capture this year or is that more of a benefit into 2017? More 2017, Karru, because largely we've through our negotiations for this year and cotton, for example, the latest cotton prices are probably 10% down from what the lows we've seen. And to be clear, we don't buy cotton. So yes, it's most of our sourcing is to 3rd parties. But cotton is just one input component that goes into our manufacturer. The other costs which are largely wage inflation, we expect part of that to be offset with costs like higher wages etcetera. Okay. Just lastly, you guys have a small stub piece of those yen bonds still outstanding, they're bullet to November, I think 2016 here. What's the thought process for those? The November is not very far, so we expect when November comes we'll probably pay the bonds down at that point of time. Thank you very much guys. Appreciate it. Thanks, Arun. And your last question comes from the line of Kevin Kwan with Goldman Sachs. Hi, good afternoon. Thanks for taking the questions. Most have been asked and answered, but just a couple of follow ups. Pramit, I think it was you who mentioned that the excess inventory or the inventory build was in the core product and mostly men's. Would you say that that excess inventory was more due to just weaker consumer trends or was there anything to do with fashion as to why it was kind of left on hand? It's basically the weaker retail environment and some seasonal builds earlier than we thought and some timing of receipts earlier than we thought. So and that's why we think the health of the inventory is solid. And the question is, do we mark the product down and sell and bank the cash or do we take it or do we sell it over time. So that's the commercial equation that we grapple with. But we're committed given the amount of cash we have tied up in inventory, we're committed to manage the levels down through the rest of the year. Okay. That's helpful. Thank you. And just one final one. When thinking about wholesale and your guidance for 2Q, you mentioned, I believe that you think you've held your own or held steady the shelf space. But with a lot of wholesale partners closing stores, would you say that or can you quantify the percentage of let's say shelf space or square footage you would be down this year versus last year as a result of some of these door closures? Kevin, what we said earlier is that we don't think it's going to be material for two reasons. 1, the stores that are closing are low volume stores. So the impact in that in our total businesses is not dramatic. And the second is, given our past history where we've where some of our customers have closed doors, we've been able to remap that either through our own stores or through other wholesale retailers. Okay, thank you. Yes, thank you. Thank you. All right. So thank you all for joining us. We're pleased with the start to the year that we've had pretty broad based and balanced growth on a currency neutral basis. And we remain optimistic that we'll deliver on our commitments for the year. So thanks a lot for joining us. Thanks for your questions. And we look forward to talking with you next quarter.