UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

 

 

 

 

For the fiscal year ended November 28, 2010

 

Commission file number: 002-90139

 

 

 

 

LEVI STRAUSS & CO.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

1155 BATTERY STREET, SAN FRANCISCO, CALIFORNIA 94111

(Address of Principal Executive Offices)

 

(415) 501-6000

(Registrant’s telephone number, including area code)

 

 

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The Company is privately held. Nearly all of its common equity is owned by descendants of the family of the Company’s founder, Levi Strauss, and their relatives. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock $.01 par value — 37,323,947 shares outstanding on February 3, 2011

 

Documents incorporated by reference: None

 

 

LEVI STRAUSS & CO.

 

TABLE OF CONTENTS TO FORM 10-K

 

FOR FISCAL YEAR ENDING NOVEMBER 28, 2010

 

 

 

Overview

 

From our California Gold Rush beginnings, we have grown into one of the world’s largest brand-name apparel companies. A history of responsible business practices, rooted in our core values, has helped us build our brands and engender consumer trust around the world. Under our brand names, we design and market products that include jeans, casual and dress pants, tops, skirts, jackets, footwear, and related accessories for men, women and children. We also license our trademarks for a wide array of products, including accessories, pants, tops, footwear and other products.

 

An Authentic American Icon

 

Our Levi’s^® brand has become one of the most widely recognized brands in the history of the apparel industry. Its broad distribution reflects the brand’s appeal across consumers of all ages and lifestyles. Its merchandising and marketing reflect the brand’s core attributes: original, definitive, honest, confident and youthful.

 

Our Dockers^® brand was at the forefront of the business casual trend in the United States. It has since grown to be a global brand covering a wide range of khaki and khaki-inspired styles for men and women with products rooted in the brand’s heritage of the essential khaki pant. We also bring style, authenticity and quality to a broader base of jeanswear consumers through our Signature by Levi Strauss & Co.^tm brand and our recently-launched Denizen^tm brand.

 

Our Global Reach

 

Our products are sold in more than 110 countries, including established markets, which we refer to as mature markets, such as the United States, Japan, and Western Europe, and developing markets, such as India, China, Brazil and Russia. We group these markets into three geographic regions: Americas, Europe and Asia Pacific. We support our brands throughout these regions through a global infrastructure, developing, sourcing and marketing our products around the world. Although our brands are recognized as authentically “American,” we derive approximately half of our net revenues from outside the United States. A summary of financial information for each geographical region, which comprise our three reporting segments, is found in Note 19 to our audited consolidated financial statements included in this report.

 

Our products are sold in approximately 55,000 retail locations, including approximately 2,300 retail stores dedicated to our brands, both franchised and company-operated. We distribute our Levi’s^® and Dockers^® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and franchised stores outside of the United States. Levi’s^® and Dockers^® products are also sold through brand-dedicated online stores operated by us as well as the online stores of certain of our key wholesale customers and other third parties. We distribute Signature by Levi Strauss & Co.^tm brand products primarily through mass channel retailers in the United States and Canada and franchised stores in Asia Pacific, and we distribute Denizen^tm products through franchised stores in Asia Pacific.

 

Levi Strauss & Co. was founded in San Francisco, California, in 1853 and incorporated in Delaware in 1971. We conduct our operations outside the United States through foreign subsidiaries owned directly or indirectly by Levi Strauss & Co. We have headquarter offices in San Francisco, Brussels and Singapore. Our corporate offices are located at Levi’s Plaza, 1155 Battery Street, San Francisco, California 94111, and our main telephone number is (415) 501-6000.

 

Our common stock is primarily owned by descendants of the family of Levi Strauss and their relatives.

 

Our Website — www.levistrauss.com — contains additional and detailed information about our history, our products and our commitments. Financial news and reports and related information about our company can be found at http://www.levistrauss.com/Financials. Our Website and the information contained on our Website are not part of this annual report and are not incorporated by reference into this annual report.

Our Business Strategies

 

Our management team is actively investing in strategies to grow our business, respond to marketplace dynamics and build on our competitive strengths. Our key long-term strategies are:

 

 

Our Brands and Products

 

We offer a broad range of products, including jeans, casual and dress pants, tops, skirts, jackets, footwear and related accessories. Across all of our brands, pants — including jeans, casual pants and dress pants — represented approximately 84%, 85% and 85% of our total units sold in each of fiscal years 2010, 2009 and 2008, respectively. Men’s products generated approximately 72%, 73% and 75% of our total net sales in each of fiscal years 2010, 2009 and 2008, respectively.

 

Levi’s^® Brand

 

The Levi’s^® brand epitomizes classic American style and effortless cool and is positioned as the original and definitive jeans brand. Since their inception in 1873, Levi’s^® jeans have become one of the most recognizable garments in the world — reflecting the aspirations and earning the loyalty of people for generations. Consumers around the world instantly recognize the distinctive traits of Levi’s^® jeans — the double arc of stitching, known as the Arcuate Stitching Design, and the red Tab Device, a fabric tab stitched into the back right pocket. Today, the

Levi’s^® brand continues to evolve, driven by its distinctive pioneering and innovative spirit. Our range of leading jeanswear and accessories for men, women and children is available in more than 110 countries, allowing individuals around the world to express their personal style.

 

The current Levi’s^® product range includes:

 

 

Our Levi’s^® brand products accounted for approximately 81%, 79% and 76% of our total net sales in fiscal 2010, 2009 and 2008, respectively, approximately half of which were generated in our Americas region.

 

Dockers^® Brand

 

The Dockers^® brand has embodied the spirit of khaki for 25 years. First introduced in 1986 as an alternative between jeans and dress pants, the Dockers^® brand is positioned as the khaki authority with a range of khaki-inspired products. In 2009, the Dockers^® brand launched the Wear the Pants campaign globally, with a focus on khakis’ masculinity and swagger, and reminding men that Dockers^® is indeed the world’s best and most loved khaki brand. The focus on men and pants continues, as the brand modernizes the category and engages a new generation of men. The brand also offers a complete range of khakis and khaki-inspired styles for women, with products designed to flatter her figure and inspire her individual style.

 

Our Dockers^® brand products accounted for approximately 15%, 16% and 18% of our total net sales in fiscal 2010, 2009 and 2008, respectively. Although the substantial majority of these net sales were in the Americas region, Dockers^® brand products are sold in more than 50 countries.

 

Signature by Levi Strauss & Co.^tm Brand and Denizen^tm Brand

 

In addition to our Levi’s^® and Dockers^® brands, we offer two brands focused on consumers who seek high-quality, affordable and fashionable jeanswear from a company they trust. We offer denim jeans, casual pants, tops and jackets in a variety of fits, fabrics and finishes for men, women and kids under the Signature by Levi Strauss & Co.^tm brand through the mass retail channel in the United States and Canada and franchised stores in Asia Pacific. We also recently launched the Denizen^tm brand in Asia Pacific to reach consumers in the emerging middle class in developing markets who seek high-quality jeanswear and other fashion essentials at affordable prices. The product collection — including a variety of jeans, tops and accessories — complements active lifestyles and empowers consumers to express their aspirations, individuality and attitudes.

 

Signature by Levi Strauss & Co.^tm brand and Denizen^tm brand products accounted for approximately 4%, 5% and 6% of our total net sales in fiscal years 2010, 2009 and 2008, respectively. Given that it launched late in 2010, Denizen^tm brand products sales had a limited impact on these numbers.

 

Licensing

 

The appeal of our brands across consumer groups and our global reach enable us to license our Levi’s^® and Dockers^® trademarks for a variety of product categories in multiple markets in each of our regions, including footwear, belts, wallets and bags, outerwear, sweaters, dress shirts, kidswear, sleepwear and hosiery. We also license our Signature by Levi Strauss & Co.^tm and our Denizen^tm trademarks in various markets for certain product categories.

In addition to product category licenses, we enter into regional license agreements with third parties to produce, market and distribute our products in several countries around the world, including various Latin American, Middle Eastern and Asia Pacific countries.

 

We enter into licensing agreements with our licensees covering royalty payments, product design and manufacturing standards, marketing and sale of licensed products, and protection of our trademarks. We require our licensees to comply with our code of conduct for contract manufacturing and engage independent monitors to perform regular on-site inspections and assessments of production facilities.

 

Sales, Distribution and Customers

 

We distribute our products through a wide variety of retail formats around the world, including chain and department stores, franchise stores dedicated to our brands, our own company-operated retail network, multi-brand specialty stores, mass channel retailers, and both company-operated and retailer websites.

 

Multi-brand Retailers

 

We seek to make our brands and products available where consumers shop, including offering products and assortments that are appropriately tailored for our wholesale customers and their retail consumers. Our products are also sold through authorized third-party Internet sites. Sales to our top ten wholesale customers accounted for approximately 33%, 36% and 37% of our total net revenues in fiscal years 2010, 2009 and 2008, respectively. No customer represented 10% or more of net revenues in any of these years, although our largest customer in 2010 and 2009, Kohl’s Corporation, accounted for nearly 10% of net revenues in each year. The loss of one of these or any major customer could have a material adverse effect on one or more of our segments or on the company as a whole.

 

Dedicated Stores

 

We believe retail stores dedicated to our brands are important for the growth, visibility, availability and commercial success of our brands, and they are an increasingly important part of our strategy for expanding distribution of our products in all three of our regions. Our brand-dedicated stores are either operated by us or by independent third parties such as franchisees and licensees. In addition to the dedicated stores, we maintain brand-dedicated websites that sell products directly to retail consumers.

 

Company-operated retail stores.  Our company-operated retail and online stores, including both full-price and outlet stores, generated approximately 15%, 11% and 8% of our net revenues in fiscal 2010, 2009 and 2008, respectively. As of November 28, 2010, we had 470 company-operated stores, predominantly Levi’s^® stores, located in 27 countries across our three regions. We had 190 stores in the Americas, 173 stores in Europe and 107 stores in Asia Pacific. During 2010, we added 79 company-operated stores and closed 23 stores.

 

Franchised and other stores.  Franchised, licensed, or other forms of brand-dedicated stores operated by independent third parties sell Levi’s^®, Dockers^®, Signature by Levi Strauss & Co.^tm and Denizen^tm products in markets outside the United States. There were approximately 1,800 of these stores as of November 28, 2010, and they are a key element of our international distribution. In addition to these stores, we consider our network of dedicated shop-in-shops located within department stores, which may be either operated directly by us or third parties, to be an important component of our retail distribution in international markets. Approximately 300 dedicated shop-in-shops were operated directly by us as of November 28, 2010.

 

Seasonality of Sales

 

We typically achieve our largest quarterly revenues in the fourth quarter, reflecting the “holiday” season, generally followed by the third quarter, reflecting the Fall or “back to school” season. In both 2010 and in 2009, our net revenues in the first, second, third and fourth quarters represented 23%, 22%, 25% and 30%, respectively, of our total net revenues for the year.

 

Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each

quarter of fiscal years 2010, 2009 and 2008 consisted of 13 weeks, with the exception of the fourth quarter of 2008, which consisted of 14 weeks.

 

Marketing and Promotion

 

We root our marketing in globally consistent brand messages that reflect the unique attributes of our brands, including the Levi’s^® brand as the original and definitive jeans brand and the Dockers^® brand as world’s best and most loved khaki. We support our brands with a diverse mix of marketing initiatives to drive consumer demand.

 

We advertise around the world through a broad mix of media, including television, national publications, the Internet, cinema, billboards and other outdoor vehicles. We use other marketing vehicles, including event and music sponsorships, product placement in major motion pictures, television shows, music videos and leading fashion magazines, and alternative marketing techniques, including street-level events and similar targeted “viral” marketing activities.

 

We also use our Websites, www.levi.com, www.dockers.com, www.levistrausssignature.com, and www.denizen.com, as marketing vehicles in relevant markets to enhance consumer understanding of our brands and help consumers find and buy our products.

 

Sourcing and Logistics

 

Organization.  Our global sourcing and regional logistics organizations are responsible for taking a product from the design concept stage through production to delivery to our customers. Our objective is to leverage our global scale to achieve product development and sourcing efficiencies and reduce total product and distribution costs while maintaining our focus on local service levels and working capital management.

 

Product procurement.  We source nearly all of our products through independent contract manufacturers. The remainder are sourced from our company-operated manufacturing and finishing plants, including facilities for our innovation and development efforts that provide us with the opportunity to develop new jean styles and finishes. See “Item 2 — Properties” for more information about those manufacturing facilities.

 

Sources and availability of raw materials.  The principal fabrics used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials — primarily cotton — used to produce them. The price and availability of cotton may fluctuate substantially, depending on a variety of factors. For example, during the second half of fiscal year 2010, the price of cotton increased substantially as a result of various dynamics in the commodity markets. The majority of our products sold during that time had been sourced prior to the increase in cotton prices and therefore the cotton price increases had little impact during fiscal year 2010. We have already begun to raise product prices in an attempt to mitigate the impact of these higher costs. However, continued fluctuations in price may cause a decrease of our profitability if we are not able to respond with further product pricing actions or could impair our ability to meet customer demand in a timely manner.

 

Sourcing locations.  We use numerous independent contract manufacturers located throughout the world for the production and finishing of our garments. We conduct assessments of political, social, economic, trade, labor and intellectual property protection conditions in the countries in which we source our products before we place production in those countries and on an ongoing basis.

 

In 2010, we sourced products from contractors located in approximately 34 countries around the world. We sourced products in North and South Asia, South and Central America (including Mexico and the Caribbean), Europe and Africa. We expect to increase our sourcing from contractors located in Asia. No single country accounted for more than 20% of our sourcing in 2010.

 

Sourcing practices.  Our sourcing practices include these elements:

 

 

 

We disclose the names and locations of our contract manufacturers to encourage collaboration among apparel companies in factory monitoring and improvement. We regularly evaluate and refine our code of conduct processes.

 

Logistics.  We own and operate dedicated distribution centers in a number of countries. For more information, see “Item 2 — Properties.” Distribution center activities include receiving finished goods from our contractors and plants, inspecting those products, preparing them for presentation at retail, and shipping them to our customers and to our own stores. Our distribution centers maintain a combination of replenishment and seasonal inventory from which we ship to our stores and wholesale customers. In certain locations around the globe we have consolidated our distribution centers to service multiple countries and brands. Our inventory significantly builds during peaks in seasonal shipping periods. We are constantly monitoring our inventory levels and adjusting them as necessary to meet market demand. In addition, we outsource some of our logistics activities to third-party logistics providers.

 

Competition

 

The worldwide apparel industry is highly competitive and fragmented. It is characterized by low barriers to entry, brands targeted at specific consumer segments, many regional and local competitors, and an increasing number of global competitors. Principal competitive factors include:

 

 

We face competition from a broad range of competitors at the worldwide, regional and local levels in diverse channels across a wide range of retail price points. Worldwide, a few of our primary competitors include vertically integrated specialty stores operated by such companies such as Gap Inc. and Inditex; jeanswear brands such as those marketed by VF Corporation, a competitor in multiple channels and product lines including through their Wrangler, Lee and Seven for All Mankind brands; and athletic wear companies such as adidas Group and Nike, Inc. In addition, each region faces local or regional competition, such as G-Star and Diesel in Europe; Pepe in Spain; Brax in Germany; UNIQLO in Asia Pacific; Edwin in Japan; Apple/Texwood in China; and retailers’ private or exclusive labels such as those from Wal-Mart Stores, Inc. (Faded Glory brand); Target Corporation (Mossimo and Merona brands); JC Penney (Arizona brand) and Macy’s (INC. brand) in the Americas. Many of our regional competitors are also seeking to expand globally through an expanded store footprint and the e-commerce channel. For more information on the factors affecting our competitive position, see “Item 1A — Risk Factors.”

 

Trademarks

 

We have more than 5,000 trademark registrations and pending applications in approximately 180 countries worldwide, and we acquire rights in new trademarks according to business needs. Substantially all of our global trademarks are owned by Levi Strauss & Co., the parent and U.S. operating company. We regard our trademarks as our most valuable assets and believe they have substantial value in the marketing of our products. The Levi’s^®,

Dockers^® and 501^® trademarks, the Arcuate Stitching Design, the Tab Device, the Two Horse^® Design, the Housemark and the Wings and Anchor Design are among our core trademarks.

 

We protect these trademarks by registering them with the U.S. Patent and Trademark Office and with governmental agencies in other countries, particularly where our products are manufactured or sold. We work vigorously to enforce and protect our trademark rights by engaging in regular market reviews, helping local law enforcement authorities detect and prosecute counterfeiters, issuing cease-and-desist letters against third parties infringing or denigrating our trademarks, opposing registration of infringing trademarks, and initiating litigation as necessary. We currently are pursuing approximately 540 infringement matters around the world. We also work with trade groups and industry participants seeking to strengthen laws relating to the protection of intellectual property rights in markets around the world.

 

Employees

 

As of November 28, 2010, we employed approximately 16,200 people, approximately 8,900 of whom were located in the Americas, 4,800 in Europe, and 2,500 in Asia Pacific. Approximately 3,800 of our employees were associated with manufacturing of our products, 6,700 worked in retail, including seasonal employees, 1,700 worked in distribution and 4,000 were other non-production employees.

 

History and Corporate Citizenship

 

Our history and longevity are unique in the apparel industry. Our commitment to quality, innovation and corporate citizenship began with our founder, Levi Strauss, who infused the business with the principle of responsible commercial success that has been embedded in our business practices throughout our more than 150-year history. This mixture of history, quality, innovation and corporate citizenship contributes to the iconic reputations of our brands.

 

In 1853, during the California Gold Rush, Mr. Strauss opened a wholesale dry goods business in San Francisco that became known as “Levi Strauss & Co.” Seeing a need for work pants that could hold up under rough conditions, he and Jacob Davis, a tailor, created the first jean. In 1873, they received a U.S. patent for “waist overalls” with metal rivets at points of strain. The first product line designated by the lot number “501” was created in 1890.

 

In the 19th and early 20th centuries, our work pants were worn primarily by cowboys, miners and other working men in the western United States. Then, in 1934, we introduced our first jeans for women, and after World War II, our jeans began to appeal to a wider market. By the 1960s they had become a symbol of American culture, representing a unique blend of history and youth. We opened our export and international businesses in the 1950s and 1960s. In 1986, we introduced the Dockers^® brand of casual apparel which revolutionized the concept of business casual.

 

Throughout this long history, we upheld our strong belief that we can help shape society through civic engagement and community involvement, responsible labor and workplace practices, philanthropy, ethical conduct, environmental stewardship and transparency. We have engaged in a “profits through principles” business approach from the earliest years of the business. Among our milestone initiatives over the years, we integrated our factories two decades prior to the U.S. civil rights movement and federally mandated desegregation, we developed a comprehensive supplier code of conduct requiring safe and healthy working conditions among our suppliers (a first of its kind for a multinational apparel company), and we offered full medical benefits to domestic partners of employees prior to other companies of our size, a practice that is widely accepted today.

 

Our Website — www.levistrauss.com — contains additional and detailed information about our history and corporate citizenship initiatives. Our Website and the information contained on our Website are not part of this annual report and are not incorporated by reference into this annual report.

 

 

Risks Relating to the Industry in Which We Compete

 

Our revenues are influenced by general economic conditions.

 

Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Our wholesale customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. Our brand-dedicated stores are also affected by these conditions which may lead to a decline in consumer traffic to, and spending in, these stores. As a result, factors that diminish consumer spending and confidence in any of the markets in which we compete, particularly deterioration in general economic conditions, high levels and fear of unemployment, increases in energy costs or interest rates, housing market downturns, fear about and impact of pandemic illness, and other factors such as acts of war, acts of nature or terrorist or political events that impact consumer confidence, could reduce our sales and adversely affect our business and financial condition through their impact on our wholesale customers as well as its direct impact on us. For example, the global financial economic downturn that began in 2008 continued to impact consumer confidence and spending negatively. Even when the economy rebounds we do not anticipate that our wholesale customers will return to carrying the levels of inventory in our products as that prior to the downturn. These outcomes and behaviors have and may continue to adversely affect our business and financial condition.

 

Intense competition in the worldwide apparel industry could lead to reduced sales and prices.

 

We face a variety of competitive challenges from jeanswear and casual apparel marketers, fashion-oriented apparel marketers, athletic and sportswear marketers, vertically integrated specialty stores, and retailers of private-label products. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the building and sustaining of their brand equity and the marketing and sale of their products, or adopt more aggressive pricing policies than we can. As a result, we may not be able to compete as effectively with them and may not be able to maintain or grow the equity of and demand for our brands. Increased competition in the worldwide apparel industry — including from the international expansion and increased e-commerce presence of vertically integrated specialty stores, from department stores, chain stores and mass channel retailers developing exclusive labels, and from well-known and successful non-apparel brands (such as athletic wear marketers) expanding into jeans and casual apparel — could reduce our sales and adversely affect our business and financial condition.

 

The success of our business depends upon our ability to offer innovative and updated products at attractive price points.

 

The worldwide apparel industry is characterized by constant product innovation due to changing fashion trends and consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to develop, market and deliver innovative and stylish products at a pace, intensity, and price competitive with other brands in our segments. We must also have the agility to respond to changes in consumer preference such as the consumer shift in Japan away from premium-priced brands to lower-priced fast-fashion products. In addition, we must create products at a range of price points that appeal to the consumers of both our wholesale customers and our dedicated retail stores. Failure on our part to regularly and rapidly develop innovative and stylish products and update core products could limit sales growth, adversely affect retail and consumer acceptance of our products, negatively impact the consumer traffic in our dedicated retail stores, leave us with a substantial amount of unsold inventory which we may be forced to sell at discounted prices, and impair the image of our brands. Moreover, our newer products may not produce as high a gross margin as our traditional products and thus may have an adverse effect on our overall margins and profitability.

 

The worldwide apparel industry is subject to ongoing pricing pressure.

 

The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, and the ongoing emergence of new competitors with widely varying strategies and resources.

These factors as well as the impact of increasing prices of raw materials, such as cotton which has been subject to significant price variability in recent months, have contributed, and may continue to contribute to, ongoing pricing pressure throughout the supply chain. This pressure has had and may continue to have the following effects:

 

 

Any of these factors could adversely affect our business and financial condition.

 

Increases in the price of raw materials or their reduced availability could increase our cost of goods and negatively impact our financial results.

 

The principal materials used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials — primarily cotton — used to produce them. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, acreage devoted to cotton crops and crop yields, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and government policy, economic climates, market speculation and other unpredictable factors. Any and all of these factors may be exacerbated by global climate change. During the course of the second half of fiscal year 2010, the price of cotton increased substantially as a result of various dynamics in the commodity markets. Fluctuations in the price and availability of raw materials have not materially affected our cost of goods in recent years, but continued increases in raw material costs, unless sufficiently offset with our pricing actions, might cause a decrease in our profitability; while any related pricing actions might cause a decline in our sales volume. Moreover, any decrease in the availability of cotton could impair our ability to meet our production requirements in a timely manner. Both the increased cost and lower availability of cotton may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.

 

Our business is subject to risks associated with sourcing and manufacturing overseas.

 

We import both raw materials and finished garments into all of our operating regions. Our ability to import products in a timely and cost-effective manner may be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes and work stoppages, political unrest, severe weather, or security requirements in the United States and other countries. These issues could delay importation of products or require us to locate alternative ports or warehousing providers to avoid disruption to our customers. These alternatives may not be available on short notice or could result in higher transportation costs, which could have an adverse impact on our business and financial condition.

 

Substantially all of our import operations are subject to customs and tax requirements and to tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries in which our products are manufactured or imported may from time to time impose additional quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our suppliers’ failure to comply with customs regulations or similar laws, could harm our business.

 

Our operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, the Dominican-Republic Central America Free Trade Agreement, the Egypt Qualified Industrial Zone program, and the activities and regulations of the World Trade Organization. Although generally these trade agreements have positive effects on trade liberalization, sourcing flexibility and cost of goods by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country, trade agreements can also impose requirements that adversely affect our business, such as setting quotas on products that may be imported from a particular country into our key markets such as the United States or the European Union.

Risks Relating to Our Business

 

Our net sales for fiscal year 2010 were below our peak level of 1996, and actions we have taken, and may take in the future, to address net sales growth and other issues facing our business may not be successful over the long term.

 

Our net sales were $7.1 billion in 1996, fell to $4.1 billion in 2003, and were $4.3 billion in 2010. We face intense competition, customer financial hardship and consolidation, increased focus by retailers on private-label offerings, expansion of and growth in new distribution sales channels, declining sales of traditional core products and continuing pressure on both wholesale and retail pricing. Our ability to successfully compete could be impaired by our debt and interest payments, which reduces our operating flexibility and could limit our ability to respond to developments in the worldwide apparel industry as effectively as competitors that do not have comparable debt levels. In addition, the strategic, operations and management changes we have made in recent years to improve our business and drive future sales growth may not be successful over the long term.

 

We depend on a group of key customers for a significant portion of our revenues. A significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition.

 

Net sales to our ten largest customers totaled approximately 33% and 36% of total net revenues in 2010 and 2009, respectively. Our largest customer in both 2010 and 2009, Kohl’s Corporation, accounted for nearly 10% of net revenues in each year. While we have long-standing relationships with our wholesale customers, we do not have long-term contracts with them. As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. If any major customer decreases or ceases its purchases from us, reduces the floor space, assortments, fixtures or advertising for our products or changes its manner of doing business with us for any reason, such actions could adversely affect our business and financial condition.

 

For example, our wholesale customers are subject to the fluctuations in general economic cycles and the current global economic conditions which are impacting consumer spending, and our customers may also be affected by the credit environment, which may impact their ability to access the credit necessary to operate their business. The performance and financial condition of a wholesale customer may cause us to alter our business terms or to cease doing business with that customer, which could in turn adversely affect our own business and financial condition. In addition, our wholesale customers may change their apparel strategies or reduce fixture spaces and purchases of brands that do not meet their strategic requirements, leading to a loss of sales for our products at those customers.

 

In addition, the retail industry in the United States has experienced substantial consolidation in recent years, and further consolidation may occur. Consolidation in the retail industry typically results in store closures, centralized purchasing decisions, increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by retailers on inventory management and productivity, any of which can, and have, adversely impacted our net revenues, margins and ability to operate efficiently.

 

Our introduction of a new brand creates risks for us and may not be successful.

 

In August 2010, we launched the Denizen^tm brand in Asia Pacific to reach consumers in the emerging middle class in developing markets who seek high-quality jeanswear and other fashion essentials at affordable prices. The product will continue to roll out through 2011. We face a number of risks with respect to this new offering. Launching and growing a new brand involves considerable investment, particularly in the inventory necessary to meet product launch as well as ongoing service requirements, and advertising. As a result, we will have increases in working capital requirements associated with the new brand and may experience increased operating costs where we transition from the Signature brand to the Denizen^tm brand. The required investments are initially made with limited information regarding actual consumer acceptance of the brand, as we are entering into a new business with no history of performance and no guarantees of a successful response in the marketplace. Additionally, our relationships with our current customers may be adversely affected if they react negatively to our selling the brand

through a distribution channel other than their own. Any of these risks could result in decreased sales, additional expenses and increased working capital requirements, which may adversely affect our business and financial condition.

 

We may be unable to maintain or increase our sales through our primary distribution channels.

 

In the United States, chain stores and department stores are the primary distribution channels for our Levi’s^® and Dockers^® products, and the mass channel is the primary distribution channel for Signature products. Outside the United States, department stores and independent jeanswear retailers have traditionally been our primary distribution channels.

 

We may be unable to maintain or increase sales of our products through these distribution channels for several reasons, including the following:

 

 

Further success by retailer private-labels and vertically integrated specialty stores may continue to adversely affect the sales of our products across all channels, as well as the profitability of our brand-dedicated stores. Additionally, our ability to secure or maintain retail floor space, market share and sales in these channels depends on our ability to offer differentiated products and to increase retailer profitability on our products, which could have an adverse impact on our margins.

 

During the past several years, we have experienced significant changes in senior management and our board. The success of our business depends on our ability to attract and retain qualified and effective senior management and board leadership.

 

The composition of our senior management team and the board has changed significantly in recent years. Recent changes in our senior management team include the departure of Armin Broger, who had been Senior Vice President and President, Levi Strauss Europe, in November 2010, and Jaime Cohen Szulc, Chief Marketing Officer — Levi’s^®, in August 2010. In addition, on September 21, 2010, we announced that three members of our management team were changing their roles to assume global responsibility for all product, marketing and business operations for the Levi’s^®, Dockers^®, and Denizen^tm brands. Specifically, Robert L. Hanson was appointed Executive Vice President and President, Global Levi’s^®, James Calhoun was appointed Executive Vice President and President, Global Dockers^®, and Aaron Beng-Keong Boey was appointed Executive Vice President and President, Global Denizen^tm. Our board added two new members in 2010: Fernando Aguirre joined on October 1, 2010, and Robert A. Eckert on May 10, 2010. Peter A. Georgescu resigned from our board in July, 2010. In total, half of our current Board joined in 2007 or later. Collective or individual changes in our senior management group or board membership could have an adverse effect on our ability to determine and implement our strategies, which in turn may adversely affect our business and results of operations.

 

Increasing the number of company-operated stores will require us to enhance our capabilities and increase our expenditures and will increasingly impact our financial performance.

 

Although our business is substantially a wholesale business, we operated 470 retail stores as of November 28, 2010. As part of our objective to accelerate growth through dedicated retail stores, we plan to continue to strategically open company-operated retail stores. The results from our retail network may be adversely impacted if we do not find ways to generate sufficient sales from our existing and new company-operated stores, which may be particularly challenging in light of the ongoing global economic downturn. Like other retail operators, we

regularly assess store performance and as part of that review we may determine to close or impair the value of underperforming stores in the future.

 

Any increase in the number of company-operated stores will require us to further develop our retailing skills and capabilities. We will be required to enter into additional leases, which will cause an increase in our rental expenses and off-balance sheet rental obligations and our capital expenditures for retail locations. These commitments may be costly to terminate, and these investments may be difficult to recapture if we decide to close stores or change our strategy. We must also offer a broad product assortment (especially women’s and tops), appropriately manage retail inventory levels, install and operate effective retail systems, execute effective pricing strategies, and integrate our stores into our overall business mix. Finally, we will need to hire and train additional qualified employees and incur additional costs to operate these stores, which will increase our operating expenses. These factors, including those relating to securing retail space and management talent, are even more challenging considering that many of our competitors either have large company-operated retail operations today or are seeking to expand substantially their retail presence. If the actions we are taking to expand our retail network are not successful on a sustained basis, our margins, results of operations and ability to grow may be adversely affected.

 

We must successfully maintain and/or upgrade our information technology systems.

 

We rely on various information technology systems to manage our operations. We are currently implementing modifications and upgrades to our systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the implementation of new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated.

 

We currently rely on contract manufacturing of our products. Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contractors to perform, could harm our sales, service levels and reputation.

 

We source approximately 95% of our products from independent contract manufacturers who purchase fabric and make our products and may also provide us with design and development services. As a result, we must locate and secure production capacity. We depend on independent manufacturers to maintain adequate financial resources, including access to sufficient credit, secure a sufficient supply of raw materials, and maintain sufficient development and manufacturing capacity in an environment characterized by continuing cost pressure and demands for product innovation and speed-to-market. In addition, we do not have material long-term contracts with any of our independent manufacturers, and these manufacturers generally may unilaterally terminate their relationship with us at any time. Finally, we may experience capability-building and infrastructure challenges as we expand our sourcing to new contractors throughout the world.

 

Our suppliers are subject to the fluctuations in general economic cycles, and the global economic conditions may impact their ability to operate their business. They may also be impacted by the increasing costs of raw materials, labor and distribution, resulting in demands for less attractive contract terms or an inability for them to meet our requirements or conduct their own businesses. The performance and financial condition of a supplier may cause us to alter our business terms or to cease doing business with a particular supplier, or change our sourcing practices generally, which could in turn adversely affect our own business and financial condition.

 

Our dependence on contract manufacturing could subject us to difficulty in obtaining timely delivery of products of acceptable quality. A contractor’s failure to ship products to us in a timely manner or to meet our quality standards, or interference with our ability to receive shipments due to factors such as port or transportation conditions, could cause us to miss the delivery date requirements of our customers. Failing to make timely deliveries

may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges, demand reduced prices, or reduce future orders, any of which could harm our sales and margins.

 

We require contractors to meet our standards in terms of working conditions, environmental protection, security and other matters before we are willing to place business with them. As such, we may not be able to obtain the lowest-cost production. In addition, the labor and business practices of apparel manufacturers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Any failure by our independent manufacturers to adhere to labor or other laws or appropriate labor or business practices, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.

 

We are a global company with significant revenues coming from our Europe and Asia Pacific businesses, which exposes us to political and economic risks as well as the impact of foreign currency fluctuations.

 

We generated approximately 42%, 43% and 44% of our net revenues from our Europe and Asia Pacific businesses in 2010, 2009 and 2008, respectively. A substantial amount of our products came from sources outside of the country of distribution. As a result, we are subject to the risks of doing business outside of the United States, including:

 

 

The functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in foreign currency exchange rates affect the results of our operations and the value of our foreign assets and liabilities, including debt, which in turn may benefit or adversely affect results of operations and cash flows and the comparability of period-to-period results of operations. In addition, we engage in hedging activities to manage our foreign currency exposures resulting from certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, earnings repatriations, net investment in foreign operations and funding activities. However, our earnings may be subject to volatility since we do not fully hedge our foreign currency exposures and we are required to record in income the changes in the market values of our exposure management instruments that we do not designate or that do not qualify for hedge accounting treatment. Changes in the value of the relevant currencies may affect the cost of certain items required in our operations as the majority of our sourcing activities are conducted in U.S. Dollars. Changes in currency exchange rates may also affect the relative prices at which we and foreign competitors sell products in the same market. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. Recently, there has been a high level of volatility in foreign currency exchange rates and that level of volatility may continue and may adversely impact our business or financial conditions.

 

Furthermore, due to our global operations, we are subject to numerous domestic and foreign laws and regulations affecting our business, such as those related to labor, employment, worker health and safety, antitrust and competition, environmental protection, consumer protection, import/export, and anti-corruption, including but not limited to the Foreign Corrupt Practices Act which prohibits giving anything of value intended to influence the awarding of government contracts. Although we have put into place policies and procedures aimed at ensuring legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, any of which could have a material adverse effect on our business.

 

As a global company, we are exposed to risks of doing business in foreign jurisdictions and risks relating to U.S. policy with respect to companies doing business in foreign jurisdictions. Legislation or other changes in the U.S. tax laws could increase our U.S. income tax liability and adversely affect our after-tax profitability.

We have made changes in our logistics operations in recent years and continue to look for opportunities to increase efficiencies.

 

We take actions to optimize our distribution network from time to time and will continue to seek additional opportunities for further improvement. Changes in logistics and distribution activities could result in temporary shipping disruptions and increased expense as we bring new arrangements to full operation, which could have an adverse effect on our results of operations.

 

Most of the employees in our production and distribution facilities are covered by collective bargaining agreements, and any material job actions could negatively affect our results of operations.

 

In North America, most of our distribution employees are covered by various collective bargaining agreements, and outside North America, most of our production and distribution employees are covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms. Any work stoppages or other job actions by these employees could harm our business and reputation.

 

Our licensees may not comply with our product quality, manufacturing standards, marketing and other requirements.

 

We license our trademarks to third parties for manufacturing, marketing and distribution of various products. While we enter into comprehensive agreements with our licensees covering product design, product quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements. Non-compliance could include marketing products under our brand names that do not meet our quality and other requirements or engaging in manufacturing practices that do not meet our supplier code of conduct. These activities could harm our brand equity, our reputation and our business.

 

Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.

 

Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights on a worldwide basis. Our efforts to establish and protect our trademark and other proprietary intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products. Unauthorized copying of our products or unauthorized use of our trademarks or other proprietary rights may not only erode sales of our products but may also cause significant damage to our brand names and our ability to effectively represent ourselves to our customers, contractors, suppliers and/or licensees. Moreover, others may seek to assert rights in, or ownership of, our trademarks and other proprietary intellectual property, and we may not be able to successfully resolve those claims. In addition, the laws and enforcement mechanisms of some foreign countries may not allow us to protect our proprietary rights to the same extent as we are able to in the United States and other countries.

 

We have substantial liabilities and cash requirements associated with postretirement benefits, pension and our deferred compensation plans.

 

Our postretirement benefits, pension, and our deferred compensation plans result in substantial liabilities on our balance sheet. These plans and activities have and will generate substantial cash requirements for us, and these requirements may increase beyond our expectations in future years based on changing market conditions. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Many variables, such as changes in interest rates, mortality rates, health care costs, investment returns, and/or the market value of plan assets can affect the funded status of our defined benefit pension, other postretirement, and postemployment benefit plans and cause volatility in the net periodic benefit cost and future funding requirements of the plans. Our current estimates indicate our future annual funding requirements may increase to $135 million in 2011. While actual results may differ from these estimates, the increased pension expense and related funding may

extend into future years if current market conditions persist. Plan liabilities may impair our liquidity, have an unfavorable impact on our ability to obtain financing and place us at a competitive disadvantage compared to some of our competitors who do not have such liabilities and cash requirements.

 

Earthquakes or other events outside of our control may damage our facilities or the facilities of third parties on which we depend.

 

Our corporate headquarters are located in California near major geologic faults that have experienced earthquakes in the past. An earthquake or other natural disaster or the loss of power caused by power shortages could disrupt operations or impair critical systems. Any of these disruptions or other events outside of our control could affect our business negatively, harming our operating results. In addition, if any of our other facilities, including our manufacturing, finishing or distribution facilities or our company-operated or franchised stores, or the facilities of our suppliers or customers, is affected by earthquakes, power shortages, floods, monsoons, terrorism, epidemics or other events outside of our control, our business could suffer.

 

Risks Relating to Our Debt

 

We have debt and interest payment requirements at a level that may restrict our future operations.

 

As of November 28, 2010, we had approximately $1.9 billion of debt, of which all but approximately $108.3 million was unsecured, and we had $369.0 million of additional borrowing capacity under our senior secured revolving credit facility. Our credit facility matures in 2012, at which time our total borrowings outstanding under the credit facility become due. Our debt requires us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, which will reduce funds available for other business purposes, and result in us having lower net income than we would otherwise have had. It could also have important adverse consequences to holders of our securities. Our ability to successfully compete could be impaired by our debt and interest expense; for example, our debt and interest levels could:

 

 

In addition, borrowings under our senior secured revolving credit facility and our unsecured term loan bear interest at variable rates of interest. As a result, increases in market interest rates would require a greater portion of our cash flow to be used to pay interest, which could further hinder our operations and affect the trading price of our debt securities. Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control.

 

The downturn in the economy and the volatility in the capital markets could limit our ability to access capital or could increase our costs of capital.

 

We experienced a dramatic downturn in the U.S. and global economy and disruption in the credit markets, which began in 2008. Although we have had continued solid operating cash flow, any continued or repeated downturn or disruption in the credit markets may reduce sources of liquidity available to us. We can provide no assurance that we will continue to meet our capital requirements from our cash resources, future cash flow and external sources of financing, particularly if current market or economic conditions continue or deteriorate further. We manage cash and cash equivalents in various institutions at levels beyond FDIC coverage limits, and we purchase investments not guaranteed by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. We rely on multiple financial institutions to provide funding pursuant to existing credit agreements, and those institutions may not be able to meet their obligations to provide funding in a timely manner, or at all, when we require it. The cost of or lack of available credit

could impact our ability to develop sufficient liquidity to maintain or grow our business, which in turn may adversely affect our business and results of operations.

 

Restrictions in our notes indentures, unsecured term loan and senior secured revolving credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.

 

The indentures relating to our senior unsecured notes, our Euro notes, our Yen-denominated Eurobonds, our unsecured term loan and our senior secured revolving credit facility contain restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay specified debt, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, repurchase stock, and enter into transactions with affiliates. These restrictions, in combination with our leveraged condition, may make it more difficult for us to successfully execute our business strategy, grow our business or compete with companies not similarly restricted.

 

If our foreign subsidiaries are unable to distribute cash to us when needed, we may be unable to satisfy our obligations under our debt securities, which could force us to sell assets or use cash that we were planning to use elsewhere in our business.

 

We conduct our international operations through foreign subsidiaries, and therefore we depend upon funds from our foreign subsidiaries for a portion of the funds necessary to meet our debt service obligations. We only receive the cash that remains after our foreign subsidiaries satisfy their obligations. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the right and ability of non-U.S. subsidiaries and affiliates to pay dividends and remit cash to affiliated companies, may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us. If those subsidiaries are unable to pass on the amount of cash that we need, we will be unable to make payments on our debt obligations, which could force us to sell assets or use cash that we were planning on using elsewhere in our business, which could hinder our operations and affect the trading price of our debt securities.

 

Our corporate governance structure may result in actions that conflict with our creditors’ interests as holders of our debt securities.

 

All of our common stock is owned by a voting trust described under “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Four voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take other actions which would normally be within the power of stockholders of a Delaware corporation. The voting trust is subject to expiration on April 15, 2011. As a result, the voting powers currently held by the voting trustees will shift to the hands of all stockholders and the stockholders will engage in voting procedures that they have not had available to them in 15 years. This new engagement in stockholder voting procedures may create distractions for management or the board which may make it more difficult for us to successfully execute our business strategy, grow our business or compete with companies not similarly structured.

 

 

Not applicable.

 

 

We conduct manufacturing, distribution and administrative activities in owned and leased facilities. We operate three manufacturing-related facilities abroad and ten distribution-only centers around the world. We have renewal rights for most of our property leases. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. We believe our facilities and equipment are in good condition and are suitable for our needs. Information about our key operating properties in use as of November 28, 2010, is summarized in the following table:

 

 

 

 

Our global headquarters and the headquarters of our Americas region are both located in leased premises in San Francisco, California. Our Europe and Asia Pacific headquarters are located in leased premises in Brussels, Belgium and Singapore, respectively. As of November 28, 2010, we also leased or owned 104 administrative and sales offices in 40 countries, as well as leased a small number of warehouses in seven countries. We own or lease several facilities that are no longer in operation that we are working to sell or sublease.

 

In addition, as of November 28, 2010, we had 470 company-operated retail and outlet stores in leased premises in 27 countries. We had 190 stores in the Americas region, 173 stores in the Europe region and 107 stores in the Asia Pacific region.

 

 

In the ordinary course of business, we have various pending cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. We do not believe there are any of these pending legal proceedings that will have a material impact on our financial condition, results of operations or cash flows.

 

 

No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended November 28, 2010.

 

 

All outstanding shares of our common stock are deposited in a voting trust, a legal arrangement that transfers the voting power of the shares to a trustee or group of trustees. The four voting trustees are Miriam L. Haas, Peter E. Haas Jr., Robert D. Haas and Stephen C. Neal, three of whom are also directors. The voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take certain other actions which would normally be within the power of stockholders of a Delaware corporation. Our equity holders, who, as a result of the voting trust, legally hold “voting trust certificates,” not stock, retain the right to direct the trustees on specified mergers and business combinations, liquidations, sales of substantially all of our assets and specified amendments to our certificate of incorporation.

 

The voting trust is subject to expiration on April 15, 2011. As a result, the voting trust certificates will be replaced by certificates for shares of common stock, and the voting powers currently held by the voting trustees will shift to the hands of all stockholders, and the stockholders will engage in voting procedures directly as voting matters arise.

 

Our common stock and the voting trust certificates are not publicly held or traded. All shares and the voting trust certificates are subject to a stockholders’ agreement. The agreement, which expires in April 2016, limits the transfer of shares and certificates to other holders, family members, specified charities and foundations and back to the Company. The agreement does not provide for registration rights or other contractual devices for forcing a public sale of shares or certificates, or other access to liquidity. The scheduled expiration date of the stockholders’ agreement is five years later than that of the voting trust agreement in order to permit an orderly transition from effective control by the voting trust trustees to direct control by the stockholders.

 

As of January 31, 2011, there were 213 record holders of voting trust certificates. Our shares are not registered on any national securities exchange, there is no established public trading market for our shares and none of our shares are convertible into shares of any other class of stock or other securities.

 

We paid cash dividends of $20 million on our common stock on May 12, 2010, and May 6, 2009. Subsequent to the fiscal year-end, on December 9, 2010, our board of directors declared a cash dividend of $20 million. Please see Note 14 to our audited consolidated financial statements included in this report for more information. The Company does not have an annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of our board of directors depending upon, among other factors, the tax impact to the dividend recipients, our financial condition and compliance with the terms of our debt agreements. Our senior secured revolving credit facility and the indentures governing our senior unsecured notes limit our ability to pay dividends. For more detailed information about these limitations, see Note 6 to our audited consolidated financial statements included in this report.

 

We repurchased 2,217 shares of our common stock during the fourth quarter of the fiscal year ended November 28, 2010, in connection with the exercise of put rights under our 2006 Equity Incentive Plan. For more detailed information, see Note 11 to our audited consolidated financial statements included in this report.

 

 

The following table sets forth our selected historical consolidated financial data which are derived from our consolidated financial statements for 2010, 2009, 2008, 2007 and 2006. The financial data set forth below should be read in conjunction with, and are qualified by reference to, “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements for 2010, 2009 and 2008 and the related notes to those audited consolidated financial statements, included elsewhere in this report.

 

 

 

 

 

Overview

 

Our Company

 

We design and market jeans, casual and dress pants, tops, jackets, footwear and related accessories for men, women and children under our Levi’s^®, Dockers^®, Signature by Levi Strauss & Co.^tm (“Signature”) and Denizen^tm brands around the world. We also license our trademarks in many countries throughout the world for a wide array of products, including accessories, pants, tops, footwear and other products.

 

Our business is operated through three geographic regions: Americas, Europe and Asia Pacific. Our products are sold in approximately 55,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s^® and Dockers^® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and nearly 1,800 franchised and other brand-dedicated stores outside of the United States. We also distribute our Levi’s^® and Dockers^® products through 470 company-operated stores located in 27 countries, which collectively generated approximately 15% of our net revenues in 2010, as compared to 11% in 2009. In addition, we distribute our Levi’s^® and Dockers^® products through their respective brand-dedicated online stores operated by us as well as the online stores of certain of our key wholesale customers and other third parties. We distribute products under the Signature brand primarily through mass channel retailers in the United States and Canada and franchised stores in Asia Pacific. We currently distribute our Denizen^tm products through franchised stores in Asia Pacific.

 

Our Europe and Asia Pacific businesses, collectively, contributed approximately 42% of our net revenues and 38% of our regional operating income in 2010. Sales of Levi’s^® brand products represented approximately 81% of our total net sales in 2010. Pants, including jeans, casual pants and dress pants, represented approximately 84% of our total units sold in 2010, and men’s products generated approximately 72% of our total net sales.

 

Trends Affecting our Business

 

We believe the key business and marketplace factors affecting us include the following:

 

 

 

 

Trends such as these bring additional pressure on us and other wholesalers and retailers to shorten lead-times, reduce costs and raise product prices, and both the increased cost and lower availability of cotton may have an adverse impact on our cash and working capital needs as well as those of our suppliers. We have already begun to raise product prices in an attempt to mitigate the impact of these higher costs. However, further increases in cotton prices and other costs of production and distribution could negatively impact financial results.

 

These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the global economic downturn to create a challenging commercial and economic environment. We expect these factors to continue into the foreseeable future. In addition to these industry trends, we will remain focused on our key strategies and will continue to invest in the business, including investments in our retail and wholesale network and our information technology infrastructure, resulting in increased advertising and promotion expense, capital expenditure and selling expense. We believe that we will maintain a gross margin in the high-40s to low-50s.

 

Our 2010 Results

 

Our 2010 results reflect net revenue growth and the effects of the strategic investments we have made to support our long-term objectives.

 

 

Our Objectives

 

Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth, continue to generate strong cash flow and reduce our debt. Critical strategies to achieve these objectives include building upon our leadership position in the jean and khaki categories through continued product and marketing innovation, enhancing relationships with wholesale customers and expanding our dedicated store network to drive sales growth, capitalizing on our global footprint to maximize opportunities in targeted growth markets, and continuously increasing our productivity. We expect that our execution of these strategies will continue to result in increased advertising and selling expenses, a lower operating margin, and high capital expenditures during the 2011 fiscal year.

 

Financial Information Presentation

 

Fiscal year.  Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each quarter of fiscal years 2010, 2009 and 2008 consisted of 13 weeks, with the exception of the fourth quarter of 2008, which consisted of 14 weeks.

 

Segments.  We manage our business according to three regional segments: the Americas, Europe and Asia Pacific. In the first quarter of 2010, accountability for information technology and marketing staff costs of a global nature, that in prior years were captured in our geographic regions, was centralized under corporate management in conjunction with our key strategy of driving productivity. Beginning in 2010, these costs have been classified as corporate expenses. These costs were not significant to any of our regional segments individually in any of the periods presented herein, and accordingly, business segment information for prior years has not been revised. The September 2010 announcement of our brand-led organization focuses on creating a leadership structure to enable a consistent product and consumer experience around the world for each of our brands. We continue to measure our business performance by region.

 

Classification.  Our classification of certain significant revenues and expenses reflects the following:

 

 

Our gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.

 

Constant currency.  Constant-currency comparisons are based on translating local currency amounts in both periods at the foreign exchange rates used in the Company’s internal planning process for the current year. We routinely evaluate our financial performance on a constant-currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.

Results of Operations

 

2010 compared to 2009

 

The following table summarizes, for the periods indicated, the consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

 

Net revenues

 

The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period:

 

 

Total net revenues increased on both reported and constant-currency bases for the year ended November 28, 2010, as compared to the prior year. Changes in foreign currency exchange rates affected our consolidated reported amounts favorably by approximately $53 million.

Americas.  On both reported and constant-currency bases, net revenues in our Americas region increased in 2010. Currency affected net revenues favorably by approximately $23 million.

 

Levi’s^® brand net revenues increased, driven by the outlet stores we acquired in July 2009, as well as strong performance of our men’s and juniors’ products in the wholesale channel. The improved Levi’s^® brand performance was partially offset by declines of net sales from our Signature and U.S. Dockers^® brands as compared to 2009, although for the fourth quarter, Dockers^® brand net sales increased as compared to the prior year, primarily driven by men’s long bottoms.

 

Europe.  Net revenues in our Europe region increased on both reported and constant-currency bases. Currency affected net revenues unfavorably by approximately $18 million.

 

The increase was driven by the positive impact of our Levi’s^® brand, including our 2009 footwear and accessories business acquisition and our expanding company-operated retail network throughout the region, and was partially offset by continued sales declines in our traditional wholesale channels, reflecting the region’s ongoing depressed economic environment.

 

Asia Pacific.  Net revenues in Asia Pacific increased on both reported and constant-currency bases. Currency affected net revenues favorably by approximately $48 million.

 

Net revenues in the region increased primarily due to the continued expansion of our brand-dedicated retail network in our emerging markets of China and India, offset by continued net revenue declines due to the weak performance of our business in Japan.

 

Gross profit

 

The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:

 

 

Compared to the prior year, gross profit increased in 2010 primarily due to the increase in our constant-currency net revenues, improved gross margins in each of our regions, and a favorable currency impact of approximately $47 million. The improvement in our gross margin primarily reflected the increased contribution from our company-operated retail network, which generally has a higher gross margin than our wholesale business.

Selling, general and administrative expenses

 

The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

 

Currency contributed approximately $12 million of the $246.2 million increase in SG&A expenses as compared to the prior year.

 

Selling.  Selling expenses increased across all business segments, primarily reflecting higher costs, such as rents and increased headcount, associated with the continued expansion of our company-operated store network.

 

Advertising and promotion.  The increase in advertising and promotion expenses was attributable to the planned increase in support of our U.S. Levi’s^® and U.S. Dockers^® brands, as well as our global launch of our Levi’s^® Curve ID jeans for women and the launch of our Denizen^tm brand in the Asia Pacific region.

 

Administration.  The increase in administration expenses reflect higher costs associated with our pension and postretirement benefit plans, as well as higher costs related to various corporate initiatives, including costs in the third quarter of 2010 associated with executive separations.

 

Other.  Other SG&A expenses include distribution, information technology, and marketing organization costs. The increase in expenses was primarily due to increased marketing project costs related to our strategic initiatives.

Operating income

 

The following table shows operating income by reporting segment and certain components of corporate expense for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

 

 

 

Currency favorably affected total operating income by approximately $35 million in 2010.

 

Regional operating income.

 

 

Corporate.  Corporate expenses are selling, general and administrative expenses that are not attributed to any of our regional operating segments. Corporate expenses for 2010 increased due to higher costs associated with our pension and postretirement benefit plans and higher costs related to various corporate initiatives, including costs in the third quarter of 2010 associated with executive separations, as well as the increased marketing costs. Corporate expenses also increased due to the classification of information technology and marketing staff costs of a global nature that were centralized under corporate management beginning in 2010; these costs were not significant to any of our regional segments individually or to prior periods, and as such, prior period amounts were not reclassified.

 

Corporate expenses in 2010 and 2009 include amortization of prior service benefit of $29.6 million and $39.7 million, respectively, related to postretirement benefit plan amendments in 2004 and 2003. We will continue to amortize the prior service benefit in the future. For more information, see Note 8 to our audited consolidated financial statements included in this report.

 

Interest expense

 

Interest expense was $135.8 million for the year ended November 28, 2010, as compared to $148.7 million in the prior year. The decrease in interest expense was driven primarily by lower average borrowing rates in 2010, resulting from our debt refinancing activity that occurred in the second quarter of 2010, and lower interest expense on our deferred compensation plans in 2010.

The weighted-average interest rate on average borrowings outstanding for 2010 was 7.05% as compared to 7.44% for 2009.

 

Loss on early extinguishment of debt

 

For the year ended November 28, 2010, we recorded a $16.6 million loss on early extinguishment of debt as a result of our debt refinancing activities during the second quarter of 2010. The loss was comprised of tender premiums of $30.2 million and the write-off of $7.6 million of unamortized debt issuance costs net of applicable premium, offset by a gain of $21.2 million related to the partial repurchase of Yen-denominated Eurobonds due 2016 at a discount to their par value.

 

Other income (expense), net

 

Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the year ended November 28, 2010, we recorded net income of $6.6 million compared to net expense of $39.5 million for the prior year.

 

The income in 2010 primarily reflects transaction gains on our foreign currency denominated balances, partially offset by losses on foreign exchange derivatives which economically hedge future cash flow obligations of our foreign operations. The expense in 2009 reflected losses on foreign exchange derivatives.

 

Income tax expense

 

Income tax expense was $86.2 million for the year ended November 28, 2010, compared to $39.2 million for the prior year. Our effective tax rate was 36.6% for the year ended November 28, 2010, compared to 20.6% for the prior year.

 

The 16.0 percentage point increase in our effective tax rate was primarily driven by two significant discrete income tax charges recognized during the second quarter of 2010, as well as our inability to benefit current year losses in our Japanese subsidiary. The $47.0 million increase in our income tax expense was primarily attributed to the same factors coupled with an increase in income before income taxes.

 

Due primarily to our recent negative financial performance in Japan, we recognized a discrete expense of $14.2 million during the second quarter of 2010 to recognize a valuation allowance to fully offset the amount of the existing net deferred tax assets of our Japanese subsidiary as of the beginning of our fiscal year 2010, as we no longer expect to benefit from those assets. Furthermore, in 2010 we were not able to benefit our current year losses in Japan, which further increased the valuation allowance by $13.3 million.

 

Additionally, we recognized an expense of $14.0 million in the second quarter of 2010 due to the enactment in March 2010 of the Patient Protection and Affordable Care Act, which includes a provision eliminating, beginning in our tax year 2014, the tax deductibility of the costs of providing Medicare Part D-equivalent prescription drug benefits to retirees to the extent of the Federal subsidy received.

2009 compared to 2008

 

The following table summarizes, for the periods indicated, the consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

 

Net revenues

 

The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period:

 

 

Total net revenues decreased on both reported and constant-currency bases for the year ended November 29, 2009, as compared to the prior year. Reported amounts were affected unfavorably by changes in foreign currency exchange rates across all regions, particularly in Europe.

 

Americas.  On both reported and constant-currency bases, net revenues in our Americas region decreased in 2009. Currency affected net revenues unfavorably by approximately $39 million.

Net revenues decreased due to the weak economic environment, lower demand for our U.S. Dockers^® brand products, and lower sales of Signature products. These declines were partially offset by increased Levi’s^® brand revenues driven by strong performance of our men’s and boy’s products and growth in the Juniors business in our wholesale channel, and increased revenues from our retail network from our July 13, 2009, acquisition of the operating rights to 73 Levi’s^® and Dockers^® outlet stores from Anchor Blue Retail Group, Inc.

 

As compared to prior year, 2009 also reflects the loss of customers due to bankruptcy in the second and third quarters of 2008. In addition, 2008 was adversely impacted by issues we encountered during our stabilization of an enterprise resource planning (“ERP”) system in the United States in the beginning of the second quarter of 2008.

 

Europe.  Net revenues in Europe decreased on both reported and constant-currency bases. Currency affected net revenues unfavorably by approximately $118 million.

 

The region’s depressed retail environment drove net revenue declines across most markets, primarily due to lower sales in our wholesale channels. This was partially offset by the impact of our business acquisitions and our expanding company-operated retail network throughout the region.

 

Asia Pacific.  Net revenues in Asia Pacific decreased on both reported and constant-currency bases. Currency affected net revenues unfavorably by approximately $17 million.

 

Net revenues in the region decreased primarily due to lower sales in Japan. These declines were offset by strong performance in most other markets in the region, driven by product promotions and the continued expansion of our brand-dedicated store network.

 

Gross profit

 

The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:

 

 

Compared to the prior year, gross profit declined in 2009 primarily due to the unfavorable impact of currency across all regions, which totaled approximately $128 million. Excluding the effects of currency, the impact of our lower net revenues to gross profit was partially offset by a slight improvement in gross margin, primarily driven by our Americas region, due to the strong performance of the Levi’s^® brand, and the increased contribution from our company-operated retail network, which has a higher gross margin than our wholesale business.

Selling, general and administrative expenses

 

The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

 

Compared to the prior year, total SG&A expenses declined in 2009 due to a favorable currency impact of approximately $62 million.

 

Selling.  Selling expenses increased across all business segments, primarily reflecting additional company-operated stores, partially offset by a favorable currency impact of $25 million in 2009.

 

Advertising and promotion.  The decrease in advertising and promotion expenses was attributable to the effects of currency and planned reduction of our advertising activities in most markets as compared to the prior year.

 

Administration.  Administration expenses include corporate expenses and other administrative charges. Currency favorably impacted these expenses by $13 million in 2009. Reflected in 2009 are increased pension expense of approximately $38 million and costs associated with our business acquisitions during the year, while 2008 included higher costs associated with our conversion to an ERP system in the United States as well as various other corporate initiatives.

 

Other.  Other SG&A costs include distribution, information technology, and marketing organization costs, gain or loss on sale of assets and other operating income. Currency favorably impacted these expenses by $14 million in 2009. The decrease in expenses was primarily due to lower distribution costs, resulting from actions we have taken in recent years to restructure our distribution center operations and the decline in sales volume, as well as lower marketing organization costs.

Operating income

 

The following table shows operating income by reporting segment and certain components of corporate expense for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

 

 

 

Currency unfavorably affected operating income by approximately $66 million in 2009.

 

Regional operating income.

 

 

Corporate.  Corporate expense is comprised of net restructuring charges and other corporate expenses, including corporate staff costs. Corporate expenses in 2009 reflect the higher pension expense, resulting from the decline in the fair value of our pension plan assets in 2008, higher severance costs for headcount reductions, and increased incentive compensation accruals, relating to greater achievement against our internally-set objectives. These increases were partially offset by a decline in corporate staff costs in 2009, reflecting our cost-cutting initiatives.

 

Corporate expenses in 2009 and 2008 include amortization of prior service benefit of $39.7 million and $41.4 million, respectively, related to postretirement benefit plan amendments in 2004 and 2003. We will continue to amortize the prior service benefit in the future; however, it will decline in 2010 by approximately $10 million, in relation to the expected service lives of the employees affected by these plan changes. We also expect the higher pension expenses to continue in 2010, despite a recovery in asset values, as changes in the financial markets during 2009, including a decrease in corporate bond yield indices, drove a reduction in the discount rates used to measure our benefit obligations. Higher pension expense may potentially extend into future periods should market conditions persist. For more information, see Note 8 to our audited consolidated financial statements included in this report.

Interest expense

 

Interest expense was $148.7 million for the year ended November 29, 2009, as compared to $154.1 million in the prior year. Lower average borrowing rates and lower debt levels in 2009, resulting primarily from our required payments on the trademark tranche of our senior secured revolving credit facility, caused the decrease.

 

The weighted-average interest rate on average borrowings outstanding for 2009 was 7.44% as compared to 8.09% for 2008.

 

Other expense, net

 

Other expense, net, primarily consists of foreign exchange management activities and transactions. For the year ended November 29, 2009, we recorded net expense of $39.5 million compared to $0.3 million for the prior year. The increase in expense primarily reflects losses in 2009 on foreign exchange derivatives which economically hedge future cash flow obligations of our foreign operations, partially offset by foreign currency transaction gains. During 2009, the U.S. Dollar depreciated relative to the rate included in many of our forward contracts, particularly the Euro and the Australian Dollar, negatively impacting the value of the related derivatives.

 

Income tax expense

 

Income tax expense was $39.2 million for the year ended November 29, 2009, compared to $138.9 million for the prior year. Our effective tax rate was 20.6% for the year ended November 29, 2009, compared to 37.6% for the prior year.

 

The decrease in income tax expense and effective tax rate was primarily driven by the reduction in income before income taxes and a $33.2 million tax benefit relating to the expected reversal of basis differences, consisting primarily of undistributed earnings in investments in certain foreign subsidiaries. During the fourth quarter of 2009, we adopted specific plans to remit the prior undistributed earnings of certain foreign subsidiaries, which were previously considered permanently reinvested. As a result of the planned distribution, we recognized a deferred tax asset and a corresponding tax benefit of $33.2 million, for the foreign tax credits in excess of the associated U.S. income tax liability that are expected to become available upon the planned distribution.

 

Liquidity and Capital Resources

 

Liquidity outlook

 

We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements.

 

Cash sources

 

We are a privately-held corporation. We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales. Key sources of cash include earnings from operations and borrowing availability under our revolving credit facility.

 

We are borrowers under an amended and restated senior secured revolving credit facility. The maximum availability under the facility is $750 million secured by certain of our domestic assets and certain U.S. trademarks associated with the Levi’s^® brand and other related intellectual property. The facility includes a $250 million trademark tranche and a $500 million revolving tranche. The revolving tranche increases as the trademark tranche is repaid, up to a maximum of $750 million when the trademark tranche is repaid in full. Upon repayment of the trademark tranche, the secured interest in the U.S. trademarks will be released. As of November 28, 2010, we had borrowings of $108.3 million under the trademark tranche and no outstanding borrowings under the revolving tranche. Unused availability under the revolving tranche was $369.0 million, as our total availability of $445.5 million, based on collateral levels as defined by the agreement, was reduced by $76.5 million of other credit-related instruments.

Under the facility, we are required to meet a fixed charge coverage ratio as defined in the agreement of 1.0:1.0 when unused availability is less than $100 million. This covenant will be discontinued upon the repayment in full and termination of the trademark tranche described above and with the implementation of an unfunded availability reserve of $50 million, which implementation will reduce availability under our credit facility.

 

As of November 28, 2010, we had cash and cash equivalents totaling $269.7 million, resulting in a net liquidity position (unused availability and cash and cash equivalents) of $638.7 million.

 

Cash uses

 

Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans, and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements.

 

The following table presents selected cash uses in 2010 and the related projected cash uses for these items in 2011 as of November 28, 2010:

 

 

 

 

The following table provides information about our significant cash contractual obligations and commitments as of November 28, 2010:

 

 

 

 

This table does not include amounts related to our income tax liabilities associated with uncertain tax positions of $150.7 million, as we are unable to make reasonable estimates for the periods in which these liabilities may become due. We do not anticipate a material effect on our liquidity as a result of payments in future periods of liabilities for uncertain tax positions.

 

Information in the two preceding tables reflects our estimates of future cash payments. These estimates and projections are based upon assumptions that are inherently subject to significant economic, competitive, legislative and other uncertainties and contingencies, many of which are beyond our control. Accordingly, our actual expenditures and liabilities may be materially higher or lower than the estimates and projections reflected in these tables. The inclusion of these projections and estimates should not be regarded as a representation by us that the estimates will prove to be correct.

Cash flows

 

The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:

 

 

2010 as compared to 2009

 

Cash flows from operating activities

 

Cash provided by operating activities was $146.3 million for 2010, as compared to $388.8 million for 2009. Operating cash declined compared to the prior year due to higher payments to vendors, reflecting our retail expansion and increased advertising as well as higher cash used for inventory, in support of our business growth. This decline was partially offset by an increase in cash collected from customers, reflecting our higher net revenues.