FULL TRANSCRIPT: Levi Strauss & Co. Q3 2024 Earnings Call

I am thrilled to welcome him to the team.

Brand Strategy and Performance

I will now talk through the quarter in the context of our strategies, starting with leading with our brand. Levi’s continues to boost its global cultural relevance and brand heat, with the brand growing 5% in the third quarter. Our growth is reflected in continued market share gains as we solidified our position as the number one women’s denim brand in the U.S., while maintaining our leadership in the men’s U.S. jeans category, in which we hold twice as much market share as our closest competitor. We also continue to gain share among high-income consumers, supported by our efforts to elevate the brand.

Our Levi’s women’s business remains robust, growing 11%, reflecting double-digit growth in both bottoms and tops. Earlier this week, we took another significant step in reaffirming Levi’s place at the center of culture through an unprecedented partnership with global icon, Beyonce. The fully integrated global campaign, titled Reimagined, is on a scale unlike anything in our recent history. The first chapter of the campaign debuted on Monday, with subsequent chapters that will run through 2025. The campaign features core products like 50190s, original truckers, and essential tees, and pays homage to classic Levi’s ads through a modern reinterpretation focused on women and icons.

We’ll be activating the campaign across more than 3,000 direct-to-consumer touch points and throughout our e-commerce channels around the world. We’re proud to see the celebration of two global icons come to life and look forward to connecting in new ways with our fans globally.

Product Performance

Moving to product, where our pipeline is strong and improving, let’s start with our core bottoms business. Overall, Levi’s bottoms grew 5% and 12% in DTC. As a denim leader, we continue to drive the category forward by leaning into our core while consistently delivering product newness. There’s no better bellwether for the strength of our brand than the health of our iconic 501, which was up 11% in the quarter, with growth in both men’s and women’s.

Loose and baggy denim continues to become a larger part of our bottoms portfolio. We remain at the forefront of this trend with loose fits of 15% in the quarter, reflecting strength across genders and channels. And through the launch of the 555 for him and the XL for her, we continue to inject newness into the looser fit trend.

Our overarching strategy is to expand from being a denim bottoms brand to becoming a head-to-toe denim lifestyle brand. That starts with owning denim dressing, which includes denim skirts, denim dresses, Western tops, denim jumpsuits, and more. For the third consecutive quarter, we saw triple-digit growth in dresses and skirts, the vast majority of which was denim.

We’re pleased with the ongoing traction in our Levi’s tops business, as revenue increased 8% for the quarter and 15% in DTC. Women’s tops performed exceptionally well, up 12% and 21% in DTC, driven by positive performance in truckers, wovens, and non-graphic tees. All these contributed to women’s being up 11% overall and women’s DTC up 18%. Levi’s men’s tops were up 5%, fueled by DTC up 12%, with strength in wovens and outerwear, in addition to newness in polos and sweaters.

The Levi’s men’s business grew low single digits overall and 9% in DTC this quarter, as we continue to respond to shifting preferences towards more comfort and versatility in his closet. We are focused on delivering innovative fabrics and fits through innovations like performance cool, which was up quadruple digits in the quarter. And our recently launched non-denim performance tech series reflects the range we’re able to offer our consumer, helping to drive 29% growth in Levi’s men’s non-denim bottoms for the quarter.

Looking forward to the holiday season, we’re doubling down on our winning strategies, including denim dressing, fashion fits like loose and baggy for men and women, and our tops expansion, including a denim-inspired outerwear collection in time for cooler weather. We’re excited to deliver a robust pipeline of newness to our fans as we enter the holiday season and into 2025.

DTC Performance

Now shifting to DTC first. Our global direct-to-consumer business delivered another strong quarter of performance, up 12% on top of 13% growth in the prior year, driven by positive comp sales for the 10th consecutive quarter. Our growth was led by U.S. DTC, which was up 12%, again driven by strong performance in brick-and-mortar retail. AURs in our U.S. mainline business were up high single digits as consumers continue to gravitate toward our full-price premium products.

We continue to raise the bar on running high-performing stores and are encouraged by the strong store KPIs across our portfolio, including increased traffic, higher conversion, and improved AURs. These healthy metrics reflect consumers’ positive response to both our product innovation and newness, as well as improved in-stocks. E-commerce continues to outperform, up 18%, reflecting strength across all segments supported by increases in traffic, UPT, and AUR. Ongoing initiatives to elevate our site and deliver a more premium and expanded online assortment are enhancing the consumer experience.

We’re seeing encouraging trends in consumer engagement, with our global loyalty program acquiring nearly 2 million new members in Q3, bringing our total member base to 37 million globally.

Wholesale Performance

Shifting to global wholesale, while this channel is seeing sequential improvement from down 6% in H1 to down 3% in Q3, excluding Denizen, it continues to be a headwind to our overall revenue growth. We are focused on ensuring this is a healthy, profitable business, and this strategic focus is evident in the channel’s gross margin increasing more than 500 basis points over prior year.

In U.S. wholesale, the Levi’s brand was down 2%. Levi’s Women’s was again a bright spot, up low single digits in the quarter, including 4% growth in tops. We are encouraged by the return of Europe wholesale to growth, up 4%, driven by strong demand for newness, and our forward wholesale order book in Europe continues to be positive in Q4. We continue to feel good about the trends we’re seeing in our global wholesale business overall. Sellout trends are improving, including in the U.S. and Europe, and customers are excited about our expanded assortments.

Portfolio Growth

Turning now to our third strategy, Powering the Portfolio. Growing our business outside the U.S. remains one of our largest opportunities, and our international business grew 5% in the quarter. Importantly, Europe inflected to growth up 7%, including mid-single-digit growth in wholesale and 10% growth in DTC.

Beyond Yoga was up 19%, an acceleration from Q2, driven by strength in wholesale and e-commerce. Under Nancy Green’s leadership, we have reset the Beyond Yoga strategy to drive more disciplined growth and profitability. Despite the impairment charge we took, which Harmit will share more about, we are confident in this brand based on the strategic direction Nancy and her team have laid out, and remain committed to fulfilling its long-term potential.

In closing, if you walk away from today’s call with one thought, let it be that we’re confident that we have the right strategies to fuel long-term, profitable growth. The core of our business, the Levi’s brand, remains strong, and we are accelerating growth across categories, channels, and the globe. Finally, I’d like to thank our incredible, talented, and passionate team around the world that is delivering outstanding service to our fans every day. And with that, I will now turn it over to Harmit to provide more color on our financial performance and outlook.

Financial Performance

HARMIT SINGH, CFO: Thank you, Michelle. I want to start by emphasizing the confidence I have in our improved profitability and cash flows. In Q3, we delivered significant margin expansion with adjusted EBIT dollars increasing 27% and adjusted EBIT margins leveraging 250 basis points. This improvement drove double-digit adjusted diluted EPS growth despite a five-cent headwind from tax while maintaining expense and inventory discipline and generating much higher cash flow through the first nine months of 2024.

While the top line came in on the low end of our guidance, we are encouraged by the acceleration of the Levi’s brand globally, contributing to our ability to exceed our profitability targets. Other key factors driving our profitability improvement include the increase in America’s profitability driven by strength in gross margin. Our business in Europe, our highest margin market, returned to growth and continued improvement in the profitability of our direct-to-consumer channel where we generated more than 350 basis points of operating margin expansion this quarter. On a year-to-date basis, this improved the DTC margins by 270 basis points versus last year.

This, combined with our continued focus on keeping inventories clean and maintaining discipline in promotional levels, allowed us to grow gross profit dollars approximately two times faster than adjusted SG&A dollars in Q3, resulting in higher flow-through of every incremental dollar of revenue. We expect this trend to further improve in Q4.

Also, as we announced today, we are reviewing strategic alternatives for Dockers. This decision highlights our capital allocation discipline and will help us continue to become a more focused, faster-growing, higher-margin business with a portfolio of brands that have a long runway of profitable growth. We are working with external advisors to identify the right path forward that we believe will enable Allison Co. and Dockers to reach their maximum potential and value as independent businesses.

As we look into the fourth quarter, we expect the continuation of sequential revenue and profitability growth we have experienced this year. In Q3 versus H1-24, revenues accelerated two percentage points and adjusted EBIT margin expanded four percentage points. As we head into Q4, top-line growth progression will be fueled by strong momentum of the Levi’s brand as well as DTC, Wholesale, and Europe. Profit growth progression will be driven by the acceleration of revenue and Project Fuel savings. I will share more when I cover the outlook.

Q3 Results

And with that, I will turn to our results. Q3 net revenues were $1.5 billion, up 3%, excluding Denizen. The drivers of the revenue growth were Levi’s and Beyond Yoga, contributing approximately five percentage points of growth, partially offset by approximately two percentage points of decline from Signature and Dockers. While Signature declined in the quarter, it was largely a timing issue, and we expect it to return to growth in Q4.

Gross profit for the third quarter was $911 million, or 60% of net revenues, our record Q3 gross margin. Our gross margin increased 440 basis points relative to last year, driven primarily by lower product costs, the continuous shift to DTC, and higher full-price sales. These factors offset approximately 60 basis points of FX headwinds and higher AFRID as we chase into new products to meet demand.

Adjusted SG&A expenses in the quarter increased 5% to $735 million, and as a percentage of net revenues, adjusted SG&A was 48.5%, up 210 basis points from last year. The increase in adjusted SG&A dollars was primarily related to higher DTC expenses and advertising versus last year, as well as an increase in distribution expenses related to the short-term process of running a parallel distribution center in the U.S.

We have contracted with MERS in the U.S. and GXO in Europe as third-party logistic providers, and the process of transfer and the change from owned to third-party is progressing well. Gross profit dollars increased by 8% and grew at approximately twice the pace of adjusted SG&A dollars, leading to EBIT leverage, with adjusted EBIT margin increasing 250 basis points to 11.6%. Adjusted EBIT dollars also grew significantly, up 27% versus last year.

Our efficiency efforts as part of Project Fuel played a key role in this outcome, resulting in savings throughout our P&L. Approximately $30 million in savings this quarter helped to offset continued investments in our DTC expansion and incremental A&P to continue to fuel our growth. We are well-positioned to deliver our $100 million savings target in 2024, with line of sight to even more opportunity beyond that.

Adjusted diluted EPS was $0.33, up 18% to prior year, despite a higher tax rate. Our adjusted diluted EPS excludes the $111 million non-cash charge related to the impairment of the Beyond Yoga goodwill and intangible assets in conjunction with our annual testing. The impairment was due to investing in the branch’s new strategic plan for growth and expansion. The business continues to perform well, up 19% in Q3 and 14% YTD.

Reported inventory dollars were down 7%. The composition of our inventory is healthy and we expect to end the year with inventory lower than prior year.

Capital Allocation

Turning to dividend and share repurchases, in the quarter we returned $69 million to shareholders, which includes $52 million in dividends and $18 million in share repurchases. Since we restarted share repurchases in Q1, we have returned 37% more capital to shareholders versus prior year. And for Q4-24, we have declared a dividend of $0.13 per share in line with Q3.

Segment Highlights

Now let’s review the key highlights by segment:

1. The Americas were up 2%, adjusting for the exit of the Denizen business. Direct-to-consumer revenues were up 16%, driven by double-digit growth in brick-and-mortar and e-commerce. Gross margin outperformed due to favorable product costs and mix. Higher full prices also contributed to the strong operating margin of 23%, up 530 basis points to prior year.
2. Europe returned to growth this quarter, up 7%, reflecting growth across both channels. We saw an acceleration in DTC growth from Q2, up 10%, most notably in e-commerce, increasing 30%. Wholesale returned to growth this quarter, up 4%. The women’s business was up double digits, with growth in both channels as fashion fits and newness are resonating with the European consumer. In the quarter, strong gross margin expansion resulted in an operating margin of 20.5%, up 280 basis points to prior year.
3. Asia net revenues increased 4% compared to the prior year, and were up 22% on a two-year stack. Direct-to-consumer revenues increased 6%, driven by strength in both company-operated stores and e-commerce, in addition to wholesale revenues, which were up 1%. While we saw significant strength in many markets, including Turkey and Japan, headwinds persisted in our China and Middle East businesses. Asia delivered an operating margin of 12%, which was flat to last year.

Outlook

Now let’s turn to our outlook. We are confident that the acceleration in sales in Q3 will continue into Q4. This will be driven by accelerated growth of the Levi’s brand, supported by a new marketing campaign, improvement in global wholesale, and continued momentum in DTC and Europe, along with the benefit from the 53rd week. However, our prior full-year expectations are being offset by headwinds in China, Dockers, and Mexico wholesale.

As a result of these headwinds, we are expecting mid-single-digit revenue growth for Q4. And for the year, we are adjusting reported revenues from the low end of our 1-3% guidance to 1%, and constant currency from the high end of our previously guided range to 1.5-2%. I am confident in our plans to address these areas, and while we recognize that the benefits from these actions will take time to fully materialize, we are beginning to see improvements as we step into Q4.

As I referenced earlier, we are also confident in our expectation of progressive margin expansion. We are increasing our full-year gross margin expectation from 180 basis points to 270 basis points, driven by the Q3 beat and a higher contribution from DTC in Q4. Full-year SG&A is expected to be up 4% compared to prior year, with the acceleration in Q4 attributable to the 53rd week and higher advertising expenses.

The increase in SG&A will be partially mitigated by Project Fuel savings, which are expected to be around $50 million. Overall, SG&A as a percent to revenue has come down as the year has progressed. We expect gross profit dollar flow-through to be higher than SG&A dollars in Q4, driving Q4 EBIT margin to be in the low teens. We continue to expect full-year EBIT margin to be slightly above 10%, leveraging approximately 100 to 130 basis points versus last year.

We now expect full-year interest expense to be around $50 million for the year, with $13 million anticipated for Q4. Our Q4 tax rate is projected to be in the mid-teens. We now expect full-year adjusted EPS to be at the midpoint of our $1.17 to $1.27 guidance range. We also remain on track to open 100 net new system stores for the year.

Key Takeaways

In summary, here are the key takeaways from my discussion today:

1. We are seeing meaningful positive momentum of the Levi’s brand globally, which will accelerate in Q4, fueled by a new Beyonce campaign and product innovation.
2. We are narrowing our focus to Levi’s and Beyond Yoga, which will drive higher growth and margins. This includes the actions we have taken to evaluate strategic alternatives for the Dockers brand, along with our decision to exit Denizen and our footwear business earlier this year.
3. Our focus on improving profitability and the structural economics of the business through driving higher gross profit lets SG&A position us well for the long term and furthers us on our path to achieve 15% operating margins over the longer term.
4. We believe we are exiting the year in a much stronger position than at the beginning, as evidenced by the sequential progression in revenue and profitability across both channels and strength across key geographies, the U.S. and Europe.

And with that, let’s go ahead and open up the line for Q&A.

Q&A Session

OPERATOR: Thank you. The floor is now open for questions. If you have a question, please press star, then the numbers one one on your telephone keypad. Due to time constraints, the company requests that you ask only one question. If you have an additional questions, please queue up again. If at any point your question has been answered, you may remove yourself from the queue by pressing star one one again. Your first question comes from the line of Bob Drbul.

ANALYST: BOB DRBUL: Hi. Good afternoon. Two questions for you, if I could sneak them in. Please forgive me. The first one is for Harmit. Can you talk a bit more just around the drivers of this quarter’s revenue miss and your confidence in the Q4 acceleration? And then for Michelle, can you just expand a bit more just on the rationale on the Dockers evaluation and just the timing of it, I guess? If you could just answer those, those would be great. Thanks.

MICHELLE GASS, CEO & PRESIDENT: Thanks, Bob. Harmit, take the first and Michelle can take the Dockers piece. Both were expected questions, so thanks for asking.

HARMIT SINGH, CFO: You know, just going back and looking at the quarter, as we said, we did come in on the low end of our guidance in terms of revenue. But we did exceed our profitability expectations. What drove the, you know, the difference between coming in the low end versus, you know, coming at the top end? Basically, four factors. I’d say a fourth of the difference or the miss was driven by foreign exchange, largely Mexico peso vis-a-vis the dollar. The other, the remaining three fourths was driven by what Michelle and I referred to in the script, which is lower performance from Mexico, particularly Mexico wholesale. Part driven by the cybersecurity breach, which we are working, you know, very closely with the largest customers so we can, you know, get the shipping back to a normal standard.

You know, part China, which is a combination of the macro headwind. China, as you all know, is a small piece of our business. And but it was impacted. And the other piece was Dockers underperforming. So those are the factors that drove the miss to a question about, you know, why we feel quarter four will continue to accelerate. So quarter three has accelerated from H1 both in revenue and profitability. We continue to believe quarter four continues the acceleration. We think top line grows at about mid single digit and even margin in the low teens.

But the factors that drive give us confidence about the about quarter four. First, we are beginning the quarter for much stronger than we exited quarter three, which is a good which is a good sign. Second, the you know, we’re confident about the continued strength in the US and Europe. Europe closed quarter three slightly stronger than we expected, which was good news. The second is, you know, we do believe the global wholesale, which has sequentially improved. It is still down in quarter three, but it’s sequentially better than the first half will continue to improve. And our momentum in our direct to consumer business, which is not only stronger, but also a lot more profitable, continues into quarter four. We are also seeing, you know, the new product assortments are, you know, being, you know, are being accepted by the consumer.

In fact, we’re chasing into some of our products as we get ready for the holiday season. And the partnership with Beyonce, I think, will fuel the momentum. And then there is the 53rd week, which net of Denizen is expected to add, you know, one and a half to two percentage point. I think the important fact for for all of you to think through is how we how are we exiting the year? And our belief is we are exiting the year in a much stronger position, both in terms of revenue growth and profitably than we began the year. Structurally, the U.S. Levi’s wholesale business is expected to end the year less than 20 percent. Yeah. And, you know, let me repeat that less than 20 percent of our total business and is down from 30 percent in 2015. And that, you know, that in combined with the strength of DTC, both on the top line and the bottom line, I think structurally allows us to enter 2025 in a much stronger position. I hope that answers your question. I’ll now defer to Michelle on Dockers.

MICHELLE GASS, CEO & PRESIDENT: Yes. Great. Thanks for the question. You know, in terms of our decision to explore strategic options for Dockers, you know, this is all about focus. And our intention going forward is to really amplify our focus on the Levi’s brand and accelerate Beyond Yoga. You know, in terms of Dockers, this business has underperformed for some time. And so as we announced, we’re going to look at alternatives with an intention to sell this business. You know, we have you’ve seen us throughout the year take decisive action on a number of fronts. We exited our European footwear business, exited the Denizen brand. We’ve evolved their distribution and logistics strategy. So this is the next and frankly, the biggest decision we’ve made to really position the business for the long term. You know, we believe it’s going to be good for the top line as we accelerate both Levi’s and Beyond Yoga.

It will also be good from a margin standpoint in terms of our overall margin structure. You know, and I would say, given that even this quarter, the Levi’s brand was up 5 percent, Dockers down 13 percent. We also believe going forward is going to create kind of more consistent growth and minimize volatility. You know, we have started the process. We’ve engaged Bank of America. And your question on timing, you can just look forward to getting more updates as we have them.

ANALYST: BOB DRBUL: Thank you very much.

MICHELLE GASS, CEO & PRESIDENT: Thanks, Bob.

OPERATOR: Thank you. Our next question comes from Matthew Boss of JP Morgan.

ANALYST: MATTHEW BOSS: Great, thanks. So, Michelle, could you elaborate on the 5 percent global growth for the Levi’s brand? Maybe how that compares to the overall denim category and market share trends that you’re seeing by region? And then for me, multi-year, any change to the 30 to 40 basis points of annual gross margin expansion as an algorithm?

MICHELLE GASS, CEO & PRESIDENT: Thanks, Matt. I’ll kick it off in terms of the 5 percent growth and what that means in the context of the consumer and category. So, in terms of the 5 percent growth for Levi’s, clearly that’s being driven by the strength of direct-to-consumer, which was up 12 percent. Globally, 12 percent here in the U.S.

And we’re seeing that, you know, as it relates to direct-to-consumer, we’re seeing that in our stores. Now, I think 10 quarters of consecutive growth. New store openings are on track, 100 new stores for the year. And then our e-commerce business is also accelerating up almost 20 percent. So, that’s really fueling the growth. In terms of wholesale, which continues to be an important part of our business, while still a headwind and still negative, it was down 3 percent globally. We are seeing that sequentially improve. And we expect, you know, collectively, you know, the Levi’s brand and the business to sequentially improve into the fourth quarter. Harmit spoke to that just now. We’ve got a lot of levers that are going to drive that growth.

I think when you also look kind of inside the makeup of the business, we continue to be really pleased with the acceleration of our women’s business. Our women’s business both, you know, both outperformed in DTC and in wholesale. And we expect that to continue. We’re seeing growth in the bottoms business for women. We’re seeing growth, and frankly, you know, men’s overall for Levi’s was also positive. So, strength in bottoms and also strength in the tops business. I mean, tops was up 8 percent for the quarter across both channels, up even higher in DTC. So, when we talk about the pivot to really become a head-to-toe lifestyle apparel company, we’re seeing those proof points, which also, over time, expands our addressable market.

So, those are highlights around the strength of the Levi’s brand and business. And as Harmit just said, and I’ll echo, you know, we expect this to continue in the fourth quarter. And the quarter has started off strong in September. So, we feel good about that, but we don’t want to get ahead of ourselves. Hence, you know, the guide as it is.

You know, I’d say from a consumer standpoint, generally, we’re feeling good about the consumer. But we also recognize that we continue to operate in an uncertain environment. We’re optimistic on the category long-term.

You asked about the geographies. The momentum in the U.S. continues. Another quarter of positive growth. Europe inflected to growth, up 7 percent. And, of course, Asia as a whole was up 4 percent. And in terms of the U.S., you know, that consumer is proving to be resilient. And you see that in our DTC numbers, up 12 percent, as I was just talking about.

You know, as it relates to market share, again, I’d say we’re pleased. Women’s has been a focus. You know, just sharing the numbers overall. And women’s continues to gain market share and is now solidly in the number one position, which hasn’t been the case historically. You know, we’ve shared over the last year, we’ve continued to gain market share. And now, like I said, we are very solidly in that number one position, which compliments being the number one market share leader. And we are, you know, 2X versus the next closest competitor. So we feel very good about what’s happening in the business and how we’re driving share.

HARMIT SINGH, CFO: On your second question, Matt, going back to the growth algorithm, let me start by just reinforcing, you know, something that you’ve heard me now say for a couple of quarters. We’ve got this laser focus on growing gross profit dollars faster than SG&A. And what it really does is increases the flow through for every incremental dollar revenue that, you know, we add, you know, to our business. We’ve seen the progress across the board. And I think that is the one metric that will really help us, you know, get to the 15% operating margin that we are talking about.

Your specific question about gross margin. I think structurally, you know, what we have said, which is a 30 to 40 basis points of gross margin that we’ll add every year. I think that doesn’t change. And I would say that’s par for the course. Where we really focused to try and accelerate that is on a couple of things. As we drive a higher direct-to-consumer business, that could be a little better. The other thing is, you know, we are focused on driving higher full price sales, especially in our direct-to-consumer business.

And that’s going to really be driven by the innovation that’s happening on a product pipeline. That’s hitting home, we’re chasing into product, and we believe that continues. So that makes a big difference. And then as we simplify our go-to-market calendar, you know, we’re really looking at how do we get more agile in how we actually source product. And that should have some benefit in cost of goods sales over time. We’ll talk more about this as we guide 25 and beyond. But, you know, I’d say you take the 30 to 40 basis points right now, and then more to come. Stay tuned for, you know, further acceleration in the next couple of quarters.

OPERATOR: Thank you. Our next question comes from the line of Oliver Chen of TD Cohen.

ANALYST: OLIVER CHEN: Hi, thanks, Michelle and Harmit. DTC and women’s were impressive. What’s happening with men’s and also as you think about your longer-term revenue growth algorithm of plus six to eight, what are the building blocks to getting there more sustainably? It sounds like there could be an innovation opportunity in men’s, and then wholesale is obviously not growing as fast as DTC. The other opportunity slash question is like faster inventory turns on your direct-to-consumer and ways to enhance that over time, perhaps using the cost method of accounting. And an East Coast port is on people’s minds as well. Thanks.

MICHELLE GASS, CEO & PRESIDENT: Yes, great. Hi, Oliver. Thanks for the question. So, yes, I mean, happy about our DTC business. Clearly, women’s accelerating. But to your point, men’s is a critical part of our business and very important. We have a lot of focus. I mean, you know why we’ve continued to talk about our win with women strategy is that, you know, we are underdeveloped in that business. Right. And that business over time should be at least half. And, you know, we’re about 35 percent or so today.

So we have a lot of upside. But with men, we must retain our top position and continue to grow there. So for the quarter, just to add a little bit more color in the men’s business, men did accelerate from the first half. Men’s was positive for Levi’s, up 2 percent, up high single digits in DTC. But we see more opportunity. We’re not we’re not satisfied there. We do want to accelerate growth. And so we are focused both on energizing the core of our business.

You know, 501 continues to perform. What more can we do there? And importantly, on the evolution of fits for men, baggy and loose is now really taking hold. And we’ve been chasing those fits for men. And we are going to be in a better in stock position in the fourth quarter, given the moves that our merchandising and planning team did, you know, versus Q3. I think I think there were, you know, some missed opportunity on the baggy and loose, say, for men in the third quarter. But we’ve got that covered for the fourth quarter.

And then over time for men, it kind of goes back to what we were talking about earlier on this head to toe denim lifestyle, both in terms of when you think about bottoms. Yes, it’s denim, but also non-denim and non-denim bottoms for us now make up about 40 percent of our business. We’re seeing traction in products like the XX Chino, which continues to perform. We just introduced this year, as you’re aware, the tech pant, which is more of a performance oriented, but still very Levi’s. And then innovation in fabrics, performance, cool, warm, comfortable, stretchy.

And, you know, and again, on the loose trend, the 555 introducing as we speak. The tops opportunity continues like it is for women, continues to be an opportunity for men. And we’re also seeing traction there. I mean, combined men’s and women’s for tops. We were at eight percent in total globally on all channels and then and then even greater for DTC. And to your point, this is a focus for us, both for a direct to consumer, but also for wholesale. You know, it’s DTC first as it relates to the overall strategy. That’s where a lot of our future growth is going to come.

But also ensuring that our wholesale channel remains healthy and we are seeing sequential improvement there. And as you know, you know, the men’s business particularly penetrates in that wholesale channel. So, you know, again, we talked about as we head into Q4, we’re expecting acceleration overall. And that would that would carry for both the men’s and women’s business.

HARMIT SINGH, CFO: Two other two questions, Oliver inventory. I’ll do a speed answer on board. Inventory turns about two. Our long term goal is three. We’re committed to it and a substantial amount of working capital and cash. The, you know, the tailwinds that we’re working on or the area we’re working on a faster go to market calendar. We’re reducing our SKUs and Dockers exit should actually help because Dockers, you know, inventory turn is lower.

I think the one thing that we just have to, you know, that we need and I think everybody needs all retailers need is a little bit more consistency and in some of the supply chain issues we’ve had. And I’ll talk about the latest one that you refer to, which is, you know, the port issue. But just, you know, getting more consistency, clarity, I think will really make a big difference. Because, you know, all of us have a little bit more safety stock right now. And in our case, we are chasing the new stuff.

So, you know, we will probably buy more of the new stuff just to make sure that we don’t lose sales. But I think, you know, those are the things we’re working on on the port strike. You know, it’s a developing situation. We are doing everything we can to prepare ourselves as much as we can. We’ve been working on this for the last couple of months. But like everyone else, the impact on us will depend on how long it goes on for. Knowing that this was on the horizon, we’ve been proactively working on it through, you know, as early as March. And we’ve been monitoring the situation closely.

We, for example, proactively shifted routes to the West Coast. We’ve prioritized certain POs and switched to airfreight just to ensure that we have the product for the holiday season, et cetera, et cetera. And so our hope, like everyone else, is that this gets resolved quickly.

ANALYST: OLIVER CHEN: Thanks, Michelle. Thanks, Harmit. Best regards. Happy holidays.

MICHELLE GASS, CEO & PRESIDENT: Thank you. You too.

OPERATOR: Thank you. Our next question comes from the line of Ike Boruchow of Wells Fargo.

ANALYST: IKE BORUCHOW: Hi. Good afternoon, everyone. Maybe Harmit or Michelle, can you elaborate a little bit more on the U.S. wholesale weakness that was in the quarter? Was that in line with your expectation? What is your expectation based on what you’re seeing so far for the fourth quarter? And I’m just trying to get maybe just a state of the union on that channel. How are you thinking about it? You know, macro and then your own execution would be great.

MICHELLE GASS, CEO & PRESIDENT: Sure. I’m happy to take that. I would say for the Levi’s brand, for U.S. wholesale, that largely came in line with our expectations. You know, we’ve talked about Dockers not meeting our expectations, and that was true very much in the wholesale channel. As I spoke to kind of earlier, global wholesale was down 3 percent up from the first half and then in the U.S. also sequentially improved down 2 percent. I will add that a bright spot not only for the total company, but also in U.S. wholesale and global wholesale, frankly, was the women’s business. So women’s was up 4 percent globally and up 2 percent in U.S. wholesale. And that’s been driven by, you know, driving the fashion fits, the baggy trend and also this head to toe denim dressing, including tops.

We are getting traction and tops with our with our wholesale business. You know, I would add that, you know, while this continues to be, you know, a headwinter sales again, DTC up 12, wholesale down 3, U.S. wholesale down 2. We are seeing, like I said, a sequential improvement. We expect that sequential improvement to carry into Q4 and beyond. I’d also add that the profitability of the channel is improving. You know, we saw 500 basis points of gross margin leverage in this quarter. And part of that, candidly, has been, frankly, focused on more full price selling.

That also impacted the top line a little bit. All was accounted for in U.S. wholesale, but having less off price sales as an example, as we focus on full price selling. So, you know, I’ll just say important channel. Our key customers are really important to us, you know, and we’re important to them. And I think the big unlock for us going forward is really making sure that, you know, we get great adoption of the new products we’re offering. You know, sometimes we have a broader, bigger assortment of, like, fashions that’s in DTC and we see that flow through. So how can we get wholesale to adopt those more quickly?

And we are beginning to see the whole head to toe lifestyle, including tops. And some of our key customers are really adopting that. I think these things carry in to build our momentum into the fourth quarter and beyond.

ANALYST: IKE BORUCHOW: Great. Thanks.

MICHELLE GASS, CEO & PRESIDENT: Thanks.

OPERATOR: Thank you. Our next question comes from the line of Brooke Roach of Goldman Sachs.

ANALYST: BROOKE ROACH: Good afternoon, and thank you for taking our question for me. I was hoping you could quantify the drivers of gross margin outperformance in the quarter versus your prior outlook, which I believe was for 200 basis points of expansion. And then looking ahead, how should we be thinking about the puts and takes on gross margin? What level of cost recapture is still on the horizon? How are you thinking about pricing and promotions? And what are the offsets that you’re currently embedding in your in your outlook for freight and supply chain disruption? Thank you.

HARMIT SINGH, CFO: Sure, Brooke.

HARMIT SINGH, CFO: So the big buckets, you know, in terms of what drove this. So gross margin higher than we expected, clearly by 200 plus basis points. But relative to a year ago, I think if you break up the 440, I would say 270 basis points was product costs that that helped 50 basis points for higher full price. And you put this, you know, extra effort, especially as as I mentioned earlier, the products that we are now bringing to market are hitting home and we’re chasing into it.

And then 190 odd basis points from brand and channel mix. We had a few offsets, you know, 60 basis points from FX and airfreight. And airfreight is largely because we’re chasing into product. So that is one walk, which is from a year ago.

Relative to what we thought is really coming an extra point from channel mix, which is, you know, DTC is strong. Europe had a strong DTC quarter, about half a point from higher full price sales. It’s always difficult to predict the teams on the ground. And our e-commerce folks are doing a great job improving that. We still, you know, we have opportunity. And so there’s more to come. And a point, you know, due to lower COGS, sometimes difficult to predict. So that’s how we are thinking of gross. That’s what really drove gross margins for the quarter.

For quarter four, I think much of the same. And that’s why, as we think about the year, we’ll probably end the year 200 plus basis points, you know. No, actually 300, close to 270, 300 basis points better than a year ago. And that’s really driven by the same factors. FX a headwind, product costs a tailwind, mix a tailwind and higher full price sales.

ANALYST: BROOKE ROACH: Great. Thanks so much.

HARMIT SINGH, CFO: You’re welcome.

OPERATOR: Thank you. The next question comes from the line of J. Soul of UBS.

ANALYST: J. SOUL: Great, thank you. You know, Michelle, if you just take a step back for a second, you think about everything that the company is doing to try to transform into a global DTC business versus, you know, what was traditionally a wholesale business. How far along is the company in that journey? I mean, how much more, you know, skills does the company have to acquire, people and talent does the company have to add? Where would you say the company is in that journey?

MICHELLE GASS, CEO & PRESIDENT: Yeah. Thanks, Jay, for the question. It’s a great question. I mean, I would say, I think, first of all, I’d say we’re still in the early stages. But that said, we’re making rapid progress. And I think this year in particular, where we have, you know, we have an initiative called Project Fuel, which is our global productivity initiative. But it’s not just about the bottom line. It’s also about the top line, how we accelerate growth and do that more profitably to reach our ambitions about turning this company into a 10 billion more profitable company.

We’ve brought in a number of new leaders who have DTC skills. I mean, Jason Gowans, who came out of Nordstrom. He is deep, deep expertise in e-commerce. And candidly, you’re seeing that play out with the acceleration of our e-com business and digital overall. Gianluca Flore just joined us, who comes from over 20 years of deep retail experience. And we are very much in the work of call it rewiring the company, which is, Harmit alluded to it, but our go to market, we now do see how we are going to, you know, take several months out of our process to get down to a 12 month calendar. And in some cases, our speed lanes will be a lot faster.

So that is one example. You know, the other piece I would point to is it’s no accident that we’re seeing DTC overall accelerate and the profitability increase. We’ve taken action through this project Fuel to drive productivity, and we’re seeing that pay out. We have 100 plus doors in pilot where we’re addressing selling skills, driving UPT. All of our metrics, as I remarked earlier, are actually showing positive growth. Things like conversion and units per transaction, which is all on the back of being an expert in retail, coupled with driving more profitability out of the boxes. And we’re seeing that through better labor deployment.

So there’s a lot to talk about here, but I would say, you know, this will be a multi-year journey. So it’s hard to put a percent, but I’d say we’re, you know, we’re making great progress. And I think that progress has accelerated in the last 12 months.

ANALYST: J. SOUL: Got it. Thank you so much.

MICHELLE GASS, CEO & PRESIDENT: Thanks for the question.

OPERATOR: Thank you. Our next question comes from the line of Laurent Vasilescu of BNP Paribas.

ANALYST: LAURENT VASILESCU: Good afternoon. Thank you very much for taking my question. Michelle, I think you mentioned European wholesale was up 4%, if I recall. If that’s the case, can you maybe talk about what you’re seeing for potentially for the fourth quarter? And I know, I recognize you’re not going to talk about fiscal year 25, but are there indications that that would potentially continue into spring of next year? And then I think, Harmit, you talked about some timing shifts, whether it was Mexico. I don’t know if there’s a, if you can quantify how much revenues fell in from 3Q into 4Q as we think about the top line for 3Q.

MICHELLE GASS, CEO & PRESIDENT: Yeah. So, great. Thanks for the question. In terms of Europe, yes, we were very pleased to see Europe in flux to growth, 7% overall strength in both channels. And as you pointed out, 4% growth in wholesale, 10% in DTC. That’s been a lot around the new product innovation we’re seeing across both genders. We’re especially seeing acceleration with women. A lot of our key customers, wholesale in Europe, have been quick to adopt this head-to-toe denim lifestyle, more tops, more skirts, more dresses, and they’re working.

So, we’re anticipating that Europe continues to, as a total market, continue to grow exactly how that plays out. Stay tuned. Everything we know is baked into our guidance. And surely, as we look to the next year and beyond, we think this is a start of a really positive trend for Europe. We have a great leadership team there. Our pre-book, since you asked about wholesale, our pre-book does continue to be positive. That was one of the factors that contributed to Q3. So, all in all, we feel like we’re very well positioned in that market.

HARMIT SINGH, CFO: Yeah. And, Laurent, to your question, while Mexico underperformed because of the, one of the reasons was the cybersecurity and our constraint to ship. The reason, I won’t quantify it. It is a little bit. The reason I won’t quantify it is because we were working through that with our largest customer. And, you know, these things, because they have technology implications, take a little time. But we’re working through it. We feel good about the fact that the business, generally, the brand and the business is healthy. And it’s a matter of timing. So, more to come. But, you know, the reason I’m not giving you, you know, a clear answer is because I just need, we just need another quarter for this to improve and the systems to start working, you know, both sides.

ANALYST: LAURENT VASILESCU: Thank you very much.

MICHELLE GASS, CEO & PRESIDENT: And with that, thanks, everyone, for joining the call and your questions. And happy holidays. We’ll see you at the next call.

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

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