Good morning. And welcome to Levi Strauss & Co. First Quarter 2020 Earnings Conference Call. My name is May and I'll be facilitating the audio portion of today's interactive broadcast. [Operator Instructions] At this time, I would like to turn the call over to Ms Aida Orphan, Senior Director, Investor Relations. Ma'am, please go ahead.

Thank you for joining us on the call today to discuss the results for our first fiscal quarter 2020. Joining me on today's call are Chip Bergh, President and CEO of Levi Strauss; and Harmit Singh, Executive Vice President and CFO. We posted complete Q1 financial results in our earnings release on our IR section of our website, investors.levistrauss.com. The link to the webcast of today's conference call can also be found on our site. We'd like to everyone that we will be making forward-looking statements on this call which involve risks and uncertainties. In particular, at this time the Covid-19 pandemic is having a significant impact on the company's business financial condition, cash flow and results of operations. There are significant uncertainty about the duration and extent of the impact of this pandemic. By dynamic nature of these circumstances means that what is said on this call could change materially at any time and our actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please review our filings with the SEC, in particular the risk factors section of the quarterly report on Form 10-Q that we filed today for discussion of the factors that could cause our results to differ. Also note that the forward looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements as required except by law. During this call we will discuss certain non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures are provided in the earnings release on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirely is being webcast on IR website and a replay of this call will be available on the website shortly. And with that I'll go ahead and turn it over to Chip Bergh.

Thanks Aida. Good afternoon, everyone. And thank you for joining our Q1 earnings call which will be unlike most typical quarterly earnings calls as while we will cover Q1 results, we'll focus more on updating you on where we are with the crisis at hand and how we are navigating the uncertainty that we're all facing. What is happening in the world around us is not just a human tragedy, but will likely result in a significant global economic tragedy. The biggest challenge we're all dealing with right now is uncertainty how long will this continue, how deep of an economic crisis does the pandemic create. How will the consumer respond when crisis abates? And ultimately what is the shape, size and scope of the apparel sector when it's over? Frankly trying to forecast this is nearly impossible. No one can control the virus or even the economic fallout, but we can control how we react to the crisis. I am very optimistic about our prospects for the future, both navigating through the crisis and the short to medium term and in the long-term recovery. And I believe we are well-positioned, if not better positioned than most companies in our industry. We had a great first quarter. Our business was humming coming into the crisis, again reaffirming the robust strategies that we are executing and the momentum we had prior to the crisis erupting globally. But beyond the strength of our business and the underlying momentum, here is why I'm confident that we will emerge stronger on the other side. We have one of the world's most iconic, most loved brands in Levi's. And consumers will come back to brands that they love and trust. They haven't gone dark either. We're investing in strengthening our bond with our fans during…

Thank you, chip. Good afternoon to all of you. I hope all of you, your families and loved ones are safe and healthy. The coronavirus is having far-reaching consequences around the world. Before I walk you through our results for the quarter, let me share what we are doing now to respond to the challenge of Covid-19. Our focus is to balance cash preservation and profit protection. To that end, we are ensuring adequate cash flow and liquidity to navigate the choppy waters, including suspending our share buyback program and drawing down on our revolver. We are actively managing our supply chain and inventory flow, while leveraging our FLX platform, while cutting our second half purchases and evaluating the most efficient way to reflow the small amount of seasonal items we have on hand and soon we will leverage existing capability such as ship from store to help manage inventory. On cost management, we're substantially reducing advertising spend and we are pulling SG&A levers available to us to cut cost in our business operation. Such as the compensation cuts and furloughs Chip mentioned. Freezing travel and headcount, significantly reducing variable expenses and negotiating with landlords to abate rank for the period stores are closed. And we're reducing our capital spend on discretionary projects while re-evaluating our store rollout plan. We are deferring our new distribution center in Europe and are now targeting a reduction in annual CapEx spend of up to 30%. We have closed the majority of our doors and those of our franchise partners to help slow the spread of the virus. Currently about 70% of these doors are closed; 20 % are fully open and the balance are operating on reduced hours. With respect to our first fiscal quarter of 2020, we are pleased to have delivered…

[Operator Instructions] Next participant is from the line of Heather Balsky from Bank of America. Your line is now open.

Hi. Good evening. Glad to hear everything is going well and everyone's in good health. Thank you for taking my question. Can you just talk about how your various wholesale partners in Europe and in the US are responding to this in terms of working capital and in terms of inventory orders? And then can you talk about the levers and tools you have to manage working capital during this downturn. Thanks.

Heather, hi. Glad to see you're safe and healthy. Thanks for asking the question. We are blessed that we have customers and wholesale partners that we have great relationships with. We are working with each one of them on a case by case basis. We're collecting the cash that's owed to us. We're managing inventory. The good news is that I mentioned, given that our inventory levels were generally healthy as we enter the quarter and ended the 2019, we are in a good spot. A large piece of our inventory including the in trade inventory is core. So we believe that once the retailers open their stores and we open our stores, we'll be able to work through that and we're in discussion with our partners. We are asking them to pay us what they owe us which is the standing of a good relationship. And we're working through with them to be ready when the crisis is over and behind us.

One other quick thing I would add, Heather, is we do have customers that are still in business and still opening their doors and still shipping products. So Walmart, Target, Amazon here in the US are all trading and we're still shipping product to them and same is true with some of the true play e-commerce players in Europe. So we do have some revenue right now and some consumer transactions happening in wholesale, but as you know, the majority of the large department store and chains here in the US are closed. And that's largely true in Europe, across Europe as well.

We have our next question from the line of Matthew Boss from JPMorgan. Your line is now open.

Great. Thanks again and congrats on a nice quarter. Be nice that they opened my line. So, Chip, as we think about the brands top and bottom line acceleration into the crisis, I thought your prepared remarks were actually really interesting. I guess how do you weigh market share versus profitability to emerge from this as a stronger brand as you said without taking some level of a step back.

Yes. So I sort of talked about it in the prepared remarks. We are very focused right now on how do we come out of this stronger as a company, but also how does the Levi's brand come out of this crisis even stronger. So let me hit a couple of things on why I think that's possible. First of all, coming into the crisis there's a very good proof point about the strength of the brand. And that is called pricing power. We've been talking about pricing power. We took pricing at the end of last year and you saw it flow through in gross margin and gross profit line this year or this past quarter Q1. So nothing better demonstrates the strength of a brand than the ability to price and we did that successfully in Q1. Second, we're continuing to invest during this period. We have not gone completely dark. We are cutting back to be very clear. We are cutting back on A&P, but we're being deliberate and strategic about actions that we can take to strengthen the relationship between the brand and the consumer and the 5:01 concert series is, I think, a great proof point of that and every day it just keeps getting more momentum. We're trying to find ways to connect more strongly with consumers during the period of time that they're cooped up. And third is on the product front. We're going to continue to bring newness. This Super Mario from Nintendo collaboration that's dropped in China and Asia and Europe and drops later this week here brings some fun and some newness to the brand. So we're not stopping; we're not pausing. We're continuing to go forward on product and product innovation. And finally, we're going to continue to leverage…

Great. Maybe to switch gears to Europe. So it's close to a third of your sales. It has been meaningful driver of growth. So maybe pre-crisis can you speak to profitability metrics and drivers of the pricing power that you were seeing in Europe and then as we think post-crisis just the remaining opportunity as we think about the profitability and pricing opportunity that you continue to see in Europe?

Sure. Matt, pre-crisis as you know we've been growing Europe now in the mid-teens and for a couple of years at 20%. Despite that growth, our margins have grown so on an operating margin basis, we've seen clear leverage, which means that we've been growing the top line, as well as driving leverage to the bottom line. We did take pricing in the second half of last year. The pricing stuck and has continued to stick just, till just before the crisis. The brand is very, very strong. Our entire portfolio of products are resonating really well in Europe. So thing men's bottoms which were up 10% in the quarter. Our women's businesses grew 19% on top of real strong growth the previous year. And so we've also continuously to see grow growth in tops. Execution continues to be very strong across both franchise and our company operations. So our view is that as stores begin to reopen, the strength of the brand besides all the pricing that we took. And the wonderful execution that the team on the ground brings to the market. I think we've stand us well especially as some of our other peers of competitors who were in a tougher position think differently. So we've gained market share. We think we will emerge out of the crisis a lot stronger.

Your next question is from the line of Paul Lejuez from Citigroup. Your line is now open.

Hey, guys. Thanks for taking the question. Curious, I'm sorry if I miss it, but did you say that you've seen an acceleration in your income sales since stores have been closed? And curious what you're seeing in terms of changes to the basket sides and mix of business and just curious if online sales may be skewed towards bottoms versus tops more so these days than normal? Thanks.

Yes, Paul. So the acceleration or the growth in the digital business we have seen in China. So China, at the end of the first month as stores have open the business is positive year-over-year. Across our other e-commerce business, the business is broadly flat. I would say Asia is up, Asia is positive; Europe and the US is slightly down. So overall the businesses has been flat. In terms of your question of bottoms and tops, the ratio both in China as well as in the US is probably the same it was before the crisis. So we haven't seen a dramatic change in the mix of the business.

Those remained flat.

Thanks. I mean I know I'm just, just to be clear.

I mean I think the other, it's important to note that over the years we've continued to add stretch in our bottoms. and I think at last count over 80% of our bottoms had reasonable amount of stretch. So to Chip's point people working at home probably are feeling a lot more comfortable.

Yes. Thanks. And can you also talk about in your DTC business first quarter of ex Black Friday strong performance. I'm just curious if you could break down e-com versus full-price versus factory stores?

I think if you looked at our first quarter one, a brick-and-mortar was up 14; e-commerce was up 12. I don't have the e-commerce numbers top of my head ex Black Friday, but I don't have it on the top of the head, but I would say both were reasonably strong from that perspective.

Your next question is from the line of Kimberly Greenberger from Morgan Stanley. Your line is now open.

Okay. Fantastic. Thank you so much. I wanted to start with just understanding what percentage of your total inventory would have some sort of a seasonal element as opposed to evergreen sort of product? If you could help us understand that because perhaps there's less markdown risk on the evergreen product. And then secondarily, what are you hearing from your vendors in terms of third quarter orders or fourth quarter orders, what's the early look at your order book? And then lastly, what sort of markdown support or margin support are your wholesale partners currently looking for? Thanks so much.

Yes. Kimberly, as I said, the good news is we have worked away at inventory and improving turns over the last couple of years. So the inventory leverage which is the growth or the decline in inventory relative to the growth in revenue has been positive. So we entered the quarter with inventory down 7%, 70% of that is core. I would say seasonal inventory is about 15% to 20% and we are working through with both our wholesale partners, as well as franchisees in ways and means we can, as the stores open sell that product. I think going back to what Chip said, the strength of the brand as well as newness that our products bring to bear, we are generally confident that we can balance growing revenue and gross margins. The other thing on gross margin just to your point, we're starting at a very good spot. Our gross margins are at a record high and I think that will bode us well both through the crisis as well as we emerge out of it. To your question about the discussions on order book et cetera, again, it's case by case. We've adjusted our inventory based on the demand signal we've got. We have a fairly flexible supply chain and so if things come back faster, we can flex it up. We also have the FLX platform where we can change fashion trends because we have length which is again something that is going to be a competitive differentiation for us relative to the rest of the folks in the apparel industry.

I guess the only other thing to add is just real briefly is and I think we said it in the prepared remarks that we cut all unfilled purchase orders in the second half of the year. So we are trying to aggressively manage the second half inventory in terms of inbound just recognizing that everybody, all of our customers are going to have to work off this inventory from their stores being closed. But the good news is more than 70% of our inventory is core replenishment and it can carry over to the next season.

Great.Okay. And last for me, I understand that when China reopened the stores we are still comping down. If you think about the last week or two what sort of the magnitude of the recent performance in comparable store sales per China?

Yes. I know I hate talking about averages on a store base of 500 stores. We have mixed performance there. We have some stores that are already comping ahead of prior year. And we had some that are still significantly down versus prior year. But I think what's important is since the stores started reopening traffic has kind of improved sequentially kind of week-over-week and our business performance in the aggregate has improved week-over-week. And we're seeing our e-commerce business now comping positive performing ahead of year ago. So I kind of used that as light at the end of the tunnel. The consumer is coming back albeit maybe a little bit tentatively but there's -- there are green shoots of optimism. It's also worth noting that our mainline doors, particularly the ones that have our more premium assortments in them seem to be doing best right now versus prior year. And that may be part of the playbook as we go forward.

And gross margins, Kimberly, you heard me say gross margins were up.

We have our next question from Bob Drbul from Guggenheim. Your line is open.

Hi. Good afternoon. I just wondering if you guys and Chip, I was wondering if you could talk a little bit more just like US wholesale but specifically the mass channel in terms of what you've seen there. What you're seeing there? A lot of discussion around tops and mass versus bottoms and mass. I just wondered if maybe you could just talk to those trends and even post quarter end.

Okay. Well. I did kind of allude to it that both Walmart and Target are still open. And we continue to be very optimistic about the task which we've now continue to expand. We're kind of north of a 100 doors with Target, feeling really very good about that. As Harmit mentioned earlier, we haven't really seen a dramatic shift from bottoms to tops. And there are lot of people who are talking about that. And they're calling it the zoom effect. People are wearing the pajamas down below and a nice top up above, but we haven't really seen a dramatic shift to our mix from tops to bottoms on our businesses. So we're encouraged with the business performance of Levi's Red Tab at Target. We also have our value brand signature in Denizen in Walmart and Target. And they actually were flattish down about a point or two points versus the prior year in Q1 and that may have been we're still trying to figure out how much of that was consumer and consumption driven versus those customers shifting their open to buy budgets to other household necessities, toilet paper, paper towels, hand sanitizer and food. I suspect it's probably more the latter than it is the former. So we'll see as this crisis unfolds, but I do think it's important to say that we do have a portfolio of brands and these value brands play a role in our portfolio. And as the consumers get shocked and potentially as we see big spikes of unemployment. We've got a brand there for the consumer and it's great product at that value price point.

Got it. And in terms of the supply chain generally, have you been able to procure everything sort of timely and has they been operating for you pretty smoothly over the last year?

Right now, I was just going, I mean very shortly, in short, yes. We're good. And we're good with what we have on hand right now. And particularly with just about everybody being closed with more than good and we're pretty confident about what we have coming in for the second half. So a good part of the second half is already produced and waiting to go on to boats to ship over here so later in the summer when it should be hitting consumers - or customers' floors. Harmit, I don't know if I cut you off.

Yes. No worries, Chip. This -- the wonderful virtual dialog. But I said three other things, Bob. First, as a value-based company has been around 167 years. We're taking full responsibility for finished, ready-to-ship orders and we are working on timetables, adjusted timetables with our vendors. We have a program in place for our vendors to get early payments at favorable market rates and several vendors take advantage of this already. We're looking at ways to expand this program to the benefit of vendors. And last but not the least, Chip talked about a $3 million grant of that we're granting a $1 million to organizations that support apparel supply chain workers with a focus on public health responses particularly for women. And we're working with industry stakeholders to explore options for a broader collective response, so that we can support workers during this crisis. So we're doing in a lot more than just making sure the goods we need are delivered.

Got it. And if I could just make it one more question. I know that the Nintendo Super Mario Brothers launch has gone well internationally. Is it true that Chris Ogle got an early pair for the ones here in the US and that's what he's wearing during this conference call?

He is absolutely wearing it. How did you know? That's crazy.

A little birdie told me that.

It's really fun my product. It hits later this week. So hopefully everybody will go out and get some. Thanks Bob. Good to hear from you.

Your next question is from the line of Jay Sole from UBS. Your line is now open.

Great. Thanks so much. Chip, you mentioned there could be some real estate opportunities that arise from the situation. And just related to that, you talked about any progress you've made over the last quarter developing the full priced store model for the US?

Yes. It's, we remained really optimistic about this new store model, which is smaller footprint, better location. We've got a couple of them. We have a few more coming. We're not stopping those. Those are still plan to open later this summer. The one I always talk about as an example is the Stanford Mall. We need to, I guess, get a little bit more clarity on how long and how deep and how much of a problem do we really have here from a financial standpoint before we can commit to whether we would accelerate that model or not. I mean as Harmit said it, balance sheet and cash is king right now. We don't want to get out over our skis from a capital standpoint. But we're bullish about this. And I'm very optimistic about it, about the model itself. And I do think that there's going to be this economic shock is going to have an impact. And it will create opportunities and it could create opportunities for us to find more of those kind of locations more quickly. And if we've got the financial strength and flexibility, we may pounce on it and not miss the opportunity to capitalize on the environment and the situation that's going to happen. So we remain optimistic about it on these stores, the ones that we've opened that are kind of along the lines of this model are profitable. I think Harmit said it in the script that our ROIC on our store base right now on a global basis is like 20%. So we clearly have an opportunity for more mainline doors here in the US. We only have a little bit more than 30 right now. So we'll take advantage of the opportunity, if the right opportunities come along.

Got it. And then maybe if I could just ask one more on inventory. You talked about the uncertainty of the situation and it's got to be difficult to plan for holiday not knowing how consumers are going to behave and if they're going to be coming back to stores or they're going to increase shopping online. Can you just touch on a little bit more the kind of flexibility that you have to be able to shift inventory between stores and online just to react to whatever happens as we go through the rest of the year?

Yes, well, I'd say first and most importantly, we've developed the ability to ship from store. We can fulfill e-commerce orders from store. And in fact, we're going to start firing that back up here in the next week or so just so we can mitigate upon the potential risk of our e-commerce distribution center or the largest distribution center potentially getting shut down. I mean a number of states distribution centers that aren't shipping food or medicine are getting shut down is not being necessary or business essential. And so we want to mitigate that possible risk. And we've built that muscle, that capability so that's the first thing I would say. The second thing is we've got, I talked about our e-commerce site. It's basically our best store. And it has a large variety of PC9s and assortments that we have in both our mainline and outlet doors. And we have plenty of flexibility to shift inventory from stores to e-commerce and in both directions. So we've got maximum flexibility to do it.

Your next question is from the line of Omar Saad from Evercore ISI. Your line is now open.

Are you guys there? Can you hear me? So apologies, no worries. Apologies if this has been asked, but I wanted to kind of dive into the consumer behavior side of the equation. I know it's easy and enticing to talk about the pre coronavirus world and the post coronavirus world. But it's not yet clear I think how long we're going to be in this coronavirus world and what it means on consumer behavior. So anything you're learning and how consumers are acting in China or different parts of China? Any thoughts on how consumer behavior might be the same or different in your categories in Europe or in North America? And then, I guess, is the key here when you can reopen stores or is the key here when consumers feel comfortable and safe to go back to things like concerts and music festivals and other kind of public bars and happy hours, jeans and casual attire occasions or so if maybe you can kind of walk me through some of those things.

Yes. Well, so I'm the big consumer guy here and we're trying to learn as much as we can in China. And I would say that China may not be a perfect model for everything that we might expect to see in the West. And that's for a whole host of reasons but it's quite possible here in the West we're going to see a much bigger economic impact, more job losses. We're already seeing it right, 10 million people filing for unemployment in the last two weeks. And I think all of those dynamics could potentially have an effect on the consumer, but what I can tell you about China is that as we brought our stores back up freshness and newness matter. Our top-selling item for women is the new balloon fit, which we literally just launched. And so they're looking for fashion. They're looking for newness. They're looking for something exciting. The Super Mario Brothers collaboration that we launched on a super brand day on T-Mall has literally taken off. And so newness, fun ness is going to be important I think. And we're very, very conscious about as we plan out second half to make sure that we're leaving ourselves enough flexibility to make sure we've got newness on the floor when the consumer does come back. But I think what's going to happen here in the US, what's going to happen with the consumer, it's one of the big unknowns and I kind of alluded to it right at the top. It's very difficult to forecast the future right now not knowing how deep or how long this goes. I would say the deeper the economic impact is and the longer everybody is cooped up; the more of a shock there will be to the…

We have our next question from the line of Dana Telsey from Telsey. Your line is now open.

Good afternoon, everyone. Chip and Harmit, hi. As you guys have been talking about obviously, as you've been talking about the expense management underway. We're in the buckets obviously is occupancy, how are you thinking and what are you seeing in terms of lease terms? Are there lease renegotiations of your fleet around the world globally, whether outlet or full line. And I totally agree there's a lot of opportunities for you to get some better locations even smaller ones in the US when all of this is said and done. Thank you.

Yes. Dana. Yes. Let me take a stab at that, we are in discussions like most of other retailers with landlords and we're seeing success. I think we've got some great landlords and they're being mindful of the situation. They like, we were talking about the brand. They also want great brands. They also want great credit and they want brands that are going to be here for the longer term. So we're working it case by case and that's why I talked about it as an opportunity from an expense management perspective. We also have governments outside the US, the UK for example, in the fiscal stimulus, they have given an abatement on property tax as a holiday. And so we are leveraging that in different markets. And we're working with the White House and the different associations to try and bring similar practices in the US as part of stimulus form. So I think we feel good about where we are. Obviously, it's difficult to generalize but as Chip earlier mentioned, if you think about a long term there probably will be vacancies. It gives us an opportunity to both expand closed space for stores that are really doing well as well as we grow main line in the US and grow mainland across the world, it gives us opportunities to get into [indiscernible]location. End of Q&A

Okay. I think we'll call it there. We apologize for going over a little bit long, but there were clearly some technology challenges with a couple of questions. Anyway thank you all for dialing in. And we're in a once in a century type of situation right now. And I just hope that you all will stay safe and keep your family safe and healthy. And we will look forward to talking with you at the end of the next quarter. And hopefully we'll be able to talk with more specifics in terms of what we expect for the balance of the year. Thank you all very much for dialing in. And take care of yourselves.

Thank you, presenters. Ladies and gentlemen, and this conclude today's conference call. Thank you all for participating. You may now disconnect. Have a great day.