Good day, ladies and gentlemen, and welcome to Levi Strauss & Company Second Quarter Earnings Conference Call for the period ending May 24, 2020. [Operator Instructions]. This conference is being recorded and may not be reproduced in whole or in part without written permission from the company. A telephone replay will be available two hours after the completion of this call through July 13, 2020. Please use conference ID 2179823. This conference call also is being broadcast over the Internet, and a replay of the webcast will be accessible for one quarter on the company's website: levistrauss.com. I would now like to turn the call over to Aida Orphan, Senior Director Shareholder Relations and Risk Management at Levi Strauss & Company.

Thank you for joining us on the call today. Joining me today are Chip Bergh, President and CEO; and Harmit Singh, Executive Vice President and CFO. We have posted complete Q2 financial results in our earnings release on the IR section of our website investors.levistrauss.com. We’d like to remind everyone that we will be making forward-looking statements on this call which involves risks and uncertainties, in particular at this time there is significant uncertainty regarding the duration and extent of the impact of the COVID-19 pandemic on the company’s business, financial conditions, cash flow and results of operations. 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 Form 10-Q that we filed today for a discussion of the factors that could cause our results to differ. Please note that the forward-looking statements [Technical Difficulty]

Aida.

Aida.

Aida, I think we lost you.

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 entirety is being webcast in our IR website and a replay of this call will be available on the website shortly. Today’s call is scheduled for one hour. Please limit yourselves to one question at a time. And now I'd like to turn over the call to Chip.

Thanks, Aida. Good afternoon, everyone, and thank you for joining our Q2 earnings call. This quarter has been defined by the coronavirus pandemic and the economic fallout from it which dramatically impacted our business during the quarter with virtually all of our retail stores and most wholesale doors closed for the vast majority of the quarter. I am proud of how the team stepped up in response prioritizing consumer and employee safety, while accelerating our activation of key e-commerce and omni-channel capabilities, proactively cutting costs, smartly managing cash and finding more innovative ways to connect the Levi’s brand with its fans. I am to going to let Harmit take you through all the details from the quarter, so that I can focus my comments on two key areas. I’ll start with the current environment and how we managed through the pandemic and into early recovery. And then, after Harmit reviews Q2, I’ll share some thoughts on how the pandemic will impact both the retail landscape and consumer behavior and why I am optimistic and confident that we are ideally positioned to win in the post-COVID world. We now have roughly 90% of our stores opened globally and performance during the reopening phase has tracked better than we expected. We are cautiously optimistic about the early trends we are seeing at our reopened stores and the strong performance of our e-commerce business. Having said that, there are still a lot of uncertainties, will there in other ways how bad will the economic downturn be, how long will the recovery take, we are already seeing consumers think, act and buy differently, while holding greater expectations and demanding more from the brands they buy. Let me highlight four key points for us as we’ve navigated the pandemic and early recovery. They are first,…

Thanks, Chip, and welcome to everyone joining our call. I hope everyone is continuing to be safe and healthy. Before I discuss our financial performance, I would like to thank our teams around the world for the tremendous efforts in helping the company manage through the different crisis while remaining focused on how we will emerge stronger on the other side. I’ve been very impressed and energized by how everyone has come together to understand and take swift actions to address current challenges and adapt to new ways of working while remaining guided by our values as we serve all our stakeholders. It’s been an unprecedented quarter like no other that I have seen. However, I am confident and optimist that we as a company will grow market share and improve our structural economics as we move through it because of the following factors; we have great brands, products that consumers love and strong talent; we have been agile in responding to the impact of the pandemic on our business as Chip described; we have a strong balance sheet and ample liquidity and responded quickly to address cash flows by reducing CapEx and cost and by taking steps to optimize working capital efficiency and while we are cutting cost and capital spend, we are focused on driving structural improvements in our cost base to drive stronger EBIT margins and reallocating resources to us high ROI investments such as automation, AI and digitization. Now I will share some color around our Q2 results. While everyone’s comparisons to prior year have been substantially impacted by the economic fallout of the pandemic, our fiscal second quarter was comprised of March, April and May. This yielded a tougher full quarter comparison than most given stores both ours, our franchisees and our customers were closed…

Thanks, Harmit. And as we look to the future, I want to share some major themes we are seeing and why I am confident that these play to our strengths and position us to capitalize in the post-COVID world. First, the pandemic and subsequent economic crisis are causing changes in consumer preferences. Consumers want value and values which does not necessarily mean consumers will trade down. The pandemic is convincing more and more people, especially young people that it’s better to buy fewer, more versatile, higher quality products of value, items that consumer can imagine wearing for years like a trucker jacket before handing it down to their grandchildren. I've long said that Levi’s is the opposite of fast fashion as consumers gravitate for products that are well made, sustainable and don’t last from season to season and year to year, Levi’s will be at the top of their list. Consumers want brands they know, love and trust and this is our heritage. Values that our company has been built on. And the days of conspicuous consumption are gone. It’s all about conscious consumption and because of this, sustainability is going mainstream, consumers are increasingly valuing sustainability which will be a primary focus of our marketing campaign this fall. We continue to innovate with a focus on comfort, style and sustainable design practices. We are also introducing exciting innovations and sustainability such as cottonized hemp denim as featured in our latest fashion fits, the high loose and the stay loose, as well as truckers and denim shirts. Consumers are increasingly moving toward casualization and for the fall season we’ve infused the casualization trend with style influencers from the 80s and 90s including looser, more relaxed silhouettes across bottoms and tops. And for those that are seeking a lower price point,…

[Operator Instructions] Your first question comes from Bob Drbul with Guggenheim.

Hi, good afternoon.

Hey, Bob.

Hi, Bob.

Pardon me. I guess the question that I have is for Harmit. On the $100 million cost reduction program, I don’t know if you have said this, but is it cash versus – can you breakdown like the cash versus non-cash and will it stick in terms of permanent cost reductions that you see going forward? Can you just maybe elaborate little bit more on the various cost cuts that you’ve made?

Sure. Sure, Bob. Thanks for asking the question. As a reminder, the savings we believe will begin in quarter four. To your question about cash and non-cash, I would say, cash would be about two-thirds, non-cash which is long-term incentives, stock et cetera is about a third. We are using this crisis to reshape the P&L structurally, so then we squeeze costs that we have to and invest in areas where we need to. So our focus is, it will enable us to get to the 12% plus goal of adjusted EBIT margins as and when revenue recover. We believe that our longer-term growth algorithm will be healthier and drive sustainable longer-term growth. Specifically, we believe that while we will invest in areas like brand building and digitization of the consumer experience, our recent actions will also improve longer-term profitability. The other thing to say, Bob, on the cuts is, we are cutting areas that are seeing a revenue drop and as Chip said, these are largely corporate folks. We continue to invest in areas that will drive growth which largely are focused around digitization, investing in AI and in other principles or disciplines that will accelerate the digitization of the company.

Your next question comes from Matthew Boss with JPMorgan.

Great. Thanks. Chip, maybe, what’s your view on overall demand for denim in the U.S. and Europe as we break down the 80% brick and mortar productivity and 70% e-commerce growth that you are seeing today? And Harmit, what’s the magnitude of gross margin pressure that you are expecting in the third quarter relative to 180 basis points that we saw in the second quarter?

Okay. Chip, why don’t you go first and I’ll take the next.

So, we got – the data that we have is best in the U.S. where we get data on a monthly basis and the overall apparel category is down. But denim has maintained its share of apparel sales and it’s unchanged if we just look at the three month period post-COVID versus the same three month period a year ago, that percentage hasn’t changed. So, we are not seeing a negative impact and also not seeing a huge positive impact. I will say, one of the trends that we had seen, particularly as we’ve started to emerge, our women’s business continues to outperform particularly in Europe where it is more than half of the business. And then the other thing I would say is, remember, we are more than denim. We also have tops and outerwear and a bunch of other categories. Our tops business is not impacted as our bottoms business during this past quarter. So, we haven’t seen huge fundamental shifts in either direction. The last thing I would say, Matt is, I am really confident we are going to build share through this. There are a number of brands that have already declared bankruptcy. There are a lot of share donors out there right now and given our commitment to continue to invest in building the brand and emerging stronger, I am confident we are going to grow share through this period of time.

And to your question on gross margins, Matt, we closed the first half of the year with gross margins at 54.7 on an adjusted basis. It’s 70 basis points higher than the year ago and that’s despite the 180 basis points decline in quarter two. To your question about the second half of the year, I would say, our effort is to progressively have cleaner inventory on the seasonal inventory side as we progress through the year. So we end the year with absolutely clean inventory. We already have – if you look at our evergreen products, products that we could sell in the season or beyond, that’s still around what it was in the pre-COVID level little over 70%. So, our expectation is that, gross margins probably a slight pressure in quarter three, but structurally, no major change to what I said a quarter ago. And as the Direct-to- Consumer business, as our e-commerce business continues to accelerate, that’s accretive from a gross margin perspective. So, while we probably end the year slightly down, structurally we’ll feel that once we have inventory clean or cleaner than what it is today, we are in a better spot. The other thing we are doing on gross margin is, we are scaling up F.L.X which is accretive to gross margin. We are driving more productivity in our assortments and also that would tend to drive higher gross margins and we continue to work with our vendors and that is to make a big difference. We have also not scaled back pricing that we took – and I think once we come out of the crisis, that will definitely help.

Your next question comes from Omar Saad with Evercore ISI.

Good evening. Thanks for taking my question. I wanted to dive in a little bit deeper on some of the digital growth and strength you are seeing. Differences across regions, are you seeing anything in the data there as the new customers, existing customers shopping more? Any category trends that you are noticing in digital? And then, also are you – have you been able to use the inventory in your stores to fulfill digital demand in the quarter? Whether it’s online orders that you ship to people’s homes or buy online, pick up in store, I would love to see where you are in that curve? Thanks.

Yes. Why don’t I take that? Good evening, Omar. Good to talk with you. So, as we alluded to in the prepared remarks, our e-commerce business has really continued to accelerate. During the quarter that we reported in May our e-commerce business was up 79%. It was up over a 100%, more than double in the U.S. that month of May. And we’ve seen it continue into June. Our e-commerce business globally was up 70 plus percent in June. So, I can’t promise continued growth rates in the 70 plus percent range forever as our stores continue to reopen. But we do expect that the pace of growth will be significantly higher than pre-COVID levels especially as we continue to invest and accelerate the digitization for consumer experience. Just for perspective, our e-commerce business used to be about 5% of our total revenue. It’s now tracking at 9%. June was 13%. On the question about who the shopper is, during Q2, 70% of our e-commerce shoppers in the U.S., this is U. S. data, 70% of the e-commerce shoppers were new to e-commerce in Q2. So we are picking up a lot of incremental new users obviously during the quarter they can go to the store. But as I said, I really do think that this is going to be sticky. The other data point I can give you is, remember, we launched the App back in December and the download rate of the App during Q2 was more than double what it was in Q1. And we are starting to see orders coming in through the App here in the U.S. as well the App is not just a way to transact in a simple and easy way to keep Levi’s on your phone, it is also more experiential as we said on the prepared remarks, we dropped our pride collection exclusively on the App and it’s still did really, really well. So, we are trying to make it more experiential and we are linking our loyalty program to that. Last on your question about ship from store, I think we said it in the prepared remarks, but during the lockdown when our stores were closed, we have the store managers going into the stores and fulfilling the e-commerce orders and about 30% of our orders in the U.S. during the month of May were fulfilled from our stores and by the store managers and that was a great way to help us manage inventory. We actually used AI to steer the orders to where we have the biggest opportunity to clear that specific inventory. And that’s a capability that we’ve built and we are going to continue to leverage that on a go forward basis.

Your next question comes from Jay Sole with UBS.

Hi. Thanks so much for taking the question.

Hi, Jay.

Hi guys. Chip, can you just talk about what the flow of deliveries is like right now to your wholesale partners and maybe how it’s differing in North America versus Europe and maybe can you compare what you are seeing now versus what was say, a month ago?

Yes, it’s still – as we said in the script, Jay, it’s still relatively slow in terms of actual deliveries. Most of them they’ve only had their stores open for a couple of weeks here in the U.S. We are starting to see orders starting to come through for late summer and fall. And so, that is saying, we are seeing sell-through. We are also seeing replenishment orders come in right now from our wholesale customers here in the U.S. and I would say it’s pretty consistent both here and – here in the U.S. as well as in Europe.

Your next question comes from Paul Lejuez with Citigroup.

Hey. Thanks guys. Chip, if you could talk a little bit more about department store closing that you are seeing out there. Maybe just based on the number of stores that did announced thus far from some of your key partners, do you have a sense of what percent of your sales are going to – have occurred through those doors, the percent that you really have to make up in other channels? And also, I think you mentioned 100 new stores, mainline stores, what was the timing on that? Thanks.

I’ll take a shot at that. Harmit, feel free to pile on. I mean, you all know exactly the same as we do in terms of what’s been announced by our key department store and wholesale customers in terms of door closures and the rough timing around that. But we do expect that we are going to see a couple of hundred wholesale door distribution points disappear over the next twelve months or so. We have experience in dealing with this going all the way back to the Mervyn's days and then Sears kind of was axing their doors. We have a lot of experience in remapping our business on kind of a store-by-store, case-by-case basis. I don’t have a specific percentage number to give you in terms of what percentage of our business is impacted by those door closures. Obviously, these guys are cutting from the least productive doors up. So the majority of our business is done, it’s classic 80-20 in wholesale. And so, there will be some impact, obviously, from those closed doors. But we're pretty confident that we can remap that distribution to other points. On the 100 doors, we've talked about this before. Our mainline business here in the U.S. as a percentage of our total store base, it’s relatively small. Think about it is in rough numbers, we have about 210 doors here in the U.S and about 32 of those doors or so are mainline doors. And we've got a model now for mainline that is very productive. Deliveries are really strong ROIC that’s based on great location in a relatively small footprint. Think of it is a 3,000 to 4,000 square foot footprint and we are in the process of opening some doors this year that matches that profile and we see…

Your next question comes from Heather Balsky with Bank of America.

Hi. Thank you for taking my question. So, first, I was just curious what you are seeing in some of the U.S. markets like Texas and Arizona where there are some surges in COVID cases? And how the trends compare to the rest of the country? And then, just a second question on your efforts to come out of this a more profitable company, do you foresee SG&A savings beyond the $100 million that you just announced? Thanks.

Chip, do you want to take the first and I’ll take the second.

Yes. Just on the stores, we have been – I don’t want to say scientific, but we consulted with an epidemiologist to put together very objective data based framework for us to decide when to open our stores and that’s why still less than 90% of our stores here in the U.S. are open. There are a number of stores that are still closed to this day because they don’t kind of get a green mark on those criteria. And we are using those same criteria to evaluate whether we need to close any doors. And I will say, at this point in time, we have not closed any other doors, any of the doors that we’ve reopened. However, there are about 40 doors right now that are in areas where the virus seems to spiraling out of control. And we looked at it – we look at it three times a week, Monday, Wednesday, and Friday, we made the decision yesterday not to close any stores. But if this – if the virus continues to spread in some of these hotspots, I think it’s quite possible we may be closing, again, some stores on a temporary basis until the virus subsides in those areas. Hopefully, it doesn’t come to that, because that will suggest that the pandemic is continuing to get worse, but we are prepared to do it if we need to because we have right from the very beginning put the safety of our employees and our customers front and center and if we need to close doors, we will.

On the second, Heather, about cost, we are focused on reducing costs both temporarily but more important structurally so that the cost reductions are more permanent in us. Our mindset is we emerge from the crisis with a low percentage of SG&A to revenue as and when revenues recover to pre-COVID levels. So beside the actions that we talked about on headcount, let me talk a little bit about variable cost and then fixed cost. So variable cost will follow revenues though in a COVID world where digitization is here to stay, we will drive productivity where we can. So, if you assume, travel was variable. I would say, in a post-COVID world with more digitization, more leveraging of technology and work from home and some elements, we think our travel cost will be lower as a percentage of revenue. Other cost, we talked about comp reductions, but things like incentive reversals and IT deferrals those are temporary. On a fixed cost basis, the other thing that we talked about is our rent. And we think, because we are opening stores, we think because we are a traffic driver and bring traffic in, we are looking at structuring our rentals or our leases that we currently have more favorably over the next few years. And the new stores that we are adding, we are getting substantial breaks on rentals that existed in the pre-COVID year. So we think structurally as revenues come back that’s accretive to EBIT margins. And then, e-commerce, which was – which is a drain on profitability is now making money and as that accelerates, that also drives profitability longer term.

Your next question comes from Carla Casella with JP Morgan.

Hi. You talked a little bit about the department stores and some of your retail customers, did you give the number of your retail or percentage of your customer, I guess your wholesale customer doors that are still closed or any kind of tracking of how the – ones that are opening or performing versus pre-COVID levels?

So, Carla, we haven’t specifically given the number of wholesales doors that are closed. They are – 90% of our doors are open, I’ll say wholesale doors are broadly similar. We haven’t given numbers on their productivity, because we don’t necessarily disclose customer-specific data, but what we can say is progressively, the sell-out trends are improving as weeks go by.

Your next question comes from Laurent Vasilescu with BNP Paribas.

Good afternoon. Thanks for taking my question. In the prepared remarks you have noted that the license in the U.S. men’s tops business will come back in-house in 2021. Could you possibly quantify the size of that business on a wholesale equivalent basis? And then it was also noted that you are taking in-house to your Singapore operations. Are there any other larger third-party markets that you are willing to take on back in-house going forward over the next year or so?

Yes, so we’ll give specific numbers when we talk about 2021 which is two quarters from now, but I will give you a bit of a backdrop. In the U.S., Laurent, our tops business consists of woven tees and knits. And for you as wholesales it was broadly license. We have taken back, we have decided to take back the woven and knit starting 2021. The Tees license only expires in 2022. And we will give you the specifics on the impact on revenue in a couple of quarters. The thing to note here is, what it does for us and whenever we have taken – we took the women’s tops license that was sold into wholesale a couple of years ago. What it allows us to do is, to engage with the customers, at the same time, we engaged on a discussion on bottoms and that really allows us and the customers to grow or accelerate the growth of the category big time. That’s what really experienced and we think the same thing will happen for the licenses we are taking back. On Singapore, Singapore was a distributor market. We’ve had a wonderful distributor. We’ve been with the brand for about 30 years and there are about 30 odd stores. We are in the process of taking it back. We believe that we can accelerate the growth of our brand, especially with all the wonderful products we have as well as profitability over the next couple of years. So that’s what we are looking at doing. In terms of other opportunity, there are a couple of markets in – there are a few of the couple of markets in Asia and a couple of markets in Latin America. And again, we love our distributors. We love our franchisees. We look at this and take back as when it’s a win-win for both sides and that’s how we look at it. So, what we are doing, during the crisis is building a playbook for organic M&A, which is franchisees, licensees, as well as distributors and as things evolve, we will share that with all of you.

Your next question comes from Dana Telsey with Telsey Advisory Group.

Good afternoon everyone. As you mentioned, the price increases that you talk, where are you now on the price increase path? What do you see – do any not hold? Do most of them hold? And where are you on the innovation path and what we should look for, for holiday? How you are thinking about holiday? And just lastly, anything on the progress of Asia than Europe and North America in terms of the recovery of reopening? Thank you.

Chip, do you want go pricing or you want me to take?

Yes, sure, I mean, we have taken pricing kind of late last fiscal year into in some parts of the world very early this fiscal year. We are seeing our AUR is going up. The pricing has stuck. Have any plans to roll it back. We – again, we are using AI and data science to give us more informed decision points around pricing. We think we still have other pricing opportunities as we go forward. But we don’t see pricing pressure right now. And we don’t have any plans to roll back the pricing. So, it has stuck.

On the – Dana, your question about regional recovery trends, our three regions, Americas, Europe and Asia, in the Americas, two-thirds of the region stores are open, productivity is around 70%. A third of the doors comp positively in the final week of June and as Chip mentioned, digital is accelerating. In Europe, nearly all our doors are open. Again, performance is better among franchisees, outlets and stores located in smaller cities. And again, a third of the doors are comping positively. We’ve also seen in Europe a return of young shoppers to our stores. And it's the momentum you saw pre-COVID that continues. In Asia, our digital footprint sell-through momentum is very strong. Markets like South Korea and Australia, New Zealand are driving strong comps and we’ve seen traffic recover especially in China and in Mainland doors mainly in malls. So, I think that’s a little bit more color by region. India is still slow, because of the acceleration of COVID cases. But India is largely a franchise business for us.

And your final question comes from Kimberly Greenberger with Morgan Stanley.

Okay, great. Thank you so much. It sounds like your Direct-to-Consumer revenue is sort of recovering more swiftly. If I could paraphrase with stores doing fairly well and e-commerce obviously reaccelerating here. I am wondering if you could give us just a little more color on the revenue metrics? In terms of the retail store network, I think you talked about 80% productivity. Is that where they are currently running or is that the average since reopening? And then secondarily, could you break that Direct-to-Consumer revenue bucket down for us between store revenue versus e-commerce revenue just to give us a relative size? And then lastly, on the wholesale side, I think you indicated that you are starting to see some late summer, early fall wholesale orders come through. And I am wondering if you look out over the next two, three, four quarters, how long do you think it takes for that wholesale revenue growth rate to normalize post-COVID? Thank you so much.

Yes, Kimberly I am going to try and address those questions. When we talked about store productivity, that was latest trends for our stores as a percentage of last year. So it's not the average store productivity since the store opened, those are latest trends. So I assume it is the last week of June as a percentage of last year. So, e-commerce was about 13% of the business. And so, if you think about Direct-to-Consumer being 45%, 50% of the business, you could do the math on e-commerce and that’s our e-commerce. It doesn’t include e-commerce from the digital ecosystem which is field players like Amazon or Zalando or Tmall, et cetera or wholesale.com. In terms of wholesale trends again, as I mentioned earlier to the question that was asked, difficult to talk about that with any precision, because wholesale doors are opening progressively. They are opening around the world. All we can say is that sell-through trends we are seeing are progressively getting better.

At this time, I would like to turn the floor back over to the company for any closing remarks.

Okay. I want to thank everyone for dialing in and also being patient. I realize we went long by about five or ten minutes here. But we wanted to get everybody’s questions which I think we did. Thank you all for dialing in. And we will be giving you another update in a couple of months. Have a nice summer.

Stay safe.

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