Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co.'s Third Quarter Earnings Conference Call for the period ending August 23, 2020. All parties are in a listen-only mode until the question-and-answer session and at that time instructions will follow. [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 today through October 13, 2020. Please use conference ID 7768738. 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 hand the conference over to Aida Orphan, Senior Director Shareholder Relations and Risk Management at Levi Strauss & Co.

Thank you for joining us on the call today to discuss the results for our third fiscal quarter of 2020. Joining me on today's call are Chip Bergh, President and CEO of Levi Strauss; and Harmit Singh, our Executive Vice President and CFO. We have posted complete Q3 financial results in our earnings release on the 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 would like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties, including risks and uncertainties as a result of the COVID-19 pandemic. There are significant uncertainties on the duration and extent of the impact of this pandemic. The dynamic nature of these circumstances mean that what is said on this call could change materially at any time and that actual results could defer 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 quarterly report on Form 10-Q that we filed today for a 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 except as required by law. During this call we will discuss certain non-GAAP financial measures. Reconciliations 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 on our IR website and a replay of this call will be available on the website shortly. And now I would like to turn over the call to Chip.

Thanks everyone for joining us today. Our third quarter results were substantially better than we expected, demonstrating the strength of our brand, the power of our diversified business model and the resilience of our teams around the world. Our brand is the strongest it's ever been and as the lockdowns lift, we're seeing consumers coming into stores on a mission. Levi's remains the clear #1 brand in the denim category and has grown market share during this period driven by our success in women's. Levi Status as an iconic lifestyle brand also positions us to benefit from the casualization trends that have been accelerated by the pandemic. Through it all, our values have guided our actions, reinforcing that how a company gets through a crisis is just as important as getting through it. Although the pandemic is changing the apparel industry, our results reinforce my confidence and optimism about our future. We are transforming our business by focusing on the areas that will drive our success, including first elevating our brand from product innovation, deepening our connection with our consumers, and leaning into our values. Second, accelerating the digitization of our business, including leveraging our use of data and analytics and accelerating the rollout of omni-channel capabilities, and third, diversification across geographies, product categories and distribution channels with an increased focus on direct-to-consumer. Beginning with elevating our brands, during this pandemic we've held our share of leadership in men's and we've grown share in women's in Europe and China. In the U.S. we grew our total apparel share in digital and also gained share in key accounts as we outperformed competition. We continue to launch collaborations that drive energy and buzz for the brand. Just last week for Fashion Week the surprise Levi's by Valentino collaboration unveiled on the runway…

Thanks, Chip. Good afternoon, everyone. I hope all of you, your families and loved ones are safe and healthy. Despite revenues being below prior year, due to the pandemic, we saw substantial sequential revenue improvements from the second quarter, and we far outperformed even our own expectations. Our financial results were solid, as we delivered higher than prior year gross margins, made money in the quarter and generated even stronger cash flows than prior year, a trifecta [ph] driven by the financial discipline we're executing as a team. Consumers remain hungry for our brand and our structural economics are sound and improving, as our cost and working capital actions have put us on a clear path to emerge from this crisis, a significantly more profitable and cash generated company with ROIC in the mid teens. As I walk you through additional detail on our third quarter results, my comments will reference constant currency comparison on a year-over-year basis in U.S. dollars, unless I indicate otherwise. We published the details of our reported and constant currency results in today's press release, so I will not repeat all of those here. Third quarter net revenues were down 26% due to the impact of the pandemic. We mitigated brick and mortar declines in wholesale and direct-to-consumer channels from lower traffic with strong digital business growth. Our total digital ecosystem comprised of the e-commerce sites we operate, and the online sites of our wholesale accounts grew more than 50% in dollars in Q3 and comprise 24% of total company third quarter revenues, double the share of what it was a year ago. Specifically, our own e-commerce business grew 53% and comprised 8% of total company revenues for the third quarter, also double what it was a year prior. And the per unit metrics in…

Thank you. [Operator Instructions] And your first question comes from the line of Matthew boss with JP Morgan.

Great, congrats on the nice progress guys.

Hi, Matt. Thanks, Matt.

Chip, so on the top line, can you speak to the Denim, maybe the Denim market, Levis lead position and how do you feel today relative to pre pandemic? And then Harmit, on the bottom line on the 12% plus operating margin target for the timeline, are you saying that you basically plan to reach that level by the second half of next year or when revenues are back to the pre-pandemic base? Just, how best to think about an annual margin expansion algorithm from here would be helpful.

Right, so, Sure. On the top line, through the pandemic, what we've seen is an acceleration of the trend towards casualization globally and we obviously are set up to capitalize on that. So while total apparel, the total apparel category has declined during the pandemic, Denim's share of total apparel is unchanged. And as you know, we are by far the leading brand globally. We lead overall as a brand. We lead in men's and we lead in women's. And as you've heard during our prepared remarks, we're growing share in women's in Europe and China. And a big part of that is being driven by a continuation of casualization on the women's business. Shorts was a very big part of our business this past quarter. So, I would say, compared to pre-pandemic, I'm even more confident about our future. We've said this, right from the very beginning, that crisis creates an opportunity. And I think what we're demonstrating is strong brands are really resonating with consumers, and our brand and the agility, which we've demonstrated through the pandemic, is positioning us to set up to win over the long-term. So we're very, very confident. All of the vectors of growth, which we talked in the past and which we talked about in the prepared remarks, in our women's business was 20% of our business when I joined the company, it's 37% now and on our way to 50 as we sat on huge opportunities for growth internationally and growth outside of Denim and our tops and outerwear business as well. So very, very confident that we're going to accelerate from here. Harmit, do you want to talk about bottom line?

Sure Matt, and the question of the 12%, as you know, when we did the IPO we said, our North Star goal was to get to 12%, didn't have a timeline. We've spent the last few months taking a hard look at our cost structure. And we believe, structurally, we can save about $200 million on an annual basis, we got to be investing in things like high advertising, the digital transformation and omni-channel. So probably spend part of that back. But, we're confident we can drop about $100 million and are even during the crisis, we've continued to grow our gross margin. So we think, growing our gross margins annually in the same way 40, 50 basis points, a combination of the two gets us to the 12% at least. And to your question of timing, Matt, our view is when we get back to, and we believe we will, when we get back to the annual revenues event in 2019, we believe our operating margins will be at least 12% driven by the combination of the two things. We think we'll probably get back to 2019 levels sometime in the second half of 2021. There are markets or regions like Europe that can get there faster. So I think, think about the operating margin number being when we get to annual revenues of 2019. Structurally, we're going to be making progress towards that this quarter, even though revenues were down 27% I think our operating margins were 8%. So I think we've got a path, we're confident of getting there and doing it in a way that we continue to grow and unlock the top line and grow market share. So the combination of market share growth, plus more profitable business is going to be, something that we're geared towards making happen.

Your next question comes from the line of Paul Lejuez with Citigroup.

Hi, thanks, guys. Can we talk a little bit about the Target assortment? I'm curious, just about the size of the assortment relative to what you currently have in the 140 stores that you're selling through Target? Also, relative to what you would have what the consumer would see in some of your other partner doors in terms of the SKU and price range and just what is the timing of when that business will roll out to those 500 stores? Thanks.

Chip, I think you're on mute.

I’m on mute, yes. You would think after doing this for seven months I would figure out the mute button. It's a great question and I was saying, if you haven't been into a Target to look at the assortment, I'd encourage you to go. It's a very tight assortment. The pad on both the men's business and the women's business is relatively small, about 30 to 40 items on the pad. But it's a good assortment of tops, and bottoms, tees, sweatshirts, trucker jackets, and then a tight assortment of bottoms on both the men's and the women's business. And the AURs out the door are going out at a premium versus on the balance of wholesale, so we've been really pleased and I would say that Target has been really pleased with the performance that we had from this relatively tight, relatively small footprint offering and hence the decision to expand to 500 doors over the course of the next year. And we'll do it in waves. But we're kind of committed collectively with Target to get to 500 doors by the fall of 2021. So we've been really, really happy with it. They're happy with it. It's good for the brand. We know that we're picking up incremental new consumers to the Levi's brand with this and we'll continue to have Denizen on the floor too representing the value offering at Target. So it's a really good play for us and we're very excited about the expansion.

Thanks Chip, just as a followup. Have you seen any negative impact on the Denizen side of the business in those 140 doors and then just how is this Target assortment compared to what you'll have indexed? Thanks.

Okay, great. So, no negative cannibalization. In fact, when we first started testing Target, with the Levi's Red Tab business, we pulled Denizen out of the store, and to make room for Levi's and collectively, we concluded that was a bad idea. We went back. we tested Denizen back in those same doors and it proved that these are two different consumers. And so we'll continue to have an assortment of both Denizen and Levis as we expand the target relationship. Dick’s is a completely different offering. We've talked before about kind of good, better, best within our product range and if you were to think about it, our better and best assortments tend to be what we have in mainline and in most of Europe and in most of Asia. And what we're going to have in Dick's is our better assortment. So the price point is going to be significantly higher than wholesale on average. The bottoms are going to be priced around $79 compared to, roughly $40 in wholesale broadly. So it is a much more premium, again, a very tight assortment, a relatively small pad, but very highly curated just as we've done at Target. And, we're going learn, but we're really excited about this because it is, again, an incremental opportunity with a wholesale customer that is winning right now. And we expect we're going to see incremental consumers and incremental new consumers and that this business is going to be really incremental.

Your next question comes from the line of Bob Drbul with Guggenheim.

Hi, good afternoon. Nice quarter.

Hey, Bob.

Harmit, just following up on the path to 12% EBIT margins, can you elaborate a little bit just about what you're seeing right now on the e-commerce profitability, the progress you're making and sort of how that fits into the progress that you're seeing on the profitability side?

Yes, sure. Thanks, Bob, great question. Understanding profitability by channel is something that's near and dear to our hearts. And, we've been doing it now for years, especially as we started investing to build an e-commerce business. So we've been tracking it religiously for a long time. I think our e-commerce business holistically is profitable. And when we talk about profitability, we talk about it on a fully loaded or allocated basis. So it includes all advertising costs, it includes all technology costs, et cetera. And it was a drag, pre-pandemic, it's now in the black and profitable. And if you think about the unit metrics on e-commerce, for every incremental unit, every new unit, our average revenue is nearly double than that of wholesale a gross margin of 20 points, above wholesale or 15 above company average and profit per unit is higher. And so as the puck moves towards there driven by digitization of the consumer experience, I think we feel really good about e-commerce, helping overall profitability for the company. The only other piece I'd say is when e-commerce was losing money to the drag it is making money, so it's helping but to be accretive to, 12% or get close to the 12% e-commerce business will need to double and we feel good about that. And that's where we think long-term, we'll be able to grow ecommerce without cannibalizing our brick and mortar experience. In terms of actual costs, the shipping costs are not a drag for us. The fact that we're shipping now from our own stores is making a difference. We've kind of locked in shipping prices through the end of the year. Returns are down post pandemic, so that's helping and our folks are working to drive e-commerce profitability as we speak, so and building a lot of efficiency as we implement omni-channel initiatives. So we feel good about where this is going longer term.

Next question comes from the line of Omar Saad with Evercore ISI.

Thanks for taking my question. Nice quarter. Chip, you talked a lot about a lot of initiatives, stores, digital products, partnerships, technologies, channels, regions, which really reflects the opportunity to brand still has, but it's a lot of balls in the air. And, you've recently had a corporate headcount reduction. If you could talk to how you're able to restructure the organization in a way to be leaner but still manage all that growing scale and complexity and also, how does this kind of doing more with less, feed into the margin story that North Star 12%? Thanks.

Yes, we've been saying for a while that we had an opportunity to be more agile, to be more market responsive. And part of what we've tried to do through this crisis, and with the headcount reduction is focus our resources, much closer to the market, and build capabilities so that we can be more agile and scale things. And, I could point to several examples, even just during the pandemic, where our responsiveness to the rapid changes that we've seen in consumer behavior during the pandemic has really helped our business. If we look at some of the omni-capabilities, and we've been investing in omni now for a couple of years, but we saw this opportunity to shift from store. We built the capability to ship from store 20% of our e-commerce business was shipped from our stores in the U.S. this past quarter, which is consistent with the quarter before that. We built the ability to buy online, pick up curbside pretty quickly. And it's just a little bit less than half of our stores in the U.S., but it'll be in 100% of our US stores, by the holidays. So a lot of this is about candidly empowering the teams close to the consumer and powering the teams to focus on winning in the marketplace and trying to cut out a lot of the corporate bureaucracy and the things that slow us down. So we're really focused through this entire transformation on winning with the consumer, leveraging the strength of our brand, leveraging the key capabilities that we have, and that we have built and really the sources of some of our competitive advantage and driving those. And as we reduce costs, it gives us the ability to invest in the things that we know are going to continue to drive our business. And that's, that was the hard choice that we were faced with a quarter ago is do we carry a bloated organization for the size of the business that we're going to be through this pandemic, and cut everything or do we right size the organization for the size of the business that we're going to be, modify our business model, so it's more scalable with the lower headcount. So that as we grow back, we get more leverage, and really focus on our investments on the things that we know drive growth on this business and that's effectively what we've done. And I think you're starting to see even after only one quarter some of the fruits from that.

The next question comes from the line of Jay Sole with UBS.

Great, thanks so much. I just have some wholesale business [technical difficulty] in the rates compared to the sell through rates, as you went through the quarter and now and [indiscernible] investments in September was much improved [indiscernible] sales were up in the Company was in September?

Jay I tried to hear you, I think it was a little difficult, but I think your question was, sell through rates and important with the trends as we close September. What I'd say is, trends as we closed September are much improved, both selling as well as sell through. September is better than expectations that we've talked about for the quarter. We are a little more cautious given uncertainty about holiday, the resurgence of the virus, the stimulus, the upcoming elections. And as you know, we're slightly disadvantaged from a calendar perspective, because our fourth quarter September through November doesn't include December. But as we enter the quarter trends are looking much better. And encouraging regions like Europe are bouncing back a lot faster and making a difference. And that's why with our inventory levels being where they are, I think, that's where we are signaling that gross margins will be the flat or slightly better, which drives improved profitability. We do have product for the holiday season, we are chasing some products in some parts of the world because we've seen demand surge beyond in our own expectations, but we think we'll be able to service consumer needs. So that's an overall perspective difficult to talk to specifically about September numbers, because it's in the next quarter, but I think you get the gist.

Next question comes from the line of Laurent Vasilescu with Exxon BNP Paribas.

And thank you Harmit, for giving us some guardrails on to accompany revenues for the fourth quarter down the teens. Just curious to know, how do we think, how should we think about that range between the Americas and Asia? And then I think you mentioned that Beijing was -- the second lockdown had a slight impact on China revenues for the third quarter. Just curious to know what your thoughts are for Europe. It sounds like it's strong, but any thoughts on volatility with regards to potential lockdowns with cities like Madrid and Paris in the news?

Yes, it's thank, for your question. I think specifically, I'd say Asia probably a little worse than the company average for the quarter largely driven by the fact that, markets like India continue to be, closed, they're opening but opening slowly. There are markets, even within Asia, in our Australia region, Malaysia and a couple of other countries that are -- Korea is doing a lot better. But I think, as a general trend, our expectation Asia will be slightly worse than the company average, I'd say Europe will be the strongest followed by US, followed by, because in Americas you also have Latin America, and most of Latin America was closed is opening. So I, that's the way I kind of rank it Europe strongest, followed by Americas, followed by Asia. I think your question about the resurgence of the virus, every, every country is, trying to figure this out, people are dealing with it differently. I think what is important for us is, as keeping the consumer and employee safety at the forefront, servicing demand, by driving digital connection to the consumer, as well as ensuring our product and our marketing calendar are focused on the point chip talked about, which is a sustainability initiatives. And our products that, hitting home as consumers start shopping for the prolonged holiday period. And I would say, Laurent, that we are picking up share in Europe and in other parts of the world.

And your next question comes from the line of Dana Telsey with Telsey Advisory Group.

Good afternoon, and nice to see the progress. As you think about this upcoming fourth quarter and it seems so long ago that we were talking about this fourth quarter having two black Fridays in it, Harmit, how are you thinking of the fourth quarter and the planning with the two black Friday's, do they negate each other since this may not be the Black Friday that we had expected and ship on the marketing budget, which is revamping? Where do you see that ramp going to? And what do you see as the new initiatives or new collaborations that we should be looking forward to? And especially given the announcement today or yesterday, what you talked about with secondhand Levi's and what that potential contribution to date? Thank you.

Yes, let me quickly address the Black Friday question Dana. Thank you for that reminder. Yes, the two Black Fridays in our fiscal 2020, the first Black Friday was in the first quarter of this year, so that's behind us. The second Black Friday is in quarter four. I'd say, between Black Friday and 53rd week it's a couple of points of growth, but it's such a different Black Friday right and so our view is it's going to be fairly promotional and a longer holiday period. November is largely going to be a holiday season carried into December, so it's difficult to predict with any precision what, a week or two weeks can do. And so, but the fact that our quarter four indication of our results represent improvement relative to quarter three, I think is indicative of the fact that we do see demand improving. Over to you Chip.

Yes, I'll be really brief here. As we said in the prepared remarks, we're going to take our advertising spending up to 8% of revenues in the fourth quarter. Some of that is obviously going to be targeting driving traffic to our e-commerce sites. But from a campaign standpoint, we're very focused on sustainability. Our whole second half campaign is around sustainability. We're launching a collection of products using cottonized hemp, which we talked about in the prepared remarks, which is a fabric innovation that is much more sustainable. Sustainability is really big right now, because of the pandemic gets very, very strong with Gen Z consumers in particular, so a big emphasis there. And our holiday campaign is going to be focused on giving better gifts that last, which plays right to our strength as a brand. We're very excited about the e-commerce initiative that we just announced yesterday. The e-commerce business today is $30 billion, projected to grow to $60 billion over the next couple of years. We're partnering to get this done, but it represents a significant opportunity. It's the way Gen Z is shopping today. And they're buying things from thrift stores, wearing them for a week, taking their Instagram photos so that it can be uniquely theirs and then they're flipping them again. And it's a big step forward from a sustainability standpoint, too, because if we can get Levi's recycled, and we can capture share of that recycled business, it is a big opportunity for us. So very early, and we're going to learn as we go on this but it's something I'm personally really excited about.

Thank you.

Your next question comes from the line of Kimberly Greenberger with Morgan Stanley.

Great, thank you so much and thanks for all of the details and transparency on the call tonight. Gross Margin this quarter was a real positive surprise for us. And I'm wondering, it sounds like you're expecting more of a flattish gross margin in the fourth quarter, but it gets to a very high level. When you think about the third and the fourth quarter of this year, are there any benefits to gross margin that you think would reverse next year if there were some geographical mix shifts that may not be proves to be sticky or some channel mix shift. I'm just trying to think about full year 2021 gross margins and should we be assuming it can actually get back to a higher level than 2019? Because the trajectory seems to be one certainly where you could sustain gross margin at higher levels over the medium term.

Yes, Kimberly good question. I think the gross margin accretion is really driven by the intrinsic strength of our brand. The premiumization of Levi's around the world, the balance that we have struck between driving revenue as well as selling inventory in a very promotional environment. We are using AI now to determine the breadth and depth of promotion. We're using AI to help us determine assortments in stores. And I think, and we have priced, even during the pandemic, for example, in the U.S., for certain women styles, we took a price up by $10 and it is broadly speaking. So I think the one, tailwind is obviously the growth of e-commerce and the higher, direct-to-consumer business and that might settle down, over time, but I think the combination of pricing pause we have the fact that we continued to premiumize the brand, the fact that we're going to be growing internationally, faster than the U.S., the fact that in the U.S. we are transforming the U.S. business to more of a DTC business. I think those are all tailwinds that will continue to, work in the favor of growing gross margins longer term. I would probably our growth algorithm on gross margins 40 to 50 basis points. I think I’d kind of maintain that, on the long term horizon annually that is.

Great, thank you.

Your next question comes from the line of Alexandra Walvis with Goldman Sachs.

Fantastic, so thanks much for taking my question here. Very [indiscernible] with the formal name there. I am just wondering if I could ask a formal, a sort of higher level question on the U.S. wholesale business. So could you remind us if you mentioned U.S. physical department stores now less than 10% of total sales? If we take the U.S. wholesale business, what's the breakdown between channels? And how do you envisage that changing over time? It sounds like there are new distribution opportunities, and you called out a few in mass and in sporting specialty, clearly those might be growth areas, are there also areas where you're proactively pulling back or seeing natural declines? And how might that affect is shaping the business over time?

Yes, I think, think of us growing the U.S. wholesale business, in areas where we're connecting better with the consumer, and areas that are healthier. So with the traditional retailers, their top doors, because as we build a lifestyle, you know, initiation [ph] of the brands is still a huge opportunity for us. And as Chip just mentioned, with new distribution in Target and Dick’s is, as we're looking at we are feminizing, the brand so there are a couple of other premium customers we're working on. So I think the overall the way I would look at it, Alex is our wholesale business, which in the U.S., which is about 30% probably settled in the mid 20s, longer term, but that's largely because the direct-to-consumer business grows and we grow with the stronger wholesale customers. The non -- the 10% really represents the non-digital piece of the traditional retailers because our focus in the traditional retailers is bringing the top doors and in the digital business. So overall, the growth algorithm that you have for wholesale probably becomes stronger and healthier longer term.

Fantastic, thanks for all the color.

Yes. And our gross margins in U.S. wholesale for the quarter were actually up earlier. So that represents is the focus between markdowns and the customers we are going to.

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

Okay, I want to thank you all for hanging in. We went a couple of minutes longer than planned, but because we had so many questions, thank you all for joining us. I hope you all remain healthy and safe. Our next earnings call isn't until after the holidays our Q4 earnings call is I think in late January. So wish you all a very happy holiday and we'll be in touch. Thank you all for joining us today.

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