Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company First Quarter Earnings Conference Call for the period ending February 27, 2022. [Operator Instructions] I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Company.

Thanks, Latif, and thank you everyone for joining us on the call today to discuss the results for our first fiscal quarter of 2022. Joining me on today's call are Chip Bergh, President and CEO of Levi Strauss; and Harmit Singh, our CFO. We have posted complete Q1 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'd like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. 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 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 and we assume no obligation to update any of these statements. During this call we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in today's 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. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now, I'd like to turn the call over to Chip.

Thank you. Aida, and welcome everyone to today's call. Before we get into the quarter's results, I want to take a moment to recognize the devastating war that is happening in Ukraine. Our response to the humanitarian crisis has been guided by our values from philanthropic donations we're making organizations like the International Rescue Committee and care to our employees volunteering their time and opening their homes to refugees, to donating tens of thousands of pieces of clothing to those in need. Our employees have been the ones leading the way. Whether it's the manufacturing team in Poland selling denim bags for medical kits or sales director in Warsaw housing refugee families, our teams continue to demonstrate our values and inspire us to do more. With that, I'll move on to our results from the quarter. We're starting the fiscal year with strong momentum. We grew first quarter revenue by 22% to $1.6 billion with broad-based growth across markets, channels, category and gender, fueled by strong consumer demand across our portfolio of brands. We also continue to drive excellent profitability with adjusted EBIT growing even faster than revenue, returning to its high watermark of 14.9%. To achieve these strong results, our teams around the globe demonstrated their ability to execute amid the dynamic macro backdrop including COVID-related supply chain disruption and inflationary pressures. Last quarter, I spoke to you about several structural tailwinds that played to our advantage that we are fully committed to capitalizing on in this moment. Results we delivered this quarter highlight how our strategies are working, positioning us for solid long-term growth. We are the global leader in a large and fast-growing market. In the U.S., denim category sales continue to deliver strong growth and we're up 11% versus pre-pandemic levels of two years ago. As…

Thanks, Chip. On the heels of record results we delivered in 2021, we continued to achieve excellent financial results in Q1 of 2022. We grew constant currency revenue by 26% compared to last year, driving growth across regions and channels. Supply chain-related issues limited further revenue opportunity by approximately $60 million or 5%, primarily in the U.S. where the consumer continues to be strong with demand outpacing supply. We drove record gross margin demonstrating the power of our iconic brand. That, combined with our disciplined execution, helped us deliver an adjusted EBIT margin of 14.9% and adjusted diluted EPS growth of 35% to $0.46 compared to the prior year. We return capital to our shareholders through a higher dividend that now exceeds pre-pandemic levels and the repurchase of 3 million shares in the quarter. And given our continued outperformance and the momentum of our brand, we also reaffirmed our financial outlook for the year as we remain confident in our ability to deliver strong results in the future. And we achieve this important objective in spite of the impacts of rising inflation, COVID resurgences impacting our business, and now the war in Ukraine that is impacting so many lives. I'll now walk you through our first-quarter results for which my comments will reference constant currency comparisons to 2021 unless I indicate otherwise. First-quarter net revenue growth of 26% was driven half by higher volumes and half by an increase in AURs. This balanced growth demonstrates the strong consumer preference for all our brands, even as we price to offset inflation. In the quarter, sales of our direct-to-consumer channel increased 39% driven by higher AURs, which were up 14% as well as by increased traffic and stock expansion. DTC now represents 39% of total net revenues versus 36% last year. Our…

[Operator Instructions] Our first question comes from the line of Paul Lejuez of Citigroup. Your line is open.

You guys reaffirmed top and bottom line. Just curious if there's any change in the composition of how you get there from a gross margin versus SG&A perspective compared to what you were thinking three months ago, which I think was gross margin up 15, 30 basis points, SG&A by average of 10 basis points, any changes there? And then I guess even higher level, a lot of uncertainties out there, I heard what you just said about some of the moving parts U.S. versus Europe, but just curious, what gives you confidence in the outlook overall, if there's anything you can share in terms of order book, how are you thinking about pricing, how that could influence the top line, anything you could share in terms of what gives you confidence in the outlook? Thanks.

Thanks, Paul. Great question. Let me talk about the overall perspective on reaffirming the top line and bottom line guidance, and I'll come to the composition in a minute. We continue to benefit from several consumer trends that uniquely position us to - in the marketplace, including the global casualization, return to the office and the new denim trend. Levi's engine is strong. Our core business is really strong, is evidenced in the U.S. And the good news for us is all our brands, Dockers, Beyond Yoga, Signature, Denizen, beside Levi's are showing momentum and accretive to growth. Balance of Europe is healthy, and we are seeing it in the order books. We get a pre-book largely from wholesale and we are seeing strong demand for the balance of the year. If you look at gender, men and women saw strong double-digit growth in Q1 and the consumer demand continues to be incredibly strong across the portfolio. The other good news in Q1 was, it was a balanced growth. AURs were up 10% as Chip mentioned, but units were also up and is an equal balance, which is really, really good and that is despite the pricing that we have taken and we are seeing demand trends in wholesale channel signal continued strength. I talked about the order book in Europe, Asia is benefiting from the reopening of the economy, so ex-China, which is in lockdown, we have seen, as economies open, demand for the brand. And the underpenetrated areas of the business, Women's tops saw double-digit growth and International continue to grow. So overall fairly, fairly robust quarter and good signals for the rest of the year based on what we're seeing right now. We don't get into quarter two, but March momentum early signs are still fairly strong.…

Thank you. Our next question comes from Laurent Vasilescu of BNP Paribas Exane. Your line is open.

Good afternoon, and thank you very much for taking my question. Chip, on the last call, you shared your enthusiasm for the European business as we kicked off 2022. Fast forward to today, ex-Russia and ex-FX, curious to know if you've seen anything that's changing your thinking on Europe, are you seeing any slowdown in the Western European consumption patterns as of late? And then, Harmit, FX was a material headwind to your European business, 800 basis points. Just curious to know how we should think about maybe 2Q growth in Europe on a constant currency basis or maybe on a full year basis, that would be very helpful. Thank you.

Okay. Laurent, hi, how are you? Let me quickly address the Europe question and then we can talk about the other details you wanted. But generally, Europe had a very strong quarter. As you know, they were up 13% reported, 21% constant. Now granted they were lapping a softer quarter a year ago because a third of our doors were closed, but generally a strong quarter. The pre-book in Europe, which is the demand signal we get from wholesale accounts, continues to be strong. Russia generally closed for the rest of the year, that's our expectation. And FX, we think Europe, on a total basis, will be flat year-over-year, but if you back out Russia and the FX, which is broadly equally weighted in terms of the impact, Europe will be up high-single-digit, which is what we said at the beginning of the year would be. So generally, we think Europe's continued growth is here to stay and that's what we're sensing or seeing in the demand. I think the FX impact for Europe, we think is about 400 basis points and the rest is largely Russia. Russia is about 2% of overall business for the company. And if you think about how Western Europe and Eastern Europe is in the mix, I think, Western Europe for Europe is about 85% of our business. And as countries open up UK, France, we are seeing a strong bounce back for our product. So, Eastern Europe is a much smaller piece and then Russia is half of that 15% mix for Europe, but generally small overall for the company.

Thank you. Our next question comes from Matthew Boss of JPMorgan. Your line is open.

So Chip, can you speak to the business trends that you're seeing across categories and maybe looking at this on a micro versus macro level, do you see the Levi's brand taking share and acquiring new customers out of this pandemic? And then as we think about the work that you've done with the brand, are you seeing any push back to price? What do you think is driving that pricing opportunity and what inning do you think that we're in as it relates to the regional opportunity from a price perspective today?

Yes, well, there is a lot to unpack there, Matt, but I guess I would start by saying that the denim category is still very, very healthy on a past 12 month basis here in the U.S., which is still by far our biggest market. Denim is up 11%. It's growing faster than total apparel. We've talked in the past about the tailwinds that we have that that are carrying us and as the market leader by far on a global basis, we believe, a big part of our responsibility is driving category growth and we're doing that with innovation and driving the new denim cycle, if you will, with the looser, baggier fits. Levi's is growing. We are bigger than the number two, number three and number four brands combined on a global basis. We're number one on Men's, number one on Women's. We are growing share. We are picking up new consumers. We mentioned in the script, we're adding 300 Target stores and that is because that is working and we are picking up new consumers for Levi's just by having distribution in Target, and we are growing share on a global basis. We talked previously about gains with women. We are gaining share with the younger consumer as well, which is really, really important resonating with that younger consumers, is one indicator of brand strength, I mean, the other thing that I'm really excited about is, we mentioned that the 501 was up 50% this quarter. And when you're most iconic item is growing like that, it says something about the overall strength of the brand. And it's not just in one market. This brand is, I would say, very confidently has never been stronger than this. And I would say semi confidently, this is the strongest…

Thank you. Our next question comes from Brooke Roach of Goldman Sachs. Your question, please.

Good afternoon and thank you so much for taking our question. Chip, I'd love to follow up on the conversation that we were just having in response to Matt's question, which is about the health of the business in North America. And you mentioned several new drivers of expansion this year including an expanded partnership a Target, more shelf space at key partners and also a new workwear line that you're launching this Spring. I'd love to hear how you're thinking about the contribution to growth from some of these new initiatives versus like-for-like increases in your core and how you're thinking about that phasing throughout the year? Thank you.

Sure, Brooke. Well, I guess, the first thing I would say is our business in the U.S. is very much core product-driven and that is a huge advantage when you think about some of the headwinds that we're facing, that the whole industry is facing, from a supply chain standpoint. We're able and we are doing this. We are building inventory in the U.S. because most of what we sell here is the core product and so, we can lean into building inventory to mitigate against future supply chain disruptions. And that is a huge advantage that we have and we're leaning into that. The brand is really, really healthy. Through the pandemic, actually even before the pandemic, we were remapping our wholesale distribution to more premium accounts. Target also came into play at that same point in time. And that started really, really small. That started with the 20 stores test on Men's and we set a full potential. We thought that it had the opportunity to be 500 doors. We're in 500 doors today and it is working so well, and we know that we are acquiring new consumers to Levi's by our presence in Target. The success of the business and the fact that we're driving new consumers to the brand. With Target, we both concluded let's expand this to another 300 doors. So that's been accretive to our business. Our overall wholesale business is very, very healthy. Wholesale in general, as you all know, is also in a very, very good place right now. The brand is really strong and we're investing in our own direct-to-consumer business too. And that is also a big driver of growth for us. So you know in the U.S., when I joined the company 10 plus years ago, most of…

Thank you. Our next question comes from Omar Saad of Evercore. Please go ahead.

Thanks, good afternoon. Another nice quarter, I agree. Maybe you guys could dive in a little bit deeper on the e-com results, where that business is, how big of an opportunity you think that could be, what are some of the key levers there both here in the U.S. and internationally, and also maybe a little bit of an update on Beyond Yoga too would be nice, how that did to the holiday season? Thanks.

Okay. I'll start with Beyond Yoga because it's, I think that's pretty quick and then I'll talk a little bit about our commerce business. We are largely through the heaviest lift of the integration. I would say, it's gone really well. The team is terrific. The brand started out with their first full quarter as part of Levi Strauss really strong. They beat their internal expectations or our internal expectations. The people on the team are great. We talked about culture fit when we announced the acquisition. It is clear that there is a very strong culture fit. And I would say, this is our first acquisition in decades. This is going to be a good win-win. We're learning a lot from them. They're a small scrappy teams and every single day, they are on every single piece of the detail. We're learning things from them as they are learning things from us and I think that's going to play out really nicely. As you know, it's a premium position, premium-priced brand. It significantly adds to the total addressable market that we're competing in. And our focus right now is beginning to build capability because we didn't buy this business because we thought it would be a $100 million business this year. We bought it because we believe it has the potential to be much, much bigger. We have built plans to that effect and in June when we're all together, on June 1 for Investor Day, we will reveal more of that, but, I believe, that this is going to be big for this company and really be a generator of meaningful growth over the next several years. For e-commerce -- our e-commerce business was up 13% versus Q1 2021, 37% ahead of Q1 2020. Our total digital ecosystem,…

Thank you. Our next question comes from Bob Drbul of Guggenheim. Your question, please.

Hi, good evening. Just a couple of quick ones from me, if I could. I think the first one is, you talked about the success that you're seeing, I think it was the Dallas store. Can you remind us just what the game plan is in terms of this year in terms of new store expansion and I guess just that store, what really is resonating to make it so successful so quickly? That's the first question. And then the second question I have is, when you look at, your lower priced offerings and I'm thinking more Signature and Denizen, can you just talk about if you're seeing more interest in those brands from the U.S. consumer, sort of how you feel like you're position and are performing in both of those brands as well? Thanks.

Hi, Bob. I'll be quick because we've got about five folks after you and we want to answer them, but I'll be quick. To our plans about opening mainline in the U.S., I think our plans are about 25 plus those and this is on the back of about 15, 20 that will be open on the way to a 100. Dallas is successful because it's located in a great mall and you just have the who's who in the mall in terms of retail. It's a great looking stores as the location is good, very balanced assortment between Men's and Women's. In fact, I would say, Women's slightly on the higher side, because the business is on a roll. And I think, better execution. So combination of location, assortment and execution, making the difference for that. On your question about yes our value brands, which also had a great quarter. I think, for the value consumer, we offer the perfect opportunity, right. As some of the consumers feel a pinch with inflation and want a great brand, they know where to go and Signature and Denizen, I think, that bodes well. We don't necessarily have to mark down the red tab and this way, we offer a good portfolio.

Our next question comes from Jay Sole of UBS. Your line is open.

Great, thank you so much. My question is just about China, the COVID-related lockdowns there, how is it impacting your supply chain? There is talk of ships not be able to leave ports. I mean, is that something that's impacting the business and is that something that is factored into your guidance? Thank you.

Jay, the good thing about our supply chain is we've got truly a global footprint. We don't impact -- we don't manufacture a whole lot in China anymore. We've been slowly divesting manufacturing out of China, if you will, and kind of playing our chips elsewhere on the global map. So today, I think we're manufacturing somewhere in the neighborhood of 5% of our global production is in China, and most of it staying in China. We've talked before that less than 1% of what we're bringing into this country, into the U.S., less than 1% of it is coming from China. So we have strategic partnerships with many of our key vendors. Many of those key vendors have multi-country footprint. So if a factory gets impacted by COVID, we can quickly shift. And this is where our scale really does help us. We can quickly move our pieces, our manufacturing to other places on the map. I would say, it's not an easy thing to do, but the team has developed an expertise in doing it over the last two years and we've been able to navigate through it reasonably well. The other issue that we've been watching real closely is the impact that of COVID shutdowns in China has had on ports there. And so far, what we're seeing and what my team is telling me is we're going to be able to navigate through this potentially rocky period of the next couple of weeks, okay. So, we're not expecting any meaningful impact whatsoever from COVID-related impacts to supply chain. It is impacting we've got I think roughly 60 or so doors closed in China right now. Our team is based in Shanghai. They haven't been in the office now for a couple of weeks. They're all working remotely. It's still a pretty challenging environment from a commercial standpoint over there. But as you know, China is less than 3% of our total global business and still an opportunity for us, for sure, but it's not going to have really a consequential impact on our results in the coming quarter or for the year.

Thank you. Our next question comes from Jim Duffy of Stifel. Your line is open.

I'm hoping that, however, can you guys elaborate on the $60 million of missed demand? Is there an Omicron impact included in that calculation or is that principally a function of delayed receipts? And then, I'm curious with inventories up 20% year-to-year, are there future expected impacts from product availability and if so, when do you expect to get caught up?

Yes. So, Jim, the $60 million is a good calculation by experts and we factored into account fill rates from normal and it takes into account both receipt of goods as well as fulfillment of goods when we get it because we are trying to service demand. The $60 million is higher than $50 million not because things are getting worse, only because in our quarter one includes December, which is a holiday period. Our view is that supply chain related issues continue through the year. But what we're seeing is an improvement in the condition in the West Coast. And so we think that it will help us. Difficult to predict how much demand we will not be able to service. The good news is, there is demand and we continue to grow and so, I think that's the way I kind of look at it, Jim.

Thank you. Our next question comes from Ike Boruchow of Wells Fargo. Please go ahead.

Hi, thanks everyone, Harmit, two questions for you. So understanding the rev guide maintain lower Europe, I think U.S. or Americas you had planned up high singles. I assume that hasn't moved up, so just tell us specifically now where you're targeting that geography? And then just the second question, I want to make sure I understand. So, you're reiterating the earnings and the revenue, but you're now calling for more deleverage. I just don't really understand why there is going to be more deleverage on expenses. I think you said incentive comp, but again, if you're not raising your outlook, I don't quite understand what the moving pieces are there. So, any more help on the SG&A being a little bit higher would be helpful.

Yes, sure, Ike. So, Ike, first question related to -- yes, okay, so in terms of the regional mix. So, you're right. I think when we talked about the year when we reported Q4, we said the Americas high single, we said Europe high single, we said Asia mid to high teens. I think, as we look at the year now, we think Americas is low double. The Europe because of Russia and FX on a reported basis, largely flat, if you take it out, single. And Asia, probably high-teens to about 20%. So that's the change in the regional outlook. To your question about the SG&A piece, the annual comp is really driven by constant currency. Our three year comp is driven by reported results. and so, the FX headwind is something that doesn't affect the comp for the year. So our SG&A deleverage slight -- just flattish. I mean, difficult to predict, but I would say, flat to slightly deleveraged versus leveraged, is being offset by higher gross margins. And so that's why the EBIT margin is broadly similar to what we indicated and that's why the EPS guidance largely is similar to what we had said about a quarter ago. And you know, the thing I would tell you and you all of you have seen it, we are really focused on cost management. So we doing whatever we can to minimize that to offset any inflationary pressures. So that's something -- we've done a good job in the past and we'll continue to do that as we are progressing through all the controllable.

Thank you. Our next question comes from Dana Telsey of Telsey Group. Your line is open.

As you think about supply chain, I think the supply chain headwind was around $60 million in this quarter, up from $50 million last quarter. How are you planning supply chain headwinds as we go through the year? And then just on marketing investment, which has increased, is that consistent through the year and any new nuances on marketing that we should watch for that differentiates by quarter? Thank you.

Yes. So there are supply chain is difficult to predict. The good news and the bad news is we continue to chase the $60 million higher than the $50 million is largely because of the holiday season being December. It's not that supply chain issues are getting worse, it's just that we are still chasing into charts et cetera. And so we let you know as this progresses. But the good news is, there is lot of demand for our brands. On A&P, you are right. A&P as a percentage ticked up about a point this quarter relative to last year and the last year, revenue was down. The year started on a tough note, but this year, I think advertising is 5.8 or something as a percentage. Rest of the year, think of advertising being largely similar to last year as a percentage. We think we'll end the year advertising as a percentage of revenue about 7.7%, 7,8%, which is slightly higher than a year ago that is largely because of Beyond Yoga. We bought the brand, they're going to be spending on advertising, et cetera, But despite that, EBIT margins will be up year-over-year and that's our outlook.

Got it. And any change to CapEx 270 and then Chip, just anything on new wholesale accounts beyond what you're doing at Target and some of the others that we should be watching for. Thank you.

No change to CapEx to 270. I know we spent about 73, 74 this quarter. So, if you extrapolate that is slightly higher than the 270, but that's because Q1 is a bit of carryover from Q4, but CapEx we are maintaining 270. No meaningful change.

Thank you. Our next question comes from Chris Donnie of Bank of America. Your question, please.

Thanks guys. Good afternoon and thanks for allowing me to squeeze in my question, I think you've talked about mid-single digit plus cost inflation for the year previously. Given the continued rather than cotton prices, is there any notable changes to this outlook? And if you could just talk about your contracting, how far ahead you book your cotton prices and how far that's locked in that would be really helpful and how that translates to your higher gross margin guidance?

Great, Chris. First, welcome to the account. Second, I was wondering who'd ask the cotton question. Thank you for asking that. Cotton is locked into for the year and I think the increase in COGS year-over-year on a full-year basis is about 5%. We will effectively either price for it or absorb some of that through cost discipline, but largely, we have price for it. Cotton as you look at 2023, cotton is higher than what we locked in. We are in the process of negotiating cotton with our lenders and it will be a win-win deal for both sides. The futures in cotton as you looked at -- look at it today, start coming down in October of 2022 and that translates over the year. So, I think, more to come, but generally, we've done an effective job maintaining margins both gross margin and EBIT margins despite the uptick in cotton this year and so and historically, we expect that from us over time.

Thank you.

All right. Is that it, Latif? I think, that's the queue, right?

It is, sir.

All right, great. So I will wrap it here. I want to thank everyone for joining us, remind everyone that we do plan to hold an Investor Day in New York City at our showrooms on June 1 and we're looking forward to seeing everybody then. Thanks very much for attending and for the great questions and we'll see you all in person versus soon. Looking forward to it. Bye-bye.

And this concludes today's conference call. Thank you for participating. You may now disconnect.