Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company Second Quarter Earnings Conference Call for the period ending May 29, 2022. All parties will be in a listen-only mode until the question-and-answer session, at which time instructions will follow. The conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. For this conference call -- this conference call 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, Vice President of Investor Relations at Levi Strauss & Company.

Thanks for joining us on the call today to discuss the results for our second 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 posted complete Q2 financial results and 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, 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. 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.

Good afternoon, and thanks for joining us today. It's been just over a month since I saw many of you at our Investor Day in New York, where we laid out our plans to accelerate profitable growth over the next five years. The team is off to a strong start in executing the strategic initiatives that will deliver those plans and you can see that clearly in the results we reported today. Revenue in the second quarter grew 20% on a constant currency basis and 15% on a reported basis to $1.5 billion, reflecting strong consumer demand across our business and around the world. We also increased profitability, expanding adjusted EBIT margin 90 basis points to a record 9.9% for the second quarter, which drove adjusted EBIT growth of 27% and adjusted diluted earnings per share growth of 26%. Combined with our strong brands, our relentless focus on our strategic priorities being brand-led, DTC-first and diversifying the portfolio has delivered strong results, even with continued macro-economic uncertainty and persistent inflationary pressures. The momentum we are driving today reinforces my conviction in the potential of our strategy and the execution abilities of our team, leaving us firmly on track to deliver on our long-term commitments. There are several notable dynamics that underscore our performance this quarter, for which my and Harmit's comments will reference revenue, constant currency comparisons to 2021, unless we indicate otherwise. Let me start with our first priority, being brand-led. The Levi's brand is stronger than it has ever been, and the demand is stronger than it has been in my career here at LS&Co. Levi's is the number one jeans brand in the world and has strengthened its standing over the past year, driving most share growth amongst world's top jeans brands, with brand awareness remaining well…

Thank you, Chip, and good afternoon, everyone. At our Investor Day in June we laid out a clear long-term strategy designed to deliver faster growth, stronger margins, and increased cash returns to our shareholders on our path to drive annual shareholder returns of 10% to 12% over the next five years. Our plan, which calls for annual revenue growth of 6% to 8%, adjusted EBIT margin expansion to 15%, and our commitment to return 55% to 65% of our free cash flow to our shareholders over that time frame is bold, yet achievable. In our second quarter, our team delivered on each of the three drivers of our long-term TSR algorithm, accelerated sales growth, margin expansion and cash return. We generated strong growth. Total net revenue grew 20% to $1.5 billion, driven by 21% revenue growth in the US and strong performance across our diverse global portfolio. Supply chain-related issues limited further revenue opportunity by approximately 2% primarily in the US where strong demand continues to outpace supply. Adjusted EBIT grew even faster, up 27% reported and 37% in constant currency as adjusted EBIT margin expanded 90 basis points to a record second quarter level of 9.9%. The strong EBIT growth was the principal factor driving adjusted diluted EPS up 26% to $0.29. We achieved these strong results even as we invested in our brand and navigated the impact of rising inflation, continued COVID-related challenges, geopolitical turmoil, and foreign exchange headwinds. We also returned $80 million of capital to our shareholders through a combination of higher dividends and the repurchase of 2 million shares. Given the continued strong performance of our diversified business, we are also reaffirming our financial outlook for the year. Second quarter net revenue growth of 20% was primarily driven by higher volume as well as an…

Thank you. The floor in open for questions. [Operator Instructions] Our first question comes from the line of Matthew Boss from J.P. Morgan. Your line is open.

Thanks, and congrats on another nice quarter.

Thanks, Matt.

So Chip, on the continued momentum and strength of the brand, could you maybe speak to drivers behind the acceleration, notably that you're seeing in the Americas? Maybe what's driving the combination of both AUR and unit growth? And just how do you see Levi's positioned to take share in this dynamic backdrop as now we move forward?

Well, I would say first thing -- I'll answer the second half of your question first, which is, I think where Levi's brand is incredibly well positioned in this very dynamic environment to continue to accelerate and grow share. And the strength of this quarter gives me a lot of confidence in saying that. I'd say there are a number of key drivers to our success. If you want to focus specifically on the US, obviously, the continuation of casualization is a dynamic that's playing out globally. That helped us a lot. But the US jeans market -- just got the data for the last 12 months ending May. US jeans were up 19%, and that was faster than total apparel. So in US the market leader, we are clearly the ones driving that. We got some recent consumer research, more consumers are now wearing jeans more often in professional settings. I would say maybe even at your bank. The CEO is probably just happy that people are coming into work and wearing a pair of jeans is perfectly acceptable today. And that's very different than a pre-pandemic world. More than half of the people that were surveyed in this survey, and this was done globally, so that they can now wear jeans to work. Now it's a huge change from pre-pandemic. So the trend towards casualization is definitely helping, a new denim cycle that we've talked about for probably over a year, straight, loose, baggy or fits. But when I look at our business, probably the strongest testimony to the strength of our brand is just what's happening on the 501s. That is our most iconic item is up 40% again this quarter across men's and women's, real solid growth. And the brand fundamentally has never been stronger. And…

Congrats again on the momentum.

Thanks, Matt.

Thank you. Our next question comes from Kimberly Greenberger of Morgan Stanley. Your line is open.

Okay. Great. Thank you so much. If I could ask a two-part question. I wanted -- Harmit, you mentioned the ERP implementation happening in the US in the second quarter of next year. Could you just talk about how we'll see that manifest in inventory growth as you sort of proactively built some inventory just to make sure that you can deliver on time through that entire period of that implementation? When does inventory rise? When do we see it normalize on a quarter-by-quarter basis? Just any color you could offer there? And then Chip, we heard that there was just a slight softening in retail sales among some of the US retailers here over the last month or so. I don't know if you have an order book or if you have any sort of a forward view in terms of customer orders here in the US and the behavior that you might be seeing among those customers on their future order commitments. If you have anything to share on that, we would certainly be interested to hear. Thank you so much.

Sure. I'll take the ERP question. The US is going to be a third implementation of the upgrade. We've done Mexico, we've done Canada. Both have gone really well. US is the largest market. A couple of other retailers have done the US and we are bringing to the -- a new one with the cloud, SAP system, clear benefit. The way we are thinking of inventory, and as you know, Kimberly, US is largely a core market where we carry the product through multiple seasons. Our expectation is between quarter three and quarter four we probably build about approximately $100 million in inventory that then waters down in quarter one, quarter two of next year. We're looking to implement this in early Q2 of 2023. So that's how we're thinking about it and working through it. I mean, there is a dedicated team, staff for a major implementation, and our commercial teams are directly involved, obviously, the discussion with key customers, it’s a takes two to tango. And so collaboratively, we feel we can get this done and do it in a way that we can actually predict consumer demand and ensure that we satisfy the fill rates, et cetera. Over to you, Chip.

Kimberly, I'll try to keep this pretty brief. Our wholesale results in the quarter were very, very strong as we talked about in the prepared remarks. And on our core Red Tab business, Levi's Renta focused here on the US specifically, we really have not seen any softening or have heard really any concern about Levi's Red Tab from our customers. So the one soft spot in our business in the second quarter was on signature and done is in our to value brands. Not surprisingly, those businesses were down mid-single digits. You know, and as you know, those businesses represent real, real small part of our total revenue, some kind of low single digits of our total revenue. But those two brands, which were up in the first quarter were down mid-single digits in the second quarter. So there's some evidence that value consumer, the low income consumer is really starting to feel the squeeze which is going to be a surprise based on the results from Walmart and Target. But Levi's Red Tab at Target is still doing really well. And we feel really, really good about our position right now in wholesale. So we haven't seen any signs of cracks. And I think, again, that speaks to the strength of the Levi’s brand.

Great color. Thank you so much.

Thanks, Kim.

Our next question comes from Omar Saad of Evercore ISI. Your line is open. Thanks.

Thanks. Good evening. It's great to hear so many different pieces of the businesses performing well. It's also great to hear you guys are allocating more resources and talent to build out the digital organization. But maybe to push in a little bit deeper on the digital performance in the quarter, guys. I think it was plus 3% overall. Maybe you could also dive in a little bit e-com versus digital wholesale? And then given the importance of digital and DTC to the elevated longer-term growth algorithm you guys laid out, not that long ago, maybe talk about the e-com performance and where you think it should go and where you think it can be. And I'm also wondering, is there any supply chain and inventory hindrances holding that channel back? Thanks.

Yeah, Omar. Digital overall was up [Technical Difficulty] e-commerce, as I mentioned, was down. It was also down because you're lapping some real strong numbers, as well as the consumers head back to the stores as a bit of the online shopping shifting to the stores and we saw that in the form of higher traffic. In terms of the puts and takes, if you think about the world, Americas generally strong on digital, Europe slightly weaker. There are some retailers like Zalando that have reported weaker sales. And Asia is still strong. To the question about what we'd like to do and where we'd like to go. We are in the early stages of really accelerating the business with the announcement that Chip made on getting a Chief Digital Officer. You have somebody in the company beside folks in the commercial side of the business waking up every morning trying to drive and grow this business. As we said in the Investor Day that we would -- our goal is to triple the size of the business from 7% to about 15%, triple the size of the business, which will also help EBIT margin. We think there is a huge opportunity. We just rolled out the app in the 10 country -- at least 20 countries where this app needs to be. We still get a small percentage of people buying through the app, so the opportunity in that is immense, and out loyalty program is just getting started. We have 19 million consumers around the world, a brand that Levi’s definitely has trend. Beyond Yoga continues to grow e-commerce. Dockers e-commerce growth is accelerating. So the real work is to get levi.com to where we like it to be.

Got it. It sounds like with loyalty accelerating, a key to accelerating the e-com will be translating that loyalty to transactions.

Correct.

Thanks for the color. Good luck.

Thanks, Omar.

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

Good afternoon, and thank you very much for taking my question. Harmit, I think you mentioned in your prepared remarks that China and FX, is it incremental 100 basis point to 150 basis point headwind for the full year? Just curious -- on China specifically, just curious to know how it performed in 2Q? And what is your expectation for the year as we think about that 100 basis point to 150 basis points? And then if I can squeeze in the second question, Harmit, I think you alluded to 4Q revenues in the transcript that's still not populating correctly, but just how do we think about 3Q, 4Q revenues for the back half?

Yeah, sure. So China, Laurent, as we mentioned at Investor Day, it’s a small piece of our business. We started the year at about 3%. We think we end the year at about 2% of our business on China. We have a wonderful team on the ground and they're working through all the puts and takes. China was down, I believe, close to 50% in quarter two, largely because of stores were in a lockdown, and we don't have a large e-commerce. We're just trying to build that. And so, we could offset the stores being closed. The 100 basis point and 150 basis points of headwind that I talked about, largely in the second half, especially driven by foreign exchange and China being the two pieces of it, FX being the Euro and Pound. As you think about Q3 and Q4, I think Q3 is mid to high-single-digit growth relative to '21 and Q4 in the mid-single-digit. I mean, I think the good comparison is to relate both the Q3, Q4, H2 to 2019 and you will relative to 2019 we are doing in the low-double-digit, and I can definitely give some more color on the inventory, the questions on that later on.

Very helpful. Thank you very much, Harmit

Thank you.

Thank you. Our next question comes from Paul Lejuez of Citi. Your line is open.

Hey, thanks. It's Tracy Kogan filling in for Paul. I was wondering if you guys can talk about store traffic and conversion in each of your regions and how that compare to 2019? And also then specifically in China since the lockdowns have abated, what store traffic -- or how has the store traffic built since the lockdowns ended? Thank you

Yeah. Tracy, the store traffic is growing relative to a year ago generally across the board. It's very difficult to go country-by-country, because different countries have different elements of geopolitical COVID uncertainty, but traffic we saw build. And that's why Chip in prepared remarks talked about the growth we're seeing in our brick and mortar stores, especially in key cities. We see tourist traffic beginning to improve. The Chinese tourists is absent, but I’d sat that we're beginning to see tourist traffic improve. And having said all that, traffic relative to ‘19 is still below '19 level, right? So traffic hasn't gone back to '19 level. Conversion rates and higher units per transaction, because now we have a lot more to offer from head to toe perspective, it helps offset the traffic decline relative to '19, especially in the US. And we are opening doors. We should have 70-odd doors on a net basis open this year. US is also opening doors and we talked in the Investor Day of how we think we can open, on a net basis, about 80 new doors '23 onwards. I mean, structurally, the economics are a little different. In brick and mortar, obviously, we've negotiated rent reductions, lower rents in new doors, et cetera, because we're one of the few retailers that are continuing to open doors. I think structurally, the economics are slightly better and help offset some of the traffic decline.

Thank you.

Thank you, Tracy.

Thank you. Our next question comes from Will Gartner of Wells Fargo. Your line is open. Again Will Gartner, your line is open.

Why don't we move to the next caller and come back to Will.

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

Thank you. Good afternoon.

Hey, Jim.

Nice work in the quarter. I want to ask, there has been a lot of volatility in the commodities market, though the recent correction has been sharp. When do you lock in cost for the first half of fiscal '23? And does the correction we've seen in the commodities landscape have you rethinking the rate of price increases that you had talked about for the back half of the year at all?

Yeah, Jim, so broadly speaking, we lock in our open to buy twice a year. So the first half of '23 is largely locked in unfortunately at higher commodity price point. The good news, as you've seen the quarter in futures and they indicate futures beginning December, cotton is trading -- it was below $0.90, yesterday it was over $0.90. I haven't seen when the market moves up, so I was looking at it earlier. And the average cotton price is between $0.80 and $0.90. So it's trending back hopefully. So it definitely help us in the second half of next year. To your question about pricing, we have taken pricing thoughtfully. Earlier on, I have taken some pricing in H2. And we've been very thoughtful about '23, obviously, it's important for us to offset cost increases and doing it surgically is critical. But we're very thoughtful. The other piece is despite the pricing that we've taken, we still -- our products still provide great value to the consumer. And I think that's evidenced by the fact that our revenue growth is well balanced between unit volumes and AURs, not every percentage increase in AURs is driven by pricing, mix is also making a difference.

Great. And just one more if I may. Are you feeling any more or less confident in the promotional environment as you look to the back-to-school season and holiday season?

Yeah, no, the brands -- good news that Chip said, the brand is very strong, strongest as it's been, and Dockers and Beyond Yoga, strong brands, too, from that perspective. We did in quarter two, I mean our gross margin did include about 100 basis points of incentive units. You like to sell every unit at full price, but we did sell incentive units regard a similar cadence built into the second half. As we think about back-to-school, we think our product offers and our marketing offers will drive our consumers to our product. And we'll be thoughtful about promotional levels, we're not going to be uncompetitive, but we'll be thoughtful as we think about back-to-school and the holiday season, which would be upon us. This Prime Day also around the corner. So we've been very thoughtful of that. But overall, given the strength of the brand, the fact that we are looking at promotion levels with AI and machine learning and other tools, I think, we'll be okay.

Thank you very much.

Thank you.

[Operator Instructions] Our next question comes from Brooke Roach of Goldman Sachs. Your line is open.

Good afternoon and thank you so much for taking our question. Can you talk to the trends that you're seeing in your business in Europe, especially in the context of the choppy macro environment? What are you seeing there now that gives you confidence to raise your underlying, ex-FX and ex-Russia guide for the region for the year? Thank you.

Hi, Brooke, the brand is strong, one could argue pre-pandemic, the brand was strongest in Europe and the execution was probably the best. They continue to leverage both the strength of the brand as well as execution and driving strong performance. Couple of things. One, in Europe, we have wholesale retailers do commit. They have a pre-book process, pre-booked in the second half is in the high single digits, which is good news. So that gives us some confidence as well as great execution. I think that balances the consumer sentiment and other stocks that we'd be seeing with the fact the economies are opening, tourism is in with a big bang in Europe. I think other things that give us a little bit of confidence, besides the strength of brand execution and the wonderful team there.

Great. Thanks so much. I'll pass it on.

Thanks, Brooke.

Thank you. Our next question comes from Robert Drbul of Guggenheim Securities. Your line is open.

Hey guys. Just, I have two questions. The first one, can you talk a little bit about just the wholesale channel inventory levels that are out in the market just sort of where you think your brands are and where sort of the category is generally? And then Chip, you're usually pretty good with some of the trends. I was wondering if long jean shorts appear to be trending and I'm just curious if you're seeing that within your business?

Okay. Your second question gets smiles across the room, Bob, I could tell you that. To your first question, the way we look at -- so we don't look at trade inventory as a subject of discussion between our sales team and commercial teams and our wholesale customers. Wherever we have line of sight, we look at trade inventory relative to '19 or '21, depending on where we can. And measured in months and so far, Bob, I can speak to the US, we've seen trade inventory largely in line with '19 levels. Talking about '19, I just wanted to make a point for everybody here. If you look at inventory growth in quarter two, we talked about -- I talked about 29% over '21. But '21 is a very difficult comparison because of the supply chain issues. The way we look at it is, okay, how do -- what is inventory levels relative to '19, and inventory to '19 is up 24%. If we take in the early receipts, our lead times have increased, and we're trying to ensure that we don't dissatisfy our consumers. That's about 10% is that -- of that 24% early receipts and then Beyond Yoga and the talent acquisition, another 3 percentage points. So if you back that out, inventory growth of 11% is broadly in line with our expectation of growth rate in the second half relative to '19. Chip, the question about long shorts point?

Bob, if that's what you're wearing, that is clearly what the trend must be.

No, not tonight, but I was thinking about it.

Okay.

Thank you, Bob.

Next question, please?

Thank you. Our next question comes from Dana Telsey at the Telsey Group. Please go ahead.

Good afternoon and nice to see the progress. Two things, as you're thinking about the supply chain, it looks like the supply chain costs were higher in the second quarter than in the first quarter. How are you planning for the balance of the year going into the back half of the fiscal year? And then the wholesale strength is impressive, unpacking the wholesale strength, looking at price, door growth units, how does it differ by region? And what is your outlook? Thank you.

Dana, hi. To your question on supply chain costs, I mean, I think if you think about costs in quarter two, air freight was higher, were 80 basis points higher. It is a combination of two things. One, very low air freight in quarter two of last year. And this year, we were getting our product, just the seasonal product to make sure that we were able to satisfy demand. Our expectation on air freight is that it begins to taper down. Supply chain issues are getting better that we're not going to be out of the wood this year. Hopefully, next year it's getting better. The other costs are commodity costs, commodity costs in the second half are higher than the first half as the cotton was, and we're offsetting that with higher AUR driven by pricing and mix. To your question about wholesale trends, it is difficult to, again, go around the world. Again, I think the fact that the brand's strong, Red Tab is really strong. The trends tailwinds that Chip talked about casualization and as people get back to the office is a more casual environment, I think definitely helps us. And I talked about pre-book in Europe, which is a good indicator. So I think that's how we look at it.

Dana, the only other thing I would add on the wholesale thing is US wholesale. We talked about this before Dana. We put a lot of work into just remapping, re-building our footprint kind of over. So our focus on premiumizing our wholesale footprint has paid off in big ways and the target expansion has paid off in big ways, getting incremental floor space in key customers like Kohl's and Macy's over the last two years or so. It's also played an important role. So we're seeing that play out and put that together with the strength of the brand and the brand shows up better in their stores, we're going to sell more of Levi's and that's where our focus has been.

Thank you.

Thank you, Dana.

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

All right. I want to thank everyone for dialing in and wish you all a happy and healthy summer and look forward to talking with you at the end of our third quarter. Thank you all very much.

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