Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company Fourth Quarter and Fiscal Year-End Earnings Call for the Period Ending November 27, 2022. All parties will be in a listen-only mode until the question-and-answer session at which time instructions will follow. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. 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.

Thank you for joining us on the call today to discuss the results for our fourth fiscal quarter of 2022. Joining me on today's call are Chip Bergh, President and CEO of Levi Strauss; and Harmit Singh, our Chief Financial and Growth Officer. We have posted complete Q4 and full-year 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 also like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could materially differ from those contemplated by our forward-looking statements. Please review our filings with the SEC, in-particular, the Risk Factors section of the Annual Report on the Form 10-K 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 over the call over to Chip.

Good afternoon, and thanks for joining us today. Q4 concluded a strong fiscal 2022 performance with the quarter delivering on the high-end of our expectations for both revenue and EPS. This was driven by strong growth internationally and in our direct-to-consumer business, which saw record quarter performances across U.S. DTC channels and positive comp sales across the Americas, Europe, and Asia. On a constant currency basis, Q4 net revenues were flat with the prior year's record Q4 revenue and we grew the business 6% above 2019’s pre-pandemic level. For the full-year, we delivered another year of strong growth. We grew reported revenues plus 7%, plus 12% in constant currency. We delivered strong market share growth globally. And despite facing a more challenging consumer environment in the second half, as well as currency headwinds, we grew adjusted EPS year-over-year by managing the factors within our control. We continue to diversify our business nearly 40% of our revenues came from outside of denim bottoms. We drove outsized growth on women's, tops, DTC, and international. We returned $350 million to shareholders, an 84% increase over prior year. And we chartered the course for sustainable, profitable long-term growth by introducing our new strategic plan and long-term financial targets. Let me go into more detail. Note that for the balance of our remarks, Harmit and I will reference revenue growth in constant currency. Starting with our brands, focusing first on Levi's. In 2022, the Levi's brand grew 11% and grew global market share more than any other denim brand for the second year in a row, led by share gains in both men's and women's. Levi's is bigger than the next three brands combined, reflecting market share gains for five out of the last six years. According to [Euromonitor] [ph], in 2022, the denim category…

Thanks, Chip. I'm both humbled and excited to be taking on the new role given the tremendous opportunity for our portfolio brand. I remain committed to this company and delivering on our long-term plan and working with you and Michelle to deliver for our stakeholders. Before I walk you through our Q4 results and the outlook for 2023, let me start with three key points. First, we delivered a solid quarter with net revenues in-line with prior year. Highlighted by continued strength in our direct-to-consumer business. This quarter's performance reflects the benefits of the diversification of our business as our success internationally in Asia and Latin America was sustained incredible momentum in Q4, demonstrating the power of the Levi's brand around the world and helping offset declines in U.S. wholesale and Europe largely driven by Russia. Second, the steps we have taken to emerge stronger from the pandemic have substantially improved the structural economies of our business, enabling us to deliver gross margin for the year 380 basis points ahead of 2019 and adjusted EBIT margin, excluding foreign exchange of 12%. We have positive momentum entering 2023. Our global direct-to-consumer business is delivering strong growth, accelerating through the holidays, and positioning us to drive further revenue acceleration in the channel. Europe exited December with positive constant currency growth, which was broad-based across major markets. And we also expect to benefit from several tailwinds, especially in the second half, including improved commodity costs, foreign exchange, and the continued benefit of cost initiatives we have implemented. I will now walk you through the progress we achieved in Q4, then what that positive momentum means for 2023. Net revenue was in-line with the prior year, driven by strong growth in our DTC business. Our international business was up 3%, offset by a mid-single-digit…

Thank you. [Operator Instructions] Our first question comes from the line of Laurent Vasilescu of BNP Paribas.

Harmit, congrats on the additional responsibilities. Harmit, it's very helpful, the guidance…

Thank you, Laurent.

No, well deserved. Question here, Harmit is on gross margins. There's a lot of debate out there. If you think about – if compare your gross margins relative to 2019, they're up 400 basis points. Harmit, I think during the pandemic, in 2021, you talked about three quarters of that is more structural and then maybe 100 basis points is just the lack of [promos] [ph]. We did see the promos kick-in, in this fourth quarter. How do we – is that still the framework that we should think about going forward? And then maybe just clicking down on 2023 guidance, this gross margin of 20 bps to 30 bps, can you, kind of maybe walk through like how much is ocean freight recapture, commodities offset by increased promotions?

Sure. Good question, Laurent. So, to your point, when we started 2022, we had anticipated gross margin accretion three-fourth structure, fourth potentially giving way to higher promotions. I think as we ended the year, the variables were broadly similar, but I think slightly different. So, I think what probably happened, the accretion is largely structural. We had further promotion. I said, it was – second half got a little bit more promotional. So, the 100 probably – I'm just thinking aloud here, it’s probably 150. We also got foreign exchange headwinds in the second half, which was different to what we anticipated. Now, as you know, we do hedge, but we don't hedge every currency. And so, that was probably the third element that got introduced. But given the diverse nature of our business, I think we ended the year structurally from a gross margin perspective, a lot better and a lot stronger company. So, you think about 2023 and our gross margin guidance that I gave, I'd say, primarily driven by structural improvements, higher DTC is growing at a fast pace. I think our DTC business in 2023 is going to grow at low double-digit. International definitely helping, and where we are really focused on is growing women's, which is accretive to gross margin going beyond yoga, which is accretive to gross margin. So, those are things that are structurally helping. In terms of a couple of other changes that I think happened, yes, we do get some tailwind from ocean freight and air freight. As the year progresses, FX probably helps us in the second half versus the first half. The first half FX is going to be a bit of a headwind. And we're assuming probably 50 basis points for the year higher dilution relative to 2022. So, we are being a little conservative. Largely, our view is probably is the first half versus the second half. So, that's how one is thinking through it. The real growth is really going to come from structural improvements in a very diversified business.

That's very helpful. And if I could quickly sneak one more in. Harmit, Chip, I think you've talked about mass channel, I think that was a source of pressure. Just curious to know how it performed in the fourth quarter U.S. mass? And how do we think about that going forward into 2023?

Yes. So, our mass channel, which is really Signature and Denizen was down, I think 19% in Q4. As we are planning the next year, we are planning this down double-digit. So, if you think about global wholesale being down 4%, half of that was probably the mass channel, half of that was Red Tab. And if you think of the fact that we were not able to fulfill $35 million, $45 million that would say, global wholesale would like to be a positive. So, the brand is really doing well. The other only point I would make, Laurent is, as we get into January and exit December, we are seeing sell-through rates in U.S. wholesale actually turn positive, which is I think a good sign.

Very helpful. Thank you very much.

Thank you. Our next question comes from the line of Bob Drbul of Guggenheim. Please go ahead, Bob Drbul.

Harmit, congratulations on the expanded role from me as well. And Chip, congratulations on bringing in Michelle Gass. I think she's going to be great. I guess a couple of questions that I have – sorry, a couple of questions I have. On the – as you look at the year in terms of the year forward, just the revenue cadence that you expect, I don't know if you could maybe give us a little more color on that and the confidence around that piece? And then, Chip, the category growth that you assume for denim, I don't know if we could talk about that? And then I do have a denim question for you afterwards as well.

Okay. So, let me get the tough question, but I'm glad you asked it, Bob, which is the first half, second half. The way we're thinking about the year folks is, we're thinking about is the tail of two halves. Where the first half is weaker than the second half. A tale of two channels, direct-to-consumer strong; wholesale, kind of flattish, and a tale of two worlds; you know The Western world probably growing low-single-digit, and Eastern world, which is Asia and Latin America going low-double-digit. It's great to have a business that's so diversified. Thinking about revenue and to your point, because one would think, okay, this is a bit of a hockey stick, actually it's not. If you think about the cadence of the first half and the second half, the normal cadence is 47% of our total revenue is in the first half, and 53% in the second half. Last year, we saw real strong growth in the first half. We were up 19%, 20%. Second half was flat. So, last year is more 50-50. And so, as you think about 2023, it's a 47 in the first half, 53 in the second half. That's one way of looking at it. The other way of looking at it is, how does it relate to 2019? If 2019 is what we call a good base. If you think of the first half, our guidance assumes that we grow first half to 2019, about 8% reported dollars and the second half of about 10%. So, the real pickup is about 2 points or 3 points of growth and that's driven by couple of things. One, FX headwind doesn't remain. And second, just acceleration of the macro – improvement, slight improvement macroeconomic condition, but we're not necessarily – it's not a hockey stick and we're not banking a lot. We haven't built in any upside from China with a smaller business and any major consumer demand swing, if that happens, it's great.

On the denim market trends that you asked about, Bob, I'll stay real high level here, but globally, Euromonitor data, this is Euromonitor data, globally, the denim category grew low-single-digit in 2022. That was actually ahead of total apparel, which was down low-single-digits. And you know, on that basis, actually on a – that's a calendar 2022 basis. And for calendar 2022, the Levi's brand was up 11%. So, we did grow share last year, again based on Euromonitor data we grew more share than any other player in the category. We grew share on men's. We grew share on women's. It's also worth noting that we have grown share five of the last six years. So, we consistently grow market share. And as the biggest brand in the category, you guys have heard me say this before, we feel a certain obligation to grow the category and part of how we do that is to grow share in the category. So, specific to the U.S. because we shared some U.S. data from NPD on the last call, the U.S. does remain pretty soft. It hasn't gotten any worse from the prior quarter. We're seeing it. It's largely a wholesale phenomenon. Harmit has taken you through the numbers on our own direct-to-consumer business and our U.S. DTC business was also very, very strong for the quarter. So, we're in control of the brand. We're growing. We're building share. The biggest challenge has been the wholesale dynamic here in the U.S. As we look forward into fiscal or into calendar 2023, the outlook from Euromonitor is for a continuation of, kind of low-single-digit category growth and we're confident, it's kind of in the range of where we've got our revenue outlook, kind of in-line with our full-year guidance. And as I said, if you go back even pre-IPO for a 5, 6 year period of time, the category was growing, kind of low-single-digits and we put up 6% compound growth rates during that period of time. So, we've consistently outgrown the category and that by the way was during a period of time when both Dockers was a drag and we didn't have Beyond Yoga. So, we're really confident that we're going to be able to put good numbers on the board even if the category continues stay a little bit soft in our biggest market, the U.S. There are pockets of growth in the category as well. As Harmit said, we're seeing good growth in Asia and in Latin America. So, the benefit of having a really diversified business whether that's geographically or from a product standpoint really matters. And that's part of how we've been able to get through it. So, hope that answers your question.

That does. And Chip, if I could just jump in with two more quick one’s for you? Are skinny jeans over, you're talking about the success of the loose fits and are rises going up or down, just curious from the trends perspective?

That’s a good question. So, a little fun fact, our top two women's items were the 311 and the 721 and they're both skinny jeans. So, the news, as Mark Twain once said, the news of my death has been greatly exaggerated. I've been known to say skinny jeans will never die. Having said that, the looser jeans are still a thing. They're definitely the trend. Half of our revenues on bottoms this past quarter came from the looser, baggier fits, but our Top 2 women's bottoms items were the 311 and the 721. So, the skinny jean has not gone anywhere anytime soon. [Rises] [ph], for a long time, we were marching the rises up. We have the rib cage, you may remember, about 18 months ago that was the look back then, rises are now coming down. And we're not quite to hit [indiscernible] territory yet, but the mid-rise jean is, kind of the hottest item right now. And I think we're going to continue to see the shift from high-to-mid and maybe even mid-to-lower rises as we go forward. Thank you for that question.

Thank you.

Thank you. Our next question comes from the line of Matthew Boss of J.P. Morgan. Your question please, Matt.

Great. Thanks. So, maybe two things. Chip, could you speak to pricing power for the brand into next year? And also the overall health that you see for the brand in Europe today? And then maybe Harmit, could you just outline the fundamental drivers as we think about over the course of the next year and more so the back half of the year, what level of visibility you have in the improvement in top line as we think about the back half?

Chip, you want to go first?

Yes. So, let me just talk to the pricing power of the brand. One of my favorite sayings is, you know a brand has good brand strength when you don't have to hold the prayer meeting to take pricing. We've taken pricing over the last 18 months to 24 months. Our AURs were up 6% for the year and that was driven fundamentally by pricing. You see it in our gross margins. Our gross margins are up nearly 400 basis points from 2019. The Levi’s brand itself, gross margins are over 60% and we grew gross margins by about 20 basis points and we were able to build share through all of that. So, the brand equity as we measure it, we measure very detailed every quarter in our Top 10 markets around the world. Our equity remains really, really strong. We're not seeing any slippage as a result of pricing. And in fact, in some markets, we own the equity for worth the money I pay for it. So, the brand continues to deliver a really strong value. In Europe, Europe revenues were down 4% in constant currency. If you exclude Russia, it was down 8% overall, but Russia was 4 points of that. The good news is, we did see sequential improvement from Q3, driven primarily by DTC and strengthen our core bottoms business. And even through the holidays, December was positive for Europe. So, we're – it's still challenging there. I don't want to mislead anybody, but we're very, very confident in the strength of the brand there. The consumer will ultimately come back and we're seeing good broad-based growth across markets like the UK and Germany. So, we have embedded a little bit of caution in our outlook relative to Europe, just reflecting the challenging consumer environment there, but it's not because we're seeing any slippage in the strength of the brand or the equity of the brand and pricing seems to be holding up there.

And Matt, to your question on the fundamental drivers, we are going to very soon celebrate the 150 anniversary for what changed everything in denim, which is the 501. And so, and we're spending money against it. It's been growing at a [indiscernible]. So, I think that's going to be, fundamentally drive the category as well as our Levi's business. I think the other key drivers I talked about direct-to-consumer expected to grow double-digit. Women's and tops, we continue to accelerate growth. Tops are expected to be low-double-digit, women's growth high-single-digit. And then you think of the other brands that for a long-time, a, Beyond Yoga didn’t exist and Dockers was a drag, I think expected to both grow a double-digit from that perspective. And as you know, through the year, supply chain, we've had supply chain challenges. We’ve not been able to fulfill demand. We think that becomes a bit of a tailwind in the second half. So that's overall the revenue growth and expectation geographically. Asia, Latin America, low double-digit, the U.S. and Europe, which as Chip said, is exiting positively in December growing low-single-digits. So, that's what we're thinking about it. We haven't built in any dramatic change in China. It's too early and it's a small piece of our business. And so, that's how one is thinking through it. In terms of the P&L, cotton headwind in H1, but a tailwind in H2 because we're just locking in purchases for H2 and cotton is back to about $0.80, so that should help.

Great color. Best of luck.

Thank you.

Thank you. Our next question comes from the line of Jay Sole of UBS. Your question please.

Hi. This is Jay. I don’t know if you can hear me, but if you can, my question is on SG&A. And it looks like SG&A dollar is about, down about 30 million year-over-year in the trend in terms of the growth rates improving. Harmit, can you just talk about the source of the SG&A savings and how you think about the opportunity to continue to stay laser focused on costs as we get into the first half and then the second half of the year? Thank you.

Sure, Jay. As you've seen both during the pandemic and when things turn tough in the second half, we went after controllable costs big time. And our focus on controllable cost starts with discretionary expenses. We slowed down hiring. We have slowed down hiring [423] [ph] through the year. Just being cautious. We are hiring where it matters. We talked about the Chief Digital Officer, Michelle coming on board. So, in areas where we think we can accelerate growth, we are still doing what is right, which is getting the right people, but generally across the board, hiring has slowed down. In terms of – and that's what led to Q4 SG&A being down year-over-year. The guidance reflects SG&A as a percentage going up, but that is largely driven by the volume deleverage. We're growing [1.5%] [ph] next year as against growth algorithm of 6% to 8%. And so, we're keeping a fair focus on discretionary costs and keeping it low from that perspective. I think where you are going to see a little bit of spend is really in the opening of stores. We're talking about 80 net doors, and growing e-commerce. And then first half, second half, I talked about spending a little bit more in advertising, but keeping the full-year as a percentage constant.

Okay. Thank you. And then maybe if I can ask one quick one. On the EPS guidance for the year, is there any buyback contemplated in that guidance?

Yes. There is – we're going to start slow, but there is buyback contemplated as it will spread through the year as against happening on day one. We've got probably a center to from an EPS perspective, not a lot.

Okay. Thank you so much.

Thank you. Our next question comes from the line of Omar Saad of Evercore ISI. Your question please Omar.

Thanks. Great job on the market share this quarter. A couple of quick follow-ups. Maybe you could dive in a little bit deeper on inventory. What gives you the confidence that you're going to get that down to a level where you're comfortable by the second half? And also, what is the ERP? Can we talk a little bit more about what the ERP implementation enables for you guys to do with your inventory? And then also any peaks on the [150th 501] [ph] product initiatives, you're going to do a lot of marketing around that, but are there some new product initiatives around the 501 that we can look forward to as well? Thanks.

Hi, Omar. I think I’ll answer the first two questions, inventory. So, inventory up 58%, if you exclude the build-up for the ERP and the early receipts, it's up 35. It's the thing that we did very quickly early on is we cut the buys for the first half and they're down 25%. And so, I think that's in an essential part of what we think gets us to normalize inventory levels by the end of Q2. The other piece is our inventory is generally healthy, a large chunk, especially the stuff you build for the ERP has – is largely a stuff that we can sell through multiple season. The only other fact, I think that's important to note, the buildup of the inventory for ERP, which is largely oriented to U.S. wholesale customers, we have the orders for most of that. So, that just flows through, and so those are the things that make us believe that we can get inventory back to normal levels by the end of Q2. To your question about the ERP. And as you know, a lot of retailers are upgrading the ERP. The old ERP, the SAP ERP was really something that was built for wholesale companies or brands. As the model evolved into more a DTC model, the new ERP actually provides from an operational perspective, lot of visibility and how that is run. The one we are implementing is on the cloud. The big change in the ERP and what we're seeing in Canada, Mexico, because I tell people it's not a technological solution, it actually has to lead to some real change in the business. It's really access to data and data on a real time basis. So, our commercial people, our operations people get access to data and they can then leverage the data to actually drive business. I mean, I haven't modeled all that in our algorithm, but those are the benefits we are really seeing. Inventory management gets a lot better and handling direct-to-consumer gets a lot better.

I'll take the 501 just real quickly. We have a year-long plan, kind of mapped out with product marketing. It's very, very holistic. We're going to bring product freshness and innovation. We're going to pay homage to a number of items right out of the archives. So, just to give you a flavor of some of those, we're going to do several limited edition drops. One of them includes, kind of what the original 1873 XX Waist Overalls, which was the very [first pair of] [ph] Levi's Blue Jeans ever sold. We're going to be doing, kind of reincarnations of those. That's going to be out there. We're launching the Men's 501 1954 jean, the Women's 501, the Original Women's 501, which launched in 1981 on both Vintage fits and 100% cotton. The [1954 501] [ph] is really trend right for right now. It's amazing. The 1981 women's jean was the first women's 501. We've also got some innovative 501’s that we're going to launch. We've got a plant-based 501 that is real sustainability, ecologically minded approach to the 501, which is comprised of 97% plant based and bio-based inputs. It's died in plant-based Indigo. You all have probably picked up the news that we've made an investment in Stony Creek Colors and that's with also with a 100% organic cotton made at Cone Mills, which is our oldest denim partner. So, just a lot of good stuff there. From a marketing standpoint, lots of center of culture stuff, music events. We've got a deep partnership with Rolling Loud. Celebrities influencers, advertising kicks-off at the GRAMMYs next weekend or following weekend, I'm really excited about the ads, you know more on that in a little bit, but we're putting all of our marketing muscle behind the 501 and celebrating the 150th. And everybody's got a great 501 story to tell.

Sounds great. Look forward. Thanks.

Thanks, Omar.

Thank you. Our next question comes from the line of Dana Telsey of Telsey Group. Please go ahead, Dana.

Thank you. Good afternoon. As you think about AUR for this upcoming fiscal year, how you're planning AUR go forward? And imbedded within the gross margin, how are you thinking about promotions versus within the channels, DTC and wholesale? Just one last thing, Chip you had talked in the past about wholesale accounts, whether it's a target or the others, what are you seeing in terms of order trends from the wholesale accounts? And how are you planning it? Thank you.

Yes. So, in terms of – Dana, in terms of AURs, we're not planning any major price increase. So, the AUR, so if you think about revenue growth, think about revenue growth being equally balanced between AUR and unit volume, for the AUR driven by mix more than pricing. If your question about promotion and dilution, I talked about a 50 basis points full-year impact higher in the first half, much less in the second half. And most of that is largely wholesale versus direct-to-consumer. We did some smart promotions and in our own direct-to-consumer business and is really resonating in terms of driving traffic. That's what driving traffic in our comp sales that I talked about. And Chip, I think…

Yes, what I would say on the wholesale trends is, right now, our assessment of wholesale inventories is that they're pretty clean and back to, kind of normal levels. And as we alluded to in the prepared remarks and also during the Q&A, we're seeing sell-through trends strengthen over the last couple of weeks in wholesale and that should bode well for replenishment orders. The other big thing that we got coming up here as Harmit has talked about in the U.S. is the ERP implementation, which is going to have a dynamic between the second quarter and the first quarter. As we shift customers ahead of the ERP conversion where we have to take the distribution centers down for a couple of weeks. And so that will have a dynamic between the first quarter and the second quarter.

Thank you.

Thank you. Our last question comes from the line of Ike Boruchow of Wells Fargo. Your question please, Ike.

Hey, thanks everyone. Harmit, congrats as well. I guess, I'll just go back to the inventory. I guess, Harmit, I'm not trying to [nitpick] [ph], but you're saying now that with the inventory of [58%] [ph] everything is in line with your expectations. And by Q2, you're expecting inventory to revert back to, I guess normal. On the last call, you said you expected inventory to revert back to in-line with sales growth in Q2. You're guiding sales growth down in 2Q. I'm assuming that's not where you're expecting inventory to go. So, it just seems like something is a little bit different than three months ago on inventory. I'm trying to just figure out exactly if you could elaborate a little bit more on the pacing of inventory or if there's anything that's kind of changed a little bit, it'd be helpful to understand?

I mean, we're just being cautious Ike, given the macro environment. And so, nothing dramatically changed. Everybody is worried about holiday. Holiday for us is actually quite decent. And as I mentioned earlier, most of the inventory that has been built is inventory that's core, passes through season-to-season. And that's why I think, you know in our reflection of getting to normal levels by the end of Q2 is how we're thinking about it.

Got it. Thank you.

Thanks, Ike.

All right. I guess we will wrap it there. Thank you all for dialing in. It's been a pleasure talking to you and we look forward to speaking with you again at the end of our first quarter of fiscal 2023. Take care. Thanks.

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