Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company's Third Quarter Earnings Conference Call for the period ended August 27, 2023. 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 third fiscal quarter of 2023. Joining me on today's call are, Chip Bergh, our President and CEO; Michelle Gass, our President; and Harmit Singh, our Chief Financial and Growth Officer. 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'd like to remind you 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 our Form 10-K and the information included in our 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. Reconciliations of our non-GAAP measures to their most comparable GAAP measure are included in today's press release. Finally, this call is being webcast on our IR website and a replay of this call will be available on the website shortly. Please note that Chip, Michelle, and Harmit will be referencing constant currency numbers unless otherwise noted. 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. Good afternoon, everyone, and thank you for joining us. I'm delighted to have Michelle joining us on the call today. I'll start with some high-level comments overall on the business before passing it to Michelle, who will share her impressions and thoughts on the business after nine months. Harmit will then take you through the financials and guidance and I will wrap up before Q&A. Overall, we had a solid quarter despite the challenging environment. Reported revenues were flat to prior year and down 2% on a constant-currency basis, as the strong double-digit growth of our direct-to-consumer business was offset by continued softness in the wholesale channel, particularly in the U.S. Gross margins exceeded our outlook even as we continue to make excellent progress on inventory, with inventory growth now roughly in line with revenue on a comparable basis. Our disciplined execution, combined with the margin upside, enabled us to deliver EPS consistent with our expectations. There are three main points I want to make about the quarter and our business overall. One, the Levi's brand continues to go from strength to strength and arguably is the strongest it has ever been. This is backed up by several proof points. First, AURs continued to grow despite the pricing action we took in the U.S. wholesale at the end of Q3, primarily driven by mix. We continue to grow share with the higher income consumer and see strength in our full price mainline business, with strong sales momentum of our Tier 1 and Tier 2 products. In addition, the Levi's brand continues to gain U.S. market share, up in men's, women's and our core 18 to 30-year old age group. Finally, we continue to see strength in our brand equity metrics, growing our brand consideration and unaided awareness…

Thanks, Chip, and welcome, everyone. Since I joined the Company in January, I have fully immersed myself in our business, getting to know our Company, our customers, our consumers, and our employees around the globe. We have a vibrant global business, phenomenal brands, a fantastic culture inherited and amazing people. It's an honor and privilege to be part of this incredible organization. Over the past decade, the Company has made great progress and I see tremendous opportunity to build on this strong foundation in the years ahead. I joined LS&Co. because of the global potential of our business and our brands, particularly the iconic Levi's brand as well as the Company's longstanding commitment to profits through principles and doing right by our employees and consumers. Now, nine months in, my optimism and conviction has only grown as I have learned more about the strength of the brand and our growth opportunities. After seeing this business up close and working with our talented team, I believe now more than ever that our strategic choices and goals introduced during our Investor Day in 2021 being brand-led, taking a DTC-first approach, and diversifying our portfolio, are the right ones to generate long-term value for all of our stakeholders. Today, we are at an important inflection point, and by leaning into our strength, I have strong conviction that we will unlock the next decade of profitable growth for our Company. As part of our strategic pillars, I've observed three key areas that will be instrumental in helping us achieve our ambition to become a $9 billion to $10 billion Company. First, accelerating international growth. Second, becoming a Denim apparel lifestyle business, and third, transforming our operating model into a best-in-class DTC-first organization. First, I'll start with the growth potential internationally. Levi's is the number-one…

Welcome, everyone. I will begin my comments today by sharing three key observations about our business and our results before diving into the numbers. First, we are achieving strong progress in our areas of strategic focus. In the third quarter, we sustained prior year revenues by driving growth in our direct-to-consumer and international businesses. We are seeing our strong momentum in these businesses continue and we exited both July and August with positive overall growth as a Company. I can also share that we are seeing our business in the US improve relative to quarter three, driven by an improvement in US wholesale. Second, our operating discipline is driving results. In Q3, we brought inventory growth down to just 1% on a comparable basis, but not at the expense of gross margin, which exceeded our expectations for quarter three and enable us to deliver adjusted EBIT in line with our outlook. Finally, as Michelle mentioned, over the coming year, we will accelerate our transition to a DTC-driven business by creating a more nimble and consumer-centric organization to support our evolution into a global powerhouse in retail and e-commerce, while supporting our low-growth wholesale business. Given the strategic acceleration to DTC and a smaller US wholesale business, we have initiated a broad-based review of our overall operating model, and our entire cost structure. We expect this review will result in material cost and working capital savings, including increased profitability and productivity of our DTC business. As we have demonstrated in the past, we are confident that these efforts will solidify our long-term adjusted EBIT margin goal and we plan to share more details about the impact of this initiative, next quarter. Now, let's turn to our third quarter results. Our DTC channel posted 13% growth lapping high single-digit growth in Q3…

We continue to control the controllables while navigating an environment with a heightened level of macro uncertainty around the world. We are confident in the strength of our brand and the newness and innovation pipeline we have coming. Our actions to stabilize US wholesale are working and our continued strong performance in global DTC underscores the strength of our brand and deep connection with consumers and is enabling us to deliver near-term results while laying the foundation for sustainable, profitable growth in the years ahead. And as you've heard from Michelle and Harmit, given our momentum, now is the time for us to accelerate our transition to a DTC-driven business by advancing the organizational structure to support our ambition. My confidence in our leadership and our team remains extremely high and we're focused on executing with discipline and rigor on our priorities. Latif, with that, you can open the floor to Q&A.

Thank you. The floor is now open for questions. [Operator Instruction] Our first question comes from the line of Bob Drbul of Guggenheim.

Michelle, welcome. I guess, if I could, just like to focus a couple of questions for Michelle, two-part one question. What surprised you in your first nine months at Levi so far? And I guess the second part of it would be, just given your background, what steps do you think are necessary to really stabilize the wholesale business? Thanks.

Thanks, Bob. Thank you for the question. So, first, in terms of being surprised, well, I'd first say that, I just couldn't be more excited to be here. It is an incredible Company. It's one of the most iconic brands in the world, awesome opportunities for growth ahead and an amazing team. And so it really is just an honor and privilege to be here. I'd say, what's been most surprising is, I think back to the seat I held before and I knew Levi's much more as a U.S. wholesale bottoms business. And I spent the nine -- last nine months traveling around the world with Chip and Harmit and others of the team and I've just honestly been blown away by the power of our brand internationally. The DTC presence, how our brand shows up much more as a lifestyle brand, candidly, and many other markets outside of the U.S., how premium we are, the resonance with youth that [Technical Difficulty] center of culture, we are across all of our markets. We have got the power of the global brand, but then how the local market adapts to be highly relevant. And while we're investing and growing the brand, our partners are too. I mean, as you know, we've got many franchisee partners around the world and through our travels have had the opportunity to hear from a number of them. And they are really passionate, really committed, and they too are investing. I mentioned India on the call where they invested a lot of dollars in the pandemic to dramatically grow our stores and grow our footprint. So, yes, so I'd say for me, one of the biggest takeaways has been that and I just see a ton of growth potential. And as I mentioned in my…

Thank you. Good luck.

Thanks, Bob.

Thank you.

Thank you. Please standby for our next question, which comes from the line of Jay Sole of UBS.

Great. Thank you so much. Harmit, you mentioned going through an overview of the cost structure, maybe outline a little bit more or elaborate a little bit more on what you mean in terms of quantifying the impact that you see. And maybe if you put it in the context of the adjusted EBIT margin guidance of 15% that was given as part of the long-term management targets of the Investor Day in June '22 that would be super helpful. Thank you.

Sure, Jay. Michelle talked about how we are making this faster pivot to DTC. And we believe that will accelerate our growth. While it's early, we recognized that this company has a lot of opportunities to be faster, more agile, to be efficient, including shorter go-to-market calendar. So let me give you an example. Before Michelle arrived, we didn't have dresses and skirts, and [Technical Difficulty] of this year. You've got it, right? That is acting more like a vertical retailer versus a wholesaler, who has go-to-market [Technical Difficulty] over 12 to 15 months. We are going to take a hard look at our assortment and drive more productivity. Like a lot of the companies, we also have a lot of tail. But the tail doesn't move as fast. So taking a hard look at that, I think, is critical. So we are looking at all processes, we are looking at go-to-market, and we are going to be a lot more consumer-centric. In terms of areas, we think this drives more productivity in our DTC operations and profitability. We think it does drive a better SG&A structure. It improves our supply chain operations, including COGS and clear working capital improvements as we drive higher turns because we are not satisfied. While we get to below inventory level, below last year inventory levels at the end of the year, we think there is a lot more opportunity. And I know I really understand, if I was in your shoes, you want us to quantify this fairly quickly, but what I will tell you is that, give us through the end of quarter four when we release our expectations for next year, we will back [Technical Difficulty] the impact. Your question about the 15% EBIT margins, we are completely behind that. We are going to be a Company that has 15% EBIT margins over time. This focus, we are looking at the entire cost structure of the Company, just solidifies our part to get there and get there the right way and get there during the timeframe that we believe is acceptable to our long-term shareholders. So we are committed to the 15%. This helps get us there and [Technical Difficulty] and then really make this Company a lot more efficient and agile.

Got it. Thank you so much.

Thank you. Please standby for our next question. Our next question comes from the line of Matthew Boss of JPMorgan.

Great. Thanks. So, Chip, maybe on global health of the brand and category. Could you just elaborate on the sequential sales improvement and speak to current demand trends that you're seeing across channels in North America and Europe today? And then for Harmit, could you speak to inventory health across distribution channels and just the puts and takes that are embedded in your fourth quarter gross margin outlook relative to three months ago?

Sure. First of all, Matt, I'll try not to be too repetitive with what was in the prepared remarks, but we're seeing a dramatic or stark contrast between the results in our direct-to-consumer business versus wholesale. So direct-to-consumer up pretty strong double-digits, up in every region, up in mainline, outlet, and e-commerce, plus we comped positively in each chain in each region and each channel on each region. So really strong results there during the quarter, and wholesale down pretty soft. And as we've kind of been digging into this, one of the things to consider is, our DTC assortment is very, very broad, tops, bottoms, men's, women's. We can also be pretty agile in responding to it. We're going to work on becoming even more agile, as Michelle said. But it's been a pretty hot summer as everybody knows. And you all have known me for a long time, I barely talk about the weather report when I'm talking about our business results, but I think there is no doubt that our wholesale business was somewhat impacted by the really, really hot summer, because the wholesale assortment is pretty much denim bottoms. We did take the pricing action late in Q3. So, we announced it, we first talked about it on this call. We announced it to our customers and it went into effect in early August. Every customer kind of executes it on their own timing and they execute it their own way and that kind of [Technical Difficulty] throughout the month of August. So what impact we did see on those six items where we took pricing actions here in the US. It was late in the quarter, but I will say that we are optimistic with what we're seeing. We are seeing an improvement in trends…

And Matt, to your question, I think you asked two questions, one was inventory and the second was gross margins for Q4. So, on inventory, we ended the quarter better than where we thought we'd be. The US is actually down relative to last year already, which is great given the large wholesale presence here. Look -- we also look at trade inventory in terms of number of months of our key wholesale customers and that is better than a quarter ago. So, that inventory situation is getting better. Inventory in Europe is in a good spot, because Europe was a little soft, so I think overall, largely because a large piece of our assortment is core and we sell a lot of core, I think, we are in a good spot from that perspective. To your question about gross margins, which we are getting better for the business, we beat gross margin expectations in quarter three largely driven by the continued strength in our direct-to-consumer business. If you think of the puts and takes, I know it's a key question that my friend Lauren and you asked, which is, you know, so what drove gross margins relative to expectation, largely the growth in DTC, which is structural and here to stay. I think relative to a favourable channel mix, favourable FX, and lower airfreight were the tailwinds. The headwinds were largely the pricing actions that we have initiated and lower full price sales relative to a year ago. Thinking about quarter four, quarter four we expect to be ahead of last year in gross margin, still ending the year slightly down, but quarter four, as I said in the prepared remarks, gross margin should be 300 basis points higher than 2019 and so what's -- what are the puts and takes and see the tailwinds on gross margins in quarter four, product costs a little better largely because commodities have come back and you'll see -- start seeing this benefit essentially in '20 -- in '24. Lower airfreight and lower promotions relative to a year ago. I mean quarter four last year was very promotional. But our expectation is that, since trade inventory is in a better spot, our inventory is in a better spot, Michelle talked about us, you know, having our -- a better pipeline as we head into a holiday season across both channels, that should drive a lot more innovation interest. So I think those are the factors that we think really help lift gross margins year-over-year in quarter four.

Great. Best of luck.

Thank you.

Thank you. Our next question comes from the line of Oliver Chen of TD Cowen.

Hi. Thank you. Hi, Chip, Harmit, and Michelle. Our question was about capabilities and the capabilities you may need to prioritize as you become more of a lifestyle brand with non-denim execution as well and that likely ties into your thinking around the agility and chasing capabilities, which will be very powerful. A follow-up was on fill rate. It sounded like fill rates are where you want them to be. What's happening there and you don't expect any more changes there, are you happy with that, because it's been a work-in-progress for the past few quarters. Thanks.

Hey, Oliver. Good to hear your voice. Michelle here. So I'll take the first part of the question on capabilities and then I'll hand it over to Harmit on fill rate. So, yes, like I said, I'm super excited about the opportunities we have, I'd say both, well, all of the opportunities we have, whether that's growing our international business, it's DTC, and then, of course, category expansion and we're building capability across all fronts, candidly. I think related to I'd put DTC together with the lifestyle category piece in that, in both cases, to operate like a vertical retailer, you need speed and agility. And we talk about more broadly making this pivot, it's operational and it's cultural. It's how we use data to drive real-time decisions. Capability-wise, I'll go on two fronts, one is it relates to products which I think was largely around your question. It's really end-to-end. So we start with our go-to-market timeline. It's too long today. It was built over years highly successful, but was built to serve a US wholesale bottoms business, that can move a lot slower than if you're a direct-to-consumer global denim lifestyle business. And there should be multiple tracks of timelines across different products. For example, as you know, tops and especially fashion tops operate on a much faster timeline than say your core 501 denim bottoms. Not saying we're going to become fast fashion, that we're not going to, but getting inside of a 12-month timeline is imperative for us to both drive relevance in these categories and then make sure we get the kind of turns that we need in a DTC business. So there is a lots of teams working on kind of unpacking and refining what this new go-to-market process will be and there has…

Yes. On fill rates. Oliver, let me just start by saying, you know, we really have a lot of great people, a lot of good talent running our DCs around the world and a shout-out to them. It's been tough, largely because we had more inventory. We really have been working collectively as a team to try and decongest that -- our DCs, so that we could start servicing our customers and our stores. And so as -- and that sequentially improved as we exited quarter three. It's got a lot better in September and our view is that by the end of -- end of quarter four, this issue is behind us from that perspective. We are also -- a couple of things, we have opened a new DC, the digital DC in the East Coast and that is a service our e-commerce platform. That makes a difference because we have more capacity. And our focus right now is to service our full price SKUs, to service DTC and ensure that as we get ready for the holiday season, the newness is on the floor. And so, I think to your point, it's [Technical Difficulty] every day and the teams are committed to ensure that we don't miss a sale.

Thank you. Best regards.

Thanks, Oliver.

Thank you. Our next question comes from Laurent Vasilescu of BNP Paribas.

Good afternoon. Thank you very much for taking my question. And Michelle, it's great to have your voice on the call. Chip, Harmit, I would love to ask about the strategic pricing actions you took in your Tier 3 distribution in US. Just a little bit more color around just what you saw in terms of price elasticity. Are you confident that it's really -- it should be isolated into -- in the Tier 3 distribution or would you potentially revisit this across other silhouette styles and points of distribution? And then maybe just another question, if I may, I would love to hear Harmit, if we go back to 2020, '21, you talked about $200 million of gross savings. I know you're not necessarily prepared to talk about it, but could we see some kind of magnitude of that type of savings as you think about 2024 and beyond?

Yes. I'll take the first question on pricing. And again, I'll try not to be too repetitive, but I'll keep it pretty brief because the data is still pretty fresh. As I said, you know, we announced the price increase in early August. Each customer implemented it on their own timing because it was based on sell-in. And so the timing is kind of been rolled out or weaved out customer-by-customer. But where we have seen customers take pricing on these six items, we have seen the trend on those items being flat. We have seen a distinct change in trends. It's still really, really early though. I mean and we still have some customers, we have one customer that just put the price into place, the reduced price into place this past week. So it is still really early days. And that's why I'm trying to temper this with a little bit of, not getting too excited about it, but I will say we were very, very disciplined in trying to really understand what were the most price-sensitive items in the line and adjusting the price on those items and those items only. And I feel pretty confident that we picked the right items and that we're not going to have to go any furthermore. I know that that was a big concern that many had. I think we, you know, we've done a good job of isolating where we were really, really vulnerable and we addressed the price-value equation on those items. And our stronger items, as I said, the 501, we didn't touch the pricing on 501. So I think we're in a pretty good place right now. My mother said, never say never. So, we're not saying, we'll never take the prices down, but at the same time, I've got a pretty high degree of confidence that we're in a good place right now.

Yes, and Laurent, to your direct question, I'm not going to get into the numbers. But -- but you know, the fact we're speaking in the call, the fact that I've said is material, should -- should indicate to you that this is an important piece of our initiatives that the entire Company is focused on. The difference between this and the last time we did it and we have done it once or twice before, in fact, two times, and it's made a difference on operating margin. So we have history supporting us. But I think the difference in this case is that it's towards this pivot to DTC. So we are focused on how to drive more productivity in the whole store -- just focus on how to drive more of an improvement in working capital through inventory turns and looking at the cost. And so there is -- there is a difference. This is probably going to be [Technical Difficulty] than the past, but something that will sustain itself and really directed at strategically the evolution of this Company into more of a DTC Company.

Thank you very much.

Thank you, Laurent.

Thank you. At this time, I'd like to turn the floor back over to the Company for any closing remarks.

All right. Well, I want to thank everybody. We went over by just a little bit, but thank everyone for hanging in there. Thank you for your questions. I wish everybody, believe it or not, a happy holiday, because the next time we are with you will be in late January when we close Q4 and report our Q4 and annual results. Looking forward to that. And have a good holiday and we'll talk to you all soon. Thank you very much.

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