Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company Fourth Quarter and Fiscal Year-end Earnings Conference Call for the period ending November 26, 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.

Thanks, Latif. Thanks, everyone, for joining us on the call today to discuss the results for our fourth quarter and fiscal year end 2023. Joining me on today's call are Chip Bergh, our President and CEO; Michelle Gass, our President and incoming CEO; and Harmit Singh, our Chief Financial and Growth Officer. We have posted complete Q4 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 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 measures 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 our 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 for joining us this afternoon. As you know, this is my last earnings call. I want to acknowledge what a privilege it's been leading this company over the last 12 years. Over this time, we've transformed the company, and I leave proud of all that has been accomplished. We revitalized the Levi's brand by putting it back at the center of culture. And today, the Levi's brand is strong globally, resonating again with younger consumers, which bodes well for the future. We evolved the company from being a predominantly US men's bottoms wholesale business to being a much more diversified business today with more than half of our sales coming from outside the US and 43% of our sales coming from our own direct-to-consumer business. We now have a meaningful women's business and evolved our brand portfolio with the addition of Beyond Yoga and we transformed our financials, enabling the strategic investments that drove profitable growth over the last decade. Our foundation is strong and much stronger than a decade ago. While we faced challenges over the last 18 months, particularly in the US wholesale channel, we ended the year on a high note with encouraging trends across the business. Our US business returned to growth, driven by a positive inflection in US wholesale growth for Levi's and continued strong momentum in the DTC channel, led by the strength of the brand. Michelle and Harmit will give you the full details on Q4 in a moment. My confidence in this company's future over the next several years is grounded on three things. First, the Levi's brand. We have what almost every apparel company wish they had, Levi's, the original. And yet the Levi's brand still has so much potential, and Michelle's focus on becoming a denim apparel lifestyle…

Thanks, Chip. First, I'd like to take a moment to share my incredible gratitude for all of Chip's support and partnership this year. Chip and I have known each other for about a decade now, but this year cemented the great relationship that we've built over the years. Over the past decade, under Chip's leadership, Levi's has returned to a position of strength around the globe and re-accelerated the growth of our business. This strong foundation sets us up to deliver long-term value creation. On behalf of the Board of Directors and our 20,000 employees around the world, I want to thank Chip for his exceptional leadership these past 12 years. What you'll take away from today's call is our business strengthened in Q4, and we delivered solid results, including a strong holiday season. The brand continues to have great momentum, helping drive full year company AURs up mid-single digits, and we have an incredible pipeline of newness and innovation coming in 2024 to continue to drive consumer demand. We have the right strategies in place, which we will accelerate by unlocking efficiency with the launch of our global productivity initiative, Project FUEL. We are seeing strong growth in our DTC and international businesses, both critical components of our growth algorithm. We have further strengthened the management team, who I am confident will drive our execution. While we're encouraged by momentum in our business, including continued positive DTC trends, moderating inflation and early improvement in US wholesale, we are taking a cautious approach to our outlook given the continued macroeconomic uncertainty. Let's start with our fourth quarter performance, an important indicator for how the company is positioned for 2024. We ended 2023 on a strong note, growing Q4 revenues by 2% to $1.6 billion and expanded gross margin 200 basis…

Thanks, Michelle. Let me start by thanking Chip for being a tremendous leader, thought partner, mentor and friend. Under Chip's leadership, we have grown the revenue of the company by nearly $1.5 billion and improved the structural economics of the business by improving gross margins by nearly 1,000 basis points. I look forward to partnering with Michelle and our incredibly talented teams as we scale the business to over $9 billion in revenues and grow operating margins to 15% over time. And with that, I will turn to our results. Revenue in the quarter was up 2%, led by an inflection to growth in the US, our largest market and 10% growth in our global direct-to-consumer channel. Comp sales saw seventh consecutive quarter of broad-based growth. And along with our franchisee partners, we opened a record number of stores in fiscal year '23, 105 net store openings, excluding Russia. We ended fiscal '23 with a system-wide store count of more than 2,400 stores. In the quarter, transitory headwinds, most notably product costs shifted to tailwinds, enabling us to deliver gross margin ahead of our expectations, along with the key contributors to the structural drivers of our gross margin, including DTC, international and women's, we expect continued improvement in 2024, as we progress on our path to 60% as discussed during our 2022 Investor Day. For the holiday period of November and December, we saw low single-digit revenue growth versus prior year, including 9% growth in our direct-to-consumer business and a continued positive trend in US wholesale and we saw robust gross margin expansion versus prior year. And while we have momentum entering 2024, we are taking a conservative approach to our outlook for the full year, primarily reflecting a cautious view on the macro environment, especially in the US and…

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

Hi. Chip, all the best. It's been amazing. Enjoy this retirement, and thanks for all the partnership and the work. It's been great.

Thank you, Bob. Thank you very much.

And then I guess, can I shift -- a question for Michelle. On the US wholesale, I think the performance was definitely better than we thought. I think the return to positive earlier than we thought. Can you just spend some more time on exactly what drove it back to positive? And do you really think this is a change in trend? And can you just maybe spend a little more time in US wholesale for the first half, just some of the drivers and the expectations there? Thanks.

Yes, you bet, Bob, great to connect. First, let me just say, we're really pleased with the quarter. I mean, return to growth, we are up 2% overall. The Levi's brand overall was up 4%. I know I said it in my remarks, but this is a multi-decade high really driven off of the strength of the brand globally. And then in particular, to your question around wholesale, we're encouraged. As you said, the US wholesale business for Levi's inflected to growth, it was up 5%. And overall, the actions that we took this past year, they're getting traction. They're working. We took a very surgical approach to some price reductions, as you know, just [indiscernible], and we're seeing volume gains there. Secondly, very importantly, we're overall improving our execution with fill rates returning to normalized levels, so that's improving in-stock rates with our key customers and we're delivering newness. We had a lot of newness hit the floor in Q4. We felt good about that in DTC and we also felt good about that with wholesale. So net-net, overall, as a company, we're exiting the year on a strong note and US wholesale, we're encouraged. But as it relates to that channel, we're not declaring victory yet. There's been a lot of volatility this past year, some in our control, some outside. And so we are taking a cautious approach as we look forward. But surely, we're going to lean into every and all opportunity as we see it.

Great. Thank you.

Thanks, Bob.

Thank you. Our next question comes from the line of Paul Lejuez of Citi. Please go ahead, Paul.

Hey, thanks, guys. Curious if maybe you could talk a little bit about the Europe business, how it performed relative to your expectations and specifically in the holiday period, the November-December period. Also, if you can address the issue in the Red Sea, if you're seeing any impact from what's going on there? Thanks.

Yes. Sure. So, I'll take the first part of that, which is Europe and then Harmit will talk about the Red Sea. I'd say overall, Europe has been tough for us this year. I mean not unlike the US, there's been macro headwinds that especially impacted us in the wholesale channel. Overall, we did post modest growth and we're planning that business modestly up in the coming year. It is -- continues to be a tale of two parts. One is our brand continues to be especially strong in Europe. We see that in our DTC channel, which was up 10% for the quarter. E-commerce is on fire. That was up 33%. So, a lot of great work happening in that business around both driving traffic, conversion and loyalty. And again, similarly, we're seeing great engagement with our consumers in our stores. Really, the challenge for us in Europe is around the wholesale channel. Some customers are in financial distress. And there's been just an overall in key parts of Europe, a challenging backdrop with the consumer. All that being said, we're working closely to ensure that we're delivering relevant products. We have a lot of newness coming in, especially in the back half of the year in Europe. And we're encouraged by pre-book. Pre-book is actually positive for the back half of the year. And what's resonating is some of our new strategies around denim lifestyle, denim dressing, so denim skirts, denim dresses. And then given that the weather was a real challenge for us, especially at the beginning of the quarter, we're making sure that we have plenty of seasonally relevant products. So, introducing Performance Cool, lightweight denim as I shared in my remarks earlier. So, the areas we can control, which is around innovation and brand strength, we are leaning in to make sure that we can show up in a great way.

And, Paul, to your question about Red Sea, first, a big shout out to our operations and commercial teams. They're working around the clock and the finance teams from a costing perspective. So, just when we thought we were getting out of the wood of supply chain issues, we have this. But we have experience in resolving some of these things. We've activated our contingency plans. At this point, we are seeing a 10- to 14-day increase in transit times. It's not going to break the bank. We're working through it as we speak. We've already shifted some product to go through the West Coast instead of the East Coast, and that's easing some of this impact. In terms of freight costs, we do have long-term contracts. Roughly 70% of our ocean freight is under three-year contracts. The rest is one-year contract. And so we are doing our best to offset it from that perspective. If the current crisis continues through the second half of the year, there is some risk to COGS. But for example, in our guidance that one has provided on gross margin, we haven't necessarily built in, for example, the exit of Denizen, which will help gross margin. So that will help offset it. The FUEL program is out there. We're working through sizing some cost benefits and so there are a couple of things that we're playing around just to make sure there's enough contingency should this crisis continue.

Thanks, guys, and best of luck, Chip and Michelle.

Thanks, Paul.

Thank you. Our next question comes from the line of Jay Sole of UBS. Please go ahead, Jay.

Great. Thanks so much. Two-part question. One, can you just maybe dive a little bit into Asia? And maybe just walk us through some of the different countries, what's going on there? What drove the business? And then on the $100 million of cost cuts, is that a number that's sort of an annualized number where you'll see sort of a run rate of, say, $25 million by 4Q or do you expect to achieve the $100 million of net cost cuts this year in total? Thanks so much.

Yeah. So, I'll answer both. On the $100 million, $100 million is in '24. It starts in Q2 and then accelerate as the year progresses. We haven't yet talked about '25. The program has just started, and so you will see benefits in '25. I mean the entire objective, as Michelle mentioned, is as we make this pivot to a DTC-first company, we've become a lot more agile and a lot more smarter from that perspective, Jay. So that's the answer to your first question. On Asia, Asia continues to see strong growth. We're ending Asia up 18% on a full year basis. Yes, Q4 was slightly not as strong. And there was some timing, I would say, in two markets between Q3 and Q4, but I feel strong about Asia. China, for example, was up 13%, up 21% for the year and profitable which was great from that perspective. In China, as an example, we have just initiated a local product engine. And the early read from that, given the feedback we've got from our franchisees and the folks in the ground is very, very positive. And so as we think about the outlook for Asia, we're signaling as part of this outlook, high single-digits. It's probably a little lower than the low double-digit we had in Investor Day, and that's largely because Asia, you all may not know this, but Asia also oversees the Middle East. And given the Middle East crisis, we're just being cautious, you never know how long that continues and [indiscernible]. So, we're just being careful about that.

Got it. Thank you so much. Very helpful.

Thank you, Jay.

Thank you. Our next question comes from the line of Matthew Boss of JPMorgan. Your question please, Matthew.

Great. Thanks. Chip, congrats. You'll be missed.

Thanks, Matt. I'm going to miss all of you, too. It's really been a pleasure working with all you guys and gals.

So, Michelle, could you maybe speak to global health of the denim category as you see it today? Any key fashion trends that you see emerging into 2024? And if you could just elaborate on the timeline for the expansion of the lifestyle opportunities that you cited. And then, Harmit, on the gross margin side, how best to break down product cost recapture within your gross margin guide relative to mix and full-price selling as we build up the gross margin for 2024?

Sure. So, Michelle, after you.

Yes. Hey, Matt, great to connect. So first, let me start with the denim category overall. Globally, denim category was up about 5%, mid-single digits this year and that's actually planned to continue as we look forward. So, we're excited about that, clearly, as the category leader. We continue to maintain our number one share position across men's and women's together by a significant margin. So, as we continue to invest in the brand around the world, that continues to be really important. And then to your point around fashion, I'd start by saying that we had a great year on the women's side. For overall FY '23, the Levi's women's business was up 4%. And for Q4, Levi's women's was up 9%. So, we've long said that we lead the category trends. And again, this past quarter demonstrated that. And as we lead the trends, we're seeing it resonate with the consumer. A lot of the low loose-fits are really driving the business. On the flip side, our Ribcage Bell did really well. So, we're offering a lot of diversity in the line on the fashion fit, everything from the higher rise to the low rise. And -- but as I said, the loose and baggy continues to be relevant and we're anticipating that as we look forward into the year. The other piece we're really excited about. I mentioned it in my remarks, is lightweight denim. As temperatures get warm, we want people to be in Levi's year-round. That impacted us this past year. So, we're going a lot bigger and deeper on things like Performance Cool and lightweight denim and have a lot of great fashion offerings for women there. And then the other part of your question is around the denim dressing, I think, especially relevant, again, to fashion in women because we do see a big opportunity in categories like skirts. Skirts is actually a growing category, quite significantly. Skirts, dresses, tops and this past quarter, we saw dresses and skirts up 50%. And the team, as we look at the pipeline this coming year, we've made much bigger investments in those categories, both in DTC and in wholesale, and our key customers are responding as well in terms of their open to buy. So feel good, feel really good as we look forward.

And, Matt, to your question, let me just break up Q4. I know it's a favorite question from some of my sell-side friends, and I'll talk '24. So Q4, up 200 basis points. I'd say broadly, product costs, about 140 basis points, mix about 75, 80 basis points. And then favorable FX, we were selling more full price, that's probably 80 basis points and then it was offset by pricing reductions we initiated in the quarter three, that's about 100 basis points of a drag. So that's Q4. As we think about next year, I think product costs, probably 140 basis points to 150 basis points tailwind. It's not higher because we're going to be anniversarying this in Q4 of 2023. The pricing actions we anniversary at the end of H1, but the impact which is a drag in gross margin is about 40, 50 basis points. And then between mix, off-price, a little bit of airfreight, it's 30 to 40 basis points of tailwind. So that's what breaks up the 140 basis points to 150 basis points gross margin for 2024, accretion for 2024.

Great color. Thanks.

Thank you, Matt.

Thanks, Matt.

Thank you. Our next question comes from the line of Dana Telsey of Telsey Advisory Group. Your question please, Dana. [Operator Instructions]

Hi. Best of luck, Chip, you'll be missed and hello, Harmit and Michelle. As you think about the wholesale business -- hi, Michelle. As you think about the wholesale business in each of the different regions and you think about the path through 2024, given you talked a little bit about the improvement in the US, anything you're doing in terms of activating it differently by region and how you're thinking of pricing by region and how you build up the gross margin? Thank you.

Sure. Why don't I talk about the sales side of it and Harmit can also talk about the margin and profitability, both of which were optimistic, but we're being cautious as we enter the year. So, I think that really the wholesale conversation is largely across the US and in Europe, both of which, as I was saying earlier, we've had -- it's been a volatile past year, as I was talking about earlier, but we feel good about the areas within our control. The pricing we took, we have no additional plans to take further pricing really across the board. We feel good about what we did do in the US. We're seeing the traction there. Specific to the US, we had a lot of congestion this past year in our distribution centers. That is behind us. And the inventory positions are really solid in the channel for us and for our customers. And so I believe we are primed to take advantage of the demand that's there. And as we presented newness to our key customers, they're excited. So, we talked about lightweight denim, that's across all channels, Performance Cool. And then also, as I was mentioning earlier in my remarks, we have a new non-denim offering that's going in both channels, wholesale and DTC, our active Tech Pant, which is non-denim, have a lot of performance attributes that truly is a product that people can wear out and about on a hike, in the office, et cetera, multiple colors, five pocket, chino. So that is a big launch here in the US. We'll see how that goes. That could be a global opportunity. And then specifically to Europe, to your question, again, we are leaning into the consumer demand, but we're also being realistic given the macro headwinds there and the pressure that we see with some of our key customers. But similarly, we've been working closely with them on innovation and needs and there's been great response on lightweight denim. As I was talking about women's fashion, so the low loose response to denim dressing. And to me, a really key data point in Europe wholesale is that our pre-book for the second half is positive. And so as we look to the year, we are optimistic to see an inflection point in the back half of the year as it relates to Europe wholesale. And candidly, for both markets. And that's complemented, of course, with the strength in our DTC business, which continues to perform very strongly.

And, Dana, to your question on gross margin across regions and pricing, we haven't built in a lot of pricing in '24. We're just conscious of a value-conscious consumer and the pricing we have taken. We haven't built in price reductions. And what we did in the US is it. So, as you think about AURs, the growth and the channel mix, higher DDC, as an example, and higher international offsets the price reduction impact that we see in the first half of pricing actions we took in the US. If you think about across the regions, I would say Latin America and Asia see a little bit of FX impact on gross margin. And as you think about the US in H1, there is the anniversarying of the price reduction we took. So, you'll see that margin impact in the US as against other regions. So that's just a little bit of color.

Thank you.

Thanks, Dana.

Thanks, Dana.

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

Good afternoon. Thank you very much for taking my question. I want to follow-up on Jay's question on the $100 million cost savings program. Harmit, I think there's some savings across the COGS line and this SG&A line. Can you just kind of give us a rough shape of that across the $100 million? And then a second quick question here. Bangladesh, I think is an important sourcing hub. They did raise minimum wages nicely, over 50% a few months ago. Just curious to know if you're going to see somewhat of an impact on that or you even able to offset that from the wage hikes? Thank you.

Yeah. The -- Laurent, the $100 million is mostly SG&A. There's probably a minor in COGS, but mostly SG&A. At this point, as we continue the program, we're going after driving more productivity in assortments, et cetera. So that's going to probably come over time. To your question about Bangladesh, yes, we did see it, our COGS guidance assumes the inflation that you're talking about.

Great. Thank you very much.

Thanks, everyone for joining the call and we look forward to speaking with you in April.

Thank you.

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

Thank you.