Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company's First Quarter Fiscal 2024 Earnings Conference Call for the period ending February 23, 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 first quarter 2024. Joining me on today's call are, Michelle Gass, our President and CEO and Harmit Singh, our Chief Financial and Growth Officer. We have posted complete Q1 financial results in our earnings release on the IR section of our website, investors.levistrauss.com. The link to the webcast of today's conference call can also be found on our site. We'd like to remind 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-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 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 Michelle Gass.

Thank you and welcome everyone to today's Call. The year is off to a strong start with both Q1 revenue and adjusted EPS coming in above our expectations. Revenues of $1.6 billion were down 8% on a constant currency basis due to last year's $100 million shift from Q2 into Q1 related to the ERP implementation in the U.S. Excluding this shift, as well as the impact from exiting the denizen business in Russia, Q1 revenues were flat. Adjusted diluted EPS of $0.26 came in better than our expectations driven by a 240 basis point increase in gross margin and prudently managing our expenses. Our performance this quarter reflects many proof points that our strategies leading with our brands, operating as a direct-to-consumer first business, and diversifying our portfolio are working. We are fueling consumer demand resulting in meaningful U.S. share gains in both men's and women, driven by newness and innovation, as well as continued strength in our core. We are continuing to see strong momentum in a global direct-to-consumer business, where we have now delivered eight consecutive quarters of robust comp growth. Our e-commerce business again achieved strong growth of 12% on top of mid-teens growth last year. And we're particularly excited about the continued acceleration in overall women's business which was about 14% in DTC globally for the quarter. We're encouraged by the performance of our largest market, the U.S. We saw sustained progress in DTC, which was up 10%, as well as continued stabilization in U. S. wholesale for Levi's brands, which was up low single digits. Stepping back, we are building a stronger business in the US, underscored by significant growth and operating margin expansion across channels in Q1. And revenue in the global wholesale channel while down was in line with expectations as the…

Thanks, Michelle. We deliver better than expected results in Q1 driven by continued outperformance in Global DDC and stabilization in US wholesale. Most importantly, we achieved these results while also improving the structural economics of the company. Together, these established a strong base for profitable growth for ‘24 and years to come. In the quarter, we delivered significant gross margin expansion and we continue to expect further improvement this year and beyond from the structural drivers of our strategies to grow DTC, Women and International and as transitory headwinds continue shift to tailwind. We delivered discipline cost management while also investing in our key growth initiatives. The productivity initiative we launched in Q1 will drive efficiencies across the company, both in ‘24 and ‘25, while positioning us to realize the growth potential of our business. We expect the combination of margin improvement and operating leverage to enable us to deliver sustainable bottom line growth, and the greater efficiency and our active inventory and working capital management is enabling us to generate strong free cash flow. This allowed us who return cash to shareholders to dividends, restart the stock buyback program and acquire our distributor in Columbia, all consistent with our capital allocation strategy. As we look ahead, based on the trends we are seeing in our business today, we are confident in our ability to deliver accelerated sales in H2 and a position to deliver continued improvement in profitability and margin expansion in 2024. As a result, we are increasing our full year earnings outlook. And with that I will turn to our results. Q1 net revenues were $1.6 billion reflecting continued momentum in our global direct-to-consumer channel, which grew 8%, up 25% on a two year stack and acceleration from Q4. Gross margin of 58.2% was better than expected…

[Operator Instructions] Our first question comes from a line of Bob Drbul of Guggenheim.

Hi, good afternoon. I was wondering, I think you mentioned on the call market share gains and some recent category trends. Just wondering if you could share some more around what you're seeing and where you feel like the market share gains have come from. Thanks.

Thanks Bob, thanks for the question. Yes, first of all, we are really excited about what we're saying in the category right now. So let's start with our biggest market in the US. That after a couple years of volatility we're seeing the jeans category actually stabilize and it's now flat to prior year. But I think most importantly we are seeing market share gains with the Levi's brand. In the men's category we saw two points of share gain and in women's we were up a point. And then underneath that some really great proof points around our strategies. First, we continue to be committed to driving a business with youth and our key target, the 18 to 30 year old, we're seeing share gains there. Around the middle income consumer, which is a big part of the market, 40% of the category, we are seeing the categories grow there as well as grow with Levi's. We're continuing to pick up share with that higher income consumer as we focus on elevating the brand. I think really attributable to everything we are doing to drive our initiatives in DTC in the U.S., DTC was up 10%. So within denim, we're feeling good. And I think you can look around even here in the US and it's a denim moment. I mean, there's a lot happening in denim and for Levi's we are the top, we are driving the trends. We're excited about everything we doing head to toe denim dressing and that's really resonating across our male and female customers. And on that note, we are expanding our addressable market. So we first start with this evolution from being all about denim bottoms to denim lifestyle categories like skirts and dresses, those are up triple digits in the quarter,…

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

Thanks very much for taking my question. Michelle, Harmeet, we know that you're encouraged by trends in Europe. There's a lot of fear on Europe since yesterday morning. So curious to get your take on what you're seeing in that market by region. Should we still see Europe grow low single digits for the year? And then separately, I know Beyonce's album was just dropped a few days ago, but curious to know if you are seeing any boost from her Levii's titled song.

Hey, Laurent. Michelle here. I'll take both your questions. Well, first of all, as it relates to Europe, as we shared on the call, it was really Europe wholesale, where we had a tough quarter there. And I'd say that was largely due to some of the macro pressures, as well as our own product deliveries. We feel like to the product side, we've corrected that. I'll get to that in a moment. But overall, we feel really good about Levi's in Europe. I mean, the brand continues to be very strong. We have many measures against our brand health. Our brand boasts the highest unaided awareness. All of our denim perceptions remain best-in-class. We're actually seeing increases in Europe on relevance, preference, and even head-to-toe denim. So those things are all headed in the right direction. And then a huge proof point for us, of course, is how the consumer is responding to our direct channels, both our stores and e-commerce. And overall, our DTC business in Europe, excluding Russia, was up 4%. I think importantly, we saw that accelerate during the quarter. And in February, DTC was double digit, and that carried on into March. And that was largely driven off of our new product drop. So what we're seeing really in many markets, I was just elaborating in the US, but in Europe as well, the consumers responding to the fashion we are bringing, so women's fashion, the looser fits, the baggy fits. The low rise, also the rib cage, all doing well. On Men's, we're also seeing the Baggy trend take hold. Our tops business is improving. So that new product is what's driving DTC and what we expect will drive also in the wholesale side. So while a softer quarter, this past quarter for Europe in wholesale, we're expecting improvement, especially in back half. And to me the biggest evidence of that is that our pre-books for Europe are up for the back half of the year. So we are expecting Europe overall to return to growth in the back half of year.

And Laurent to your question about full year, yes, we do affirm that Europe would be up low single digit.

And your second question on Beyonce. I would just say that denim is having a moment and the Levi's brand is having a powerful moment around the world. I mean, you see head-to-toe denim everywhere around the world, Western is really trending and Western trending in fashion and in music, as you just said. One of the things that really is significant about the Levi’s brand and we place a lot of emphasis and investment is making sure that Levi's brand remains in the center of culture. And I don't think there's any better evidence or proof point than having someone like Beyonce, who is a culture shaper, to actually name a song after us. So we're super proud of that, and we are very, very honored that someone like the Beyoncé would actually name one of her new songs.

Our next question comes from the line of Dana Telsey of Telsey Advisory Group.

Hi. Good afternoon, everyone, and nice to see the progress, Michelle and Harmit. As you talked about stabilization in U.S. wholesale, was it department stores, off price, the discounters, what did you see in US wholesale and what's your outlook going forward? And, Harmit, as you mentioned, inventory levels with the gross margin uptick in guidance for the year, any specific drivers of gross margins to go through the years, and any shaping of gross margin that we should be mindful of given compares to last year. Thank you.

Hey, Dana. Well, I'll take the first one, and then Harmit can take that second question. So as it relates to wholesale, really where we're seeing the improvement is I call it in full price wholesale. So it is in our partners largely in department stores and we're really excited with the progress. So for the Levi's brand, U.S. wholesale, this past quarter, we were positive. Second consecutive quarter of seeing positive sell-in and were also seeing improved sellout in that channel. And it really is a direct reaction to the actions that we've taken, say the congestion issues that we had last year in the supply chain are long behind us, so we're filling it rates we need to at normalized levels. I'd say the partnerships with our wholesale partners have been very, very strong. I mean this is an important channel to us. Levi's is an incredible brand to them. And Dana, I would say while we talk about rewiring the company or becoming organized around a DTC first mentality, it's not DTC only. Wholesale will continue to play a really important role to amplify our brand and to reach consumers where otherwise we wouldn't. So it was really important that we win together with these wholesale partners. But as I said, we're seeing momentum in both sell-in and sellout. And the single biggest reason is product. We're bringing a lot of newness to the channel, newness, we call it in our core denim bottoms, and the core is continuing to work. I mean, I mentioned earlier in the remarks that we're seeing great traction ongoing with the 501, but we are also in this denim cycle of looser, baggier, definitely seeing it women, but also seeing in men, so we were excited for men to expand their…

And Dana, the question on gross margins, strong start to the year that has allowed us to raise the full year expectation, as you've heard. So what's driving the strong start to the year? Product costs coming to normal levels, so if you think about the 240 basis points, about 150 basis point is driven by product cost. About a 110 is driven by the mix of DTC, half of that is the SAP ERP implementation that impacted Q1. Half of it is continued growth in our DTC business and the structural improvements in international, et cetera, as well as the strong women's business. In the quarter, FX was the headwind and, in the quarter, we are analyzing the pricing initiatives that we reduced prices in quarter three of last year. So that's really Q1. Q2, as you probably know, if you go back and look at history, Q2 gross margins traditionally are lower than Q1 largely due to channel mix is usually about 100 basis points lower than Q1, however, we expect Q2 to be around 58.2% and that is practically a record high right, the only time we had a higher margin in Q2 was last year because DTC was a bigger piece of the business, so the underlying factors which is product cost, lower product costs, lower air freight and others continue through Q2. FX was a bit of a tailwind a year ago. It's a bit a headwind this year and is largely a first half issue. So we expect H1 gross margin to be about 100 basis points better than a years ago. Second half of the year, gross margins should be up about 200 basis points largely because we would have analyzed the price reduction, and DTC momentum, we believe, will continue to accelerate. So that's helped gross margins. So that’s how we are thinking about gross margin between H1 and H2 and on a full year basis.

Our next question comes from the line of Jay Sole of UBS.

Great, thank you so much. Michelle, you mentioned in the prepared remarks that you saw a lot of opportunity to improve the core wall economics of the company stores. Maybe can you just elaborate on that a little bit? Where do you see the opportunities? And if you can put that in context, if U.S. maybe like the top three or four margin drivers that we see that get the margins at mid-teens level over the next few years, what would those be? Thank you.

Yes, I bet, no, it's a huge focus for us. As we think about the future of our business, the growth really coming from DTC, it's critical for us to get the structural economics of the DTC channel to work harder for us. And we have a lot of efforts afoot both in our stores and on e-commerce specific to our stores. I talk about first the top line drivers and then some of the other opportunities we had on profitability. But the first and biggest priority for us is to drive the top line. A, you get the top line benefit, of course, but B, it helps you leverage all your fixed costs, as you know, your fix real estate, fix labor, and the like. And as it relates to the topline drivers, I would say a couple things. Some of these are just, they're the basics, like making sure that you're always in stock on the key items. And the teams have enhanced better tools today than they did even a year ago, systems and accountability to make sure that on X number of top SKUs things like your 511 top washes or your low loose introduction for women or whatever those might be that we're not out of stock on the key sizes. And doing that has, as we shared the results, that's had a direct effect in some of the results we are seeing even this past quarter. Secondly is about innovation and newness and in a store if I'm just thinking about the store, the consumer wants a more comprehensive head-to-toe look and we're getting a lot more disciplined in how we are introducing newness literally on a monthly basis making sure it's all through the lens of the Levi's brand and the close and…

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

Hi, thank you very much. Hi, Michelle. Hi, Harmit. On Women's tops and dresses is a -- is clearly a big, nice opportunity. What's ahead for timing of that and how it can and will drive upside to the model and moving the needle even more. And as we think about your DTC first opportunity and strategy ahead, what do you think of speed and inventory management as well as the reality of markdown management and the cost method of accounting and making sure you're thinking about gross margin return on inventories as you become more agile and also balanced novelty versus core and also look to increase inventory flows and frequency to be agile with the customer. Thank you.

Okay, thanks Oliver. I'll take first and then Harmit takes a second piece. We're seeing traction already, Oliver, I mean, to the comments we made earlier, the DTC to be up 8% in the quarter, 25% on a two year basis, the momentum is actually accelerating quarter-on-quarter which is fantastic. As it relates to women, I called out, DTC up 14% overall, up 19% in the US. And that's both tops and bottoms. So bottom's up total company, DTC bottoms up 13%, women's tops up the 13%, total company. So we're seeing traction in both. And it's only going to grow from here. So as it relates to bottom strength and things like the 501 continues, but the boot cuts, the flares, the 90s, Baggy Dad, all doing really well as fashion fits. And then on the top, what's really resonating with her are things like non-graphic tees, woven shirts, outerwear. And as I was just speaking to a minute ago, this whole head-to-toe denim on skirts and dresses is off the charts. And so we're chasing into what working today and the assortment only gets more robust. I'll quickly just answer your question on speed. Go-to-market for us is one of our top priorities as we make this pivot to DTC. And we are looking to literally shave months off of our process from concept to consumer. So I'd say stay tuned on that and we're already doing that in certain categories as we are chasing into them.

And to your question about markdowns and inventory returns, Oliver, I would say that's an opportunity for us. We can turn inventory faster in our stores and markdown cadence given all the new products that we're introducing, I think we can get a lot more scientific and that's why we feel that the productivity opportunity in DTC is pretty high and large and that’s what we are working on as part of Project Fuel.

A quick follow-up, Harmeen. On your guidance assumptions around margins, what was merchandise margin or what were the merchandise margin assumptions? If there's ones, we should be attentive for the year. Thanks, everybody. Best regards.

We haven't gone into those specifics, Oliver, but I'd say if you're asking specifically relative to markdowns and discounts, the margins are really driven in our view, by the structural improvement in the business which is really our women’s and growth in our DTC channel. I think those are the factors that are driving the margins and that's why it's more sustainable longer term.

Our next question comes from the line of Christopher Nardone of BOA.

Hey, thank you guys. Good afternoon. Can you help us unpack the strength you're seeing in the North America retail business. I'd be curious if you're able to help us quantify the trends you are seeing in the outlet business, first digital and then first full price stores. Then as a related follow up, just curious, if you can help quantify how we should think about the impact to these hundred net new doors to your total sales growth for the full year. Thank you very much.

Yes, I take your first question, the growth in DTC in the US is broadly across all three channels, mainline is really strong, okay, outlet is probably strong but less stronger and our e-commerce businesses actually doing fairly well. And so I would just say if you want to rank it mainline, ecommerce and outlet but all three strong from that perspective. And broadly what we're seeing is largely driven by traffic as well as higher UPT and AUR. Conversion is an opportunity for us. And that's why we feel that this can only get better over time. And we are seeing the basket size improve because of newness that Michelle talked about and better in stock, which is really helping the case from that perspective. I think you had a second question, Jay, sorry, Chris, what is the second question Chris?

Yes, sure. I just wanted to see if we can talk about the impact you expect to see from these 100 net new doors. Is it impactful to the 1% to 3% total growth you're expecting? And then if you could kind of clarify where these new doors will be opening for store?

Sure, so the 1% to 3% is impacted by the 200 basis points of a headwind because of the exit of Denizen Denison and the other things that we spoke about. I mean the gross number is more 3% to 5%. The 100 net new doors, 70% of them are skewed towards the second half. So you see partial impact this year but probably more the following year. And as you think about what's driving the DTC business, the number that we have kind of talked about, which is high single digit, low double digit. A large piece of that is comp growth in existing stores followed equally between e-commerce and new stores. So I think comp stores being the main driver and then equally split between the other two. And we do have Chris, we have a very disciplined process where every year we review how the fleet is performing and determine the return on invested capital and return invested capital is in the high teens and so that encourages us to actually invest more capital and grow the store-based longer term.

Our next question comes from the line of Tracy Kogan of Citi.

Hi, this is Tracy Kogan filling in for Paul. I think you guys said Europe DTC was up double digits in February, and that has continued into March. And I was just wondering what March versus January and February looked like in the other regions. And then just a follow-up on gross margin. I think Harmit, you laid out the drivers, the 240 basis point increase. But what were the drivers that drove it above your expectation of up 150 basis points? What came in better? Thanks.

Yes, I think I mentioned, Tracy, to your second question. I kind of broke up the 240, 150 in product costs, lower product cost and the channel mix, which half of the channel mix was about a little over 100 basis points, but half that was the ERP driven shift. And then you had other factors like low airfare, et cetera, offset by FX headwinds and offset by the analyzation of the U.S. price reduction. So that's really what drove the Q1. What was better than would be anticipated it was just a strength in the DTC business, that was strong that kind of helped out as a quarter and the US was a big piece of that because US was up 10% on DTC. So that was the factor that grow the upside. To your second question which was to do about, yes, we don't go into the specifics, Tracy, but Europe started soft and has accelerated. As Michelle said, once the new products were introduced, that I think drove consumer demand and actually has helped unlock some of the open to buy from our wholesale customers. And we're seeing that generally both in the US and in Europe and so that's the positive side.

So, it did, it has improved, at least generally speaking, in the US and Asia as well, generally similar to Europe. Is that fair?

Yes, I would say US and Europe in terms of the exit, stronger, Asia, it had been strong all along. So I think Asia generally is performing well other than China was a little soft and the Middle East impact we are seeing because Asia also handles the Middle East.

Our next question comes from the line of Alex Straton of Morgan Stanley.

Great. Thanks so much for taking the question. I just have a couple for you. The first maybe for Michelle and a piggyback off the last one is just I mean, taking a step back, how would you describe the state of the consumer I think now versus three months ago, just trying to get a sense if it's the same, better or worse? And then a second one, maybe for Harmit, just on North America margins, they definitely expanded nicely year-over-year. They're above pre -pandemic levels, but they are below where we were during COVID, I think about 20%. So what's holding that back and is that 20% level achievable in the future for North America? Thanks a lot.

I'll take the first one really quickly. In a nutshell, I'd say we're feeling better about the consumer than we did three to six months ago. We're seeing lots of evidence of that, both in terms of our overall category, the denim space, and the stabilization we are seeing there in our biggest market in particular, the expectation globally in the denim category to be up in a single digit, and then how we see our own consumer respond both within our DTC performance, as we talked about quite a bit, with our DTC business up 8%, US DTC up 10%, the gains with the middle income consumer, and just market share gains across the board. So we're optimistic, more optimistic than I'd say we were three to six months ago.

And on the profitability in the US, yes, you're right. It's a lot more profitable than definitely a year ago. And that's obviously driven by gross margin and better management of labor, et cetera that we talked about. It's not all the way to 20%, largely because when it was 20%, we were growing at a faster clip, including in wholesale. And that is something that is an opportunity for us. But, as we unlock growth, which we are confident in doing as the year progresses that should flow into the bottom line.

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

Thanks everyone. And we look forward to speaking with you next quarter. Have a great rest of your day.

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