Q4 2019 Earnings Call
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[noise] [noise], good day, ladies and gentlemen, and welcome to the Levi Strauss in company fourth quarter and fiscal year.
2019 earnings conference call for the period ending November 24th 2019.
All parties will be in a listen only mode into the question and answer session at which time instructions will follow.
This conference is being recorded and may not may not be reproduced in whole or impart without written permission from the company.
A telephone replay will be available two hours after the completion of this call through February 5th 2020.
Please use conference I'd to 979134.
This conference call also is being broadcast over the Internet and a replay of the webcast will be accessible for one quarter on the company's website Levi Strauss Dot com.
I would now like to turn the call over to Ida Orphan Senior director Investor Relations and risk management at Levi Strauss in company.
Thank you for joining us on a call today to discuss the results for our fourth quarter two full fiscal year for 2019, joining me on today's call or CIT Burns President and CEO Levi Strauss in her meeting our executive Vice President and CFO , the as opposed to complete quarter for full year financial results in our earnings release honor.
Our IR section of our website investors taught me Vice trials Dot com linked to the webcast of today's conference call can also be found on our site.
Just remind everyone 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 are forward looking statements.
Results should not be considered as an indication of future performance.
Please review our filings with the FCC for a discussion of the factors that could cause results to differ also known as a forward looking statements on this call are based on information available to US as of today's date, we disclaim any obligation to update any forward looking statements, except as required by law.
During this call we will discuss certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results.
Finally, this call is in its entirety being webcast on our IR website, a replay of this call will be available on the website shortly.
This call is scheduled for one hour. Please limit yourself to one question at a time you give others the opportunity to have their questions about.
Now I'd like to turnover in the call to check.
Thanks, Good afternoon, everyone and thank you for joining us today.
29, she was a historic your southern company, we returned to the public equity markets with our IPO last spring maintain focus on what we could controls in a challenging environment an executed against our objectives. We're pleased with the financial results. We delivered in the progress we've made toward becoming a leading global lifestyle brand.
Backbone of our success remains the strategic initiatives, we've implemented to diversify our business by expanding or direct to consumer presence and growing internationally and across categories.
On the back of double digit growth last year, we delivered revenues of $5.8 billion and 29 chewing up 3% on a reported basis and 6% constant currency.
We did this despite facing several challenges both expected in unexpected not the least of which was having no benefit the black Friday week in the fourth quarter.
That impact in combination with our distributor acquisition in South America, and the unrest in Hong Kong cost the company your point of growth for the full year.
Growth was driven by diversification and included the following highlights all in constant currency, our full year basis or growth internationally was broad based with Europe growing 13% and he's a 10%.
Direct to consumer grew 10% and within that E. Commerce grew 18% women's and tops were particularly strong each up 14% for the year.
Levi's brand had another strong year, maintaining its position at the center of culture, a growing 70% for the year on the back of 13%. The prior year, we continued to assert ourselves as the inventors of data and the leader of the category connecting with consumers through innovative shopping experiences leading fits in styles.
Exciting new collaborations all while redefining our industry.
Fives continues to be the partner of choice for Influencers artists iconic characters and technology companies alike 20, United team, we unveiled several diverse creative collaborations with partners, including Star Wars, Hello, Kitty and Stranger things, we worked with Nike to watch an exclusive into being a collection of footwear and we pay.
Partner with Google to create an improved version of your card or smart trucker, but allows consumers to control their phone from a concept there jacket.
In 2019. These collaborations delivered over 12 billion impressions globally, equating to roughly a $100 million immediate value.
Elaborations continue to generate brand heat as well as drive traffic in sales and looking forward to 2020, you can expect to see the Levi's brand Council lies with many more exciting unexpected in innovative collaborations in the pipeline.
We continue to evolve the levi's consumer experience to create deeper connections with our fans.
Opened six nexgen stores globally across Europe , and Asia in 2019.
New stores amplify the Levi's brand and future redesign storefront shallower shops updated fitting rooms and more.
As we exited the year, we launched our largest ever pop up in Miami.
45000 square feet, which opened in conjunction with the launch of our Basel has been a hot spot. This week in the run up to the Super Bowl.
Pop up showcases the best of our brand in the future of retail housing Levi's premium products are largest and most innovative tailor shop interactive one of the kind experiences technical innovations and collaborations with well known orders such as Shepherd ferry and say items and just last night in Miami, We launched.
Our global product campaign for the Levi's X X gene, though our new extra comfort extra soft Chino for men with Grammy nominated artist co lead us, but global phase of the campaign.
Speaking of Super Bowl, how 'bout them diners.
Our ROI from Levis Stadium investment has been tremendously amplified behind the run this powerhouse team has been on.
And with more than a decade ago. Our stadium deal has been one of the best returning advertising investments we make in the U.S. and continues to be one of many vehicles that enable us to stay squarely at the center of culture.
I'll now walk you through our full year constant currency results in the context of our three where to place strategic choices, which are driving profitable core expand for more become a leading world class Omnichannel retailer.
First on our profitable core business, which comprises mens bottoms, our top 10 wholesale customers and our top five mature markets, we protected and grew our sure leadership in mens bottoms.
Revised mens bottoms grew low single digits, while dockers mens bottoms declined as we anniversary Dillard reset in 2018.
Tom 10, global wholesale customers collectively grew 2% despite a disruptive U.S. channel and our top five mature markets grew 2% within which the international markets were collectively up 10% and the U.S. was down 1% for the year.
We have several initiatives in place to strengthen performance in the US market, we have the opportunity to expand distribution at wholesale and in direct to consumer it's a premiumize the marketplace on the back of the strength of our brand.
Offering a broader assortment of are better and thus products across both men's and women's in order to offset some of the macro trends, we're seeing a wholesale.
Initiatives in the U.S. wholesale channel include gaining share within the largest department store retailers through elevated product presentations and broadening our portfolio incremental penetration in premium retailers and selectively adding distribution in enlarging our footprint in existing specialty in regional retailers we.
Collaboratively managing our expanding digital business across pure play wholesale dot com and our own ecommerce site and we are growing our presence with our partners in the mass channel.
We believe these initiatives will support our aspiration to manage the U.S. wholesale business to flattish over time.
And our us direct to consumer channel, we will open more mainline doors leveraging the successful bottle, we deployed internationally smaller footprint more profitable work capital efficient stores in better locations.
This will support our objective to increase distribution of our premium products in the us marketplace.
We are approaching expanding DTC brick and mortar distribution judiciously by testing a handful of stores and for US. This year. The task has a high ROI will expand that model.
We're focused on optimizing execution of our strategies within in the us with an objective to grow the marketplace over time, despite fluctuations within us wholesale on a quarter to quarter basis.
For a second strategy is to diversify the business by expanding for more and this strategy continued to drive strong results as I mentioned, our total women's business grew 14% and 29 team approaching $1.8 billion and four years in a row of double digit growth.
We continue to grow our market share in women's denim, including in the us where weve overtaken the number two position.
We're driving trends and leading the category and innovation demonstrated by the rapid growth of our women's fashion fits including high rise styles like the rid cage and loose with bidding bottoms like our new balloon gene, which are really resonating with the consumer.
We also have recently expanded our accessories line ventured into new categories in womens including body, where.
These are natural extensions of our brands and areas that offer us a long runway for growth in women's.
Our total tops business growth of 14% also its fourth year double digit growth was driven by the successful wide spectrum of Pops, including teas, Please outerwear and trucker jackets.
Each of our emerging markets of India, Russia, and Brazil posted strong double digit growth and though modest a 2%.
China is back to growth.
Our plan is to accelerate growth in mainland China in 2020 and December was a very strong month.
And then the virus had a significant impact to our business in January .
It is really unfortunate how the outbreak of recent buyers that's been impact in People's lives, especially during the Chinese new year.
We're taking the seriously and responsibly with our top priority being our people and our business partners. As a result, we temporarily closed roughly 50% of our fleet and have stopped all employee travel in out of China.
Well this will put a damper on our growth in China in the near term we are continuing to execute on our strategies. There. We will update you on the impact to our business when we provide our first quarter results.
As a reminder, mainland China is still only 3% of our business.
Our value brands signature and done is in grew mid single digits in 2019, as we continue to offer great products at lower price points in the value market without cannibalizing. The other parts of our business both brands improved gross margins and leverage their cost basis, improving profitability signature and denizen collectively.
Represent about 7% of our total business.
Our third where to place strategic choices to become a leading world class Omnichannel retailer as.
Global DTC for US includes the brick and mortar stores and e-commerce sites that we operate.
The consumer growth of 10% also its fourth year of double digits reflected strength in each of our three regions revenue growth from our brick and mortar stores was up 8% globally.
Affirmative existing stores improve both internationally and in the United States, We continue to build out our store network, which grew by a net of 81 stores in 2019.
Global ecommerce was up 18% for the year with strong growth in all three regions largely driven by increased traffic.
We continue to enhance our omnichannel capabilities, we've accelerated the U.S. rollout of ship from store due to strong performance, we're leveraging our by de technology more than 600 doors across 17 countries and growing including all of our company operated mainline doors in China to provide inventory visibility.
Consumer demand in real time.
Both of these initiatives are adding to consumer experience and positively impacting top and bottom line.
We've introduced the all new Levi's, App and loyalty program in the US which allows consumers to access curated editorial and brand content as well as purchase premium products available exclusively on the App from limited edition collaborations the Levi's authorized vintage truckers looking forward we plan to.
Rollout revised SAP and loyalty program beyond the us.
Our strategies to diversify our global business are clearly working domestically and abroad. Our international business is approaching 60% of total revenues direct to consumers heading to 40% women's is nearly a third a total revenues and tops is almost a fourth in all of these areas there remain a long runway.
For growth.
In underlying our performance for the year as it has always been during our long history is profits through principles in 2019, we reaffirmed our commitment to the Paris agreement.
We pioneered a contextual approach to water use the prioritizes saving water in areas that need at most and we're encouraged by others in our industry to sign on to reducing our carbon emissions to meet side space targets, our employees and consumers have come to expect that we will do what's right and we operate with the firm belief.
But sustainability and business performance go hand in hand, and in today's environment profits, who principles is another thing keeping us at the center of culture.
Overall is a really good fiscal 2019, we look forward to advancing on our strategic initiatives as we continue to gain traction in building a global lifestyle brand.
We are well positioned to drive strong growth in 2020 and beyond.
Now over to Harmeet to review the fourth quarter and year end finished financials for me. Thank you, Jim and welcome to everyone joining our call.
We were pleased to have delivered fourth quarter performance and head of my expectations across gross margin adjusted EBITDA and adjusted diluted EPS.
And metal revenue plan.
We also perform better against fourth quarter expectations for us on soon.
Absent the impact is most notably that our fourth quarter did not include the benefits of 2019 Black Friday.
Along with the impact of acquisition in South America.
The news continues to track with a long term growth algorithm and the underlying health of our business remains strong.
I'll now walk you through our fourth quarter and full year results before joining do our outlook for 2020 .
My comments today, we'll reference comparisons on a year over year bases in U.S dollars unless I indicate otherwise.
We published the details of high reported and constant currency results in today's press release, So I will not be all of those here.
As chip mentioned, our results will not be impacted by the lack of the benefit off the 2019, Black Friday week, which fell outside of fiscal year into quarter one 2020 .
I will refer to as adjusted for Black Friday.
As such my comments today will focus on organic businesses does.
Adjusted for Black Friday.
Fourth quarter net revenue the 1.6 billion grew feed.
For sand in constant currency when adjusted for Black Friday, the impact of acquisition in South America and beyond based in Hong Kong.
Also note that we're lapping a strong fourth quarter, two LNG 18, which we grew 11% in constant currency.
The company direct to consumer business grew 7% in constant currency when adjusted for Black Friday unexpected engine and high performance of the retail network and E Commerce growth.
Net revenues from the company's hosted business declined 1% on both reported and constant currency basis, reflecting the south American distribute acquisition as a decline in U.S wholesale was offset by growth in Europe .
Gross margin of 54.3%.
Increased 110 basis points on a reported basis and increased 130 basis points, excluding 20 basis points of unfavorable currency effect.
On the back of a healthier and meant you position and a stronger brand globally about half the gross margin expansion reflected lower sales for the off price channel with the remainder primarily driven by the price increases we have taken higher direct to consumer and international growth.
Adjusted SGN in as a percentage of revenue increased 50 basis points when adjusted for Black Friday, reflecting investments related to the continued expansion of our direct to consumer natural implementation off our omni channel initiative at the beginning of hub.
Mobile monthly your ERP upgrade.
Adjusted EBIT margin of 9.3% expanded 50 basis points when adjusted for Black Friday, reflecting the higher gross margin.
Adjusted diluted EPS for the fourth quarter of 26 cents declined four cents compared to prior year.
Due to the increase in the company's Shin Kong, resulting from an IPO in combination with missing the benefit of Black Friday.
Now I'll share more details in the fourth quarter.
The results of our three regions in constant currency on this I stated otherwise.
Fourth quarter revenue in the Americas declined 2% when adjusted for Black Friday and for the impact of acquisition of the distributor in South America.
Thank you consume all grew 2% when adjusted for Black Friday.
US wholesale declined 4% sequential improvement from the prior caller.
Mainly reflecting reduced shipments to the off price channel this year and lapping the final leg of last year's Dawkins line reset.
Adjusted for these the U.S. Hudson decline was 1%.
The disruption that many of our customers continued to experience in the channel was substantially offset by double digit growth in premium and did you do and a few bright spots at department stores, particularly high single digit growth in our women's business.
Europe's revenue were up 11% when adjusted for Black Friday with growth again broad based across channels product segments end markets.
And this in the back of mid teens growth in the press.
Direct to consumer revenues were up 11 cents adjusted for Black Friday, driven by strong traffic and wholesale revenues were up 11% on Brazil on broad growth across our customer base.
Mmm business continues to perform it up 16% on the back off 90% growth last year.
Revised men's margin grew 9% fueled by innovative new fits that resonating with consumers.
And Europe's profitability is really strong on a fully up basis is up over 200 basis points showing real leverage as we grow revenue.
In NGL net revenues grew 6% when adjusted for declines in Hong Kong, reflecting the online there and a seasonal shift in the timing of shipments in India.
Net new growth was broad based across most of the reasons market, particularly in the direct to consumer channel.
I think typically in China revenue was flat for the corridor as growth in our company operated mainland and outlet stores was offset by a decline in the franchise and E Commerce channel.
Now switching gears to our full year results.
Im pleased to point out that last year as a public company, we delivered at the high end on a constant currency long term growth algorithm.
Revenue grew 6% adjusted EBIT was up 8% adjusted net income was up 14% augmented by a dividend yield up nearly 2%.
The lack of Black Friday since benefit combined with our acquisition in South America, and the unrest in Hong Kong the year over year revenue growth comparison by about one percentage point.
Fiscal 2019 revenues was driven by growth across all regions consistent with our strategies direct to consumer drove the bulk of our growth, which grew 12% on a constant currency basis adjusted for Black Friday.
Performance and expansion of the retail network as well as e-commerce growth.
Mobile wholesale grew 4% as strong international growth more than offset a treatments and decline in U.S. wholesale.
And adjusted for the I can give previously discussed you as wholesale declined 1%.
Full year gross margin of 52.8% wasn't inline with prior year on a reported basis, but excluding all currency effects gross margin expanded by 60 basis points above our long term growth algorithm, driven primarily by direct to consumer and international growth and the price increase.
As we have taken.
As a reminder, a gross margin was under 50% only five years ago.
Adjusted SDN and as a percentage of revenues was 43.2% flat to prior as we levered on these costs and invested the savings behind.
BDC growth.
We've added net 81 company operated stores to our retail footprint and 29.
Adjusted EBIT margin was 10.6% 40 basis points higher than the prior year on a constant currency basis, when adjusted for Black Friday.
Again, well above our long term growth algorithm.
Adjusted diluted earnings per share increased four cents to $1.20 cents on reported basis and increased nine cents on a constant currency basis.
Turning to balance sheet and cash flows in dollar terms in entry at the end of the ongoing growth was flat compared to the yield profile and the composition on an entry was hendi.
Heading into fiscal 2020.
We delivered strong adjusted free cash flow for the year up 116, millions 21 million higher than the prior.
Even after higher capital investment and a 27% increasing the dividend paid in 2019.
As we've done the phase two fits good 2020 .
The gun running and wanted to provide some color on holidays does which for us.
Combination of November and December .
In our recent holiday period year over year revenue grew mid single digits.
On top of low double digit growth last year.
Global direct to consumer and global wholesale both grew and women's was up double digit.
But again pleased with global positive performance given us wholesale was down high single digit as it lab high single digit growth deprive audited.
In part due to the North sea and strong price, but importantly on a dual use tax bases use wholesale is roughly flat.
Holiday also yielded strong year over year gross margin expansion above our long term growth algorithm.
Shifting the continued year over year reduction intends to the off price channel in the U.S.
Additionally, given this tend to have brand we were intentionally less promotional during holiday most recently in the marketplace and as compared to our own promotional debt in 2018.
Now, let's turn to violent.
As a reminder, we provide annual guidance and we'll update our annual guidance each quarter as necessary as we move through the euro.
And then provide color on the tier lightens expected in the upcoming caught up.
Finally had 2020 guidance reflects the strong base business in line with a long term growth algorithm.
Timing off our fiscal calendar.
The impact of our acquisition and another business model change and recently approved approved board decisions to increase the return of capital to all shareholders.
We expect net revenues to grow up 7% in constant currency and around 6% in reported dollars.
This estimate includes underlying base business growth of around 5% in constant currency.
And approximately two points of growth from the benefit of having a black Friday week in the first quarter as well as the benefit of 50 towed wheat, which will include a second black Friday in the fourth quarter.
Not at the net revenue benefit from the 2019, South American distribute acquisition. We have previously discussed will be substantially offset by a change in ownership AFI U.S. footwear distributor, who has recently been changed by licensee partner.
As a result in a license revenue stream, replacing what formerly was drinks sense to the footwear distributor.
It's also important to note that there is no adverse impact throughout fiscal 2020 EBIT as demand as a result off the changes in these business model.
Specifically with respect to U.S. wholesale based on what we know today, we anticipate that on a full year basis U.S. wholesale would be roughly flattish to 29 team broadly in line with a long term growth algorithm and adjusted a plan lower sales to the off price channel.
During the first half of two engines trending.
Oh, let's keep in mind that even with the fully a flat is should we expect in New York orders to be quite choppy.
Given the yoga lapping the U.S. wholesalers in order Onetwenty 19 was up 8% and Q3 was down 10%.
Turning now to EBIT in 2020, we expect full year adjusted EBIT margin expansion in the range of 30 to 40 basis points on both the constant currency and on reported basis.
We anticipate gross margin expansion well above our long term growth algorithm largely due to the outside outside favorable mix shift to direct to consumer related to the do Black Friday is as well as continued favorability from our geographic mix mix and price increases we also.
We expect knows sands to the off price channel to help gross margins.
However, we also expect adjusted and CNN as a percentage of revenues due to a number of factors, including continued strategic investments in direct to consumer and higher advertising to support our growth objectives, particularly in China as well as the impact of new.
[music] lease accounting standards and the tax treatment for new equity awards.
Based on a net revenue and adjusted EBIT guidance, we expect adjusted diluted EPS in the range off a dollar and 18 cents to a dollar and 22 cents, which incorporates our tax rate in the range of 20% to 21%.
And our expectation that currency translation was unfavorably impact the comparison to 29 team by about a penny.
We have a strong balance sheet access to 1.8 billion in liquidity and agenda is generating returns on capital in the mid teens.
Given the confidence in our long term growth algorithm and access to substantial liquidity announcing the falling capital deployment plan, which will fuel long term growth and return capital to shareholders.
The planning capital expenditures of approximately 200 210 million inclusive of nearly 100, New company operated store openings on a gross basis than 2020. This is in addition to the stores that we recently taken or in South America.
And moving to quarterly dividend pins and.
And have announced how first card quarterly dividend of eight cents per share at this rate fully dividends would fall in the range of 130 million an increase of approximately 14% as compared to 29 team.
Additionally, our voted to approve the share buyback program, then people used to offset dilution that would otherwise be introduced from us talk employer employee stock grant.
Based on today's stock price and the vesting schedules of the awards, we anticipate using cash in the range of 80 to 100 million in 2020 for this purpose.
Before I mean, most computing. Please note the falling color with respect to the first quarter two anything.
We do expect a strong gordo foot total company revenues, we are anticipating revenue growth will come in in a bit below our full year revenue guidance, reflecting an expected to decline in U.S. wholesale as bad as the rents from the growing or was the impact to which we will quantify as the situation develops.
We anticipate that the U.S. wholesale would be down significantly in Q1, driven by two factors first as we lap 8% growth last year and second given the improved has dropped by inventory, we expect lower sales to the off price channel.
Additionally, despite anticipated strong gross margin expansion into first quarter of 22, any we expect adjusted EBIT margin in the first part though to be adversely impacted by two factors as compared to prior.
First we expect about 100 basis points on adjusted EBIT margin decline from higher advertising as you plan to small town advertising by bringing more office spend into the first half of the.
Second the timing of the employer tax expense for new equity Federal Awards will hit does when the west in Q1, and this would pressure adjusted EBIT margin by approximately 50 basis point not that we expect adjusted EBIT margin to build back towards our annual guidance as the year progresses.
With that we're not done it we'll now open it up and take your questions.
Thank you. The four is now open for question. If you have a question. Please press star any number went on your telephone keypad.
If at any point. Your question has been answered you may remember yourself from the Q by pressing the pound fine.
Your first question comes from Bob trouble with Guggenheim.
Good afternoon, guys good quarter.
Hey, Bob spawn.
I guess the first question, it's probably towards Harmeet.
You guys mentioned you know the annual algorithm.
You know in the prepared remarks I was just wondering if you could just sort of remind us a refresh exactly what you guys consider the algorithm to be.
Sure.
Thanks, Bob Good question.
I know algorithm basically talks about growing revenue in the mid single digit range. So think about 4% to 6% in constant currency that basically comprised of the Americas going to 4% Europe and Asia and the high single digit and even considered Chad.
Those wholesale growing globally in the low single digits and direct to consumer growing in the high single digit and on a product basis, the mens bottoms business growing low single digit and the tops in women's business growing high single digits. So thats the on the on the good side.
Then on the adjusted EBIT side, we expect to grow a little cost or should I expect to good our EBIT in the mid to high single digit, especially as the adjusted EBIT expanded 20 to 30 basis points annually and then there's leverage on fixed.
Cost of interest and.
Vincent because we expect the debt levels to be largely there.
This is going to be augmented by out or increasing dividends.
Which we've just talked about driving a total shareholder return of close to 10% and then on top of this why they've announced plans to bye bye.
Shares this offset dilution long until we can increase share repurchases valid as eminent so it all that is on top of the TSR growth of 10%.
Okay drilling annually on a constant currency basis.
As I have got it yeah, that's great and.
I think a question for chip I'm, just I think you talked about the balloon genes.
I just sort of two product question is where you are skinny jeans fading in favor of clean it changed that's my first question and then the second one is our shaping genes, becoming a trend I saw recently that the totally shaping pull on skinny Jain from signature by Levis.
What is the number one best on Amazon just wonder if you might be able to comment on those two thanks.
This is true and thanks for plugging that Bob.
No I'm on the trends.
No I would say that the overall trends driving the category holistically or kind of a continuation of the same theme we've been seeing for last.
Sure, So which is a macro trend casualization.
Evolving impact on Street wear and street wear influence and you know clearly an 80 to 90 is still going on on women's you know everybody's been talking about the death of the skinny jeans for for years and I will say that the skinny is still more than 50% of our total women's.
Bottoms revenue.
But women want a wide range and I think part of our success over the last couple of years in women's has been meeting her need for fit fabric and.
And fabric in particular and finish as well I know I called the three OS.
And so we've been leading in some of the more fashion forward fits like lose switches the balloon gene that we mentioned in the prepared remarks, so the wide lag and high rise in straight I mean, we led the trends as the rides and sipping going up and you know are one of our fastest at hottest.
Items that are aligned as the rig cage, skinny, which is our highest rides women's gene however, with the 13 and a half inch rise. So the fashion pits are clearly driving a lot of the growth.
Back to our fashion fits our women's were up by about 87% over the prior year.
But the core screening business is still a huge part of the business and it's so important part and then on the.
On the shaping jeans, we've been selling shaping genes for over a decade and.
There are some women were that's really an important consideration for them. They want to a gene that flatters, then celebrates or curves and we offer across.
Many parts of our line of the signature gene that you references the number one selling gene on on Amazon and we've got more coming in this in this space in 2020 as we look ahead and you know more on that later in the fiscal year, but it is certainly an important part of our.
Women's business.
Got it.
That's perfect. Thank thank you very much.
Bank Bob.
Your next question comes from Matthew Boss with JP Morgan.
You're not so congrats congrats on nice quarter.
Thank you, Matt maybe maybe the break them to do at Grand scheme.
Elaborate on growth opportunities within the U.S. wholesale is very excited about just your confidence in managing this part of that business flattish and then just maybe touch on some of the drivers if that continues direct to consumer runway remaining also in the us.
Yes so.
Back to the growth algorithm just to kind of get everybody ground that we say, we'll try and we're going out.
U.S. will grow kind of 2% to 4% and within that we're seeing remote.
Well I've kind of deliver a wholesale business roughly flattish year on year and Thats, what weve been able to do over the last three years on it on a CAGR basis and you know in today's environment.
No there are winners and losers. So first and foremost we are focusing on winning with the winners but within every single customer we have opportunities and we're focused on the larger stores and showing upgrade and the larger stores of all of our big Big retailers we have.
Portfolio opportunities as well when you look at on segmentation of the wholesale base. So as you know we've been really focused on premiumizing, our offering here in the U.S. based on the strength of the brand that has led to incremental distribution and some of the more premium wholesale customers and we.
Still have opportunities there we've been upgrading our in store.
Fixtures in a number of these premium wholesale customers over the last a year or so.
Then we've also been expanding in the mass channel as you know and today.
What we've done in target. We're now in 50 stores heading the savaging and I think will go a little bit faster than that over the course of the next year. That's been very very positive for us we have a lot of data that shows that it is largely incremental.
In fact.
We've run some consumer research were target consumers have said, it's the first time they bought revise genes in a long long time so.
We have a number of waivers to portion poles.
And that's part of what gives us confidence and there's still some white white space opportunities that we're chasing down so the strength of the Brando groundless and everything and that gives us conviction that we can continue to maintain a roughly flattish wholesale business. There will be choppy just to reinforce that 0.1 more time.
Quarter to quarter, we're going to have our ups and downs as we go through the year just as we did last year, but we're confident we can we challenged ourselves that we're going to maintain those business at roughly flattish.
As we go forward just for clarity, Matt the 2% to 4% was the Americas growth U.S. was.
Supercenter the marketplace.
Great and then maybe hardly just a follow up on gross margin how best to think about the drivers and level at gross margin expansion that you've invested in years 2020 outlook and then just yet what inning would you say that the brands pricing power is today globally.
I didn't answer that one first has really as you work still in a very very early innings. So.
First bottom of the first top of the second maybe we've taken some pricing action in Europe in the second half of the year, we'll see some pricing action go into effect in the U.S. here or early this fiscal year yet.
So just building on that.
I would say the Tailwinds are you now the fact of the contribution to gross margin expansion price increases chip talked about.
Sourcing savings.
Just continue to drive.
Our leverage on volumes.
The reduction of off price, which is how we are continuing that through quarter. Two of this year and then the benefit of growing our direct to consumer channel.
As well as international now in 2000.
20, because we have two by Fiat is and is driving.
The consumer business that helps.
Hi, good acquisition that probably have a marginal.
In fact, the headwind maybe slight headwind on currency not a lot.
Slide into any 20, so I think thats why we feel good about a higher gross margin in 20 trainee relative to our growth.
Our algorithm, which was 40 to 50 basis points, but one other thing I would add Matt and we mentioned that in the script as you know it does get back to brand strength on the lead by sprint and through the holidays, we were intentional to not be not chase the competitive marketplace.
And as a result or promotion levels that got out of our promotions was less than it was the prior year and less in general than what the marketplace was when we still had a decent holiday. So I think it again it just underscores the strength of the Brad.
Great Thanks and.
Good luck in the nine was done some debt.
Go Niners thanks, Matt.
Your next question comes from Omar Saad with Evercore.
Good evening, Thanks for taking my question.
Wanted to ask about the revenue guidance, it's a little bit ahead of the long term algorithm that you were discussing army.
Plus seven it's a good number maybe you guys could break down some of the key chunks that gets us there I know, there's some noncomparable a components around the black Friday, how big of a piece of that.
Should we think about pricing, what's the underlying U.S. wholesale and broader Americas assumptions, maybe some of the key pieces. There and then I also wanted to ask if you could dive in on Europe , a little bit I think it slowed a little bit more on a constant currency basis than we thought.
Maybe if there's any kind of color to add around that market. Thanks guys.
Sure Omar so.
Our guidance as you begin to your is 7% on constant currency six on reported that revenue growth year over year.
We are saying our base business saw algorithm.
Talked about 406 middle of that in about 5%.
Talked about the different confidence.
Your question about us wholesale.
We're saying flattish and by the end of the our adjusted for the off price reduction have been doing.
In terms of.
What makes up the seven we are saying.
Two percentage points.
Largely driven by our fiscal calendar. So each black Friday would have by about 50 basis points Thats about a 100% on a basis point improvement and the 52 week at the bottom 100 basis points.
It's probably a little lower than what do you guys have in your model largely because it's not as simple as taking one week from the year and make stipulating it.
Couple of reasons, let me explain that one not every part of our global business as the 50 Threerd week, So largely Asia.
You know runs on a monthly calendar and there's some markets in Europe .
With a very similar.
Monthly calendar, so they're not going to had the benefit of the 52 week. The second is if you take the.
If you take.
Yes, the remaining business I'd direct to consumer business. The straight extrapolation, you could take one week and Thats the impact on the 50 Threerd week.
Hi, John wholesale business.
No.
I would be resuming is about 50 basis points largely because it is the replenishment says that we incorporating.
Largely people.
And the opened to book by the done on a monthly.
Great and so that's how we're thinking about it.
That's why it's a 100 basis points on for Black Friday, 100 basis points for the 50, Threerd week, and that's making it up now we have done an acquisition in South America.
That was supposed to help it was supposed to be a headwind this year, but.
Late last year.
Our early this year one of our license partners.
Our distributor and so is the license partner who used to handle footwear.
Business in the U.S. for Dockers is not barn are put that.
Distributor for Levi's, and so we definitely see synergies and benefits long it down with this combination, but the business model change that offsets the acquisition that we talked earlier.
Hello Hello.
Absolutely and could you maybe give us some color on Europe as well.
Yeah sure so what's the underlying assumption and what's the underlying assumption on price sorry for for this fiscal year.
Yes, the underlying assumption and prices what have you factored into the into the revised gross margin in our normal gross margin.
You know perspective, 40 to 50 basis points. We think 60 to 80 next is probably more like it so that incorporates the price changes, we should think we'll stick broadly.
No the tip. Your question on Europe , Europe grew 11% adjusted for Black Friday.
You know its approach.
David softer than the remarkable growth ahead, and Thats just the law of large numbers.
I believe is Europe longer term, who said that in a growth algorithm is more high single digit low double digit business, but having said all that.
Leveraging beautifully on the profit advances the businesses.
Now close to a billion 6 billion seven and the operating margins are not.
Close to 20%. So you know because this business beautifully positioned for driving profitable good long term.
Thanks for all the color.
Thanks.
Your next question comes from has their Bosqi with Bank of America.
Hi, Thank you for taking my question and I was hoping first you could you could talk about the U.S. store test that you are running and I guess, how do you source compare to your existing fleet and what you're testing exactly and then also how you think of the U.S. store opportunity I'm on currencies test work.
Okay, whether you're talking about our owned and operated stores is that what you're asking yet.
Yes, so we talked about this I think on the last call on.
Basically so our big opportunity in the U.S. is mainline doors go back to part of our strategy for us. The U.S. is unlike just about any other market globally. It is largely a tier three market with prices on apparel Levi's Red tab at roughly $40. You go to Europe you go to me.
Most of Asia and we're in a 100 dollar 90 to 100 dollar price point as our opening price point and more mainline doors are hearing the U.S., we have roughly 30 mainline doors and that said they tend to be larger doors, often not in great locations, but model that were that we're now executing.
Is smaller.
Stores, all that in the range of three to 4000 square feet.
With a tighter assortment in better location. So it's more capital efficient be stores tend to be more profitable on an earn in better locations as well and a great presentation of the brand is basically what we're executing and most of the rest of the world or we've never executed it here in the U.S. and so we have a couple of east.
Stores already right across the Bay from US here in San Francisco in Emeryville as a good example.
And we're going to open.
In the plan, we've got a couple of doors like this that we're going to open in 2020 that are in the range of 2500 to 4000 square feet in great locations. We've talked before one example is we will open a store this spring and the Stanford Mall, we have no source data Palo alto or around Stan.
For the standard mall as an a mall and we don't have store there and we're in a great location with a relatively small footprint and we Ics and that on paper that sure pencils out to be very very profitable. If we can prove this model out and we will expand the model over time, and we'll do what your dishes.
We're pretty is we're pretty diligent and deliberate about capital deployment, but that that's basically what we're all about and we'll have more as we go through the year on how those stores are performing.
Great. Thank you and me on the question on on a scenario for 2020 can you have just break down the drivers a little bit more can you quantify the impact from the accounting changes the calendar shift an extra weekend and also the ramp and marketing relative to 2018.
Yes. So so you know if gross margin is 60 to 80 basis points I'd say as soon as probably 30 to 40 Thats what gets you to Tony 40 adjusted EBIT.
Basically the.
So what does that made up of I said.
Advertising, probably 10 basis points something in that range, depending what impacts is this the significant being a public company you know we have to pay taxes when the awards vest on.
And that happens into Q1, that's about 10 basis points, and a 10 basis points reclass between interest and as generic.
As we implement the least ended and the rest is largely a direct to consumer I expansion.
So those are the factors that drive and SGN increase.
Yes.
Thanks, a lot.
Your next question comes from Kimberly Greenberger with Morgan Stanley .
Okay, great. Thank you so much.
I wanted to just.
Just ask as I'm adjusting my 2020 numbers here for the guidance given today.
We want to make sure to keep in mind our 2021.
The forecast so we don't get out of whack in understanding that you're not giving 2021 guidance today I'm just wondering if I should infer a by the fact that you're looking for 7% growth this year.
With that base business, that's at 5% and the 50 Threerd week will not repeat in 2021, nor will you have to black Friday, So should I think about more of a 3% growth rate in 2021 is we normalize for the outsized performance here in 2000.
Yes, I mean.
I haven't done the Matt can value, but I'd use the growth as good as I talked about which is the mid single digit growth and yes, you are lapping a strongly yours or whatever the number you get on that basis will be the basis.
Just for the Black Friday, I think I.
I think I'd use that and if a enough depending on of.
Some other pieces of our business accident into the second half of the year, Oh, which is not as the Asia and China, We will update you folks as the quarters, though.
You know track along.
Okay, Great and then I just wanted to ask about the expanded distribution here in the U.S. with targets.
And I wanted to understand a little bit about what you're monitoring in order to make sure that business is incremental rather than cannibalizing other U.S. wholesale business. What it was a check point's you're looking for sure. So we are monitoring this very very.
Closely.
As you can imagine it could be seen its being disruptive in the marketplace, but I don't know if you've been into a target or if you've seen it but.
My starting point is on both the men's pad and the women's Pat and I was I was in my target that has been is.
Literally free days before Christmas and the merchandise price point on the pad on both the women's and men's pad was 40 999, I mean, so we are selling at a premium to the market. The average marketplace price for apparel Levi's today, it's about $40 and so first check for cannibalization.
One is target is actually selling at attracting new consumers at a higher price point consistent with our whole strategy or trying to premiumize the brand.
We bought one consumer research inside of target to see whether these consumers have bought levi's and other locations, including our own doors and the vast majority of those.
Target recalled in those gas.
I have indicated that this is the first time, they bought Levi's and one time no. The other thing we're doing in all of the test stores. We we've drawn a five mile radius around each test store and we've looked at our pre and post business results and other customers and see bear.
Very little cannibalization, so net net we're pretty confident that this is incremental.
For our business, it's clearly incremental to target, but it's also incremental for us and having very little cannibalizing effect.
On our other customers. So we've got a high degree of confidence in that which is part of the reserve. We're willing to continue to move forward targets done a great job executing as well go to the pad the brands looks great and.
Take the way we're looking there over some other places right now so it's really been good for the brand.
Great color. Thank you Kevin.
Thanks, Kimberly I think we have time for one question and then the others we will.
Yeah, I mean, it's Paul and we know who's on the Q1 is onto the auto far openside caused that we have set up.
So maybe one of them quest.
And your last question comes from Dana tells me with Telsey Advisory group.
Good afternoon, everyone and thank you forget onion onto the wire given high meet your commentary on the first quarter can you unpack, how we should expect the cadence for the year to play out and what you are looking how you're thinking about it, especially given the two black Friday this year.
Yes.
John .
Sorry.
No no by then you finish.
If you think about the wholesale business the differences between the U.S. versus Europe . What do you see is the biggest the biggest differences and whether its Asia, whether it's your up and what the learnings could be from one from one to the other if you would it drive growth globally in terms of wholesale to that to the level of you'd like thank you. Okay.
Okay, Dan I know you know I'm going to us.
I'm going to principally stay away from guiding the quarter's but I'll give you some color. So I would say that as we've said the the first first quarter.
In a slightly below our full year number driven by the facts as I talked about we haven't quantified.
The unfortunate the impact of the unfortunate situation in China, because that's evolving as we speak and they will give you more details of that then that reports first quarter results I think ought to do is progressively better than quarter, one and cost of or is the strongest quarter, because it's got to black Friday.
And the 50 Threerd week, that's how I would kind of.
Prevents the quarterly flow of revenue.
And we give you the Carlo and on EBIT as a core this progress.
Right and on the on the biggest difference between us wholesale and Europe slash the rest of the world wholesale I'd say there are a couple of important dynamics number one in the U.S. There is a very heavy off price component and we've talked about strategic.
Only how we're trying to manage that but if you look at denim consumption in the U.S. over the last 12 to 18 months a lot of the consumption has shut that off price.
Hey match loss.
And there's there's much less of that dynamic going on in wholesale.
In Europe , I mean, Europe and European.
In Asia.
The other big difference is really a difference in our business here in the U.S. as I explained you asked is largely a tier three market and our U.S. wholesale customers are selling revise out the door gain and day out.
Price ranging from below $30 to kind of mid 40, Dollarss day in day out with an average around $40, which by the way it's much better than eight years ago when I got here.
And in Europe , and in Asia, we have primarily at tier two and tier one business. So veteran best in the U.S.. It's a good quality market at good price points and into year end in Europe and international It's a veteran best quality, which is consistent with what we have in our.
In our mainline doors, so the pricing and.
Product that we've got in wholesale in Europe .
Is very similar to the pricing and product that we've got in our mainline doors in Europe and Thats not so we have much more of a premium representation of the brands and the brand pricing on average across most of Europe and most of Asia is in the kind of 80 to 100 dollar price point as opposed to $40 from us.
So.
Those are probably the two biggest differences I guess the only other thing that I would say about Europe today versus the U.S.. Although we've made some good progress in the U. us is.
Europe has been much more successful.
With the women's relaunch, which we did back in the middle of 2015 in wholesale.
And our European wholesale business on both men's and women's tends to be much more of a lifestyle representation of the brand and what you see here in the U.S., where we're still large largely being treated as a classification, where blue gene bottoms and a lot of customers wouldn't so walk in.
Whereas in Europe .
The Levi's brand is much more heads it so much more of a lifestyle representation of the brand and not surprisingly our women's business is better developed and our tops business is better developed in Europe than it is in the U.S. So that gives you a little bit of an insight on.
Why we're trying to do some of the things that we're trying to do in U.S. wholesale to begin making us wholesale look more like.
Europe and Asia from a wholesale dynamic I hope that helps it dies saving a lot of opportunity.
Absolutely that's how we look at it.
All right well I think we'll close it there I want to thank everyone for dialing in for participating sorry, we went over by a little bit Chris I hadn't heard me will be on the phone with most of you over the next day or two and you'll have plenty of opportunity to.
Go a little bit deeper with them those follow up calls, but thank you all for joining yen and we look forward to talking with you again at the end of the first quarter.
Good day, thank you.
Thank you. This concludes today's conference call. Please disconnect your lines at this time.
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