Q2 2020 Levi Strauss & Co Earnings Call
Second quarter earnings conference call for the period, ending May 24 2020.
All parties will be in listen only mode until the question and answer session at which time instructions will follow.
Okay.
This conference is being recorded and may not be reproduced in whole or in part without written permission from the company.
A telephone replay will be available two hours after the completion of this call through July 13th 2020.
Please use conference I'd to 1798 to three.
This conference call has also been black broadcast over the Internet and a replay of the webcast will be accessible for one quarter on the company's website Levi Strauss dotcom.
I would now like to turn the call over to Ida Orphan Senior director shareholder relations and risk management Levi Strauss in company.
Thank you for joining us on the call today, joining me today, our chip Burke, President and CEO, and Harmeet, saying executive Vice President and CFO, We've posted complete Q2 financial results in our earnings release on the IR section of our website investors Dot Levi Strauss dotcom.
We'd like to remind everyone that we will be making forward looking statements on this call, which involve risks and uncertainties.
In particular at this time, there were significant uncertainty regarding the duration and extend to the impact of the cold at Nike intend on it on the company's business financial condition cash flow and results of operations.
Our actual results could differ materially from those contemplated they are forward looking statements.
Reported results should not be considered as an indication of future performance.
Please review our filings with the FCC in particular, the risk factor section of the form 10-Q.
We filed today.
For discussion of the factors that could cause results to differ.
No that's a forward looking statements.
I don't.
All right I think we last year.
The most directly comparable GAAP financial measures.
Our provided in the earnings release on our IR website.
These non-GAAP measure or not intended to be a substitute for GAAP result.
Finally, this call in its entirety is being webcast in our IR website and a replay of this call will be available on the website shortly.
Today's call is scheduled for one hour. Please limit yourself to one question at a time.
And now I'd like to turn over the call to chat.
Thanks, Good afternoon, everyone and thank you for Georgia or Q2 earnings call.
This quarter's been defined by the Corona virus pandemic and the economic fallout from that which dramatically impacted our business turned the quarter.
Virtually all of our retail stores and most wholesale doors closed for the vast majority of the quarter.
I'm proud of how the team stepped up in response to prioritize and consumer and employees shaky color accelerating or activation of T. E commerce in omni channel capabilities proactively cutting costs smartly, managing cash and finding more innovative ways to come back, but we buy spread with it stands.
I'm going to what for me take you through all the details from the quarter, so, but I can focus my comments on Twoq heritage.
I'll start with the Colin environment, and how we manage through the pandemic and into early recovery and then alcohol. They reduced Q2 I'll share some thoughts on how the pandemic.
Impact both the retail landscape and consumer behavior, and why I'm optimistic and confident that we are ideally consumption to win in the post cobot world.
We don't have roughly 90% of book stores opened globally and performance during the reopening phase abstract battery can do you expect.
We are cautiously optimistic about the early trends, we're seeing in our reopen shortage and the strong performance of our ecommerce but as much.
Having said that there are still a lot of uncertainties will there be another way, how bad will be economic downturn b, how long will the recovery check.
Oh already seen consumers think bar differently, while holding greater expectations, you had demanding more from the brands they bar.
Let me highlight four key points for us since we've navigated the pandemic an early recovery they are boost continuing to build our brand and deepen our connection with consumers.
Second investing in and accelerating ecommerce an omni channel capabilities.
Accelerating the pace of digitizing, the company and leveraging our yard and data.
And for driving product newness and excitement.
Let me walk you through some details on each one of these.
First we continue to invest in brand building by maintaining a deep connection with our consumers engaging with the virtually unprecedented levels on social media through live music streaming and do it yourself customization watching new collaborations that made waves in the industry with immediate sellouts and partnering with.
Global Influencers as we told immersive storage, our block, which is seen record high viewers.
We continued our fiber one live concert series on Instagram live streaming performances from some of our favorite artists and in celebration of fiber one day, we to virtual music Festival.
Full day of content, featuring live music style tutorials and revise history, reaching 147 million impressions.
We continued the pilot new channels for commerce that are particularly relevant with gentry.
One of the first branch to launch on took talks new shop Merrell program, you wash partnering with Influencers to showcase Levi's, that's all Lux laser technology, which drove five and a half million video views on to talk as well, which increased traffic and sales to our sorry.
Our recently launched mobile Wap represents an evolution of our online shopping experience aim to fostering and growing the brands connection with our consumers.
Online enrollment rates of nearly doubled since entering shelter in place due to strong.
Strong response combined with the increased importance of building deeper connections with our fans, we just rolled out our loyalty program nationally.
Second we have invested heavily to strengthen our position as a leading world class omni channel retailer and during the quarter, we accelerated a full suite of omni channel capabilities in the U.S. shown that had been in the works and others that we quickly launched in response to consumer preferences cure a few examples.
While they were closed returned or stores into micro fulfillment centers, leveraging our ship from store capabilities to fulfill online orders and moved through inventory.
30% of our online demand was fulfilled by stores in the month of Mary contributing to E commerce growth of 79% thought month.
We rolled out curbside pickup and are now why been 80% of our shores, we launched a new virtual concierge offering consumers the truck stop one on one interactions with the short shorts, yet and the completed their own home.
Yeah, we're seeing strong conversion rates.
This work has continued into Q3 is we pulled forward the rollout of buy online pick up and shore and 20% averse floors and plan to complete the roll out to the remaining you watched worsen becoming much we've begun testing appointment scheduling and select stores, enabling consumers to skip the line and get immediate access into the store.
And then the next few weeks, we will begin piloting same day delivery for our consumers.
This program along with others that we are exploring will offer consumers several forms of contact list retail shopping expanding the way consumers can shop with us.
Walter Rolling out omni channel capabilities in various markets around the world in phases, and we'll keep you updated about work as it progresses.
[noise], but don't think appointed it's been to accelerate our overall digital transformation and leverage the use of data analytics and machine learning and more aspects of our business.
Applying a data driven approach to determining appropriate promotion levels. That's just one example, during a major ecommerce promotion about Europe, we were able to amplify revenues units sold and profits four times, what we did in the previous year.
We're also using AI and are you watch stores to ensure we're optimizing margins and fulfilling orders the most efficient way, which has been critical with the recent roll out of ship from store.
And we're using AI to enable I suppose enable personalized benefits in our newly launched loyalty program further cultivating loyal frat fabs.
Our ethanol Lux laser, finishing technology enables us to reduce lead times to better match inventory to the current demand trends and we've accelerated the use of digital and virtual design and product development tools that have helped us maintain or creative activities during shelter in place, which will also provide advantages in.
Time, and resources pointing to way to a future without samples.
And fourth.
We continue to deliver new product and the number of its I didn't collaborations across channels.
We watch the spring collection, which focused on you pull optimism in partnership with LIBOR and Jayden Smith.
Our collaboration with new balance sold out everywhere within seconds or the product launch, including new balance Dot Com T mall and more.
And consumers camped out virtually and lined up in her juke due to the Levi's by golf Wang release, which sold out in minutes.
Our 2020 Pride collection, which we dropped exclusively on Iraq exceeded expectations on conversion and average order value.
For summer, we've introduced school relax and easy summer pieces in soft new Earth tones in diabetes inspired denim finishes.
Product continues to resonate with consumers during the shelter in place period on our broader Doug digital footprint.
We were recently selected by Amazon to be featured in our Big style sale at the end of June and saw our second biggest selling week on their platform.
And our reversible face masks became the number one best seller on Amazon in mid June.
Complex magazine recently listed Levi's among its best spreads of 2024 relevancy answer the creative Freedom, We grant and collaboration like we look like what you did earlier this year with industry. We now doxey on N.B.A., all stars and Tremayne Emory have done until.
Sure.
And although were branded balance sheet remains strong the substantial revenue impact from the health crisis requires us to adjust stores crop cost structure. So we can continue to fuel high ROI investments that drive our business Digitization brand building and.
Other areas that are working for us, which will accelerate or rebound.
That's why today, we announced the difficult to the decision to reduce our workforce by approximately 700 people, which represents about 15% of our global non retail nonmanufacturing head count.
This will allow us to respond to the media business impact of cold in my team and give us confidence in our cost structure during the potential extended recovery.
This is by far the most difficult aspect of the situation made especially hard because we had been building such strong momentum before the pandemic cat and many of our colleagues who are being impacted by this difficult, but necessary reduction were critical to our success.
Finally, before I turn it over to her need or want to take a moment to acknowledge the ongoing call to action in the U.S. and around the world for all of us to stand up and confront the reality of systemic racism.
Our company has launched inclusivity and has a history of fighting for quality and just last five years, a lesson Carl I can't believe five Strauss Foundation together have invested $37 million, an organization's advancing social justice quality in the United States.
In June we hosted a series of conversations with Black leaders on our Instagram wives, Oh, they voices in the block community.
We've taken important steps, but we know it is not nearly enough over last few weeks, we've taken a hard look at ourselves and made a number of commitments to encourage more diversity at all levels on the company.
I look forward to updating you on the progress on these commitments going forward.
<unk> over to you.
Thanks Chip.
Welcome to everyone joining our call I hope everyone is continuing to be safe and healthy.
Before I discuss our financial performance I would like to tank got teams around the world for the tremendous efforts in helping the company managed through the different crises, while remaining focused on how we will emerge stronger on the other side.
I've been very impressed and energized by how everyone has come together to understand and take Swift actions to address current challenges and adapter new ways of working well remaining guided bio values as we sell all our stakeholders.
It's been an unprecedented goto like no other that I've seen.
However, I'm confident and optimistic.
We as a company would grow market share and improve our structural economics as we move fluid because of the falling fact is we have great brands products that consumers love and strong talent.
If you're going to jilin responding to the impact of the pandemic on our business as chip described.
We have a strong balance sheet and ample liquidity and responded quickly to address gas flows by reducing capex and cause and by taking steps to optimize working capital efficiency.
And while cutting costs and gap in Spain, we are focused on driving structural improvements in our cost base to drive stronger EBIT margins and reallocating resources to as high ROI investments such as automation.
And Digitization.
Oh shed some color around Q2 results.
Everyone's comparisons to prior had been substantially impacted by the economic follow up the pandemic our fiscal second quarter was comprised of March April than me.
This yielded a full quarter comparison than most given stores, both dogs franchisees and our customers were closed an almost in all markets for nearly 10, all that good being weak beginning in mid March.
All told we estimate the weighted average of less than 40% off operational footprint was open for business in the corridor.
With this backdrop in mind, we delivered net revenues of 498 million, 62% decline from prior year.
As we would expect most of the this revenue was booked in the first half off much once those had close it bring me when light as markets only began to reopen in Maine.
We opened a bullet codify those progressively throughout me most of which more in Europe and did so slowly and cautiously privatizing consumer and employee safety.
As wholesale customers reopened shipments were minimal as the was the majority of them. We're only beginning to work through the inventory did see prior to the locked down.
The highest read news was our own E commerce business, which for the total company grew 25% for the corridor.
Total company almost was slightly down to price in March as can do most focused on stocking necessity as if it paid to shelter in place, but in April we saw a return to double digit growth and this accelerated to 79% growth in me a month enrich our U.S.
Ecommerce growth hit triple digits.
This does substantially ecommerce growth drove leverage on the investments that would be making in that channel, resulting in E commerce being profitable for both the second Gordo and year to date should trends continue we expect our E commerce business to be profitable for the full year ahead of expectation.
Turning to gross margin reported gross margin of 34%, including corporate related charges of 87 million.
Excluding these charges adjusted gross margin was 51.5% down just a 180 basis points from probably yeah.
Gross margin was bolstered by the benefited the price increases we have taken which had an even in this environment demonstrating the value all thought products do a fan.
And adjusted gross margin for a direct to consumer business. Overall has strong and was also in line with price.
As promotions were not as significant driver in the quarter.
Well said margin declined by a few points, primarily reflecting higher proportion of discounted sales in Europe as they actively managed down inventory levels.
Adjusted gross margin in the Americas was flat to last year, while Asia was up at China is higher gross margin, which had strong at flat to last year comprised a higher share of Agios revenues this quarter.
Turning to as Ginny, which on a reported basis that 551 million included 88 million in Golden related charges. Excluding these adjusted <unk> was 462 million down more than 150 million from price or a 25% decline.
Adjusted as she and it was down across the board all regions functions and guy degrees of spend right, mainly reflecting the cost reduction initiatives, we swiftly instituted.
About 20% of adjusted as she any associated with thing distribution and other expenses tied directly to revenue and these were down in line with revenue decline.
The remaining 80% is not the Ricky driven by revenue and in traditional dumbed is a fixed cost base. However, as I've said in the past in a crisis nothing is fixed and I actions to reduce these costs resulted in a more than 15% reduction.
Specifically to reduce any expenses, we've put a lot many of our R&D work goods from us doors, why live a close and engage with the landlords globally to renegotiate Ren.
Given that the Levi's brand is a traffic driver and that we are one of the few companies that continue to open new stores. We are using this crisis do not only in show that we get the best applications, but also structure more favorable lease done.
Our efforts are focused on abatement of rain for the day its doors that close.
Relocation to better sportswear design and rendered auctions on the remaining down given the expected major disruption author realistic market.
In advertising because spending it Berlin me that had been plan to drive traffic to physical stores, but retain and concentrated spend to stay connected to the consumer online.
And administration, because executive leaders and board members compensation, including the reversal of fiscal 22 any incentive accruals.
Any Nike, we rebalanced portfolio, but cutting discretionary and no just project, while accelerating digital transformation to drive a better consumer and employee experience.
It also broadly maintaining our ERP rollout plan as you believed this would have digitized processes.
Turning to adjusted EBIT the substantial degrees in adjusted as Ginny was not sufficient to offset the goal would impact to revenue and accordingly, adjusted EBIT for the quarter was a loss of 206 million adjusted net loss was 192 million and adjusted diluted loss per share was 40.
Eight cents.
Well, let's move to the balance you didn't cash flows first and foremost our liquidity position remains very strong $2 billion, which is higher than it was at the end of Q1.
We executed a 500 million dollar add on to a 5% U.S dollar bond do 2025, it's callable at a small premium which is what did for the flexibility. This bolsters our liquidity, allowing us to play defense should things don't worse or offence as we emerge on the other.
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We had previously drawn 300 million against out of all well, but would be incremental cash on hand from the boundaries. In addition to generating positive cash flow sooner than initially expected we paid the revolver back in late June to reduce our interest burden.
Independent from the boundaries are working capital cost reduction and Catholics action in response to the crisis radically mitigated our cash burn we still little around 160 million for the entire core though.
Reflecting the roughly 10 week stores were closed.
Stores have reopened we're no longer burning cash and June was positive from a cash flow perspective.
Looking to have left you shouldn't see has been a big part of this and I applaud our teams around the world for rising to the goal to enhance liquidity.
We have aggressively pursued collection through out the crisis.
We have brought up payment terms in line with industry in market practices around the world, while ensuring that our direct windows have access to supply of financing if needed.
And most importantly, we took swift action on inventory early on as the magnitude of the crisis became clear.
Despite the drop of more than 60% to go do an inventory dollars nickel reserves are only up 10% year over year.
Asia drove the bulk of the increase as inventories in the Americas was only up 5% well Europe was up 13% to probably yeah.
And overall inventory composition between core and seasonal it's similar to a we were pretty Goldman.
Oh agility to quickly God inflow of inventory is part of the equation as we will be working through inventory for at least the balance of the.
Given the inventory overhang in the sector, we anticipate assays look excess inventory in the back half of fiscal Twentytwenty depress your adjusted gross margin, which we expect we'd be lower than probably you, particularly in the third quarter.
We will sell in season product wherever possible and despite the majority of inventory being goal, we do not plan to pack and hold a material amount.
As you moved through the back half of 2020, we would strike a balance between revenues and gross margin and do this and we have the advantage of the ability to clear inventory through a network of outlets.
We have and will continue to invest in future growth like capital expenditures on stores, our omni channel and other digital initiated AI and data analytics as bad as the upgrade of our ERP.
I realize capex estimate, but 2020 is now around $160 million substantially lower than the 200 million viewers knee guide it but.
We now expect it'd be opening around 70 company operated those this year.
We had already open cookie dough those year to date, primarily internationally and we continue to open those selectively through the balance would be up.
And most of the stores. We are opening this year will be digitally enabled transforming our students from just a place to buy levis into an immersive omni channel brand experience, giving us consumers and authentic compelling and consistent expression of the Levi's Brent.
Under them Beloff organic Emoney, we had been busy since we last fall we have taken ownership of our business in Singapore and not converting as market from third party to company operated and you've taken back a handful of franchise goes in other markets into our store network.
I'm pleased to announce to get finalized the agreement you take back a U.S. wholesale men stop license for knits and woven products in 2021.
Before starting the current trends you're seeing postcard of course close let me briefly describe the golden related charges, we took this quarter.
Impacting gross profit booked in men Dori reserves of 87 million impacting as Ginny, we took a charge of 28 million for receivables due to the impact of Corbett on a wholesale customers and recorded 60 million in store related impairment.
We also took a restructuring charge of 67 million in the quota consisting of severance and related benefits for the employees, we have announced today, we'd be leaving the company in the coming month.
This was a very difficult decision, but unfortunately, it was necessary to reduced fixed cost base, while reinvesting some of the savings in accelerating the digital transformation. Another company. So that we continue to expand adjusted EBIT margin as we emerged from this crisis.
We anticipate this action will result in an annualized reduction of $400 million in compensation costs beginning in quarter four.
As we exited the quarter and moved through June we saw encouraging trends.
As we speak to you today about 90% plus stores unopened and almost 40% of the open stores are comping positively to prior year.
So overall, we keep productivity office don't fleet is improving sequentially and the final week of June productivity approached 80%.
Well its performance differences, depending on the market stores that are normally heavily traffic by tourists are down more than the others.
Conversion as high as the revenue decline is lower than the traffic decline showing that consumers are coming back with a high intend to buy.
E Commerce business continues to do really bad growing nearly 70% in the month of June even as brick and mortar those reopened.
This is more than three times the growth rate, we would seem to be quoted which speaks to the stickiness in consumer shopping trends chip mentioned.
And at wholesale nearly all doors in most markets that reopened and you're starting to get a few summer and fall order.
It's a market specific color includes the following in the Americas due to the regions doors are open it productivity around 70% and totaled the doors comped positively in the final week of June.
In Europe, nearly all our doors open it performs better among franchisees outlets in store located in smaller city and stores up moving to as last year's revenue level, where the tourist doors comping positively to prior though it varies by market and in China, almost always have reopened and I've come.
Corporate extraordinary work comp positively in the final week of June.
China remains a huge opportunity for us.
Given these trends, which are better than our expectation and absent. The second we were expecting revenue performance was is probably a to improve sequentially by corridor.
Having said that looking ahead to the remainder of the.
It's still too early to speculate and the size of the apparel category will go into pre Corbett level.
Given the recent so you're covered 19 cases in some parts of the U.S. and in international markets like India. There remains quite a bit of uncertainty on the pace of revenue recovery and result in cash flows and we do not expect revenues to return to be corporate level until sometime in 2021.
Accordingly, we continue to suspend guidance and will not be paying a dividend in the third quarter.
We will reassess dividend payments for the fourth quarter as the situation of all.
Either way, we're not strategy strong connection to the consumer and trifecta of brand products in people, we believe will emerge with the largest share of the cat degree at whatever size.
Digital business would be bigger piece of the pie as will the well I brick and mortar scope fleet and well go it is accelerating Watson disruption smaller wholesale footprint on the other side is likely a healthier one and the continuing to expand our wholesale distribution.
And as they begin to do it doesn't get confident that the steps, we're taking to sustainably reduce cost and drives greater efficiencies in working capital will enable us to further expand adjusted EBIT margin and drive cash flows.
By focusing on what we can control it will help ensure that growth algorithm is healthier and sustainable over the long term before we take your questions I've done it back to chip for I look forward.
Thanks, Harvey and as we look to the future I want to share some major things, we're seeing and why I'm confident these play to our strengths and position us to capitalize in the postcode world.
First the pandemic and subsequent economic crisis, or causing changes in consumer preferences.
Consumers want value and values, which does not necessarily mean consumers will trade down.
The pandemic is convincing more and more people, especially young people, but it's better to by fewer more versatile higher quality products of value items. The consumer can imagine word for years like a trucker jacket beforehand to get down to their grandchildren.
I've long said that me by since the opposite the fast fashion as consumers gravitate toward products that are well made sustainable built to last from season to season and year to year Levi's will be at the top of their list consumers want brands. They know love and trust and this is our heritage values that our company has.
And Bill Conway.
And the days of conspicuous consumption are gone, it's all about conscience consumption because of this sustainability is going mainstream consumers are increasingly valuing sustainability, which will be a primary focus of our marketing campaign. This fall.
We continue to innovate with a focus on comfort style and sustainable designed practices. We're also introducing exciting innovations and sustainability such as caught knives denim has featured in our latest fashion thats the high lose and stay lose as well as truckers and done Im shirts consumers are increasingly move.
And toward commercialization and for the fall season, we've been fuse the casualization trend with style influencers from the Eightys and ideas, including looser more relaxed silhouettes across bottoms and tops and for those that are seeking a lower price point or signature and doesn't brands delivered great that's fabrics and fashion.
Or the price, making fashion available to everyone.
The second major theme or seeing is that the consumer shopping behavior has been changed for good and here too we are well positioned to address the changing consumer attitudes about shopping in stores with approximately 85% of our stores in the U.S. located in open air venues such as strips outlets and off mall, we expect these.
Locations will be more preferred shopping venues as consumers consider health and safety.
These store locations also compliment the execution of our rollout of buy online pickup in short initiatives, including curbside pickup and more consumers are increasingly allocating a barger sherbert discretionary spend to online purchases. We expect these shifts in consumer shopping behaviors and the conveniences they've grown accustomed to.
Well stick and we're positioned to take full advantage.
And as a final theme, we expect the pandemic will fundamentally alter the competitive landscape, especially here in the U.S. wholesale disruption and department store door closures will accelerate and this creates an opportunity for us.
We'll be aggressive in pursuing incremental and diverse distribution opportunities with a focus on elevating levis, including in premium doors and on expanding our distribution and the value channel, where we have significant opportunities to capture market share.
Stores close a malls close we're confident we can remapped distribution overtime, both with existing customers and new ones. There are substantial growth opportunity across all of our brands categories and consumer segments to expand our head to toe lifestyle expression and win share of closet.
Elevating the lead by spread and distribution Remapping will also be addressed through the ongoing expansion of our company operated store base. There remains plenty of white space and we anticipate opening more than 100 smaller footprint mainline doors in the U.S. over the coming years.
In summary, we are confident that Allison coal is well positioned to benefit from the shift in consumer behavior and changes in the retail landscape.
We're pleased with the strong response to the numerous initiatives we've employed during the co bid prices and this gives us even greater confidence in our ability to capture the market opportunities remain ahead with that we'll now take your questions.
Thank you the floor is now open for questions. If you have a question. Please press Star then the number one on your telephone keypad due to time constraints. The company request that you ask only one question. If you haven't additional question please queue up again.
At any point. Your question has been answered you may remember yourself from the Q my pricing the pound sign.
First question comes from Bob a durable with Guggenheim.
Hi, good afternoon.
Hey, Bob Hi, Bob.
Pardon me I guess a question that I have is for me on on the 100 million dollar cost reduction program.
He said this but.
Cash.
Can you break down like the cash versus non cash and will it stick in terms of.
The permanent cost reductions that you see going forward, maybe elaborate little bit more on various cost cost cuts that you've made sure.
Sure.
Bob.
Thanks for asking the question as a reminder, the savings we believe will begin in court to fall.
Do you have questioned about cash and non cash I would say cash would be about food could non cash which is you know long term incentive stock et cetera is about.
You know they are using this crisis to reshape the BNS structurally so that we squeeze cost that we have two and investing it is baby need to so our focus is will enable us to get to the 12% plus goal of adjusted EBIT margin as amended revenues recover.
We believe that our longer term growth algorithm will be healthier and drive sustainable longer term growth, especially weekly we believe that why do we reinvest in areas like brand building and Digitization of the consumer experience. Our recent actions will also improve longer term profitability. The other thing to say.
Bob on the on the cuts is we are cutting areas that are seeing a revenue drop and a chip said these are largely corporate.
Faux we continue to invest in areas that will drive growth, which largely a focused around digitization investing in and yeah and you know other.
Principles are disciplines that will accelerate the digitization of the company.
Your next question comes from Matthew Boss JP Morgan.
Great. Thanks.
Maybe what's your view on overall demand for denim and the U.S. in Europe, as we break down the 80% brick and mortar productivity and 70% E commerce growth that you're seeing that you're seeing today and harmeet, what's the magnitude of gross margin pressure, you're expecting in the third quarter relative to 180 basis point.
Instead, we saw in the second quarter.
Okay Chip I didn't do go first and I'm sorry.
[music].
So we've got the data that we haven't specced in the U.S., where we got stayed on a monthly basis and the overall apparel care category is down.
But denim has maintained its share of apparel sales and it's unchanged. If you just look at the three month period post kobin versus the same three month period, a year ago that percentage hasn't changed so we're not seeing or a negative impact also not seeing that huge positive impact.
I will say one of the trends that we had seen particularly as we started to emerge or women's business continues to outperform particularly in Europe. We're now is more than half of the business.
And then the other thing I would say is remember were more than denim. We also have tops and outerwear and a bunch of other categories are tops business. It was not as impacted as our bottoms business. During this past quarter. I'm. So are you know we haven't seen huge fundamental shifts in either direction.
The last thing I would say, Matt is I'm really confident we're going to go on share repurchase there or you know there are number of brands that have already declared bankruptcy.
There are a lot of shirt owners out there right now and given our commitment to continue to invest in building the brand and emerging stronger I'm confident we're gonna grow share through this period of time.
And do you have question on gross margins Mad.
You know we closed the first half of the Youre with gross margin that 54.7 on adjusted basis is 70 basis points.
Hi than year ago, and that's despite the 180 basis point so decline in quoted due.
To your question about the second half of the your I'd I would say our airport is too.
You know progressively.
Hi, cleaner inventory on the seasonally mentally side as you progress to the yet so we end the year with absolutely clean them entry. We already have if you look at our evergreen products products that we could sell indices than all beyond that's still around what it wasn't the peak over level in a little over 70%.
So our expectation is that gross margin, probably as you know slight pressure in quarter, three but structurally no major change to watch, though I said a quarter to go and you know as the direct to consumer business as our ecommerce business continues to accelerate that's.
<unk>.
From a gross margin perspective, so you know why do we probably end the year slightly down a structurally we feel that once we have in just a immensely clean or cleaner than what it is today you know we had in a better sport. The other thing the doing on gross margin is you know we are scaling up and select.
Which is accretive to gross margin, we are driving more productive the D. N. A assortments you know so you know that would tend to drive.
Higher gross margins and we continue to work with our vendors.
That does too you know make a big difference we have also not scaled back pricing that'd be token you know I think once we come to the crisis, you know that will definitely help.
Your next question comes from Omar I add with Evercore ISI.
Good evening. Thanks for taking my question I wanted to dive in a little bit deeper on some of the digital growth and strength you're seeing.
You know differences across regions are you seeing anything in the data there is a new customers existing customer shopping more anything category trends that you're noticing digital and then also are you are you have you been able to use the inventory in your stores to fulfill digital demand in the quarter.
Whether it's you know online orders that you ship took people's homes or.
On line pick up in store I'd love to see where you are in occur. Thanks, Yeah, why don't I take that good evening Omar good to talk with you.
So as we alluded to in the prepared remarks, our E Commerce business has really continue to accelerate.
During the quarter that we reported in May our E Commerce business was up 79%.
It was up over 100% more than double the U.S. Scott that month of married and we've seen a continue into June or E. Commerce business globally was up 70 plus percent in June So I can't promise continued growth rates in the 70 plus percent range forever.
Our shores continue to reopen but we do expect at the pace of growth will be significantly higher than pre cobas levels, especially as we continue to invest and accelerate the digitization of the consumer experience I'm just for perspective, our ecommerce business used to be about 5% of our total revenue. It's now tracking it nine.
June was 13% on the question about who the shopper is.
During Q2, 70% of our ecommerce shoppers in the U.S. and since you asked me about 70% of ecommerce shoppers were new to E. Commerce. In Q2. So we are picking up a lot of incremental new users you know obviously during the quarter. They couldn't go to the store, but as I said I really do think that this is gonna be sticky.
The other I guess data point I can give you is remember we watch yeah I'm back in.
December and be download rate of yacht during Q2 was more than double what it was in Q1.
And a you know we're starting to see orders coming in through the up here in the U.S. as well be Athens, not just a way to transact in the simple easy way to keep Levi's on your phone. It is also more experiential as we said on the prepared remarks, we dropped our pride collection exclusively on the.
GAAP and it still did really really well so we're trying to make it more experience showing real linking or loyalty program to that.
Lastly on your clutch question about ship from store I think reset it in the prepared remarks, but.
During the lock down when our stores were closed.
We have the store managers going into the stores and fulfilling E commerce orders and about 30% of our orders in the U.S. During the month of May we're fulfilled from our shores.
By the store managers and that was a great way to help us manage inventory, we actually used to AI to security orders to where we had the biggest opportunity to clear that specific inventory and that's a capability that we've built and we're going to continue to leverage that on a go forward basis.
Your next question comes from Jason.
Yes.
Hi, Thanks, much egg question.
Yes.
A chip can you just talk about what the flow of deliveries as like right now to your wholesale partners and maybe how its deferring and North America versus Europe, and maybe you can compare with what you're seeing now versus what it was like say a month ago.
Yeah, it's still a as we said in the script Jay it's still relatively slow in terms of actual delivered deliveries you know they most of them they've only had their stores open for a couple of weeks here in the U.S.
We are starting to see orders starting to come through for late summer and fall and so that is saying you know we're seeing Sellthrough. We're also seeing replenishment orders come in right now from our wholesale customers here in the U.S. and I would say, it's pretty consistent both here and here in the U.S. as well as.
In Europe.
Your next question comes from Paul.
City.
Hey, Thanks, guys are currently you could talk a little bit more about the department store closings that you're seeing out there maybe you just based on the number of stores have been announced thus far from some of your key partners give a sense of what percent of your sales are going to have occurred through those doors. The percent do you really have to make up and.
In other channels and also I think you mentioned 100, new stores mainline stores, what would the timing on that thanks.
I'll take a shot at that hurt me feel free to pile on I mean.
No you you all know exactly the same as we do in terms of what's been announced by our Archie Department store and wholesale customers.
In terms of door closures on the rough timing around that but we do expect we're going to see you know a couple hundred wholesale door distribution distribution points, you know disappear over the next 12 months or so.
We we have experience in dealing with us going all the way back to the Mervyn stays and then as Sears kind of you know was accessing their doors, we have a lot of experience and remapping our business on kind of a store by store case by case basis I don't have a specific.
Percentage number to give you in terms of what percentage of our business is impacted by those store closures. You know obviously these guys are cutting from the least productive doors are so in the majority of our business is done its classic 80 20 in wholesale and.
You know so there will be some impact obviously from those closed stores, but we're pretty confident we can remap that distribution to other points.
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On the hundred doors, you know we've talked about this before.
Our our mainline business here in the U.S. as a percentage of our total store base is relatively small you don't think about it is in rough numbers. We have about 210 doors here in the U.S. and about 32 of those doors or so or mainline doors and we've got a model now the main line that is.
Very productive delivers a really strong ROI see that's based on great location in a relatively small footprint you know think of it as a.
3000 to 4000 square foot.
Footprint and we are in the process of opening some doors. This year that matches that profile and we see a significant opportunity to accelerate that as a way to continue to premiumize. The lead by sprint given the strength of the brand equity in this market.
Giving us more distribution points for our better and best pure tier two and tier one product.
So we're on that you know the other thing I would say is the real estate opportunities are going to be pretty significant I think as we look at the commercial real estate market with the number of brands that are gonna have to close stores.
You know, we're working with our largest landlords as Herman said you know both in terms of right renegotiation, but also in terms of opportunities for better real estate, and you know better locations and and that gives us an opportunity to capitalize during this period of time, where I think we're going to see the commercial real estate market that pounded pretty.
Heavily and that creates an opportunity for us to improve our footprint and better mapped to the consumer.
Given the wholesale dynamic, but we're going to face. The last thing I would say is there are still wholesale opportunities for us and where it's either total white space or where we've got a smaller.
Footprint today with that particular customer, where we have opportunities to continue to expand and we're working all those it's premature to say anything right now, but I expect we'll be able to talk about it as we got further down the road this year.
Your next question comes from Heather Balsky with Bank of America.
<unk>.
Oh, Thank you for taking my question I'm, so sorry.
On comedy U.S. markets, like Texas, Arizona, where where there are some searches.
Correct.
How those trends there.
Well I can say Oh man.
One question on your efforts really hum out of that.
Possible company did you first he asked kinase even beyond 100 million you you just now.
Chip you want to take the first and I'll take the second.
Yeah, just on the stores, we we have been I don't want to say scientific but we consulted with epidemiologist to put together you know very objective data based framework for us to decide when to open our stores and that's why you know still less than 90 per se.
Out of our stores here in the U.S. are open.
There are number of stores that are still close to this day, because they don't kind of get a green mark on those criteria and we are using those same criteria do evaluate whether we need to close any doors.
I will say at this point in time, we have not closed any other doors.
The doors that we reopened however, there are about $40 right now that are in areas, where the virus seems to be spiralling out of control and we looked at it we look at a three times a week Monday Wednesday on Friday, we made the decision yesterday not to close any stores.
But if this is.
The virus continues to spread and some of these hot spots I think it's quite possible. We may be closing again, some stores on a temporary basis until the iris subsides in those areas.
You know hopefully it doesn't come to that because that will suggest that the pandemic is continuing to get worse, but we're prepared to do it if we need to because we have right from the very beginning put the safety of our employees.
And our customers front and center for you to clean clothes stores really well.
On the second had the about caused so.
You know.
We are focused on reducing costs, Oh boy temporarily but more important structurally.
So that the cost reductions are.
Most of them in and out.
Our mindset is we emerge.
On the crisis with the low percentage of SGN into revenue as in men revenue recovered to record levels. So beside the actions that we've talked about in headcount and I'll, Let me talk a little bit about you know variable costs and then fixed cost so they would cause.
We'll follow revenues going to be in a good was digitization is here to stay we will drive productivity do baby can so if you would assume you know travel was red Bull.
I would say in a post go were quoted was with more digitization more leveraging of technology and you know work from home at some element, we think our travel costs would be lower as a percentage of revenue other cost you talked about gone productions.
But things like incentive reversals and I'd deployed those are temporary.
You know off of fixed on a fixed cost bases or the other thing that we've talked about is it Iran. And we think because we are opening stores, we obtained because the other traffic driver and bring traffic and we're looking at structuring our.
Rental or you know our leases are they we currently have moved favorably over the over the next few years and the new stores, maybe adding we're getting you know a substantially breaks on rentals.
That existed, but you know in the peak over there. So we think structurally as revenues come back that's accretive to EBIT margins and then E. Commerce, So which was a which is a dream on a unprofitability is now.
Making money in as that accelerate that also drives profitability a longer term.
Your next question comes from Carla Casella with JP Morgan.
Hi, I'm, you talked a little bit about department stores Internet here retail customers on did you give the number of your retail our percentage of her customer I guess your wholesale customer doors that are still closed door.
And you kind of a tracking on how the ones that are opening are performing versus pre covenant levels.
So Carla we haven't done specifically given the number of wholesale doors that.
Closed they are you know 90% of our doors are open I'd say wholesale doors are broadly similar.
We haven't given numbers on their productivity.
Because you know we don't mislead disclose.
You know customer specific data, but what we can say is progressively fell out trends are improving.
As the weeks Goodbye.
Your next question comes from the Laurent.
Vasilescu with BNP pair Abbas.
Good afternoon, Thanks for taking my question.
Prepared remarks, you noted that the license U.S. mens tops business will come back in house the 2021.
Possibly quantify the size of that business on a wholesale equivalent basis and then we've also noted that you're taking in house your Singapore.
Operations.
Are there any other larger third party markets, you're willing to take on a back in house going forward over the next year or so.
Yes so.
You know, we'll get specific numbers when we talk about 21, which is in two quarters from now, but I'll give you a bit of a backdrop in the U.S.
Lorraine.
No our.
Tops business consists of wounds D D. The knit and does for you as wholesale it was broadly license Oh, we have taken back we've decided to take back to the woven and knit starting 22 anyone that these licenses only expires in 2022.
And we would give you.
The specifics on the impact of on revenue.
In a in a couple of quarters. The thing to note here is what it does for US and then we have taken we took the women's stops license that was sold into wholesale a couple of years ago. What it allows us to do is.
To engage with the customers at the same time be engaged on a discussion on board of them and that really allows us and the customers do.
You know grewal or accelerate the growth of off the cat degree Big time, that's what we've experienced and meeting the same thing will happen you know for the licenses. We are taking back on Singapore, Singapore was a distributor market. We've had a wonderful distributor who been with the Brian for about 30.
Two years and did about 30 odd stores are we in the process of taking it back we believe that we can accelerate the growth.
Oh.
Our.
Brent, especially with all the wonderful products, we have as well as profitability over the next couple of years. So that's what we're looking at doing in terms of other opportunity. They are a couple of markets in initiative fueled the couple of markets in Asia and a couple of markets in Latin America, and again, a you know b.
How about distributors, we love of franchisees, but you know we look at this.
Take back as a.
When it's a win win for both sides and that told we look at it. So what are they doing during the crisis is building a playbook for organic M&A, which is franchisees licensees as well as distributors and as things evolve. We will you know share that with all the fuel.
Your next question comes from Dana totally would totally advisor groups.
Good afternoon, everyone.
He mentioned the price increases that you talk where are you now on the price increase.
Path, what do you see do any not hold do anything to do most of them hold and where are you on the innovation path and what we should look for for holiday, how you're thinking about holiday and just lastly, anything on the progress of Asia, then you're up in North America in terms of the recovery of reopening. Thank you.
Chip you want to go pricing all.
Well I mean, it takes I'm sure I mean, I I find I, we have taken pricing kind of late last fiscal year into in some parts of the world very early this fiscal year, and we are seeing or any worse going up or the pricing has stuck we don't have any plans to roll it back with me.
You know again, we're using.
A high and data science to give us more informed decision points around pricing. We think we still have other pricing opportunity since we go forward.
But we don't see pricing pressure right now and we don't have any plans to roll back the pricing. So it has stock.
On the Dan I have questioned about regional recovery trend.
You know a three regions Americas, Europe and Asia in the Americas.
Two third of the regions doors are open productivities around 70% I told the daus comp positively in the final week of June and as Chip mentioned digital is accelerating.
In Europe.
Nearly all of those open again performances better among franchisees outlived its and stores located in smaller cities and again you know what could have a of the doors are comping positively.
We're also seeing in Europe are done of young shoppers to AWS stores and you know it's the momentum you saw pretty cool would that continues in the Asia.
Digital footprint said through momentum is very strong.
You know markets like South Korea, and Australia, New Zealand, a driving strong.
Comps and are we seeing traffic recover, especially in a in China and in mainland doors.
Many malls, so I think thats little bit more color by region, you know India's still slow because of the acceleration of cold. It gives it a but India is largely a franchise business for us.
And your final question comes from Kimberly Greenberger with Morgan Stanley.
Okay, great. Thank you so much of it sounds like your direct to consumer revenue is its sort of recovering.
More swiftly if I could paraphrase what stores doing fairly well and ecommerce obviously reaccelerating here I'm wondering if you could give us just a little more color on the revenue metrics in terms of the retail store network. I think you talked about 80% productivity is that where they're currently running more.
With that the average since reopening and then secondarily could you break that direct to consumer revenue bucket down for S. between store revenue versus E. Commerce revenue just to give us a relative size a and then lastly on the wholesale side I think you indicated.
That you're starting to cease.
Late summer early fall wholesale orders come through and I'm wondering if you look out over the next 234 quarters, how how long do you think it takes for that wholesale revenue growth rate to normalize post cogan. Thank you so much.
Yes.
Give me I'm going to try and.
Address those questions.
You know when we talked about store productivity.
That was yeah latest trends for our stores as a percentage of last year. So it's not.
You know the average store productivities.
Since the store open there was a need this trend so assuming it is.
Last week of Oh.
Oh the June.
You know as a as a percentage of last year.
We said in June ours to E Commerce was about 13% of the business.
And so if you think about direct to consumer being 45, 50% off the business. So you could you can do the math on E Commerce and that's all you calling us it doesn't include.
He comments from the digital ecosystem, which is a.
Oh players like Amazon as the landfill L T mall et cetera, all wholesale dot com.
In terms of.
Wholesale trends again, I mentioned earlier to the question there with us difficult to talk about that.
With any precision because wholesale doors are opening progressively opening around the world.
All we can say the sell through trends, we're seeing a progressively getting better.
[noise] [noise] at this time I'd like to turn the floor back over to the company for any closing remarks.
Okay I want to thank everyone for dialing in and also being patient I realized you went long by about a five or 10 minutes here, but we wanted to get everybody's questions, which I think we did.
Thank you all for dialing in and we will be giving you another update in a couple of months.
I mean I summer.
Stay safe.
Thank you. This concludes today's conference call. Please disconnect your lines at this time.
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