Q3 2020 Levi Strauss & Co Earnings Call
Excuse me, ladies and gentlemen, this is the operator today's conference call is scheduled to begin momentarily.
That time families will again be some musical thank you for your patience.
[music].
Good day, ladies and gentlemen, and welcome to the Levi Strauss income third quarter earnings conference call for the period ending August 23 2020.
Oh, Okay. All parties are in a listen only mode I said the question and answer session.
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The telephone replay will be available two hours after the completion of this call today through October 13 2020.
Please use conference I'd number 7768738.
This conference call is also being broadcast over the Internet.
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One corner on the company's website leave out.
Levi Strauss dotcom.
I would now like to hand, the conference over to Ita orphan.
Your directory shareholder relations and risk management at leave Astra income.
Thank you for joining us on the call today to discuss the results for our third fiscal quarter of 2020, joining me on todays call are chip Byrd, President and CEO Levi Strauss and heard me, saying, our executive Vice President and CFO, We have posted complete Q3 financial results in our earnings release on the IR.
Section of our website investors don't Levi Strauss dotcom the link to the webcast of today's conference call can also be found on our site you would like.
I would like to remind everyone that we will be making forward looking statements on this call, which involve risks and uncertainties, including risks and uncertainties. As a result of the Colgate 19 pandemic there were significant uncertainty about the duration and extent of the impact of the pandemic.
Anemic nature of these circumstances mean, nobody said on this call could change materially at any time and that actual results could differ materially from those contemplated by our 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 quarterly report on form 10-Q that we filed today for a discussion of the factors that could cause our results to differ also note that the forward looking statements on this call are based on information available to us as it.
Today's date, we disclaim any obligation to update any forward looking statements, except as required by law during.
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.
Finally, this call in its entirety is being webcast on our IR website and a replay of this call will be available on the website shortly and now I'd like to turn over the call can check thanks.
Thanks, everyone for joining us today.
Our third quarter results were substantially better than we expected demonstrating the strength of our brand the power of our diversified business model and the resilience of our teams around the world or.
Our brand is the strongest it's ever been and that's locked down left we're seeing consumers coming into stores on a mission.
He buys claims were clear number one brand in the denim category has grown market share during this period driven by our success in women's right.
We bought status as an iconic lifestyle brand also positions us to benefit from the casualization trends that have been accelerated by the pandemic.
Brutal our values has guided our actions reinforcing but how a company gets through a crisis is just as important as getting through it.
Although the pandemic is changing the apparel industry, our results reinforce my confidence and optimism about our future.
We are transforming our business by focusing on the areas that will drive our success, including.
First elevating our brand through product innovation deepening our connection with our consumers and leaning into our values suck.
Second accelerating the digitization of our business, including leveraging our use of data and analytics and accelerating the rollout omni channel capabilities.
And third diversification across geographies product categories and distribution channels with an increased focus on direct to consumer.
Beginning with elevating our brand during.
During this pandemic, we've held our share leadership in mens and we've grown share in womens Europe and China.
In the U.S., we grew our total apparel sure digital and also gained share in key accounts as we outperformed competition.
We continue to launch collaborations that drive energy and buys for the brand.
Just last week for fashion, we surprised revised by Valentino collaborations and build on the runway in Milan, featuring an updated version of our 517 boot coaching W. originally released in 1969.
As people seek out more casual comfort, we're defining and leading trends with the launch of new looser more relaxed kilowatts across bottoms and tops, including a women's non graphic Tees, which grew in your driven by our soft uncomfortable perfect keys and baby change.
At Levi's, we've always believed that making a difference in the world. It's also good for business.
We have a strong track record and take our responsibility to the environment very seriously.
Our fall campaign is focused on sustainability and features our newly launched collection featuring cotton nice huh.
A leading fabric and the innovation that saves a substantial amount of water and uses fewer pesticides been cotton and.
And just yesterday in the U.S., we launched we buy second hand, a first of its kind buyback and re commerce program, which creates a marketplace that will allow consumers to purchase previously bought levis directly from us as well is turned and warn genes and jackets in store credit towards future purchase.
[noise] redevelop secondhand with Gen Z and board as they search for uniqueness and character in their quoting to assert their individuality.
More than half of Gen Z shops in the secondary market and they're looking for the real thing.
That's one of the most sought after brands when the secondhand space, we're excited to engage with all our consumers post purchase and capture demand for previously owned revise.
We also recently partnered with getting for a first ever rental only chops all centered on circular design, which is available in both the United States in the UK and which was inspired by Levi's vintage archives.
Yeah, We just launched our new sustainable Puffer jackets made from recycled plastic bottles in waste not only do these jackets look and feel great. You can now warm up well keeping landfill and energy usage down.
Beyond our efforts and re commerce and sustainable fashion, we continue to drive real progress on issues, such as climate and water, which is both good for business and what our consumers will be looking for going forward.
We've also been outspoken about the need to address structural racism and it's in her section with other issues such as gun violence prevention Boulder access.
We've teamed up with rock the boat to make sure consumers are both right.
I've turned over our Instagram platform to activists nonprofit leaders to sure how they're hoping to get the vote out this fall.
We partnered with Haley Beaver and filmmaker maker Oaky boehner.
Create to create a powerful P.S. say and portraits series with key octopus and celebrity spotlighting the importance of voter education and participation. This.
This video has generated 2.8 billion impressions were $43 million and media value.
These efforts build on our leadership, but the time to vote movement, which now includes more than 1300 companies, who pledged that their collective 10 million plus employees, well I pod to cast their vote and this year's election.
And we're laser focused on our own commitments to become a more diverse company as well carrying out the commitments first announced when we released our diversity data in June.
Our second area of focus is accelerating our digital transformation.
We're seeing tremendous momentum in digital selling our full digital sales footprint grew more than 50% in the quarter and comprised nearly a quarter of total company revenues.
We've upgraded our E commerce sites in Canada, Europe, and the US there faster and feature improved navigation and search functionality, allowing consumers to quickly find products and to streamline cart and checkout capabilities are driving increased conversion.
We're also revolutionizing the way consumers can connect with the brand and shoplift Levis other digital platforms for.
For example, we reenvisioned the back to school season, with a more digital approach with guns. The mine, we teamed up with kohls to create a unique virtual closet experience on snapshot, enabling consumers to browse and added goods assortment of denim truckers and cheese and then.
And then virtually mix and match off against to create new looks yes.
Okay. Thanks, importantly, our accelerated rollout of omni channel capabilities position us for a successful upcoming holiday season.
Buy online pickup in store, which has been very successful we'll be in the majority of our U.S. fleet before the holiday shopping season begins.
In Q3 ship from store fulfilled 20% of all E commerce volume and drove optimization of margin in stores.
We're expanding our U.S. loyalty program into all us stores and be Vive Dot com.
Now have more than 1 billion loyalty members with increased acquisition rates across all channels and repeat purchase rates have risen to 40%.
Transaction size and frequency of purchase or higher for both <unk> and we're using AI to personalize offers each consumer further cultivating loyal fans.
And on our mobile App downloaded acquisition rates continue to increase driven by more frequent exclusive collaborations an early product access opportunities.
70% of those downloading me up our new users, they're sticky and conversion with them is nearly double.
We're making good progress leveraging use of data analytics and machine learning more aspects of our business the ways Weve deploy I go well beyond loyalty mobile at ours.
At our stores is enabling local stores in China, and the U.S. to better curator assortments by predicting demand based on the specific profile preferences of consumers and the vicinity of each store.
Which would thereby optimize the profitability of these smaller mainline doors and we.
And we've expanded our successful AI and able to ecommerce promotions in Europe significantly increasing profits revenues and units and these promotions and adding to the share gains in women's products by the.
By the end of this year all E commerce in store promotions will be AI powered across 17 countries in Europe.
Internally, we're also digitizing our ways of work.
We are preparing to execute our second digital global wine watch for the Levi's spread this month using digital tools to assort, the line and drive increased efficiency and.
And in June we opened our omni channel digital showroom in Europe and.
Initially planned as a small scale test for a handful of accounts, we accelerated this capability due to Covance and conducted full digital digital selling for spring and summer 2021, with our top 200 wholesale and franchise partners in Europe.
Due to the great success, we had we are rapidly evolving this functionality will begin scaling it globally over the coming months.
We believe we are positioned to stay ahead of competition and this comprehensive digitization of our go to market capabilities.
Third we continue to diversify our business across geography distribution channels and product categories rather.
Revenue from international is nearly 60% of total direct to consumer revenues were around 40% women's is more than a third of revenue and tops is nearly a quarter going.
Going forward, we expect these areas of our business to continue to drive outsized growth.
We had to represent even higher percentages of total revenues and future.
On the international front more countries are emerging from walk down Europe, which has been our fastest growing market over the past few years is recovering strongest while traffic remains down particularly in tourist location. Many countries in Europe are ramping up quickly with consumers patiently lining up outside our stores.
And in China, which represents a huge opportunity for us we're strengthening the business by accelerating our move away from underperforming franchisees and our.
And our company operated stores, which now comprise more than half of our revenues in China, we're seeing double digit growth outside Beijing, which was impacted by a second wave with the virus during the quarter.
Just last month, we opened the brand's pinnacle Nexgen store in China in the heart of Shanghai's popular shopping district on Nanjing Road, but were.
But we're early days, we're seeing stronger than anticipated traffic and higher than expected conversion abuse, an up market consumers elevating the brand in the market.
The global Women's business continues to show strength as women share of total revenues grew to 37% of the total.
The business showed pockets of growth.
Our top 10 wholesale accounts the women's business grew 13%.
Women's shorts in both traditional fiber, one denim and fashion styles grew double digits.
Women's bottoms delivered half core quarters total lead by Dot com growth with strong performance and fiber one shorts crops rig cage and 721 high rise fits.
New woven tops performed well as we increase our assortment of blouses, expanding the reach and broadening the appeal of the revised brand to her.
[noise] from a channel diversification perspective, we're increasing our focus on direct to consumer.
We're thinking and acting DTC first as we accelerate our investments in our own direct to consumer E Commerce businesses.
Commerce grew at the fastest rate ever this last quarter.
Meanwhile, our store expansion strategies remain intact.
Physical stores are and will be an extremely important part of our business, we make our best impression with consumers through our revised stores and we've been transforming them from traditional stores into an immersive omni channel brand experience and.
And while sales remain down versus prior year were mitigating ongoing traffic declines by driving meaningfully higher conversion.
We're elevating the brand stature as we rollout multiple store formats globally, including our next gen stores, which offer leading customization techniques and enhanced digital features to drive storytelling and sales.
In the U.S.. We recently opened next Gen stores in century City, Scottsdale fashion square and Stanford Mall.
Two additional next Gen stores opening this fall.
There remains substantial white space for profitable mainline stores in the coming years, we plan to open around 100 smaller footprint mainline doors in the U.S. from the 30, plus we have today some of which will be next gen.
About a fourth of our current full price network in the U.S., our smaller footprint and they're working on delivering ROI see well above hurdle rates.
Well broken our direct to consumer business will outpace that of our wholesale channel. We continue to see opportunities to reach new consumers with new and expanded to wholesale distribution, which will support elevating the brand and diversified growth in wholesale particularly in the U.S.
Our new distribution, we are excited to announce that we just launched the Levi's brand into Dick's Sporting goods starting on line and then 11 of the top flagship stores supported by media strategy in coordination with fix the product assortment is focused and elevated showcasing the strength of the brand with hiring.
Lars and an appeal to younger consumers given this will be a premium priced offering we expect this business to be incremental to our existing wholesale business. This is.
This is a big opportunities and we expect to learn from it and identify ways to expand the partnership next year.
On the expansion front the success of our partnership with target is one of the important opportunities before us we are.
We're very pleased with the positioning of our brand to target a focused assortment of men's and women's resulting in higher than average Jay you ours and today, we are announcing an expansion of our partnership from 140 doors to 500 doors by fall of 2021.
Particularly encouraging is that in the doors are open to date, we're seeing new consumers discovering our brand without cannibalizing our business with other wholesale accounts.
Dynamism will remain and target stores to address the more cost conscious consumer.
We are selectively pursuing additional wholesale distribution expansion and we'll share more in the coming quarters.
We believe these strategies will support future growth as well as our goal to elevate the brand in the market.
And we continue to gain space within the top doors of existing customers leveraging our expanded lifestyle portfolio and the strength of our brand to drive traffic.
Focusing on their most productive doors, we seek to mitigate the impact of the inevitable closures of underperforming doors in the future.
With that I'll now turn it over to Harvey to walk you through the results of the quarter Harvey.
Thanks Chip good afternoon, everyone I hope all of you your family and loved ones are safe and healthy.
Despite revenues being below prior year due to the pandemic, we saw substantial sequential revenue improvement from the second quarter and.
And before all outperformed even our own expectations.
Our financial results were solid as we delivered higher than prior year gross margins made money in the quarter and generated even stronger cash flows than price.
A trifecta given by the financial discipline that executing as a team.
Consumers remain hungry for our brand and Thats structural economics are sound and improving as that cost and working capital actions have put us on a clear path to emerge from this crisis, a significantly more profitable and cash generative company good ROI see in the.
Mid teens.
As I walk you through additional detail on our third quarter results. My comments will reference constant currency comparison on a year over year basis in U.S dollars unless I indicate otherwise.
We published the detailed go far reported and constant currency results in today's press release, So I will not repeat all of those here.
Third quarter net revenues were down 26% due to the impact of the pandemic.
Mitigated brick and mortar declines in wholesale and direct to consumer channel from lower traffic with strong digital business growth.
Our total digital ecosystem comprised of Lee Goldman sites, we operate and the online sites of a wholesale accounts grew more than 50% in dollars in Q3 and comprised 24% of total company third quarter revenue.
Well the share award it was a year ago.
Specifically, our own E Commerce business grew 53% and comprised 8% of total company revenues for the third quarter.
Also double what it was a year prior.
And the Blue unit metrics in our ecommerce business are very strong average revenue per unit double that of wholesale.
Gross margin more than 20 points above home sales and the profit per unit, it's higher than wholesale.
Our E commerce business on a fully allocated basis was again profitable in the third quarter and year to date, and we expect full year profitability in Twentytwenty a year ahead of schedule.
Adjusted gross margin expanded 60 basis points.
Given the environment, we were exceptionally pleased with this as it underscores the intrinsic helped OPEB brands and channels.
The price increases we have taken are sticking and didn't have the highest share of sales from our direct to consumer channel.
Clearly ecommerce.
Wholesale gross margin has strong and in line with prior year.
We're running the business with the low volume of promotions and managing through inventory by leveraging our outlet network and more than 20, new pop up without resorting to extreme discounting all increased sales to the off price channel.
Levis you all around the world growth slightly demonstrating the strength of the brand Eva.
Even at higher prices abroad continue to represent exceptional value, providing more opportunity to increase gross margin in the future.
Adjusted EBITDA was down 105 million from price or an 18% decline.
Adjusted EBITDA and it was again down across all regions function and category, that's been primarily reflecting the cost reduction initiatives, we instituted last quarter.
Turning to profit we have been able to offset the lower revenues with us stronger gross margin and cost saving actions and delivered adjusted EBITDA of 84 million and adjusted EBIT margin of 8%.
The strong adjusted EBITDA yielded adjusted net income of 31 million and adjusted diluted earnings per share of eight cents for the quarter, bringing both metrics back into positive territory, you know to date, a full quarter earlier than we had anticipated.
Adjusted EBITDA and adjusted net income would therefore only negative for one quarter because of the pandemic.
Now I'll share a few highlights from our three regions third quarter revenues in the Americas declined 27% in line with the total company with the U.S. better than that given that into my goal is largely closed for the quarter.
Business further diversified towards women, which was 37% of the region still the revenue in the quarter up from 31% last year.
The signature brand delivered double digit growth in the quarter, reflecting the strength of our value offering.
Go to U.S. wholesale was only down 20% with higher gross margin than prior year.
Our U.S. E Commerce business grew 61% and all the traffic remain challenged in brick and mortar stores conversion any laws outperformed bride in both foodservice location and outlets.
Europe was our strongest performing region, where the revenue decline of 17% hold.
Wholesale and retail store decline, but broadly similar but the highlight of the region was E com is growth of 35%.
Recovery has been slower intuition occasions, with non suicide cities on a stronger recovery trajectory.
A bump ups in the region had does work through inventory and was traffic remains down convergent in higher units, but transaction reflected the consumers high intend to buy when they came out.
Our brand equity is the strongest it has ever been and Levi's remains by far the most popular denim brand in Europe.
Asia as the region declined 41% largely driven by the fact that India one of our largest markets in the region was effectively closed in the entire quarter.
In India, we proactively took back inventory from close it franchisee and reallocated to pure play E commerce, which yielded nearly 50% digital growth over prior year.
You also taking the opportunity to close underperforming stores and to upgrade and expand other into better locations, thereby gaining on net flow space in the market.
Excluding India the remainder of Asia was down 24% roughly in line with the total company performance varied notably by market.
Ecommerce was a bright spot in Asia as it grew 27% for the quarter we.
We continue to bleed Asia represents a huge opportunity to grow as a high brand and then it suggest there is significant room to increase our sales.
Turning to balance sheet and cash flows inventories at the end of the third quarter net of reserves were 1% higher than a year prior on a reported basis, achieving nip attitude with brio accordo sooner than expected.
Recent organic acquisition in Singapore, and South America represent three points of inventory is key.
Excluding this year over year inventory was down and.
The Americas inventory was 5% globe.
Offset by Asia, which is higher.
Inventory at quarter end was healthy with more than 65% able to carry over into future seasons.
We anticipate ending the year with total inventory down to probably even including the impact of the organic acquisition and.
And after burning cash last quarter, a cost and working capital action yielded strong adjusted free cash flow, a $195 million increase as compared to third quarter last year, driven by higher cash from operations and lower Capex.
We ended the quarter with $1.4 billion in cash and then on the 600 million available under our credit facility, bringing total liquidity to an ample $2 billion.
Looking forward our views in the balance of the year and beyond assuming no significant worsening off the juarez or dramatic re closure of the global economy.
First given the improving strength of the business and having exceeded our own third quarter performance expectations, we see that outperformance extending into the fourth quarter. So.
So we have banking I'd code going to beat into our internal full year expectation and raising our expectations for core to fall.
We started the quarter with with much improved trends in September on revenues gross margin EBIT and inventory.
Accordingly, we anticipate fourth quarter revenues, maybe down to probably in the range of 14% to 15%.
We expect Q4, adjusted gross margin will be flat to slightly up compared to prior years, 54.3%.
Yielding full year adjusted gross margin above prior year's 53.8%.
It'd be anticipating and we anticipate delivering Q4 adjusted diluted EPS in the range of 14 to 16 cents.
This includes lower Q4, adjusted EBITDA CNN off as much as $80 million to $100 million compared to prior year.
Despite an acceleration of advertising to around 8% fourth quarter revenue.
And the incremental expenses from a physical 50, threerd week falling in the quarter.
Please note that our fourth quarter estimates assume no significant foreign currency fluctuation during the fourth quarter.
I realize capex estimate, though for 2020 remains $160 million.
Due to the investment is going to as technology and digital transformation in areas like E Commerce Omnichannel initiatives.
And data analytics and ERP upgrade.
And regarding stores, we have opened more than $60 year to date, primarily internationally and have added another 85 doors to a network from our organic acquisition.
We expect to selectively open about Turkey more doors through the balance of the year in Taipei locations, most of which will be digitally enabled and generally would rent at much better rates than we had pretty cold it.
And while the recovery trends are encouraging there remains uncertainty about the future and therefore, we will not be paying a dividend in the fourth quarter.
If a positive business trends continue we anticipate a return to base quarterly dividend in Twentytwenty one.
Turning to 2021 and beyond I want to share some thoughts on baby tend to take this business. We still believe a return to peak gold revenues will go at some point in the second half of 2021.
And the revenue recovery trajectory has improved considerably for what we thought three months ago or not.
On our next earnings call, we expect to have more clarity on the specific timing.
And why do we expect recovery in various markets to remain uneven Europe as a whole could get back to drinking 19 level in the first half of two anyone given our brand and execution strength.
Irrespective of revenues, our cost actions give us tremendous confidence they will emerge from this crisis a significantly more profitable company. In fact, we now expect to achieve our adjusted EBITDA margin not style of at least 12%. Let me return to peak overage revenue that level.
Several years sooner than we previously anticipated and much higher than 29 teams 10.6%.
This substantial EBIT margin increased a doomed, Ohio adjusted gross margin as well as structural cost savings of around 200 million, including the headcount rent travel and negotiated when the savings we have discussed previously.
We plan to reinvest roughly half the cost savings to fuel the investments that are driving growth and dropped the remainder to the bottom line.
Beyond 2021, we anticipate our strategies and execution to drive a structurally stronger business more.
More than half our total business will come from.
D C and franchise channel, which structurally sound economics, specifically, we anticipate that adjusted EBIT margins for company operated ecommerce will be a ball with the total company. When you look almost double its current size.
Women's would become half our total business as it grows at a faster rate than men.
Our global digital footprint with double do more than that.
Our business with our own E commerce, comprising about half of that and.
And importantly, U.S. wholesale will be significantly healthier.
In Q3, the non digital business with the largest traditional brick and mortar department stores was less than 10% of our total revenue.
That's more indicative of what could we expect going forward.
Chip mentioned, we are shifting our business away from the less productive those and growing with them in the most productive those and in the digital business.
And this will complement on many opportunities to grow in L.D. wholesale distribution with pure play premium value and the new and expanded distribution, we have announced with that we'll now open it up and take your questions.
Thank you the floor is now open for questions.
Have a question. Please press Star then the number one on your telephone keypad.
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And your first question comes from the line of Matthew Boss with JP Morgan.
Great Congrats on the nice progress guys.
Matt Thanks, a lot.
Chip so on the top line can you speak to maybe the denim market Levi's lead position and how you feel today relative to pre pandemic and then harmeet on the bottom line on the 12% plus operating margin target for the timeline are you, saying that you basically plan to reach that level.
By the second half of next year or when revenues are back to the pre pandemic <unk> just how best to think about an annual margin expansion algorithm from here would be helpful.
But if you want to go first on the sure.
Sure on the topline you know through the pandemic, what we've seen is an acceleration of the trend towards casualization globally, and we obviously are set up to capitalize on that so while total apparel the total apparel Uh huh.
Category has declined during the pandemic diamonds share total apparel, it's unchanged and as you know we are by far the leading brand globally. We lead overall as a brand we lead and men's and we lead in mens and womens and as you heard during our prepared remarks.
Growing share and womens in Europe, and China, and a big part of that is being driven by.
A continuation of the casualization on the womens mens shorts once a very big part of our business this past quarter. So [noise].
No I would say compared to pre pandemic I'm, even more confident about our future and we've said this you know right from the very beginning that crisis creates an opportunity and I think what we're demonstrating is strong brands are really resonating with consumers and our brand and the agility.
Which we've demonstrated through the pandemic.
Is positioning us to set up the win over the long term show very very confident or all of the vectors of growth, which weve talked in the past.
Which we talked about in the prepared remarks, our women's business was 20% of our business when I joined the company, it's 37% now and on our way to 50, as we said huge opportunities for growth internationally and growth outside of denim and tops and outerwear business as well so very very confident.
We're going to accelerate from here.
Well, if you want to talk and it sure sure Matt and the question of the 12% as you know when we did the IPO. We said you know.
On a non stop goal was to get to 12% Didnt have a timeline.
With.
I'll spend the last few months, taking a hard look at our cost structure and we believe.
Structurally we can save about $200 million on an annual basis, we got to be investing in things like higher advertising the digital transformation and omni channel. So probably spend part of that back but you know we're confident we can drop about $100 million and I even during the crisis. We have continued to grow our gross margin.
And so we think you know growing our gross margin annually in the same way.
Weighing of 40 50 basis points, you know a combination of the two will get us to the 12% you know at least and do a question of timing Matt in all.
In our view is when we get back to and we believe we will then you get back to the annual revenues advantage. When you 19, we believe Oh operating margins will be at least 12%.
And by the combination of the two thing we think we'll probably get back to 19 lemons or sometime in the second half book 2021, New York markets or regions like Europe that can get that foster. So I think think about the the operating margin number being a when we get to annual rent.
He was up 19 structurally you know we have been I mean, making progress towards that this quarter, even though revenues were down 27% I think operating margins were 8%. So I think we've got a pause we are confident of getting there and doing it in a way that we continue to grow and unlock the topline and grow.
Market share so the combination of market share growth plus a more profitable business is going to be something that we are.
Something that we are geared towards making happen.
Your next question comes from the line of Paul machines with Citigroup.
[laughter], Thanks, guys to talk a little bit about the target assortment I'm curious just.
Just about the size of the assortment relative to what you currently have in the 140 stores that you're selling through target also relative to what you would have with the consumer would see in some of your other partner doors just in terms of the skew and price range and just what is the timing of when that business will.
ER will roll out to those 500 stores. Thanks.
Chip I think.
I think you're on mute I'm I'm here, Yeah, I would think after doing this for seven months I would figure out the mute button on its great question and and I was saying if you haven't been into a target to look at the assortment I'd encourage you to go it's a very tight assortment on the pad on both the men's.
Business and the women's business is relatively small about 30 to 40 items on the pad, but it's a good assortment of tops and bottoms fees sweatshirts Trucker jackets, and then a tight assortment of bottoms on both the men's and women's business and the works out to do.
Sure are going out at a premium persons on the balance of wholesale. So we've been really pleased and I would say the target has been really pleased with the performance that we've had come this relatively tight relatively small footprint.
Offering at.
And ER and hence the decision to expand to 500 doors over that over the course of the next year and will.
And we'll we'll do it in waves, but you know what kind of committed collectively with with target to get to 500 doors by the fall of 2021. So we've been really really happy with it they are happy with that and it's good for the brand. We know that we're picking up incremental new consumers to the Levi's brand with us.
And we will continue to have Dan isn't on the floor to representing a value offering at target. So.
You know, it's it's a it's a really good play for us and we're very excited about the expansion.
Thanks Chip just just a follow up have you seen any negative impact on the guidance inside of the business and those hundred 40 doors and then just how does this target assortment compare to what you all have index.
Okay, great. So no negative cannibalization in fact, when we first started testing target with the Levi's Red pad business, we pulled down as an out of the store and to make room for Levi's and collectively we concluded that was a bad idea. We went back retested denizen backing those same.
Indoors and and it proved that these are two different consumers and so we'll continue to have an assortment of bolt ons and everybody since we expand and target relationship fixes are completely different offering you know weve talked before about kind of good better best within our product range.
Change and if you were saying if you were to think about it our better and best Assortments tend to be what we have in mainline and in most of Europe and in most of Asia and what we're going to have index is our better assortment. So the price point is going to be significantly higher than wholesale.
On an average on the bottoms are going to be priced around $79 compared to you know roughly $40 in wholesale broadly. So it is a much more premium again, a very tight assortment relatively small pad, but very highly curated just as we've done a target yeah.
And you know, we're going to we're going to learn but we're really excited about this because it is again an incremental opportunity with a wholesale customers that is as is running right now and we expect we're going to see incremental consumer loans and the incremental incremental new consumers and.
And that this business is going to be really incremental.
Your next question comes from the line of Bob terrible with Guggenheim.
Hi, good afternoon, nice quarter, Hey, Bob.
Harmeet just following up on the path to 12% EBIT margins can you.
Can you elaborate a little bit just about what you're seeing right now on the E commerce profitability. The progress you're making you know sort of how that fits into the progress that you're seeing on on the profitability side.
Yes sure. Thanks.
Thanks, Bob.
Great question you know.
Understanding profitability by channel is something that near and Dear to Hodson you know we've been doing it now for years basically as we started investing to build the E commerce business and we've been tracking it religiously for a long time I think our E commerce business Holistically.
Is profitable and when we talk about profitability, we talk about it on a fully loaded or allocated basis includes all advertising costs. It includes all technology costs et cetera, and it was a drag.
P. pandemic, it's now you know in the black and unprofitable.
And if you think about the unit metrics.
He call much baby.
Incremental unit every new unit you know our average revenue nearly double that of wholesale gross margin of 20 point.
You know above a wholesaler 15 above company average and profit per unit is higher and so you know as the move towards there driven by Digitization of the consumer experience I think we feel really good about you call myself or.
Helping overall profitability for the company or the only other piece I'd say job then E. Commerce. So it was losing money it was a drag.
Making money, so it's helping but to be accretive to you know like 12% to get close to the 12% you call Ms business will need to double and we feel good about that and that's why we think long term you know, we'll be able to grow he call much without cannibalizing, a brick and mortar experience in terms of actual cause.
You know the shipping costs, a not a drag for us. The fact that is shipping now from from our own stores is making a difference we've kind of locked in shipping prices through the end of the year returns that down post pandemics and that's helping a and a you know a folks are looking to drive.
Comments profitability as we speak so and building a lot of efficiency as we impella implement omni channel initiatives, we feel good about that this is going.
Along with them.
Next question comes from Atlanta on my side with Evercore ISI.
Thanks for taking my question nice quarter.
You know Tim you talked a lot about about a lot of initiatives stores digital products partnerships technologies channels regions, which are really reflects the opportunity. The brand still has but it's a lot of balls in the air and you know you've recently had a corporate head count reduction if you could talk to how you're able to restructure the organization in a way to be leaner.
But still manage all that growing scale and complexity and also how does this kind of doing more with less feed into the margin story that northstar, 12%. Thanks.
Yeah, I mean, we've been saying for a while that we had.
Opportunity to.
To be more agile to be more market response, and you know part of a part of what Weve tried to do through this crisis and with on the head count reduction is a key focus our resources much closer to the market and build capabilities. So that we can be more agile.
And scale things and you know I could point to several examples even just during the pandemic, where our responsiveness to the rapid changes that we've seen and in consumer behavior. During the pandemic has really helped our business yeah. If we look at so.
The omni capabilities and we've been investing in R&D now for a couple of years, but.
You know we saw this opportunity to ship from store rebuilt the capability to ship from store, 20% of our E Commerce business.
We shipped from our stores in the U.S. this past quarter, which is consistent with third quarter before that Dokey go.
We built the ability to buy online pickup curbside pretty quickly and it isn't just a little bit less than half of our stores in the U.S., but it'll be a 100% of argue our stores by the holidays. So a lot of this is about candidly empowering the teams close to the consumer and powering the team.
To focus on winning in the marketplace and trying to cut out a lot of the corporate bureaucracy and the things that slow us down. So we're really focused through this entire transformation on winning with the consumer leveraging the strength of our brand leveraging the key capabilities.
What we have done that we have built and really the sources of some of our competitive advantage and driving those and as we reduce cost it gives us the ability to investing the things that we know are going to continue to drive our business. That's that was the hard choice that we were faced with a a quarter ago and.
Do we carry a bloated organization for the size of the business that we're gonna be prudent pandemic and cut everything or do we right sized the organization for the size of the business that we're gonna be modifier business model. So much more scalable with the lower headcount so that as we grow back we get more leverage and really.
Focus our investments on the things that we know drive growth on this business and that's effectively what we've done and I think you're starting to see even after only one quarter some of the fruits from that.
Your next question comes from the line of Chase home with you yes.
Great. Thanks, so much.
Actually about the wholesale business probably.
Our sell in rates compared to the softer rates.
You went through the quarter and now [laughter] September was much improved can you give us what the sales growth.
Well I was in September.
Jay I.
I'd.
We tried to hear you I think it was a little did.
Difficult, but I think your question was sell through rates and import and importantly, the trends as we closed September what I'd say is trended we closed September a much improved both sell in as well as said true September.
September is better than expectations that we've talked about for the corridor there a little more cautious given uncertainty about holiday the resurgence of the wire as the stimulus the upcoming election.
And as you know we're slightly just in one just from a calendar perspective, because our fourth quarter at September through November doesn't include in December but as we ended the quarter trends are looking much better and encouraging regions like Europe are bouncing back a lot Boston is making a difference and thats why would I know.
Then two levels being where they are I think you know that's why we are signaling that gross margins will be the flat to slightly better which from the drive improved profitability, we do have product.
You know for the holiday season.
Choosing some product in some parts of the world because.
I've seen demand surge beyond our own expectations, but we think we'll be able to service a consumer need. So that's an overall perspective difficult to talk to you specifically, but September numbers, because it's in the next quarter, but I think to get the gist.
Next question comes from the line of Love, Ron That's the Nesco with Exxon BNP Paribas.
Questions and thank you Hamid for giving us some guardrails on total company revenues for the fourth quarter were down mid teens, just curious to know how do we think how should we think about that range between the Americas EMEA and Asia and then I think you mentioned that Beijing was.
The second second locked down had a slight impact on China revenues for the third quarter, just curious to know what your thoughts are for Europe. It sounds like it's strong, but any thoughts on volatility with regards to potential lockdowns with cities like Madrid, and Paris, and the news [noise].
Yeah, you know its thank Loren for your question I think specifically I'd say is yes, probably a little worse than the company average for the quarter largely driven by the fact that.
You know markets like India continue to be a you know.
Ah you know close the opening but opening slowly.
Yeah markets, even within Asia.
You know, Australia region, Malaysia, and a couple of other countries Korea doing a lot better, but I think as a general trend our expectation is that it would be slightly worse.
Worse than the company average I'd say Europe would be the strongest followed by a you know a U.S. followed by because in Americas. You also have Latin American most of Latin America was close is opening so that's good.
That's the way I kind of rank it Europe strongest followed by the Americas, followed by Asia.
I think your question about.
The resurgence of the wireless.
You know every every countries.
I'm trying to figure this out people are dealing with it differently I think what is important for US is you know, it's keeping that consumer and and employee safety at the forefront servicing them on.
By driving digital connection to the consumer as well as ensuring our product and our marketing calendar.
In all focused on the point chip talked about which is sustainability initiatives.
And you know our products that you know our you know hitting home as consumers start shopping for the prolonged holiday period.
And I would say Lauren, but we are picking up share in Europe or in other parts of the world.
And your next question comes from the line of Dana Telsey with Telsey Advisory group.
Good afternoon, and nice to see the progress as you think about this upcoming fourth quarter and it seems so long ago that we were talking about this fourth quarter, having two black Fridays in it I mean, how are you thinking of the fourth quarter and the planning with the two black Fridays today negate each other since this may not be the black Friday that we had expected.
And chip on the marketing budget, which is re ramping where do you see that ramp going to and what do you see as the new initiatives or new collaborations that we should be looking forward to and especially given the announcement today or yesterday, what you talked about with second hand, Levi's and what that potential contribution to be thank you.
Yes, let me quickly address the Black Friday question, Dan and thank you for that reminder, Oh yeah.
The two black Friday is in our fiscal 2020, the first Black Friday was in the first quarter of this year. So that's behind US. The second Black Friday is isn't core to full I'd say, you know between Black Friday, and 50 Threerd week gets it so in a car.
<unk> points of growth Ah, but it's the it's such a different black Friday, right and ER and ER and so.
And so our view is you know, it's going to be fairly promotional in and.
And along the holiday period November is largely going to be a holiday season, you know getting into December so it's difficult to predict with any precision word you know a week or two weeks can do and so but the fact that our quarter four indication up our results represent an improvement relative to.
<unk> three I think is indicative of the fact that we do see is demand improving.
Well, what do you chip.
Yeah, I'd I'd be really brief here as we said in the prepared remarks.
Gonna take our advertising spending up to 8% of revenues in the fourth quarter and some of that is obviously going to be targeting driving traffic to our E commerce sites, but from a campaign standpoint, we're very focused on sustainability, our whole second half campaign is around sustainability. We're.
Watching a collection of product using cotton ice temp, which we talked about in the prepared remarks, which is a fabric innovation that is much more sustainable sustainability is really big right now because of the pandemic catch very very strong with genji consumers in particular, so I'm a big emphasis there.
And our holiday campaign is going to be focused on giving better gifts that last which plays right to our strength as a brand we're.
We're very excited about the re commerce initiative.
Initiative that we just announced yesterday.
The re commerce business today is $30 billion projected to grow to $60 billion over the next couple of years, we're partnering to get them started but it represents.
A significant opportunity it's the way Gen. James He is shopping today and they're buying things from bookstores wearing them for a week, taking their Instagram photos. So that it can be uniquely theirs and then they're thrifting them again and it it's.
It's a big step forward from a sustainability standpoint, too because if we can get levi's recycled and we can capture share of that recycle business. It is a big opportunity for us So very early and we're going to learn as we go on this but it's something I'm personally really excited about.
Thank you.
Your next question comes from line of Kimberly Greenberger with Morgan Stanley.
Great. Thank you so much and thanks for all of the details and transparency on the call Tonight.
Gross margin this quarter was a real positive surprise for us and I'm wondering it sounds like you're expecting more of a flattish gross margin.
Gross margin in the fourth quarter, but against a very high level.
Do you think about the third and the fourth quarter. It is here are there any benefit your gross margin you think would reverse next year if there were.
Geographical mix shifts that may not prove to be sticky or some channel mix shift I'm just trying to think about full year 2021 gross margin.
And should we be assuming a it can actually get back.
Back to a higher level than 2019, because the trajectory seems to be one certainly where you could sustain gross margin at higher levels over the medium term.
Yeah, Kimberly good question you know.
I think the gross margin accretion.
Is really driven by the intrinsic strength of club brand the pre minimization of Levis, you know around the world the balance that we have struck between dry.
Driving revenue as well as selling inventory in a very promotional environment.
We are using AI now to determine the breadth and depth of promotion we are using AI to help us determine assortments in stores are and I think and we have rights Oh, you know even during the pandemic for example in the U.S.
Yes up with certain women styles, we took a price up by $10 and is broadly speaking so.
So I think.
The the one tailwind is obviously the growth of E commerce and the higher you know a direct to consumer business.
In died might settle down and you know overtime, but I think the combination of a pricing bar that we have or the fact that we continue to be minimized. The brand. The fact that we are going to be growing internationally faster than the U.S. The fact that in the U.S.
We are transforming the U.S. business to more of a DTC business I think those are all tailwinds that will continue to do you know working the favorable growing gross margins longer term I would probably a growth algorithm on gross margins 40 to 50 basis points I'd say.
I think I'd kind of maintain that you know on the long term horizon.
I know that that is right.
Thank you.
Your next question comes from the line of Aleksandrov, well, that's what's called Goldman Sachs.
Sometimes andrew Thanks, so much for taking my question here I'm very thinks that the with the formal name that I am wondering if I could ask a formal a sort of high level question on the U.S. wholesale business. So could you remind US you know you mentioned.
Yes, physical department stores now less than 10% of total sales, but if we take the U.S. wholesale business you know whats the breakdown between channels and how do you envisage that changing all the time I mean, it sounds like there in new distribution opportunities and you called out a few in mass and.
14 specialty you know clearly you know what those might be growth areas, all that all scenarios, where youre proactively pulling back we'll see you know natural declines and how might that affect the shape of the business all the time.
Yeah I think.
You know think of us I'm going to.
The U.S. wholesale business.
In areas where.
Where we are connecting better with the consumer and areas that are healthier so with that.
With the traditional retailers they adopt doors because as we build a lifestyle. You know in addition to the brand is still a huge opportunity for us.
And the and as Chip just mentioned with new distribution in target and VIX is you know is we're looking at it premiumizing. The brand. So there are a couple of other premium customers. We are working on so I think the overall or the way I would look at it Alex is.
Our wholesale.
Wholesale business, which in the U.S., which is about 30% probably settle in them in the mid twentys longer term.
But that's largely because the direct to consumer business grows and we grow would be would be stronger wholesale customers or the non the 10% really represent the non digital piece of the traditional retailers because our focus with the traditional retailers is growing.
On the top doors and individual business. So overall the growth algorithm that you have for wholesale probably becomes a stronger and healthier longer term.
Fantastic Thanks for all the color.
Yep and our gross margin the newest wholesale for the quarter were actually up year over year. So that represents this be the focus between markdowns and the <unk>. The <unk> the customers were going to.
And at this time I would like to turn the floor back over to the company for any closing remarks.
Okay I want to thank you all for hanging and then we went a couple of minutes longer than planned, but just because we had so many questions Ah. Thank you all.
Thank you all for joining us I hope you all remain healthy and safe on our next earnings call isn't until after the holidays. Our Q4 earnings call. It was I think in late January So wish you all very happy holiday and we'll be in touch. Thank you all for joining us today.
Thank you. This concludes today's conference call. Please disconnect your lines at this time.
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