Q4 2020 Levi Strauss & Co Earnings Call
Good day, ladies and gentlemen, and welcome to the Levi Strauss and co fourth quarter earnings Conference call for the period, and then November 29, 2000 and 'twenty.
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 February 3rd 2021, one week after a call for the telephone replay.
Please use conference I D 696 3016.
This conference call is being broadcast over the Internet and a replay of the webcast will be accessible for one quarter on the company's website Www Dot Levi Strauss Dot com.
I would now like to turn the call over to other orphan senior director of shareholder relations and risk management at Levi Strauss and co.
Thank you for joining us on a call today to discuss the results for our fourth fiscal quarter of 2020, joining me on today's call a chip Bergh, President and CEO of Levi Strauss and Hermite sang CFO, we have posted complete Q4 financial results and our earnings release on our IR section of our web site investors Dot Levi.
Dot com.
Linked to the webcast of today's conference call can also be found on our site, we'd like to remind everyone that we will be making forward looking statements on this call, which involve risks and uncertainties actual results could differ materially from those contemplated by our forward looking statements. Please review our filings with the SEC and particular, the risk factors section of the and.
We will report on form 10-K that we filed today for the factors that could cause our results to differ also note. That's a forward looking statements on this call are based on information available to us as of today and we assume no obligation to update any of these statements.
During this call we will discuss non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are provided in today's earnings release on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call and its entirety is being webcast on our IR website and a replay of this call will be available.
On the website shortly today.
Today's call is scheduled for one hour. So please limit yourself to one question at a time to give others the opportunity to have their questions addressed and now I'd like to turn over the call to chip.
Thank you I had a good afternoon, everyone and thanks for joining us today.
Looking back on 2020, I am both grateful for and proud of our teams and how well they executed and face of all the challenges created by the pandemic and other crises.
From the start we acted quickly to protect our people our consumers and our business.
And we demonstrated the resilience and agility needed to meet unexpected moments, while also building for the long term.
Work, we have done this year. It gives me great confidence, we will emerge a stronger and more profitable company.
And the pandemic hit there was tremendous uncertainty about the rest of the fiscal year.
And we were operating against several scenarios and I'm proud to say that we beat our internal expectations and overall delivered a really strong year given the backdrop.
A performance further validated the power of our brand and the strength of our strategies and our ongoing ability to adapt to the changing expectations of our consumers.
Many of the changes that have accelerated and across our industry look like they are here to stay a significant consumer shifts such as the move towards casual ization, a heightened focus on sustainability and a more conscious consumption play to our strengths.
And forward, we are sharpening our focus and doubling down on the things that are making and outside contributions to our business performance things that will differentiate us and drive value for our shareholders.
First leading with our brands.
Operating with a D C first mindset and pivoting to act more like a vertical retailer.
Third we will further diversify our business by driving outsized growth and underpenetrated areas and.
And fourth digitally transforming our business.
I'll talk first about how will increasingly lead with our brands.
This has an unmatched brand heritage and authenticity that has resonated with consumers for more than a 150 years and.
And we are driving deeper connections to our consumers than ever before through our product.
Marketing.
Digital and physical experiences.
By further strengthening brand, we can increase market share and denim, while continuing to increase our share of closet and other categories.
We remain the global leader and denim by a mile and maintain jeans market share leadership and the U S and we've grown share and women's and key markets and Europe, like Germany, France and Spain.
We're seeing increased demand for our iconic products like our original five a one pit, which was up 80% across mens and womens and Levi Dot com and Q4.
At the same time, we are building, new icons and establishing denim trends.
Our women's fashion fits and high rise continue to drive growth and we're seeing strength with our newer more relaxed fits.
We're focused on growing lifestyle and share of closet and categories other than denim bottoms.
And those categories remains significantly underpenetrated.
We're continuing to advance the casual aesthetic and recently launched Red patch sweats, a unisex Gen Z focused pilot collection, which sold out in weeks and we.
We will follow up with a bigger collection later this year.
In Q4, we collaborated with sustainably minded brands like farm, Rio and Ghani iconic brands like new balance, which sold out instantly across the globe and we teamed up with leading premium and street wear brands like awake and why and golf Wang.
Going forward to 2021, a collaboration pipeline is robust, including and Upcycling collection with Italian fashion House Newbie and another collaboration with Valentino.
We are targeting Gen Z brand connections and new ways of social shopping leveraging digital platforms and Q4, we launched our first ever Instagram live shopping experience, allowing the audience to directly purchase the products displayed by our stylists on Instagram without ever leaving the experience.
And we joined forces with Snapchat, launching a levi's a bit mochi collection, which saw a strong engagement, especially with a younger consumer.
Our brand and our values reinforce each other making us a stronger company.
A great example of this is our sustainability work.
It was the focus of our fall product line and marketing campaign and will be again and the spring.
We're making progress on our industry, leading science based targets on climate.
For example, we now use more than 70% renewable electricity and our owned and operated facilities on our way to a 100% by 2025 and.
And we were one of only three apparel companies recently named to the carbon disclosure project a list.
We're innovating on sustainability too.
We've been scaling caught nice temp and our mainline assortment and last July our wealth Red line brought to market a pair of jeans that uses recycled denim content.
And a year ahead, we will continue to drive more sustainable and more search of a products and practices throughout our supply chain.
Second from a channel standpoint, we're thinking and acting DTC first as we accelerate our investments and our own retail stores and ecommerce businesses the.
The growth of our DTC business will be accretive to our company gross margins and improve the overall profitability. It's a company.
And DTC provides us a forum to demonstrate the strength of the brand and showcase our category expansion.
Physical stores are and will continue to be and important part of our business. They are experiential and help us to connect and engage with the consumer and build brand equity.
And the fourth quarter, we opened 21, nextgen stores, which offer and elevated and digitally connected experience for our consumers.
We now have five nextgen stores, and the U S, which along with our other smaller footprint stores.
A higher rois seat and the average U S Mi and my door.
We will continue expanding our retail footprint, capturing white space opportunities with a focus on these more productive store formats.
Our owned E Commerce business grew at a record rate this year, a 29% from last year and is now profitable on a fully allocated basis.
We believe growth rates will remain above pre pandemic levels as we continue to build out our omni channel capabilities.
During the pandemic, we accelerated building and scaling a number of new omni capabilities that had been on a roadmap, including buy online pickup and store wide queuing same day delivery and appointment scheduling and <unk>.
Successfully implemented strategies to improve storage efficiencies and consumer experience like mobile checkout, which enabled us to transact with consumers on the sidewalk when store capacity was constrained.
Also rolled out additional payment options like after pay which has been scaled to all stores and the U S and is delivering and 80% increase and average order value for in store transactions.
Our ship from store capability has been expanded to Canada, the UK and Germany, and we plan to continue deployment and Europe in early 2021.
Yes.
We're also driving meaningful growth and our loyalty program since rolling out the program in Europe and Q4, we've reached close to a 4 million members worldwide were.
We're using AI to enhance and differentiate our loyalty programs by offering personalized benefits to members and helping us achieve meaningful growth and enrollments revenues and App registrations.
And our mobile App continues to beat our expectations for both average order value and engagement driven by more frequent exclusive collaborations and content.
Early product access opportunities and personalized product recommendations powered by AI and.
And Q4, the download rate increased 65% versus the prior quarter and 70% of our consumers on the app or Gen Z or millennials.
A.
Our third area of focus is the diversification of our portfolio by continuing to deliver growth and areas that are underpenetrated and are accretive to margins I will share. The progress. We've made in these areas since 2015 as well as our longer term goals, which we expect to achieve and the next decade.
And 2015 international sales accounted for 47% a total revenues and 2020 international was 56% and is headed to two thirds.
And 2015 women's represented only 20% a total revenues in 2020 womens was 34% and on the way to becoming path.
And 2015 DTC accounted for 29% of our total revenues in 2020, DTC was 39% and we think it could be as much as 60%.
And 2015, our tops business represented 11% of our total business and 2020, it was 21% of revenues.
Another 16% of our 2020 revenues was from other categories that are not then a bottoms such as accessories footwear and she knows over the next decade, as we drive outsized growth and tops and these other categories. We expect half our revenues will come from products that are not denim.
And bottoms.
And in 2015, our total digital ecosystem, comprising both our own digital sales and those of our customers was less than a 10th of our total revenues and 2020 it grew to nearly a fourth.
By 2030, we expect this to get to one third with our own ecommerce comprising about half of that.
We're also diversifying within wholesale where we continue to focus on attracting new consumers through more digital and more premium or.
Our value offerings continue to perform.
Signature has the number one selling women's Jean on Amazon.
And as seen double digit growth at Walmart.
Our red tab rollout a target and so on track to expand to 500 doors by fall of 2021, and we're excited about our joint announcement yesterday of a new revised target limited edition collection, which will showcase the levi's brand in unexpected ways with an assortment of home and life.
Style items.
And as we shared and Q3, we expect a non digital business with our largest traditional brick and mortar department stores to be less and 10% of our total revenue going forward.
But it's more than just where to play. It's also how we will win we are digitally transforming everything we do enabling us to deliver a superior consumer experience increase efficiency and our business drive more profitable growth and reduce costs. We continue.
And to expand and scale the use of AI and our business beyond the consumer experience, including power and most of Levi's promotions globally to opt out of a optimized margins and assortment planning and labor scheduling and our stores.
We're also digitizing our ways of working our brands held for virtual line assortment meetings, reducing physical samples by leveraging digitize the assortments with photo realistic three D renderings and.
And we're investing in digital tools to shorten our go to market process.
Before I turn it over to her meet I want to reiterate our commitment to making our world and workforce more equitable and inclusive.
We've hired our first chief diversity inclusion and belonging officer, Elizabeth Morrison, who will lead this important work.
And we will publish again, our annual representation data as well and so our diversity pay equity data later this year.
I look forward to sharing with you our progress on a commitments going forward.
Let me now turn it over to a heartbeat.
Thank you chip good morning, everyone I hope all of you your families and loved ones are safe and healthy.
We had a very strong quarter and holiday season, both beating our expectations. Despite the resurgence of the virus and resulting store closures mainly in Europe.
Quarterly revenue comparisons to prior year have continued to improve sequentially from 62% down in Q2 to 27% down in Q3 to 12% down in Q4.
The structure and economics of our business continued to improve as we reshaped our P&L.
Ongoing and outsized digital growth continued improvement in gross margin and a reduction in base operating costs, while reallocating dollars to strategic choices that will accelerate growth.
The fourth quarter was profitable and generated positive cash flow. Despite the double digit revenue decline worse is right yeah.
I'm very optimistic heading into 2021 as we continue to focus on executing a strategy with discipline and high ROI investments driving margin and cost productivity and working capital efficiencies.
And I remain convinced we will emerge from this crisis a six.
And the frequently and more profitable and cash generative company with adjusted EBIT margins of at least 12% and with ROIC in the mid teens.
As I walk you through additional detail of a fourth quarter reserve My comments will reference constant currency comparisons on a year over year basis, and us dollars unless I indicate.
Net otherwise.
We published a detail a little pause results in today's press release, So I will not repeat all of those here.
The 12 per cent decline and fourth quarter net revenues beat our guidance of a 14% to 15% decline.
Despite the adverse impact of unexpected store closures.
Almost 15% of a global store base was closed in November including about a third of our stores and Europe.
And these store closures have continued into December and January.
Based on the trends, we're seeing through October.
We estimate that closing a stores net to the amount we saw shift to online cost us approximately two points to a revenue growth and three cents of EPS and car to a fault.
We also had a 52 week and a black Friday, and the fourth quarter, which benefited year over year reported revenue comparisons by approximately three percentage points.
I've told a digital ecosystem the combined revenues of the E Commerce sites, we operate and the online sites. So far a wholesale accounts comprise 23% a total company fourth quarter revenue up from 15% a year ago.
Total digital sales grew in the fourth quarter by more than 13%.
Growth accelerated in November and we pivoted consumer demand in Europe to online.
Specifically, our own E Commerce business grew 35% and protocol and nearly doubled as a share of total company's revenue two 8%.
Our increased focus on a E commerce business has enabled us to recapture about half the loss sales of a physical store.
And as I shared last quarter you'd call Ms profit for incremental you and it is higher than wholesale.
Adjusted gross margin expanded cookie basis points to 54, 6%.
Hi, as fourth quarter adjusted gross margin, we have ever posted a.
And demonstrating the intrinsic value of our brands and channel.
Price increases and a highest share of sales from a direct to consumer channel were again the primary drivers.
Levi's AUR was around the world Rose slightly.
Gross margin expanded significantly for both E commerce, and wholesale as we typed and discounts and reduced sales to be off price channel.
Adjusted SG&A was down $61 million from probably a 9% decline.
And we've continued to deliver a strong cost reductions across the board, primarily reflecting a structural cost reduction initiatives.
We are reinvesting a portion of the savings behind the areas driving a growth, namely BDC and technology.
Other SG&A costs were slightly higher than a prior expectation primarily due to higher variable cost on a revenue beat.
Fourth quarter, adjusted EBIT was $113 million.
Adjusted EBIT margin was 8% and adjusted diluted earnings per share was 20 cents a dakota.
And all higher than our expectation.
Now I'll share a few highlights from a three region force.
Got a revenue in the Americas declined 11% slightly better than the company.
Like didn't make a was a bright spot in the region, especially on a quiet Andy's business grew and Lakota and through holiday.
The full digital ecosystem and the region grew 13% and the corridor.
U S E commerce growth rate accelerated through the quarter to a 73 per cent for the month of November with a phone call to a growing nearly 30%.
And finally, the region's operating income was really strong declining only 8% on the 12% revenue decline.
Europe was striking slightly above prior year levels through October and demonstrating the resilience and strength of the brand we've consistently seen.
And then the Lockdown hit day November, which led to a third of those closing and the reagents quarterly decline of 12%.
E Commerce growth rate continued to accelerate as we posted ecommerce growth a more than 50% per Lakota.
And with significantly increased in November to over 150% when we closed a those.
A brand equity continues to grow all these are the most popular denim brand in Europe by fall Levi's and continues to gain share and the marketplace.
The team and the region is getting experience with a COVID-19 playbook, which combined with a consume a strong demand from the brand gives us the confidence.
And that as the surge subsides and a log downs lift we should snap back as we did after the first.
Asia as a region declined 15% a significant sequential improvement from last quarter as India began to reopen.
Excluding India and the remainder of Asia was down 11%.
For a digital ecosystem and the region grew 27% and the quota.
China was nearly flat to prior year as DTC grew high single digits, while we reduced sales to franchisees to proactively manage inventory has.
We are increasing our investment and focus on Asia.
And the Levi's brand has high brand awareness and we have a significant opportunity to accelerate sales growth.
Turning to balance sheet and cash flows.
Inventories at the end of the a net of reserves were 8% low price.
Due to a revenue outperformance and disciplined inventory management and adhere.
And inventory composition remain healthy with more than 65% and able to carry over into future seasons.
A cost and working capital actions again yielded strong adjusted free cash flow in the fourth quarter, bringing full year adjusted free cash flow to a $141 million.
A 22% increase a o'brien.
I'm, particularly proud of hall, our entire organization raised the bar on cash management, as we focused and managing through the different crises, while emerging stronger.
And while we prudently reduced our original Capex budget of 200 million when the pandemic hit and we continue to invest behind high ROI growth initiated.
And our Capex was 130 million to cause a which went to his technology and it took to accelerate a DTC initiate it.
We continued to expand our store footprint, primarily internationally in Taipei and locations most digitally enabled and generally a good rents at much better rates than we had pre COVID-19.
We opened 90 doors doing the and added another 85 dose from our organic acquisition, bringing total company operated store count at year end 2042.
We expanded our AI and data analytics team and continued automating and digitizing processes.
And in late November we successfully went live with S&P and Mexico, the first market and a global multi year cloud based ERP upgrade.
The implementation was done remotely and the automation the system brings will greatly enhance the efficiency and agility of our team there.
Next moving on to North America, starting with Canada.
The fourth quarter brings to a close what has been a year like no other I've ever experienced.
We have much to be proud of.
Sales from a digital ecosystem accelerated through the a and he's finished would fully a growth of 26%.
Oh and E commerce is not profitable on a fully allocated basis, a year ahead of schedule and a generating a low single digit EBIT margin.
We expect that EBITDA margin in this channel should expand and ultimately track too bad a deal with a company average as the business doubled in size and the coming years.
We have delivered adjusted gross margin expansion of 60 basis points to 54, and 4% and at levels above a growth algorithm.
Execute a structural cost savings of around $200 million collectively and head count and rent travel and negotiated a vendor savings even as we continue to invest in it and initiated driving book.
The strong gross margin and cost savings enable us to have only one unprofitable quarter and to deliver high single digit adjusted EBIT margins in call. It three and called a poll despite double digit revenue declines in these quarters.
And we drove tremendous improvement and working capital.
Before sharing thoughts and a year ahead, let me take a moment to discuss a holiday results.
As a reminder, we define holiday as a combination of November and December.
Both months were impacted by Lockdowns and store growth.
Adjusting for the impact of store closures, we estimate a holiday revenue down 11% better than Q4 with a much stronger December.
We saw a steady fundamental improvements through the holiday season.
Revenue growth in our digital ecosystem accelerated to 33% ahead of the market that is growing our digital market share.
Our own E commerce remain profitable through the holiday period, as we took a surgical approach to online promotion.
And gross margin had a strong increasing in December as we typed and promotions.
Regional color for a holiday included a falling in the Americas holiday shopping started earlier this year mid October with Amazon spend than a prime day, which was a record for us in terms of Prime day sales and we kept a discount sites and a very promotional environment.
And in Asia total direct to consumer return to growth was this price with China and India, both growing double digits in December as the changes we have made to the store fleet a star.
Doing good payback.
Now I'll share some thoughts on 2021.
And this business for the long term and I'm very confident in a strategy.
But as we've all seen things can change suddenly in this environment.
And unprecedented events require a quick and unprecedented action.
Given the very low and near term visibility we are taking the approach a planning a 'twenty 'twenty one fiscal year one at a time.
As the year unfolds, and we gain more visibility we'll update our outlook.
In terms of revenue, we're expecting first half revenue growth in the range of 18% to 20% worse in 'twenty and 'twenty.
And based on the underlying strength of demand for a brand and then zooming conditions improve as a vaccines rollout.
And it continued to believe that revenue should return to pre pandemic levels during the second half after a year.
And then Q4 of 'twenty, one the first full quarter with revenue above the comparable POI growth.
2019.
And there could be markets across the world, where this happened earlier, such as China or Europe.
With respect to Q1 'twenty one specifically.
We anticipate first quarter revenue was down high teens in constant dollars compared to Q1 a 2020.
In addition to the fact, we're lapping a really strong quarter right and the Covid impact was minimal.
Bad is and will be adversely impacted by two significant factors.
Plus Q1 of 'twenty, and 'twenty had a black Friday, which will adversely impact the Q1, 'twenty and 'twenty one growth rate by two points.
Second store closures have increased currently about 17% of a global store basis flows, including about 40% of us those in Europe.
We're assuming these store closures will continue through the remainder of Q1, two and you want and we expect this will cost us six or seven points of growth.
Turning to gross margin, we expect first quarter adjusted gross margin will be a button 100 basis points higher than last year's record of 55.7%.
This is driven by the accelerated shift of a business towards international DTC and digital and combined with the benefit of price increases being less promotional.
And with a healthy inventory and incremental Cogs savings.
In terms of adjusted SG&A dollars, the structural cost savings, we took a games a pre pandemic run rate will take us all the way back to right around Q1, 2019 level, despite higher investment behind our strategic growth initiatives.
We anticipate a first go to a tax rate in the high single digits and first quarter adjusted diluted EPS in the range of 20 to 20 per cent.
We estimate EPS would have been 10 to 12.
If it wasn't for the store closures.
Uses of capital in 'twenty and 'twenty one include <unk>.
Really a capex of around $210 million to.
And two thirds of the investment will go towards technology and areas like E Commerce Omni channel initiative. It is a.
And I did the analytics and the S&P upgrade.
A D D C brick and mortar we anticipate opening around 80 stores globally.
Most of these will be international with the biggest share and chime.
And the U S. We plan to open and around 15 full price Nexgen does and 'twenty 'twenty, one which would take a smaller footprint mainline door count in the U S to above 25 on a wave 200.
I'm also pleased to announce that'd be a reinstating a quarterly dividend payment at four cents per share.
Based on a positive cash flow and.
And a continued confidence that we're emerging stronger.
Business strength continued to improve we'll consider increasing quarterly dividends as we move through 'twenty and 'twenty one.
And finally with respect to a current levels of debt we and.
Tend to pay back much of what we borrowed last year.
We'll take a call on the timing and amount of the pay down as the a progressive and visibility improves.
In summary.
Store closures are unfortunate, but that's outside our control.
The business within our control is really strong and they're not profitable E commerce business.
A good.
Bush and of the large store sales.
As a result, we remain confident about a path to revenue recovery once stores reopen.
When revenue do recover to pre pandemic levels, we expect to be a much stronger more profitable business with annual adjusted EBIT margins at 12% plus.
Notably higher than 2019 standpoint and 6%.
This will be driven primarily by a much stronger gross margin, while we reinvested and accelerating the shift to DTC technology and other strategic growth initiatives.
As we navigate and emerge from these uncertain times, we are committed to driving profitable growth and returning capital to our shareholders with that we'll now open it up and take your questions.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key.
Please stand by while we compile the Q&A roster.
Yes.
I show. Our first question comes from the line of Matthew Boss from J P. Morgan. Please go ahead.
Great and congrats on a nice quarter guys.
Thanks, Matt.
Chip, maybe near term and he comments post holiday on the organic trends that you're seeing and the marketplace that was helpful color on November and and particular the acceleration that you saw in December and then secondly, larger picture I guess, when we incorporate the increased casual with Asian distribution reading and happening.
And a permanent cost saving that you guys have spoken to.
Let's think about pre pandemic annual targets, a mid single digit top line and 40 to 50 basis points of gross margin as we think following the price.
Okay both.
Great questions.
As we said in the prepared remarks, we were pleased with a sequential improvement and our business.
Really from the time, a pandemic started but importantly, a.
And the fourth quarter and and through the November December holiday period. So we feel really good about that progression, we're not going to really talk about.
January since we're in the middle of that quarter, but you all have probably seen the N P D and other data that's out there that seems to indicate a lift on and the apparel sector overall driven in part by the stimulus checks.
So.
We'll see how that plays out, but we feel really really good about.
The progression and our business the pivot to digital.
And the lift and the positive trends on our ecommerce and digital ecosystem and solve real positives and we think we'll be able to sustain.
Through the through the rest of the pandemic and as we emerge from this crisis with respect to the growth algorithm and and Harmeet may want a pile on here a little bit we.
We need a little bit more time to digest, it and we're sticking with our growth algorithm as it is a with the exception of the.
Fact that we believe we're going to be able to get to that 12% operating margin northstar much much quicker with a cost actions that we've taken and believe we can sustain a.
You know that when we get back to pre pandemic levels of revenue, we feel pretty confident where we're going to be in a 12% operating margin.
A range and but in terms of the actual.
Growth component of the algorithm, we need to see how that really plays out clearly some of the trends during the pandemic.
A play to our advantage and if they sustain that may translate into a different growth algorithm at the end of the day and at the strip towards casualization.
We continue to see really good progress and the diversification of our business. So we feel really really good about where we are but I think it's premature to say that the growth algorithm and it's going to change.
Yeah, I think a what.
And I'd build on a mat.
And then make too.
Getting back to pre pandemic.
And there's going to be a <unk>.
And what we're seeing is a structural shift and the business the business is structurally much stronger.
And more digital more didn't see more international more women and and the structural shift is helping a gross margins, especially as we really fine tune discounting you're seeing that bear out in 'twenty and 'twenty, you've seen that bear out and our Q1 guidance on.
Gross margin.
And then structurally with tightening cost right and the question then is.
And what happens post pandemic I would say the business is structurally stronger.
Wholesale and structurally healthier.
And I think once we are at that stage, a close to that stage to chip's point, we'll a you know fine tune a growth algorithm, but.
It's probably going to be healthier and stronger if trends continue.
Which favor us right now.
That's great color and best of luck.
Thanks, Matt.
Thank you and I show. Our next question comes from the line of Omar Saad from Evercore. Please go ahead.
Good evening. Thank you for taking my question My first one I wanted to ask given the you know the gross margin the strength, you're seeing and going to see next quarter. The price increases you're seeing a the brand's pricing power looks really strong.
How do you think about leveraging that are you evolving your product lines from more premium products and premium channels help me reconcile that pricing power, we're seeing and a brand also the fact that you know you also sounding really bullish and are on target and Amazon and Walmart and help me reconcile those two elements and then I have one follow up thanks.
Okay, well I'll take that you know I do think I've always said that gross margin is perhaps one of a greatest indicators of brand health and brand strength.
And and.
Our gross margin very very strong right now and we're optimistic as we go forward one of a big focal points as we've talked before Omar is elevating the U S market you know the U S is still by far and away our biggest a bit.
Against market.
And a it skews so.
Wholesale, but we've been on a really intentional march to.
Elevate in this market.
More premium distribution a customers like Nordstrom.
You know more mainline doors, which we talked about pretty extensively over the last six months, where we really do believe we've got significant opportunity with this and tend to add about a 100 doors over the next couple of mainline doors over the next couple of years, the smaller footprint stores. We've added a couple more and the last six months.
The evidence is very very clear that these stores are outperforming our total fleet or a total mainline fleet.
So we feel really good about that so we do believe we've got a mix opportunity to mix more of our business up into tier two.
And to a better product if you will and we still have pricing opportunities. We've taken pricing a couple of times over the last two years and haven't really had to roll anything back it seems to be sticking so mixing more positively to more premium products is important for us mixing our.
And as we've re mapped our wholesale distribution, especially here in the U S. We're doing that with and intentional I on mixing it more positively you know a small fun fact on target, even though they're a mass retailer.
You know the assortment and side target is is very very tight, but the AUR is going out the door, a target or higher than the U S. Wholesale average AUR. So so it's helping us to premium is from this marketplace and when you look at the pad, it's a real premium expression of the brand. So we feel really really good about this.
Intentional March that we're making to premier Mies and drive higher AUR is through pricing and mix and that'll translate to a gross margins as well.
Got it that's Super helpful. Chip and then one follow up you know as you think about this.
The debate a wholesale versus direct to consumer how are you guys thinking about owned E commerce versus the kind of a wholesale dot com, which one is growing faster you know do you have a preference or are you agnostic Y and then as you know what's kind of a bottleneck keeping your own E commerce from being a much higher percentage of the business I think you said, 8%, which was similar to last quarter.
And <unk>.
Some of the benchmarks out there as high as 20, and 30% a and in terms of brands out there. Thanks, Jeff I mean first of all and they say right upfront, we're while a percentage double where we were a year ago, we're definitely not happy or satisfied with where we are because we do look at a number of other peers, where there are a mixture is significantly higher and.
And we're working really diligently to see how do we accelerate even beyond that.
We have started looking at and reporting as you know our total digital ecosystem, which includes the pure plays and a wholesale dotcom. We think it's important to look at that and the total context.
And I I am somewhat agnostic I, although having said that I want that direct relationship with a consumer. So if you put a gun to my head and say pick one I'd much rather have a consumer buying off of Levi dotcom than they.
And other other.
Other places, but at the end of the day I want back consumer to buy a levi's and.
And so we do look at the total ecosystem, we want the entire ecosystem to rise and we want a rise with that so, but we're continuing to invest and building new cable capabilities on our own E. Commerce site. You know we've talked about the App, we've talked about the loyalty program. All of these things I think are going to contribute to us.
Driving that revenue on our owned E commerce higher in the years ahead.
Great Geoff Thanks for the insight I appreciate to understand where you had that.
A lot of homework.
Thank you.
Our next question comes from the line of Bob <unk> from Guggenheim Securities. Please go ahead.
Hey, good evening, guys and just.
Two quick questions for you and then I have one follow up on the first one is when you talk about China. I was just wondering if you could give us just an update on a percentage of the sourcing.
From China These days and I think.
If we get one point it was like 8% a few years ago I just wanted to see where it is today and I guess is the reset there largely complete and are you looking for more robust rates of growth and 21.
So I'll take both of those and I'm going to try to be pretty quick just recognizing how many people are in line here.
With respect to imports from China into the United States, and mitigating any risk there trade or otherwise.
Our imports into the U S from China, and now is less than one per cent.
And Youre right. It was a 8% and if you go back it was 8% several years ago and if you go back even further and was more and match so.
Fly chain team has done a great job mitigating any trade related risks or other risks with imports from China and we're in a really good place there.
With respect to a business in China.
We are not completely done yet, where we're making really good progress.
And the results and are owned and operated stores.
Hi.
Had been strong here recently.
And you look at our business a couple of years ago 70 per cent of our business was done through franchise partners.
And that's now down to 50%, 50% as a company operated we built a couple of these big Beacon stores, as we're calling them and Wuhan and Shanghai. We're excited about what that will do from a branding standpoint and over the last two years or so we've closed more than 200 doors, we closed Fran.
<unk> partners and or shifted to other franchise partners. So we still have some work in front of us.
And over yet Bob I wish I could say that it was we still have a little bit a work ahead of us, but we're really optimistic based on the results and our owned and operated retail stores and some of our better performing franchise stores and I expect by the time, we're kind of into the second half of this year or did and close to exiting this year.
A hard transformation work from a customer standpoint, and channel standpoint will be behind us.
Got it can I sneak in one more chip.
Quickly and.
So you know I guess when you look at the the the comfort clothing clothing casually station, a little bit and there's some talk around baggy jeans, and making a comeback and anti skinny jeans is is that something you think you guys are seeing a can benefit from over the next few months and quarters that actually the line that we launched a.
A moose fit line this past season, and our stores now and both men's and women's a sort of a loose straight fit.
Off to a very very fast start and so it is definitely something that not only are we seeing and I think we're kind of leading this trend to some extent.
And I think it's here to stay I don't think skinny jeans is ever going away on the women's side of the business, but there's definitely a trend towards more casual looser fitting a clause and general and same is true and jeans and we're seeing our loose straight that's performing really well.
Over the last couple of months.
Thank you very much good luck.
Good talking to you Bob.
Thank you and.
Our next question comes from the line of Paul Lajoie from Citigroup. Please go ahead.
Hey, Thanks, guys.
Talk about the EBIT margin guidance for next year that 12% or more just just curious I'm sure you've got a range of revenue outcomes and I'm curious.
And just thinking about the flexibility and the model what's the minimum level of sales that you would need to kind a hit that 12%.
Curious about your ability to kind of manage through various scenarios and I'm. Just curious if you could maybe give a little color on what youre seeing in terms of order books from your U S.
And store customers versus the target Walmart and Amazon.
The world and just to get a sense of how they're thinking about inventory management and and for purchases.
And Paul on.
On the operating margin and I think we remain consistent to what we said earlier, which is when.
When we get to 2019 levels, we feel good about.
Delivering 12% plus operating margin.
And that's a comp a debt.
And continues to be a combination of <unk>.
Accretion and a gross margins you've seen that happen even in a pandemic yoga guided a.
Decent number and the gross margin accretion.
And is largely driven by two factors one is the channel and geographic mix, which has a higher gross margin and the second is driven by the higher AUR and it's a combination of price and lower.
Discounting.
Our view is you know a returns back to 19 levels. After all the cost that we've taken out net of NIM.
And so we're making good question about.
The order book from you know our customers.
You know, what we'd say and the inventory levels, we'd say inventory has been a mentor.
Stories.
Very similar to husband inventory.
At the company and it's largely a.
Coal you can carry season to season.
A third a that's a seasonal and we feel good about inventory the auto book.
You know, we don't get into the auto book, but our view is day.
And it's largely the store closures.
Thanks to the wireless resurgence there.
Causing a.
The decline in sales and in Europe for example, as I mentioned in the prepared remarks.
A peak a closing the doors and in November.
We were already beginning to track higher than 19 levels at the end of October so.
We feel the strength of the brand is really strong and a product lineup.
A lineup is really strong so we feel confident about emerging from this a strong, especially as the casualization trends company.
Got it thanks, Amie and good.
Good luck guys.
Thanks, Paul.
Thank you.
Next question comes from the line of Lorraine Hutchinson from Bank of America. Please go ahead.
Thanks, Good afternoon.
And just wanted to follow up on on the goal of moving non denim bottoms.
And then finally.
<unk> talked over the years about Pops and maybe if you could just rank the opportunities that you see.
And between accessories, and footwear cheetos other categories and how do you get to that goal.
Well they have coal as a kind of a throw down that I put out to the organization to say how do we continue to drive diversification and.
And Ah think big kind of way and when you look at all of a different categories, where we compete and where we still have sizable upside opportunity I think we can get there any number of ways, but.
And clearly tops today remains one of the biggest opportunities for us and you know I jokingly say, we don't buy market share data on tops, because even though it's now 21% of our revenues I don't think we'd scratch, a 1% market share and top so lots of upside opportunity there.
Outerwear continues to be a big opportunity for us as well and then non denim bottoms, which kind of comes and goes but we.
And we talked in the prepared remarks about and I'm doing this.
Sweat a capsule sweatsuit capsule that we did earlier in the fall and.
And that went really really well and if you look at what the kids are wearing today, that's what they're wearing and and.
And that represents a significant opportunity for us as well so.
And that can add.
Tried a rank order one through five which ones a top priority because they are all big opportunities for us and we have different parts of the organization really focused on it so.
And we are part of our story over the last four years and spend a diversification of the business for five years, you know, we talked about and in the script. The progress that we've made and some maybe these categories and we've set kind of a ambitious targets for the next 10 years.
And if we achieve those half of our business will be and denim bottoms and half will be and everything else and and that will be a really good outcome.
Because it really does expand our portfolio and our share of total closet.
Thank you.
Okay.
Thank you. Our next question comes from the line of Jay sole from UBS. Please go ahead.
Great. Thanks, so much chip and when I ask you about the next Gen stores.
No.
The numbers that you mentioned that if you see the business being 60 per cent DTC overtime and it sounds like a about a quarter that would be E com and I'd suggest a there is a big piece that'll be full price stores and outlet stores.
Talk about the percentage that you see of the business being full price per outlet and how the next gen stores fit into that goal.
Yeah, it's kind of interesting and so a good question Jay if you look at our business around the world today here in the U S. Our retail footprint still skews very heavily to outlet.
And and the outlet model has historically been made for outlet and Europe, our businesses skews more towards mainline stores and Asia same way and so.
And so one of our biggest opportunities is to change our retail footprint here in the U S, which is this mainline opportunities so.
These nextgen stores by and large they are smaller footprint stores. The twenty-five hundreds a 3500 a square foot store and.
And we believe and and they deliver a really good return on investment I mean, we now have a couple of dozen of them up and running around the world and they are outperforming our fleet, we have a high degree of confidence and our.
And our ability to execute these stores smartly assort them using data science to assort, the stores down to the door level.
And when you think about all the white space that we have just in the U S alone I mean, I keep saying, we have no stores and Boston, where there a quarter a million.
College age students and and hopefully sometime sooner and you'd be talking about the new doors, we're going to be opening and Boston, but we have.
Huge white space opportunities here and the U S to shift the mix more mainline.
And it.
It helps to premium is the market, which I talked about earlier it helps elevate the AUR and the market earlier and I mentioned earlier and so that really is the path that we're on.
Got it and then maybe just one quick one on the next Gen stores do you see them as mall stores or a street stores and I mean do they have the ability to sort of go and different types of locations.
They were.
And not in many indoor malls today here in the U S.
The good news, we have very limited exposure to a malls and many of these stores are and kind of outdoor lifestyle malls. If you will.
And those they can also be street level stores, so it'll be a mix, but we're you know.
We're really focused on a locations.
And we're capitalizing on lease opportunities that are out there today, where we're getting great rates relative a preprint pre pandemic rates and these kinds of stores can really go anywhere, but we're really not a connect.
And can expose ourselves very significantly to indoor malls.
Got it okay. Thank you so much.
You bet.
Thank you.
Our next question comes from the line of Laurent that's a less scope from Exane BNP Paribas. Please go ahead.
Good afternoon, and thank you for taking my question Pardon Me I think you mentioned Europe as of October was telling it like it was up year over year, just slightly which suggests to me and tell me if I'm wrong here, but November November might have been down 20% plus to get to that 9%.
For the quarter is that right way to think about it and and how do we think about Europe for the force first quarter and then on the flip side, how should we think about Asia from first quarter as you start to anniversary the Covid impact and Asia called out on last year's fourth quarter.
Yeah, I think a.
Good question I don't have the specific November number, but I think your math is is a it's fairly close.
I'd say December December.
Europe actually started fairly well and you know we have a <unk>.
Doors open and then as we closed December and went back towards the total of the doors opened in January we have probably at this time.
80% of our doors are closed and you could think of a way we get the business because you know every country countries are different and different.
Places in a locked down to a a 10th of what do we get the business about 50% of a business in Europe and Denver.
And we have a cross franchising and ours is closed.
And as things get better we believe.
Now a will come out of a pretty quickly on Asia.
Sequentially, a business has improved and as I mentioned as we started December a.
Both China, and India reported a double digit growth, so I'd say Asia.
And also because if you think about a quarter one a quarter one largely has no impact from COVID-19 other than China and.
Other than one month and China.
So you know a sequentially probably gets a little better.
As we think about the quarters.
Very helpful. Thank you very much.
Thanks Lauren.
Thank you.
I show. Our next question comes from the line of Kimberly Greenberger from Morgan Stanley. Please go ahead.
Great. Thank you so much.
Great call and really good color, particularly through the holiday season, and so thank you so much for that.
I wanted to ask one question about Q1, and then one just about kind of longer term margin puts and takes.
And the first quarter Harmeet I think I heard you say down high teens.
And he said in constant dollars and and.
And I just wanted to make sure I understand what this means is the as reported in dollars.
And this constant currency and and how what would that mean for.
The report that we'll see and dollars.
So at first.
It's a kimberly good call out.
This is in constant dollars reported dollars currency should benefit us I think and revenue if the rates.
And that today by about two percentage points.
And I think a slightly more benefit on EPS. So we should see some benefit on.
On a reported basis in Q1 because of currency.
Okay wonderful thanks for that clarification and then.
It's a very intriguing it sounds like you would expect to get back to revenue parity with 2019 and the back half of this year.
And I'm wondering if.
And how we should think about the margins.
Particularly in Q4 for example, as we get later this year should we think about a <unk> margin. For example, that's a bound for Q2 thousand 19.
And then you.
And you've phrased it as sort of a 12% class.
And your out year target on an adjusted operating margin.
And you could just dive a little bit into the plus you know what are the opportunities for March and to actually go above that level. Thanks.
I think a.
In terms of.
Q4, so you could think of a if you think about gross margins being the prime driver of the EBIT margin.
And I would just use the same seasonality and gross margins as we had seen over the last few years.
You know a Q2 and Q3 a weaker than Q4.
For example, a Q4, we feel you know assuming the virus.
Doesn't really ugly head further.
We feel come.
Comfortably we can get to a 19.
And 19 levels of revenue and a company that will be EBIT margins of 12%.
The 12% plus is bright and mainly going to be driven by.
The pace of acceleration of a gross margin and a structurally things and.
And to.
You know go the way. They are then we could get a higher rate of growth.
As well as the curtailment of a.
Basically we feel good about curtailing a base cost and that's what we indicated a.
We feel good about getting back to 19 levels of SG&A.
And really is going to be about a.
Do we continue to invest and our growth initiatives.
We've talked about that structurally enhances business with a long term or not and that's why you know.
Rather than giving a number at this stage, we have set a 12% plus if you'd asked me you know and I.
Joined the business eight years ago I'd say.
The goal was to get to a 15% and then D. D C happened and he call Ms happened and a whole bunch of other things happen and so we decided to.
Invest and grow the business and so that's why you know one is being a little cautious at this point, but we feel good about that.
At the same and then growing from there over time.
Great color. Thank you.
Thanks Kim.
Thank you.
A last question comes from the line of Alexandra <unk> from Goldman Sachs. Please go ahead.
Fantastic. Thanks, so much getting and the question here.
Two for you and perhaps related some of them and the loyalty program. So you mentioned that you were up to 4 million loyalty members I Wonder if you could share any metrics of the superior performance and strategic cost and that's something from me and there's a lot of value higher frequency and engagement and.
Hi, Ed and they shop more and a DTC channel anything you can share on that front and the potential for that program would be great.
And then secondly on market share you know it seems mawkish that's accelerated during the pandemic you know any thoughts on why you will emerge from a market share perspective post pandemic versus like a pre pandemic.
So I'll take a shot at this Alex and good to talk to you a happy new year as well.
So on a loyalty program, we're still in very early days, we do have 4 million members.
Watched it in Europe, and the last quarter or sorry, a 2 million members from Europe, and $2 million and the U S.
And we're you know we are using the loyalty program.
To personalize a.
You know opportunities for every single member.
But we do have some early metrics here and we run through a couple of them are loyalty members lifetime value is 27% higher than non members.
Total revenue from loyalty transactions is up a 193% over Q3.
And a consumer shopping and two plus channels with a court within the quarter was up 26% over Q3. So we're actually seeing these loyalty members. The also more multi.
Multi channel shoppers. So again, it's kind of early days and.
And we're using data science to power all of a personalization and everything else.
And we're trying to learn quickly we apply those learnings and go from there, but we're really happy with the early and start that we've got.
What was your second question again.
Just any thoughts on market share as markets market share right right right right, yes, So I mean a biggest.
We're number one and manage a number one a win and womens global a number one brand globally. We've made good share progress on our women's business.
And primarily in Europe over the last year, we've gained market share in and.
A couple of the critical markets and Europe.
I would say and last quarter here in the U S. Our women's business actually fell back a little bit we lost a share point.
And that was a.
Because we decided not to get overly promotional we lost a share point to old Navy, who was very very promotional and we just decided to not go there from for the sake of maintaining the strength of a brand.
We're confident we'll get it back.
And a but but we continue to believe we've got opportunities across both the men's and women's business.
And obviously when you are the biggest sky the probability of losing share is higher than your probability of gaining share, but we've demonstrated our ability to gain share here.
Over the last couple of years, and we believe part of emerging a stronger when we declared we're going to emerge stronger part of it is coming out of this with a share gains and we have a number of weak competitors and we think we can capitalize on that as we go go forward.
Fantastic. Thank you for a little color today.
Thanks, a lot.
Thank you.
Ladies and gentlemen, this concludes today's Q&A session and today's conference call. Thank you for participating you may now all disconnect everyone have a good day.
Okay.
[music] and.