Q1 2021 Levi Strauss & Co Earnings Call
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Using the app as a seamless connector for the online to offline experience and our pilot a new convenience oriented in store features, like contact list returns and South check out and we continue to diversify the business on the international front or developing markets of China India. And Russia all had great first quarters and represent significant growth opportunities, despite the lockdowns first quarter sales of women's Bottoms in Europe, exceeded q1 2019 in that revenues in our top 10, wholesale accounts revenues from our women's Business group double-digits as compared to a year ago at our wholesale Channel continues to transform and become healthier with a higher share of business and digital Mass premium and with financially healthy retailers.
Our total digital ecosystem group 36% and comprised 26% of total company first quarter revenues up from 16% a year ago with the opportunity in digital remains huge. We aspire to grow this overtime to a third of our business. All these efforts are driving higher Aur resulting from premiumisation wage product mix and pricing and we have additional pricing opportunities going forward on the back of the brand strength finally before I turn it over to her me. I'd like to take a moment to share some of the things we're doing on. Yes G front.
we continue to
Make progress on our goals for climate and water and in becoming a more environmentally resilient company. We recently rolled out new greenhouse gas emission targets to all our key suppliers and 3/4 of our products are now made with our industry-leading waterless techniques, which have cumulatively saved over four billion litres of water down and recycled an additional nearly ten billion litres.
Add diversity equity and inclusion. We published our most recent representation numbers in February. We still have work to do and we're putting our money where our mouth is. We got a d e targets as a component of long-term compensation for executive leaders in the company.
And we expanded our sustainable fabric collection with the successful launch of Eco. He's bringing our stretch platform and organic cotton together and also driving a premium. You can find more details of how we're making progress against our sustainability goals and our recently issued 2020 annual report. Let me now turn it over to her. Thanks chip. Good afternoon everyone. I hope all of you your families and loved ones are safe and healthy. We had a very strong quarter of beating our expectations despite store closures mainly in Europe.
The structural economics of our business continue to improve with ongoing and outside digital growth record gross margin and a reduction in base operating costs while reallocating dollars to strategic choices that will accelerate growth. The first quarter was again profitable and generated positive or cash flow despite the double-digit revenue decline versus prior. And while we continue to manage our business prudently as we operate through ongoing and often particularly in Europe. I remain convinced we will emerge from this crisis a significantly more profitable and cash generative company with roic in a meeting and adjusted ebit. Margin of at least 12% much higher than our pre pandemic margin of 10.6%
As I walk you through additional detail of first-quarter results my comment, we'll reference constant currency comparison on a year-over-year basis in your life unless I indicate. Otherwise we publish the details of our results in today's press release. So I will not repeat all of those here.
First quarter net revenue the one point three billion dollars declined 16% and adjusted diluted earnings per share was 34% both beating Black Friday. We're falling in the first quarter apply heard of your Revenue comparison by three percentage points.
taking in
To consideration the adverse Black Friday impact and the fact that those in Europe were closed 3 months in q1 as compared to one month in Q4 estimation q1. Revenue decline was more like high single-digits a sequential improvement from last quarter's double-digit decline.
Consumer spending continue to shift towards online shopping due to the changing Retail Landscape.
Chip mentioned total digital growth was really strong, especially in Europe within digital growth of our own e-commerce business was approximately 27% when adjusted for the Black Friday calendar shift during the quarter Ecommerce growth accelerated reaching 55% for the month of February and the game profitable on a fully allocated basis.
Our first quarter adjusted ebitda was $174 and adjusted ebit margin was 13.3% driven by the acceleration in gross. Margin while holding sg&a at 2019 levels.
We were pleased to deliver adjusted even margin in the lower team while keeping in mind. It benefited a couple of points from advertising at only 5% of Revenue below my expected annual 7% Target. Let me know give you some color on the details.
Adjusted gross margin expanded two hundred basis points to 57.7% the highest adjusted gross. Margin. We have ever posted FX contributed about 70 basis points of the favorability reflecting a weaker US dollar against International currency. The remaining hundred thirty basis points was driven by improving structured economics of our business Levis Rose in all Global channels demonstrating the intrinsic health of our brand.
Price increases and a higher share of business from our own e-commerce Channel contributed to the expansion.
We've also reduced promotion both in depth and breadth on the strength of the brand and are healthy inventory position and go smashing a particularly strong and wholesale reflecting a strong customer make including from growth in digital and healthy retailers as well as a favorable shift in product to a higher margin products.
Adjusted sg&a was down $85 from a 13% Decline and at $579 off this represent a return to 2019 levels.
not
Understanding a substantial increase over the past couple of years behind the areas driving our growth mainly direct to Consumer and Technology. We're able to deliver a just wage at 2019 levels because of the structural cost reduction initiatives we have taken
No, I share a few highlights from our three region first quarter revenues in the Americas declined 13% better than the overall company home focus on building a healthier wholesale business in the u.s. Is gaining traction as wholesale revenues grew slightly and delivered higher gross margins compared to Jersey last year.
The full digital ecosystem in the region grew 16% and nearly 1/4 of the Region's sales was driven.
Our own e-commerce growth rates in the US accelerated through the quarter to 29% for the month of February are NextGen store rollout in the US remains Iraq and these stores continue to outperform. For example, a new Scottsdale store is the top-performing store in our Fleet and finally wage reasons operating income grew 6% despite the revenue decline on the back of stronger gross margins and cost control.
Revenue declined 22% impressive results given a total of the Region's business footprint was closed in the quarter showing the brand strength and Agility to execute A playbook developed over the last year as conditions changed.
We're recapturing sales in our own e-commerce Channel which grew 40% in the quarter adjusted for Black Friday and where growth rates accelerated in the quarter to nearly 70% off in February while doors doors are under pressure local. Those are faring well on higher conversion despite lower traffic with growth in the market that were open. Glued in front a wholesale channel in the region group compared to Prior and we're seeing a strong forward demand signal and wholesale giving us confidence in a speedy recovery when locked down left.
An operating margin of 26% for the region was in line with last year despite the sales decline because of higher gross margin lower variable expense and cost discipline.
Asia as a region declined 8% the full digital ecosystem in the region blue over 60% in the quarter in this performance with your head of the region and importantly this Market grew compared to q1 of 2019 driven by the acceleration of the digital ecosystem and the ongoing transformation of chocolate and franchise Network.
China Post
Strong growth are expected versus q1 twenty-twenty and I direct to Consumer channels in the market posted growth compared to q1 2019. We continue to transform my business in China and move towards more company-operated stores productivity is up on higher capture rate and a higher share of more premium Products off a best-selling jeans are from made in Japan made and crafted and Levis vintage clothing line.
Beacon store in Wuhan is emerging strongest back to pre pandemic Revenue levels and is selling more chops than bottoms.
Yeah, elevating our Fleet and open for new NextGen doz in China in the quarter and the franchisee reset in the market continues as between up unprofitable George a business in China is being transformed and is headed to a mix of 70% direct-to-consumer and 30% franchisee about a year from now fifty years ago. It was the inverse of this Bank.
We continue to be pleased with our progress in this key Market, which had only 3% of total company revenues remains one of our biggest long-term opportunities.
Learning to balance sheet and cash flows inventories at the end of the quarter natural reserves were 2% glow prior and 9% below prior in the American reflecting our ongoing discipline Inventory management inventory composition remains healthy with more than two-thirds able to carry over into future months.
Cash and liquidity remain strong and at the end of the quarter net debt was negative.
Adjusted free cash flow in the first quarter was -9 million only a six million decline or prior despite much lower revenues and adjusted ebitda.
We refinanced half a billion of 5% u.s. Dollar note obtaining a substantially lower coupon of 3.5% and in March, we page down most of our 5% note the lower coupon and debt reduction will save us twenty million dollars annually in interest expense.
We expect to pay down the remaining two hundred million of 5% notes in the second half of this year and good business Trends improving. We expect substantial improvement in our life as you move through the remainder of the year.
We continue to return cash to our shareholders last quarter. We reinstated a quarterly dividend payments at $0.04 per share based on a strong first-quarter performance. I'm pleased to announce that we are increasing the second quarter dividend to six cents per share as business Trends continue to improve will consider increasing dividends further south.
Because sharing a few to Outlook, let me take a moment to provide an update on our sales performance through March as a reminder the economic impact of the pandemic really starting to hit us in March of last year right after the end of our first fiscal quarter for the three-month period of January through March revenues were slightly up compared to the same three-month period of twenty twenty now turning to our Q2 Outlook based on our first quarter of outperformance and our confidence in the stronger than friends with seeing headed into Q2. We have banking a q1 revenue and epsb and we're raising our outlook for the second quarter.
We now expect reported revenues for the first half of 2021 will grow 24 to 25% versus prior significantly higher than the 15 to 20% growth estimate. We shared last quarter higher first half Outlook include the second quarter reported growth estimate of around $140 off a substantial increase from the one 20% implied by a prior guide and we expect to deliver another $0.78 of adjusted EPS in the second quarter of bringing first-half adjusted EPS 241 to 42%
Our Outlook is on a reported basis and incorporates the expectation that currency will again benefit revenue and adjusted EPS comparison to Prior month.
Our perspective balances are confident in what's within our control with the uncertainty in the marketplace related to the wireless variance vaccine rollout and the consequent impact to Market and our distribution footprint particularly in Europe where we have a zoom current store closures will persist through mid-may this equates to a weighted average around thirty-five to forty percent of our stores in Europe.
A few color commands on a key Second Color assumptions be on Revenue. We expect gross margin to remain substantially higher than prior due to Thursday. We expect second quarter gross. Margin to Diplo first quarter gross. Margin by at least two hundred basis points a similar Trend toward we have usually seen in the the prior to the pandemic.
Sg&a continues to track around 2019 levels as it did in 2019 second quarter will increase notably compared to q1 due to the timing of our advertising campaign interest expense will be lower than q1 reflecting our recent refinancing and Debt Pay down and on taxes. The exercise of took appreciation right will benefit our tax rate in the second quarter based on recent and potential additional exercises. We expect the tax rate of less than zero and could see it in the negative double-digit in Q2. This benefit will also help our annual tax rate, which we know expect will land in the office.
and finally as we share
Made on our last call due to the uncertainty introduced by the impacts of COVID-19. We are planning our current fiscal year into half and expect to guide the second half in our July earnings call after our planning process is complete.
But although we have not yet completed our planning process the encouraging Trends we're seeing suggest that we may see a return to recover revenues a month or two sooner than our previous thinking primarily driven by strength of the US consumer and key markets in our Asia region off accordingly. We are not confident that fourth quarter revenues will be slightly above 2019 levels with some of our individual markets out there sooner. We continue on the part of emerging a stronger company. Then we entered the pandemics a year ago with a sustainable and suggested ebit margin of 12% plus once we return to Precor with Revenue with that will now open it up and take your question.
Thank you. The floor is now open for questions. If you have a question, please press star then the number one on your telephone keypad due to time constraints need any request that you only asked one question. Do you have an additional question please? Queue up again. If any point your question has been answered. You may remove yourself from the queue by pressing the pound sign.
Your first question comes from Matthew boss, JP Morgan.
Great. Thanks and congrats on a really nice sort of guys.
Thanks, man. So so Chip, could you elaborate on the denim research and I think that was the commentary that you said that you're seeing. This is an industry-wide Levi specific wage or maybe both and then just any additional color that you could provide around. I think the comment that you made was demand signals in Europe today or higher than pre pandemic levels that you were seeing a 2019 just any additional color around that.
Sure, first on the denim Resurgence. I I do believe that this is both us and industry-wide wage. It's being driven by a couple of Dynamics. Number one is this continuing Trend towards casualisation and and we've seen it here recently. You know now that consumers need to get vaccinated and people were starting to get it go out again, you know, there are now occasions that people are planning for it. They're going back out and they're and they're buying Denim and they're buying the branch they know and trust and are largely reaching for us. I think the other thing that's driving it as I said in the prepared remarks are these new fits and Silhouettes, you know, we launched this high-rise loose fit in early 2020 just as the pandemic was was happening and it was relatively small collection at first and it really just took off.
And so we expanded it.
And it continues to build on it. It's now been followed by all of our key competitors and I think it is clear to say that it is a big Trend which we've LED but important, you know, as as consumers start thinking about going out again, it gives people a reason to go out and update their wardrobe if the it looked now is this high-rise loose fit jeans and that's for both men's and women's by the way, it gives them it gives them a reason to go out and update their wardrobe. And and I think that's a big driver as well. In fact just as a small little Side Story on home or relaxed men's fits a 5:50 in the 5:59 or to Legacy fits that we've had for years and and literally just a couple of years ago. We were talking about potentially discontinuing them because they were so out of style back then and those to fit block Screwfix percent versus prior year and in this most recent quarter, so yep.
Maybe we're heading into a new denim cycle The Last denim cycle was really started by the the skinny. Jean and that was over a decade ago before I joined this company. So, we may be looking at the at the start of a new denim cycle. I guess the last thing I'd say about the denim Resurgence is uh, don't forget we have you know, not only are we the leader in fact, we have enormous opportunity in non denim as well. And and we're trying to capitalize on that on the stronger demand signal in Europe. I think that one's pretty straightforward. Our brand name is red hot in Europe and it has continued to be despite the challenges of the parent Dynamic and you see that just in the business results with a third of our doors close, you know, and and and our DTC businesses half of our business in Europe and they still posted relatively decent results. Their e-commerce business was up 40% in the quarter when you adjust for Black Friday.
But importantly it was up 70% in February. So consumers are really reaching for Levis. And I think there's just a lot of pent-up demand and wholesale customers recognize that means they reopen they want to be ready for it and and we're seeing it but I think it really does trace back to the strength of the brand overall.
Great to hear that's good luck.
Thanks, Matt. Our next question comes from Paul is Reva City.
Hey, thanks guys. Did you reference a Better Mix within wholesale as a driver of gross margin Improvement. I was just curious if you could talk a little bit more about the you know, geographical mix product mix or specific retailer. Mix was was really the driver of that and also sorry if I missed it, but did you mention how women's and tops performed during the week? Sure Paul? So but the you know the US wholesale makes you know as we got into the pandemic wage, you know strategically we had said when we get out of the pandemic, it'll be a healthier wholesale mix where the percentage from traditional retailers. The non-digital peace will be lower but a stronger and higher mix, you know from the others off.
Combination of a couple of things one is higher and more premium.
Product number one number two Hai Aur age because given the health of the inventory and given the strength of the brand. We have Progressive like reduced dilution across-the-board. We've also taken pricing, you know, we talked about taking pricing in uh, in in in um, wholesale women, uh, you know sometime, you know in the middle of last year and that has stock we we started twenty with uh, you know, I think two or three month price increase across the u.s. Hold. So and and you know, the ongoing partnership and the scale that we're seeing with Target is also helping and I think as as the as we come out of the pandemic our focus on this plus the fact that even with traditional retailers we're focused on the top dog.
We also focused on building more of a lifestyle orientation. So I think reference this call if you think about the top 10, wholesale accounts and you know, quite a few of them are in the US Women's Business continues to grow grew and quality of laws degree in California and continues to go through your question about women, you know that business is doing you know, fairly well tops. Um, as mix a company-wide is largely the same about a fifth of our business, but if you think about Europe wage, you know, and in some other parts of the world we are seeing growth in Tops on a unit basis. It clearly continues to be an opportunity for us. We still sell, you know, full bottles for every top our goal is to get to 121 at some stage and you know that's embedded in a non denim growth that we've talked about etc. Etc. So dead
Um, you know, if you think about International I direct to Consumer business lots of markets tops are very bottom. So clearly continues to be an opportunity. Thanks. How many good luck?
Thanks.
Our next question comes from Jay sole would you be S great. Thanks so much, you know you mentioned the impact on revenue from the from the store closures and the calendar Chef. Can you just talk about what kind of impact those factors had on margins in the quarter?
Yeah, I'd say, you know, it was a headman largely because you know, the average gross margins in Europe are higher than the average company gross margin and stores gross margins are a higher and within recapture, you know hundred percent of all the laws sales rep as those have, you know closed in in Europe. So it's a it was a headwind but overall gross margin strength gross margin off big time, you know a record gross margin. So other factors like, uh, you know pricing initiatives you have taken the continued growth in you are and the impression in Channel and Geographic mix continue working a favor. You also were helped by effects, you know, in in the quarter. We don't expect the effects benefit to continue. Yep.
The factors broadly. I think you close to the year. I would also say that.
Mentioned in the call the record gross margins don't Bank it on a full year basis because it just in order to its normal season ization called gross margins about 2,000 points lower the quarter one that's been our history. But we do think we end the year from gross margin perspective much stronger than we were in nineteen and twenty months.
Got it. And then if I can ask one more, you know, there's just been a lot of talk about Port congestion. And the the Suez Canal issue, you know, are you seeing that impact your ability to flow inventory in a timely fashion? And is it impacting margins this year? And would it show up more in gross margin and sg&a? Yeah, so we're watching this carefully the potential bottlenecks and supply chain. We have experience delays, but the good news for us because you know geographically we have a portfolio and we have a brand that's really strong. We've been able to offset the impact of the delay both in court and we think we can encode in sorry go to one everything we can offset that in order to in terms of in terms of costs. Um, you know, as I mentioned in the last call, we negotiated capacity and that allowed us, you know, as long as to offset some of the increases that we can see we had have had to increase our air freight.
I'd given the strong gross margins you had overall. I think that's again being Offset, you know, at least in the in the short-term a longer-term, you know, we are seeing in from a precious, you know, but we feel good about twenty Twenty-One last difficult, you know, our product prices are locked in our you know, brought up fulfillment prices are locked in as we energy think about twenty twenty-two and Beyond given the price increases are taken and where we are and pricing we think as a brand of, you know, we have the opportunity we have the pricing power is evident by the initiatives we have taken on pricing is also evidenced by the strength of the band the chip indicated and our Market leadership position. So I think overall we should be fine in to anyone and will offset any inflation we see in twenty-two with pricing.
Got it. That's very helpful. Thank you so much. Thank you.
Change it's our next.
Our next question comes from Omar Saad. We are good afternoon. Thank you for taking my question. If I wanted to follow up on one of your opening comments. It sounds like you said you're seeing a more engaged and Active consumer not just in before the pandemic, but but but you know. That goes back even farther wanted to see if you could clarify and elaborate there. And then on the inventory, do you do you do you supply chain an inventory in the in the in the coming through the chain to meet that kind of exuberant demand as we continue to reopen globally. Thanks. Yeah so long
Summer from a consumer
Stand point and just you know, the comment about it being even stronger than what we had seen, uh immediately before the pre pandemic. I think what we're seeing is dead, you know a combination of a lot of pent-up demand from people being stuck at home and hunkered down and not really doing a lot of shopping combined with an exuberance wage economic stimulus or in the US vaccination rates these people feeling more comfortable about going out and these new denim trends that that we have established and I think it's really nice combination of all of those things Omar as I said in the prepared remarks, I feel much more confident today than I did even a month ago about, you know, took a bility to come through this pandemic in a much stronger position and uh, and and and really seeing left off your question about inventory dead.
You know, it is probably and I'm sure you'll hear this from others as as you talk around the horn during earnings season. I think it's the biggest challenge. We're all facing is is what we're seeing here recently sustainable for the next 6 or 12 months, or is it a pop in the arm and and it goes back to something that looks more like the immediate prepay and Emma. And so we're trying to be very balanced. I think that was the word harmit used as as we provide our Outlook and as we forecast the second half of the year, you know on the other hand, there's good reason to believe that the man is going to be very very strong and as we set we're few think our fourth quarter will be ahead of 2019, but on the other hand, you know a week ago, the the director of the CDC was saying be careful folks because there could be another wave and so we're trying to take all this into consideration and be as balanced as we can as we think about, you know our our second quarter.
And the second half of the year and and that's what's reflected in our in our our guidance. If it turns out to be much stronger, you know, we'll put a ton of pressure off our supply chain to be able to chase on and I think we're well-positioned to do that because you know many of the products that we're selling our core replenishment products where we always have them on hand and we can fire that engine up pretty quickly and the more seasonal things. We've got flexibility of flx and other things like that to to address unexpected higher wage and Beyond what we've built in the forecast great. Thanks for the caller.
that
our next question comes from Bob durable with Guggenheim.
Hi guys, good afternoon. Just questions for me a little bit more money terms of how you feel. You're performing. It sounded pretty good. And I'm just curious if you could maybe give us a little bit of thought around your cotton sourcing cotton sourcing strategy game particularly in China. It's my first question.
Sure, and I'll go ahead check that. So first of all, let me talk to a commercial aspects of our business and I'm you know, this remains a huge opportunity for us as you all know, if it's only two to 3% of our total Global revenue and you know, our story in China is one of a turnaround time, but we're very encouraged with the recent Trends trying to post it, you know strong growth as we expected versus q1 twenty-twenty where they were impacted by the Pan Am and you know, we're seeing great results with fewer doors versus a year ago. So we're continuing to transform our business in China. We are moving more towards a company operated, uh foot print as hard as we said in the prepared remarks are are beacons for which we open to move on just a couple. Yep.
It's before the pandemic started is emerging really strong. It's back to pre pandemic Revenue levels, and we're really excited about that. So we think we're making good progress there. We've got a great team and now some continuity on that team and see nothing but upside and over time. We believe that that business mix is going to ship to about 70% DTC and 30% franchise on the on the shin John Cotton situation. I guess I would say a couple of things first. It is an extremely complicated situation and we are watching it very very closely. We do not Source any products in sinkiang, where do we get any relationship with fabric mills in sinkiang and it's in good part because we have four thirty years had what we have what we call our terms of Engagement. Yep.
We prohibit forced labor anywhere in our supply chain. We also insist with our suppliers the ability to audit our suppliers on an unannounced basis with neither one of those things have any supplier in sinkiang ever agreed to so for more than a decade. We have not been doing any business in sinkiang. We have not been materially impacted by the boycotts. And you know, as I said from a commercial standpoint China is a big opportunity for us and we're going to continue to operate them. All right consistent with our values.
Great, and it's just a follow-up on the target relationship. You know, I know you guys did the the home offering this this recent quarter up just any update on the target relationship what you've learned so far it really what you've learned from the home capsule that you guys did both online and in the stores, that would be very helpful. Thank God. Sure. Well first I'll talk about the the home collaboration that we did with them which is what they call limited-time offer you a one-time drop that you know, they have done historically now for over 20 years primarily with high-end fashion brands. So Lilly Pulitzer, Missoni, you know, they're they've done this as I said for twenty years. We've been really pleased. I think they would say the same thing about this collaboration. We did it primarily as a brand Energy.
the center of culture kind of moment and
And it definitely did that and hopefully you got an opportunity to go into a Target and see what it looked like in-store. It definitely drove a lot of brand excitement. And I think it was just the target consumer to the Levi's brand in a way that they had never expected before so, you know, we we've been very, you know pleased with it but beyond that we're really happy with our own relationship with Target. You'll remember we entered initially with just uh twenty store test on men's we were at 140 doors. We're now at $300 across men's and women's on our way to Five Hundred Doors, which we've committed to together will be in Five Hundred Doors by back to school the brand continues to do really really well there and importantly the Denizen brand continues to do well in Target as well. So we feel really good about the portfolio that we've got in their story The Way their execution
King from in-store merchandising standpoint. We think it's been really really good for the brand. They're selling product out the door at higher than us wholesale average pricing and wage, you know on words were real happy with that relationship.
Thanks to appreciate it.
You got my next question comes from Lorraine Hutchinson Bank of America.
Thanks, good afternoon. Just it sounds like you've you the recent war games of durable. I just wanted to get your view on the opportunity for them to go forward. You said there are continued opportunities is that all pricing or are there any other strategies that you're looking to to drive that metric?
Well, I would say that we do believe that we've got continued outside from a standpoint and as indicated earlier about the prospect of inflation coming. It's good to be in a position where you don't need a prayer meeting to take pricing, but we think we can get it a lot of different ways, you know mix is important even at a store level. I'm continuing to mix up our business and our main line doors ugh represents a significant opportunity driving down promotions, which is something we've been able to do pretty successful over the past two or three quarters. Now, we we've pretty much walked away completely from the you know, the the off-price channel if you will, but Ross is TJ Max's of the world for flushing inventory because we manage our inventory so well, so we are focused on growing a you ours we do think we've got, you know continued opportune time.
There we've taken price increases in the last quarter or the last two quarters on women's we took a $10 price increase and it's stuck. We're seeing our pricing stick when we take it and age, you know, even if you think about our assortments on parts of our business where we've been really really successful and I'll take t-shirts as an example. We have basically 1001 price point of t-shirts and our stores there is an opportunity to tear up there. So we're looking at it very aggressively but we do think given the strength of the brand on a global basis got continued outside the opportunity here.
Thank you.
Our next question comes from Kimberly greenberger with Morgan Stanley.
Fantastic. Thanks so much. Really nice results here today. I wanted to ask about the 12% margin Target and her me off. I heard you correctly. I think you indicated that you expected to get back to 2019 levels beginning in the fourth quarter this year. I assume that would continue I guess through the first three quarters of 2022 so that 12% margin Target. It sounds like um, you know would be on track for for 2022. I want to make sure first that I've I've understood you correctly on that and then when you think about that 12% margin are you thinking that's sort of where margins are going to normalize, uh, kind of medium to longer-term or are there other levers that you've got to raise? Margin Beyond? Mm. Yep.
22 to something above that 12% number. Thanks.
Thanksgiving really was wondering when somebody would ask that. So I appreciate it. As you know quarter one are you know even margins were higher than the average percent combination of gross margins, uh, you know tracking at 57 s going back to nineteen levels, but Revenue still down 16% or you know, if you adjust for things, you know, sequentially organic revenues down high single-digits. So as we think about the past month to get to the 12% plus and the reason we are confident, you know about it is the Tri-Rail drivers one revenues returning to 9 a.m. We think you for of 21 is the first quarter where we as a as a company holistically will have revenues higher than April of nineteen. Yep.
They are countries and they are markets that are already there and some will get there earlier, but that's the first driver and if that continues which wage believe it is long ago. I think it's it's it really bodes. Well, the second is sg&a 219 levels. We already there. I think our latest perspective on the first half really talks about nineteen levels of Revenue. Even in in Quarter Two And I think it's a this is an important point because you know by the end of twenty one will have a 150 more bills that we are operating then the end of nineteen and as you know, brick-and-mortar does sg&a, but we've been very successful as the team and the company reallocating dollars between, you know, the other forms of overhead and you know towards things that will really explode draw things like digital things like take off.
olajide things like etcetera etcetera and the third is gross margin acceleration and you know
I think what we have said in the past is think of a 56 handle on a pulley or basis, you know, obviously we can't replicate the gross margins in q1 for a whole bunch of reasons including effects. But I think over time all the actions we have taken including the are your question. We just talked about plus the channel make plus the pricing for the brand has I think they said the an improved that going to your question about sustainability of the 12% plus and was the growth algorithm. I think we can sustain the 12% Plus in terms of what the growth Adam is. I think let's let's put the pandemic behind us that have you know moment or two of what I call sustainable results and then we'll come back and talk about sustainable growth algorithm is but what I would remind everybody is even freed the pandemic, you know, when we invent public we talked about, you know, growing our wages.
Lehman margins twenty to Thirty basis points and that was driven on the back of growth in growth in gross margin as well. As you know, a slower growth on on Thursday. So, you know about the future twenty-two and Beyond will get back to you, but we feel good about the part to get to 12%
Fantastic. Thanks so much. Thanks good mother.
Our next question comes from Alaska with Exane diem. Good afternoon. Thanks for taking my questions following on Kimberly. I think on recent calls, you know how long it would execute about two hundred million structural cost savings or which I think half would be reinvested. Is that still the right way to think about it? And then on the $78 decline in sg&a for the first quarter off to me how much was driven by cost savings? And how do we think about the cost savings over the next three quarters? Yeah. I think I think to your first question. The 2800 is is broadly correct. I mean when we started 2020 pandemic in our run rate on sg&a was, you know, I you know, uh higher than 19 what we did during the pandemic is we took out some structural costs and we're reinvesting in areas that will accelerate growth Omni Channel technology.
New doors Etc. And I think the best way to think about is that they will be put some text on a quarterly basis, but think of us closing the the year at nineteen levels of sg&a, you know in coded to you know, we will accelerate our thoughts are investing in advertising and promotion because of the campaign that we talked about but on a full year basis, we think advertising and promotion costs are about 7% of Revenue. I think that's the basis of our thinking there is probably inflation. We are doing our best to offset inflation to productivity and cost efforts, you know are in direct proportion and closing teams are doing a phenomenal job taking costs out and I think those are the things that give us confidence that we can keep costs in chat.
Very helpful. Thank you, very
much
our next question comes from being a tells the tells me Advisory Group good afternoon, everyone and congratulations on such nice improving results in the past. Thank you Dana. In fact that you've talked about the DTC channel on the split between e-commerce and stores. What's the update on the on the store format NextGen and how you're speaking about the Omni Channel initiatives. They're wrong with it shipped from store any any of the other activations? Yeah. So I think Dana would be said about direct to Consumer. I mean we think about last year with direct-to-consumer broadly with about 40% of our business, you know, as we've made the Strategic pivot to the three areas the chip talked about the subject to Consumer being, you know, one of the three we've we've said that, you know, we could grow break to Consumer to around 60% of our total revenue over a period of time.
We feel good about it. And as that grows, we think our own e-commerce business, you know doubles in size and when Sorry, Miss business double size, we take our own e-commerce business. Yes to the 12% you know ebit margin that we're talking about so, you know this quarter because of the fact that you know, are those were closed off in Europe and Europe has you know has a large direct to Consumer business. Our direct-to-consumer business was down I think in the mid twenties, we're wholesale was down much much less but I think structurally long term, uh, you know, we feel good about growing a direct-to-consumer business because we're making efforts on expanding only Channel we've done a ton in the US on omni-channel bulb. I think you talked about, you know, think about loyalty think about, you know the app that you've launched etcetera. We're in the process of scaling that now across Europe ship. Yep.
Store from stores what we launched during the pandemic it's across the u.s. And now markets in Europe are you know deploying it for example in the next month Belgium England Spain France will all have shift control. So we really focused on on you know, expanding Omni Channel globally that's going to take some technology dollars to cut that in our capital for cash. But that's where it really makes a big difference is the direct engagement with our consumer and we especially the younger consumer and retain that really bodes well for the brand long-term
Great, and then just to follow up on target obviously in the new home collection. You've had collaborations that have been successful. What should we be looking for in either the next few quarters in terms of activation for the brand any collaborations and products that we should be watching. Thank you. We do have uh a number of collaborations coming just took last quarter. We had more than ten different either Regional or Global collaborations. In fact the Pokemon launch which was back in February was one of our strongest collaborations of all time and it drove 20% of our app Revenue in February. So these these collaborations, you know, the way I've talked about them before is they bring a lot to the brakes and and they drive a lot of interests but most of them are relatively small in terms of volume and revenue, but they they just drive a ton of excitement and interest. Yep.
There's one in particular night.
I I said I think should be on everybody's radar for the second quarter and that is a second collaboration with Valentino. So we're launching 517 units Levis Valentino vintage 5:17, but we're also doing 5107 units of a thousand edition of the 517 which is a replica of the original vintage orange tab 517 jeans, both adored with co-branded patches and Interiors wage, you know, the rear addition 517 is now live online for pre-order, you know, we talked about premium izing the brand. Uh, it's it's a unisex jeans. It's going to be sold at San Marcos Bergdorf Louisa Via Roma Sachs has already sold out of this collaboration at a pre-order price of $900.
A $90 prepare. So, you know, it's another example of it's not a tunning unit, but it's going to bring a ton ton of excitement and heat and it's just another way to continue to premium eyes the bread.
Thank you. You're welcome. Thank you, Dana.
I think that you will end up there right at 3:00 or so West Coast time, and I want to thank you all for dialing in and we'll look forward to talking to you again on our Q2 earnings call in a couple of months. Thanks very much everyone. Thank you.
Thank you. This concludes today's conference call at this time.
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