Q2 2021 Levi Strauss & Co Earnings Call
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Good day, ladies and gentlemen, and welcome to Levi Strauss <unk> Company second quarter earnings Conference call for the period ending May 32021, all parties will be in a listen only mode until the question and answer session.
At which time instructions will follow.
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 2 hours. After the completion of this call through July 15th 2021, 1 week after call for a telephone replay.
Please use the conference I D 378 for a 5.8 for.
This conference call also is being broadcast over the Internet and a replay of the webcast will be accessible for 1 quarter on the company's website Levi Strauss dotcom.
I would now like to turn the call over to Ida orphan senior director of shareholder relations at Levi Strauss <unk> company.
Thank you for joining us on the call today to discuss the results for a second fiscal quarter of 2021, joining me on today's call a chip Bergh, President and CEO of Levi Strauss and Harmeet Zhang our CFO.
Posted complete Q2 financial results in our earnings release on our IR section of our website investors Dot Levi Strauss dot com the limb.
The webcast of today's conference call can also be found on our site, we would 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 in particular, the risk factors section of the quarterly report.
The form 10-Q that we filed today for the factors that could cause our results to differ.
Note that the 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 certain 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 in its entirety is being webcast on our IR website and a replay of this call will be available on the website. Shortly today's call is scheduled for 1 hour. So please limit yourself to 1 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.
Thanks, <unk> and good afternoon, everyone. Our second quarter performance was better than we expected, reflecting broad based strength across our business as we continue to see recovery from the pandemic.
Our results reflect the enduring power of our brand in a time when consumers are seeking out authenticity from companies that reflect their own values.
In addition to seeing strong denim and casual Ization trends. We're also benefiting from the ongoing execution of our strategic initiatives.
And we are excited to see consumers returning to our stores as markets reopen with sequentially improving traffic trends.
While the pandemic continues to impact our business. We are encouraged by accelerated revenue recovery in the quarter with all regions and channels growing versus prior year.
When compared to Q2.2019 reported revenues are down only 3 points.
The recovery was led by the U S and sales exceeded Q2, 2019 levels and more than 10 markets across the globe, including China.
For the third quarter in a row, we delivered a record gross margin, which led to our highest second quarter adjusted EBIT margin ever despite continued investments behind advertising and our growth initiatives.
As we look ahead, we are confident the strength of our business will continue in fact, we are now expecting growth versus 2019 levels, 1 quarter earlier than previously anticipated with better structural economics.
Let me share a few highlights from the second quarter day.
Demand for our brands remains strong globally for them.
Men's bottoms business continues to gain traction and has nearly returned to pre pandemic levels.
In our womens bottoms business has now exceeded Q2.2019 revenue up 9% the law.
Looser fits that we launched pre pandemic are continuing to drive growth and increase as a percent of both men's and women's bottoms of Assortments now representing nearly half of each day.
Launched our multi platform global marketing campaign by better wear a longer <unk>.
We partnered with leading Influencers and change makers like Jason Smith of Chamberlain, Marcus Rashford, and more to raise awareness and be voices for change and implementing more environmentally sustainable apparel production and consumption backwards.
Reaction of the campaign has been overwhelmingly positive generating strong growth in our average daily brand mentions across global social platforms, and a significant lift in brand consideration and purchase intent after consumers experienced and engaged with the campaign ads.
Building off the success of our 501 lives series, the Levi's brand through a global Virtual festival, a may 20th to celebrate the birthday of the Levi's 5 of 1 gene.
Which has provided effortless cool style to working men and women rock stars and everyone in between for decades block.
Broadcast around the world from our official Levi's Instagram accounts. The festival featured musical performances meaningful conversations and do it yourself denim personalization and repair of recessions within the house tailors.
The celebration resulted in hundreds of PR stories and generated 4 billion impressions.
And we continue to bring energy to the market through a number of exciting high profile collaborations with Valentino Mew, Mew and denim tears, yielding strong sell throughs and elevating the brand with distribution in premium doors and features across leading publications.
In our DTC channel, we continue to accelerate our omni channel capabilities to ensure that our consumers can get product wherever and whenever they choose <unk>.
Our company operated E Commerce business grew 42% on a reported basis a great result, considering we're lapping strong growth from the prior year.
We were particularly pleased that the growth rate remains strong even as brick and mortar stores reopened in the second quarter.
We're investing in leading technology and expanding our fulfillment capabilities and earlier this month, our largest distribution center in Henderson, Nevada became our first owned and operated facility to fulfill orders for ecommerce retail and wholesale channels.
Overtime, we expect to increasingly leverage our own dcs to fulfill ecommerce orders, which will drive more agility and inventory positioning reduce lead times and accelerate expansion of ecommerce margins.
To ensure a seamless and frictionless experience across all channels, we continue to invest in our omni channel capabilities.
In the U S demand served by ship from store group versus 2020.
Internationally, we continue to expand ship from store in Europe successfully launching in Belgium, the Netherlands, France, Spain and Denmark.
We're now accepting Paypal and venmo and all of our U S stores as it extends our reach especially for Gen Z.
We've implemented a pivotal improvements to our buy online pickup in store program like the shop, the store function and we saw an increase in both the volume and higher units per transaction. After it was launched on the site shop. The store is expected to launch on a ramp in Q3.
We continue to look for ways to enhance the consumer experience and have made significant progress in optimizing our return capabilities, including contactless returns, allowing consumers to easily return merchandise of more than 2500 drop off locations within the U S.
Physical stores remain an important part of our business to build awareness and connect with consumers in a meaningful way, including driving higher loyalty member enrollment.
As traffic to our stores continues to increase conversion and AUR has remained strong and we're seeing better full price sell throughs.
A store productivity levels continue to recover we are confident in the outlook of our DTC business and we will continue to invest in growing all segments of this channel.
We also remain focused on diversifying our business.
<unk> 1 of the most unusual quarters in our history, all regions channels and categories grew significantly versus last year.
The U S was by far our strongest market this quarter with growth of 4% versus Q2.2019.
Strong wholesale and e-commerce performance.
And China returned to growth compared to 2019.
1 of our largest growth opportunities we remain focused on maintaining this momentum.
In Europe, it's clear that consumer demand for the brand remains strong as was the case last fall when Europe reopening in May revenues bounce back quickly and posted strong growth versus 2019.
Our global wholesale business near 2019 levels and is much more profitable with a higher share of digital our wholesale strategy is working and we saw a robust results in the U S, which saw a sales up versus 2019 day.
A man for our premium products remains strong and we continue to expand that business with premium retailers, including Nordstrom, where a men's and women's products can now be found in all stores.
Our other brands dockers signature and denizen, all had strong quarters.
<unk> grew over 100% versus Q2.2020 with a much higher gross margin and the signature brand even exceeded Q2.2019 by nearly 30% due to the success with Wal Mart and continued expansion on Amazon with signature goals.
We are using digital data and AI to dramatically improve the consumer experience and deepen connections leveraging every touch point to better connect and engage our fans.
We will continue to deliver compelling consumer experiences digitally.
We just launched our global Tictoc channel, which generated more than 100 million views in the first 6 weeks since its launch and Rihanna our first shop of ball livestream event on Levi of Dot Com and the beginning of June.
Through data and AI capabilities, we've created a more cohesive and personalized consumer experience on our app and with our loyalty program.
Our app continues to exceed expectations with a 20% increase in downloads compared to Q1.
We're also seeing increases in average order value sequentially and the op contribution to ecommerce revenue continues to increase.
And then our loyalty program consumer lifetime value of members remains substantially higher than.
And for non members as a as units per transaction.
In terms of digitizing our own business, we are transforming the way in which we plan where they are now forecasting initial demand for each product next season.
<unk> from our first wave test showed that AI driven demand forecasting improved accuracy.
So scaling it should enable more precise inventory investment lead to less markdowns and clearance prevent waste and enhance sustainability all of which will improve our margins.
This will be powerful in combination with the ongoing work AI has been contributing to pricing and promotion.
Before I turn it over to Harmeet, we know that in order to thrive in a digital first future we need to invest not only in technology, but in our people.
This quarter, we launched a digital upscaling initiatives, which included the industry's first machine learning bootcamp and immersive training and coding machine learning and agile ways of working uniquely designed for Allison co employees.
After graduation, these practitioners now data scientists returned to the business to apply their skills and create momentum around our digital agenda.
By the end of the year, we will of upscaled more than a 100 employees globally.
Let me now hand, it over to Harmeet for a review of our second quarter financials, and our guidance outlook for me.
Thank you chip good afternoon, everyone I hope all of you your families and loved ones, a returning back to the new norm as.
As the economies recover the vaccination.
Accelerates globally and consumer demand for a paddle improves.
The momentum of our business continues to accelerate as we significantly outperformed our revenue and profit expectations in the quarter.
The structural economics of our business has sustainably improved versus 2019, and I'm confident of achieving our adjusted EBIT margin target of 12% plus.
I'll share more on guidance in a few moments, but we are a true that the recovery is happening faster than we thought and we're now poised to deliver total company growth was this 2019 in quarter 3 a full quarter earlier than previously expected.
And that's even before we are firing on all cylinders given store traffic and tourism have not yet fully recovered.
As a walk you.
Through a second quarter results my comments will reference constant currency comparisons on a year over year basis, the newest dollars unless I indicate otherwise.
We're a meaningful I will also share a comparisons to 2019.
Second quarter net revenues of $1.3 billion grew a 148% compared to second quarter 2020, and adjusted diluted earnings per share was 23 cents.
Both exceeding our guidance.
Compared to the second quarter of 2019 constant currency revenues were down only 4% of <unk>.
Sequential improvement in sales.
And adjusted diluted EPS was significantly ahead of 2019, driven by improved structure economics of the business.
Let me share some color on the detail.
Despite an increasing number of markets opening a e-commerce business, which represents 8% of a total revenues grew 37% in the second quarter compared to prior year.
We are really pleased with this given we're lapping strong growth.
Compared to the second quarter 2019.
Commerce business has grown 71%.
Those of the digital ecosystem sales.
<unk> growth also accelerated to 68% over price and represented 23% of sales in called the tube and.
And compared with second quarter 2019, our total digital business has nearly doubled.
DTC brick and mortar a still recovering given many markets have not fully reopen we are seeing traffic redone and importantly, a key performance metrics at retail remains strong.
Compared to quarter 2 of 2019 global wholesale was down only 2% in U S wholesale was up by 6%.
Importantly, U S wholesale gross margin.
And profitability is the strongest has been in Hawaii.
A second quarter adjusted EBIT.
Was a $115 million and a 9% adjusted EBIT margin was the second quarter a record high.
Despite higher advertising as a percentage of revenues showcasing a record gross margins.
Relative to 2019 reported adjusted EBIT margins were up 280 basis points.
The record adjusted gross margin of 58, 2% represented a 670 basis points of expansion compared to call. The 222 N a.
<unk> grew a cross channel genders products and regions.
The second quarter 2019, gross margin expanded 490 basis points.
The bulk of the increase for both comparisons was driven by several sustainable attributes including.
A higher proportion of sales from a DTC channel the price increases we have taken across all channels and a number of geographies.
A highest share of women, which now has sustainably higher gross margin than men.
The Cogs saving from a globally diversified supply chain.
The quarters gross margin expansion also reflected some of the temporary benefits across all channels, including wholesale like the highest share of denim bottoms.
Lower levels of promotions and other of price selling which collectively amounted to roughly 100 basis points of benefit to gross margin.
These benefits did in the quarter due a higher degree than we previously anticipated.
To reinforce the majority of the factors driving margin expansion, a structural and sustainable.
The D C sales book brick and mortar and digital have a highest gross margin and a strategies will drive BDC to a higher percentage of a total business in the years ahead.
All of the button and do not that even after the price increases we have taken book in the past and for the second half of 'twenty 'twenty..1 we still have pricing power do not run the offset cost inflation, but to also improve our gross margin as well.
Importantly, we have negotiated most of a product costs through the first half of 'twenty to 'twenty 2.
Very low single digit inflation.
Adjusted SG&A was 6 under the $28 million, excluding an unfavorable currency impact of approximately $8 million adjusted SG&A was in line with Q2.2019.
This is despite higher incentives as we are exceeding expectation and higher ROI growth investments towards advertising BDC AI and technology as those increases while funded by savings that we of action last year.
Now I'll share a few highlights from a 3 region.
Second quarter revenue in the Americas increased a 150 per cent compared to prior year.
Compared to the second quarter of 2019 Americas revenue grew 4% led by a wholesale and digital.
The expansion of wholesale gross margin underscores the healthy a business we have built in the region.
This Q2.2019 company E Commerce grew 51% and the for digital ecosystem grew 61% and represented nearly 20% of sales.
Total revenues from brick and mortar stores in the region nearly reached 2019 levels.
Despite the significant impact of tourism, not having yet recovered.
And the region's operating income was a $153 million up 52% against the second quarter of 2019, reflecting substantially stronger gross margin and ongoing cost controls.
Within the Americas region, the U S business, a structurally a lot stronger today than it was pre pandemic for several reasons.
It has a larger digital business, a highest share of revenues with financially healthier and more premium customers more full price sales pricing fall and a higher retail productivity, especially critical as we open more full price stores.
We're confident we can continue to grow the U S business over the long term.
Turning to Europe revenues increased 165% versus 2020, reflecting strong demand as markets in the region reopen.
Compared to the second quarter of 2019, Europe's revenues were down 12% as director of consume a brick and mortar and franchise remain down given more than a third of those will close during the quarter.
These declines were partially offset by growth in a year.
E Commerce business and digital wholesale.
A company E. Commerce grew 80 per cent compared to 2019, while the full of digital ecosystem in Europe has doubled and now represents over a total of the region sales.
Importantly, Europe exited the quarter with revenue in a growing high single digits compared to May 2019.
Operating margin has expanded 80 basis points since Q2.2019, despite the sales decline, reflecting higher gross margin and cost discipline.
Asia revenues grew a 113% compared to prior year.
Compared to the second quarter of 2019 Asia revenues were down 13% as that's been them a continued to negatively impact several of a significant market with roughly half the decline in the region at Jubilee the move to India.
But we're seeing growth in several important markets and continuing growth in digital fueling our optimism.
China grew 3% versus Q2, 2019, reflecting double digit growth and a direct to consumers do a network and E Commerce, which we expect to continue into the second half.
A markets in Australia, and New Zealand were another bright spot up strong double digits from Q2.2019.
And company E Commerce doubled in size from second call of 2019, while all of the same time period. The full of digital ecosystem in the Asia grew 17, 9% and now represents 15% of the region sales.
Turning to balance sheet and cash flow of inventories at the end of the core ROE of 12% below prior year, essentially driven by double digit declines in both the Americas and Asia.
Inventories remain healthy and primarily comprised of a product that can carry into future seasons.
Compared to the end of the second quarter of 2019 inventories were down 4%.
Cash and liquidity remains strong and at the end of the culture of net debt was negative $46 million and overall liquidity was $2 billion.
Adjusted free cash flow through the first half of the year was $60 million, representing a 54% improvement versus the comparable period of 2019.
And we continued to return cash to our shareholders I am pleased to announce that we are again raising the dividend to 8 cents per share for the third quarter up from 6 cents per share and in line with pre pandemic levels.
Before sharing a second half outlook, let me take a moment to provide an update on a sales performance through June.
As a reminder to improve compatibility with the calendar reporting companies, we've decided to indicate a revenue performance to gather in the quarters when relevant.
For the 3 months period of April through June the revenues were up low single digits to the comparable period of 2019 on a reported basis with the month of June up mid to high single digits compared to June 2019.
Now turning to the outlook for the second half and full year 'twenty 'twenty 1.
Given the structural and sustainable improvements in the business and the momentum headed into the second half we expect a much stronger full year in both revenue and EPS than previously anticipated.
We expect the reported revenues for the second half of 2021 to grow 28% to 29% was the second half 'twenty 'twenty.
This equates to reported revenue growth of 425% was the second half 2019.
Which includes a currency benefit of 2 points.
From a regional perspective relative to 2019, we expect second half reported revenues to grow in the Americas by mid single digits and in Europe by high single to low double digits.
Asia, Despite strong growth in China will still be blow of 2019 due to the ongoing prevailing of the pandemic debt.
From a quarterly perspective, we expect ongoing sequential improvement in a quarterly growth rate was the 2019.
The Q3 growth blow and Q4 about a second half growth rate.
In terms of profit, we expect second half adjusted EBIT margin of 12%.
And we expect to deliver adjusted diluted EPS of 72 to 76 cents in the second half, which would bring us to a dollar.
29 to a $1.33 for the full year.
Compared to 2019, this equates to a second half EPS growth of more than 26%.
And folio a growth of more than 15%.
A few color comments on a key second half assumptions beyond revenue.
We expect the second half gross margin in the range of 56% an increase of nearly 300 basis points above second half 2019.
As per usual, we expect sequential quarterly improvement in gross margin, So Q3, lower and Q4 higher than the second half average.
With the strong second half gross margin outlook combined with the Q2 gross margin outperformance. We now expect a full year gross margin of around 57% higher than a prior expectation of 56% and more than 300 basis points above full year 2019.
And we are increasing our investment in adjusted SG&A.
Second half adjusted SG&A will be about a 100 million higher than it was in the second half 2019 a.
About 30 to 35 million reflects our estimate for unfavorable currency effects from a weaker U S dollar the.
Remaining 65 to 70 million split roughly equally between advertising and selling.
Increasing our advertising investment to drive our initiatives and market share goals as the fuel and elevate our brand.
We expect second half advertising dollars at 7.7% of second half revenue.
This is 70 basis points higher than second half 2019.
And we'll also have higher selling and variable expenses related to raising a second half revenue outlook, which is largely comprised of DTC revenues.
The incremental adjusted SG&A will support accelerating profitable growth without impacting our adjusted EBIT margin target given the associated higher gross margin and leverage from higher revenues.
And finally with respect to taxes give.
Given the significant tax benefit we recorded in the second quarter, we now expect a lower full year tax rate of around 10 or 11%.
This implies a second half tax rates in the very low teen.
Before we go to Q&A I'd like to leave you with 3 key court.
First we beat the second quarter expectation and a raising our full year outlook.
Achieving this would result in a full year revenues nearly approaching 2019 levels with second half adjusted EBIT margin tracking 12%.
And full year adjusted diluted EPS substantially higher than 2019.
And we're getting to the improved profitability and a high quality way with higher revenue gross margin and disciplined cost management.
Second.
Structurally a business is stronger than it was in 2019, driven by a higher share of digital revenues, a healthier U S wholesale business.
And technology investments that have accelerated a DTC business, while connecting us directly with more consumers.
Over the past 2 years, we have reshaped a P&L with higher sustainable gross margin and cost cuts, which are fueling a N P and other growth investments, while delivering higher adjusted EBIT margin.
This gives us great confidence to continue market leadership growth driven by the strength of a brand and a product, especially as denim resurgence and casuals the Asian trend accelerate.
We remain confident that we will deliver full year adjusted EBIT margin of 12% plus in 'twenty 'twenty 2.
And third we have a very strong balance sheet with net debt below zero.
This through a renewed focus on cash which has improved a cash conversion cycle significantly as compared to 2019 a.
As a result, we continue to have substantial liquidity to grow this business, both organically and inorganically.
While returning cash to us shareholders.
With that we'll take your questions.
Thank you to ask a question. Please press star 1 on your Touchtone telephone again Thats Star 1 on your Touchtone telephone to ask a question to withdraw your question press. The pound key we ask that you. Please ask 1 question and then return to the queue. Please standby, while we compile the Q&A.
Roster.
Our first question comes from the line of Matthew Boss of JP Morgan Your line is open.
Thanks, and congrats on another great quarter.
Thanks, Matt.
Maybe chip in light of the global momentum.
Could you elaborate on current trends in the denim category and just your confidence in the sustainability of the strength as we think about pent up demand I know you've talked about size profile changes, maybe that relative to the fashion silhouette fit drivers of a potential multiyear denim cycle that.
<unk> 0.1st on last call.
Yep.
Well I.
I think with 1 more quarter underneath our belt I think a we are.
We can confidently say that we are in the early innings of a new denim cycle.
Got a lot of confidence in the sustainability and our ability to continue the momentum that we've seen through this quarter.
The the strong results reflect an industrywide denim resurgence that is being driven by several things..1 is the continuation of the Casuals Asian trend and I would say the batch occurring more on a global basis than just the inside the U S.
As the pandemic, a fog lifts and more people get vaccinated the return to social activities as Lockdowns lift.
People are now starting to go back to the office in many parts of the world all.
All of this creates a new wardrobe opportunities.
And I have talked about the fact that this is U S state of but about 35 per cent of consumers in the U S have changed waist sizes.
And some of it is up and some of it is down but either way. It creates another reason for people to go out and update their wardrobe, but importantly, I do think the new silhouettes, which we've led actually.
Before the pandemic, we launched our first kind of baggy Fitch and it really took hold and then there's the pandemic kind of started the happen. We just kept doubling down on it from 1 season to the next but we are seeing.
On both the men's and women's business, but these are big drivers of our business.
Of the looser bad year fits are almost half of both mens and womens sales this past quarter and that's a pretty significant change, especially a women's from Q2.2 years ago.
And you know.
As bottoms silhouette changes. It also has an impact on tops has an impact on footwear and it really does present an opportunity to.
The update People's Wardrobes broadly beyond just the denim bottoms.
On top of all of that we've also talked about the importance of extending beyond denim and we saw really good results. There some of our newer styles such as the Xx Chino that was up 246% and our shorts offerings are up on the women's business, we've seen really good results on.
Dresses.
And that has also helped quite a bit the this past quarter. So.
I think it's I think we are in the early innings of a new denim cycle driven by this new silhouette, that's kind of a throwback to the early nineties.
I think it is fundamentally being driven by the Casuals Asian trend and it gives me a great deal of confidence as we go forward into the next couple of quarters.
Great Congrats again.
Thanks, Matt.
Thank you. Our next question comes from Bob debut of the <unk>.
<unk> Securities Your question please.
Thanks.
Good evening guys.
Because of a well a couple of questions from earlier.
On a chip the I guess can we talk a little bit about pricing. Just if you can elaborate on pricing are they sticking or the recent pricing actions sticking.
How much pricing are you taking in the second half and can you really just talk to like the sustainability of these price increases and how you guys are approaching it. Thanks.
The harmeet.
You're on mute I think I think coordinate when I say answer here.
There you go so.
So Bob the on pricing.
You've said in the past we ended the.
The early innings of pricing.
We've been more proactive on the back of a brand being odd and a products being relevant that chip talked about in our view is you take pricing.
When the when the brand's resonating with the consumers not when you need to.
And our debt.
We have taken pricing during the pandemic, it's sticking if you look at a.
A first half pricing probably had about a point on revenue.
And you think of the quarter about a point a quarter 2 pricing was about a point of gross margin.
Thinking forward.
The other piece is chip talked about the lose a bag of fit.
They're a higher AUR as the better gross margin I talked about a womens piece of a piece of the business, which under penetrated and growing that has higher gross margin because we did take some pricing.
In the last year, especially in the U S a relevant to a wholesale so.
Now the other piece in the pricing bucket is the reduction in markdown.
We're using AI and data analytics as well as with lean inventories debt. So you know, we're making sure.
Debt our products are marked down appropriately that's definitely helping a U.
You would think of AUR, a generally across the system in call of 2 they were up about 5% and is a cross geographies across channels.
So our view is of.
That pricing is sticking a we're also prepaid for any cost inflation. If it happens I talked about the fact that we've been able to negotiate a H 1 cost of goods at very low single digit inflation.
Which is a little higher relative to the previous year's Spike.
More than prepaid for inflation, if it comes down a.
That part and I think the other pieces of a think of the industry in a prices have largely been deflationary over the last 2 decades and as market leaders.
Denim is a resurging I think it's an opportunity to lead the industry.
Great. Thank you very much.
Thank you. Our next question comes from Jay sole of UBS. Your line is open.
Hi, good afternoon. The odd this is a moody's you're starting out on behalf of of Jay. So I wanted to ask about a Europe. You know you mentioned that sales in May a improved versus May 2019, a I think I heard like up double digits. So just wanted to understand how that number a.
You know a improves throughout the quarter and sorry, if you could also like a a state again, what youre seeing for the third quarter of eye by region that would be very helpful. Thank you.
Sure you know.
[noise] pre pandemic Europe was the strongest a market.
We were market leaders by a mile executing really well growing double digits.
Before the last resurgence.
The recovery in Europe was also of the strongest a and a unfortunately a country's has to go into lockdowns and so during the quarter of about a total of 5 stores were closed in Europe as we exited the quarter.
In a lot of them have reopened so when we talked about exiting the corridor.
We talked about me a.
Sales in Europe being I believe in the high single digit you could take a market like the U K, which where retailers open a you know we are seeing if you take the last 2 months, we've seen double digit increase in sales.
The there is the brand is very strong and is largely a.
The performance has been light only because stores have been closed the European team has done a great job also of pivoting to making the business more digital so I talked about.
The company E Commerce business in the core of growing close to a little over 90% and the full digital ecosystem, becoming a total of the business. So our view of the world is a difficult to predict.
A win.
And how lockdowns happen, we all heard about.
Japan. This morning by a view of the World is our execution capability of our teams on the ground a.
You know our focus in driving agility on the back of.
The consumer of employees being safe and we're able to recover pretty quickly.
And so that's how we're thinking about Europe and.
In other parts of the world.
Over the next 12 to 18 months.
Alright, thank you.
Thank you. Our next question comes from Laurent <unk> of Exane BNP Paribas. Your line is open.
Good afternoon. Thanks for taking my question for me I think you've mentioned that June is up mid to high single digits and then if I remember correctly on the 2 H.
Guide, which I think implies a 2 year stack, it's 4% to 5%, but debt <unk> would be a slower slower growth rate just trying to square away you know how do we think about June.
It sounds like June would be the driver of it then there's a sequential slowdown just trying to understand the mechanics here.
And then any thoughts on updated thoughts on the target a partnership.
As we head into the back to school would be very helpful. Thank you very much.
Great I'll take the June in the second half question and then I'll pass on the second question on Doug of the chip a back.
But to your question a June was a good.
Good indication of a you know what happens when lockdowns lift.
And.
What we're seeing is consumers come back and come back book, especially to brands that have relevant products as well as brands. They can trust and you're right. The numbers in June of a pretty strong a pause here.
Also feel in a part of that is pent up demand part of that is people getting back to the new norm. So as you think of the second half of the a you know of.
Our expectation clearly higher than a quarter ago.
Clearly reinforcing that we not only a return to growth relative to 19, but we get to growth in Q3, which is a quarter ahead of our expectations. So that's how we're thinking about it.
The other piece to note is the out various parts of the world is to close the mean, the Asia and I just referenced Japan today.
We're not a.
1 of the Bachelor of against the wires, yet there is still a.
Our work to be done on that front and so it's important to ensure the that's incorporated in our outlook as we think about the next 6 months.
Yeah and on target long the headline thought as we continue to be really happy with that relationship a and I think if the word ask them. They would say the same thing for <unk>.
Currently in about 300 doors with the Levi's Red tab.
About another almost 500 doors with denizens.
We are expanding the 500 target stores in time for back to school. So that is already in motion. So our Q3 results will include some distribution expansion of Levi's Red tab to 500 target doors.
And then on top of the in most of those stores will also have Dennis and then a denizen will be exclusively in another 12.175, or so doors. So total target distribution of about a 7.775 stores or so but we.
We will be expanding Levi's red tab to the 500, a target doors from time for back to school.
Great to hear thank you very much.
Net.
Thanks, a lot.
Thank you for our next question comes from Paul The Suez of Citigroup. Please go ahead.
Thank you, it's Tracy Kogan filling in for Paul.
Was wondering if you guys could update us on any supply chain issues a year.
Currently seeing an immediate supply chain issues have affected your inventory levels are or constraint or the man then when you think of it might improve a thanks.
Yes, we have experienced some impacts although I would also be very quick to say that I think we are managing through this better than most.
I would say the impact for the quarter was about a half a point of growth for the total company. So kind of in the range of $7 million to $8 million from the quarter.
Our expectation for the second half is there will continue to be challenges, but we're gonna be air freighting more a that's already built into our gross margin guidance, which we've given.
And we are working around some of the biggest challenges you know there is still a challenge and a long beach. We're now shipping most of our product into the U S through the east coast, a only about 20% of our U S. Freight is coming through the West coast right now when we built the delays into our lead times.
So we're fully expecting that we're going to be able to manage the back to school volume.
As that comes upon us and holiday as well on the.
Team has done really a great job of.
Contracting and getting guaranteed space on vessels, you know a lot of people were talking about not being able to get containers, not being able to get onto a ship.
The team has done an extraordinary job on getting us a guaranteed space guaranteed pricing as.
As well, which is helping us to control our costs. So.
The since a big challenge for the industry. We're hearing it from a lot of our customers. We are all over it and I think we are in part because we've got such a diversified supply chain I think we're managing through this better than most.
Great. Thanks very much.
You bet.
Thank you. Our next question comes from Dana Telsey Telsey Advisory Group. Your line is open.
Good afternoon, and congratulations on the progress given the improvement in margin that you've seen how do you think about the DTC margin e-commerce versus stores is the improvement being seen in each of those channels and how do you think about that going forward and then just lastly in terms of product in.
<unk> and raw material costs, how are you planning those going forward. Thank you.
Thanks, Dana and.
Thank you for the insight on CNBC today a I'd.
I'd say to your question on gross margin in a D D C. A.
<unk> continues to be a tailwind.
Our gross margin both in stores as well as e-commerce is higher than the company average.
And a we have said strategically a 1 of the pivots. We made during the pandemic was there a we will accelerate our direct to consumer a bit.
Business, a weird about 40% of the.
The business today is going to consume a but we hope to get to about 60%. So that clearly has.
Our gross margins.
So as I talked earlier.
We're selling a lot more full price product.
We are also.
Being very thoughtful of bar and disciplined about a promotions all of these factors will help in a were seeing an increase in AUR as I talked about.
That's making a.
You know a big difference.
There is a piece in the gross margin side.
That I think.
It may be temporary I mean, a small but is there and we called it out.
I think that's why gross margin in the second half, even though the 300 basis points higher than 2019, a slightly more moderated than the you know 60, 70, a 500 basis points rather than 19 of you've seen a here for your question about cost.
Given the scale that we have and given.
Given that would be a wonderful.
In a partner them into the around the world, we've been able to negotiate a.
I would say cost increases on product too.
2 very low single digit a.
For the first half of 'twenty to 'twenty 2.
And day gives us confidence about continuing of maintaining gross margin growth as we get into 2022.
And you'd be are seeing inflation in media caused with the inflation and fulfillment costs, we're seeing inflation in media, but manageable from a perspective and given that a brand has pricing power if we ever need to.
Take more pricing that we think we can.
Thank you.
Thank you. Our next question comes from Kimberly Greenberger of Morgan Stanley. Your line is open.
Okay, Great for me I wanted to ask you about the gross margin of 57% full year gross margin. This year, obviously, a really exceptional accomplishment.
I know you called out the 100 basis points of temporary benefits.
Here in the second quarter and I can't recall, if you are if you gave that in Q1.
If you can just take a look at the full year out of that 57 per cent is there a 25 basis point or a 50 basis points.
You know sort of a give.
Give back next year I'm, just wondering what the a sustainable if if we were to think about the more structural benefits you're delivering a gross margin this year versus some of the temporary ones. If you could help us understand the breakdown within the 57 per cent target this year that would be great.
Yeah debt.
Italy, you know of.
We're not ready to give.
Our guidance.
For 'twenty 'twenty, 2 a talk about the growth algorithm because things are still stabilizing but we feel good about insuring.
Ensuring the gross margin kind.
Can use to be accretive year over year, a we demonstrated that even last year and in the heart of the pandemic I. Thank for your question.
Difficult to call out Kimberly by you know in this quarter, we felt probably they are a temporary benefits of about 100 basis points, which annually. If you equate it to about 2025 basis points.
Chip I referred to.
The us a trading product in the second half.
And we built in that into a gross margin guidance.
You know a resumption as long the dumb.
It will revert back to the old normal.
Shifting the products of women on a need to a afraid as much. So there are some puts and takes a.
As we think about the year broadly I think a.
It was the strength 3 quarters.
In a.
Conduct of fashion a record gross margin just talks about a.
You know how strong the brand is a.
And so that's what I would kind of leave you with is the.
The thinking day will probably continue to grow gross margin annually a much that will be a probably talk to you more.
In a couple of months.
Maybe early next year when you talk about 2022, but I think the the the broader perspective also is a.
A confidence of delivering a 12% EBIT.
EBIT margin operating margin and growing from there.
The beginning 2022, so I think a.
I would say.
All of our view of the World is gross margin continues to be accretive the continued to invest on things that matter N P et cetera, but that doesn't drive leverage.
And a improve operating margins.
Very clear thank you so much.
Kimberly.
Thank you. Our next question comes from Lorraine Hutchinson of Bank of America. Your question. Please.
Good afternoon.
Question about how you're thinking about the future orders and how you're trying to strike a balance between meeting the outside of demand that you're seeing particularly in some of these new fashion items and tops.
Maintaining all the progress you've made on gross margin, so where you're coming out in terms of planning your production and your inventory levels for the coming season.
Yeah the.
You know we're.
We're doing a few things structurally that would continue to improve.
Our inventory management and we are moving from 2 seasons to full chip talked about.
You know of implementing AI driven demand forecast team that leads to better inventory management, but also ensuring that we minimize the missing sales.
You know so that the the quite a few things. The other thing that we're doing is we are raising the percentage of common assortments around the world because it allows us to move inventory of.
Between countries and between Italy, it's.
The other muscle there'd be a bit.
Is the muscle of choosing a you know thanks to the 1 of her work of a supply chain folks in Alberta the than the ground a.
Now I think we can chase more into demand as against all of doing everything and keeping and so that leads to a better inventory management, and obviously, a lower mark downs, because you're not necessarily buying product before you'll see the strength.
So the way, we think about inventory levels.
You know a loren I think the 12% decline that you see is not here to stay we probably have a inventory at a bar in Q3 and as we start planning a.
'twenty 'twenty 2 inventory levels will probably be slightly higher mid to high single digit but the good news for US is as you've seen even during the pandemic 2 thirds of a inventory is core of what we can sell from season to season. So in our.
Our view of the world is debt.
We had we will have inventory that will allow.
It allows to grow this business will probably be chairs. The if the recovery continues at the pace of this will probably be choosy.
Demand and that's not a place a bad place to be a chip is set a couple of times without the <unk>.
Lewis of the sales and have a lot more inventory that we have to mark down.
Okay.
Thank you. Our next question comes from Carla Casella of Jpmorgan. Your question. Please.
Hi, I'm curious you mentioned that Lady is has a higher gross margin of at this point and 1 day of what's that it shouldn't be the volcano is it the next door or something else.
A.
I'd say a couple of things Carla.
And the good old days there.
You know we were not growing women's.
It was dilutive to all of the.
The company margins then we introduced a you know.
Wonderful women's product and has the I don't know 15 quarters of double digit growth. So the problem is relevant it was resonating with her.
The.
And then we've continued to innovate and introduce new styles, we took pricing.
We had the volume and we leveraged the volume to drive better cost of goods sold so all of those factors of really contributed to higher a you know gross.
Gross margin for our womens business is underpenetrated. So the team does a girl and I think as it grows it continues to be accretive.
And so we think the gross margins are sustainable as we continue to grow.
A women's business for us today as part of toward a little over a third of a business.
You know and we will be a stated publicly you know our intention is to.
Growth is to at least.
In a half of our total business over time the of countries that do it effectively today I think Australia.
It has a very.
You know as the women's business, that's at par with the men's business out of the market.
Europe, So I think it's clearly possible.
Okay, Great and then can I ask just 1 on on travel.
Where would you say you are in terms of travel if you look at today versus pre pandemic.
How much more upside is there as well as travel reopens worldwide.
Are you talking about travel as in travel expense.
The sort of a sales sales for a sale or.
Oh, you're talking about tourist sales.
I said tourist sales are higher a.
Practically nonexistent debate.
I think you'll see a little bit in Q2, but it's very small.
You think about our doors.
You know a.
What the team has teams around the world of doing a wonderful job is reaching out to more local consumers. So I think.
We are reaching out to a lot more younger consumers around the world to try and offset some of the tours.
Klein.
In a difficult to predict but I'd say.
You know, it's really by country every country has a different.
Rules for allowing tourists.
We see things get back to normal probably a year.
And a half from now but.
Our view is the being able to mitigate where we can.
Okay, that's great. Thanks, a lot.
Yeah.
Thank you at this time I'd like to turn the call back over to the President and CEO chip Bergh for closing remarks alright.
Alright, well, thank you everyone for dialing in and for the terrific questions.
We will look forward to speaking with you again at the end of or a third quarter. Thanks, very much and enjoy the rest of your summer.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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