Q1 2022 Levi Strauss & Co Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the Levi Strauss <unk> Company first quarter earnings conference call for the period ending February 27th 2022.
<unk>.
All parties will be in a listen only mode until the question and answer session at which time instructions will follow on.
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 April 13, 2022, one week after the call for telephone replay.
Please use conference I'd 7585107.
This conference call is also being broadcast over the Internet and a replay of the webcast will be accessible for one quarter on the company's website Levi Strauss Dot com.
I would now like to turn the call over to idle orphan Vice President of Investor Relations at Levi Strauss <unk> company.
Thanks, Latif and thank you everyone for joining us on the call today to discuss the results for our first fiscal quarter of 2020 tail. Joining me on today's call are chip Bergh, President and CEO of Levi Strauss and Harmeet Zhang our CFO , we have posted complete Q1 financial results in our earnings release on the IR section of our web site investors that Levi Strauss dotcom.
The link 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 ICC in particular, the risk factors section of the quarterly report on Form 10-Q that we filed today for the factors that could cause our results to differ also note that the.
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 measure 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 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 would like to turn the call over to chip.
Thank you Ida and welcome everyone to today's call.
Before we get into the quarter's results I want to take a moment to recognize with devastating award, but it's happening in Ukraine.
Our response to the humanitarian crisis since been guided by our values from the philanthropic donations, we're making to organizations like the international Rescue Committee and care to our employees volunteering their time and opening their homes to refugees.
Dominating tens of thousands of pieces of clothing to those in need.
Our employees had been the ones leading the way.
Whether it's the manufacturing team in Poland, selling denim bags for medical kits, where sales director in Warsaw housing refugee families. Our teams continue to demonstrate our values and inspire us to do more.
With that I'll move on to our results from the quarter.
We're starting fiscal year with strong momentum, we grew first quarter revenue by 22% to $1 $6 billion with broad based growth across markets channels category and gender fueled by strong consumer demand across our portfolio of brands.
We also continued to drive excellent profitability with adjusted EBITDA growing even faster than revenue returning to its high watermark of 14.9%.
To achieve these strong results our teams around the globe demonstrated their ability to execute amid a dynamic macro backdrop, including COVID-19 related supply chain disruption and inflationary pressures.
Last quarter I spoke to you about several structural tailwind that play to our advantage that we are fully committed to capitalizing on in this moment results. We delivered this quarter highlight how our strategies are working positioning us for solid long term growth.
We are the global leader in a large and fast growing market.
In the U S. Denim category sales continued to deliver strong growth and were up 11% versus pre pandemic levels two years ago.
As the market leader, we continue to push the category forward by launching premium priced innovative products like the circular five O. One a new version of the Bible. One original made with organic cotton post consumer recycled denim.
And designed to be recyclable. It's just one new addition to the looser fit denim trend. We started that is driving significant growth in our bottoms business and represents roughly half both our women's and men's bottoms assortment.
Our brand equity has never been stronger and is driving outsized growth.
Along with the quality and value of the product. The overall strength of the Levi's brand has enabled us to raise AUR is by 10% without negatively impacting demand.
Our ability to effectively take prices enabled us to mitigate cost pressures, including inflation in inputs and logistics.
These decisions are instructed by powerful proprietary technology and analytics, including artificial intelligence and methodical analyses of price elasticity in fact, even as we have raised prices consumer demand has continued to grow and revised brand unit volume has now returned to 2019.
Yes.
We took select pricing actions last year as well as early this fiscal year and we believe there remains additional headroom to raise prices in parts of our portfolio through the balance of this year and beyond as we continue to innovate and lead trends.
Our direct to consumer business continues to thrive and deepen our connections with consumers.
The differentiated experience, we create for our consumers that our stores drove significant momentum through Q1 with global brick and mortar up nearly 50% versus prior year.
We continue the rollout of our next Gen stores destinations, where consumers can find our most elevated brand expression and personalized experience. These.
These stores are showing encouraging results like North Park mall in Dallas, which in its second month of operation was the most productive store in our U S fleet.
And as we continue to expand our physical presence, we're making strides expanding our digital presence.
<unk> continues to show positive results with monthly active users more than doubling in the quarter as well as increase in traffic and conversion across the U S and Europe .
In Q2, the App will be rolled out to India and several European countries with further expansion later in the year.
Finally, our global diversified portfolio is a key strength, helping to drive strong growth even in these times of macro uncertainty and.
In Q1, we delivered growth in all areas of the business that are underpenetrated.
<unk> womens tops and international all five brands in our portfolio contributed to growth, including the two value brands.
The Chilean denizen, together grew more than 10% and consumer trends and the value channel remained healthy.
I will now touch on some key highlights from the quarter.
The Levi's brand grew 20% with our top five markets again outperforming the brand overall.
Levi's men's business is experiencing exceptional growth with bottoms up 24%, representing the categories highest for first quarter revenue in over a decade.
Levi's Women's bottoms also continue to see strength up 21% versus prior year.
And the 501 was up almost 50% in the quarter demonstrating the love consumers have for our brands most iconic product.
Our revised tops business, which returned to growth versus pre pandemic levels in Q4 increased 12% driven by broad based strength in men's in addition to womens which saw continued traction in woven and dresses.
Direct to consumer momentum accelerated across the globe generating 35% growth driven by the continued recovery of brick and mortar as the severity of the pandemic has lessened, allowing consumers to come back to our stores are.
Our global brick and mortar growth was driven by both mainline and outlet stores in all geographical segments due to improved traffic trends and higher AUR.
But it's still down from pre pandemic, we are pleased to see traffic in our most tourist dependent locations beginning to recover.
And since the start of the pandemic, we have doubled down on our strategy to transform our wholesale business into a more elevated digitally oriented and profitable market.
Global wholesale business grew 15% with our top 10 key strategic accounts collectively growing at an even faster pace.
And our revised brands U S wholesale business grew 23% achieving its highest first quarter revenues in over a decade.
And based on the overwhelming success of the Levi's brand at target, we've collectively decided to expand our partnership together, taking the brand further than either of US thought we would back in 2019.
You'll remember our goal back then was 500 doors, which is where we've been since last year.
But as the results have been so strong we will be rolling out to an additional 300 stores. This spring.
With the expansion will be showcasing the strength of the brand and introducing 60, plus new styles for both men and women.
We're picking up incremental new consumers to the Levi's brand at target and we're excited about these expansion plans.
We have also doubled our premium business with Nordstrom, where our womens line has outperformed other brands. Furthermore, we are benefiting from more favorable floorspace of key customers and we are selectively increasing distribution in key wholesale specialty accounts aligned with younger consumers like urban outfitters.
Finally, net revenues through all digital channels were up 16% despite stores reopening representing approximately 25% of total first quarter revenues.
Now provide specific highlights on signature dockers and beyond yoga.
Signature saw continued momentum benefiting from growth across genders and categories as well as an increase in AUR and based on insights of our top selling Carpenter gene. We will also be expanding signature into everyday work where the spring.
Doctors had another quarter of sequential improvement in growth versus pre pandemic levels, while driving strong profitability.
Revenue continues to shift to a healthier mix with nearly half of sales now coming from outside the U S and about a third in DTC.
Brand was also showing encouraging trends with the 18 to 34 year old demographic, who now drive nearly 40% of sales on dockers dot com in the U S.
And the integration of beyond Yoga continues to go well the brand has started the year strong exceeding our expectations in Q1.
It's a well positioned premium brand, but significantly expands our total addressable market, while contributing to the diversification of the company.
Beyond the business results, we are very focused on starting to build the capability to scale the business and have started to make some terrific hires in e-commerce brick and mortar and marketing.
Before I turn it over to her meet I want to recognize the hard work and dedication of our teams across the organization we.
We delivered exceptional results in a uniquely challenging operating environment.
I look forward to continuing the conversation at an Investor day that we will be holding in New York on June 1st where investors will have an opportunity to hear the latest about our long term strategic plans and meet with the broader leadership team.
We will share additional details in the coming weeks.
Amit over to you.
Thanks Chip.
On the heels of record results, we delivered in 'twenty 'twenty. One we continued to achieve excellent financial results in Q1 of 2022.
We grew constant currency revenue by 26% compared to last year driving growth across regions and channels.
Supply chain related issues limited further revenue opportunity by approximately $60 million or 5% primarily in the U S where the consumer continues to be strong with demand outpacing supply.
We drove record gross margin demonstrating the power of our iconic brands.
That combined with our disciplined execution helped us deliver an adjusted EBIT margin of 14, 9% and adjusted diluted EPS growth of 35% to 46% compared to the prior year.
We return capital to our shareholders through a high dividend that now exceeds pre pandemic levels and the repurchase of 3 million shares in the quarter.
And given our continued outperformance and the momentum of our brand. We also reaffirmed our financial outlook for the year.
As we remain confident in our ability to deliver strong results in the future.
And we achieved these important objectives in spite of the impacts of rising inflation COVID-19 resurgence is impacting our business and now the wall in Ukraine that is impacting so many lives.
I'll now walk you through our first quarter results for which my comments will reference constant currency comparisons to 2021, unless I indicate otherwise.
First quarter net revenue growth of 26% was driven.
Half by higher volumes and half by an increase in AUR.
This balanced growth demonstrates the strong consumer preference for all our brands, even as we price to offset inflation.
In the quarter sales of.
Direct to consumer channel increased 39% driven by higher AUR, which were up 14% as well as by increased traffic and scope expansion.
DTC now represents 39% of total net revenues was 36% last year.
Our E Commerce business was up 13% year over year, driven by traffic and AUR and represented 9% of total net revenues up from 6% pre pandemic 2019.
Record adjusted gross margin continued to strengthen expanding 170 basis points to 59, 4% due to a higher mix of sales from DTC as well as price increases lower promotion and higher share of full price sales.
Partially offset by higher product costs.
Gross margin accretion also includes the impact of 20 basis points of unfavorable currency and 20 basis points of higher airfreight costs.
Moving to SG&A.
Adjusted SG&A expenses in the quarter was $708 million or 44, 5% of net revenue relatively flat as a percentage when compared to 44, 3% of net revenue in Q1 2021 .
The approximate $130 million increase relative to last year was primarily due to higher selling expenses and increased distribution expenses associated with higher volumes and labor costs higher spending in A&P as we invest evenly across the year.
And higher incentive compensation, given the outperformance versus expectation.
<unk> offset by currency benefit due to the stronger U S dollar.
Our record high gross margin, coupled with disciplined SG&A expenditure enable us to drive an adjusted EBIT margin of 14, 9% with adjusted EBIT dollars up 37%, even as we continued to strategically invest in our long term growth including.
Accelerating our direct to consumer business and investing in advertising.
Adjusted net income of $189 million was up from $140 million in Q1 of 'twenty one.
As lower interest expense due to lower debt levels and benefits from deferred comp interest expense was offset by higher taxes due to a higher rate versus prior year.
We expect interest expense to normalize for the rest of 2022.
I'll now take you through key highlights by segment recall the regional segments include a Levi's brand Levis signature and denizen, while the other brands segment includes dockers and beyond yoga.
In the Americas revenues grew 27% driven by higher unit volumes and higher prices across channels.
Our largest market the U S remains very strong delivering growth of 24% versus prior year.
Our company operated stores had a particularly strong quarter also driven by increased traffic while wholesale growth was robust and also driven by strong sell through.
Latin America was up nearly 70% with broad based growth across channels with particular strength in our third largest market in Mexico, as well as Brazil and Chile.
Building on the positive momentum from the past two quarters Europe delivered another robust quarter up 13% as reported and 21% constant demonstrating the resilience of the consumer and strength of the Levi's brand. Despite the omicron wherein as.
As a reminder, the was the majority of our business is concentrated in western Europe with only 4% of total global net revenues generated in eastern Europe of which Russia comprises hub.
Direct to consumer was up 56%, reflecting price increases and higher traffic as nearly one third of company operated stores were closed last year and wholesale grew 3% due to gains in brick and mortar.
Nearly all countries drove results with double digit sales growth in key markets, such as Germany and the UK.
And we continue to see sequential improvement in Asia up, 11% reported and 14% constant, giving us confidence that as COVID-19 related restrictions eventually abate our opportunity for growth remains as compelling as ever in the region.
Direct to consumer growth of 19% was led by continued strength in company operated mainline stores with outlet.
Turning to growth.
Asia, Excluding China was up nearly 20% as most markets, including India, Indonesia, Japan, Korea, and Malaysia delivered strong growth as economies begin reopening post COVID-19 linked closures.
China, which is only 3% of our total business was down mid single digits as growth in E. Commerce was more than offset by declines across other channels due to COVID-19 related lockdown.
Overall revenue growth in Asia drove operating profit up 53% and delivered operating margins of 17%.
We also recently announced our decision to transition from a license to a directly operated business in Thailand.
This will have minimal impact on our financial results in 2022, as we reposition the business for profitable growth.
We believe that under a direct leadership, we can accelerate growth in Thailand, as well as Asia as a region.
Revenues of our other brands were up 105% and contributed three points of the company's growth for the quarter.
This was driven by dockers, whose revenue was approximately 50% higher than last year and the acquisition of beyond yoga, whose sales were approximately $26 million. Both of these brands are also profitable.
Turning to balance sheet and cash flows.
Inventories at the end of the quarter were 20% above Q1, 2021 .
Slightly below sales growth.
We are building cole Levi's inventory.
Brian met any in the U S through the first half of the year to better meet the brand's growing demand.
As a reminder, approximately two thirds of our inventory is comprised of coal non seasonal product that poses minimum markdown risk.
Our strong inventory position demonstrates our ability to manage global supply chain challenges and remain a competitive strength of our company.
Cash and liquidity remains strong with end of quarter and net debt of $248 million and overall liquidity of $1 6 billion. Our leverage ratio is now one one times the lowest it has been since the mid nineties.
Adjusted free cash flow in the first quarter was negative 124 million a decrease of 115 million compared to the first quarter of 'twenty, one due to our increased capital returns to shareholders via share repurchases and dividend.
Last quarter, we announced we increased our quarterly dividend payment to 10 cents per share exceeding pre pandemic levels based on our strong performance.
And in the quarter, we repurchased approximately 3 million shares.
Subsequent to quarter end, the company repurchased 2 million shares for $14 million.
This completes the 200 million buyback program authorized by the board in late 'twenty or 'twenty one.
Moving on to our guidance for fiscal 'twenty. Two we've continued to see strong demand for our products across geographies and categories and our teams remain focused on executing on our strategic priorities to capitalize on these opportunities through the balance of the year.
The underlying momentum, we see will allow us to offset some of the headwinds associated with the war in Ukraine, and its broader macro economic implications as well as incremental currency headwinds, which together will impact revenue by approximately $200 million and EPS by approximately.
And at least 15 cents.
On balance despite these incremental headwinds given the strong momentum in our business. We are reaffirming our full year guidance and continue to expect double digit revenue growth for the full year of living to 13% or $6 four to $6 five.
<unk> billion and adjusted EPS of $1 50 to $1 56.
This implies 8% to 10% revenue growth for the remainder of the AR.
While we are maintaining our outlook, we expect it will now be comprised of even stronger growth in the Americas, primarily led by the U S and continued strength in Asia offset by reduced growth in Europe due to the unfavorable foreign exchange rates and the reduced revenue expectations.
<unk> in Russia.
Our outlook assumes no material worsening of current condition.
In conclusion, we delivered strong financial performance in 2021.
As we emerge from the pandemic are structurally healthier business the continuation of strong consumer demand globally and solid momentum across our portfolio of brands reinforces our confidence in our outlook.
Teams are executing across our strategic initiatives, while effectively managing a dynamic macro and operating environment supporting delivery of profitable growth with that I'll go ahead and open the call for Q&A.
Thank you to ask a question. Please press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Paul the juice of Citigroup. Your line is open.
Hey, guys. Thank you.
You guys reaffirmed top and bottom line just curious if theres any change in the composition of how you get there from a gross margin versus SG&A perspective, compared to what you were thinking three months ago, which I think was gross margin up 15 30 basis points SG&A leverage.
Japan.
Any changes there and then I guess, even higher level.
A lot of uncertainties out there I mean I heard what you just said about some of the.
The moving parts you asked first Europe , but just curious what gives you confidence in the outlook overall, if theres anything you can you can share in terms of order book.
How are you thinking about pricing and how that can influence the top line anything you can share in terms of what gives you confidence in the outlook.
Thanks, Paul.
Great question.
Let me talk about the overall perspective on reaffirming the topline and bottom line guidance and I'll come to the composition in a minute we continue to benefit from several consumer trends.
And equally position us to.
In the marketplace, including the global casualty nation, the return to the office and the new denim trend Levis engine is strong our core business is really strong.
As evidenced in the U S and the good news for US is all our brands.
Dockers beyond yoga.
Mitchell denizen beside levis showing momentum.
Creatives to growth.
Balance of Europe is healthy and we're seeing it in the order books.
We get a pre book largely from wholesale and we are seeing strong demand for the balance of the.
If you look at gender men and women saw strong double digit growth in Q1, and the consumer demand continues to be incredibly strong across the portfolio. The other good news in Q <unk> Q1 was it was a balanced growth AUR was were up 10% as chip mentioned, but our units were also up.
And you know is an equal balance, which is really really good and that is despite the pricing that we've taken.
And we are seeing demand trends in wholesale channel signal continued strength I talked about the auto book in Europe Asia is benefiting from the reopening of the economy. So ex China, which is in a lockdown we have seen as economies open.
Demand for the brand.
And the Underpenetrated areas of our business women tops are double digit growth and international continue to grow.
So overall, you know a fairly fairly robust quarter and good signals for the for the rest of the for the year based on what we're seeing right now we don't get into quarter, two but March momentum early signs are still fairly strong and so that that you know that gives us confidence as you think.
The future I think to your question about the composition I reflected the change in composition regionally.
But in terms of gross margins have started the year very strong we were up big time relative to last year, our expectation for the unaffiliated basis is gross margin probably is up 20 to 40 basis points to slightly higher that's in the back of a strong first quarter.
With Russia.
Essentially close in China, which are high gross margin business is a bit of an offset but we think we'll end the year slightly stronger than we reflected a quarter ago SG&A.
I'd say slightly was we said would would leverage we think flat to slightly down and that's largely because we've had higher.
We beat expectations in Q1.
In terms of expectations, we should largely for the year paid on an constant currency, so there's slightly higher incentive comp accrual.
The view for the rest of the year is SG&A grows at around you know what the revenue growth is and EBIT percentage.
You know still grows year over year 20 to 30 basis points. So generally we think structurally it's a pretty sound business.
That we believe we will deliver as we end 2022 and step into 'twenty three.
Great. Thanks, a lot good luck guys.
Thank you Paul.
[laughter].
Thank you. Our next question comes from neuron vascular SKU BNP Paribas Exane. Your line is open.
Good afternoon, and thank you very much for taking my question chip on the last call you shared your enthusiasm for the European business as we kicked off 2022.
Fast forward to today ex Russia, and ex FX curious to know if you're seeing anything that's changing your thinking on Europe are you seeing any slowdown in the western European consumption patterns as of late and then the Harmeet FX was a material headwind to your European business 800 basis points just curious.
You know, how we should think about maybe two to growth in Europe on a constant currency basis or maybe on a full year basis that would be very helpful. Thank you.
Okay.
Hi, how are you let me quickly address the Europe question and then.
We can talk about the.
Details you wanted but generally Europe had a very strong quarter.
As you know they were up 13% reported 21% are gone.
Constant now granted they were lapping a softer quarter than a year ago, because the total of those doors were closed.
But generally a strong quarter.
Pre book in Europe , which is the demand signals, we get from wholesale accounts continues to be strong.
With Russia.
You know Jenny.
Generally closed for the rest of the that's an expectation and FX, we think Europe .
And on a total basis will be flat year over year, but if you back out Russia, and the FX, which is broadly you know.
Equally weighted in terms of the impact in Europe will be up high single digits, which is what we said at the beginning of the year would be so generally we think Europe .
<unk> continued growth is here to stay and that's what we are sensing or seeing in the demand I think the FX impact for Russia for Europe , We think is about 400 basis points.
And the rest is largely Russia, Russia is about 2% of overall business for the company and you could think about how western Europe and Eastern Europe is.
In the mix I think best in Europe for Europe is about 85% of our business.
And as countries open up.
K front, we are seeing a strong bounce back up for.
For our product so eastern Europe is a much smaller piece and then Russia is in a half of that 15.
15% mix for Europe , but generally small overall to the company.
Very helpful. Thank you very much.
Thanks, Ron.
Okay.
Thank you. Our next question comes from Matthew Boss of JP Morgan Your line is open.
Great. Thanks, and congrats on another another nice quarter guys.
Thanks, Matt.
Thank you Matt Chip, so chip can you speak to business trends that you're seeing across categories and maybe looking at this on a micro versus macro level do you see the Levi's brand, taking share and acquiring new customers out of this pandemic and then as we think about the work that you've done with the brand are you seeing any.
Back to price a what do you think is driving that pricing opportunity and what inning do you think that we're in as it relates to the regional opportunity from a price perspective today.
Yeah, well, there's a lot to unpack there, Matt, but I guess I would start by saying that.
Denim category is still very very healthy.
On our past 12 month basis here in the U S, which is still by far our biggest market.
Denim is up 11%, it's growing faster than total apparel, we've talked in the past about the tailwind that we have that that are carrying us.
But as the market leader by far on a global basis, we believe a big part of our responsibility is driving category growth and we're doing that with innovation and driving the new denim cycle. If you will with the looser bad year fits.
Levi's is growing we are bigger than the number two number three and number four brands combined on a global basis. We're number one on men's number one on women's we are growing share we are picking up new consumers.
You mentioned in the script, we're adding 300 more stores.
300, more target stores and that is because that is working and we are you are picking up new consumers to levis, just by having distribution and target and we are growing share on a global basis.
We've talked previously about gains with women.
We are gaining share with the younger consumer as well, which is really really important resonating with that younger consumers is one indicator.
<unk> strength I mean, the other thing that I'm really excited about is we mentioned that the final one was up 50% this quarter and when your most iconic item is growing like that it says something about the overall strength of the brand and it's not just in one market. This spring.
<unk>.
You know I would I would say very confidently has never been stronger than this and I would say semi confidently. This is the strongest the brand has ever been on a global basis, we have taken pricing, we mentioned that AUR or up 10% that is on the back of a very very strong brand and it's sticking we have not.
Not had we've not had to backtrack at all on pricing and as we said you know our growth was half volume growth and half.
<unk> growth driven by price increases so again, another really strong indicator of the health of the brand and finally, you know the other big indicator of the health of the brand is just these record gross margins that we're delivering so we're continuing to innovate we talked about the circular five O one which is made from.
Organic cotton.
Recycled post consumer waste recycled cotton and it is fully recyclable that's premium priced.
No we're not seeing any real pushback on pricing at all at this point.
Having said that I don't want to suggest that our heads in the sand you know we're reading the same headlines everybody else's in the same Jamie Diamond White earns at everybody else's, we're watching it very very carefully but at this point the consumer seems to be really strong and our brand still represents a tremendous value.
The last thing I would say is from a competitive standpoint, when the category is growing this robustly.
Also I have to turn into a zero sum game about you know the only way to grow is to steal share from somebody else because when you are the market leader your chances of being the share donor is higher than being the share.
Gaynor and that's why growing the category is so important and.
It floats all boats and we really like that so.
The business is very very healthy and we feel good about the consumer and we and we do believe that there is still opportunity for more pricing down the road in the second half of the year, which we think we're going to need based on where cost are growing and.
We've been extremely surgical with how we've done our price increases and I think that's a big part of the reason why its been sticking.
Congrats on the momentum.
Thanks, Matt.
Thank you. Our next question comes from Brooke Roach of Goldman Sachs. Your question. Please.
Good afternoon, and thank you so much for taking our question chip I'd love to follow up on the conversation. We were just having in response to Matt's question, which is the health of the business in North America, and you mentioned several new drivers of expansion this year, including an expanded partnership with target.
More shelf space at key partners and also new Workwear line that you're launching this spring I'd love to hear how you're thinking about the contribution to growth from some of these new initiatives versus like for like increases in your core and how.
How youre thinking about that phasing throughout the year. Thank you.
Sure Brooke well.
I guess, the first thing I would say as you know our business in the U S is very much core core product driven and that is a huge advantage. When you think about some of the headwinds that we're facing but the whole industry is facing from a supply chain standpoint.
We're able and we are doing this where we are building inventory in the U S. Because most of what we sell here as core product and so we can lean in to building inventory to mitigate against future supply chain disruptions.
That is a huge advantage that we have and we're leaning into that but the brand is really really healthy fruit.
Through the pandemic actually even before the pandemic, we were re mapping our wholesale distribution.
To more premium accounts, that's one target target also came into play at that same point in time and that started really really small on that started with a 20 store test on men's and we set at full potential we thought that it had the opportunity to be 500 doors, we're in 500 doors today and it.
It is working so well and we know that we are acquiring new consumers to levi's by our presence and target that.
The success of the business and the fact that we're driving new new consumers to the brand.
At target we both concluded let's expand this to another 300 doors. So that's been accretive to our business. Our overall wholesale business is very very healthy wholesale in general as you. All know is also in a very very good place right now.
The brand is really strong and we're investing in our own direct to consumer business too and that is also a big driver of growth for us. So.
In the U S. When I joined the company 10, plus years ago, most of our doors in the U S were outlet doors and the doors that we have been adding over the last couple of years have been mainline doors, we had no presence in many many major markets.
With the mainline door and now we're starting to build presence in several key markets around around the country, but we have enormous opportunity for mainline and that's all in an effort to continue to elevate the brand here Matthew.
Travel the world and look at revise on a market by market basis, our business skews much more of a tier three product here in the United States.
For example, most of Europe , where it is with tier two business at higher price points higher gross margins and a very successful tier two business both in our own doors as well as in wholesale doors. So we know we've got opportunities to premium is here and that's been a big focal point for us.
Our wholesale mapping here are in the marketplace.
And we're seeing it in the business results and success in.
Nordstrom for example, we talked about.
Spanning into urban outfitters to Ted.
Attract those younger consumers so.
No we're very optimistic about our business here in the U S. U S consumer is.
Still in a very good place and.
Their personal balance sheets are still in a good place.
<unk> put a lot of money in the bank during the pandemic and most of it has not come out right right, yet and consumer confidence in March was higher than in January and February and back to almost pre pandemic levels. So we're very confident about our business and as Hamid said you know we think there is upside here in the U S.
Thank you.
Thank you. Our next question comes from Omar Saad of Evercore. Please go ahead.
Thanks, Good afternoon, another nice quarter I agree maybe you guys could dive in a little bit deeper on the E. Com results, where that business is how how big of an opportunity you think that could be what are some of the key levers there. Both here in the U S and internationally and also maybe a little bit of a update on beyond yoga two would be nice.
How how they did through the holiday season. Thanks.
Okay, I'll start with beyond yoga, because it's a I think that's pretty quick and then I'll talk a little bit about our ecommerce business.
No we are largely through the heaviest lift up the integration I would say, it's gone really really well. The team is terrific. The brand started out with their first full quarter as part of Levi Strauss.
Really strong.
Beat their internal expectations of our internal expectations.
The people on the team are great.
We talked about culture fit when we announced the acquisition. It is clear that there is a very strong culture fit.
And I would say this is our first acquisition in decades right.
This is gonna be a good win win we're learning a lot from them, they're a small scrappy team and every single day. There on every single piece of the detail we're learning things from them as they are learning things from us and I think that's going to be that's going to play out real nicely.
You know as you know, it's a premium position premium price brand.
It's significantly adds to the total addressable market that we're competing in.
And our focus right now is beginning to build capability because we didn't buy this business because we thought it would be $100 million business. This year, we bought it because we believe it has the potential to be much much bigger.
We are rebuilt plans to that effect and.
In June when we're all together on June 1st for Investor Day, we'll reveal more of that but you know I I believe that this is gonna be big for this company.
And really be a generator of meaningful growth over the next several years.
For E Commerce.
Our ecommerce business was up 13% versus Q1 'twenty one.
37% ahead of Q1 2020, our total digital ecosystem.
Includes.
Our pure play e-commerce , and the Dot com for our wholesale customers was up 16%. It was about a quarter of our business overall up from 22% in 'twenty, one and from 14% pre pandemic. So the business is clearly shifting to digital and e-commerce .
Its profitable as you know.
We returned to profit in the pandemic and as this continues to scale its just going to become even more profitable over time.
We're leveraging data science to try to really tailor the experience to the consumer.
But I've got to say very honestly.
I'm not super happy with 13% growth I think we've got a lot more opportunity here on digital and.
With its salience of our total business I believe there is still significant upside ahead of us.
We are focused on expanding the App I think we talked about that in the prepared remarks. So we are going to expand.
Up to several more markets in this quarter.
We're also focusing on expanding a number of the omnichannel capabilities that we built during the pandemic that are still largely just here in the U S. We're now expanding those capabilities to Europe and other key markets around the world. So there's still a lot of work to be done here a lot of heavy lifting ahead, but I think it represents.
What's still upside opportunity for us.
Thanks for the rundown chip good luck for the rest of the year.
Thanks Omar.
Thank you. Our next question comes from Bob Devil of Guggenheim. Your question. Please hi, good evening.
A couple of quick ones for me if I could.
I think the first one is you talked about the success that you're seeing I think it was the Dallas store.
Can you remind us just.
What the game plan is in terms of this year in terms of new store expansion and I guess just that that store.
What really is resonating to make it so successful so quickly. So the first question and then the second question I have is.
When you look at I guess, your lower priced offerings and I'm thinking more signature and denizen can.
Can you just talk about if youre seeing more interest in those brands from the U S. Consumer you know sort of how you feel like your position and are performing.
And both of those.
As well thanks.
Hey, Bob I'll be quick because we've got about five folks.
After you and we want to answer them, but I'd be quick to you.
Plans about opening mainline in the U S. I think are planned at about 25, plus those and this is on the back of about a 15 20 that'd be open on the way to 100.
Dallas is successful because you know.
It's located in a great mall.
You just had the who's who in the mall in terms of retail it's a great looking store as the location is good very balanced assortment between men's and women's in fact I.
I would say women's lately on the on the highest side because the businesses on a roll and Oh, you know what I'd say.
Better execution, so combination of location assortment and execution, making the difference.
But you know for that on your question about <unk>.
Yeah, our value brands, which also had a great quarter.
I think you know for the value consumer.
We offered the perfect opportunity right as you know if some of the consumers feel a pinch with inflation and one of the great brand, they know where to go and signature and denizen I think.
I think that bodes well, we don't necessarily have to.
Down the Red tab and this may be off a good portfolio.
Thank you.
Thanks, Bob It's Bob.
Our next question comes from Jay sole of UBS. Your line is open.
Great. Thank you. So much my question is just about China.
The COVID-19 related Lockdowns there how is it impacting your supply chain you there's talk of ships not being able to leave courts.
Is that something that's impacting the business and is that something that's factored into the guidance. Thank you.
Good day.
The good thing about our supply chain as we've got truly a global footprint.
No we don't in fact.
We don't manufacture a whole lot in China anymore, we've been slowly divesting manufacturing out of China, If you will and kind of playing our chips elsewhere on the global map. So today I think we're manufacturing somewhere in the neighborhood of 5% of our global production is in China.
And most of it staying in China, and we've talked before that less than 1% of what we're bringing into this country into the U S less than 1% of it is coming from China. So we've got we have strategic partnerships with with many of our key vendors. Many of those key vendors have multi country footprint. So if.
<unk> gets impacted by Covid, we can quickly shift and this is where our scale really does help us we can quickly move our pieces.
Our manufacturing.
To other places on the map, but I would say, it's not an easy thing to do but the team has developed an expertise in doing it over the last two years and we've been able to navigate through it reasonably well the.
The other issue that we've been watching real closely is the impact that COVID-19 shutdowns in China has had on ports there and so far you know what.
What we're seeing and what my team is telling me is we're going to be able to navigate through this.
Potentially rocky period of the next couple of weeks Okay. So.
No, we're not expecting any any meaningful impact whatsoever from COVID-19 related impacts to supply chain.
Is impacting we've got I think roughly 60 or so doors closed in China, right now but team.
Our team is based in Shanghai, They haven't been in the office now for a couple of weeks, they're all working remotely.
It's still a pretty challenging environment from a commercial standpoint over there.
As you know China's Boston and 3% of our total global business and still an opportunity for us for sure, but it's not going to have really a consequential impact on our results in the coming quarter or for the year.
Yeah.
Thank you so much.
Thank you. Our next question comes from Jim Duffy of Stifel. Your line is open.
Thanks, Good afternoon, another nice quarter, guys I'm, hoping that you can leverage.
Can you guys elaborate on the $60 million Miss demand as her and omicron impact included in that calculation or is that principally a function of delayed receipts and then I'm curious with inventories up 20% year to year, the future expected impacts from product availability and if so when do you expect to get caught up.
Yeah, So so Jim.
So $60 million is that is a good calculation by experts.
And <unk>.
Factored into account fill rates from normal.
And and and it takes into account board.
Receipt of goods as well as fulfillment of goods when you know when we get it because they're trying to service demand.
The <unk> is higher than 50, not because things are getting worse, the only because in.
In our quarter one includes December which is a holiday period.
Our view is that our supply chain related issues continued through the year, but what we are seeing is an improvement in the conversion and in the west coast and so we think that will help us.
Difficult to predict you know how much demand.
You know, we will not be able to service.
The good news is there is demand and we continue to grow and so I think that's the way I kind of look at it Jim.
Helpful. Thank you.
Jim.
Thank you. Our next question comes from I'm, Peru, Chile of Wells Fargo. Please go ahead.
Hey, Thanks, everyone Harmeet two questions for you so understanding the Rev Guide maintained lowered Europe I think.
U S or Americas had planned up high singles I assume that has moved up can you stomach tell us specifically now where youre targeting.
That geography, and then just the second question I want to make sure I understand so you're reiterating the earnings and the revenue, but you're you're now calling for more deleverage.
Just don't really understand why theres going to be more deleverage on expenses I think you said incentive comp, but but again, if you're not raising your outlook I don't quite understand what the moving pieces are there. So any more help on the SG&A being a little higher it would be helpful.
Yes sure.
So your first.
First question related to.
Yeah, Okay. So in terms of the regional mix.
So you're right I think.
When we talked about the your when you reported Q4, we'd said.
The Americas High singles, We said Europe high single.
Asia.
Mid to high teens I think.
We look at the.
Now, we think America's low double.
The Europe .
Because of Russia in FX on a reported basis largely flat you could take it out as high single and Asia, probably high teens to about 20%. So that's the that's the change.
In the in the.
And the regional outlook to your question about the.
The SG&A piece.
You know the.
The annual comp is really driven by constant currency.
Our two year comp is driven by our reported results and so the FX headwind.
Is it something that doesn't affect the gone for the.
For the year, so our S.
SG&A deleverage.
A slight I said flatly somebody's digital to predict but I would say flat to slightly.
Deleverage was the leverage is being offset by higher gross margins and so that's why the EBIT margin is broadly similar to the ones. We indicated and that's why the EPS guidance largely as is similar to what we had said about a quarter ago.
And you know the thing I would tell you all of you have seen it.
We are really focused on Boston management. So you know we do whatever we can to minimize that to offset any inflationary pressures. So that's something they've done a good job in the past and you know we've continued to do that as the year progressed control the controllable.
Thanks, guys.
Okay.
Thank you. Our next question comes from Dana Telsey Telsey Group. Your line is open hi, good afternoon, everyone nice to see the continued progress.
Hi, Dan Hi, as you think about supply chain I think the supply chain headwind was around $60 million in this quarter up from $50 million. The last quarter. How are you planning supply chain headwinds as we go through the year and then just on marketing investment, which has increased is that consistent through the year and then the new new.
Who wants is on marketing that we should watch for that differentiates by quarter.
Yeah.
Yeah. So so Dan on supply chain is difficult to predict the good news is the bad news is we continue to chase the 60 million higher than the 50.
It's not easy because of the holiday season being December is not that the supply chain issues are getting worse. It's just that we are chasing the student chasing into charts et cetera.
So we let you know as this progresses, but you know the good news is there's a lot of demand for our brands on A&P light A&P as a percentage ticked up about a point this quarter relative to last year and we were in the last year revenue was down.
The year started on a tough node.
But this year.
I think advertising is five eight something as a percentage that should be a pink.
Pink of advertising being largely similar to last year as a percentage we think we'll end the advertiser.
Advertising as a percentage of revenue about $7 77, which is slightly higher than a year ago, largely because it beyond yoga. I mean, you know we are we bought the brand they're going to be spending on advertising et cetera, but despite that EBIT margins will be up year over year and that's all.
Got it.
And any change to Capex of the 270 and then chip.
On new wholesale accounts beyond what you're doing at target and some of the others that we should be watching for thank you.
No change to Capex to 70 I know.
About 70 374 this quarter.
Two extra play that is slightly higher than the $2 70, but that's because Q1, there's a bit of a carryover from Q4, but.
Capex is maintaining its $2 70 and then.
Oh, Yeah, no meaningful change marketing yes.
Got it.
Yeah.
Yeah.
Yeah.
Thank you next question.
Dana.
Thank you. Our next question comes from Chris Nardone Bank of America. Your question. Please.
Thanks, guys. Good afternoon, and thanks for allowing me to squeezing my question I think you've talked about a mid single digit plus cost inflation for the year previously given the continued rise in cotton prices is there any notable changes to this outlook.
And if you could just talk about your contracting.
You know how how far had you book your cotton prices and how far that's locked in that'd be really helpful and how that translates to your higher gross margin guidance.
Great Chris welcome to the account.
I was wondering who would ask the cotton question too.
Thank you for asking that.
Gordon is locked in for the year.
And.
I think the increase in Cogs year over year on a full year basis is about 5%.
Effectively either price for it.
All absorbed some of that through cost discipline, but largely we have price where it.
Gordon as you look at 2023.
Cotton is higher than what we locked in we are in the process of negotiating Gordon with our lenders and you know it.
It would be a win win deal for both sides. The futures in cotton as you looked at look at it today start coming down in October of 2022.
And that translates over there so I think.
More to come but generally you know we've done an effective job of maintaining margins, both gross margins and EBIT margins. Despite the uptick in cotton this year and so and historically, so expect that from us over time.
Thank you.
Yeah.
Alright.
Is that it looked to me I think that's the key right. It is sir.
Alright, great. So I will wrap it here I want to thank everyone for joining us remind everyone that we do plan to hold an investor day in New York City at our showrooms on June 1st and we're looking forward to seeing everybody. Then thanks very much for attending and for the great questions and we'll see you all and <unk>.
Some very soon looking forward to it bye bye.
And this concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Yes.
[music].
Okay.
Yeah.
Yes.
[music].