Q2 2022 Levi Strauss & Co Earnings Call
Good day, ladies and gentlemen, and welcome to the Levis Strauss in company's second quarter earnings Conference call for the period ending May 29, 2022, all parties will be in a listen only mode and should the question and answer session at which time instructions will fall.
Follow the conference call is being recorded and may not be reproduced in whole or in part without written permission from the company for this conference call. This conference call is being broadcast over the Internet and a replay of the webcast will be accessible for one quarter on the company's website Levis Strauss.
Dot com.
I would now like to turn the call over to Idaho Orphan Vice President of Investor Relations at Levi Strauss <unk> company.
Thanks for joining us on the call today to discuss the results for our second fiscal quarter of 2000 <unk>. Joining me on today's call are chip Bergh, President and CEO of <unk> and Herman <unk> our CFO .
Complete Q2 financial results in our earnings release on the IR section of our website investors Bestbuy com.
The webcast of today's conference call can also be found on our site, we'd like to remind everyone. 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 on Form 10-Q that we filed today for the factory.
That could cause our results to differ also note. 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. 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'd like to turn the call over to chip.
Good afternoon, and thanks for joining us today.
Ben just over a month since I saw many of you at our Investor Day in New York, where we laid out our plans to accelerate profitable growth over the next five years. The team is off to a strong start in executing our strategic initiatives that will deliver those plans and you can see that clearly in the results we reported today.
In the second quarter grew 20% on a constant currency basis, and 15% on a reported basis to $1 5 billion.
Reflecting strong consumer demand across our business and around the world.
We also increased profitability expanding adjusted EBIT margin 90 basis points to a record nine 9% for the second quarter, which drove adjusted EBIT growth of 27% and adjusted diluted earnings per share growth of 26%.
With our strong brands, our relentless focus on our strategic priorities being brands like DTC first and diversifying the portfolio has delivered strong results, even with continued macro economic uncertainty and persistent inflationary pressures the.
The momentum we are driving today reinforces my conviction in the potential of our strategy and the execution abilities of our team, leaving us firmly on track to deliver our long term commitments.
There are several notable dynamics that underscore our performance this quarter for which buy and Hermes comments will reference revenue constant currency comparisons to 2021, unless we indicate otherwise.
Let me start with our first priority being brand Black believes.
The Levi's brand is stronger than it has ever been and the demand is stronger than it has been in my career here at Allison co.
Levis was the number one <unk> brand in the world and it strikes understanding over the past year driving share growth amongst the world's top GM spreads with brand awareness remaining well above the competition across most markets.
We have been moving with agility to capitalize on global Casuals Asian trends fueling strong growth for Levis, while also driving strong underlying category growth.
<unk> to outpace apparel.
This performance was supported by our focused efforts to leverage our leadership position with a strong pipeline of innovation.
This past quarter, we dug into our archives, releasing the Levis fresh collection, which was inspired by our product collection from the 19 seventies, featuring a range of sustainably died pieces for men and women, including fiber what genes swats accessories and more at premium price points.
Innovative collection saw particular success with women's and tops. In addition to younger consumers with whom we are gaining share and seeing record engagement on our industry, leading chip talk.
Overall, the Levi's brand grew 20% with our top five markets collectively growing at an even faster rate.
Revised bottoms revenue was up double digits across both men's and women's versus last year and pre pandemic Q2, 2019 levels and nearly all levis fits across genders contributed to growth globally led by strength and looser fits.
Fiber one family of products also continued to show strong growth up 40% across mens and womens highlighting the momentum of the most iconic fit in our lives.
Turning to our second strategic priority DTC first our direct to consumer business continues to thrive, allowing us to deepen our connection with consumers, while showcasing the fullest expression of our brands.
This quarter total DTC net revenue increased 22% with growth driven by our company operated stores strengthen our global brick and mortar business was driven by both mainline and outlet stores across geographic segments. As a result of increased foot traffic and store expansion.
As well as higher unit volumes and AUR.
During the quarter. We also benefited from a return of tourist traffic in many of our downtown locations propelling growth in our flagship stores in key cities, including San Francisco, New York, Paris and London.
Our latest generation of new stores continue to perform against our expectations, reflecting the market potential that we have yet to unlock the success of these newer stores reinforces our conviction and reaching more than 500 company operated stores by 2027.
Our ecommerce business remains healthy with revenue continuing to far exceed pre pandemic levels.
Did see a moderation in the online traffic as consumers return to shopping in our stores and large numbers.
E Commerce remains an important driver of our growth algorithm and we are committed to tripling its size over the next five years after successfully growing e-commerce since nearly a half a billion dollar business over the last decade.
To achieve this ambitious goal we are building the capabilities and the organizational structure to both scale ecommerce and accelerate our broader digital transformation as.
As part of that we are establishing a new chief Digital officer, a role that will report to me the role will bring together our data AI engineering and digital product management efforts under one leader, who will spearhead our digital efforts for both E Commerce and our digital go to market.
We see tremendous potential in e-commerce and with the leadership to drive its success, we will move more quickly to realize it.
We also continue to leverage our data capabilities to deepen our direct personalized relationships with our consumers through our Levi's app and loyalty programs.
<unk> continued to see strong engagement with monthly active users up double digits. It also expanded into India and is now available in 10 countries total with plans to further rollout to eight more countries across Europe . This year.
These initiatives helped expand our loyalty member base by over 50% year over year with gains in team member productivity metrics, including average order value.
And while our direct to consumer business continues to generate consistently strong growth our global wholesale business also continued its strong performance in Q2 growing 18% with improved profitability.
In terms of diversifying our portfolio our third priority. We are focused on significant market opportunities in Underpenetrated high gross margin parts of our business that can drive strong growth even in these times of macro uncertainty.
The opportunities here are tremendous with untapped potential across womens tops international at our other brands dockers and beyond yoga.
This quarter, we made progress across each of these areas of focus.
Following 11 consecutive quarters of pre pandemic double digit revenue growth.
Our total women's business grew 23% the fifth consecutive quarter of double digit growth since exiting the most challenging parts of the pandemic.
While womens saw broad based growth across geographic segments growth was especially strong in the Americas, where the Levi's women's business was up 30%.
And in our top 10 wholesale accounts globally Levi's women's we're up 50%.
One of the biggest long term opportunities. We have ahead of us and to extend into true hydrogel expressions of our brands and we're making solid progress for the total company comps were up 23% with strength broad based globally across categories.
Saw particularly strong growth in the Americas up 26% with traction in polo is in the U S, which were up more than tenfold Levi Dot com.
Overall women and saw continued strength in woven and dresses in addition to double digit growth in Diagraph at Ts.
Our non denim bottoms business also performed well up nearly 20% for Levi's men's with continued success with our double X Chino and more.
Our international business was up 19% with all geographies delivering strong double digit revenue growth.
Our top markets in Europe , France, Germany, and the UK were collectively up strong double digits.
Excluding China, and Hong Kong, where lockdowns have persisted growth in Asia was over 40% with every market contributing to that growth.
Our other brands also performed well in the quarter Dockers continued to build momentum delivering 27% growth in Q2 as it the internal plans on both the top and bottom line.
This was supported by strong international and DTC growth as well as some notable wins with womens rich.
Reflecting the progress we've made and refreshing the brand dockers womens launched on Amazon in the U S. This quarter and Thats, a lot of dough and El Corte Anglaise in Europe .
While it's early days, so far the product is performing well.
Beyond Yoga also made solid progress in the quarter with success in dresses off colors and prints and its mommy collection, most of which sold out in the first week of June .
June 25th the brand also opened its first pop up store at the Grove in Los Angeles and the initial response from consumers has been terrific.
Beyond yoga remains on track to open its first permanent store in Q4 of 2022.
Across the board. This was a strong quarter marked by consistent execution of our strategic priorities I want to recognize the hard work and dedication of our teams across the organization.
We delivered solid results in a uniquely challenging operating environment.
I'll now turn it over to Hermes to cover the financial results in more detail Amit.
Thank you chip and good afternoon, everyone.
At that Investor day in June we laid out a clear.
Our long term strategy designed to deliver positive growth stronger margin.
Increased cash returns to our shareholders on a path to drive annually.
Shareholder returns a fancy dress event over the next five years.
Our plan, which calls for annual revenue growth of 6% to 8% adjusted EBIT margin expansion to 15.
15% and our commitment to return, 55% to 55% of free cash flow to our shareholders over that timeframe is bold yet achievable.
Our second quarter, our team delivered on each of the three drivers of our long term DSI has arisen accelerated sales growth margin expansion and gas was down.
We had very strong growth noted net revenue grew 20% to $1 5 billion driven by a 21% revenue growth in the U S and strong performance across our diverse global portfolio.
Supply chain related issues limited further revenue opportunity by approximately 2% primarily in the U S where strong demand. Thank you year to outpace supply.
Adjusted EBITDA grew even faster up 27% reported and 37% in constant currency.
Adjusted EBIT margin expanded 90 basis points.
Our record second quarter level of 94, 9%.
The strong EBIT growth was the principal factor dragging adjusted diluted EPS up 26% to drain the 90 10.
We achieved these strong results even as we invested in our brand and navigated the impact of rising inflation continued COVID-19 related challenges geopolitical turmoil and foreign exchange headwinds.
We also returned $18 million of capital to our shareholders through a combination of higher dividends and the repurchase of 2 million shares.
Given the continued strong performance of our diversified business. We are also reaffirming our financial outlook for the year.
Second quarter net revenue growth of 20% was primarily driven by higher volume as well as an increase in AUR demonstrating again, the strength of our brand and our leadership in the denim category as we have rights.
To offset inflation.
Direct to consumer channel.
Revenue increased 22% driven by increased traffic store expansion and continued gains in AUR, which were up high single digits.
As chip regimen with consumer shopping behavior is shifting from online do in person shopping.
E Commerce business was down 2% in quarter, two yet remains over 60% higher was <unk> 19, with this operating margin on a fully allocated basis in the mid single digits.
And growth through our digital channels was up 8% year over year remaining elevated versus 2019 levels and comprising approximately 20% of building second quarter net revenue.
Adjusted gross margin was maintained in reported dollars.
Second quarter, a record of 58, 2%, primarily due to improved Scott two elements, including mixed shift to higher gross margins Edp international women as well as a sustainable improvement within Jose.
Combined with price increases these factors offset higher product costs, including 80 basis points of higher freight costs to support delivery of our seasonal merchandise as well as 30 basis points negative impact due to declines of high gross margin market China.
Rescue.
Moving to SG&A.
Adjusted SG&A expenses in the quarter was 711 million or 48, 3% of net revenue leveraging 90 basis points. Despite the A&P be higher by 10 basis points.
Our robust gross margin coupled with our disciplined SG&A management and operating leverage generated an adjusted EBIT margin expansion of 90 basis points to 94, 9%, while adjusted EBIT dollars were up 7% in constant currency even.
As we continue to strategically invest in our long term growth initiatives.
As a result of Russia, and Asia Reef, Craig we suspended the majority of our commercial activity in Russia.
The closure of the majority of hospitals and the suspension of shipments to our.
Wholesale and licensing customer.
Given the high level of uncertainty surrounding our business in Russia, we fully anticipate the related lockdown assets, including store assets and goodwill.
The total charges related to Russia, Ukraine crisis recorded during the quarter were $60 million impacted diluted earnings per share by <unk> 15.
Our effective tax rate was approximately 36%, which was higher due to a 15 percentage foreign tax rate increased resulting from non stack deductible charges related to the Russia, Ukraine crisis.
Adjusted net income.
<unk> hundred $17 million was up from $93 million in quarter two of 'twenty one.
The increase in adjusted EBIT, and lower interest expense, partially offset by higher taxes.
Yes, good afternoon.
I'll now take you through key highlights by segment.
Recall the reason segments include our Levis, Brian Levis signature and denizen, whereas the other brands segment includes doctors and beyond yoga.
In the Americas revenues grew 17% driven primarily by higher unit volume as well as higher.
Across again.
Overall, the momentum in our largest market the U S banking delivering growth of 16%.
Canada saw a strong growth up double digits and our overall Latam business was up 18% driven by growth in Chile.
Chile and Brazil.
Our company operated store was posted another strong quarter up 20% driven by increased traffic and price increases while wholesale grew 19% with particular strength in the U S.
You continue to see strong momentum and revenue was up 3% reported and 15% constant despite the impact of the Russia, Ukraine crisis.
DTC was up 38%, reflecting higher traffic as consumers return to shopping in store.
As a reminder, approximately one third of company operated stores were closed last year in the region.
Most countries saw growth, including large markets, such as France, Germany it.
Italy, Spain and the UK.
Asia accelerated and revenue was up 16% reported and 21% constant despite COVID-19 related restrictions negatively impacting markets like China and Hong Kong.
Wholesale was up 41% DTC growth of 7% was led by both mainline and outlet stores.
While growth was broad based large markets like India.
India, and Japan were particularly strong tie.
Thailand also transition from a license there.
Actually operated business unit growth contributing to results.
Overall revenue growth in Asia.
Chip was upgrading process and deliver an operating margin of eight 6%.
Other brands net revenue was up 61% driven by growth in <unk> and the addition of beyond Yoga overall operating profits were also up 66%.
Turning to balance sheet and cash flows.
Inventory decreased 39% from the prior year still.
Good our internal plan.
Our strategy to more effectively meet demand by investing selectively in growth product, which can be sold across multiple future Steven.
A third of the increase includes the planned acceleration of receipts.
For our upcoming seasons to mitigate longer lead time.
And the acquisition of beyond Yoga, and the transition of our hybrid business from a license to a directly operated business.
Also contributed three percentage points of the year to year increase in inventory.
Roughly 20% of the total inventory is comprised of product in transit we.
We are comfortable with the overall level composition and quality of inventory on hand.
Cash and liquidity remains strong with end of quarter, our net debt of $306 million and overall liquidity of 115 billion.
Our leverage ratio remains at a multi decade low.
One one time.
Adjusted free cash flow, which we now define as cash flow from operating activities less property plant equipment was $13 million down from $148 million in the second quarter of the prior year, primarily due to higher spending on inventory.
In the second quarter, we've done approximately $18 million to shareholders.
The company paid a dividend of 10 cents per share, 54% higher than one year ago.
In the quarter, we repurchased shares of approximately $40 million.
Going forward the company declared a dividend of 12 <unk>.
Sure.
It's an increase from last quarter and as I mentioned in June at Investor Day. The board of Directors also authorized a new $750 million share repurchase program.
Moving on to our guidance for fiscal 'twenty Q against a backdrop of continued macroeconomic volatility we are focused on controlling the controllable and delivering results with strong execution and disciplined as we have done in the past.
We've continued to see strong demand for our products across geographies and categories.
Our teams remain focused on executing on our strategic priority to capitalize on these opportunities through the balance of the year.
The underlying trends, we are seeing in our business support cost.
Renewed expectation for 11% to 13% annual reported net revenue growth to six four to $6 5 billion.
This is allowing us to offset 100 to 150 basis points of incremental headwind from currency and lockdown restrictions in China. When we last gave guidance with you in April .
This represents 32, 50% net revenue growth on a constant currency basis, well above our expectations coming into the year.
Looking at our reported net revenue growth by region. We now expect the Americas to be up low teens Asia mid teens, and Europe flat to slightly down.
In constant currency Asia, excluding FX would be up approximately 20% and Europe , excluding FX and Russia would be up low double digits.
Our full year expectations for adjusted gross margin expansion of 20 to 40 basis point EBIT margin expansion of 20 to 30 basis points and Capex of $217 million has not changed.
We are planning for a tax rate of approximately 20% for the full year up from our prior outlook of mid to high teen.
We are also maintaining our expectations for our adjusted diluted EPS of $1 50 to $1 56 at this quarter to be an underlying strengths in our business are has been offset incremental headwind from when we last guided in the hip growth including fuel.
Samsung Foreign exchange no sense from the higher tax rate and four cents impact from more protected lockdown in China.
With respect to our expectations in the second half as share some color on SG&A expenses and the tax rate.
We currently expect Q3 to show us some deleverage given lower relative investment in the prior year.
And as discussed doing net new stores at peak.
Q4 will be announced prior year as a percentage of revenue.
We also expect the tax rate in the mid <unk> in the third quarter due to the continued anticipated impact of Covid related restrictions in China.
Finally, as we upgrade to our new on the cloud ERP system in early quarter two of next year in the U S.
Our successful implementation in both Mexico and Canada.
We will be building, mostly core product in Q3, and Q4 to protect shipments to our customer.
This upgraded ERP will be instrumental in increasing the speed and agility, but providing real time visibility to inventory across our network and setting us up well to accelerate our direct to consumer business.
In summary, we continue to see momentum across the business.
We've been able to build a phenomenon to anyone to deliver a very strong performance in the first half of 'twenty two.
We are on track to deliver a solid 22, while making progress across our strategic priorities setting us up well to deliver on our longer term financial targets.
I will close with three key messages.
First.
The broad diversity of our business across geographies.
And product categories provides us with the control and Optionality to successfully navigate the challenges of the external environment.
This positions us to deliver in both good and tough times.
Second the strength of our brands strong execution by our team and disciplined cost management has allowed us to expand and sustain growth and EBIT margin expansion.
We have made great progress on our commitment to return cash to our shareholders, increasing our dividend by 20% from last quarter, completing our 200 million share repurchase program in the corridor and announcing $750 million.
Ill briefly share the authorization at our analyst day.
Year to date, we have returned close to $200 million.
Shareholders.
400% increase over last year.
These three factors have allowed us to deliver a strong first half in 'twenty, two and reaffirm full year guidance. Despite all the headwinds in the marketplace.
With that I'll now go ahead and open the call for Q.
Thank you the floor is now open for questions. If you have a question. Please press Star then the number one on your telephone keypad.
Due to time constraints the company requests that you ask only one question.
If you have an additional question please queue up again.
Okay.
Our first question.
It comes from the line of Matthew Boss.
From Jpmorgan your line is open.
Thanks, and congrats on another nice quarter.
So excellent chip so chip on the continued momentum and strength of the brand could you maybe speak to drivers behind the acceleration, notably that youre seeing in the Americas, maybe what's driving the combination of both AUR and unit growth.
And just how do you see levis positioned to take share in this dynamic backdrop is now we move forward.
Well.
I would say first thing.
Ill answer the second half of your question first which is I think the Levi's brand is incredibly well positioned.
In this very dynamic environment.
Continue to accelerate and grow share and the strength of this quarter gives me a lot of confidence in saying that.
I'd say there are a number of key drivers to our success.
Focused specifically on the U S.
Obviously, the continuation of Casuals Asia, and that's a dynamic that's playing out globally that has helped us a lot, but the U S <unk> market.
Got the data for the last 12 months ending May U S jeans were up 19% and that was faster than total apparel so as.
As the market leader, we are clearly the ones driving that.
We've got some recent consumer research more consumers are now wearing jeans more often in professional settings I.
I would say maybe even at your bank.
It's probably just happy that people are coming into work and we're going to encourage you to is perfectly acceptable today, and that's very different than pre pandemic well more than half of the people.
That word.
Surveyed.
And this survey.
And this was done globally, so that they can now where genes to work not so huge change sprint prepaid debit. So the trend towards capitalization is definitely helping with denim cycle that we've talked about for probably over a year.
Chip Luce Bayou effects.
When I look at our business, probably the strongest testimony to the strength of our brand is just what's happening on the 501 now that is our most iconic item.
40% again, this quarter across men's and women's real solid growth.
And in the brand fundamentally has never been stronger and that is probably best seen in the split.
Unit growth in AUR growth.
Our AUR is not a global basis I don't have the numbers off the top of my head for U S, but on a global basis.
Ours were up 8% and unit growth grew double digit 11% and so we've successfully pass through pricing that has contributed to us being able to hold our gross margin at levels equal to a year ago. Despite all the headwinds that we've talked about in prepared remarks.
Impact though.
So Russia lot sales in China, both high gross margin businesses impacted of Airfreight, you box that all of those things plus higher cost of goods that helped gross margin, which speaks to just the power of the Levi's brand and then finally, we're just continuing to connect with consumers.
It really relevant in authentic way and.
That's that's what we do really really well and Thats what put.
<unk> put this brand in such a strong position over the last several years. So we can't control inflation, we can't control, what's going to happen to interest rates or whenever the fed is going to do or anything else, but we cant focus on the things.
Within our control.
And we are going to continue to do a great job of executing against those things connecting with consumers and building the brand.
Congrats again on the momentum.
Thanks, Matt.
Okay.
Okay.
Thank you. Our next question comes from Kimberly Greenberger of Morgan Stanley . Your line is open.
Okay, great. Thank you so much.
If I could ask a two part question.
Hamid you mentioned the ERP implementation happening in the U S. In the second quarter of next year could you just talk about how.
We'll see that manifest in inventory growth is new.
It's sort of proactively build some inventory just to make sure that you can.
Deliver on time through that through that entire period of that implementation.
When does the inventory rise when do we see it normalize.
On a quarter by quarter basis, just any color you could offer there and then chip.
We heard.
That there was just a slight softening in retail sales among.
Some of the U S retailers here over the last month or so I don't know if you have an order book or if you have any sort of forward view.
In terms of customer orders here in the U S.
Hazier, thank you might be seeing among those customers on their future order commitments.
You have anything to share on that would certainly be interested to hear thank you. So much.
Sure.
Yes, good question.
The U S is going.
Todd.
Implementation of the upgrade.
We've done Mexico, and Canada, both have gone really well.
U S is our largest market a couple of other retailers have done in the U S.
We are planning to the cloud.
Cloud S&P system benefits.
Way, we are thinking of inventory and as you know.
The U S is largely a coal market will be carrying the product through multiple seasons.
Activision is between quarter, three and cold fall, we'll probably build or buy.
Maybe $100 million in May.
Tori.
Ed and watered down in quarter, one quarter two of next year looking to implement this in early Q2.
On.
After 2023, so that's how we're thinking about it.
<unk>.
And working through it I mean, there is a dedicated team.
And staff.
A major implementation and commercial team Doug directly involved obviously the discussions with key customers.
It.
It takes two to tango and so and are collaborating we feel we can get this done due to convey that we can actually predict.
Consumer demand.
And ensure that it is.
Hi.
Thanks.
Over to you chip.
Kimberly I will try to keep those pretty brief.
On our wholesale results in the quarter were very very strong as we talked about in prepared remarks.
On our core.
Lead time business Levi's Red tab.
<unk> senior out of the U S. Specifically, we really have not seen any softening or have heard really any concern about.
By spread.
From our customers.
One soft spot in our business in the second quarter was on signature and denizen are two value brands not surprisingly.
Those businesses were down mid single digits.
And as you know those businesses represent real real small part of our total revenue.
At a low single digits of our total revenue, but those those two brands, which were up in the first quarter were down mid single digits.
Second quarter. So there is some evidence.
At the value consumer the low income consumer is really starting to feel the squeeze.
Shouldn't be a surprise based on the results from Walmart and target.
Levi's Red tab with target is still doing really well.
We feel really really good about our position right now in wholesale.
Any signs of cracks.
And I think again that speaks to the strength of the Levi's brand.
Great color. Thank you so much.
Thanks, Ken.
Our next question comes from Omar Saad of Evercore ISI. Your line is open.
Thanks, Good evening.
It's great to hear so many different pieces of the business is performing well it's.
It's also great to hear you guys are allocating more recently media resources and talent to build out the digital organization.
But maybe to put it in a little bit deeper on the digital performance in the quarter guys.
It was plus 3% overall, maybe you could also dive in a little bit E comm versus digital wholesale and then.
Given the importance of digital and DTC to the elevated longer term growth algorithm you guys laid out.
Not that long ago, maybe talk about the E com performance and where you think a chip.
Should go and where do you think it can be and I'm also wondering is there any.
Apply chain in inventory hindrances holding that channel back thanks.
Yeah Omar.
Digital.
Overall was up our e-commerce as I mentioned was down.
It also done because you're lapping some really strong numbers as well as the consumer.
Heads back to the stores, there's a bit of.
The online.
Shopping shifting to the stores and we saw that in the form of higher traffic.
In terms of the puts and takes if you think about the world Americas' generally strong.
Digital Europe .
Yes.
<unk> because at some retailers.
Note that our reported weaker sales.
<unk>.
It's still strong.
To the question about what we'd like to do.
We'd like to go.
We are in the early stages of really accelerating this business.
The announcements you've made on getting our chief Digital officer, you'll have somebody in the company and our beside of folks.
And the commotion.
Side of the business banking up every morning trying to drive and grow this business as we said in Investor day.
We would our goal is to triple the size of the business.
From 7% to about 15%, which given the size of the business, which will also help.
EBIT margin, we think there's a huge opportunity we just rolled out.
The app in the country.
20.
That needs to be we still get a small percentage of people buying through the app. So the opportunity is immense and our loyalty program is just getting started.
<unk> million dollars.
It moves around the world.
Brian .
Does levis.
If any of this trend.
Beyond yogurt continues to grow E Commerce dockers.
<unk> growth is accelerating the real work is to get Levis Dot com.
I would like it to be.
Got it it sounds like with loyalty accelerating a key to accelerating our E comm will be translating that loyalty to transactions.
Correct.
Thanks for the color good luck.
Thanks, Tom.
Our next question comes from Lorem vascular SKU of Exane BNP Paribas. Your line is open.
Good afternoon, and thank you very much for taking my question.
I think you mentioned in your.
Your prepared remarks that China, and FX is an incremental 100 to 150 basis point headwind for the full year just curious on China, specifically, just curious to know how it performed in <unk>, but what is your expectation for the year as we think about that 100 150 basis points.
Squeezing the second question, Amit I think you alluded to <unk> revenues.
A transcript its still not populated correctly, but just how do we think about <unk> revenues.
For the for.
For the back half.
Yes sure.
So and as you mentioned in Investor day.
And a small piece of our business. We started the year at about 3%. We think we end the year about 2% of our business on China.
The full team.
On the ground working towards the <unk>.
China was down.
I believe close to 50% in order to largely because I suppose Brooke.
In a lockdown.
We don't have a large e-commerce business.
It depends on that.
And so we couldn't offset.
Both being closed.
The 100 to 150 basis points of headwind that I talked about.
Largely in the second half.
Essentially driven by foreign exchange and China being too.
Pieces of it.
As we've been in the Euro.
As you think about Q3, and Q or I think Q3 is mid to high single digit growth.
91 in Q4 in the mid single digit.
I think the good comparison is delayed.
In Q3 Q4 H two.
Two 2019, and you can see that in 2019.
In the low double digits and I can definitely give some more color on the inventory question.
On that at all.
Very helpful. Thank you very much for me.
Thank you.
Thank you. Our next question comes from Paula Joseph Citi. Your line is open.
Hey, Thanks, It's Tracy Kogan filling in for Paul.
I was wondering if you guys could talk about store traffic and conversion in each of your regions and how that compare to 2019 and and also then in specifically in China.
The lockdowns have abated, what store traffic or how has how has the store traffic.
Since the Lockdown Simon Thank you.
Yeah Tracy destroyed traffic is.
It is growing.
Relative to a year ago generally across the board.
It's it's very difficult to go.
Country by country because different.
Different countries have different.
Elements of geopolitical COVID-19 uncertainty by Patrick.
We saw build and Thats why it chip in prepared remarks talked about.
The growth we are seeing in our brick and mortar stores basically and key city.
VC tourist traffic is beginning to improve.
The China the Chinese tourists is absent.
And you can see.
Tourist traffic improve.
Having said all of that traffic relative to 19.
It's still below 90.
It's a topic hasnt gone back to 19 Lynne can.
Conversion.
Rates and higher units per transaction, because now we have a lot more to offer from head to toe respective helps offset the traffic declines relative to 19.
Especially in the U S.
We are opening doors.
It should have.
70 odd doors on a net basis, we opened this year.
U S is also opening doors and we've talked in the Investor deal.
We think we can open on a net basis about aging of those.
Turning to be honest.
I mean, just constantly the economics a little different.
In brick and mortar obviously with negotiated rent reductions.
Rents in new doors.
One of the few retailers continue to open doors.
Structurally the economics are slightly better as Bob says.
Yes.
Thank you.
Thank you Tracy.
Thank you. Our next question comes from Weir Gardner.
Wells Fargo. Your line is open.
Again, we'll Gartner your line is open.
Okay.
Okay.
Well, Keith why don't we move to the next caller in Quebec.
Well absolutely.
Our next question comes from Jim Duffy of Stifel. Your line is open.
Oh, Thank you good afternoon.
Hey, Jeff.
Nice work in the quarter I wanted to ask are you spent a lot of volatility in the commodities market.
Though the recent correction that has been sharp when do you lock in cost for.
For the first half of fiscal 'twenty, three and does the correction we've seen in the commodities landscape heavy rethinking the rate of price increases that you would.
<unk> talked about for the back half of the year at all.
Yes, Jim.
Sure.
Broadly speaking.
We lock in.
Our open Dubai twice so.
So the first half of 'twenty three is largely locked in.
Unfortunately.
<unk>, a higher commodity price points.
The good news.
<unk> seen the cotton futures.
And they indicate future beginning.
December .
<unk> is trading.
Below 90 yesterday.
Over 90, I havent seen when the market goes up well be looking at it earlier.
The average price.
Right.
On the corn price is.
Is between 80 and 90, so it's trending back hopefully.
So it's definitely help us.
In the second half of next year to your question about pricing we have.
They can pricing partially.
Earlier on.
<unk>.
We've taken some pricing in Asia, and we're being very thoughtful about 23, obviously, it's important for us to offset any cost increases.
And in doing so is equally split.
It's critical.
Very thoughtful the other pieces.
The pricing that we've taken we still our product is to provide great value to the consumer and I think thats evidenced by the fact that.
Revenue growth has been balanced between unit volumes.
And not every.
Presenting an increase in annualized driven by pricing mix is also making that.
Okay.
Great and just one more if I may are you feeling any more or less confident in the promotional environment. As you look to the back to school season and holiday season.
Yes no.
The brands.
Good news as chip said the brand very.
Very strong as strong as it's been.
And dockers and beyond yoga from back to.
From that perspective.
We did important too I mean, our gross margin did include about 100 basis points of incentive units.
You'd like to send them to you in it at full price, but if it did so incentive units grew card are similar.
Cadence built into the second half.
As we think about back to school.
We think our product offers and our marketing offers.
Drive.
Consumers to our products.
And.
<unk>.
We'll be thoughtful about.
Promotional levels.
We're not going to be uncompetitive with alcohol as we obtained goodbye.
Back to school and the holiday season.
It will be upon us at this time.
Around the continent, and being very thoughtful of that.
But overall given the strength of the brand. The fact that we are.
Looking at promotion levels.
And the machine learning and other tools that we'd be okay.
Thank you very much.
Thank you.
Again to ask a question press star one at this time.
Okay.
Our next question comes from break Ro Brooke Roach of Goldman Sachs. Your line is open.
Good afternoon, and thank you so much for taking our questions.
So the trends that you are still on your business in Europe , especially in the context of the choppy macro environment. What are your flow. There now that gives me confidence to range of underlying ex FX and ex Russia guide for the region for the year. Thank you.
Oh, Hi, Brooke.
The brand's strong.
One could argue pre pandemic band was strongest in Europe , and the execution was probably the best.
<unk> continued to leverage both the strength of the brand as well as execution and driving.
Performance a couple of things one.
Europe .
We have wholesale retailers at.
Do commit.
People process that we booked in the second half is in the high single digits, which is good news that gives us some confidence.
As well as great execution.
I think that balances.
Ill.
The consumer.
Sentiment and other.
Staff distribute seem to affect the economy, though.
Tourism is.
<unk>.
And with a big Bang in Europe , I think that the things that give us a little bit of confidence.
I would just tended been execution on the wonderful team.
Okay.
Great. Thanks, so much I'll pass it on.
Thanks Brooke.
Thank you. Our next question comes from Robert <unk> of.
Guggenheim Securities Your line is open.
Hey, guys just I have two questions. The first one.
Can you talk a little bit about just the wholesale channel inventory levels that they are out in the market just sort of where you think.
Your brands are and where sort of the category is generally and then chip.
You usually have pretty good with some of the trends.
I was wondering if it's long Jean shorts appear to be trending and I'm just curious if youre seeing that within your business.
Okay.
Your second question Bill gets miles across the room, Paul I can tell you that as you go first.
First question the way we look at so we do.
Look at trade inventory.
It's a subject of discussion.
Between our sales team and commercial teams and our wholesale customers.
We have line line upside.
We look at trade inventory relative to.
$19 21, depending on where we can.
<unk> measured in months and so far Bob.
I can speak to the U S <unk> trade inventory largely in line with 19 levels.
Talking about 19, I just wanted to make a point for everybody here. If you look at inventory growth in quarter two.
We talked about I talked about 2019.
'twenty one to 'twenty, one is a very difficult comparison because of the supply chain issues, we look at it.
What's your inventory levels relative to 19 maintain 2019 was up 24%. If we became the early receipts.
Lead times have increased and we are trying to ensure that we don't.
Dissatisfied consumers.
10%.
<unk> 24, as early receipts and then beyond yoga.
And a talent acquisition is another story.
<unk> points.
If you back that out.
And then you go to the lens defendant broadly in line with our expectation of growth rates in the second half relative to 19.
Chip to the question about long shot on charge offs.
Bob if thats, what youre wearing that is clearly what the trend by speed.
Yeah.
Okay.
No not Tonight.
Thank you everybody.
Okay.
Okay. Thank.
Thank you Bob next question please.
Yeah.
Thank you. Our next question comes from Dana Telsey Telsey Group. Please go ahead.
Good afternoon, and nice to see the progress.
Two things as you're thinking about the supply chain it looks like the supply chain costs were higher in the second quarter than in the first quarter. How are you planning to the balance of the year filling into the back half of the fiscal year and then wholesale strength is impressive untapped.
In the wholesale strength looking at price door growth units, how does it differ by region and what is your outlook. Thank you.
DNI to your question on supply chain costs.
I think if you think about costs incurred to air freight was higher what 80 basis points higher.
It is a combination of two things.
Very loyal paid in quarter two of last year.
And this year we were.
Getting a product just.
The seasonal product to make sure that we were able to satisfy demand.
Our expectation on air freight is that it begins to taper down.
Supply chain issues are getting <unk>.
To be honest this year hopefully next year is getting better.
The other cost commodity cost.
Commodity costs in the second half are higher than the first half.
And we are offsetting that.
With.
All right.
Driven by pricing and mix.
Question about wholesale trend is difficult to gain golf around the world.
Again.
I think the fact that.
The brand is strong.
Lead times are really strong.
<unk> tailwind as chip talked about capitalization and as people get back to the office is the more casual demand I think definitely.
Yes.
And.
And I talked about people in Europe .
Which is.
Good indicators, so I think.
That's how we look at it.
The only other thing I would add on the wholesale.
U S wholesale.
Talk about this before data we put a lot of work into just re mapping and building our footprint of over.
So our focus on premium is in our wholesale footprint has paid off in big ways and the target expansion has paid off in big ways getting incremental floor space in key customers like Kohl's and Macy's over the last two years or so it's also played an important role. So we're seeing that play out.
With that together with the strength of the brand.
On the.
The brand shows up better in the stores, we're going to sell more levis, So that's where our focus has been.
Thank you Dana.
At this time I'd like to turn the floor back over to the company for any closing remarks.
Alright, I want to thank everyone for dialing in and wish you all.
A happy and healthy summer and look forward to talking with you at the end of our third quarter. Thank you all very much.
Yes.
Thank you. This concludes today's conference call. Please disconnect your lines at this time.
Okay.
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