Q3 2022 Levi Strauss & Co Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Yeah.
Yeah.
Good day, ladies and gentlemen, and welcome to the Levi Strauss <unk> Company third quarter earnings Conference call for the period ending August 28 2022 all.
All parties will being a listen only mode until the question and answer session at which time instructions will follow at.
This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company.
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 Levi Strauss Dot com.
I would now like to turn the call over to either orphan Vice President of Investor Relations at Levi Strauss <unk> company.
Thank you for joining us on the call today to discuss the results for our third fiscal quarter of 2020 to join.
Joining me on today's call are chip Bergh, President and CEO of Levi Strauss and Harmeet Zhang our CFO , we have posted complete Q3 financial results in our earnings release on the IR section of our web site investors thought 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 SEC in particular, the risk factors section of the quarterly report on Form 10-Q that we filed today.
Factors that could cause our results to differ.
Also note that the forward looking statements on this call are based on information available to us as of today and we assume no obligation to update any of these statements. During this call we will discuss certain non-GAAP financial measures. These Don 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.
He 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 Chuck good.
Good afternoon, and thanks for joining us today as you know and I've heard from other companies macro conditions deteriorated since we last spoke with you in early July .
As we moved through the third quarter, a confluence of pressures from inflation to falling consumer sentiment to rising interest rates began to result in softer consumer demand, while our industry continues to experience supply chain disruption and a heightened promotional environment.
Not surprisingly this made for a challenging quarter.
Despite this we were able to deliver solid results with net revenue growth of 7% on a constant currency basis, which translates to plus 1% on a reported basis.
This was below our own internal expectations for the first time in several quarters. Our teams responded to this very dynamic environment by focusing on controlling the controllable.
We took quick action to both stay competitive and protect the bottom line, resulting in a double digit adjusted EBIT margin of 12 plus percent.
I've talked before about the importance of strong brands during uncertain times, our brands remained very strong delivering strong growth despite the challenging environment spa.
Specifically, excluding the impact of foreign exchange, we delivered constant currency growth across our key brands with Levi's, plus 6% and dockers plus 13%.
But beyond the revenue results there are other key proof points that underscore the strength of our brands.
This quarter, we delivered the Levi's brand highest third quarter revenue in a decade with growth across categories and genders, we've made meaningful progress winning over the next generation of fans continuing to gain share with the 18 to 30 year old age segment in the U S. While maintaining our leadership position.
Cross consumers of all ages, and our unaided brand awareness remains well above competition across most markets.
Second the strength of the brand has equated to pricing power.
Ours were up mid single digits, and a more promotional environment and the pricing we've taken to offset inflation has largely stock.
Third and as a result of our pricing power our gross margins go off modestly versus a year ago, primarily due to currency and discounting remains strong and are still nearly 400 basis points higher than pre pandemic levels as we have successfully offset significant inflationary cost.
Increases.
Fourth our direct to consumer business continued to delivered outside growth.
Plus 8% in constant currency, which by the way Amit and I will continue to refer to and the balance of our remarks, driven by increases across our stores and ecommerce business.
Having strong powerful brands and a diversified business with scale matter. During these volatile times. These advantages allowed us to grow global wholesale by 6%.
And total U S company revenue by 5%, despite a number of U S wholesale customers slowing orders.
To put the U S results in context, we significantly outperformed both the overall jeans wear market, which based on NPD data declined by mid single digits. During the June through August quarter.
And the overall U S apparel market, which slowed to only 1% growth.
I think it's also important to note that despite the past three month decline in the jeans wear category. It is still up mid single digits versus pre pandemic.
Despite the quarterly category softening, we remain confident about the long term trend of casual <unk> continuing to be a tailwind for the business.
In addition, even with continuing supply chain constraints, our team took swift action to minimize the impact to just $30 million to $40 million or about 2% to three percentage points of revenue growth.
As the operating environment becomes more challenging and supply disruptions continue our unique and durable competitive advantages will continue to set us apart from the competition.
Let me walk you through the progress we made across our strategic priorities during the quarter again, all in constant currency. Our first strategic priority is brand led.
As mentioned Levi's brand grew 6% versus prior year and almost 10% ahead of 2019, we're driving growth in our bottoms business by delivering a pipeline of fresh and innovative products as we define new trends and introduce new fits we continued to build upon our success with looser fits with the launch of our new baggy.
God, a signature 90 style, which delivered strong performance as did our new boot cut and straight fed watches the trend toward looser fits in women's was also accompanied by a shift from high to mid rises.
Which were up 20%.
Iconic 501 family again posted double digit growth across mens and womens after 149 years. This fit continues to resonate.
We continue to position the Levi's brand at the center of culture by partnering with leading brands and cultural icons on product collaborations.
Many collaboration returned this year and was featured on the runway at the Copenhagen.
<unk> week and sold out in two weeks and the new Levi's denim tiers collection was worn by Golden State Warriors scarred Steph Curry.
Hubbard of October's Rolling stone.
We also recently launched the second iteration of our buy better where longer campaign designed to inspire shoppers, both young and young at heart.
Highlighting the quality and the timeless style of revised. Additionally, this campaign underscores the durability of a pair of Levi's important in today's environment, where consumers are looking for quality and value for money. This.
This is the highest scoring AD and copy testing that we've had since I joined the company over a decade ago reflection of how much this message resonates.
Moving onto our second priority.
Total company <unk> C channel grew 8%.
Owned and operated mainline and outlet stores grew in the third quarter mid single digits with traffic and AUR is both up versus prior year again, another sign of the strength of our brands and even as consumers return to our stores ecommerce grew 16% driven by the Levi's brand in Asia beyond Yoga and.
Dockers overall e-commerce was up 64% versus 2019, with the Americas, and Europe segments up double digits in Asia more than doubling.
Globally. The Levi's App continued to achieve increased engagement with monthly active users again up double digits, along with 17% growth in revenue.
We made progress in deepening our direct personalized relationships with our consumers via our global loyalty programs, which saw double digit growth in total members and revenue.
We also grew our global wholesale business by 6% driven by the Levi's brand across Asia, and the Americas and the U S. The Levi's brand was up low single digits with strong growth in women's new fits this growth was offset by a 12% decline in our value brands signature and denizen, which are most sensitive to.
<unk> and consumer discretionary spending.
Further this business was impacted by a reduction in Venice and women's distribution at target as we've expanded Levi's Red tab.
As a reminder, our values brands only comprise a mid single digit percentage of our total net revenues.
Our third strategic priority is diversifying our portfolio and we continued the strong momentum we have achieved in each of our major growth opportunities with womens tops international and our other brands Docker and dockers and beyond yoga.
Each contributing positively to third quarter growth.
Our total company women's business grew 8% above men's strong performance of up 6%. The women's business was driven by revised bottoms, which were up 7% and saw notable strength in the Americas. Additionally.
Additionally, the small but growing women's business on dockers was completely additive as was beyond yoga.
For the total company top saw 12% growth as we continue to diversify our offerings revised tops were up 8% driven primarily by mens which grew 14%.
We continue to see strength in Tees woven and polo's, our Levi's women's business saw positive growth across non graphic tees dresses and sweaters.
Our international business grew 8%, even as we navigated a more challenging consumer environment in Europe and in China, We saw encouraging strength across Asia, which excluding China was up 68% as well as in several of our largest in important European markets, notably the UK and Spain.
Our updated dockers brand with its California casual aesthetic posted 13% growth driven by both AUR and volume while also delivering strong profitability that exceeded our plan.
The brand delivered growth across major geographies and channels U S was up 2% and international brick and mortar and E. Commerce saw notably strong gains dockers women's and tops businesses also saw strong growth and grew as a percentage of the brand sales.
Beyond yoga contributed $22 million to net revenue was solid consumer demand in the quarter with company operated E Commerce sales up strong double digits on a pro forma basis.
<unk> launched at 28 colleges across the country as the brand continues to build awareness and reach new consumers.
Perhaps most exciting at the end of last month beyond Yoga opened its first permanent store located in Santa Monica showcasing the brand's full array of category offerings for the first time.
While we're just getting started we believe there is an attractive long term opportunity to grow the brand's presence through retail.
Finally, one of our most important companywide objectives is leading the industry in environmental stewardship last week, we released our annual sustainability report, which includes a comprehensive set of disclosures and introduces a new slate of sustainability goals 16 at all that cut across our three main pillars of climate.
Consumption and community you can find the report online and the sustainability tab of our website.
In closing, we continue to achieve steady progress against our long term objectives as we navigated a more difficult environment in the third quarter.
While we expect it to remain challenging over the next few quarters I am confident in our ability to navigate the near term headwinds and importantly deliver on our long term goals for the following five reasons first.
We have really strong brands.
Second our categories are structurally attractive with long term tailwind from the casualization trend and denim cycle.
Third we have the global scale to reactive disruptions and manage through inflationary pressure with competitive sourcing.
Fourth we have a diversified business model, where some of our biggest opportunities are gross margin accretive and generate higher AUR.
And fifth we have a seasoned and proven team that has delivered excellent results, while managing through challenging times.
Allison co is separated itself from competition and challenging times in the past by making the right moves we believe the current environment as an opportunity for us to do this again.
We'll operate with discipline and lean into our strengths to further expand our lead for the years to come.
However to Hanmi.
Thanks Chip, let me begin with three thoughts before we get into the numbers.
We delivered a solid quarter with.
With net revenues up 7% in constant currency, demonstrating the power and resilience of the Levi's brand.
We delivered these results even in the face of higher FX headwind.
Victory pandemic related supply chain issues intensifying in the U S, resulting in the inability to fulfill orders.
Well as stiffening ongoing economic and in placing headwinds impacting consumer discretionary spending in the U S and Europe .
Thanks to the strength of our brands, our diversified business model and operational agility enabled consistently manage expenses and.
Thanks to expectations.
Diluted earnings Okay.
We made progress against our long term strategic plan delivering growth across our attractive high margin opportunities, including women Dobbs direct to consumer international and our adult goods and beyond Yoga brand.
By exercising control of the controllable we are now.
Navigating the chart.
While continuing to invest in a compelling long term growth initiatives and returning capital to our shareholders.
Now, let's get to some additional Q3 financial detail.
Net revenue grew 7%.
Primarily driven by the U S Asia, and Latin America with broad based increases in AUR.
Direct to consumer channel net revenue grew 8% driven by positive comp store sales across our mainline and outlet stores.
In the U S due to increased traffic.
And <unk>.
And despite strengthen scores.
<unk> business was up 16% and net revenue to all the digital channels were up 15%.
Adjusted gross margin in reported dollars was 56, 9% up more than 390 basis points versus 2019, yet contracting 60 basis points year over year.
Due to a 30 basis points unfavorable currency exchange rate impact as well as the impact of higher product costs and lower full price sales, particularly in the U S relative to last year.
Partially offset by price increases and if.
Favorable channel mix.
Moving to SG&A.
Adjusted SG&A expenses in the quarter.
$675 million up 6% from last year at the lower end of our expectations.
As we began to see the impact of the softening macro environment, we minimize spending in the quarter by reducing discretionary expenses like travel delaying nonessential hiring and projects and we're continuing to do the same as we moved into quarter four.
As a percentage of revenue adjusted SG&A was 44, 5%, reflecting higher distribution expenses and ongoing strategic investments in IP and our direct to consumer business.
Lower than expected revenues.
Adjusted EBIT margin was 12, 4% contracting 240 basis points on a reported basis and 200 basis points on a constant currency basis.
Adjusted EBIT dollars were down 15% on a reported basis and <unk>.
8% on a constant currency basis.
The effective income tax rate was seven 2% for the third quarter.
Compared to four 8% in the same quarter of the prior year.
Lower effective tax rate relative to the company's full year updated outlook for mid teens was driven by the planned acceleration of certain tax related initiatives.
Adjusted net income was $161 million compared to $197 million in the same quarter of the prior year.
The decrease was due to lower operating income.
Adjusted diluted EPS was <unk> 40.
Which includes a <unk> <unk> negative impact from foreign exchange all of which half was incremental to the outlook. We provided in July .
I'll now take you through key highlights by segment recall Division segments include a Levi's brand Levis signature and denizen, while the other Brian segment includes dockers and beyond yoga.
In the Americas revenues grew 3% driven by higher AUR across channel.
Did you see growth of 8% was driven by company operated mainline and outlet stores, which benefited from increased traffic and AUR.
In addition to new stores.
Wholesale growth of 2% was driven by international.
The Levi's brand in the U S. We said chip mentioned was partially offset by lower revenues of our value brands.
Overall, the Americas segments saw growth across all markets with the U S up 2% and notable momentum across Latin America led by the strength in Mexico.
In Europe revenues were 9% lower on a constant currency basis, which includes a 4% negative impact from the suspension of our business operations in Russia.
Macro pressures, including inflation and extreme need negatively impacted the region several of our large markets posted growth.
Our successful pricing actions delivered.
High single digit AUR growth, which partially offset soft consumer demand.
We continue to anticipate pressure from the macro environment, we remain confident in the strength of the brand in the region and Levi's remains by far the most popular denim brand in Europe .
Asia again accelerated with greater than anticipated revenue up 53%, despite COVID-19 related restrictions negatively impacting markets like China.
Volumes in <unk>.
Both increased strongly in wholesale and direct to consumer, but partly benefited from lapping wider spread COVID-19 related closures last year.
E Commerce was up 33%, while our company operated stores saw gains from traffic.
And new stores.
The Asia segment, excluding China grew 68% with broad based growth across market led by India, Malaysia, and Indonesia, and Thailand, and overall revenue growth and higher gross margins have delivered better than anticipated operating margin expansion of nearly two.
<unk> thousand basis points to seven 4%.
Other brands net revenue was up 44% driven by 13% growth in dockers and the addition of beyond yoga.
Turning to balance sheet and cash flows reported inventories increased 43% on a dollar basis. Although there are a few items driving that increase.
Noting.
<unk> made me one third relates to Cogs inflation, and the normalization of last year's abnormally low inventory level.
Another third of the increase relates to the intense Joe earlier receipts of core inventory.
We get supply chain risk and the U S implementation of a new ERP system in the second quarter of fiscal 'twenty three.
And the final third was driven by an increase of goods in transit.
Core product, which can be sold across multiple future season represented approximately two thirds of total inventory and we are comfortable with the composition and quality of inventory.
As you build inventory for 2023, and we look forward to respond to changing demand we have reduced inventory by for the first half of 2023 by approximately 25%.
These actions should enable us to return to normalized inventory levels in line with net revenue growth by the end of quarter 223.
Got it and liquidity remained strong with the end of quarter net debt of $372 million and overall liquidity of $1 4 billion.
Our leverage ratio remained at one one times.
Owing to investments and inventory and inflation adjusted free cash flow, which we define as cash flow from operating activities less property plant and equipment was negative $12 million in the third quarter.
However, we expect adjusted free cash flow for quarter, four and the full year to be positive.
In the third quarter, we returned approximately $74 million to shareholders.
Company paid a dividend of <unk> <unk> per share nearly 50% higher than a year ago.
In the quarter, we repurchased shares of approximately $26 million.
And colorful the company declared a dividend of <unk> 10 per.
Per share in line with last quarter, and we currently have $690 million remaining under our share repurchase program, which has no expiration date.
Now, let's turn to guidance.
While we are confident in the strength of our brand and deep consumer connections, we are not immune to the macro headwind the sector is experiencing.
And bill in the month of September we are continuing to experience momentum in U S direct to consumer business, which is up 10%.
<unk> bring our outlook for the remainder of the two reflect ongoing supply chain disruption.
Macro economic pressures.
For fiscal 'twenty, two we now expect reported net revenues to grow fixed.
672, 7%.
Presenting approximately 11, 5% to 12% net revenue growth on a constant currency basis.
Our outlook includes three points of incremental FX pressure since we guided in July .
On a reported basis, we now expect <unk> to be up high single digits Asia mid teen in Europe down high single digits.
In constant currency, we expect Asia to grow in the low 20% range.
Excluding FX and Russia, we expect Europe to grow high single digits.
We also now expect adjusted diluted earnings per share of $1 44 to $1 49.
Despite incremental FX headwind of $5 Tien tsin.
Quoted back in July .
In total for the full year, we now expect more than $250 million of unfavorable FX impact on net revenues and 13% and adjusted diluted EPS.
To put our latest full year adjusted diluted EPS guidance in context relative to where we started in early 2022.
Adverse FX.
Russia.
<unk> are estimated to have impacted adjusted diluted EPS by <unk> or 'twenty.
By focusing on what we can control while building this business for the longer term, we have managed to offset nearly 75% of this downside.
We expect our full year adjusted gross margin slightly down versus last years 57, 9% nearly 400 basis points higher than 2019.
The change from our prior outlook is driven by foreign exchange.
And lower full price sales as we expect the broader marketplace to be more promotional.
Through the end of the holiday season.
As a result, we now expect adjusted EBIT to 11, 6% to 11, 8% for the year, which is approximately 60 to 80 basis points lower than prior year on a reported basis, but 100 to 120 basis points ahead of 19.
We continue to expect $270 million in Capex for the year.
As we expand our direct to consumer business and continued strategic investments in it.
We expect our full year effective tax rate to be in the mid teen which implies a mid single digit tax rate for quarter four.
Specifically it relates to quarter four this implies a fourth quarter net revenues will be slightly down on a constant currency basis and down approximately 6% on a reported basis.
Our outlook reflects a more cautious view with regard to supply chain challenges, particularly in the U S into the fourth quarter.
We expect adjusted diluted EPS to be between 29 and 34.
As I did in the beginning I want to leave you with a few key points.
Our vision for our long term future remains unchanged.
While we expect conditions to remain challenging in the near term we are confident in our ability to leverage our strengths to deliver sustainable profitable long term growth and emerge in a stronger position.
Our brands and the structural economics of our business remain as strong as ever.
On top of a resilient.
We're making good progress in attractive growing and high margin areas, including women top international and direct to consumer business.
We are focused on controlling the controllable.
Reducing discretionary spending but not at the expense of expensive any.
All of our strategic investment.
To fuel, our brand and which will enable us to deliver on our long term growth plan.
And finally.
Strong with a solid balance sheet, and a strong diversified and scaled business model.
Generally the cash flow to reinvest for long term growth, while continuing to return cash to our shareholders.
And with that operator, I would like to open it up for questions.
Thank you the floor is now open for questions. If you have a question. Please press Star then one one on your telephone keypad due to time constraints. The company requests that you only ask one question. If you have an additional question please queue up again.
Our first question comes from the line of Bob <unk> of Guggenheim Partners.
Bob Daryl your line is open.
I guess chip and army.
Just when you look at the quarter can you talk a little bit more I don't know like geographically.
How it materialize when you think about that.
The changes in the quarter.
How you missed.
Your expectations or just the dynamics that unfolded and I'd be a little bit be interested to hear just how you think wholesale inventories are of the categories with some of the changes in the category that you talked about as well throughout the quarter. Thanks.
So Bob Thanks for asking the difficult question.
But as you know we delivered a solid.
Up 7%.
And levis.
And quarter to hit a red card.
Revenue for the quarter in a decade, but youre right, we missed our own internal high bar.
Things progressed fairly quickly.
Through the quarter the.
The moment we saw.
Headwinds incremental headwinds in FX.
Apply chain continued pressures and demand softness, especially in the western world.
We focus on the controllable. So if you think of revenue breakup.
Miss to our own internal expectations and the following by a third was foreign exchange.
Third supply chain constraints that persisted and honestly a limited ability to service demand that was out there so that was about $30 million to $40 million.
And revenue and then the macro economic environment, which weakened in the U S and Europe .
Here in Latin America.
The standout geographically.
That grew.
We continue to be long on those businesses.
As we think about.
The impact on EPS and profitability.
The.
The drop do I want my expectations in revenue, which is about 12, and we quickly focus on the controllable so between cause.
And other things like tax rates.
Right.
In the mid teens, we hope to sustain in the high teens longer term. So that's why we kind of offset it.
In terms of your question on wholesale in U S wholesale.
If you could think about the quarter U S wholesale was up low single digits.
If you.
<unk>.
Mass channel, which is two retailers that we sell signature and denizen was down as chip mentioned.
12% U S wholesale actually was up in the mid single digits. So overall failure, okay, we do monitor trade inventory levels.
And we measured in months and as the end of quarter three trade inventory levels in the U S with wholesale customers was largely similar to what it was in 19.
There are obviously some customers are higher some customers are lower but thats.
Yes.
The way.
We see the data.
Okay.
Great. Thank you very much.
Thanks, Bob.
Thank you. Our next question comes from Paul <unk> of <unk>.
<unk>.
Paul. Please go ahead your line is open.
Hey, Thanks, guys curious if you could talk a little bit more about inventory and maybe if you can provide any color maybe breaking it down by region tops versus bottoms men's versus women's I think Amit you might have mentioned something about how much of season less product.
But also curious if you think there are any places where you have more than you'd like where you have to be a little bit more promotional to clear through thanks.
Sure.
I tried to break out the inventory.
The drivers of growth.
Prepared remarks, Todd was largely driven by inflation by inflation in Cogs, which is up Gordon was higher.
And.
Lower inventory inventory basically lost it into a dive.
<unk> was largely driven by us bringing early.
Earlier things because of the longer lead times as well as the ERP and the third was largely goods in transit.
In terms of the.
The thing that we're doing.
Paul and the team.
Our.
And most of this inventory is largely call. So we can.
Through season about until it is seasonal.
We don't have a lot of obsolete the way we do have obsolete we are.
Marking that down and selling it and that was one.
Impacted our gross margins in Q.
Q3 re rent and thinking gross margins.
Based on the items that we wouldn't be selling full price would be impacted about 100 basis points, probably 130, <unk> hundred 40 basis points impact you factored that in Q4, two so we can we are.
Moving quickly around the world to Mark things down the other thing there'll be doing is that we did.
Reduce our buys for the first half of 2020.
Three big time right.
Right now is down to 5% because we are as we build inventory for the ERP installation and important to reduce debt.
In terms of geographic split.
All the the buildup is largely in the U S, which is primarily a core market.
And the reason for that build is also driven by the fact that it's largely core and as the ERP. That's helping drive that you know what happens with the ERP implementation, we do stop shipping for about six to eight weeks and Thats why we would then look good.
And so to your point and a third of the inventory is seasonal it varies by geography, but U S is more core than seasonal.
Got it. Thank you guys. Good luck.
Thanks.
Thank you. Our next question comes from Omar Saad.
Evercore.
Please go ahead Omar side.
Thanks for taking my question good afternoon.
I wanted to see if you guys could talk about the denim cycle, especially as it relates to your outlook for next quarter are you seeing a slowdown a broader slowdown in the denim cycle.
There are other companies out there in the category also seem to see a little bit softer trends at retail.
And.
Especially in light of the reopening as people get dressed up again, and maybe getting a little bit more dressy again are you seeing that affect the casualization trend. Thanks.
Yes.
We've referred to some of this in the prepared remarks, Omar but just to give you some real hard category data and I'm quoting NPD data on.
On our past 12 months basis. This is all through.
At the end of August so in the past 12 months basis now total apparel was up 11 denim is up 10.
By the way, we were up more than that on the past 12 month basis, and then in the script, we referred to the most recent three months through the end of.
August .
In July August .
There was a significant slowdown.
Down mid single digits and total apparel.
Up one.
Well im not crazy about those numbers.
As good as it does kind of validate the narrative that it's been out there which is that there has been this.
Transitioning into more formal.
As people go back to weddings and back into the office et cetera et cetera.
And it does that data does validate that.
To put our results up against that and we clearly outperformed denim and outperform total apparel during that same three month period of time I don't expect it's going to stay that way for long.
And that data by the way as the U S only data.
The casualization trend we've talked about this for quite some time.
It's no longer just a U S trend it is a global trend.
Zero.
Our business skews to men manner going back into the office we're in jeans.
And we expect that.
It's going to recover.
Many many times before we're the market leader and I believe it's incumbent upon market leaders to drive category growth.
And we're going to continue to focus on doing that on the things within our control driving innovation, we're going to continue to focus on innovation and continuing to support the business with strong marketing and marketing support and the combination of those things.
Should should drive growth.
Let's not forget the team of that weather, probably helped by the fact that during this period of time.
As well.
That's changing.
Are you putting favorable so.
The last thing I would add is heard me referred to it in the script, but we did just kind of put out there. The September U S direct to consumer sales, which were up double digits.
I don't think were going to see the category get back to double digit levels of growth that we've seen over the last 12 months, but I do expect that the long term trend for denim is going to be kind of mid single digit levels of growth over the long term and.
The shorter the time frame you look at the more.
Volatility there is in the data.
And I suspect over time, we're going to see then and bounce back the kind of.
That mid single digit level.
Over the next few months so.
Hopefully that addresses what youre looking for.
Thank you for the color chip.
Thank you. Our next question comes from Matthew Boss of Jpmorgan.
Please go ahead your line is open Matthew boss.
Hello, Keith Let's go to the next caller and come back to that.
Okay.
Okay. Our next our next caller comes our next question comes from Chris <unk> of Bank of America, Chris <unk>. Your line is open.
Thanks for taking my question.
Can you discuss expectations for the trajectory of your European business relative to your <unk> results, even looking out to the first half of next year and are there any particular countries that are showing notable weakness and any difference in how youre thinking about wholesale and DTC in the region and that would be great.
Thank you.
Yes, I would say.
All cards on the table here, Chris were probably most cautious about the business in Europe as we look ahead.
As we've talked in the script.
We saw some countries in Europe in Q3 performed quite well.
UK and Spain were up nicely.
We also had a number of smaller markets across Europe also performed well coming up versus prior year on a constant currency basis.
But there were other markets that were notable in Sop.
Now, particularly in Germany, and some of them some other markets in the north.
If you strip out the impact of Russia, Europe was down by mid single digits, 5% for the quarter and as we look ahead.
The guidance that we provided does kind of built in some cautiousness I guess with respect to Europe and I suspect, we'll see more as the winter begins to hit.
What is the impact on the consumer over there as they face much steeper not just so much deflation, but much deeper energy costs as well.
The good thing about having such a broad global portfolio is we've got other markets as Hamid said better performing exceptionally well that can help to offset some of the softness but brand is still incredibly strong in Europe .
But but we're seeing our wholesale customers being cautious to their open to buy budgets and how they're planning inventory and.
And we are seeing as I said, some bifurcation in our business even through the third quarter and we're kind of playing that through as we think about the future.
Thank you. Our next question comes from the line of Alex Stratton.
Morgan Stanley . Your line is open. Please go ahead Alex.
Thanks for taking my question can you just talk about the flexibility of our wholesale partners have as it relates to canceling orders if they were to see more of a slowdown so put differently at this moment can they cancel any of their fourth quarter orders your fourth quarter, the first quarter or the second quarter and by how much and.
And also what kind of support would you guys offer should your retail partners have too much inventory as it kind of builds up in the broader space.
Jim.
Well first of all I'll answer your last question first.
Okay.
Sure.
Now.
As we said on the call inventory levels across wholesale broadly speaking here in the U S. In particular.
Our.
Yeah.
Are generally in line with where they were pre pandemic.
Yeah. So.
Relatively reasonable now it does vary from customer to customer.
Most customers are kind of on their own after they own the product they manage their promotional markdown budget we supported.
Supported within <unk>.
Traditional guidelines are apparent across the marketplace and are treating all customers.
Equivalent Lee.
In terms of.
Canceling orders.
We let's say that it's a negotiation at the end of the day.
<unk> product specifically for our customer we hold the line very very tight. So we do a number of products that are very very specific to a particular customer and if we are cutting product and making product for a specific customer.
Hey on it at the end of the day and we try to hold the line very very hard on that.
If it's a product that is more <unk>.
<unk> placed product or it's a product that we can put in our outlet stores.
There is a bit more of a negotiation I hope that.
Helps Alex.
It does thank you.
Thank you. Our next question comes from Ike <unk> of Wells Fargo. Your line is open. Please go ahead <unk>.
Hey, Thank you so chip I just wanted to go back to the prepared remarks and just dig.
Digging a little bit more to me. So I think when you are speaking to the business at a high level.
The business is being guided to negative constant currency growth in <unk>. I think you said you expect things to remain challenging over the next few quarters.
I know youre not going to give us guidance for next year, but.
Can you put some context behind that how exactly we should think about the business based on the order book or any other.
Visibility you may have right now thank you.
Yes.
And by the way guys part of the reason I hesitate on that last call. The Blue Angels are in town and we just got straight a minute ago.
It's crazy, we've got Jets flying right over our heads here.
<unk>.
So I guess the way I would characterize the way. We're looking ahead and I talked about this a little bit with respect specifically to Europe Theres, just a lot of uncertainty right now.
Forecasting during the pandemic was pretty tough, but it's pretty challenging right now to get a pretty good hollow bond, whereas the consumer having and where is.
Whereas the business savvy, especially with respect to their customers and their open to buy budgets.
<unk>.
And that uncertainty.
It was caused by some of the noise and confusion and a lot of the economic signals that we're getting no inflation is still relatively strong.
They see that begin to change over the next.
A couple of months, but we are at or near full employment and wages are growing wages are growing across all incomes bank accounts are still reasonably healthy.
Thanks to the pandemic impact.
Particularly in the middle and upper <unk>.
Segments of income so there.
Some data that you can look at and say things look pretty good, but but there is a ton of uncertainty inflation continues to have more and more of an impact.
As I said in Europe , a lot of concern about what's going to happen during the winter with energy costs, particularly across that marketplace.
But as I said it is more of these western markets where.
We're seeing these impacts we have other parts of the business that are performing incredibly well and.
And even within our own portfolio in the west our DTC business is performing pretty well and so our balanced portfolio.
The strength that we're seeing in Asia, the strength that we're seeing in Latin America.
The strength that we're seeing on our women's business on doctors beyond yoga being completely additive at this point, we begin to lap that now.
These are helping to offset some of these speed bumps that were seeing in other markets, but it is too early to comment on guidance I can tell you guys honestly hand on a Bible I havent, even seen the numbers as we're developing our plan at this point, but.
Yes.
<unk>.
I expect that.
We will.
B, reflecting kind of the reality because we see it today with some of these uncertainties.
Through probably the first half of next fiscal year. So.
I hope that helps without giving you any specific numbers.
Chip the only thing I'd build on from a cost perspective, what we've seen.
So.
On one hand, we built and built up inventory as we close the year.
But we have built up inventory when Gordon was.
Much lower than what it was for the first half of next year.
As we see the futures of Gordon for the second half Gordon's down to little over 80.
Is the normalized so there should be some tailwind there in 2022 the second is some.
All right.
Reduction in distribution costs and trade costs as we.
Start thinking too.
Half of next year, and so I think those are the things that probably helped.
As chip said.
The long term and.
We'll take that you.
You saw expectations, we said in the Investor day, and so we Havent nonstop.
We're working on.
Okay.
Thank you.
Thank you. Our next question comes from Vasily <unk> of Exane BNP Paribas.
Your line is open. Please go ahead, Laura good afternoon, and thanks for taking my question Chip I think you mentioned the.
The value channel.
In the U S was down 12, but.
Ex that the U S wholesale was actually up mid single digits for the quarter, how do we think about those those guardrails for the fourth quarter do they converge.
Does the value channel and get a little bit better.
The rest of the business gets a little bit worse, any guardrails around that and then.
I think you mentioned ex China.
Asia was up 68% I presume, obviously that was on a cc basis, just curious to know what youre seeing in China. I know you have a small business there, but any color on what you're seeing quarter to date trends would be very helpful. Thank you.
Yes.
Yes.
B.
Why don't you talk China.
This reference so exiting quarter four quarter four we are seeing constant currency slightly down growth.
And we reported down.
Give us one second let them do their thing.
So the FX headwind very similar to quarter three.
And thats reflected in the defeasance cost.
The change in the constant currency growth in Q3 down to slightly down in quarter four was driven by.
Really two factors one is Asia that has been growing at 50%, 60% is going to start lapping the normalized base. So we expect Asia to grow in the high teens.
But not at this level. So that's one piece and the second is as we think about the Americas a combination of the supply chain disruption we should think.
Engineers into Q4 and begins to improve Q1 onwards, as well as U S wholesale.
Down versus up that's how we're building the expectation.
Looking like Crazy too.
Deliver better numbers, but that's the expectation.
Setting aside going to China chip overdue I think China was down in Q3, 17%.
Two 2% of our business and as we said in Investor Day, We don't expect this business will be a major contribution contributed to our growth longer term.
You just answered it.
Yes.
Thank you very much.
Thank you. Our next question comes from Jay sole of UBS. Your line is open. Please go ahead, Sir your line is open.
So much my question is.
Aberrate a little bit on the supply chain challenges you experienced in the quarter and maybe help us understand maybe some of the differences that type.
Played out versus your expectation.
At the end of last quarter.
Maybe you could start there that would be great. Thank you.
Thanks Jay.
Overall, what we'd say is.
I'll look parts of supply chain, indeed, improving we are still feeling the impacts of disruption. We additionally have some conversion within our logistics and distribution network.
<unk> build.
That we did to predict Q1 revenue as well as our ERP transition.
This conversion.
It comes a lot of efficiency in our distribution network and so we think Q4 will be the peak and we expect to start an improvement.
In Q1.
And to offset this and build as I said earlier, we're kind of reducing <unk> by big time.
So that by the end of quarter, two inventory levels return back to normal.
And the condition is largely.
Between the ports of clients loader and.
And goods.
Distribution center lots, we're looking through it.
The majority of it is largely in the U S.
In <unk> the.
Primarily a core market so we're working through that.
Through the same with our <unk>.
Customers.
To ensure there's minimal disruption, but it does hurt overall revenue.
Yes, the only thing I would add is.
All I heard others talk about supply chain improving significantly.
Their starting point was a lot different than our starting point.
Our supply chain issues are kind of in line with the issues that we had lost last quarter.
Two to three points worth of growth left on the table due to supply chain issues, we didn't have that.
Major supply chain issues the way some of our peers did.
Bind to 12 months ago, because our eggs are spread across more baskets relative relative to our peers who have so.
So much of their supply chain and concentrated in one or two markets.
The change on change is not as significant for us as it has been for some of the others.
Yeah.
Got it okay. Thank you so much.
Thank you. Our next question comes from Dana Telsey Telsey Chris.
Please go ahead your line is open Dana Telsey.
As you think of the current macro environment and what's happening in the channels. How are you thinking of the level of promotion, whether it's by your own DTC e-commerce or store, what's happening on the wholesale side by region also and with the offsets on the gross margin side are there offsets.
In terms of the magnitude whether it happens to be freight or whether it happens to be anything else that we should note. How do you see the gross margin cadence evolving. Thank you.
Yeah, So hi, Dan.
Thank you for the question.
Our gross margin.
So when we started the second half of the year I think we publicly said we've built in probably 100 basis points contraction in gross margin in the second half.
In Q3, similarly in Q4.
It was really saying okay.
What percentage of our products.
We will be not selling at full price.
As the quarter progressed promotion there was increased we had some seasonal product that we wanted to lock down.
In the western part of the World coated tree.
The gross margin impact was about an additional 30 basis points and you look at quarter four it's about.
Turkey more because we think the environment is a little bit more promotional.
And regarding some inventory than we'd like to.
A markdown and sales so that's how we're thinking about it.
At the end of the day, our gross margins for the year will be slightly lower than last year, but still significantly higher maybe close to 400 basis points relative to <unk> 19.
<unk>.
B.
The payments that we continue to grow our gross margins.
Longer term.
That help you.
Yes, yes.
And as you see your own channels with stores and online how do you see the cadence there.
So.
I'll take that one.
So let's put it this way Dana we're not going to be leading an aggressive promotional environment, but we're not going to be left uncompetitive.
Just as we did in the third quarter. When we saw the promotional environment was heating up we took steps to be competitive.
We're not in a place where we've got to go out and.
Absolutely liquidate a lot of inventory, so we're not going to read it.
But we're not going to be less uncompetitive, but that may mean.
That may not mean that we're going to go all the way to 70% off if everybody else is down to 70% off.
May mean that we go for few weeks, but.
We will be competitive, but we're also at the end of the day, we are about the strength of our brand and an overly promotional.
The Hot Hot promotion brand is not good for brand integrity and so.
We're going to do our best to protect gross margin without being uncompetitive in the marketplace.
Just on market marketing what are your plans for marketing and marketing expense as we go through this time period.
Yes.
I, probably should have hit this earlier, but what.
Whether you're thinking about Q4 thinking about next year, we're going to continue to invest in the long term and we're going to continue to make investments in.
DTC and e-commerce, because those are strategic for us and we're going to continue to invest in building our brands matter how tough it gets out there those are the things that will.
Yes.
Thank you.
Okay.
And at.
At this time I would like to turn the call back over to chip.
I didn't hear that for closing remarks.
Okay, let's see.
Yes, Sir.
Okay.
Thanks to everyone for dialing in.
And we will talk to you again not until.
End of January so I wish you all happy holidays, a good fall and happy holidays, and we'll see.
Speak with you at the end of our fiscal year in Q4.
In late January .
Good holiday and thanks for dialing in today everyone.
This concludes today's conference call. Thank you for participating you may now disconnect.
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