Q4 2022 Levi Strauss & Co Earnings Call

January 25, 2023

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Okay.

Good day, ladies and gentlemen, and welcome to the Levis Strauss and company fourth quarter and fiscal year end earnings call for the period ending November 27 2022.

All parties will be in a listen only mode until the question and answer session at which time instructions will follow.

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 Levis Strauss Dot com I would now like to turn the call over to Ida Orphan Vice President of Investor Relations at Levi Strauss and company.

Thank you for joining us on the call today to discuss the results for our fourth fiscal quarter of 2022.

Joining me on today's call are chip Bergh, President and CEO of Levi Strauss and Harmeet, Zhang our chief financial and growth Officer, We have posted complete Q4 and full year financial results in our earnings release on the IR section of our web site investors that Levis Strauss Dot com the link to the webcast of today's conference call can also be found on our site.

We'd also like to remind everyone that we will be making forward looking statements on this call, which involve risks and uncertainties actual results could materially differ from those contemplated by our forward looking statements. Please review our filings with the SEC in particular, the risk factors section of the annual report on Form 10-K that we filed today for the 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 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 the call will be available on our 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 quest.

And now I'd like to turn over the call to chip.

Good afternoon, and thanks for joining us today.

Q4 concluded a strong fiscal 2022 performance with the quarter delivering on the high end of our expectations for both revenue and EPS.

This was driven by strong growth internationally and in our direct to consumer business, which saw a record quarter performances across U S DTC channels.

Positive comp sales across the Americas, Europe and Asia.

On a constant currency basis Q4, net revenues were flat with the prior year's record Q4 revenue and we grew the business, 6% above 2019 to pre pandemic levels.

For the full year, we delivered another year of strong growth, we grew reported revenues plus 7% plus.

Plus 12% in constant currency.

We delivered strong market share growth globally.

Despite facing a more challenging consumer environment in the second half as well as currency headwinds, we grew adjusted EPS year over year by managing the factors within our control.

We continue to diversify our business nearly 40% of our revenues came from outside of denim bottoms.

We drove outsized growth on women's tops DTC and international.

We returned $350 million to shareholders and 84% increase over prior year.

We chartered a course for sustainable profitable long term growth by introducing our new strategic plan and long term financial targets.

Let me go into more detail note that for the balance of our remarks, Harmeet and I will reference revenue growth in constant currency.

Starting with our brands focusing first on levis.

In 2022, the Levi's brand grew 11% and grew global market share more than any other denim brand for the second year in a row led by share gains in both mens and womens.

Levis is bigger than the next three brands combined reflecting market share gains for five out of the last six years.

According to Euromonitor in 2022, the denim category grew low single digits globally.

Pacing total apparel for the full year and is projected to grow at a similar rate in 2023 and at a mid single digit CAGR over the next several years.

With exciting initiatives planned through the year, including rolling out a robust and innovative product pipeline and a powerful brand marketing campaign, we remain well positioned to continue to grow market share and drive category growth in the year ahead.

Levi's brand equity remains very strong as evidenced by the 6% AUR increase and healthy 60% gross margin, which was up another 20 basis points in 2020 to.

Another barometer for the health of the brand is the success of our iconic 501, which grew nearly 30% for the year.

Looser fits remain on trend and grew double digits this year, representing more than half of our total bottoms assortment for the year.

And in 2023, we're celebrating the 150 at the anniversary of the iconic 501 gene.

This will be anchored in a powerful multi media brand campaign that launches next week during the Grammys and will show up around the globe across GB cinema print and digital.

We also have an exciting lineup of exclusive collaboration drops and continued product freshness and innovation hitting stores across the world throughout the year.

Turning to our direct to consumer business, we made excellent progress in growing our global DTC business, which was up 18% for the year driven by a 19% increase in our owned and operated stores in a high single digit increase in ecommerce.

Bind DTC delivered solid mid single digit growth in Q4, plus 10% growth, excluding Russia and comprised 39% of total company net revenues a fourth quarter record.

Both Q4 and throughout the year, we generated solid comp store sales growth, while expanding our footprint with our global rollout of 136 next Gen stores.

In the U S. Our DTC business broker Q4 record with mainline and outlet stores and e-commerce, each delivering record revenue.

We continue to see strong momentum in traffic across our fleet as well as strength in <unk>, which increased high single digits versus last year.

We opened 11 mainline stores in the U S. In Q4 alone, bringing total U S mainline doors to 66.

Early results are very encouraging with most of them exceeding revenue and profitability expectations.

There are openings.

And we have a great pipeline of mainline doors coming in 2023, including Nashville, Honolulu and Miami.

During the year, we grew our base of loyalty consumers to nearly $23 million, representing an almost 50% increase over last year and our App is now up in 18 countries across the U S Europe and India.

As we look to the year ahead, we're investing in capabilities and talent to drive sustainable profitable long term growth in our digital business last week, we announced hiring our new Chief Digital officer.

Jason gallons joins us in early February from Nordstrom, where he was most recently as VP of digital Commerce Jason.

Jason will focus on bringing together, our engineering data AI and digital product management to spearhead our digital efforts for both E Commerce and our digital go to market.

We also made progress in wholesale.

For the year, our total global wholesale business grew 9% and is more elevated and digitally oriented in the quarter against a 20% comp a year ago global wholesale was down 4%.

Largely because we were unable to fulfill approximately $40 million in orders due to capacity challenges at our U S. D. CS.

Still within wholesale we saw bright spots, particularly our Levi's women's business at our top 10 accounts, which grew mid single digits compared to the prior year.

As we move into 2023, we are encouraged by healthier inventories in the channel and the work we have done to improve our own inventory dynamics and actions to improve capacity at our U S. D. CS.

Finally, we also achieved substantial progress on our diversification strategy.

40% of our 2022 revenue was beyond denim bottoms, including Gino's active leggings tops dresses footwear and accessories.

These businesses grew 10% in 2022, and we expected sales penetration to continue to grow meaningfully over the coming years.

Expanding our women's and tops businesses is a key priority in our strategic plan and in 2022, we drove double digit growth in each category.

Total company women's revenue grew 13%, surpassing $2 billion and our tops business grew 12% exceeding $1 2 billion for the year.

We're expanding our offerings in both women's and tops and believe these areas still represent meaningful upside.

International diversification is also a key strength in these times of macro uncertainty in international now represents 53% of our total business.

In 2020 to our international business grew 13% 15.

15%, excluding Russia.

Even as we navigated a more challenging consumer environment in Europe , and Lockdowns in China.

This was driven by broad based growth in Latin America, Asia, and Europe , excluding Russia.

The dockers and beyond Yoga businesses are also becoming growth drivers with long runways that expand our addressable market opportunity for.

For the year Dockers grew 27% driven by broad based double digit growth across all geographies and nearly doubled EBIT.

Revenue continues to shift to a healthier mix.

With nearly half of sales now coming from outside the U S and about a third in DTC.

2022 was the year of integration for beyond Yoga, and we're pleased with its $100 million revenue contribution in.

In Q4.

We opened beyond yoga is first to brick and mortar stores, giving the branded opportunity to showcase its full category offering.

Approximately 50% of their sales are from customers new to the brand and we believe brick and mortar will be a powerful catalyst for the brand.

As we look forward to 2023, we have a lot to be excited about.

We are the undisputed leader in the denim category and are driving its growth.

Our brands are stronger than ever resonating in the marketplace and driving strong AUR.

We are exciting initiatives planned to continue to capture market share.

And on top of our continued DTC momentum, we are driving even more excitement with the 150 <unk> anniversary of our most iconic product for 501.

Finally, I am excited about the future leadership of this company Michelle.

Michelle Gass joined Us as President earlier, this month and she has hit the ground running.

Michelle brings deep omni retail experience and strong brand building skills as president Michelle is responsible for the Levi's brand and a global commercial organization, which includes all go to market wholesale franchise retail and E Commerce shift.

She effectively has about 85% of the company's P&L.

I know, it's only been three weeks she is already making a difference.

C&I have a well mapped out transition plan and I'm confident she will become our next CEO within the next 18 months.

Im also pleased to share that <unk> role is expanding the chief financial and growth officer.

You all know that Harmeet and I have had a great working relationship and I cannot understate. The role that he has played as my partner. These last 10 years and turning the company around taking it public instilling financial discipline and driving accelerated profitable growth.

In this expanded role Hermite will assume additional responsibilities for strategy and retail real estate.

Certain with the expansion of his role he will continue to be a key partner for me and Michelle and steering the company to our long term goals, congratulations harmeet and over to you.

Thanks Chip.

Both humbled and excited to be taking on the new role given the tremendous opportunity for our portfolio of brands.

We remain committed to this company and delivering on our long term plan.

And working with you and Michelle to deliver for our stakeholders.

Before I walk you through our Q4 results and the outlook for 'twenty three let me start with three key points.

First we delivered a solid quarter with net revenues in line with Brian .

Highlighted by continued strength in our direct to consumer business.

This quarters performance reflects the benefits of the diversification of our business as a success internationally in Asia and Latin America, both sustained incredible momentum in Q4, demonstrating the power of the Levi's brand around.

On the world and helping offset declines in U S wholesale and Europe , largely driven by Russia.

Second the steps, we are taking to emerge stronger from the pandemic has substantially improve the structural economics of our business, enabling us to deliver gross margin for the year 380 basis points ahead of 2019, and adjusted EBIT margin excluding foreign it's.

Change of 12%.

We have positive momentum entering 'twenty three.

Our global direct to consumer business is delivering strong growth accelerating through the holidays and positioning us to drive further revenue acceleration in the churn.

Europe exited December with positive constant currency growth, which was broad based across major markets.

And we also expect to benefit from several tailwind, especially in the second half, including improved commodity costs foreign exchange and the continued benefit of cost initiatives, we have implemented.

I will now walk you through the progress we achieved in Q4.

Then what that positive momentum means for 'twenty three.

Net revenue was in line with the prior year driven by strong growth in our DTC business.

International business was up 3% offset by a mid single digit decline in the U S.

It was primarily due to supply chain.

<unk> is impacting U S wholesale.

Our DTC channel net revenue grew by 6% driven by positive comp sales growth across all segments, including in the U S and Europe .

Traffic AUR.

And <unk> all grew on a global basis.

Despite consumers returning to us goes in large numbers.

E Commerce business grew 5%.

Adjusted gross margin in reported dollars was 55, 8% up 150 basis points versus 2019, but contracting 230 basis points year over year.

Lastly, due to an approximate 100 basis points unfavorable currency exchange rate impact.

Price increases and a favorable channel mix, partially offset the impact of higher product costs and lower full price sales.

The decline in gross margin was greater than guidance, owing primarily to the impact of foreign currency and lower full price sales than we anticipated.

Moving to SG&A adjusted SG&A expenses in the quarter was $745 million down 4% from last year as we remain laser focused on controlling costs, while continuing to invest selectively for the long term.

Adjusted EBIT margin was 9%.

<unk> 300 basis points on a reported basis and 210 basis points on a constant currency basis.

Adjusted diluted EPS was <unk> 34, it's been at the high end of our Q4 outlook, despite a 4% negative impact from foreign exchange.

I'll now take you through the highlights by segment.

In the Americas.

Revenues declined 5% as strong growth in DTC and double digit growth in wholesale in Canada, and Latin America was offset by a decline in U S wholesale.

Did you see growth of 8% was driven by positive store comps in the U S, Canada, and Latin America and E Commerce as well as the addition of new stores.

Canada was up mid single digits, and Latin America grew 15% driven in part by strong growth in our second largest market Mexico.

Europe outperformed our expectations down modestly at 4%, excluding last year on top of 17% growth in the prior year.

Overall, Europe Q4 revenues saw a sequential improvement.

Q3, primarily driven by the CDC and the strength in our core bottoms business.

DTC was up 3%, excluding Russia, and we experienced momentum in key markets like the UK, Germany, and Spain entering Q1 'twenty three.

In Asia net revenues were up 17%, reflecting sustained broad based growth across most markets led by India and Indonesia.

Did you see the revenue growth of 17% was driven by strong comp performance in company operated stores and wholesale also grew 16%.

Our successful pricing actions also delivered double digit AUR growth in the quarter.

Overall operating margin also expanded over 600 basis points to 11, 4%.

Turning to balance sheet and cash flows as we discussed throughout last year. We have strategically built inventory ahead of probably U S. ERP implementation in the first half.

Reported inventories increased 58% on a dollar basis over prior year in line with our plan.

If you exclude the ERP build and goods in transit they increase as approximately 35%.

The bulk of the increase was in core product, which can be sold across multiple future season and represents more than two thirds of total inventories.

We are confident that Q4 inventory growth will be the high point and have managed by us down for the first half of 'twenty three by 25%.

With the ERP preparation underway, we expect to bring inventory back to normal levels by the end of Q2, which will provide a working capital tailwind in the second half.

Cash and liquidity remains strong with the end of quarter, our net debt of approximately 500 million and overall liquidity of $1 5 billion.

Our leverage ratio remained at one one times.

Owing to investments and inventory adjusted free cash flow was approximately negative 53 million in the fourth quarter.

We remain committed to returning capital to shareholders and in the fourth quarter <unk> done approximately $82 million, bringing on 22 total return to $350 million in.

In Q1, the company declared a dividend of 12 cents per share in line with last quarter and we currently have approximately 700 million remaining on the share repurchase program, which has no expiration date.

Before turning to our outlook for the IV.

I will touch on our holiday performance.

<unk> momentum continued through the holiday period of November and December up almost 10% versus prior year.

Growth accelerated sequentially from November into December .

Flex the continuing strength of the Levi's brand generating strong results across the globe led by continued strength in brick and mortar including in the U S.

And despite operating in a largely promotional marketplace. During the November December period gross margin remained robust.

200 basis points ahead of 2019.

Now, let's turn to fiscal 'twenty three outlook.

As we look forward, we are confident in our strategies and continue to expect profitable growth in 2003.

That said, we acknowledge there's still.

A lot of macro uncertainty.

With caution and are.

Outlook.

We do however expect additional wins in the second half as we lap higher product costs and the stronger dollar.

For fiscal 'twenty, three we expect net revenues between six three and $6 4 billion, reflecting reported revenue growth of one 5% to 3% year over year.

Inclusive of 200 basis points of headwind split evenly from foreign exchange and the suspension of our business operations in Russia.

In reported dollars, we expect low single digit growth in the Americas and Europe , excluding Russia.

Mid single digit growth in Asia.

This includes a negative 100 basis points of FX impact in Europe , and 500 basis points in Asia.

For gross margin, we anticipate expansion of 20 to 30 basis points driven by the favorable accelerated shift of our business towards DTC digital women's and international.

Our SG&A.

<unk> is expected to deleverage 40 to 50 basis points due to continued strategic investments to set us up for future growth, yes remaining disciplined on expenses.

Overall, we expect adjusted EBIT margin to be down 10 to 30 basis points versus 'twenty two.

We expect interest expense to normalize to approximately 15 million of quarter due to not benefiting from deferred comp.

As we did in 'twenty, two and our full year tax rate in the mid to high teens.

Adjusted diluted EPS is expected to be in the range of a dollar.

$2 40.

We continue to invest behind high ROI growth initiatives.

Uses of capital in 'twenty three include full year capex of around $218 million.

We expect cash flow to be positive as inventory normalizes in HQ.

In terms of DTC brick and mortar we anticipate opening more than 80 net new company operated stores globally.

In the U S. We plan to open around 15 full priced levis nextgen doors in 'twenty three.

Taking a mainline door count to approximately 80 by the end of the as we progress towards our goal of opening 100 full price does in the U S.

I will now share some color on each one was at <unk> and then <unk>.

<unk> quarterly detail given the ERP implementation, taking place in the U S. In the second quarter following successful implementation in Canada and Mexico.

Our guidance assumes that our business will strengthen the needs to work through the H one.

Given more difficult compares in each one as well as continued headwinds from foreign exchange and higher product costs.

Therefore, we expect reported revenues in H, one to be down low to mid single digits compared to prior year.

We expect these headwinds to moderate in each two and reported revenues to increase high single digits.

Given the 150 at the Nols just kicking off in late Q1, we expect advertising as a percentage of revenues to be higher in H, one than a year ago by 40 basis points with no change on a full year basis.

As we advance wholesale orders prior to the ERP implementation.

Revenue increased low single digits for Q1.

Q1 gross margin is expected to be down at least 200 basis points.

Conversely for Q2, we expect revenues to be down high single digits.

The shift in sales to Q1.

Due to gross margin is expected to be slightly up due to a more favorable mix with higher DTC penetration.

Before I turn it over for Q&A I want to leave you with three key points.

Our market share expansion, the diversity of our business and December exit rates bolster our confidence in our ability to continue to deliver profitable growth in 2023.

The investments we have made in DTC are driving strong and sustainable performance.

We will continue to strategically invest in growing our store base, ensuring we drive comp sales growth.

<unk> accelerate e-commerce.

Finally, our commitment to our long term growth goals and strategy is unwavering.

All of the 23 will be impacted by the softer macro environment.

Underlying momentum in our business and strength of our brands gives us confidence.

Ability to deliver on our growth algorithm.

<unk> 23.

With that I'll now go ahead and open the call for Q&A.

Thank you. The floor is now opened for questions. If you have a question. Please press Star then the number is one one on your telephone keypad.

Due to time constraint. So the company requests that you ask only one question.

If you have an additional question please queue up again.

If at any point. Your question has been answered you may remove yourself from the queue by pressing star one one.

Okay.

Again, Thats star one on one to ask a question.

Our first question comes from the line of Laurent vascular SKU.

BNP Paribas Amit.

Congrats on the additional responsibilities.

It's very helpful guidance.

Oh.

Well deserved question here at Hanmi.

Is on gross margins, there's a lot of debate out there if you think about it.

<unk> your gross margins relative to 2019.

400 basis points, Amit I think during the pandemic in 2021, you talked about three quarters of that is more structural and then maybe 100 basis points is just the lack of promos.

Did see the promos kicking in this fourth quarter, how do we is that still the framework that we should think about going forward and then maybe just clicking down on 2023 guidance.

Gross margin of 20% to 30 bps.

Can you kind of maybe walk through like how much is ocean freight recapture.

Sure.

Commodities offset by.

Increased promotions.

Yes.

Good question Laurent so.

So.

To your point when we started 22.

We had anticipated gross margin accretion three foot structure.

Potentially.

Giving way to higher promotions I think as we ended the.

The variables.

Broadly similar but slightly different so I think what probably happened.

The accretion.

As long as lease structure.

We had further promotion I would say it was.

Second I've got a little bit more promotional.

So the 100, probably.

Thinking allowed here is probably a 150, we also have foreign exchange headwinds in the second half which was different toward we anticipated now as you know we do.

But we don't hedge every currency.

And so that was probably.

The third element that got introduced but given the diverse nature of our business.

I think we ended the year structurally from a gross margin perspective.

Better a lot stronger company, so you'd think about 23 and our gross margin guidance.

Gabe.

I would say primarily driven by structural improvements higher DTC is growing at a faster pace I think our DTC business.

In 'twenty three is going to grow.

At low double digit.

International maybe helping and where we are really focused on is growing women's which is accretive to gross margin growing beyond yoga, which has.

Accretive gross margin. So those are the things that are structurally.

Helping in terms of.

Yes.

Couple of other changes that I think happened.

Yes, we do get some tailwind from ocean freight and air freight.

As the year progresses, FX, probably helps us in the second half versus the first half the first half of ethics is going to be a bit of a headwind.

And.

Zooming, probably 50 basis points for the year higher dilution relative to 'twenty 'twenty. Two so we are being a little conservative largely viewed as probably the first half versus the second half. So that's how one is one is thinking through it.

Hi.

The real growth is really going to come from structural improvements in a very diversified business.

That's very helpful and if I could quick quickly sneak one more in.

Amit Chip I think you've talked about the mass channel.

It's a source of pressure just curious to know how it how it performed in the fourth quarter U S mass and how do we think about.

How do we think about that going forward into 2023.

Sure.

Yes, so our mass channel, which is really signature and denizen was down I think 19% in Q4 as we are planning. The next year. We are planning this down double digit. So if you think about our global wholesale being down.

4% half of that was probably the mass channel half of that was red tab and you could think of.

The fact that we.

We're not able to fulfill $35 $45 million.

Would say global wholesale would actually been a positive. So the brand is really doing well the other one point I would make.

No one is as we.

Get into January and exit December we're seeing sell through rates in U S. Wholesale actually turned positive which is I think a good sign.

Very helpful. Thank you very much.

Thank you.

Our next question comes from the line.

Bob <unk> of Guggenheim. Please go ahead, Bob Turbo.

Yes.

Congratulations on the expanded role for me as well.

And chip congratulations on bringing in Michelle Gus I think she is going to be great.

I guess, a couple of questions that I have sorry.

Sorry, sorry, yeah, a couple of questions I have.

On the as you look at the year in terms of the year forward just the revenue cadence that you expect I don't know if you could maybe give us a little more color.

On that and the confidence around that piece and then chip.

Chip the category growth that you assume for denim I don't know if we could talk about that and then I do have a denim question afterwards as well.

Okay. So let me get the.

The tough question, but I am glad you asked it Bob.

Which is the.

The first half second half.

Thinking about the <unk> folks as we're thinking about is tale of two halves, where the first half.

<unk> in the second half a tale of two channels direct to consumer strong wholesale kind of flattish and a tale of two was the.

The western World, probably growing low single digit and eastern World, which is Asia and Latin America growing.

Low double digit it is great to have the business that so diversified thinking about revenue and to your point because one would think okay. This is a bit of a hockey stick actually is not.

If you think about the cadence of the first half in the second half the normal cadence is 47% of our total revenue in the first half and 53 in the second half last year.

Really strong growth in the first half we were up 19%, 20% second I was flat to last year is more 50 50, and so as we think about 'twenty three.

47 in the first half 53 in the second half that's one way of looking at it the other way of looking at it is.

How does it relate to 1919 is what we call a good base. If you think of the first half.

Our guidance assumes that we grow first half to 19, 8% reported in the second half of our 10% so.

Pick up is about two or three points of growth and is driven by.

Couple of things, one FX headwind doesn't remain and second.

Acceleration of the macro improvement.

Slight improvement in macroeconomic conditions, but we're not necessarily it's not a hockey stick and we are not banking a lot. We haven't built in any upside from China with a smaller business and any major consumer demand swing.

It happens that's great.

Okay.

On the denim market trends, which you asked about Bob I'll stay real high level here, but globally Euro monitor data. This is euro monitor data.

Globally, the denim category grew low single digits in 2022.

That was actually ahead of total apparel, which was down low single digits.

And you know on.

On that basis.

Actually on a cat that's a calendar 'twenty two basis and for calendar 'twenty two the Levi's brand was up 11% so.

Did grow share last year again based on your own monitor data.

We grew more share than any other player in the category. We grew share on mens we grew share on womens.

It's also worth noting that we have grown share five over the last six years. So we consistently grow market share and is the biggest brand in the category you guys have heard me say this before we feel a certain obligation to grow the category and part of how we do that is to.

Grow share in the category so.

Specific to the U S because.

We shared some U S data from NPD on the last call. The U S does remain pretty soft, but it hasn't gotten any worse from the prior quarter.

We're seeing it it's largely a wholesale phenomenon harmeet has taken you through the numbers on our own direct to consumer business and our U S. DTC business was also very very strong.

For the quarter.

So we're in control of the brand.

We're growing we're building share.

The biggest challenge has been the wholesale dynamic here in the U S.

We look forward into <unk>.

Fiscal or calendar 'twenty three.

Outlook.

From Euro monitor is for a continuation of kind of low single digit category growth.

We're confident it's kind of in the range of.

We've got our revenue outlook.

Kind of in line with our full year guidance.

And as I said, if you go back even pre IPO for five six year period of time, the category was growing kind of low single digits, and we put up 6% compound growth rates during that period of time. So we've consistently outgrown the category and that by the way it was.

During a period of time when both dockers was a drag and we didn't have beyond yoga. So we're really confident that we're going to be able to put good numbers on the board even if the category continues to stay a little bit soft in our biggest market. The U S. There are pockets of growth in the category as well as <unk> said you know we're seeing good growth in Asia.

And then Latin America, so the benefit of having a really diversified business.

Whether that's geographically or from a product standpoint really matters and.

And Thats part of how we've been able to get through it so.

Hope that answers your question.

That does it and chip if I could just jump in with two more quick ones for you.

Skinny jeans over you are talking about the success of deleuze fits in arises going up or down just curious from the from the trends perspective.

Some questions so little fun fact, our top tier women's items, where the 311 and the 721 and they are both skinny jeans. So.

But news.

As Mark Twain, one sad news of my Doctor has been greatly exaggerated.

I've been known to say Skinny jeans will never die.

Having said that the Lucerne genes are still a thing they are definitely the trend half of our revenues on bottoms. This past quarter came from the looser badger fits but our top two womens bottoms items, where the 311 and the 721, so the skinny Jean is not going anywhere anytime.

Soon rises.

For a long time, we were March on the horizon, we have the rib cage you may remember about 18 months ago that was look back then rises are now coming down and.

We're not quite to hip hugger territory, yet, but the Midrise gene is kind of the hottest item right now and.

And I think we're going to continue to see the shift from high to mid and maybe even mid to lower rises as we go forward.

Thank you for that question.

Thank you.

Thank you our next question.

Comes from the line of Matthew Boss of Jpmorgan. Your question. Please Mary Thanks.

Great. Thanks, So maybe two things chip could you speak to pricing power for the brand into next year and also the overall health that you see for the brand and in Europe Today, and then maybe Harmeet could you just outlined the fundamental drivers as we think about over the course of the next year and more so in the back half of the.

Year, what level of visibility you have in the improvement in top line as we think about the back half.

So you want to go first Jeff. So let me just talk to the pricing power of the brand one of my favorite sayings is a brand has good brand strength. When you don't have to hold the prior meeting to take pricing.

Our price our we've taken pricing over the last 18 to 24 months or <unk> were up 6% for the year end.

And that was driven fundamentally by by pricing you see it in our gross margins. Our gross margins are up nearly 400 basis points from 2019.

Bill Levi's brand itself gross margins are over 60% and we grew gross margins by about 20 basis points and we were able to build share through all of that so the brand.

The brand equity as we measure it we measure it very detail every quarter and our top 10 markets around the world.

Our equity remains really really strong we're not seeing any slippage as a result of pricing and in fact in some markets.

One the equity for.

Worth the money I pay for it.

So the brand continues to deliver a really strong value.

In Europe , Europe revenues were down 4% in constant currency, if you exclude Russia was down 8% overall, but Russia was four points of that.

The good news is we did see substantial sequential improvement from Q3, driven primarily by DTC and strengthen our core bottoms business and even through the holidays.

December was positive for Europe . So.

We're.

It's still challenging there I don't want to mislead anybody but.

We're very very confident in the strength of the brand there.

The consumer will ultimately come back and.

We're seeing good broad based growth across.

Markets like the UK and Germany. So.

We have embedded a little bit of caution in our outlook relative to Europe , just reflecting that.

Challenging consumer environment, there, but it's it's not it's not because we're seeing any slippage in the strength of the brand or the equity of the brand and pricing seems to be holding up there.

And Matt to your question on the fundamental drivers.

We're going to very soon celebrate.

The 150 <unk> anniversary for you know.

What changes change everything in.

Denim, which is a 501.

And so.

We're spending money against it.

<unk> been growing it.

As the best Nick pace, So I think that's going to be fundamentally drives the category as well as levis business I think the other key drivers I talked about direct to consumer expected to grow double digit.

Women's and tops, we continue to accelerate growth.

I expect it to be low double digit women's growth high single digit and then you think of the other brands that for a long time.

Beyond yoga didn't exist and dockers was a drag I think expected to both grow at double digit from that perspective.

And as you know through the year.

Supply chain, we've had supply chain challenges and not been able to fulfill the demand we think that becomes a bit of a tailwind in the second half.

So that's overall the revenue growth.

Expectations geographically.

Asia, Latin America low double digit.

And.

In Europe , which as chip said is exiting positively.

In December growing low single digits and Thats why were thinking about it we haven't built in any dramatic change in China, It's too early and it's a small piece of our business.

And so that's how one is thinking through in terms of the P&L.

Sure.

<unk>.

Gordon headwind in H one.

But a tailwind and edge too because we're just locking in purchases from <unk> to <unk>.

Back to about 80, so that should help.

Great color best of luck.

Thank you.

Thank you. Our next question comes from the line of Jay So UBS. Your question. Please.

Hi, This is Jay I don't know if you can hear me, but if you can.

On SG&A and it looks like SG&A dollars are about down about $30 million year over year and the trend in terms of the growth rates improving Hamid can you just talk about the source of the SG&A savings and how you think about the opportunity to continue to stay laser focused on cost as we get into the first half and then the second half of the year. Thank you Jay.

As you've seen both during the pandemic and when things done.

In the second half.

<unk>.

Went after controllable cost big time.

And and our focus on controllable cost starts with discretionary expenses.

Slowed down hiring.

Have slowed down hiring 423 through the year.

Just being cautious.

Our hiring related matters, we talked about the chief Digital officer.

Michelle coming on board so in areas, where we think we can accelerate growth we are still.

Doing what is right, which is getting the right people, but generally all across.

The board.

Hiring has slowed down.

And Thats, what led to Q4, SG&A being down year over year the guidance reflects.

SG&A as a percentage going up but that is largely driven by the volume deleverage and we've been doing and went on a trip.

<unk> next year as against growth algorithm of 6% to 8%.

So we are keeping.

Fair.

Focus on discretionary costs and keeping it low.

From that perspective, I think where you are going to see a little bit of spend is really in the opening of stores. We're talking about 80, net doors and growing E. Commerce, and then first half second half I talked about spending a little bit more on advertising, but keeping the full year as a percentage constant.

Okay. Thank you and then maybe if I can ask one quick one on the EPS guidance for the year is there any buyback contemplated in that guidance.

Yes, there is.

Going to start slow, but there is buyback.

<unk>.

Contemplated as it spread through the year as against happening on day one.

We've got probably a center to from an EPS perspective, not a lot.

Okay. Thank you so much.

Thank you.

Our next question comes from the line of Omar Saad.

Evercore ISI your question please Omar.

Thanks, great job on the market share this quarter.

A couple of quick follow ups.

Maybe you could dive in a little bit deeper on inventory what gives you the confidence that youre going to get that down to a level, where you're comfortable by the second half in <unk>.

Also what is the ERP can you talk a little bit more of a what the ERP implementation enablers for you guys to do with your inventory.

So any peaks on.

55, or one product initiative that you can do a lot of marketing around that but are there some new product initiatives around the 501 that we can look forward to as well. Thanks.

I think I'll answer the first two questions inventory.

So inventory up 58%.

You exclude the buildup for the ERP and the early receipts, it's up 35.

The team that we did very quickly early on is we cut the buys for the first half and the down 25% and so I think that's it.

And then essentially passed.

We think gets us to normalize inventory levels by the end of end of Q2.

Other pieces our inventories.

Generally healthy.

A large chunk, especially the stuff you bill for the ERP.

Has.

It is largely <unk>.

Stuff that we can sell to multiple seasons.

The only of the fact I think.

That's important to note the buildup of the inventory for the ERP, which is largely oriented to U S wholesale customers we.

Had the orders for most of that so that.

Flows through and so those are the things that make us.

I believe that we can get inventory back to normal levels by the end of Q2 to your question about the ERP.

And as you know a lot of retailers are upgrading.

The ERP the old ERP.

<unk>.

SAP ERP was really.

Something.

That was built for wholesale.

Company the brands.

As the model has evolved into more of a DTC model the new ERP actually provides.

From an operational perspective, a lot of visibility in.

That is run.

One we are.

Implementing is on the cloud.

The big change on the ERP and what we're seeing in Canada, Mexico because.

Tell people, it's not a technical logical solution. It actually has to lead to some real change in the business is really access to data and data on a real time basis. So commercial people operations people get access to data and they can then leverage that data to actually drive.

Business I mean, I haven't modeled all of that and our algorithm, but those are the benefits. We are really seeing inventory management gets a lot better.

Handling direct to consumer gets a lot better.

I'll take the.

501, just real quickly.

We have a year long plan kind.

Kind of mapped out with.

With product marketing, it's very very holistic, we're going to bring product freshness and innovation, we're going to pay homage to a number of items right out of the archives. So just to give you a flavor of some of those we're going to do.

Several limited edition drops.

One of them includes kind of what the original 18 73 double Lex waste overall, which was the very first pair of Levi's blue jeans ever sold.

We're going to be doing kind of reincarnations of those that's going to that's going to be out there.

We're launching.

Men's five or $119 54 gene the womens 501, the original women's 501, which launched at $19 81.

Vintage fits in 100% cotton.

The 54 or 501 is really trend right for right now.

It's amazing.

The 81 women's Jean was the first women's 501, we've also got some innovative fiber ones that we're going to launch we've got a plan.

Land based firewall one that is.

Real sustainability ecologically minded approach to the 501, which is comprised of 97% plant based and bio based inputs.

Scott It's died in plant based indigo.

You all have probably picked up the news, but we've made an investment in Stony Creek colors.

And that's that's with also with 100% organic cotton made a cold mills, which is our oldest denim partners. So just a lot of good stuff there.

From a marketing standpoint lots of center of culture stop music events, we've got a deep partnership with rolling loud celebrities influencers advertising kicks off at the Grammys next weekend following weekend.

I'm really excited about excited about the ads.

Q4 2022 Levi Strauss & Co Earnings Call

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