Q1 2023 Levi Strauss & Co Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to Levi Strauss & Company's first-quarter earnings conference call for the period ending.
February 26 2023.
All participants 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.
At Levi Strauss Dot com.
I would now like to turn the call over to Idaho, working Vice President of Investor Relations at Levi Strauss <unk> company.
Thank you for joining us on the call today to discuss the results of our first fiscal quarter for 2023.
Joining me on today's call are Chip Bergh, President and CEO of Levi Strauss, and Harmit Singh, our Chief Financial and Growth Officer. We have posted complete Q1 financial results in our earnings release on the IR section of our website, investors.levisstrauss.com.
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 our Form 10-K and information included in our 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 non-GAAP measures are not intended to be a substitute for our GAAP results. Reconciliations of our non-GAAP measures to their most comparable GAAP measures are included in today's press release.
Finally, the call in its entirety is being.
Webcast on our IR website, and a replay of this call will be available on the website shortly.
Today's call is scheduled for one hour. So, please limit yourself to one question at a time to give others the opportunity to have their questions addressed.
Now, I'd like to turn the call over to Chip.
Good morning and welcome everyone to today's call.
Coming off a 26% constant currency growth in our year-ago period, we're off to a solid start to the year.
<unk> first quarter revenue, 9% in constant currency and 6% on a reported basis to $1 $7 billion, while driving strong progress on inventory and advancing the key initiatives of our strategic plan.
Our direct-to-consumer business growth accelerated to 16% in constant currency, with record DTC sales representing 42% of global revenues, which is three points ahead of last year.
We delivered strong growth globally; our international business grew by 11% in constant currency, accounting for 56% of our total revenues.
Even excluding the planned acceleration of wholesale shipments to support our U.S. ERP implementation, we achieved solid top-line results that exceeded our expectations for EPS.
Our performance this quarter clearly demonstrates that our strategies are working, driven by the strength of our brands, the growth of our direct-to-consumer business, and the benefits of our globally diversified business model.
We continue to make progress in our three strategic priorities, leading with our brands, prioritizing our direct-to-consumer business, and diversifying our portfolio.
Please note that, for the remainder of our remarks, pardon me, and I will reference year-over-year revenue growth in constant currency.
Starting with our first priority, leading with our brands.
Aligning with the Levi's brand, we increased our market share again this quarter, achieving share leadership in the U.S. among key 18 to 30-year-old target consumer groups. Also, we continued to grow our share in women's denim bottoms, closing the gap for the number one position.
In the quarter, the Levi's brand was up 9%, with our men's bottoms business delivering a record Q1 in women's bottoms, achieving its highest revenue of any quarter.
Men's bottoms grew by 9%, with growth across all geographic segments, and we continue to fuel momentum in women's bottoms, which grew by 18%.
We are planning a steady cadence of newness throughout the year, and we continue to lean into trends such as our newly launched women's XL balloon, and nobody's food, and the shift in widths from high to mid and wider leg openings, all of which drove solid growth in the quarter.
2023 is an important year for our company, marking our 170th anniversary and the 158th year of our iconic 501 - the blueprint for today's modern blue jeans. As we celebrate the heritage of our namesake brand, we're using this important milestone to cement the next generation of Levi's.
Fans, in February we launched our largest, coordinated global marketing campaign. "The Greatest Story Ever Worn" kicked off during the Grammy's, where Bad Bunny also appeared. Michelle wore a pair of vintage 501s, which has helped drive nearly 3 billion impressions with consumers worldwide.
After all these years, Lot Further Fiber One has only grown and continues to experience exponential growth, a solid proof point of the strength of the brand.
Q1 net revenues were up 45% on top of 30% growth last year, and revenues for 501 this year are expected to reach close to $800 million, which is nearly 70% higher than pre-pandemic on a reported basis.
As we move through the year, we're infusing energy and newness into our iconic 501 by introducing new launches for him and her, inspired by historical fits. We also have a robust lineup of collaborations planned, like our recent drop with the iconic streetwear brand, Stussy, which sold out in one hour.
And an exciting partnership with Bluejeans, the popular K-pop girl band, furthers our ambition to engage younger consumers.
Our global DTC business delivered a record quarter, up 16% compared to a year ago, driven by positive comp sales and traffic growth across brick-and-mortar mainline and outlet stores in all geographic segments, as well as e-commerce. Our US DTC business also achieved another record quarter.
Of revenue, with especially strong performance in our US flagships and larger tourist destinations.
We continued our store expansion in Q1, opening 25 Levi's doors globally, including five mainline doors here in the US.
The investments we're making to elevate our consumers' digital experience and strengthen their digital connection to our brands are paying off.
Even with consumers returning to our stores in large numbers, our e-commerce business grew 14%.
Driven by broad-based global growth and across all brands, including Rebar.com, which was up by double digits.
We continue to expand the breadth of our offerings online while improving the user experience.
Our loyalty membership was also up almost 40% in Q1, with nearly 25 million members, and this continues to translate into a higher level of spend among loyalty members.
Our direct relationships with consumers and continued strong performance in our international wholesale business helped to mitigate the impact of softer US wholesale revenue.
Global wholesale grew by 4%, driven primarily by Asia, Canada, and the US. We accelerated approximately $100 million of revenue from Q2 to Q1, primarily due to our Q2 ERP implementation.
As a result, our U S wholesale business grew low single digits on top of last year's strong 25% growth.
Additionally, while our core consumer has generally remained resilient, we continue to experience demand softness from value-oriented consumers, most notably impacting our Signature and Denizen brands.
As for our diversification strategy, we continued the strong momentum we have achieved in each of our major growth opportunities, with international women's tops and our other brands, Dockers and Beyond Yoga, each contributing positively to the first quarter growth internationally.
Revenues were up 11% or 14%, excluding Russia. Europe saw 6% growth, excluding Russia, with most markets growing, including our largest markets of France, the UK, and Germany returning to growth.
Asia continued its strong momentum, up 22% as we experienced growth across all markets, except for China.
In China, after the zero-carbon policy was lifted, we have seen a bounce-back in traffic, with our latest results trending back to pre-COVID-19 levels.
Total company women's revenue grew 12%, led by strong double-digit growth in both the Americas and Asia.
Our tops business grew 4% following 16% growth last year with strong performance in our DTC channel up 12% for both women and men.
And our other brands performed well in the quarter. Dockers continued to build momentum with net revenues up 29%, driven by broad-based double-digit growth across geographies and channels, with DTC especially strong.
E-commerce remains robust, with over 30% growth in part supported by increased repeat customers and the brand's loyalty program, which is now driving over 30% of sales in this channel across the US and Europe.
And Beyond Yogurt continues to make solid progress with revenues up 11%, driven by DTC AUR in volume and continued success with the brand's expanded line of dresses. Our first two stores are off to a good start, with two more planned to open in Q2, along with several further openings throughout the remainder of the year.
Year.
Finally, Michelle Gass has now been with the company for 100 days as Company President, responsible for the Levi's brand and our global commercial and digital operations.
As I expected, she and I are working together really well, with both of us determined to make this a very successful transition.
She has not surprisingly landed great inside the organization, establishing her leadership very clearly on our business, our deep retail and E. Commerce experience is obvious to the organization and she has already identified both execution and organizational opportunities, which will help us access.
We're experiencing profitable growth in our DTC women's and tops businesses. I was excited and confident when we hired Michelle as my eventual successor, and I'm even more optimistic about this company's future today than I was before. With that, I will now turn the call over to Hanmi.
Thanks Chip.
We achieved solid results in Q1 with sales up 9%, excluding the benefit from accelerated US wholesale chip primarily related to the ERP transition; business grew in the low single digits.
Focus on our strategic initiatives and the structural shift in our business.
Fueled our results with our international business and direct-to-consumer channel driving almost 70% of the growth in the quarter.
We made significant progress, reducing our inventory, with total inventory dollars and units down significantly.
We have achieved this in part by taking deliberate actions to clear inventory in the US.
Reducing receipts in H, one putting us in a stronger position.
Move to the balance of the year.
We remain committed to controlling costs with a focus on discretionary expenses, while continuing to invest for the long term, including opening 18 net new stores.
Our ERP implementation in the US.
Following two successful implementations in Canada and Mexico.
And despite the beat we delivered this quarter, we are maintaining our annual revenue and EPS guidance range, reflecting a cautious outlook on the macro environment, even as we remain excited about the momentum in our direct-to-consumer and international businesses.
And the progress we're making against our strategy.
I will now provide more color on our Q1 performance and 2023 outlook."
Net revenue increased by 9% driven by continued global momentum in our direct-to-consumer business.
International revenues were up 11% with results greater than expected across most markets.
While the US was up 6%.
We were up mid single digits, driven by broad based growth across geographies genders categories and brands.
Direct to consumer channel sequentially accelerated with net revenues up 16% driven by broad based.
Is it comp sales growth on top of extremely strong first quarter comp sales last year, driven by higher traffic and higher volumes across geographies, including in the US and Europe.
Adjusted reported gross margin was 55.8%.
Just 60 basis points below last year's record of 59.4%, but 120 basis points ahead of 2019's pre-pandemic levels.
Deliberate actions that we took to reduce inventories in the US, which I mentioned a moment ago, coupled with a more promotional environment, resulted in greater than expected pressure on gross margin in the chart.
The inventory level sets us up in a stronger position as we move through the year.
Gross margin benefited from price increases, lower freight expenses, and favorable channel mix. Despite a negative 40 basis point impact from accelerated wholesale shipment quarter.
However, those benefits were offset by several logical transitory factors, including a 200 basis point impact from higher product costs, reflecting record cotton prices, higher ocean freight, and demurrage charges, as well as nearly 300 basis points.
The impact from lower full price sales.
As we move through the the head wins impacting gross margin should begin to recede, including from product costs, given lower cotton pricing great.
Great and demurrage.
Lapping lower, full price selling.
And unfavorable FX from <unk> two last year.
And the key contributors to structurally higher margins that we have spoken to you about, such as favorable channel and geographic and women's mix, will continue to benefit the margin.
Adjusted SG&A expenses in the quarter were $757 million, up 7% from last year, driven primarily by four-wall investment in support of the higher DTC sales.
And <unk> investment.
501 marketing campaign progress to expand its skewed to the first half of the year.
While adjusted EBIT margin came in line with our expectation at 11%, down from $14 nine last year. The decrease was driven almost entirely by the decline in our gross margin rate.
Adjusted diluted EPS was <unk> 34.
With a penny negative impact from foreign exchange.
I will now take you through our key highlights by segment.
In the Americas, net revenues grew 7%, driven by the strength in DTC.
The general was up by low double digits in the US and achieved.
Second quarter of record revenue.
Overall, Canada was up double digits, and Latin America grew high single digits, driven by increases across nearly all markets in the region.
Europe returned to growth, with net revenues up 6%, excluding Russia, on top of 21% growth in the prior year.
Driven by our DTC business.
Geographically, growth was seen across most countries; our largest markets, France, the UK, and Germany were collectively up low single digits, while Spain and Italy were up.
Double digits.
Strong demand for the Levi's brand in Asia continued, with revenues accelerating to 22% growth driven by all channels and markets outside China.
Led by India.
Asia ex China was up 28%.
As Chip mentioned, we are seeing trends improve in China, and now expect China proper.
Profitable this year.
Asia operating margin also expanded by 160 basis points to 18.5% due to higher revenues and lower SG&A.
And operating margin dollars were an all time record.
Now looking at our balance sheet and cash flows.
As discussed over the past year.
Execute the ERP transition and as a result of our actions to reduce receipts in H1.
Rapidly reducing inventory levels.
Inventory was up 33% on a dollar basis.
25% sequential improvement from last quarter of up 58%.
Core product represents more than two thirds of IPO to inventory we can.
Continue to expect sequential improvement quarter over quarter, which caused it to be being substantially lower than Q1.
And expect leverage to be in line with sales growth by the end of the.
Adjusted free cash flow was negative $272 million in the first quarter, driven by the timing of capital and the implementation of our ERP. As a result, we used our revolver to support our cash position.
Sequentially improve inventory throughout the year; we expect free cash flow to turn positive, enabling us to pay back ABL draw.
And of course, net debt was approximately $834 million, and overall liquidity was $1.2 billion.
Average ratio remained strong although it did increase to one four times compared to $1. One time at the end of Q1 'twenty two due to a negative free cash flow.
In the quarter, we returned approximately $56 million in capital to shareholders, including dividends of $48 million, up nearly 20% from the first quarter of the prior year.
223, the company declared a dividend of 12 cents per share, in line with last quarter.
Moving onto our outlook, even though we exceeded expectations in Q1, given it is early in the and macro uncertainty, we are maintaining a cautious stand and reaffirming our fiscal 2023 revenue.
And EPS outlook.
We continue to expect net revenue between $6.3 billion and $6.4 billion, reflecting reported growth of 1.5% to 3%.
An EPS in the range of $1.30 to $1.40.
While we are maintaining our guidance overall, the way in which we get there has changed from previous expectations.
We expect the strong momentum in our global DTC and into management businesses to offset.
Wholesale trends in the US and Europe as retailers continue to be cautious with their open-to-buy.
As a result for the year, we expect nearly 60% of Levis brand revenue coming from international and DTC as a mix of our total business in the mid 40% range.
Our DTC channel and international businesses, both fast-growing with tremendous opportunity given our under-penetration in these categories and, importantly, high gross margin businesses.
In reported dollars, we continue to expect low single-digit growth in the Americas for the full year, as strong growth in our U.S. DTC business and Latin America will be tempered by U.S. wholesale.
We are pleased to see Europe returning to growth in Q1, driven by the strength in DTC, with trends coming in better than expected.
The outlook has improved but it can still be within the previously guided range of low single digits.
Based on the stronger trends we are seeing in Asia, we now expect low double-digit growth, an improvement from the mid-single-digit growth in our previous guidance.
As I mentioned last quarter, we continue to expect 23 to be a tale of two halves, with the first half weaker and the second half considerably stronger, given a number of factors, including the year we are lapping promotional levels.
Cotton prices impacting COGS, NIH run, and supply chain disruptions progressively getting better.
I will now provide color on Q2 and the full year.
For the second quarter, the over-delivery reported in Q1 will temper growth in Q2.
Not have an impact in the first half or full year.
In Q2, we now expect revenues down high single digits to low double digits given that we are in our ERP implementation and associated downtime.
The ability to ship products in the US in excess of what we have contemplated in our guide is limited.
Gross margin is expected to meaningfully improve versus Q1 as a result of a higher contribution from DTC.
It will be down slightly to last year's.
And we continue to expect SG&A to be up mid single digits is that gift.
<unk> two a year ago.
In respect to the full year, given the higher levels of promotion than we previously anticipated, we now expect the full-year gross margin to be down approximately 50 basis points versus the prior 57.5%.
We remain confident that second half gross margin will sequentially improve as headwinds moderate.
I mean, I expect the full year tax rate to be low to mid teens versus our prior expectations of mid to high teens.
Brian to Q&A: I'd like to make three key points.
While we expect to face continuing challenges throughout the year, the strength of our brand gives us confidence in sustaining our top-line momentum. Our Q1 performance serves as proof that our strategy is working.
Europe returned to growth, as well as our strengthening international performance and broad-based momentum in our direct-to-consumer business, all fueling.
Cable growth.
Fuel gross margin will progressively improve as we move through the year and headwinds abate.
We expect to end the year with a gross margin above 57%, on our way to our long-term goal of 60%.
And third, we will continue to focus on controlling the controllable by reducing discretionary spending while continuing to invest in growing DTC as we open new doors, grow comp sales, and accelerate e-commerce. With that, I'll now go ahead and open the call for Q&A.
Thank you the floor is now open for questions. If you have a question. Please press Star then the number is one one on your telephone keypad.
Due to time constraints, the company requests that you ask only one question. If you have an additional question, please queue up again.
If at any point your question has been answered, you may remove yourself from the queue by pressing star one one again.
Thank you. Our first question.
Comes from the line of Bob Durable Guggenheim.
Your question please.
Good morning.
Good morning, Bob. Hi, Bob.
Hey, guys, good morning.
Yes.
If I could just focus a little on inventories and gross margins.
To start off the call.
On the inventory side, can you just talk about where you ended up in?
<unk> 33 versus your plan, where do you think inventory levels are specifically in the US?
Wholesale partner levels and then on the gross margin side."
Together with the inventory, can you just talk about the expectations for our Q2 gross margins versus your assumptions regarding promotional activity, specifically in the U.S.? Thank you.
Thank you.
Thanks, Bob.
You asked the question that we thought you would ask us, so let's start with it.
We've made meaningful progress on inventory, as I mentioned in my prepared remarks: it's down meaningfully both in dollar and unit.
It is sequentially improving, if you recall, when we reported Q4, we said that was the peak and it gets better, which is why it is happening.
We do believe that.
Sequential improvement continues into Q2.
And as you, as I've mentioned, inventories largely clean, we did.
Get rid of inventory to the extent we could, that did hurt margins. I'll come to margins later.
Yes, but I think the inventory improvement is largely driven by the fact that we proactively cut age-one buys.
And we were able to clear inventory to question about <unk>.
Is this largely driven by the U.S.? Yes, unequaled, but luckily it is U.S., U.S. For example, inventory levels at the end of Q4 up 90% year-over-year in Q1 is down to 35% year-over-year. So, dramatic improvement in the U.S. and.
That's why we think that.
It gets better progressively as the progresses.
From that perspective, regarding your question about gross margin, the miss against our expectation was largely because we proactively cleared inventory as well as promotional levels being slightly higher than we anticipated.
Garnered one.
Great read if you look at it last year for full year.
Gross margin recorded gross margins last year.
Basically, there was very little promotion. Gross margins are at an all-time high of $59. We ended the year at 57 and a half.
A year ago, into what's happened on gross margins in the quarter, let's start with what I call the good guys, and a lot of these good guys are going to be here for a while, which is the fact that we took prices up.
We are seeing lower air freight and a favorable channel mix. If you quantify all of that, it is about 150 basis points that we see continuing through the year and then.
What I call, or what we call, transitory.
You will see that as the year progresses.
200 basis points is a combination of commodity increase cotton.
In the H one, it was barred.
Our product, Baldwin cotton, was at an all-time high.
That, along with some damage.
Cost et cetera is about 200 basis points that begin to recede as we step into H to about, I think, the tailwind is about 170-180 basis points. Because, you know, there is some inventory that we bought in H, one that would clearly be niche too.
And the rest is promotion levels, which are much higher than a year ago. The two pieces one.
Last year, this time, you didn't really sell anything at full price, notwithstanding something a little higher, and then promotion is what we expect.
And we conservatively anticipate this is difficult to predict, but we are anticipating that promotion levels continue through the year. So as you think about the year.
Annual expectation on gross margin I think we're going to be about relative to loss guidance about 70 basis points down at the end of the year and as you largely driven by higher promotional levels, which we expect.
Offset by better channel mix BTT is going to be higher internationally is going to be higher Europe is.
Rebounding nicely. So, I think that's how we're thinking about gross margins, and as you know.
A large piece of what we sell is core; we brought a lot of newness into our assortment with the 500 150 anniversary, and all of that helps. I hope that addresses.
Your question Bob.
Thank you.
So welcome.
Thank you.
Our next question.
It comes from the line of Matthew Boss.
J.P. Morgan, your question please, Matthew.
Great, thanks. So maybe Chip, could you just update us on the health of the Levi's brand, maybe what you're seeing in the US and Europe marketplaces today as it relates to the denim category? And then Harmeet, to your points before, any change in the pricing strategy, just given the dynamic consumer backdrop out there?
Yes, sure. Good morning, Matt.
So let me first talk the category since that's part of your question and I think you all know that.
The data that we get on a quarterly basis is U S. Only still a major part of our business.
Don't get the rest of the world on a quarterly basis, but.
Sort of as we had thought, we would expect the category to be back to growth again in the quarter and the most recent quarter is up 1%.
That's on top of a prior year's quarter of up 16%. So.
You remember the last call; we talked about how coming out of the pandemic, we saw a big spike in denim, and then we had two quarters of kind of mid-single-digit softness.
We're back to growth now, and that's good - that 1% growth in the category.
Compare that to what we reported in our U S. DTC business with record volume that was up low double digits. So.
We are clearly gaining share.
Talk about it in the end.
In the prepared remarks, we are now the outright leader.
The men's and women's 18 to 30 year old jeans market gained one point of value share in the past 12 months and the past three months.
We continue to grow our share in women's denim bottoms.
On closing the gap, we are now knocking on the door of being the number one brand in the US. That has not happened in my entire 11 and a half years at this company.
We continue to have momentum while others are struggling.
In terms of brand equity, a couple of things.
I guess, the first thing I would point to is just the strength of our overall DTC business, where we are in control.
The brand, how we engage with the consumer, and how we show up.
It shows up in the business results in our global DTC business delivered a record quarter, we were up 16% versus prior year, we comp positively in all regions. Our ecommerce business was up double digits too I think that kind of speaks to.
Consumers are still coming to this brand.
Yes.
One other data point is:
As we do our brand equity studies around the globe.
We do get at price perception per Levis, and this was price perception, right? But.
It will be by streams, as a leader and being worth paying more for quality and longevity.
And.
As a result, we are well positioned to continue navigating through this inflationary period, and I don't think we mentioned it in the prepared remarks, but our AURs were up by mid-single digits again this quarter, despite the promotional environment.
Europe , specifically Europe revenues were up 2% I think we said this in the prepared remarks.
Up 6%, excluding Russia.
Sequentially improving versus last quarter again, driven by the strength of BTC, which was up 16% excluding Russia.
Comps were.
Positive every month across North and South Europe.
There were also positive in the quarter in mainline and outlet stores as well as ecommerce every market in Europe grew with the exception of a couple of the smaller markets in the Nordics, our largest market, France, UK, Germany, we're all collectively up low single digits, Spain, and Italy were up double digits.
So, Europe is doing a little better than what we thought it was going to do going into the year.
But it's still kind of in the range of what we guided originally.
I guess the last thing I would say about Europe , just like the U S were pretty cautious about our wholesale business there.
As retailers are planning their open to buy budgets pretty close to their best given all of the macro economic uncertainty.
And Matt to your question about any change in pricing strategy.
If the question behind the question is are we taking prices down that's not what's happening.
But we're not necessarily pricing up in today's environment.
And so, we are promoting smartly, like most retailers.
Not necessarily number one in promotions, we are competitive, but one that's really one and we've got a lot of.
Units in our assortment, and that's why.
Sure.
Attracting traffic.
Et cetera, where we can price.
For example, the organic stuff that we bring in the prize thoughtfully, but overall, we are being mindful of the fact that the.
Consumers generally, especially in the western part of the world, are just.
Just.
Our Guide on Spending.
Great Best of luck.
Thank you Matt.
Thank you.
Our next question.
Comes from the line.
Jay Zoll of UBS. Please go ahead, Jay.
Great. Thank you so much, Harmeet. I heard you say you expect SG&A dollars to be up mid-single digits in Q2. I'm not sure I caught what you expect SG&A dollars to do for the full year and how that impacts your operating margin guidance for the year.
Could you just expand on that a little bit, of course? Please, thank you. Yeah, I would say low single to mid-single on a full-year basis.
And it is largely the way we are thinking about SG&A.
Jay.
As well.
We can cut discretionary expenses we have.
We have really tight didnt.
New hires, we have tightened things like travel, and this is business critical.
Et cetera, et cetera, I think where we're spending the dollars is as we open new doors we'll have.
On a net basis, 80 doors.
This year.
Between our three brands and that has been a few of the direct to consumer business, which is important.
Advertising.
A little bit, especially with the 501 campaign.
And.
Basic infrastructure like the ERP, which is being implemented as we speak in the US, as well as the distribution capacity that we are gearing up for in the long term. So I think those are the areas where the spending drives a little bit of uncertainty, but where we can tighten, we'll continue the dialogue.
Okay. Thank you so much.
Youre welcome.
Thank you.
Our next question.
One moment.
Pardon me. Our next question comes from the line of Bearish Isle.
Wells Fargo. Your question, please.
Hey, everyone. Thanks for taking the question.
Maybe Harmeet.
Can you talk a little bit more about the implications?
<unk> the ERP.
Has had on US wholesale, just maybe specifically, can you quantify the dollars that were pulled forward into the first quarter?
And the dollar that'll be pulled out of the second quarter may be, specifically, could you give us information embedded in that down high single to low double, what is the planned US Wholesale decline in Q2? And then any other color on US Wholesale, whether it's order books or planning in the back half would also be great. Thanks, yeah sure.
When we were talking.
About a quarter ago, I think we had anticipated.
Timing of the ERP and the discussions we're having with our key customers.
The range of the.
The sales push between Q1 and Q2 would be about 80 to 100.
<unk> million dollars.
<unk>.
You mentioned on the call.
I think the timing is about $100 million between Q2 and Q1.
I do want to.
Thank our wonderful customers, because they were able to work with us in getting this.
No.
Just.
As we work through the timing of the.
ERP the ERP is currently.
Being implemented.
For example, as short as we speak, and we are in the process of cutting over, I think to your question about.
Q2 a.
A large piece of.
The $100 million is what we actually take from Q2 and put it in Q1, so Q2 will be impacted.
With that.
Yes.
And that's why, as we think about.
What to expect in Q2, we are guiding.
Down high single-digit, low double-digit; that obviously also has a positive impact on gross margin. That's what I was saying: gross margins will be down.
A little bit, not what you saw in Q1. So, I think that's how we're thinking about it.
Do expect.
The impact of the ERP will largely be an H one.
Does it ramp up really happens in May which is the last month of the quarter and so by the time you get into quarter. Three I think we should have this behind us and as you know.
We have implemented the ERP in Canada and Mexico, and it is largely a very standardized module being implemented in the US. The benefits are largely going to be in data insights.
And simplification for our operators.
That's what we're seeing in the two markets, and that's the benefit that we see. This is foundational to everything else we're doing, and I, especially as we grow e-commerce and grow our direct-to-consumer business. This gives us the foundational base to actually accelerate automation.
And connect with the consumer a lot better.
Great. Thanks.
Thanks.
Right.
Thank you.
Next question.
Comes from the line of <unk>.
Dana Telsey Telsey group your question please Dana.
Hi, good morning, everyone. As you think about performance.
As you think about the performance of denim versus non-denim, what did you see there? And Chip, you've given out in the past what the overall apparel category, how that performed versus denim. What are you seeing there? Can you just expand upon with wholesale, how do you expect that to progress through the year, and is there a difference between.
The department stores or the discounters, and what you're seeing in order rates. Thank you.
And there's a lot there.
So first of all Youre right.
I normally give the apparel category and identify this time, but I've got the number here in front of me.
Apparel was up, too. This is US data again for Q1.
Recall I said that the denim category was up one.
Off of a base of Cloud 16, apparel was up to; I don't have what the base period is for total apparel, but it was up slightly ahead of.
Denim and Thats.
With everything we're seeing and hearing that some of the more dressier categories is doing a little bit better we're even seeing that in our own business.
Our non-dark denim business.
At this time.
Pretty well it was up low double digits as well some of our.
Selling items right now: our Chino, cargoes, and things like that.
We're seeing it really those those categories move really well.
<unk>.
What else was in that? Yes, I think you asked about.
Our expectations for wholesale.
As you know.
Or I just wanted to clarify.
Think of the US wholesale business.
In the year, we're lapping is important.
First half I think the U S wholesale business was up goes a little over 20%.
In Q1 2000 in Q2, and so we are lapping strong numbers and then we have the ERP timing.
Our expectation for the full year, and this is included in our expectation for the year, is down.
In the low to mid-single digits.
<unk> made up.
Bye.
The consumer business – but I think you would think of the business structurally.
This is going to <unk>.
To consumer business, which is about 42%.
But for Levis is close to <unk>.
45% continues to get strong.
And strategically, that's really what we said at Investor Day: this is a business that should head towards 55%. So again, stronger gross margins are better.
Et cetera.
I think 23 is a good reset year from that perspective, and we're taking it.
Fortunate and what's happening in the western world in terms of macroeconomics, but as a company, mergers create a structurally better company by the end of the year. It's a good thing.
Yes, the only other thing I would add on top of that data is.
And talking with our wholesale customers virtually all of our customers are keeping their open-to-buy budgets pretty tight.
Given the uncertainty.
And then the only other thing I would add is that we are seeing pretty significant softness in our signature Denizen business. So, that value consumer is really being squeezed. There is definitely a bifurcation happening where the lower-end consumer is making hard choices.
And either trading down or just not buying denim, but that middle-income consumer, which is kind of the sweet spot for the Levi's brand, is doing well and is still buying denim. It is that area that is driving the growth of the Levi's business, the growth of our DTC business, and the strength that.
We are seeing in our direct-to-consumer business.
Thank you.
Thank you. Our next question comes from the line. I apologize.
Eddie.
Your question please Paul.
Thanks, it's Tracy Kogan filling in for Paul. I don't think I heard you talk about <unk>, and I was just wondering if you're still expecting high single-digit sales growth there, and if you have anything like order books to support or give you confidence in that growth. Thanks.
Yes no.
Tracey Hi.
<unk> connect we don't as you know guide culturally.
Talk about the year, but if you do the math.
H two.
Is.
Up higher than mid-single-digit.
And so.
Hey, Stuart closely.
It's probably the low end of our growth algorithm, and so we are beginning to.
What we have said.
Earlier is in a.
A tale of two halves the first half we could the secondhand stronger is also <unk>.
Driven by the year, we're overlapping, but if you go back and benchmark 2019.
The difference between the first half in the second half is not that dramatic at just the year that we're lapping.
Our expectation really is.
Yes.
Get a little better as the year progresses, and we were able to work out all the inventory issues et cetera et cetera.
Great, thanks. Just on freight, I think you said airfreight was a tailwind, but ocean freight was a headwind this quarter. I guess it netted out as a headwind. I'm just wondering how you're thinking about those pieces of freight for the remainder of the year.
I mean.
H two it becomes a tailwind.
What pieces of trade, and that's how we're thinking through it.
Great. Thanks very much, guys.
Hi.
Thank you.
Our next question.
Comes from the line of Laura.
That's the last U B S.
M T farabaugh.
Your question please Lauren.
Good morning, Chip. Pardon me; thanks for taking my question.
Pardon me, I just wanted to square away some math here.
I think in your prepared remarks, you mentioned that DTC should be about mid-40% of the.
<unk> percentage points.
Overall sales for the year - does that imply global wholesale would be down by high single digits? I might be off with the math, but just wanted to confirm if that's the case and how much of that decline.
It's coming from US wholesale, and then maybe drilling down further.
I'm just curious. I think last quarter, you mentioned that mass.
Down high teens, just curious to know how you're thinking of how it performed this quarter and how you're thinking about it for the full year.
Yeah, so the the.
The mid Forty's is largely levis.
If you think of the company.
Dockers.
It has about 30% of the business in DTC and Beyond Yoga.
In the half the business, but if you.
You would think of the company we are in a little better than 42% at the end of the year. That's the that's the projection.
So if you do run the math view is global wholesale is down in the low to mid single digit.
And is largely.
The U.S. and Europe.
As Chip mentioned.
Our customers have.
Cautious in the open to buy.
And we are building that into our expectations and really focusing on driving our direct-to-consumer business.
<unk> changed.
So youll see that.
Roll into the numbers.
From that perspective.
Very helpful, and any color on the mass channel that outperformed this quarter, and how you're thinking about it for the year?
Yes, so the mass channel is down about 13%.
Florida is down 19; it was enjoying a 10% growth quarter.
In 2022, and we're planning it down we're planning it down.
Low double-digit.
And again.
We sell to two wonderful customers, largely Signature and Denizen, and they are cautious in the open-to-buy; and we're influencing, which is good news for us, as one of the customers.
Yes, we are.
Taking.
Women's out denizen movements out of doors and really.
<unk>.
Working with them to grow Levi's Red tab and that does help payment as the brand.
Very helpful. Thank you very much.
Thank you.
Our next question.
Comes from the line of Brooke Roach from Goldman Sachs. Please go ahead, Brooke.
Good morning, and thank you so much for taking our question. I was wondering if you could talk to the sell-through trends that you're seeing in US Wholesale for the core Red Kap business and how consumer engagement with the brand at wholesale may be differing relative to the stronger trends that you're seeing in North America DTC. And then, Herman, can you clarify if the increase is more?
<unk> view on wholesale assumption of a more cautious open to buy or has there been a slowdown in sell through trends versus your prior expectations that may be driving this outlook.
Yes so.
<unk> as you all know, it's a very difficult month.
You read.
Because of tax refund checks, the weather.
And so I think, as we think about the quarter, April, for example.
It's early days, but we've seen traffic coming back in.
Things are looking a lot better.
To your question about <unk>.
And direct-to-consumer business, which is a real representation of the brand showing up in our assortment, is doing well.
Your question about the cautious view on wholesale is largely the open to buy.
We were thinking.
What's driving that decision, so if that opens up, things get better.
And that will probably over time as inventories tight and so also improve the promotional environment.
Thank you.
Welcome Brook.
Thank you.
Our next question comes from the line of Alex Stratton.
Of Morgan Stanley, your question please, Alex.
Great, thank you so much for taking my question. Just a couple on my end: first, I totally understand that promos are higher year-over-year, given the changing environment, but I'm wondering how promos change sequentially.
In the latest quarter, compared to the prior, and maybe how you would characterize the broader environment there, and then secondly.
Just on inventory, quickly, I want to understand if that is in line by the end of the year with foreign sales growth or is it a longer timeline? And then, I think you may have previously communicated, I think most brands are saying they'll be clean entering the back half. So, I'm just wondering.
Whats different on Levi here. Thanks, so much.
Yes, I mean.
Alex our view is we're going to be clean.
Clean Latina today than we were a quarter ago will be clean by call. It too it's not about.
Is the inventory clean, as this question about our view on inventory is a routine quarterly inquiry too?
The growth rate relative to a year ago is mid to high teens, slightly higher than what we anticipated a quarter ago, just given.
US wholesale is, but as you know, in US, the inventories are largely full and so that's.
That's guiding our thinking on getting inventory back to sales levels from that perspective.
In terms of the promotional environment, we're just being cautious is difficult to predict.
And so.
<unk> expectations of gross margins, we have built in.
Slightly higher promotional levels in <unk>, two and if that doesn't pan out obviously that translates into.
Into higher gross margins, but that is really factored into expectations.
The only other thing I would add is to keep in mind that the base period promotional environment changed pretty dramatically between the first half and second half of last year.
They're worth all the supply chain issues, and many people didn't even have enough products. So, everything was being sold at full price.
Then, in the second half, it started to become a lot more promotional, so the year-over-year change is quite dramatic in the first half for us. However, the year-over-year change in the second half should be much less dramatic and have less overall impact on the gross margin, I think.
I think if you're trying to understand Alex.
Question of gross margin. So last year Q1 was 59.
0.4 ended at 57% to the point chip was making because got promotion as the year progressed. This year Q1 was 50 582 hundred of that is really commodities, which gets better.
As we step into H H to it, so that's why we think there is progression in gross margin getting us back.
To slightly over 57%.
Plus.
Yes.
I think the promotional environment gets better; it's not going to be as promotional, in my view, but we are building in some promotions in H2.
Yes.
But it's not going to be as bad as Q1 and Q2.
Thanks, a lot.
Youre welcome.
Thank you.
Our next question comes from the line of Chris <unk> of Bank of America.
Your question please Chris.
Hi, guys. Good morning. Two quick questions.
On second-half guidance, can you just talk about your confidence in maintaining that strong DTC momentum in a potentially lower promotional environment compared to the last second half, and then a quick question on Asia: you increased your guidance to low double digits, and that's on top of mid-20% growth last year. Is there any way you can.
Right on, where you're seeing the most strength in Asia, and how much is coming from new doors versus comp.
Thank you. Yes, yes.
Thanks, Chris.
As you know, growing Asia.
As one of our strategic.
Initiate it.
And the last few years.
The noise has been just covering some countries closed, etcetera, etcetera. So I think Q1 is a good read.
From that perspective now.
One doesn't reflect.
The reopening of China it could.
Because that happened.
Largely in February."
Most markets in Asia.
We are off to a great start, and you can see the leverage in our operating margin as well as operating dollars.
Whether it's India, whether is Australia, whether it's other its allocation countries. We've had we had a good quarter.
From that perspective, the brand is strong as mainly a DTC business, and the direct-to-consumer business is.
The growth is largely driven by comp sales performance.
Which is which is the good news.
And we haven't really factored in any upside, should.
What we see in China continuing sustained itself for the rest of the year.
So that's the Asia story. You had another question, Chris.
One of the issues.
The strong margins, strong DTC one.
Asia sustained itself as the year progressed.
Because the brand strong consumes a lot more resilient, it's a younger consumer, so I think.
That really helps.
To your point on DTC DTC last year did slow down in the second half largely Europe was down in Q2, and Q4 was down and you have seen Europe rebound the consumer in Europe . Our view is is a lot stronger than everybody anticipated.
And.
Wholesale customers continue to be tight on the open in Dubai.
We see the DTC growth continuing in other pieces. We now have a new Chief Digital Officer, and Michelle is putting a lot more emphasis on driving retail performance.
And I think those things will definitely benefit us.
Because there is low-hanging fruit, and as we continue to focus on improving execution, our operators.
On the ground, do a great job, but the clear opportunities.
I think, as we continue to.
Optimize that we will continue to see DTC performance.
Cool.
Okay.
Thank you. At this time, I would like to turn the call back over to the company for any closing remarks.
Thank you Latif.
I want to thank everyone for dialing in and for this.
Questions, and we'll look forward to talking with you at the end of the next quarter. Thanks very much, and have a nice weekend.
Thank you. This concludes today's conference call. Please disconnect your lines at this time.
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