Q4 2023 Levi Strauss & Co Earnings Call
Good day, ladies and gentlemen, and welcome to the Levi Strauss <unk> company fourth quarter and fiscal year end earnings conference call for the period ending November 26 2023.
Parties will be lessened the 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 Levi Strauss Dot com.
I'd now like to turn the call over to Ida Orphan Vice President of Investor Relations at Levi Strauss <unk> company.
Expertise thanks: Expertise thanks, everyone for joining us on the call today to discuss the results for our fourth quarter and fiscal year end 2023, joining me on today's call are chip Bergh, President and CEO, Michelle <unk>, our president and incoming CEO and her meet Zhang our Chief Financial Officer.
Aida Orphan: We have posted complete Q4 financial results and our earnings release on the IR section of our website investors don't lead by shelf Dotcom. The link to the webcast of today's conference call can also be found on our site.
Michelle D. Gass: To remind you 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.
Michelle D. Gass: And that we filed today for the factors that could cause our results to differ.
Michelle D. Gass: 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.
Michelle D. Gass: During this call we will discuss certain non-GAAP financial measures.
Michelle D. Gass: 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 measure are included in today's press release.
Michelle D. Gass: Finally, this call is being webcast on our IR website and a replay of this call will be available on our website shortly.
Michelle D. Gass: Please note that ship, Michelle and her meet will be referencing constant currency numbers unless otherwise noted.
Charles Victor Bergh: Today's call is scheduled for one hour. So please limit yourself to one question at a time to give others the opportunity to have their questions addressed and now I'd like to turn the call over to chip.
Charles Victor Bergh: Thank you for joining us. This afternoon as you know this is my last earnings call I want to acknowledge what a privilege. It's been leading this company over the last 12 years over this time, we've transformed the company and all that.
Charles Victor Bergh: We are proud of all that has been accomplished.
Charles Victor Bergh: We revitalized will Levi's brand by putting it back at the center of culture and today. The Levi's brand is strong globally resonating again with younger consumers, which bodes well for the future.
Charles Victor Bergh: We evolved the company from being a predominantly U S men's bottoms wholesale business to being a much more diversified business today with more than half of our sales coming from outside the U S and 43% of our sales coming from our own direct to consumer business.
Aida Orphan: We now have a meaningful women's business and evolved our brand portfolio with the addition of beyond yoga and.
Aida Orphan: And we transformed our financials, enabling the strategic investments that drove profitable growth over the last decade.
Aida Orphan: Our foundation is strong and much stronger than a decade ago, while we faced challenges over the last 18 months, particularly in the U S. Wholesale channel. We ended the year on a high note with encouraging trends across the business. Our U S business returned to growth driven by a positive inflection in U S wholesale growth for.
Aida Orphan: Levi's and continued strong momentum in the DTC channel led by the strength of the brand Michelle.
Michelle D. Gass: Michelle and Harmeet, we will give you the full details on Q4 in a moment.
My confidence in this company's future over the next several years is grounded on three things first the Levi's brand rehab would almost every apparel company wish they had levis the original and yet the Levi's brand still has so much potential and michelle's focus on becoming a denim apparel lifestyle business.
Michelle: And transforming the operating model into a best in class DTC first organization will be instrumental in unlocking the next decade of profitable growth.
Michelle: Second our global productivity initiatives or project fuel.
Michelle: We made a major transformation effort in 2014, which generated a significant amount of savings there was a key element of creating the growth curve that we generated from 2015 through 2021.
I believe the transformation program underway, now, which will generate the same magnitude of savings will be a catalyst to accelerated profitability.
Michelle: Third our teams at the end of the day, it's about the people and the leadership I believe we have some of the most talented and dedicated people in the industry, whether that's at our retail stores, our distribution centers or at the top of the house.
Michelle: And at every level in between we've.
Michelle: We've made changes to the executive team over the last 12 months, including the addition of Kenny Mitchell as our Chief Marketing Officer, Jason gallons as our Chief Digital Officer and most recently. The addition of Nancy Green to lead beyond Yoga.
Kimberly Conroy Greenberger: These are all big impact players and sets us up longer term.
Kimberly Conroy Greenberger: First of all though I have great confidence in Michelle as she assumes the role of CEO.
Michelle: Michelle successful Onboarding has been my top priority.
Michelle: Working together side by side for the last 13 months as convinced me that she will take this company to the next level and build on the legacy that I leave behind and I'm looking forward to seeing her guide this company through the exciting new era of growth ahead.
Michelle: Finally, I want to thank all of you for your support and your confidence and trust in me and my team.
Michelle: Michelle.
Michelle: Thanks, Jeff first I'd like to take a moment and share my incredible gratitude for our chip support and partnership this year chip and I have known each other for about a decade now, but this year cement the great relationship that we've built over the years.
Michelle: Over the past decade under Jeff's leadership, Levi's has returned to a position of strength around the globe and Reaccelerate the growth of our business.
Jeff: <unk> Foundation sets us up to deliver long term value creation on behalf of the board of directors and our 20000 employees around the world I want to thank Jeff for his exceptional leadership. These past 12 years.
Jeff Bezos: What you'll take away from today's call is our business strengthened in Q4, and we delivered solid results, including a strong holiday season.
Jeff Bezos: The brand continues to have great momentum, helping drive full year company AUR up mid single digits, and we have an incredible pipeline of newness and innovation coming in 2024 to continue to drive consumer demand.
Jeff Bezos: We have the right strategies in place, which we will accelerate by unlocking efficiency with the launch of our global productivity initiative project fuel, we are seeing strong growth in our DTC and international businesses. Both critical component of our growth algorithm. We have further strengthened the management team, who I am confident will drive our exit.
Jeff Bezos: Houston.
Jeff Bezos: While we are encouraged by momentum in our business, including continued positive DTC trends moderating in place on an early improvement in U S. Wholesale we are taking a cautious approach to our outlook given the continued macroeconomic uncertainty.
Jeff Bezos: Let's start with our fourth quarter performance, an important indicator for how the company is positioned for 2024. We ended 2023 on a strong growing Q4 revenues by 2% to $1 6 billion and.
Jeff Bezos: And expanded gross margins 200 basis points.
Jeff Bezos: All of our expectations.
Jeff Bezos: The margin upside and our team's disciplined execution enabled us to deliver approximately 30% growth in EPS versus prior year, and we further improved our inventory position and generated positive free cash flow for the quarter and full year.
Jeff Bezos: Our efforts to stabilize our wholesale business are working our global wholesale business showed meaningful sequential improvement in Q4 down 3% versus down 10% in Q3, the improvement was driven by U S wholesale and reflecting to growth for Levi's, which was up 5%.
Jeff Bezos: Solid execution at our distribution centers has resulted in fill rate returning to normalized levels, enabling us to deliver better in stock positions with our key customers and more newness in time for the holidays and the surgical pricing actions. We took late in Q3 are showing promising results and we have no plans to take additional price cuts.
Jeff Bezos: As we look to 2024, while we're continuing to plan the wholesale business prudently. We're cautiously optimistic on this important channel we're working closely with our partners on how we can strengthen our business in 2024 and beyond by improving execution, delivering more newness and innovation and exploring and testing new ways of working together.
Jeff Bezos: As you know along with Levi's Red tab, we operate to value brands that have historically played a role in our segmentation strategy.
Aida Orphan: Based on work we've done we have made the strategic decision in collaboration with our customers to discontinue the denizen brand.
Aida Orphan: Given the successful rollout of Red tab and target our focus there will be on growing the higher gross margin Red tab business, where we are seeing strong performance in comp doors.
Aida Orphan: Denison exit will be about one point of impact to sales in 2024, and Hermes, we will share more on the outlook. Despite our exit from Denison, we remain committed to the value segment and to supporting and growing the signature brands.
Aida Orphan: In addition to seeing positive trends in wholesale DTC continues to drive outsized growth, giving us conviction that now is the time to accelerate our transition to operating the business as a DTC first company for.
Aida Orphan: For the quarter, the DTC business was up 10% versus prior year and Comped positively in every region across every direct to consumer channel and mainline E Commerce and outlet.
Aida Orphan: Traffic was also up in every region and in every channel.
Aida Orphan: We drove another quarter of double digit growth in our ecommerce business, which was up 17% this quarter with traffic and units per transaction and AUR all increasing as we've worked to improve the Levi dot com experience and broaden its assortment and we drove meaningful growth in our global loyalty program in the fourth quarter.
Aida Orphan: With membership up by almost 30% to $30 million in 2023, driven by strong double digit growth in membership across all regions for.
Aida Orphan: For the full year global DTC was up 13% to $2 $6 billion on top of 18% growth in the prior year. This represents 43% of total global revenues five points ahead of last year and tracks with our long term algorithm.
Aida Orphan: The success, we are seeing highlights the continued strength of our brand worldwide for the full year. We grew Levi's brand revenue to $5 4 billion in multi decade high with AUR is up 3% over prior year key to our success is our continued global leadership in denim bottoms and for the full year.
Aida Orphan: We retained our dominant number one market share position globally.
Aida Orphan: Further strengthening and broadening our brand rates, we are attracting a new generation of consumers increasing the number of 18 to 30 year old buyers globally.
Aida Orphan: And our efforts to elevate our brands are attracting higher income consumers as reflected in our U S mainline results, which were up almost 30% in the fourth quarter.
Aida Orphan: In Q4, Levi's brand revenues returned to growth up 4% driven by strength in mens and even higher growth in women as the brand saw strong performance in our core offerings as well as from the newness and innovation, we delivered in the quarter.
Aida Orphan: We were particularly pleased with nearly 40% growth in Levi's non denim bottoms driven by strength in the Xx Chino.
The 501 continues to stand the test of time.
Aida Orphan: Clear barometer for the strength of the Levi's brand. The 501 grew 21% in Q4 and 11% for the year, reflecting strong growth across DTC and wholesale and approaching $800 million in annual sales nearly 70% larger than pre pandemic levels.
Aida Orphan: The strength in investment in our brand continues to be a critical part of our growth over the past year, we have been laser focused on putting levi's at the center of culture, driving strong connections and building brand love with fans and consumers around the world.
Speaker Change: This year, we partnered with some of the biggest names in biggest brand in fashion and music. This includes successful collaborations with crocs and luxury label Kenzo tapping into youth culture with the likes of Emma Chamberlain.
Speaker Change: Capsule collection with Juicy inspired by our shared California roots.
Speaker Change: And in International campaign, with the Hot K pop band New genes.
Speaker Change: And just this morning, we announced the extension to the naming rights for Levi's Stadium through 2043.
Speaker Change: One of our highest marketing returns on investment Levis Stadium places our brand firmly at the center of culture connecting us with new generations of fans through the unifying power of sports and music. This.
Speaker Change: These partnerships and collaborations expand our influence and generate a ton of PR and social reach looking forward to 2024, we have a strong lineup of collaborations planned for the year continuing to create a ton of buzz and energy around the brand.
Speaker Change: In terms of our strategic priority to diversify our business and our efforts are working our business continues to become more global or international business continued to outpace the total company growing 4%, excluding Russia in Q4 on top of 5% in the prior year for the full year, our international business accounted for 56.
Speaker Change: Percent of our total revenues three points ahead of last year.
Speaker Change: Asia today is a $1 $1 billion business growing nearly 30% versus 2019.
Jeff Bezos: Our growth this year in this segment has been broad based across markets and channels and we view this region as one of our largest opportunities going forward.
Jeff Bezos: Our total company women's business was also up 8% in the quarter led by double digit growth in our bottoms business.
Jeff Bezos: This was our highest Q4 revenue for womens and a decade.
Jeff Bezos: Now moving to beyond yoga, the business had a solid year up 14% for the fourth quarter and 19% for the full year, achieving revenues of over $115 million under.
Jeff Bezos: Under Michelle Whalers leadership, we successfully incorporated beyond yoga and the Allison co portfolio and have opened six brick and mortar store locations in the U S.
Michelle D. Gass: Now we believe that the brand is at an inflection point.
Michelle D. Gass: Last week, we announced Nazi green as beyond Yoga next CEO Nancy is a proven brand builder with deep retail experience and our legacy of driving significant profitable growth, having scaled athletic to nearly $1 billion from $250 million is the brand CEO, while at Gap Inc.
Kimberly Conroy Greenberger: Nancy's appointment will unlock the next phase of growth for the brand.
Nancy: Dockers was roughly flat for the year and down 20% in Q4 with both periods marked by DTC and international growth offset by weakness in U S. Wholesale in December we saw U S wholesale trends improve driven by a healthier inventory position as well as strong comp store performance globally in <unk>.
Nancy: <unk> margin expansion.
Nancy: As with the Levi's business, we are cautious on the U S wholesale outlook for 2024, and we're planning this business prudently.
Nancy: I'll now touch on the product newness and innovation, we have coming to the Levi's brand in 2024 first across both men's and women's bottoms. We have two platforms that we are expanding to address warm weather markets and provide consumers with options that allow them to wear denim all year long.
Jeff Bezos: This includes globally scaling our performance cool line, which has been a big success in Asia as well as a new launch of our lightest weight denim across our most popular fit.
Jeff Bezos: Second we're leveraging our expertise in Boston to continue fueling our revised non denim bottoms business to address this incremental opportunity. We have developed an innovative non denim pant for him with technical properties, including moisture control and $3 60 mobility. This pan is versatile and appropriate for multi.
Jeff Bezos: For wear occasions from working at the office to going on a hike and provides us with the opportunity to capture more share of his closet.
Jeff Bezos: One of our largest U S men's product launches to date the tech Pant will be available early this year on both our direct to consumer channels and through key wholesale partners.
Jeff Bezos: Now focusing on women and women's denim bottoms, we set the trend building upon our success with looser fit which now represent half of our women's business. We are introducing multiple new fashion fit including our latest the XL, which has the option to be worn either at the high or low rise.
Jeff Bezos: Beyond bottoms, we're evolving our position from being a denim bottoms brand into a true denim lifestyle brand.
Jeff Bezos: Just as we today is Dan for the most authentic and highest quality pair of jeans in the world, we see a tremendous opportunity in broadening this position to all things denim.
Jeff Bezos: Denim dressing goes across many untapped segments for us such as skirts dresses tops outerwear and accessories.
Jeff Bezos: While we've made progress this last year with denim skirts and dresses, helping drive these categories up nearly 50%. We are in the very early stages of this exciting opportunity and have lots of newness in the pipeline coming in 2024 and beyond.
Jeff Bezos: I will briefly touch on our tops business, which was up low single digits in the fourth quarter, while we have a meaningful top business today at over $1 billion.
We have not delivered a consistent tops program commensurate with the strength of our bottoms business.
Jeff Bezos: Over the last year, our teams have been hard at work to deliver an end to end reset of this business in 2024, our focus is establishing a stronger core essential business in categories like T shirt, Walgreens and polo.
Jeff Bezos: We're encouraged by the early response, we are seeing to recent introductions such as in outerwear, which was up more than 20% in the fourth quarter.
Jeff Bezos: Overall, we are really excited about the innovation platforms that we're rolling out this year I feel confident the newness and energy we are delivering to market will drive growth in our core business. While also fueling the adjacent incremental businesses. We're building as part of our long term vision to own denim lifestyle.
Jeff Bezos: Finally, as I mentioned earlier, we launched our global productivity initiatives. This year that we are calling project fuel.
Jeff Bezos: As we are tightening our strategies and accelerating DTC first this work will be ongoing and is expected to deliver approximately $100 million and net savings for fiscal 2024.
Jeff Bezos: The majority of the savings is it related to a 10% to 15% reduction of our global corporate workforce. In addition, we've identified savings related to streamlining our global operating model rewiring, our go to market process, and improving productivity and profitability across our channels.
Jeff Bezos: Consistent with our values. This work will be done with respect and thoughtfulness as we work to become a more agile and focused company.
Aida Orphan: To conclude we are pleased with our fourth quarter performance, we have a solid foundation to build on and I am confident in our 2024 and long term outlook.
Aida Orphan: Amit.
Amit: Thanks, Michelle let me start by thanking chip for being a tremendous leader thought partner mentor.
Michelle: Mentor and friend.
Michelle: Chip's leadership, we have grown the revenue of the company by nearly $1 billion and improve the structural economics of the business.
Proving gross margins by nearly 1000 basis points.
I look forward to partnering with Michele and our incredibly talented teams as we scale the business to over 9 billion in revenues and grow operating margins to 15% overtime.
Michelle: And with that I will turn to our results.
Michelle: Revenue in the quarter was up 2% led by an inflection to growth in the U S. Our largest market and 10% growth in our global direct to consumer Jim.
Comp sales saw a seven consecutive quarter of broad based growth.
Michelle: And along with our franchisee partners, we opened a record number of stores in fiscal year 'twenty three.
Michelle: <unk> five net store openings, excluding Russia.
Michelle: We ended fiscal 'twenty three with the system wide store count of more than 2400 stores.
Michelle: In the quarter transitory headwinds, most notably protocols shifted to tailwind, enabling us to deliver gross margin ahead of expectations.
Michelle: Along with the key contributors to the structural drivers of gross margin, including DTC International and womens.
Michelle: Continued improvement in 2020 full as you progress on up.
Michelle: 260% as discussed during our 2022 Investor day.
Michelle: For the holiday period in November and December we saw low single digit revenue growth versus prior year.
Michelle: Including 9% growth in our direct to consumer business.
Michelle: Continued positive trend in U S wholesale.
Michelle: And we saw robust gross margin expansion versus prior year.
Michelle: And while we have momentum entering 2024.
Michelle: Our conservative approach to our outlook for the full year.
Michelle: Mainly reflecting a cautious view on the macro environment, especially in the U S and Europe.
Aida Orphan: We are taking actions to further improve the structural economics of our business solidifying the bot to 15%.
Aida Orphan: And as Michel mentioned earlier.
Michel: <unk> profitable growth, we launched project fuel.
Michel: While you're in the early stages of this initiative, we have already identified approximately $100 million and expected net savings into any full from streamlining our organization structure with the elimination of positions within our global workforce.
Michel: Hence in our procurement capabilities across most categories of spend.
Michel: Further improving our cost of goods sold and driving enhanced productivity in our stores.
Michel: In the first quarter of 'twenty four we expect to record estimated restructuring charges of approximately $110 million to $120 million.
Michel: The savings of this initiatives are expected to start in Q2 accelerate as <unk> progresses and continue into 2025.
Michel: We expect to identify additional savings opportunities that will flow into 2025, and we will continue to share updates over the coming quarters.
Michel: Let me share a few more details on our adjusted gross margin of 57, 8%, which came in better than expectations, driven primarily by product cost.
Michel: Gross margin expanded a robust 200 basis points year over year.
Michel: 320 basis points above Q4 2019.
Jeff Bezos: Expansion was driven by lower product costs and bought from Gordon.
Jeff Bezos: Favorable channel mix higher full price selling favorable FX and lower air freight.
Jeff Bezos: These positive benefits were partially offset by the targeted pricing actions, we took in quarter three to drive volume and capture market share, which we will anniversary in H two of 2024.
Jeff Bezos: Adjusted SG&A expenses in the quarter was 750 million largely flat to a year ago in line with our guidance.
Jeff Bezos: Lower A&P and incentive comp, mostly offset DTC expansion, where we grew our own stores by 8% to a total of 1172 globally.
Jeff Bezos: Adjusted SG&A as a percentage of net revenues leveraged 130 basis points.
Jeff Bezos: Adjusted EBIT margin was 12, 2% up 320 basis points to prior year in line with our expectations.
Jeff Bezos: We are encouraged by the improvement in profitability, we are seeing in both wholesale and direct to consumer channel.
Jeff Bezos: God awful wholesale margins improved driven by more full price selling.
Jeff Bezos: The course of the profitability of brick and mortar sequentially improved.
Jeff Bezos: Fully allocated adjusted EBIT margin for E. Commerce also improved several points to high single digits and is on the path to being on.
Jeff Bezos: Our overall business.
Jeff Bezos: Adjusted diluted EPS was <unk> 44 cents in line with our expectations and up nearly 30% versus last year.
Now, let's review the key highlights by segment with all revenue growth in constant currency.
Jeff Bezos: In the Americas net revenues inflicted to growth up 4% driven by a return to growth of the U S, which was up 4%.
Jeff Bezos: The increase was primarily driven by double digit growth indirect to consumer including 13% growth in E Commerce.
Aida Orphan: Specifically within brick and mortar the increase was driven by solid comp sales.
Aida Orphan: Growth in the U S and Canada.
Aida Orphan: Our wholesale business was also positive as previously discussed in.
Aida Orphan: In Europe net revenues, excluding Russia returned to growth up 1%.
Aida Orphan: Despite the continued unfavorable heat through.
Aida Orphan: Through the first half of the quarter DTC momentum continued with another quarter of double digit growth up 10% excluding last year.
Aida Orphan: This was driven by broad based increases across markets and a particularly strong performance in e-commerce up 33%.
Aida Orphan: Strength in direct to consumer was partially offset by continued softness in wholesale which was down 7%, excluding Russia due to continued conservatism from our partners.
Aida Orphan: While we saw sequential improvement in wholesale in the quarter, we remain conservative on the outlook for this gen, especially in the first half of 2024.
Aida Orphan: Asia was up 7% in the fourth quarter versus a year ago or two years stack up 24%.
Aida Orphan: And for the full year Asia grew 18% on top of 24% last year.
Aida Orphan: This quarter's growth was driven by continued momentum across channels and most markets.
Aida Orphan: Revenues in China grew 13% for the quarter closing the year up 21% and returning to profitability for the year.
Aida Orphan: Overall Asia is Q4 operating margin expanded 50 basis points to 11, 9%, whereas.
Aida Orphan: Fiscal 'twenty three the operating margin expanded 220 basis points to 13, 9% as we continued to scale this business driving strong operating leverage.
Aida Orphan: Now looking to our balance sheet and cash flows.
Aida Orphan: We exceeded our quarterly inventory target in Q4.
Aida Orphan: Reported inventory dollars decreased 9% or 17% on a comparable basis. This represents an 18 point improvement from last quarter.
Aida Orphan: Inventory in the U S remains significantly below last year's level and we expect to continue to make progress in Q1 with overall inventory expected to be below prior year level.
Aida Orphan: In Q1, and full year on a comparable basis as we work to further optimize inventories improving dunes and working capital.
Jeff Bezos: Adjusted free cash flow was a positive $202 million in the quarter up from negative 54 million in the fourth quarter.
Jeff Bezos: Adjusted free cash flow for the year was positive $120 million up from negative $40 million in fiscal 2022.
We expect continued improvement and positive free cash flow in fiscal 'twenty four.
Jeff Bezos: For the full year, we returned $199 million in capital to shareholders, primarily in dividends, which were up 9% to prior year.
Jeff Bezos: And for Q1 24.
Jeff Bezos: The dividend of <unk> 12 cents per share in line with last quarter.
Jeff Bezos: Currently have 680 million remaining on the current share repurchase authorization and expect to be active in the market in the coming year.
Jeff Bezos: To offset dilution.
Jeff Bezos: Now, let's turn to our fiscal 'twenty four outlook as you look forward. We are confident in the strength of our brand and strategies and continue to expect profitable growth in 2024, we see continued strength in our global DTC business, but have a little caution in the outlook as you acknowledged.
Jeff Bezos: As there are risks ahead, including uncertainty in the macro economy, including Europe.
Jeff Bezos: LNG is in the wholesale channel.
Jeff Bezos: For fiscal 'twenty, four we expect net revenue growth of 1% to 3% year over year, which includes an approximate 200 basis points negative impact primarily due to exiting the denizen business plan lower off price sales and.
Jeff Bezos: And FX partly.
Jeff Bezos: Offsetting by the benefit of the 50 <unk> week.
Jeff Bezos: In reported dollars, we expect low single digit growth in the Americas, and Europe and high single digit growth in Asia and for our other brands segments, we expect low double digit growth.
Jeff Bezos: By channel.
Aida Orphan: Dictations include continued high single digit to low double digit growth in DTC for the full year.
Aida Orphan: In wholesale as mentioned, we're taking a prudent approach to planning this business and expect the channel will be down low single digits for the full year.
Aida Orphan: This reflects all sit down in each one with a return to growth and it's too.
Aida Orphan: For gross margin, we anticipate expansion of 140 to 150 basis points to over 58% driven by lower product costs higher full price selling and growing faster in areas that our gross margin accretive like DTC International and then.
Aida Orphan: We also expect continued improvement in our wholesale profitability driven by the U S.
Aida Orphan: Adjusted SG&A dollars are expected to grow between 2% to 4%, which is inclusive of the year one benefits of our cost savings plan.
Aida Orphan: The increases were driven by continued DTC expansion at a normalized level of incentive compensation.
Aida Orphan: We expect A&P as a percentage of revenue to approximate.
Aida Orphan: 7%.
Aida Orphan: Overall, we expect adjusted EBIT margin to be between 10 to 10, 3% or approximately 15% higher in dollar terms versus prior year.
Aida Orphan: We expect interest expense to be approximately $15 million book order and a full year tax rate in the mid to high teens up from 6% in 2023, as we get to normalized levels of tax in the high teens.
Aida Orphan: Adjusted diluted EPS is expected to be in the range of $1 15 to $1 25.
Aida Orphan: The expected earnings range incorporates <unk> <unk> negative impact from the aforementioned revenue items and also 12 cent drag.
Aida Orphan: Getting back to normalized tax rates.
Jeff Bezos: We continue to invest behind high ROI growth initiatives uses of capital in 2004 include full year capex to be around four 5% of revenues.
Jeff Bezos: We continue to expect cash flow to be positive.
Aida Orphan: In terms of net new stores, we expect to open more than 100 globally as a system.
Aida Orphan: Inclusive of around 80 company owned stores.
I will now share some color on H, one versus age two and then some atrium quarterly detail largely given the U S. ERP implementation that took place in the first half of 2023.
Aida Orphan: Rich will detail in our guidance and results at that time.
Aida Orphan: Well it is a little complicated.
Aida Orphan: I am going to do my best to simplify it for all of you.
Aida Orphan: In Q1, we expect reported revenues to be down high single digits to low double digits sales.
Aida Orphan: Sales with otherwise declined low single digits, excluding the impact of our U S ERP shift.
Aida Orphan: Exiting denizen and the final liquidation of our Russia business last year.
Aida Orphan: Recall, there was a large $100 million shift from Q2 into Q1 last year, primarily related to our U S ERP implementation.
Aida Orphan: Russia, no longer impacts our business beyond Q1.
Aida Orphan: In quarter, two we expect revenues to be up high single digits, given the U S ERP shift.
Aida Orphan: Actually offset by exiting denizen.
Aida Orphan: Overall this results in H, one expected revenues to be down low single digits to prior year.
Aida Orphan: Approximately flat to slightly up excluding Russia and denizen.
Aida Orphan: This implies an acceleration to mid single digit growth in H, two which is primarily a function of the benefit of the 50 <unk> week contributing roughly a point of growth in <unk> as well as direct to consumer expansion with more doors opening in the second half.
Jeff Bezos: And our return to growth of our business in Europe and U S wholesale.
Jeff Bezos: Looking to gross margin, we expect Q1 up approximately a 150 basis points in Q2 down approximately 50 basis points given channel mix normalization related to the U S ERP shifts.
Jeff Bezos: The implied gross margin improvement from H, one into H two is primarily due to anniversarying the strategic pricing actions, we took in HQ2023.
Jeff Bezos: And with respect to EBIT margin. We will also see an improvement is due is higher sales are expected to leverage SG&A inclusive of the benefit of our productivity initiative project fuel.
Jeff Bezos: I've said by higher incentive compensation and a normalized cadence in A&P versus prior year.
Jeff Bezos: This is lower than the second half of 'twenty three due to the fiber one campaign launched in each 123.
Jeff Bezos: Before I turn it over to Q&A I wanted to leave you with four key points.
Jeff Bezos: Our fourth quarter performance and our holiday period performance demonstrate our ability to deliver profitable growth in the year ahead.
Jeff Bezos: Our strong gross margin illustrates the health of our brand and we expect continued improvement with several headwinds inflicting to tailwind.
Jeff Bezos: In 'twenty to 'twenty, three we grew our direct to consumer 13% lapping 18% growth in 2022.
Jeff Bezos: Plans for 'twenty for zoom high single to low double digit growth driven by positive comp sales and continued growth in E Commerce and <unk> company net store openings.
Jeff Bezos: And we continue to improve the agility and efficiency of our business with the launch of our cost savings initiatives, which will result in stronger profitability in 'twenty, four and 'twenty five and help solidify our path to deliver 15% operating margins overtime.
Jeff Bezos: And with that I'll turn it over to Q&A.
Jeff Bezos: 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.
Jeff Bezos: Due to time constraints the company requests that you ask only one question.
Jeff Bezos: If you have an additional question please.
Jeff Bezos: Please queue up again.
Jeff Bezos: If at any point. Your question has been answered you may remove yourself from the queue by pressing star one again.
Jeff Bezos: Our first question.
Jeff Bezos: Comes from the line of Bob <unk> of Guggenheim. Please go ahead.
Bob <unk>: Hi chip.
Bob <unk>: All the best.
Bob <unk>: Been amazing.
Bob <unk>: Joy just retirement and thanks for all the the partnership and the work that's been great Goodbye.
Bob <unk>: Thank you very much.
Bob <unk>: Yeah.
Bob <unk>: And then I guess can I shift.
Bob <unk>: For Michelle.
Bob <unk>:
Michelle: On the U S. Wholesale I think the performance was definitely better better than we thought I think the return to positive earlier than we thought.
Michelle: Could you just spend some more time on exactly what drove it back to positive and do you really think this is a change in trend and can you just maybe spend a little more time in U S. Wholesale for the first half just some of the drivers and the expectations there. Thanks.
Michelle: You bet, Bob Great to connect.
Bob: First let me just say, we're really pleased with the quarter.
Turning to gross were up 2% over all the.
Bob: The Levi's brand overall was up 4% and I know I said it in my remarks that this is a multi decade high really driven off of the strength of the brand globally and then in particular to your question around wholesale we're encouraged as you said the U S wholesale business for Levi's inflect to growth it was up five.
Bob: And overall the actions that we took this past year, they're getting traction they are working and we.
A very surgical approach to some price reductions as you know just across the extent and we're seeing volume gains there.
Bob: Secondly, and very importantly, we're overall improving our execution with fill rates returning to normalized levels. So that's improving in stock rates with our key customers and when we're delivering newness.
Bob: Lot of newness hit the floor in Q4, we felt good about that in D. C. We also felt good about that with wholesale so so net net overall as a company we're exiting the year on a strong note.
Bob: U S wholesale were encouraged but as it relates to that channel, we're not declaring victory yet there's been a lot of volatility this past year seminar controls them outside and so we are taking a cautious approach as we look forward, but surely we're going to lean in to every and all opportunity as we see it.
Bob: Great. Thank you.
Bob: Okay.
Bob: Yeah.
Bob: Thank you.
Bob: Our next question.
Bob: Comes from the line of Paul as you.
Bob: Citi. Please go ahead Paul.
Paul: Hey, Thanks, guys I'm curious if maybe you could talk a little bit about the Europe business, how it performed relative to your expectations and specifically in the holiday periods in November December period.
Paul: Also if you can address the issue in the Red Sea, if youre seeing any impact.
Paul: From from what's going on there. Thanks.
Paul: Yes, sure. So I'll take the first part of that which is Europe and then Herman will talk about the RNC I'd say overall Europe, it's been tough for us this year I mean, not unlike the U S. There's been macro headwind and that's especially impacted us in the wholesale channel.
Herman Cain: Overall, we posted modest growth and we're planning that business modestly up in the coming year.
Herman Cain: It is it is continues to be a tail into two parts one is.
Our brand continues to be especially strong in Europe, we see that in our DTC channel, which was up 10% for the quarter ecommerce is on fire that was up 33% a lot of great work happening in that business around both driving traffic conversion and loyalty.
Herman Cain: And again similarly, we're seeing great engagement with our consumers in our stores.
Herman Cain: Really the challenge for Us in Europe is around the wholesale channel customers are in financial distress.
Herman Cain: And there's been just an overall in some parts of Europe.
Herman Cain: <unk> backdrop with the consumer all of that being said, we're working closely to ensure that we're delivering relevant products. We have a lot of newness coming in especially in the back half of the year in Europe.
Herman Cain: And we're encouraged by our pre pre book is actually positive for the back half of the year and what's resonating in some of our new strategies around denim lifestyle denim drafting denim skirts denim dresses and then given that the weather was a real challenge for us, especially at the beginning of the quarter, we're making sure that we have plenty of seasonally relevant.
Herman Cain: Products that were introducing performance cool lightweight done them as I shared in my remarks earlier, so where are the areas. We can control, which is around innovation and brand strength. We are leaning in to make sure that we can show up in a in a great way.
Herman Cain: And Paul to your question about Red Sea first a big shout out to our operations and commercial teams. They are working around the clock.
Herman Cain: Finance teams from a costing perspective.
Herman Cain: No.
Herman Cain: Just wondering Todd we're getting out of the word of supply chain issues. So we have this but you know we have experience.
Herman Cain: In resolving some of the things we have activated our contingency.
Herman Cain: At this point, we're seeing a 10% to 14 day increase in transit times is not going to break the bank, we're working through it.
Herman Cain: We speak we have already shifted.
Herman Cain: Some product to go through the West coast instead of the East coast and that's easing some of this impact on terms of freight costs, we do have long term contracts.
Herman Cain: Roughly 70% of our ocean trade it under three year contracts.
Herman Cain: First is one year contract.
Herman Cain: So we're doing our best to offset it.
Herman Cain: From that perspective, if the current crisis continues through the second half of the year. There is some risk to Cogs, but for example in our guidance.
Herman Cain: One is provided on gross margin you know we haven't necessarily built in for example, the exit of Denison, which will help gross margins so that will help offset it.
Herman Cain: The fuel program is out there.
Herman Cain: Working through.
Herman Cain: Sizing some cost benefits and so there are a couple of things that we're playing around with just to make sure. There's enough contingency should this crisis continue.
Herman Cain: Thanks, guys and best of luck trip and Michelle.
Herman Cain: Thanks, Paul.
Herman Cain: Thank you.
Our next question.
Comes from the line of Jay sole of UBS. Please go ahead Jay.
Herman Cain: Great. Thanks, so much two part question. One can you just maybe dive a little bit into Asia, and maybe just walk us through some of the different countries, what's going on there.
Herman Cain: What drove the business and then on the on the $100 million of cost cuts is that a number that's sort of an annualized number where youll see sort of.
Herman Cain: Run rate of say $25 million by <unk> or do you expect to achieve the $100 million of that cost cuts. This year in total thanks, so much yeah. So.
Jay: I'll answer both.
Jay: On the $100 million under a million is in 'twenty four it starts in Q2.
Speaker Change: And then accelerates as the progresses.
Speaker Change: We haven't yet talked about 25. The program has just started and so you will see.
Speaker Change: Benefits in 'twenty five.
Speaker Change: Our objective as Michelle.
Speaker Change: Mentioned is as you make this pivot to a DTC.
Speaker Change: The company will become a lot more.
Speaker Change: And a lot more smarter.
Speaker Change: From that.
Back to Jay So that's the answer to your first question on Asia Asia.
Speaker Change: Continues.
Speaker Change: Continues to see strong growth, we are ending Asia.
Speaker Change: Up 18% on a full year basis, Yes, Q4 was slightly.
Speaker Change: You know not as strong.
Speaker Change: There was some timing I would say.
Speaker Change: Ah in two markets between Q3, and Q4, but still.
Speaker Change: Strong about is China for example was up 13% up 21% for the year and profitable.
Speaker Change: Which was great.
Speaker Change: From that perspective in China as an example, we have just initiated a local product engine.
Speaker Change: And the early read from that given the feedback we got from our franchisees.
Speaker Change: And you know the folks on the ground is very very positive and so as we think about the outlook for Asia.
Speaker Change: You know we are signaling as part of this outlook high single digit is probably a little lower than the low double digit we had invested and that's largely because Asia.
Speaker Change: You all may not know this but Asia also oversees the middle east and given the middle East.
Speaker Change: Prices were just being cautious you know.
Speaker Change: You never know.
Speaker Change: How long that continues.
Speaker Change: Ill.
Speaker Change: So we're just being careful about that.
Speaker Change: Got it. Thank you so much very helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question.
Speaker Change: Comes from the line of Matthew Boss of Jpmorgan. Your question. Please Matthew.
Speaker Change: Great. Thanks chip congrats youll be missed.
Speaker Change: Thanks, Matt Artemis, all do too.
It's been no it's really a pleasure working with all of you guys.
Speaker Change: And goals.
Michelle: So Michelle.
Could you maybe speak to global health of the denim category as you see it today.
Michelle: Any key fashion trends that you see emerging into 2024, and if you could just elaborate on the timeline for the expansion of the lifestyle opportunities that you cited and then Amit on the gross margin side, how best to breakdown product cost recapture within your gross margin guide relative to mix and full price selling.
Michelle: As we build up the gross margin for 2024.
Michelle: Sure So Michelle up too, yes, hey, Matt great to connect them. So first let me start with the denim category overall.
Michelle: Globally denim category was up about 5% mid single digits. This year and that's actually planned to continue as we look forward.
Michelle: So we're excited about that clearly is as the category leader, we continue to maintain our number one share position across men's and women's.
Michelle: By a significant margin. So yes, we continue to invest in the brand around the world that continues to be really important and then to your point around fashion I'd start by saying that we had a great year on the womens side, you know for overall FY2023 women.
Matthew Robert Boss: <unk> women business was up 4% and for Q4 at Levi's Women's was up 9%.
Matthew Robert Boss: We've long said that we lead the category trends and again this past quarter demonstrated that and as we leave the trends we're seeing it resonate with the consumer.
Matthew Robert Boss: A lot of the low loose that are really driving the business on the flipside flip side, our real cage Val does really well. So we're offering a lot of diversity in the line on the fashion that everything from the higher rise low rise and but as I said the lives and values continues to be relevant and we're anticipating that as it.
Matthew Robert Boss: Oh yeah.
Matthew Robert Boss: The other piece, we're really excited about I mentioned it in my remarks is lightweight denim as temperatures.
Matthew Robert Boss: Got warm.
Matthew Robert Boss: We want people to be and revise the year rounds that impacted us. This past year. So we're going a lot bigger and deeper on things like procurement cool in lightweight down them and have a lot of great fashion offerings for our women there and then the other part of your question is around the denim dressing you know I think especially relevant again to fashion and women because we do see a big opera.
Matthew Robert Boss: <unk> in categories like skirts or if there's actually a growing category.
Matthew Robert Boss: <unk> quite significantly skirts dresses tops and this past quarter, we saw dresses and skirts up 50%.
Matthew Robert Boss: And the team as you look at the pipeline is coming here, we've made much bigger investment in those categories, both in DTC and wholesale and our customers are responding as well in terms of their open to buy.
Matthew Robert Boss: Feel good feel really good as we look forward.
Matthew Robert Boss: And.
Matthew Robert Boss: Matt to your question, let me just break up Q4, I noticed the favorite question moves from some of them.
Matthew Robert Boss: When I say inside trends and I'll talk 2004, So Q4 up 200 basis points I'd say broadly product costs about 140 makes about $75 80.
Matthew Robert Boss: Basis points.
Matthew Robert Boss: And then you know favorable FX, we were selling more full price thats, probably 80 and then.
Matthew Robert Boss: It was offset by pricing.
Matthew Robert Boss: Reductions.
Matthew Robert Boss: Asia at end of quarter, three that's about a 100 basis points of a drag. So that's Q4 as we think about next year I think product cause probably a 140 to 150.
Matthew Robert Boss: Tailwind.
Matthew Robert Boss: Not higher because we're going to be Anniversarying. This in Q4 of 2023.
The pricing actions, we anniversary at the end of each one but the impact.
Matthew Robert Boss: Which is a drag on gross margins about 40 50 basis points.
Matthew Robert Boss: And then between mix of price a little bit of air freight, it's 30 to 40 basis points.
Matthew Robert Boss: Tailwind so that's what makes up the $1 40 to 150 gross margin for 2020 pool accrue.
Matthew Robert Boss: Accretion for 2022.
Matthew Robert Boss: Great color. Thanks.
Matthew Robert Boss: <unk> been at that.
Matthew Robert Boss: Thank you.
Matthew Robert Boss: Okay.
Matthew Robert Boss: Our next question.
Matthew Robert Boss: It comes from the line of Dana Telsey of Telsey Advisory Group. Your question. Please Dana.
Matthew Robert Boss: Dana Please make sure your line is muted.
Matthew Robert Boss: Your phone lift your handset.
Matthew Robert Boss: Hi, Best of luck chip, you'll be missed and Hello, Amit and Michelle.
Matthew Robert Boss: It is about the wholesale business.
Speaker Change: Michelle do you think about the wholesale business in each of the different regions and you think about the path to 2020 for giving you talked a little bit about the improvement in the U S. Anything youre doing in terms of activating it differently by region, and how you're thinking of pricing by region.
Speaker Change: How you built up the gross margin. Thank you.
Speaker Change: Sure when I talk about the sales side of it and harm. He can also talk about the margin and profitability both of which both of which are we're optimistic but we're being cautious as we enter the year. So I think that really the wholesale conversation is largely across the U S and in Europe.
Michelle: Both of which as I was saying earlier, we've had it's been it's been a volatile past year as I was talking about earlier, but we feel good about the areas within our control.
Michelle: The pricing we took we have no additional plans to take further pricing.
Michelle: Really across the board we feel good about what we did do in the U S. We're seeing the traction there specific to the U S. You know we have a lot of congestion in the past year and our distribution centers that is behind us and our inventory positions are really solid in the channel for us and for our customers.
Michelle: And so I believe we are primed to take advantage of the demand that's there and as we presented newness to our key customers.
Michelle: Theyre excited so talked about lately denim that's across all channels.
Michelle: Performance Cool and then also as I was mentioning earlier in my remarks, we have a new non denim offering that's going in both channels wholesale and DTC are active check pads, which is non denim has a lot of performance attributes that truly is that.
Michelle: A product that people can wear out and about on a hike.
Michelle: In the office et cetera, multiple colors by pocket Chino. So that is a big launch here in the U S. We'll see how that goes that could be a global opportunity and then specifically to Europe to your question again, we are we are leaning into the consumer demand, but we're also being realistic given the macro headwinds there.
Michelle: And the pressure that we see with some of our key customers, but similarly, we've been working closely with them on innovation and needs and there's been great response on.
Michelle: On lightweight Jonathan.
Michelle: As I was talking about women's fashion, so the low loose.
Michelle: Sponsor denim dressing and to me a really key data point in Europe wholesale is that our pre book for the second half is positive and so as we look to the year. We are optimistic to see an inflection point in the back half of the year as it relates to Europe wholesale and candidly for both Mark.
Michelle: And that's complemented of course with the strength in our DTC business, which continues to perform very strongly.
Michelle: And then on to your question.
Michelle: Gross margin across regions and pricing.
Michelle: We haven't built in a lot of pricing in 'twenty four we just conscious of the value conscious consumer in the pricing we've taken.
Michelle: Haven't built in price reductions.
Michelle: And what we did in the U S as is.
Michelle: Is it.
Michelle: So as you think about the growth.
Michelle: And the channel mix higher.
Michelle: DTC as an example, and higher international offset surprise reduction impact.
Michelle: We'd see in the first half.
Michelle: Pricing actions, we took in the U S. If you think about across all.
Michelle: Across the regions.
Michelle: I would say Latin America, and Asia C a little bit of.
Michelle: FX impact on gross margin.
Michelle: And as you think about.
Michelle: The U S. In H one there is the anniversarying of the price reductions we took so you'll see that margin impact in the U S.
The other regions. So that's just a little bit of color.
Michelle: Thank you.
Michelle: Thanks, Dan Thanks, Dan Thank you.
Dan Smith: Thank you.
Dan Smith: Our next question comes from the line of Laura vast vast Alaska of BNP Paribas.
Laura Alaska: Good afternoon, and thank you very much for taking my question I wanted to follow up on Jays question on the $100 million cost savings program.
Laura Alaska: Pardon me.
Laura Alaska: I think there is some savings across the Cogs line.
Laura Alaska: SG&A line can you just kind of give us a rough shape of that across the $100 million and then.
Quick question here.
Laura Alaska: I think it's important sourcing hub.
Laura Alaska: They did raise minimum wages nicely over 50%.
Laura Alaska: A few months ago, just curious to know if youre going to see a somewhat of an impact on that or are you going to able to offset that.
Laura Alaska: Yes.
Laura Alaska: Wage hikes. Thank you guys.
Laura Alaska: So on the $100 million, mostly SG&A.
Laura Alaska: There's probably a minor in Cogs, but mostly issuing it at this point you know as we continue the program we're going off to.
Laura Alaska: Driving more productivity and Assortments et cetera, So that's going to probably come over time to your question about Bangladesh, Yes, we did see our Cogs guidance assumes the inflation that you're talking about.
Great. Thank you very much.
Laura Alaska: Thanks, everyone for joining the call and we look forward to speaking with you in April.
Laura Alaska: Yeah.
Laura Alaska: Thank you.
Laura Alaska: This concludes today's conference call. Please disconnect your lines at this time.
Laura Alaska: Thank you.
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