Q3 2019 Earnings Call

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Jason.

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Yeah I have this filling of your first and last name. Please.

First name D.A.B.I.D.A. Davidson.

And last name be our old W. en route.

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A I.E.R.A.

Okay. Thank you and join you to the Columbia beyond a quarter by quarter basis due to the timing of shipments door closures.

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Product launches et cetera.

And do evaluate U.S. wholesale performance over a longer time horizon.

For now we see the third quarters the top this comp for the full year and while we'll have the tale of the dockers and pod and lower off price sales again in Q4, we expect that U.S. wholesale comparisons to prior year will improve in the fourth quarter.

We expect that U.S. wholesale will remain challenging, but we're strategically evolving our approach to the channel and we will exit the year with a structurally stronger wholesale footprint and we answered it.

Now turning to our where to place strategic choices, which as a reminder, our drive the profitable core expand for more and become a leading world class Omnichannel retailer first on the profitable core business, which comprises mens bottoms, our top 10 wholesale customers and our top five mature markets.

Revenues in each of these three components of the profitable core grew in the third quarter when adjusted for the dockers and off price impacts to us wholesale that I just discussed.

Most importantly, we've grown revenues in each of the three components of the profitable core low single digits on a year to date basis without any adjustments.

Turning to our second strategy, which is to diversify the business by expanding for more into tops women's underpenetrated markets and with our value brands.

All percent growth in our women's business was fueled by the success of our high rise skinny fits and ongoing growth in women's tops.

Total tops growth at 17% was balanced across men's and women's driven by truckers sweatshirts and keys as we continue to diversify within the category.

Graphic Tees remain a hot item up 6% in the quarter after being up more than 40% in the third quarter last year.

Each of our emerging markets of India, Russia, and Brazil posted another quarter of double digit growth and in China net revenues grew 2%.

Our company operated stores in China grew mid single digits from positive comp performance and a shift towards more full price stores and this was on top of double digit growth last year.

Franchise performance was mixed as we continue to work to turnaround that part of the business.

Last week in collaboration with the franchise partner, we opened a new 7000 square foot store in new Han. This is now our largest store to date in China, allowing us to showcase a broader assortment, including Super premium products and early consumer response has been very strong.

And on the heels of our recent rollout of revised customization services. We chat we have joined forces with the hugely popular music and dance gains QQ dance to create a three d. rendered wardrobe for its game characters, so consumers will be able to address like their game avatars.

Check it out on you to by searching for a revised skew to dance not only do partners partnerships such as these provide consumers with a fun interactive shopping experience, allowing them to define and designed our own cool, but they also support our endeavor to position the Levi's brand at the center of culture.

China remains on track to post growth for the full year after being flat last year, you have the right people and strategies in place to accelerate China's growth in 2020.

Our third where to place strategic choices to become a leading world class Omnichannel retailer direct to consumer growth of 12% reflected strength in each of our three regions global DTC for US includes the brick and mortar stores and e-commerce sites that we operate.

Revenue growth from our brick and mortar stores was up 10% globally performance of existing stores improve both internationally and in the United States in our outlets and full price stores and we continue to build out our store network, which has grown by 90 stores since last year.

In the third quarter, we opened the largest levi's flagship in Asia, and Tokyo's Harajuku District, the center of Japanese youth culture and fashion.

Global ecommerce growth was even stronger up 21% for the quarter with increased traffic and double digit growth in all three regions.

We continue to enhance our omnichannel capabilities, our rollout of ship from store continues. We are now also leveraging RF I'd technology more than 500 stores across 17 countries and growing.

Both of these initiatives allow us to optimize inventory augment sales and improved store productivity.

We're seeing an uplift in stores, where we have rolled this out.

Looking forward to the fourth quarter in the US we're launching new ways to connect loyal shoppers to the best of the Levi's brand with a new loyalty program and App, which will give consumers access to frictionless shopping exclusive product loyalty rewards and style inspiration.

These platforms allow us to get closer to the consumer and we will be rolling them out globally over the next year.

Our strategies to diversify our global business are clearly working domestically and abroad. Our international business is approaching 60% of total revenues direct to consumer is heading to 40 women's is nearly a third of total revenues in tops is almost a quarter in all of these areas the remains along.

Runway for growth.

And we're achieving all of this while keeping our commitment to doing right by people on the planet in August we released the global strategy to reduce our water usage by half in water stressed areas by 2025.

We're also setting the standard for other apparel companies with our industry, leading targets to reduce carbon emissions and our long history, incorporating sustainability and everything we do not least of which is the supply chain disruption, we're driving with project that Alex continues to reduce our reliance on precious resources.

Driving innovation across our business and resonating with younger consumers, whose passion for the planet has been particularly visible of late.

Now over to Harmeet to review, our third quarter performance and update our full year outlook our me.

Thank you Jim.

Welcome to everyone joining our call my comments today, when resin headquarter comparisons on a year over year advances in U.S dollars unless I indicate otherwise.

Hi, good quarter revenue of 1.45 billion grew 4% reported bases and 5% in constant currency.

The contributions by region Channel then category of the five points of constant currency growth, whereas all those by region five points of growth from Europe and dual points from Asia were partially offset by lower sales in the Americas.

By channel see volumes came from a company operated stores one point from called E Commerce, and one point from global wholesale.

And by category six points of growth generated by a diversification into lines wins and tops was partially offset by a decline in dockers Levi's men's volume growth flat for the quarter.

Hi quarter gross profit of 767 million represents an increase of 25 million Despite limited million dollars of unfavorable currency translation.

Gross margin of 53% declined 20 basis points in on reported basis due to currency headwinds from a stronger us dollar.

Excluding all currency effects, both translation and transaction gross margin expanded by 40 basis points driven by the margin benefits of our direct to consumer and international growth.

We also starting to see benefits of the price increases we have taken globally with substantially mitigated no product enhancements via M&A.

Third quarter SGN expense of $596 million.

Percent above prior year SGN as a percentage of revenues improved by 60 basis points, hi investments in direct to consumer expansion technology and distribution capacity, but more than offset by higher incentive compensation expense last year up the flat.

I think a fallen significantly ahead of internal expectations in 2018, and then all our impact from previously cash settled stock based compensation awards. Additionally, we drove leverage on various cost this quarter inflecting cost discipline.

Third quarter operating income of 171 million was up 8% on an important advances and up 9% on a constant currency basis operating margin expanded 40 basis points to 11.8% due to the lower incentive compensation expense.

Adjusted EBIT was excludes the impact from our previously cash settled stock based compensation was 176 million in the top corridor up 2% on an important bases and our focus in on a constant currency basis.

Adjusted EBIT margin was strong at 12.2%, reflecting on cost discipline as the 20 basis points decline compared to the price.

Due to the currency headwind in gross margins.

Adjusted net income of 128 million for the quarter was down $5 million as the price benefited from 11 million in discrete tax benefits that did not repeat this year.

Adjusted diluted EPS for the third quarter of 2019 was 31 cents.

Please send decline as compared to 34 cents in the prior year.

The prior year tax benefits I, just mentioned in combination with the increase in our share count this year adversely impacted the year over year adjusted diluted EPS comparison by five cents.

Non share more details on the third quarter results of our three regions in constant currency on this I stated otherwise.

In the Americas net revenues were down 3% after being up 9% last year.

Direct to consumer in the region grew 9%, reflecting this trend to the Levi's brand and execution in our stores performance was positive including positive comps in us outlets and which was augmented by strong double digit growth in e-commerce .

We anticipate our recently announced acquisition on the South American Distributer will give us the opportunity to accelerate growth in this important region led Levi's brand many residents with the consumer.

In anticipation of the acquisition, we Didnt ship additional product to the distributing content caught up and that adversely impacted growth in the Americas by about a point in this quarter.

Which was about half a point through the total company.

Beyond this impact underlying performance in the Americas region International markets remained strong.

Within the U.S. strong direct to consumer growth of 7%, partially offset the us wholesale decline. This year, we're comping the dockers line reset and Fitzgerald financially distressed retail out and we are reducing stand still off price all of which we do not consider indicator.

Both our underlying performance in the channel.

Collectively these in mostly impacted us wholesale comparisons by about six points in the corridor.

And we expect these factors to give simona daughter magnitude in the aggregate in the fourth quarter, primarily driven by lower off price sales.

Excluding these factors us wholesale declined 4% in the third quarter reflect reflecting the ongoing challenging environment in the channel.

Importantly, given the diversification of the business over the last few years. This only creates to one point for the company overall, which we've been more than the able to offset by areas of opportunity that are growing at a faster pace.

US wholesale remains an important profitable channel, but keep in mind and our revenue algorithm does not assume growth in the us wholesale.

Our strategy is our targeted towards managing into flattish over time.

No walking us wholesale is about flat year to date on an adjusted basis, and we expect a fully to be similar.

And even with the decline this quarter the Americas as the region has grown 3% year to date.

Right in the middle of the range for this region in our growth algorithm.

Third quarter operating income for the full Americas region declined 7%.

Mode in the region revenue as higher selling expenses offset a higher gross margin.

Europe again posted outstanding growth, 14% on reported basis and 18% in constant currency and this despite a backdrop has remained challenging at retail and missed an increasingly uncertain macroeconomic climate.

Revenue growth this quarter was again broad based across the region with double digit growth in mens and womens all product categories and both channels when wholesale and direct to consumer each matched the region's 18% growth rate.

The brand continues to be hard in Europe , and the team continues to do an amazing job executing across all channels to support the brands momentum.

Europe's operating income grew 34% on a reported basis and 39% on a constant currency basis, reflecting the net revenues growth a higher gross margin and leverage on SGN.

In Asia also posted a strong garneau, notwithstanding macro volatility from tariff dogs and protests in Hong Kong.

The regions net revenues grew 9% on a reported vinces and 12% in constant currency.

Traditional wholesale franchise and e-commerce , each grew double digits.

Most markets in the region group.

This is Tom strongest growth in Asia. This quarter was in India, partially due to a seasonal change in shipments vis-a-vis prior year.

China grew modestly and remains a huge opportunity as this dividend represents only about 3% of total company revenues.

Hong Kong was a notable exception in the region the ongoing protests, they're impacted traffic and cause some of us chose to close temporarily costing the region about a point of growth.

Asia is operating income grew 18% on on reported basis, and 25% on a constant currency basis, reflecting the net revenues growth and SDN and leverage.

Turning to balance you than cash flows in dollar terms in many three at the end of the third quarter was nearly flat compared to.

Do you fryer.

Reflecting the debit measures we've taken in recent quarters to reduce and maintain the health of I'm entry.

Adjusted free cash flow of 28 million for the first nine months of 2019 was $42 million higher compared to the first nine months of 2018, despite higher capex investments and paying a higher dividends in the first quarter. This year.

Speaking of dividends you may have seen our press release, a couple weeks ago announcing an increase to the dividend we've been planning to pay in the coming weeks.

At 15 cents per share we now estimate total payment of approximately 59 million, a 7% increase as compared to the previously announced 55 million.

Turning capital to shareholders is a key component of our total shareholder return on.

The higher dividend payment would bring fiscal 2019 dividends up to approximately.

114 hundred $14 million, a 27% increase compared to 2018.

We'll take orders in the books were solidly on track to achieve our full year guidance.

We expect fully a constant currency revenue growth in the range of 5.5% to 6%.

We're tightening our range now that we have only one quarter to goal and incorporating the impact of the distributor acquisition, we announced in August .

Add new nods currency due to a stronger US dollar we expect currency currency translation really adversely impact the full year reported revenue growth by about 275 basis points.

Given year to date constant currency revenue growth is 8% on constant currency guidance implies fourth quarter about flat to slightly down compared to the prior year.

This reflects an adverse impact of about 500 basis points collectively from lack of a black Friday lower off price sales to distribute acquisition in South America and the unrest in Hong Kong.

None of these factors detract from the underlying strong health of the business.

Turning to gross margin reaffirm our full year guidance and wanted to further clarify the currency impact embedded in our gross margin expectations on a reported advances we expect full year gross margin roughly in line with prior years, 53.8%.

Excluding all currency effects, both translation and transaction, we expect full year gross margin expansion in the range of 40 to 60 basis points in line with our growth algorithm, reflecting our geographic and channel diversification strategy.

With respect to adjusted EBIT margin on a reported advances we expect full year adjusted EBIT margin roughly inline with prior years, 10.5%.

And keep in mind. This year, we won't have the 25 basis point benefit to fully adjusted EBIT margin that we normally get from Black Friday.

Excluding the currency effects from translation, we expect adjusted EBIT margin to expand approximately 10 basis points.

With respect to adjusted EBIT dollar growth, we expect currency translation without adversely impact the fully reported adjusted EBIT growth rate by about 450 basis points.

In view of high year to date tax rate, we now expect to fully our effective income tax rate in the range of 19% to 20%.

Our 2019 Capex expectation remains in the range of 190 to 200 million and we continue to expect nearly 100 store openings on a gross basis this year.

It is pertinent to note that our full year constant currency revenue guidance, taking into consideration lack of black Friday, the distributor acquisition and our strategic decision to reduce and still off price in support of brand equity.

Presents an organic growth rate off over 7%.

Head of our growth algorithm and this is on top of 14% last year.

Before turning to Q and in a reminder, on Thats why the remains difficult to predict what the future holds for 10 of policy, we have proactively taken steps to insulate our business from the long term negative impact of these kinds of measures.

As such we believe we are less exposed than others and we estimate the impact of Dallas on imports to the us from China will have a negligible financial impact to our business with that we'll take your questions.

Thanks, Sir the floor is now open for questions.

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Okay. Thanks, the company request.

Ask only one question.

We have an investor questions. So that's a going.

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You never leave yourself from the keys that pressing the profile.

Your first question comes from Matthew Boss with Jpmorgan go ahead with your question.

Thanks for all the color guys.

Maybe just on U.S. wholesale revenues as we think about a 4% adjusted the underlying decline in the third quarter that you laid out ex some of those items.

I guess whats the magnitude of improvement that you're expecting as we think about the fourth quarter, maybe how best to think about underlying us wholesale run rate as we think about next year and just larger picture as we kind of parse through that with the department store softness does this impact your ability to drive mid single digit underlying revenue.

Since we think about next year and beyond.

So I'll answer your last question first and then come back and talk about us wholesale specifically.

In short I think our growth algorithm remains completely intact, our ability to grow alessandra, 2% to 4% range remains unchanged and.

It's fundamentally driven by the underlying strength of the revised brand across the full region, which is best evidenced by the strength of our DTC business on wholesale excluding those onetime dynamics that we talked about which was worth six points on the balance the underlying trend.

Negative for as we said and merit in the prepared remarks, we do expect that this is going to be the toughest comp for the quarter or for the year toughest comp quarter for the full year.

I think it's fair to assume over the long haul that we're going to be able to manage our us wholesale business to be about flattish. That's what we've been saying all along we've really been focused on structurally evolving our us wholesale business.

To be sounder event. It was as we entered the year, so things like exiting as much as possible the off price business, which comes at a really low gross margin in this not healthy for the brand as we do that that strengthens our business structurally and things like testing the brand in charge.

Good which still has continued to do really really well at a very good price point by the way so I.

Im confident we're going to be able to maintain that business in the flattish.

In terms of total dollars and as a percentage of our total business will continue to to decline as we grow our faster growing businesses of DTC in international.

Hey, Matt.

As Ed mentioned in on an adjusted basis, if you take the.

In other three factors out.

You as wholesale business is flattish on a year today advances and we expect the same for the year.

In terms of Anniversarying.

Dockers reset is going to move.

Fairly minor in part to fall.

And we resetting off price, we expect to have reset off price by Q1 of 2020 Soviet Anniversaring. Most of these in a onetime factors over the next quarter. So.

Great and then and then just one follow up on the gross margin maybe Harmeet could you just walk us through the drivers of gross margin expansion in the fourth quarter and then just as we think multiyear just maybe the puts and takes on the gross margin line. Thanks sure. So I think if you think the quarter in all our gross margin.

Ex currency was up 40 basis points I would say.

The expansion of direct to consumer and international.

You know.

Helps gross margins 40 to 50 basis points, we have taken price increases.

Globally in the U.S., Europe , and Asia, and those price increases are offsetting our product investments and then there is just saving on so from sourcing and the lag. So thats really what was driving us in quarter four.

Because we're upping the top end of our.

Gross margin range ex currency to 40 to 40 to 50 to 40 to 60 that is largely driven by the fact that we expect lower off price sales in quarter, four and as chip mentioned in those sales come at lower much much lower margin, so that really benefits us.

And currency I think in quarter, four will be much lower impact as you've seen in quarter to quarter. Three is kind of progressively come down over the last couple of quarters does that help you Matt.

We'll take that as yes.

Next question. Your next question comes from Paul Vanish way with Citigroup.

Thanks, guys can you talk a little bit about Europe business I'm curious on the wholesale side that revenue growth how much of that is being driven by new doors this quarter versus.

Same store sales and think question for DTC.

First had driven by new store openings versus comp growth in that in that region and then I guess, just one follow up on the U.S. wholesale.

Okay can you maybe break out for us how growth in the channel or contraction in the channel look by department stores versus the mass channel versus specialty. Thank you.

So first question was about Europe right.

So if you if you think you would think about a business in Europe , our business in Europe was up 14% on top of.

No.

Mid teens growth last year. It was it was across all channels. So wholesale was up 18.

I think direct to consumer was up 18.

None of the channel the freely.

No.

Really work together the fairly homeowners from that perspective.

In terms of is it more doors or and.

Is it.

Comp sales I would say in our comp sales performance in in Europe is probably the strongest.

Around the World we've had.

Generally positive traffic in quarter, three in Europe and in Asia.

In the U.S. traffic will undoubtedly slightly down by more than offset through better conversion and and conversion and increased unit per transaction using leading positive comps. So I think is the combination of both new doors as well as comp sales, though they define factors.

Europe is between franchise and company.

Those reopening one year door a week.

On a gross basis.

Okay.

And just same on the wholesale side is that mostly the new accounts are the.

Same accounts same same chains that you're just selling more care.

It's it's so it's largely the same.

Change, we're selling more too, but we are selling.

More of lifestyle as.

Women's business and our Das business continues to grow so bill Maher for lifestyle.

We are selling more product and obviously, taking more floor space given these trends of the brand.

Gotcha. Thanks.

The question Paul just to answer your question on Us wholesale.

In a chip talked about.

Incremental penetration in premium retailers saw premium business.

In.

In U.S. wholesale is up 8% for the quarter, 16% year to date.

We're also in a growing our digital of footprint.

In the U.S. and thats across build players as well as wholesale dot com and that business.

In quarter, three was up 20%. So again the strategies are too.

Grow premium and to continue to go digital and Thats offsetting some of the traffic declines in introduced from Department stores.

Okay. Thank you good luck guys.

Thanks.

Your next question comes from terrible with Guggenheim Securities.

Hi, I'm good afternoon, I'm just a couple of questions for me. The first one is can you just elaborate a little more on that target test and I guess, specifically are you seeing any cannibalization with other retailers or do you think it's purely additive with the red tab and and I would also just be curious to know within target do you think that it.

Impacting the Denison brand at all.

Okay. So.

Hi, Bob.

The target tests, just to take everybody back the started.

Starting with the 20 door test early in the calendar year.

He actually came to us they had on consumer research with their gas that indicated that a brand that big most wanted to buy and target, but couldn't buy was levis most searched item our target dot com, but people kind of by was revised.

And so we started with a 22 forecast just on bands and in those 2000 doors, we pulled venison and so revised was purely incremental.

Really good price points or was it was levi's mens was bottoms.

Yes, and some trucker Jack trucks on the bottoms. We've included some of our latest most contemporary that's like the fiber to which was priced around $50.

Real quickly learned that Theyre, just loved finding revising their stores, we work with target to have gray in store presentation of the merchandising is really well done.

And the test in short at work, we look very very carefully.

Impact of cannibalization because if this was purely a left pocket right pockets were just shifting revised from one customer to another and not gaining incremental share from this we weren't interested in pursuing yet and we so we drove five mile radius around every test store and we look at the incremental.

How many of the task than it was incremental so we have now since.

Now expanded to 50 doors on mens and we have started a 20 door test on women's.

Which was also up through a very good start.

You may recall last quarter I said, a full potential. This is we're really focused on the urban doors and the college town doors as one of the things. We're learning is we're converting a younger target consumer who isn't shopping at the malls and they are discovering levis at their target and we're converting them on some of our.

Premium wholesale product so feels really good and it does appear to be truly incremental so full potential. This is probably somewhere in the range of a couple of hundred doors 200 doors or so but.

But we're continuing to work at with the target team, but feel really good about the progress that we've made and this is part of as I said in the prepared remarks. This is part of evolving.

Structural nature of our us wholesale business and this one seems to be a good ones for us.

Got it great and just the second question is.

On the marketing side.

Can you just talk about the plans for the fourth quarter and sort of how you're managing the marketing budget is even as you look in the next few quarters into the next year.

Yes from well from a from a from a financial standpoint, what we've tried it is that we expect to advertising to be about flattish for the full year around 7% of revenues and that implies that it's a little bit heavier in the fourth quarter, which is normal given the seasonality.

And.

So we are going into the holiday season.

Loaded and ready to bear as I said, we've got a number of really strong collaborations connecting with consumers digitally around the world is really really important I've talked about the collaboration that we've got with QQ dance in China, which which really is awesome and we're connecting with the young consumer through that.

And really marrying the virtual world, but digital world.

And the physical world with products that consumers have put on their avatar and the game and buy for themselves.

So we've got a lot of exciting things, but just continue to put the brand at the center of attention and.

We will continue to double down on our marketing every time, we do it appears to be working so.

We feel really confident as we go into the holiday that we've got a really strong program lined up for the fourth quarter and through the holiday season.

Great. Thank very much good luck guys. Thanks, Bob.

Your next question comes from Alexandra Waldis with Goldman Sachs.

Hey, guys. Thanks, so much for taking my question I Wonder if you could dig a little bit more into.

The strategy with respect to off price, so could you remind us when.

The.

Decline in sales to stop channel started.

Perhaps your views on how long that will continue.

Any color on how big of prices as a percentage of the Americas business today would be would be helpful.

Do you see that going over time.

Okay. So.

Hi, Alex.

So first of all just a backup we don't make for off price. There are a lot of apparel manufacturers that see that as an ongoing chair Chantal.

They build product specifically to hit those price points and they're kind of in there on an ongoing basis, we do not do that we treat off price.

Early as a channel for selling distressed inventory, we sold a lot last year, because part of the dockers reset as a matter of fact, we had to get rid of a lot of inventory. So we have a lot of it in the base period.

We kind of our inventory position really started to get very clean as we were coming into Q2 this year.

So there will be some hangover on on off price going through Q1 of next fiscal year, but our objective as we continue to manage our inventories pretty aggressively is to avoid using off price, we will only got off price when we.

We are trying to get rid of distressed inventory, it's not healthy for from a brand management standpoint is not certainly not attractive financially, but finding levi's and one of these off price customers of 14 99, just makes it really really hard to so revise at full price in this market. So that's how we're trying to match.

Richard.

No that the off price cycle will end in Q1 of 2020 from a whopping standpoint, so to answer your question.

It doesn't the thanks, so much that's really helpful.

One more if you wouldn't minus thanking him and follow up to some of the earlier questions.

Could you give us any color on how fast signature grew this quarter and then perhaps also denizen.

Given some of the measures that you're taking and target.

Yes, so both of those brands were willing to talk about him about.

Prepared remarks for brands were essentially flat for the quarter.

One of the things and target I did say that as we tested revise red Tabin target, we pull denizen.

We have had a conversation with target about going back and testing Dennis and because it plays at a very different price points targets, a very different consumer so going back into some of those original test stores and seeing what happens when we put denizen Bakken incrementally.

And and Alex the flat for the quarter was on the back over 15% growth in quarter three of last year.

Awesome, Thanks, guys for color.

Okay. Thank you.

Your next question comes from Kimberly Greenberger with Morgan Stanley .

Great. Thank you so much I'm wondering if you could just talk about the accounting impact when you acquire distributor is there a sort of subsequent benefit in future quarters Q revenue.

EBIT dollars. If you can just sort of walk us through how to think about the impact and then understanding that you're not giving 2020 guidance today I'm. Just wondering if you have a view of how we should on a preliminary basis think about FX impacts.

Going into next year.

And then lastly try not you indicated grew modestly.

In the quarter I'm wondering if that sort of meeting your expectations.

And what are the sort of puts or takes.

In China as a separate from Hong Kong. Thank you.

Kim Let me answer one and two and then chip can.

On to China.

So let's take the first one which is.

The acquisition.

Our distributor model is very similar to the wholesale model, which is to sell in model. So we sell into the distributor they markup.

And.

Book, the consumer revenue at their ramp.

The as we when we announced the transaction and the transactions rate consistent with capital of flow through to deploy capital to grow this business an extra growth in markets, where we think we can.

Drive the business faster.

In.

Some of our partners.

So the reason we stop selling in quarter three in quarter four was largely to avoid the accounting issue that you're talking about.

Plus the the distributor has enough inventory.

And so in terms of the change in the business model What'll happen is post the acquisition the business model with will.

Move from an wholesale business model viewer recognizing the revenues based on sell sell in to consumer business model, where we recognized revenues based on sell out so thats the debt does that change.

You know we will.

Give a perspective on the fact of.

The acquisition in 2020, when we talk about 22 any guidance.

In early 2000.

Two Andy.

Fourth quarter for earnings when the process of taking a hard look on what is the impact of the business conversion plus importantly, what other.

The dollars and since we have to invest vendors and advertising, whether it's an organization, but intrinsically. We believe that this transaction is accretive to EPS over the long term and does accelerate growth in that market.

So thats the question on the acquisition to your question about.

FX.

If I could predict FX I'd be probably doing something very different but what I would say right now.

Is up.

It's probably best to use today's rates as as the best proxy when we.

When we close out the your and talk about 2020 at that point will indicate the impact on 2020, but I think.

Events indicate thats, probably current spot rates and the last question I think it wasn't much I saw on on China.

I think just backing way up.

Since.

We are due to a lot of view, China is still a huge opportunity for us.

Represents about 3% of our total business overall.

We said in.

Prepared remarks.

Grew 2% in the quarter, primarily driven by the strength of our business and comfort company operated doors, we have been evolving our China business over the last couple of years go back to fiscal years, we declined in China last fiscal year. We were flat we took a number of steps in China last year.

Set ourselves up for success long term in China. So we took back a number of franchise stores at Beijing.

And.

During high where we own and operate our own doors, we stopped heavily discounting in T mall and now we're basically selling predominantly full price product.

And we are now moving to Premiumizing Super premium I stopped marketplace for that's what's working there. If you look at other particularly look at other brands. So I talked a little bit about this new store that we opened to move upon.

7000 square feet at server three levels that store features expansive sections for all of our premium collections, including revised made and crafted revise authorized vintage Levi's vintage clothing. It's also got a massive tailor shop. So we're putting.

Kind of customization and personalization right at the forefront of everything we're going to continue to focus on strengthening and Premiumizing. The way that we buy sprint shows up in that marketplace. We've got.

A brand new team on the ground on the spin that's led by.

Amy Chang, who we hired about a year ago She's Chinese.

And we're very very optimistic that weve turned the corner and we expect.

Kind of much stronger results over the next couple of years as it represents one of the biggest opportunities we've got.

Terrific. Thank you.

Thanks Kim.

Your next question comes from Omar Saad with Evercore ISI.

Thanks for taking my question I guess Alaska.

I wanted to ask about tops.

It looks like an accelerated to the mid to upper mid teens to high teens, you know, it's an area in your business or maybe there's been some skepticism about the sustainability.

Fashion quotient, there, but the graphic Tees piece I think you said it was only plus six and maybe help us deconstruct, what's really working in that business men's women's international.

As it all trucker jackets and help us think about some of the strategies going forward for that category and clearly are being able to sustain the level of growth.

At a high rate, maybe perhaps higher than some others some unexpected thanks.

Thanks Omar.

Clearly.

No.

Underpenetrated opportunity for us the X.

The acceleration quarter over quarter from that perspective is largely driven I think about adults business think of about a third being fees.

Made up the bulk of it graphic fees uttered truckers and sweatshirts and that hurt.

Well when and other stuff.

We don't spend a lot often there's a huge opportunity think Paulo.

T shirts from that perspective the acceleration.

In quarter, three relative color too.

It was driven by truck cousins sweatshirts really growing at a much faster clip than the average that we indicated a 17%.

And as you think about.

Our longer term opportunities you see just again to previous what's coming on the bike and for each one and age two of 2020, I think really focusing on.

The other opportunities we have I think is what makes US confident we can continue to grow this for a long long time.

Thank God for one more question.

Your next question comes from Dana Telsey with Telsey Advisory group.

Good afternoon, everyone.

About the wholesale.

If you think about the wholesale business and the shift that's going on whether to more premium or to target. How do you see department store penetration changing we see a shift in the account base of wholesale and just lastly on price increases that you mentioned, which.

Began to be initiated zacks globally, and how does that range by category. Thank you.

Okay.

Yes, I guess I'll I'll take a wholesale footprint piece I mean.

As we've said before.

But the channel, especially department stores and the large chain stores, which is the bulk of our legacy wholesale business.

It's.

It is facing structural headwinds and challenges and you know.

One customer has gone bankrupt that that customer used to be our biggest single wholesale customer not even 10 years ago and they are.

Almost gone and so on there's going to continue to be door closures were going to continue to see no.

The short these customers that are overstored cutting from the bottom up.

To date fiscal year to date, we faced over 700 doors that have close where we were in distribution and that is going to continue for the foreseeable future and so our commitment as Spencer continue to run this business to try to manage the revenue which is profitable revenue in this.

Channel to be about flat over time, I think it's inevitable that we will see a shift in what that footprint looks like as some of these bigger legacy customers closed doors that they need to close and and there we are mapping the mark market and.

In trying to preserve our wholesale business by being in the right place at the right time and.

I can't Crystal ball exactly what it's going to look like in three years were five years, but our commitment is to and whats.

Built into the growth algorithm is that we will be able to maintain this business about flattish over time and if you look at our track record that's what we've been able to do despite all the headwinds over the last three plus years. So I'm confident in our ability to be able to continue to do that and then.

Weekly.

To answer your question about pricing, we had more during the roadshow as whether the as you.

When we had met.

With all of your last couple of weeks, we had said pricing as an opportunity for us the brand has pricing power. We have taken several reprising AG actions globally. For example in the U.S. we raised prices.

On some of our first to file to the Fyfourteen the 527 by 10 boxes.

Largely speaking.

Taken space in several actions in Europe in the Asia.

In Europe .

In different markets, we have taken pricing between three and 5% similar in Asia debts.

Generally speaking you're seeing and in an increase in you laws and that's indicative plug in and just the performance. If you look at what's happening in Europe and Asia. There is indicative of the fact that the brands hard to be able to take pricing. So as we think about pricing strategy is longer term, it's all about.

Pricing for inflation and trying to offset currency is one bucket, it's about reducing markdowns, where we can.

And thirdly, it's about pricing for innovation, we did price in the second how for.

Levi's engineered genes.

In Asia and for example, that's also.

Hello.

Now I'd like to turn the floor back over to the company for any closing remarks.

Just about together so with that.

I suspect we will probably be the first earnings call to Rob by wishing you all happy holiday because we won't be back with you all it. So after the holidays when we report our fourth quarter. So I wish you all very happy holiday.

Got you again, new calendar here.

Thank you all for dialing in today.

Thank you. This concludes today's conference call. Please disconnect your line at this time.