Levi Strauss & Co.

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. Fourth Quarter Earnings Conference Call for the period ending November 29, 2020. All parties will be in a listen-only mode until the question-and-answer session, at which time instructions will follow. This conference is being recorded and may not be reproduced in whole or in part without written permission from the company. A telephone replay will be available two hours after the completion of this call through February 3, 2021, one week after call for the telephone replay. Please use conference ID 6963016. 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, www.LeviStrauss.com. I would now like to turn the call over to Ida Orfin, Senior Director, Shareholder Relations, and Risk Management at Levi Strauss & Co.

Thank you for joining us on the call today to discuss the results for our fourth fiscal quarter of 2020. Joining me on today's call are Chip Berg, President and CEO of Levi Strauss, and Harmeet Singh, CFO. We have posted complete Q4 financial results in our earnings release on our IR section of our website, investors.levistrauss.com. The link to the webcast of today's conference call is can also be found on our site. We'd like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Please review our filings with the SEC, in particular the risk factors section of the annual report on Form 10-K that we filed today, for the factors that could cause our results to differ. Also note that the forward-looking statements on this call are based on information available to us as of today, and we assume no obligation to update any of these statements. During this call, we will discuss non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in today's earnings release on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being webcast on our IR website, and a replay of this call will be available on the website shortly. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I'd like to turn over the call to Chip.

Thank you, Ida. Good afternoon, everyone, and thanks for joining us today. Looking back on 2020, I am both grateful for and proud of our teams and how well they executed in face of all the challenges created by the pandemic and other crises. From the start, we acted quickly to protect our people, our consumers, and our business. We demonstrated the resilience and agility needed to meet unexpected moments while also building for the long term. The work we have done this year gives me great confidence we will emerge a stronger and more profitable company. When the pandemic hit, there was tremendous uncertainty about the rest of the fiscal year. We were operating against several scenarios, and I'm proud to say that we beat our internal expectations and overall delivered a really strong year given the backdrop. Our performance further validated the power of our brand, the strength of our strategies, and our ongoing ability to adapt to the changing expectations of our consumers. Many of the changes that have accelerated across our industry look like they are here to stay. Significant consumer shifts, such as the move towards casualization, a heightened focus on sustainability, and more conscious consumption play to our strengths. Going forward, we are sharpening our focus and doubling down on the things that are making an outside contribution to our business performance, things that will differentiate us and drive value for our shareholders. First, leading with our brands. Second, operating with a DTC-first mindset and pivoting to act more like a vertical retailer. Third, we'll further diversify our business by driving outsized growth in under-penetrated areas. And fourth, digitally transforming our business. I'll talk first about how we'll increasingly lead with our brands. Revise has an unmatched brand heritage and authenticity that has resonated with consumers for more than 150 years. And we're driving deeper connections to our consumers than ever before through our product, marketing, digital, and physical experiences. By further strengthening the brand, we can increase market share in denim while continuing to increase our share of closet and other categories. We remain the global leader in denim by a mile. We maintain Jeans market share leadership in the U.S., and we've grown share in women's in key markets in Europe, like Germany, France, and Spain. We're seeing increased demand for our iconic products, like our original 501 fit, which was up 80% across men's and women's on Levi.com and Q4. At the same time, we are building new icons and establishing denim trends. Our women's fashion fits and high-rise continue to drive growth, and we're seeing strength with our newer, more relaxed fits. We're focused on growing lifestyle and share of closet in categories other than denim bottoms. And those categories remain significantly under-penetrated. We're continuing to advance the casual aesthetic and recently launched Red Tab Sweats, a unisex Gen Z focused pilot collection, which sold out in weeks. We will follow up with a bigger collection later this year. In Q4, we collaborated with sustainably-minded brands like Farm Rio and Ghani, iconic brands like New Balance, which sold out instantly across the globe. And we teamed up with leading premium and streetwear brands like Awake NY and Golf Wang. Looking forward to 2021, our collaboration pipeline is robust, including an upcycling collection with Italian fashion house Miu Miu and another collaboration with Valentino. We were targeting Gen Z brand connections in new ways of social shopping, leveraging digital platforms. In Q4, we launched our first ever Instagram live shopping experience, allowing the audience to directly purchase the products displayed by our stylist on Instagram without ever leaving the experience. And we joined forces with Snapchat, launching a Levi's Bitmoji collection, which saw a strong engagement, especially with the younger consumer. Our brand and our values reinforce each other, making us a stronger company. A great example of this is our sustainability work. It was the focus of our fall product line and marketing campaign and will be again in the spring. We're making progress on our industry-leading science-based targets on climate. For example, we now use more than 70% renewable electricity in our owned and operated facilities, on our way to 100% by 2025. And we were one of only three apparel companies recently named to the Carbon Disclosure Project's A-list. We're innovating on sustainability, too. We've been scaling cottonized hemp in our mainline assortment. And last July, our wealth red line brought to market a pair of jeans that uses recycled denim content. In the year ahead, we'll continue to drive more sustainable and more circular products and practices throughout our supply chain. Second, from a channel standpoint, we're thinking and acting DTC first as we accelerate our investments in our own retail stores and e-commerce businesses. The growth of our DTC business will be accretive to our company gross margins and improve the overall profitability of the company. And DTC provides us the forum to demonstrate the strength of the brand and showcase our category expansion. Physical stores are and will continue to be an important part of our business. They are experiential and help us to connect and engage with the consumer and build brand equity. In the fourth quarter, we opened 21 next gen stores, which offer an elevated and digitally connected experience for our consumers. We now have five next gen stores in the U.S., which, along with our other smaller footprint stores, have higher ROIC than the average U.S. mainline door. We will continue expanding our retail footprint, capturing white space opportunities with a focus on these more productive store formats. Our owned e-commerce business grew at a record rate this year, up 29% from last year, and is now profitable on a fully allocated basis. We believe growth rates will remain above pre-pandemic levels as we continue to build out our omnichannel capabilities. During the pandemic, we accelerated building and scaling a number of new Omni capabilities that had been on our roadmap, including buy online, pick up in store, line queuing, same day delivery, and appointment scheduling. We successfully implemented strategies to improve stores' efficiencies and consumer experience, like mobile checkout, which enabled us to transact with consumers on the sidewalk when store capacity was constrained. We've also rolled out additional payment options like Afterpay, which has been scaled to all stores in the US and is delivering an 80% increase in average order value for in-store transactions. Our ship-from-store capability has been expanded to Canada, the UK, and Germany, and we plan to continue deployment in Europe in early 2021. We're also driving meaningful growth in our loyalty program. Since rolling out the program in Europe in Q4, we've reached close to 4 million members worldwide. We're using AI to enhance and differentiate our loyalty programs by offering personalized benefits to members, helping us achieve meaningful growth in enrollments, revenues, and app registrations. And our mobile app continues to beat our expectations for both average order value and engagement driven by more frequent exclusive collaborations and content, early product access opportunities, and personalized product recommendations powered by AI. In Q4, the download rate increased 65% versus the prior quarter, and 70% of our consumers on the app are Gen Z or millennials. Our third area focuses the diversification of our portfolio by continuing to deliver growth in areas that are under-penetrated and are accretive to margins. I will share the progress we've made in these areas since 2015, as well as our longer-term goals, which we expect to achieve in the next decade. In 2015, international sales accounted for 47% of total revenues. In 2020, international was 56%, and is headed to two-thirds. In 2015, women's represented only 20% of total revenues. In 2020, women's was 34%, and on the way to becoming half. In 2015, DTC accounted for 29% of our total revenues. In 2020, DTC was 39%, and we think it could be as much as 60%. In 2015, our tops business represented 11% of our total business. In 2020, it was 21% of revenues. Another 16% of our 2020 revenues was from other categories that are not denim bottoms, such as accessories, footwear, and chinos. Over the next decade, as we drive outsized growth in tops and these other categories, we expect half our revenues will come from products that are not denim bottoms. And in 2015, our total digital ecosystem, comprising both our own digital sales and those of our customers, was less than a tenth of our total revenues. In 2020, it grew to nearly a fourth. By 2030, we expect this to get to one third, with our own e-commerce comprising about half of that. We're also diversifying within wholesale. where we continue to focus on attracting new consumers through more digital and more premium. Our value offerings continue to perform. Signature has the number one selling women's jean on Amazon and has seen double digit growth at Walmart. Our red tab rollout at Target is on track to expand to 500 doors by fall of 2021. And we're excited about our joint announcement yesterday of a new Levi's for Target limited edition collection, which will showcase the Levi's brand in unexpected ways with an assortment of home and lifestyle items. And as we shared in Q3, we expect the non-digital business with our largest traditional brick and mortar department stores to be less than 10% of our total revenue going forward. But it's more than just where to play. It's also how we will win. We are digitally transforming everything we do, enabling us to deliver a superior consumer experience, increase efficiency in our business, drive more profitable growth, and reduce costs. We continue to expand and scale the use of AI in our business beyond the consumer experience, including powering most of Levi's promotions globally to optimize margins, assortment planning, and labor scheduling in our stores. We are also digitizing our ways of working. Our brands held four virtual line assortment meetings, reducing physical samples by leveraging digitized assortments with photorealistic 3D renderings. And we're investing in digital tools to shorten our go-to-market process. Before I turn it over to Harmeet, I want to reiterate our commitments to making our world and workforce more equitable and inclusive. We've hired our first Chief Diversity, Inclusion, and Belonging Officer, Elizabeth Morrison, who will lead this important work. And we'll publish again our annual representation data as well as our diversity pay equity data later this year. I look forward to sharing with you our progress on our commitments going forward. Let me now turn it over to Harmeet.