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.

Harmeet Sahota- Thanks, Chip. Good morning, everyone. I hope all of you, your families, and loved ones are safe and healthy. We had a very strong quarter and holiday season, both beating our expectations despite the resurgence of the virus and resulting store closures, mainly in Europe. Quarterly revenue comparisons to prior year have continued to improve sequentially from 62% down in Q2 to 27% down in Q3. to 12% down in Q4. The structural economics of our business continued to improve as we reshaped our P&L with ongoing and outsized digital growth, continued improvement in gross margin, and a reduction in base operating costs while reallocating dollars to strategic choices that will accelerate growth. The fourth quarter was profitable. and generated positive cash flow despite the double-digit revenue decline versus prior year. I'm very optimistic heading into 2021 as we continue to focus on executing our strategies with disciplined high ROI investments, driving margin and cost productivity, and working capital efficiencies. And I remain convinced we will emerge from this crisis a significantly more profitable and cash-generative company with adjusted EBIT margins of at least 12% and with ROIC in the mid-team. As I walk you through additional detail of our fourth quarter results, my comments will reference constant currency comparisons on a year-over-year basis in US dollars, unless I indicate otherwise. We published the details of our results in today's press release So I will not repeat all of those here. The 12% decline in fourth quarter net revenues beat our guidance of a 14% to 15% decline, despite the adverse impact of unexpected store closures. Almost 15% of our global store base was closed in November, including about a third of our stores in Europe. And these store closures have continued into December and January. Based on the trends we've seen through October, we estimate that closing our stores net to the amount we saw shift to online cost us approximately two points of revenue growth and three cents of EPS in quarter four. We also had a 53rd week and a Black Friday in the fourth quarter, which benefited year-over-year reported revenue comparisons by approximately three percentage points. Our total digital ecosystem, the combined revenues of the e-commerce sites we operate and the online sites of our wholesale accounts comprise 23% of total company fourth quarter revenues, up from 15% a year ago. Total digital sales grew in the fourth quarter by more than 30%. Growth accelerated in November as we pivoted consumer demand in Europe to online. Specifically, our own e-commerce business grew 35% in quarter four and nearly doubled as a share of total company revenue to 8%. Our increased focus on our e-commerce business has enabled us to recapture about half the lost sales of our physical stores. And as I shared last quarter, e-commerce profit per incremental unit is higher than wholesale. Adjusted gross margin expanded 30 basis points to 54.6%, the highest fourth quarter adjusted gross margin we have ever posted, again demonstrating the intrinsic health of our brands and channels. Price increases and a higher share of sales from our direct-to-consumer channel were again the primary drivers. Levi's AURs around the world rose slightly. Gross margin expanded significantly for both e-commerce and wholesale as we tightened discounts and reduced sales to the off-price channel. Adjusted SG&A was down 61 million from prior year, a 9% decline. We continue to deliver strong cost reductions across the board, primarily reflecting our structural cost reduction initiatives. We are reinvesting a portion of the savings behind the areas driving our growth, namely DDC and technology. Other SG&A costs were slightly higher than our prior expectation, primarily due to higher variable costs on our revenue beat. Fourth quarter adjusted EBIT was $113 million. Adjusted EBIT margin was 8%. And adjusted diluted earnings per share was $0.20 for the quarter. all higher than our expectations. Now I'll share a few highlights from our three regions. Fourth quarter revenue in the Americas declined 11%, slightly better than the company. Latin America was a bright spot in the region, especially our acquired Andes business, which grew in the quarter and through holidays. The full digital ecosystem in the region grew 30% in the quarter. U.S. e-commerce growth rates accelerated through the quarter to 73% for the month of November, with the full quarter growing nearly 30%. And finally, the region's operating income was really strong, declining only 8% on the 12% revenue decline. Europe was tracking slightly above prior levels through October, demonstrating the resilience and strength of the brand we've consistently seen. Then the lockdown hit in November, which led to a third of our doors closing and the region's quarterly decline of 12%. E-commerce growth rates continued to accelerate as we posted e-commerce growth of more than 50% for the quarter, which significantly increased in November to over 150% when we closed our doors. Our brand equity continues to grow, already the most popular denim brand in Europe by far, Levi's continues to gain share in the marketplace. The team in the region is getting experience with the COVID playbook, which combined with the consumer's strong demand for the brand gives us the confidence that as the surge subsides and the lockdowns lift, we should snap back as we did after the first surge. Asia, as a region, declined 15%, a significant sequential improvement from last quarter as India began to reopen. Excluding India, the remainder of Asia was down 11%. The full digital ecosystem in the region grew 27% in the quarter. China was nearly flat the prior year as DDC grew high single digits while we reduced sales to franchises to proactively manage inventory health. We're increasing our investment and focus on Asia. Whether Levi's brand has high brand awareness and we have a significant opportunity to accelerate sales growth. Turning to balance sheet and cash flows, inventories at the end of the year, net of reserves were 8% below prior due to our revenue outperformance and discipline inventory management. At year end, inventory composition remained healthy with more than 65% able to carry over into future seasons. Our cost and working capital actions again yielded strong adjusted free cash flow in the fourth quarter, bringing fully adjusted free cash flow to $141 million, a 22% increase over prior year. I'm particularly proud of how our entire organization raised the bar on cash management as we focused on managing through the different crises while emerging stronger. And while we prudently increased Reduced our original CapEx budget of $200 million when the pandemic hit, we continued to invest behind high ROI growth initiatives. Full year CapEx was $130 million, two-thirds of which went towards technology and a third to accelerate our DDC initiatives. We continue to expand our store footprint, primarily internationally in Taipei locations, most countries. digitally enabled, and generally with rents at much better rates than we had pre-COVID. We opened 90 doors during the year and added another 85 doors from our organic acquisition, bringing total company operator store count at year end to 1,042. We expanded our AI and data analytics team and continued automating and digitizing processes. And in late November, we successfully went live with SAP in Mexico, the first market in our global multi-year cloud-based ERP upgrade. The implementation was done remotely, and the automation the system brings will greatly enhance the efficiency and agility of our team there. We're next moving on to North America, starting with Canada. The fourth quarter brings to a close what has been a year like no other I've ever experienced. We have much to be proud of. Sales from our digital ecosystem accelerated through the year, and it finished with full-year growth of 26%. Our own e-commerce is now profitable on a fully allocated basis a year ahead of schedule, and is generating a low single-digit EBIT margin. We expect that EBIT margin in this channel should expand and ultimately track to parity with the company average as the business doubles in size in the coming years. We've delivered adjusted gross margin expansion of 60 basis points to 54.4% and at levels above our growth algorithm. We've executed structural cost savings of around $200 million collectively in headcount, rent, travel, and negotiated vendor savings, even as we continue to invest in initiatives driving growth. The strong gross margin and cost savings enable us to have only one unprofitable quarter and to deliver high single-digit adjusted EBIT margins in quarter three and quarter four, despite double-digit revenue declines in these quarters. And we drove tremendous improvement in working capital. Before sharing thoughts on the year ahead, let me take a moment to discuss our holiday results. As a reminder, we define holiday as the combination of November and December. Both months were impacted by lockdowns and store closures. Adjusting for the impact of store closures, we estimate holiday revenue down 11% better than Q4 with a much stronger December. We saw steady fundamental improvements through the holiday season. Revenue growth in our digital ecosystem accelerated to 33% ahead of the market, thus growing our digital market share. Our own e-commerce remained profitable through the holiday period as we took a surgical approach to online promotion. And gross margin held strong, increasing in December as we tightened promotions. Regional colorful holiday included the following. In the Americas, holiday shopping started earlier this year, mid-October with Amazon's pandemic Prime Day, which was a record for us in terms of Prime Day sales, and we kept discounts tight in a very promotional environment. And in Asia, total direct-to-consumer return to growth versus prior year, with China and India both growing double digits in December as the changes we have made to the store fleet are starting to pay back. Now I'll share some thoughts on 2021. We run this business for the long term and are very confident in our strategies. But as we've all seen, things can change suddenly in this environment. And unprecedented events require quick and unprecedented action. Given the very low near-term visibility, we're taking the approach of planning our 2021 fiscal year one half at a time. As the year unfolds and we gain more visibility, we'll update our outlook. In terms of revenue, we're expecting first-half revenue growth in the range of 18% to 20% versus 2020. And based on the underlying strength of demand for our brands and assuming conditions improve as the vaccines roll out, we continue to believe that revenue should return to pre-pandemic levels during the second half of the year. with Q4 of 2021 the first full quarter with revenues above the comparable quarter of 2019. And there could be markets across the world where this happens earlier, such as China or Europe. With respect to Q1 2021 specifically, we anticipate first quarter revenues will be down high teens in constant dollars compared to Q1 of 2020. In addition to the fact we're lapping a really strong quarter, wherein the COVID impact was minimal, the comparison will be adversely impacted by two significant factors. First, Q1 of 2020 had a Black Friday, which will adversely impact the Q1 2021 growth rate by two points. Second, store closures have increased. Currently, about 17% of our global store base is closed, including about 40% of our stores in Europe. We're assuming these store closures will continue through the remainder of Q1 2021, and we expect this will cost us six or seven points of growth. Turning to gross margin, we expect first quarter adjusted gross margin will be about 100 basis points higher than last year's record of 55.7%. This is driven by the accelerated shift of our business towards international, BTC, and digital, combined with the benefit of price increases being less promotional, operating with healthy inventory, and incremental COG savings. In terms of adjusted SG&A dollars, the structural cost savings we took against our pre-pandemic run rate will take us all the way back to right around Q1 2019 levels, despite higher investment behind a strategic growth initiative. We anticipated a first quarter tax rate in the high single digits and first quarter adjusted diluted EPS in the range of 20 to 24 cents. We estimate EPS would have been 10 to 12 cents higher if it weren't for the store closures. Uses of capital in 2021 include fully a capex of around $210 million. Two-thirds of the investment will go towards technology in areas like e-commerce, omni-channel initiatives, AI, data analytics, and the SAP upgrade. In terms of DTC brick and mortar, we anticipate opening around 80 stores globally. Most of these will be international, with the biggest share in China. In the U.S., we plan to open around 15 full-price next-gen doors in 2021, which would take our smaller footprint mainline door count in the U.S. to above 25, on our way to 100. I'm also pleased to announce that we are reinstating our quarterly dividend payment at $0.04 per share, based on our positive cash flow and our continued confidence that we are emerging stronger. If business trends continue to improve, we'll consider increasing quarterly dividends as we move through 2021. And finally, with respect to our current levels of debt, we intend to pay back much of what we borrowed last year. We'll take a call on the timing and amount of the paydown as the year progresses and visibility improves. In summary, the store closures are unfortunate, but that's outside our control. The business within our control is really strong, and our now profitable e-commerce business is recovering a good portion of the lost store sales. As a result, we remain confident about our path to revenue recovery once stores reopen. When revenues do recover to pre-pandemic levels, we expect to be a much stronger, more profitable business with annual adjusted EBIT margins at 12% plus, notably higher than 2019's 10.6%. This will be driven primarily by a much stronger gross margin while we reinvest in accelerating the shift to DTC, technology, and other strategic growth initiatives. As we navigate and emerge from these uncertain times, we are committed to driving profitable growth and returning capital to our shareholders. With that, we'll now open it up and take your questions.

Thank you, sir. As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Matthew Boss from J.P. Morgan. Please go ahead.

Great, and congrats on a nice quarter, guys.

Thanks, Matt.

Chip, maybe near term, any comments post-holiday on the organic trends that you're seeing in the marketplace that was helpful color on November and in particular the acceleration that you saw in December? And then secondly, larger picture, I guess when we incorporate the increased casualization, distribution remapping, and the permanent cost saving that you guys have spoken to, How best to think about pre-pandemic annual targets of mid-single digit top line and 40 to 50 basis points of gross margin as we think following the crisis?

Okay, both great questions. You know, as we said in the prepared remarks, we were pleased with the sequential improvement in our business really from the time the pandemic started. But importantly, you know, in the fourth quarter and through the November, December holiday period. So we feel really good about that progression. We're not going to really talk about January since we're in the middle of that quarter, but you all have probably seen the NPD and other data that's out there that seems to indicate a lift in the apparel sector overall, driven in part by the stimulus checks. So we'll see how that plays out. But we feel really, really good about The progression in our business, the pivot to digital, the lift and the positive trends on our e-commerce and digital ecosystem, it's all real positives that we think we'll be able to sustain through the rest of the pandemic and as we emerge from this crisis. With respect to the growth algorithm, and Harmeet may want to pile on here a little bit, We need a little bit more time to digest it. You know, we're sticking with our growth algorithm as it is, with the exception of the fact that we believe we're going to be able to get to that 12% operating margin North Star much quicker with the cost actions that we've taken and believe we can sustain. You know, when we get back to pre-pandemic levels of revenue, we feel pretty confident we're going to be in the 12% operating margin range. range, but in terms of the actual growth component of the algorithm, we need to see how that really plays out. Clearly, some of the trends during the pandemic play to our advantage, and if they sustain, that may translate into a different growth algorithm at the end of the day. This shift towards casualization, we continue to see really good progress in the diversification of our business, so we feel really, really good about where we are, but I think it's premature to say that the growth algorithm is going to change.

Yeah, I think, uh, what I'd build on, um, Matt, uh, uh, pandemic to getting back to pre pandemic, um, norms, there's going to be a, uh, what we are seeing is a structural shift in the business. The business is structurally much stronger, uh, more digital, more DDC, more international, more women. Um, And the structural shift is helping our gross margins, especially as we really fine-tune discounting. You've seen that bear out in 2020. You've seen that bear out in our Q1 guidance on gross margin. And then structurally, we're tightening costs, right? And the question then is, what happens post-pandemic? I would say the business is structurally stronger. Wholesale is structurally healthier. And I think once we are at that stage or close to that stage, to Chip's point, we'll, you know, fine-tune our growth algorithm. But it's probably going to be healthier and stronger if trends continue, which favor us right now.

That's great, Kalar. Best of luck.

Thanks, Matt.

Thank you. I'm sure our next question comes from the line of Omar Saad from Evercore. Please go ahead.

Good evening. Thank you for taking my question. My first one, I wanted to ask, given the gross margin strength you're seeing and going to see next quarter, the price increases you're seeing, the brand's pricing power looks really strong. How do you think about leveraging that? Are you evolving your product lines for more premium products or premium channels? Help me reconcile that pricing power we're seeing in the brand. Also, the fact that you're also sounding really bullish around Target and Amazon and Wal-Mart. Help me reconcile those two elements, and then I have one follow-up. Thanks.

Okay, well, I'll take that. I do think I've always said that gross margin is perhaps one of the greatest indicators of brand health and brand strength, and our gross margin is very, very strong right now, and we're optimistic as we go forward. One of our big focal points, as we've talked before, Omar, is elevating the U.S. market. The U.S. is still by far and away our biggest market, and it skews still to wholesale. But we've been on a really intentional march to elevate in this market more premium distribution at customers like Nordstrom. You know, more mainline doors, which we talked about, you know, pretty extensively over the last six months where we really do believe we've got significant opportunity with this intent to add about 100 doors over the next couple of mainline doors over the next couple of years. These smaller footprint stores, we've added a couple more in the last six months. The evidence is very, very clear that these stores are outperforming our total fleet, you know, our total mainline fleet. So we feel really good about that. So we do believe we've got a mixed opportunity to mix more of our business up into tier two, you know, into our better product, if you will. And we still have pricing opportunities. We've taken pricing a couple of times over the last two years and haven't really had to roll anything back. It seems to be sticking. So mixing more positively to more premium products is important for us. mixing our distribution as we've remapped our wholesale distribution, especially here in the U.S. We're doing that with an intentional eye on mixing it more positively. You know, a small fun fact on Target, even though they're a mass retailer, you know, the assortment inside Target is very, very tight. But the AURs going out the door at Target are higher than the U.S. wholesale average AUR. So it's helping us to premiumize in this marketplace. And when you look at the pad, it's a real premium expression of the brand. So we feel really, really good about this intentional march that we're making to premiumize and drive higher AURs through pricing and mix. And that'll translate to gross margins as well.

Got it. That's super helpful, Chip. And then one follow-up. As you think about the debate of wholesale versus direct-to-consumer markets, How are you guys thinking about owned e-commerce versus the kind of wholesale.com? Which one is growing faster? You know, do you have a preference or are you agnostic? Why? And then, you know, what's kind of the bottleneck keeping your own e-commerce from being a much higher percentage of the business? I think you said 8%, which was similar to last quarter. You know, some of the benchmarks out there are as high as 20%, even 30% in terms of brands out there. Thanks.

Yep. I mean, first of all, let me say right up front, we're, you know, while 8% is double where we were a year ago. We're definitely not happy or satisfied with where we are because we do look at a number of other peers where their mix is significantly higher, and we're working really diligently to see how do we accelerate it even beyond that. We have started looking at and reporting, as you know, our total digital ecosystem, which includes the peer plays and wholesale.com. We think it's important to look at that in the total context. You know, I, I am somewhat agnostic. I, although having said that, I want that direct relationship with the consumer. So if you put a gun to my head and say, pick one, I'd much rather have a consumer buying off of Levi.com than, than, uh, other, other, other places. But at the end of the day, I want that consumer to buy Levi's. And, uh, and, and so we do look at the total ecosystem. We want the entire ecosystem to rise, and we want to rise with that. But we're continuing to invest in building new capabilities on our own e-commerce site. We've talked about the app. We've talked about the loyalty program. All of these things, I think, are going to contribute to us driving that revenue on our own e-commerce higher in the years ahead.

Great, Chip. Thanks for the insights. Appreciate to understand where your head's at. Thanks a lot, Omar.

Thank you. Our next question comes from the line of Bob Durbel from Guggenheim Securities. Please go ahead.

Hey, good evening, guys. Just two quick questions for you, and then I have one follow-up. The first one is when you talk about China, I was just wondering if you could give us just an update on the percentage of the sourcing from China these days. I think at one point it was like 8% a few years ago. I just want to see where it is today. And I guess, you know, is the reset there largely complete? And, you know, are you looking for more robust rates of growth in 21?

So I'll take both of those, and I'm going to try to be pretty quick, just recognizing how many people are in line here. With respect to imports from China into the United States and mitigating any risk there, trade or otherwise, our imports into the U.S. from China now is less than 1%. And you're right, it was 8%. And if you go back, it was 8% several years ago. And if you go back even further, it was more than that. So the supply chain team has done a great job mitigating any trade related risks or other risks with imports from China. We're in a really good place there. With respect to our business in China, we are not completely done yet. We're making really good progress. The results in our owned and operated stores have been strong here recently. If you look at our business a couple of years ago, 70% of our business was done through franchise partners. That's now down to 50%. 50% is company operated. We've built a couple of these big beacon stores as we're calling them in Wuhan and Shanghai. We're excited about what that will do from a branding standpoint. And over the last two years or so, we've closed more than 200 doors. We've closed franchise partners and or shifted to other franchise partners. So we still have some work in front of us. It's not over yet, Bob. I wish I could say that it was. We still have a little bit of work ahead of us, but we're really optimistic based on the results in our own and operated retail stores and some of our better performing franchise stores. And I expect by the time we're kind of into the second half of this year or getting close to exiting this year, the hard transformation work from a customer standpoint and channel standpoint will be behind us. Got it. Can I sneak in one more, Chip?

Quickly. I know. So, you know, I guess when you look at the comfort clothing casualization a little bit, there's some talk around baggy jeans making a comeback and anti-skinny jeanses. Is that something you think you guys are seeing or can benefit from over the next few months and quarters?

Actually, the line that we launched, a loose fit line this past season, it's in our stores now, both men's and women's. It's sort of a loose, straight fit off to a very, very fast start. So it is definitely something that not only are we seeing it, I think we're kind of leading this trend to some extent. And I think it's here to stay. I don't think skinny jeans is ever going away on the women's side of the business, but there's definitely a trend towards more casual, looser-fitting clothes in general, and same is true in jeans. And we're seeing our loose, straight fits performing really well over the last couple of months.

Great.

Thank you very much. Good luck. You bet. Good talking to you, Bob. You too, Chip.

Thank you. Our next question comes from the line of Paul Lejouet from Citigroup. Please go ahead.

Hey, thanks, guys. I'm just going to talk about the EBIT margin guidance for next year, that 12% or more. Just curious, I'm sure you've got a range of revenue outcomes, and I'm curious, you know, just thinking about the flexibility in the model, what's the minimum level of sales that you would need to kind of hit that 12%? I'm just curious about your ability to kind of manage through, you know, various scenarios there. And I'm just curious if you could maybe give a little color on what you're seeing in terms of order books from your U.S. department store customers versus the Targets, Walmarts, Amazons of the world, and just to get a sense of how they're thinking about inventory management and forward purchases. Thanks.

Paul, on the operating margin, I think we remain consistent to what we said earlier, which is, When we get to 2019 levels, we feel good about delivering 12% plus operating margins. And that continues to be a combination of accretion in our gross margins. You've seen that happen even in the pandemic here. We've guided a decent number. And the gross margin accretion, is largely driven by two factors. One is the channel and geographic mix, which is higher gross margin, and the second is driven by the higher AURs, which is a combination of price and lower discounting. SG&A, our view is, you know, returns back to 19 levels after all the costs that we've taken out net of the investments we're making. To your question about The order book from, you know, our customers. You know, what we'd say and the inventory levels. We'd say inventory, health of inventory is very similar to health of inventory at the company. You know, it's largely core. You can carry season to season with a third that's seasonal. We feel good about inventory. The order book... you know, we don't get into the order book, but our view is that, you know, it's largely the store closures, thanks to the virus resurgence that's causing the decline in sales. I mean, Europe, for example, as I mentioned in the prepared remarks, pre-closing the doors in November, we were already beginning to track, you know, higher than 19 levels at the end of October. So, So we feel the strength of the brand is really strong, and our product lineup is really strong. So I feel confident about emerging from this strong, especially as the casualization trends continue.

Got it. Thanks, Amit. Good luck, guys.

Thanks, Paul. Thanks, Paul.

Thank you. Our next question comes from the line of Lorraine Hutchinson from Bank of America. Please go ahead.

Thanks. Good afternoon. Good afternoon. Chip, I just wanted to follow up on the goal of moving non-Denham bottoms to half of the business. I know we've talked over the years about tops, and maybe if you could just rank the opportunities that you see between accessories, footwear, chinos, other categories. How do you get to that half goal?

Well, the half goal is kind of a throwdown that I put out to the organization to say, how do we continue to drive diversification in a in a think big kind of way. And when you look at all of the different categories where we compete and where we still have sizable upside opportunity, I think we can get there any number of ways, but you know, clearly TOPS today remains one of the biggest opportunities for us. You know, I jokingly say we don't buy market share data on TOPS because even though it's now 21% of our revenues, I don't think we'd scratch a 1% market share. in top. So lots of upside opportunity there. You know, outerwear continues to be a big opportunity for us as well. And then non-denim bottoms, you know, which kind of comes and goes, but we talked in the prepared remarks about, you know, doing this, you know, sweat capsule, sweatsuit capsule that we did earlier in the fall. And you know, that went really, really well. And if you look at what the kids are wearing today, that's what they're wearing. And that represents a significant opportunity for us as well. So, you know, I'm not going to try to rank order one through five, which one's the top priority, because they're all big opportunities for us. And we have different parts of the organization really focused on it. So, but we are, you know, part of our story over the last, four years has been the diversification of the business or five years. You know, we talked about it in the script, the progress that we've made in so many of these categories and we've set kind of ambitious targets for the next 10 years that if we achieve those, half of our business will be in denim bottoms and half will be in everything else. And, and that will be a really good outcome because it really does expand our portfolio and our share of total closets.

Thank you.

Thank you. Our next question comes from the line of Jay Sill from UBS. Please go ahead.

Great. Thanks so much. Chip, I want to ask you about the next-gen stores. I think the numbers that you mentioned, if you see the business being 60% DTC over time, and it sounds like about a quarter of that would be e-com, it suggests there's a big piece that will be full-price stores and outlet stores. Can you talk about the percentage that you see of the business being full price versus outlet and how the next-gen stores fit into that goal?

Yeah, it's kind of interesting. It's a good question, Jay. If you look at our business around the world today, here in the U.S., our retail footprint still skews very heavily to outlet. And the outlet model has historically been made for outlet. In Europe, our business skews more towards mainline stores. In Asia, same way. And Um, so one of our biggest opportunities is to change our retail footprint here in the U S which is this mainline opportunity. So these next gen stores, you know, by and large, they are smaller footprint stores, you know, the 2,500 to 3,500 square foot store. And we believe, and they deliver a really good return on investment. I mean, we now have a couple dozen of them up and running. around the world and they are outperforming our fleet. We have a high degree of confidence in our ability to execute these stores, smartly assort them using data science to sort these stores down to the door level. And when you think about all the white space that we have just in the US alone, I mean, I keep saying we have no stores in Boston where there are a quarter of a million college-age students. And hopefully sometime soon I'm going to be talking about the new doors we're going to be opening in Boston. But we have huge white space opportunities here in the U.S. to shift the mix, more mainline, and it helps to premiumize the market, which I talked about earlier. It helps to elevate the AURs in the market earlier that I mentioned earlier. And so that really is the path that we are on.

Got it. And then maybe just one quick one on the next gen stores. Do you see them as mall stores as street stores? I mean, do they have the ability to sort of go in different types of locations?

They, they were, you know, we're, we're not in many indoor malls today here in the U S um, which is the good news. We have very limited exposure to malls and many of these stores are in kind of outdoor lifestyle malls, if you will. Um, And they can also be street-level stores. So it'll be a mix, but we're really focused on A locations. We're capitalizing on lease opportunities that are out there today where we're getting great rates relative to pre-pandemic rates. And these kind of stores can really go anywhere, but we're really not going to expose ourselves very significantly to indoor malls.

Got it, okay. Thank you so much.

You bet.

Thank you. Our next question comes from the line of Laurent Vasilescu from Exane BNP Paribas. Please go ahead.

Oh, good afternoon. Thank you for taking my question. Harmeet, I think you mentioned Europe as of October. It was telling me it was up year over year just slightly, which suggests to me, and tell me if I'm wrong here, but November might have been down 20% plus to get to that 9% for the quarter year. Is that the right way to think about it? And how do we think about Europe for the first quarter? And then on the flip side, how should we think about Asia for the first quarter as you start to anniversary the COVID impact in Asia called out on last year's fourth quarter?

Yeah, I think good question. I don't have the specific November number, but I think your math is fairly close. I'd say December, Europe actually started fairly well. You know, we had stores open, and then as we closed December, it went back, you know, towards the third of the doors open. January, we have probably at this time, 40% of our doors are closed. And if you think of where we get the business, because, you know, every country, countries are different in different ways. You know, places on the lockdown, if you think of where we get the business, about 50% of our business in Europe in terms of the doors we have across franchise and ours is closed. And as things get better, you know, we believe, you know, we'll come out of this pretty quickly. On Asia, sequentially our business has improved. And as I mentioned, as we start December, both China and India reported double-digit growth. So I'd say Asia and also because if you think about our quarter one, our quarter one largely had no impact for COVID other than China and other than one month in China. So, you know, sequentially probably gets a little better as we think about the quarters.

Very helpful. Thank you very much.

Thanks, Loren.

Thank you. I show our next question comes from the line of Kimberly Grinberger from Morgan Stanley. Please go ahead.

Great. Thank you so much. Great call and really good color, particularly through the holiday season. So thank you so much for that. I wanted to ask one question about Q1 and then one just about kind of longer-term margin puts and takes. In the first quarter, Harmeet, I think I heard you say down high teams, You said in constant dollars, and I just want to make sure I understand what this means. Is this as reported in dollars? Is this constant currency? And what would that mean for the report that we'll see in dollars? Let me just start with that one first.

It's Kimberly, good call out. This is in constant dollars. Reported dollars, currency should benefit us, I think. In revenue, if the rates are where they are today, by about two percentage points. And I think, you know, slightly more benefit on EPS. So we should see some benefit on a reported basis in Q1 because of currency.

Okay. Wonderful. Thanks for that clarification. And then it's very intriguing. It sounds like you would expect to get back to revenue parity with 2019 in the back half of this year. And I'm wondering how we should think about the margins, particularly in Q4, for example, as we get later this year. Should we think about a 4Q margin, for example, that's above 4Q 2019? And then you've phrased it as sort of 12% plus. in your out-year target on adjusted operating margin, maybe you could just dive a little bit into the plus. You know, what are the opportunities for margin to actually go above that level? Thanks so much.

Yeah, I think in terms of Q4, so if you think about gross margins being the prime driver of the EBIT margins, You know, and I would just use the same seasonality on gross margins as we've seen over the last few years. You know, Q2 and Q3 are weaker than Q4, for example. Q4, we feel, you know, assuming the virus, you know, doesn't ray its ugly head further, you know, we feel comfortable we can get to 19 levels of revenue. and a company that will be EBIT margins of 12%. The 12% plus is primarily going to be driven by the pace of acceleration of our gross margin, and if structurally things tend to go the way they are, then we could get a higher rate of growth, as well as the curtailment of base. We feel good about curtailing our base costs, and that's why we indicate it. that we feel good about getting back to 19 levels of SG&A. The question really is going to be about do we continue to invest in our growth initiatives that we have talked about that structurally enhances business for the long term or not. And that's why, you know, rather than giving a number at this stage, you know, we've set a 12% plus. If you'd asked me, you know, when I joined the business eight years ago, I'd say, You know, the goal was to get to 15%, and then DTC happened and e-commerce happened and a whole bunch of other things happened. And so we decided to, you know, invest and grow the business. And so that's why, you know, one is being a little cautious at this point, but we feel good about getting to 12% and then going from there over time. Great color. Thank you. Thanks, Kim.

Thank you. Our last question comes from the line of Alexandra Walters from Goldman Sachs. Please go ahead.

Fantastic. Thanks so much for getting in the question here. I had two for you and perhaps related. The first one was on the loyalty program. So you mentioned that you were up to 4 million loyalty members. I wonder if you could share any metrics of the superior performance associated with those customers. So anything from, you know, is order value higher, frequency of engagement and Purchase higher, do they shop more in the DTC channel? Anything you can share on that front and the potential for that program would be great. And then secondly, on market share, you know, it seems market share has accelerated during the pandemic. You know, any thoughts on where you will emerge from market share perspective post-pandemic versus where you were pre-pandemic?

So I'll take a shot at this, Alex, and good to talk to you. Happy New Year as well. So on the loyalty program, we're still in very early days. We do have 4 million members. We launched it in Europe in the last quarter or so. We have 2 million members in Europe and 2 million in the U.S. We are using the loyalty program to personalize opportunities for every single member. But we do have some early metrics here. Let me run through a couple of them. Our loyalty members' lifetime value is 27% higher than non-members. Total revenue from loyalty transactions is up 193% over Q3. And consumer shopping in two-plus channels within the quarter was up 26% over Q3. So we're actually seeing these loyalty members be also more active multi-channel shoppers. So again, it's kind of early days. And, you know, we're using data science to power all of the personalization and everything else. And we're trying to learn quickly, reapply those learnings and go from there. But we're really happy with the early start that we've got. What was your second question again?

Just any thoughts on market share. Market share. Right, right, right, right.

Yeah, so, I mean, our biggest, you know, we're number one in men's, number one in women's globally, number one brand globally. We've made good share progress on our women's business, primarily in Europe. Over the last year, we've gained market share in a couple of the critical markets in Europe. I would say in the last quarter here in the U.S., our women's business actually fell back a little bit. We lost a share point. And that was because we decided not to get overly promotional. We lost a SharePoint to Old Navy, who was very, very promotional. And we just decided to not go there for the sake of maintaining the strength of the brand. We're confident we'll get it back. But, you know, we continue to believe we've got opportunities across both the men's and women's business. You know, obviously, when you're the biggest guy, the probability of losing share is higher than your probability of gaining share. But we've demonstrated our ability to gain share here over the last couple of years. And, you know, we believe part of emerging stronger when we declared we're going to emerge stronger, part of it is coming out of this with share gains. And, you know, we have a number of weak competitors, and we think we can capitalize on that as we go forward.

Fantastic. Thank you for all the color today.

Thanks a lot, Alex.

Thank you. Ladies and gentlemen, this concludes today's Q&A session and today's conference call. Thank you for participating. You may now all disconnect. Everyone have a good day.