Levi Strauss & Co.

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company First Quarter Earnings Conference Call for the period ending February 27, 2022. 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 April 13, 2022, one week after the call for telephone replay. Please use conference ID 758-5107. This conference call is also being broadcast over the Internet, and a replay of the webcast will be accessible for one quarter on the company's website, LeviStrauss.com. I would now like to turn the call over to Ida Orfin, Vice President of Investor Relations at Levi Strauss & Company.

Thanks, Lateef. And thank you, everyone, for joining us on the call today to discuss the results for our first fiscal quarter of 2022. Joining me on today's call are Chip Berg, President and CEO of Levi Strauss, and Harmeet Singh, our CFO. We have posted complete Q1 financial results in our earnings release on the IR section of our website, investors.levistrauss.com. The link to the webcast of today's conference call can also be found on our site. We'd like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Please review our filings of the SEC, in particular the risk factors section of the quarterly report on Form 10-Q 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 certain 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 the call over to Chip.

Thank you, Ida, and welcome everyone to today's call. Before we get into the quarter's results, I want to take a moment to recognize the devastating war that is happening in Ukraine. Our response to the humanitarian crisis has been guided by our values, from the philanthropic donations we're making to organizations like the International Rescue Committee, and CARE, to our employees volunteering their time and opening their homes to refugees, to donating tens of thousands of pieces of clothing to those in need. Our employees have been the ones leading the way. Whether it's the manufacturing team in Poland sewing denim bags for medical kits, or a sales director in Warsaw housing refugee families, our teams continue to demonstrate our values and inspire us to do more. With that, I'll move on to our results from the quarter. We're starting the fiscal year with strong momentum. We grew first quarter revenue by 22% to $1.6 billion with broad-based growth across markets, channels, category, and gender, fueled by strong consumer demand across our portfolio of brands. We also continue to drive excellent profitability with adjusted EBIT growing even faster than revenue returning to its high watermark of 14.9%. To achieve these strong results, our teams around the globe demonstrated their ability to execute amid a dynamic macro backdrop, including COVID-related supply chain disruptions and inflationary pressures. Last quarter, I spoke to you about several structural tailwinds that play to our advantage that we are fully committed to capitalizing on in this moment. Results we delivered this quarter highlight how our strategies are working, positioning us for solid long-term growth. We are the global leader in a large and fast-growing market. In the U.S., denim category sales continue to deliver strong growth and are up 11% versus pre-pandemic levels of two years ago. As the market leader, we continue to push the category forward by launching premium-priced innovative products like the Circular 501, a new version of the 501 original made with organic cotton, post-consumer recycled denim, and designed to be recyclable. It's just one new addition to the looser fit denim trend we started that is driving significant growth in our bottoms business and represents roughly half of both our women's and men's bottoms assortment. Our brand equity has never been stronger and is driving outsized growth. Along with the quality and value of the product, the overall strength of the Levi's brand has enabled us to raise AURs by 10% without negatively impacting demand. Our ability to effectively take price has enabled us to mitigate cost pressures, including inflation in inputs and logistics. These decisions are instructed by powerful proprietary technology and analytics, including artificial intelligence and methodical analyses of price elasticity. In fact, even as we have raised prices, consumer demand has continued to grow, and Levi's brand unit volume has now returned to 2019 levels. We took select pricing actions last year, as well as early this fiscal year, and we believe there remains additional headroom to raise prices in parts of our portfolio through the balance of this year and beyond as we continue to innovate and lead trends. Our direct-to-consumer business continues to thrive and deepen our connections with consumers. The differentiated experience we create for our consumers at our stores drove significant momentum through Q1, with global brick and mortar up nearly 50% versus prior year. We continue to roll out of our next-gen stores, destinations where our consumers can find our most elevated brand expression and personalized experience. These stores are showing encouraging results, like North Park Mall in Dallas, which in its second month of operation was the most productive store in our U.S. fleet. And as we continue to expand our physical presence, we're making strides expanding our digital presence. The Levi's app continues to show positive results, with monthly active users more than doubling in the quarter, as well as increases in traffic and conversion across the U.S. and Europe. In Q2, the app will be rolled out to India and several European countries with further expansion later in the year. Finally, our global diversified portfolio is a key strength helping to drive strong growth even in these times of macro uncertainty. In Q1, we delivered growth in all areas of the business that are underpenetrated, including women's, tops, and international. All five brands in our portfolio contributed to growth, including the two value brands. Signature and Denison together grew more than 10%, and consumer trends in the value channel remain healthy. I will now touch on some key highlights from the quarter. The Levi's brand grew 20%, with our top five markets again outperforming the brand overall. Our Levi's men's business is experiencing exceptional growth, with bottoms up 24%, representing the category's highest first quarter revenue in over a decade. Levi's women's bottoms also continue to see strength, up 21% versus prior year. And the 501 was up almost 50% in the quarter, demonstrating the love consumers have for our brand's most iconic product. Our Levi's tops business, which returned to growth versus pre-pandemic levels in Q4, increased 12%, driven by broad-based strength in men's in addition to women's, which saw continued traction in wovens and dresses. Direct-to-consumer momentum accelerated across the globe, generating 35% growth, driven by the continued recovery of brick-and-mortar as the severity of the pandemic has lessened, allowing consumers to come back to our stores. Our global brick-and-mortar growth was driven by both mainline and outlet stores in all geographical segments due to improved traffic trends and higher AURs. Though still down from pre-pandemic, we are pleased to see traffic in our most tourist-dependent locations beginning to recover. And since the start of the pandemic, we have doubled down on our strategy to transform our wholesale business into a more elevated, digitally-oriented, and profitable market. Our global wholesale business grew 15%, with our top 10 key strategic accounts collectively growing at an even faster pace. And our Levi's Brands U.S. wholesale business grew 23%, achieving its highest first quarter revenues in over a decade. And based on the overwhelming success of the Levi's Brand at Target, we've collectively decided to expand our partnership together, taking the brand further than either of us thought we would back in 2019. You'll remember our goal back then was 500 doors, which is where we've been since last year. But as the results have been so strong, we will be rolling out to an additional 300 stores this spring. With the expansion, we'll be showcasing the strength of the brand and introducing 60-plus new styles for both men and women. We're picking up incremental new consumers to the Levi's brand at Target, and we're excited about these expansion plans. We've also doubled our premium business with Nordstrom, where our women's line has outperformed other brands. Furthermore, we're benefiting from more favorable floor space at key customers, and we're selectively increasing distribution in key wholesale specialty accounts aligned with younger consumers like Urban Outfitters. Finally, net revenues through all digital channels were up 16%, despite stores reopening, representing approximately 25% of total first quarter revenues. I'll now provide specific highlights on Signature, Dockers, and Beyond Yoga. Signature saw continued momentum benefiting from growth across genders and categories, as well as an increase in AURs. And based on insights of our top-selling carpenter gene, we will also be expanding Signature into everyday workwear this spring. Doctors had another quarter of sequential improvement in growth versus pre-pandemic levels while driving strong profitability. Revenue continues to shift to a healthier mix, with nearly half of sales now coming from outside the U.S., and about a third in DTC. The brand is also showing encouraging trends with the 18 to 34-year-old demographic, who now drive nearly 40% of sales on dockers.com in the US. And the integration of Beyond Yoga continues to go well. The brand has started the year strong, exceeding our expectations in Q1. It's a well-positioned premium brand that significantly expands our total addressable market while contributing to the diversification of the company. Beyond the business results, we are very focused on starting to build the capability to scale the business, and have started to make some terrific hires in e-commerce, brick and mortar, and marketing. Before I turn it over to Harmeet, I want to recognize the hard work and dedication of our teams across the organization. We delivered exceptional results in a uniquely challenging operating environment. I look forward to continuing the conversation at an investor day that we will be holding in New York on June 1st, where investors will have an opportunity to hear the latest about our long-term strategic plans and meet with the broader leadership team. We will share additional details in the coming weeks. Harmeet, over to you.