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.

Thanks, Chip. On the heels of record results we delivered in 2021, we continued to achieve excellent financial results in Q1 of 2022. We grew constant currency revenue by 26% compared to last year, driving growth across regions and channels. Supply chain related issues limited further revenue opportunity by approximately 60 million, or 5%, primarily in the U.S., where the consumer continues to be strong with demand outpacing supply. We drove record gross margin, demonstrating the power of our iconic brand. That combined with our disciplined execution helped us deliver an adjusted EBIT margin of 14.9%, an adjusted diluted EPS growth of 35%, to 46 cents compared to the prior year. We returned capital to our shareholders through a higher dividend that now exceeds pre-pandemic levels and the repurchase of 3 million shares in the quarter. And given our continued outperformance and the momentum of our brand, we also reaffirmed our financial outlook for the year as we remain confident in our ability to deliver strong results in the future. And we achieved these important objectives in spite of the impacts of rising inflation, COVID resurgences impacting our business, and now the war in Ukraine that is impacting so many lives. I'll now walk you through our first quarter results, for which my comments will reference constant currency comparisons to 2021, unless I indicate otherwise. First quarter net revenue growth of 26% was driven half by higher volumes and half by an increase in AURs. This balanced growth demonstrates the strong consumer preference for all our brands, even as we price to offset inflation. In the quarter, sales of our direct-to-consumer channel increased 39%, driven by higher AURs, which were up 14% as well as by increased traffic and token expansion. DDC now represents 39% of total net revenues versus 36% last year. Our e-commerce business was up 13% year-over-year, driven by traffic and AURs, and represented 9% of total net revenues, up from 6% pre-pandemic 2019. Record adjusted gross margin continued to strengthen, expanding 170 basis points to 59.4% due to a higher mix of sales from DTC, as well as price increases, lower promotions, and higher share of full price sales, partially offset by higher product costs. Our gross margin accretion also includes the impact of 20 basis points of unfavorable currency and 20 basis points of higher air freight costs. Moving to SG&A, adjusted SG&A expenses in the quarter was $708 million, or 44.5% of net revenue, relatively flat as a percentage when compared to 44.3% of net revenue in Q1 2021. The approximate $130 million increase relative to last year was primarily due to higher selling expenses and increased distribution expenses associated with higher volumes and labor costs, higher spending in A&P as we invest evenly across the year, and higher incentive compensation given the outperformance versus expectation, partially offset by currency benefit due to the stronger U.S. dollar. Our record high gross margin coupled with disciplined SG&A expenditure enable us to drive an adjusted EBIT margin of 14.9%, with adjusted EBIT dollars up 37%, even as we continue to strategically invest in our long-term growth, including accelerating our direct-to-consumer business and investing in advertising. Adjusted net income of $189 million was up from $140 million in Q1 of 2021, as lower interest expense due to lower debt levels and benefits from deferred comp interest expense was offset for higher taxes due to a higher rate versus prior year. We expect interest expense to normalize for the rest of 2022. I'll now take you through key highlights by segment. Recall, the regional segments include our Levi's brand, Levi's, Signature, and Denizen, while the other brand segment includes Dockers and Beyond Yoga. In the Americas, revenues grew 27% driven by higher unit volumes and higher prices across channels. Our largest market, the U.S., remains very strong, delivering growth of 24% versus prior year. Our company operated stores had a particularly strong quarter, also driven by increased traffic, while wholesale growth was robust and also driven by strong sell-through. Latin America was up nearly 70% with broad-based growth across channels, with particular strength in our third-largest market, Mexico, as well as Brazil and Chile. Building on the positive momentum from the past two quarters, Europe delivered another robust quarter, up 13% reported and 21% constant, demonstrating the resilience of the consumer and strength of the Levi's brand despite the Omicron variant. As a reminder, the vast majority of our business is concentrated in Western Europe, with only 4% of total global net revenues generated in Eastern Europe, of which Russia comprises half. Direct-to-consumer was up 56%, reflecting price increases and higher traffic, as nearly one-third of company-operated stores were closed last year, and wholesale grew 3% due to gains in brick-and-mortar. Nearly all countries drove results with double-digit sales growth in key markets, such as Germany and the UK. And we continue to see sequential improvement in Asia, up 11% reported and 14% constant, giving us confidence that as COVID-related restrictions eventually abate, our opportunity for growth remains as compelling as ever in the region. Direct-to-consumer growth of 19% was led by continuous strength in company-operated mainline stores with outlets returning to growth. Asia, excluding China, was up nearly 20% as most markets, including India, Indonesia, Japan, Korea, and Malaysia, delivered strong growth as economies began reopening post-COVID linked closures. China, which is only 3% of our total business, was down mid-single digits as growth in e-commerce was more than offset by declines across other channels due to COVID-related lockdowns. Overall, revenue growth in Asia drove operating profits up 53% and delivered operating margins of 17%. We also recently announced our decision to transition from a licensed to a directly operated business in Thailand. This will have minimal impact on our financial results in 2022 as we reposition the business for profitable growth. We believe that under our direct leadership, we can accelerate growth in Thailand as well as Asia as a region. Revenues of our other brands were up 105% and contributed three points to the company's growth for the quarter. This was driven by Dockers, whose revenue was approximately 50% higher than last year, and the acquisition of Beyond Yoga, whose sales were approximately 26 million. Both these brands are also profitable. Turning to balance sheet and cash flows. Inventories at the end of the quarter were 20% above Q1 2021, slightly below sales growth. We are building Cole Levi's inventory primarily in the U.S. through the first half of the year to better meet the brand's growing demand. As a reminder, approximately two-thirds of our inventory is comprised of core non-seasonal products that poses minimum markdown risk. Our strong inventory position demonstrates our ability to manage global supply chain challenges and remains a competitive strength of our company. Cash and liquidity remain strong. with end-of-quarter net debt of $248 million and overall liquidity of $1.6 billion. Our leverage ratio is now 1.1 times the lowest it has been since the mid-'90s. Adjusted free cash flow in the first quarter was negative $124 million, a decrease of $115 million compared to the first quarter of 2021, due to our increased capital returns to shareholders via share repurchases, and dividends. Last quarter, we announced we increased our quarterly dividend payment to 10 cents per share, exceeding pre-pandemic levels based on our strong performance. And in the quarter, we repurchased approximately 3 million shares. Subsequent to quarter end, the company repurchased 2 million shares for 40 million. This completes the 200 million shares buyback program authorized by the board in late 2021. Moving on to our guidance for fiscal 22, we continue to see strong demand for our products across geographies and categories, and our teams remain focused on executing on our strategic priorities to capitalize on these opportunities through the balance of the year. The underlying momentum we see will allow us to offset some of the headwinds associated with the war in Ukraine and its broader macroeconomic implications, as well as incremental currency headwinds, which together will impact revenue by approximately 200 million and EPS by approximately 15 cents. On balance, despite these incremental headwinds, given the strong momentum in our business, we are reaffirming our fuller guidance, and continue to expect double-digit revenue growth for the full year of 11 to 13%, or 6.4 to 6.5 billion, and adjusted EPS of $1.50 to $1.56. This implies 8 to 10% revenue growth for the remainder of the year. While we are maintaining our outlook, we expect it will now be comprised of even stronger growth in the Americas, primarily led by the U.S., and continued strength in Asia, offset by reduced growth in Europe due to the unfavorable foreign exchange rate and the reduced revenue expectations in Russia. Our outlook assumes no material worsening of current conditions. In conclusion, we delivered strong financial performance in 2021 as we emerged from the pandemic, a structurally healthier business. The continuation of strong consumer demand globally and solid momentum across our portfolio brand reinforces our confidence in our outlook. Our teams are executing across our strategic initiatives while effectively managing a dynamic macro and operating environment supporting delivery of profitable growth. With that, I'll now go ahead and open the call for Q&A.

Thank you. To ask a question, please press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Paul Lajus of Citigroup. Your line is open. Hey guys, thank you.

You guys reaffirmed top and bottom line. Just curious if there's any change in the composition of how you get there from a gross margin versus SG&A perspective compared to what you were thinking three months ago, which I think was gross margin up 15, 30 basis points, SG&A leverage of 10. Any changes there? And then I guess even higher level, a lot of uncertainties out there. I heard what you just said, Armeet, about some of the – the moving parts, U.S. versus Europe, but just curious what gives you confidence in the outlook. Overall, if there's anything you can share in terms of order books, how you're thinking about pricing and how that could influence the top line, anything you could share in terms of what gives you confidence in the outlook. Thanks.

Thanks, Paul. Great question. Let me talk about the overall outlook. perspective on reaffirming the top line and the bottom line guidance, and I'll come to the composition in a minute. We continue to benefit from several consumer trends that uniquely position us in the marketplace, including the global casualization, the return to the office, and the new denim trend. Levi's engine is strong. Our core business is really strong, is evident in the U.S., And the good news for us is all our brands, you know, Dockers, Beyond Yoga, Signature, Denizen, besides Levi's, are showing momentum and accretive growth. Balance of Europe is healthy, and we're seeing it in the order books. You know, we get a pre-book largely from wholesale, and we're seeing strong demand for the balance of the earth. If you look at gender, men and women saw strong double-digit growth in Q1. And the consumer demand continues to be incredibly strong across the portfolio. The other good news in Q1 was it was a balanced growth. AURs were up 10%, as Chip mentioned, but units were also up, and it was an equal balance, which is really, really good. And that is despite the pricing that we have taken. And we're seeing demand trends in wholesale channel signal continued strength. I talked about the order book in Europe. Asia is benefiting from the reopening of the economy. So, you know, ex-China, which is in lockdown, we're seeing, as economies open, you know, demand for the brand. And the underpenetrated areas of business, women's, you know, top start, double-digit growth, and international continue to grow. So overall, you know, a fairly robust quarter and good signals for the rest of the for the year based on what we're seeing right now. You know, we don't get into quarter two, but March momentum, early signs are still fairly strong. And so that's, you know, that gives us confidence as we think about the future. I think to your question about the composition, I reflected the change in composition regionally. But in terms of gross margins, we've started the year very strong. We were up big time relative to last year. Our expectation on a full year basis is gross margin probably is up 20 to 40 basis points, so slightly higher. That's in the back of a strong first quarter. With Russia, it's essentially closed, and China, which is a high gross margin business, is a bit of an offset, but we think we'll end the year slightly stronger than we reflected a quarter ago. SG&A, I'd say slightly worse. You know, we said would leverage. We think flat to slightly down. And that's largely because, you know, we've had higher, you know, we beat expectations in Q1, internal expectations, which is largely for the year paid on constant currency. So there's a slightly higher incentive comp accrual. Our view for the rest of the year is SG&A grows at around, you know, what the revenue growth is. And EBIT percentage, you know, still grows year over year, 20 to 30 basis points. So generally, we think structurally it's a pretty sound business that, you know, we believe we will deliver as we end 2022 and step into 23. Great.

Thanks a lot, Harmeet. Good luck, guys.

Thank you, Paul. Thank you. Our next question comes from Laurent Vasilescu, BNP Paribas 16. Your line is open.

Good afternoon. Thank you very much for taking my question. Chip, on the last call, you shared your enthusiasm for the European business as we kicked off 2022. Fast forward to today, ex-Russia and ex-FX. Curious to know if you're seeing anything that's changing in your thinking on Europe. Are you seeing any slowdown in Western European consumption patterns as of late? And in Harmeet, FX was a material that had went to your European business, 800 basis points. Just curious to know how we should think about maybe 2Q growth in Europe on a constant currency basis or maybe on a full year basis. That would be very helpful. Thank you.

Okay. Lauren, hi, how are you? Let me quickly address the Europe question and then, you know, we can talk about the the other details you wanted. But generally, Europe had a very strong quarter. As you know, they were up 13% reported, 21% constant. Now, granted, they were lapping a softer quarter a year ago because a third of those were closed, but generally a strong quarter. The pre-book in Europe, which is the demand signal we get from wholesale accounts, continues to be strong. You know, with Russia, you know, generally close for the rest of the year, that's our expectation. And FX, we think Europe, you know, on a total basis will be flat year over year. But if you back out Russia and the FX, which is, broadly, you know, equally weighted in terms of the impact, you know, Europe will be up high single digit, which is what we said at the beginning of the year would be. So generally we think Europe's continued growth is here to stay, and that's what we're sensing or seeing in the demand. I think the FX impact for Europe we think is about 400 basis points, and the rest is largely Russia. Russia is about 2%. of overall business for the company. And if you think about how Western Europe and Eastern Europe is in a mix, I think Western Europe for Europe is about 85% of our business. And as countries open up, UK, France, we're seeing a strong bounce back for our product. So Eastern Europe is a much smaller piece, and then Russia is half of that 15% mix for Europe. But generally small overall for the company.

very helpful thank you very much thank you thank you our next question comes from Matthew boss of JP Morgan your line is open great thanks and congrats on another another nice quarter guys thanks Matt thank you Matt chip so chip can you speak to business trends that you're seeing across categories and maybe looking at this on a micro versus macro level Do you see the Levi's brand taking share and acquiring new customers out of this pandemic? And then as we think about the work that you've done with the brand, are you seeing any pushback to price? What do you think is driving that pricing opportunity? And what inning do you think that we're in as it relates to the regional opportunity from a price perspective today?

Yeah, well, there's a lot to unpack there, Matt. But I guess I would start by saying that The denim category is still very, very healthy. On a past 12-month basis here in the U.S., which is still by far our biggest market, denim is up 11%. It's growing faster than total apparel. We've talked in the past about the tailwinds that we have that are carrying us. As the market leader, by far, on a global basis, we believe a big part of our responsibility is driving category growth, and we're doing that with innovation and driving the new denim cycle, if you will, with the looser, baggier fits. Revise is growing. We are bigger than the number two, number three, and number four brands combined on a global basis. We're number one on men's, number one on women's. We are growing share. We are picking up new consumers. We mentioned in the script we're adding 300 more stores 300 more Target stores, and that is because that is working. And we are picking up new consumers to Levi's just by having distribution in Target. And we are growing share on a global basis. We talked previously about gains with women. We are gaining share with the younger consumer as well, which is really, really important, resonating with that younger consumer's is one indicator of brand strength. I mean, the other thing that I'm really excited about is we mentioned that the 501 was up 50% this quarter. And when your most iconic item is growing like that, it says something about the overall strength of the brand. And it's not just in one market. You know, this brand is I would say very confidently has never been stronger than this. And I would say semi-confidently, this is the strongest the brand has ever been on a global basis. We have taken pricing. We mentioned that AURs are up 10%. That is on the back of a very, very strong brand. And it's sticking. We have not had to backtrack at all on pricing. And as we said, our growth was half volume growth and half AUR growth driven by price increases. So, again, another really strong indicator of the health of the brand. And finally, you know, the other big indicator of the health of the brand is just these record gross margins that we're delivering. So, you know, we're continuing to innovate. We talked about the circular 501, which is made from organic cotton. recycled, post-consumer waste recycled cotton and it is fully recyclable, that's premium priced. We're not seeing any real pushback on pricing at all at this point. But having said that, I don't want to suggest that our head is in the sand. We're reading the same headlines everybody else is and the same Jamie Dimon letter that everybody else is. We're watching it very, very carefully. But at this point, The consumer seems to be really strong. And our brand still represents a tremendous value. The last thing I would say is from a competitive standpoint, when the category is growing this robustly, it doesn't have to turn into a zero-sum game about the only way to grow is to steal share from somebody else. Because when you're the market leader, your chances of being the share donor is higher than being the share gainer. That's why growing the category is so important and it floats all boats and we really like that. The business is very, very healthy and we feel good about the consumer and we do believe that there is still opportunity for more pricing down the road in the second half of the year, which we think we're going to need based on where costs are going. We've been extremely surgical with how we've done our price increases, and I think that's a big part of the reason why it's been sticking.

Congrats on the momentum.

Thanks, Matt. Thank you. Our next question comes from Brooke Roach of Goldman Sachs. Your question, please.

Good afternoon, and thank you so much for taking our question. Chip, I'd love to follow up on the conversation that we were just having in response to Matt's question, which is the health of the business in North America. And you mentioned several new drivers of expansion this year, including an expanded partnership at Target, more shelf space at Key Partners, and also a new workwear line that you're launching this spring. I'd love to hear how you're thinking about the contribution to growth from some of these new initiatives versus like-for-like increases in your core, and how you're thinking about that phasing throughout the year. Thank you.

Sure, Brooke. Well, I guess the first thing I would say is, you know, our business in the U.S. is very much core product-driven, and that is a huge advantage when you think about some of the headwinds that we're facing, that the whole industry is facing from a supply chain standpoint. You know, we're able, and we are doing this. We are... building inventory in the U.S. because most of what we sell here is core product. And so we can lean into building inventory to mitigate against future supply chain disruptions. And that is a huge advantage that we have, and we're leaning into that. The brand is really, really healthy. Through the pandemic, actually even before the pandemic, we were remapping our wholesale distribution to more premium accounts, That's when Target also came into play at that same point in time. And that started really, really small. That started with a 20 store test on men's and we said at full potential we thought that it had the opportunity to be 500 doors. We're in 500 doors today and it is working so well and we know that we are acquiring new consumers to Levi's by our presence in Target that You know, the success of the business and the fact that we're driving new consumers to the brand, you know, with Target, we both concluded let's expand this to another 300 doors. So that's been accretive to our business. Our overall wholesale business is very, very healthy. Wholesale in general, as you all know, is also in a very, very good place right now. The brand is really strong, and we're investing in our own direct-to-consumer business too. And that is also a big driver of growth for us. So, you know, in the U.S., when I joined the company 10 plus years ago, most of our doors in the U.S. were outlet doors. And, you know, the doors that we have been adding over the last couple of years have been mainline doors. We had no presence in many, many major markets. with a mainline door. And now we are starting to build presence in several key markets around the country, but we have enormous opportunity for mainline. And that's all in an effort to continue to elevate the brand here. You know, if you travel the world and look at Levi's on a market-by-market basis, our business skews much more to Tier 3 product here in the United States than, for example, most of Europe. where it is a Tier 2 business at higher price points, higher gross margins, and a very successful Tier 2 business both in our own doors as well as in wholesale doors. So we know we've got opportunities to premiumize here, and that's been a big focal point for our wholesale mapping here in the marketplace. And we're seeing it in the business results. So success in Nordstrom, for example, We talked about expanding into urban outfitters to attract those younger consumers. We're very optimistic about our business here in the U.S. The U.S. consumer is still in a very good place. Their personal balance sheets are still in a good place. Consumers put a lot of money in the bank during the pandemic, and most of it has not come out right yet. And consumer confidence in March was higher than in January and February and back to almost pre-pandemic levels. So we're very confident about our business, and as Harmeet said, you know, we think there's upside here in the U.S.

Thank you.

Thank you. Our next question comes from Omar Sayed of Evercore. Please go ahead.

Thanks. Good afternoon. Another nice quarter, I agree. Maybe you guys could dive in a little bit deeper on the e-comm results, where that business is, how big of an opportunity you think that could be, what are some of the key levers there, both here in the U.S. and internationally, and also maybe a little bit of an update on Beyond Yoga, too, would be nice, how that did through the holiday season. Thanks.

I'll start with Beyond Yoga because I think that's pretty quick, and then I'll talk a little bit about our e-commerce business. We are largely through the heaviest lift of the integration. I would say it's gone really, really well. The team is terrific. The brand started out with their first full quarter as part of Levi Strauss, really strong. They beat their internal expectations or our internal expectations. The people on the team are great. We talked about culture fit when we announced the acquisition. It is clear that there is a very strong culture fit. And I would say this is our first acquisition in decades, right? This is going to be a good win-win. We're learning a lot from them. They're a small, scrappy team, and every single day they are on every single piece of the detail. We're learning things from them as they are learning things from us, and I think that's going to play out real nicely. As you know, it's a premium position, premium price brand. It significantly adds to the total addressable market that we're competing in, And our focus right now is beginning to build capability because, you know, we didn't buy this business because we thought it would be a $100 million business this year. We bought it because we believe it has the potential to be much, much bigger. We've built plans to that effect, and in June when we're all together, on June 1st for Investor Day, we'll reveal more of that. But, you know, I believe that this is going to be big for this company and really be a generator of meaningful growth over the next several years. For e-commerce, our e-commerce business was up 13% versus Q1 2021, 37% ahead of Q1 2020. Our total digital ecosystem, which includes pure play e-commerce and .com for our wholesale customers was up 16%. It was about a quarter of our business overall, up from 22% in 21 and from 14% pre-pandemic. So the business is clearly shifting to digital and to e-commerce. It's profitable, as you know, return to profit in the pandemic. And as this continues to scale, it's just going to become even more profitable over time. We're leveraging data science to try to really tailor the experience to the consumer. But I've got to say, very honestly, I'm not super happy with 13% growth. I think we've got a lot more opportunity here on digital, and with its salience of our total business, I believe there is still significant upside ahead of us. We are focused on expanding the app. I think we talked about that in the prepared remarks. So we are going to expand the app to several more markets in this quarter. We're also focusing on expanding a number of the omni-channel capabilities that we built during the pandemic that are still largely just here in the U.S., we're now expanding those capabilities to Europe and other key markets around the world. So there's still a lot of work to be done here, a lot of heavy lifting ahead, but I think it represents lots of still upside opportunity for us.

Thanks for the rundown, Chip. Good luck for the rest of the year.

Thanks, Omar. Thank you. Our next question comes from Bob Durbel of Guggenheim. Your question, please. Hi.

Good evening. Just a couple of quick ones from me, if I could. I think the first one is you talked about the success that you're seeing. I think it was the Dallas store. Can you remind us just what the game plan is in terms of this year, in terms of new store expansion? And I guess just that store, what really is resonating to make it so successful so quickly? That's the first question. And then the second question I have is when you look at, I guess, your lower-priced offerings, and I'm thinking more Signature and Venison, can you just talk about if you're seeing more interest in those brands from the U.S. consumer, sort of how you feel like you're positioned and or performing in both of those brands as well? Thanks.

Hey, Bob, I'll be quick because we've got about five folks up to you, and we won't answer them, but I'll be quick. To your plans about opening Mainline in the U.S., I think our plans are about 25 plus doors, and this is on the back of about 15, 20 that we opened, on the way to 100. Dallas is successful because, you know, it's located in a great mall, You just have the who's who's in the mall in terms of retail. It's a great looking store. So location is good. Very balanced assortment between men's and women's. In fact, I would say women's slightly on the higher side because the business is on a roll. And I'd say great execution. So combination of location, assortment, and execution making the difference. you know, for that. On your question about our value brands, which also had a, you know, great quarter, I think, you know, for the value consumer, you know, we offer the perfect opportunity, right? As, you know, if some of the consumers feel a pinch with inflation and want a great brand, they know where to go in signature and denizen. I think you know, I think that bodes well. We don't necessarily have to, you know, mark down the red tab, and this way we offer a good portfolio. Thank you.

Thanks, Bob. Let's start. Our next question comes from Jay Sol of UBS. Your line is open.

Great. Thank you so much. You know, my question is just about China. You know, the the COVID-related lockdowns there. How is it impacting your supply chain? There's talk of ships not being able to leave ports. I mean, is that something that's impacting the business, and is that something that's factoring into guidance? Thank you.

Yeah, Jay, you know, the good thing about our supply chain is we've got truly a global footprint. You know, we don't, in fact, we don't manufacture a whole lot in China anymore. We've been slowly divesting manufacturing out of China, if you will, and playing our chips elsewhere on the global map. Today, I think we're manufacturing somewhere in the neighborhood of 5% of our global production is in China, and most of it's staying in China. We've talked before that less than 1% of what we're bringing into this country, into the US, less than 1% of it is coming from China. You know, we have strategic partnerships with many of our key vendors. Many of those key vendors have multi-country footprints. So if a factory gets impacted by COVID, we can quickly shift. And, you know, this is where our scale really does help us. We can quickly move our pieces, you know, our manufacturing to other industries. places on the map. I would say it's not an easy thing to do, but the team has developed an expertise in doing it over the last two years, and we've been able to navigate through it reasonably well. You know, the other issue that, you know, we've been watching real closely is the impact that COVID shutdowns in China has had on ports there. And so far, you know, what we're seeing and what my team is telling me is we're going to be able to navigate through this potentially rocky period of the next couple of weeks. Okay. So, um, you know, we're not expecting any, any meaningful impact whatsoever from COVID related impacts to supply chain. You know, it is impacting, we've got, I think roughly 60 or so doors closed in China right now. Um, the team, you know, our team is based in Shanghai. They haven't been in the office now for a couple of weeks. They're all working remotely. it's still a pretty challenging environment from a commercial standpoint over there. But as you know, China is less than 3% of our total global business and still an opportunity for us for sure, but it's not going to have really a consequential impact on our results in the coming quarter or for the year.

Thank you so much.

Thank you. Our next question comes from Jim Duffy of Stifel. Your line is open.

Thanks. Good afternoon. Another nice quarter, guys. I'm hoping that you can elaborate. Can you guys elaborate on the $60 million of missed demand? Is there an Omicron impact included in that calculation, or is that principally a function of delayed receipts? And then I'm curious, with inventories up 20% year to year, are there future expected impacts from product availability? And if so, when do you expect to get caught up?

Yeah. So, Jim, the $60 million is a good calculation by experts. And, you know, we factor into account fill rates from normal, and it takes into account both receipt of goods as well as fulfillment of goods when we get it because we're trying to service demand. The 60 is higher than 50, not because, you know, things are getting worse, only because in our quarter, one includes December, which is a holiday period. Our view, you know, is that supply chain-related issues continue through the year, but what we are seeing is an improvement in the congestion in the West Coast, and so we think that, you know, it will help us. It's difficult to predict, you know, how much demand, you know, we will not be able to service. The good news is there is demand, and we continue to grow. And so I think that's the way I kind of look at it, Jim.

Helpful. Thank you.

Thank you. Thank you. Our next question comes from Ike Perucha of Wells Fargo. Please go ahead.

Hey, thanks, everyone. Harmeet, two questions for you. So understanding the rev guide maintain lowered Europe, I think U.S. or America as you had planned up high singles. I assume that has moved up. Can you tell us specifically now where you're targeting that geography? And then just the second question, I just want to make sure I understand. So you're reiterating the earnings and the revenue, but you're now calling for more deleverage. I just don't really understand why there's going to be more deleverage on expenses. I think you said incentive comp, but, again, if you're not raising your outlook, I don't quite understand what the moving pieces are there. So any more help on the SGMA being a little higher would be helpful.

Yeah, sure, Ike. So, Ike, your first question related to, you know, Yeah, okay. So in terms of the regional mix, so you're right. I think when we talked about the year, when we reported Q4, we said the Americas high single, we said Europe high single, we said Asia, you know, mid to high teens. I think as we look at the year now, we think Americas is low double. The Europe you know, because of Russia and FX on a reported basis is largely flat. If you take it out, it's high single. And Asia probably high teens to about 20%. So that's the change in the regional outlook. To your question about the SG&A piece, you know, The annual comp is really driven by constant currency. Our three-year comp is driven by reported results. And so the FX headwind is something that doesn't affect the comp for the year. So our SG&A deleverage, a slight, I'd say flat, it's a little bit of a predict, but I'd say flat to slightly deleverage versus leverage, is being offset by higher gross margins. And so that's why the EBIT margin is broadly similar to what we indicated. And that's why the EPS guidance largely is similar to what we had said about a quarter ago. And, you know, the thing I would tell you, and all of you have seen it, you know, we are really focused on cost and management. So, you know, we're doing whatever we can. to minimize that, to offset any inflation pressures. So that's something. We've done a good job in the past, and, you know, we continue to do that as the year progresses for all the controllables.

Thanks, Ed.

Okay. Thank you. Our next question comes from Dana Telsey of Telsey Group. Your line is open.

Hi. Good afternoon, everyone. Nice to see the continued progress. Hi, Dana. Hi. Hi. As you think about supply chain, I think the supply chain headwind was around $60 million in this quarter, up from $50 million the last quarter. How are you planning supply chain headwinds as we go through the year? And then just on marketing investment, which has increased, is that consistent through the year? And any new nuances on marketing that we should watch for that differentiates by quarter? Thank you.

Yeah, so then on supply chain, it's difficult to predict. The good news is, or the bad news is, We continue to chase. The $60 million higher than the $50 is largely because of the holiday season being December. It's not that supply chain issues are getting worse. It's just that we are chasing. We're still chasing in the shorts, et cetera. And so we let you know as this progresses, but the good news is there is a lot of demand for our brands. On A&P, you are right. A&P has a percentage ticked up. about a point this quarter relative to last year. And we were, you know, last year revenue was down, you know, the year started on a tough note. But this year, you know, I think advertising is 5.8 or something as a percentage. Rest of the year, I think of advertising being largely similar to last year as a percentage. We think we'll end the year advertising as a percentage of revenue, about 7.7, 7.8, which is slightly higher than a year ago. That's largely because of Beyond Yoga. I mean, you know, we bought the brand. They're going to be spending on advertising, et cetera. But despite that, you know, EBIT margins will be up year over year, and that's our outlook.

Got it. And any change to CapEx for the 270? And then, Chip, just anything on new wholesale accounts beyond what you're doing at Target and some of the others that we should be watching for. Thank you.

No change to CapEx 270. I know we spent about $73.74 this quarter, so if you extrapolate that, it's slightly higher than the $270, but that's because Q1 is a bit of carryover from Q4, but, you know, CapEx we're maintaining at 270. And then, yeah, no meaningful change.

Marketing. Yes. Guided.

Yeah. Yeah. Yeah.

Thank you.

Next question. Thanks, Dana. Thank you. Our next question comes from Chris Nardoni of Bank of America. Your question, please. Thanks, guys.

Good afternoon, and thanks for allowing me to squeeze in my question. I think you talked about mid single-digit plus cost inflation for the year previously. Given the continued rise in cotton prices, is there any notable changes to this outlook? And if you could just talk about your contracting you know, how far ahead you book your cotton prices and how far that's locked in. That would be really helpful in how that translates to your higher gross margin guidance.

Great, Chris. First, welcome to the account. Second, I was wondering who would ask the cotton question to you. Thank you for asking that. You know, cotton is locked in for the year, you know, and – I think the increase in COGS year over year on a full year basis is about 5%. We were effectively either priced for it or, you know, absorbed some of that through cost discipline, but largely we have priced for it. Cotton, as you look at 2023, you know, cotton is higher than what we locked in. We're in the process of negotiating cotton with our vendors, and, you know, it will be a win-win deal for both sides. The futures on cotton, as you look at it today, start coming down in October of 2022, and, you know, that translates over the years. So I think more to come, but generally, you know, we've done an effective job maintaining margins, both gross margins and EBIT margins, despite the uptick in cotton this year and so, and historically, so expect that from us over time. Thank you.

All right. Is that it, Lateef? I think that's the cue, right?

It is, sir.

All right, great. So I will wrap it here. I want to thank everyone for joining us, remind everyone that we do plan to hold Investor Day in New York City at our showrooms on June 1st, and we're looking forward to seeing everybody then. Thanks very much for attending and for the great questions, and we'll see you all in person very soon. Looking forward to it. Bye-bye.

And this concludes today's conference call. Thank you for participating. You may now disconnect.