Levi Strauss & Co.

The conference will begin shortly.

To raise your hand during Q&A, you can... Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company second quarter earnings conference call for the period ending May 29, 2022. All parties will be in a listen-only mode until the question-and-answer session, at which time instructions will follow. The conference call is being recorded. and may not be reproduced in whole or in part without written permission from the company. For this conference call, 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, LeviStrauss.com. I would now like to turn the call over to Ida Orfin, Vice President of Investment Relations at Levi Strauss & Company.

Thank you for joining us on the call today to discuss the results for our second 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've posted complete Q2 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 we will be making forward-looking statements on this call, which involves 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 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. 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.

Good afternoon, and thanks for joining us today. It's been just over a month since I saw many of you at our investor day in New York, where we laid out our plans to accelerate profitable growth over the next five years. The team is off to a strong start in executing the strategic initiatives that will deliver those plans, and you can see that clearly in the results we reported today. Revenue in the second quarter grew 20% on a constant currency basis and 15% on a reported basis to $1.5 billion, reflecting strong consumer demand across our business and around the world. We also increased profitability, expanding adjusted EBIT margin 90 basis points to a record 9.9% for the second quarter, which drove adjusted EBIT growth of 27% and adjusted diluted earnings per share growth of 26%. Combined with our strong brands, our relentless focus on our strategic priorities, being brand-led, DTC-first, and diversifying the portfolio has delivered strong results, even with continued macro and economic uncertainty and persistent inflationary pressures. The momentum we are driving today reinforces my conviction in the potential of our strategy and the execution abilities of our team, leaving us firmly on track to deliver our long-term commitments. There are several notable dynamics that underscore our performance this quarter, for which my and Harmeet's comments will reference revenue constant currency comparisons to 2021, unless we indicate otherwise. Let me start with our first priority, being brand-led. The Levi's brand is stronger than it has ever been, and the demand is stronger than it has been in my career here at Ellison Co. Levi's is the number one jeans brand in the world and has strengthened its standing over the past year, driving the most share growth amongst the world's top jeans brands, with brand awareness remaining well above the competition across most markets. We've been moving with agility to capitalize on global casualization trends, fueling strong growth for Levi's, while also driving strong underlying category growth that continues to outpace apparel. This performance was supported by our focused efforts to leverage our leadership position with a strong pipeline of innovation. This past quarter, we dug into our archives, releasing the Levi's Fresh Collection, which was inspired by a product collection from the 1970s, featuring a range of sustainably dyed pieces for men and women, including 501 jeans, sweats, accessories, and more at premium price points. The innovative collection saw particular success with women's and tops, in addition to younger consumers with whom we are gaining share and seen record engagement on our industry-leading TikTok. Overall, the Levi's brand grew 20% with our top five markets collectively growing at an even faster rate. Levi's bottoms revenue was up double digits across both men's and women's versus last year and pre-pandemic Q2 2019 levels. And nearly all Levi's fits across genders contributed to growth globally. led by strength in looser fits. The 501 family of products also continue to show strong growth, up 40% across men's and women's, highlighting the momentum of the most iconic fit in our line. Turning to our second strategic priority, DTC First, our direct-to-consumer business continues to thrive, allowing us to deepen our connection with consumers while showcasing the fullest expression of our brands. This quarter, total BTC net revenue increased 22% with growth driven by our company-operated stores. Strength in our global brick-and-mortar business was driven by both mainline and outlet stores across geographic segments as a result of increased foot traffic and store expansion, as well as higher unit volumes and AURs. During the quarter, we also benefited from a return of tourist traffic in many of our downtown locations, propelling growth in our flagship stores in key cities including San Francisco, New York, Paris, and London. Our latest generation of new stores continue to perform against our expectations, reflecting the market potential that we have yet to unlock. The success of these newer stores reinforces our conviction in reaching more than 1,500 company-operated stores by 2027. Our e-commerce business remains healthy with revenue continuing to far exceed pre-pandemic levels. We did see a moderation in online traffic as consumers returned to shopping in our stores in large numbers. E-commerce remains an important driver of our growth algorithm and we are committed to tripling its size over the next five years after successfully growing e-commerce into nearly a half a billion dollar business over the last decade. To achieve this ambitious goal, we are building the capabilities and the organizational structure to both scale e-commerce and accelerate our broader digital transformation. As part of that, we are establishing a new chief digital officer role that will report to me. The role will bring together our data, AI, engineering, and digital product management efforts under one leader who will spearhead our digital efforts for both e-commerce and our digital go-to-market. We see tremendous potential in e-commerce, and with the leadership to drive its success, we will move more quickly to realize it. We also continue to leverage our data capabilities to deepen our direct personalized relationships with our consumers through our Levi's app and loyalty programs. The app continued to see strong engagement with monthly active users up double digits. It also expanded into India and is now available in 10 countries total, with plans to further roll out to eight more countries across Europe this year. These initiatives helped expand our loyalty member base by over 50% year over year, with gains in key member productivity metrics, including average order value. And while our direct-to-consumer business continues to generate consistently strong growth, our global wholesale business also continues its strong performance in Q2, growing 18% with improved profitability. In terms of diversifying our portfolio, our third priority, we are focused on significant market opportunities in under-penetrated, high gross margin parts of our business that can drive strong growth even in these times of macro uncertainty. The opportunities here are tremendous. with untapped potential across women's, tops, international, and our other brands, Dockers and Beyond Yoga. This quarter, we made progress across each of these areas of focus. Following 11 consecutive quarters of pre-pandemic double-digit revenue growth, our total women's business grew 23%, the fifth consecutive quarter of double-digit growth since exiting the most challenging parts of the pandemic. While women's saw broad-based growth across geographic segments, growth was especially strong in the Americas, where the Levi's women's business was up 30%. And in our top 10 wholesale accounts globally, Levi's women's were up 50%. One of the biggest long-term opportunities we have ahead of us is to extend into true head-to-toe expressions of our brands, and we're making solid progress. For the total company, tops were up 23%, with strength broad-based globally across categories. We saw particularly strong growth in the Americas, up 26%, with traction in polos in the U.S., which were up more than tenfold on levi.com. Overall, women saw continued strength in wovens and dresses, in addition to double-digit growth in non-graphic tees. Our non-denim bottoms business also performed well, up nearly 20% for Levi's men's, with continued success with our XX Chino and more. Our international business was up 19%, with all geographies delivering strong double-digit revenue growth. Our top markets in Europe, France, Germany, and the UK were collectively up strong double-digits. Excluding China and Hong Kong, where lockdowns have persisted, growth in Asia was over 40%, with every market contributing to that growth. Our other brands also performed well in the quarter. Dockers continued to build momentum, delivering 27% growth in Q2, as it beat internal plans on both the top and bottom line. This was supported by strong international and DTC growth as well as some notable wins with Women's. Reflecting the progress we've made in refreshing the brand, Dockers Women's launched on Amazon in the U.S. this quarter and at Zalando and El Corte Ingles in Europe. While it's early days, so far the product is performing well. Beyond Yoga also made solid progress in the quarter with success in dresses, top colors and prints, and its Mommy and Me collection, most of which sold out in the first week. On June 25th, the brand also opened its first pop-up store at the Grove in Los Angeles, and the initial response from consumers has been terrific. Beyond Yoga remains on track to open its first permanent store in Q4 of 2022. Across the board, this was a strong quarter marked by consistent execution of our strategic priorities. I want to recognize the hard work and dedication of our teams across the organization. We delivered solid results in a uniquely challenging operating environment. I'll now turn it over to Harmeet to cover the financial results in more detail. Harmeet?

Thank you, Chip, and good afternoon, everyone. At our investor day in June, we laid out a clear long-term strategy designed to deliver faster growth stronger margins, and increased cash returns to our shareholders on our path to drive annual shareholder returns of 10% to 12% over the next five years. Our plan, which calls for annual revenue growth of 6% to 8%, adjusted EBIT margin expansion to 15%, and our commitment to return 55% to 65% of our free cash flow to our shareholders over that timeframe is bold yet achievable. In our second quarter, our team delivered on each of the three drivers of our long-term TSR algorithm, accelerated sales growth, margin expansion, and cash return. We generated strong growth. Total net revenue grew 20% to 1.5 billion, driven by 21% revenue growth in the U.S. and strong performance across our diverse global portfolio. Supply chain related issues limited further revenue opportunities by approximately 2%, primarily in the U.S., where strong demand continues to outpace supply. Adjusted EBIT grew even faster, up 27% reported and 37% in constant currency, as adjusted EBIT margin expanded 90 basis points to a record second quarter level of 9.9%. The strong EBIT growth was the principal factor driving adjusted diluted EPS up 26% to 29 cents. We achieved these strong results even as we invested in our brand and navigated the impact of rising inflation COVID-related challenges, geopolitical turmoil, and foreign exchange headwinds. We also returned $80 million of capital to our shareholders through a combination of higher dividends and the repurchase of 2 million shares. Given the continued strong performance of our diversified business, we are also reaffirming our financial outlook for the year. Second quarter net revenue growth of 20% was primarily driven by higher volume, as well as an increase in AURs, demonstrating again the strength of our brand and our leadership in the denim category as we price to offset inflation. Direct-to-consumer channel net revenue increased 22%, driven by increased traffic, store expansion, and continued gains in AURs, which were up high single digits. At chip reference, with consumer shopping behavior shifting from online to in-person shopping, our e-commerce business was down 2% in quarter two, yet remains over 60% higher versus 2019, with its operating margin on a fully allocated basis in the mid-single digits. and growth through all digital channels was up 8% year-over-year, remaining elevated versus 2019 levels, and comprising approximately 20% of total second quarter net revenue. Adjusted gross margin was maintained in reported dollars at a second quarter record of 58.2%, primarily due to improved structural elements, including makes shifts to higher gross margin GDP, international, women, as well as the sustainable improvement within wholesale. Combined with price increases, these factors offset higher product costs, including 80 basis points of higher A-price costs to support delivery of seasonal merchandise, as well as 30 basis points negative impact due to declines of high gross margin markets China and Russia. Moving to SG&A, adjusted SG&A expenses in the quarter was 711 million or 48.3% of net revenue, leveraging 90 basis points, despite ANC being higher by 10 basis points. Our robust gross margin coupled with our discipline SG&A management and operating leverage generated an adjusted EBIT margin expansion of 90 basis points to 9.9%, while adjusted EBIT dollars were up 37% in constant currency, even as we continue to strategically invest in our long-term growth initiatives. As a result of Russia's invasion of Ukraine, we suspended the majority of our commercial activity in Russia, including the closure of the majority of our stores and the suspension of shipments to our wholesale and licensing customers. Given the high level of uncertainty surrounding our business in Russia, we fully inflate the related long-term assets, including store assets and goodwill. The total charges related to Russia-Ukraine crisis recorded during the quarter were 60 million, impacting diluted earnings per share by 15 cents. Our effective tax rate was approximately 36%, which was higher due to a 16% foreign tax rate increase resulting from non-tax deductible charges related to the Russia-Ukraine crisis. Adjusted net income of $117 million was up from $93 million in quarter two of 21 due to the increase in adjusted EBIT and lower interest expense. partially offset by higher taxes, as just referenced. I'll now take you through key highlights by segment. Recall, the recent segments include Levi's brand, Levi's Signature, and Denizen, while the other brand segment includes Dockers and Beyond Yoga. In the Americas, revenues grew 17%, driven primarily by higher unit volume, as well as higher AURs across channels. Overall momentum in our largest market, the U.S., continued, delivering growth of 16%. Canada saw strong growth, up double digits, and our overall Latin business was up 18%, fueled by growth in Peru, Chile, and Brazil. Our company-operated stores posted another strong quarter, up 20%, driven by increased traffic and price increases, while wholesale grew 19% with particular strength in the U.S. Europe continued to see strong momentum, and revenue was up 3% reported and 15% constant, despite the impact of the Russia-Ukraine crisis. GDP was up 38%, reflecting higher traffic as consumers returned to shopping in-store, As a reminder, approximately one-third of company-operated stores were closed last year in the region. Most countries saw growth, including large markets such as France, Germany, Italy, Spain, and the UK. Asia accelerated and revenue was up 16% reported and 21% constant, despite COVID-related restrictions negatively impacting markets like China and Hong Kong. Wholesale was up 41%, while BDC growth of 7% was led by both mainline and outlet stores. While growth was broad-based, large markets like A&Z, India, and Japan were particularly strong. Thailand also transitioned from a licensed to a directly operated business in April, contributing to results. Overall revenue growth in Asia helped triple operating profits and deliver an operating margin of 8.6%. Other brands' net revenue was up 61%, driven by growth in Dockers and the addition of Beyond Yoga. Overall operating profits were also up 66%. Turning to balance sheet and cash flows. Inventories increased 29% from the prior year, consistent with our internal plan and our strategy to more effectively meet demand by investing selectively in co-products which can be sold across multiple future seasons. A third of the increase includes the planned acceleration of receipts for our upcoming seasons to mitigate longer lead time. And the acquisition of Beyond Yoga and the transition of our time in business from a licensed to a directly operated business also contributed three percentage points of the year to year increase in inventory. Roughly 20% of the total inventory is comprised of products in transit. We are comfortable with the overall level, composition and quality of inventory on hand. Cash and liquidity remains strong. With end of quarter net debt of 306 million and overall liquidity of 1.5 billion. Our leverage ratio remains at a multi-decade low of 1.1 times. Adjusted free cash flow, which we now define as cash flow from operating activities, less property, plant, and equipment, was 13 million, down from 148 million in the second quarter of the prior year, primarily due to higher spending on inventory. In the second quarter, we returned approximately $80 million to shareholders. The company paid a dividend of $0.10 per share, 64% higher than one year ago. And in the quarter, we repurchased shares of approximately $40 million. Going forward, the company declared a dividend of $0.12 per share, a 20% increase from last quarter. And as I mentioned in June and in yesterday, the board of directors also authorized a new $750 million share repurchase program. Moving on to our guidance for fiscal 2022. Against a backdrop of continued macroeconomic volatility, we are focused on controlling the controllables and delivering results with strong execution and discipline as we have done in the past. 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 trend we are seeing in our business supports our continued expectation for 11 to 13% annual reported net revenue growth to 6.4 to 6.5 billion. This is allowing us to offset 100 to 150 basis points of incremental headwind from currency and lockdown restrictions in China from when we last shared guidance with you in April. This represents 13 to 15% net revenue growth on a constant currency basis, well above our expectations coming into the year. Looking at our reported net revenue outlook by region, we now expect America to be up low teens, Asia mid-teens, and Europe flat to slightly down. In constant currency, Asia, excluding FX, would be up approximately 20%, and Europe, excluding FX and Russia, would be up low double digits. Our full year expectations for adjusted gross margin expansion of 20 to 40 basis points, EBIT margin expansion of 20 to 30 basis points, and capex of $270 million have not changed. We are now planning for a tax rate of approximately 20% for the full year, up from our prior outlook of mid to high teens. We're also maintaining our expectations for adjusted diluted ETFs of $1.50 to $1.56 as the quarter two beat and underlying strength in our business are helping offset incremental headwinds from when we last guided in April, including two cents from foreign exchange, two cents from the higher tax rate, and four cents impact from more protected lockdowns in China. With respect to our expectations in the second half, I'll share some color on XCNA expenses and the tax rate. We currently expect Q3 to show some deleverage given lower relative investment in the prior year, and as we continue to invest in new stores and ANP. Q4 will be around prior year as a percentage of revenue. We also expect the tax rate in the mid-20s in the third quarter due to the continued anticipated impact of COVID-related restrictions in China. Finally, as we upgrade to our new on-the-cloud ERP system in early quarter two of next year in the U.S., post-successful implementations in both Mexico and Canada we will be building mostly core products in Q3 and Q4 to protect shipments to our customers. This updated ERP will be instrumental in increasing speed and agility by providing us real-time visibility to inventory across our network and setting us up well to accelerate our direct-to-consumer business. In summary, we continue to see momentum across the business. We've been able to build on a phenomenal 21 to deliver a very strong performance in the first half of 22. We are on track to deliver a solid 22 while making progress across our strategic priorities, setting us up well to deliver on our longer-term financial target. I will close with three key messages. First, the broad diversity of our business across geography, channels, and product categories provides us with the control and optionality to successfully navigate the challenges of the external environment. This positions us to deliver in both good and tough times. Second, the strength of our brand, strong execution by our team, and disciplined cost management have allowed us to expand and sustain growth and EBIT margin expansion. Third, we have made great progress on our commitment to return cash to our shareholders, increasing our dividend by 20% from last quarter, completing our 200 million share repurchase program in the quarter, and announcing a $750 million repurchase authorization at our Annals Day. Year-to-date, we have returned close to $200 million to our shareholders, a 400% increase over last year. These three factors have allowed us to deliver a strong first half in 2022 and reaffirm pull your guidance despite all the headwinds in the marketplace.

With that, I'll now go ahead and open the call for Q&A. Thank you. The floor is now open for questions.

If you have a question, please press star, then the number one on your telephone keypad. Due to time constraints, the company requests that you ask only one question. If you have an additional question, please queue up again.

Our first question comes from the line of Matthew Boss.

I'm JP Morgan. Your line is open.

Thanks and congrats on another nice quarter. So Chip, So Chip, on the continued momentum and strength of the brand, could you maybe speak to drivers behind the acceleration, notably, that you're seeing in the Americas? Maybe what's driving the combination of both AUR and unit growth? And just how do you see Levi's position to take share in this dynamic backdrop as now we move forward?

I would say first thing, I'll answer the second half of your question first, which is I think the Levi's brand is incredibly well positioned in this very dynamic environment to continue to accelerate and grow share, and the strength of this quarter gives me a lot of confidence in saying that. I'd say there are a number of key drivers to our success. If you want to focus specifically on the U.S., Obviously, the continuation of casualization is a dynamic that's playing out globally. That's helped us a lot. But the U.S. jeans market just got the data for the last 12 months ending May. U.S. jeans were up 19%, and that was faster than total apparel. So, you know, as the market leader, we are clearly the ones driving that. We've got some recent consumer research. More consumers are now wearing jeans more often in professional settings. I would say maybe even at your bank, the CEO is probably just happy that people are coming into work and wearing a pair of jeans is perfectly acceptable today. And that's very different than a pre-pandemic world. More than half of the people that were surveyed in this survey and this was done globally, said that they can now wear jeans to work. That's a huge change from pre-pandemic. So the trend towards casualization is definitely helping. The new denim cycle that we've talked about for probably over a year, straight, loose, baggier fits. But, you know, when I look at our business, probably the strongest testimony to the strength of our brand is just what's happening on the 501s. You know, that is our most iconic item is that, 40%, again, this quarter across men's and women's real solid growth. And the brand fundamentally has never been stronger. And that is probably best seen in the split of unit growth and AUR growth. I mean, our AURs, this is on a global basis. I don't have the numbers off the top of my head for U.S., but on a global basis, our AURs are up 8%. and unit growth through double digit, 11%. And so we've successfully passed through pricing that has contributed to us being able to hold our gross margin at levels equal to a year ago, despite all the headwinds that Harmeet talked about in prepared remarks. You know, the impact of no Russia and less sales in China, both high gross margin businesses, impact of air freight. We've offset all of those things, plus higher cost of goods. and health growth margin, which speaks to just the power of the Levi's brand. And then finally, we're just continuing to connect with consumers in a really relevant and authentic way. And that's what we do really, really well. And that's what's put this brand in such a strong position over the last several years. So we can't control inflation. We can't control what's going to happen to interest rates or whatever the Fed's going to do or anything else. But we can't focus on the things that are within our control. And we're going to continue to do a great job executing against those things, connecting with consumers and building the brand.

Congrats again on the momentum.

Thanks, Matt.

Thank you. Our next question comes from Kimberly Greenberger of Morgan Stanley. Your line is open.

Okay, great. Thank you so much. If I could ask a two-part question. Harmeet, you mentioned the ERP implementation happening in the U.S. in the second quarter of next year. Could you just talk about how we'll see that manifest in inventory growth as you sort of proactively build some inventory just to make sure that you can deliver on time through that entire period of that implementation. When does inventory rise? When do we see it normalize, you know, on a quarter-by-quarter basis? Just any color you could offer there. And then, Chip, we heard that there was just a slight softening in retail sales among some of the US retailers here over the last month or so. I don't know if you have an order book or if you have any sort of a forward view in terms of customer orders here in the US and the behavior that you might be seeing among those customers on their future order commitments. If you have anything to share on that, we would certainly be interested to hear. Thank you so much.

Sure. I take the ERP question. You know, the U.S. is going to be a third implementation of the upgrade. We've done Mexico. We've done Canada. Both have gone really well. U.S. is the largest market. A couple of other retailers have done the U.S., and we are bringing to the new on the cloud SAP system clear benefits. The way we are thinking of inventory, and as you know, Kimberly, U.S. is largely a core market where we carry the product through multiple seasons. Our expectation is between quarter three and quarter four, we'll probably build about, you know, approximately $100 million in inventory that then waters down quarter one, quarter two of next year. We're looking to implement this in early Q2 of 2023. So that's how one is thinking about it and working through it. I mean, there's a dedicated team, you know, staff for major implementation, and our commercial teams are directly involved, obviously, in the discussions with key customers. And so it takes two to tango, and so, you know, collaboratively we feel we can get this done and do it in a way that we can actually protect. consumer demand and ensure that we satisfy, you know, the fill rate, et cetera.

Over to you, Chip. Right. Kimberly, I'll try to keep this pretty brief. You know, our wholesale results in the quarter were very, very strong as we talked about in prepared remarks. And on our core red tab business, Levi's Red Tab, focused here on the U.S. specifically, we really have not seen any softening or have heard really any concern about revised red tab from our customers. The one soft spot in our business in the second quarter was on Signature and Denizen, our two value brands. Not surprisingly, those businesses were down mid-single digits. And as you know, those businesses represent real, real small part of our total revenue, kind of low single digits of our total revenue. But those two brands, which were up in the first quarter, were down mid-single digits in the second quarter. So there's some evidence that the value consumer or the low-income consumer is really starting to feel the squeeze. You know, this shouldn't be a surprise based on the results from Walmart and Target, but You know, Levi's Red Tab at Target is still doing really well. And, you know, we feel really, really good about how we're positioned right now in wholesale. We haven't seen any signs of cracks. And I think, again, that speaks to the strength of the Levi's brand.

Great color. Thank you so much.

Thanks, Kim.

Our next question comes from Omar Saad of Evercore ISI. Your line is open.

Thanks. Good evening. It's great to hear so many different pieces of business is performing well. It's also great to hear you guys are allocating more resources and talent to build out the digital organization. But maybe to push in a little bit deeper on the digital performance in the quarter, guys, I think it was plus 3% overall. Maybe you could also dive in a little bit e-com versus digital. digital wholesale, and then given the importance of digital and DTC to the elevated longer-term growth algorithm you guys laid out not that long ago, maybe talk about the e-com performance and where you think it should go and where you think it can be. And I'm also to the elevated longer-term growth algorithm you guys laid out not that long ago. Maybe talk about the e-com performance and where you think it should go and where you think it can be. And I'm also wondering, is there any supply chain and inventory hindrances holding that channel back? Thanks.

Yeah, Omar. Digital, you know, overall, you know, was up. Our own e-commerce, as I mentioned, was down. You know, it was also down because we were lapping some real strong numbers, as well as as the consumer heads back to the stores. There's a bit of, you know, the online Shopping shifting to the stores and we saw that in the form of higher traffic The in terms of the puts and takes if you think about the world America's generally strong on digital Europe You know slightly weaker than some retailers like Lando that are reported weaker sales and Asia, you know still strong To the question about what we'd like to do and where we'd like to go, we are in the early stages of really accelerating this business with the announcement Chip made on getting a chief digital officer. You have somebody in the company, you know, beside the folks in the commercial side of the business waking up every morning trying to, you know, drive and grow this business. As we said in the investor day, that we would, our goal is to triple the size of the business from, you know, 7% to about 15%, triple the size of the business, which will also help even margin. We think there's a huge opportunity. We just rolled out, you know, the app in the 10th country, at least, you know, 20 countries where this app needs to be. We still get a small percentage of people buying through the apps. So the opportunity in that is immense. And our loyalty program is just getting started. We have 19 million consumers around the world. Brand that's Levi's, that's definitely a trend. Beyond Yoga continues to grow. E-commerce, Dockers, e-commerce growth is accelerating. So the real work is to get Levi's.com to where we like it.

Got it. It sounds like with loyalty accelerating, a key to accelerating the econ will be translating that loyalty to transactions.

Great.

Thanks for the caller.

Good luck. Thanks, Alon.

Our next question comes from Laurent Vasilescu of Exane BNP Paribas. Your line is open.

Oh, good afternoon. Thank you very much for taking my questions. Harmeet, I think you mentioned in your prepared remarks that China and FX is an incremental 100 to 150 basis point headwind for the full year. Just curious, on China specifically, just curious to know how it performed in 2Q and What is your expectation for the year as we think about that 100 to 150 basis points? And if I could squeeze in the second question, Armie, I think you alluded to 4Q revenues in the transcript. It's still not populated correctly, but just how do we think about 3Q, 4Q revenues for the back half?

Yeah, sure. So China, Rowan, as you mentioned in yesterday's a small piece of our business. We started the year at about 3%. We think we end the year at about 2% of our business from China. We have a wonderful team on the ground, and they're working through all the puts and takes. China was down, I believe, close to 50% in quarter two, largely because our stores were locked down. And we don't have a large e-commerce business. We're trying to build that. And so we could offset, you know, those stores being closed. The 100 and 150 basis points of headwind that I talked about, largely in the second half, essentially driven by foreign exchange and China being two pieces of it, FX largely being the euro and the pound. As you think about Q3 and Q4, I think Q3 is mid to high single-digit growth relative to 21, and Q4 in the mid-single-digit. I mean, I think a good comparison is to relate both the Q3, Q4 H2 to 2019. And you'll see relative to 2019, they're growing in the low double-digit. And I can definitely give some more color on the inventory with questions on that.

Very helpful. Thank you very much, Harmeet.

Thank you. Thank you. Our next question comes from Paul in the city.

Your line is open.

Hey, thanks. It's Tracy Cogan filling in for Paul. I was wondering if you guys could talk about store traffic and conversion. in each of your regions and how that compared to 2019, and also then specifically in China since the lockdowns have abated, what store traffic or how has the store traffic built since the lockdowns ended? Thank you.

Yeah, Tracy, the store traffic is growing, you know, relative to a year ago, generally across the board. It's very difficult to go, you know, country by country because, you know, different countries have different elements of geopolitical COVID uncertainty. But traffic, you know, we saw build, and that's why Chip in prepared remarks talked about, you know, the growth we're seeing in our brick and mortar stores, especially in key cities. We see tourist traffic beginning to improve. You know, the Chinese tourist is absent, but outside there we've been seeing tourist traffic improve. And having said all that, traffic relative to 19 is still below 19 levels, right? So traffic hasn't gone back to 19 levels. Conversion rates and higher units per transaction, because now we have a lot more to offer from a head-to-toe perspective, helps offset the traffic declined relative to 19, especially in the U.S. And, you know, we are opening doors. We should have, you know, 70-odd doors on a net basis open this year. U.S. is also opening doors, and we talked to the investor there. We think we can open on a net basis about 18 of those 23 onwards. I mean, structurally, the economics are a little different. In Brigham Morrow, obviously, we negotiated rent reduction, lower rents in new doors, et cetera, because we, you know, one of the few retailers that continue to open doors. I think structurally the economics is slightly better. Thank you. Thanks, Tracy.

Thank you. Our next question comes from Will Gardner of Wells Fargo. Your line is open. Again, Will Gardner, your line is open. Lateef, why don't we move to the next caller and come back to Will. Absolutely.

Our next question comes from Jim Duffy of Stateful. Your line is open. Oh, thank you.

Good afternoon. Nice work in the quarter. I wanted to ask, there's been a lot of volatility in the commodities market, though the recent correction has been sharp. When do you lock in costs for the first half of fiscal 23? And does the correction we've seen in the commodities landscape-heavy rethinking the rate of price increases that you had talked about for the back half of the year at all?

Yeah, Jim. So, you know, broadly speaking, we lock in our open to buy twice a year. So the first half of 2023 is largely locked in. Unfortunately, higher commodity price point. The good news, as you've seen, the cordon futures, and they indicate futures beginning December. You know, cordon is trading. It was below 90 yesterday, below over 90. I haven't seen when the market closed. I was looking at it earlier. And the average, you know, cordon price is between 80 and 90 cents. So it's turning back, hopefully. So it's definitely going to help us in the second half of next year. To your question about pricing, we have taken pricing thoughtfully earlier on. We have taken some pricing in H2, and we've been very thoughtful about 23. Obviously, it's important for us to offset cost increases, and doing it surgically is critical. But we're very thoughtful. The other piece is Despite the pricing that we've taken, our products still provide great value to the consumer. And I think that's evidenced by the fact that our revenue growth is well balanced between unit volumes and AURs. Not every percentage increase in AUR is driven by pricing. Mix is also mixed.

Great, and just one more, if I may. Are you feeling any more or less confident in the promotional environment as you look to the back-to-school season and holiday season?

Yeah, no, you know, the brands, the good news that Chip said, the brands are very strong, strong as a team. And Dockers and Beyond Yoga are strong bands, too, you know, from that perspective. We did, in quarter two, I mean, our gross margin did include about 100 basis points of incentive units. You like to sell every unit at full price, but we did sell incentive units. We've got a similar cadence built into the second half. As we think about back to school, we think our product offers and our marketing offers will drive consumers to our product. And we'll be thoughtful about promotional levels We're not going to be uncompetitive, but we'll be thoughtful as we think about back to school and the holiday season, which will be upon us. There's Prime Day also around the corner, so we'll be very thoughtful of that. But overall, given the strength of the brand, the fact that we're looking at promotion levels with AI and machine learning and other tools, I think we'll be okay. Thank you very much.

Thank you. Again, to ask a question, press star 1 at this time.

Our next question comes from Brooke Roche of Goldman Sachs. Your line is open.

Good afternoon, and thank you so much for taking our question. Can you talk to the trends that you're seeing in your business in Europe, especially in the context of the choppy macro environment? What are you seeing there now that gives you confidence to raise your underlying XFX and X Russia guide for the region for the year? Thank you.

Hi, Brooke. The brand strong, one could argue pre-pandemic, the brand was strongest in Europe and the execution was probably the best. They continue to Leverage both the strength of the brand as well as execution and driving from performance a couple of things one In Europe, you know, we have hosted retailers that do commit You have a people process the people to the second half is in the high single digit Which is good news that gives us some confidence As well as great execution. I think that balances, you know, you know the consumer you know, sentiment and other, you know, softness to be seen, but the fact that economies are opening, tourism is in with a big bang in Europe, I think are the things that give us a little bit of confidence besides the strength of that and the execution of the wonderful team there.

Great. Thanks so much. I'll pass it on.

Thanks, Brooke. Thank you. Our next question comes from Robert Durbar of Guggenheim Securities.

Your line is open.

Hey, guys. I have two questions. The first one, can you talk a little bit about just the wholesale channel inventory levels that are out in the market, just sort of where you think your brands are and where sort of the category is generally? And then, Chip, you're usually pretty good with some of the trends. I was wondering if you know, long jean shorts, you know, appear to be trending. And I'm just curious if you're seeing that within your business. Okay.

Your second question just gets miles across the room, Paul, I can tell you that. Your first question, the way we look at, so we do, you know, look at trade inventory. It's a subject of discussion between our sales team and commercial teams and our wholesale customers. Wherever we have line of sight, we look at trade inventory relative to 19 or 21, depending on where we can, and measured in months. And so far, Bob, I can speak for the U.S., we've seen trade inventory largely in line with 19 levels. Talking about 19, I just wanted to make a point for everybody here. If you look at inventory growth in quarter two, We talked about, I talked about 29% over 21, but 21 is a very difficult comparison because of the supply chain issues. The way we look at it is, okay, how do, you know, what's inventory levels relative to 19? Inventory to 19 is up 24%. If we take in the early receipts and, you know, lead times have increased and we're trying to ensure that we don't dissatisfy our consumers, That's about 10% of that 24 is early receipts, and then beyond yoga and the talent acquisition, another three percentage points. So if you back that out, you know, inventory go to 11%. It's probably in line with our expectation of growth rates in the second hour relative to 19. Chip, a question about long shot, long shot, short shot.

Bob, if that's what you're wearing, That is clearly what the trend must be.

No, not tonight, but I was thinking about it.

Okay.

Thank you, Bob. Next question.

Thank you. Our next question comes from Dana Telsey of the Telsey Group. Please go ahead.

Good afternoon, and nice to see the progress. Two things, as you're thinking about the supply chain, it looks like the supply chain costs were higher in the second quarter than in the first quarter. How are you planning for the balance of the year going into the back half of the fiscal year? And then the wholesale strength is impressive. Unpacking the wholesale strength, looking at price, door growth, units, how does it differ by region and what is your outlook? Thank you.

Dana, hi. To your question about supply chain costs, I mean, I think if you think of our costs in quarter two, air freight was higher, where 80 basis points higher. It was a combination of two things. One, very low air freight in quarter two of last year, and this year we were getting a product, just the seasonal product to make sure that we were able to satisfy the cost. You know, our expectation on air freight is that it's begins to taper down. You know, supply chain issues are getting better. We're not going to be out of the woods this year. Hopefully next year it's getting better. You know, the other costs are commodity costs. You know, commodity costs in the second half are higher than the first half because of the cotton wars. And we're offsetting that with higher AURs driven by pricing and mix. Your question about wholesale trends, It's difficult to, again, go around the world. Again, I think the fact that the brand's strong, RedTab is really strong, the trends tailwind that Chip talked about, casualization, and as people get back to the office, it's a more casual environment, I think definitely helps us. And I talked about pre-book in Europe. which is a good indicator. So I think that's how we look at it.

The only other thing I would add on the wholesale thing is the U.S. wholesale. We talked about this before, Dana. We put a lot of work into just remapping and building our footprint over. So our focus on premiumizing our wholesale footprint has paid off in big ways. The target expansion has paid off in big ways. Getting incremental floor space and key customers like Kohl's and Macy's over the last two years or so, it's also played an important role. So we're seeing that play out and put that together with the strength of the brand. And if the brand shows up better in their stores, we're going to sell more Levi's. And that's where our focus has been.

Thank you. Thank you, Dana.

At this time, I'd like to turn the floor back over to the company for any closing remarks.

All right. I want to thank everyone for dialing in and wish you all a happy and healthy summer and look forward to talking with you at the end of our third quarter. Thank you all very much.

Thank you. This concludes today's conference call.

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