Levi Strauss & Co.

Good day, ladies and gentlemen, and welcome to the Levi Straussen Company third quarter earnings conference call for the period ending August 28, 2022. All parties will be in a listen-only mode until the question and answer session, at which time instructions will follow. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the companies. This conference call is being broadcast over the Internet, and the 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.

Thank you for joining us on the call today to discuss the results for our third 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 Q3 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 with the SEC, in particular the risk factor 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 Jeff.

Good afternoon, and thanks for joining us today. As you know, and I've heard from other companies, macro conditions deteriorated since we last spoke with you in early July. As we move through the third quarter, a confluence of pressures from inflation to falling consumer sentiment to rising interest rates began to result in softer consumer demand, while our industry continued to experience supply chain disruption and a heightened promotional environment. Not surprisingly, this made for a challenging quarter. Despite this, we were able to deliver solid results with net revenue growth of 7% on a constant currency basis, which translates to plus 1% on a reported basis. While this was below our own internal expectations for the first time in several quarters, our teams responded to this very dynamic environment by focusing on controlling the controllables. We took quick action to both stay competitive and protect the bottom line, resulting in a double digit adjusted EBIT margin of 12 plus percent. I've talked before about the importance of strong brands during uncertain times. our brands remain very strong, delivering strong growth despite the challenging environment. Specifically, excluding the impact of foreign exchange, we delivered constant currency growth across our key brands with Levi's plus 6% and Dockers plus 13%. But beyond the revenue results, there are other key proof points that underscore the strength of our brands. First, this quarter we delivered the Levi's brand highest third quarter revenue in a decade, with growth across categories and genders. We've made meaningful progress winning over the next generation of fans, continuing to gain share with the 18 to 30-year-old age segment in the U.S., while maintaining our leadership position across consumers of all ages. And our unaided brand awareness remains well above competition across most markets. Second, the strength of the brand has equated to pricing power. AURs were up mid-single digits in a more promotional environment, and the pricing we've taken to offset inflation has largely stuck. Third, and as a result of our pricing power, our gross margins, though off modestly versus a year ago, primarily due to currency and discounting, remain strong and are still nearly 400 basis points higher than pre-pandemic levels, as we have successfully offset significant inflationary cost increases. Fourth, our direct-to-consumer business continued to deliver at outside growth of plus 8% in constant currency, which, by the way, Harmeet and I will continue to refer to in the balance of our remarks, driven by increases across our stores and e-commerce business. Having strong, powerful brands and a diversified business with scale mattered during these volatile times. These advantages allowed us to grow global wholesale by 6% and total U.S. company revenue by 5%, despite a number of U.S. wholesale customers slowing orders. To put the U.S. results in context, we significantly outperformed both the overall jeanswear market, which based on NPD data, declined by mid-single digits during the June through August quarter, and the overall US apparel market, which slowed to only 1% growth. I think it's also important to note that despite the past three month decline in the jeans wear category, it is still up mid single digits versus pre pandemic. Despite the quarterly category softening, we remain confident about the long term trend of casualization continuing to be a tailwind for the business. In addition, Even with continuing supply chain constraints, our team took swift action to minimize the impact to just $30 to $40 million, or about two to three percentage points of revenue growth. As the operating environment becomes more challenging and supply disruptions continue, our unique and durable competitive advantages will continue to set us apart from the competition. Let me walk you through the progress we made across our strategic priorities during the quarter. again, all in constant currency. Our first strategic priority is brand-led. As mentioned, Levi's brand grew 6% versus prior year and almost 10% ahead of 2019. We're driving growth in our bottoms business by delivering a pipeline of fresh and innovative products as we define new trends and introduce new fits. We continue to build upon our success with looser fits with the launch of our new baggy dad, a signature 90s style which delivered strong performance, as did our new bootcut and straight fit launches. The trend toward looser fits in women's was also accompanied by a shift from high to mid-rises, which were up 20%. The iconic 501 family again posted double-digit growth across men's and women's. After 149 years, this fit continues to resonate. We continue to position the Levi's brand at the center of culture by partnering with leading brands and cultural icons on product collaborations. The Ghani collaboration returned this year and was featured on the runway at the Copenhagen Fashion Week and sold out in two weeks. And the new Levi's Denim Tears collection was worn by Golden State Warriors guard Steph Curry on the cover of October's Rolling Stones. We also recently launched the second iteration of our Buy Better Wear Longer campaign designed to inspire shoppers, both young and young at heart, while highlighting the quality and the timeless style of Levi's. Additionally, this campaign underscores the durability of a pair of Levi's, important in today's environment where consumers are looking for quality and value for money. This is the highest scoring ad in copy testing that we've had since I joined the company over a decade ago, reflection of how much this message resonates. Moving on to our second priority, total company DTC channel grew 8%. Owned and operated mainline and outlet stores grew in the third quarter, mid-single digits, with traffic and AURs both up versus prior year. Again, another sign of the strength of our brands. And even as consumers returned to our stores, e-commerce grew 16% driven by the Levi's brand in Asia, Beyond Yoga, and Dockers. Overall, e-commerce was up 64% versus 2019, with the Americas and Europe segments up double digits and Asia more than doubling. Globally, the Levi's app continued to achieve increased engagement with monthly active users, again up double digits. along with 17% growth in revenue. And we made progress in deepening our direct personalized relationships with our consumers via our global loyalty programs, which saw double-digit growth in total members and revenue. We also grew our global wholesale business by 6%, driven by the Levi's brand across Asia and the Americas. In the US, the Levi's brand was up low single digits with strong growth in women's new fits. This growth was offset by a 12% decline in our value brands, Signature and Denizen, which are most sensitive to changes in consumer discretionary spending. Further, this business was impacted by a reduction in Denizen women's distribution at Target as we've expanded Levi's Red Tab. As a reminder, our values brands only comprise a mid-single-digit percentage of our total net revenues. Our third strategic priority is diversifying our portfolio, and we continue the strong momentum we have achieved in each of our major growth opportunities, with women's, tops, international, and our other brands, Dockers and Beyond Yoga, each contributing positively to third quarter growth. Our total company women's business grew 8%, above men's strong performance of up 6%. The women's business was driven by Levi's Bottoms, which were up 7% and saw notable strength in the Americas. Additionally, the small but growing women's business on Dockers was completely additive, as was Beyond Yoga. For the total company, tops saw 12% growth as we continue to diversify our offering. Levi's tops were up 8%, driven primarily by men's, which grew 14%. We continue to see strength in tees, wovens, and polos, while our Levi's women's business saw positive growth across non-graphic tees, dresses, and sweaters. Our international business grew 8%, even as we navigated a more challenging consumer environment in Europe and in China. We saw encouraging strength across Asia, which excluding China, was up 68%, as well as in several of our largest and important European markets, notably the UK and Spain. Our updated Dockers brand with its California casual aesthetic posted 13% growth driven by both AUR and volume while also delivering strong profitability that exceeded our plan. The brand delivered growth across major geographies and channels. The US was up 2% and international brick and mortar and e-commerce saw notably strong gains. Dockers Women's and Topps businesses also saw strong growth and grew as a percentage of the brand's sales. Beyond Yoga contributed $22 million to net revenue with solid consumer demand in the quarter with company-operated e-commerce sales up strong double digits on a pro forma basis. It launched at 28 colleges across the country as the brand continues to build awareness and reach new consumers. Perhaps most exciting, at the end of last month, Beyond Yoga opened its first permanent store located in Santa Monica, showcasing the brand's full array of category offerings for the first time. While we're just getting started, we believe there is an attractive long-term opportunity to grow the brand's presence through retail. Finally, one of our most important company-wide objectives is leading the industry in environmental stewardship. Last week we released our annual sustainability report, which includes a comprehensive set of disclosures and introduces a new slate of sustainability goals, 16 in all, that cut across our three main pillars of climate, consumption, and community. You can find the report online in the sustainability tab of our website. In closing, we continue to achieve steady progress against our long-term objectives. as we navigated a more difficult environment in the third quarter. While we expect it to remain challenging over the next few quarters, I'm confident in our ability to navigate the near-term headwinds and importantly deliver on our long-term goals for the following five reasons. First, we have really strong brands. Second, our categories are structurally attractive with long-term tailwinds from the casualization trend and denim cycle. Third, we have the global scale to react to disruptions and manage through inflationary pressure with competitive sourcing. Fourth, we have a diversified business model where some of our biggest opportunities are gross margin accretive and generate higher AURs. And fifth, we have a seasoned and proven team that has delivered excellent results while managing through challenging times. Ellison Co. has separated itself from competition in challenging times in the past, by making the right moves. We believe the current environment is an opportunity for us to do this again. We will operate with discipline and lean into our strengths to further expand our lead for the years to come. Now over to Harmeet.