Levi Strauss & Co.

Good day, ladies and gentlemen, and welcome to the lead by Strauss & Company first quarter earnings conference call for the period ending February 26, 2023. 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 company. 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 at 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 first fiscal quarter of 2023. Joining me on today's call are Chip Berg, President and CEO of Levi Strauss, and Harmeet Singh, our Chief Financial and Growth Officer. 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 with the SEC. in particular the risk factor section of our Form 10-K and the information included in our 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. Reconciliations of our non-GAAP measures to their most comparable GAAP measure are included in today's press release. Finally, the 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 morning, and welcome everyone to today's call. Coming off 26% constant currency growth in our year-ago period, we're off to a solid start to the year. We grew first quarter revenue 9% in constant currency and 6% on a reported basis to $1.7 billion, while driving strong progress on inventory and advancing the key initiatives of our strategic plan. In our direct-to-consumer business, growth accelerated to 16% in constant currency, with record DTC sales representing 42% of global revenues, three points ahead of last year. We delivered strong growth globally. Our international business grew 11% in constant currency, accounting for 56% of our total revenues. and even excluding the planned acceleration of wholesale shipments to support our US ERP implementation, we achieved solid top-line results and exceeded our expectations for EPS. Our performance this quarter clearly demonstrates our strategies are working, driven by the strength of our brands, the growth of our direct-to-consumer business, and the benefits of a globally diversified business model. We continue to make progress against our three strategic priorities, leading with our brands, prioritizing our direct-to-consumer business, and diversifying our portfolio. Please note that for the balance of our remarks, Harmeet and I will reference year-over-year revenue growth in constant currency. Starting with our first priority, leading with our brands. Beginning with the Levi's brand, we grew market share again this quarter, achieving share leadership in the U.S. amongst the key 18- to 30-year-old target consumer group, and we continued to grow share in women's denim bottoms, closing the gap to the number one position. In the quarter, the Levi's brand was up 9%, with our men's bottoms business delivering a record Q1 and women's bottoms achieving its highest revenue of any quarter. Men's bottoms grew 9% with growth across all geographic segments, and we continue to fuel momentum in women's bottoms, which grew 18%. We're planning a steady cadence of newness through the year, and we continue to lean into trends, like with our newly launched Women's XL Balloon and Naughty's Boot, and the shift in rise from high to mid and wider leg openings, all of which drove solid growth in the quarter. 2023 is an important year for the company, marking our 170th anniversary and the 150th of our iconic 501, the blueprint for today's modern blue jeans. As we celebrate the heritage of our namesake brand, we're using this important milestone to cement the next generation of Levi's fans. In February, we launched our largest coordinated global marketing campaign, The Greatest Story Ever Worn. It kicked off during the Grammys where Bad Bunny also opened the show wearing a pair of vintage 501s and has helped drive nearly 3 billion impressions with consumers worldwide. After all these years, love for the 501 has only grown and continues to experience exponential growth, a solid proof point of the strength of the brand. Q1 net revenues were up 25% on top of 50% growth last year, and revenues for the 501 this year are expected to reach close to $800 million, which is nearly 70% higher than pre-pandemic on a reported basis. As we move through the year, we're infusing energy and newness into our iconic 501 through new launches for him and her inspired by historical fits. We also have a robust lineup of collaborations planned, like our recent drop with the iconic streetwear brand Stussy, which sold out in one hour, and an exciting partnership with New Jeans, the popular K-pop girl band, furthering our ambition to engage younger consumers. Our global BTC business delivered a record quarter, up 16% versus a year ago, driven by positive comp sales and traffic growth across brick and mortar mainline and outlet stores in all geographic segments, as well as e-commerce. Our U.S. BTC business also achieved another record quarter of revenue, with especially strong performance in our U.S. flagships and larger tourist destinations. We continued our store expansion in Q1, opening 25 Levi's stores globally, including five mainline doors here in the U.S. The investments we're making to elevate our consumers' digital experience and strengthen their digital connection to our brands are paying off. Even with consumers returning to our stores in large numbers, our e-commerce business grew 14%. driven by broad-based global growth and across all brands, including Levi.com, which was up double digits. We continue to expand the breadth of our offering online while improving the user experience. Our loyalty membership was also up almost 40% in Q1 to nearly 25 million members, and this continues to translate to a higher level of spend among loyalty members. Our direct relationships with consumers and continued strong performance in our international wholesale business helped mitigate the impact of softer U.S. wholesale revenue. Global wholesale grew 4%, driven primarily by Asia and Canada. In the U.S., we accelerated approximately $100 million of revenue from Q2 to Q1, primarily due to our Q2 ERP implementation. As a result, our U.S. wholesale business grew low single digits on top of last year's strong 25% growth. Additionally, while our core consumer has generally remained resilient, we continue to experience demand softness from the value-oriented consumers, most notably impacting our signature and Denison brands. As for our diversification strategy, we continued the strong momentum we have achieved in each of our major growth opportunities with international, women's, tops, and our other brands, Dockers and Beyond Yoga, each contributing positively to the first quarter growth. International revenues were up 11% or 14% excluding Russia. Europe saw 6% growth, excluding Russia, with most markets growing, including our largest markets of France, the UK, and Germany returning to growth. Asia continued its strong momentum, up 22%, as we experienced growth across all markets other than China. In China, after the zero COVID policy was lifted, we have seen a bounce back in traffic, with our latest results trending back to pre-COVID levels. Total company women's revenue grew 12%, led by strong double-digit growth in both the Americas and Asia. Our COPS business grew 4% following 16% growth last year, with strong performance in our DTC channel, up 12% for both women and men. And our other brands performed well in the quarter. Dockers continued to build momentum with net revenues up 29%, driven by broad-based double-digit growth across geographies and channels, with DTC especially strong. Docker's e-commerce remained robust, with over 30% growth, in part supported by increased repeat customers and the brand's loyalty program, which is now driving over 30% of sales in this channel across the U.S. and Europe. And Beyond Yoga continues to make solid progress with revenues up 11%, driven by DTC, AURs, and volume, and continued success with the brand's expanded line of dresses. Our first two stores are off to a good start with two more planned to open in Q2, along with several further openings through the balance of the year. finally michelle goss has now been with the company for a hundred days as company president responsible for the levi's brand and our global commercial and digital operations as i expected she and i are working together really well with both of us determined to make this a very successful transition she has not surprisingly landed great inside the organization establishing her leadership very clearly on her business Her deep retail and e-commerce experience is obvious to the organization, and she is already identifying both executional and organizational opportunities, which will help us accelerate profitable growth in our DTC women's and top businesses. I was excited and confident when we hired Michelle as my eventual successor, and I'm even more optimistic about this company's future today than I was before. And with that, I will turn the call now over to Harmeet. Thanks, Shep.

We achieved solid results in Q1, with sales up 9%. Excluding the benefit from accelerated U.S. wholesale shipments, primarily related to the ERP transition, our business grew low single digits. Focus on our strategic initiatives and the structural shift in our business fueled our results with our international business and direct-to-consumer channel driving almost 70% of the growth in the quarter. And we made significant progress reducing our inventory with total inventory dollars and units down meaningfully. We have achieved this in part by taking deliberate actions to clear inventory in the U.S., as well as reducing receipts in H1, putting us in a stronger position as we move through the balance of the year. We remain committed to controlling costs with a focus on discretionary expenses while continuing to invest for the long term, including opening 18 net new stores and our ERP implementation in the U.S., following two successful implementations in Canada and Mexico. And despite the beat we delivered this quarter, we are maintaining our annual revenue and EPS guidance range, reflecting a cautious outlook on the macro environment, even as we remain excited about the momentum in our direct-to-consumer and international businesses and the progress we're making against our strategy. I will now provide more color on our Q1 performance and 2023 outlook. Net revenue increased 9%, driven by continued global momentum in our direct-to-consumer business. International revenues were up 11%, with greater than expected results across most markets, while the U.S. was up 6%. AURs were up mid-single digits, driven by broad-based growth across geographies, genders, categories, and brands. Our direct-to-consumer channel sequentially accelerated with net revenues up 16%, driven by broad-based positive comp sales growth on top of extremely strong first quarter comp sales last year, driven by higher traffic and higher volumes across geographies, including in the U.S. and Europe. Adjusted reported gross margin was 55.8%. 360 basis points below last year's record, 59.4%, but 120 basis points ahead of 2019 pre-pandemic levels. The deliberate actions that we took to reduce inventories in the U.S. that I mentioned a moment ago, coupled with a more promotional environment, resulted in greater than expected pressure on gross margin in the short term. but the inventory level sets us up in a stronger position as we move through the year. Gross margin benefited from price increases, lower air freight expenses, and favorable channel mix, despite a negative 40 basis points impact from accelerated wholesale shipments. However, those benefits were offset by several largely transitory factors, including a 200 basis points impact from higher product costs reflecting record cotton prices, higher ocean trade, and damage charges, as well as nearly 300 basis points impact from lower full price sales. As we move through the year, the headwinds impacting gross margin should begin to recede, including from product costs given lower cotton pricing, freight and demurrage, as well as lapping lower full price selling and unfavorable effects from H2 last year. And the key contributors to our structurally higher margins that we have spoken to you about, such as favorable channel, geographic, and women's mix, will continue to benefit margins. Adjusted H&N expenses in the quarter were $757 million, up 7% from last year, driven primarily by four-wall investment in support of the higher DDC sales, and A&P Investment to support our 501 marketing campaign, for which the spend is skewed to the first half of the year. While adjusted EBIT margin came in line with our expectation at 11%, down from 14.9% last year, the decrease was driven almost entirely by the decline in our gross margin rate. Adjusted diluted EPS was $0.34, with a penny negative impact from foreign exchange. I'll now take you through our key highlights by segment. In the Americas, net revenues grew 7%, driven by the strength in DDC. The channel was up low double digits in the U.S. and achieved our second quarter of record revenue. Overall, Canada was up double digits, and Latin America grew high single digits, driven by increases across nearly all markets in the region. Europe returned to growth, with net revenues up 6%, excluding Russia, on top of 21% growth in the prior year, driven by our DTC business. Geographically, growth was seen across most countries. Our largest markets, France, the UK, and Germany, were collectively up low single digits, while Spain and Italy were up double digits. Strong demand for the Levi's brand in Asia continued, with revenues accelerating to 22% growth, driven by all channels and markets outside China, led by India. Asia ex-China was up 28%. As Chip mentioned, we are seeing trends improve in China and now expect China to turn profitable this year. Asia operating margins also expanded 160 basis points to 18.5% due to higher revenues and lower HCNA. And operating margin dollars were an all-time record. Now, looking to our balance sheet and cash flows, as discussed over the past year, as we execute the ERP transition and as a result of our actions to reduce receipts in H1, we are rapidly reducing our inventory levels. Q1 inventory was up 33% on a dollar basis, a 25% sequential improvement from last quarter of up 58%. Co-product represents more than two-thirds of our total inventory. We continue to expect sequential improvement quarter over quarter, with quarter two being substantially lower than Q1. And expect levels to be in line with sales growth by the end of the year. Adjusted free cash flow was negative $272 million in the first quarter, driven by the timing of capital and the implementation of our ERP. As a result of this, we used our revolver to support our cash position. As we sequentially improve our inventory through the year, we expect free cash flow to turn positive, enabling us to pay back our ABL draw. End of quarter net debt was approximately $834 million, and overall liquidity was $1.2 billion. Our leverage ratio remains strong, although it did increase to 1.4 times compared to 1.1 times at the end of Q1-22 due to our negative free cash flow. In the quarter, we returned approximately $56 million in capital to shareholders, including dividends of $48 million, up nearly 20% from the first quarter of prior year. And in Q2 23, the company declared a dividend of $0.12 per share in line with last quarter. Moving on to our outlook, even though we exceeded expectations in Q1, given it is early in the year and a macro uncertainty, we are maintaining a cautious stand and reaffirming our fiscal 2023 revenue and EPS outlooks. We continue to expect net revenues between $6.3 billion and $6.4 billion, reflecting reported growth of 1.5% to 3% year-over-year and EPS in the range of $1.30 to $1.40. While we're maintaining our guidance overall, the way in which we get there has changed from previous expectations. We expect the strong momentum in our global DDC and international businesses to offset softer wholesale trends in the U.S. and Europe as retailers continue to be cautious with their open to buy. As a result for the year, we expect nearly 60% of Levi's brand revenue coming from international and DDC as a mix of our total business in the mid 40% range. Our DDC channel and international businesses are both fast-growing with tremendous opportunity given our underpenetration in these categories, and importantly, our high gross margin businesses. In reported dollars, we continue to expect low single-digit growth in the Americas for the full year, as strong growth in our U.S. DDC business and Latin America will be tempered by U.S. wholesale. We are pleased to see Europe return to growth in Q1, driven by the strength in DDC, with trends coming in better than expected. The outlook has improved, but it's still within the previously guided range of up low single digits. And based on the stronger trends we are seeing in Asia, we now expect low double-digit growth and improvement from mid-single-digit growth in our previous guide. As I mentioned last quarter, we continue to expect 23 to be a tale of two halves, with the first half weaker and the second half considerably stronger, given a number of factors, including the year we are lapping, promotional levels, record cotton prices impacting COGS in H1, and supply chain disruptions progressively getting better. I will not provide color on Q2 and the full year. For the second quarter, the over-delivery reported in Q1 will temper growth in Q2, but will not have an impact on the first half or full year. In Q2, we now expect revenues down high single digits to low double digits, given that we are in our ERP implementation and associated downtime. Our ability to ship product in the U.S. in excess of what we have contemplated in our guide is limited. Q2 gross margin is expected to meaningfully improve versus Q1 as a result of a higher contribution from DDC, but will be down slightly to last year's. And we continue to expect SG&A to be up mid-single digits relative to a year ago. In respect to the full year, given the higher levels of promotion than we previously anticipated, we now expect full year gross margin to be down approximately 50 basis points versus prior years 57.5%. We remain confident that second half gross margin will sequentially improve as headwinds moderate. And we now expect the full year tax rate to be low to mid-teens versus our prior expectations of mid to high teens. Prior to Q&A, I'd like to make three key points First, while we expect to face continuing challenges through the year, the strength of our brand gives us confidence in sustaining our top-line momentum, and our Q1 performance serves as a proof point that our strategies are working. Europe's return to growth, as well as our strengthening international performance and broad-based momentum in our direct-to-consumer business are all fueling our profitable growth. Two, gross margin will progressively improve as we move through the year and headwinds abate. And we expect to end the year with gross margins above 57% on our way to a long-term goal of 60%. And three, we will continue to focus on controlling the controllables by reducing discretionary spending while continuing to invest in growing DDC as we open new doors, grow comp sales, and accelerate e-commerce. 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 numbers 11 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. If at any point your question has been answered, you may remove yourself from the queue by pressing star 11 again. Thank you. Our first question. comes from the line of Bob Durbel of Guggenheim. Your question, please, Bob.

Hi. Good morning. Morning, Bob. Hi, Bob. Hey, guys. Good morning. If I could just focus a little on inventories and gross margins to start off the call. On the inventory side, can you just talk about where you ended up, the up 33 versus... your plan, you know, where you think inventory levels are, you know, specifically at your U.S. wholesale partner levels. And then on the gross margin side, you know, tying it together with the inventory, can you just talk about the expectations on, I mean, Q2 gross margins versus your assumptions around the promotional activity specifically in the U.S.? Thank you. Thanks, Bob.

You asked the question that we thought you'd ask, so let's start with it. Overall, we made meaningful progress on inventory. As I mentioned in my prepared remarks, it's down meaningfully, both in dollar and unit terms. It's sequentially improving. If you recall, we said when we reported Q4 that that's the peak and it gets better, which is what is happening. You know, we do believe that by the, you know, the sequential improvement continues into Q2. And as I mentioned, inventory is largely clean. We did, you know, get rid of inventory to the extent we could. That did hurt margins. I've come to margins in a Yeah, in a while. But I think the inventory improvement is largely driven by the fact that we proactively cut H1 buys. And, you know, we were able to clear inventory to question about, you know, is this largely driven by the US? Yes. Unequivocally, it is US. US, for example. Inventory levels at the end of Q4 were up 90% year-over-year, and Q1 is down to 35% year-over-year. So it's a dramatic improvement in the U.S., and that's why we think that it gets better progressively as the year progresses. From that perspective, to your question about gross margin, the miss against our expectation was largely because we proactively were able to clear inventory as well as promotional levels were slightly higher than we anticipated. You know, quarter one is not a great read. If you look at it last year, full year gross margins, it will record gross margins last year when, you know, basically there was very little promotion. Gross margins are an all-time high of 59.4. We ended the year at 57.5. you know, a year ago into what's happened on growth margins in the quarter. Let's start with what I call the good guys. And a lot of these good guys are going to be here for a while, which is the fact that, you know, we took prices up. We are seeing lower air freight and the favorable channel mix. If you quantify all that, it's about 150 basis points that we see. Continue through the year. And then, you know, what I call or what we call transitory, it will recede as the year progresses. You know, 200 basis points is a combination of commodity increased cotton, you know, in H1 was bought. You know, our product was bought when cotton was an all-time high. That, along with some damage, cost, et cetera, is about 200 basis points. That begins to recede as we step into H2. But I think the tailwind is about, you know, I would say 170, 180 basis points because, you know, there is some inventory that we bought in H1 that will clear in H2. And the rest is promotion levels, which were much higher than a year ago. The two pieces, one, you know, last year at this time, we didn't really sell anything under the full price. Now we're selling something a little higher, and then promotion is high. We expect, you know, and we're conservatively anticipating this. It's difficult to predict, but we're anticipating that promotion levels continue through the year. So as you think about the year ahead, annual expectation on gross margin. I think we're going to be about relative to last guidance, about 70 basis points down at the end of the year. And that's largely driven by higher promotion levels, which we expect offset by better channel mix. VTC is going to be higher. International is going to be higher. Europe is, you know, rebounding nicely. So I think that's how we're thinking about gross margins. And as you know, A large piece of what we sell is core. We brought a lot of newness into our assortment with the 501, 150th anniversary, and all that helps. I hope that addresses your question, Bob. It does, Harmeet. Thank you. You're welcome.

Thank you. Our next question comes from the line of Matthew Boss. of JP Morgan. Your question, please, Matthew.

Great. Thanks. So maybe, Chip, could you just update us on health of the Levi's brand, maybe what you're seeing in the US and Europe marketplace today as it relates to the denim category? And then, Harmeet, to your points before, any change in the pricing strategy, just given the dynamic consumer backdrop out there?

Sure. Good morning, Matt. So let me first talk the category, since that's part of your question. And I think you all know that the data that we get on a quarterly basis is U.S. only, still a major part of our business. We don't get the rest of the world on a quarterly basis. But sort of as we had thought and would expect, the category is back to growth again in the most recent quarter. It's up 1%. That's on top of a prior year order of up 16%. So if you remember the last call, we talked about how coming out of the pandemic, we saw a big spike in denim, and then we had two quarters of kind of mid single digit softness. We're back to growth now, and that's good. That 1% growth in the category, you know, compare that to what we reported in our USDPC business with record volume that was up below double digits. So we are clearly gaining share. We talked about it in the prepared remarks. We are now the outright leader in the men's and women's 18 to 30-year-old jeans market after gaining one point of value share in the past 12 months and past three months. And we continue to grow Cher and women's denim bottoms, you know, closing the gap. We are now knocking on the door of being the number one brand in the U.S. That has not happened in my entire 11 and a half years at this company. And, you know, we continue to have momentum while others are struggling. You know, in terms of brand equity, a couple of things. I guess the first thing I would point to is just the strength of our overall DTC business, where we are in control of the brand and how we engage with the consumer and how we show up. It shows up in the business results. Our global DTC business delivered a record quarter. We were up 16% versus prior year. We comp positively in all regions. Our e-commerce business was up double digits too. I think that kind of speaks to consumers are still coming to this brand. And one other data point is as we do our brand equity studies around the globe, You know, we do get at price perception for Levi's, and this is price perception, right? But Levi's streams as a leader in being worth paying more for, for quality and longevity. And we, you know, as a result of that, we're pretty well positioned to continue to navigate through, you know, this inflationary period. And I don't think we said it in the prepared remarks, but our AURs were up mid-single digits again this quarter, despite the promotional requirements. On Europe specifically, Europe revenues were up 2%. I think we said this in the prepared remarks. That's up 6% excluding Russia, sequentially improving versus last quarter. Again, driven by the strength of VTC, which was up 16% excluding Russia. Comps were positive every month across North and South Europe. They were also positive in the quarter in mainline and outlet stores as well as e-commerce. Every market in Europe grew, with the exception of a couple of the smaller markets in the Nordics. Our largest markets, France, UK, Germany, were all collectively up low single digits. Spain and Italy were up double digits. So Europe is doing a little bit better than what we thought it was going to do going into the year, but it's still kind of in the range of what we got it originally. You know, I guess the last thing I would say about Europe, just like the U.S., we're pretty cautious about our wholesale business there. As retailers are, you know, playing their open-to-buy budgets pretty close to their best, given all of the macroeconomic uncertainty.

And, Matt, your question about any change in pricing strategy? if the question behind the question is are we taking prices down no that's not what's happening um yeah but we're not necessarily pricing up uh in today's environment would you know uh and so we're promoting smartly like most uh retailers uh you know we're not necessarily number one in promotions we're competitive but we're not naturally one and we've got a lot of uh in our assortment, and so that's how we're attracting traffic, et cetera. Where we can price, for example, the organic stuff that we bring in, we price thoughtfully, but overall we're being mindful of the fact that the consumer generally, especially in the western part of the world, are just tight on spending.

Great. Best of luck.

Thank you.

Thanks, Matt. Thank you. Our next question comes from the line of Jay Soul of UBS. Please go ahead, Jay.

Great. Thank you so much. Harmeet, I heard you say you expect SG&A dollars to be up mid-single digits in Q2. I'm not sure I caught what you expect SG&A dollars to do for the full year and how that impacts your operating margin guidance. Is it possible, could you just expand on that a little bit for us, please? Thank you.

Yeah, I would say low single to mid single on a full year basis. And, you know, and it is largely the way we are thinking about SG&A, Jay, is wherever we can cut discretionary expenses, we are. You know, we have really tightened new hires. We have tightened things like travel, and this is business critical, etc., etc. I think where we're spending the dollars is as we open new doors, you know, we'll have uh on a net basis 80 doors uh you know this year uh between our three uh brands and that is going to fuel the direct to consumer business which is important um you know advertising uh you know a little bit especially with the 501 uh campaign uh and you know on basic infrastructure like the erp which is being implemented as we speak in the us as well as the distribution capacity that you know we're gearing up for the long term so i think those are the areas where the spending is which drives a little bit of the scna but where we can tighten we'll continue the title okay thank you so much you're welcome thank you our next question one moment pardon me our next question

comes from the line of Ike Burishaw of Wells Fargo. Your question, please, Ike. Hey, everyone.

Thanks for taking the question. Maybe, Harmeet, can you talk a little bit more about the implications the ERP has had on U.S. wholesale? Just maybe specifically, can you quantify the dollars that were pulled forward into the first quarter and the dollars that will be pulled out of the second quarter, maybe specifically, could you give us embedded in that down high single to low double, what is the U.S. wholesale decline planned in 2Q? And then any other color on U.S. wholesale, whether it's order books or plan in the back half would also be great. Thanks.

Yeah, sure. You know, when we were talking about a quarter ago, I think we anticipated The timing of the ERP and the discussions we were having with our key customers, the range of the sales push between Q1 and Q2 would be about $80 to $100 million. And as we mentioned on the call, I think the timing is about $100 million between Q2 and Q1. I do want to thank our wonderful customers because, you know, they were able to work with us in getting this, you know, just, you know, as we work through the timing of the ERP. The ERP is currently being implemented, you know, so our DCs, for example, are shut as we speak, and we're in the process of cutting over. I think to your question about, you know, Q2, a large piece of uh you know uh the the hundred million is what we actually take from q2 and put it in q1 so q2 will be impacted uh you know with that uh yeah you know and that's why as we think about uh what to expect in q2 you know we're guiding uh down high single digit low double digit that obviously uh also has a positive impact on gross margin that's why we're saying gross margins will be down a little bit, not what you saw in Q1. So I think that's how we're thinking about it. We do expect the impact of the ERP to largely be in H1 because the ramp-up really happens in May, which is the last month of the quarter. And so by the time we get into quarter three, I think we should have this behind us. And as you know, So, you know, we have implemented the ERP in Canada and Mexico and is largely a very standardized module that's being implemented in the U.S. and the benefits are largely going to be in data insights and simplification for operators. You know, that's what we're seeing in the two markets, and that's the benefit that we see. And this is foundational to everything else we're doing, you know, especially as we grow e-commerce and we grow our direct-to-consumer business. This gives us the foundational base to actually accelerate automation and connect with the consumer a lot better.

Great. Thanks. Thanks, Ike.

Thank you. Our next question comes from the line of Dana Telsey of the Telsey Group. Your question, please, Dana.

Hi. Good morning, everyone. As you think about the performance of denim versus non-denim, what did you see there? And, Chip, you've given out in the past the overall apparel category, how that performed versus denim. What are you seeing there? And can you just expand upon that? With wholesale, how do you expect that to progress through the year? And is there a difference between the department stores or the discounters and what you're seeing in order rates? Thank you.

There's a lot there. So, first of all, you're right. I normally do give the apparel category, and I didn't this time, but I've got the number here in front of me. Apparel was up two. This is U.S. data again for Q1. Recall I said that the denim category was up one off of a base of plus 16. Apparel was up two. I don't have what the base period is for total apparel, but it was up slightly ahead of denim, and that's consistent with everything we're seeing and hearing that, you know, some of the more dressier categories is doing a little bit better. We're even seeing that in our own business. Our non-denim business has done pretty well. It was up low double digits as well. Some of our best-selling items right now are chinos and cargos and things like that. We're seeing it really, those categories move really well. What else was in the question?

Yeah, so I think, Dana, you asked about our expectations for wholesale. As you know, or I just want to clarify, if you think of the U.S. wholesale business, and the year we're lapping is important. You know, the first half, I think the U.S. wholesale business was up close a little over 20%. 25 in Q1, 20 in Q2. And so we are lapping strong numbers. And then we have the ERP timing. Our expectation for the year, and this is wholesale in total, our expectation for the year is down in the low to mid single digits. made up by our direct-to-consumer business. So I think if you think of the business structurally, this is going to, you know, our direct-to-consumer business, which is about 42%, but for Levi's, it's close to, you know, 45%, continues to get stronger. And strategically, that's really what we said in the message today. This is a business that should head towards 55%. So it gets stronger. The gross margins are better. So, you know, I think 23 is a good reset year from that perspective. And we're taking, you know, it's unfortunate what's happening in the Western world in terms of the macroeconomics, but if the company emerges structurally a better company at the end of the year, it's a good thing.

The only other thing I would add on top of that, Dana, is, you know, in talking with our wholesale customers, virtually all of the customers are keeping their open-to-buy budgets pretty tight. Given the uncertainty. And then the only other thing I would add is that we are seeing pretty significant softness in our signature denizen business. So that value consumer is really being squeezed. There's definitely a bifurcation happening. where the lower-end consumer is making hard choices and either trading down or just not buying denim. But that middle-income consumer amount, which is kind of the sweet spot for the Levi's brand, is doing well and is still buying denim. And that is driving the growth of the Levi's business, the growth of our DTC business, and the strength that we are seeing in our direct-to-consumer business.

Thank you.

Thank you. Our next question comes from the line, apologies, of Citi. Your question, please, Paul.

Thanks. It's Tracy Cogan filling in for Paul. I don't think I heard you talk about 3Q, and I was just wondering if you're still expecting high single-digit sales growth there, and if you have anything, you know, like order books to support or give you confidence in that growth. Thanks.

Yeah, no, Tracy, hi. Good to connect. We don't, as you know, guide quarterly. You know, we talk about the year. But if you do the math, you know, our H2 is up higher than, you know, mid-single digits. And so, you know, H2 will closely approach probably the low end of our growth algorithm. And, you know, so we're beginning to progress this. You know, what we said earlier is, you know, a tale of two halves. The first half weaker, the second half stronger. It's also driven by the year we're lapping, but if you go back and look, benchmark it to say 19, the difference between the first half and the second half is not that dramatic. It's just the year that we're lapping. But, you know, our expectation really is, you know, things, you know, get a little better as the year progresses and we're able to work out all the inventory issues, et cetera, et cetera.

Great, thanks. And just on freight, I think you said air freight was a tailwind, but ocean freight was a headwind this quarter. I guess it netted out as a headwind. I'm just wondering how you're thinking about those pieces of freight for the remainder of the year.

I mean, H2, it becomes a tailwind, both pieces of freight, and that's how we're thinking through it.

Great. Thanks very much, guys.

Bye. Thank you. Our next question comes from the line of Laurent Vasilescu of BMP Paribas. Your question, please, Laurent.

Good morning, Chip. Harmeet, thanks for taking my question. Harmeet, I just want to square away some math here. I think in your prepared remarks, you mentioned that DTC should be about mid 40% of the percentage points of the overall sales for the year. Does that imply global wholesale would be down high single digits. I might be off with the math, but just wanted to confirm. And if that's the case, how much of that decline is coming from U.S. wholesale and then maybe drilling down further? Just curious, I think last quarter you mentioned that math was down high teens. Just curious to know how you're thinking of how it performed this quarter and how you're thinking about it for the full year.

Yeah, so the mid-40s is largely Levi's. You know, if you think of the company, you know, Dockers, you know, has about 30% of the business is DDC. And Beyond Yoga, it's, you know, half the business. But if you, you know, you would think of the company, we are a little better than 42% at the end of the year. That's the projection. So if you run the math, our view is global wholesale is down in the low-mid single digit. And it's largely the U.S. and Europe where, as Chip mentioned, our customers are cautious and open to buy. And we are building that into our expectations and really focused on driving our direct-to-consumer business. If things change, you know, obviously you'll see that, you know, roll into the numbers, you know, from that perspective.

Very helpful. And any color on the mass channel, how to perform this quarter and how you're thinking about for the year?

Yeah. Yeah, so, you know, the mass channel is down about 13%. You know, in quarter four, it was down 19%. It was lapping at 10% growth quarter in 2022. And we're planning it down. We're planning it down, you know, low double digits. And, again, you know, we sell to two wonderful customers, largely Signature and Denizen, and they're cautious and they're open to buy. And we're reinforcing it. Good news for us is one of the customers, we are, you know, taking women's out, Denizen women's out of doors and really, you know, working with them to grow our Levi's Red Tab, and that does help feminize the brand.

Very helpful. Thank you very much.

Thank you. Our next question comes from the line of Brooke Roche of Goldman Sachs. Please go ahead, Brooke.

Good morning, and thank you so much for taking our question. I was wondering if you could talk to the sell-through trends that you're seeing in U.S. wholesale for the core red tab business and how consumer engagement with the brand at wholesale may be differing relative to the stronger trends that you're seeing in North America, DTC. And then, Harmeet, can you clarify, is the more cautious view on wholesale a function of a more cautious open-to-buy, or has there been a slowdown in sell-through trends versus your prior expectations that may be driving this outlook?

Yeah. So, you know, March is, as you all know, it's a very difficult month to read, you know, because of tax refund checks, the weather, you know. And so I think as we think about the quarter, you know, April, for example, you know, it's early days, but, you know, we've seen, you know, traffic come back and And, you know, things are looking a lot better. To your question about, and our direct-to-consumer business, which is a real representation of how the brands showing up in our assortment is doing well. To your question about the cautious view on wholesale is largely the open-to-buy, you know, that we're thinking, you know, that's driving that decision. So if that opens up, you know, things get better. And that will probably, over time, as inventories tighten, should also improve the promotional environment.

Thank you. Welcome, Brooke. Thank you.

Our next question comes from the line of Alex Stratton of Morgan Stanley. Your question please, Alex.

Great. Thanks so much for taking my question. Just a couple on my end. First, I totally understand that promos are higher year over year given the change in environment, but I'm wondering how promos change sequentially in the latest quarter compared to the prior and maybe how you would characterize the broader environment there. And then secondly, Just on inventory quickly, I want to understand if that in line by the end of the year with forward sales growth is a longer timeline than I think you may have previously communicated. I think most brands are saying they'll be clean entering the back half. So I'm just wondering what's different on Levi here. Thanks so much.

Yeah, I mean, Alex, our view is we're going to be clean. We're cleaner today than we were a quarter ago. We'll be clean by quarter two. It's not about is the inventory clean. It's just a question about our view on inventory is we think quarter two – The growth rate relative to a year ago is mid to high teens, slightly higher than what we anticipated a quarter ago, just given where U.S. wholesale is. But as you know, in U.S., the inventory is largely poor. And so, you know, that's guiding our thinking on getting inventory back to, you know, sales levels from that perspective. In terms of the promotional environment, we've just been cautious. It's difficult to predict. And so, you know, in our latest expectation of gross margins, we have built in, you know, slightly higher promotions levels in AH2. Now, if that doesn't pan out, obviously that translates into higher gross margins. But that's really affected into expectations.

The only other thing I would add is keep in mind that, The base period promotional environment changed pretty dramatically between first half and second half. Last year, first half, there were all the supply chain issues, and a lot of people didn't even have enough products, so everything was being sold at full price. And then the second half, it started to get a lot more promotional. So the year-over-year change is quite dramatic in the first half for us. The year-over-year change in the second half should be much less dramatic and have less of an overall impact on the gross margin.

I think if you're trying to understand, Alex, the progression of gross margin, so last year Q1 was 59.4, ended at 57 to the point Chip was making because it got promotional as the year progressed. This year Q1 is 55.8. 200 of that is really commodities, which gets better as we step into H2. So that's why we think there is progression in gross margin, getting us back to slightly over 57% as we close the year. you know, I think the promotion environment gets better. It's not going to be as promotional of you, but we're building in some promotions in H2, you know, but it's not going to be as bad as Q1 and Q2.

Thanks a lot.

You're welcome.

Thank you. Our next question comes from the line of Chris Nardone of Bank of America. Your question, please, Chris.

Hi, guys. Good morning. Two quick questions. On second half guidance, can you just talk about your confidence in maintaining that strong DPC momentum on a potentially lower promotional environment compared to the last second half? And then quick question on Asia. You increased your guidance to upload double digits, and that's on top of mid-20% growth last year. Is there any way you can elaborate on where you're seeing the most strength in Asia and how much is coming from new doors versus comps? Thank you.

Yeah. Thanks, Chris, Asia. As you know, growing Asia is one of our strategic initiatives, and the last two years, You know, the noise has been just COVID, you know, some country closed, et cetera, et cetera. So I think, you know, Q1 is a good read, you know, from that perspective. Now, Q1 doesn't reflect, you know, the reopening of China because that happened yesterday. largely in February. But most markets in Asia are off to a great start. And you can see the leverage in our operating margin as well as operating dollars. You know, whether it's India, whether it's Australia, whether it's other South Asian countries, we had a good quarter. Um, you know, from that perspective, the brand strong is largely a DDC business and the direct to consumer business is, um, uh, or the growth is largely driven by conference performance. Uh, you know, which is, which is the good news. Uh, And we haven't really factored in any upside should what we see in China continue to sustain itself for the rest of the year. So that's the Asia story. You had another question, Chris. One was the strong DDC. One, you know, we think Asia sustains itself as the year progresses because, you know, the brand's strong. Consumers are a lot more resilient. It's a younger consumer, so I think, you know, all that really helps. To your point on DDC, DDC last year did slow down in the second half. Largely, Europe was down. Q3 and Q4 was down. And we have seen Europe rebound. The consumer in Europe, our view, is a lot stronger than everybody anticipated. And, you know, while wholesale customers continue to be tight on the open to buy, you know, we see the DTC growth continue. The other piece is, you know, we do have a new chief digital officer, and Michelle's putting a lot more emphasis on driving retail performance. And I think those things definitely will benefit us. because there is low-hanging fruit. And as we continue to focus on improving execution, our operators on the ground do a good, you know, great job, but there are clear opportunities. And I think as we continue to optimize that, we will continue to see DDC performance improve.

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

Thank you, Lateef. And I want to thank everyone for dialing in and for their questions. And we'll look forward to talking with you at the end of the next quarter. Thanks very much. Have a nice weekend.

Thank you. This concludes today's conference call. Please disconnect your lines at this time.