Levi Strauss & Co.

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company second quarter earnings conference call for the period ending May 28, 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, 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 second 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 Q2 financial results and 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 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 factor section of our Form 10 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, 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. And please note for the balance of the remarks, Chip and Harmeet will reference year-over-year revenue growth in constant currency. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I'd like to turn the call over to Chip.

Thank you, and welcome everyone to today's call. We delivered a solid quarter in line with our expectations. Our results reflect two very different dynamics in our business. On one hand, strong VTC and international, and on the other, continued softness in US wholesale, which I will address in a moment. Revenues for the quarter were down 9%. However, this was mostly attributable to the $100 million shift in revenue from Q2 into Q1, primarily due to the ERP implementation in the U.S., which we discussed on our last call. Excluding this shift, Q2 was down 2% versus prior year, and first half revenue was flat against a difficult plus 23% comparison versus year ago. Our strategic growth priorities are performing at or above our plan. Our DTC business, the most premium expression of the Levi's brand globally, continues to perform very well, up 14% in Q2, with broad-based positive comp growth and AURs up mid-single digits. The continued strength of our DTC first strategy, which grew to a record 44% of total sales in the first half, underscores our confidence in unlocking Levi's tremendous brand value. Our international business also remains strong, growing 8% or 10% excluding Russia, led by continued momentum in Asia and Latin America. International has been the fastest growing part of our business over the last few years, and it represents one of our largest opportunities going forward. However, this strength in international and DTC has been more than offset by a soft U.S. wholesale business. Today, U.S. wholesale represents less than 30% of our total revenues, down from 40% a decade ago, as our strategic focus has been to grow DTC and international. And while first half U.S. wholesale revenue was down from last year on difficult comparisons, U.S. wholesale revenues are still up 2% versus 2019 with gross margins up as well. There are two main drivers to the slowdown of our U.S. wholesale business. First, the macro effects of higher inflation in a slowing U.S. economy has put increased pressure on the price-sensitive consumer. Second, as we have mentioned for several quarters, our inventory backlog created supply chain challenges in our U.S. distribution centers, resulting in our inability to fulfill all demand. The lower fill rate resulted in higher customer out of stocks and less newness on the floor the last few quarters. We're taking a number of actions to address these issues, regain competitiveness, and restore growth to our U.S. wholesale business. First, we are taking surgical price reductions on a select number of our red tab tier three wholesale offerings, which we know are most price elastic and where the price gap versus competition widened too far. Importantly, we are not taking price reductions in U.S. mainline full-price stores, nor the vast majority of our U.S. wholesale assortment, including the 501 and women's fashion fits, which are all less price sensitive. Finally, we are not taking any price reductions on our international businesses, where we continue to demonstrate strong pricing power, as seen by the results. Second, with the ERP implementation behind us and as our inventory levels continue to improve, we are seeing an improvement in order fill rates, now nearly back to historical levels, which will result in better selling for us and in stock positions at retail. Further, this will allow us to deliver the strong newness we have lined up to hit floors in July for the key back to school and holiday seasons. We are confident that these actions will improve our U.S. wholesale results going forward. Now let's turn to the progress we achieved in executing our three strategic priorities. Starting with our first priority, leading with our brands. Due to the ERP shift, I'll speak to the brand's results for the full first half. The Levi's brand grew low single digits on top of 22% growth last year. Levi's bottoms grew low single digits, with women's growth slightly stronger than men's. We continue to drive denim trends with products like our super low boot, giving women more options for looser fits with lower rises. In the U.S., we're seeing strong demand with the 100,000-plus income consumer, particularly in our mainline stores, helping drive share gains in the premium end of the jeans category in the U.S., We've also maintained our share leadership with the key 18- to 30-year-old demographic, and for U.S. jeans overall, we gained market share across men's and women's. The Greatest Story Ever worn marketing campaign in celebration of the 501's 150th anniversary generated billions of impressions globally and drove strong 501 demand, with revenues up low double digits in the first half, against more than 40 percent growth last year moving on to our second priority being dtc first as i mentioned global dtc delivered strong double-digit growth in q2 led by broad-based positive comp sales and traffic growth across company-operated stores in all geographic segments usdtc was also strong led by our mainline stores which saw continued strength in flagship and tourist destinations we're also seeing the benefits of our investments in digital and the impact of our new chief digital officer jason gallons our e-commerce business grew 21 percent in q2 driven by both higher traffic and better conversion strength was global and across all brands as we continue to expand the breadth of our offering online while improving the user experience and customer journey Consistent with driving growth in DTC and e-commerce, we just opened a state-of-the-art digital fulfillment center for the East Coast in Kentucky, and we'll begin shipping from there this month. This completes bringing our U.S. e-commerce business in-house, which will drive more agility in inventory positioning, reducing lead times, improving customer satisfaction, and accelerating digital margin expansion over time. We are also continuing to expand our loyalty program with over 26 million members, up 40% over prior year. Loyalty member transactions and average transaction values grew across all segments, a positive signal as we drive continued growth and membership. Overall, our digital and e-commerce businesses remain under-penetrated versus peers, and the channel represents a tremendous sales and profit opportunity for the company. Our third strategic priority is to continue to diversify the business. On a first half basis, our total company women's and tops revenues grew 1% and 3% respectively, both on top of more than 20% growth last year. Women's was driven largely by the Levi's brand, particularly in Asia. In addition to ongoing strength in denim fits for her, including lower rises, Women's also saw growth from newly launched dresses, cargos, and overalls. Tops were driven by strength in Levi's men's. We remain enthusiastic about our opportunity to significantly grow these businesses as we continue to diversify our offerings. As for our other brands, Beyond Yoga's revenues accelerated double digits versus Q1, growing 28% in the quarter, driven by continued DTC strength. Overall, first half sales were up 19%. The brand saw notable success with sports bras and dresses, and it opened two additional stores in Southern California, bringing the total store count now to four. Dockers was also impacted by weakness in U.S. wholesale, while the brand experienced continued strength, with DTC up 22% and International up 10% in the second quarter. Adjusting for the ERP shift, Dockers would have been flat in Q2, with sales up 8% in the first half. Before I turn it over to Armeet, I want to share my conviction in our future and the strength of the Levi's brand around the world. Rochelle and I have traveled extensively this last quarter, visiting a number of key international markets, including Mexico, India, China, and Japan. And everywhere we have been, the Levi's brand is incredibly strong and we are winning. We've met with consumers, customers, and franchise partners, and we're inspired by their view of Levi's and our future. Our strength in DTC and international, combined with the actions we are taking to fix our US wholesale business, give me confidence that we can accelerate as we go into the key holiday season and end of the year with momentum heading into next fiscal year. Finally, Also giving me great confidence in our future is how Michelle has come up to speed on the business, organization, and opportunities. Her current remit is big. The Levi's brand globally, all of our commercial organization through which the Levi's P&L rolls up, and the digital organization. She has dug in and has played a key role in figuring out our path forward on U.S. wholesale. She is also all over our tops and women's businesses. And I am confident you're going to see a lot more good work as those products come to market later this year and into 2024. She's also starting to make some smart organization moves to set the company up for the long term. As I said before, I was confident when we hired her that she would be a great successor. And now after six months, I'm even more sure of myself as she will take this company to the next level when she becomes CEO. With that, I will turn it over to Harmeet.