Levi Strauss & Co.

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company second quarter fiscal 2024 earnings conference call for the period ending May 26, 2024. 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.

Thanks, Lateef. Thank you for joining us on the call today to discuss the results for our second quarter fiscal 2024. Joining me on today's call are Michelle Goss, our President and CEO, and Harmeet Singh, our Chief Financial and Growth Officer. We have posted complete Q2 financial results in our earnings release on the IR section of our website, investors.levystrauss.com. The link to the webcast of today's conference call can also be found on our site. We'd like to remind you 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 factors section of our Form 10-K for the year ended November 26, 2023, 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 financial 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. Reconciliation of non-GAAP forward-looking information to the corresponding GAAP measures, however, cannot be provided without unreasonable efforts due to the challenge in quantifying various items, including but not limited to the effects of foreign currency fluctuations, taxes, and any future restructuring, restructuring-related severance, and other charges. Finally, this call is being webcast on our IR website, and a replay of this call will be available on the website shortly. Please note that Michelle and her meet will be referencing constant currency numbers unless otherwise noticed. And now I would like to turn the call over to Michelle.

Thank you, and welcome, everyone, to today's call. We delivered another strong quarter with revenue up 9% in constant currency and 2% adjusted for the ERP shift and the exit of the denizen business. reflecting sequential improvement across the business. The ongoing acceleration in the business gives us confidence in the second half of the year and beyond. Here are a few highlights. We continue to see strong growth in our direct-to-consumer channel, up 11%, reflecting nine consecutive quarters of robust comp growth. The Levi's brand continues to gain momentum, up 2% on an adjusted basis. Our global Levi's women's business is accelerating, and delivered 22% growth in DTC in Q2. Levi's now ranks number one in women's denim bottoms in the US. Our largest market, the US, once again delivered positive growth for a third consecutive quarter on an adjusted basis. Global wholesale sequentially improved, down 4% on an adjusted basis due to an improvement in sellout trends. While we are driving this growth, we are also improving our profitability as evidenced by record gross margins of 60.5%, enabling us to deliver a higher-than-expected adjusted diluted EPS of 16 cents. As I've shared previously, we are currently undergoing a significant transformational pivot to become a best-in-class direct-to-consumer retailer. While this evolution will span multiple years, our efforts are already positively impacting our quarterly results. I will now talk you through the details of the quarter in the context of our strategic priorities, leading with our brand, operating as a direct-to-consumer-first business, empowering our portfolio, starting with leading with the Levi's brand. A key indicator of brand health, we continue to make meaningful market share gains in the U.S., driving growth with women and our key youth target group of 18- to 30-year-olds, while maintaining our dominant leadership position in men. Importantly, we have maintained our leadership position across consumers of all ages, and our unaided brand awareness remains well above our competition across most markets globally. We continue to drive brand heat and impactful storytelling by showing up at the center of culture across music, art and design, fashion and sports. We were thrilled and honored to have Beyonce name a song after us on her newest album. And as an example of our agility, we responded to the speed of culture, not only demonstrating our understanding of engaging social communities in an authentic way, but also generating more than 3 billion impressions and a ton of buzz for the brand that remains today. We activated in a big way at Coachella and Stagecoach music festivals and launched collaborations with ERL, Stussy, and Starter. As we look to the second half of the year, we have a number of impactful partnerships planned across the globe, including a Paris-themed collaboration with renowned label Pagal. This is also in support of our key city strategy, amplifying our efforts in Paris through initiatives like the opening of our iconic Champs-Élysées store in the second quarter and our fifth House of Strauss. Moving to product, we saw strong performance in our core offerings while also introducing newness and innovation in Denim and Beyond as we expand our total addressable market. We continue to lead the global trend around straight, loose, and wide leg bottoms. Now comprising more than 50% of our overall bottoms assortment, loose fits grew 21% across channels in Q2. We are continuing to lead into the trend this summer with the launch of a new baggy fit for women, the XL, which will be available globally and across channels. along with a new relaxed fit for men, the 555. The core of our business remains very healthy. Our original icon, the 501, continues to deliver impressive growth, up 16% in DTC and Q2. Our strategic focus around denim dressing continues to gain traction, is becoming a more meaningful part of our portfolio, and is expanding our total addressable market opportunity. Denim dressing continues to perform very well, with denim dresses, skirts, and jumpsuits again up triple digits in the quarter. We're also seeing success in tops and non-denim categories, evidence that our tops reset and increased focus on denim lifestyle are working. Tops were up 20% in our DTC channel for Q2, with even stronger growth in women's tops, driven by our elevated essential offerings in woven tops and non-graphic tees. The growing popularity of Western wear is at an all-time high, and our fans continue to choose from our collection of timeless yet fresh Western-inspired pieces. This includes our iconic Western shirts, which are seeing particularly strong sales in women, up 40%. Relative to non-denim bottoms, our recently introduced tech pant in the 5.11 fit for men is delivering strong results. We see this as a new and expanding innovation platform driving incremental wear occasions for our consumers. Given our early success, we'll be introducing a range of new products over the coming year, with the next introduction being the XX Chino, available worldwide and across both our wholesale and DTC channels. Looking to the second half of 2024, we will continue to deliver newness and drive innovation. For women, we have a strong lineup that supports our denim dressing and denim lifestyle strategy, including skirts, dresses, and jackets. We are also expanding into key categories like outerwear and sweaters to drive the head-to-toe offering. And following the success of our Performance Cool product, which we broadly rolled out globally earlier this year, this fall we are set to expand the innovative platform with the launch of Performance Warm. made with a soft interior that is designed for warmth and cooler weather. Looking ahead, we are making great progress on our efforts to streamline our go-to-market calendar by reducing SKUs by at least 15% and addressing complexity in our process, which will start benefiting us in H125. The team is already using some of the learnings to create more agility in our process, such as chasing into top sellers this season. As we shorten our timelines and operate with a tighter assortment, we will see a number of benefits, including responding faster to consumer trends and enhancing our overall efficiency as a DTC-driven organization. Now, let's shift to direct-to-consumer, our next strategic priority and one of the biggest unlocks as we pivot to become a best-in-class omnichannel retailer. DTC continued to grow rapidly, up 11% on top of 14% growth in the prior year. We achieved these strong results by delivering high single-digit positive comp growth. As I shared on our last call, we've been laser-focused on driving profitability and productivity in our stores. This quarter, we saw an improvement across all store KPIs, led by higher UPT and better conversion driven by our new product introduction, an improvement in our in-stock position, and a continued focus on best-in-class engagement with fans in our stores. USDTC was up 12%, led by our Mainline stores. AURs and Mainline were up low single digits as consumers gravitate toward our full-price premium products. Globally, we continue to execute our retail expansion plans and are on track to open 100 net new doors this year. In Q2, we opened our largest store in Thailand at the Central World Mall in Bangkok. This store is a pilot where we're implementing learnings from consumer research to improve the in-store consumer journey. By applying changes like displaying our denim lifestyle categories more visibly throughout the store and elevating our premium collections, we drove revenue growth in both tops and bottoms. Results are encouraging, and this is just one example of the great potential we have in improving store productivity. E-commerce continues to be a big opportunity for us, up 19% this quarter, led by double-digit growth in the U.S., where we are seeing strong full-price sell-through and strength in women, now comprising more than 50% of the business in this channel. Ongoing initiatives to elevate our site and enhance the consumer experience, as well as deliver a more premium and expanded assortment, continue to drive our momentum across all of our markets. We also drove meaningful growth in our loyalty program, acquiring almost 2 million members in Q2, with 36 million members globally. As we make our pivot to be a DTC first company, we also remain committed to wholesale. On an adjusted basis, our global wholesale business is down 4% in line with our expectations and a sequential improvement to Q1. We feel good about the trends we're seeing in our global wholesale business overall. The actions we've taken to stabilize this business are working. Sellout trends are improving, including in the US and Europe, and customers are excited about our expanded assortments. Importantly, this channel is significantly more profitable than last year, amplified by our healthier inventory levels and the improvement in our supply chain operations. Turning now to our third strategy, powering the portfolio. Our international business is becoming a more meaningful contributor to our business and grew low single digits in the quarter. This reflects 6% growth in Asia on top of 27% growth in the prior year, bolstered by strength in Japan, India, and Turkey. And our Europe business sequentially improved, down low single digits in the quarter, with certain key markets, including Italy and Spain, positive in the quarter, as well as an improvement in performance across both wholesale and DTC. Dockers was down 1% on an adjusted basis, coming in below our expectations. Profit exceeded prior year, led by gross margin expansion and disciplined expense management, and inventories are significantly below prior year, down 16%. Going forward, we'll be leaning into innovation with an expanded head-to-toe collection of the performance-based Dockers Go series, which has exceeded expectations since its launch. Beyond Yoga was up 13%, an acceleration to Q1, driven by strength in wholesale and e-commerce. In the quarter, we continue to see success in our much-loved core space dive business, as well as wins in new lifestyle categories like wider leg pants and dresses. Our new CEO of Beyond Yoga, Nancy Green, has moved quickly to bring in seasoned industry leaders in product development, sourcing, retail, e-commerce, and marketing to build the capabilities to rapidly scale this business and achieve the long-term potential of the brand. To conclude, we are pleased with our performance through the first half of 2024, which underscores that we have the right strategies in place to drive long-term sustainable and profitable growth. The Levi's brand has never been stronger. We continue to gain market share, and our amplified focus with women and younger consumers is working. We have momentum across the world, including the U.S., where we have delivered three consecutive quarters of positive performance. We are seeing a strong response to our innovation and product launches, centered around owning denim lifestyle and have a robust pipeline for the remainder of the year. Our transformational pivot to operating as a DTC-first company is reaching a tipping point with accelerating sales momentum and an improvement in margins. And we have an incredible, talented, and passionate team around the world that is driving this transformation and delivering outstanding service with our consumers every day. All of this gives me great confidence for the rest of the year and beyond. And with that, I'll now turn it over to Harmeet to cover the financials.

Thanks, Michelle. We are pleased to have delivered earnings that significantly exceeded expectations, despite stronger than expected headwinds from FX and a higher tax rate versus the prior year. Gross profit dollars grew twice as fast as SG&A dollars, reflecting both revenue and gross margin growth but also a relative expense discipline driving higher operating margins going forward this is a key metric we are focused on to enable us to achieve a longer term goal of 15 high quality margins our ddc business continues to not only be our fastest growing business but is also seeing real improvements in profitability with operating margins increasing more than 300 basis points during the quarter. This includes a significant improvement in e-commerce profitability with EBIT margins now double digits on a fully allocated basis. The improvement in profitability in our DDC business surpassed our own expectations. And we believe we will continue to grow profitability in this channel as we pivot to a DDC-first company. And as our wholesale business becomes a smaller piece of our overall business, as Michelle mentioned, it is more profitable as inventory levels have normalized and gross margins across the business have increased, which we are focused on sustaining. The benefits from Project Fuel are progressing as planned, and we believe our strategies related to this initiative are working. We remain on track to deliver $100 million in savings this year through a workforce reduction that has largely been implemented, savings from indirect procurement that are in progress, and higher productivity from our DDC business, which is evident from our recent results. We also believe there will be additional savings in 2025, which we intend to quantify when we guide next year. In the quarter, we continue to make improvements in reducing our inventory position, and along with working capital management, we have generated positive free cash flow of $223 million in the second quarter and $437 million year-to-date. Shareholder returns in the quarter were up 36% as we bought back shares and paid dividends. Reflecting our confidence in our cash flow position, we are increasing the quarterly dividend by 8% to 13 cents in quarter three, making this the first increase in dividends since July of 2022. And with that, I will turn to our results. Q2 net revenues were $1.4 billion, reflecting continued momentum in our global direct-to-consumer channel, which grew 11% and up 26% on a two-year stack. Along with our franchise partners, we have opened 30 net new doors in H1, excluding the Columbia take-back. Together, our DDC and franchise business comprises 54% of total net revenues. We remain on track to open a net of 70 stores in H2, ending the year with a system-wide store count of more than 2,600. Gross margin of 60.5% was a record high and improved 180 basis points year over year. Expansion was primarily driven by lower product costs the structural shift to DDC, and the faster growth from our women's business all coming in higher than our expectations. These factors offset over 100 basis points of FX headwinds. Adjusted SG&A expenses in the quarter increased 4.3% to $785 million, and as a percentage of sales, adjusted SG&A was 54.4%, 190 basis points lower than last year. The SG&A leverage was slightly better than our expectations as we began to see the benefits of our cost control actions and our global productivity initiative project fuel. The increase in SG&A dollars was primarily related to additional incentives accrual in quarter 2024 versus last year. Gross profit dollars increased by 11% and grew at twice the pace of SG&A dollars, leading to EBIT leverage, with adjusted EBIT margin increasing 360 basis points to 6%. Adjusted EBIT dollars also significantly increased versus last year. On an H1 basis, gross profit dollars also grew at a faster pace than SG&A dollars, driving an increase in adjusted EBIT margin of 40 basis points. Adjusted diluted EPS was 16 cents, up 12 cents from prior year, significantly exceeding our expectations. Reported inventory dollars were down 19%, excluding the impact of the modification of terms with the majority of our suppliers. This reduction was better than our plan, and overall, inventory is expected to end the year below prior levels as we work to further optimize inventory as part of project fuel we are focused on getting inventory turns back to three over time as we drive assortment productivity this will release significant working capital let me take a moment to talk to you about the significant changes we're making to our global distribution and logistic strategy. We have made the decision to move from primarily owned and operated distribution and logistic network in the U.S. and Europe to one that will be more balanced between our own and leading third-party logistic providers. As we continue our pivot to a DDC-first company, our distribution network needs investment, including upgrading existing capacity with omni-channel capabilities. Our new strategy allows us to secure these investments in a capital-efficient manner by leveraging third-party capital while freeing up our own resources to invest in growing the direct-to-consumer channel. This will also enable us to reduce our fulfillment costs per unit compared to running the facilities ourselves, while immediately delivering a cash infusion of over $90 million this year, primarily as a reimbursement of the capital spent to build our new distribution center in Germany. In the near term, the changes require the parallel operation of new and old facilities for the rest of 2024, resulting in a transitory increase in distribution costs with a negative 2 cent impact to EPS in 2024. We expect we will begin to see a favorable 2 cent impact to EPS in 2026 which will progressively increase in 27 and beyond as distribution costs come down and inventory efficiencies improve as we better service our omnichannel needs. Now let's review the key highlights by segment. In the Americas, DTC revenues were up 16%, driven by double-digit growth in brick-and-mortar and e-commerce. While U.S. wholesale was down mid-single digits, the US market grew low single digits entirely as a result of DTC growth on an adjusted basis. We are also seeing meaningful improvements in profitability across both channels. Robust gross margins driven by favorable brand and channel mix and reduced product costs resulted in strong operating margins of 18%. Notably, our gross profit dollars grew significantly faster than our SG&A expenses. In Europe, DDC revenues increased 7%, a sequential improvement to Q1, reflecting growth in mainline, outlet, and e-commerce. Wholesale, while down 11%, has improved versus last quarter. Given the continued strength in DDC and the sequential improvement in wholesale, we continue to expect Europe to return to growth in H2. with a pre-book in Europe up mid-single digits for the second half. In the quarter, gross margins were up 420 basis points, offset by SG&A investments, resulting in a 15% operating margin, which was flat to last year. Asia net revenues increased 6% compared to the prior year and are up 34% on a two-year stack. DDC revenues increased 6%, driven by strength in e-commerce and company operator stores, and wholesale net revenues were up 5%. China, while lapping 95% growth in the prior year from the COVID reopening, was down by 10%. We have recently enhanced our locally relevant product assortments and believe this should help improve the business. Excluding China, Asia was up 9% driven by growth across most markets. Overall, for the quarter, Asia delivered an operating margin of 13%, which is 70 basis points higher than prior year, largely driven by gross margin expansion. Now let's turn to our fiscal 24 outlook, and I will also shake color on the next two quarters. Sales trends were consistent each month in the quarter, and we saw a strength in several key drivers of our business, including the U.S. market, acceleration of our global DTC business from last quarter, and robust growth in women. However, despite the supported trends, headwinds from foreign exchange have recently increased, especially with the euro and Mexican peso, creating a wider divergence between reported and constant currency performance. with a more meaningful impact in quarter three. As a result of the FX impact on our business for the full year, we now expect full year reported revenues to be at the midpoint of our range of 1% to 3% year-over-year growth, with revenue in constant currency trending closer to the upper end of our range. As respects gross margin, we now expect the full year to be up 180 basis points to prior year. 30 basis points higher than our previously guided range despite incremental FX headwinds of approximately 20 basis points for the year. This will be offset by an increase in SG&A due to the transition in our logistics and distribution network I spoke to earlier and a slight increase in advertising as we continue to fuel the momentum of our business. Additionally, we reiterate our expectation for approximately $15 million a quarter in interest and a mid to high teens tax rate. As respect to earnings, we are making long-term investments in the business with our distribution and logistics transition, as well as our brands with an increase in marketing. We expect these investments will impact fully our EPS by $0.03. We also expect the impact of FX to be an incremental 2 cents headwind for the year. Given these factors, despite the beat in Q2, we are maintaining our adjusted diluted EPS estimate of $1.17 to $1.27 for the year at this time. Let me give you a bit more color on the back half of the year. In Q3, we expect continued sequential improvement in revenues. We reported revenues up low single digits, and low to mid single digits on a constant currency basis this is inclusive of a currency headwind of over a hundred basis points revenue growth in quarter four will inflect upward to mid to high single digits on both the reported and constant currency basis including a 60 basis point headwind from fx The improvement in Q4 versus Q3 is driven by the fact that the majority of store openings are skewed to the fourth quarter and there is the benefit of the 53rd week. In the third quarter, gross margin will accelerate and be up approximately 200 basis points to prior year as we will have fully anniversaried the pricing actions we took last year with the benefits of product costs, higher DDC, and women's continuance. We also expect a mid-single-digit increase to S&A due to the continued expansion of DDC, higher ANP, and incentive funding compared to prior year, as well as incremental costs related to our distribution transition, partially offset by savings from project fuel. We are confident that the acceleration in sales and profitability from Q1 to Q2 versus prior year will continue into the second half of the year. Our confidence is rooted in several factors. First, we are seeing a strong response to our new product assortment and more exciting launches set for the second half. We also focused on full price sales, particularly in our mainline stores in the U.S. as we continue to introduce new products. Second, we continue to see momentum in our DDC business and as I mentioned, store openings are skewed to H2 when 70% of our net new doors are slated to open. Third, we are confident in the continued strength of our U.S. business and Europe overall is poised to return to growth in age two, supported by a positive wholesale pre-book and continued strength in DDC. Fourth, as we become a more DDC-focused retailer, we are confident in our plans for back-to-school and a holiday product and marketing campaign. The benefit of the 53rd week contributes approximately a point to H2 and two points to quarter four. And as we think about the profitability improvements in H2, our gross profit dollars are expected to grow two times the pace of SG&A dollar growth. To close, we delivered on our commitments and saw solid results in H1. The strategic and financial benefits of our shift to DDC are getting us closer to the consumer, and along with a smaller, yet more profitable wholesale business, is improving the structural economics of the company. We continue to be confident in the acceleration in revenue, profitability, and free cash flow, while taking some tough but transformative actions to become a best-in-class, omnichannel DDC First retailer. And with that, I will go ahead and open up the line 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 any additional questions, 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. Our first question comes from the line of Laurent Vasilescu of BNP Paribas.

Oh, good afternoon. Thank you very much for taking my question. Michelle, Harmeet, can you talk about your confidence in the 2H acceleration for the top line? I believe you talked about European order books up mid-single digits for 2H. How should we think about overall wholesale for 2H? And any further color, Michelle, on Europe, on what you're seeing in terms of the trends so far?

Lauren, let me take the confidence second half in the acceleration. And then I'll pass on the wholesale, including yours, to Michelle. But as you probably heard, we are confident about the acceleration, both top line and bottom line, in the second half. So to think about it simply, the trends that we've seen, the sequential improvement we've seen in the first half, continue into the second half and get better. The get better are driven by the following. One, you know, Michelle talked about the wonderful product lineup that we have and the exciting launches in the second half. You know, we have launched a lot of these products in the U.S. We're going to scale it and started with DDC, scaling it into wholesale and scaling it globally. And that's why we're really confident about the back to school and the holiday product launches we have. DDC is really strong. Productivity and profitability in DDC is really improving. And then we've got these extra stores that we're building in the second half. So that really would help our DDC business. The U.S. business has three consecutive quarters of growth that we expect to continue into the second half. Europe is sequentially improving, but we feel really good about uh europe returning to growth in the second half the pre-book is up mid signal digit and ddc will continue um you know in the strength that we're seeing there is the benefit of the 53rd week both in h2 and quarter four and then on profitability you know is really driven by you know broadly three factors the first is as revenue accelerates will flow through that uh because really focus on gross profit dollars driving you know, being higher than SGN dollars driving EBIT leverage. Fuel savings just begun in Q2. I think we have fuel savings of, you know, approximately 20 million. The rest of that coming in the second half through the initiatives that we talked about. And then continued progression on the gross margin expansion that we talked about. So, you know, that's what really drives profitability.

wholesale over to you yeah not a whole lot to add but just to chime in on your question around the wholesale channel so global wholesale you know we're we're pleased and we're seeing sequential improvement in our wholesale business globally of course in particular our two biggest wholesale businesses in the US and in Europe up you know we were down 4% which was up versus q1 and and we're expecting that progressive improvement to continue into the back half. It's really all the strategies that we've put in place over the last year that are gaining traction. It starts with product. Harmeet just mentioned that. But we really are leading the trend with product, and that's fueling our DTC business, but it's also fueling our wholesale business. So it starts with Denim Bottoms and Denim Authority around this whole trend on baggy loose wide leg that's resonating our key customers are excited they're ordering it and um and consumers are responding and our sellout trends are improving across our wholesale channel so we're that's that's a leading indicator so we're really encouraged by that second i would say our strategy around denim lifestyle and in particular with women we're seeing outsized growth there so tops bottoms, denim dresses, denim skirts, working in DDC, also working in wholesale. And then I would add, as it relates to our supply chain, which was a challenge for us, as you know, last year in the US, that's all behind us. So when you take all those factors, we are in a completely different and better place than we were a year ago as it relates to global wholesale, both Europe and US. And then as it relates to your question on Europe, just to take that question home, we saw a big improvement from Q1 into Q2. So we were down to DTC up 7%. And we are fully expecting to see Europe grow in the back half of the year, with DTC continuing to accelerate, already positive, continue positive, and seeing significant gains in wholesale as well, with the indicator being that the pre-books are up. So all in all, on both fronts, both wholesale and Europe, We're optimistic in the back half, and that's all baked into the acceleration we have planned in H2.

Very helpful. Thank you much for all the color. Thank you. Thanks, Lauren.

Thank you. Our next question comes from the line of Bob Durbel of Guggenheim.

Hi. Good afternoon. Just two questions, you know, I think a little bit of a follow-up, but just in terms of the U.S. business sector, Can you talk a little more around what you're seeing from the consumer, both your male and female consumers? And ultimately, when you look at some of the trends within the denim businesses, Michelle, do you see momentum continuing with some of the bigger drivers in product?

Yes. Thanks, Bob, for the question. So a few questions within that. First of all, as it relates to our U.S. business, we're very pleased. We're feeling really good third quarter of positive growth. I mean, we really think about, and Hermit mentioned this in his remarks, but we really think about the U.S. as a total marketplace. Our DTC business is growing tremendously. It was up 12% in the quarter, and that was driven off of, to your question on trends, that was largely driven off of women's. Men's still healthy in the mid-single digits, but women's was up over 20% across both bottoms and tops. And in fact, as it relates to the U.S. market, market share, which is really a powerful indicator. I mentioned earlier in the call, but I'll say it again, number one market share leader in women's dead and bottoms. And we have now created great separation in that position. So feeling great about that. Men's continues to hold the number one position, gaining market share as well with that younger consumer. So really encouraging data. leading indicators as it relates to the U.S. market. So feel good about that. And as I just mentioned, DTC is our primary growth driver, but we are feeling very good about the trends we're seeing in the U.S. wholesale business as well. And then to your question on state of the consumer and based on our business, we're feeling good. I mean, our consumer is proving to be resilient. They're coming into our stores. They're shopping online. So our indications, I mean, we control what we control. And certainly there's some level of uncertainty as we look into the back half of the year and beyond. We're always certain about that uncertainty. But we control what we can control. And our responsibility as the denim category leader is to drive that innovation, drive that freshness and newness. We're doing that in bottoms with these trends I was speaking to, the looser, baggier trends. But we're also now doing it on head-to-toe denim lifestyle, which is a newer strategy for us. And it's working. I mean, denim product beyond bottoms is selling like crazy. I mean, Western shirts, and I know Western's trending as well as it relates to trends in the denim market, up 40%. Denim skirts and dresses, you know, those were up triple digits. And I would say on all of this, Bob, we're just getting started. So we will continue to fuel excitement in the category for kind of months and years to come.

Thank you.

Thanks, Bob.

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

Great, thanks. Michelle, on the total addressable market, which you touched on in prepared remarks, could you elaborate on assortment changes that you've made so far that support an expanded TAM for the Levi brand, opportunities you're excited about to drive greater share of wallet, and then Harmeet, Could you just maybe break down gross margin puts and takes that we should consider for the back half of the year relative to the distribution and logistics headwind?

Sure. Sure. Thanks, Matt. Yeah, great question and one that we're quite bullish on, actually. So, as I did mention, we are expanding our total addressable market, and I'd say in a couple ways. First, kind of build on the last question, is really this whole head-to-toe denim dressing and then denim lifestyle. So all things denim. I mean, believe it or not, historically, we've been a small player in even things like denim skirts, denim tops, denim jackets, denim dresses, and the like. And early indications are super positive. I mean, we have a big opportunity there, and I'm really excited about what's in the pipeline. So that'd be point number one. And then point number two is non-denim. And when you actually look at our total business, 44% of our direct-to-consumer business is actually now what we'd consider non-denim bottoms. So that does include kind of the skirts and dresses I was mentioning, but it also includes non-denim in both men and women. And we've driven a lot of newness in those categories as well. So our XX Chino platform, which has done really well over the last couple years, We're expanding that into performance. So you may recall we launched a new platform, the performance platform, Performance Tech, just recently, last couple months. We started with the 511 Fit for Men. We're launching it into XX Chino in the coming year. That's soon to land actually in the U.S. across channels. And we're working on a more premium offering that's going to go global. And we're actually looking at expanding the platform from there. So we Levi's definitely has permission, but it will always stay true to, and I think this is really important, to the true Levi's DNA, the aesthetic of the brand. But the consumer is saying both men and women, they want more Levi's in their closets. So whether, again, that's more denim lifestyle head to toe or more of this non-denim, it's working. And we're seeing it in the numbers. So we're seeing it in terms of gaining share in women, significant share. and with men holding our share, but we're also gaining share in non-denim casual pants and men. So all good indicators. We're excited. And that gives us a much bigger playing field.

And Matt, on the question of gross margin, so let's talk quarter two first, and I'll just give you the second half of the year. And I'll talk about this new focus on gross profit dollars, less SG&A. But basically, in quarter two, the big buckets The tailwinds were really product costs, really driven by commodities. That was approximately 250 basis points higher than a year ago. And the mix on areas that we are driving growth in, so think DDC, think women's, and think international. So that's about 50 basis points. It was offset by over 100 basis points, as I said in the remarks on FX, and then about 20 basis points on air freight. Given some of the Red Sea issues that we're seeing and the fact that we are actually chasing into product, believe it or not, some of the product offers are selling so quickly that we're chasing into it. So we are air freighting a little bit more. So that's really... quarter two. As you think about the second half of the year, and quarter three is a little different than quarter four, and I'll explain to you in a minute why. But overall, I think tailwinds will be product costs more in quarter three. We started lapping this late in Q3. So a little bit in Q3 last year, and you saw the benefit in Q4. The mixed Benefit continues. And then FX headwind is not as high as 100 in Q2, but probably 50-odd basis points in Q3, substantially less in Q4. AFRAID as a headwind, probably the same, especially as it's chasing into stuff. So generally feeling very good about gross margins, and that's where we raise the guidance for the year, which if we If we deliver, we're confident off, we'll be under the record on an annual basis from that perspective. But overall, as we get to the operating margin goal of 15%, this is metric of gross profit dollars less SG&A and ensuring that that drives the leverage is important. You go back to 2021 when operating margins were over 12%, gross profit was growing at a much faster clip than SG&A. And that's the discipline that we as a leadership team want to instill in ourselves.

Great caller. Best of luck.

Thank you. Thank you. Our next question comes from the line of Ike Borchow of Wells Fargo.

Hey, good afternoon, everyone.

I guess what I wanted to ask is, I'm trying to understand the momentum in the business and certain parts of the categories you guys sell seems pretty apparent. And there's certain parts of the assortment that seem to be doing extraordinarily well. But when you look at the overall revenue of the business, it's still not, it doesn't quite connect with the optimism that you guys have. Now, the direct-to-consumer business is very strong, but it's also, it was similar last year. So I guess where I'm going with that is, is that a function of there's more to come, the inventories are too tight, the wholesalers' partners haven't been willing to take product, it takes more time? Because I'm just trying to understand, there seems to be so much buzz that's growing, I would have thought there would be more revenue growth commensurate with that. So I guess maybe for Michelle, can you kind of connect those dots for me?

Yeah. Let me take a stab. And so sequentially, quarter to quarter, you know, hopefully the ERP noise is behind us. But, you know, sequentially quarter two grew 2% constant currency. And similarly on Levi's. I just think, as you think about the quarter, Ike, because your question is a good question. Think of the quarter, Levi's generally was on our expectation. US was stronger, Europe was unplanned. Asia is slightly lower, largely because of China. China-Asia was fairly strong. The thing that, you know, I think the headwinds, I talked about a little on this script, but the headwinds were really FX, okay, and Dockers underperformed. So, you know, as you think about, because, you know, I think your question is more centered around Levi's, but that's really what happened in the quarter. Now, what gives us real confidence in the second half, because revenue does accelerate, especially in constant currency, is the new product offers that just, you know, in a global business, you get the best bang for the buck when it's across channels and it's across geographies. And our product is, you know, right now making the transition across geographies and across channels. So that's why you're seeing the sequential or expectation that sequentially it will improve. This takes a little time. from that perspective. The DDC business continues to grow. Michelle talked about wholesale. Wholesale was down, granted, in Q4, but it's less down than Q1 globally. And our expectation is that that improves as the year progresses. And it's largely driven by two things. Inventory levels generally in the trade are getting to a good spot. So that should open the open to buy. And as they see new product, customers are gearing to put that on the floor. So that's why I think it's a natural progression, and sometimes it just takes a little time, and that's what we're beginning to see.

Yeah, the only thing I would add to that is when you kind of take a step back, I mean, as we look to the back half of the year, we are planning for and we've guided for acceleration. So we're expecting the back half of the year to be in the mid-single digits in terms of growth. which bakes in the continued double-digit performance in DTC, as well as some modest improvement in wholesale. But our DTC business now is becoming such a big part of our business. As long as we get, call it, stability in the wholesale channel and the kind of growth or stability we're seeing now, the model works. And so that's why we're extremely confident in the back half of the year. And I think Harmeet did a great job explaining this current quarter. The FX piece clearly was the biggest impact, given that 60% of our business is global. But the Levi's brand and the Levi's business is extremely healthy, as evidenced by the market share gains that we're making in many places around the world, including here in the US.

That was very helpful, thank you. Thanks, Ike.

Thank you. Our next question comes from the line of Dana Telsey of Telsey Advisory Group.

Hi, good afternoon, everyone. As you think about top line and then managing it with the better than expected gross margins and your guide for the SG&A, unpacking the increased marketing spend that's happening in the second half of the year, How much higher is this marketing spend than your original plan? And given the positive reception to the trends and that you're the market share leader, how should we think about marketing expense going forward? What do you need in top line sales to leverage some of these expenses? In other words, thank you.

Thanks, Dana. You know, I wish we could have floated the EPSB, you know, five cents, which I think a lot of people were expecting. But as we think about this business, you have to think about this business longer term. You know, so if you think of the five cents, the two cents of the five cents is really being spent as we make the pivot to more of a hybrid distribution logistic network. And, you know, we did get the cash infusion. of over $75 million in the quarter, but about $90 in the year. And that's just running to DCs parallelly as they transition. And that's one cent in quarter three and maybe one cent in quarter four. The marketing question, Dana, is about a cent higher in H2, and it's just to fuel. We're expanding the TAM, as Matt, you asked. We are introducing new products. our consumers need to be more aware of it. So we have to drive awareness. And, you know, we have wonderful marketing programs that Kenny, I think, talked about in quarter two. And so this just helps fuel the brand momentum. To your question about what's the right spend, you know, we do a ROI analysis. And so as long as we think it really drives revenue, you know, marketing spend will probably end the year, you know, around 7%. It's a little over than what we thought last time we talked about it. But, you know, it'll probably grow over time, but so will revenue. And so that's really the, you know, the linkage we look at.

Thank you.

You're welcome.

Thanks, Dana.

Thank you. Our next question comes from the line of Chris Nardone, B of A. Thanks, guys.

Good afternoon. Just a couple of follow-ups on the U.S. business. Can you elaborate on the progression of U.S. DTC results through the quarter and comment on whether trends have sustained in June? And then on the U.S. wholesale business, are you committed to growing the U.S. wholesale business in the back half? And curious if you have any comments on how sellout is trending versus maybe last quarter.

Yeah. So to your question about U.S. DTC,

It's actually the quarter was fairly even. We saw the U.S. DDC business start really strongly at the beginning of the year. That's continuing into the quarter. And we feel really good about the continuation into quarter three. The U.S. team is doing a phenomenal job, really, making this pivot to DDC business. and driving productivity. The EBIT margins are off the charts as an example. We don't talk about it by segment, but we look at the, you know, the America's operating margins, a large piece of that is driven by our DDC business. To your question about U.S. wholesale, you know, it gets better from the mid single digit decline that we talked about as the year progresses. Very difficult to predict whether it turns positive. The thing that we can say, I think, Michelle, with confidence is we are seeing sell-throughs actually improve as we exit into the quarter. And so, you know, that just bodes well. And inventory levels are relatively, you know, lean. So the combination of that, especially as a U.S. consumer, you know, who we think is resilient, I think you can do the math over time.

Yeah, maybe the only thing to add on that one, Harmeet, well said, is that just to make the point When we think about the state of the U.S. wholesale business a year ago versus where we are today, it literally is a sea change of what we're seeing in U.S. wholesale. The operations supply chain. We're back to normal. We're shipping orders. We had a little bit of catch up. Now it's kind of business as usual. Product, you know, the center of everything. The product is resonating. I think especially with as we look to our denim lifestyle strategy, women's tops, those are all outperforming. As we talked about, the sellout trends are improving in U.S. wholesale. We're working closely with all of our key customers so that the brand is showing up in a way that's a win-win for us and for them. So really all the core strategies that we put in place a year ago to turn this business around is working, and we've now seen several quarters of improvement versus where we were a year ago.

Yeah, and I've been reminded to say this as well. which is fully a guidance is not contingent on U.S. wholesale growing in the second half. I just want to, you know, make that point, Chris. And you didn't ask this, but U.S. wholesale is a lot more profitable today than it was a year ago.

Very clear. Thank you.

Thank you. Thank you. Our next question comes from the line of Oliver Chen of TD Cohen. Oliver, please make sure your line is unmuted. You can have the speaker follow if you want to answer it.

Latif, we can... Yeah, and it may be a logistic issue, Latif. We'll catch up with Oliver later. Okay.

We'll go to the next question, which comes from the line of Paul Lajus of Citi. Please go ahead, Paul.

Thanks, guys. I'm curious if you can talk about the drivers of the DTC increases in each of your regions, just in terms of square footage increases versus comps, but also units versus pricing. And then as a follow-up to that, I'm curious if you've changed your expectations at all for the second half for DTC in any of the regions based on what you saw in 2Q or the first half in general. Thanks.

Yeah, Paul, I'll be brief. You know, comms sales were a big driver of the DDC piece. Our units as in terms of new doors, net new doors was modest in the first half. So that will pick up in the second half. And, you know, while we talk about stores and we talk about comms, our e-commerce business is on fire. The e-commerce team led by Jason, they're doing a phenomenal job. And it's really going back to the basics, driving loyalty, driving higher conversion, et cetera, fixing the fundamentals. So I think that's where you... We never talked about it, but as you heard in the call, the e-commerce profitability is up to low double digits, and that's a big thing. To your question about DDC productivity and DDC... EBIT margins at 300 basis points. I'd say half gross margin, half real productivity, which is driven by two things. One is better labor management and better revenue leverage. Those are the two things. And in both cases, I think we're just getting started. We think there's a lot more opportunity on driving productivity and narrowing the gap between the wholesale EBIT margin and the DDC EBIT margin because that will really... help us get to the 15% operating margin.

Harmeet, how much was pricing a driver in each region?

Yeah, you know, pricing was modest, I would say, Paul. The U.S. is very modest. You know, we took some reductions last year. We have not taken more. AURs, as it becomes more of a DDC business, AURs are up largely in our mainline stores. They're full price stores across the three regions. Little bit of pricing in Asia, very modest price. I mean, I think very little pricing in Europe.

No, and I would just build on that, Harmeet, and say any AUR increases that we're seeing is coming off of mix shift. You know, as our consumers buy more elevated premium product. I mean, as we bring in a lot of these fashion fits, the looser, the low-waste, baggy, we're able to price up. But, I mean, to your point, this volume, the sales, it's generated off of volume, the velocity of our business.

Yeah. Got it. Thank you. Good luck.

Thank you.

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

Just appreciate everybody joining the call. Thanks for the great engagement and questions. We look forward to connecting with you next quarter.

Thank you. This concludes today's conference call. Please disconnect your lines at this time. Thank you. Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company second quarter fiscal 2024 earnings conference call for the period ending May 26, 2024. 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.

Thanks, Lateef. Thank you for joining us on the call today to discuss the results for our second quarter fiscal 2024. Joining me on today's call are Michelle Goss, our President and CEO, and Harmeet Singh, our Chief Financial and Growth Officer. We have 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 you 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 factors section of our Form 10-K for the year ended November 26, 2023, 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 financial 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. Reconciliation of non-GAAP forward-looking information to the corresponding GAAP measures, however, cannot be provided without unreasonable efforts due to the challenge in quantifying various items, including but not limited to the effects of foreign currency fluctuations, taxes, and any future restructuring, restructuring-related severance, and other charges. Finally, this call is being webcast on our IR website, and a replay of this call will be available on the website shortly. Please note that Michelle and Harmeet will be referencing constant currency numbers unless otherwise noted. And now I would like to turn the call over to Michelle.

Thank you and welcome everyone to today's call. We delivered another strong quarter with revenue up 9% in constant currency and 2% adjusted for the ERP shift and the exit of the Denizen business, reflecting sequential improvement across the business. The ongoing acceleration in the business gives us confidence in the second half of the year and beyond. Here are a few highlights. We continue to see strong growth in our direct-to-consumer channel, up 11%, reflecting nine consecutive quarters of robust comp growth. The Levi's brand continues to gain momentum, up 2% on an adjusted basis. Our global Levi's women's business is accelerating and delivered 22% growth in DTC in Q2. Levi's now ranks number one in women's denim bottoms in the US. Our largest market, the US, once again delivered positive growth for a third consecutive quarter on an adjusted basis. Global wholesale sequentially improved, down 4% on an adjusted basis due to an improvement in sellout trends. While we are driving this growth, we are also improving our profitability as evidenced by record gross margins of 60.5%, enabling us to deliver a higher than expected adjusted diluted EPS of 16 cents. As I've shared previously, we are currently undergoing a significant transformational pivot to become a best-in-class direct-to-consumer retailer. While this evolution will span multiple years, our efforts are already positively impacting our quarterly results. I will now talk you through the details of the quarter in the context of our strategic priorities. Leading with our brand, operating as a direct-to-consumer first business, empowering our portfolio. Starting with leading with the Levi's brand. A key indicator of brand health we continue to make meaningful market share gains in the U.S., driving growth with women and our key youth target group of 18 to 30-year-olds, while maintaining our dominant leadership position in men. Importantly, we have maintained our leadership position across consumers of all ages, and our unaided brand awareness remains well above our competition across most markets globally. We continue to drive brand heat and impactful storytelling by showing up at the center of culture across music, art and design, fashion and sports. We were thrilled and honored to have Beyonce name a song after us on her newest album. And as an example of our agility, we responded to the speed of culture, not only demonstrating our understanding of engaging social communities in an authentic way, but also generating more than 3 billion impressions and a ton of buzz for the brand that remains today. We activated in a big way at Coachella and Stagecoach music festivals and launched collaborations with ERL, Stussy, and Starter. As we look to the second half of the year, we have a number of impactful partnerships planned across the globe, including a Paris-themed collaboration with renowned label Pagal. This is also in support of our key city strategy, amplifying our efforts in Paris through initiatives like the opening of our iconic Champs-Élysées store in the second quarter and our fifth, House of Strauss. Moving to product, we saw strong performance in our core offerings while also introducing newness and innovation in Denim and Beyond as we expand our total addressable market. We continue to lead the global trend around straight, loose, and wide-leg bottoms. Now comprising more than 50% of our overall bottoms assortment, loose fits grew 21% across channels in Q2. We are continuing to lean into the trend this summer with the launch of a new baggy fit for women, the XL, which will be available globally and across channels, along with a new relaxed fit for men, the 555. The core of our business remains very healthy. Our original icon, the 501, continues to deliver impressive growth, up 16% in DTC and Q2. Our strategic focus around denim dressing continues to gain traction. is becoming a more meaningful part of our portfolio, and is expanding our total addressable market opportunity. Denim dressing continues to perform very well, with denim dresses, skirts, and jumpsuits again up triple digits in the quarter. We're also seeing success in tops and non-denim categories, evidence that our tops reset and increased focus on denim lifestyle are working. Tops were up 20% in our DTC channel for Q2, with even stronger growth in women's tops, driven by our elevated essential offerings in woven tops and non-graphic tees. The growing popularity of Western wear is at an all-time high, and our fans continue to choose from our collection of timeless yet fresh Western-inspired pieces. This includes our iconic Western shirts, which are seeing particularly strong sales in women, up 40%. Relative to non-denim bottoms, our recently introduced tech pant in the 511 Fit for Men is delivering strong results. We see this as a new and expanding innovation platform driving incremental wear occasions for our consumers. Given our early success, we'll be introducing a range of new products over the coming year, with the next introduction being the XX Chino, available worldwide and across both our wholesale and DTC channels. Looking to the second half of 2024, we will continue to deliver newness and drive innovation. For women, we have a strong lineup that supports our denim dressing and denim lifestyle strategy, including skirts, dresses, and jackets. We are also expanding into key categories like outerwear and sweaters to drive the head-to-toe offering. And following the success of our Performance Cool product, which we broadly rolled out globally earlier this year, This fall, we are set to expand the innovative platform with the launch of Performance Warm, made with a soft interior that is designed for warmth and cooler weather. Looking ahead, we are making great progress on our efforts to streamline our go-to-market calendar by reducing SKUs by at least 15% and addressing complexity in our process, which will start benefiting us in H125. The team is already using some of the learning to create more agility in our process, such as chasing into top sellers this season. As we shorten our timelines and operate with a tighter assortment, we will see a number of benefits, including responding faster to consumer trends and enhancing our overall efficiency as a DTC-driven organization. Now, let's shift to direct-to-consumer, our next strategic priority and one of the biggest unlocks as we pivot to become a best-in-class omnichannel retailer. DTC continued to grow rapidly, up 11% on top of 14% growth in the prior year. We achieved these strong results by delivering high single-digit positive comp growth. As I shared on our last call, we've been laser focused on driving profitability and productivity in our stores. This quarter, we saw an improvement across all store KPIs, led by higher UPT and better conversion driven by our new product introductions, an improvement in our in-stock position, and a continued focus on best-in-class engagement with fans in our stores. USDTC was up 12% led by our mainline stores. AURs and mainline were up low single digits as consumers gravitate toward our full-price premium products. Globally, we continue to execute our retail expansion plans and are on track to open 100 net new doors this year. In Q2, we opened our largest store in Thailand at the Central World Mall in Bangkok. This store is a pilot where we're implementing learnings from consumer research to improve the in-store consumer journey. By applying changes like displaying our denim lifestyle categories more visibly throughout the store and elevating our premium collections, we drove revenue growth in both tops and bottoms. Results are encouraging, and this is just one example of the great potential we have in improving store productivity. E-commerce continues to be a big opportunity for us, up 19% this quarter, led by double-digit growth in the U.S., where we are seeing strong full-price sell-through and strength in women, now comprising more than 50% of the business in this channel. Ongoing initiatives to elevate our site and enhance the consumer experience, as well as deliver a more premium and expanded assortment, continue to drive our momentum across all of our markets. We also drove meaningful growth in our loyalty program, acquiring almost 2 million members in Q2 with 36 million members globally. As we make our pivot to be a DTC-first company, we also remain committed to wholesale. On an adjusted basis, our global wholesale business is down 4% in line with our expectations and a sequential improvement to Q1. We feel good about the trends we're seeing in our global wholesale business overall. The actions we've taken to stabilize this business are working. Sellout trends are improving, including in the U.S. and Europe, and customers are excited about our expanded assortment. Importantly, this channel is significantly more profitable than last year, amplified by our healthier inventory levels and the improvement in our supply chain operations. Turning now to our third strategy, powering the portfolio. Our international business is becoming a more meaningful contributor to our business and grew low single digits in the quarter. This reflects 6% growth in Asia on top of 27% growth in the prior year, bolstered by strength in Japan, India, and Turkey. And our Europe business sequentially improved down low single digits in the quarter, with certain key markets, including Italy and Spain, positive in the quarter, as well as an improvement in performance across both wholesale and DTC. Dockers was down 1% on an adjusted basis, coming in below our expectations. Profit exceeded prior year, led by gross margin expansion and disciplined expense management, and inventories are significantly below prior year, down 16%. Going forward, we'll be leaning into innovation with an expanded head-to-toe collection of the performance-based Dockers Go series, which has exceeded expectations since its launch. Beyond Yoga was up 13%, an acceleration to Q1, driven by strength in wholesale and e-commerce. In the quarter, we continued to see success in our much-loved core space dive business, as well as wins in new lifestyle categories like wider leg pants and dresses. Our new CEO of Beyond Yoga, Nancy Green, has moved quickly to bring in seasoned industry leaders in product development, sourcing, retail, e-commerce, and marketing to build the capabilities to rapidly scale this business and achieve the long-term potential of the brand. To conclude, we are pleased with our performance through the first half of 2024, which underscores that we have the right strategies in place to drive long-term, sustainable, and profitable growth. The Levi's brand has never been stronger. We continue to gain market share and our amplified focus with women and younger consumers is working. We have momentum across the world, including the U.S., where we have delivered three consecutive quarters of positive performance. We are seeing a strong response to our innovation and product launches centered around owning denim lifestyle and have a robust pipeline for the remainder of the year. Our transformational pivot to operating as a DTC first company is reaching a tipping point with accelerating sales momentum and an improvement in margins. And we have an incredible, talented and passionate team around the world that is driving this transformation and delivering outstanding service with our consumers every day. All of this gives me great confidence for the rest of the year and beyond. And with that, I'll now turn it over to Harmeet to cover the financials.

Thanks, Michelle. We are pleased to have delivered earnings that significantly exceeded expectations, despite stronger than expected headwinds from FX and a higher tax rate versus the prior year. Gross profit dollars grew twice as fast as SG&A dollars, reflecting both revenue and gross margin growth but also our relative expense discipline driving higher operating margins. Going forward, this is a key metric we are focused on to enable us to achieve a longer term goal of 15% high quality margins. Our DDC business continues to not only be our fastest growing business, but is also seeing real improvements in profitability with operating margins increasing more than 300 basis points during the quarter this includes a significant improvement in e-commerce profitability with ebit margins now double digits on a fully allocated basis the improvement in profitability in our ddc business surpassed our own expectations and we believe we will continue to grow profitability in this channel as we pivot to a DDC-first company. And as our wholesale business becomes a smaller piece of our overall business, as Michelle mentioned, it is more profitable as inventory levels have normalized and gross margins across the business have increased, which we are focused on sustaining. The benefits from Project Fuel are progressing as planned. and we believe our strategies related to this initiative are working. We remain on track to deliver $100 million in savings this year through a workforce reduction that has largely been implemented, savings from indirect procurement that are in progress, and higher productivity from our DDC business, which is evident from our recent results. We also believe there will be additional savings in 2025, which we intend to quantify when we guide next year. In the quarter, we continue to make improvements in reducing our inventory position, and along with working capital management, we have generated positive free cash flow of $223 million in the second quarter and $437 million year-to-date. Shareholder returns in the quarter were up 36% as we bought back shares and paid dividends. Reflecting our confidence in our cash flow position, we are increasing the quarterly dividend by 8% to 13 cents in quarter three, making this the first increase in dividends since July of 2022. And with that, I will turn to our results. Q2 net revenues were $1.4 billion, reflecting continued momentum in our global direct-to-consumer channel, which grew 11% and up 26% on a two-year stack. Along with our franchise partners, we have opened 30 net new doors in H1, excluding the Columbia take-back. Together, our DDC and franchise business comprise 54% of total net revenues. We remain on track to open a net of 70 stores in H2, ending the year with a system-wide store count of more than 2,600. Gross margin of 60.5% was a record high and improved 180 basis points year over year. Expansion was primarily driven by lower product costs the structural shift to DDC, and the faster growth from our women's business all coming in higher than our expectations. These factors offset over 100 basis points of FX headwinds. Adjusted SG&A expenses in the quarter increased 4.3% to $785 million, and as a percentage of sales, adjusted SG&A was 54.4%. 190 basis points lower than last year. The SG&A leverage was slightly better than our expectations as we began to see the benefits of our cost control actions and our global productivity initiative project fuel. The increase in SG&A dollars was primarily related to additional incentives accrual in quarter 2024 versus last year. Gross profit dollars increased by 11% and grew at twice the pace of SG&A dollars, leading to EBIT leverage, with adjusted EBIT margin increasing 360 basis points to 6%. Adjusted EBIT dollars also significantly increased versus last year. On an H1 basis, gross profit dollars also grew at a faster pace than SG&A dollars, driving an increase in adjusted EBIT margin of 40 basis points. Adjusted diluted EPS was 16 cents, up 12 cents from prior year, significantly exceeding our expectations. Reported inventory dollars were down 19 percent, excluding the impact of the modification of terms with the majority of our suppliers. This reduction was better than our plan and overall inventory is expected to end the year below prior levels as we work to further optimize inventory as part of project fuel we are focused on getting inventory turns back to three over time as we drive assortment productivity this will release significant working capital let me take a moment to talk to you about the significant changes we're making to our global distribution and logistics strategy. We have made the decision to move from primarily owned and operated distribution and logistics network in the U.S. and Europe to one that will be more balanced between our own and leading third-party logistics providers. As we continue our pivot to a DDC-first company, our distribution network needs investment, including upgrading existing capacity with omni-channel capabilities. Our new strategy allows us to secure these investments in a capital-efficient manner by leveraging third-party capital while freeing up our own resources to invest in growing the direct-to-consumer channel. This will also enable us to reduce our fulfillment costs per unit compared to running the facilities ourselves, while immediately delivering a cash infusion of over $90 million this year, primarily as a reimbursement of the capital spent to build a new distribution center in Germany. In the near term, the changes require the parallel operation of new and old facilities for the rest of 2024, resulting in a transitory increase in distribution costs with a negative 2 cent impact to EPS in 2024. We expect we will begin to see a favorable 2 cent impact to EPS in 2026 which will progressively increase in 27 and beyond as distribution costs come down and inventory efficiencies improve as we better service our omnichannel needs. Now let's review the key highlights by segment. In the Americas, DTC revenues were up 16%, driven by double-digit growth in brick-and-mortar and e-commerce. While U.S. wholesale was down mid-single digits, the US market grew low single digits entirely as a result of DTC growth on an adjusted basis. We are also seeing meaningful improvements in profitability across both channels. Robust gross margins driven by favorable brand and channel mix and reduced product costs resulted in strong operating margins of 18%. Notably, our gross profit dollars grew significantly faster than our SG&A expenses. In Europe, DDC revenues increased 7%, a sequential improvement to Q1, reflecting growth in mainline, outlet, and e-commerce. Wholesale, while down 11%, has improved versus last quarter. Given the continued strength in DDC and the sequential improvement in wholesale, we continue to expect Europe to return to growth in H2. with a pre-book in Europe up mid-single digits for the second half. In the quarter, gross margins were up 420 basis points, offset by SG&A investments, resulting in a 15% operating margin, which was flat to last year. Asia net revenues increased 6% compared to the prior year and are up 34% on a two-year stack. DDC revenues increased 6%, driven by strength in e-commerce and company operator stores, and wholesale net revenues were up 5%. China, while lapping 95% growth in the prior year from the COVID reopening, was down by 10%. We have recently enhanced our locally relevant product assortments and believe this should help improve the business. Excluding China, Asia was up 9% driven by growth across most markets. Overall, for the quarter, Asia delivered an operating margin of 13%, which is 70 basis points higher than prior year, largely driven by gross margin expansion. Now let's turn to our fiscal 24 outlook, and I will also shake color on the next two quarters. Sales trends were consistent each month in the quarter, and we saw a trend in several key drivers of our business, including the U.S. market, acceleration of our global DTC business from last quarter, and robust growth in women. However, despite these supported trends, headwinds from foreign exchange have recently increased, especially with the euro and Mexican peso, creating a wider divergence between reported and constant currency performance. with a more meaningful impact in quarter three. As a result of the FX impact on our business for the full year, we now expect full year reported revenues to be at the midpoint of our range of 1% to 3% year-over-year growth, with revenue in constant currency trending closer to the upper end of our range. As respects gross margin, we now expect the full year to be up 180 basis points to prior year. 30 basis points higher than our previously guided range despite incremental FX headwinds of approximately 20 basis points for the year. This will be offset by an increase in SG&A due to the transition in our logistics and distribution network I spoke to earlier and a slight increase in advertising as we continue to fuel the momentum of our business. Additionally, we reiterate our expectation for approximately $15 million a quarter in interest and a mid to high teens tax rate. As respect to earnings, we are making long-term investments in the business with our distribution and logistics transition, as well as our brands with an increase in marketing. We expect these investments will impact fully our EPS by $0.03. We also expect the impact of FX to be an incremental 2 cents headwind for the year. Given these factors, despite the beat in Q2, we are maintaining our adjusted diluted EPS estimate of $1.17 to $1.27 for the year at this time. Let me give you a bit more color on the back half of the year. In Q3, we expect continued sequential improvement in revenues. We reported revenues up low single digits and low to mid single digits on a constant currency basis. This is inclusive of a currency headwind of over 100 basis points. Revenue growth in quarter four will inflect upward to mid to high single digits on both a reported and constant currency basis, including a 60 basis point headwind from FX. The improvement in Q4 versus Q3 is driven by the fact that the majority of store openings are skewed to the fourth quarter, and there is the benefit of the 53rd week. In the third quarter, gross margin will accelerate and be up approximately 200 basis points to prior year, as we will have fully anniversaried the pricing actions we took last year with the benefits of product costs, higher DDC, and women's continuance. We also expect a mid-single-digit increase to S&A due to the continued expansion of DDC, higher ANP, and incentive funding compared to prior year, as well as incremental costs related to our distribution transition, partially offset by savings from project fuel. We are confident that the acceleration in sales and profitability from Q1 to Q2 versus prior year will continue into the second half of the year. our confidence is rooted in several factors. First, we are seeing a strong response to our new product assortment and more exciting launches set for the second half. We also focused on full price sales, particularly in our mainline stores in the U.S. as we continue to introduce new products. Second, we continue to see momentum in our DDC business and as I mentioned, store openings are skewed to H2 when 70% of our net new doors are slated to open. Third, we are confident in the continued strength of our U.S. business, and Europe overall is poised to return to growth in age two, supported by a positive wholesale pre-book and continued strength in DDC. Fourth, as we become a more DDC-focused retailer, we are confident in our plans for back-to-school and a holiday product and marketing campaign. The benefit of the 53rd week contributes approximately a point to H2 and two points to quarter four. And as we think about the profitability improvements in H2, our gross profit dollars are expected to grow two times the pace of SG&A dollar growth. To close, we delivered on our commitments and saw solid results in H1. The strategic and financial benefits of our shift to DDC are getting us closer to the consumer, and along with a smaller, yet more profitable wholesale business, is improving the structural economics of the company. We continue to be confident in the acceleration in revenue, profitability, and free cash flow, while taking some tough but transformative actions to become a best-in-class, omnichannel DDC First retailer. And with that, I will go ahead and open up the line 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 any additional questions, 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. Our first question comes from the line of Laurent Vasilescu of BNP Paribas.

Oh, good afternoon. Thank you very much for taking my question. Michelle, Harmeet, can you talk about your confidence in the 2H acceleration for the top line? I believe you talked about European order books up mid-single digits for 2H. How should we think about overall wholesale for 2H? And any further color, Michelle, on Europe, on what you're seeing in terms of the trends so far?

Lauren, let me take the confidence second half in the acceleration. And then I'll pass on the wholesale, including yours, to Michelle. But as you probably heard, we are confident about the acceleration, both top line and bottom line, in the second half. So to think about it simply, the trends that we've seen, the sequential improvement we've seen in the first half, continue into the second half and get better. Get better driven by the following. One, you know, Michelle talked about the wonderful product lineup that we have and the exciting launches in the second half. You know, we have launched a lot of these products in the U.S. We're going to scale it and started with DDC, scaling it into wholesale and scaling it globally. And that's why we're really confident about the back to school and the holiday product launches we have. DDC is really strong. Productivity and profitability in DDC is really improving. And then we've got these extra stores that we're building in the second half. So that really would help our DDC business. The U.S. business has three consecutive quarters of growth that we expect to continue into the second half. Europe is sequentially improving, but we feel really good about Europe returning to growth in the second half. The pre-book is up mid-signal digit. and DDC will continue in the strength that we're seeing. It is the benefit of the 53rd week, both in H2 and quarter four. And then on profitability, it's really driven by broadly three factors. The first is as revenue accelerates, we'll flow through that because really focused on gross profit dollars driving, being higher than SGN dollars driving EBIT leverage. Fuel savings, just begun in Q2. I think we have fuel savings of, you know, approximately $20 million. The rest of that coming in the second half through the initiatives that we talked about. And then continued progression on the gross margin expansion that we talked about. So, you know, that's what really drives profitability. On wholesale, over to you, Michelle.

Yeah, not a whole lot to add. But just to chime in on your question around the wholesale channel, so global wholesale, we're pleased, and we're seeing sequential improvement in our wholesale business globally, of course, in particular in our two biggest wholesale businesses in the U.S. and in Europe. We were down 4%, which was up versus Q1, and we're expecting that progressive improvement to continue into the back half. It's really all the strategies that we've put in place over the last year that are gaining traction. It starts with product. Harmeet just mentioned that. But we really are leading the trend with product, and that's fueling our DTC business, but it's also fueling our wholesale business. So it starts with Denim Bottoms and Denim Authority around this whole trend on baggy, loose, wide leg. That's resonating. Our key customers are excited. They're ordering it. and consumers are responding, and our sellout trends are improving across our wholesale channel. So that's a leading indicator, so we're really encouraged by that. Second, I would say our strategy around denim lifestyle, and in particular with women, we're seeing outsized growth there. So tops, bottoms, denim dresses, denim skirts, working in DDC, also working in wholesale, And then I would add, as it relates to our supply chain, which was a challenge for us, as you know, last year in the U.S., that's all behind us. So when you take all those factors, we are in a completely different and better place than we were a year ago as it relates to global wholesale, both Europe and U.S. And then, you know, as it relates to your question on Europe, you know, just to take that question home, we saw a big improvement from Q1 into Q2. So we were down to DTC up 7%. And we are fully expecting to see Europe grow in the back half of the year, with DTC continuing to accelerate, already positive, continue positive, and seeing significant gains in wholesale as well, with the indicator being that the pre-books are up. So all in all, on both fronts, both wholesale and Europe, we're optimistic in the back half, and that's all baked into the acceleration we have planned in H2.

Very helpful. Thank you very much for all the color.

Thank you. Our next question comes from the line of Bob Durbel of Guggenheim.

Hi, good afternoon. Just two questions, you know, I think a little bit of a follow-up, but just in terms of the U.S. business, can you talk a little more around, you know, what you're seeing from the consumer, you know, both your male and female consumers, and And ultimately, when you look at some of the trends within the denim businesses, Michelle, do you see momentum continuing with some of the bigger drivers in product?

Yes. Thanks, Bob, for the question. So a few questions within that. First of all, as it relates to our U.S. business, we're very pleased. We're feeling really good. Third quarter of positive growth. I mean, we really think about, and Hermione mentioned this in his remarks, but we really think about the U.S. as a total marketplace. Our DTC business is growing tremendously. It was up 12% in the quarter, and that was driven off of, to your question on trends, that was largely driven off of women's. Men's still healthy in the mid-single digits, but women's was up over 20% across both bottoms and tops. And in fact, as it relates to the US market, market share, which is really a powerful indicator I mentioned earlier in the call, but I'll say it again, number one market share leader in women's dead and bottoms. We have now created great separation in that position. Feeling great about that, men's continues to hold the number one position, gaining market share as well with that younger consumer. Really encouraging leading indicators as it relates to the US market. Feel good about that, and as I just mentioned, DTC is our primary growth driver, but we are feeling very good about the trends we're seeing in the U.S. wholesale business as well. And then to your question on state of the consumer and based on our business, we're feeling good. I mean, our consumer is proving to be resilient. They're coming into our stores. They're shopping online. So our indications, I mean, we control what we control. And certainly there's some level of uncertainty as we look into the back half of the year and beyond. We're always certain about that uncertainty. But we control what we can control. And our responsibility as the denim category leader is to drive that innovation, drive that freshness and newness. We're doing that in bottoms with these trends I was speaking to, the looser, baggier trends. But we're also now doing it on head-to-toe denim lifestyle, which is a newer strategy for us. And it's working. I mean, denim product beyond bottoms is selling like crazy. I mean, Western shirts, and I know Western's trending as well as it relates to trends in the denim market, up 40%. Denim skirts and dresses, you know, those were up triple digits. And I would say on all of this, Bob, we're just getting started. So we will continue to fuel excitement in the category for kind of months and years to come.

Thank you.

Thanks, Bob.

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

Great, thanks. Michelle, on the total addressable market, which you touched on in prepared remarks, could you elaborate on assortment changes that you've made so far that support an expanded TAM for the Levi brand, opportunities you're excited about to drive greater share of wallet, and then Harmeet, Could you just maybe break down gross margin puts and takes that we should consider for the back half of the year relative to the distribution and logistics headwind?

Sure. Sure. Thanks, Matt. Yeah, great question and one that we're quite bullish on, actually. So, as I did mention, we are expanding our total addressable market, and I'd say in a couple ways. First, kind of build on the last question, is really this whole head-to-toe denim dressing thing. and then denim lifestyle. So all things denim. I mean, believe it or not, historically, we've been a small player in even things like denim skirts, denim tops, denim jackets, denim dresses, and the like. And early indications are super positive. I mean, we have a big opportunity there, and I'm really excited about what's in the pipeline. So that'd be point number one. And then point number two is non-denim. And when you actually look at our total business, 44% of our direct-to-consumer business is actually now what we consider non-denim bottoms. So that does include kind of the skirts and dresses I was mentioning, but it also includes non-denim in both men and women. And we've driven a lot of newness in those categories as well. So our XX Chino platform, which has done really well over the last couple years, We're expanding that into performance. So you may recall we launched a new platform, the performance platform, performance tech, just recently, last couple months. We started with the 511 Fit for Men. We're launching it into XX Chino in the coming year. That's soon to land actually in the U.S. across channels. And we're working on a more premium offering that's going to go global. And we're actually looking at expanding the platform from there. So we Levi's definitely has permission, but it will always stay true to, and I think this is really important, to the true Levi's DNA, the aesthetic of the brand. But the consumer is saying both men and women, they want more Levi's in their closets. So whether, again, that's more denim lifestyle head to toe or more of this non-denim, it's working. And we're seeing it in the numbers. So we're seeing it in terms of gaining share in women, significant share. and with men holding our share, but we're also gaining share in non-denim casual pants and men. So all good indicators. We're excited. And that gives us a much bigger playing field.

And Matt, on the question of gross margin, so let's talk quarter two first, and I'll just give you the second half of the year. And I'll talk about this new focus on gross profit dollars, less SG&A. But basically in quarter two, the big buckets, The tailwinds were really product costs, really driven by commodities. That was approximately 250 basis points higher than a year ago. And the mix on areas that we are driving growth in, so think DDC, think women's, and think international. So that's about 50 basis points. It was offset by over 100 basis points, as I said in the remarks on FX, and then about 20 basis points on air freight. Given some of the Red Sea issues that we're seeing and the fact that we are actually chasing into products, believe it or not, some of the product offers are selling so quickly that we're chasing into it. So we are air freighting a little bit more. So that's really... quarter two. As you think about the second half of the year, and quarter three is a little different than quarter four, and I'll explain to you in a minute why. But overall, I think tailwinds will be product costs more in quarter three because we started lapping this late in Q3. So a little bit in Q3 last year, and you saw the benefit in Q4. The mixed Benefit continues. And then FX headwind is not as high as 100 in Q2, but probably 50-odd basis points in Q3, substantially less in Q4. AFRAID as a headwind, probably the same, especially as it's chasing into stuff. So generally feeling very good about gross margins, and that's where we raise the guidance for the year, which if we If we deliver, we're confident off, we'll be under the record on an annual basis from that perspective. But overall, as we get to the operating margin goal of 15%, this is metric of gross profit dollars less SG&A and ensuring that that drives the leverage is important. You go back to 2021 when operating margins were over 12%, gross profit was growing at a much faster clip than SG&A. And that's the discipline that we as a leadership team want to instill in ourselves.

Great caller. Best of luck. Thank you.

Thank you. Our next question comes from the line of Ike Borchow of Wells Fargo.

Hey, good afternoon, everyone.

I guess what I wanted to ask is, I'm trying to understand the momentum in the business and certain parts of the categories you guys sell seems pretty apparent. And there's certain parts of the assortment that seem to be doing extraordinarily well. But when you look at the overall revenue of the business, it's still not, it doesn't quite connect with the optimism that you guys have. Now, the direct-to-consumer business is very strong, but it's also, it was similar last year. So I guess where I'm going with that is, is that a function of there's more to come, the inventories are too tight, the wholesalers' partners haven't been willing to take product, it takes more time? Because I'm just trying to understand, there seems to be so much buzz that's growing. I would have thought there would be more revenue growth commensurate with that. So I guess maybe for Michelle, can you kind of connect those dots for me?

Yeah. Let me take a stab. And so sequentially, quarter to quarter, yeah you know hopefully this the erp noise is behind us but um you know sequentially quarter two grew two percent uh constant currency and um and and similarly on levi's i just think as you think about the quarter uh ike because your question is there is is a good question i think in the quarter levi's generally was on our expectation u.s was stronger europe wasn't planned Asia is slightly lower, largely because of China. China-Asia was fairly strong. The thing that, you know, I think the headwinds, I talked about a little on this script, but the headwinds were really FX, okay, and Dockers underperformed. So, you know, as you think about, because, you know, I think your question is more centered around Levi's, but that's really what happened in the quarter. Now, what gives us real confidence in the second half, because revenue does accelerate, especially in constant currency, is the new product offers that just, you know, in a global business, you get the best bang for the buck when it's across channels and it's across geographies. And our product is, you know, right now making the transition across geographies and across channels. So that's why you're seeing the sequential or expectation that sequentially it will improve. This takes a little time. from that perspective. The DDC business continues to grow. Michelle talked about wholesale. Wholesale was down, granted, in Q4, but it's less down than Q1 globally. And our expectation is that that improves as the year progresses. And it's largely driven by two things. Inventory levels generally in the trade are getting to a good spot. So that should open the open to buy. And as they see new products, customers are gearing to put that on the floor. So that's why I think it's a natural progression, and sometimes it just takes a little time, and that's what we're beginning to see.

Yeah, the only thing I would add to that is when you kind of take a step back, I mean, as we look to the back half of the year, we are planning for and we've guided for acceleration. So we're expecting the back half of the year to be in the mid-single digits in terms of growth. which bakes in the continued double-digit performance in DTC, as well as some modest improvement in wholesale. But our DTC business now is becoming such a big part of our business. As long as we get, call it, stability in the wholesale channel and the kind of growth or stability we're seeing now, the model works. And so that's why we're extremely confident in the back half of the year. And I think Harmeet did a great job explaining this current quarter. The FX piece clearly was the biggest impact, given that 60% of our business is global. But the Levi's brand and the Levi's business is extremely healthy, as evidenced by the market share gains that we're making in many places around the world, including here in the US.

That was very helpful, thank you. Thanks, Ike.

Thank you. Our next question comes from the line of Dana Telsey of Telsey Advisory Group.

Hi, good afternoon, everyone. As you think about top line and then managing it with the better than expected gross margins and your guide for the SG&A, unpacking the increased marketing spend that's happening in the second half of the year, How much higher is this marketing spend than your original plan? And given the positive reception to the trends and that you're the market share leader, how should we think about marketing expense going forward? What do you need in top line sales to leverage some of these expenses? In other words, thank you.

Thanks, Dana. You know, I wish we could have floated the EPSB, you know, five cents, which I think a lot of people were expecting. But as we think about this business, you have to think about this business longer term. You know, so if you think of the five cents, the two cents of the five cents is really being spent as we make the pivot to more of a hybrid distribution logistic network. And, you know, we did get the cash infusion. of over 75 million in the quarter, but about 90 in the year. And that's just running to DCs parallelly as they transition, you know, and that's one cent in quarter three and maybe one cent in quarter four. The marketing question, Dana, is about a cent higher in H2, and it's just to fuel, you know, we have, we're expanding the TAM, as Matt, you asked. We are introducing new products. our consumers need to be more aware of it. So we have to drive awareness. And, you know, we have wonderful marketing programs that Kenny, I think, talked about in quarter two. And so this just helps fuel the brand momentum. To your question about what's the right spend, you know, we do a ROI analysis. And so as long as we think it really drives revenue, you know, marketing spend will probably end the year, you know, around 7%. It's a little over than what we thought last time we talked about it. But, you know, it'll probably grow over time, but so will revenue. And so that's really the, you know, the linkage we look at.

Thank you.

You're welcome.

Thanks, Dana.

Thank you. Our next question comes from the line of Chris Nodoni of BOA.

Thanks, guys. Good afternoon. Just a couple of follow-ups on the U.S. business. Can you elaborate on the progression of U.S. DTC results through the quarter and comment on whether trends have sustained in June? And then on the U.S. wholesale business, are you committed to growing the U.S. wholesale business in the back half? And curious if you have any comments on how sellout is trending versus maybe last quarter.

Yeah. So to your question about U.S. DTC, It's actually, the quarter was fairly even.

We saw the U.S. DDC business start really strongly at the beginning of the year. That's continuing into the quarter. And we feel really good about the continuation into quarter three. The U.S. team is doing a phenomenal job, really, making this pivot to DDC and driving productivity. The EBIT margins are off the charts as an example. We don't talk about it by segment, but We look at the, you know, the America's operating margins, a large piece of that is driven by our DDs of business. To your question about U.S. wholesale, you know, it gets better from the mid-single-digit decline that we talked about as the year progresses. Very difficult to predict whether it turns positive. The thing that we can say, I think, Michelle, with confidence is we are seeing sell-throughs actually improve as we exit into the quarter. And so, you know that that does both well and inventory levels are relatively, you know lean So the combination of that especially as a US consumer You know, we see who we think is resilient.

I think you can you can do the math over time Yeah, maybe the only thing to add on that one Harmeet well said is that just to make the point when we think about the state of the US wholesale business a year ago versus where we are today and It literally is a sea change of what we're seeing in U.S. wholesale from the operations supply chain. You know, we're back to normal. We're shipping orders. We had a little bit of catch up. Now it's kind of business as usual. Product, you know, the center of everything. The product is resonating. I think especially with as we look to our denim lifestyle strategy, women's tops, those are all outperforming. As we talked about, the sellout trends are improving in U.S. wholesale. We're working closely with all of our key customers so that the brand is showing up in a way that's a win-win for us and for them. So really all the core strategies that we put in place a year ago to turn this business around is working, and we've now seen several quarters of improvement versus where we were a year ago.

Yeah, and I've been reminded to say this as well. which is fully a guidance is not contingent on U.S. wholesale growing in the second half. I just want to, you know, make that point, Chris. And you didn't ask this, but U.S. wholesale is a lot more profitable today than it was a year ago.

Very clear. Thank you.

Thank you.

Thank you. Our next question comes from the line of Oliver Chen of TD Cohen. Oliver, please make sure your line is unmuted, and you can have the speaker phone lift your hands up.

Lateef, we can.

Yeah, and it may be a logistic issue, Lateef. We'll catch up with Oliver later. Okay.

We'll go to the next question, which comes from the line of Paul Lajus of Citi. Please go ahead, Paul.

Thanks, guys. I'm curious if you can talk about the drivers of the DTC increases in each of your regions, just in terms of square footage increases versus comps, but also units versus pricing. And then as a follow-up to that, I'm curious if you've changed your expectations at all for the second half for DTC in any of the regions based on what you saw in 2Q or the first half in general. Thanks.

Yeah, Paul, I'll be brief. You know, comms sales were a big driver of the DDC piece. Our unit has in terms of new doors, net new doors was modest in the first half. So that will pick up in the second half. And, you know, while we talk about stores and we talk about comms, our e-commerce business is on fire. You know, the e-commerce team led by Jason, they're doing a phenomenal job. And it's really going back to the basics, driving loyalty, driving, you know, higher conversion, et cetera, fixing the fundamentals. So I think that's where you, we never talked about it, but, you know, as you heard in the call, the e-commerce profitability is up to low double digits, and that's a big thing. To your question about DDC productivity and DDC productivity uh ebit margins of 300 basis points i'd say half gross margin half rails productivity which is driven by two things one is better labor management and better uh or revenue leverage those are the two things and in both cases i think we're just getting started uh you know we we think there's a lot more opportunity on driving productivity and narrowing the gap between the wholesale ebit margin and the ddc ebit margin because that will really uh help us get to the 15% operating margin.

Harmeet, how much was pricing a driver in each region?

Yeah, you know, pricing was modest, I would say, Paul. The U.S. is very modest. You know, we took some reductions last year. We have not taken more. AURs, as it becomes more of a DDC business, AURs are up largely in our mainline stores. They're full price stores across, you know, the three regions. Little bit of pricing in Asia, very modest price. I mean, I think very little pricing in Europe.

No, and I would just build on that, Harmeet, and say any AUR increases that we're seeing is coming off of mix shift. You know, as our consumers buy more elevated premium product. I mean, as we bring in a lot of these fashion fits, the looser, the low-waste, baggy, we're able to price up. But, I mean, to your point, this volume, the sales, it's generated off of volume, the velocity of our business.

Yeah. Thank you. Good luck. Thank you.

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

Just appreciate everybody joining the call. Thanks for the great engagement and questions. We look forward to connecting with you next quarter.

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