Levi Strauss & Co.

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company second quarter fiscal 2025 earnings conference call for the period ending June 1st, 2025. 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 Investment Relations at Levi Strauss & Company.

Thank you for joining us on the call today to discuss the results for our second quarter fiscal 2025. Joining me on today's call are Michelle Goss, our President and CEO, and Harmeet Singh, our Chief Financial and Growth Officer. We've posted complete Q2 financial results in our earnings release on the IR section of our website, investors.levistrouse.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 involves risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Please review our filings with the SEC, in particular the risk factors section of our Form 10-K for the fiscal year ended December 1, 2024, and the MD&A section of our recently filed Form 10Q for the factors that could cause our results to differ. Also note that the forward-looking statements on this call are based on information available to us as of today, and we assume no obligation to update any of these statements. During this call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for our GAAP results. Reconciliations of our non-GAAP measures to their most comparable GAAP measure are included in today's press release. Reconciliation of non-GAAP forward-looking information to the corresponding GAAP measures, however, cannot be provided without unreasonable effort due to the challenge in quantifying various items, including but not limited to the effects of foreign currency fluctuations, taxes, any additional U.S. tariffs or responsive non-U.S. tariffs, and any future restructuring, restructuring related, severance, and other charges. 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 organic net revenues or constant currency numbers unless otherwise noted, and the information provided is based on continuing operations. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I'd like to turn over the call to Michelle.

Thank you, and welcome everyone to today's call. I'm pleased to share that we delivered another standout quarter exceeding expectations across sales, margins, and EPS. We saw broad-based revenue growth across channels and categories, as well as strong margin expansion driven by the consistent execution of our strategic priorities. We arrive at the midpoint of 2025 in a strong position with the confidence to raise our top and bottom line outlook. Harmeet will share more on our guidance later in the call. In Q2, we delivered another quarter of high single-digit organic net revenue growth, up 9%. Direct-to-consumer was up 10%, reflecting the 13th consecutive quarter of positive comparable sales growth with strong and increasing profitability across channels. Our wholesale business delivered another quarter of growth, up 7%. Our US business maintained solid momentum, up 7%, while international was up 10% driven by outstanding results in Europe. And we continue to see strong performance in our core as well as outside growth in our key focus areas like women's and top. As we reach the midpoint of the year, I'd like to take a step back and reflect on the progress we've made transforming the business over the last 18 months. First, we've made significant strides in accelerating our shift toward becoming a DTC-first business across both brick and mortar and e-commerce. Today, our owned and operated channels represent over half of our business, and they continue to deliver consistent, healthy comps alongside improving profitability. This progress reflects our disciplined shift toward becoming a truly consumer-led DTC-first retailer. Second, we are making measurable progress in our evolution from a denim bottoms business to a full head-to-toe apparel lifestyle brand. While maintaining our dominance in jeans, we continue to drive outside growth in lifestyle categories, including tops, dresses, outerwear, and non-denim bottoms. Importantly, we've expanded our assortment with greater discipline, rationalizing skews, and introducing newness that is delivering stronger productivity and higher full-price sell-through. These choices are key drivers of our sustained market leadership and rising AUR. Third, we're narrowing our focus. As shared in May, we announced the sale of Dockers, which followed our decision to exit our denizen and footwear businesses. These bold strategic choices are enabling us to deliberately distort focus to the Levi's brand, putting brand equity, consumer connection, and category leadership at the center of every decision. Underpinning this transformation is a sharpened ability to operate with rigor and execute with excellence. From go-to-market acceleration and streamlining store operations to end-to-end supply chain efficiency, we are rewiring how we work, embedding structure, discipline, and cross-functional alignment at scale. These foundational shifts are unlocking growth, enhancing profitability, and enabling us to better serve our fans as we make progress toward becoming a $10 billion company. While the global operating environment has become more challenging, with uncertainty around tariffs and broader consumer behavior, we are navigating this period from a position of strength. I'll now walk you through highlights from the quarter in the context of our strategy. Note that all numbers that Harmeet and I will reference are on an organic, continuing operations basis. Let's start with our first strategy, being brand-led. The Levi's brand continues to resonate with fans around the world, growing 9% overall, with 6% growth in men and 14% in women. Our unaided brand awareness and consideration remains best in class, with our scores significantly increasing year over year in core markets across the globe. Our position as the most recognizable denim brand in the world is a powerful competitive advantage and a key indicator that our brand is stronger than ever. We continue to invest in the brand through global marketing initiatives and impactful activations, ensuring the Levi's brand remains at the center of culture. This quarter, we launched the third chapter of our Reimagine campaign with Beyonce, featuring a recreation of yet another classic marketing spot from our rich archive We brought this partnership to fans globally through a limited edition product drop, and through our unique House of Strauss network, we worked directly with her team to create custom, one-of-a-kind looks for her Cowboy Carter tour. Being front and center in music culture remains key to our marketing strategy. From the start of the music festival season, we've shown up in a major way, from dressing shaboosie at Stagecoach to hosting an incredible roster of influencers at Coachella. More recently, we were a leading sponsor for Primavera Sound in Barcelona, one of Europe's biggest festivals. With three Levi's dedicated stages, we outfitted influential pop icon Troye Sivan and offered an exclusive product collection. And to further drive brand heat, we continued to lean into the power of collaborations this quarter. After teasing at Paris Fashion Week last summer, we launched an elevated collection with Fashion House Sakai, which sold at a premium price point and performed exceptionally well. Turning to product. Our evolution into a denim lifestyle brand is gaining momentum. We continue to lead the industry and deliver the best fit, fabric, and innovation, striking the right balance between our authentic denim roots while infusing newness into the assortment. We're staying true to our denim heritage as we build out a compelling head-to-toe lifestyle assortment. And our amplified focus on women's and denim lifestyle is delivering outsized growth. We remain the unequivocal global leader in jeans. We are driving the trends today while setting the trends for tomorrow. Our Levi's bottoms business was up 8% driven by double digit growth in women's and men's was up mid single digits. While traditional fits like slim and straight leg styles remain a closet staple, Loose and baggy continue to gain popularity for both women and men. Ahead of the summer, we saw this trend accelerate in our shorts offering, which grew double digits in both men's and women's. With the 90s and Y2K fashion in full swing, longer and looser style shorts are in high demand. We're confident we have the right newness and innovation, like the baggy dad jort, in place to deliver for our fans and drive this trend. Earlier this year and ahead of the warmer months, we introduced an expanded line of lightweight looks, including our linen plus denim collection, to appeal to our fans' interest in lighter, softer, and more comfortable styles. We've infused these new fabric innovations across our assortment, from dresses, rompers, jeans, and truckers, to sweaters, wovens, and polos. We've seen strong success across both men and women, and will continue to fuel this trend throughout the year as more consumers look for lighter weight offerings year round. Another notable style trend gaining momentum is what we're calling Quiet Western, an evolution of the full Western theme we saw take off last year, but with a more subtle twist. With our robust denim lifestyle offering, we're seeing consumers find that perfect pairing more and more often. Women are pairing a classic boot cut or flare jean with our simple essential rib tank or one of our textured knits inspired from our heritage. And men are wearing a classic Western shirt with a khaki XX chino. Quiet Western is perfect for the Levi's denim lifestyle aesthetic and a natural place for us to lead. Last year, we reset our tops business, and that work is truly taking hold and propelling our evolution into denim lifestyles. This included bringing in new talent, new vendors, and new capabilities, including a new TOPS agility function on a shorter go-to-market cycle, which enables a more responsive and on-trend assortment in TOPS and graphic tees focused on our DTC channels. Energized by this new capability, along with an elevated assortment overall, our TOPS business grew 16% this quarter, with acceleration across genders and channels. Looking ahead, we have everything in place to continue the momentum we've experienced this year, a fresh lineup of product innovations, unique and exclusive product collaborations, and globally relevant partnerships. We have a number of great marketing activities planned for H2, including continuing to fuel our women's business with the launch of an additional chapter of Reimagine and the introduction of a new campaign focused on underscoring our relevancy and authenticity with men. And you can expect to see the Levi's brand come to life with more exciting and innovative collaborations, like our highly anticipated Levi's and Nike collab, which just dropped. For product, we're bringing even more fit and fabric innovation to excite our fans in the second half of the year. We're expanding our diversified fit portfolio to drive the loose and baggy trend, while also introducing freshness in skinny and straight silhouettes. As the quiet Western aesthetic takes hold, we're leaning into bootcut and Western-inspired fits to fuel this evolving style. And for our iconic 501, we're launching a breakthrough performance fabric with thermoregulating technology, bringing year-round comfort denim to a closet staple. Now shifting to our strategy to be DTC first. Our global direct-to-consumer performance this quarter was up 10%, with another quarter of very solid positive comp. Our strong performance came from increased store traffic, better conversion rates, and higher AURs, leading to growth both in stores and online across all geographic segments. As we have shared the past several quarters, we have been focused not only on driving DTC growth, but doing it in a healthy and profitable way. And those efforts are paying off as DTC margins continue to improve meaningfully. We continue to enhance our front of house consumer experience and back-of-house efficiency. And we are driving full price sales as consumers gravitate to our new assortments. Our work is not yet done, and we see opportunity for continued margin expansion in this channel. We also continue to expand our global store network, opening 16 net new doors this quarter. Store opening highlights include mainline locations in Nagoya, Japan, Seoul, Korea, and in the U.S. in New Jersey. These stores have been designed and built to better reflect our enhanced denim lifestyle offer. We drove another quarter of double-digit e-commerce growth, up 13% in Q2, with both traffic and AURs increasing as our efforts to elevate and improve the consumer experience on Levi.com are gaining traction. Our loyalty program is another key connection point to our consumers, enabling us to engage more deliberately with our fans. We're increasingly using data and analytics to personalize loyalty member product offerings and experiences. And we're seeing members purchase more frequently and transact at a higher AUR than the balance of our consumer base. With close to 40 million members worldwide, this quarter we expanded the program across several countries in Europe. And later this month, we're launching enhanced features for loyalty members in the US. Now turning to our third strategy, powering the portfolio. Our international business grew 10% in Q2, led by 15% growth in Europe. Last month, I had the opportunity to visit several of our key cities across Europe, including Paris, Barcelona, and Milan, some of the most fashion-forward cities in the world. I was blown away by how strong and relevant the Levi's brand is in the marketplace, both in stores and with consumers, especially young shoppers. Our team has been hard at work elevating how and where the brand shows up. and I'm constantly impressed by their commitment and dedication, which is another key driver in Europe's overall performance. We spent time with some of our key franchise partners who share our confidence with our growth prospects and are investing more behind our brand. We also met with key wholesale partners like Zalando and Galleries Lafayette, who are leaning into our broadened assortment and lifestyle, particularly with women. And even though Europe is our second largest geographic segment, we still see a significant growth opportunity ahead. Beyond Yoga was up 12% in Q2. DTC was up 31%, and we're encouraged by the very strong comp performance we are seeing in our stores. In June, we opened our first Beyond Yoga location on the East Coast in Greenwich, Connecticut, which showcases our new elevated format and design concepts and features our most comprehensive assortment spanning women, maternity, and men. Our largest Beyond Yoga door to date, this store is already delivering nicely relative to our expectations. And we're on track to open six more doors this year, bringing our total store count to 14. Turning briefly to Dockers. In May, we announced a definitive agreement to sell the brand to Authentic Brands Group. Dockers has been a leader in the global khaki category, and we're confident that Authentic is well positioned to guide the brand's next chapter. I want to take a moment to recognize and thank the Dockers team for their unwavering commitment, creativity, and many contributions to EllisonCo over the past several decades. Their work built an enduring brand with a loyal following, and we're proud of all they've accomplished. In addition, I want to express my deep appreciation to the cross-functional teams across EllisonCo who are working tirelessly on this transaction. In closing, This was another strong quarter across the board, clear evidence that our strategic agenda is gaining traction. We're entering the second half of 2025 from a position of strength with the right initiative in place to sustain our momentum. Levi's is a brand with 172 years of rich heritage and has remained a global icon. As we look ahead, Levi's has an even bolder future with a bigger legacy. And quarter by quarter, we're building it. And with that, I will turn it over to Harmeet to provide a financial overview of the quarter and our expectations for the year. Harmeet?

Thanks, Michelle. We had a strong finish to the first half of 25. In quarter two, we delivered upside on sales, gross margins, SG&A, EBIT margin, and EPS. We saw broad-based strength across DDC and wholesale, international and domestic, women's and men's, tops and bottoms, units and AURs. We were especially pleased to see DDC again lead our growth with comp sales up high single digits. Higher revenue productivity coupled with better management of costs contributed to DDC EBIT margins increasing approximately 300 basis points in quarter two and approximately 400 basis points year-to-date. In addition, our wholesale channel accelerated to 7% plus growth, posting its third consecutive quarter of growth, while also experiencing improving margins. The continued inflection of our financial performance is a direct result of our laser focus on the core Levi's brand and our DDC First strategy. We are fundamentally becoming a company with a higher growth rate, higher margin profile, stronger cash flows, higher returns on invested capital, and a higher percentage of DDC. We arrive at the midpoint of 2025 in a very strong position with the confidence to raise our full year top and bottom line outlook. I will share more on our guidance for the balance of 2025 later in the call. Now turning to a preview of our results. Overall, we saw continued strength across the P&L. Net revenue grew 9%. This was our third consecutive quarter of high single-digit growth. Strength was broad-based as evidenced by the fact that DDC grew 10% and wholesale 7%. E-commerce grew 13% and brick and mortar 10%. International grew 10%. and the U.S. 7%. Women's grew 13% and men 6%. Tops grew 15% and bottoms 7%. And importantly, we generated a healthy mix of revenue growth with two-thirds driven by higher volume and a third by higher AURs. In quarter two, our global wholesale business again exceeded our expectations. The wholesale channel in Europe returned to growth this quarter as we completed the transition of our new distribution center. Looking forward, our order books remain positive for the balance of the year. In the U.S., Levi's Wholesale grew 7%, reflecting continued strength in digital and premium accounts. Our wholesale partners are embracing our head-to-toe offerings, broader product assortment, and fashion fits. Having a strong direct-to-consumer presence and focus gives us insights to product trends, enabling both us and our customers to have the confidence to buy and fill flows for our new product offers. Our 578 Baggy for Men is an example of a product that performed exceptionally well in DDC and is now in expansion mode in wholesale for the second half of 2025. And we have other new product offerings and expanded assortments launching with customers in the U.S. this summer and as we head into fall. We are encouraged by our wholesale performance this year as the actions we have taken to stabilize this business are working. And while we continue to take a judicious approach to planning this business, we are raising our full year 25 projection for the wholesale channel to be between flat to now slightly positive. Gross margin for quarter two was a record 62.6% of net revenues expanding 140 basis points versus last year. This was driven by lower product costs and favorable channel mix. We also continue to benefit from higher full price sales and lower promotion levels as we improve the lifecycle management of our products, a key transformation initiative in our pivot toward DDC-first company. Adjusted SCNA expenses in the quarter were 54.4% of total net revenues. There was a 50 basis point rate improvement to prior year, mainly driven by leverage on higher sales. Distribution expenses increased versus prior year, given the ramp-up of our new DC in Europe and running parallel DCs in the US. The incremental distribution expenses associated with the consolidation of our DCs are temporary, and we expect the transition to be complete as we exit the year. We also just completed the sale of our Canton Distribution Center, for which we received $22 million in cash in the quarter. The transformation we are making to our DC network enables us to establish a more hybrid footprint, which will improve service levels and optimize distribution costs, supporting our evolution to a DDC-first denim lifestyle leader. Now back to the numbers. Driven by both gross margin expansion and SG&A leverage, we generated adjusted EBIT margin of 8.3%, up 190 basis points to prior year. Year-to-date, our EBIT margins are up 300 basis points to 10.9%. And the strong EBIT growth was a principal factor in delivering adjusted diluted EPS of 22 cents, which was up 37% to prior year. Now let's review the key highlights by segment. The America's net revenues were up 9% and the operating margin increased 270 basis points versus the prior year to 20.5%. We continued to see strong performance across both channels with DDC up 10% and wholesale up 8%. The U.S. business continued a strong performance and grew 7% with both DDC and wholesale up at similar levels. Our full-price stores continue to perform exceptionally well, with comp sales up high single digits, and as we look forward, we believe we can double our mainline store count over time. LATAM was up 18%, reflecting broad-based trends across the region, including double-digit growth in Mexico. Europe's net revenues were up 15% in quarter two, and operating margin for this segment was 17.2%, up 210 basis points to prior year. We saw broad-based strength across markets, including double-digit growth in France, the UK, Italy, and Spain. Momentum continued in the DDC channel, up 9%, driven by comp sales, reflecting strength across mainline, outlet, and e-commerce. And our wholesale business was up 23%, benefiting from the resumption of normalized shipping at our DC in Germany, as well as strong performance from top customers. Year-to-date, our wholesale business in Europe is up 7%, and we continue to expect this channel to be positive for the balance of the year. Asia net revenues were flat to prior year, as we took proactive actions to improve the structural economics of this business including reducing sales to less profitable partners in India, taking back a portion of our franchisee business in Malaysia, and continuing to rationalize our franchisee base in China. As a result of these one-time actions, operating margins in the quarter contracted 150 basis points. We continue to see solid performance in DDC, which was up double digits, and several markets, including Japan, Turkey, and South Africa, experienced strong growth. Year-to-date, Asia grew 5%, and EBIT margins were up 40 basis points to last year. We expect year-to-date trends to continue, and Asia remains on track to deliver mid-single-digit growth for the year. Turning to the balance sheet and cash flow, in the quarter, we generated free cash flow for $146 million, and delivered a return on invested capital of 18% of four points to prior year. We've also declared an 8% increase in the dividend to 14 cents per share, and we plan to return at least 100 million from net proceeds of the docker sale to shareholders in the form of share repurchases. We ended the quarter with reported inventory dollars up 15%, approximately Half the increase is to support sales through holiday, while the balance is mostly attributable to product bought, brought in early to navigate the uncertain tariff impact, the disruption in the Red Sea, and our market buybacks in Colombia and Malaysia. We expect to end the year with inventories roughly in line with revenue growth. Before turning to guidance, let me briefly address the topic of tariffs. After the announcement on April 2nd, our internal task force has focused on understanding the financial impact of tariffs, but also designing and implementing comprehensive actions to mitigate the impact. While the situation is still fluid, our guidance assumes an additional 30% tariff on goods arriving in the US from China and an additional 10% tariff on U.S. imports from the rest of the world. Based on these assumptions, we estimate a gross impact before mitigation of approximately 50 basis points to our gross margin for 2025. After mitigation, we expect the net impact of tariffs to be about 20 basis points headwind to our full year gross margin or approximately a 40 basis points impact in the second half. This will result in a two to three cent impact to 25 adjusted diluted EPS split evenly between quarter three and quarter four. Our key mitigation initiatives include promotion optimization, targeted pricing actions, vendor negotiations, and further supply chain diversification. Looking beyond 25, should tariffs remain in place at these levels, given our transformation initiatives, which provides us multiple levers, we believe we are better positioned than most to manage through this uncertainty. Now I will turn to our outlook for the full year and quarter three. As we look to the remainder of the year, we are closely monitoring the evolving tariff dynamics in addition to consumer confidence and behavior. Given the upside in the first half of the year, continued strong execution and momentum in our business, we are raising our top and bottom line guidance. For the full year, we have increased our expectations for organic net revenue growth by one percentage point to 4.5% to 5.5%. We are increasing our reported net revenue growth by three percentage points This equates to a reported net revenue growth of 1% to 2% for the year. This incorporates a 50 basis point drag from foreign exchange versus the 250 basis points incorporated in our prior outlook. Our guidance continues to assume a three-point headwind from the exit of Denison, our footway business, and the 53rd week. We continue to expect gross margin expansion this year despite tariffs. As noted above, we expect an approximate 20 basis points net impact. Our full year expectation for gross margin is now up 80 basis points to prior year, a new record. We still expect our SG&A rate to be around 50%. We also expect our gross profit dollars for the year to be significantly higher than the SG&A dollar increase, leading to EBIT margin expansion of 70 to 90 basis points to prior year. As a result, our full EBIT margin expectations are maintained at 11.4 to 11.6%. And we are raising our adjusted diluted EPS by 5 cents to between $1.25 to $1.30. For clarity, This guidance now includes a net tariff headwind of $0.02 to $0.03 and a $0.14 headwind from tax and FX versus prior year compared to the $0.20 assumed in our previous guidance. Now let me provide details on quarter three. For the third quarter, organic net revenue from continuing operations is expected to be up 4% to 5%. This is on top of a 4% organic growth in Q3 2024. We expect Q3 reported net revenue growth of 3% to 4%. This includes a 100 basis points tailwind from FX and a 200 basis points headwind from our business exit. Gross margin is expected to be flat to up 30 basis points after incorporating the impact of tariffs. We expect adjusted EBIT margin to be in the range of 10.8 to 11.2%. While below last year, this is due to a shift in the timing of marketing expenses from quarter four to quarter three, ahead of the launch of our new campaign. And as mentioned above, an increase in distribution expenses as we progress through our DC transition, which will be completed by the end of the year. And we expect our quarter three adjusted diluted EPS to be in the range of 28 to 30 cents. This includes an approximate one cent net impact from tariffs and about two cents from a higher tax rate versus prior year. In closing, we have started the year with momentum, growing faster than the category with both channels contributing. While there's still uncertainty on the macros Largely driven by tariffs, we are in a good position to mitigate the adverse impact given a brand, product, and profitability momentum. A transformation to a more profitable DDC-first denim lifestyle retailer is working and positions us well to drive mid-single-digit organic growth annually and build a roadmap to deliver 15% operating margins over time.

I will now 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 an 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 Matthew Boss of JP Morgan. Please go ahead, Matthew.

Thanks and congrats on a great quarter. Thank you. Michelle, could you speak to drivers of the demand strength that you're seeing today? Have you seen any moderation of momentum for the Levi's brand globally to date? And maybe could you help size up market share gains relative to the industry? And then for Harmeet, could you just walk through the clear inflection that you've seen in gross margin? What has structurally changed? What levers are durable and really support the higher margin profile that you cited in the release and on the call?

So, Matt, thanks for the question. I mean, we are just so pleased to report this quarter, our third consecutive quarter of high single-digit growth plus 9%. And Of course, with this confidence, as you know, we raised our full year guide. You know, we are seeing broad-based growth across the business, both direct-to-consumer and wholesale, international and our U.S. domestic business, women and men, tops and bottoms. We're seeing it in units. We're seeing it in rising AURs. So it is evident that our key strategies are this pivot we're making to become a DTC first company and not just DTC only to their wholesale business. Also we're supporting that business that grew as well, but really rewiring this company to be a best in class retailer and the evolution from a denim bottoms business to a full head to toe lifestyle business. The team is executing, you know, our product is resonating. The pipeline has never been more robust. A lot of newness, freshness, whether that's in fit, loose baggy, still doing really well. Fabric, our linen denim was a big hit earlier this year. Shorts are doing really well, warm summer. So product's doing great. And like I said, men's and women's. And women's, we have a distorted focus, as you know, because we're under-penetrated. And we're, once again, double-digit there. The brand has just never been stronger. And that's being fueled really by a variety of things. You know, we're built on a strong foundation heritage, but you do have to earn it every day. And so showing up where the consumer is, whether that's social media, center of culture, music, Beyonce, dressing shabuzy. As they say, you are the company you keep, and you've got pretty good company. And today Nike joins that family as well. And based on the lines out the doors this morning, we think this Nike collaboration is going to be a really big hit. You know, and in terms of as we look forward, you know, as we've moved into June, we've seen the trends continue. And I don't think we have any reason to believe they're going to fall off because this is core to the strategy of the business. And then the only thing I would add is market share. We continue to maintain our global top market share position and then our number one position here in the U.S. for men and women. Over to you, Parmeet.

So on growth margins, Parmeet, Let me start by just reinforcing. We're building a stronger, more focused, higher-performing company, and one defined by accelerated growth, expanding margins, and superior returns on invested capital. So to answer your question about gross margins, the gross margins, we're hitting a record every quarter, and we'll hit another record end of this year. Twenty-three, as you know, was around 57%. So what are the drivers, Matt? One is structurally the fact that higher DDC, higher women's, higher international, higher gross margins. Now, that's something you guys have heard over the last couple of years. It's consistent. We're really leaning into it. You've seen it in terms of delivery results. The second is narrowing the focus did help. Exit of Denizen, exit of Dockers made a difference. And then in the part of the end, what is the end here? The first is, as part of the transformation, we're taking a harder look at productivity in our assortments. You know, lower turning skews, let's eliminate them. You know, go-to-market calendar, let's get tighter, etc. That, you know, leads to higher COGS over time. And then the product pipeline is really resonating. So we're really driving full price sales and reducing promotion. So that's really how we're thinking about it. There's some headwinds on tariff. I've talked about it. FX, maybe a little, but we hedge it. So, you know, some puts and takes, but we feel good. And I'd say, you know, if some of you are thinking, are we at the peak of gross margins? I'd say, you know, we're not done yet.

It's great color. Best of luck. Thank you.

Thank you. Our next question comes from the line of Laurent Vasilescu of BNP Paribas. Please go ahead, Laurent.

Good afternoon. Thank you very much for taking my question. Michelle, I wanted to ask about organic wholesale revenues. And tonight, AK shows that they were up 6% for 1H. But I think you called out that wholesale should be up slightly for the year, which would imply 2H should be down low single digits. But at the same time, I think, Armeet, you called out that order books remain positive for the balance of the year. So can you maybe square away how we rectify that in terms of math? Or ask another way, how should we think about 3Q wholesale revenues?

Yeah, you know, Laurent, first to answer your question that you asked a couple of weeks ago, we did deliver 13 consecutive quarter of same-store sales. So I just put that to bed. To your question about wholesale, you know, you asked for it. I wanted to make sure I couldn't answer you four weeks ago. I can answer you now. To your question about wholesale, we're just being prudent, Laurent, and judicious in our approach. I mean, you know, our view is as our wholesale customers, with the pre-book and the demand signals we're getting, lean into all the product assortments, this channel will continue to grow. It's just important to be prudent. It's a channel we don't control, but over time, we believe the channel should be flagged to positive. It's a big piece of our business, and we have wonderful partners. If you think of the wholesale business, We're getting growth from the digital channel. We're getting growth from our premium customers. And department stores in the U.S. are a smaller piece of our business, but we're working with them to grow this business over time.

So should it grow in 3Q, wholesale, organically, something like low to mid-single digits? Is that the right way to think about it, Armeet?

Yeah, you know, we don't disclose by channel, but I'd say we'd probably lean in quarter three more than Q4, only because we're filling the flow for the holiday season. The other thing, Laurent, just for you and for everybody's benefit, think of our business on a two-year stack. So the first half, we were up 9%. Last year, we were probably flat. The second half, we were probably up last year, you know, 4% or 5%. And so a 4% organic, 4 to 5 organic growth over a 4% last year in quarter three is actually, you know, growing at the same pace, you know, and so that's what I like you to think about.

Okay, thank you very much. Best of luck.

Thank you.

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

Hi, good afternoon, and congratulations, everyone, on the very nice results. Michelle, as you think about the brand and the marketing issues, I saw some of the Nike things today, and I agree with you, it was definitely very busy. What are the other marketing activations that we should look forward or meet? How do you think of marketing spend and price increases? Where are you in price, and how much more does AUR have to go, and which categories do you think there's opportunity? Thank you.

So I can make mine pretty, pretty brief here, Dana. You know, as we said in our remarks, the brand has never been stronger and that is being fueled by relevant products. You know, very exciting to see our vision of head to toe denim lifestyle, you know, really come to life and the consumer is responding. We're investing in the brand. So this, you know, we always talk about being at the center of culture and we are driving it and the kinds of partners and collaborations that, emerging and people who want to partner with us is super exciting so whether that was Sakai very elevated designer out of Japan we had a very successful launch there today dropping Nike Beyonce has been a great success and we've just been thrilled with her being a bit of an ambassador of the brand Shibuzy wearing our product you know at the festivals and then you know if we look forward we still have more of Beyonce to go and And then we are going to have a really exciting campaign oriented to men this fall. So when we think about fall and holiday, I feel like we're really well positioned to make sure that the brand stays extremely strong.

On your question of marketing expense, Dana, around 7%. There's a timing change between Q3 and Q4, and that we indicated. So that's how we're thinking of marketing. Your question about AURs, let me first start with another quarter where volumes were two-thirds of our growth and AURs a third. Again, the magic of the ant, like I like to say. It's good to have both. AUR is essentially broad-based, across geographies, across channels, and across categories. And the other thing is it's not coming at the expense of volume. And we have products... you know, that are being rolled out that will continue to improve this. Think the blue tab, which is our premium tier one offer that's done very well in Asia. So, again, room to grow from where we are today.

Thank you.

Thanks, Dana.

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

Super. Thank you so much. I have two questions. Michelle, at the top of the call, you talked about the four key drivers that have been going on, you know, as part of the strategy for the last 18 months. Can you just dive in to operate with rigor a little bit and just tell us, you know, why is it it seemed like now that there's an acceleration happening in the business, that the capabilities just sort of seem to be getting better? Because, you know, the company's been working for a long time on operating with rigor and narrowing the focus and becoming a lifestyle brand. Just maybe if you can touch on what's really happening now and give us an anecdote from, say, supply chain or something that's happening that's allowing the company to have the strong results that you're talking about today. And then secondly, just on the TOPS business, I think you said TOPS were up 16%. Can you just talk about the quality of the TOPS business? I think in the past there was a lot of logo tees, bat wings tees, things like that. Talk about the kind of TOPS you're selling today and talk about how you feel about that and give us maybe a little context around that. how that tops business is evolving and the confidence you have that it can keep growing at a strong rate.

Great. So to your first point, as I did say early in the call, we are operating with greater rigor and discipline and really infusing the entire company with a DTC first mindset. And what does that mean? First, if we start with product, we are in process. We've been talking about reducing the time of our go-to-market. That is happening. We're introducing agility tracks so we can chase product better or in things that turn quickly like tops, they're just on a shorter cycle. So that is happening. Number two, we have had a massive effort afoot to have a more globally directed assortment. And if I look back a couple years ago, that number was in the single digits of what was common across the globe. That number is more than 30%. first half of the year, and it's growing. You can imagine the kind of efficiencies that you get from that. And along with that, we are being really disciplined on reducing non-productive skews. So the reduction is in the team to make way for fresher, newer products that can ultimately turn better. We are putting a lot more rigor, you know, you commented on the supply chain in terms of service levels. So that service level is in our stores and service letters, service levels in wholesale. And then to your point on top, I mean, this was a complete end-to-end reset, and the team has done phenomenal work. They set a new vision. We've brought in new design capability, merchandising capability, vendor, supply chain, you name it. And the success is broad-based, and that's what's so exciting. So we saw growth in men up 14, in the CTC was 11, You know, similar, women's up 19% overall. So these numbers are both across channels. Denim tops are really driving it. I mean, we are the leader in denim, so we're pushing that. Sweaters, workwear, and then on the women's side, things like dresses, jumpsuits, that's in the tops category. And as we've said, we really want to own this denim lifestyle. And even categories like outerwear. So this is no longer a t-shirt business, just t-shirt business for Levi's. We are in the tops business full stop.

Got it. Okay. Super helpful. Thank you so much. Thank you.

Thank you. Our next question comes from the line of Chris Nodon of B of A. Please go ahead, Chris.

Thanks, guys. Can you help us think about how the margin profile of your DTC business has evolved over the last couple quarters and where it sits today? Then I'm just trying to think, looking out into next year, is there anything structural preventing you to returning your business to a sub-50% SG&A rate as you strive towards this 15% margin goal over time? I'm just trying to think through the puts and takes if a DTC-weighted algorithm could prevent you from reaching your medium-term plan.

Yeah, you know, Chris, I'm glad you asked this question. DTC, the aggressive growth or the Double-digit growth in DDC or the 13 consecutive quarters of same-store sales and DDC becoming a 50% plus business total mix is not a drag on EBIT margins anymore. It is actually progressing well. Year-to-date is up 400 basis points to last year. Last year, we ended at about 400 basis points. It's probably in the high teens. There is a gap between wholesale and DDC. It used to be probably in the lower teens a couple of years ago. So what is really making the difference? The first is revenue per square foot. I mean, the fact that comp sales are up, the fact that revenue per square foot is the prime driver, is actually the prime driver of the DDC EBIT margins is a big thing. So we're really... We are measuring it. We are looking at ways to improve it. The throughput of new product offers is making a difference. The fact that we have more women product on the floor, tops, Michelle talked about, I think that's probably making the difference. Taking a hard look at cost management, the cost of new bills, the cost of things like labor management, et cetera, is also helping. So those are the factors, I think, that are driving it. I believe we are in the early innings of this. As we make this pivot to DDC first, this is something that's going to be important. The only other factor I would say sometimes gets lost in translation, our e-commerce business is now a profitable business. It used to be a drag. We always said you grow the top line, you leverage costs, and that's what's happening. The business that's growing in the mid-teens, you know, that's making a difference. And as we bring our distribution network, make it more omni-channel, that should again help because you're leveraging fixed costs as against variable costs.

Thanks, Amit. Good luck. Thanks.

Thank you. Our next question comes from the line of Paul Lajus of Citi. Please go ahead, Paul.

Hey, thanks, guys. As it relates to the tariff assumptions, I think I heard you say 10% and 30%. I'm curious where you're planning Vietnam and maybe some of the other countries that we've heard about. And then on price increases, I'm curious what you have planned for the back half and what the implied driver of top line is in terms of units versus AUR.

Thank you. Yeah, Paul, you know, it's... The tariff situation is fluid. It's difficult to plan with every day there being an expected change. So what we decided to do for this guidance is assume an additional 30% for China and an additional 10% for every other country around the world. That's what we have factored in at this stage. I quantify the impact, 25 to 30 million for the year and 50 basis points of gross margins. I also talked about things we are doing to offset it and the net two to three cents impact on the business. Overall, the way we think about it is competitively, we are well positioned, right? Despite all the uncertainty, 60% of our business is international. A lot of our core products are multi-shows, both geographically as well as through vendors. And we're thinking 26 at this stage. To your question about pricing, it's targeted, it's minimal. We're using the new products as a vehicle to try and drive that. But more importantly, we're really focused on reducing promotions, driving full price sales.

Thank you. Good luck. Thanks. Thank you.

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

Thanks so much. Just a couple for Harmeet. Maybe first, just on the sales trend so far this year, you know, mid-single digit, organic even higher than that. So as we think about a more normalized growth trend, as we get some of these kind of temporary factors out of the business, where do you think Levi should be growing at medium term? And then just a more nearer term question, it looks like the full year guidance assumes that back half SG&A falls compared to growing in the front half. Can you just remind us what's enabling that change in trend? Thanks so much.

Yeah, so to your first question about top line, I'd say mid-single digit growth is what Michelle and I and the rest of the executive team are focused on and doing it consistently so that you can get to that 10 billion over time. To your question about SG&A, the fact is, Alex, we have leveraged SG&A year to date on a full year basis because we're looking at organic revenue as a good thumb rule. Our view is SG&A at 50% does leverage. Where we're spending is largely in areas that make us a better DDC-focused company, as against anything else. So I talked about distribution expenses. That remap is happening. A big shout-out to our distribution teams who collaborate with our commercial teams to ensure that we meet the demand, which is there, as we make this change. The second is we talked about earlier the fact that we are going to be opening stores, right, on a net basis, 50 to 60 stores. You know, 20% or 30% of that franchise would largely be being operated. We're taking a few markets back. So that's the other piece. And then the ERP upgrade is the other piece that we are working on. But overall, our view is that SG&A does begin to leverage, especially as we get to the mid-single digit. The way we are thinking about it, Alex, is does the gross profit dollars increase more than offset the SG&A increase?

And we're seeing that in flow-through and in EBIT markets.

Great. Thanks so much. Good luck.

Thank you.

Thank you. Our next question comes from the line of Peter Goldrick of Staple. Your question, please, Peter.

Hi there. Thanks for taking my question. I was curious on the enhanced loyalty program. You pointed out some encouraging directional drivers. As you roll out in the U.S., can you point to any expectations for contribution embedded in the back half as you roll that out in the U.S.?

We don't break our – first, Peter, welcome. Second, we don't break it out by channel or by geography. It's, you know, what you've heard from others, what you've heard from us. You know, our more loyal consumers, our more loyal fans, you know, drive higher frequency and are definitely embracing the denim lifestyle offers. You know, and this will continue to be an opportunity for a brand our size. Michelle and I and the team joke about it. We should be having probably 100 million, you know, loyal fans of consumers. So, you know, and this used to be zero till just after COVID.

And so that's how we're thinking about it. Appreciate that caller. Thank you. Thanks.

Thank you. Our next question. comes from the line of Paul Kearney of Barclays. Please go ahead, Paul.

Hi, thanks for taking my question. I know it's broad-based by geo and channel, but can you give some additional color and detail on the AUR lift for the quarter between promos, price, or mixed? Then second, can you talk about the expectations on the wholesale business and how retailers are managing inventory, and how is the growing lifestyle assortment with women's and tops enabling new opportunities with retail customers? Thank you.

Okay, so on AURs, yeah, it is broad. I'd say DDC probably a little stronger than wholesale. I would say women's probably a little stronger than men's. And regions, I would say the U.S. and Europe probably a little stronger than Asia. That's, you know, just thinking about the color on how the customers are thinking.

Yeah, and I can add to your question on wholesale. I think we say largely wholesale. inventories are in good shape across the channel. And I think your question on how are they responding to our lifestyle assortment, and I think it's been very positive. I mean, certainly some customers are further ahead than others, but if you take, say, Europe, we have a more premium offer even in wholesale, and That business is doing really well with partners like Galleries Lafayette, with Philando, who are leaning into lifestyle and to women's in particular. But we're also seeing that take hold here in the US. And so I think as we sit here, and even though a big part of our growth is going to be DTC, it is why we increased our guidance even for this year to flat to slightly positive for wholesale. But it will continue to be an important channel. It reaches millions of consumers. And we're excited, and our customers are excited about all the newness we're bringing to them.

Excellent. Thank you. Best of luck.

Thank you. Thank you.

Thank you. Our next question comes from the line of Oliver Chen of TD Cohen. Please go ahead, Oliver.

Hey, thanks. Thanks, Michelle and Harmeet. You had really nice broad-based strength, but men's lagged, women's, and also Asia was weaker than we expected. I know you're undergoing changes there. I would love your thoughts there. And how did your guidance interrelate with your order books? It sounded like you're pretty encouraging order books, but was it the right methodology to raise guidance given the uncertain environment? And then as you mentioned, lifecycle management products, what should we know about what inning you're in? And are merchandise margins, they're not peakish given the feedback you offered on the call, Harmeet? Thanks.

Yeah, so on the question of guidance, it's important, Oliver, if you were in our shoes, you'd feel the same. It's important to be prudent and judicious. And, you know, given the demand signals we are seeing, you know, build part of it. And so, you know, given that we've had three quarters of high single digit growth, we see the momentum continuing because the consumer is I think, as Michelle said, generally resilient and, you know, continued fan of the brand. So that's question one. To your lifecycle management, this is, Oliver, going back to DDC first, right? This is about making sure that our store associates and our operations team and commercial teams around the world, especially with the new product offers, are able to drive higher full price sales over a period of time before marking it down. Seeing sell-through by store versus by country. Things as simple as that. So we're in the process of really, you know, focusing and driving an opportunity. You had a question? You had a question about wholesale or Asia?

Asia, and then I can take that.

Yeah. So on Asia, Oliver, Asia, we're long gone. You know, it's a business. that we feel we're under-penetrated. There are markets like India and a couple of other markets, Japan, for example, that are growing very nicely. China is a small piece of a business. It's about 2%. We think 2025 is a year where we reset China, and our teams are on the ground right now thinking through that, probably get back to growth sometime in 2026. But over the year, we think Asia grows. in the mid-single-digit and EBIT margin expands. And then Michelle, yeah.

Yeah, so I think your question on men's and women's, I mean, I actually view it, Oliver, as a man. I mean, we already have so much market share in the men's business, and we've got to continue to obviously protect it and grow it, but 6% we felt was quite strong, and the men's business is responding to the innovation we're bringing in, you know, in bottoms, things like the linen-denim market, Baggy and loose fits like 555, the relaxed fit, the 578 baggy. We had to chase that one even a bit. And then our tops business in men's up very nicely at 14% for the quarter. Clearly, we are seeing an outperformance in women's, as we should, because we're still underpenetrated there. We're only 38%. And I think we all know that that business should be at least half of our business. And we're making really good progress. I mean, I think for context, the Levi's women's business is up almost twice since 2019 to X, where it was five years ago, and yet we still have so much runway ahead. So I don't think it's an either or. I think it's an and.

Okay, thank you. And did you, Harmeet, did you think merchandise margins are peakish in terms of where you are relative to pricing? No.

I think, you know, our view is that the answer is no. You know, we're in the... We're nowhere near in the middle of the journey for DDC First. We're probably in the early innings. So I think as we get better at retail and retailing, it probably improves over time.

Best regards. Thanks.

Thanks.

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

Good afternoon, and thank you for taking our question. Michelle, Harmeet, I was hoping you could dive a little bit deeper into the momentum that you've seen in the Europe business. Outside of the distribution center adjustment, are there any other one-time drivers of outperformance that you think might normalize for the rest of the year? And given the stronger performance and stronger partnerships, what do you think the medium-term run rate of growth could be in the European market ahead? Thank you.

You know, to your question about one-time, the best way to look at Europe is to take a year-to-date view. Wholesale is up seven. I think Europe year-to-date is up in the high single digits. The demand books for fall are positive. So, you know, our view is, you know, thinking of Europe in the mid to high single digit is a good way to look at it. Secondly, you know, when the company was You know, over $7 billion a year for the $2 billion business. Right now it's a billion and a half. So we have clear opportunity. We have a great team on the ground. They're working through it. A couple of years ago, Brooke, we got a little hurt because we didn't have the products on the floor to respond to warmer weather. And today, you know, we have the linen that Michelle talked about. We have lighter weight denim products. you know, tops. We have a lot of shorts. And so we are, we have product that responds to global warming. Michelle, you were just there. So I'm sure, you know, you have some insights.

Yeah, no, I just, I know we're at time, but I would just say being on the ground with the market, we have a phenomenal leadership team there that's executing like crazy. Our DTC business is super strong. The product is relevant. All the things we've been talking about, brand relevant, center of culture, the pipeline. So we are, You know, we're long on Europe. We still think there's a lot of opportunity. Great. Thanks so much.

Thanks, Brooke.

And with that, we'll close out the call. Thanks, everyone, for joining, and we look forward to speaking with you next quarter.

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