Levi Strauss & Co.

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co.'s second quarter fiscal 2026 earnings conference call for the period ending May 31, 2026. All parties will be in a listen-only mode until the question-and-answer session, at which time instructions will follow. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the companies. This conference call is being broadcast over the internet and 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 Aida Orphan, Vice President of Investor Relations at Levi Strauss & Co.

Thank you for joining us on the call today to discuss the results for our second quarter of fiscal 2026. Joining me on today's call are Michelle Gass, our President and CEO, and Harmit Singh, our Chief Financial and Growth Officer. We'd like to remind you that we will be making forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed with the SEC. We assume no obligation to update any of these forward-looking statements. Additionally, during this call, we will discuss certain non-GAAP financial measures, which are not intended to be a substitute for our GAAP results. Definitions of these measures and reconciliations to their most comparable GAAP measure are included in our earnings release, available on the IR section of our website, investors.levistrauss.com. Please note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers, unless otherwise noted, and information provided is based on continuing operations. Finally, this call is being webcast on our IR website and a replay of this call will be available on the website shortly. Today's call is scheduled for one hour, so please limit yourself to one question at a time to allow others to have their questions addressed. And now I'd like to turn the call over to Michelle.

Thank you and welcome everyone to today's call. We're pleased to report another strong quarter with Q2 exceeding expectations across the top and bottom line. These results highlight the strength of our business model, underpinned by the enduring power of our iconic brand, and how we're driving growth across markets, channels, categories, and consumer demographics. The progress we're delivering today is the direct result of the strategic choices we've made to sharpen our focus and unlock the full potential of the Levi's brand, choices that have positioned us to capture our highest return growth opportunities. As we continue to evolve into a GDC-first lifestyle company, we are driving more consistent and faster growth, expanding our addressable market, and improving our profitability. Quarter after quarter, our results demonstrate that our strategies are working and momentum is building. And we believe we are still in the early innings of unlocking the full opportunity ahead, with more ways to win than ever before. Let's now turn to the details of the quarter. As a reminder, all numbers Harmit and I will reference are on an organic basis. We delivered solid top-line performance this quarter, with organic net revenues up 6%. Our international markets continue to demonstrate strong momentum, led by a 12% increase in Asia, while the U.S. delivered a 6% increase. Our direct-to-consumer business continues to lead our growth, with revenue up 8% and comparable sales up 6% in Q2. delivering our 17th consecutive quarter of comp growth. Global wholesale increased 3%, led by strength in the US wholesale channel. Our evolution into a denim lifestyle brand is enabling us to continue to drive outsized performance in women's, up 11% in the quarter. And we further extended our leading market share position in both men's and women's, reflecting the strength of our brand, impactful marketing, and a steady pipeline of product innovation. Importantly, top line momentum translated into strong bottom line delivery with margin expansion and strong earnings growth. On the strength of our performance, we're raising our full year sales and EPS guidance. Harmit will share more shortly. I'll now walk you through highlights from the quarter in the context of our strategies. Our first strategy is to be brand led. Powered by a best-in-class global marketing team that moves with agility and keeps Levi's firmly at the center of culture around the world. In Q2, we continued to build on our global behind-every-original campaign, following its successful launch at the Super Bowl earlier this year. The campaign features a dynamic mix of cultural voices across music, sport, and fashion, including Dochi, Questlove, and basketball superstar SGA. In line with our strategy to align global campaigns with local relevance, we expanded the talent roster to include top local talent across key markets, including Mexican pop star and actress Belinda and leading Bollywood actress Alia Bhatt. We also activated our collaboration with K-pop superstar and Levi's brand ambassador, Rosie, through pop-up shops in key Asian markets, reinforcing our focus on growing the women's business in the region. Ahead of the Global Soccer Championship, Levi's launched denim product collaborations with the U.S., Mexico, England, and France football federations. And when the Soccer Championship came to Levi's Stadium in June, our team turned a branding restriction into a viral marketing campaign, demonstrating our ability to operate at the speed of culture through bold, agile execution. This drove the most viewed, shared, and commented post in Levi's history, generating approximately a billion press impressions. Now turning to product. As I mentioned earlier, we remain in the early innings of capturing a significant opportunity ahead, and our product engine, rooted in denim, is central to unlocking that growth. For more than 150 years, denim has anchored the global wardrobe. Outlasting virtually every trend in fashion. It began as practical workwear and yet has become a global symbol of style and self-expression. Today, the continued trend toward casualization is a structural tailwind fueling denim growth globally. And the category is projected to grow mid-single digits annually through 2030, outpacing the category's historical growth. As the global market share leader in denim, Levi's is uniquely positioned to capture this opportunity, and we are accelerating that capture through a steady pipeline of innovation in fits and fabrics. In Q2, our bottoms business grew 6%, driven by strength in core fits, with newness adding incremental momentum. Looser silhouettes continued to deliver solid growth. Our 501 90s for her and 501 loose for him were key standouts in the quarter. reinforcing both the longevity and relevance of our core icons. We're also seeing continued strength across a range of other silhouettes, including our cinch baggy franchise, wide leg, and low loosened women's, and relaxed and boot cut in men's. Importantly, our core fits across skinny, slim, boot cut, and straight continue to make up the majority of our bottoms business, reflecting our healthy and diversified bottoms portfolio. Our push into categories beyond denim bottoms has expanded our total addressable market and contributed roughly a third of our top line growth in the quarter. This reflects our strong progress in expanding our assortment for summer, creating more warm-weather, head-to-toe offerings for our consumers. We're seeing strength across key summer categories, including lightweight denim, linen shirts, and dresses. Our expanded shorts assortment is also resonating, with the category up 11% in the quarter. In women's, we also saw exceptional strength in seasonal trends, including white denim, which grew 70%. Strong in-store execution is bringing these assortments to life through compelling merchandising, outfitting, and seasonal storytelling. We're making great progress in our evolution into a true head-to-toe denim lifestyle destination, and our tops business remains a meaningful opportunity to expand our total addressable market. In Q2, tops were up 5%. or up 7% when excluding the impact of the European Distribution Center transition last year. Newer categories like blouses, wovens, sweaters, and polos are driving strong growth, outpacing legacy categories like graphic tees. As these legacy categories continue to mature within our portfolio, we're actively refining how we invest across our traditional and newer styles to maximize the opportunity. and we expect the business to accelerate in the second half of the year. BlueTab continues to gain traction as the most premium expression of our brand. Importantly, BlueTab is introducing the Levi's brand to a new consumer and we are already seeing early share gains at the premium end of the category. While still in the early stages, we see significant runway ahead as we scale the business, unlocking a sizable premium segment that remains under-penetrated for Levi's today. Now shifting to our strategy to become a best-in-class DTC-first retailer. Our global direct-to-consumer business was up 8% in Q2 and comprised 51% of total company revenue in the quarter. Comparable sales were up 6%, underscoring the strength of our retail execution, with gains across key store KPIs, including UPT and AUR. Our continued efforts to premiumize the site experience and elevate our online assortment drove another strong quarter in our e-commerce channel, up 17%. E-com growth was fueled by solid performance across all key metrics, including increased traffic, better conversion, higher UPT, and AUR growth as we reduced promotional activity on our site. This business has grown almost 60% over the past three years, yet still only comprises approximately 12% of our overall revenues, remaining under-penetrated versus peers and representing a meaningful opportunity for continued growth. This quarter, we welcomed 3 million new members to our loyalty program, bringing global membership to nearly 50 million. We're continuing to enhance the program through more personalized experiences and leveraging our data to deliver more relevant and connected interactions. Global wholesale was up 3%, reflecting strength across customers in U.S. wholesale. The women's business was a particular standout, and sellout trends across the U.S. wholesale channel remain healthy. Globally, our wholesale partners are increasingly leaning into our diversified lifestyle assortment, reflecting strong consumer demand and confidence in our broader offerings. Now turning to our third strategy, powering the portfolio. While international represents approximately 60% of our business today, we see significant runway ahead, with many markets still early in their growth journey. This quarter, international revenue grew 6%, led by double-digit gains in Asia and Latin America. This year, we celebrate 60 years of the Levi's brand in Mexico, our second largest market globally and a key contributor to international performance, with Q2 growth of 15%. Supported by strong brand equity, Mexico remains both a meaningful revenue driver and a cultural and strategic hub. Across Latin America, momentum is accelerating with double-digit growth led by Brazil, the Andes, and Colombia. We see continued opportunity to build on this strength through store openings, e-commerce, and wholesale expansion. In Asia, performance was strong across markets with Q2 growth led by Turkey, Japan, and India. In China, we are beginning to see signs of progress, supported by new leadership and improvements in product and execution. While still early, we're encouraged by a return to growth and improving underlying trends. Signature, our value-focused brand, grew at a low single-digit rate in Q2 and was up 9% for the first half of the year. We expect growth to continue and build through the second half of the year, supported by an expanded lifestyle assortment including a broader TOPS offering. Beyond Yoga was up 16% led by strength in e-commerce. Momentum continues to be fueled by newness and expansion into lifestyle categories including the launch of a new linen capsule which quickly became one of the brand's top selling collections. In closing, this quarter again reinforces the strength of our strategy and the progress we're making. We've sharpened our focus elevated the Levi's brand and raised our level of execution, building a stronger and more durable business. While we remain mindful of the external environment, the momentum we're seeing across our strategic priorities gives us confidence in the path ahead. I want to thank our teams around the world for their relentless focus on the consumer and the disciplined execution that continues to drive our results. With that, I'll turn it over to Harmit. Harmit?

Thank you, Michelle. Q2 was another strong proof point that our profitable growth algorithm is working. We exceeded expectations on both the top and bottom lines, expanded margins, delivered strong EPS growth, and generated significantly stronger free cash flow. This quarter, once again, reflected the power of the AND. Growth across wholesale and DDC, the U.S. and international, women's and men's, Topps and Bottoms, Units, and AUR. Our recently expanded TAM contributed roughly one-third of revenue growth, reinforcing the traction of our denim lifestyle strategy. Improving flow-through remains a priority, and Q2 showed clear progress. Gross margin expanded despite pressure from tariffs. and Discipline SG&A Management converted top line growth into stronger than expected bottom line delivery. Given our solid first half performance and business momentum, we are passing the entire Q2 beat and raising our full year revenue and EPS outlook for the second consecutive quarter. I'll walk you through the details shortly. Before discussing Q2 results, I'll update you on two infrastructure initiatives that support our transformation into a DDC-first lifestyle company. First, an update on our distribution network transformation. We completed the remap of Europe to an omnichannel distribution network at the end of quarter two, consolidating e-commerce fulfillment into our distribution centers in Germany and the UK. We are seeing benefits in operational efficiency. Distribution expense leverage and profitability in Europe. In the U.S., we remain on track to complete the transition of Hebron, our own distribution center, to MERS by the beginning of the fourth quarter. The transition has taken longer than planned as we balanced strong demand with the operational shift. As we exit parallel operations and consolidate into the new network, We expect to eliminate duplicative costs, simplify the operating model, and improve inventory and service levels. We also reached a major milestone in our global ERP transformation, migrating Asia and Beyond Yoga onto our new global platform after the successful transition in North America. Europe and the remaining Latin American countries are on track for completion by mid-2027. Once complete, the company will operate on a single ERP, enabling faster decision-making, supporting our DDC-first model, all while creating the foundation to scale AI and automation globally. Now moving to our Q2 results. Net revenues increased 8% reported and 6% organic. This is despite a two-point drag from last year's Europe Distribution Center transition. Gross margin was better than expected and expanded 10 basis points to 62.7%. Lower product costs and pricing actions were tailwinds. Tariffs and foreign exchange were a headwind in the quarter. Adjusted SENA increased 6.5%, primarily reflecting higher selling expenses and unfavorable foreign exchange. As a percentage of revenue, however, adjusted SG&A leveraged 80 basis points, underscoring the discipline and scalability of our cost structure. As a result, adjusted EBIT margin expanded 70 basis points to 9%, reflecting our ability to convert top-line growth into margin expansion. Adjusted EBIT dollars also grew. Thank you. Thank you. and continued progress in reducing excess and obsolete. For the full year, we expect inventory dollars to be slightly above last year but below expected sales growth, positioning us to service back-to-school and holiday demand. Building on a strong Q1 performance, in Q2, adjusted free cash flow increased nearly 60% year-over-year to $231 million, Driven by business momentum and improved working capital. Turning to our capital allocation strategy, our approach remains disciplined and balanced, prioritizing high ROI growth opportunities while returning at least 55% to 65% of free cash flow to shareholders through dividends and opportunistic share repurchases. In 2026, our capacity to return capital is even stronger, supported by Docker sales proceeds and execution of our ASR. Consistent with this commitment, we are increasing our quarter three quarterly dividend by $0.02 to $0.16 per share, double our annual increase over each of the past two years, reflecting confidence in our earnings and free cash flow generation. Now let's review the key highlights by segment. The Americas delivered 7% growth, with the U.S. up 5% on momentum in both DDC and wholesale. Operating margin declined 40 basis points, driven by the unfavorable impact of tariffs and the favorable impact of cost initiatives and pricing actions. Europe declined 1% in quarter two, reflecting last year's distribution center transition While first half revenue grew mid single digit consistent with our full year guidance. Underlying trends remain healthy with DDC up 7% and strength in key markets including Germany and the UK. Q2 operating margin increased nearly 400 basis points to 21.1% driven by gross margin strength and lower distribution expenses. Looking ahead, we are encouraged by high single-digit wholesale pre-order growth for H2. Asia, net revenues increased 12%, fueled by double-digit growth across both DDC and wholesale. Performance was strong across markets as consumers continued to gravitate towards our expanded denim lifestyle assortment. Operating margin was 15%. expanding 350 basis points versus prior year driven by revenue acceleration, gross margin strength, and SG&A leverage. Now turning to guidance. Based on our strong first house performance and business momentum, we are raising our full year outlook. The tariff environment continues to be uncertain, and our updated guidance continues to assume incremental U.S. tariffs on imports from China at a 30% rate and the rest of the world at 20%. Our guidance does not assume any benefit from potential tariff refunds, which are approximately $80 million paid to date. For the full year, we are raising our revenue outlook and I expect reported net revenues to increase 7% to 7.5% and organic net revenues to be up 5.5% to 6%. This assumes foreign exchange is 150 basis point tailwind to sales versus our previous expectation of 100 basis point benefit, all of which has already been realized in H1. Gross margin is now expected to expand approximately 10 basis points to prior year, driven by the structural drivers of our business. Higher DDC, Women's, and International, along with reduced promotional levels and cost efficiencies. We expect adjusted EBIT margin to be 12% for the full year, a continuation of the sequential margin improvement we've seen over the past several years, while taking proactive decisions to reinvest in the infrastructure investments that I highlighted earlier and net new store openings. and we are raising our adjusted diluted EPS expectations by 4 cents to the range of approximately $1.46 to $1.52 up from our previous range of $1.42 to $1.48. And with regards to store openings, we continue to expect to open 50 to 60 net new doors this year with the majority of net openings weighted to the second half of the year. For quarter three, We expect reported and organic net revenues to be up 4% to 5% for the quarter, reflecting no expected benefit from foreign exchange. Gross margin is expected to expand around 10 basis points versus prior year to 61.8% despite a roughly 70 basis points FX headwind. Adjusted EBIT margin leverages approximately A few comments on the phasing of EBIT margins in the second half. H-1 margins adjusted for the Q1 timing of A&P were up 30 basis points. We expect that progression to continue into Q3. The EBIT expansion becomes more pronounced in Q4 as we begin to lap the full impact of tariffs in Q4 last year, less FX pressure on gross margin, the normalization of ANP spending, reduced duplicative distribution costs, and continuing to drive HG&A discipline. The underlying message is consistent. We are converting revenue growth into higher earnings and stronger profitability. And as a result, we expect to end the year with adjusted EBIT margins up 60 basis points continuing our trajectory over the last three years. In closing, our results demonstrate a healthy long-term growth algorithm with mid-single-digit revenue growth, expanding margins, strong earnings acceleration, Thank you for joining us. And with that, I'll open 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. Please stand by while we compile the Q&A roster. Our first question comes from the line of Laurent Vasilescu of BNP Paribas. Your line is open, Laurent.

Oh, good afternoon, Michelle and Harmit. Thanks for taking my questions. I've got two questions here. First is on U.S. wholesale. I think you mentioned signature grew, you know, signature grew of high teens last quarter. I think it was up low single gen this quarter. Curious to know what you're seeing with the more value-based consumer market. and Shannon Overall. And then the second question is on Europe. Europe DTC grew 7% organically this quarter versus 5% last quarter. So DTC is actually accelerating. Curious to know how should we think about European DTC for the third quarter? And are you still confident that Europe as a whole should grow mid-single digits in the second half with pre-books still up high single digits? Thank you very much.

Great. Thanks, Laurent, for your questions. I'll take the first one on signature and then pass it over to Harmit on Europe. So, you know, overall, we see signature as an important business for us. It is on the smaller side, about $300 million annually, and we do expect it to accelerate in the back half. But I do think it's important when we look at this quarter relative to Q1, you take that in total and signature was up 9% in the first half. And so we see that in the second half being either high single digits, low double digits. And we see a lot of opportunity. You know, it's a solid, resilient business. They're taking sort of a page out of a called the Levi's Red Tab Playbook and really leaning in to newness, into lifestyle offerings, and that's resonating. We see opportunity in tops. In the women's business in particular, in signature, women's is only 30% of the business. and so we see an outperformance there with women's and we expect that to continue. So I think to your question on the health of that value-based consumer, we're optimistic there and in fact I think overall our consumer is proving to be quite resilient. Signature satisfies an important part of our segmentation strategy on that more value-oriented consumer but we're seeing health with that consumer, with our core consumer, and even on the premium side of things. So, you know, with wholesale, you'll always see some variations quarter to quarter. Really important to look at it in the totality, and like I said, 9% first half, and we're expecting that to accelerate in the back half of the year. And then over to Harmit on Europe.

So, Lauren, on Europe, so Europe, as you know, Given the timing of Dorsten last year, which is the distribution center, which is which is off to the races. I'll talk about it in a second. But Europe was up 5% in the first half. That's consistent with our full year guide. Demand remains strong and the business is really driving margin expansion as my remarks reflected. The strength is across most markets. It includes the UK, Germany, and Italy. So if you just take Dodgson, what's the impact of Dodgson in quarter two. It's about eight percentage points. So Europe in sort of minus seven would have been, sorry, minus one would have been plus seven. So that's fact number one. Your question about DDC, DDC has accelerated in quarter two. And your question about Q3 and four, we expect DDC to be mid to high single digits. I mean, that's the expectation. But wholesale is a big piece of the business. And as you heard from my remarks, our pre-books are up by a single digit, reinforcing confidence in H2 and the full year outlook. So, you know, that's our perspective. And I just want to spend a minute on profitability. You heard it in the prepared remarks. You know, our gross margins are up over 300 basis points. Distribution costs are down 100 basis points because the entire, you know, The vision of what we were trying to do on distribution is coming to life, and Europe was the first to go at it, and operating margins are up dramatically. So I think overall, Europe is in a good spot, and unlike some of the other folks, we're not seeing that, and we're ready for the hot weather, warm weather, as Michelle reflected in her remarks.

Very helpful. Thank you very much and best of luck. Thank you.

Thank you. Our next question comes from the line of Matthew Boss of JP Morgan. Please go ahead, Matthew.

Thanks and congrats on another nice quarter.

Thanks, Matt.

Thank you. So, two-part question. Michelle, 6% organic revenue growth on top of 9% growth a year ago. Could you speak to areas of strength that you're seeing across categories and elaborate on the expansion in the brand's total addressable market that you cited as tied to the expanded assortment? And then, Harmit, if you could just walk through drivers behind the sequential moderation that you embedded in the back half revenue outlook, I think it's roughly 4% relative to the front half, up roughly 8. Just any change in consumer behavior to date that you've seen across regions or is this just more taking a prudent outlook?

Yeah, so I'll kick it off with what we're seeing to date. So I think what's really exciting, Matt, is that we are seeing broad-based growth. We're seeing it across channels, genders, categories, and geographies. And it's a direct reflection of our strategy continuing to fuel that momentum. If you take channel as an example, both DTC and wholesale were, again, positive in the quarter. As you know, DTC up 8%, wholesale up 3%, and wholesale actually contributed more to the beat, if you will. But as expected, we expect DTC to be that outperformer as we continue to have a lot of runway there. If you take gender, again, fantastic quarter on women's, up 11%, double digit again. with a steady growth in the men's business, which is highly mature. You know, it's worth mentioning on men's and women's. I did mention it in my prepared remarks, but number one market share position and gaining share. And this is on the bottoms business, not even speaking to our expanded addressable market. So we're really pleased with that category. Again, we saw growth in both tops and bottoms. Bottoms up 6%. You know, tops up 5%, but we were impacted by this Europe-Dorsten distribution shift, so it was actually up 7%. I think what's really, you know, great on both fronts is that we're seeing innovation fuel the growth on both tops and bottoms. On bottoms, you know, while we have a solid business and more traditional fits, we're seeing loose, baggy, new fabrications drive momentum. Tops, we're seeing outperformance in these newer categories that really complete the head-to-toe outfitting Blouses, button downs, polos, sweaters, all outperforming. And then geographies. Again, very exciting. U.S. market up 6% overall. I'm looking at all of our brands, Levi's and Beyond Yoga. Even Levi's, very solid, up 5%. And then up 6% international with a big outperformance on the Asia side, as you heard, 12%. So, you know, this is the kind of report we like to share because, you know, it's all working. And then you know it really does speak to in you know in this in this chapter of Levi's where we're really leaning into head-to-toe denim lifestyle and you mentioned it our expandable our expanded TAM is significant we're going from playing in the denim bottoms business to apparel with a very focused view on what fits in our vision of head-to-toe denim lifestyle and I think the team's doing a great job and we've got you know we've got a lot of upside and as as We sit here today, the consumer is responding, and we have more ways to win than we've ever had.

So second question, I think there was two parts to the second question. What's the moderation? Is it prudent? Is it conservative? And then what's the help of the consumer? Let me start with the consumer. Our consumer continues to be resilient, as reflected in another quarter of strong results. It's broad-based across channels, geographies, and categories. So you think of the beef. Geographically, it came from the U.S. and Asia. Europe was as expected. It came from wholesale and it came from women. Demand is really healthy because two-thirds of our growth is driven by more units and that's largely the expanded TAM and the under-penetrated areas of women and TOPS. So that's point one. Second is we are seeing strength across value, core, and premium. Levi's Red Tab example group, you know, 5 or 6%. Signature, you know, we expect this is just largely a timing. We expect second half to be strong. And Blue Tab is just getting started. And so that's the first piece. Yes, there is, you know, under the umbrella of the macro uncertainty, I think we're feeling good about it. Your question about second half versus first half, it is prudence. It is conservatism. You know, and it's Probably, you know, maybe a couple of points on DDC and maybe a little, you know, more conservative on wholesale. Our job is to continue to beat as we've done. We've taken the last seven quarters, Matt. We've beaten the top line. We've beaten the bottom line. We've raised our guidance for two quarters in a row on a full year basis. So our perspective is, you know, as Michelle said, we have more ways to win. The power of the end that you all heard, which is everything seems to be working, you know, is what we hope carries us through the year.

Great, Cutler. 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. Danny, your line is open. Please make sure your line isn't muted. And if you need a speakerphone.

Ah, yeah, it was muted. Sorry. Yep. Congratulations. And nice to see the progress, everyone. On Beyond Yoga, you mentioned, hi, you mentioned strength in e-commerce. How is Beyond Yoga doing in the stores? What do you see the game plan for that going forward? and the marketing has been very effective. Like you had music last year, a bit of sport this year. How are you thinking about marketing for the back half of the year? Any difference from overseas or by channel or region? Thank you.

Fantastic. Okay, I'll take those two questions, Dana. So first on Beyond Yoga, you know, we're pleased to continue to see that nice double-digit growth of 16% high teens again this quarter. and that's being driven by, you know, a combination of factors. It's product, you know, and really expanding beyond the traditional active wear of say leggings and tanks and moving into lifestyle and that's working. I mean, they're seeing a lot of consumer resonance with, you know, casual pants, travel wear, linen was a new platform they introduced this summer, it's done fantastic, tops, sweaters, dresses, So that's working. We called out e-commerce because that is the biggest part of the business to date. But we are optimistic on the multi-channel approach and you asked about stores. You know, we're in the very early days. We have less than 20 stores. But we're learning a lot and the newer stores that we're opening are working. There's a new merchandising approach. We're building slightly bigger stores so we can bring the full expression. I would also say in Beyond Yoga's standpoint, men's is an untapped opportunity. And as we've been bringing the men's category forward, that consumer's responding. So there's a lot that we're excited about in Beyond Yoga. You know, it's still early innings for this brand, but we see a lot of green shoots on the business. So that's one. And then your second question is on the brand and marketing. and I tell you the marketing team just continues to deliver and you know every quarter you know there are new ways for us to show up at the center of culture and we do that globally we do that locally and we do have unparalleled brand heat around the world and the strength of our brand I mean it's a massive competitive advantage and we do keep raising the bar you know I think most recent example of course and still quite topical is around the World Cup. And here at Levi's Stadium, there was an opportunity when our logo got covered. The team saw that opportunity, leaned in, and made that into a big moment for the brand. By turning that on social media, it's our most viewed social media campaign. We're up to a billion press impressions. and we even took that through and taking that through our flagship stores around the world and covering logos and we just launched t-shirts in a matter of weeks. So it just shows the power of this culture of being fast and agile and really maximizing the moment. So we'll continue to find those type of moments in addition to this year we're running our Behind Every Originals campaign. We're excited about what that's doing for the business and while that's a global campaign, we're also bringing that local. So I think a great example is Rosie, who's a K-pop star, is part of that campaign. We have now developed a collaboration with her in our Asian markets. And I think you were just talking to our teams in Asia. They would say that that is absolutely fueling the business, especially with women, by doing pop-ups, the product collaborations, et cetera. So the last I would say to this is we are a brand-led company. It's an important part of our equation in winning along with product and execution, and we will continue to have this be a big part of what we do going forward, but the team's doing an outstanding job. Thank you. Thanks, Dana.

Thank you. Our next question comes from the line of Jay Sol of UBS. Your line is open, Jay.

Great. Thank you so much. My question is on the ERP implementation. It's made great progress, more progress. It sounds like it's going to be happening through the middle of next year. Can you just talk about when that process is finished, what it unlocks for the company, especially as you continue to move toward this DTC-first-led business, and what kind of impact might it have on margins when the ERP is implemented at this time with the distribution centers up and running the way you planned? Thank you.

I would say I'm very bullish on this. I was the executive sponsor for a couple of years. And when I first joined the company 13 years ago, we had nine ERPs. People said, let's get to one ERP. When I saw the bill, I said, it's too much to spend less work in turning around the business and growing the top line first. So that's what we focused on. The fact of the matter is the team's done a phenomenal job. And it's a collaborative process. It's not just run by technology. It's business-led, technology-enabled. And we're moving from a very disjointed, customized ERP system to a standardized ERP system that's on the cloud. and it was important to take the, you know, and take it to the cloud versus keeping it on premises. The success of the project, Jay, the way we have defined it, and this is something that the board and we partnered was the following. This is about unlocking data. It's about ensuring that the users get access to data and get access to data on time and on a regular basis example. If you think about our stores or you think about the distribution center, on a screen on my iPad, I can see the movement of goods happening as they happen. What's the fill rate? What's the service? What's happening in the sales? That was something we were not able to do. And now we can do North America. We can see what's happening in Asia. And your question of when does this all complete, it probably is slated to complete by middle of 2027. The fact that we've got this far, knock on wood, without any major hiccups, is a good thing. And so the size of the prize is we get that. You all have said when you change your fiscal calendar, at least once we have an ERP, we have the foundation to get that, to at least think through that and make that happen very quickly. So that's really how we're thinking. And it really helps us leverage AI because of the data unlock.

Got it. Thank you so much.

Thanks.

Thank you. Thank you. Our next question comes from the line of Rick Patel of Raymond James. Your line is open, Rick.

Hi, this is Suraj Mohostra on for Rick Patel. Thank you for taking our question. So how much were AUR and units up in 2Q, and can you double-click on the AUR drivers as we think about the split between pricing, promotions, and sales mix? Thanks.

Sure. So the good news is both were up. You know, one of the things that, you know, where this wonderful growth office I had, I think the sustainable growth is driven in my humble view and our humble view as a team by driving both. And given that, you know, we are under-penetrated in the new TAM that Matt asked about, I think driving unit growth would drive market share. So as you think of the quarter, two-thirds of the growth was contributed by units and a third by AUR. If you take last quarter, I think it's more 50-50. Our expectation for the year is more 50-50. You take 2025, I think it was two-thirds units and a third AUR. And so what's benefiting the AUR, Suresh, to your question? A couple of things. One is higher mix of full-price selling. You know, we are focused on that. Continued growth in DDC because DDC has higher AURs than wholesale. Trend in premium offerings like BlueTab. BlueTab is at a higher price point than RedTab. And category expansion in areas like women. So that's broadly, those are broad factors that contribute to AUR growth, but I think You know, you should expect to see more of a balance from us.

Great. Thank you very much for the color.

Thank you. Our next question comes from the line of Ike Peruchal of Wells Fargo. Your line is open, Ike.

Hey, how you guys doing? Hey, Michelle. Hey, Harmit. Two questions for me on margin, probably to Harmit. So first on the second quarter, revenue is 300 basis points better, but margin only hits the high end of your guide. So I'm surprised there wasn't a little bit more flow through. Could you maybe talk about maybe any puts and takes that happened during the quarter? And then Harmit, the third quarter guide I get, The implied fourth quarter on margin implies a pretty meaningful step up in expense leverage. I think it's implying margins up 150 to 200, and that's gross margins kind of similar, 3Q to 4Q, so it's all in the expense space. So can you help walk us through kind of what are the moving pieces in SG&A that are so much more scalable when you get to the fourth quarter, maybe versus the third quarter, second quarter? Thanks.

Sure. So your question about Q2, yes, you're right. Revenue is strong. Gross margins were really strong. Gross margins were up. And I think that was despite, I think, a slight drag on because of FX. SG&A was up 6.5%, a little more, largely driven by FX. A third of the SG&A increase was contributed by FX. and you know we did lever I mean yeah you're right we were in the top end of a range of 8 to 9 but we did lever EBIT expanded 70 basis points if you think of the first half because you have this Q1 spend on advertising the first half and answer your question EBIT margins were probably up 30 basis points if you adjust for A&P and in the second half, the EBIT expansion is driven largely by three things. One is volume leverage, so volume in the second half is probably in dollar terms, probably five, you know, as you think about the seasonality between first half and second half is about 5% more in the second half of the year. That's number one. And P is between first half and the second half is half a point lower, largely because of the Q1 spend. And essentially, this is skewed towards Q4. So Q4 you will see A&P lower than a year ago. And the distribution expenses, you know, we have announced the closure of Hebron. You know, notice has been sent, so it's happening. And that's, distribution expenses between H2 and H1 is probably a half a point better. And that's, again, essentially happening in Q4. Now if you look at the Q4 P&L, let's say circa it's about 14% EBIT, you go back to 2024, our EBIT margins in Q4 were approximately 14%. The only reason I don't go back to last year is because last year tariffs, the impact of tariffs, which is I think a little over 100 basis points, really dragged the EBIT margins. And so Q4 24 is a good proxy. Q4, 2026. But, you know, looking at the different aspects, those are the things that are probably screwing Q4. Does that answer your question, Ike? Because this is an important question you ask.

So you're saying that the reason why you get so much more scale and the margin could be closer to 14 in the fourth quarter is because there's leverage on the A&P, there's leverage on the distribution, and the tariff kind of roll off and reversal a little bit. Are those the main ones?

Yes, those are the two factors. You start it spot on. And sales are slightly, you know, Q4 is slightly, you know, seasonality was slightly stronger, so you leverage your fixed costs. So those are the four factors, and you captured it.

Okay, thank you.

Thank you. Our next question comes from a line of Kendall Toscano of Bank of America. Your line is open, Kendall.

Hi, thanks for taking my question. Two questions, actually. The first one is on tariffs. I know last quarter you outlined a benefit of $35 million to COGS and $0.07 to EPS for the full year if lower rates persisted. So curious if any of that benefit did show up in 2Q and what you would expect for the third quarter. I know it's not included in guidance, but given that you probably have a bit more visibility into that now. And the second question was just on the USDC transition. You mentioned that taking maybe a bit longer than anticipated, and I was wondering if you could elaborate on the timing and magnitude of cost savings that you would expect now versus what you were initially anticipating for 2026. Thanks.

So tariff, I'll break it up into two parts, Kendall, to your question. One is tariff refunds. You know, of $80 million, we've just started applying because most of our refunds go through the reconciliation process, and this is defined in the window a week or so ago. And so we haven't built that internally. We haven't incorporated it into our internal results. We are not incorporating it in our guidance, but it's substantial. And we haven't figured out what to do with it, right, because, you know, that will depend on the environment and a whole bunch of things. To your question about the $35 million, our guidance does not assume that. There's a little bit of, you know, the way it works is given that our inventory turns out, you know, close to two. It takes a while when you bought inventory at a high cost for that to turn out. and so our view is Q2 was marginal, Q3 will be a little bit, and if it is, it'll be an upside to our numbers, but it's very difficult. The reason we didn't incorporate this is largely because the conversation on tariffs is a little fluid. There's expectation that the tariffs go back closer to the 19, 20% level late July. And so rather than give a number and keep changing it, we just thought it prudent to just keep the tariff rates at 30 for China and 20 for the rest of the world. Thank you. And your question on distribution, the distribution costs at the end of H-1 were about 20 basis points benefit. You've seen what's happening in Europe, you know, a year and a few months into it. It is largely an omnichannel setup, leveraging the PNF as well as really helping us service the bond. I think to the question about U.S., the slight delay is, you know, we said we'd start tapering it off, you know, which is, you know, looking at closing Hebron towards the beginning of the second half. The demand has been really strong. You can see that from the U.S. results. So our decision is to start the tapering off as the quarter progresses, quarter three, close Hebron by the end of quarter three, and move things to our center in Groveport in Ohio. The cost is a couple of million. Kendall, not a lot, but it is the right call to ensure that it demands this service. and the fact that we have given the intent, given notice, is indicated that we're serious about it.

Appreciate the color. Thanks.

Thank you. Our next question comes from the line of Bob Durbel of BTIG. Your line is open, Bob.

Hi. Good afternoon. And I just wanted to add, you know, The World Cup marketing has been spectacular with San Francisco Stadium.

Thank you.

It's really well done. I guess the two questions that I have sort of is, number one is, when you think about where you guys have brought the blue tab business, what have you learned now as you've expanded it, as you've rolled it out a bit more? And I guess the second question is more higher level is, Within the denim category itself, are you seeing any changes to the promotional environment for the category?

Yes. Why don't we start with denim category overall? Your specific question around promotional environment, we're obviously staying very close to this, but I think to our remarks earlier, our consumer is proving to be resilient. I think all the newness we're bringing, the value we offer, we're were durable, dependable brands. I think that plays in as well as all the newness and innovation. So even if it gets promotional, we'll always stay close. But you heard it. I mean, two-thirds of our increase was around unit growth, only a third on pricing. And even pricing, a lot of that is driven around our premiumization strategy, less promo. We had less promo online as an example, more full-price selling. So we will always stay very close to the market and the consumer, but overall, were feeling confident, and hence why we felt good about increasing our guide for the balance of the year. I would also say, by the way, as it relates to the denim category overall, historically, this has been a pretty stable category. It's been part of the wardrobe staple for hundreds of years, as long as we've been around and we invented it. There are times where you get fluctuations and changes in fits and styles. We drive a lot of that, and it's fueling the growth. And I think what's really exciting is that if you look out, well, first of all, the denim category has been growing, number one. Number two, we're gaining share. And number three, it's expected to grow over the next five years and even outpace apparel. So feeling really good about denim category. And then beyond that, you know, we're making this big pivot to head-to-toe denim lifestyle, which is increasing our addressable market by the tune of 15X. So these categories that we're newer in, like a full assortment of tops, for example, non-denim bottoms, That just presents a ton of runway for us ahead and it's fueling our growth. So I think overall we're feeling quite bullish on the denim category and how we will play in that market. Your second question on Blue Tab, we're also very optimistic about this. I mean, as the denim leader, we should have our fair share of the premium denim segment and we are significantly are all undershared in this category. We're really just getting going if you think about it. I mean, we've had versions of premium denim over time, but now we've created a complete kind of sub-brand opportunity, what we call denim luxury, which is truly the pinnacle expression of all things Levi's denim at higher levels. We're commanding price points like in bottoms from $200 to $350, truckers and outerwear $250 on up. and we love what we're seeing. I mean it was up 40% in the first quarter, up 40% against this quarter. Relatively small business today, but there's no reason why this can't be 100 million, 200 million plus over time. So I would just say stay tuned. The consumers responding to your question specifically on what are we learning, I would say number one, we're learning that it doesn't have to be just denim and denim bottoms. So what you will see from us coming out later this year Thank you.

Our next question comes from the line of Paul Lajus of Citi. Your line is open, Paul.

Thanks. It's Tracy Cogan filling in for Paul. I just wanted to follow up on the question about quarter-to-date performance. I think you said you're seeing continued momentum quarter-to-date, and I wasn't sure if you could clarify. Do you mean it's similar to where it was in 2Q, or is it currently in line with your 4% to 5% guidance for the quarter? Thanks.

Hello, Tracy. As you know, I have to say this, which is we don't provide intra-quarter updates. What I can tell you is that the business trend continues to support our third quarter outlook and pull your guidance. We haven't seen any meaningful change in demand. Demand remains healthy, and that's why our expectation is we'll close your balance between AUR and units. and the group is largely broad-based. I know there's some concern about Europe. That's why I just want to close by saying the pre-booking Europe for the second half is encouraging. And the supports are made single-digit growth for Europe for the year.

Thank you, guys. Thank you.

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

Thanks, Lateef. Thanks, everyone, for joining the call. Wishing everyone a great summer. We look forward to connecting again in October.

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