LEVI STRAUSS & CO Q3 FY2024 earnings call

• Net revenues increased 2% in constant currency and 3% adjusting for Denizen exit, with Levi’s brand growing 5% globally in Q3. - Profitability improved with record Q3 gross margins of 60%, adjusted EBIT margin expanded 250 basis points, and double-digit adjusted diluted EPS growth. - Evaluating strategic alternatives for the global Dockers business. - China market had unmet expectations, with macro backdrop exacerbating challenges and new China Managing Director appointed. - Mexico wholesale underperformed due to cybersecurity breach. - Levi’s brand partnered with Beyonce for a global campaign. - Product-wise, core bottoms grew, loose denim trend strong, moving towards head-to-toe denim lifestyle. - DTC business strong with U.S. DTC up 12% and e-commerce up 18%, global loyalty program added nearly 2 million new members. - Global wholesale channel had环比 improvement, Europe wholesale returned to growth. - Beyond Yoga grew 19% with clear strategic direction despite goodwill impairment.

In Q3, net revenues increased 2% in constant currency and 3% when adjusting for the exit of the Denizen business. The Levi’s brand grew 5% globally in Q3, marking the best quarterly growth for Levi’s in two years. DTC was up 12%, the U.S. was positive and Europe returned to growth. Dockers, China and Mexico did not meet expectations. Americas were up 2% adjusting for Denizen exit, with DTC revenues up 16%. Europe returned to growth up 7%, with wholesale up 4% and DTC up 10%. Asia net revenues increased 4% compared to prior year and were up 22% on a two-year stack. Beyond Yoga was up 19% in Q3.

• Fourth quarter expected mid-single-digit revenue growth, full-year reported revenues adjusted from 1%-3% low end to 1%, constant currency from high-end range to 1.5%-2%. - Full-year gross margin expectation increased from 180 basis points to 270 basis points. - Full-year SG&A expected up 4% partially offset by ~$50 million from Project Fuel savings. - Q4 EBIT margin expected to be low teens, full-year adjusted EPS midpoint of $1.17-$1.27. - Full-year interest expense expected ~$50 million, Q4 ~$13 million. - Q4 dividend declared at $0.13 per share. - On-track to open 100 net new system doors for the year.

• Mexico wholesale affected by cybersecurity breach impacting shipping. - China macro environment exacerbating business challenges. - Supply chain issues like port strikes potentially affecting product supply. - Uncertainty related to evaluating strategic alternatives for Dockers business.

Q: Can you talk a bit more just around the drivers of this quarter’s revenue miss and your confidence in the Q4 acceleration?

A: Thanks, Bob. Let me take the first and Michelle can take the Dockers piece. Both were expected questions, so thanks for asking. Just going back and looking at the quarter, as we said, we did come in the low end of our guidance in terms of revenue, but we did exceed our profitability expectations. What drove the difference between coming in the low end versus coming at the top end? Basically four factors, I’d say a fourth of the difference or the miss was driven by foreign exchange, largely Mexico peso, with the dollar. The remaining three-fourth was driven by what Michelle and I referred to in the script, which is lower performance from Mexico, particularly Mexico wholesale, part driven by the cybersecurity breach, which we’re working very closely with the largest customer. So, we can get the shipping back to normal standards. Part China, which is a combination of the macro headwind, China as you all know is a small piece of our business, but it was impacted and the other piece was Dockers underperforming. So, those are the factors that drove the miss. To your question about, why we feel quarter four will continue to accelerate. So, quarter three has accelerated from H1 both in revenue and profitability. We continue to believe quarter four continues the acceleration. We think top line grows at about mid-single digit and EBIT margin in the low teens. But the factors that drive or give us confidence about the about quarter four. First, we’re beginning the quarter for much stronger than we exited quarter three, which is a good sign. Second, we’re confident about the continued strength in the U.S. and Europe. Europe closed quarter three slightly stronger than we expected, which was good news. The second is, we do believe the global wholesale, which has sequentially improved, it was still down in quarter three, but sequentially better than the first half will continue to improve. And our momentum in our direct to consumer business, which is not only stronger, but also a lot more profitable continues into quarter four. We are also seeing the new product assortments are being accepted by the consumer. In fact, we’re chasing into some of our products as we get ready for the holiday season and the partnership with Beyonce, I think will fuel the momentum. And then there is the 53rd week, which net of Denizen is expected to add 1.5 to 2 percentage points. I think the important fact for all of you to think through is how are we exiting the year and our belief is we are exiting the year in a much stronger position both in terms of revenue growth and profitably than we began the year. Structurally, the U.S. Levi’s wholesale business is expected to end the year less than 20%. Yes, let me repeat that, less than 20% of our total business and is down from 30% in 2015. And that combined with the strength of DTC both on the top line and the bottom line, I think structurally allows us to enter 2025 in a much stronger position. I hope that answers your question. I’ll now defer to Michelle on Dockers.

Q: Could you elaborate on the 5% global growth for the Levi’s brand? Maybe how that compares to the overall denim category and market share trends that you’re seeing by region?

A: Thanks, Matt. I’ll kick it off in terms of the 5% growth and what that means in the context of the consumer and category. So in terms of the 5% growth for Levi’s, clearly, that’s being driven by the strength of direct-to-consumer, which was up 12%, globally 12% here in the U.S. and we’re seeing that as it relates to direct-to-consumer, we’re seeing that in our stores. Now I think 10 quarters of consecutive growth, new store openings are on track, 100 net new stores for the year. And then our e-commerce business is also accelerating, up almost 20%. So that’s really fueling the growth. In terms of Wholesale, which continues to be an important part of our business, while still a headwind and still negative, it was down 3% globally. We are seeing that sequentially improve. And we expect, collectively, the Levi’s brand in the business to sequentially improve into the fourth quarter. Harmit spoke to that just now. We’ve got a lot of levers that are going to drive that growth. I think when you also look kind of inside the makeup of the business, we continue to be really pleased with the acceleration of our Women’s business. Our Women’s business both outperformed in DTC and in wholesale, and we expect that to continue. We’re seeing growth in the bottoms business for women’s. We’re seeing growth, and frankly, men’s overall for Levi’s was also positive, so strength in bottoms and also strength in the tops business. I mean, tops was up 8% for the quarter across both channels, up even higher in DTC. So, when we talk about the pivot to really become a head to toe lifestyle apparel company, we’re seeing those proof points, which also over time expands our addressable market. So, those are highlights around the strength of the Levi’s brand and business. And as Harmit just said and I’ll echo, we expect this to continue in the fourth quarter and the quarter has started off strong in September. So, we feel good about that, but we don’t want to get ahead of ourselves, hence, the guide as it is. I’d say from a consumer standpoint, generally, we’re feeling good about the consumer, but we also recognize that we continue to operate in an uncertain environment. We’re optimistic on the category long term. You asked about the geographies. The momentum in the U.S. continues another quarter of positive growth. Europe inflected to growth, up 7%. And of course, Asia as a whole was up 4%. And in terms of the U.S, that consumer is proving to be resilient. And you see that in our DTC numbers, up 12% as I was just talking about. As it relates to market share, again, I’d say we’re pleased. Women’s has been a focus, just sharing the numbers overall, and Women’s continues to gain market share and is now solidly in the number one position, which hasn’t been the case historically. We’ve shared over the last year, we’ve continued to gain market share. And now, like I said, we are very solidly in that number one position, which complements men’s being the number one market share leader. And we are 2x versus the next closest competitor. So, we feel very good about what’s happening in the business and how we’re driving share.