LEVI STRAUSS & CO Q3 FY2026 earnings call

• Strategic Transformation: The company has evolved from a denim bottoms business into a global denim lifestyle company, with categories outside Levi's Denim Bottoms accounting for approximately 50% of top-line growth. The portfolio is more diversified, having added nearly $1 billion in revenue over three years.
• DTC Performance & Recovery: Direct-to-Consumer (DTC) performance fell short of expectations in Q3 due to softer traffic in the U.S. and Europe. In Europe, unseasonably warm weather weighed on sales, but trends improved as temperatures normalized. In the U.S., the back-to-school campaign underperformed due to a mismatch between marketing focus (Loose fits) and consumer demand (Low Rise). Management pivoted quickly to support Low Rise trends, resulting in positive DTC trends in September and confidence in returning to mid-single-digit growth in Q4.
• Product & Brand Momentum: The Levi's brand grew 4%. Men's bottoms saw traction with newer iterations like the 501 Loose and Relax. Women's business accelerated in September, driven by low-rise trends (Cinch Baggie, Low-Lose). Tops grew 7%, led by women's tops (+10%). Blue Tab (premium segment) exceeded expectations with double-digit growth, extending into elevated fabrics like cashmere.
• International Growth: Asia remains a consistent source of strength with double-digit growth, supported by partnerships (e.g., Rosie) and pop-up experiences generating significant earned media value. China grew 13%, viewed as a significant long-term opportunity.
• Distribution Network Transition: The U.S. distribution network transformation has faced delays and complexity, exacerbated by a fire-related incident at a facility. The Hebron DC was closed at the end of Q3, but full benefits are expected in 2027. Europe’s transition is complete and showing cost leverage.
• Leadership Change: John Vandamore was named the next CFO, succeeding Harmit Singh, who is retiring after 14 years. Vandamore brings experience from Skechers.

• Americas: Net revenues grew 2%. Latin America (LATAM) delivered strong performance with revenues up 10% and operating margin expanding 640 basis points to 29.9%, primarily driven by tariff refund benefits. Europe net revenues grew 5%, supported by double-digit wholesale growth, with operating margin increasing 150 basis points to 22.8% due to gross margin strength.
• Asia: Net revenue grew 10% for the third consecutive quarter, fueled by strength across channels and key markets including Japan, India, Australia, and China (up 13%). Operating margin expanded 220 basis points to 14.2%, with year-to-date EBIT margin reaching 16.7%.
• Global Wholesale: Increased 6%, reflecting broad-based growth across segments and categories beyond denim, indicating strong partner confidence in the brand's lifestyle offering.

• Full Year 2026 Organic Net Revenue: Raised to approximately 6% (high end of previous range), driven by stronger wholesale performance.
• Full Year 2026 Reported Net Revenue: Approximately 7% (down from previous 7-7.5%), impacted by foreign exchange headwinds.
• Full Year 2026 Gross Margin: Approximately 63%, including ~80 basis points of net tariff refund benefits. Excluding tariffs, margin is higher than prior outlook due to lower product costs.
• Full Year 2026 Adjusted SG&A: Approximately 51% of revenue (up from prior 49.7-49.9%), including ~50 basis points of tariff refund redeployment costs.
• Full Year 2026 Adjusted EBIT Margin: Slightly above prior guidance at approximately 12.1%, including ~30 basis points of net tariff refund benefit. Excluding tariffs, margin is up 40 basis points year-over-year.
• Full Year 2026 Adjusted Diluted EPS: Range of $1.54 to $1.56, including a 4-cent net tariff refund benefit.
• Q4 2026 Organic Net Revenue: Approximately 4%.
• Q4 2026 Reported Net Revenue: Approximately 3%.
• Q4 2026 Adjusted EBIT Margin: Approximately 11.4% to 11.6%, including 180 basis points of net tariff refund redeployment costs.
• Q4 2026 Adjusted Diluted EPS: Approximately 36 to 38 cents, including $0.07 of net tariff refund redeployment.

• Operational Execution Risks: Delays in realizing benefits from the U.S. distribution network transformation, compounded by a fire-related incident, have pushed expected cost savings to 2027.
• Market Dynamics: Intense competition in the denim category, particularly around fit trends (e.g., Low Rise vs. Loose), requiring agile marketing and inventory pivots.
• Weather Sensitivity: European DTC performance was significantly impacted by unseasonably warm weather, highlighting vulnerability to climate conditions affecting foot traffic.
• Forward-Looking Statements: Results may differ materially from expectations due to risks and uncertainties detailed in SEC filings, including macroeconomic factors and consumer spending patterns.

Q: Laurent Vasilescu asked for details on U.S. DTC underperformance and confirmation of Q4 mid-single-digit growth expectations for both U.S. and Europe.

A: Michelle Gass explained that U.S. DTC missed targets because the Back-to-School campaign focused on 'Loose' fits while consumer demand shifted to 'Low Rise.' The team pivoted quickly to promote Low Rise and invest in marketing, seeing positive trends in September. She confirmed that U.S. DTC is now positive and global DTC is tracking mid-single digits, with confidence in ending the year at high-single-digit growth. Europe also recovered to mid-single-digit growth as weather normalized.

Q: Matthew Boss asked about the health of the denim category and the sustainability of the annual growth algorithm given tariff-driven margin boosts.

A: Michelle Gass stated the denim category remains healthy and competitive, with Levi's maintaining #1 market share in men's and women's in the U.S. She emphasized that half of the organic growth came from non-denim bottoms (tops), proving the lifestyle strategy works. Harmit Singh clarified that the annual algorithm (mid-single-digit growth + margin expansion) is intact. He noted that 2026 includes one-time tariff benefits and higher marketing/distribution costs which will not recur in 2027, allowing margins to expand further next year.

Q: Jay Sol asked if wholesale sell-through trends in the U.S. and Europe mirror the improving DTC trends and how this impacts pre-books.

A: Harmit Singh confirmed that wholesale performed well globally, though timing differs from DTC. He noted that European pre-books for Spring-Summer 2027 are up high single digits. For the U.S., he indicated that Q4 wholesale growth might appear weaker YoY due to flow/set timing rather than weakening demand, affirming healthy retailer demand overall.

Q: Dana Telsey asked about lessons from the Back-to-School miss, holiday preparations, and the competitive environment.

A: Michelle Gass highlighted the importance of agility, noting they reshooted campaigns and re-merchandised stores to capitalize on the Low Rise trend. She expressed confidence in the holiday assortment, focusing on sweaters and innovation. Regarding competition, she acknowledged intensified rivalry but stated Levi's is responding with increased marketing investment and superior product execution, aiming to win the holiday season.

Q: Kendall Ticino asked about the timeline for U.S. distribution center cost savings following the closure of the parallel Hebron facility.

A: Michelle Gass admitted the transition was more complex than anticipated, delayed by operational challenges and a fire. She confirmed that closing Hebron was a critical milestone, but full cost benefits are not expected until 2027. She cited Europe’s successful transition as proof that the U.S. will achieve similar efficiency once the Groveport facility fully stabilizes.