Levi Strauss & Co. (LEVI) Earnings Call Transcript & Summary

That's clear, Harmit. One of the things that's come up on several occasions today is building that connection with the loyal consumer, who then becomes a repeat consumer, and you can better lever that customer acquisition costs over time. And that makes me think of something that Marc mentioned in the video, which was encouraging consumers to download the Red Tab mobile app. And I just -- final question on this customer acquisition and loyalty piece would be how important are the mobile app and the loyalty strategy in your plan for the business? And how do you see those evolving over time?

It's critical. Chip talked about accelerating things in a few months when we thought it take years. And that's one of the things we did. We were testing an app in the U.S. It was to be launched nationwide sometime in '21. We accelerated that. We were in the process of testing a loyalty program. We accelerated that. And at the end of quarter 4, we have 4 million loyal consumers: 2 million in the U.S., 2 million in Europe. So we are -- we've launched it in the U.S. We've accelerated that in Europe, and we're just getting started. I think to your question, engaging with the consumer and driving higher loyalty is important. And what we are seeing early signs of is that our more loyal consumers, for example, are buying more. They're downloading the app. They're engaging better with the consumer. And where it really makes a difference is, as we have talked about diversification, we've talked about building more of a lifestyle orientation, owning the share of the closet. And we can show our assortments a lot better on the app. We can engage with the consumer a lot better. I'll give you an example. We've -- last year, we did 32-odd collaboration with other wonderful brands. And I think late last year, we collaborated with New Balance. And in the same family, I have a millennial, she got to know about the collaboration because she's using my -- using the Levi's app. And before you know it, the product was sold out. So the entire question in the same family is how do you get the product, right? As a millennial, she was able to engage with the brand through the app and that led to a great experience. So I think millennials and the younger consumers, for them, this is going to be very important. And as we drive more of lifetime value with our loyal consumers globally, I think you'll see the growth in our business, which is something new. It's something different. It's something not that we did 8 years ago. It's something that just started over the last 12 months.

Super clear. Now we spent a lot of time talking about the digital channel and your store channel and the overall direct-to-consumer strategy of the business. But wholesale, of course, remains a very important channel for Levi's, albeit one that's rapidly evolving. Can you talk to the complexion of your wholesale business today? How does it break down between different types of partners? And where do you see this going? And I wonder if I could bring Chip in to kick off from this one.

Well, so first of all, the wholesale business is still really, really important to us. So even though we are doubling down on DTC and really committed to accelerating growth in our DTC business, our wholesale business is so big. It is still, and it's very, very profitable from an EBIT standpoint. So I mentioned how the landscape is shifting so quickly as a result of the pandemic. It's accelerated what probably would have taken another 5 or 10 years to play out and compressed it all into the last year or so. And we've shared multiple initiatives in the past on earnings calls and in other conferences and things like that on what we're doing with our wholesale footprint, particularly here in the U.S. And I mentioned earlier our traditional department store business, which used to be a really significant part of our total business, even in the 10 years that I've been here, is now down to less than 10% of our total business. We've remapped our business. We've built a new footprint of high-caliber, high-quality wholesale partners. We are premiumizing the brand in the marketplace with these customers. So we've really focused on the premium customers. So Nordstrom, as an example, has become a much more significant and important part of our business, regional as well. And at the same time, we still have a value business. We haven't really talked about it, but we have Signature and Denizen, which are 2 value brands. Signature is sold primarily in Walmart. It's also available on Amazon. It's at a price point from $19.99 to roughly $29.99. And Denizen is kind of in the $29.99 to $34.99 price point. And those brands are attractive to a broad swath of consumers. We play with those brands, primarily in the mass channel. But as you know, we've launched Red Tab very, very successfully at Target, and Target is a winning customer today. We were in 140 doors successfully with both men's and women's for about the last 18 months or so. It's a relatively tight assortment, but at premium prices to the U.S. wholesale average out the door, and we're attracting new consumers. We're attracting new fans to Levi. So that's been part of the remapping we announced, I think, about a quarter ago that in collaboration with Target, we're going to expand that to 500 doors by back-to-school this year. So we've got a lot of different moving parts. I think the big takeaway though should be that as we emerge from the pandemic, wholesale will still be important to us, but it will look different. And we will be in healthier customers with a stronger proposition and winning -- with winning customers at the end of the day. And that's really what we're trying to do. In fact, a small fun fact, our women's business in our top 10 wholesale accounts globally was up high single digits in both the third quarter and fourth quarter. So wholesale still helps us. We're a very democratic brand. And it still helps us reach into parts of the country and parts of the world where it might take us a real long time before we ever have our own retail store there. So it still plays an important role in our overall strategy.

And as we think nearer term, Harmit, I wonder if you could jump in here. Would you expect material wholesale rebound in 2021 as partners reopen doors? Or will you be immediately more selective, as Chip was talking about, when you're reinitiating shipments, rebuilding the Levi's wholesale business after the pandemic?

Yes. So other than probably the first 3 months, and I think opportunistically in some cases, because we really wanted to ensure that we got paid, we were shipping to our wholesale businesses. So it was -- even during the -- during 2020, shipping was continued. And we did pause in a few cases. So I think in the cases where we paused, and we believe that the wholesale customer is financially sound, I think you'll see that rebound. But as Chip talked about, our view of wholesale generally is that it's a healthier business. It's a business that represents more of a lifestyle and a better gender mix than it has been in the past. And wherever we can, we are going to premiumize, whether it's with Nordstrom, whether it's the top end of our good category in Target, et cetera, et cetera. So I think in the U.S., it's definitely the healthier business. Outside the U.S., Europe, for example, 50% of the business is wholesale. That business has come back as our retail business came back. And I think once stores reopen in Europe, we will see the similar rebound.

Let's stick on that...

The only other thing I would say is one measurement is -- or the health of the business is our gross margin in wholesale. And our gross margin in wholesale over the last 2 quarters has improved year-over-year. We really tightened our discounting. We have made sure that where we could, we have taken price increases. For example, we took up -- as the women's business was on a roll, we took our prices in some of the women products up by $10. That has stuck. So I think just -- I think that will measure the health of the business longer term, too. Sorry, Alex, didn't want to interject that.

No, my apologies for interrupting. I did want to ask about AURs actually. And one of the areas where you've been really successful during the pandemic and indeed before that is raising AURs and reducing promotions. Can you talk us through the drivers of that? How related is it to the channel shift? And how confident are you that those AUR gains can continue as the environment normalizes?

Yes. So I would say we're focused on growing AURs. And the drivers of improving AUR performance are basically 2 or 3 buckets: One, as you talked about, we have reduced discounting. We are leveraging AI to understand the breadth and depth of our markdowns, and it's making a big difference. In the past, we would take our assortments and probably discount it 30%, 40%. Now we are saying it's -- that's probably not appropriate. We are also limiting the amount of discounts, so it's not spread across all assortments. We've taken price rises. And as Chip and I like to say, we're probably at the top of the second innings or the bottom of the third innings on pricing. Because the way we think about pricing is you think about pricing for innovation, pricing for inflation and reducing markdowns. And we're looking at all 3 levers as we think about premiumizing the brand going forward. We've talked about a portfolio of assortments that better balance between good, better, best. And so if you think about the U.S., which is largely a good market, and you think about us growing mainline and growing our premium assortment to premium wholesalers, our AURs are going to grow and increase. So that's one way of looking at it. Second is, Alex, you talked about channel mix, DTC and growth internationally. Internationally is more of a better, best market. So as international grows, our gross margin improve and AURs obviously improve. And then as direct-to-consumer grows, that also impacts AURs. And so I think we have a couple of levers that will allow us to grow AURs longer term.

Chip, I'd like to bring you here -- in here on the pricing discussion as well. Levi's operates across a range of price points from value to premium, brand positioning, differs a little bit by geography. You touched on this a little bit when you talked about the different products you have in different channels. But I wanted to ask you, are you happy with the segmentation today? Or does this need to change at all? And is the way that you segment a brand in this omnichannel environment different to how you would have done historically? Chip, I think you're on mute there.

I am. I'm sorry. I -- in a very oversimplified way, the Levi's brand, Levi's Red Tab is segmented good, better, best. Tier 3 being good, Tier 2 being better, Tier 1 being best. Marc gave an example of Tier 1 product, the Japanese selvedge that we're selling in the store in Palo Alto at $188. And frankly, we're not seeing a lot of resistance to it. So I do believe we have -- we continue to have opportunities to premiumize the brand around the world to get higher AURs, to trade consumers up to higher-quality product. As you look around the world, our business is different. The U.S. skews very heavily to Tier 3. That's a result of our long U.S. wholesale legacy, if you will. Tier 3 average out the door is around $40. By the way, that's about $8 better than it was 10 years ago when I joined. But we still think we've got significant opportunities as we talked about elevating the brand in this marketplace given the strength of the brand, and that's why we're so focused on premium distribution, why we're so focused on mainline. Internationally, we tend to be more Tier 2 and Tier 1 product. That's true broadly across Europe and in parts of Asia, and I'll talk about each in a moment. But we do have some international markets that are still predominantly Tier 3 markets because the consumer is more of a value consumer. Mexico is a good example. India is a good example where the AURs are more like U.S. in the $40 to $50 kind of price point. And again, the brand is very, very healthy in those markets, and we're continuing to try to elevate there. In Europe, our business skews heavily towards Tier 2 and Tier 3, as I said, And that's consistent even in wholesale in Europe. Our wholesale proposition in Europe is a Tier 2 proposition at roughly the same price points as what we sell in our own mainline doors. And that really is a window to the future that I think is possible for Levi's as the brand continues to strengthen more on a global basis. And then we do have some markets where Tier 1 is an important part of the business. So parts of Japan are a good example of that. China more and more is becoming a much higher-quality, higher price point business for us. And we're seeing in our owned and operated stores in China a real opportunity to elevate to Tier 1. And we're even calling it Tier 1 plus where there are -- the sky is almost the limit in terms of pricing power. But I guess the last thing I would say is you know I'm a brand guy. The best evidence of pricing power is what is happening on the brand's gross margin. And we've been successfully growing our gross margin, as you know. Some of that has been through mix, channel, geography. Some of that is also being driven just by pure pricing, as Harmit said. And we continue to believe that we still have opportunities here, and we will continue to look for ways to capitalize on those opportunities.

Chip, you just took us around the world in terms of how this brand is positioned in different geographies and some of the different pricing structures. Harmit, I wonder if you can build on that international discussion. What other ways does the Levi's business differ internationally versus in the U.S.? And perhaps linking this back to the video earlier, should we expect the new stores to look similar in -- across regions?

Yes. So I think one key difference, Levi's versus a lot of our peers, not all, a lot of the peers, is we have a global footprint. We have global infrastructure. The other difference is that China continues to be an opportunity for us. It's only 3% of our business. And so if 20% of the apparel market is in China, I think that's huge. If you think about our business internationally, it's more direct-to-consumer than in the U.S. And so -- but only 55% of the business -- of our business is international. I think the apparel market, 75% of the apparel market is outside the U.S. So we have clear opportunity in terms of growth from that perspective. To your question about stores, the 2,500 to 3,500 square feet model really came from Europe. Tailor Shops were -- really worked in Europe, and we brought it across the world. So Europe is a good example of the true potential of the brand. And as you know, pre-pandemic, Europe was on a tear, right? They were growing 20% year-over-year for a while. And I think if you think of true potential, there is great potential to be able to execute across all cylinders, which is what is happening in Europe. And so as we -- the other thing to -- other difference internationally and the U.S. is the mix of our store base. In the U.S., the bulk of our stores are outlets. We are growing our mainline. Outside the U.S., the bulk of our stores are mainline as against outlets. And so that helps position the brand. We have enough outlets where if you want to flush, we can. We have enough outlets because we make for most of our outlets. We have enough outlets that drive the value orientation for the value consumer. But the balance is really more mainline, less outlets. So as you think about our stores, we talked about this year on a gross basis, opening 80 stores. It's still primarily international.

We're coming towards the end of our time here, but I think we've got time probably for 2 more questions. So one for Harmit, one for Chip. Harmit, let's start with you. Levi's has been really forward thinking in reimagining and repositioning its manufacturing and its supply chain operations to allow for greater speed and agility. Can you talk about key strategies and innovations here? And I'm interested in your thinking on the blurring lines between factory distribution, center store and what's next in that process.

Yes. I mean, we have a wonderful supply chain. I'd say it's a competitive advantage for us. And we haven't talked sustainability, but it's -- as a group, we're really focused on sustainability. We've been recognized and continue to be recognized on it. But in terms of our strategies, and I'll tell you what has happened and what -- where we're headed. We talked about the F.L.X. program, right, which is introducing lasers. It really helps when you need to manage inventory. It really helps when you need to chase demand because you're finishing the product close to home. So that's one piece of it. The other thing that we have done is start shipping from store, and that really allows us to convert our stores into mini DCs. We -- starting in Europe, we have digitized samples during the pandemic. Now our samples are largely digitized. We are working on trying to accelerate that around the world. As we think about our strategies going forward, if you think about our common assortments around the world, I think our common assortments are less than 10%. We are looking at, at least getting to 20% or 30%. That really helps us, will really help supply chain, will really help us manage inventory, et cetera. We tend to buy in 2 halves. So if you think of a 12-month calendar, we're buying -- we have a 6-month buying season and another 6-month buying season. What we're trying to get to is a 4 season of buy. So you buy on a quarterly basis. That will again help us drive a lot more agility and, importantly, will allow us to meet consumer trends from that perspective. The other thing we're doing over the years, we had automated and digitized the demand planning side of the end-to-end planning. We're really focused on digitizing and automating the supply end. What that will led -- lead to is better forecasting, better integration of supply and demand and obviously allow us to ensure we don't miss a sale. Don't -- we ensure that we have the right sizes, et cetera. So I think there's a lot more work happening on that front, but I would like to just call out the fact that as an organization, we focus on sustainability. It's been a big piece, and ESG is important to us.

Super clear. Chip, last question for you. You've been vocal about the opportunity to grow in tops and women's and other underpenetrated categories. We've talked a little bit about that today, but I just wanted to focus in on it for these final questions. Can you help us to understand how much runway there is on this strategy? And how do those NextGen stores help?

I guess the short answer, Alex, is we think there's enormous opportunity here. We're the #1 brand in denim by a mile globally. We're #1 in men's globally. We're #1 in women's globally, but we're not #1 in women's in many markets around the world. We happen to be #1 globally because we have a global footprint and a global brand. But here in the U.S., we're #3 with Levi's. And so women's represents a significant opportunity for us. 3 years ago, it was 20% of our business. Today, it's 1/3 of our business. It should be at least half. And that's what we're focused on. And we think there's clear opportunity for us to get there, and these NextGen stores are helping. We're just shaping demand by assorting the store so that it's heavily skewed -- or it's at least skewed, not heavily skewed, but skewed towards women. And as you saw in the video, more than half of our sales out of that store right now are coming from women. On tops, we don't even buy market share on tops because we're less than 1%. It's 20% of our total business, 21%, I think, of our total business. It was 10% a couple of years ago. It could easily be 30%, 40% of our business over the next couple of years. And so -- and that's still not scratching the surface in terms of what the full opportunity for tops is there. Outerwear is another big opportunity for us. And back to the theme of this conference, DTC gives us the ability to manage the brand and present the brand to the consumer with that full head-to-toe lifestyle expression of the brand, and it will allow us to accelerate growth in these underpenetrated categories without compromising our position as the leader in men's denim globally and without compromising our position as the #1 denim brand in the world and one of the most iconic brands in any industry, I would add.

Well, Chip, thank you for those comments. And thank you for bringing the final answer back to the theme of this conference. I appreciate that. And of course, it's a theme which really plays into an opportunity for Levi's. So I will wrap up the session by saying thank you to Chip and Harmit for sharing your insights here. Thank you to Marc, Aida, Chris and the team for a great video. I thought it was a fun and differentiated way to kick off the last session of the day and, of course, also thought provoking. And given this is the last section, I wanted to thank everyone in the audience who've joined us for this hour and for all the other sessions throughout the day. We very much appreciate you joining us, and we hope you found the day as interesting, as informative as I did. Please feel free to reach out to the team with any questions, feedback, comments. We'd really love to hear from you or hear your thoughts. So thank you again to Levi's. Thank you to the rest of our presenters. Thank you to the audience, and we look forward to hearing from you all soon.

Thanks, Alex, and team. Thank you.