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

Welcome, and thank you for standing by. This is a restricted line. This meeting is related to Wells Fargo business. Any unauthorized party in this meeting or any unauthorized use of the information communicated on this call is subject to prosecution to the fullest extent of the law. Any unauthorized person on the line at this time, including press or media, please disconnect from the call at this time. [Operator Instructions] I would like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to Ike Boruchow. Thank you. You may begin.

Thanks, Courtney, and thanks, everyone, for dialing in. So my name is Ike Boruchow. I'm a softlines analyst at Wells Fargo. We appreciate all of you who dialed in today. And more importantly, we appreciate Levi's for being with us. And we have -- we're lucky enough to have CEO, Chip Bergh; CFO, Harmit Singh; and of course, Aida Orphan as well with us. So I want to thank the team for making the time in such an uncertain time for the softlines group. So I know this will be really informative for everyone. And before we start, I want to get one more heads up to all the investors dialed in. This will be basically a fireside chat for the first half of the call with me asking the team questions. And then around the 30-minute mark, we're going to open it up to your own questions, which -- the operator will help out with that. So just be aware.

Okay. So I guess we'll start it out, Chip. I mean thanks again for being with us. I really wanted to start with the top line visibility and the top line drivers of the business. I know there's plenty of time for margins and cost questions later. But specifically, the topic of denim cycle comes up all the [ time. You guys ] are the market share leader in denim. I'd love to get more perspective from you just on what you're seeing in your own denim business, how this is informing your strategies into '22, what kind of tailwind is this in terms of -- is this multiyear? Is this 12 months? Just -- I think that's probably a good place for us to start.

Okay. Well, first of all, thank you very much for having us this morning, and we're delighted to be here. There are a number of factors contributing to the results that we delivered this past quarter. We were really pleased with our overall results with net revenues up 3% versus the pre-pandemic levels, really strong profitability. And it's clear that on the one hand, there are some good tailwinds for us. Clearly, the casualization trend that started before the pandemic and goes back quite a while here in the U.S., the pandemic has accelerated the casualization trend. It is now -- I know we've got folks on the call from other parts of the world. We're starting to see places where it used to be suit and tie and more formal business wear in the office, and we're starting to see casualization happening in other parts of the world that have been kind of holdbacks, if you will. So the pandemic has clearly accelerated the casualization trend. And then we've been talking about these new looser fits and silhouettes, which we actually -- we led this trend. I'd like to say that's what market leaders do. Market leaders drive category growth, and that's what we've been doing here. But we led these trends. Actually, before the pandemic, we launched our collection, a small capsule really, of looser, baggier fits. It was something that the team had picked up, and we launched it. And when Levi's does something and goes big, it can move the needle. And those fits caught on, and we just kept doubling down through the pandemic. And as we're exiting the pandemic, it is clear all you got to do is walk down the street, these new looser, baggier fits and silhouettes are definitely driving into the business. And I think I was the first one to call it 3 quarters ago, we are in a new denim cycle. The last denim cycle actually predates me at this company. I joined the company over 10 years ago, and the last denim cycle was really driven by the skinny jean. Denim cycles are good for the business overall. They're good for apparel overall because as the silhouette changes, it also drives changes in tops. It drives changes in footwear. So we're clearly benefiting from all of that. But I would say it's not just the tailwinds that we've been driving. Our business is really, really strong. I mean I would come back to just the overall strength of the Levi's brand around the world. And we doubled down on marketing and connecting with the consumer during the pandemic, and I think we're starting to see that. Just to dimensionalize what's happening in the denim category, for the last 2 quarters in a row, the jeans business has grown faster than total apparel. That's U.S.-only data. It's the only good-quality data that we have on a shorter time frame. And the U.S. adult jeans category over the last 9 months has grown to $11.2 billion, which is significantly ahead of both the pandemic period, which was $8.5 billion, and pre-pandemic was $10.6 billion. So that is, I think, a real clear signal that denim is surging. Back to the brand strength, our denim bottoms business grew double digits this past quarter, really fueled by women's, which outperformed every category of our business. Our women's bottoms business was up 18% versus pre-pandemic, and men's was up kind of high single digits. So we're feeling really good. Brand strength is probably amongst the strongest this brand has ever been, and we're driving growth across all the channels.

Super helpful. I guess one follow-up to that is, so the category is clearly doing very well. Are you taking share at the same time? Like can you talk about other brands you're taking share from? Are there certain outlets where you've seen more share opportunities? I guess just trying to balance just the category growth versus your own ability -- I know your market share is already highest ever. But are there obviously any take share along the way, too?

Yes, absolutely. And we are building share. In fact, just to dimensionalize it on a year-to-date basis, and this is NPD data, the U.S. jeans market is up 5.7%. We're up over 6%, 6.2%. So that clearly suggests we're growing share. The share data we get, which varies around the world, clearly indicates that we're driving share growth on the women's business. Men's business is more well developed, as you know. And the share doesn't move a whole lot, but we are growing share broadly speaking here in the U.S. and around the world.

Got it. Super helpful. Okay. So Harmit, this might be more a conversation for you, but I think we can't have a conversation on any brand in the space today without digging into the supply chain and inflationary pressures. So you guys were -- you won the prize. You're one of the firsts to comment on the pressures next year, which was met with a nice sigh of relief for the space the next day. I think you talked about low single-digit inflation in the first half, and now you're thinking mid-single-digit inflation in the back half of '22. But you're also saying you believe you can offset these headwinds, which is pretty impressive. Maybe just talk us through how you're able to do that. What are the initiatives that you have in place to offset those pressures? What exactly are those pressures? I had some people asking, is that all cotton? Is that other things? So help us with that. And then similarities and differences between today and 2011. I know you gave some details on the call, but going back to that would probably be helpful.

Sure. Again, good morning, and thanks, Ike, for hosting this and, importantly, for everybody joining us. I wanted to -- let me start by just talking about supply chain and address your questions on inflation. But I think as Chip referenced in the call, our view is our supply chain is a competitive advantage. And I'm going to leave you with 3 thoughts, which is we believe it's diversified; we believe the team has been very agile and continues to be agile; and then proactivity in cost management, which will address your inflationary pressure. On the diversification, we source from 24 countries around the world. Not any country -- not one country makes up more than 20%. So we're not concentrated. And because we have a high core base, we've established sourcing of our core products from more than one source. So we can cross-source. And the proof of this has been evidenced when there was a big debate about tariffs in China. We were importing from China into the U.S. Two years ago, it was 8%. A couple of years before that, it was high -- in mid-teens. It's down to 1%. So we're able to cross-source or transfer production in other markets. Right now, which has been in the news -- continues to be in news, our sourcing from Vietnam is less than 5%. So there's an old thing, which is don't put all your eggs in one basket. And I think we're demonstrating that as we have diversified the supply chain [ capability ]. All of us woke up to the news this morning that the Biden administration is working to increase the throughput on the West Coast by 24/7, just a working mechanism, which is where the rest of the world is. And I'm very glad the administration is doing that. But we have seen congestion in the West Coast now for about 12-plus months. It started soon after the pandemic. And what we were able to do because you can't do this by just putting a switch on or whatever, we were able to divert our supply from the West Coast to the East Coast. And the West Coast, which used to make about 40% of our logistics into the country, is now down to 20%. So we continue to try and be as agile as we can, and this is just an example. To your question on cost management, we buy in 2 halves. We don't by cotton directly. Most of our manufacturing is done through third parties. And because we have a large core, we can, for some of the core items, place orders for longer than 6 months because it's largely same style. Because we do buy in 2 halves, we did lock in for the first half of next year, which is 2022, inflation in COGS. And COGS is more than cotton at about 1% relative to 2021. And because of the pricing we have been taking, we were a little skeptical of the view that inflation would be transitory because our view is what -- how do you define transitory. And if you go back to the 1970s, people thought inflation would be transitory, but it lasted a couple of years. In this business, you have to be proactive, and we were. So we've been taking pricing now for a little while, and that will really help us offset the inflationary factors. The second half -- the other good news this morning is cotton is down. We track it, I think, a couple of times a day. It's down from the $1.13. It was -- when we printed our earnings, it's tracking at $1.05 futures. As you can see, futures do taper off as you are getting into the mid to the second half of next year. So we're in the process of pricing our [ cost ] for 2022 in the second half. We think we'll be able to land in the mid-single digits. And the reason it's not 30% up as cotton is because we don't -- an entire cost of manufacturing for us is more than cotton. We use -- on our bottoms, somewhere in the 18% to 20% is cotton, 2 pounds of cotton to a pant. Our tops is much less. So as an overall cost of goods, cotton is substantially lower than the 18%, 20%. So it's not all cotton. The other piece is crisis is a wonderful opportunity. This is -- we continue to drive productivity. We continue to -- which is using the same fabric across a whole bunch of styles. As we've reflected in the last few calls, we have talked about driving more commonality of assortments. And the pandemic brought that home because you can move inventory, et cetera. So we're driving a lot of productivity as well as stale management to try and offset some of these costs. So that's one cost, which is COGS. And as I said earlier, we have price. We believe there's pricing power. Chip talked about market share growth. Our AURs are up in the mid-teens, and that's, I think, a combination of both pricing as well as ensuring that we continue to premiumize the product. So I think our view is if we have to surgically take pricing to offset some of the inflation pressures in the second half, we could do that, and that's something that we're very conscious of. The other costs relate to shipping costs. 70% of our shipping capacity through the first half of next year is locked. And because we're chasing demand, our view is that we will [ exit ], we've continued to [ exit ] in quarter 4 as in quarter 3. And given our gross margin accretion, we'll be more than offsetting that. That pressure probably continues for a couple of quarters, and in some states, it should settle. And so that's how we are thinking about ensuring we're able to chase into demand. In terms of impact, our impact in quarter 3 in terms of why we say lost sales was minimal, it's about $10 million. It's a little more in Q4. But as you've seen, Q4 guidance is also progressively getting better. So things like congestion, et cetera, decrease. And obviously, that's a bit of a tailwind as we head into 2022.

Got it. Got it. All right. That's helpful, Harmit. I've got 2 more before I...

Let me address your last question, which is how we [ compared ] to 2011. I think Chip was just getting on board as we headed into the crisis. But Chip, why don't you talk about it because the company...

Right. I mean I actually joined the company back in 2011 as the new CEO. And just to keep this very brief, we are a dramatically different company today than we were in 2011. And we are in a much better, a much stronger position to face not just cotton but I would say inflation much more broadly. Our business is dramatically different. Just to dimensionalize it, in 2011, 58% of our business was in the U.S., 48% was U.S. wholesale. We didn't have a strong brand back then. We were somewhat beholden to our wholesale partners. We didn't have pricing power back then. Today, we are much more diversified. And it all gets back to the strategic choices that we took 10 years ago. We're a more premium, more diversified business. Today, we're starting to approach 60% of our business outside of the U.S. International mix is more positively. It's a higher gross margin business for us. We're much more DTC. Back in 2011, 21% of our revenues were DTC. This past quarter, I think we were 35%, 36%. At the end of last fiscal year, I think we were close to 40%. And as I said earlier, we have a stronger brand. I mean we took pricing in the second half a year ago, and it's sticking. And we took that pricing anticipating inflationary pressures. And if we need to take more, we're confident that we can take more strategically on a very targeted basis. So we've got a much stronger brand. We're now leveraging data science and AI, machine learning to make pricing and merchandising decisions, promotion decisions. So it's like a night and day comparison, and that gives me a ton of confidence that no matter what is thrown at us, we're going to be able to navigate through it. And I think the challenges that many of our peers have seen in this most recent quarter, the fact that we were able to get through it with about a $10 million impact to our top line on $1.5 billion suggests that this is a team that kind of knows what it's doing and can manage through these difficult times.

Got it. Well, Chip, I want to ask you one more, and then I have one last one for Harmit before I open it up. But I wanted to kind of transition to capital allocation but more specifically Beyond Yoga. You gave a lot more details on the last call. I mean you're not really a company that's known for big M&A. I mean you seem very excited about this deal. I mean what were the key drivers behind that decision to acquire that brand in that category? And then when we think about modeling this out over a multiyear period, what's the potential here from a revenue perspective and a margin perspective for that asset?

Yes. Ike, when we did our road show, we talked about capital allocation, and we also talked a little bit about M&A and what our filters are. And we have 3 filters: number one, there has to be a strong strategic rationale behind a potential acquisition; number two, there needs to be a very strong financial case; and number three, there needs to be a good culture fit. I've done acquisitions in the past, my years at Procter & Gamble, [indiscernible] acquisitions in the past. I was involved in the Gillette acquisition. I was the first Procter that dropped in. And culture and culture fit is really, really important. So we have that as one of our filters. And we've been looking at acquisitions for a while. I mean our balance sheet is super strong. And I think a lot of you all have been asking, what are you going to do with all that cash? We've been looking at them. But until now, we really haven't found anything that really meets those 3 filters for us. So what do we like about Beyond Yoga? First of all, first and foremost, it provides an entry into the fast-growing, high-margin premium activewear segment. It is -- the U.S. is the largest market of athleisure or premium athletic wear. I think we said on the call that the total athleisure market is 5x bigger than denim in the U.S. So it's a huge market. The performance part of it is obviously a little bit smaller, but it is a high-margin, fast-growing business and growing globally. This is not just a U.S. phenomenon. Number two, I really believe -- and the reason I'm excited about this is if we take what they bring to the table, they have a really good, deep understanding of their consumer. They created a community behind the Beyond Yoga brand. They have amazing product. And consumers talk about its buttery softness, and that is a big differentiator. And it's -- and it competes at a premium price. And then you take the fact that it is largely a direct-to-consumer business. You take all of that and the incredible team that is there, and it's a small team, along with the other impressive facts that really kind of blew me away because I like to think we're a pretty disciplined leadership team. Harmit and I are financially pretty disciplined. This company has never lost money. It's been in business for 16 years. The last 10 years, it has grown double digit, and they've done it the old fashion way. They never went to private equity for money. They never had to take out a loan. They just basically plowed their cash and earnings back into the business every year and continue to grow it. In the last 10 years, they've grown double digit. So that -- put that together with our capabilities, brand-building skills that we've got here -- and I spent my entire career until I came here working at P&G building brands, launching new brands. We've got -- I think we've demonstrated that we know what we're doing with the Levi's brand and the turnaround that, that brand has had over the last decade. So you take our brand-building skills, you take our capability in brick-and-mortar retail and DTC overall and you put that together with the pipe that we've got built to our global distribution network with on-the-ground operations in about 60 countries, you put all that together and you go, this could be really big for us. And you're not going to pin me down to a number or a timetable, but the fact that the brand has grown double digit for the last 10 years and been profitable and we said on the call that it's going to be accretive right out of the gate from a margin standpoint, we're confident that this is going to be a long-term play for us, and it will be a meaningful contributor to our overall portfolio over time.

Fair enough. And I will not try to pin you down on this call, but maybe later.

Maybe later.

My last question, Harmit, this is probably a question we can talk about for another 30 minutes. But I guess the concept of margins in the entire space is just seeing record high margins in a lot of instances. I think you talked on the call a lot about the current state of the margins. For your brand, I think you said something along the lines of 3/4 of the gains you're seeing. So right now, you think it could be sticky. Maybe 1/4 of them are transitory. Can you just elaborate a little bit more on the puts and takes? And I guess where I'm coming from is -- I know when I look at our margins in our model, we're assuming your margins rebase a little bit closer to 12% next year as things do, to use your word, kind of normalize a bit. I think The Street is closer to 13%. I guess how do we think about the trajectory of margins as we kind of go through the transitory versus the structural changes in the business?

Yes. First, our view is that we continue to grow margins. That's the growth algorithm we talked about when we did the IPO. We were asked how high is higher, what's your target. We said 12% plus, and we've delivered on that. So as you think about where we end the year, EBIT margin will be 12% plus. To the question on gross margins, we said gross margins grow 40, 50 basis points every year. The pandemic accelerated a whole bunch of things. It accelerated our structural focus on e-commerce. Our women's business continues to roll. Women's gross margins are now higher than men's. And we believe we are underpenetrated there. International, it's still on the -- in the good days, when everything is open, international is 55% of our business. This world apparel market, 75% of that is overseas. So I think there's an opportunity there. And we are now demonstrating their pricing power. So the reason I kind of said, okay, gross margins were up over 400 basis points in quarter 3 and what do you use for modeling purposes as you think longer term, I think 3/4 of that is structural, is here to stay and is driven by the factors I talked about. About 100 basis points is probably driven by the environment. It's driven by lean inventory. It's probably driven by low promotion levels, et cetera, et cetera. Now does this stick or not? That's probably anybody's call. Our view is, as a brand, we're going to do everything we can to ensure we continue to get what we can for the brand, et cetera. But if the market turns promotional, then it's a different story. Our wholesale -- U.S. wholesale gross margins have never been this strong because we have pushed premiumization and we have reduced markdowns and dilution. The other piece in our gross margin that is incorporated this Q3 and Q4 is higher air freight, about 70 basis points of air freight. That's something that we think doesn't last forever, and at some stage, it normalizes. Those are the puts and takes. Our view was, Ike, because the run rate could be used as a base for growth next year, our view was rather than use the run rate for H2, it's important to use where we end the year, understand what are the puts and takes and then grow off that. So I think your point about starting with a base of a little over 12% and growing off that is probably the best way to look at it versus starting off a base of 13% and growing from there for 2022. There's still a lot of uncertainty. We just talked about commodities, et cetera. But I think intrinsically, growing EBIT margins and growing gross margins is something that we -- our growth algorithm aspires to do. There could be puts and takes given the environment, but that's what we have demonstrated both pre-pandemic, within the -- during the pandemic, and we'll continue to demonstrate post-pandemic.

Should we expect -- just like with the IPO when you had targeted 12%, now you've gotten there -- I mean above 12%. I mean regardless of next year, should we expect another multiyear kind of target or long-term target for you guys at some point in near future?

Yes. And thank you for bringing that up. We have toyed -- it will be 3 years since we've gone public by the summer of next year. So we have toyed with the idea of doing an Investor Day, probably somewhere on the East Coast, so we can get a lot more participation, pre-summer next year. What we're just waiting to -- what we're waiting for is some kind of establishment of things getting a little normal. And so our view is when we post earnings in Q4, we'll probably give a perspective on '22 and then a longer-term view sometime before summer of next year. That's when we will talk about what is our growth algorithm, what are our margin targets and where does this company go. And your question on beyond Yoga, that probably gets answered then because we have integrated the business. We will establish a plan, et cetera, et cetera. So I think this -- bear with us for a few more months, let things settle down and then I think look at us because we are a group that wants to grow this company for the long term. And I think giving longer term is important, and that's it at this point of time.

Super helpful. Makes a lot of sense. All right. Well, Courtney, I will pass the mic to you, and I think we can open up the call to questions from the investors who are dialed in.

[Operator Instructions]

Ike, the group is deferring to you.

I'll keep going. Is there anything in queue?

Our first question comes from [ Michael Fitzsimons ].

I just wanted to understand the AUR comment, and I think you talked about mid-teens AUR increases. But I don't know if that was in a specific geography or a specific channel. And then just broadly, if it's across the board, maybe just like just talk about that level of pricing and how much is sustainable, how much you worry about or don't worry about.

Yes. The -- Mike, the AUR increase was across the board, across all channels. So it's across geographies. It's across channels. And I'm just looking at the data. It's across genders. So it's, I think, demonstrating a couple of things. It's demonstrating pricing power. It's demonstrating the fact that as U.S. wholesale strengthens, we are now growing our business with retailers like Target, where we expanded big time. AURs are stronger than -- or higher than some of the other mass retailers. We had -- at Nordstrom, we talked about pop-up stores there, et cetera. So the question about is this -- will this stick or will it not, I think we continue to believe, a, we have pricing power. We are unlocking AI and machine learning to try and accelerate that. We continue to believe that the brand can be premiumized. And just think about the U.S. being largely a good market versus Europe and many countries in Asia mean -- more better and best. And as we grow our direct-to-consumer business, which is largely better and best, that's where we see the improvement from a premiumization perspective. So those are the broad strategies. Could you expect mid-teens growth forever? Obviously not because the base gets stronger. But I think as we continue to bring in more innovation -- and if you think about pricing, I only look at pricing in 3 buckets. There's pricing for inflation. That includes foreign exchange because we do source in dollars and sell in local currency. There's pricing for innovation as we introduce new styles. Chip talked about the looser, baggier fits. And we've been adding a lot of sustainable elements to our products. So the question is do we price for that. And then there is reducing markdowns and promotions. I would say we haven't -- we've done a little bit of pricing for inflation pre-pandemic. We accelerated that during the pandemic. We did a little bit of pricing for innovation. We've kind of activated that, and we've reduced markdowns. So as you think about AUR tailwinds going forward, I think it's largely going to be through price and driving more premium products over time and then making sure we offset inflation.

Our next question comes from [ Michael Oscomas ].

Congrats on a great quarter. Just a quick question on the full year guide. I was wondering if you can give any sort of commentary around Q4 and why it was kind of brought down so much. Is this all supply chain? Or are there any other puts and takes that we should be aware of?

Yes. The -- our full year guide was that on a revenue basis, we'd get close to '19 levels. On EPS, I think it was $1.42 to $1.45, which is probably a 27% increase relative to '19. So the company is a lot more profitable. Gross margins, I think the -- on gross margin, I think we said a little north of 57%. Now the implied -- and we talked about Q4. I think Q4, top line was up 6% to 7% on a reported basis. And a few words that we did raise the expectation with EPS of $0.38 to $0.40. And so the puts and takes, I think the headwinds were FX impact, about 1 point on top line. And I think we said we'll offset that with Beyond Yoga. So again, I don't know because we didn't give an expectation for quarter 4. When we gave the last guidance, we talked about the second half of the year. So folks may have implied what quarter 4 was, and so we just clarified it. But on a full year basis, we're ending the year stronger than what we indicated in the last quarter. And just for everybody -- just as a clarification, when I talked about AURs being up mid-teens, I was talking about direct-to-consumer. As a company, our AURs are more in the high single-digit growth. But it's AURs up mid-teens for our direct-to-consumer business. So I don't know if that answers your question...

Yes. I guess my question is, sorry if I wasn't clear, around revenue. I think you guys said you guys were going to be above the 2H growth rate guided, and then now it's kind of lower. So that was the question, just on top line.

Yes. I think the only headwind that we saw was probably foreign exchange. And that's largely driven by the euro. We thought we'd offset that by including Beyond Yoga because we have 2 months of Beyond Yoga in our numbers. But profitability-wise, we did raise expectations for the year.

Our next question comes from [ Kane Vandenberg ].

In recent calls, you've discussed how your U.S. wholesale is in a much healthier place today than pre-COVID. I guess could you just talk about what COVID did to accelerate the changes that you had been making, what those changes were -- are and where you are in the process of improving the U.S. wholesale business? And then finally, just how do you feel about your current distribution footprint in the U.S.?

Great question. I'll take this. So I would say the pandemic had probably a real positive impact on our U.S. wholesale business, less in terms of what it did for us and more in terms of what it did for some of our customers. I think it gave everybody an opportunity to clean up their inventory, get focused on their e-commerce business, build new capabilities on e-commerce. And a lot of those things have come back to help us. So we have remapped our U.S. wholesale distribution prior to the pandemic, probably 18 months, 2 years prior to the pandemic. That's when we really started. It was about the time that Sears was going down. That's when we had started our test with Target. We're really happy with the Target results. We're now in 500 doors, which was kind of the goal that we had set. But if you go into a Target that has Levi's, what you'll see is 2 relatively small pads for men's and women's but a really good representation of the brand, some premium pricing there in terms of the mix of the items that they've got. They're carrying our wholesale items, but they're carrying a more premium mix of our wholesale items. So we've got some bottoms in there going out the door at nearly $50. They got truckers in there. So we've been really, really happy with that. That has been accretive. We're picking up new consumers. They've run the research and demonstrated to us that these are consumers that in the past have not bought Levi's. And because it's in their favorite place to shop, they're now buying Levi's. So that's been a real positive. We really tightened our focus in a couple of other wholesale customers to really focus on the top 100 or 150 doors as open-to-buys were shrunk. Going into the pandemic, we started saying we don't really care what we look like in store 650. We want to be great in those top 100 doors that do the majority of their business. And so that was another big pivot. And then we basically exited the off-price channel. And off-price is not brand accretive. It might be good from a share standpoint, but it's not brand accretive. If somebody can walk into Ross or T.J. Maxx and buy a pair of Levi's for $16.99, it's just not great for the brand. So we had made the decision to kind of pull the needle out of the arm on that. So all of these things have kind of come into play. And then the final piece, I guess, is our focus on premiumizing the marketplace. So a much stronger presence now at Nordstrom, where we've actually got a pop-in shop now, which is really, really working well and looks great. So all of this has been an effort to just premiumize the brand, and it's working. But clearly, we have also been helped by the fact that our customers' inventories are clean. We're not getting -- the pricing and promotion environment in U.S. wholesale is a lot of full price selling, not a lot of crazy discounting because they've got clean inventories and consumer demand is strong. So we don't need to. And that has clearly helped as well, along with the fact that many of these customers have accelerated their e-commerce business, and we're benefiting from that as well. So Harmit said it earlier. We used the phrase. The pandemic accelerated change in so many different places. It accelerated the landscape shift in U.S. wholesale, and you'll see it in our gross margins right now.

Got it. That's very helpful. So just to make sure I understand, other than off-price, there wasn't really any major exiting those sort of subpar doors. Just want to understand that. And then one last question, maybe for Harmit. You guys have seen a really nice continuing acceleration in U.S. wholesale. Should we think of that as sort of restocking? Or is that representative of underlying demand?

So to your first question, I think as doors close, there was an accelerated pace of closure of doors in wholesale. There was a time when our mix from traditional retailers, the brick-and-mortar traditional retailers, think of the big 3 or the big 4, was pretty high. So Chip talked about U.S. wholesale being close to 50% of the business. Our traditional retailers were close to 20% or something like that. Today, the mix -- as those underperforming doors have closed at an accelerated pace, that mix -- this brick-and-mortar is approximately 10%. So the growth is really coming from the nontraditional retail. I think that's good news. So it's just strengthening the structure of the business. I think pre the pandemic, U.S. wholesale was a little volatile. If you look at pre-pandemic the last couple of years, U.S. wholesale was kind of flat. We were offsetting door closures with getting more floor space, improving AURs and accelerating women's. I think today, there is growth in U.S. wholesale. It's going to be modest. And when we talk about our growth algorithm when things normalize, we will talk a little bit about how we continue grow this at a modest pace. So that's just in response to your first question. To your second question about are people building inventory, we're just chasing demand right now. And we're not necessarily -- based on recent performance or recent results as we start the quarter, we're not seeing demand curtail. So the hope is that the inventory that's being sold in is inventory that sells through. And so we're not seeing a dramatic change in sell-through rates at this point. I mean our view is holiday will be a relatively strong holiday season. It has -- like [ it ] has already probably started. And I think the NRF talked about a 3% to 5% increase year-over-year. And as we just get a sense of demand -- where people are, it's indicating that is headed to us from holiday season of brands that have inventory. And someone asked this question, I think, during earnings. I didn't think there would be a day that I'll be asked when do you build positive inventory growth year-over-year. But I think as we said, we believe because our fiscal ends in November, a month before holiday, our view is we probably end the year slightly up relative to inventory relative to last year in '19. And I think that's just indicating that we also think the holiday season will be relatively strong.

Our next question comes from [ Gabe ].

I wanted to go back to Q3 results. And I know you guys had mentioned on the Q2 call that June was up -- June sales were up mid-single to high single digits against '19. And then the number for Q3 overall was about, I think, 3%. So can you just go through where the deceleration happened? And I know you had guided to that, and maybe there was some pent-up demand benefit in June, but if you could be more specific about which regions or channels you saw that sequential deceleration, that would be helpful.

Yes, sure. Good question. Thanks. It was largely Asia. Asia, the lockdowns accelerated, Asia. I think a number of stores in Asia that were closed through the quarter were about 20%. Asia was down 23-odd percent, 23 -- something like that. Yes. So I think that was the one reason that was a bit of a drag. Europe continued to grow strength -- sorry, U.S. continues to grow strength to strength. And Europe as it -- I think July lockdowns increased. And then as we exited the quarter 3, it got a little better. So those are the factors that impacted the different regions. Having said that, as we exit September and get into October, most of our doors in Asia are now open. We see our Asia business improved dramatically from what we reflected in quarter 3. So we'll probably be down but not as badly down as it was in Q3. I think -- and we're seeing general strength -- continued strength in the U.S. and Europe. So I think Asia will be probably the region that has improved performance in Q4.

Got it. Yes. That was going to be my follow-up. Just as you go from 3 to the 6% to 7% in the guidance, is that really all Asia? Or are you assuming acceleration anywhere else?

Yes. I think it's -- Asia is, I would say, a big factor. Slight further strength in Europe because in Europe, we're just getting out of lockdowns. But I think those are the 2 factors that drive it. And the only thing I would say is just from a timing perspective, Black Friday, the impact of Black Friday because we're looking at relative to '19, in quarter 4 '19, there was really -- we didn't have the impact of Black Friday. It's going to be a positive headwind in Q4. It's about 2 points of growth.

Our next question comes from [ Dick Mohan ].

[ Dick Mohan ] [indiscernible]. I guess to your early denim cycle commentary. I guess as we think about both the impact of casualization here and abroad plus the shift to wider silhouettes, what would really give you, I guess, pause or hesitation around that? Is there anything -- any kind of KPIs or things you're looking for just in case that trend maybe starts to fade or [ subside ] a little bit?

Well, we're watching it pretty closely. And I wouldn't go out on a limb and say that this is going to be like skinny bottoms that lasted over a decade. And by the way, women are still buying skinny bottoms. So that hasn't completely gone away at the expense of these looser, baggier fits. And we are watching it kind of quarter-to-quarter. It was about 50% of our bottoms business this past quarter. It was about 50% the prior quarter. It seems to have -- I don't want to say leveled off, but it's kind of been consistent over 2 quarters. We'll have to see how it continues to go. We're watching the consumer. We're all over social media because we're looking at what are the young kids doing, which drives a lot of this. And it still seems to be resonating. But I'm not here forecasting that's going to last like skinny bottoms for the next decade. We just got to stay on top of it. And what I continue to reinforce with the team is we need to continue to just focus on the consumer and what is the consumer looking for and meet those needs and ideally be out in front of them. But just to give you a couple of numbers here, our high-rise and looser fashion fits on our women's business were up 81% versus 2019, almost double where they were in 2019. 2019, it was a relatively small collection, and now it's half of our volume. And the 501, we talked about on the call, the 501, which is our franchise, if you will, was up 20% versus Q3 2019, combined between men's and women's. And both were up and up real strong. So we watch it from quarter-to-quarter. It's really hard to predict these things. I mean when we first launched that first collection right before the pandemic, I wouldn't have predicted that this was going to start a new denim cycle. So that's -- we're continuing to keep an eye on it. And it seems to be working. I mean all of our competitors are following it. So that's an indication that they see it, too. That will fuel it further. And so I think I think we're in for a ride here for a while. Whether that's another 2 quarters or 4 quarters or 4 years or 8 years, I don't know. And it's just really tough to predict these things, which is part of what makes this industry so much fun and so exciting.

Got it. And just kind of one follow-up question there. I think to your point earlier, the last denim cycle over a decade ago and kind of the first mover advantages, going back to that, denim cycle were pretty big, but then the trend broadened out and kind of -- not everyone but a lot of retailers started following it. As that kind of happens on the denim cycle, what do you think are kind of the risks and the opportunities as more people start to move into these new silhouettes and these new styles?

Well, as I said, I mean I think it validates that this is full look. And it increases the odds, but it really does drive a denim cycle, I believe. So it kind of floats more boats. And we feel good about the fact that the jeans category, at least here in the U.S., where we've got the data, the jeans category is growing faster than total apparel. Now admittedly, we were pummeled more than total apparel during the pandemic. But the fact that competition is moving into these same silhouettes, they're talking about it on their earnings calls as well, I think, validates that this is real. It's legit. I think the expectation is that it's going to provide a tailwind for a period of time. And I think it's good for the industry and the category overall. As I said earlier, I think, to Ike's first question, as the market leader -- and I've worked on market-leading brands back before in my P&G life. I ran the Gillette business for 7 years. And it's a responsibility of market leaders to drive category growth. And it feels really good to be driving growth at this growth rate right now across the entire industry. When the total category grows, it doesn't have to turn into a share war and a zero-sum gain, which is what happens when categories are flat or declining. And so we feel really good about the robust category growth, and we are gaining share through it. So that's kind of a -- it's a double win, if you will. So I don't worry about the fact that competition has followed. I actually think it's a good thing for the category, for the industry and ultimately for us.

Guys, I think we need to begin to wrap up the call. There was one final question I did want to ask. Harmit, I know we talked about the Beyond Yoga acquisition in general. But just bigger picture, the capital allocation strategy going forward. I mean you guys have the buyback program, dividend, M&A. You just -- I think you spent $800 million of capital last quarter. So just strategy going forward on how we should think about use of cash.

Yes. No, I think -- thanks, Ike, to that question. The company is so much stronger than it was pre-pandemic profitability-wise and even from a cash perspective. As a company, coming into the pandemic, the focus was revenue and profitability. I think during the pandemic, we accelerated our focus on cash and cash conversion now is part of our bonus program for all the executives in the company in the annual plan. And so we're generating a lot more cash today than we were pre-pandemic. Now the question -- and we've always said, when this company really hums, it generates a lot of cash. So the question is how do you allocate it. And I think for the first time probably in the history of the company, goes back 150, 160 years, we've kind of unlocked all the levers of cash deployment. The first protocol is spend capital to grow the company. And 2/3 of our capital deployment is really growth capital, new stores, technology, AI, et cetera, et cetera, some infrastructure capital as we build a distribution center, update our ERP, et cetera. So that's about, I would say, 3% this year, long term between 3% and 3.5%. The second is returning capital to our shareholders. We reinstated dividends. Dividends are back to '19 levels. And we introduced the share buyback program, largely for a couple of reasons. One, float is more than double than it was during the IPO. I think we want to put our money where our mouth is between this intrinsic value. And the last time we did share buybacks, we did create value. And the third is just to offset dilution and employee stock. And the third pillar is all about M&A, organic M&A, we took back Romania. We took back, I think, another market sometime in the last 12 months. But we then bought Beyond Yoga, and we're going to grow that and scale it. So I think as we think about capital allocation, longer term, the company will generate a decent amount of cash. And those will be how we prioritize, first, capital to grow the business, returning capital to shareholders and then M&A. We're not going to do M&A on a regular basis. We now have to -- we've done one. We have to scale it, earn the right that it makes sense and then think about other categories that we want to grow.

Excellent. Well, Chip, Harmit, Aida, thank you so much. Everyone who dialed in, thank you for dialing in. And we appreciate it, and I hope everyone enjoys the rest of their week. So thanks, everyone.

Thanks for having us, Ike. Thank you.

Thank you.

Bye-bye. Thanks.

Bye-bye.