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

Okay. Great. Good afternoon. It's Matt Boss, JPMorgan, department stores and softlines. With us today, we have the team from Levi's. We have CEO, Chip Bergh; and CFO, Harmit Singh. So format for this is moderated fireside chat, and then we'll open it up for Q&A at the end. Chip, I don't know if you had anything prepared. I could pass it over to you or we can kick right off.

No, I don't. I mean thank you for having us here, Matt. We pulled our earnings forward a day so that -- because we've missed this historically because of the quiet period. And so it's -- we're delighted to be here. It's a great opportunity. So thanks for inviting us.

Great. Well, thanks for being here.

Maybe I'll jump right into the heart of what I would say is over the past 2 days here at the conference has really been consumer spending, consumer sentiment, health of the underlying consumer. Maybe on the heels of your print last night, what are you seeing from the consumer today? Are you seeing any signs of slowing? Any change in the underlying health in your business? Maybe how best to characterize it?

Okay. Well, so we reported our first quarter, which is December, January, February, last night, 22% reported revenue growth, 26% in constant currency. Half of that is volume growth and the other half is AUR growth pricing. We've been taking pricing for the last 12 months or so in anticipation of higher costs coming at us, and you see that in our gross margin. We had record gross margin of 59.6%, I think -- 59.4%. And fundamentally, demand is very, very strong. We're seeing that through March as well. The brand, I've been saying for probably the last year or 1.5 years, the brand has never been stronger. I think we may be at the point -- which is a parity claim, right? I think we may be at the point where I can say with confidence that this may be a point where the brand is at its strongest ever. We're stronger today than maybe any other time in the brand's history. And we see that based on the high gross margins that we've got and our ability to pass pricing through. The consumer here in the U.S., I fundamentally believe, is in a very good place. There's no question they're starting to see the impact of inflation. You go to the pump, you go to the gas -- or go to the food store, grocery store, they're clearly seeing it. But a couple of data points. Consumer confidence in March was higher than February or January, almost at pre-pandemic levels. The economy, we are effectively at full employment. Anybody who wants a job can get a job right now. And there are parts of the economy where there are struggles to get labor. That's driving wage improvement. Both salary and hourly wages are rising. And I think that's part of what's contributing to the higher consumer confidence. And then the last thing is the consumer, the home balance sheet, if you will, is in a very, very healthy place. And you've written about it, the consumer during the pandemic, there was a lot of savings. The consumer largely has not had to tap into those reserves. And the first indication that they've had to tap into, it was just this past month. And so we look at that, we look at the demand signals that we're seeing, both from our own retail business, both brick-and-mortar and e-commerce as well as from our largest wholesale customers, and the combination of a really hot brand with the demand signal still being really strong. We feel like we're in a pretty good place. So we beat our own internal expectations in Q1. We beat consensus in Q1. I would say under normal circumstances, we would have raised guidance. We were prudent, I think, to maintain guidance, which I think is a win with all of the uncertainty today, and it's largely based on the confidence that we see in the strength of our brand. And we just -- some credit card data and maybe, Harmit, you can hit that...

Sure, sure.

Even before you go there, I mean within that, to your point, maintaining guidance, maybe, Harmit, some of the things that now you embedded in incrementally, meaning your core business, you effectively did raise.

Right, because you've got Russia out, and you've got $200 million of Russia and foreign exchange impacts that weren't in the base or in the original guidance, and we're offsetting that with fundamentally a slightly healthier core.

Yes.

Yes. So I think it's important for us to say this. And that is that we're looking at stuff on a regular basis. I mean it's not that -- Chip likes to say we have our head in the sand. It's an evolving situation. The consumer is clearly facing higher gas prices and inflation. And so we have to be very thoughtful. The data we see, besides the demand signals we are seeing, I've got data and I get data on a regular basis. I just looked at the market, first data that Mastercard just released on credit spending in March. If you back out gas and you back out auto, it was up 8.4%. If you look at retail and stores, they were up 11%. If you benchmark that versus '19, it's up 18%. Bank of America sent me their data this morning. And if you look at the March spending relative to 3 years ago, it's up 23%. February was up 23%. And they see the second half of March, spending come back. And the other data we look at is what's the impact and how are low-income and middle-income consumers spending on clothing and accessories? And they've seen that increase recently. So you look at all this data and you say, "Okay, the consumer is strong." When you go outside the U.S. and look at Europe, in Europe, our retailers, our wholesale customers, they prebook demand for the next few seasons. And that demand is up in -- outside Russia and obviously, foreign exchange. That demand is up. So you triangle it all and you say, okay, the consumer seems to be in a good spot. The brand has never been stronger. And this is our fifth recession. What tends to happen, I think, in the last 3 or 4 recessions that we have experienced, if you continue to connect with the consumer, even during tough times, when things start bouncing back, they intend to interact with brands they trust, trust in the brands they interacted. And as Chip says, brand has never been in a strong place. Our style has never been as relevant and we're connecting beyond the consumer. So this is a good -- from our perspective, it's a tough situation, but we're in a good spot.

It's a really good point. I was looking at our Chase credit card data even this morning, and March actually accelerated 100 basis points relative to February. What's interesting in there is you saw a 400 to 500 basis point acceleration in travel and leisure, and apparel more or less held trend. And so I think -- and it's actually a good question that I was going to pass to you, Chip, is a lot of the meetings that we've talked about, this move back towards reopening and how maybe different categories, different brands play into that. I think what's interesting with your brand is getting back out, going to events, going to concerts. It's getting back to normalcy. But then this overall halo of casualization that I know you've coined. So maybe how do you think about the overall maybe total addressable market coming out of this for denim? And then secondarily, we still have this denim cycle on the fashion side.

So I was just going to say, so denim on a past 12-month basis here in the U.S. is up 11%. It's growing faster than total apparel. I think we'll see the same thing on a global basis. The casualization trend, which has been going on for a while here in the U.S., is now also global. People that used to wear suits to work in Europe are no longer wearing suits. So these tailwinds of both casualization and then the new denim cycle, which we led with the looser, baggier fits, which is both on men's and women's, unlike the previous cycle, which was skinny jeans, which was fundamentally a women's trend, these are tailwinds that I think we've got going in our favor. And we are, by far, the leading brand in denim. I mean we're bigger. On a global basis, we're bigger than the #2, 3 and 4 brands combined. And so I think we're in a really good place. The other thing, I know there's a lot of concern about recession and what's going to happen to the consumer, high inflation period, I think the pandemic is going to have a long-term impact on consumer behavior. And one of the things that we saw kind of during the pandemic and then even coming out of the pandemic is prior to the pandemic, people are buying too much apparel. And sustainability has really come into the spotlight as a result of the pandemic. And consumers have kind of realized I don't need to fill up my big -- I mean closets and houses in the United States that have been built in the last 20 years, closets are bigger. My wife's closet is bigger than the bedroom that I grew up in. And consumers have gotten smart. And I think if we see anything -- that the concern around the economy, what we might see is consumers buying less but buying quality, buying brands that they trust, buying brands that have -- represent real value, and we think that actually plays to our sweet spot.

Yes. I mean one of the things, and I know we talked about this during the pandemic, was all of the changes that you made and some of the things that you've accelerated during a tougher time. And so coming out of the pandemic, it feels like not just to the consumer, but internally, it feels like you're a much stronger company.

We are a much better company. And in fact, the Chinese characters for crisis is also the same word as opportunity. And crisis creates an opportunity. And when the pandemic hit, I still remember that quarter, it was our fiscal second quarter. In an average quarter, we would do about $1.5 billion of revenue. We did less than $0.5 billion. And so it was a scary moment, but we declared then, we're going to use this opportunity to make this company a better company. We've reworked the P&L. We reworked our cost structure, but we continue to invest in the brand and continue to invest in connecting with consumers. And as we've been coming out of the pandemic, we are structurally a much stronger company from a financial standpoint. The brand is stronger, and we're kind of clicking on all cylinders right now.

It also seems like you have a lot more control over the brand. And maybe, Harmit, could you talk about distribution, maybe in particular in North America, some of the changes that you've made. I know you have the Target partnership, but then also changes at the department store where as people worry about what's going to happen in the next leg of the overall environment, to me, it seems like you're in a lot more control over your own inventory, distribution, presentation and product.

Yes. Pre-pandemic wholesale, people would argue, was not as healthy for us. We had department stores who had financial issues. We had underperforming doors. We had door closures, et cetera. So our strategy was let's grow the business but grow the direct-to-consumer business. Let's grow e-commerce as a result. So 2 things happened during the pandemic. One, we were able to convert the wholesale business in the U.S. to a much healthier business. Target is a great example where we just announced plans to expand the relationship to 800 doors. Plus, as we have interacted with the retailers, we have tried to elevate the brand and really focus on the performing doors and spend our energy on the performing doors plus work with them and grow the dot-com business. So our digital ecosystem, which includes pure players and wholesale.com, is now 1/4 of our business. And we have said that this should be 1/3 of our business, if not more. E-commerce, our own e-commerce, which is now 9% of the business, was half that pre-pandemic. And there's nowhere where we want it to be. I mean this should be in the mid-teens to closer to 20%, and it's high gross margin. Our direct-to-consumer business in the U.S., which is our own doors, was largely an outlet business here. We had very few mainline doors. Mainline doors have performed very well for us outside the U.S. These are 2,500- to about 4,000-square-foot doors. We have begun to open them. We'll have 25, 26 more doors this year than we had last year. We've got a few doors now in Boston, Vietnam. We opened the door in Dallas that we talked about. And the thing that we are doing with the assortment is a little different because the women's business is on fire. So as we are starting in these mainline doors, we're giving equal space. And to the women's assortment mix, we are seeing women and men's clothes in some doors close to 50%. And the women's business is accretive to gross margins, right? There was a time when it was dilutive. So I think we are changing the entire distribution structure, trying to grow the areas of the business where we can control to yourself the assortment as well as work with retailers who are financially healthier.

I mean DTC -- the only thing I would add, DTC has been strategic for us almost since day 1 when I got there. And it is about controlling the brand. I'm a brand guy at the end of the day, and we are in complete control of the brand, and we have the relationship with the consumer. So when I joined 10-plus years ago, DTC was 20% of our business. This past quarter, it was 39%, and our ambition is to grow it way beyond 50%, and we think we can get there. And as Harmit said, the other beauty of DTC is we can shape demand by how we assort the door. We're way underpenetrated on our women's business. It's now a little bit more than 1/3 of our business. It was less than 20% of our business when I joined. It wasn't even $1 billion in sales when I joined this company. And in our own stores, we can skew the assortment to women's, and people are going to buy what they see in the store. So -- and it's working. So it's a big part of our strategy, and we think there's still lots of upside. Again, if you go back 10 years, we were almost entirely outlet. And now we have all these mainline opportunities since our mainline stores are very productive now.

And as we think about Europe, what type of demand signals are you seeing right now on the ground in Europe? It sounded like that, yesterday on the call, was another area of strength for the brand.

Yes. Clearly, in Europe, business is structured a little differently. 50% or slightly more is our direct-to-consumer business. We have a lot more mainline doors, not as many outlets. And the product is more the better and the best and is across wholesale and our direct-to-consumer business. So the demand signals, first, we look at all the consumer data like we look at here, number one. Number two, in Europe, our wholesale retailers prebooked their product for the next few seasons. And we look at that and say, "Okay, how does that compare to a year ago?" And it's up, right? And so that's why we said, even if you back out our Russia business and if you back out the impact of FX, Europe will be up in the high single digit, which is what we started the year with. And that gives us the confidence. The other piece is just demand from our own doors, and we're seeing that. And the other thing we're seeing in Europe that we've also experienced this quarter in Asia is as economies open up, there is that pent-up demand and people are visiting the brands they trust. So you take the U.K., which is now fully open, the business is very strong. France has had a strong bounce back. Germany, they're still dealing with COVID. So you can see that businesses coming back, but coming back slower. We've seen the same in Asia. China, we had lockdowns because of the COVID resurgence, but the rest of Asia was up 20% because economies are open. And I think people tend to gravitate back to brands they have trust and the products they like.

Asia is an area that you've done a lot of work since you got here, Chip, China, in particular. Maybe talk about where we're at today along some of that time line of the work that you've done and what Asia and China potentially means long term in terms of now an opportunity.

Yes. So China is about 3% of our total global revenues. You benchmark that versus many of our peers, that's pretty light. And it's a market that pre-pandemic, we were really focused on dramatically accelerating our growth when the pandemic happened. Traffic is still down in China. Order of magnitude is almost 50% versus pre-pandemic. And we're still dealing with COVID impacts and lockdowns in China right now, and it's a market that I do know really, really well. But given a lot of the geopolitical -- the other thing I should say is back before the pandemic, about 30% of the doors in China were owned and operated. The balance were franchised. So we really relied on franchise partners. And our plan at that point in time was to, over time, kind of reverse that, and 70% owned and operated, 30% franchise, which meant -- implied quite a bit of investment in China. Because of the pandemic, because traffic still hasn't returned to normal, we are being a little bit more cautious, I guess, in terms of our investment, I guess, appropriately diligent about not getting too far ahead of our skis in a market where there hasn't been full recovery yet. And there are these geopolitical tensions. I think what has happened with Russia has been a little bit of a wake-up call in terms of how much do you really want to invest in markets where there could be some geopolitical fallout. So we're going to be a little bit more cautious. It still represents a significant opportunity. Brand health has gotten stronger in China over the last couple of years. We are connecting with the consumer much better. We had real success during Chinese New Year with product that was locally designed, locally made, locally sourced, which is something new for us because they used to have to completely buy off of the global line. And we think that, that represents some opportunity as well. But the brand is strong. We play at the super premium end of the market in China, and it's a good place for us to be. And I'm optimistic, but we're not going to get to 10% or 15% of the business overnight there anymore. We'll be a little bit more diligent.

So as we think about different opportunities, and again, maybe even thinking about expanding out from the core, tops has been a huge opportunity for you. Active is now an opportunity with your acquisition. And as you cited, women's is a material opportunity. So maybe is there a way to kind of segment out from here? Maybe what you're the most excited about? Where you're seeing that traction and just kind of how best to think about some of the other areas, maybe just outside of that core for you?

Yes. I mean, you've pretty much said it. If you go back 10 years when -- 10, 9 years when we joined the company, we were a men's blue jeans bottoms business sold mostly in wholesale, mostly in the United States. And a big part of our success over the last decade or so has been diversifying, really leveraging the portfolio that we had because even within Levi's being such a big brand, there was so much portfolio opportunity with women's, with tops, and that's been a big part of our success over the last 5 or 6 years, even kind of leading into the IPO. And we still have enormous opportunities on tops and on women's. Our women's business, as I said earlier, was less than 20% of the total company when going back a decade. It's now 1/3, but we all know women buy more product that men do in apparel, and it should be half of the business. And we've got our sights set on that. We think it's achievable. Our women's business is hot. It's really resonating. Tops, I jokingly say, we don't even buy market share data in tops because we wouldn't even scratch 1%, enormous opportunity. We sell -- we still sell more denim bottoms than we do tops. And that's the complete inverse of the way the industry is structured. So big opportunities there. Beyond Yoga was an opportunity. We can probably spend a little bit of time on it. But that athletic performance athleisure category is 5x bigger than denim on a global basis. So it dramatically expands the size of the market that we compete in. It's a small little brand. Almost all of its revenue here in the United States between their owned and operated e-commerce business and a couple of wholesale customers. We've got core capabilities in brand building, and that's an opportunity. Brand awareness on Beyond Yoga is in the teens. But the people who are aware are buyers, and they tend to be really loyal. So there's a huge just brand awareness opportunity, and we kind of know how to do that. There's a big channel opportunity. They have no brick-and-mortar. We kind of figured out brick-and-mortar. We're pretty good at that. And we have a pipe built to roughly 60 markets around the world, over 100 where we actually have a presence. And all of our managing directors are like, "When can I get it?" And we're going to be disciplined and thoughtful about how we expand the brand. But as I said on the call, we didn't buy it because we think it could be $100 million this year. We bought it because we see enormous potential for this becoming a big global brand and being a significant contributor to the portfolio of this company.

As we think about channels of distribution, Harmit, how best to think about the digital business, the digital opportunity from here? Maybe what investments have you made? What kind of runway do you see for that business? And maybe anything you can provide maybe on the profitability of the digital business today.

Sure. So the only thing I'll add to what Chip talked about, the opportunities, most of the opportunities are accretive on gross margin, direct-to-consumer. I mean, I'll talk about e-commerce in a minute. Women's, higher gross margin than men's today. Beyond Yoga, higher gross margin than our base business. So that's the good news. I mean, so as we grow this, it should only help our margin structure. Going back to distribution and going back to the digital piece. Our digital piece is -- I only commented, double where it was, but it's nowhere we'd like it to be. The 9% should be 20% or 25%. And especially if the consumer is shopping more digitally. And so the way we think and the digital ecosystem, which is about 1/4 of our business, should be in 35% or 40%. And I think that's where we see the opportunity. The e-commerce business of Beyond Yoga is 50% of their business. So there's no reason why it shouldn't be higher. So a couple of things we're working on. Because we were starting from behind, we had to roll out e-commerce by launching our own websites. Once we were happy with that and we got that scale around the world, then we said, "Let's go with mobile app." We've got mobile app now in 9 countries, okay? There's nowhere near where we want to be. And we'll be adding more countries this year and then scaling that up. Because today, the younger consumer and all of us, I think, are using the mobile app a lot more. That's one. Second, loyal consumers. We have 8 million loyal consumers. For a brand our size, it should be 100 million loyal consumers. We are scaling that up through programs. Loyal consumers, a, interact more frequently with the brand, plus we are able to provide newness collaboration directly to the loyal consumers first. And so scaling that up, I think, is important. The third is just the basics, foundations. One of the things that happened during the pandemic, at least in our company as well in other companies, is the agility and the speed to get changes made. We rolled out buy online, pick up in store in a matter of weeks when we were looking at doing it this year. So now we're scaling that around the world. The ship from store with all the logistics issues we are seeing, we've got that scale in the U.S. We're scaling it up in Europe. And basic things like personalization, 24/7 shopping that we can provide, those are the things we're still working on. We call that the basic, but that's important. And then just ensuring that our e-commerce consumers get access to the new stuff on a more regular basis. That's something we're learning from Beyond Yoga because they're bringing newness or there's something new on a daily basis there. So I think thinking of that, I think, is important. Now good news for us is even at 9%, the business is no longer unprofitable. It actually is making money. It's mid-single digit. When it doubles, it won't be dilutive to our overall EBIT margin structures. And so it's all about scale and getting that going. It does require investment. And so -- but we have the cash and we have the capital, and so we're investing that over time.

The one other thing I would add about digital, especially here in the U.S., which is our biggest market, is -- and I said it on the call yesterday, you probably remember it, that the one place where I was not happy is our e-commerce growth, which was 13%. So it lagged the company average. And so it's getting a lot of my personal attention right now, let's just kind of put it that way. But a lot of our opportunities is basic blocking and tackling. If you go to the most popular items in the most popular sizes, sometimes we're out of stock. So west of the Rockies, we brought all of the distribution for e-commerce into our Henderson distribution center. East of the Rockies, we're still in a third-party logistics provider. So it's a separate pile of inventory that goes out of stock more frequently than our own distribution centers. So we've now -- we will now open the east of the Rockies in the next year or so, a new owned and operated facility that will basically -- it should be our best store. Our e-commerce site should be our very best store and it shouldn't be out of stock on our best-selling items in the most popular sizes. So that will also be a big help. I mean, some of this is just basic blocking and tackling and really leveraging the strength of the brand to connect with the consumer. And I think it will continue to represent a growing part of the pie of our business, and there's lots of upside there.

Yes. And what's interesting, too, is I know that you've cited continued opportunity with your owned stores at brick-and-mortar as well. You always use the Boston example.

Yes. Now I can't use that anymore.

You can't use that case anymore. But how many examples like that still are there? How many opportunities out there do you see at brick-and-mortar still going forward? Or maybe where do you think we stand?

Yes. So we have a new Managing Director of our business in the U.S. and Canada who came from -- he was running our business in India. And he's been on the ground now for about 6 weeks or so. And he was here in New York just last week or 2 weeks ago. And he [ walked all of ] New York. And he was like New York could be as big as our India business. Manhattan can be as big as our India business. He's super excited. I mean the good news is, if you go back to when we joined the company, our mainline model wasn't really working in the U.S. And it was -- for a lot of reasons, we believe we had to have much bigger stores because we have to stuff all of our stores with everything we sold, which meant that we wound up in bad locations and meant that we wound up with bad stores that weren't very, very productive. We've totally flipped it on its head, and our new model are these smaller footprint stores that Harmit just referenced, 2,500 to 4,000 square feet, where we can put it in great locations and then we assort the stores smartly, leveraging data science and who's shopping in that particular mall so that we can assort the store very, very strategically. And those stores are highly productive and profitable. And once we've got a degree of confidence that, that model works broadly, our ROIC is very good, it's cookie cutter. And we have markets -- I think we opened our first mainline door in Seattle just a couple of months ago. We just opened our first couple of mainline doors in the Boston and Greater Boston area. But we have markets where we have no mainline. I mean, Nashville, which is booming, we don't have -- and it's country Western town, right? I mean you would think Levi's would kill it there. We don't have a single mainline door, but we've approved 1 -- we've actually approved 2, I think, in the last 2 months or so. But there are lots of markets where we might only have 1 or 2 mainline doors where we could easily -- you look at Manhattan, we could easily have a half a dozen more stores in the Greater Manhattan area [ or even alone ]. So there's lots of opportunity. We'll do 25 or so mainline doors in the U.S. this year. And we've said over a 3-year period of time, 100, but that may be light if they all work or most of them work.

Yes. And so with the strength of the brand, you cited the brand might never have been stronger than it is right now. How do we think about pricing? Are you seeing any pushback whatsoever with some of the pricing actions? And with some of the rising input costs and some of the rising costs of doing business, how much can you use pricing as a lever to basically net out on the positive side against this?

Well, we did start taking pricing early. We saw the cost increases coming. And if you get behind the curve on pricing in a very inflationary period of time, it's almost impossible to catch up. So we got out ahead early, which is part of the reason why our gross margins are as healthy as they are combined with the fact that inventory levels have been generally very healthy around the world. So that means lower promotions. So the combination of those 2 things have helped from a pricing standpoint. We're being much more scientific about pricing. So we didn't go take a 5% price increase across the line. We used data and data science and advanced analytics to help us isolate where do we have the greatest opportunity. And that is why the pricing has stuck. I mean our AURs were up 10% this last quarter. They were up 10% the prior quarter versus a year ago as well. And we've got more pricing coming because we expect costs will continue to be under pressure. And -- but at the same time, we're watching it like a hawk. I mean, I don't want people to take away that we're completely oblivious to what people are saying and writing about and what economists are saying. But -- and we will have options if we need to pull back. And -- but we'll watch it real closely. But right now, we've seen no resistance to price increases. We haven't seen consumer pushback. I mean, our unit volume grew, drove half of our growth this past quarter. And the brand is really, really strong, which gives you pricing power. As Jim Collins likes to say, you don't have to hold a prayer meeting before you raise prices. And that's kind of where we are right now with the strength of the brand.

Harmit, gross margin, it was a material area of upside in the first quarter. Maybe could you just walk through some of the assumptions now embedded for the remainder of the year on the gross margin front?

Sure. So the gross margins were up because pricing actions were sticking. They're all helping to offset inflationary pressures that we're seeing. The higher direct-to-consumer mix is making a difference. Growth we saw in Europe, making a difference because of the higher gross margin business, and same in Asia. So a lot of factors that worked in our favor. As we think about the year, we took our gross margin expectations up a notch, right? And that is despite Russia suspension as well as China slowdown because those are higher gross margin businesses. So we're offsetting that. As we think about the year, there is pricing coming in, in the second half. And the reason we said it's coming is because we are selling into the retailers as we speak and is really done with the purpose of offsetting some of the cotton inflation that we saw. So I think if you think about -- and there's a little bit more FX because that also hurts us. But having said all that, I think we see the impact of the first quarter carry itself through the end of the year. We'll still end the year at a record gross margin because last year was a record and this year. And as you think about gross margins going forward, and we'll talk more about it in Investor Day because you love to ask what your growth algorithm is. But the pieces of the business that we're focused on growing are actually margin -- gross margin accretive. And so I think more to come from that perspective. And the only thing I'd say on the gross margin is we have, in the second half, built in an increase in markdown and promotional expectations because the consumer is feeling the pinch. If inventories are higher across the board, we could see that. So we have built that. And if that doesn't happen, there is that.

Is it fair to say that on that point, that's not something that you've seen yet that's built in?

Yes. Yes. We haven't seen it. We didn't experience it in Q1, but we've just been cautious.

Yes. On the expense side, what's the best way to think about SG&A expense dollars relative to top line going forward in the model?

Yes. I mean I think we need about 3% or 4% top line growth to offset what we call normal inflation. And then as we grow our direct-to-consumer business, it is a bit of an SG&A drag because it takes little time to ramp up, but it still leverages on an EBIT perspective because the gross margin on DTC is higher than the SG&A. I think -- and so -- and we'll talk more in our Investor Day. As our growth expectations tick up, you should be able to see some leverage. And that's what will drive EBIT margin growth over time. Now we will -- the areas where we'll probably invest, we'll continue to look at advertising. And if that unlocks higher revenue growth, that's an equation that I think is acceptable to all and it reaches out to consumers, et cetera. But from an infrastructure perspective, we've got these DCs we're talking about, the ERP upgrades and we're doing it over time. So it's not like it [ will ] hurt us in 1 year, it'll happen over time. So I think you will see EBIT leverage as the years progress, just because of the revenue growth and our focus on costs.

Maybe I'll ask one more, and then we'll open it up to any questions in the room. But just capital allocation. How would you rank priorities for cash flow going forward and help us to think about the balance sheet?

Yes. I think when we did the IPO, we laid out 3 areas of spend. One was capital, think of capital at 3% or 4%. Last year, it was closer to 4%. So we think spending capital to grow this business is largely in the form of new doors. Technology to unlock growth and some infrastructure, I think, will continue. That's important. And the business -- the beauty of this business is, as you grow the business, it generates a lot of cash. The second is we're a dividend-paying company. We don't have a dividend policy. We said historically, we've grown dividends, and that's been our practice. We suspended it during the pandemic, but then we reinstated it and is higher. So that will continue. And the second piece of return -- returning back to the shareholders was buying back stock to offset employee stock dilution. We have done that. But then we said, okay, we have a decent amount of cash. So we just completed the $200 million program on share buyback. And then the third was acquisitions, which is both organic, things like the take back of Thailand, like Andes. And we're kind of running out of that. And then inorganic like Beyond Yoga. We're not going to do a lot more acquisitions until we prove it out. So I think as you think about Investor Day, one of the things we have heard from investors is, "Okay, you do pay dividends. Can you give us some clarity on how you will think about dividends over the long term now that you have enough cash? And there's enough float because when we went public, the public float was less than 10%. Today it's over -- it's close to 25%. Will you be doing share buybacks higher than dilution? So we're thinking through that. We'll have a discussion with the Board and we'll talk more about it at Investor Day.

Great. With that, I'll open it up to any questions in the room.

As it relates to inorganic acquisitions, what -- how does what you've experienced so far with the one you've done inform your path for the next one, if at all?

Well, I guess what I would say is I don't think we have license to do another acquisition until we prove this one out first. So we're kind of in a little bit of a holding pattern. We're looking at things. But we're very, very optimistic based on everything that we've seen from the Beyond Yoga acquisition. We talked about the importance of cultural fit, we've got a really, really, I want to say, unique culture. And there is a very strong cultural fit. All of the employees of Beyond Yoga stayed at the time of the acquisition. I think we've lost maybe 3 in the 3 or 4 months since the deal closed out of 80 so -- 80-or-so employees. As Harmit said, we're learning as much from them as I think they are from us. They're a lot smaller. I mean it's an entrepreneurial kind of start-up and they're scrappy. But one of the things we've learned from this, they dropped a new product every single day on their e-commerce site. And I'm like, we're a much bigger brand and we don't do that. How come we don't do that on Levi's? So it is a win-win. I would say having a really clear path on how it's going to create value, kind of short, medium and longer term is one of the things that is really, really important. And we had a thesis. When we did the acquisition, we're kind of proving that thesis out as we get onboard. The big opportunity here is scaling it. This is a sub-$100 million brand, which we think has huge potential. So how do you build the capability to scale without getting too far ahead of your skis to collapse the structural economics of the business? It's a really profitable business. So the pacing and where you put your bets in terms of the talent that you need and the capabilities that you need is part of the magic of putting this together. So -- but there are other categories that over time could be really attractive to us from an acquisition standpoint. But we need to make this one work to get licensed to do another one. And we haven't done an acquisition as a company in over a generation, decades. And so the other thing I would say is one of the things that I -- the role I guess I've played is making sure that a big company doesn't squish the little company, right? There's a lot of magic in that little company, and we need to make sure that we treat it with tender loving care while integrating it. These guys were private with a private investor, the father of the founder was the main investor. And now they're part of a publicly traded company that has to close the quarter with a great deal of granularity to meet SEC requirements. So that first close was an interesting experience because they had -- we had to get levels of detail out of the business that they just weren't used to providing. So they're learning about how to run a more disciplined business from a financial reporting standpoint. So there have been some growing pains along the way, but I have to say that I'm much more optimistic about the long-term potential of this business now that we've had an opportunity to really crawl underneath the covers and meet the talent. It's a super talented team and they really, really know their consumer. And the product is part of what makes the brand unique and special. It is a very distinctive product with a buttery [ saucepan feel ] that when we get consumers into it, they love it, and there's no going back to what they were before. And so that's the marketing challenge ahead of us, and that's a pretty easy marketing challenge. So there's -- I think there's a lot of opportunity here.

And by the way, the one thing that's changed from the time when we got in is how we are operating the company. So let me explain that a little bit. Dockers was a brand that grew up from within the company. But it was part of the Levi's group. So the merchants are part of the Levi's merchants. The marketeers were part of the Levi's. And Dockers, as you know, has struggled. And so we had a couple of choices 18 months ago. We could either exit Dockers, but we would give it to a private equity who would find a way to dedicate time and turn it around or we could keep it and run it like private equity. And that's what we chose to do. We actually separated the team from the Levi's group because we wanted -- there's so much opportunity in Levi's. We wanted Levi's to focus on Levi's. And we set up an operating structure for Dockers. And they are incented, okay, on the value Dockers creates for the mother brand because we ran -- it was a private company. So we had external values valuing the company. That allowed us to help turn around Dockers. For the first time, Dockers is no longer a drag. It's actually growing. That structure is what we've used for Beyond Yoga. And so it's an independent operating structure. We have an operating Board like any private equity, and we're running it like that. So we provide what I'd call capital and strategic ideas to a group that is in part to grow the business on a regular basis. Now this works, right, then you could talk about a company that has a portfolio of brands in different categories and scaling it. And the other thing, as we looked at acquisitions, we said, let's not do a bet to [ farm more ], okay? Let's not focus on turnarounds because we've done 1 turnaround. We may be doing 2. Let's look at opportunities that can scale and grow because we have a business that's global. And so I think that's the other opportunity as we look at other smaller acquisitions over time is because we do now have a pipe supply chain back of the house, infrastructure and people that we can easily scale over time.

In fact, I mean, one of the things that you mentioned that triggers a thought is Beyond Yoga wasn't being [ shopped ]. We contacted them proactively. We were very interested in that category because of its size, because of its growth rate, because of the structural economics of the category, because of the casualization trends, this is just a continuation of their casualization trends. And so we proactively reached out to a number of companies and brands. And literally, the moon and stars kind of aligned with Beyond Yoga because they have gotten to the point where they needed capital. They were at the point where they had run their business, they've been around for 15, 16 years, in a very disciplined way. They were profitable every single year that they've been in existence. They kind of built their business the old-fashioned way, made money and reinvested it back into growing the business. And they had hit a point where they started to really need capital. As they continue to expand, just to pay for the inventory, they needed more working capital. As they started thinking about the need to do retail stores, obviously, that's capital-intensive. They had hit a point where to continue to grow the way they wanted to grow, they were either going to have to sell a part or all to private equity, go raise some debt or think of a strategic buyer perhaps. And we proactively reached out right at that point in time where they were wrestling with what do we do from a capital structure standpoint for the company. And what attracted them to Levi's was our culture. And in fact, when they announced the deal internally, they showed the Levi's Circles ad, which was the ad that we had, I don't know, 4 or 5 years ago, which showed the diversity of our consumer base basically. And they said, this is the company for us. And they talked about the culture fit with Levi's as being what attracted them to us. So it was -- but one of the big lessons is you don't wait for the deal to come to you. You've got to be out there figuring out what it is that you want and going after it and identifying your targets and developing the relationships. And this was a case of needing to build a relationship. And it took several months as a result of that, but the outcome, I think we will prove over time, was well worth it.

I think that's a perfect place to close. Thanks for your time today, guys, and congrats on the momentum in the business.

Thanks, Matt. Thanks for having us.

Thanks, Matt.