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

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. Fourth Quarter and Fiscal Year End Earnings Call for the period ending November 27, 2022. [Operator Instructions] This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. This conference call is being broadcast over the Internet, and a replay of the webcast will be accessible for 1 quarter on the company's website, levistrauss.com. I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Co.

Thank you for joining us on the call today to discuss the results for our fourth fiscal quarter of 2022. Joining me on today's call are Chip Berg, President and CEO of Levi Strauss; and Harmit Singh, our Chief Financial and Growth Officer. We have posted complete Q4 and full year financial results in our earnings release on the IR section of our website, investors.levistrauss.com. The link to the webcast of today's conference call can also be found on our site. We'd also like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could materially differ from those contemplated by our forward-looking statements. Please review our filings with the SEC, in particular, the risk factors section of the annual report on the Form 10-K that we filed today for the factors that could cause our results to differ. Also note that the forward-looking statements on this call are based on information available to us as of today, and we assume no obligation to update any of these statements. During this call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being webcast on our IR website, and a replay of the call will be available on our website shortly. [Operator Instructions] And now I'd like to turn over the call to Chip.

Good afternoon, and thanks for joining us today. Q4 concluded a strong fiscal 2022 performance with the quarter delivering on the high end of our expectations for both revenue and EPS. This was driven by strong growth internationally and in our direct-to-consumer business, which saw a record quarter performances across U.S. DTC channels and positive comp sales across the Americas, Europe and Asia. On a constant currency basis, Q4 net revenues were flat with the prior year's record Q4 revenue, and we grew the business 6% above 2019's prepandemic level. For the full year, we delivered another year of strong growth. We grew reported revenues plus 7%, plus 12% in constant currency. We delivered strong market share growth globally. And despite facing a more challenging consumer environment in the second half as well as currency headwinds, we grew adjusted EPS year-over-year by managing the factors within our control. We continue to diversify our business. Nearly 40% of our revenues came from outside of denim bottoms. We drove outsized growth on women's tops, DTC and international. We returned $350 million to shareholders, an 84% increase over prior year, and we charted the course for sustainable, profitable long-term growth by introducing our new strategic plan and long-term financial targets. Let me go into more detail. Note that for the balance of our remarks, Harmit and I will reference revenue growth in constant currency. Starting with our brands, focusing first on Levi's. In 2022, the Levi's brand grew 11% and grew global market share more than any other denim brand for the second year in a row, led by share gains in both men's and women's. Levi's is bigger than the next 3 brands combined, reflecting market share gains for 5 out of the last 6 years. According to Euromonitor, in 2022, the denim category grew low single digits globally, outpacing total apparel for the full year and is projected to grow at a similar rate in 2023 and at a mid-single-digit CAGR over the next several years. With exciting initiatives planned through the year, including rolling out a robust and innovative product pipeline and a powerful brand marketing campaign, we remain well positioned to continue to grow market share and drive category growth in the year ahead. Levi's brand equity remains very strong as evidenced by the 6% AUR increase and healthy 60% gross margin, which was up another 20 basis points in 2022. Another barometer for the health of the brand is the success of our iconic 501, which grew nearly 30% for the year. Looser fits remain on trend and grew double digits this year representing more than half of our total bottoms assortment for the year. And in 2023, we're celebrating the 150th anniversary of the iconic 501 jean. This will be anchored in a powerful multimedia brand campaign that launches next week during the Grammys and will show up around the globe across TV, cinema, print and digital. We also have an exciting lineup of exclusive collaboration drops and continued product freshness and innovation hitting stores across the world throughout the year. Turning to our direct-to-consumer business. We made excellent progress in growing our global DTC business which was up 18% for the year driven by a 19% increase in our owned and operated stores and a high single-digit increase in e-commerce. Combined, DTC delivered solid mid-single-digit growth in Q4 plus 10% growth, excluding Russia, and comprised 39% of total company net revenues, a fourth quarter record. In both Q4 and throughout the year, we generated solid comp store sales growth while expanding our footprint with our global rollout of 136 NextGen stores. In the U.S., our DTC business broke a Q4 record with mainline and outlet stores and e-commerce each delivering record revenue. We continue to see strong momentum in traffic across our fleet as well as strength in AURs, which increased high single digits versus last year. We opened 11 mainline stores in the U.S. in Q4 alone, bringing total U.S. mainline doors to 66. Early results are very encouraging, with most of them exceeding revenue and profitability expectations since their opening. And we have a great pipeline of mainline doors coming in 2023, including Nashville, Honolulu and Miami. During the year, we grew our base of loyalty consumers to nearly 23 million representing an almost 50% increase over last year. And our app is now up in 18 countries across the U.S., Europe and India. As we look to the year ahead, we're investing in capabilities and talent to drive sustainable, profitable long-term growth in our digital business. Last week, we announced hiring our new Chief Digital Officer. Jason Gowans joins us in early February from Nordstrom, where he was most recently SVP of Digital Commerce. Jason will focus on bringing together our engineering, data, AI and digital product management to spearhead our digital efforts for both e-commerce and our digital go-to-market. We also made progress in wholesale. For the year, our total global wholesale business grew 9%, and is more elevated and digitally oriented. In the quarter, against the 20% comp a year ago, global wholesale was down 4% largely because we were unable to fulfill approximately $40 million in orders due to capacity challenges at our U.S. DCs. Still within wholesale, we saw bright spots particularly our Levi's women's business at our top 10 accounts, which grew mid-single digits compared to the prior year. As we move into 2023, we are encouraged by healthier inventories in the channel and the work we have done to improve our own inventory dynamics and actions to improve capacity at our U.S. DCs. Finally, we also achieved substantial progress on our diversification strategy. Nearly 40% of our 2022 revenue was beyond denim bottoms, including chinos, active leggings, tops, dresses, footwear and accessories. These businesses grew 10% in 2022, and we expected sales penetration to continue to grow meaningfully over the coming years. Expanding our women's and tops businesses is a key priority in our strategic plan. And in 2022, we drove double-digit growth in each category. Total company women's revenue grew 13%, surpassing $2 billion, and our tops business grew 12%, exceeding $1.2 billion for the year. We are expanding our offerings in both women's and tops and believe these areas still represent meaningful upside. International diversification is also a key strength in these times of macro uncertainty, and international now represents 53% of our total business. In 2022, our international business grew 13%, 15% excluding Russia, even as we navigated a more challenging consumer environment,in Europe and lockdowns in China. This was driven by broad-based growth in Latin America, Asia and Europe, excluding Russia. The Dockers and Beyond Yoga businesses are also becoming growth drivers with long runways that expand our addressable market opportunity. For the year, Dockers grew 27%, driven by broad-based double-digit growth across all geographies and nearly double the EBIT. Revenue continues to shift to a healthier mix with nearly half of sales now coming from outside the U.S. and about 1/3 in DTC. 2022 was the year of integration for Beyond Yoga and we're pleased with its $100 million revenue contribution. In Q4, we opened Beyond Yoga's first 2 brick-and-mortar stores giving the brand an opportunity to showcase its full category offering. Approximately 50% of their sales are from customers new to the brand, and we believe brick-and-mortar will be a powerful catalyst for the brand. As we look forward to 2023, we have a lot to be excited about. We are the undisputed leader in the denim category and are driving its growth. Our brands are stronger than ever, resonating in the marketplace and driving strong AURs. We have exciting initiatives planned to continue to capture market share. And on top of our continued DTC momentum, we are driving even more excitement with the 150th anniversary of our most iconic product, the 501. Finally, I'm excited about the future leadership of this company. Michelle Gass joined us as President earlier this month, and she has hit the ground running. Michelle brings deep omni retail experience and strong brand-building skills. As President, Michelle is responsible for the Levi's brand and the global commercial organization, which includes all go-to-market wholesale franchise, retail and e-commerce. She effectively has about 85% of the company's P&L. And though it's only been 3 weeks, she's already making a difference. She and I have a well mapped out transition plan, and I'm confident she will become our next CEO within the next 18 months. I'm also pleased to share that Harmit's role is expanding the Chief Financial and Growth Officer. You all know that Harmit and I have had a great working relationship, and I cannot understate the role that he has played as my partner these last 10 years in turning the company around, taking it public, instilling financial discipline and driving accelerated profitable growth. In this expanded role, Harmit will assume additional responsibilities for strategy and retail real estate. I'm certain with the expansion of his role, he will continue to be a key partner for me and Michelle in steering the company to our long-term goals. Congratulations, Harmit and over to you.

Thanks, Chip. I'm both humbled and excited to be taking on the new role given the tremendous opportunity for our portfolio of brands. I remain committed to this company and delivering on our long-term plan and working with you and Michelle to deliver for our stakeholders. Before I walk you through our Q4 results and the outlook for '23, let me start with 3 key points. First, we delivered a solid quarter with net revenues in line with prior year, highlighted by continued strength in our direct-to-consumer business. This quarter's performance reflects the benefits of the diversification of our business as our success internationally in Asia and Latin America, both sustained incredible momentum in Q4 demonstrating the power of the Levi's brand around the world and helping offset declines in U.S. wholesale and Europe, largely driven by Russia. Second, the steps we have taken to emerge stronger from the pandemic have substantially improved the structural economics of our business, enabling us to deliver gross margin for the year, 380 basis points ahead of 2019, and adjusted EBIT margin, excluding foreign exchange of 12%. We have positive momentum entering '23. Our global direct-to-consumer business is delivering strong growth, accelerating through the holidays and positioning us to drive further revenue acceleration in the channel. Europe exited December with positive constant currency growth, which was broad-based across major markets. And we also expect to benefit from several tailwinds, especially in the second half including improved commodity costs, foreign exchange and the continued benefit of cost initiatives we have implemented. I will now walk you through the progress we achieved in Q4 then what that positive momentum means for '23. Net revenue was in line with the prior year driven by strong growth in our DTC business. Our international business was up 3%, offset by a mid-single-digit decline in the U.S., which was primarily due to supply chain challenges impacting U.S. wholesale. Our DTC channel net revenue grew by 6% driven by positive comp sales growth across all segments, including in the U.S. and Europe. Traffic, AURs and UPTs all grew on a global basis. And despite consumers returning to our stores in large numbers, our e-commerce business grew 5%. Adjusted gross margin in reported dollars was 55.8%, up 150 basis points versus 2019, but contracting 230 basis points year-over-year partially due to an approximate 100 basis points unfavorable currency exchange rate impact. Price increases and a favorable channel mix partially offset the impact of higher product costs and lower full price sales. The decline in gross margin was greater than our guidance owing primarily to the impact of foreign currency and lower full-price sales than we anticipated. Moving to SG&A. Adjusted SG&A expenses in the quarter was $745 million, down 4% from last year as we remain laser focused on controlling costs while continuing to invest selectively for the long term. Adjusted EBIT margin was 9%, contracting 300 basis points on a reported basis and 210 basis points on a constant currency basis. Adjusted diluted EPS was $0.34 at the high end of our Q4 outlook despite a $0.04 negative impact from foreign exchange. I'll now take you through key highlights by segment. In the Americas, net revenues declined 5%. A strong growth in DTC and double-digit growth in wholesale in Canada and Latin America was offset by a decline in U.S. wholesale. DTC growth of 8% was driven by positive store comps in the U.S., Canada and Latin America and e-commerce as well as the addition of new stores. Overall, Canada was up mid-single digits and Latin America grew 15% driven in part by strong growth in our second largest market, Mexico. Europe outperformed our expectations, down modestly at 4%, excluding Russia, on top of 17% growth in the prior year. Overall, Europe's Q4 revenues saw a sequential improvement relative to Q3 primarily driven by DTC and the strength in our core bottoms business. DTC was up 3%, excluding Russia, and we experienced momentum in key markets like the U.K., Germany and Spain entering Q1 '23. In Asia, net revenues were up 17%, reflecting sustained broad-based growth across most markets led by India, ANZ and Indonesia. DTC revenue growth of 17% was driven by strong comp performance in company-operated stores and wholesale also grew 16%. Our successful pricing actions also delivered double-digit AUR growth in the quarter. Overall, operating margin also expanded over 600 basis points to 11.4%. Turning to balance sheet and cash flows. As we discussed throughout last year, we have strategically built inventory ahead of our U.S. ERP implementation in the first half. Reported inventories increased 58% on a dollar basis over prior year in line with our plan. If you exclude the ERP build and goods in transit, the increase is approximately 35%. The bulk of the increase was in core products, which can be sold across multiple future seasons and represents more than 2/3 of total inventories. We are confident that Q4 inventory growth will be the high point and have managed [ buys down ] for the first half of '23 by 25%. With the ERP preparation underway, we expect to bring inventory back to normal levels by the end of Q2, which will provide a working capital tailwind in the second half. Cash and liquidity remained strong with the end of quarter net debt of approximately $500 million and overall liquidity of $1.5 billion. Our leverage ratio remained at 1.1x. Owing to investments in inventory, adjusted free cash flow was approximately negative $53 million in the fourth quarter. We remain committed to returning capital to shareholders. And in the fourth quarter, we returned approximately $82 million, bringing our '22 total return to $350 million. In Q1, the company declared a dividend of $0.12 per share, in line with last quarter, and we currently have approximately $700 million remaining under our share repurchase program, which has no expiration date. Before turning to our outlook for the year, I will touch on our holiday performance. DTC momentum continued through the holiday period of November and December, up almost 10% versus prior year. Growth accelerated sequentially from November into December. This reflects the continuing strength of the Levi's brand, generating strong results across the globe, led by continued strength in brick-and-mortar, including in the U.S. And despite operating in a largely promotional marketplace during the November, December period, gross margin remained robust, almost 200 basis points ahead of 2019. Now let's turn to our fiscal '23 outlook. As we look forward, we are confident in our strategies and continue to expect profitable growth in '23. That said, we acknowledge there's still a lot of macro uncertainties and have [ assumed ] caution in our outlook. We do, however, expect additional tailwinds in the second half as we lap higher product costs and the stronger dollar. For fiscal '23, we expect net revenues between $6.3 billion and $6.4 billion, reflecting reported revenue growth of 1.5% to 3% year-over-year, inclusive of 200 basis points of headwind split evenly from foreign exchange and the suspension of our business operations in Russia. In reported dollars, we expect low single-digit growth in the Americas and Europe, excluding Russia, and mid-single-digit growth in Asia. This includes a negative 100 basis points of FX impact in Europe and 500 basis points in Asia. For gross margin, we anticipate expansion of 20 to 30 basis points driven by the favorable accelerated shift of our business towards DTC, digital, women's and international. Our SG&A rate is expected to deleverage 40 to 50 basis points due to continued strategic investments to set us up for future growth, yet remaining disciplined on expenses. Overall, we expect adjusted EBIT margin to be down 10 to 30 basis points versus '22. We expect interest expense to normalize to approximately $15 million a quarter due to not benefiting from deferred comp interest as we did in '22, and a full year tax rate in the mid- to high teens. Adjusted diluted EPS is expected to be in the range of $1.30 to $1.40. We continue to invest behind high ROI growth initiatives, uses of capital in '23 include full year CapEx of around $280 million. We expect cash flow to be positive as inventory normalizes in H2. In terms of DTC brick-and-mortar, we anticipate opening more than 80 net new company-operated stores globally. In the U.S., we plan to open around 15 full-priced Levi's NextGen doors in '23, taking our mainline door count to approximately 80 by the end of the year as we progress towards the goal of opening 100 full-priced doors in the U.S. I will now share some color on H1 versus H2 and then some H1 quarterly detail given the ERP implementation taking place in the U.S. in the second quarter following successful implementation in Canada and Mexico. Our guidance assumes that our business will strengthen in H2 versus H1 given more difficult compares in H1 as well as continued headwinds from foreign exchange and higher product costs. Therefore, we expect reported revenues in H1 to be down low to mid-single digits compared to prior year. We expect these headwinds to moderate in H2 and reported revenues to increase high single digits. Given the 150th anniversary kicking off in late Q1, we expect advertising as a percentage of revenues to be higher in H1 than a year ago by 40 basis points with no change on a full year basis. As we advance wholesale orders prior to the ERP implementation, we expect revenues to increase low single digits for Q1. Q1 gross margin is expected to be down at least 200 basis points. Conversely, for Q2, we expect revenues to be down high single digits due to the shift in sales to Q1. Q2 gross margin is expected to be slightly up due to a more favorable mix with higher DTC penetration. Before I turn it over for Q&A, I want to leave you with 3 key points: our market share expansion, the diversity of our business, and December exit rates bolster our confidence in our ability to continue to deliver profitable growth in 2023. The investments we have made in DTC are driving strong and sustainable performance. We will continue to strategically invest in growing our store base, ensuring we drive comp sales growth and accelerate e-commerce. Finally, our commitment to our long-term growth goals and strategy is unwavering. Although '23 will be impacted by the softer macro environment, the underlying momentum in our business and strength of our brands gives us confidence in our ability to deliver on a growth algorithm beyond '23. With that, I'll now go ahead and open the call for Q&A.

[Operator Instructions] Our first question comes from the line of Laurent Vasilescu, BNP Paribas.

Harmit, congrats on the additional responsibilities. Harmit, it's very helpful, the guidance. Question here, Harmit, is on gross margins. There's a lot of debate out there if you think about -- if you compare your gross margins relative to 2019, they're up 400 basis points. Harmit, I think during the pandemic, in 2021, you talked about 3/4 of that is more structural. And then maybe 100 basis points is just the lack of promos. We did see the promos kick in, in this fourth quarter. How do we -- is that still the framework that we should think about going forward? And then maybe just clicking down on 2023 guidance. This gross margin of 20 to 30 bps. Can you kind of maybe walk through like how much is ocean freight recapture, commodities offset by increased promotions?

Sure. Good question, Laurent. So to your point, when we started '22, we had anticipated gross margin accretion, 3/4 structural. Fourth, potentially giving way to higher promotions. I think as we ended the year, the variables were broadly similar, but I think slightly different. So I think what probably happened, the accretion is largely structural. We had further promotion. I'd say it was -- second half got a little bit more promotional. So the 100 probably -- I'm just thinking aloud here, is probably $150 million. We also got foreign exchange headwinds in the second half, which was different to what we anticipated. Now as you know, we do hedge, but we don't hedge every currency. And so that was probably the third element that got introduced. But given the diverse nature of our business, I think we ended the year structurally from a gross margin perspective a lot better and a lot stronger company. So you think about '23, and our gross margin guidance that I gave, I'd say primarily driven by structural improvements. Higher DTC is growing at a fast pace. I think our DTC business in '23 is going to grow at low double digits. International, definitely helping. And where we are really focused on is growing women's, which is accretive to gross margin, growing Beyond Yoga, which is accretive to gross margin. So those are the things that are structurally helping. In terms of a couple of other changes that I think happened. Yes, we do get some tailwind from ocean freight and airfreight. As the year progresses, FX probably helps us in the second half versus the first half. The first half FX is going to be a bit of a headwind. And we're assuming probably 50 basis points for the year higher dilution relative to 2022. So we are being a little conservative. Largely, our view is probably the first half versus the second half. So that's how one is thinking through it. The real growth is really going to come from structural improvements in a very diversified business.

That's very helpful. And if I could quickly sneak one more in. Harmit, Chip, I think you've talked about the mass channel. I think that was a source of pressure. Just curious to know how it performed in the fourth quarter, U.S. mass? And how do we think about that going forward into 2023?

Yes. So our mass channel, which is really Signature and Denizen, was down, I think, 19% in Q4. As we are planning the next year, we are planning this down double digit. So if you think about global wholesale being down 4%, half of that was probably the mass channel. Half of that was Red Tab. And if you think of the fact that we were not able to fulfill $35 million, $45 million, that would say global wholesale would actually been a positive. So the brand is really doing well. The other only point I would make, Laurent, is as we get into January and exit December, we are seeing sell-through rates in U.S. wholesale actually turned positive, which is I think a good sign.

Our next question comes from the line of Bob Drbul of Guggenheim.

Harmit, congratulations on the expanded role from me as well. And Chip, congratulations on bringing in Michelle Gass, I think she's going to be great. I guess a couple of questions that I have. On the -- as you look at the year in terms of the year forward, just the revenue cadence that you expect, I don't know if you could maybe give us a little more color on that and the confidence around that piece. And then Chip, the category growth that you assume for denim, I don't know if we could talk about that, then I do have a denim question for you afterwards as well.

Okay. So let me get the tough question, but I'm glad you asked it, Bob, which is the first half, second half. The way we're thinking about the year, folks, is we're thinking about it as a tale of 2 halves, with the first half weaker than the second half. A tale of 2 channels, direct-to-consumer, strong; wholesale, kind of flattish. And a tale of 2 worlds, the Western world probably growing low single digit; and Eastern world, which is Asia and Latin America growing low double digits. It's great to have a business that's so diversified. Thinking about revenue, and to your point, because one would think, okay, this is a bit of a hockey stick. Actually, it's not. If you think about the cadence of the first half and the second half, the normal cadence is 47% of our total revenue is in the first half and 53% in the second half. Last year, we saw a real strong growth in the first half. We were up 19%, 20%. Second half was flat. So last year, it was more 50-50. And so as we think about '23, it's a 47% in the first half, 53% in the second half. That's one way of looking at it. The other way of looking at it is, how does it relate to '19 if '19 is what we call a good base. If you think of the first half, our guidance assumes that we grow first half to '19, about 8% reported dollars and the second half about 10%. So the real pickup is about 2 or 3 points of growth, and that's driven by a couple of things. One, FX headwind doesn't remain. And second, just acceleration of the macro improvement -- a slight improvement in macroeconomic conditions. But we're not necessarily -- it's not a hockey stick, and we're not banking a lot. We haven't built in any upside from China, which is a smaller business and any major consumer demand swing. If that happens, it's great.

On the denim market trends that you asked about, Bob, I'll stay real high level here. But globally, Euromonitor data, this is Euromonitor data. Globally, the denim category grew low single digits in 2022. That was actually ahead of total apparel, which was down low single digits. And on that basis, actually on a -- that's a calendar '22 basis. And for calendar '22, the Levi's brand was up 11%. So we did grow share. Last year, again, based on Euromonitor data, we grew more share than any other player in the category. We grew share on men's, we grew share on women's. It's also worth noting that we have grown share 5 of the last 6 years. So we consistently grow market share. And as the biggest brand in the category, you guys have heard me say this before, we feel a certain obligation to grow the category. And part of how we do that is to grow share in the category. So specific to the U.S., because we shared some U.S. data from NPD on the last call, the U.S. does remain pretty soft. It hasn't gotten any worse from the prior quarter. We're seeing it. It's largely a wholesale phenomenon. Harmit has taken you through the numbers on our own direct-to-consumer business, and our U.S. DTC business was also very, very strong for the quarter. So we're in control of the brand. We're growing. We're building share. The biggest challenge has been the wholesale dynamic here in the U.S. As we look forward into fiscal -- or into calendar '23, the outlook from Euromonitor is for a continuation of kind of low single-digit category growth. And we're confident it's kind of in the range of where we've got our revenue outlook kind of in line with our full year guidance. And as I said, if you go back even pre-IPO for a 5-, 6-year period of time, the category was growing kind of low single digits, and we put up a 6% compound growth rates during that period of time. So we've consistently outgrown the category. And that, by the way, was during a period of time when both Dockers was a drag, and we didn't have Beyond Yoga. So we're really confident that we're going to be able to put good numbers on the board, even if the category continues to stay a little bit soft in our biggest market, the U.S. There are pockets of growth in the category as well. As Harmit said, we're seeing good growth in Asia and in Latin America. So the benefit of having a really diversified business, whether that's geographically or from a product standpoint, really matters. And that's part of how we've been able to get through it. So I hope that answers your question.

That does it. And Chip, if I could just jump in with 2 more quick ones for you. Are skinny jeans over? You're talking about the success of the loose fits. And are rises going up or down? Just curious from the trends perspective.

That's a good question. So a little fun fact, our top 2 women's items were the 311 and the 721 and they're both skinny jeans. So the news, as Mark Twain once said, "The news of my death has been greatly exaggerated." Skinny jeans, I've been known to say skinny jeans will never die. Having said that, the looser jeans are still a thing. They're definitely the trend. Half of our revenues on bottoms this past quarter came from the looser, baggier fits. But our top 2 women's bottoms items were the 311 and the 721. So the skinny jean is not going anywhere anytime soon. Rises. For a long time, we were marching the rises up. We had the rib cage, you may remember, about 18 months ago. That was look the back then. Rises are now coming down. And we're not quite to hit hugger territory yet, but the mid-rise jean is kind of the hottest item right now. And I think we're going to continue to see the shift from high to mid and maybe even mid- to lower rises as we go forward. Thank you for that question.

Our next question comes from the line of Matthew Boss of JPMorgan.

So maybe 2 things. Chip, could you speak to pricing power for the brand into next year, and also the overall health that you see for the brand in Europe today? And then maybe, Harmit, could you just outline the fundamental drivers as we think about over the course of the next year and more so the back half of the year? What level of visibility you have in the improvement in top line as we think about the back half?

Chip, you want to go first?

Yes. So let me just talk to the pricing power of the brand. One of my favorite things is, a brand has good brand strength when you don't have to hold the prayer meeting to take pricing. Our price -- we've taken pricing over the last 18 to 24 months. Our AURs were up 6% for the year. And that was driven fundamentally by pricing. You see it in our gross margins. Our gross margins are up nearly 400 basis points from 2019. The Levi's brand itself, gross margins are over 60%, and we grew gross margins by about 20 basis points, and we were able to build share through all of that. So the brand equity, as we measure it, we measure it very detailed every quarter in our top 10 markets around the world. Our equity remains really, really strong. We're not seeing any slippage as a result of pricing. And in fact, in some markets, we own the equity for worth the money I pay for it. So the brand continues to deliver a really strong value. In Europe, Europe revenues were down 4% in constant currency. If you exclude Russia, it was down 8% overall, but Russia was 4 points of that. The good news is we did see substantial -- sequential improvement from Q3 driven primarily by DTC and strength in our core bottoms business. And even through the holidays, December was positive for Europe. So we're -- it's still challenging there. I don't want to mislead anybody, but we're very, very confident in the strength of the brand there. The consumer will ultimately come back. And we're seeing good broad-based growth across markets like the U.K. and Germany. So we have embedded a little bit of caution in our outlook relative to Europe, just reflecting the challenging consumer environment there, but it's not because we're seeing any slippage in the strength of the brand or the equity of the brand, and pricing seems to be holding up there.